McKesson Corp · 10-K/A · For 3/31/96

Filed On 2/13/97   ·   SEC File 33-86536   ·   Accession Number 898430-97-500

Amendment to Annual Report   ·   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K/A      Amendment to Annual Report                            49    249K 
 2: EX-11       Computation of Earnings                                2±    13K 
 3: EX-23       Independent Auditors' Consent                          1      6K 
 4: EX-27       Financial Data Schedule                                2      6K 

10-K/A   ·   Amendment to Annual Report
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SECURITIES AND EXCHANGE COMMISSION  
Washington, D.C.  20549 

FORM 10-K/A 
(AMENDMENT NO. 1) 

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

For the fiscal year ended March 31, 1996  

or

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

Commission file number 1-13252

McKESSON CORPORATION
A Delaware Corporation
I.R.S. Employer Number 94-3207296 

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

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

                                    (Name Of Each Exchange
(Title Of Each Class)                 On Which Registered)  

Common Stock, $.01 par value           New York Stock Exchange  
                                    Pacific Stock Exchange

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

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

Indicate by check mark if disclosure of delinquent filers 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 definitive 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 nonaffiliates of the Registrant  
at June 3, 1996  $1,453,307,348                                                 
-------------                               

Number of shares of common stock outstanding at June 3, 1996:  42,939,511       
                                                        ----------

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   The undersigned Registrant hereby amends the items, financial statements,
exhibits or other portions of its Annual Report on Form 10-K for the fiscal year
ended March 31, 1996 as set forth below.                                        

LIST OF ITEMS AMENDED 
--------------------- 

Item                                                       Page                 
----                                                       ----                 

PART II                     

6.    Selected Financial Data............................    1                  

7.    Management's Discussion and Analysis of Financial                         
Condition and Results of Operations                                 
Financial Review...................................    6            

8.    Financial Statements and Supplementary Data........   15                  

PART IV                     

14.   Exhibits, Financial Statement Schedules, and                              
Reports on Form 8-K................................   45            

Signatures.........................................   46            

TEXT OF AMENDMENTS  
------------------  

  Each of the above listed Items is hereby amended by deleting the Item in
its entirety and replacing it with the Items attached hereto and filed herewith.

The purpose of the amendment is to restate the historical financial   
statements for operations discontinued subsequent to the original filing. On    
December 31, 1996, the Registrant sold its 55% equity interest in Armor All     
Products Corporation ("Armor All") to The Clorox Company. Also in December 1996,
the Registrant made the decision to divest the net assets of its Service        
Merchandising Division, Millbrook Distribution Services Inc. ("Service          
Merchandising"). All of the net assets and results of operations of both Armor  
All and Service Merchandising have been reclassified as discontinued operations 
for all periods presented.                                                      

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PART II 

ITEM 6.   Selected Financial Data                                               

  The following selected consolidated financial data for each of the six
years in the period ended March 31, 1996 has been derived from the audited      
consolidated financial statements of the Company included herein.  The selected 
consolidated financial data set forth below should be read in conjunction with  
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this report.                                                       

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SIX-YEAR HIGHLIGHTS 

  CONSOLIDATED OPERATIONS(1)

                                                        · Enlarge/Download Table

                                                         YEARS ENDED MARCH 31                                 
                          ----------------------------------------------------------------------------------  
                            1996        1995                 1994           1993       1992           1991    
                          ---------   ---------            ---------      ---------  ---------      --------  
                                (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)                                
                                                                                                              
Revenues/(2)/...........  $ 9,953.7   $ 9,438.7            $ 8,520.8      $ 7,991.8  $ 7,219.1      $5,646.3  
 Percent change.........        5.5%       10.8%                 6.6%          10.7%      27.9%         10.5% 
Gross profit/(3)/.......      915.5       808.2/(3)/           783.6          777.2      723.3         665.6  
 Percent of revenues....        9.2%        8.6%                 9.2%           9.7%      10.0%         11.8% 
Operating profit........      245.7        90.6/(4)/           202.6          200.3      129.2/(5)/    186.2  
 Percent change.........      171.2%      (55.3)%                1.1%          55.0%     (30.6)%        (6.1)%
 Percent of revenues....        2.5%        1.0%                 2.4%           2.5%       1.8%          3.3% 
Operating margin                                                                                              
 (deficit)/(6)/.........      241.3        (9.0)/(7)/          153.6/(8)/     156.5       79.3/(9)/    157.5  
 Percent of revenues....        2.4%        (.1)%                1.8%           2.0%       1.1%          2.8% 
Interest expense........       44.4        44.5                 39.3           47.5       52.9          51.2  
Income (loss) before                                                                                          
 taxes on income........      196.9       (53.5)/(7)/          114.3/(8)/     109.0       26.4/(9)/    106.3  
 Percent change.........         --          --                  4.9%         312.9%     (75.2)%         6.5% 
Taxes on income.........       76.2        96.6/(10)/           45.0           42.2       10.9          40.5  
 Effective tax rate.....       38.7%         --                 39.4%          38.7%      41.3%         38.1% 
Income (loss) after                                                                                           
 taxes                                                                                                        
 Continuing operations..      120.7      (150.1)/(7)//(10)/     69.3/(8)/      66.8       15.5/(9)/     65.8  
  Percent change........         --          --                  3.7%         331.0%     (76.4)%        14.6% 
 Discontinued                                                                                                 
  operations............       14.7       554.6/(11)/           87.8/(12)/     47.9       16.8/(13)/    29.5  
 Extraordinary item--                                                                                         
  debt extinguishment...         --          --                 (4.2)            --         --            --  
 Cumulative effects of                                                                                        
  accounting changes....         --          --                (16.7)            --     (110.5)           --  
Net income (loss).......      135.4       404.5                136.2          114.7      (78.2)         95.3  
 Percent change.........      (66.5)%     197.0%                18.7%            --         --           1.7% 
Average stockholders'                                                                                         
 equity.................    1,043.3       808.3                623.1          581.5      593.3         660.1  
 Return on                                                                                                    
  equity/(14)/..........       13.0%       50.0%                21.9%          19.7%     (13.2)%        14.4% 
Total dividends                                                                                               
 declared...............       44.7        61.5                 77.1           74.4       72.3          71.8  
Common dividends                                                                                              
 declared...............       44.7        56.5                 66.9           64.0       61.8          61.2  
Fully diluted earnings                                                                                        
 (loss) per common share                                                                                      
 Continuing operations..  $    2.59   $   (3.34)           $    1.49      $    1.44  $     .22      $    1.47 
  Percent change........         --          --                  3.5%         554.5%     (85.0)%        17.7% 
 Discontinued                                                                                                 
  operations............        .31       12.20                 1.99           1.07        .43            .66 
 Extraordinary item.....         --          --                 (.10)            --         --             -- 
 Cumulative effects of                                                                                        
  accounting changes....         --          --                 (.38)            --      (2.85)            -- 
 Total..................       2.90        8.86                 3.00           2.51      (2.20)          2.13 
  Percent change........      (67.3)%     195.3%                19.5%            --         --           4.9% 

-------                                                                         
(1)  Restated to reflect the Armor All and Service Merchandising segments as    
discontinued operations.                                              
(2)  Reflects the reclassification of sales and cost of sales associated with   
   sales to customers' warehouses and includes only the gross margin on such
sales in revenues.                                                    
(3)  Revenues less cost of sales, in fiscal 1995 includes $35.9 million of      
charges for restructuring, asset impairment and other operating items,
0.4% of revenues.                                                     
(4)  Includes $124.6 million in charges for restructuring, asset impairment     
and other operating items, 1.3% of revenues.                          
(5)  Net of restructuring charges of $65.1 million, 0.9% of revenues.           
(6)  Income from continuing operations before interest expense and taxes on     
income.                                                               
(7)  Includes $59.4 million of compensation costs related to the PCS            
    Transaction, $139.5 million of charges for restructuring, asset impairment
   and other operating items representing 2.1% of revenues in the aggregate,
$130.6 million after-tax.                                             
(8)  Includes a loss on the termination of interest rate swap arrangements      
of $13.4 million, $8.2 million after-tax.                             
(9)  Net of restructuring charges of $65.1 million, 0.9% of revenues, $41.0     
million after-tax.                                                    
(10) Includes $107.0 million of income tax expense related to the sale of       
PCS.                                                                  
(11) Includes gain on sale of PCS of $576.7 million after-tax, write-down of the
   Company's investment in Service Merchandising of $72.8 million after-tax,
    and $1.0 million of income after-tax from a donation of Armor All stock to
the McKesson Foundation.                                              
(12) Includes $32.7 million after-tax relating to a gain on the                 
sale and donation of Armor All stock.                                 
(13) Net of restructuring charges of $15.8 million after-tax related to         
Service Merchandising.                                                
(14) Based on net income.                                                       

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SIX-YEAR HIGHLIGHTS 

    CONSOLIDATED FINANCIAL POSITION/(1)/

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                                         YEARS ENDED MARCH 31                               
                         ------------------------------------------------------------------ 
                           1996      1995          1994      1993      1992          1991   
                         --------  --------      --------  --------  --------      -------- 
                            (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)                  
                                                                                            
Customer receivables.... $  631.7  $  635.6      $  615.3  $  605.3  $  566.4      $  373.0 
 Days of sales/(2)/.....     22.9      24.2          26.0      27.3      28.2          23.8 
Inventories--LIFO cost..  1,317.0   1,081.9         900.5     777.1     746.2         587.6 
Inventories--FIFO cost..  1,602.5   1,376.2       1,204.3   1,090.9   1,042.1         855.8 
 Days of sales/(2)/.....     63.8      57.4          56.0      54.4      57.8          61.9 
Drafts and accounts                                                                         
 payable................  1,343.2   1,229.8       1,061.5     999.9     910.2         642.0 
 Days of sales/(2)/.....     53.5      51.3          49.4      49.9      50.4          46.4 
Current assets..........  2,463.0   2,464.2       1,627.9   1,490.0   1,487.4       1,132.4 
Current liabilities.....  1,642.5   1,585.2       1,326.5   1,298.6   1,196.4         881.7 
Working capital.........    820.5     879.0         301.4     191.4     291.0         250.7 
 Percent of                                                                                 
  revenues/(2)/.........      8.2%      9.3%          3.6%      2.4%      4.0%          4.4%
Property, plant and                                                                         
 equipment--net.........    356.0     341.6         345.7     334.2     333.8         320.8 
 Percent of reve-                                                                           
  nues/(2)/.............      3.6%      3.6%          4.1%      4.2%      4.6%          5.7%
Capital expenditures....     73.6      76.4          68.1      49.0      67.1          66.9 
Total assets............  3,360.2   3,260.2       2,676.6   2,458.4   2,439.1       2,115.3 
Total debt/(3)/.........    471.0     492.1         532.1     429.2     574.3         598.2 
Stockholders' equity....  1,064.6   1,013.5         678.6     619.4     554.5         675.6 
Capital employed/(4)/...  1,535.6   1,505.6       1,210.7   1,048.6   1,128.8       1,273.8 
 Ratio of debt to                                                                           
  capital employed......     30.7%     32.7%         43.9%     40.9%     50.9%         47.0%
Average capital                                                                             
 employed/(4)/..........  1,599.4   1,373.0       1,115.9   1,088.4   1,179.6       1,214.8 
 Turnover/(5)/..........      6.2       6.9           7.6       7.3       6.1           4.6 
Fully diluted shares....     46.7      45.5          44.1      44.8      38.8/(6)/     44.6 
Common shares                                                                               
 outstanding at 3/31....     44.8      44.4          40.6      40.6      38.9          38.2 
Dividends per common                                                                        
 share..................     1.00      1.34          1.66      1.60      1.60          1.60 
Cash distribution from                                                                      
 PCS                                                                                        
 Transaction per common                                                                     
  share.................       --     76.00/(7)/       --        --        --            -- 
Book value per common                                                                       
 share/(8)/.............    23.76     22.83         16.38     14.99     13.97         17.44 
Market price                                                                                
 High...................   55 5/8   109 1/4        68 1/2    47 1/8    40 1/8        38     
 Low....................   37 1/4    30 1/8        38 5/8    30 1/4    32            26 7/8 
 At year end............   51 1/4    40 3/8        59 1/2    44 3/4    32 5/8        32 7/8 

-------                                                                         
(1) Restated to reflect the Armor All and Service Merchandising segments as     
discontinued operations.                                                

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

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

(4) Capital employed consists of total debt and stockholders' equity.           

(5) Revenues divided by average capital employed.                               

(6) Excludes convertible securities which were anti-dilutive.                   

(7) Received by shareholders directly from Eli Lilly and Company.               

(8) Stockholders' equity less preferred stock plus portion of ESOP notes and    
  guarantee related to the Series B ESOP preferred stock divided by year-end
common shares outstanding.                                              

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SIX-YEAR HIGHLIGHTS 

 REPORTING SEGMENTS/(1)/

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                                                  YEARS ENDED MARCH 31                              
                         -------------------------------------------------------------------------  
                           1996        1995            1994        1993      1992           1991    
                         ---------   ---------      ---------   ---------  --------       --------  
                                                    (DOLLARS IN MILLIONS)                           
                                                                                                    
HEALTH CARE SERVICES                                                                                
 Revenues/(2)/.......... $9,656.7    $9,177.7       $8,274.7    $7,753.4   $6,976.9       $5,399.1  
  Percent change........      5.2%       10.9%           6.7%       11.1%      29.2%          10.9% 
 Operating profit.......    206.1        76.1/(3)/     165.6       169.9      105.1/(4)/     161.9  
  Percent change........    170.8%      (54.0)%         (2.5)%      61.7%     (35.1)%         18.3% 
  Percent of revenues...      2.1%         .8%/(3)/      2.0%        2.2%       1.5%/(4)/      3.0% 
 Average capital                                                                                    
  employed/(5)/.........  1,043.5       989.5          836.9       663.3      722.7          656.4  
  Turnover/(6)/.........      9.3         9.3            9.9        11.7        9.7            8.2  
  Return/(7)/...........     19.8%        7.7%          19.8%       25.6%      14.5%          24.6% 
 Segment assets.........  2,525.3     2,148.6        1,951.6     1,759.5                            
 Capital expenditures...     43.5        44.4           34.4        24.5       38.3           26.4  
 Depreciation...........     33.9        30.2           23.1        20.2       20.4           16.5  
 Amortization of                                                                                    
  intangibles...........      6.9         7.0            6.9         6.1        7.0            7.6  

WATER PRODUCTS                                                                                      
 Revenues...............  $ 259.3    $  246.0       $  240.3    $  229.6   $  232.8       $  236.7  
  Percent change........      5.4%        2.4%           4.7%       (1.4)%     (1.6)%          1.8% 
 Operating profit.......     39.6        14.5/(8)/      37.0        30.4       24.1           24.3  
  Percent change........    173.1%      (60.8)%         21.7%       26.1%      (0.8)%        (34.5)%
  Percent of revenues...     15.3%        5.9%/(8)/     15.4%       13.2%      10.4%          10.3% 
 Average capital                                                                                    
  employed/(5)/.........    114.2       122.7          119.4       107.9      104.4          103.1  
  Turnover/(6)/.........      2.3         2.0            2.0         2.1        2.2            2.3  
  Return/(7)/...........     34.7%       11.8%          31.0%       28.2%      23.1%          23.6% 
 Segment assets.........    142.0       142.3          150.4       135.7                            
 Capital expenditures...     24.8        26.3           28.7        20.6       25.9           25.9  
 Depreciation...........     21.4        20.3           18.3        16.8       15.9           15.5  
 Amortization of                                                                                    
  intangibles...........      0.1         0.2             --          --         --             --  

--------                                                                        
(1) Restated to reflect the Armor All and Service Merchandising segments as     
discontinued operations.                                                
(2) Reflects the reclassification of sales and cost of sales associated with    
 sales to customers' warehouses and includes only the gross margin on such
sales in revenues.                                                      
(3) Includes $107.3 million of charges for restructuring, asset impairment and  
other operating items, 1.2% of revenues.                                
(4) Net of restructuring charges of $69.7 million, 1.0% of revenues.            
(5) Net assets of the segment.                                                  
(6) Revenues divided by average capital employed.                               
(7) Operating profit divided by average capital employed.                       
(8) Includes $17.3 million of charges for restructuring, asset impairment and   
other operating items, 7.0% of revenues.                                

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SIX-YEAR HIGHLIGHTS 

 REPORTING SEGMENTS/(1)/

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                                                       YEARS ENDED MARCH 31                    
                                   ----------------------------------------------------------- 
                                    1996     1995           1994         1993    1992    1991  
                                   ------   -------       --------      ------  ------  ------ 
                                                  (DOLLARS IN MILLIONS)                        
                                                                                               
CORPORATE                                                                                      
 Revenues......................... $ 37.7   $  15.0       $   5.8       $  8.8  $  9.4  $ 10.5 
 Expenses.........................  (35.5)   (112.7)/(3)/   (50.0)/(4)/  (49.4)  (56.8)  (33.4)
 Average capital employed/(2)/....  441.7     260.8         159.6        317.2   352.5   455.3 
 Total assets*....................  692.9     969.3         574.6        563.2   607.3   647.8 
 Capital expenditures.............    5.3       5.7           5.0          3.9     2.9    14.6 
 Depreciation.....................    1.9       1.4           6.2          9.9    10.1    10.0 

 *Total assets include:                                                                        
  Cash and cash equivalents and                                                                
   marketable securities..........  456.2     670.4          62.7         77.5   140.0   151.1 
  Net assets of discontinued                                                                   
   operations/(5)/................  125.7      88.2         353.9        333.3   287.2   303.1 

--------                                                                        
(1) Restated to reflect the Armor All and Service Merchandising segments as     
discontinued operations.                                                
(2) Net assets of segment.                                                      
(3) Includes $74.3 million of expense related to compensation costs associated  
 with the PCS Transaction, charges for restructuring, asset impairment and
other operating items.                                                  
(4) Includes a loss on the termination of interest rate swap arrangements of    
$13.4 million.                                                          
(5) Includes the net assets of the Armor All and Service Merchandising segments,
and PCS prior to its disposition on November 21, 1994.                  

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FINANCIAL REVIEW

ITEM 7.                                                                         

  On December 31, 1996, the Registrant sold its 55% equity interest in Armor All
Products Corporation ("Armor All") to The Clorox Company. Also in December 1996,
the Registrant made the decision to divest the net assets of its Service        
Merchandising Division, Millbrook Distribution Services Inc. All of the net     
assets and results of operations of both Armor All and Service Merchandising    
have been reclassified as discontinued operations for all periods presented.    

RESULTS OF OPERATIONS                                                           

Fiscal 1996 income from continuing operations was $120.7 million, $2.59 per 
fully diluted share, an increase of 38% over the prior year's income from       
continuing operations of $87.5 million before unusual items. Fiscal 1995 income 
includes expenses associated with the sale of PCS and charges resulting from    
initiatives to streamline the distribution and water businesses. Fiscal 1994    
results include a loss on the termination of interest rate swap arrangements.   
For purposes of discussing the results of operations, these income and expense  
items are referred to as "unusual items" in the Financial Review as management  
believes that these items either represent 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 operating amounts.                           

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                                           YEARS ENDED MARCH 31                   
                          --------------------------------------------------------
                                  1996             1995               1994        
                          ------------------ ------------------ ------------------
                          PRE-TAX  AFTER-TAX PRE-TAX  AFTER-TAX PRE-TAX  AFTER-TAX
                          -------  --------- -------  --------- -------  ---------
                                                (IN MILLIONS)                     
                                                                                  
Income from Continuing                                                            
 Operations                                                                       
  Before unusual items...  $196.9    $120.7  $ 145.4    $ 87.5   $127.7    $ 77.5 
  Unusual Items                                                                   
   Compensation costs                                                             
    related to the PCS                                                            
    Transaction..........                      (59.4)    (45.3)                   
   Income tax expense                                                             
    related to the PCS                                                            
    Transaction..........                               (107.0)                   
   Charges for                                                                    
    restructuring, asset                                                          
    impairment and other                                                          
    operating items......                     (139.5)   ( 85.3)                   
   Interest rate swap                                                             
    terminations.........                                         (13.4)     (8.2)
                           ------    ------  -------   -------   ------    ------ 
Income (loss) from                                                                
 Continuing Operations...  $196.9    $120.7  $ (53.5)  $(150.1)  $114.3    $ 69.3 
                           ======    ======  =======   =======   ======    ====== 

PCS Transaction                                                                 

On November 21, 1994 McKesson and Eli Lilly and Company ("Eli Lilly")       
completed a transaction whereby Eli Lilly effectively acquired McKesson's       
pharmaceutical benefits management business which consisted primarily of PCS    
Health Systems, Inc. and Clinical Pharmaceuticals, Inc., both wholly-owned      
subsidiaries of McKesson. Of the approximately $4 billion of proceeds from this 
transaction, approximately $600 million was paid to the Company. An additional  
$24 million of the $4 billion consideration was received from Eli Lilly to fund 
deferred vested stock option payments. The remainder of the $4 billion was paid 
directly to the McKesson shareholders by Eli Lilly.                             

Unusual Items--Fiscal 1995                                                      

The $59.4 million of pre-tax compensation costs related to the PCS          
Transaction consists of $23.6 million associated with an allocation of cash and 
shares to ESOP plan participants resulting from a paydown of ESOP debt by the   
ESOP trust, and $35.8 million associated with the Company's vested stock        
options and other compensation programs.                                        

The $107.0 million of income tax expense resulted from the distribution of  
McKesson common stock to effect the PCS Transaction.                            

The $139.5 million pre-tax charge for restructuring, asset impairment and   
other operating items resulted, in part, from the initiation by the Company's   
management of several measures designed to                                      

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FINANCIAL REVIEW--(CONTINUED) 

streamline operations and improve productivity in the Company's Health Care     
Services and Water Products segments. These measures included consolidation of  
certain facilities, workforce reductions and divestiture of under-performing    
assets and were expected to reduce operating expenses, improve working capital  
efficiency and enhance customer service. Other charges consist primarily of     
write-downs of assets to be disposed of to fair value less costs to sell,       
impairment losses on capitalized software due to changes in technology,         
severance for announced workforce reductions, write-downs of inventory          
associated with the discontinuation of certain product lines, and receivables   
reserves related to facility closures and a reassessment of credit risks in the 
Health Care Services segment. The assets to be disposed of are associated with  
facility consolidations in the Health Care Services and Water Products segments 
and surplus properties held by the Company. The disposition of these properties 
is expected to occur over the next three years. See Financial Note 3 "Charges   
and Gains in Continuing Operations" on pages 24 and 25 of the accompanying      
financial statements.                                                           

Unusual Items--Fiscal 1994                                                      

  Fiscal 1994 income from continuing operations includes a pre-tax loss of $13.4
million from the termination of interest rate swap arrangements.                

Net Income                                                                      

 Fiscal 1996 net income was $135.4 million or $2.90 per fully-diluted share,
including $14.7 million ($.31 per share) of income from the discontinued Armor  
All and Service Merchandising segments. Fiscal 1995 net income was $404.5       
million or $8.86 per share, both of which include amounts related to the PCS    
Transaction, and to initiatives taken by the Company to enhance the productivity
of its businesses. The Company recorded income of $554.6 million from           
discontinued operations, including a gain on the sale of PCS of $576.7 million, 
$21.0 million for PCS earnings during the part of the year it was owned by the  
Company, and a $44.1 million loss from the discontinued Armor All and Service   
Merchandising segments, reflecting a $72.8 million charge to write-down the     
Company's investment in its Service Merchandising segment. Fiscal 1994 net      
income was $136.2 million or $3.00 per share which includes $69.3 million from  
continuing operations, $55.1 million from discontinued operations, $32.7 million
from the gain on sale/donation of Armor All stock, an extraordinary after-tax   
loss of $4.2 million from the early retirement of debt and a $16.7 million      
after-tax charge for the cumulative effect of the accounting change to adopt    
Statement of Financial Accounting Standards ("SFAS") No. 112 "Employers'        
Accounting for Postemployment Benefits."                                        

BUSINESS SEGMENTS                                                             

The Company's business segments of continuing operations consist of Health
Care Services and Water Products. Health Care Services is the Company's primary 
business and includes the U.S. pharmaceutical and health care products          
distribution business, its operations to support the needs of pharmaceutical and
other health care product manufacturers, institutional and retail customers and 
its international pharmaceutical distribution operations (including Canada and  
an equity interest in a Mexican distribution business).                         

 Water Products is engaged in the processing, delivery and sale of bottled
drinking water and the sale of packaged water to retail stores.                 

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FINANCIAL REVIEW--(CONTINUED) 

REVENUE GROWTH                                                                  

In fiscal 1996, revenues increased by $515.0 million or 6% to $10.0 billion 
from the prior year. Revenues of $9.4 billion in fiscal 1995 increased 11%      
from fiscal 1994. Substantially all of the revenue growth represents volume     
growth from existing businesses.                                                

Revenues for Health Care Services increased 5% in fiscal 1996 compared with 
increases of 11% and 7%, respectively, in 1995 and 1994. The growth in fiscal   
1996 was dampened by the loss of a high-volume customer at the beginning of the 
fiscal year. All customer segments (retail and institutional) recorded revenue  
increases, with significant contributions from the Valu-Rite and proprietary    
generic drug programs. Revenue growth accelerated in the fourth quarter of      
fiscal 1996, increasing 9% compared with the fourth quarter of fiscal 1995.     

The practice in the Health Care Services distribution business is to pass on
to customers price changes from suppliers. In each of fiscal 1996, 1995 and     
1994, prices declined on many generic pharmaceutical products sold by the Health
Care Services business. These price declines were offset, in part, by moderate  
inflation on other product lines, which resulted in almost no net price         
increases in such fiscal years.                                                 

Water Products revenues increased 5% in fiscal 1996 to $259.3 million and 2%
to $246.0 million in fiscal 1995. The increases in both years resulted from     
higher packaged water sales to the grocery trade and moderate growth in the     
direct-delivery business, mitigated by a decrease in sales of vended water.     

Corporate revenues in fiscal 1996 increased to $37.7 million from $15.0     
million in fiscal 1995, primarily due to increased interest income from higher  
cash and short-term investment balances as a result of the full year benefit    
from the PCS Transaction proceeds.                                              

OPERATING PROFIT                                                                

Health Care Services operating profit before unusual items rose 12% to      
$206.1 million in fiscal 1996. Operating profit for Health Care Services in     
fiscal 1995 included charges of $107.3 million for unusual items. The U.S.      
distribution business experienced intense competition in fiscal 1996 which      
caused a decline in selling margins. This decline was offset by product         
management efforts under the Company's proprietary generic pharmaceutical       
program and other inventory management programs, as well as operating expense   
efficiencies. Fiscal 1996 operating profits also included the start-up and      
research and development costs of strategic initiatives. These costs were       
offset by a pre-tax gain of $11.2 million on the sale of the Company's          
interest in a Central American pharmaceutical manufacturer for $36.1 million.   
The operating profit for fiscal 1995 reflects lower operating expenses due to   
workforce reductions and ongoing consolidation of facilities and                
administrative services and moderate increases in international operations.     

The Company uses the last-in, first-out (LIFO) method of accounting for     
inventories which results in cost of sales that more closely reflect replacement
cost than other accounting methods, thereby mitigating the effects of inflation 
and deflation on operating profit. As previously discussed, price declines on   
many generic pharmaceutical products in the Health Care Services segment in each
of the fiscal years ended March 31, 1996, 1995 and 1994 moderated the effects of
inflation in other product categories, which resulted in minimal overall cost   
changes in those fiscal years.                                                  

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FINANCIAL REVIEW--(CONTINUED) 

Water Products operating profit before unusual items increased 25% to $39.6 
million in fiscal 1996 due to moderate sales growth and lower overall           
operating costs, due in part to ongoing programs to improve customer service    
which have reduced customer turnover expenses and increased productivity.       
Fiscal 1995 operating profit, excluding unusual items of $17.3 million,         
declined 14% due to expenses in the grocery products division related to the    
introduction of new products, promotional activities and increased packaging    
raw materials costs and competitive pressures in the vended water division.     

Corporate expenses in fiscal 1995 and 1994 included charges of $74.3 million
and $13.4 million respectively, for unusual items. Adjusting for such unusual   
items, Corporate expenses were $35.5 million, $38.4 million and $36.6 million in
fiscal 1996, 1995, 1994, respectively.                                          

The following table identifies the operating margin (income before interest 
expense and taxes on income as a percent of revenues) components for the past   
three years.                                                                    

Computed based on total revenues:                                           

                                                                · Download Table

                                                 1996  1995        1994     
                                                 ----  ----        ----     
                                                                            
Gross profit margin/(1)/........................ 9.2%   8.6%/(2)/  9.2%     
Operating expenses.............................. 6.8    8.7/(2)/   7.4/(3)/ 
                                                 ---   ----        ---      
Operating margin (deficit)...................... 2.4%  (0.1)%/(2)/ 1.8%/(3)/
                                                 ===   ====        ===      

--------                                                                        
(1) Revenues less cost of sales.                                                

(2) Excluding fiscal 1995 unusual items, the gross profit margin is 8.9%,       
operating expenses are 6.9% and the operating margin is 2.0%.           

(3) Excluding fiscal 1994 unusual items, operating expenses are 7.2% and the    
operating margin is 2.0%.                                               

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FINANCIAL REVIEW--(CONTINUED) 

Operating margin excluding unusual items, increased to 2.4% in fiscal 1996  
from 2.0% in fiscal 1995 due to successful cost control efforts at Health Care  
Services and Water Products.                                                    

The following table summarizes operating profit as a percentage of revenues 
by segment:                                                                     

                                                                · Download Table

                                                AS A PERCENT OF REVENUES    
                                             ------------------------------ 
                                              1996     1995          1994   
                                             -------  -------       ------- 
                                                                            
Health Care Services........................     2.1%     0.8%/(1)/     2.0%
Water Products..............................    15.3      5.9/(2)/     15.4 

--------                                                                        
(1) Excluding fiscal 1995 unusual items, the percentage is 2.0%.                

(2) Excluding fiscal 1995 unusual items, the percentage is 12.9%.               

Operating profit for Health Care Services increased moderately from fiscal  
1995 excluding unusual items due to operating expense improvements and product  
management efforts which offset declines in selling margins.                    

INTERNATIONAL OPERATIONS                                                        

International operations accounted for 16% of fiscal 1996 consolidated      
operating profits and 7% of consolidated assets at March 31, 1996. Fiscal 1995  
international operations were 12% of consolidated operating profits excluding   
unusual items and 7% of consolidated assets at March 31, 1995. International    
operations are subject to certain opportunities and risks, including currency   
fluctuations. 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.                                                 

WORKING CAPITAL                                                                 

The following table shows working capital at March 31 of each year as a     
percentage of revenues for the fiscal year. Working capital for the purposes of 
this presentation excludes cash, cash equivalents, marketable securities and    
interest-bearing obligations.                                                   

                                                                · Download Table

                                                 MARCH 31 WORKING CAPITAL     
                                                 AS A PERCENT OF REVENUES     
                                                ------------------------------
                                                  1996       1995       1994  
                                                --------   --------   --------
                                                                              
Health Care Services..........................      5.6%       4.6%       4.5%
   Total Company...............................     4.0        2.6        3.7 

 The decrease in the 1995 total company working capital ratio is primarily due
to approximately $120 million of accrued liabilities at March 31, 1995 related  
to the PCS Transaction. Excluding such items, the March 31, 1995 total company  
working capital ratio would have been 3.9%. The increase in fiscal 1996 is      
primarily due to an increased investment in inventories of $239.6 million to    
obtain favorable purchase terms on certain items from vendors and to support    
the increasing sales growth in Health Care Services. The increase in payables   
associated with higher inventory levels partially mitigated the effect of the   
higher inventory investment.                                                    

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FINANCIAL REVIEW--(CONTINUED) 

CASH FLOW AND LIQUIDITY                                                         

Cash and cash equivalents and marketable securities (primarily U.S. Treasury
securities with maturities of two years or less) were $456 million, $670        
million and $63 million at March 31, 1996, 1995 and 1994, respectively. The     
increase in fiscal 1995 reflects the proceeds received by the Company from the  
PCS Transaction.                                                                

Cash Flow from Operations for Capital Expenditures and Dividends                

The following table summarizes the excess (deficit) of cash flow from       
operations over capital expenditures and dividends:                             

                                                                · Download Table

                                                     YEARS ENDED MARCH 31   
                                                     ---------------------- 
                                                      1996    1995    1994  
                                                     ------  ------  ------ 
                                                        (IN MILLIONS)       
                                                                            
Net cash provided (used) by continuing operations                           
 Income (loss) after taxes from continuing                                  
  operations........................................ $  121  $ (150) $   69 
 Depreciation.......................................     57      52      48 
 Amortization of intangibles........................      7       7       7 
 Gain on sale of subsidiary.........................    (11)     --      -- 
 Other noncash charges..............................     49     190      24 
 Working capital changes............................   (212)     57    (132)
                                                     ------  ------  ------ 
  Total.............................................     11     156      16 
Capital expenditures................................    (74)    (76)    (68)
                                                     ------  ------  ------ 
  Excess (deficit)..................................    (63)     80     (52)
Net cash provided (used) by discontinued operations.     (7)     43      65 
Dividends paid......................................    (44)    (70)    (77)
                                                     ------  ------  ------ 
  Net excess (deficit).............................. $ (114) $   53  $  (64)
                                                     ======  ======  ====== 

Cash flow from continuing operations reflects the cash earnings of the      
Company's continuing businesses and the effects of the changes in working       
capital. Working capital in fiscal 1996 was impacted by the $136 million        
increase in inventories net of related payables and the payment in fiscal 1996  
of PCS Transaction liabilities. The cash used for working capital changes in    
fiscal 1994 primarily reflects a management decision to increase inventories    
early in that year.                                                             

 Capital expenditures for the fiscal years ended March 31, 1996, 1995 and 1994
for the Health Care Services segment were $44 million, $44 million and $34      
million, respectively, and for the Water Products segment were $25 million, $26 
million and $29 million, respectively.                                          

The decrease in dividends paid during fiscal 1996 reflects the conversion   
during 1995 of preferred stock in connection with the PCS Transaction           
(converting the associated dividend requirements to the lower common stock      
dividend) and the change in the annual common stock dividend from $1.68 per     
share to $1.00 per share following the PCS Transaction.                         

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FINANCIAL REVIEW--(CONTINUED) 

Other Financing Activities                                                      

 During fiscal 1996, the Company repurchased 1.35 million of its common shares
for $63 million as part of a 3.5 million share repurchase program authorized in 
May 1995. On May 31, 1996, the Company announced the authorization for the      
repurchase of an additional 3.5 million common shares and that substantially    
all of the shares in the initial authorization had been repurchased.            

The reductions in long-term debt in fiscal 1996 and 1995 reflect scheduled  
debt repayments and an advanced ESOP debt payment in 1995.                      

 In fiscal 1996, the Company made a $20 million acquisition in the Health Care
Services segment. The acquired company provides support services to commercial, 
non-profit and governmental organizations engaged in drug and biomedical        
development. The Company also acquired interests in two companies engaged in    
the development of new technology based initiatives for $13.3 million to        
enhance Health Care Services' competitive position. In April 1996, the Company  
acquired another company in the Health Care Services segment for approximately  
$65 million. The newly acquired company designs, manufactures, installs and     
supports automated pharmaceutical dispensing equipment for use by health care   
institutions.                                                                   

The Company has $250 million of available credit under domestic committed   
revolving credit lines. As a result of the Company's investment grade credit    
rating (S&P A+; Moody's A2), management believes the Company has access to      
additional private credit sources and to public capital markets at favorable    
terms. Funds necessary for future debt maturities and other cash requirements   
of the Company are expected to be met by existing cash balances, cash flow from 
operations, existing credit sources and other available debt capacity.          

CAPITALIZATION                                                                  

The Company's capitalization was as follows:                                

                                                                · Download Table

                                                            MARCH 31         
                                                      ---------------------- 
                                                       1996    1995    1994  
                                                      ------  ------  ------ 
                                                         (IN MILLIONS)       
                                                                             
Short-term borrowings................................ $    7  $   22  $   57 
Term debt............................................    284     290     295 
Exchangeable debt....................................    180     180     180 
                                                      ------  ------  ------ 
  Total debt.........................................    471     492     532 
Stockholders' equity.................................  1,065   1,014     679 
                                                      ------  ------  ------ 
  Total capitalization............................... $1,536  $1,506  $1,211 
                                                      ======  ======  ====== 
Debt-to-capital ratio at March 31....................   30.7%   32.7%   43.9%
Average interest rate during year                                            
  Total debt.........................................    6.6%    6.5%    6.0%
  Short-term borrowings..............................    7.3     6.2     3.7 
  Other debt.........................................    6.4     6.5     7.6 

The decreases in the debt-to-capital ratios in fiscal 1996 and 1995 resulted
primarily from the increase in stockholders' equity from the PCS Transaction,   
scheduled debt reductions, repayments of short-term borrowings and an advanced  
ESOP debt payment in 1995.                                                      

Average fully-diluted shares were 46.7 million in fiscal 1996, 45.5 million 
in fiscal 1995 and 44.1 million in fiscal 1994. Common shares outstanding       
increased to 44.8 million at March 31, 1996 from 44.4 million at March 31, 1995 
primarily due to shares issued upon exercise of employee stock options in       
excess of the 1.35 million shares repurchased during the year.                  

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FINANCIAL REVIEW--(CONTINUED) 

CAPITAL EMPLOYED                                                                

Capital employed (net assets) by segment was:                               

                                                                · Download Table

                                                  MARCH 31                  
                                            ---------------------------     
                                             1996    1995         1994      
                                            ------  ------       ------     
                                               (IN MILLIONS)                
                                                                            
Health Care Services....................... $1,149  $  898       $  887     
Water Products.............................    110     110          123     
                                            ------  ------       ------     
  Total Operations.........................  1,259   1,008        1,010     
Corporate                                                                   
 Cash, cash equivalents and marketable                                      
  securities...............................    456     670           63     
 Discontinued operations...................    126      88          354     
 Other.....................................   (305)   (260)        (216)    
                                            ------  ------       ------     
  Total Capital Employed................... $1,536  $1,506       $1,211     
                                            ======  ======       ======     
Return on Average Capital Employed                                          
 Health Care Services/(1)/.................   19.8%    7.7%/(2)/   19.8%    
 Water Products/(1)/.......................   34.7    11.8/(2)/    31.0     
  Total Consolidated Operations/(3)/.......   15.1    (0.7)/(4)/   13.8/(4)/
Return on Average Stockholders' Equity.....   13.0%   50.0%/(5)/   21.9%    

--------                                                                        
(1) Operating profit divided by average capital employed.                       

(2) Excluding fiscal 1995 unusual items from operating profit, Health Care      
Services is 18.5% and Water Products is 25.9%.                          

(3) Income from continuing operations before taxes and interest expense divided 
by average capital employed.                                            

(4) Excluding fiscal 1995 and 1994 unusual items, consolidated return is 13.8%  
and 15.0% in fiscal 1995 and 1994, respectively.                        

(5) Net income includes $576.7 million gain on sale of PCS.                     

The increase in capital employed in Health Care Services in fiscal 1996     
reflects the increased investment spending for retail and institutional         
strategic initiatives and the additional inventory investment. The increase in  
capital employed in fiscal 1995 resulted from the cash received from the PCS    
Transaction, net of fiscal 1995 reserves for restructuring, asset impairments   
and other operating items.                                                      

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 fiscal 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. Increases   
(decreases) to reserves for these environmental matters, primarily recorded     
within discontinued operations, amounted                                        

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FINANCIAL REVIEW--(CONCLUDED) 

to ($1.5) million, $3.4 million and $8.7 million in fiscal 1996, 1995 and 1994, 
respectively. The increase in fiscal 1995 primarily resulted from a governmental
directive to do additional remedial work at a former operating site in Syracuse,
New York. The increase in fiscal 1994 was primarily required as a result of     
adverse technical developments at former operating sites in Santa Fe Springs and
Union City, California, offset in part by a positive soil remedy selection at   
the Syracuse site. Management does not believe that changes in the remediation  
cost estimates in future periods, or the ultimate resolution of the Company's   
environmental matters, will have a material impact on the Company's consolidated
financial position. See "Legal Proceedings."                                    

INCOME TAXES                                                                    

The tax rate on income from continuing operations (excluding fiscal 1995 and
1994 unusual items) was 39%, 40% and 39% in fiscal 1996, 1995 and 1994,         
respectively.                                                                   

NEW ACCOUNTING PRONOUNCEMENTS                                                   

See Note 1 "Significant Accounting Policies" on pages 22 and 23 of the      
accompanying financial statements.                                              

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ITEM 8.    Financial Statements and Supplementary Data                          

Index to Financial Statements and Financial Statement Schedule                  
--------------------------------------------------------------                  
                                                                  Page
                                                                  ----
Consolidated Financial Statements:                                              
Independent Auditors' Report.......................................     16      
Statements of Consolidated Income for the years ended                           
March 31, 1996, 1995 and 1994................................     17
Consolidated Balance Sheets, March 31, 1996, 1995, and 1994........     18      
Statements of Consolidated Stockholders' Equity for the years                   
ended March 31, 1996, 1995 and 1994..........................     19
Statements of Consolidated Cash Flows for the years ended                       
March 31, 1996, 1995, and 1994...............................     21
Financial Notes....................................................     22      

Supplementary Financial Schedule:                                               
Independent Auditors' Report on Supplementary Financial Schedule...     43      
Schedule II--Consolidated Valuation and Qualifying Accounts........     44      

  Financial statements and schedules not included herein 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 financial statements, 
financial notes or supplementary financial information.                         

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INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors of McKesson Corporation:                

We have audited the accompanying consolidated balance sheets of McKesson    
Corporation and subsidiaries as of March 31, 1996, 1995, and 1994, and the      
related statements of consolidated income, consolidated stockholders' equity and
consolidated cash flows for the years then ended. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to    
express an opinion on these financial statements based on our audits.           

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

 In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of McKesson Corporation and           
subsidiaries at March 31, 1996, 1995, and 1994, and the results of their        
operations and their cash flows for the years then ended in conformity with     
generally accepted accounting principles.                                       

 As discussed in Note 14 of the consolidated financial statements, in 1994 the
Corporation changed its method of accounting for postemployment benefits to     
conform with Statement of Financial Accounting Standards No. 112.               

DELOITTE & TOUCHE LLP                                                           
San Francisco, California                                                       
May 13, 1996 (December 31, 1996 as to Notes 8 and 17)                           

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MCKESSON CORPORATION

STATEMENTS OF CONSOLIDATED INCOME 

                                                                · Download Table

                                                YEARS ENDED MARCH 31            
                                       ---------------------------------------- 
                                           1996          1995          1994     
                                       ------------  ------------  ------------ 
                                        (IN MILLIONS EXCEPT PER SHARE AMOUNTS)  
                                                                                
REVENUES (Note 1)....................  $    9,953.7  $    9,438.7  $    8,520.8 
                                       ------------  ------------  ------------ 
COSTS AND EXPENSES (Note 3)                                                     
Cost of sales........................       9,038.2       8,630.5       7,737.2 
Selling..............................         114.0         116.5         107.7 
Distribution.........................         327.4         316.4         319.3 
Administrative.......................         232.8         384.3         203.0 
Interest.............................          44.4          44.5          39.3 
                                       ------------  ------------  ------------ 
    Total............................       9,756.8       9,492.2       8,406.5 
                                       ------------  ------------  ------------ 
INCOME (LOSS) BEFORE TAXES ON INCOME.         196.9         (53.5)        114.3 
Income taxes (Note 13)...............          76.2          96.6          45.0 
                                       ------------  ------------  ------------ 
INCOME (LOSS) AFTER TAXES                                                       
Continuing operations................         120.7        (150.1)         69.3 
Discontinued operations (Notes 2,                                               
 8 and 17)...........................          14.7         (23.1)         55.1 
Discontinued operations--(Notes 2,                                              
 8 and 17)                                                                      
  Gain on sale/donation of Armor All                                            
   stock.............................            --           1.0          32.7 
  Gain on sale of PCS................            --         576.7            -- 
Extraordinary item--debt                                                        
 extinguishment (Note 9).............            --            --          (4.2)
Cumulative effect of accounting                                                 
 change (Note 14)....................            --            --         (16.7)
                                       ------------  ------------  ------------ 
NET INCOME...........................  $      135.4  $      404.5  $      136.2 
                                       ============  ============  ============ 
EARNINGS (LOSS) PER COMMON SHARE                                                
Fully diluted                                                                   
  Continuing operations..............  $       2.59  $      (3.34) $       1.49 
  Discontinued operations............           .31          (.51)         1.25 
  Discontinued operations--                                                     
   Gain on sale/donation of Armor All                                           
    stock............................            --           .02           .74 
   Gain on sale of PCS...............            --         12.69            -- 
  Extraordinary item.................            --            --          (.10)
  Cumulative effect of accounting                                               
   change............................            --            --          (.38)
                                       ------------  ------------  ------------ 
    Total............................  $       2.90  $       8.86  $       3.00 
                                       ============  ============  ============ 
Primary                                                                         
  Continuing operations..............  $       2.59  $      (3.52) $       1.53 
  Discontinued operations............           .31          (.53)         1.35 
  Discontinued operations--                                                     
   Gain on sale/donation of Armor All                                           
    stock............................            --           .02           .80 
   Gain on sale of PCS...............            --         13.23            -- 
  Extraordinary item.................            --            --          (.10)
  Cumulative effect of accounting                                               
   change............................            --            --          (.41)
                                       ------------  ------------  ------------ 
    Total............................  $       2.90  $       9.20  $       3.17 
                                       ============  ============  ============ 
SHARES ON WHICH EARNINGS (LOSS)                                                 
PER COMMON SHARE WERE BASED                                                     
Fully diluted........................          46.7          45.5          44.1 
Primary..............................          46.6          43.6          40.8 

See Financial Notes.                                                            

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MCKESSON CORPORATION

CONSOLIDATED BALANCE SHEETS 

                                                                · Download Table

                                                           MARCH 31            
                                                  ---------------------------- 
                                                    1996      1995      1994   
                                                  --------  --------  -------- 
                                                        (IN MILLIONS)          
                                                                               
ASSETS                                                                         
Cash and cash equivalents........................ $  260.8  $  363.1  $   62.7 
Marketable securities available for sale (Note                                 
 1)..............................................    195.4     307.3        -- 
Receivables (Note 6).............................    672.8     651.7     625.1 
Inventories (Note 7).............................  1,317.0   1,081.9     900.5 
Prepaid expenses (Note 13).......................     17.0      60.2      39.6 
                                                  --------  --------  -------- 
  Total current assets...........................  2,463.0   2,464.2   1,627.9 
                                                  --------  --------  -------- 
Land.............................................     38.0      39.9      38.8 
Buildings........................................    205.8     199.9     198.8 
Machinery and equipment..........................    469.9     433.5     431.7 
                                                  --------  --------  -------- 
  Total property, plant and equipment............    713.7     673.3     669.3 
Accumulated depreciation.........................   (357.7)   (331.7)   (323.6)
                                                  --------  --------  -------- 
  Net property, plant and equipment..............    356.0     341.6     345.7 
Goodwill and other intangibles...................    183.7     172.4     180.0 
Net assets of discontinued operations                                          
  (Notes 8 and 17)...............................    125.7      88.2     353.9 
Other assets (Notes 13 and 14)...................    231.8     193.8     169.1 
                                                  --------  --------  -------- 
  Total assets................................... $3,360.2  $3,260.2  $2,676.6 
                                                  ========  ========  ======== 
LIABILITIES                                                                    
Drafts payable................................... $  194.0  $  160.1  $  188.1 
Accounts payable--trade..........................  1,149.2   1,069.7     873.4 
Short-term borrowings............................      6.6      21.7      57.2 
Current portion of long-term debt (Note 9).......     27.9      17.4      18.2 
Salaries and wages...............................     26.3      33.5      30.5 
Taxes............................................     92.2     138.9      24.0 
Interest and dividends...........................     19.0      19.3      27.1 
Other............................................    127.3     124.6     108.0 
                                                  --------  --------  -------- 
  Total current liabilities......................  1,642.5   1,585.2   1,326.5 
                                                  --------  --------  -------- 
Postretirement obligations and other noncurrent                                
 liabilities (Note 14)...........................    216.6     208.5     214.8 
                                                  --------  --------  -------- 
Long-term debt (Note 9)..........................    436.5     453.0     456.7 
                                                  --------  --------  -------- 

STOCKHOLDERS' EQUITY                                                           
Preferred stocks.................................       --        --     125.3 
Common stock.....................................      0.4       0.4      89.2 
Additional paid-in capital.......................    332.0     319.8     174.4 
Other capital....................................    (36.2)     (4.1)     (9.5)
Retained earnings................................    968.9     875.9     610.3 
Accumulated translation adjustment...............    (49.7)    (51.6)    (22.3)
ESOP notes and guarantee (Note 12)...............   (122.5)   (126.4)   (165.1)
Treasury shares, at cost.........................    (28.3)     (0.5)   (123.7)
                                                  --------  --------  -------- 
  Stockholders' equity (Notes 9 and 12)..........  1,064.6   1,013.5     678.6 
                                                  --------  --------  -------- 
  Total liabilities and stockholders' equity..... $3,360.2  $3,260.2  $2,676.6 
                                                  ========  ========  ======== 

See Financial Notes.                                                            

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MCKESSON CORPORATION

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY 
YEARS ENDED MARCH 31, 1996, 1995 AND 1994 
(SHARES IN THOUSANDS, DOLLARS IN MILLIONS)

                                                        · Enlarge/Download Table


                                             PREFERRED STOCKS             COMMON STOCK         
                                             -----------------            --------------       
                                       (100,000 Shares Authorized)  (200,000 Shares Authorized)
                                             SHARES    AMOUNT             SHARES  AMOUNT       
                                             -------- --------            ------  ------       
                                                                                               
BALANCES, MARCH 31, 1993....................   2,913  $  126.5            44,583  $ 89.2       
Purchase of shares..........................                                                   
Issuance of shares under employee plans                                                        
 (Note 12)..................................                                                   
Conversion or redemption of debentures and                                                     
 preferred stock............................     (30)     (1.2)                                
ESOP note payments..........................                                                   
Tax benefit of unallocated ESOP share                                                          
 dividends..................................                                                   
Other.......................................                                                   
Translation adjustment......................                                                   
Net income..................................                                                   
Cash dividends declared                                                                        
  Preferred stock (Series A, $1.80 per                                                         
   share)...................................                                                   
  Preferred stock (Series B ESOP, $3.62 per                                                    
   share)...................................                                                   
  Common, $1.60 per share...................                                                   
                                             -------  --------            ------  ------       
BALANCES, MARCH 31, 1994....................   2,883     125.3            44,583    89.2       
Issuance of shares under employee plans                                                        
 (Note 12)..................................                                 538     0.1       
Purchase of shares (Note 12)................  (2,883)   (125.3)             (733)   (1.5)      
Change in par value of common stock from                                                       
 $2.00 to $.01 per share (Note 12)..........                                       (87.4)      
ESOP note payments..........................                                                   
Distribution of net assets of PCS...........                                                   
Other.......................................                                                   
Translation adjustment......................                                                   
Unrealized gain on marketable securities....                                                   
Net income..................................                                                   
Cash dividends declared                                                                        
  Preferred stock (Series A, $.90 per                                                          
   share)...................................                                                   
  Preferred stock (Series B ESOP, $1.8098                                                      
   per share)...............................                                                   
  Common, $1.34 per share...................                                                   
                                             -------  --------            ------  ------       
BALANCES, MARCH 31, 1995....................      --        --            44,388     0.4       
Issuance of shares under employee plans                                                        
 (Note 12)..................................                               1,062               
Purchase of shares (Note 12)................                                                   
ESOP note payments..........................                                                   
Other (Note 14).............................                                                   
Translation adjustment......................                                                   
Unrealized gain on marketable securities....                                                   
Net income..................................                                                   
Cash dividends declared                                                                        
  Common, $1.00 per share...................                                                   
                                             -------  --------            ------  ------       
BALANCES, MARCH 31, 1996....................      --  $     --            45,450  $  0.4       
                                             =======  ========            ======  ======       

See Financial Notes.                                                            

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                                                        · Enlarge/Download Table

                                                             TREASURY                  
                                                         ------------------            
ADDITIONAL                       ACCUMULATED    ESOP                           STOCK-  
  PAID-IN    OTHER    RETAINED   TRANSLATION  NOTES AND  COMMON               HOLDERS' 
  CAPITAL   CAPITAL   EARNINGS   ADJUSTMENT   GUARANTEE  SHARES    AMOUNT      EQUITY  
----------  -------  ---------  -----------   ---------  ------    -------    -------- 
                                                                                       
$180.7      $ (8.3)    $546.8      $(17.0)     $(177.1)   (4,009)   $(121.4)  $  619.4 
                                                            (769)     (31.5)     (31.5)

  (3.3)                                                      705       25.6       22.3 

  (1.1)                                                       37        1.4       (0.9)
                                                  12.0                            12.0 

                          4.4                                                      4.4 
  (1.9)       (1.2)                                           58        2.2       (0.9)
                                     (5.3)                                        (5.3)
                        136.2                                                    136.2 

                         (0.2)                                                    (0.2)

                        (10.0)                                                   (10.0)
                        (66.9)                                                   (66.9)
------      ------     ------      ------      -------    ------    -------   -------- 
 174.4        (9.5)     610.3       (22.3)      (165.1)   (3,978)    (123.7)     678.6 

  11.1         1.4                                           118        4.5       17.1 
   5.1                                                     3,846      118.7       (3.0)

  87.4                                                                              -- 
  26.9                                            38.7                            65.6 
                        (80.1)                                                   (80.1)
  14.9         2.1        2.7                                                     19.7 
                                    (29.3)                                       (29.3)
               1.9                                                                 1.9 
                        404.5                                                    404.5 

                         (0.1)                                                    (0.1)

                         (4.9)                                                    (4.9)
                        (56.5)                                                   (56.5)
------      ------     ------      ------      -------    ------    -------   -------- 
 319.8        (4.1)     875.9       (51.6)      (126.4)      (14)      (0.5)   1,013.5 

 (10.6)       (4.0)                                          761       34.9       20.3 
                                                          (1,349)     (62.7)     (62.7)
                                                   3.9                             3.9 
  22.8       (27.3)       2.3                                                     (2.2)
                                      1.9                                          1.9 
              (0.8)                                                               (0.8)
                        135.4                                                    135.4 

                        (44.7)                                                   (44.7)
------      ------     ------      ------      -------   ------     -------   -------- 
$332.0      $(36.2)    $968.9      $(49.7)     $(122.5)    (602)    $ (28.3)  $1,064.6 
======      ======     ======      ======      =======   ======     =======   ======== 

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MCKESSON CORPORATION

STATEMENTS OF CONSOLIDATED CASH FLOWS 

                                                                · Download Table

                                                       YEARS ENDED MARCH 31     
                                                      ------------------------- 
                                                       1996     1995     1994   
                                                      -------  -------  ------- 
                                                           (IN MILLIONS)        
                                                                                
OPERATING ACTIVITIES                                                            
Income (loss) after taxes from continuing                                       
 operations.........................................  $ 120.7  $(150.1) $  69.3 
Adjustments to reconcile to net cash provided by                                
 operating activities:                                                          
 Depreciation.......................................     57.2     51.9     47.6 
 Amortization of intangibles........................      7.0      7.2      6.9 
 Provision for bad debts............................     13.7     49.0      8.9 
 Deferred taxes on income...........................     42.9    (80.4)    18.0 
 Gain on sale of subsidiary.........................    (11.2)      --       -- 
 Other noncash (Note 3).............................     (7.4)   220.9     (2.5)
                                                      -------  -------  ------- 
    Total...........................................    222.9     98.5    148.2 
                                                      -------  -------  ------- 
 Effects of changes in                                                          
  Receivables.......................................       --    (76.1)   (41.4)
  Inventories.......................................   (239.6)  (213.7)  (134.3)
  Accounts and drafts payable.......................    103.9    167.2     75.1 
  Taxes.............................................    (13.1)   115.3     (7.8)
  Other.............................................    (62.9)    64.5    (23.3)
                                                      -------  -------  ------- 
    Total...........................................   (211.7)    57.2   (131.7)
                                                      -------  -------  ------- 
    NET CASH PROVIDED BY CONTINUING OPERATIONS......     11.2    155.7     16.5 
Discontinued operations (Notes 2 and 8).............     (7.4)    43.4     64.9 
                                                      -------  -------  ------- 
    NET CASH PROVIDED BY OPERATING ACTIVITIES.......      3.8    199.1     81.4 
                                                      -------  -------  ------- 
INVESTING ACTIVITIES                                                            
Purchases of marketable securities..................   (130.6)  (324.0)      -- 
Maturities of marketable securities.................    244.8     19.9       -- 
Property acquisitions...............................    (73.6)   (76.4)   (68.1)
Properties sold.....................................      6.7      4.3      6.9 
Proceeds from sale of subsidiaries (Notes 2 and 4)..     36.1    568.5       -- 
Acquisitions of businesses, less cash and short-term                            
 investments acquired (Note 4)......................    (33.5)    (0.7)   (56.1)
Proceeds from sale of subsidiary stock..............       --       --     78.7 
Investing activities of discontinued operations.....     (4.4)   (24.5)   (82.7)
Other (Note 14).....................................    (49.5)    (2.9)    (1.8)
                                                      -------  -------  ------- 
    NET CASH PROVIDED (USED) BY INVESTING                                       
     ACTIVITIES.....................................     (4.0)   164.2   (123.1)
                                                      -------  -------  ------- 
FINANCING ACTIVITIES (Notes 9 and 12)                                           
Proceeds from issuance of debt......................      0.6     29.8    204.0 
Repayment of debt...................................    (19.1)   (50.9)  (104.1)
Capital stock transactions                                                      
 Issuances..........................................     19.2     13.5     21.7 
 Share repurchases..................................    (62.7)    (3.1)   (31.5)
 ESOP note payments.................................      3.9     13.6     11.9 
 Dividends paid.....................................    (44.2)   (69.9)   (76.5)
Financing activities of discontinued operations.....      0.2      4.1      1.3 
                                                      -------  -------  ------- 
    NET CASH PROVIDED (USED) BY FINANCING                                       
     ACTIVITIES.....................................   (102.1)   (62.9)    26.8 
                                                      -------  -------  ------- 
NET INCREASE (DECREASE) IN CASH AND CASH                                        
 EQUIVALENTS........................................   (102.3)   300.4    (14.9)
Cash and Cash Equivalents at beginning of year......    363.1     62.7     77.6 
                                                      -------  -------  ------- 
CASH AND CASH EQUIVALENTS AT END OF YEAR............  $ 260.8  $ 363.1  $  62.7 
                                                      =======  =======  ======= 

See Financial Notes. Above referenced Notes describe related noncash investing  
and financing activities. In addition, see Note 9 for interest paid and Note 13 
for income taxes paid.                                                          

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FINANCIAL NOTES 

1. SIGNIFICANT ACCOUNTING POLICIES                                              

The consolidated financial statements of McKesson Corporation (the "Company"
or "McKesson") include the financial statements of all majority-owned companies,
except those classified as discontinued operations. All significant             
intercorporate amounts have been eliminated. Certain prior year amounts have    
been restated to conform to the current year presentation.                      

Within the United States and Canada, McKesson is the largest wholesale      
distributor of ethical and proprietary drugs and health and beauty care         
products. The Company is also engaged in the processing and sale of bottled     
drinking water to homes and businesses and packaged water through retail stores.
The principal markets for the drug and health and beauty care distribution      
businesses are chain and independent drug stores, hospitals, alternate care     
sites, food stores and mass merchandisers.                                      

 The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions   
that affect the reported amounts of assets and liabilities and disclosure of    
contingent assets and liabilities as of the date of the financial statements    
and the reported amounts of revenues and expenses during the reporting period.  
Actual results could differ 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 computed in marking these securities to market  
have been reported within stockholders' equity. At March 31, 1996, the fair     
value exceeded the amortized cost of these securities by $1.1 million. The      
investments mature on various dates through fiscal 1998.                        

Inventories consist of merchandise held for resale and are stated at the    
lower of cost or market. The cost of substantially all domestic inventories is  
determined on the last-in, first-out (LIFO) method. International inventories   
are stated at average cost.                                                     

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.                                                   

Capitalized Software included in other assets reflects costs related to     
internally developed or purchased software for projects in excess of $1.0       
million that are capitalized and amortized on a straight-line basis over        
periods not exceeding seven years.                                              

Goodwill and Other Intangibles are amortized on a straight-line basis       
over periods estimated to be benefited, generally 25 to 40 years. Accumulated   
amortization balances netted against goodwill and other intangibles were $54.8  
million, $47.8 million and $40.4 million at March 31, 1996, 1995 and 1994,      
respectively. The Company periodically assesses the recoverability of the cost  
of its goodwill based on a review of projected undiscounted cash flows of the   
related operating entities. These cash flows are prepared and reviewed by       
management in connection with the Company's annual long range planning process. 

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FINANCIAL NOTES--(CONTINUED)

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         
significant 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. Revenue is recognized when products are shipped or     
services are provided to customers. In addition, for large volume sales of      
pharmaceuticals to major self-warehousing drug store chains, the Company acts as
an intermediary in the order and subsequent delivery of products directly from  
the manufacturer to the customers' warehouses. These sales of $3.0 billion in   
1996, $2.9 billion in 1995, and $2.8 billion in 1994 are reported net of        
associated cost of sales, as revenues in the consolidated statements of income. 
Included in revenues is interest income of $37.8 million, $18.4 million and $6.2
million in fiscal 1996, 1995 and 1994, respectively.                            

Income Taxes. The Company accounts for income taxes under the liability     
method in accordance with Statement of Financial Accounting Standards ("SFAS")  
No. 109, "Accounting for Income Taxes", see Note 13.                            

Earnings (Loss) per Common Share. Primary earnings (loss) per share are     
calculated by dividing net income less preferred dividends by the weighted      
average shares outstanding adjusted for the dilutive effect of stock options.   
Fully diluted earnings (loss) per share reflect the dilutive effect of stock    
options and assume the conversion of the preferred stocks and related earnings  
adjustments.                                                                    

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

New Accounting Pronouncements. In March 1995, the Financial Accounting      
Standards Board (FASB) issued Statement of Financial Accounting Standards       
(SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for      
Long-Lived Assets to be Disposed Of", which requires a Company to review the    
carrying value of long-lived assets and certain intangibles for impairment when 
events or changes in circumstances indicate that the carrying amount of the     
asset may not be recoverable. This standard is effective for the Company's 1997 
fiscal year. The Company has not yet determined the effects SFAS 121 will have  
on its financial position or the results of its operations.                     

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based  
Compensation", which will be effective for the Company's 1997 fiscal year. SFAS 
No. 123 allows companies which have stock-based compensation arrangements with  
employees to adopt a new fair-value basis of accounting for stock options and   
other equity instruments, or to continue to apply the existing accounting       
required by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for 
Stock Issued to Employees" and disclosure of the proforma impact of adoption in 
the footnotes to the financial statements. The Company intends to continue to   
account for stock-based compensation arrangements under APB Opinion No. 25, and 
therefore management does not believe that the effect of implementing this      
standard will be material to the Company's financial position, results of       
operations or cash flows.                                                       

2. SALE OF THE PCS BUSINESS                                                     

On July 10, 1994, the Company entered into an Agreement and Plan of Merger  
and a Reorganization and a Distribution Agreement ("Merger Agreement" and       
"Distribution Agreement", respectively) providing for the acquisition by Eli    
Lilly and Company ("Eli Lilly") of McKesson's pharmaceutical benefits           
management business ("PCS"), which was primarily operated by PCS Health         
Systems, Inc. and Clinical Pharmaceuticals, Inc., both of which were wholly-    
owned subsidiaries of McKesson, for approximately $4 billion.                   

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FINANCIAL NOTES--(CONTINUED)

As required by the Merger Agreement, on July 15, 1994 ECO Acquisition       
Corporation ("ECO"), a subsidiary of Eli Lilly, commenced a cash tender offer   
to purchase from McKesson shareholders all outstanding shares of McKesson       
Common Stock (the "Shares") at a price of $76.00 net per Share (the "Offer").   
The Offer was completed on November 21, 1994 with ECO purchasing over 90% of    
the Shares. Following the purchase of Shares under the Offer, McKesson and ECO  
merged (the "Merger") and each Share not purchased in the Offer (other than     
Shares held by Eli Lilly and certain other related entities) was converted into 
the right to receive $76.00 in cash, without interest.                          

Simultaneous with the completion of the Offer and pursuant to the terms of  
the Distribution Agreement, McKesson (i) transferred all of its assets and      
liabilities, other than those related to PCS, to SP Ventures, Inc., a newly-    
formed corporation ("New McKesson") and (ii) declared a dividend of one share   
of common stock of New McKesson, par value of $.01 per share, for each Share    
held of record as of November 19, 1995 (collectively, the "Spin-Off"). After    
giving effect to the Spin-Off and the completion of the Offer, the current      
business of McKesson (other than PCS) is being continued through New McKesson.  
As a result of the Offer, Merger and Spin-Off (collectively, the "PCS           
Transaction"), each existing McKesson shareholder received a cash payment of    
$76 per Share (representing the proceeds from the sale of PCS) and one share of 
common stock of New McKesson representing their continuing interest in the      
retained businesses.                                                            

For financial statement purposes, New McKesson is the continuing entity and 
has retained the name McKesson Corporation. The accompanying financial          
statements reflect PCS as a discontinued operation.                             

Approximately $600 million of the $4 billion consideration paid by Eli Lilly
was received by the Company. An additional $24 million of the $4 billion        
consideration was received from Eli Lilly to fund deferred vested stock option  
payments. The remainder of the $4 billion was paid directly to McKesson         
shareholders by Eli Lilly. In fiscal 1995, the Company recorded a gain on the   
sale of PCS of $576.7 million, after transaction costs and other expenses.      

3. CHARGES AND GAINS IN CONTINUING OPERATIONS                                   

Fiscal 1995                                                                     

The loss from continuing operations in fiscal 1995, includes $59.4 million  
($45.3 million after-tax) of compensation costs related to the PCS Transaction, 
$107.0 million of income tax expense related to the distribution of New         
McKesson common stock to McKesson shareholders subsequent to the transfer of    
assets and liabilities from McKesson to New McKesson to effect the PCS          
Transaction, and $139.5 million ($85.3 million after-tax) of charges for        
restructuring, asset impairment and other operating items.                      

The $59.4 million of compensation expense related to the PCS Transaction in 
continuing operations (classified in administrative expense) consists of $23.6  
million associated with an allocation of cash and shares to ESOP plan           
participants resulting from a paydown of ESOP debt by the ESOP trust and $35.8  
million associated with the Company's vested stock options and other            
compensation programs.                                                          

The $139.5 million of charges for restructuring, asset impairment and other 
operating items in continuing operations ($35.9 million included in cost of     
sales and $103.6 million included in administrative expense) resulted, in part, 
from the initiation by the Company's management of several measures designed to 
streamline operations and improve productivity in the Company's distribution    
and Water Products businesses. These measures include consolidation of certain  
facilities, work-force reductions and divestiture of under-performing assets.   

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Other charges consist primarily of write-downs of assets to be disposed of to   
fair value less costs to sell, impairment losses on capitalized software due to 
changes in technology, severance for an announced company-wide work-force       
reduction of approximately 350 individuals, write-downs of inventory associated 
with the discontinuation of certain product lines, and receivable reserves      
related to facility closures and a reassessment of credit risks in the Company's
distribution businesses. The assets to be disposed of are associated with       
facility consolidations in the distribution and Water Products businesses and   
surplus properties held by the Company. The disposition of these properties is  
expected to occur over the next three years.                                    

The charges (substantially all non-cash with the exception of severance) for
restructuring, asset impairment and other operating items included in continuing
operations in fiscal 1995, and the remaining balances outstanding at March 31,  
1996 related to such charges, are as follows:                                   

                                                                · Download Table

                                          Fiscal 1995    Reserve Balance
                                            Charges       March 31, 1996
                                          -----------    ---------------
                                                (in millions)           
                                                                        
Costs associated with facility closures                                 
 and surplus properties - primarily                                     
 write-downs of assets to be disposed of   $ 27.6             $13.1     
Severance costs for announced workforce                                 
 reductions                                  11.5               2.0     
Asset write-downs resulting from changed                                
 business conditions:                                                   
  Facilities and equipment                    2.4                 -     
  Software                                   24.7                 -     
Discontinuation of product lines             20.5              14.3     
Receivable reserves                          32.2               0.6     
Other operating items                        20.6               2.2     
                                           ------             -----     
  Total                                    $139.5             $32.2     
                                           ======             =====     

  The write-downs associated with assets to be disposed of and asset impairments
due to changed business conditions were based primarily on independent          
appraisals. Charges to the restructuring reserve in fiscal 1995 and 1996 have   
consisted primarily of asset write-offs (substantially all of which are non-    
cash) and cash payments for severance of $5.2 million and $4.3 million in fiscal
1996 and 1995, respectively. The remaining balance of the reserve related to    
severance is expected to be paid in fiscal 1997.                                

Fiscal 1994                                                                     

Included in continuing operations in fiscal 1994 is a loss of $13.4 million 
resulting from the termination of interest rate swap arrangements. These        
interest rate swap arrangements had been designated, through March 31, 1993, as 
a hedge of the Company's short-term variable interest domestic borrowings. As a 
result of the Company's May 12, 1993 sale of Armor All shares and other         
factors, the interest rate swap arrangements were no longer considered          
effective as a hedge against the variable-rate borrowings as the Company, at    
that time, no longer expected to borrow domestically on a short-term basis in   
fiscal 1994.                                                                    

4. ACQUISITIONS, INVESTMENTS AND DIVESTITURES                                   

In fiscal 1996 the Company made a $20 million acquisition in the Health Care
Services segment. The acquired company provides support services to commercial, 
non-profit and governmental organizations engaged in drug and biomedical        
development. The Company also acquired interests in two companies engaged in    
the development of new technology-based initiatives to enhance the Health Care  
Services segment's competitive position. In April 1996, the Company acquired    
another company in the Health Care Services segment for $65 million. The newly  
acquired company designs, manufactures, installs and supports automated         
pharmaceutical dispensing equipment for use by health care institutions.        

In fiscal 1996, the Company sold its interest in a Central American         
pharmaceutical manufacturer for $36.1 million, resulting in a gain of $11.2     
million.                                                                        

The Company made two acquisitions in fiscal 1994 for an aggregate cash      
purchase price of $56.1 million. In April 1993, the Company                     

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FINANCIAL NOTES--(CONTINUED)

acquired a 22.7% interest in Nadro S.A. de C.V. ("Nadro") in the Health Care    
Services segment. Nadro is the leading pharmaceutical wholesale distributor in  
Mexico. The Company has an option to acquire an additional 9% of Nadro's common 
stock; such option has not yet been exercised and remains currently exercisable 
by the Company. In addition, the Company purchased a local delivery water       
company in the Water Products segment.                                          

5. OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK                     

Trade receivables subject the Company to a concentration of credit risk with
customers in the retail sector. This risk is spread over a large number of      
geographically dispersed customers.                                             

 At March 31, 1996, the Company was contingently liable for approximately $105
million of trade receivables. These receivables were sold to a bank with        
recourse to the Company for certain uncollectible amounts. Proceeds received by 
the Company on sale of accounts receivable amounted to $105 million, $47        
million and $40 million in fiscal 1996, 1995 and 1994, respectively.            

6. RECEIVABLES                                                                  

                                                                · Download Table

                                                           MARCH 31,         
                                                      ---------------------- 
                                                       1996    1995    1994  
                                                      ------  ------  ------ 
                                                         (IN MILLIONS)       
                                                                             
Customer accounts.................................... $631.7  $635.6  $615.3 
Other................................................   79.2    65.4    34.6 
                                                      ------  ------  ------ 
  Total..............................................  710.9   701.0   649.9 
Allowances...........................................  (38.1)  (49.3)  (24.8)
                                                      ------  ------  ------ 
  Net................................................ $672.8  $651.7  $625.1 
                                                      ======  ======  ====== 

The allowances are for uncollectible accounts, discounts, returns and other 
adjustments.                                                                    

7. INVENTORIES                                                                  

                                                                · Download Table

                                                        MARCH 31            
                                               ---------------------------- 
                                                 1996      1995      1994   
                                               --------  --------  -------- 
                                                     (IN MILLIONS)          
                                                                            
Inventories before LIFO cost adjustment                                     
 (approximates replacement cost).............. $1,602.5  $1,376.2  $1,204.3 
LIFO cost adjustment..........................   (285.5)   (294.3)   (303.8)
                                               --------  --------  -------- 
  Total....................................... $1,317.0  $1,081.9  $  900.5 
                                               ========  ========  ======== 

The LIFO method was used to value approximately 90% of the inventories at   
March 31, 1996 and 1995, and 89% of the inventories at March 31, 1994.          

8. DISCONTINUED OPERATIONS                                                      

On December 31, 1996, the Company sold its 55% equity interest in Armor All 
Products Corporation ("Armor All") to The Clorox Company ("Clorox"). Also in    
December 1996, the Company made the decision to divest the net assets of its    
Service Merchandising Division, Millbrook Distribution Services Inc. ("Service  
Merchandising"). All of the net assets and results of operations of both Armor  
All and Service Merchandising have been reclassified as discontinued operations 
for all periods presented.                                                      

The net assets of discontinued operations at March 31 were as follows:      

                                                                · Download Table

                                                       MARCH 31          
                                                -----------------------  
                                                1996     1995    1994    
                                                -----    -----  -------  
                                                    (IN MILLIONS)        
                                                                         
  Total assets................................ $ 275.5  $ 309.6  $ 881.3 
  Total liabilities...........................  (149.8)  (221.4)  (527.4)
                                               -------  -------  ------- 
    Net assets................................ $ 125.7  $  88.2  $ 353.9 
                                               =======  =======  ======= 
                                                                               
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At March 31, 1996 and 1995, the assets of discontinued operations consist   
primarily of cash, receivables, inventory, property, plant and equipment and    
goodwill of Armor All and Service Merchandising. Liabilities of discontinued    
operations consist primarily of accounts payable and other accrued liabilities  
of Armor All and Service Merchandising.                                         

At March 31, 1994, assets of discontinued operations consist of cash, claim 
reimbursements and rebate receivables, receivables, inventory, and property     
plant and equipment, and goodwill primarily associated with PCS, Armor All and  
Service Merchandising. Liabilities of discontinued operations consist primarily 
of accounts payable claim and rebate payables and other accrued liabilities     
associated with PCS, Armor All, and Service Merchandising operations.           

Results of discontinued operations were as follows:                         

                                                                · Download Table

                                                        1996    1995    1994    
                                                       ------  ------  -------  
                                                           (IN MILLIONS)        
                                                                                
Revenues.............................................. $749.6  $999.9  $1,105.1 
                                                       ======  ======  ======== 
Discontinued operations before taxes.................. $ 31.7  $ 20.2  $  110.0 
Provision for taxes on income.........................  (13.7)  (32.3)    (45.9)
Minority interest in Armor All........................   (3.3)  (11.0)     (9.0)
                                                       ------  ------  -------- 
  Discontinued operations.............................   14.7   (23.1)     55.1 
                                                       ------  ------  -------- 
Gain on sale/donation of Armor All stock..............      -    (2.0)     50.8 
Tax benefit (expense).................................      -     3.0     (18.1)
                                                       ------  ------  -------- 
  Discontinued operations--gain on sale/donation                                
    of Armor All stock................................      -     1.0      32.7 
                                                       ------  ------  -------- 
Gain on sale of PCS...................................      -   571.8         - 
Tax benefit...........................................      -     4.9         - 
                                                       ------  ------  -------- 
  Discontinued operations--gain on sale of PCS........      -   576.7         - 
                                                       ------  ------  -------- 
    Total............................................. $ 14.7  $554.6  $   87.8 
                                                       ======  ======  ======== 

Discontinued operations in fiscal 1996 of $14.7 million after-tax includes  
$4.3 million and $10.4 million after-tax from the operations of Armor All and   
Service Merchandising, respectively.                                            

The after-tax loss from discontinued operations in fiscal 1995 of $23.1     
million includes $19.4 million and $13.9 million in after-tax profits from the  
operations of PCS and Armor All, respectively, and a $58.0 million loss after-  
tax from the Service Merchandising segment. This segment's results includes     
approximately $72.8 million after-tax of charges related to the write-down of   
the Company's investment as a result of significant changes in that business'   
customer base and marketplace. Results also include $1.6 million after-tax      
profit from settlements recovered in insurance litigation related to            
environmental matters associated with the former operations of the Company's    
chemical businesses, which were divested in fiscal 1987, net of adjustments to  
environmental reserves. The gain on donation of Armor All stock of $1 million   
after-tax in fiscal 1995 is related to contributions to the McKesson Foundation.

The charges for restructuring, asset impairment and other operating items   
included in discontinued operations in fiscal 1995 and the remaining balances   
outstanding at March 31, 1996 related to such charges are as follows:           

                                                                · Download Table


                                          Fiscal 1995      Reserve Balance
                                        Pre-tax Charges     March 31, 1996
                                        ---------------    ---------------
                                                                          
Severance costs for announced                                             
  workforce reductions                    $   0.7             $     -     
Asset write-downs resulting from                                          
  changed business conditions:                                            
    Goodwill                                 56.3                   -     
    Facilities and equipment                 25.0                 1.9     
Discontinuance of product lines               1.4                   -     
                                          -------             -------     
  Total                                   $  83.4             $   1.9     
                                          =======             =======     

Discontinued operations in fiscal 1994 of $55.1 million after-tax includes  
$30.6 million, $14.0 million, and $10.5 million after-tax from the operations of
PCS, Armor All and Service Merchandising, respectively. The fiscal 1994 results 
also include adjustments to environmental and other reserves associated with    
previously divested operations, offset completely by a gain from the settlement 
of tax litigation associated with the Company's former wine and spirits         
operations in the state of Florida and other operating income. The gain on      
sale/donation of Armor All stock in fiscal 1994 includes a gain of $55.1 million
from the sale of 5,175,000 shares and the donation of 250,000 shares of Armor   
All. The shares donated to the McKesson Foundation had a market value of $4.3   
million.                                                                        

9. LONG-TERM DEBT                                                               

                                                                · Download Table

                                                               MARCH 31      
                                                         --------------------
                                                          1996   1995   1994 
                                                         ------ ------ ------
                                                            (IN MILLIONS)    
                                                                             
ESOP related debt....................................... $122.5 $126.4 $165.1
4.50% exchangeable subordinated debentures due 2004.....  180.0  180.0  180.0
8.625% Notes due 1998...................................   49.0   49.0   49.0
8.75% Notes due 1997....................................   10.0   10.0   10.0
3.45% to 7.47% IDRBs due through 2012...................   20.0   25.6   25.9
Capital lease obligations (averaging 8.5%)..............    4.4    4.7    5.0
Other, 6.5% to 15.7%, due through 2021..................   78.5   74.7   39.9
                                                         ------ ------ ------
    Total...............................................  464.4  470.4  474.9
Less current portion....................................   27.9   17.4   18.2
                                                         ------ ------ ------
    Total............................................... $436.5 $453.0 $456.7
                                                         ====== ====== ======

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FINANCIAL NOTES--(CONTINUED)

The Company has a revolving credit agreement with eight U.S. banks and their
Canadian affiliates whereby the banks commit $250 million borrowing             
availability at the reference rate (8.25% at March 31, 1996) or money market-   
based rates. The agreement expires in fiscal 2000. The agreement permits the    
Company's wholly-owned Canadian subsidiary, Medis, to borrow the Canadian       
dollar equivalent of up to $75 million (as part of the $250 million             
arrangement) at the Canadian prime rate or Canadian money market-based rates.   
The agreement contains limitations on additional indebtedness. Compensating     
balances are not required. In April, 1996, the agreement was extended to expire 
in FY 2002 and modified to accommodate the merger of two banks participating in 
the credit. At March 31, 1996, the Company had $250 million of unused borrowing 
capacity under this agreement.                                                  

Total interest payments were $47.5 million, $45.3 million, $43.3 million in 
fiscal 1996, 1995 and 1994, respectively.                                       

ESOP related debt (see Note 14) is payable to banks and insurance companies,
bears interest at rates ranging from 8.6% fixed rate to approximately 80% of    
the prime or LIBOR +0.4% and is due in installments through 2009.               

The exchangeable subordinated debentures are exchangeable, at the option of 
the holder, into shares of Armor All common stock owned by the Company at an    
exchange price of $25.94 per share (equivalent to an exchange rate of 38.55     
shares of Armor All common stock for each $1,000 principal amount of            
debentures), subject to the Company's right to pay cash equal to the market     
price of the stock in lieu of making the exchange (see Note 17).                

During fiscal 1994, the Company redeemed $50.7 million of 8.625% Notes and  
recorded an extraordinary loss of $4.2 million on the early retirement.         

Certain debt agreements require that the Company's total debt not exceed    
56.5% of total capitalization (total debt plus equity). At March 31, 1996,      
total debt was 30.7% of total capitalization.                                   

 Aggregate annual payments on long-term debt and capitalized lease obligations
(see Note 10) for the years ending March 31 are:                                

                                                                · Download Table


                                                LONG-TERM  CAPITAL       
                                                   DEBT    LEASES  TOTAL 
                                                ---------- ------- ------
                                                      (IN MILLIONS)      
                                                                         
1997..........................................     $ 27.4    $0.3  $ 27.9
1998..........................................       66.9     0.3    67.2
1999..........................................       18.0     0.3    18.3
2000..........................................       19.5     0.3    19.8
2001..........................................       20.3     0.3    20.6
Later years...................................      307.7     2.9   310.6
                                                   ------    ----  ------
 Total........................................     $459.8    $4.4  $464.4
                                                   ======    ====  ======

10. 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 $3.3 million, $3.5 million and $4.2 million at March 31, 1996,   
1995 and 1994, respectively. Amortization of capital leases is included in      
depreciation expense.                                                           

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As of March 31, 1996, future minimum lease payments and sublease rentals in 
years ending March 31 are:                                                      

                                                                · Download Table

                                                   NON-       NON-           
                                                CANCELABLE CANCELABLE        
                                                OPERATING   SUBLEASE  CAPITAL
                                                  LEASES    RENTALS   LEASES 
                                                ---------- ---------- -------
                                                        (IN MILLIONS)        
                                                                             
1997...........................................   $15.9      $(1.4)    $ .6  
1998...........................................    13.6       (1.1)      .6  
1999...........................................    11.0        (.5)      .6  
2000...........................................     8.7        (.3)      .6  
2001...........................................     6.8        (.1)      .6  
Later years....................................    18.4        (.1)     4.1  
                                                  -----      -----     ----  
Total minimum lease payments...................   $74.4      $(3.5)     7.1  
                                                  =====      =====           
Less amounts representing interest.............                         2.7  
                                                                       ----  
Present value of minimum lease payments........                        $4.4  
                                                                       ====  

Rental expense was $26.1 million, $24.9 million and $24.0 million in fiscal 
1996, 1995 and 1994, 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.                                                                 

11. FAIR VALUE OF FINANCIAL INSTRUMENTS                                         

At March 31, 1996, the carrying amount and the fair value of the Company's  
financial instruments, as determined under SFAS No. 107, "Disclosures about     
Fair Value of Financial Instruments", were as follows:                          

                                                                · Download Table

                                                          CARRYING ESTIMATED 
                                                           AMOUNT  FAIR VALUE
                                                          -------- ----------
                                                             (IN MILLIONS)   
                                                                             
Cash and cash equivalents................................  $260.8    $260.8  
Marketable securities....................................   195.4     195.4  
Short-term borrowings....................................     6.6       6.6  
Long-term debt, including current portion................   464.4     464.2  

The estimated fair values were determined as follows:                       

Cash and cash equivalents and short-term borrowings: carrying amounts   
approximate fair value.                                                     

Marketable securities and long-term debt: quoted market prices or market
comparables.                                                                

12. STOCKHOLDERS' EQUITY                                                        

At March 31, 1996 and 1995, the Company was authorized to issue 100,000,000 
shares of preferred stock ($.01 par value) of which none were outstanding and   
200,000,000 shares of common stock ($.01 par value) of which approximately      
44,848,000 shares and 44,374,000 shares were outstanding net of treasury stock, 
respectively. At March 31, 1994 there were 120,000,000 shares of common stock   
($2.00 par value) authorized of which approximately 40,605,000 were             
outstanding, net of treasury stock and two issues of preferred stock authorized 
and outstanding. Prior to November 21, 1994 and in connection with the PCS      
Transaction, all of the outstanding shares of preferred stock were converted    
into either common stock or cash.                                               

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FINANCIAL NOTES--(CONTINUED)  

Noncash conversions of preferred stock to common stock totaled $123.5       
million in fiscal 1995. Other noncash transactions impacting stockholders'      
equity in fiscal 1995 included the $23.6 million paydown of ESOP debt by the    
ESOP Trust and $80.1 million of net assets of PCS distributed in connection     
with the PCS Transaction and charged to retained earnings.                      

Options to purchase common stock at various times through the year 2006 have
been granted at market prices at date of grant to key employees.                

Option information follows:                                                 

                                                                · Download Table

                                  1996           1995            1994       
                              -------------  -------------  --------------- 
                                                                            
OPTION SHARES                                                               
Outstanding at beginning of                                                 
 year........................     6,127,161      3,205,025        3,240,719 
Granted......................       884,200        828,150          828,675 
Exercised....................    (1,762,447)      (651,651)        (684,310)
Canceled.....................      (278,511)      (229,072)        (175,355)
Surrendered (stock                                                          
 appreciation rights)........            --             --           (4,704)
PCS options/(1)/.............            --       (497,650)              -- 
Repricing of options due to                                                 
 PCS Transaction/(2)/........            --      3,472,359               -- 
                              -------------  -------------  --------------- 
Outstanding at year end......     4,970,403      6,127,161        3,205,025 
Available for additional                                                    
 grants at year end..........     2,527,999      3,133,688          648,410 
                              -------------  -------------  --------------- 
Reserved at end of year......     7,498,402      9,260,849        3,853,435 
                              =============  =============  =============== 
Exercisable at end of year...     2,209,460      2,188,196        1,174,526 

AT MARCH 31                                                                 
Range of outstanding option                                                 
 prices...................... $5.78-$36.875  $5.78-$36.875  $19.625-$59.625 
Aggregate amounts (in                                                       
 millions)                                                                  
 Option price................        $112.4          $97.8           $134.4 
 Market value................        $254.7         $247.4           $190.7 

--------                                                                        
(1) PCS employees that held McKesson options received directly from Eli Lilly   
cash and restricted stock for all vested and unvested options,          
respectively, at the time of the PCS Transaction.                       

(2) Exercisable options held by an employee of the Company at the time of the   
PCS Transaction were split into two separately exercisable options, one 
for shares of McKesson common stock and one for shares of New McKesson  
 common stock. The options were repriced such that the aggregate intrinsic
value of the two separately exercisable options remained the same as the
value of the corresponding original exercisable option. Upon the        
completion of the PCS Transaction, each adjusted McKesson option was    
canceled in exchange for a cash amount, paid by Eli Lilly, equal to the 
  difference between $76 and the adjusted exercise price of such option. All
 non-exercisable options held by an employee of the Company at the time of
the PCS Transaction were repriced at an exchange ratio of 3.3967 New    
McKesson options to one McKesson option. The exercise price of each New 
McKesson option is equal to the exercise price per share of the original
McKesson option divided by 3.3967.                                      

The holders of options with stock appreciation rights may exercise the      
option or, with the approval of the Compensation Committee of the Board of      
Directors, may receive the appreciation in the stock's value in the form of     
cash or stock.                                                                  

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13. TAXES ON INCOME                                                             

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

                                                                · Download Table

                                                 1996      1995     1994 
                                                 -----    ------    -----
                                                     (IN MILLIONS)       
                                                                         
CURRENT                                                                  
Federal.......................................   $23.3    $137.3    $17.0
State and local...............................     5.0      30.4      3.6
Foreign.......................................     5.0       9.3      6.4
                                                 -----    ------    -----
  Total Current...............................    33.3     177.0     27.0
                                                 -----    ------    -----
DEFERRED                                                                 
Federal.......................................    27.2     (65.6)    12.1
State.........................................     7.5     (13.5)     2.7
Foreign.......................................     8.2      (1.3)     3.2
                                                 -----    ------    -----
Total Deferred................................    42.9     (80.4)    18.0
                                                 -----    ------    -----
  Total Provision.............................   $76.2    $ 96.6    $45.0
                                                 =====    ======    =====

Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial           
statements. Foreign pre-tax earnings were $26.2 million, $25.3 million and      
$20.7 million in fiscal 1996, 1995 and 1994, respectively.                      

The reconciliation between the Company's effective tax rate on income from  
continuing operations and the statutory Federal income tax rate follows:        

                                                                · Download Table

                                                        1996   1995    1994 
                                                        ----  ------   ---- 
                                                                            
Statutory federal income tax rate...................... 35.0%   35.0%  35.0%
State and local income taxes net of federal tax                             
 benefit...............................................  4.1   (20.4)   3.6 
Nondeductible amortization.............................  1.1    (5.5)   2.7 
Dividends paid deduction--ESOP allocated shares........ (0.5)    3.3   (1.8)
Basis difference on debentures.........................        (65.7)       
Tax expense on corporate restructuring to effect the                        
 PCS Transaction.......................................       (111.4)       
Nondeductible compensation costs related to the PCS                         
 Transaction...........................................        (15.4)       
Nondeductible restructuring charges....................         (1.0)       
Other--net............................................. (1.0)    0.5   (0.1)
                                                        ----  ------   ---- 
Effective tax rate..................................... 38.7% (180.6)% 39.4%
                                                        ====  ======   ==== 

Income tax payments were $97 million, $69 million and $86 million in fiscal 
1996, 1995 and 1994, respectively.                                              

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FINANCIAL NOTES--(CONTINUED)

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

                                                                · Download Table

                                                     1996     1995    1994   
                                                    -------  ------  ------- 
                                                        (IN MILLIONS)        
                                                                             
ASSETS                                                                       
Nondeductible accruals for                                                   
 environmental obligations........................  $  11.9  $ 15.9  $  15.8 
Receivable reserves...............................     13.8    12.2      3.7 
Other.............................................     34.0    39.4     34.3 
                                                    -------  ------  ------- 
Current...........................................     59.7    67.5     53.8 
                                                    -------  ------  ------- 
Nondeductible accruals for:                                                  
  Postretirement and postemployment plans.........     76.6    81.6     82.7 
  Deferred compensation...........................     29.0    26.4     13.0 
  Costs associated with facility closures                                    
   and surplus properties.........................      8.8     7.8      0.8 
  Facilities and equipment write-downs resulting                             
   from changed business conditions...............      1.6     0.8       -- 
Retirement plan...................................      6.0      --       -- 
Loss and credit carryforwards.....................      9.7      --       -- 
Other.............................................     17.0    13.0     15.2 
                                                    -------  ------  ------- 
Noncurrent........................................    148.7   129.6    111.7 
                                                    -------  ------  ------- 
  Total...........................................  $ 208.4  $197.1  $ 165.5 
                                                    =======  ======  ======= 
LIABILITIES                                                                  
Basis differences for inventory valuation.........  $ (50.9) $(18.0) $ (22.7)
Other.............................................     (5.9)   (2.8)    (2.5)
                                                    -------  ------  ------- 
Current...........................................    (56.8)  (20.8)   (25.2)
                                                    -------  ------  ------- 
Accelerated depreciation..........................    (43.6)  (35.9)   (37.9)
Basis difference related to tax advantaged invest-                           
 ments............................................       --      --    (15.1)
Systems development costs.........................    (14.5)   (5.2)   (13.6)
Retirement plan...................................       --   (12.2)   (12.6)
Other.............................................     (9.9)   (5.8)   (16.6)
                                                    -------  ------  ------- 
Noncurrent........................................    (68.0)  (59.1)   (95.8)
                                                    -------  ------  ------- 
  Total...........................................  $(124.8) $(79.9) $(121.0)
                                                    =======  ======  ======= 
Total net current (included in prepaid expenses)..  $   2.9  $ 46.7  $  28.6 
                                                    =======  ======  ======= 
Total net noncurrent (included in other assets)...  $  80.7  $ 70.5  $  15.9 
                                                    =======  ======  ======= 

14. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS                                  

Pension Plans                                                                   

 Substantially all full-time employees of the Company are covered under either
the Company-sponsored defined benefit retirement plan or by bargaining unit     
sponsored multi-employer plans. The benefits for Company-sponsored plans are    
based primarily on age of employees at date of retirement, years of service and 
employees' pay during the five years prior to retirement.                       

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FINANCIAL NOTES--(CONTINUED)

 Net pension expense for the Company-sponsored defined benefit retirement plan
and executive supplemental retirement plan consisted of the following:          

                                                                · Download Table

                                                      1996    1995    1994  
                                                     ------  ------  ------ 
                                                        (IN MILLIONS)       
                                                                            
Service cost--benefits earned during the year....... $  5.3  $  6.7  $  5.5 
Interest cost on projected benefit obligation.......   23.7    22.4    22.0 
Return on assets                                                            
  Actual (income) loss..............................  (51.6)    3.2   (23.6)
  Deferred gain (loss)..............................   31.2   (25.9)    2.3 
Amortization of unrecognized loss and prior service                         
 costs..............................................    4.5     5.0     2.1 
Amortization of unrecognized net transition asset...   (2.5)   (2.5)   (2.5)
                                                     ------  ------  ------ 
  Net pension expense............................... $ 10.6  $  8.9  $  5.8 
                                                     ======  ======  ====== 

Assets of the plans are measured on a calendar year basis. The funded status
of the Company-sponsored defined benefit retirement plan at December 31 was as  
follows:                                                                        

                                                                · Download Table

                                                      1996    1995    1994  
                                                     ------  ------  ------ 
                                                        (IN MILLIONS)       
                                                                            
Actuarial present value of benefit obligations                              
  Vested benefits..................................  $249.8  $204.0  $226.0 
  Nonvested benefits...............................    14.1    11.0    13.5 
                                                     ------  ------  ------ 
  Accumulated benefit obligation...................   263.9   215.0   239.5 
  Effect of assumed increase in future compensation                         
   levels..........................................    20.7    20.9    21.9 
                                                     ------  ------  ------ 
  Projected benefit obligation for services                                 
   rendered to date................................   284.6   235.9   261.4 
Assets of plan at fair value.......................   248.9   218.8   241.5 
                                                     ------  ------  ------ 
Shortfall of assets over projected benefit                                  
 obligation........................................   (35.7)  (17.1)  (19.9)
Unrecognized prior service cost and net loss from                           
 experience different from that assumed............    67.1    56.7    63.8 
Unrecognized net transition asset, recognized                               
 straight-line through 1998........................    (6.0)   (8.8)  (11.7)
Adjustment required to recognize minimum liability.   (40.4)     --      -- 
                                                     ------  ------  ------ 
Pension asset (liability) included in other assets                          
 (noncurrent liabilities)..........................  $(15.0) $ 30.8  $ 32.2 
                                                     ======  ======  ====== 

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 benefit obligations for 
Company-sponsored plans were determined using a discount rate of 7.25% at       
December 31, 1995, 8.75% at December 31, 1994 and 7.5% at December 31, 1993 and 
an assumed increase in future compensation levels of 4.0% at December 31, 1995  
and 1993 and 5.0% at December 31, 1994. The expected long-term rate of return   
on assets used to determine pension expense was 9.75% for all periods. The      
adjustment required to recognize the minimum liability was charged to other     
equity, net of tax.                                                             

The assets of the plan consist primarily of listed common stocks and bonds  
for which fair value is determined based on quoted market prices.               

The projected benefit obligation for the Company's executive supplemental   
retirement plan at December 31, 1996 was $43.0 million of which $37.4 million   
(the accumulated benefit obligation) is recognized as a liability on the        
consolidated balance sheet.                                                     

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Profit-Sharing Investment Plan                                                  

Retirement benefits for employees not covered by collective bargaining      
arrangements include a supplementary contributory profit sharing investment     
plan ("PSIP"). The leveraged ESOP portion of the PSIP has purchased an          
aggregate of 4.1 million shares of common stock since inception and 2.85        
million shares of convertible preferred stock from the Company. The convertible 
preferred stock was converted into common stock in connection with the PCS      
Transaction. These purchases have been financed by 10 to 20-year loans from or  
guaranteed by the Company. The Company's related receivables from the ESOP have 
been classified 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 contributions. The ESOP loan maturities and rates are identical to the     
terms of related Company borrowings (see Note 9).                               

 After-tax ESOP expense (income), including interest expense on ESOP debt, was
$(0.2) million, $4.0 million and $5.1 million in fiscal 1996, 1995 and 1994,    
respectively. Additional tax benefits received on dividends paid on unallocated 
shares of $2.2 million, $2.7 million and $4.5 million in fiscal 1996, 1995 and  
1994, respectively, have been credited directly to retained earnings in         
accordance with SFAS 109.                                                       

Contribution expense for the PSIP in fiscal 1996, 1995 and 1994 was all ESOP
related and is reflected in the amounts above. In fiscal 1996 and 1994,         
approximately 457,000 and 497,000 shares, respectively, were allocated to plan  
participants. In fiscal 1995, 693,000 shares and $8.9 million of cash were      
allocated to plan participants.                                                 

In fiscal 1996, the ESOP Trust completed the purchase of 5.2 million Company
shares for $212 million with the remaining proceeds received on the unallocated 
shares tendered in connection with the PCS Transaction (see Note 2). In fiscal  
1995 one-time compensation costs related to the PCS Transaction were recorded   
that included $23.6 million associated with an allocation of $31.1 million of   
cash and 409,000 shares to ESOP plan participants resulting from a paydown of   
ESOP debt by the ESOP Trust with a portion of the proceeds received on the      
unallocated shares tendered under the Offer.                                    

 Through March 31, 1996, 4.8 million common shares have been allocated to plan
participants. At March 31, 1996, 7.3 million common shares in the ESOP Trust    
had not been allocated to plan participants.                                    

Health Care and Life Insurance                                                  

In addition to providing pension benefits, the Company provides health care 
and life insurance benefits for certain retired employees. The Company's policy 
is to fund these benefits as claims are paid. The benefits have been reduced    
significantly for those employees retiring after December 31, 1990. In 1989,    
the Company implemented the preferred stock 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 benefits consisted
of the following:                                                               

                                                                · Download Table

                                                        1996   1995   1994  
                                                        -----  -----  ----- 
                                                          (IN MILLIONS)     
                                                                            
Service cost--benefits earned during the period........ $ 1.1  $ 1.2  $ 1.5 
Interest cost on projected benefit obligation..........  11.4   10.5   12.8 
Amortization of unrecognized gain and prior service                         
 costs.................................................  (9.3)  (7.6)  (8.6)
                                                        -----  -----  ----- 
  Total................................................ $ 3.2  $ 4.1  $ 5.7 
                                                        =====  =====  ===== 

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Payments for postretirement health care and life insurance benefits amounted
to $10.9 million, $11.5 million and $12.8 million in fiscal 1996, 1995 and 1994 
respectively.                                                                   

The funded status and amounts recognized in the consolidated balance sheet  
for postretirement health care and life insurance benefits at December 31, were 
as follows:                                                                     

                                                                · Download Table

                                                         1995   1994   1993 
                                                        ------ ------ ------
                                                           (IN MILLIONS)    
                                                                            
Accumulated postretirement benefit obligations:                             
  Retirees............................................. $122.2 $118.6 $122.4
  Active plan participants.............................   17.9   16.7   21.6
                                                        ------ ------ ------
    Total..............................................  140.1  135.3  144.0
  Unrecognized prior service cost and accumulated net                       
   gain................................................   14.8   27.3   26.9
                                                        ------ ------ ------
  Accrued postretirement benefit obligation............ $154.9 $162.6 $170.9
                                                        ====== ====== ======

The assumed health care cost trend rate used in measuring the accumulated   
postretirement benefit obligation is 6.7% for 1996, gradually declining to 5.0% 
in 1999 and thereafter. The health care cost trend rate assumption has a        
significant effect 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 December 31, 1995 by $9.2 million and the       
related fiscal 1996 aggregate service and interest costs by $0.8 million. The   
discount rate used in determining the accumulated postretirement benefit        
obligation was 7.25% at December 31, 1995, 8.75% at December 31, 1994 and 7.5%  
at December 31, 1993.                                                           

Postemployment Benefits                                                         

 As of April 1, 1993, the Company adopted SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." The cumulative effect of adopting the new         
standard resulted in a charge to net income of $16.7 million, net of a $10.4    
million tax benefit.                                                            

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15. SEGMENTS OF BUSINESS                                                        

                                                                · Download Table

                                        1996       1995            1994         
                                      ---------  ---------       ---------      
                                              (IN MILLIONS)                     
                                                                                
REVENUES                                                                        
Health Care Services/(1)/............ $ 9,656.7  $ 9,177.7       $ 8,274.7      
Water Products.......................     259.3      246.0           240.3      
Corporate............................      37.7       15.0             5.8      
                                      ---------  ---------       ---------      
  Total.............................. $ 9,953.7  $ 9,438.7       $ 8,520.8      
                                      =========  =========       =========      
OPERATING PROFIT                                                                
Health Care Services/(2)/............ $   206.1  $    76.1/(3)/  $   165.6      
Water Products.......................      39.6       14.5/(3)/       37.0      
                                      ---------  ---------       ---------      
  Total..............................     245.7       90.6           202.6      
Interest--net/(4)/...................     (13.3)     (31.4)          (38.3)     
Corporate............................     (35.5)    (112.7)/(3)/     (50.0)/(5)/
                                      ---------  ---------       ---------      
  Income (loss) before taxes on                                                 
   income............................ $   196.9  $   (53.5)      $   114.3      
                                      =========  =========       =========      
SEGMENT ASSETS--AT YEAR END                                                     
Health Care Services................. $ 2,525.3  $ 2,148.6       $ 1,951.6      
Water Products.......................     142.0      142.3           150.4      
                                      ---------  ---------       ---------      
  Total..............................   2,667.3    2,290.9         2,102.0      
Corporate                                                                       
 Cash, cash equivalents and                                                     
  marketable securities..............     456.2      670.4            62.7      
 Net assets of discontinued                                                     
  operations.........................     125.7       88.2           353.9      
 Other...............................     111.0      210.7           158.0      
                                      ---------  ---------       ---------      
  Total.............................. $ 3,360.2  $ 3,260.2       $ 2,676.6      
                                      =========  =========       =========      
DEPRECIATION AND AMORTIZATION                                                   
Health Care Services................. $    40.8  $    37.2       $    30.0      
Water................................      21.5       20.5            18.3      
Corporate............................       1.9        1.4             6.2      
                                      ---------  ---------       ---------      
  Total.............................. $    64.2  $    59.1       $    54.5      
                                      =========  =========       =========      
CAPITAL EXPENDITURES                                                            
Health Care Services................. $    43.5  $    44.4       $    34.4      
Water................................      24.8       26.3            28.7      
Corporate............................       5.3        5.7             5.0      
                                      ---------  ---------       ---------      
  Total.............................. $    73.6  $    76.4       $    68.1      
                                      =========  =========       =========      

--------                                                                        
(1) Reflects the reclassification of sales and cost of sales associated with    
 sales to customers' warehouses and includes only the gross margin on such
sales in revenues.                                                      
(2) Includes $12.2 million, $8.9 million and $7.9 million of pre-tax earnings   
from an equity investment in fiscal 1996, 1995 and 1994, respectively.  
(3) Health Care Services and Water Products amounts in fiscal 1995 include      
charges for restructuring, asset impairment and other operating items of
$107.3 million and $17.3 million, respectively. Corporate includes $74.3
million of expense related to compensation costs associated with the PCS
    Transaction, charges for restructuring, asset impairment and other operating
items.                                                                  
(4) Interest expense is shown net of corporate interest income.                 
(5) Corporate includes in fiscal 1994 a loss on the termination of interest rate
swap arrangements of $13.4 million.                                     

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The Health Care Services segment includes the Company's U.S. pharmaceutical 
and health care products distribution businesses, its operations to support the 
needs of pharmaceutical and other health care product manufacturers and         
institutional and retail customers and its international pharmaceutical         
operations (including Canada and an equity interest in a Mexican distribution   
business).                                                                      

The Water segment is engaged in the processing, delivery and sale of bottled
drinking water and the sale of packaged water to retail stores.                 

Information as to the Company's foreign operations was as follows:          

                                                                · Download Table

                                                1996      1995           1994   
                                              --------- ---------      ---------
                                                      (IN MILLIONS)             
                                                                                
REVENUES/(1)/                                                                   
  United States.............................. $ 8,429.5 $ 8,080.4      $ 7,245.3
  International..............................   1,524.2   1,358.3        1,275.5
                                              --------- ---------      ---------
    Total.................................... $ 9,953.7 $ 9,438.7      $ 8,520.8
                                              ========= =========      =========
OPERATING PROFIT                                                                
  United States.............................. $   207.5 $    64.8      $   174.8
  International..............................      38.2      25.8           27.8
                                              --------- ---------      ---------
    Total.................................... $   245.7 $    90.6/(2)/ $   202.6
                                              ========= =========      =========
ASSETS, AT YEAR END                                                             
  United States.............................. $ 3,130.9 $ 3,024.2      $ 2,418.3
  International..............................     229.3     236.0          258.3
                                              --------- ---------      ---------
    Total.................................... $ 3,360.2 $ 3,260.2      $ 2,676.6
                                              ========= =========      =========

--------                                                                        
(1) Reflects the reclassification of sales and cost of sales associated with    
 sales to customers' warehouses and includes only the gross margin on such
sales in revenues.                                                      
(2) Includes $124.6 million in charges for restructuring, asset impairment and  
other operating items.                                                  

16. OTHER COMMITMENTS AND CONTINGENT LIABILITIES                                

In addition to commitments and obligations in the ordinary course of        
business, the Company is subject to various claims, other pending and possible  
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.                                       

The Company currently is a defendant in six civil actions filed since late  
1993 by retail pharmacies. The first proceeding, Feitelberg v. Abbott           
                                      --------------------
Laboratories, is pending in the Superior Court for the State of California      
------------                                                                    
(County of San Francisco) and is now referred to as Coordinated Proceeding      
Special Title,                                                                  

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Pharmaceutical Cases I, II and III. The second proceeding, HJB, Inc. v. Abbott  
                                                         -------------------
Laboratories (now known as MDL 997), is pending in the United States District   
------------                                                                    
Court for the Northern District of Illinois. The third proceeding, K-S          
                                                         ---
Pharmacies, Inc. v. Abbott Laboratories, is pending in the Circuit Court of     
---------------------------------------                                         
Wisconsin for Dane County. A fourth action, Adams v. Abbott Laboratories, was   
                                    ----------------------------
filed in the U.S. District Court for the Eastern District of Arkansas. A fifth  
action, Salk Drug Co. v. Abbott Laboratories, was filed in the District Court   
------------------------------------                            
of Minnesota, Fourth Judicial District. Finally, an action was filed this past  
year in California Superior Court for San Francisco County, Horton v. Abbott    
                                                        ----------------
Laboratories, et. al. These actions were brought as purported class actions on  
--------------------                                                            
behalf of all other similarly-situated retail pharmacies. A class has been      
certified in Feitelberg and in MDL 997. There are numerous other defendants in  
these actions including pharmaceutical manufacturers, a pharmaceutical mail     
order firm, and several other wholesale distributors. These cases allege, in    
essence, that the defendants have unlawfully conspired together and agreed to   
fix the prices of brand name pharmaceuticals sold to plaintiffs at artificially 
high, discriminatory, and non-competitive levels, all in violation of various   
state and federal antitrust laws. Some of the plaintiffs specifically contend   
that the wholesaler and manufacturer defendants are engaged in a conspiracy to  
fix prices charged to plaintiffs and members of the purported classes           
(independent and chain retail drug stores) above the price levels charged to    
mail order pharmacies, HMOs and other institutional buyers. The California      
cases allege, among other things, violation of California antitrust law. In MDL 
997, plaintiffs allege that defendants' actions constitute price fixing in      
violation of the Sherman Act. In the K-S Pharmacies, Inc. and Salk Drug         
complaints, plaintiffs allege violation of Wisconsin and Minnesota antitrust    
laws, respectively. In each of the complaints, except Adams, plaintiffs seek    
certification as a class and remedies in the form of injunctive relief,         
unquantified monetary damages (trebled as provided by law), and attorneys fees  
and costs. In addition, the California cases seek restitution. In MDL 997, the  
court recently granted the motion for summary judgment filed by the Company and 
other wholesaler defendants. In K-S Pharmacies, the court dismissed the Company 
and other wholesaler defendants without prejudice and is considering whether    
the dismissal will be with prejudice. The Company believes it has meritorious   
defenses to the allegations made against it and intends to vigorously defend    
itself in the remaining cases. In addition, 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 indemnified against the costs of adverse    
judgments, if any, against the wholesaler and manufacturers in these or similar 
actions, in excess of $1 million in the aggregate per wholesale distributor     
defendant.                                                                      

Primarily as a result of the operation of its former chemical businesses,   
which were divested in fiscal 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 actions purportedly required to address  
environmental conditions alleged to exist at five 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 staff, in   
consultation with outside environmental specialists and counsel) of the upper   
limit of the Company's range of reasonably possible remediation costs for these 
five sites is approximately $24 million, net of $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 $24 million is expected to be paid out between April 1996 
and March 2028, and is included in the Company's recorded environmental         
reserves at March 31, 1996.                                                     

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In addition, the Company has been designated as a potentially responsible   
party ("PRP") by the U.S. Environmental Protection Agency under the             
Comprehensive Environmental Response Compensation and Liability Act of 1980, as 
amended (the "Superfund" law), for environmental assessment and cleanup costs   
as the result of the Company's alleged disposal of hazardous substances at 27   
Superfund sites. With respect to each of these Superfund 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 these 27 Superfund sites is approximately $3 million, net
of $4 million which insurance companies, and $3 million which another PRP, are  
expected or have agreed to contribute to the Company's allocated share where the
Company believes it is probable that the third parties will fulfill their       
agreements to pay. Settlements and costs paid by the Company in Superfund       
matters to date have not been significant. The $3 million is included in the    
Company's recorded environmental reserves at March 31, 1996, along with an      
additional $1 million for miscellaneous other matters.                          

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            
effectiveness 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.               

Management believes, based on current knowledge and the advice of Company's 
counsel, that the outcome of the litigation and governmental proceedings        
discussed in this note will not have a material adverse effect on the Company.  

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17.  SUBSEQUENT EVENTS                                                        

In April 1996, the Company acquired Automated Healthcare, Inc. ("AHI") for
$61.4 million in cash and the assumption of $3.2 million of employee stock      
incentives.  AHI designs, manufactures, sells and installs automated            
pharmaceutical dispensing equipment for use by health care institutions.  The   
goodwill related to the acquisition of approximately $13.8 million is being     
amortized on a straight-line basis over a three to ten year period.  In the     
third quarter of fiscal 1997, a $48.2 million charge was recorded to write-off  
the portion of the purchase price of AHI allocated to technology for which      
feasibility had not been established as of the April 1996 acquisition date.  The
allocation of the purchase price was finalized in the Company's third fiscal    
quarter based on the completion of an independent valuation analysis.  As of    
April 1996, further development costs necessary to develop the purchased        
technologies into commercially viable products were estimated at approximately  
$1 million.                                                                     

 On November 8, 1996, the Company acquired FoxMeyer Corporation's healthcare
distribution business ("FoxMeyer"), pursuant to an expedited auction process in 
the FoxMeyer Corporation bankruptcy proceeding in Wilmington, Delaware.  Through
an amended sale agreement, the Company paid approximately $23 million in cash to
the debtors, paid off approximately $500 million in secured debt and assumed an 
additional $75 million in other liabilities.  The Company acquired assets       
consisting primarily of accounts receivable and inventories of approximately    
$650 million, customer contracts and fixed assets.  This acquisition was        
accounted for under the purchase method.  The excess of the fair value of net   
assets acquired over the purchase price, after reducing to zero the carrying    
value of long-term assets which are expected to be retained for use by the      
Company, was approximately $50 million (negative goodwill). Negative goodwill is
being amortized on a straight-line basis over a five year period. The purchase  
price allocations are based on preliminary estimates and may be subject to      
revision. The Company utilized proceeds from commercial paper issuances and a   
note payable to a bank to fund the transaction.                                 

  On December 4, 1996, a purported stockholder class action entitled Vogel vs.
                                                                     ---------
Armstrong, et. al. was filed in the Court of Chancery of the State of Delaware  
-----------------                                                               
against the Company, Armor All Products Corporation ("Armor All"), members of   
Armor All's Board of Directors and The Clorox Company ("Clorox"). The complaint 
alleges that (i) the Company and Armor All's directors breached their fiduciary 
duties to Armor All's public shareholders by entering into an agreement to sell 
Armor All for an insufficient price, (ii) the Company and the Armor All         
directors, contrary to their fiduciary duties, consummated the sale in order to 
favor the Company over the other shareholders of Armor All, and (iii) Clorox, in
purchasing the shares of Armor All, aided and abetted those breaches of         
fiduciary duty. Plaintiff seeks rescission, compensatory damages, interest,     
attorneys fees and costs. The Company believes the allegations made against it  
in the complaint are without merit and intends to vigorously defend the         
litigation.                                                                     

 In December 1996, the Company made the decision to divest the net assets of
Service Merchandising, for which no loss on disposition is anticipated.         

 On December 31, 1996, the Company sold its 55% equity interest in Armor All
Products Corporation to The Clorox Company for $221.9 million and recognized an 
after-tax gain of $120.2 million. At closing, after tax proceeds of $109.8      
million replaced the 6.9 million Armor All shares held in trust as exchange     
property for the Company's $180 million exchangeable debentures.                

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18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)                                 

                                                                · Download Table

                                    FIRST    SECOND   THIRD    FOURTH   FISCAL  
                                   QUARTER  QUARTER  QUARTER  QUARTER    YEAR   
                                   -------- -------- -------- -------- ---------
                                      (IN MILLIONS EXCEPT PER SHARE AMOUNTS)    
                                                                                
FISCAL 1996                                                                     
 Revenues/(1)/.................... $2,388.3 $2,402.6 $2,581.1 $2,581.7  $9,953.7
 Gross profit.....................    221.2    229.3    226.2    238.8     915.5
 Income after taxes...............                                              
  Continuing operations...........     28.0     28.2     28.7     35.8     120.7
  Discontinued operations.........      4.8      3.5      4.2      2.2      14.7
                                   -------- -------- -------- -------- ---------
    Total......................... $   32.8 $   31.7 $   32.9 $   38.0 $   135.4
                                   ======== ======== ======== ======== =========
 Earnings per common share                                                      
  Fully diluted                                                                 
   Continuing operations.......... $   0.60 $   0.61 $   0.61     0.77 $    2.59
   Discontinued operations........     0.10     0.07     0.09     0.05      0.31
                                   -------- -------- -------- -------- ---------
    Total......................... $   0.70 $   0.68 $   0.70 $   0.82 $    2.90
                                   ======== ======== ======== ======== =========
  Primary                                                                       
   Continuing operations.......... $   0.60 $   0.61 $   0.61 $   0.77 $    2.59
   Discontinued operations........     0.10     0.07     0.09     0.05      0.31
                                   -------- -------- -------- -------- ---------
    Total......................... $   0.70 $   0.68 $   0.70 $   0.82 $    2.90
                                   ======== ======== ======== ======== =========
 Cash dividends per share                                                       
   Common......................... $   0.25 $   0.25 $   0.25 $   0.25 $    1.00
 Market prices per common share                                                 
  High............................ $ 47 3/8 $ 46 5/8 $ 53 1/4 $ 55 5/8 $  55 5/8
  Low.............................   37 1/4   42 5/8   44 7/8   46 1/2    37 1/4

(1) Reflects the reclassification of sales and cost of sales associated with    
 sales to customers' warehouses and includes only the gross margin on such
sales in revenues.                                                      
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                                                                · Download Table

                          FIRST    SECOND          THIRD          FOURTH   FISCAL   
                         QUARTER   QUARTER        QUARTER        QUARTER    YEAR    
                         -------- ---------      ---------       -------- --------- 
                             (IN MILLIONS EXCEPT PER SHARE AMOUNTS)                 
                                                                                    
FISCAL 1995                                                                         
 Revenues/(1)/.......... $2,265.6 $ 2,360.4      $ 2,439.6       $2,373.1  $9,438.7 
 Gross profit...........    200.8     206.6          174.5          226.3     808.2 
 Income (loss) after                                                                
  taxes                                                                             
  Continuing operations.     19.5      11.3 /(2)/   (210.6)/(3)/     29.7    (150.1)
  Discontinued                                                                      
   operations...........     16.5      13.8          (63.3)/(4)/      9.9     (23.1)
  Discontinued                                                                      
   operations--                                                                     
    Gain on sale/                                                                   
     donation of Armor                                                              
     All stock...........       -       0.4            0.6              -       1.0 
    Gain on sale of PCS.        -         -          576.7              -     576.7 
                         -------- ---------      ---------       -------- --------- 
       Total............ $   36.0 $    25.5      $   303.4       $   39.6 $   404.5 
                         ======== =========      =========       ======== ========= 
 Earnings (loss) per                                                                
  common share                                                                      
  Fully diluted                                                                     
   Continuing                                                                       
    operations.......... $   0.42 $    0.23      $   (4.61)      $   0.64 $   (3.34)
   Discontinued                                                                     
    operations..........     0.37      0.30          (1.39)          0.22     (0.51)
   Discontinued                                                                     
    operations--                                                                    
     Gain on sale/                                                                  
      donation of Armor                                                             
      All stock.........        -      0.01           0.01              -      0.02 
     Gain on sale of PCS        -         -          12.64              -     12.69 
                         -------- ---------      ---------       -------- --------- 
       Total............ $   0.79 $    0.54      $    6.65       $   0.86 $    8.86 
                         ======== =========      =========       ======== ========= 
  Primary                                                                           
   Continuing                                                                       
    operations.......... $   0.43 $    0.22      $   (4.76)      $   0.64 $   (3.52)
   Discontinued                                                                     
    operations..........     0.40      0.33          (1.42)          0.22     (0.53)
   Discontinued                                                                     
    operations--                                                                    
     Gain on sale/                                                                  
      donation of Armor                                                             
      All stock.........        -      0.01           0.01              -      0.02 
     Gain on sale of PCS        -         -          13.03              -     13.23 
                         -------- ---------      ---------       -------- --------- 
       Total............ $   0.83 $    0.56      $    6.86       $   0.86 $    9.20 
                         ======== =========      =========       ======== ========= 
 Cash dividends per                                                                 
  share                                                                             
  Common................ $   0.42 $    0.42      $    0.25       $   0.25 $    1.34 
  Series A preferred....     0.45      0.45                                    0.90 
  Series B ESOP                                                                     
   preferred............     0.905     0.905                                   1.81 
  Cash distribution from                                                            
   PCS Transaction per                                                              
   common share.........                         $   76.00                          
 Market prices per                                                                  
  common share                                                                      
  High.................. $     87 $ 103 5/8      $ 109 1/4       $ 40 3/4 $ 109 1/4 
  Low...................   58 1/2    70 3/4         30 1/8         31 7/8    30 1/8 

--------                                                                        
(1) Reflects the reclassification of sales and cost of sales associated with    
 sales to customers' warehouses and includes only the gross margin on such
sales in revenues.                                                      

(2) Includes $11.5 million of charges for other operating items, $7.0 million   
after-tax in the aggregate.                                             

(3) Includes $59.4 million of compensation costs related to the PCS Transaction,
$128.0 million of charges for restructuring, asset impairment and other 
operating items, $123.6 million after-tax in the aggregate.             

(4) Includes $83.4 million of charges for restructuring, asset impairment, and  
other operating items, $72.8 million after-tax.                         
42  

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INDEPENDENT AUDITORS' REPORT ON 
SUPPLEMENTARY FINANCIAL SCHEDULE

The Stockholders and Board of Directors of McKesson Corporation:                

We have audited the consolidated financial statements of McKesson Corporation   
and subsidiaries as of March 31, 1996, 1995 and 1994, and for the years then    
ended and have issued our report thereon dated May 13, 1996 (December 31, 1996  
as to Notes 8 and 17) which expresses an unqualified opinion and includes an    
explanatory paragraph relating to the Corporation's change in its method of     
accounting for postemployment benefits; such consolidated financial statements  
and report are included elsewhere in this Form 10-K/A. Our audits also included 
the consolidated supplementary financial schedule of McKesson Corporation,      
listed in Item 14(a). This consolidated supplementary financial schedule is the 
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated supplementary 
financial schedule, when considered in relation to the basic consolidated       
financial statements taken as a whole, presents fairly in all material respects 
the information set forth therein.                                              

/s/ Deloitte & Touche LLP                                                       
-------------------------                                                       
DELOITTE & TOUCHE LLP                                                           
San Francisco, California                                                       
May 13, 1996 (December 31, 1996 as to Notes 8 and 17)                           

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                                                                     SCHEDULE II

McKESSON CORPORATION - CONSOLIDATED 
VALUATION AND QUALIFYING ACCOUNTS 
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994 
(in thousands)  

                                                        · Enlarge/Download Table


           Column A              Column B            Column C             Column D          Column E      
-----------------------------   ----------   -----------------------   ---------------  ------------------
                                                     Additions                                            
                                             -----------------------                                      
                                Balance at   Charged to   Charged to                                      
                                Beginning    Costs and      Other                         Balance at      
         Description            of Period     Expenses     Accounts    Deductions/(1)/  End of Period/(2)/
-----------------------------   ----------   ----------   ----------   ---------------  ------------------
                                                                                                          
AMOUNTS DEDUCTED FROM                                                                                     
  ASSETS TO WHICH THEY APPLY:                                                                             

Year Ended March 31, 1996                                                                                 
-------------------------                                                                                 

   Allowances for doubtful                                                                                
     accounts receivable         $38,249       $13,679      $     -        $28,185            $23,743     
   Other reserves                 13,098        10,595            -          8,453             15,240     
                                 -------       -------      -------        -------            -------     
                                 $51,347       $24,274      $     -        $36,638            $38,983     
                                 =======       =======      =======        =======            =======     

Year Ended March 31, 1995                                                                                 
-------------------------                                                                                 

   Allowances for doubtful                                                                                
     accounts receivable         $13,582       $49,005/(3)/ $     -        $24,338            $38,249     
   Other reserves                 13,135         1,900            -          1,937             13,098     
                                 -------       -------      -------        -------            -------     
                                 $26,717       $50,905      $     -        $26,275            $51,347     
                                 =======       =======      =======        =======            =======     

Year Ended March 31, 1994                                                                                 
-------------------------                                                                                 

   Allowances for doubtful                                                                                
     accounts receivable         $20,791       $ 8,870      $     1        $16,080            $13,582     
   Other reserves                 12,566         2,203            -          1,634             13,135     
                                 -------       -------      -------        -------            -------     
                                 $33,357       $11,073      $     1        $17,714            $26,717     
                                 =======       =======      =======        =======            =======     

---------------------------------                                                                         
NOTES:                                           1996         1995           1994                         
                                               -------      -------        -------                        
                                                                                                          
   (1)  Deductions:                                                                                       
          Written off                          $28,338      $27,324        $16,080                        
          Credited to other accounts             8,300       (1,049)         1,634                        
                                               -------      -------        -------                        
             Total                             $36,638      $26,275        $17,714                        
                                               =======      =======        =======                        

   (2)  Amounts shown as deductions from:                                                                 
          Current receivables                  $38,088      $49,217        $24,782                        
          Other assets                             895        2,130          1,935                        
                                               -------      -------        -------                        
             Total                             $38,983      $51,347        $26,717                        
                                               =======      =======        =======                        

   (3)  The allowances for doubtful accounts receivable charged to costs and                              
        expenses in fiscal 1995 included nonrecurring charges of $32.2 million                            
        of receivable reserves related to facility closures and a reassessment                            
        of credit risks in the Company's Health Care Services business. See                               
        Financial Note 3.                                                                                 

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PART IV 

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

(a)(1) Financial Statements - see Index to Consolidated Financial Statements and
Financial Statement Schedule at page 15 of this Form 10K/A.       

(2) Financial Statement Schedule - See Index to Consolidated Financial    
 Statements and Financial Statement Schedule at page 15 of this Form
10K/A.                                                            

(3) Exhibits - See Exhibit Index at page 47 of this Form 10-K/A.          

(b)    Reports on Form 8-K                                                      
None.                                                             

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SIGNATURES  

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

          McKESSON CORPORATION
  (Registrant)

Dated: February 13, 1997           By /s/ RICHARD H. HAWKINS                    
                   -----------------------
              Richard H. Hawkins
                                      Vice President and Chief Financial Officer

              By /s/ HEIDI E. YODOWITZ
                  ------------------------
           Heidi E. Yodowitz
    Controller

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EXHIBIT INDEX/(1)/  

                                                                · Download Table

Exhibit                                                                    
Number                     Description                                     
-------   ------------------------------------------                       
                                                                           
11        Computation of Earnings Per Common Share for the Five Years Ended
          March 31, 1996.                                                  

23        Independent Auditors' Consent.                                   

27        Financial Data Schedule.                                         

---------                                                                       
(1) Exhibits which have been previously filed, or incorporated by reference, in 
    the Company's Annual Report of Form 10-K for the fiscal year ended March 31,
 1996 and which are not amended in this filing have been omitted from this
Exhibit Index.                                                          

47  

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K/A Filing		Date		First		Last			Other Filings
		3/31/93		21		27
		4/1/93		37
		5/12/93		27
		12/31/93		35		37
		3/31/94		10		46
		7/10/94		25
		7/15/94		26
		11/21/94		7		31
		12/31/94		35		37			10-Q, 10-Q/A
		3/31/95		10		46			10-K405
		11/19/95		26
		12/31/95		35		37			10-Q
For The Period Ended		3/31/96		1		49			10-K
		5/13/96		18		45
		5/31/96		14
		6/3/96		1
		11/8/96		42					8-K/A, 8-K
		12/4/96		42
		12/31/96		2		45			8-K, 10-Q, 10-Q/A
Filed On / Filed As Of		2/13/97		48					10-Q/A
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