AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1999

REGISTRATION NO. 333-88769

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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QK HEALTHCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 5122 11-3508451
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)

2060 NINTH AVENUE
RONKONKOMA, NEW YORK 11779

(631) 439-2000

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

MICHAEL W. KATZ
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
QK HEALTHCARE, INC.
2060 NINTH AVENUE
RONKONKOMA, NEW YORK 11779

(631) 439-2000

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

CHRISTINE M. MARX, ESQ. JOHN C. KENNEDY, ESQ.
EDWARDS & ANGELL, LLP PAUL, WEISS, RIFKIND, WHARTON & GARRISON
51 JOHN F. KENNEDY PARKWAY 1285 AVENUE OF THE AMERICAS
SHORT HILLS, NEW JERSEY 07078 NEW YORK, NEW YORK 10019
(973) 376-7700 (212) 373-3000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common stock, par value $.001 per share..................... $293,250,000 $77,418.00(2)
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o).

(2) $71,932.50 of the fee was paid with the initial filing.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.

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2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES, IN ANY JURISDICTION WHERE THE OFFER OR SALE IS
NOT PERMITTED.

Subject to Completion, dated December 3, 1999

PROSPECTUS

15,000,000 SHARES

QK HEALTHCARE, INC.

COMMON STOCK
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This is our initial public offering of shares of common stock. We are
offering 15,000,000 shares.

No public market currently exists for our shares. We propose to list the
shares on the New York Stock Exchange under the symbol "KRX". We expect the
public offering price to be between $13.00 and $17.00 per share.

INVESTING IN OUR SHARES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.

PER SHARE TOTAL
---------- ----------

Public offering price................................. $ $
Underwriting discounts................................ $ $
Proceeds to QK Healthcare, Inc........................ $ $

We have granted the underwriters an option for a period of 30 days to
purchase up to 2,250,000 additional shares of common stock.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Lehman Brothers expects to deliver the shares on or about ,
1999.
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LEHMAN BROTHERS

CREDIT SUISSE FIRST BOSTON

SALOMON SMITH BARNEY

, 1999
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TABLE OF CONTENTS

PAGE
----

Prospectus Summary.............. 3
Risk Factors.................... 9
Use of Proceeds................. 17
Dividend Policy................. 17
Capitalization.................. 18
Dilution........................ 19
Selected Historical Financial
Data.......................... 20
Pro Forma Financial
Information................... 22
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 26

PAGE
----

Business........................ 35
Management...................... 43
Related Party Transactions...... 49
Principal Stockholders.......... 51
Description of Capital Stock.... 53
Shares Eligible for Future
Sale.......................... 56
Underwriting.................... 58
Legal Matters................... 60
Experts......................... 60
Where You Can Find More
Information................... 61
Index to Financial Statements... F-1

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Until , 1999, all dealers selling shares of the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in the common stock. You should read the
entire prospectus carefully, especially the risks of investing in our common
stock discussed under "Risk Factors." Unless otherwise indicated, all
information in this prospectus gives effect to the transfer of the
pharmaceutical business of Quality King Distributors, Inc. to us pursuant to the
reorganization described in this prospectus for all relevant periods and assumes
that the underwriters will not exercise their option to purchase additional
shares in the offering. Unless otherwise indicated, the terms "we," "us" and
"our" refer to QK Healthcare, Inc.

THE COMPANY

We are a national wholesale distributor of selected healthcare products to
retailers, wholesale distributors and pharmacy benefit managers. Pharmacy
benefit managers are companies that manage and administer prescription benefits
for health plans and other third party payors. Our products currently include
branded and generic pharmaceutical products and medical/surgical products. As
compared to traditional wholesale distributors,

- we carry a narrow range of merchandise inventory, rather than a full line
of products

- we offer our customers a limited range of inventory, delivery and
purchasing services

- we acquire and hold significant inventory levels of specific products
when it is financially advantageous to do so

- we primarily deliver products in bulk shipments to our customers'
warehouses rather than to individual stores.

We offer pharmaceutical and other healthcare products to our customers at
superior prices. In addition, we believe that traditional wholesale distributors
do not view us as a competitor but rather as an important partner that provides
them with an alternative means of completing product sales and purchases.

We acquire products from our extensive network of over 300 suppliers,
including most of the major pharmaceutical manufacturers and wholesale
distributors. We primarily stock products that we acquire on favorable terms by
taking advantage of manufacturers' incentive discounts, various market
opportunities and anticipated price increases. We believe that our ability to
commit significant amounts of capital in short time periods makes us an
important partner to members of our network.

Our purchasing and sales systems, together with our extensive knowledge of
the pharmaceutical industry, are critical parts of our capabilities. Our
experienced buying team relies heavily on our proprietary management information
system that provides decision support in the selection, quantity and timing of
our product purchases. Quality King developed this system over 25 years and
customized it to meet the needs of our pharmaceutical business. Our direct sales
force, complemented by our telemarketing activities and our internet services,
ensures effective communication of our product offerings to our customers. We
believe our information system provides our sales personnel with a competitive
advantage in customer interactions by providing them with current

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information regarding product pricing and availability and manufacturers'
promotional programs.

We have grown significantly over the past five years as a result of the
expansion of our product line, customer base, supplier relationships and
management, as well as overall industry growth. From fiscal 1995 through the
twelve months ended July 31, 1999, our annual net sales grew from $169.0 million
to $959.4 million, representing a compound annual growth rate of 59%. Our income
from operations grew over this period from $3.8 million to $54.3 million,
representing a compound annual growth rate of 103%.

INDUSTRY OVERVIEW

The United States pharmaceutical industry sales grew at a 9% compound
annual growth rate between 1990 and 1997. This growth has been the result of
several factors, including:

- Aging population

- Introduction of new pharmaceuticals

- Cost containment efforts that stress drug therapies

- Pharmaceutical price increases by drug manufacturers.

Coinciding with this growth, the number of individuals who are having their
pharmaceutical products paid for through third-party payors has increased. As a
result, the principal participants in the pharmaceutical distribution
chain -- pharmaceutical manufacturers, wholesalers and retailers -- have
experienced increasing pressure upon their profitability. This pressure has led
these participants to search for additional means of increasing their profits,
including completing product sales and purchases with alternative partners.

STRATEGY

We believe that we play a unique role in the pharmaceutical distribution
chain in that our customers include both distributors and retailers. Our goal is
to enhance our market position and to continue to grow our business by pursuing
a strategy with the following core elements:

- Continue to be a valuable resource to our customers and suppliers

- Focus on providing selective lines of products

- Increase our product offerings

- Broaden our customer base and expand into other health-related
distribution businesses

- Expand our internet and telemarketing marketing sales activities.
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HISTORY AND REORGANIZATION

From 1987 until shortly before the offering, we were a division of Quality
King Distributors, Inc. Quality King is a promotional wholesale distributor
which previously had four separate divisions: hair care products; groceries;
health and beauty care products; and pharmaceuticals and medical supplies. Prior
to the offering, Quality King reorganized its businesses. The reorganization
included transferring the pharmaceutical business to us and distributing our
stock to the stockholders of Quality King. As a result of the reorganization, we
now conduct the pharmaceutical business independently from Quality King with our
own employees. However, Quality King continues to provide computer and warehouse
space, and warehouse management and consulting services to us.

In connection with its reorganization, Quality King, an S corporation,
allocated $109 million of its shareholders' undistributed earnings to us. Prior
to this offering, we paid a distribution in that amount to our controlling
stockholders in the form of promissory notes. We intend to use a portion of the
proceeds of this offering to pay $95 million of these notes.

Our offices are located at 2060 Ninth Avenue, Ronkonkoma, New York 11779.
Our phone number is (631) 439-2000.

THE OFFERING

Common stock offered............ 15,000,000 shares

Common stock outstanding after
the offering.................... 32,000,000 shares

Use of proceeds................. We intend to use the net proceeds from this
offering to reduce our short-term borrowings
and to pay $95 million of the notes issued
to our controlling stockholders in
connection with the S corporation
distribution made to them prior to this
offering. See "Use of Proceeds."

Proposed New York Stock Exchange
Symbol........................ "KRX"

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of , 1999 and
excludes:

- 3,010,000 shares underlying options outstanding at the closing of this
offering at an exercise price $5.00 less than the initial offering price
of the shares in this offering

- 564,000 shares underlying options outstanding at the closing of this
offering at an exercise price equal to the initial offering price of the
shares in this offering

- 726,000 shares available for future grant under our option plan

- 2,250,000 shares subject to the underwriters' option to purchase
additional shares in the offering.

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table summarizes selected historical and pro forma financial
data for each of the four years in the period ended October 31, 1998 and for the
nine months ended July 31, 1998 and 1999. We prepared the summary historical
financial data from the historical accounting records of Quality King. Although
we were a significant division of Quality King, separate financial statements
were not prepared in prior periods. In connection with the preparation of our
financial statements, as described in Note 1(a) of the Notes to the Financial
Statements, we identified and carved-out of the books and records of Quality
King all balance sheet and income statement accounts that were directly
traceable to our pharmaceutical business. Those accounts included accounts
receivable, inventories, advances to suppliers for future purchases, prepaid
expenses and other current assets, accounts payable, accrued expenses and other
current liabilities, net sales, cost of sales and operating expenses. Management
also identified other operating expenses that were not directly traceable to any
specific division of Quality King. We allocated a portion of these expenses
based on assumptions and methods that we consider reasonable and appropriate.
The procedures employed utilized various allocation bases including number of
transactions processed, estimated delivery miles and warehouse square footage.

In 1999, we changed our fiscal year-end from October 31 to July 31. Prior
to July 31, 1999, we valued our inventories using the last-in, first-out
("LIFO") method. We have restated the financial data presented for all periods
to report the results of operations as if inventories were valued using the
first-in, first-out ("FIFO") method.

You should read the summary historical and pro forma financial data in
conjunction with the "Selected Historical Financial Data," "Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and our financial statements and their related notes
appearing elsewhere in this prospectus.

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(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)

NINE MONTHS ENDED
TWELVE MONTHS ENDED OCTOBER 31, JULY 31,
----------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
----------- ----------- -------- -------- ----------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)

STATEMENT OF OPERATIONS DATA:
Sales, net....................................... $168,983 $328,307 $552,488 $772,359 $568,062 $755,088
-------- -------- -------- -------- -------- --------
Gross profit..................................... 6,953 16,767 35,987 45,392 30,394 53,577
-------- -------- -------- -------- -------- --------
Operating expenses:
Warehouse and delivery......................... 945 1,832 3,039 4,069 2,976 4,162
Selling, general and administrative............ 2,208 10,376(1) 6,762 7,187 5,849 7,718
-------- -------- -------- -------- -------- --------
Total operating expenses..................... 3,153 12,208 9,801 11,256 8,825 11,880
-------- -------- -------- -------- -------- --------
Income from operations........................... 3,800 4,559 26,186 34,136 21,569 41,697
Interest expense -- related party(2)............. 3,937 7,649 12,984 17,370 12,451 15,300
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes................ (137) (3,090) 13,202 16,766 9,118 26,397
Income taxes (benefit)(3)........................ (2) (53) 224 285 155 449
-------- -------- -------- -------- -------- --------
Net income (loss)................................ $ (135) $ (3,037) $ 12,978 $ 16,481 $ 8,963 $ 25,948
======== ======== ======== ======== ======== ========
Pro forma for change in tax status:
Historical income (loss) before income taxes... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 9,118 $ 26,397
Pro forma income taxes
(benefit)(4)................................. (15) (1,194) 5,312 6,736 3,672 10,573
-------- -------- -------- -------- -------- --------
Pro forma net income (loss).................... $ (122) $ (1,896) $ 7,890 $ 10,030 $ 5,446 $ 15,824
======== ======== ======== ======== ======== ========
Pro forma basic earnings (loss)
per share...................................... $ (.01) $ (.11) $ .46 $ .59 $ .32 $ .93
======== ======== ======== ======== ======== ========
Weighted average number of shares
outstanding.................................... 17,000 17,000 17,000 17,000 17,000 17,000
======== ======== ======== ======== ======== ========
Pro forma for the reorganization and the
offering(5):
Pro forma net income........................... $ 15,457 $ 19,584
======== ========
Pro forma basic earnings per share............. $ .48 $ .61
======== ========
Pro forma weighted average number of shares
outstanding.................................. 32,000 32,000
======== ========
Pro forma diluted earnings per share........... $ .47 $ .59
======== ========
Pro forma weighted average diluted shares
outstanding.................................. 33,003 33,003
======== ========
OTHER DATA(6):
Gross margin..................................... 4.1% 5.1% 6.5% 5.9% 5.4% 7.1%
Income from operations margin.................... 2.2% 1.4% 4.7% 4.4% 3.8% 5.5%

JULY 31, 1999
----------------------------
PRO FORMA,
HISTORICAL AS ADJUSTED(7)
---------- --------------

BALANCE SHEET DATA:
Total assets................................................ $337,985 $344,005
Advances from Quality King -- related party................. $276,454 $ 0
Total debt.................................................. $276,454 $161,454
Stockholders' equity........................................ $ 17 $121,037

(See footnotes on next page)

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(1) Includes a $6,000 write-off of accounts receivable from FoxMeyer Corporation
when it filed for Chapter 11 protection under the bankruptcy code.

(2) As described in Note 9 of the Notes to the Financial Statements, we computed
interest expense based on the average monthly balances of inventories,
accounts receivable and advances to suppliers less accounts payable.
Interest expense is based on the effective rates paid by Quality King under
its bank loan agreement for the respective periods.

(3) Represents state and local taxes as an S corporation.

(4) Reflects the pro forma provision for income taxes, primarily current, that
would have been reported had we operated as a stand-alone entity and filed
federal and state income tax returns for our operations as a C corporation.
We assumed a pro forma income tax benefit in 1995 and 1996 based on future
operating income projections.

(5) Adjusted to give effect to the interest savings from the application of
$115,000 of the net proceeds from the offering to reduce the short-term
borrowings assumed from Quality King as if these transactions had occurred
as of November 1, 1997. We calculated the reduction using Quality King's
effective interest rate.

(6) Gross margin equals gross profit as a percentage of net sales. Income from
operations margin equals income from operations as a percentage of net
sales.

(7) Gives effect to the following transactions:

- the declaration of the $109,000 dividend to our controlling stockholders
paid by delivery of promissory notes

- the capital contribution of $14,000 by Quality King

- the assumption of a portion of Quality King's short-term borrowings

- the offering and the application of its net proceeds to pay $95,000 of
the notes to the controlling stockholders and to reduce the short-term
borrowings assumed from Quality King

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RISK FACTORS

Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before buying shares of
our common stock.

BECAUSE WE WILL PAY A SIGNIFICANT PORTION OF THE PROCEEDS OF THE OFFERING TO OUR
CONTROLLING STOCKHOLDERS, LESS OF THE PROCEEDS WILL BE AVAILABLE FOR USE IN OUR
BUSINESS

In connection with its reorganization, Quality King, an S corporation,
allocated $109 million of its shareholders' undistributed earnings to us. Prior
to the offering we paid a distribution in that amount to our controlling
stockholders in the form of promissory notes. We intend to use a portion of the
proceeds of this offering to pay $95 million of these notes. As a result, $95
million of the $210 million net proceeds of the offering will not be available
to meet the working capital or growth needs of our business. If such proceeds
were available, we could use them to further reduce our debt levels and/or to
finance our inventories and receivables. Because these proceeds will not be
available for use in our business, our debt to assets ratio will be higher,
which will result in higher financing costs. These higher costs will reduce our
earnings and may produce greater earnings volatility in the future.

COMPETITION IN THE WHOLESALE PHARMACEUTICAL DISTRIBUTION MARKET COULD ADVERSELY
AFFECT OUR OPERATING RESULTS

The wholesale pharmaceutical distribution business is very competitive. We
compete on the basis of price, product availability and delivery speed with
other wholesale distributors and manufacturers who sell directly to retailers.
The wholesale pharmaceutical distribution business is dominated by five major
distributors whose aggregate annual sales exceeded $69 billion in 1998. These
major distributors, as well as many of our competitors, have greater financial
and marketing resources than we do. To the extent competitors seek to gain or
retain market share by reducing prices, changing credit terms or increasing
marketing expenditures, our sales and margins could decline, which could
seriously harm our operating results and cause the price of our stock to
decline. In addition, the development of alternative distribution channels, such
as internet-based electronic commerce, could lead manufacturers to bypass us,
which could cause our sales and margins to decline.

IF WE LOSE THE PRINCIPAL MEMBERS OF OUR MANAGEMENT, OUR RELATIONSHIPS WITH OUR
CUSTOMERS AND SUPPLIERS COULD BE HARMED

Our success depends upon the retention of the principal members of our
management team, particularly Glenn Nussdorf, our Chairman and Chief Executive
Officer, and Michael Sosnowik, our President. We believe that their
relationships with our suppliers and customers are critical to our success. The
loss of the services of Mr. Nussdorf, Mr. Sosnowik or other key members of our
management team could cause our sales and margins to decline, which could
seriously harm our operating results and cause the price of our stock to
decline. Except for Mr. Sosnowik, who has an employment agreement which expires
in 2003, we do not have employment agreements with any of our executive
officers. We also do not have life insurance policies on the lives of any
members of our management team.

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IF WE ARE NOT ABLE TO BORROW FUNDS UNDER OUR BANK LOAN AGREEMENT, WE MAY HAVE TO
CURTAIL OUR OPERATIONS

Our principal capital requirements are to fund our inventory and other
working capital needs to support our growth. We have had negative cash flow from
operations of $10.3 million, $75.9 million and $8.3 million for the years ended
October 31, 1997 and 1998 and the nine months ended July 31, 1999, respectively.
We expect our cash flow from operations to continue to be negative for the
foreseeable future. As a result, we are dependent on our bank loan agreement for
cash to fund our operations. Under the bank loan agreement, we are able to
borrow up to $350 million, depending primarily on our inventory and receivables
levels. As of July 31, 1999, after giving effect to this offering, the
application of its net proceeds and other related transactions, we would have
had approximately $147.5 million outstanding and approximately $86.0 million of
additional funds available to us under our bank loan agreement. Borrowings under
our bank loan agreement are subject to the satisfaction of various conditions,
including the absence of a material adverse change in our business. When our
bank loan agreement expires in 2005, we will need to refinance our bank loan
agreement and/or raise additional funds. If we are unable to borrow sufficient
amounts under the bank loan agreement or to refinance it, we may be required to
significantly curtail our operations.

OUR BANK LOAN AGREEMENT IMPOSES VARIOUS RESTRICTIONS WHICH AFFECT OUR OPERATIONS
AND LIMIT OUR ABILITY TO PAY DIVIDENDS

Our bank loan agreement contains numerous financial and operating covenants
that limit our discretion with respect to business matters. These covenants
place significant restrictions on, among other things, our ability to incur
additional indebtedness, to pay dividends and other distributions, to repay
other obligations, to create liens or other encumbrances, to make investments,
to engage in transactions with affiliates, to sell or otherwise dispose of
assets and to merge or consolidate with other entities, and will otherwise
restrict our corporate activities.

Our bank loan agreement also requires us to meet various financial ratios
and tests. We may not be able to comply with these and other provisions due to
changes in economic or business conditions or other events beyond our control.
Our failure to comply with any of these ratios and tests could result in
acceleration of the maturity of the indebtedness under our bank loan agreement
as well as the maturity of other outstanding debt. If the maturity of our
indebtedness were accelerated, we might not have sufficient assets to repay in
full such indebtedness. To secure our obligations under the bank loan agreement,
we granted a first priority pledge of and security interest in substantially all
of our assets to the lenders.

WE ARE HIGHLY LEVERAGED AND DEBT AND INTEREST EXPENSE WILL AFFECT OUR EARNINGS
AND MAY ADVERSELY AFFECT OUR OPERATIONS

We have a significant amount of indebtedness. Our total debt was
approximately $161.5 million and stockholders' equity was approximately $121.0
million at July 31, 1999 after giving effect to this offering, the application
of its net proceeds and other related transactions. We may incur significant
additional indebtedness under our bank loan

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agreement. Our indebtedness could negatively affect our operations in a number
of ways, including:

- We may be unable to obtain additional financing when needed for our
operations or when desired for acquisitions or expansions

- We must dedicate a large part of our cash flow to interest payments on
our debt, which reduces our funds available for other corporate purposes

- The interest rate of our debt is based on market interest rates and is
not hedged so a rise in market interest rates will increase our interest
expense

- The level of our debt could limit our flexibility in responding to
downturns in the economy or in our business.

LOSS OF ONE OR MORE OF OUR LARGEST CUSTOMERS COULD HURT OUR BUSINESS BY REDUCING
OUR REVENUES AND EARNINGS

During the nine months ended July 31, 1999, our largest 20 customers
accounted for approximately 83% of our net sales and one customer, McKessonHBOC
Corporation, accounted for approximately 24% of our net sales. As is customary
in our industry, we generally do not have long-term contracts with our
customers. Significant declines in the level of purchases by one or more of
these customers or the loss of one or more of these customers through industry
consolidation could cause our sales to decline, which could seriously harm our
operating results and cause the price of our stock to decline. An adverse change
in the financial condition or bankruptcy of any of these customers, including an
adverse change as a result of a change in governmental or private reimbursement
programs, could result in significant declines in their levels of purchases or
the loss of any of these customers, as well as lower margins and difficulty
collecting our accounts receivable.

IF OUR MANAGEMENT INFORMATION SYSTEM FAILS TO PRODUCE ACCURATE AND TIMELY
INFORMATION, OUR OPERATIONS COULD BE ADVERSELY AFFECTED

Our success depends, in part, on the accuracy and proper utilization of our
management information system, as well as those of our vendors and customers.
Our management and employees rely heavily on our system to assist them in
procurement, sales and other operating decisions. In addition, our customers
rely on our system to submit electronic orders. Our management information
system gives us the ability to manage our inventories and accounts receivable
collections, to sell and ship on an efficient and timely basis and to maintain
our operation as inexpensively as possible. If our system is not sufficient to
sustain our present operations and our anticipated growth for the foreseeable
future, our purchasing and sales operations could be disrupted, which could
seriously harm our operating results and cause the price of our stock to
decline. In order to ensure the sufficiency of our system, we may need to invest
in software enhancements and expanded capabilities, as well as in additional
computer hardware.

FAILURE TO MANAGE OUR GROWTH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS

We have recently experienced a period of rapid growth and it is our
objective to continue that growth. This growth has placed, and will continue to
place, strains on our management, operations and systems. As a result, we have
had to hire additional sales,

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purchasing, administrative and warehouse personnel, expand our warehouse
capacity and expand and upgrade our management information system to handle
significant increases in the volume of our sales and purchases. In order to
manage our growth, we must continue to improve our operating and administrative
systems and to attract, hire and train qualified management and operating
personnel. In today's competitive labor market, finding and hiring qualified
management and operating personnel is increasingly difficult. If we do not
effectively manage our growth, our sales and margins could decline which could
seriously harm our operating results and cause a decline of our stock price.

RECENT OPTION GRANTS WILL NEGATIVELY IMPACT FUTURE EARNINGS

Upon consummation of this offering, options to purchase up to 3,010,000
shares of our common stock will be granted to members of senior management for
past services. These options will have an exercise price $5.00 below the initial
offering price of our common stock being sold in this offering. As a result, we
will be required to take a $9.03 million net charge against our earnings in the
first quarter following this offering.

OUR RELATIONSHIP WITH QUALITY KING POSES RISKS

Three of our directors, including our Chairman of the Board, are executive
officers and/or directors of Quality King. These directors and related entities
are the controlling stockholders of both our company and Quality King. We
currently have, and will continue to have, a variety of contractual
relationships with Quality King, including an agreement by which we and Quality
King will hold harmless each other from various obligations and contingent
liabilities and a non-competition agreement. We also purchase computer and
warehouse management and consulting services from Quality King. Quality King's
interests under these contracts may be adverse to our interests and we cannot be
certain that Quality King management will not use its position in a manner
adverse to us, either in the context of these contracts or otherwise. Also,
because three of our directors are directors and controlling stockholders of
Quality King, any Board decision involving Quality King or any transaction with
Quality King may result in a conflict of interest for these directors.

Our Chairman of the Board intends to allocate his business time between
Quality King and us. In addition, another of our executive officers is expected
to provide sales services to Quality King in exchange for a commission-based fee
to be paid to us. As a result, these officers will not be available to us on a
full-time basis and they may have duties to Quality King that may interfere with
their duties to us.

As discussed above, our purchasing and sales operations are dependent on
our management information system. Under a support services agreement, Quality
King provides us with computer and warehouse management and consulting services.
Quality King's inability to provide these services for any reason could
interfere with our ability to use our management information system which could
disrupt our purchasing and sales operations. Such a disruption could seriously
harm our operating results and cause the price of our stock to decline.

IF OUR THIRD-PARTY SHIPPERS BECOME UNAVAILABLE, DELIVERY OF OUR PRODUCTS WOULD
BE DISRUPTED

Most of our sales are delivered to customers using third-party shippers,
primarily UPS. In the event these third-party shippers were to become
unavailable for any reason,

12
14

such as a labor strike or natural disaster, we could experience shipping delays.
Shipping delays could result in the loss or delay of sales to our customers
which could hurt our operating results and cause a decline of our stock price.

IF WE ARE UNABLE TO EFFECTIVELY ADAPT TO CHANGES IN THE HEALTHCARE INDUSTRY, OUR
SALES AND MARGINS COULD DECLINE

In recent years, the healthcare industry has experienced significant change
driven by efforts to reduce costs and improve standards of care. These efforts
include potential national healthcare reform, trends toward managed care,
purchasing groups and pharmacy benefit managers, cuts in Medicare and horizontal
and vertical consolidation within the healthcare industry. These changes could
result in fewer attractive buying opportunities, price reductions, reduced
margins and loss of customers. If we or our customers or suppliers are unable to
react effectively to these and other changes in the healthcare industry, we
could experience a loss of customers, difficulty in collecting our accounts
receivable and decreases in sales and margins which could harm our operating
results and cause a decline of our stock price.

OUR CONTROLLING STOCKHOLDERS CAN EXERCISE SIGNIFICANT CONTROL OVER ALL MATTERS
REQUIRING STOCKHOLDER APPROVAL

After this offering, Glenn, Stephen and Arlene Nussdorf will beneficially
own in the aggregate approximately 53% of our issued and outstanding common
stock. As a result, they will control our affairs, including the election of
directors, appointment of our management and approval of any actions requiring
the approval of our stockholders, including the adoption of amendments to our
certificate of incorporation and the approval of mergers.

FAILURE TO COMPLY WITH THE EXTENSIVE GOVERNMENT REGULATIONS APPLICABLE TO OUR
BUSINESS COULD RESULT IN PENALTIES

The wholesale drug distribution industry is subject to regulation by
federal, state and local governmental agencies. The distribution of prescription
pharmaceuticals and controlled substances requires licenses and permits as well
as the implementation of an oversight and compliance program mandated by the
Prescription Drug Marketing Act of 1987. In general, regulations pertain to the
purchase, safe storage and distribution of pharmaceuticals and controlled
substances that are monitored through periodic site inspections conducted by the
Food and Drug Administration and the Drug Enforcement Agency. Failure to comply
with these requirements and regulations or to respond to changes in these
requirements and regulations could result in penalties on us such as fines,
restrictions on operations or a temporary or permanent closure of our facility.
These penalties could harm our operating results and cause a decline of our
stock price.

OUR FAILURE AND THE FAILURE OF OUR SUPPLIERS AND CUSTOMERS TO BE YEAR 2000
COMPLIANT COULD HARM OUR BUSINESS

The year 2000 computer issue creates risks for us, as is true for most
companies. If our systems do not correctly recognize date information when the
year changes to 2000, there could be an adverse impact on our operations.

13
15

Our internal year 2000 compliance review focused on reviewing our internal
computer information and security systems for year 2000 compliance, and
developing and implementing remediation programs to resolve year 2000 issues in
a timely manner. To date, our aggregate year 2000 expenditures have been
primarily driven by the cost of conducting the year 2000 compliance review. The
cost of our year 2000 preparation was not material to our results of operations.

We contacted most of our third party suppliers and customers and requested
their written assurances that their systems are year 2000 compliant. Some of our
suppliers and customers have informed us that they will not fully complete their
year 2000 compliance programs and testing until late in 1999. As a result, we
will be unable to fully evaluate their readiness and its impact on our business
with them until after December 31, 1999. Our contingency plan includes having
our data processing personnel on 24-hour call for an indefinite period after
December 31, 1999 to deal with any problems that may arise.

Any failure by our suppliers to correct their year 2000 problems could
result in an interruption in, or a failure of, our normal business activities
or operations. These interruptions and failures could damage our relationships
with our customers and may result in reduced or delayed purchases and declines
in margins, which could hurt our operating results and cause a decline of our
stock price.

Our customers' purchasing plans could be affected if they fail to correct
their year 2000 problems or if they need to expend significant resources to fix
their existing systems. This may result in reduced or delayed payments or
purchases, which could reduce our net sales, which could hurt our operating
results and cause a decline of our stock price.

A DISRUPTION IN OUR COMPUTER SYSTEM OR OUR TELEPHONE SYSTEM COULD INTERFERE WITH
OUR OPERATIONS AND HURT OUR RELATIONS WITH OUR CUSTOMERS

We provide our customers with products at attractive prices that supplement
the products they obtain from their other suppliers. A significant portion of
our sales is dependent upon our ability to transmit product offerings, reserve
orders and transmit sales confirmations and invoices electronically utilizing
our management information and telephone systems. Any continuing disruption in
either our computer system or our telephone system affecting our ability to
receive and process customer orders and ship products on a timely basis could
adversely affect our relations with our customers. This could result in
customers increasing their dependency on their primary suppliers, leading to
reductions in our orders from customers or loss of customers. The resulting
declines in sales could hurt our operating results and cause a decline of our
stock price.

A LARGE NUMBER OF OUR SHARES ARE OR WILL BE ELIGIBLE FOR FUTURE SALE WHICH COULD
DEPRESS OUR STOCK PRICE

Sales of substantial amounts of common stock, or the perception that a
large number of shares will be sold, could depress the market price of our
common stock. After this offering, our controlling stockholders will own
beneficially approximately 53% of the outstanding shares of our common stock
(50% if the underwriters' option to purchase additional shares in the offering
is exercised in full). After expiration of a 360-day "lock-up" period to which
all of our controlling stockholders, directors and executive officers are
subject, these holders will in general be entitled to dispose of their shares,
although the shares of common stock held by our affiliates will continue to be
subject to the volume and other restrictions of Rule 144 under the Securities
Act. However, Lehman Brothers

14
16

Inc. may, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to the lock-up.

After the offering, the holders of approximately 20,574,000 shares of our
common stock (including shares issuable upon the exercise of outstanding
options) will have rights, subject to some conditions, to require us to file
registration statements covering their shares or to include their shares in
registration statements that we may file for ourselves or other stockholders. By
exercising their registration rights and selling a large number of shares, these
holders could cause the price of our common stock to decline.

YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION OF THE BOOK VALUE OF YOUR
INVESTMENT IN OUR COMMON STOCK

The initial public offering price of our common stock is substantially more
than the book value per share of our common stock, after giving effect to the
reorganization and other related transactions. As a result, purchasers of the
common stock pursuant to this offering will experience immediate and substantial
dilution of $11.41 per share in such net tangible book value per share of common
stock from the assumed initial public offering price of $15.00 per share. The
exercise of outstanding options with an exercise price less than the initial
public offering price of this offering will result in further dilution to you.
See "Dilution."

OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED AND ITS PRICE MAY BE VOLATILE

Prior to this offering, there has not been a public market for our common
stock. We cannot predict the extent to which investor interest in us will lead
to the development of a liquid trading market. The initial public offering price
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. The market price of our common stock could be subject to wide
fluctuations as a result of many factors, including those listed in this "Risk
Factors" section of the prospectus.

In recent years, the stock market has experienced significant price and
volume fluctuations that are often unrelated to the operating performance of
specific companies. Our market price may fluctuate based on a number of factors,
including:

- our operating performance and the performance of other similar companies

- news announcements relating to us, our industry or our competitors

- changes in earnings estimates or recommendations by research analysts

- changes in general economic conditions

- loss of significant customers or suppliers

- the number of shares to be publicly traded after the offering

- actions of our controlling stockholders

- other developments affecting us, our industry, or our competitors.

15
17

OUR CERTIFICATE OF INCORPORATION, BY-LAWS AND BANK LOAN AGREEMENT COULD
DISCOURAGE OR PREVENT A POTENTIAL ACQUISITION OF OUR COMPANY THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE

Our certificate of incorporation, by-laws, bank loan agreement and Delaware
law contain provisions that may discourage, delay or prevent a merger or
acquisition of our company that stockholders may consider favorable. This may
reduce the market price of our common stock.

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS AND ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM ANTICIPATED FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE

Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believes," "continues," "could," "estimates," "expects,"
"intends," "may," "plans," "seeks," "should" or "will" or the negative of these
terms or similar expressions are generally intended to identify forward-looking
statements. These statements are only predictions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable,
forward-looking statements involve risks and uncertainties. There are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including the risks
outlined in this "Risk Factors" section and elsewhere in this prospectus.

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18

USE OF PROCEEDS

Our net proceeds from this offering (based on an assumed initial public
offering price of $15.00) are estimated to be approximately $210 million ($241.7
million if the underwriters' option to purchase additional shares in the
offering is exercised in full), after deducting estimated underwriting discounts
and commissions and other offering expenses payable by us. We intend to use the
net proceeds from this offering as follows:

- $95 million to pay a portion of the notes issued to our controlling
stockholders in connection with the S corporation distribution made to
them prior to this offering

- The balance to reduce our short-term borrowings.

The notes bear interest at the London inter-bank offer rate, or LIBOR, plus
1 1/2%. Principal and interest are payable quarterly over seven years. The notes
require a mandatory prepayment of $95 million upon consummation of this
offering. For more information relating to the S corporation distribution, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- History and Reorganization" and Note 12(a) of the Notes to the
Financial Statements.

We assumed a portion of Quality King's short-term borrowings under its bank
loan agreement in an amount equal to the advances to us from Quality King. We
will repay approximately $115 million of such short-term borrowings with a
portion of the net proceeds of this offering and the balance will be refinanced
concurrently with the offering with borrowings under our new bank loan
agreement. The short-term borrowings assumed from Quality King bear interest at
either LIBOR plus 1 3/8% or the prime rate (approximately 6.7% as of July 31,
1999), which is the rate under Quality King's bank loan agreement. Amounts
outstanding under Quality King's bank loan agreement are due June 30, 2001.

We will determine the amount of our short-term borrowings at the closing of
this offering based on the difference between our total assets and liabilities.
Because our total assets and liabilities vary, the amount of our short-term
borrowings will vary. We currently estimate that the amount of our short-term
borrowings immediately after the closing of this offering will be approximately
$147.5 million.

DIVIDEND POLICY

We expect to use $95 million of the net proceeds from this offering to pay
a portion of the notes issued to our controlling stockholders in connection with
the $109 million dividend which was declared to distribute the portion of
Quality King's undistributed S corporation earnings that were allocated to us.
Other than the $109 million dividend to our controlling stockholders, we have
not made any dividends in the past and do not expect to make cash dividends or
distributions in the future. Any future determination to pay cash dividends will
be at the discretion of our board of directors and will depend upon our
financial condition, results of operations, capital requirements and such other
factors as the board of directors deems relevant. In addition, our ability to
declare and pay dividends on our common stock is restricted by covenants in our
bank loan agreement.

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CAPITALIZATION

The following table shows our short-term debt and capitalization (i) as of
July 31, 1999, and (ii) as adjusted to give effect to:

- the declaration of a $109 million dividend to our controlling
stockholders paid by delivery of promissory notes

- the capital contribution of $14 million by Quality King

- the assumption of a portion of Quality King's short-term borrowings

- the offering and the application of its net proceeds to pay $95 million
of the notes to the controlling stockholders and to reduce the short-term
borrowings assumed from Quality King

You should read this table in conjunction with the financial statements and
related notes, "Pro Forma Financial Information" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this prospectus.

JULY 31, 1999
-----------------------
PRO FORMA,
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)

Advances from Quality King............................... $276,454 $ --
Short-term borrowings(1)................................. -- 147,454
Notes payable to stockholders(2)......................... -- 14,000
Stockholders' equity(3).................................. 17 121,037
-------- --------
Total capitalization................................... $276,471 $282,491
======== ========

- -------------------------

(1) Short-term borrowings consist of borrowings under our bank loan agreement.
The bank loan agreement provides for up to $350 million in revolving loans
or a lesser limit based on our aggregate accounts receivable and
inventories. The bank loan agreement will expire five years after the
consummation of this offering. Interest payable on amounts outstanding under
the bank loan agreement are expected to be based on a LIBOR or other base
rate plus a margin depending on our financial leverage. Our ability to
borrow under the bank loan agreement is subject to various conditions,
including compliance with financial covenants.

We will determine the amount of our short-term borrowings at the closing of
this offering based on the difference between our total assets and
liabilities. Because our total assets and liabilities vary, the amount of
our short-term borrowings will vary. We currently estimate that the amount
of our short-term borrowings immediately after the closing of this offering
will be approximately $147.5 million.

(2) Consists of promissory notes issued to our controlling stockholders in
connection with the S corporation distribution made prior to this offering.
The notes bear interest at LIBOR plus 1 1/2% payable quarterly over seven
years.

(3) The amount in the Pro forma, as adjusted column excludes 2,250,000 shares
subject to an option granted to the underwriters to purchase additional
shares in the offering.

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20

DILUTION

The net tangible book value per share of our common stock is the difference
between our tangible assets and our liabilities, divided by the number of shares
of common stock outstanding. For investors in the common stock, dilution is the
per share difference between the assumed $15.00 per share initial offering price
of the common stock in this offering and the net tangible book value of common
stock immediately after completing the offering. Dilution in this case results
from the fact that the per share offering price of the common stock its
substantially in excess of the book value per share attributable to the existing
stockholders for the presently outstanding stock.

On July 31, 1999, our pro forma net tangible book value, which reflects the
reorganization and the related transactions discussed in "Pro Forma Financial
Information" other than this offering, was approximately $(94,983,000) and the
pro forma per share net tangible book value based on 17,000,000 shares of common
stock outstanding was approximately $(5.59) per share.

As of July 31, 1999, without taking into account any changes in our net
tangible book value subsequent to that date other than to give effect to the
sale of the common stock in this offering at the assumed offering price of
$15.00, less the estimated offering expenses, including underwriting discounts
and commissions, the pro forma net tangible book value of each of the
outstanding shares of common stock would have been $3.59 per share after the
offering. Therefore, investors in the common stock would have paid $15.00 for a
share of common stock having a net tangible book value of approximately $3.59
per share after the offering. That is, their investment would have been diluted
by approximately $11.41 per share. At the same time, existing stockholders would
have realized an increase in net tangible book value of $9.18 per share after
the offering without further cost or risk to themselves. The following table
illustrates this per share dilution:

Assumed initial public offering price per share of
common stock......................................... $15.00
Pro forma net tangible book value per share of common
stock before the offering.............................. $(5.59)
Increase in pro forma net tangible book value per share
of common stock attributable to investors in the
offering............................................. 9.18
------
Pro forma net tangible book value per share of common
stock after the offering(1)(2)....................... 3.59
------
Dilution per share to the new investors................ $11.41
======

- -------------------------

(1) After deduction of the estimated offering expenses payable by us (including
the underwriting discounts and commissions).

(2) Does not give effect to the 2,250,000 shares subject to an option granted to
the underwriters to purchase additional shares in the offering.

The foregoing discussion and table do not give effect to 3,574,000 shares
of common stock issuable upon exercise of options granted to management as
discussed under "Management -- Stock Option Plan" or the 726,000 shares of
common stock reserved for issuance upon the exercise of options to be granted in
the future under our stock option plan.

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SELECTED HISTORICAL FINANCIAL DATA

We derived the following selected financial information with respect to our
financial position as of October 31, 1998 and our results of operations for the
years ended October 31, 1997 and 1998 from our audited financial statements that
appear elsewhere in this prospectus. We derived balance sheet data as of October
31, 1997 from audited financial statements that are not included in this
prospectus. We derived the following selected financial information with respect
to our financial position as of October 31, 1995 and 1996 and our results of
operations for the years ended October 31, 1995 and 1996 from our unaudited
financial statements that are not included in this prospectus. In 1999 we
changed our fiscal year from October 31 to July 31. We derived the selected
financial information with respect to our financial position as of July 31, 1999
and our results of operations for the nine months ended July 31, 1999 from our
audited financial statements that appear elsewhere in this prospectus. We
derived the selected financial information with respect to our results of
operations for the nine months ended July 31, 1998 from our unaudited financial
statements that appear elsewhere in this prospectus. We derived the selected
balance sheet data at July 31, 1998 from our unaudited financial statements that
have not been included in this prospectus.

Operating results for the nine months ended July 31, 1998 are not
necessarily indicative of the results for any other period. In the opinion of
management, the unaudited operating results for the nine months ended July 31,
1998 reflect all adjustments (consisting only of normal recurring accruals)
necessary to present fairly our results of operations.

We prepared the historical financial data from the historical accounting
records of Quality King. Although we were a significant division of Quality
King, separate financial statements were not prepared in prior periods. In
connection with the preparation of our financial statements, as described in
Note 1(a) of the Notes to the Financial Statements, we identified and carved-out
of the books and records of Quality King all balance sheet and income statement
accounts that were directly traceable to our pharmaceutical business. Those
accounts included accounts receivable, inventories, advances to suppliers for
future purchases, prepaid expenses and other current assets, accounts payable,
accrued expenses and other current liabilities, net sales, cost of sales and
operating expenses. Management also identified other operating expenses that
were not directly traceable to any specific division of Quality King. We
allocated a portion of these expenses based on assumptions and methods that we
consider reasonable and appropriate. The procedures employed utilized various
allocation bases including number of transactions processed, estimated delivery
miles and warehouse square footage.

Prior to July 31, 1999, we valued our inventories using the LIFO method. We
have restated the financial data presented for all periods to report the results
of operations as if inventories were valued using the FIFO method.

You should read the selected financial data presented below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and their related notes appearing
elsewhere in this prospectus.

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(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Sales, net............................. $168,983 $328,307 $552,488 $772,359 $568,062 $755,088
-------- -------- -------- -------- -------- --------
Gross profit........................... 6,953 16,767 35,987 45,392 30,394 53,577
-------- -------- -------- -------- -------- --------
Operating expenses:
Warehouse and delivery............... 945 1,832 3,039 4,069 2,976 4,162
Selling, general and
administrative.................... 2,208 10,376(1) 6,762 7,187 5,849 7,718
-------- -------- -------- -------- -------- --------
Total operating expenses.......... 3,153 12,208 9,801 11,256 8,825 11,880
-------- -------- -------- -------- -------- --------
Income from operations................. 3,800 4,559 26,186 34,136 21,569 41,697
Interest expense-related party(2)...... 3,937 7,649 12,984 17,370 12,451 15,300
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes...... (137) (3,090) 13,202 16,766 9,118 26,397
Income taxes (benefit)(3).............. (2) (53) 224 285 155 449
-------- -------- -------- -------- -------- --------
Net income (loss)...................... $ (135) $ (3,037) $ 12,978 $ 16,481 $ 8,963 $ 25,948
======== ======== ======== ======== ======== ========
Pro forma for change in tax status:
Historical income (loss) before
income taxes...................... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 9,118 $ 26,397
Pro forma income taxes
(benefit)(4)...................... (15) (1,194) 5,312 6,736 3,672 10,573
-------- -------- -------- -------- -------- --------
Pro forma net income (loss).......... $ (122) $ (1,896) $ 7,890 $ 10,030 $ 5,446 $ 15,824
======== ======== ======== ======== ======== ========
Pro forma basic earnings (loss) per
share............................. $ (.01) $ (.11) $ .46 $ .59 $ .32 $ .93
======== ======== ======== ======== ======== ========
Weighted average number of shares
outstanding....................... 17,000 17,000 17,000 17,000 17,000 17,000
======== ======== ======== ======== ======== ========

OCTOBER 31, JULY 31,
----------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
----------- ----------- -------- -------- ----------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)

BALANCE SHEET DATA:
Current assets......................... $67,033 $140,198 $170,922 $274,890 $262,138 $337,747
Total assets........................... $67,033 $140,198 $170,922 $274,890 $262,138 $337,985
Advances from Quality King -- related
party................................ $53,837 $126,217 $149,530 $241,916 $227,549 $276,454
Stockholders' equity................... $ 17 $ 17 $ 17 $ 17 $ 17 $ 17

- -------------------------

(1) Includes a $6,000 write-off of accounts receivable from FoxMeyer Corporation
when it filed for Chapter 11 protection under the bankruptcy code.

(2) In connection with the preparation of our financial statements as described
in Notes 1(a) and 9 of the Notes to the Financial Statements, we computed
interest expense based on the average monthly balances of inventories,
accounts receivable and advances to suppliers less accounts payable. We
based interest expense on the effective rates paid by Quality King under its
bank loan agreement for the respective periods.

(3) Represents state and local taxes as an S corporation.

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23

PRO FORMA FINANCIAL INFORMATION

The pro forma information gives effect to the following transactions in
connection with the reorganization and this offering:

The Reorganization:

- the declaration of the $109 million dividend to our controlling
stockholders paid by delivery of promissory notes

- the capital contribution of $14 million by Quality King

- the assumption of a portion of Quality King's short-term borrowings

- the conversion from an S corporation to a C corporation for income tax
purposes

The Offering:

- this offering and the application of its net proceeds to pay $95 million
of the notes to our controlling stockholders and to reduce the short-term
borrowings assumed from Quality King

- the issuance to key management of options to purchase 3,010,000 shares of
common stock at $5.00 per share below market value.

The accompanying pro forma condensed balance sheet gives effect to these
transactions as if they had occurred at July 31, 1999. The accompanying pro
forma condensed statements of operations for the nine months ended July 31, 1999
and the year ended October 31, 1998 give effect to these transactions as if they
had occurred at November 1, 1997. See "Use of Proceeds."

The pro forma condensed statements of operations do not reflect the
non-recurring non-cash management compensation charge relating to the options
granted to key management for past services. We will record this charge in the
first quarter ending immediately after this offering.

Concurrently with the offering, we will refinance the balance of the
short-term borrowings assumed from Quality King with borrowings under our new
bank loan agreement.

This pro forma information does not purport to represent what our actual
results of operations would have been had the transactions occurred on the dates
indicated or for any future period or date. The pro forma adjustments give
effect to available information and assumptions that we believe are reasonable.
You should read this pro forma information in conjunction with our historical
financial statements and their notes, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus.

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24

QK HEALTHCARE, INC.

PRO FORMA CONDENSED BALANCE SHEET
JULY 31, 1999

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

PRO FORMA ADJUSTMENTS
-------------------------- PRO FORMA,
HISTORICAL REORGANIZATION OFFERING AS ADJUSTED
---------- -------------- --------- -----------

ASSETS
Current
Cash..................................... $ -- $ 210,000(1) $ --
(210,000)(2)
Other current............................ 337,747 337,747
-------- ---------
Total current.............................. 337,747 337,747
Deferred income taxes...................... -- 6,020(3) 6,020
Other non-current assets................... 238 238
-------- --------- --------- ---------
$337,985 $ -- $ 6,020 $ 344,005
======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Advances from Quality King -- related
party................................. $276,454 $ (14,000)(4) $ --
(262,454)(5)
Short-term borrowings.................... 262,454(5) (115,000)(2) 147,454
Notes payable to stockholders............ -- 97,000(6) (95,000)(2) 2,000
Other current liabilities................ 61,514 61,514
-------- --------- --------- ---------
Total current liabilities.................. 337,968 83,000 (210,000) 210,968
Long-term liabilities
Notes payable to stockholders............ -- 12,000(6) 12,000
-------- --------- --------- ---------
337,968 95,000 (210,000) 222,968
-------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock............................. 17 15(1) 32
Additional paid-in capital............... -- 14,000(4) 209,985(1) 239,035
15,050(3)
Retained earnings (deficit).............. --(7) (109,000)(6) (9,030)(3) (118,030)
-------- --------- --------- ---------
Total stockholders' equity................. 17 (95,000) 216,020 121,037
-------- --------- --------- ---------
$337,985 $ -- $ 6,020 $ 344,005
======== ========= ========= =========

- -------------------------

(1) Reflects the estimated net proceeds from the sale of 15,000 shares of common
stock in this offering, aggregating $210,000, net of $15,000 of expenses,
including underwriting discounts and commissions.

(2) Reflects use of proceeds from this offering to pay $95,000 of the notes due
to our controlling stockholders for dividends and to reduce short-term
borrowings assumed from Quality King by $115,000.

(3) Reflects the issuance of options to purchase 3,010 shares of common stock at
an assumed price of $10.00 per share ($5 per share less than the assumed
initial offering price of the shares in this offering) to key management
personnel for past services which will result in an estimated special charge
of $15,050 ($9,030 after related tax effect) and an increase in additional
paid-in capital.

(4) Reflects a $14,000 one-time initial capital contribution by Quality King,
which was accomplished by forgiveness of a portion of the advances from
Quality King.

(5) Reflects the assumption of a portion of Quality King's short-term borrowings
in an amount equal to the advances from Quality King.

(6) Reflects the declaration of the $109,000 dividend payable to our controlling
stockholders. This amount represents a portion of the undistributed S
corporation earnings of Quality King. We calculated this amount based on the
provisions of the Internal Revenue Code which require an allocation of
undistributed earnings to be based on a ratio of the fair value of our
assets to the fair value of the assets of Quality King.

(7) Prior to the reorganization we operated as a division of Quality King.
Accordingly, we treated all accumulated net income as distributions to
Quality King.

23
25

QK HEALTHCARE, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1999

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

PRO FORMA PRO FORMA,
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------

Sales, net.............................. $755,088 $755,088
-------- --------
Gross profit............................ 53,577 53,577
Operating expenses...................... 11,880 11,880
-------- --------
Income from operations.................. 41,697 41,697
Interest expense........................ 15,300 $(6,210)(1) 9,090
--(2)
-------- ------- --------
Income before income taxes.............. 26,397 6,210 32,607
Income taxes............................ 449 105(3) 554
-------- ------- --------
Net income.............................. $ 25,948 $ 6,105 $ 32,053
======== ======= ========
Pro forma:
Income before income taxes............ $ 26,397 $ 6,210 $ 32,607
Pro forma income taxes................ 10,573 2,450(4) 13,023
-------- ------- --------
Pro forma net income.................. $ 15,824 $ 3,760 $ 19,584
======== ======= ========
Pro forma basic earnings per share.... $ .93 $ .61
======== ========
Pro forma weighted average shares
outstanding........................ 17,000 32,000(5)
======== ========
Pro forma diluted earnings per
share.............................. $ .59
========
Pro forma weighted average diluted
shares outstanding................. 33,003(6)
========

- -------------------------

(1) Reflects the interest savings from the use of $115,000 of the net proceeds
from this offering to reduce the advances from Quality King. In connection
with the reorganization, we will assume a portion of the Quality King
indebtedness representing such advances. Simultaneously with the closing of
this offering, we will refinance such indebtedness with borrowings under our
bank loan agreement. We calculated the interest expense reduction using
Quality King's effective interest rate of 7.2%. The interest rate under our
bank loan agreement is substantially the same as the rate under the Quality
King bank loan agreement.

(2) Reflects the net additional interest expense related to the notes payable to
our controlling stockholders reduced by the interest savings related to the
reduction of advances from Quality King. The interest rate used was the same
as under the Quality King bank loan agreement.

(3) Reflects the additional state income taxes attributed to the change in
interest expense.

(4) Reflects additional income taxes, primarily current, that would have been
reported had we operated as a stand-alone entity and filed federal and state
income tax returns for our operations as a C corporation.

(5) Reflects the sale of 15,000 shares of common stock.

(6) Reflects the dilutive effect (1,003 shares) of the issuance of stock options
to purchase 3,010 shares granted to key management personnel.

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26

QK HEALTHCARE, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

PRO FORMA PRO FORMA,
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------

Sales, net.............................. $772,359 $772,359
-------- --------
Gross profit............................ 45,392 45,392
Operating expenses...................... 11,256 11,256
-------- --------
Income from operations.................. 34,136 34,136
Interest expense........................ 17,370 (8,970)(1) 8,400
--(2)
-------- ------- --------
Income before provision for income
taxes................................. 16,766 8,970 25,736
Provision for income taxes.............. 285 153(3) 438
-------- ------- --------
Net income.............................. $ 16,481 $ 8,817 $ 25,298
======== ======= ========
Pro forma:
Income before income taxes............ $ 16,766 $ 8,970 $ 25,736
Pro forma income taxes................ 6,736 3,543(4) 10,279
-------- ------- --------
Pro forma net income.................. $ 10,030 $ 5,427 $ 15,457
======== ======= ========
Pro forma basic earnings per share.... $ .59 $ .48
======== ========
Pro forma weighted average shares
outstanding........................ 17,000 32,000(5)
======== ========
Pro forma diluted earnings per
share.............................. $ .47
========
Pro forma weighted average diluted
shares outstanding................. 33,003(6)
========

- -------------------------

(1) Reflects the interest savings from the use of $115,000 of the net proceeds
from this offering to reduce the advances from Quality King. In connection
with the reorganization, we will assume a portion of the Quality King
indebtedness representing such advances. Simultaneously with the closing of
this offering we will refinance such indebtedness with borrowings under our
bank loan agreement. We calculated the interest expense reduction using
Quality King's effective interest rate of 7.8%. The interest rate of our
bank loan agreement is substantially the same as the rate under the Quality
King bank loan agreement.

(3) Reflects the additional state income taxes attributed to the change in
interest expense.

(4) Reflects the additional income taxes, primarily current, that would have
been reported had we operated as a stand-alone entity and filed federal and
state income tax returns for our operations as a C corporation.

(5) Reflects the sale of 15,000 shares of common stock.

(6) Reflects the dilutive effect (1,003 shares) of the issuance of stock options
to purchase 3,010 shares granted to key management personnel.

25
27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We have grown significantly over the past five years primarily due to the
expansion of our product line, customer base, supplier relationships and
management, as well as by overall industry growth. From fiscal 1995 through the
twelve months ended July 31, 1999, our annual net sales grew from $169.0 million
to $959.4 million, representing a compound annual growth rate of 59%. Our income
from operations grew over this period from $3.8 million to $54.3 million,
representing a compound annual growth rate of 103%.

In 1999 we changed our fiscal year-end from October 31 to July 31.

HISTORY AND REORGANIZATION

In 1961 Bernard and Ruth Nussdorf formed Quality King Distributors, Inc.
Quality King was a promotional wholesale distributor with four separate
divisions: hair care products; groceries; health and beauty care products; and
pharmaceuticals. Quality King formed the pharmaceutical business in 1987. In
connection with the reorganization of Quality King, the pharmaceutical business
was transferred prior to the effective date of this offering to QK Healthcare,
Inc., a newly-formed S corporation, and its stock was distributed to the
stockholders of Quality King (the "Reorganization"). As a result of the
Reorganization, we now conduct the pharmaceutical business independently from
Quality King with our own employees. However, Quality King continues to provide
computer and warehouse management and consulting services to us pursuant to a
support services agreement and we will continue to sublease our facilities from
Quality King. See "Related Party Transactions -- Agreements with Quality King"
for a discussion of this agreement.

Since November 1, 1986, Quality King has been treated for federal income
tax purposes as an S corporation under Subchapter S of the Internal Revenue Code
of 1986, as amended (the "Code"). Since November 1, 1989, Quality King has been
treated for New York State income tax purposes as an S corporation under Section
660 of the Tax Law of the State of New York. As a result, Quality King was not
subject to federal or New York State income taxes for these years, except for
the limited franchise tax imposed by New York State on S corporations for
taxable years after 1989. Earnings of Quality King for these years were taxed,
for federal and New York State income tax purposes, on the individual tax
returns of its stockholders. In past years, Quality King made annual S
corporation distributions to provide its stockholders with funds to pay income
taxes on its earnings. These distributions aggregated $9.6 million, $9.0 million
and $10.2 million in the years ended October 31, 1996, 1997, and 1998,
respectively, and $12.8 million in the nine months ended July 31, 1999. Because
it did not distribute all of its earnings to its stockholders, Quality King
accumulated a significant amount of undistributed S corporation earnings.

In connection with the Reorganization, Quality King allocated $109 million
of its estimated undistributed S corporation earnings to QK Healthcare, Inc.,
which prior to the offering was also an S corporation. The provisions of the
Internal Revenue Code require an allocation of the undistributed earnings based
on the ratio of the fair value of our assets to

26
28

the fair value of the assets of Quality King. This $109 million was based on (i)
approximately $75.6 million, representing all of the previously earned and
undistributed S corporation earnings allocated to us through October 31, 1998,
and (ii) an amount (estimated to be approximately $33.4 million) equal to the
undistributed S corporation earnings allocated to us for the period from
November 1, 1998 through the day preceding the closing date of the
reorganization. Prior to the offering, we declared a distribution (the
"Distribution") in the aggregate amount of $109 million. We paid the
Distribution by delivery of promissory notes to our existing stockholders in the
aggregate amount of the Distribution (the "Notes"). The Notes mature in 2006 and
require the mandatory prepayment of $95 million upon the closing of this
offering. The Notes bear interest at an annual rate of LIBOR plus 1 1/2%. We
will use a portion of the proceeds from this offering to pay $95 million of
these Notes. For more information relating to the Distribution, see Note 12(a)
of the Notes to the Financial Statements.

IMPACT OF THE REORGANIZATION AND OFFERING

Upon consummation of this offering, we will grant options to purchase up to
3.01 million shares to members of our senior management for past services. These
options will vest 100% upon grant and will have an exercise price $5.00 below
the initial public offering price of our stock being sold in this offering. As a
result, we will be required to record a net charge against earnings of $9.03
million.

Upon consummation of this offering, we will no longer be treated as an S
corporation. As a result, we will be subject to federal income tax and to the
ordinary rate of New York State income tax on corporations. Pro forma
adjustments are presented in the financial statements included in this
prospectus to reflect a provision for income taxes based on pro forma income
before taxes as if we had been a C corporation for all periods presented.

In connection with the Reorganization, we prepared our financial statements
by carving out of the historical books and records of Quality King all balance
sheet and income statement accounts that were directly traceable to our
pharmaceutical business. Quality King also allocated to us various operating
expenses that were not directly traceable to any specific division of Quality
King. See Note 8 of the Notes to the Financial Statements. In addition, in our
financial statements we calculated interest on advances from Quality King based
upon the average balances of inventories, accounts receivable and advances to
suppliers less accounts payable and on the effective rates paid by Quality King
under its bank loan agreement. See Note 9 of the Notes to the Financial
Statements. Upon consummation of this offering, we intend to enter into a bank
loan agreement with a group of lenders. We expect the interest rate under our
new bank loan agreement to be comparable to the interest rate under the Quality
King bank loan agreement.

Following the Reorganization and this offering, we will no longer be a
division of Quality King. We will operate on a stand-alone basis. The financial
information included in this prospectus is not necessarily indicative of our
future results of operations, financial position and cash flows.

27
29

RESULTS OF OPERATIONS

The following table sets forth selected statement of operations data as a
percentage of net sales for the periods indicated:

FISCAL YEARS ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------------------- --------------------
1996 1997 1998 1998 1999
----------- ----- ----- ----------- -----
(UNAUDITED) (UNAUDITED)

Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Gross profit................... 5.1 6.5 5.9 5.4 7.1
----- ----- ----- ----- -----
Operating expenses:
Warehouse and delivery....... 0.6 0.6 0.6 0.6 0.6
Selling, general and
administrative............ 3.1 1.2 0.9 1.0 1.0
----- ----- ----- ----- -----
Total operating
expenses................ 3.7 1.8 1.5 1.6 1.6
----- ----- ----- ----- -----
Income from operations......... 1.4 4.7 4.4 3.8 5.5
Interest expense -- related
party........................ 2.3 2.3 2.3 2.2 2.0
----- ----- ----- ----- -----
Income (loss) before income
taxes........................ (0.9) 2.4 2.1 1.6 3.5
Income taxes (benefit)......... 0.0 0.0 0.0 0.0 0.1
----- ----- ----- ----- -----
Net income (loss).............. (0.9)% 2.4% 2.1% 1.6% 3.4%
===== ===== ===== ===== =====
Pro forma for change in tax
status:
Historical income (loss)
before income taxes....... (0.9)% 2.4% 2.1% 1.6% 3.5%
Pro forma income taxes
(benefit)................. (0.4)% 1.0% 0.9% 0.7% 1.4%
----- ----- ----- ----- -----
Pro forma net income
(loss).................... (0.5)% 1.4% 1.2% 0.9% 2.1%
===== ===== ===== ===== =====

NINE MONTHS ENDED JULY 31, 1999 COMPARED TO NINE MONTHS ENDED JULY 31, 1998

NET SALES. Net sales increased $187.0 million or 33% from $568.1 million
for the nine months ended July 31, 1998 to $755.1 million for the nine months
ended July 31, 1999. This increase was primarily attributable to increased sales
to our existing customers. Additional resources were made available to us during
the nine months ended July 31, 1999 through additional advances from Quality
King, enabling us to purchase more products on favorable terms.

GROSS PROFIT. Gross profit increased $23.2 million or 76% from $30.4
million for the nine months ended July 31, 1998 to $53.6 million for the nine
months ended July 31, 1999. Gross profit as a percentage of net sales increased
from 5.4% for the nine months ended July 31, 1998 to 7.1% for the nine months
ended July 31, 1999. The increase in gross profit was the result of the
increased sales volumes, lower inventory costs due to an expansion in our
supplier base which led to improved pricing opportunities, and a more profitable
product mix.

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30

OPERATING EXPENSES. Operating expenses increased $3.1 million or 35% from
$8.8 million for the nine months ended July 31, 1998 to $11.9 million for the
nine months ended July 31, 1999. This increase was due to a 40% increase in
warehouse and delivery expenses and a 32% increase in selling, general and
administrative expenses. The increase in warehouse and delivery expenses
resulted from a substantial increase in the size of our warehousing facility and
the higher costs associated with increased sales volumes. Selling, general and
administrative expenses increased primarily due to increases in sales salaries
and commissions due to higher sales volumes, although selling, general and
administrative expenses as a percentage of net sales remained at approximately
1.0%.

INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations increased $20.1 million or 93% from $21.6 million for the nine
months ended July 31, 1998 to $41.7 million for the nine months ended July 31,
1999. Income from operations as a percentage of net sales increased from 3.8%
for the nine months ended July 31, 1998 to 5.5% for the nine months ended July
31, 1999.

INTEREST EXPENSE. Interest expense increased $2.8 million or 22% from
$12.5 million for the nine months ended July 31, 1998 to $15.3 million for the
nine months ended July 31, 1999. This increase resulted primarily from a $70.2
million increase in the average advances from Quality King from $211.7 million
for the nine months ended July 31, 1998 to $281.9 million for the nine months
ended July 31, 1999.

INCOME TAXES. Our pro forma income taxes increased $6.9 million or 188%
from $3.7 million for the nine months ended July 31, 1998 to $10.6 million for
the nine months ended July 31, 1999. This increase was the result of the
increase in earnings.

YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED OCTOBER 31, 1997

NET SALES. Net sales increased $219.9 million or 40% from $552.5 million
for the year ended October 31, 1997 to $772.4 million for the year ended October
31, 1998. This increase was primarily attributable to increased sales to our
existing customers. Additional resources were made available to us for the year
ended October 31, 1998 through additional advances from Quality King, enabling
us to purchase more products on favorable terms.

GROSS PROFIT. Gross profit increased $9.4 million or 26% from $36.0
million for the year ended October 31, 1997 to $45.4 million for the year ended
October 31, 1998. Gross profit as a percentage of net sales decreased from 6.5%
for the year ended October 31, 1997 to 5.9% for the year ended October 31, 1998.
The decrease in gross profit percentage was primarily attributable to our
strategy to expand our market share and enhance customer relationships. In order
to accomplish this, we increased our offerings of more popular items with lower
margins.

OPERATING EXPENSES. Operating expenses increased $1.5 million or 15% from
$9.8 million for the year ended October 31, 1997 to $11.3 million for the year
ended October 31, 1998. This increase was due to a 34% increase in warehouse and
delivery expenses and a 6% increase in selling, general and administrative
expenses. The increase in warehouse and delivery expenses resulted from
increased sales volumes. As a percentage of net sales, warehouse and delivery
expenses remained approximately 0.6% for each fiscal year. Selling, general and
administrative expenses increased primarily due to increases in sales salaries
and commissions due to the higher sales volumes, although selling, general

29
31

and administrative expenses as a percentage of net sales decreased from 1.2% for
the year ended October 31, 1997 to 0.9% for the year ended October 31, 1998.

INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations increased $7.9 million or 30.0% from $26.2 million for the year
ended October 31, 1997 to $34.1 million for the year ended October 31, 1998.
Income from operations as a percentage of net sales was 4.7% for the year ended
October 31, 1997 and 4.4% for the year ended October 31, 1998.

INTEREST EXPENSE. Interest expense increased $4.4 million or 34% from
$13.0 million for the year ended October 31, 1997 to $17.4 million for the year
ended October 31, 1998. This increase resulted from a $52.8 million increase in
the average advances from Quality King, increasing from $169.0 million for the
year ended October 31, 1997 to $221.8 million for the year ended October 31,
1998.

INCOME TAXES. Our pro forma income taxes increased $1.4 million or 26%
from $5.3 million for the year ended October 31, 1997 to $6.7 million for the
year ended October 31, 1998. This increase was the result of the increase in
earnings.

YEAR ENDED OCTOBER 31, 1997 COMPARED TO THE YEAR ENDED OCTOBER 31, 1996

NET SALES. Net sales increased $224.2 million or 68% from $328.3 million
for the year ended October 31, 1996 to $552.5 million for the year ended October
31, 1997. This increase was primarily attributable to increased sales to
existing customers. Additional resources were made available to us during the
year ended October 31, 1997 through additional advances from Quality King,
enabling us to purchase more products on favorable terms.

GROSS PROFIT. Gross profit increased $19.2 million or 114% from $16.8
million for the year ended October 31, 1996 to $36.0 million for the year ended
October 31, 1997. Gross profit as a percentage of net sales increased from 5.1%
for the year ended October 31, 1996 to 6.5% for the year ended October 31, 1997.
The increase in gross profit was the result of the increased sales volumes,
lower inventory costs due to an expansion in our supplier base which led to
improved pricing opportunities, and a more profitable product mix.

OPERATING EXPENSES. Operating expenses decreased $2.4 million or 20% from
$12.2 million for the year ended October 31, 1996 to $9.8 million for the year
ended October 31, 1997. Warehouse and delivery expenses increased $1.2 million
or 67% from $1.8 million for the year ended October 31, 1996 to $3.0 million for
the year ended October 31, 1997. As a percentage of net sales, warehouse and
delivery expenses remained approximately 0.6% for the years ended October 31,
1997 and 1996. Selling, general and administrative expenses decreased $3.6
million or 35% from $10.4 million for the year ended October 31, 1996 to $6.8
million for the year ended October 31, 1997. Selling, general and administrative
expenses for the year ended October 31, 1996 included a $6.0 million charge
related to the write-off of an account receivable from FoxMeyer Corporation who
filed for Chapter 11 protection under the bankruptcy code. Eliminating the
effect of the write-off, selling, general and administrative expenses increased
approximately $2.4 million or 55% from $4.4 million for the year ended October
31, 1996 to $6.8 million for the year ended October 31, 1997. This increase was
a result of the increased sales volumes.

30
32

INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations increased $21.6 million or 474% from $4.6 million for the year
ended October 31, 1996 to $26.2 million for the year ended October 31, 1997.
Eliminating the effect of the accounts receivable write-off during the year
ended October 31, 1996, income from operations increased $15.6 million or 147%.

INTEREST EXPENSE. Interest expense increased $5.4 million or 70% from $7.6
million for the year ended October 31, 1996 to $13.0 million for the year ended
October 31, 1997. The increase resulted from a $65.7 million increase in the
average advances from Quality King, increasing from $103.3 million for the year
ended October 31, 1996 to $169.0 million for the year ended October 31, 1997.

INCOME TAXES. Our pro forma income taxes were $5.3 million for the year
ended October 31, 1997 compared to a benefit of $1.2 million for the year ended
October 31, 1996. The benefit was the result of a loss before income taxes which
was primarily attributable to the $6.0 million write-off of accounts receivable
due to the bankruptcy filing of FoxMeyer Corporation.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Our principal working capital needs are for inventory and accounts
receivable. Our need for working capital has grown with our business. Due to our
rapid growth, we have had negative cash flow from operations of $10.3 million,
$75.9 million and $8.3 million for the years ended October 31, 1997 and 1998 and
the nine months ended July 31, 1999, respectively. Since we expect such growth
to continue, we expect our cash flow from operations to continue to be negative
for the foreseeable future.

Although we closely monitor the creditworthiness of our major customers, we
may incur some collection losses on major customer accounts receivable in the
future. In 1996, we wrote-off $6 million of accounts receivable from FoxMeyer
Corporation when it filed for Chapter 11 protection under the bankruptcy code.

The following table sets forth selected financial data with respect to our
financial position as of October 31, 1997 and 1998 and July 31, 1998 and 1999
and our results of operations for the years ended October 31, 1997 and 1998 and
the nine months ended July 31, 1998 and 1999.

NINE MONTHS ENDED
YEARS ENDED OCTOBER 31, JULY 31,
------------------------ -----------------------
1997 1998 1998 1999
---------- ---------- ----------- --------
(UNAUDITED)
(IN THOUSANDS)

Operating Data:
Net sales...................... $552,488 $772,359 $568,062 $755,088
Net cash used in operating
activities.................. 10,339 75,906 69,057 8,277
Balance Sheet data (at period
end):
Accounts receivable............ 49,159 83,937 77,646 83,917
Inventories.................... 120,721 189,703 183,473 249,918
Accounts payable............... 19,999 31,561 33,394 58,742
Advances from Quality King..... 149,530 241,916 227,549 276,454

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33

CAPITAL RESOURCES

Historically, we have financed our operations through advances from Quality
King. In connection with the Reorganization, we assumed a portion of Quality
King's short-term borrowings under its bank loan agreement in an amount equal to
the advances to us from Quality King. We will repay approximately $115 million
of such short-term borrowings with a portion of the net proceeds of this
offering and the balance will be refinanced concurrently with this offering with
borrowings under our new bank loan agreement.

To finance working capital after the Reorganization, we intend to enter
into a bank loan agreement with a group of banks to provide funds for continuing
operations, the repayment of certain debt, working capital and general corporate
purposes. We are currently negotiating with a bank to provide up to $350 million
of revolving loans. This loan will be secured by first priority liens on all of
our tangible and intangible assets. The bank loan agreement will expire five
years from the consummation of this offering. Advances under the bank loan
agreement will be limited to agreed upon percentages of our accounts receivable
and inventory. The interest rate per annum is expected to be, at our option,
either LIBOR plus 1.375% to 1.75%, depending on our financial leverage, or the
prime rate. We will be required to pay fees in connection with the bank loan
agreement, including a commitment fee of .25% to .375% on the unutilized portion
of the loan. The bank loan agreement is expected to have mandatory prepayment
provisions in the event of the issuance of debt or equity securities or the sale
of assets. We also expect the new bank loan agreement to contain a number of
financial covenants which, among other things, will require us to maintain
specified financial ratios and impose limitations on us with respect to
investments, additional indebtedness, dividends, distributions, guarantees,
transactions with affiliates, liens and encumbrances. The bank loan agreement is
also expected to provide that a change of control will constitute an event of
default.

We intend to use the proceeds of this offering

- to pay $95 million of the Notes due to our controlling stockholders,
which bear interest at an annual rate of LIBOR plus 1 1/2% and which were
issued in connection with the distribution to the controlling
stockholders of the undistributed S corporation earnings of Quality King
that were allocated to us

- to pay $115 million of the short-term borrowings we assumed from Quality
King in connection with the Reorganization.

We believe that the net proceeds of this offering, together with borrowings
from our new bank loan agreement, will be sufficient to meet our working capital
needs for at least two years.

NINE MONTHS ENDED JULY 31, 1999. Net cash used in operations was $8.3
million for the nine months ended July 31, 1999. This amount was primarily the
result of net income of $25.9 million, an increase in inventories of $60.2
million from October 31, 1998, and an increase in accounts payable of $27.2
million from October 31, 1998 which partially reduced the requirements for funds
for inventories. The increase in inventories is due to the procurement of
inventories for the increased sales and to maximize purchasing opportunities.

YEAR ENDED OCTOBER 31, 1998. Net cash used in operations was $75.9 million
for the year ended October 31, 1998. This amount was primarily the result of net
income of $16.5 million, an increase in accounts receivable and inventories of
$103.8 million from

32
34

October 31, 1997, and an increase in accounts payable of $11.6 million from
October 31, 1997 which partially reduced the requirements for funds for
inventories. The increase in receivables is consistent with our revenue growth.
The increase in inventories is due to the procurement of inventories for the
increased sales and to maximize purchasing opportunities.

INFLATION

We prepared our financial statements on the basis of historical costs and
not with the intention of reflecting changes in the relative purchasing power of
the dollar. Because of our ability to take advantage of forward purchasing
opportunities, we believe that our gross profits generally increase as a result
of manufacturers' price increases in the products we distribute. Gross profits
may decline if the rate of price increases by manufacturers declines.

Generally, we pass price increases through to customers when we receive
them. As a result, they reduce the negative effect of inflation. Increases in
operating expenses have been partially offset during the past three years by
increased volumes and improved productivity.

YEAR 2000 COMPLIANCE

We, our vendors and customers use software and related technologies
throughout our businesses that are affected by the year 2000 problem, which is
common to most businesses, and concerns the inability of information systems,
primarily computer software programs, to properly recognize and process
date-sensitive information on and after January 1, 2000. This inability could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in other normal business activities.

We have developed and implemented a plan to modify our management
information systems to properly recognize the year 2000 and believe that the
modifications made to existing software and new software has mitigated the year
2000 issue. The cost of our year 2000 preparations, including both costs for
modification of existing software and addition of new software, was not material
to our results of operations.

We have had formal communications with all of our significant suppliers and
large customers to determine the extent to which we are vulnerable to those
third parties' failure to remediate their own year 2000 issues. Although these
suppliers and customers have assured us that they will be year 2000 compliant,
we cannot be sure that the systems of these other companies will be timely
compliant. We have taken several steps to insure the continuity of our business
services in the event that these systems are not year 2000 compliant, including
establishing a back-up power supply, providing for additional security, and
insuring information system's personnel will be available for unanticipated
events.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market
rates and prices, such as commodity prices, foreign currency exchange and
interest rates. We are not exposed to market risks from changes in commodity
prices or foreign currency exchange rates. We do not hold derivative financial
instruments nor do we hold securities for trading

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or speculative purposes. We are exposed to risk from changes in interest rates
from borrowings under our variable rate bank loan agreement. If the outstanding
balance at July 31, 1999 of $276 million was the average balance for the
following twelve month period and we experienced a 1% increase in average
interest rates, the interest expense for that period would have increased by
$2.8 million. Based on current economic conditions, we do not believe interest
rates will increase substantially in the near future. As a result, we do not
believe it is necessary to hedge our exposure against potential future interest
rate increases.

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BUSINESS

GENERAL

We are a national wholesale distributor of selected healthcare products to
retailers, wholesale distributors and pharmacy benefit managers. Our products
currently include branded and generic pharmaceutical products and
medical/surgical products produced by a wide range of manufacturers. Our
strategy is to use our market intelligence and business relationships to procure
products on favorable terms. We carry a merchandise inventory of approximately
2,000 stock keeping units, unlike traditional wholesale distributors that
generally stock 20,000 - 25,000 stock keeping units, of pharmaceutical and other
healthcare products. Consistent with our strategy, we offer our customers a
limited range of inventory, delivery and purchasing services as compared to
traditional wholesale distributors. We also primarily deliver products in bulk
shipments to our customers' warehouses, as compared to individual stores. We
believe our strategy allows us to offer pharmaceutical and other healthcare
products to our customers at superior prices. In addition, we believe that
traditional wholesale distributors do not view us as a competitor but rather as
an important partner who provides them with an alternative means of completing
product sales and purchases.

INDUSTRY OVERVIEW

PHARMACEUTICAL INDUSTRY GROWTH. The pharmaceutical industry in the United
States has experienced significant growth in recent years. Industry sales grew
at a compound annual growth rate of 8.9% from approximately $59.9 billion in
1990 to approximately $108.9 billion in 1997.(1) Pharmaceuticals grew from 8.6%
to 10.0% of overall healthcare costs from 1990 to 1997.(1) Industry sales are
expected to increase at a compound annual growth rate of 9.6% from $108.9
billion in 1997 to $206.9 billion in 2004 and pharmaceuticals are expected to
represent 12.2% of overall healthcare costs in 2004.(1) The factors causing this
growth include the following:

- AGING POPULATION. The number of individuals over age 65 in the United
States has grown from 20.1 million in 1970 to 33.8 million in 1996.(2)
This age group, which is projected to grow to 39.6 million individuals by
2010, spends approximately 3.7 times more per capita on pharmaceuticals
and medical supplies than the rest of the population.(3)

- INTRODUCTION OF NEW PHARMACEUTICALS. Traditional research and
development as well as new technologies continue to generate new
compounds that are more effective in treating diseases. These compounds
have been responsible for significant increases in pharmaceutical sales.
In particular, the aggregate first calendar year sales of new
pharmaceutical products increased from $1.3 billion for products launched
in 1993 to $2.6 billion for products launched in 1998. We believe ongoing
research and development expenditures by pharmaceutical and biotechnology
companies will contribute to continued growth of pharmaceutical sales.

- ---------------

1 Source: U.S. Health Care Financing Administration.

2 Source: U.S. Bureau of the Census.

3 Source: U.S. Bureau of Labor Statistics.

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- COST CONTAINMENT EFFORTS THAT STRESS DRUG THERAPIES. In response to
rising healthcare costs, government and private payors have adopted cost
containment measures that encourage the use of efficient drug therapies
to prevent or treat diseases. While national attention has been focused
on the overall increase in aggregate healthcare costs, we believe that
drug therapy has had and will continue to have a beneficial impact on
overall healthcare costs by reducing expensive surgeries and prolonged
hospital stays.

- PHARMACEUTICAL PRICE INCREASES BY DRUG MANUFACTURERS. We believe that
price increases by pharmaceutical manufacturers on selected items in
their product lines will continue to equal or exceed the overall Consumer
Price Index. We believe these increases will be due in large part to the
continued demand for newly patented drugs, the costs and prices of which
have been increasing as manufacturers have attempted to recoup costs
associated with the development, testing and regulatory approval of these
drugs. In particular, the level of price increases for branded
pharmaceuticals has been substantial; in 1998 the increase was 4.8%.

PHARMACEUTICAL REIMBURSEMENT ENVIRONMENT. Government and private payors
are facing the challenges of controlling healthcare spending in the face of
rising healthcare costs and increased spending on pharmaceuticals. In addition,
the influence of third-party payors upon pharmaceutical spending has increased
as the percentage of retail prescriptions paid for by them has increased from
34.7% in 1993 to 65.0% in 1998. Third-party payors have used their increased
influence to implement numerous cost containment measures designed to manage
their spending on pharmaceuticals, including lowering their reimbursement rates
to pharmaceutical retailers.

As a result of these cost containment measures, pharmaceutical retailers
have been facing increasing pricing pressures. From 1995 to 1999, the average
gross margin received by combination food/drug retailers on third-party payor
sales of pharmaceuticals decreased from 20% to 16%. The rapid growth of
mail-order pharmacies has caused additional pricing pressure. From 1993 to 1998,
mail-order pharmaceutical sales increased at a compound annual growth rate of
20.1% from $4.4 billion to $11.0 billion.

Healthcare institutions, which are generally reimbursed for providing
healthcare services, are also facing pricing pressures as third-party payors
seek to control healthcare spending by lowering reimbursement rates for these
services. As a result, healthcare institutions have adopted cost containment
measures to control spending on a variety of ancillary items, including
pharmaceuticals.

PHARMACEUTICAL DISTRIBUTION CHAIN. The changing reimbursement environment
together with the rapid growth of the pharmaceutical industry has led to
increased competition among the principal participants in the pharmaceutical
distribution chain -- pharmaceutical retailers, wholesalers and manufacturers.
As a result, these participants are searching for additional means of increasing
their profits, including completing product sales and purchases with alternative
partners.

- RETAILERS. Retailers are facing significant pricing pressures under the
new reimbursement environment. In order to maintain profit margins in the
face of price restraints, retailers have had to search for additional
means of lowering their costs, including procuring product at
advantageous prices from wholesalers who complement their primary
suppliers.

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- WHOLESALE DISTRIBUTORS. Wholesale distributors provide their customers
with access to a wide range of pharmaceutical and healthcare products
from various manufacturers. Traditional wholesalers typically enter into
preferred arrangements with retailers and healthcare institutions that
include negotiated prices and require the wholesaler to provide all of
the customer's pharmaceutical products. Traditional wholesale
distributors also typically provide their customers with inventory,
delivery, and purchasing services. The need to supply a full line of
pharmaceutical products requires traditional wholesalers to allocate
their capital among a wide range of inventory and service
responsibilities in order to meet their full service obligations to their
customers. To maximize profitability and returns on capital, many
traditional wholesalers have increased their focus on using purchasing
activities to take advantage of pricing or "buy-side" opportunities
available from manufacturers, other distributors or other participants in
the marketplace.

- MANUFACTURERS. Wholesale distributors represent the most important
distribution channel for pharmaceutical manufacturers, accounting for
approximately 54.8% of the approximately $102 billion of prescription
drug sales for the year ended December 31, 1998. Manufacturers actively
seek additional wholesale relationships to increase their sales and to
manage their inventory levels.

OTHER OPPORTUNITIES. We believe that many of the same factors that are
driving the growth of the pharmaceutical market and placing pressures on
pharmaceutical reimbursement are also impacting other segments of the healthcare
product and supply market. As a result, the dental, veterinary supply and home
healthcare markets are also growing while at the same time experiencing pricing
pressures at the retail and institutional levels.

STRATEGY

- CONTINUE TO BE A VALUABLE RESOURCE TO OUR CUSTOMERS AND SUPPLIERS. We
have developed long-standing relationships with our customers and
suppliers over the last 12 years. We believe that our success has in
large part been due to our ability to provide our customers with products
at attractive prices. Through the use of our proprietary management
information system and supplier network we have developed an ability to
take advantage of pricing opportunities. At the same time, we believe we
are responsive to our suppliers and provide them with effective
distribution of significant volumes of their products to a broad range of
wholesaler and retailer accounts.

- FOCUS ON PROVIDING SELECTIVE LINES OF PRODUCTS. Rather than offering
complete lines of products and a full array of distribution services, we
currently offer to our customers selective product lines that complement
their existing supplier relationships. We believe that this product mix
does not compete with the primary businesses of the traditional wholesale
distributors. As a result, we believe we play a unique role in the
pharmaceutical distribution chain, with both retailers and distributors
as our customers.

- INCREASE OUR PRODUCT OFFERINGS. We believe that there is a substantial
opportunity to increase our business by buying additional volumes of our
existing product lines

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and expanding our network of pharmaceutical suppliers. In addition,
consistent with our focus on providing selective lines of products, we
have successfully entered into new product categories recently, including
injectibles, vaccines and medical/surgical products such as dressings and
ostomy and urological products. We believe that having additional capital
will allow us to expand our existing product lines and offer new product
lines.

- BROADEN OUR CUSTOMER BASE AND EXPAND INTO OTHER HEALTH-RELATED
DISTRIBUTION BUSINESSES. We currently sell to over 300 customers. We
intend to expand our business beyond our existing customer base of the
major retail drugstore chains, wholesalers, grocery chains and mass
merchandisers, and pharmacy benefit managers. We believe that significant
opportunities exist to market our products to smaller chains and
wholesalers. To broaden our customer base, we intend to expand our direct
sales, telemarketing and internet sales activities to target these new
customers in a cost-effective manner. We also believe that we can apply
our skills and distribution expertise to serve additional health-related
businesses. These businesses include the veterinary, dental and home
health markets.

- EXPAND OUR INTERNET AND TELEMARKETING SALES ACTIVITIES. We utilize both
the internet and telemarketing to complement our direct sales force. We
believe that devoting additional resources to enhancing these parts of
our sales effort will help grow our business and expand our customer
base.

BUSINESS STRENGTHS

Our purchasing and sales systems together with our extensive knowledge of
the pharmaceutical industry are critical parts of our capabilities. These
capabilities combine a proprietary management information system developed by
Quality King with a supply network that enables our experienced personnel to
determine which products to purchase, in what quantities and from whom to meet
our customers' needs.

PROCUREMENT. We primarily stock products that we acquire on favorable
terms by taking advantage of manufacturers' incentive discounts, various market
opportunities and price increases. Purchasing decisions are made by our buying
team which is led by a senior management group with over 55 years of experience
in purchasing healthcare products. The team utilizes our proprietary purchasing
information system which is based on a system internally-developed by Quality
King over 25 years that was customized to meet the needs of our pharmaceutical
business. Our customized system provides decision support to assist in the
selection, quantity and timing of our purchases by supplying the following
information to our experienced buying team:

- the historical sales and inventory patterns of our customers

- current market prices

- general supply information at various price levels

- expectations with respect to price increases

- expected carrying times and carrying costs.

SUPPLIER RELATIONSHIPS. We believe that our suppliers view us as a valued
customer. We have developed an extensive network of approximately 300 suppliers.
We purchase products from over 100 major pharmaceutical manufacturers and from
wholesale distributors. We maintain a regular dialogue with our suppliers to
locate desired products at the lowest prices and to generate purchasing
opportunities.

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We believe that our success in obtaining products at favorable prices from
our suppliers is attributable primarily to the following factors:

- our ability to commit significant capital quickly to any single purchase

- our strong reputation and relationships with our customers, including
retailers and wholesalers

- our prompt payment practices

- our ability to purchase in bulk quantities.

In addition, to take advantage of market opportunities we often purchase
products in excess of anticipated short-term customer demand, and then hold such
products in inventory for a longer-than-average period of time. Overall, we
usually select our purchases based on the most attractive combination of price,
payment terms, selection, quantity, market demand, pricing trends and available
supply.

SALES AND MARKETING. We have a combined sales, marketing, order entry and
customer service staff of 21 persons, including licensed pharmacists and other
pharmaceutical industry professionals.

All of our sales personnel have access to current inventory information
which is generally updated with each order, allowing immediate order
confirmation to customers and ensuring that ordered products are in stock for
prompt shipment. Our management information system affords our customers access
to current information relating to price and product availability. Customers may
elect to receive this information in any one of a variety of formats, including
on-line computer lists, computer diskettes, or magnetic tape, each of which are
updated daily. Our customers can transmit orders electronically directly to our
data processing system or by phone or purchase order.

We designed our internal marketing programs to give our customers access to
manufacturers' special price and promotional offerings to enable them to better
plan inventory investments. We disseminate information on manufacturers'
promotional programs to our direct sales representatives to give them a
competitive advantage in customer interactions.

Our sales personnel have access to a variety of management reports
generated by our proprietary management information system. These reports are
designed to demonstrate the savings that we generate for our customers. We
believe that this information helps our customers validate the value of
purchasing from us relative to other sources.

CUSTOMER RELATIONSHIPS. We strive to be a valued supplier to our
customers. Our fulfillment rate for the nine months ended July 31, 1999 was in
excess of 99.5%. We currently sell to over 300 customers, including retail
drugstore chains, traditional wholesale distributors, grocery chains and mass
merchandisers, and pharmacy benefit managers. We maintain a regular dialogue
with our customers to generate selling opportunities and to assist them in
finding scarce products at low prices.

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The following table shows our net sales and sales mix by customer category
for the periods indicated:

NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1998 JULY 31, 1999
---------------- ----------------
NET SALES % NET SALES %
--------- --- --------- ---
(DOLLARS IN MILLIONS)

Retail Chains............................... $349.1 45% $332.4 44%
Distributors................................ 328.7 43 284.6 38
Pharmacy Benefit Managers and other......... 94.6 12 138.1 18
------ --- ------ ---
Total............................. $772.4 100% $755.1 100%
====== === ====== ===

During the year ended October 31, 1998 and the nine months ended July 31,
1999, our 20 largest customers accounted for approximately 91% and 83%,
respectively, of our net sales. McKessonHBOC Corporation, our largest customer
during these past two fiscal years, accounted for approximately 25% of our net
sales in the year ended October 31, 1998 and approximately 24% in the nine
months ended July 31, 1999. We believe that our 20 largest customers purchase
less than 1% of their total purchases from us.

PRODUCTS

We distribute branded and generic pharmaceutical products and
medical/surgical products produced by a wide range of manufacturers. Our branded
and generic pharmaceutical products include oral medications, injectible
pharmaceuticals and vaccines. We carry approximately 5,000 stock keeping units,
although we typically have only 2,000 stock keeping units in stock at any one
time. We carry a selection of popular products at favorable prices.

The following table shows our net sales and sales mix by product category
for the periods indicated:

NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1998 JULY 31, 1999
---------------- ----------------
NET SALES % NET SALES %
--------- --- --------- ---
(DOLLARS IN MILLIONS)

Branded..................................... $720.3 93% $702.3 93%
Generic..................................... 46.5 6 40.8 5
Medical/surgical and other.................. 5.6 1 12.0 2
------ --- ------ ---
Total............................. $772.4 100% $755.1 100%
====== === ====== ===

FACILITIES

Our approximately 71,000 square foot warehouse and distribution facility
and corporate headquarters is located in Ronkonkoma, New York. We believe that
centralizing our warehousing and distribution functions enables us to serve our
customers in the most cost-effective manner. We ship most of our products to our
customers by UPS.

Efficient distribution of small orders is made possible through extensive
computerization and modern warehouse techniques. These include computerized
warehouse product

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location, routing and inventory replenishment systems, bar code technology,
mechanized order selection and efficient truck loading and routing.

We sublease our warehouse and distribution facility and corporate
headquarters from Quality King. Quality King subleases the property from
Nussdorf Associates, a real estate partnership controlled by our controlling
stockholders. Title to the property is held by the Town of Islip Industrial
Development Agency, subject to mortgages securing outstanding industrial revenue
bonds. Our sublease expires December 2004. See "Related Party
Transactions -- Agreements with Quality King" for a description of the terms of
our sublease.

We consider our facilities to be adequate for our present and foreseeable
needs and believe that we have the ability to expand our space in order to meet
our needs for the future.

MANAGEMENT INFORMATION SYSTEMS

We use a management information system that was originally developed by
Quality King and subsequently modified to meet the needs of our pharmaceutical
business. We use the system to increase efficiency, assist in procurement
decisions, improve customer access to information, decrease the time and labor
cost of receiving orders and improve the speed with which inventory is received,
stocked and monitored. The information system is intended to provide seamless,
integrated tracking of customer order entry, purchasing, restocking and invoice
preparation. We own the software utilized by this system and Quality King owns
the hardware.

Quality King uses the IBM AS400 model S20 as its primary computer system.
This system supports over 700 local and remote users, including our sales
offices. The AS400 also runs a PC server running IBM's LAN 400 with
approximately 60 personal computers attached.

All of the software running on the AS400, with the exception of the
operating system, was developed in-house and customized for the specific needs
of Quality King and its divisions. The software applications include accounts
payable, accounts receivable, order entry, electronic data interchange,
inventory control, purchasing, sales, imaging, integrated faxing, E-mail,
routing and satellite fleet communications. Currently we have approximately 20
electronic data interchange trading partners. An internet web site, available to
our authorized customers, provides company information and the ability to enter
charge card orders. These orders are uploaded to the AS400 for processing using
industry standard X12 EDI files.

The system provides sub-second response time. It is currently at 50%
capacity and is expected to meet our needs for several more years. We believe we
have significant ability to add capacity to the system in order to meet our
needs for the future.

Quality King provides computer and warehouse management and consulting
services to us pursuant to a support services arrangement. See "Related Party
Transactions -- Agreements with Quality King" for a discussion of this
agreement.

COMPETITION

Our business is highly competitive. Our principal competitors include
national and regional wholesale distributors and manufacturers, many of which
have or may obtain significantly greater financial and marketing resources than
us. The five largest national pharmaceutical wholesale distributors are
McKessonHBOC Corporation, Cardinal Health,

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Inc., Bergen Brunswig Corporation, AmeriSource Health Corporation and Bindley
Western Industries. We compete primarily on the basis of price and product
availability.

GOVERNMENT REGULATION

Our business is subject to regulation under the Federal Food, Drug and
Cosmetic Act, the Prescription Drug Marketing Act, the Controlled Substances
Act, and state laws applicable to the distribution of pharmaceutical products
and controlled substances.

The Federal Food, Drug and Cosmetic Act generally regulates such matters as
the handling, packaging, storage, and labeling of drugs and cosmetics. The
Prescription Drug Marketing Act, which amended the Federal Food, Drug and
Cosmetic Act, establishes requirements applicable to the wholesale distribution
of prescription drugs, including the requirement that wholesale drug
distributors be licensed in accordance with federally established guidelines on
storage, handling, and records maintenance by each state in which they conduct
business. In addition, because some of the drugs that we handle are regulated
under the Controlled Substances Act (for example, those containing narcotics
such as codeine or certain stimulant or depressant medications), we also are
subject to the applicable provisions of the Prescription Drug Marketing Act,
including specific labeling, packaging and recordkeeping requirements and the
obligation to register with the federal government as a distributor of
controlled substances. Finally, we are required to maintain licenses and permits
for the distribution of pharmaceutical products and controlled substances under
the laws of each state in which we operate.

We believe that we are in compliance in all material respects with all
federal and state laws and regulations applicable to our business and possess
all material permits and licenses required for the conduct of our business.
However, federal and state regulations are subject to change. We cannot predict
what impact, if any, such changes might have on our business.

EMPLOYEES

As of September 30, 1999, we had approximately 81 employees, of which 21
were employed in sales and purchasing positions, 18 were employed in clerical
and administrative positions, and 42 were employed at our warehouse and
distribution facility. In addition, 21 employees of Quality King provide
services to us as well as Quality King pursuant to a support services agreement.
See "Related Party Transactions -- Agreements with Quality King."

We are party to a collective bargaining agreement expiring August 3, 2002
with the United Food Commercial Workers Union (AFL-CIO) covering all of our
warehouse employees. We have never experienced a work stoppage, strike, or other
interruption in our business as a result of a labor dispute, and believe our
employee relations to be good.

LEGAL PROCEEDINGS

We are a party from time to time to various legal proceedings in the
ordinary course of our business. There are no pending legal proceedings which
have had or which management expects will have a material adverse effect upon
our business, financial condition or results of operations. Quality King has
agreed to indemnify us for any liabilities, including litigation costs or
damages, arising prior to the Reorganization. See "Related Party
Transactions -- Agreements with Quality King."

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table shows certain information concerning our current
directors and executive officers. Effective upon consummation of this offering,
Dennis Erani and Brian Finn, neither of whom is currently an officer or
otherwise affiliated with us, will become members of our board of directors.

NAME AGE POSITION(S)
---- --- -----------

Glenn Nussdorf...................... 45 Chairman of the Board, Chief
Executive Officer and Director
Michael Sosnowik.................... 43 President and Director
Michael Katz........................ 51 Vice President -- Administration,
Chief Financial Officer and
Treasurer
Salvatore LaDuca.................... 37 Senior Vice President, Purchasing
Michael Ross........................ 45 Vice President, Sales and Marketing
Dennis Barkey....................... 44 Vice President, Chief Accounting
Officer
Arlene Nussdorf..................... 36 Director
Stephen Nussdorf.................... 48 Director
Dennis Erani........................ 55 Director -- Nominee
Brian Finn.......................... 39 Director -- Nominee

Information with respect to the business experience and affiliations of our
directors, nominees for directors and executive officers is summarized below.

Mr. Glenn Nussdorf became our Chairman of the Board, Chief Executive
Officer and Director upon consummation of the Reorganization. Mr. Nussdorf
joined Quality King in 1970 and served Quality King in various capacities. From
1994 until 1996 he was Senior Vice President of Quality King. Since 1996 he has
served as President and Chief Executive Officer of Quality King, primarily
responsible for supervising purchasing and sales of all divisions, including
pharmaceutical, and designing and implementing the business strategy that
emphasized fostering the growth and expansion of the pharmaceutical division.
Upon consummation of the Reorganization, Mr. Nussdorf became Chairman of the
Board of Quality King and resigned as President and Chief Executive Officer of
Quality King. Mr. Nussdorf expects to devote approximately 90% of his time to
us, primarily directing management, designing and implementing business strategy
and supervising purchasing and sales. Mr. Nussdorf also serves on the Board of
Directors of Model Reorg, Inc., an affiliate of Quality King in the business of
distributing designer fragrances. Mr. Nussdorf is the brother of Stephen and
Arlene Nussdorf.

Mr. Michael Sosnowik became our President and Director upon consummation of
the Reorganization. Mr. Sosnowik joined Quality King in 1995 as Vice President
and served as President of its pharmaceutical division from 1996 until the
Reorganization. His responsibilities included directing marketing, sales and
purchasing and assuring that all quality standards in the division were
maintained. Mr. Sosnowik will have primarily the same responsibilities with us.
Prior to joining Quality King, Mr. Sosnowik was the Executive Vice President of
Choice Drug Systems, responsible for overseeing the operations of long-term care
and correctional institution pharmacies. Mr. Sosnowik is a licensed pharmacist
and member of the American Pharmaceutical Association, the

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Association of Managed Care Pharmacists, the National Association of Chain Drug
Stores, the National Wholesale Druggists' Association and the Academy of Managed
Care Pharmacists.

Mr. Michael Katz became our Vice President -- Administration, Chief
Financial Officer and Treasurer upon consummation of the Reorganization. Mr.
Katz joined Quality King in 1991 and served in various capacities, primarily
responsible for overseeing administration, finance and trucking. From 1994 until
1996 he was Senior Vice President of Quality King. From 1996 until the
Reorganization he served as Executive Vice President of Quality King. Mr. Katz
has participated in the design and implementation of the business strategy which
has fostered the growth of the pharmaceutical division with particular emphasis
on administration and finance. In addition, he served in the Office of the Chief
Executive from September 1996 until the Reorganization and is a Director of
Model Reorg, Inc., an affiliate of Quality King in the business of distributing
designer fragrances. Mr. Katz is a Certified Public Accountant in the State of
New York and is a member of the American Institute of Certified Public
Accountants and the Institute of Management Accountants.

Mr. Salvatore LaDuca became our Senior Vice President, Purchasing upon
consummation of the Reorganization. Mr. LaDuca joined Quality King in 1980 and
served Quality King in various capacities. Mr. LaDuca was instrumental in
developing the inventory management department at Quality King and designing and
developing the automated systems and analysis tools which are the framework for
many of the sophisticated programs utilized in our management information
system. Mr. LaDuca was the Director of the health and beauty care division of
Quality King from 1989 until 1997. From 1997 until the Reorganization he was the
Director of Purchasing of the pharmaceutical division.

Mr. Michael Ross became our Vice President, Sales and Marketing upon
consummation of the Reorganization. Mr. Ross joined Quality King in 1977 and was
primarily involved in marketing and sales. From 1994 until the Reorganization he
served as Vice President of Sales, primarily responsible for all marketing
efforts, key account relationships and designing and coordinating major
corporate sales programs. Mr. Ross is a member of the National Association of
Chain Drug Stores, the General Merchandise Distributors Council and the National
Wholesale Druggists' Association.

Mr. Dennis Barkey became our Vice President, Chief Accounting Officer upon
the consummation of the Reorganization. Mr. Barkey joined Quality King in 1990
as Chief Financial Officer with primary responsibilities in the areas of
accounting, budgeting, financial planning and cash management. Prior to joining
Quality King, Mr. Barkey served as an Audit Manager for Margolin, Winer & Evens,
a public accounting firm. Mr. Barkey is a Certified Public Accountant in the
State of New York, a Certified Financial Planner and a member of the American
Institute of Certified Public Accountants.

Ms. Arlene Nussdorf became a director upon the consummation of the
Reorganization. Ms. Nussdorf joined Quality King in 1989 and is a Senior Vice
President of Quality King with experience in the purchasing, sales and
distribution of grocery and health and beauty care products. Ms. Nussdorf is
primarily responsible for the growth of the grocery division of Quality King.
Ms. Nussdorf is the sister of Glenn and Stephen Nussdorf.

Mr. Stephen Nussdorf became a director upon consummation of the
Reorganization. Mr. Nussdorf joined Quality King in 1972 and has served Quality
King in various capacities in all divisions of its business. Mr. Nussdorf
presently also serves in the Office of

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The Chief Executive and as a Director of Model Reorg, Inc., an affiliate of
Quality King in the business of distributing designer fragrances. Upon
consummation of the Reorganization, Mr. Nussdorf will assume the
responsibilities of President and Chief Executive Officer of the health and
beauty care division of Quality King. Mr. Nussdorf is the brother of Glenn and
Arlene Nussdorf.

Mr. Dennis Erani will become a director upon consummation of this offering.
Mr. Erani is an equity owner in and the Executive Vice President and General
Merchandise Manager of A&E Stores, Inc. In this capacity, he is responsible for
supervising all purchasing and store operations for this 69-store chain.

Mr. Brian Finn will become a director upon consummation of this offering.
Since 1997, Mr. Finn has been a Principal in Clayton Dubilier & Rice, Inc., a
private investment firm. From 1991 to 1997 Mr. Finn was a Managing Director at
the investment banking firm of Credit Suisse First Boston and was promoted to
Co-Head of Mergers and Acquisitions during that period. He currently serves as a
director of U.S. Office Products Company, Dynatech Corporation, iShip.Com and
Telemundo Holdings, Inc. Mr. Finn holds a degree from the Wharton School of the
University of Pennsylvania and presently serves on the Wharton Undergraduate
Executive Board.

TERM OF EXECUTIVE OFFICERS AND DIRECTORS

Upon consummation of this offering, the number of members of our board of
directors will be increased from four to six, and Messrs. Erani and Finn will be
elected directors by the board of directors. In addition, our board of directors
will be divided into three classes, with two directors in each class. The term
of Class I directors, composed of Mr. Finn and Stephen Nussdorf, expires in
2000; the term of Class II directors, composed of Mr. Sosnowik and Ms. Nussdorf,
expires in 2001; and the term of Class III directors, composed of Mr. Erani and
Glenn Nussdorf, expires in 2002. Thereafter, each director will serve for a term
of three years. Directors hold office until the annual meeting of stockholders
in the year in which the term of their class expires and until their successors
have been duly elected and qualified. Executive officers are appointed by the
board of directors and serve at the discretion of the board.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors has established, effective upon consummation of this
offering, an audit committee, the members of which will be Messrs. Erani and
Finn, and a compensation committee, the members of which will also be Messrs.
Erani and Finn. The audit committee will oversee actions taken by our
independent auditors and review our internal audit controls and procedures. The
compensation committee will review and approve the compensation of our officers
and management personnel and administer our employee benefit plans. We also
adopted a policy that, following this offering, all future material agreements
between us and Quality King or its other affiliates, including our controlling
stockholders and their family members, will be reviewed and passed on for
fairness by a committee of our board of directors comprised of independent
directors.

DIRECTORS' COMPENSATION

Directors who are not executive officers will receive an annual fee of
$20,000 and $1,000 for each board meeting they attend and $500 for each
committee meeting they attend which is not held on the same day as a board
meeting. Directors will be reimbursed

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for out-of-pocket expenses incurred in connection with attending meetings of the
board of directors and its committees.

COMPENSATION OF EXECUTIVE OFFICERS

ANNUAL COMPENSATION. The following table shows certain information
concerning the annual compensation paid or to be paid to our five most highly
paid executive officers whose cash compensation exceeded $100,000 and other
employees for services rendered in all capacities during the twelve months ended
July 31, 1999 and October 31, 1998:

SUMMARY COMPENSATION TABLE

NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2)
--------------------------- ---- --------- --------

Glenn Nussdorf................................... 1999 $400,032 --
Chief Executive Officer 1998 $400,032 --
Michael Sosnowik................................. 1999 $749,996 $795,137
President 1998 $706,728 $827,950
Michael Katz..................................... 1999 $ 87,543 --
Vice President -- Administration, Chief
Financial 1998 $ 73,190 --
Officer and Treasurer
Salvatore LaDuca................................. 1999 $436,940 --
Senior Vice President, Purchasing 1998 $516,814 --
Michael Ross..................................... 1999 $287,874 --
Vice President, Sales and Marketing 1998 $172,179 --

- -------------------------

(1) Messrs. Sosnowik and LaDuca performed services solely for the pharmaceutical
division of Quality King prior to the Reorganization. Their compensation
represents the entire compensation they received in the periods indicated.
Messrs. Nussdorf, Katz and Ross performed services for various divisions of
Quality King prior to the Reorganization. As a result, their salaries were
allocated. The aggregate salaries for Messrs. Nussdorf, Katz and Ross for
the twelve months ended July 31, 1999 were $500,032, $260,000 and $678,517,
respectively, and for the twelve months ended October 31, 1998 were
$500,032, $260,000 and $489,980, respectively. After the consummation of
this offering, we will bear the entire compensation expense of these
officers.

(2) All bonuses are discretionary and are included in the period earned.

STOCK OPTION PLAN. Pursuant to our stock option plan, employees and other
persons who perform services for us are eligible to receive incentive stock
options (as defined in Section 422 of the Internal Revenue Code) and stock
options that do not qualify as incentive stock options, which are known as
non-qualified stock options. Our stock option plan authorizes the grant of
options with respect to a maximum of 4,300,000 shares of our common stock. If
any shares covered by an option granted under our stock option plan are
forfeited or if an option expires, terminates or is canceled for any reason
whatsoever, then those shares will again be available for grant under our plan.

Stock options that are intended to qualify as incentive stock options will
be subject to terms and conditions that comply with the rules prescribed by
Section 422 of the Internal Revenue Code. Payment in respect of the exercise of
an option granted under our stock option plan may be made in cash or its
equivalent, or by exchanging shares of our common

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stock owned by the optionee for at least six months or by a combination of the
foregoing, provided that the combined value of all cash and cash equivalents and
the fair market value of such shares so tendered to us as of the date of tender
is at least equal to the aggregate exercise price of the option. No stock
options may be granted under the stock option plan after July 31, 2009.

Following this offering, the stock option plan will be administered by the
compensation committee. Subject to the provisions of the stock option plan, the
compensation committee will have the authority, among other things, to determine
the individuals to whom awards are to be granted and the terms and conditions of
such awards, including the number of shares to be covered by such awards and the
exercise price of stock options.

The compensation committee may amend, suspend, discontinue, or terminate
our stock option plan at any time, subject to stockholder approval if necessary
to comply with any tax or other regulatory requirement. If our stock option plan
is terminated, any unexercised option will continue to be exercisable except in
the case of a change of control. The plan and all unexercised options terminate
upon a change in control unless other provisions are made.

STOCK OPTION AWARDS TO DATE. We granted stock options to purchase an
aggregate of 3,574,000 shares of our common stock to our employees under our
stock option plan as of the effective date of this offering, including Messrs.
Sosnowik, Katz, LaDuca and Ross. These options, which include noncompetition
agreements, were granted on the following terms:

- Incentive stock options to purchase 154,000 shares at an exercise price
equal to the initial offering price of the shares in this offering will
vest in four equal annual installments and will be exercisable for 10
years

- Incentive stock options to purchase 410,000 shares at an exercise price
equal to the initial offering price of the shares in this offering will
be fully vested and exercisable for 10 years but the shares acquired upon
exercise will be subject to various restrictions on resale of the shares
as described below

- Non-qualified stock options to purchase 3,010,000 shares at an exercise
price $5.00 less than the initial offering price of the shares in this
offering will be fully vested and exercisable for 10 years but the shares
acquired upon exercise will be subject to various restrictions on resale
of the shares as described below.

Since the exercise price of the non-qualified stock options is below the
initial offering price of the stock being sold in this offering, upon the
closing of the offering we will be required to incur a net charge of $9,030,000
against our earnings.

The option agreements provide that any shares acquired upon exercise of the
fully vested options may not be resold for 42 months following the date of grant
except as follows:

- Up to 10% of the total number of shares underlying the options may be
sold each quarter commencing with the 27th month after the date of grant

- If we file a registration statement with respect to any shares owned by
our controlling stockholders, each of the option holders will have the
right to sell the same percentage of their option shares as the selling
stockholders are selling of their shares of our common stock under the
registration statement

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- If the option holder dies or becomes disabled, is terminated without
cause or if there is a change of control of our company, all restrictions
on resale of the shares issued upon exercise of the holder's options
terminate as of the date of the applicable event

- If the option holder voluntarily terminates his or her employment with
us, that option holder's options will terminate 45 days after the date of
termination of employment.

EMPLOYMENT AGREEMENT

Mr. Sosnowik has entered into a four-year employment agreement with us
which commences on the effective date of this offering. The agreement provides
for a base salary of $650,000 and the grant for past services of a non-qualified
stock option to purchase 1,300,000 shares of our common stock at an exercise
price of $5.00 less than initial offering price of the shares sold in this
offering. See "Stock Option Awards to Date" above for a description of these
options.

Mr. Sosnowik is restricted from competing with us during the term of the
agreement and for one year after its termination and is prohibited from
disclosing confidential information regarding us. If Mr. Sosnowik resigns or we
terminate his employment for cause, he is entitled to receive his salary accrued
through the date of termination. If we terminate him without cause, he is
entitled to receive his salary through six months after termination. In the
event of his death, we will pay his accrued salary through the last day of the
month in which he dies.

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RELATED PARTY TRANSACTIONS

REORGANIZATION AND S CORPORATION DISTRIBUTION

In connection with the Reorganization, Quality King transferred its
pharmaceutical business to QK Healthcare, Inc., a newly-formed S corporation,
and the common stock of QK Healthcare was distributed to our controlling
stockholders. As a result of the Reorganization, we now conduct the
pharmaceutical business independently from Quality King with our own employees.
However, Quality King provides computer and warehouse management and consulting
services to us pursuant to the support services agreement described below.

In connection with the Reorganization, Quality King allocated $109 million
of its estimated undistributed S corporation earnings to us. Prior to this
offering, we declared a distribution to our controlling stockholders in the
aggregate amount of $109 million which was paid by delivery to them of
promissory notes in such amount. The Notes mature in 2006 and require the
mandatory prepayment of $95 million upon consummation of this offering. The
Notes bear interest at an annual rate of LIBOR plus 1 1/2%. A portion of the
proceeds from this offering will be used to pay $95 million of these Notes. For
more information relating to the Distribution, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- History and
Reorganization" and Note 12(a) of the Notes to the Financial Statements.

AGREEMENTS WITH QUALITY KING

In connection with the Reorganization, we entered into the agreements
described below with Quality King. We also adopted a policy that, following this
offering, all future material agreements between us and Quality King or its
other affiliates, including our controlling stockholders and their family
members, will be reviewed and passed on for fairness by a committee of the Board
of Directors comprised of independent directors.

INDEMNIFICATION, NONCOMPETITION AND TAX COOPERATION AGREEMENT. We entered
into an agreement with Quality King and Pro's Choice Beauty Care, Inc., another
entity formed in connection with the Reorganization to which Quality King
transferred its assets relating to its haircare business. Under this agreement,
Quality King will indemnify us for any losses arising prior to the
Reorganization, regardless of the division to which the liability relates. Any
liabilities arising after the Reorganization will be borne by the entity to
whose business the liability relates. To our knowledge, there are no such
liabilities existing at this time.

We also agreed with Quality King and Pro's Choice under this agreement not
to compete with each other's businesses in the United States for five years and
to cooperate with each other in supplying any information that may be requested
in connection with the preparation and filing of tax returns or audits.

SUPPORT SERVICES AGREEMENT. We also entered into a support services
agreement with Quality King. After this offering, Quality King will continue to
provide all of the computer and warehouse management and consulting services it
provided to us prior to the Reorganization. We will pay Quality King a fee equal
to 0.065% of our net sales for such services, which amount will be payable
quarterly based on the prior quarter's net sales. We calculated this fee based
on the historical relationship between the number of transactions processed and
net sales. This agreement may be terminated by us upon 180 days notice. Quality
King has no right to terminate during the first three years and after that
period may terminate the agreement only upon 365 days notice.

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This agreement also provides that Quality King will pay us a commission of
0.55% of any net sales of Quality King or any of its affiliates other than us
which arise due to the sales services of one of our officers.

SUBLEASE. In connection with the Reorganization, we entered into a
five-year sublease agreement with Quality King for our 71,000 square foot
warehouse and distribution facility and corporate headquarters located in
Ronkonkoma, New York. Under the terms of this sublease, we will pay $33,689 per
month in rent, plus increases in real estate taxes. We are also required to pay
36.5% of all increases in charges after the commencement date of the sublease.
If we terminate the sublease, we must pay a termination fee of $101,067. Quality
King leases this site from Nussdorf Associates, a partnership controlled by our
controlling stockholders.

REGISTRATION RIGHTS

CONTROLLING STOCKHOLDERS. The controlling stockholders have been granted
registration rights with respect to the common stock held by them. Subject to
timing, size and other limitations, the controlling stockholders have the right
to require us to register their common stock for sale under the Securities Act
on up to five occasions, but not more than once every six months. The
controlling stockholders also have the right to include their shares in other
registration statements filed by us. We are required to pay expenses other than
underwriting discounts and commissions incurred by us in connection with these
registrations. In connection with such registrations, we will indemnify the
controlling stockholders against various liabilities, including liabilities
under the Securities Act.

OPTION HOLDERS. Under our existing option agreements with members of
management, the option holders have the right to join in any registration
statement filed by us in which any of our controlling stockholders are selling
our common stock. Each option holder may register and sell up to the same
percentage of such option holder's aggregate number of shares held or then
issuable upon exercise of his options as is then being sold by the controlling
stockholders. We are required to pay expenses other than underwriting discounts
and commissions incurred by us in connection with these registrations. In
connection with such registrations, we will indemnify the option holders against
various liabilities, including liabilities under the Securities Act.

TRANSACTIONS WITH AFFILIATES

We have a freight-forwarding and paying agent arrangement with Quality
Consolidators, Inc., a company controlled by our controlling stockholders. We
pay a monthly fee of approximately $30,000 for these services.

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PRINCIPAL STOCKHOLDERS

The following table summarizes certain information regarding the beneficial
ownership of our outstanding common stock as of the date of the Reorganization
for:

- each person or group who beneficially owns more than 5% of the common
stock

- our chief executive officer

- each person named in the Summary Compensation Table above

- each of our directors and nominees for directors

- all of our directors and executive officers as a group.

Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, each person identified in the table possesses sole voting
and investment power with respect to all shares of common stock held by them.
Shares of common stock subject to options currently exercisable or exercisable
within 60 days are deemed outstanding for computing the percentage of the person
holding these options, but are not deemed outstanding for computing the
percentage of any other person. Applicable percentage ownership in the following
table is based on 17,000,000 shares of common stock outstanding before the
offering and 32,000,000 shares of common stock outstanding after the completion
of this offering. Unless otherwise indicated, the address of each of the named
individuals is c/o QK Healthcare, Inc., 2060 Ninth Avenue, Ronkonkoma, NY 11779.

PERCENTAGE OF
OUTSTANDING
SHARES ISSUABLE SHARES
OUTSTANDING PURSUANT TO OPTIONS ----------------------
SHARES OF EXERCISABLE WITHIN BEFORE THE AFTER THE
NAME COMMON STOCK 60 DAYS OFFERING OFFERING
- ---- ------------ ------------------- ---------- ---------

Glenn Nussdorf Trust dated
November 1, 1998(1)......... 2,833,333 -- 16.67% 8.85%
Glenn Nussdorf Trust dated
November 2, 1998(1)........... 2,833,333 -- 16.67% 8.85%
Stephen Nussdorf Trust dated
November 1, 1998(1)......... 2,833,333 -- 16.67% 8.85%
Stephen Nussdorf Trust dated
November 2, 1998(1)......... 2,833,333 -- 16.67% 8.85%
Arlene Nussdorf Trust dated
November 1, 1998(1)......... 2,833,333 -- 16.67% 8.85%
Arlene Nussdorf Trust dated
November 2, 1998(1)......... 2,833,333 -- 16.67% 8.85%

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Glenn Nussdorf(1)............. 17,000,000 -- 100% 53.13%
Michael Sosnowik.............. -- 1,300,000 -- 3.90%
Michael Katz.................. -- 200,000 -- *
Salvatore LaDuca.............. -- 1,300,000 -- 3.90%
Michael Ross.................. -- 200,000 -- *
Stephen Nussdorf(1)........... 17,000,000 -- 100% 53.13%
Arlene Nussdorf(1)............ 17,000,000 -- 100% 53.13%
Dennis Erani.................. -- -- -- --
Brian Finn.................... -- -- -- --
All directors and executive
officers as a group (9
persons).................... 17,000,000 3,120,000 100% 57.29%

- -------------------------

* Less than 1%

(1) Glenn, Stephen and Arlene Nussdorf are co-trustees under each of the Glenn
Nussdorf Trusts dated November 1, 1998 and November 2, 1998, the Stephen
Nussdorf Trusts dated November 1, 1998 and November 2, 1998 and the Arlene
Nussdorf Trusts dated November 1, 1998 and November 2, 1998. As a result,
each of the co-trustees has shared investment power over these shares and
is therefore deemed to have shared beneficial ownership of all of these
shares.

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DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock currently consists of 100 million shares of
common stock and 20 million shares of preferred stock. After consummation of the
Reorganization and this offering, we will have 32,000,000 shares of common stock
and no preferred stock outstanding.

COMMON STOCK

The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors. The common stock does not have cumulative voting rights, which means
that the holders of a majority of the outstanding common stock voting for the
election of directors can elect all directors then being elected. The holders of
our common stock are entitled to receive dividends when, as, and if declared by
our board of directors out of legally available funds. Upon our liquidation or
dissolution, the holders of common stock will be entitled to share ratably in
our assets legally available for the distribution to stockholders after payment
of liabilities and subject to the prior rights of any holders of preferred stock
then outstanding. All of the outstanding shares of common stock are, and the
shares of common stock to be sold in the offering when issued and paid for will
be, fully paid and nonassessable. The rights, preferences and privileges of
holders of common stock are subject to the rights of the holders of shares of
any series of preferred stock which may be issued in the future.

PREFERRED STOCK

The preferred stock may be issued from time to time in one or more series.
Our board of directors is authorized to fix the dividend rights, dividend rates,
any conversion rights or right of exchange, any voting rights, rights and terms
of redemption, the redemption price or prices, the payments in the event of
liquidation, and any other rights, preferences, privileges, and restrictions of
any series of preferred stock and the number of shares constituting such series
and their designation. We have no present plans to issue any shares of preferred
stock.

Depending upon the rights of such preferred stock, the issuance of
preferred stock could have an adverse effect on holders of our common stock by
delaying or preventing a change in control, making removal of the present
management more difficult, or resulting in restrictions upon the payment of
dividends and other distributions to the holders of common stock.

CERTAIN CERTIFICATE OF INCORPORATION, BY-LAW AND STATUTORY PROVISIONS

The provisions of our certificate of incorporation and by-laws and of the
Delaware General Corporation Law summarized below may have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that
you might consider in your best interest, including an attempt that might result
in your receipt of a premium over the market price for your shares.

DIRECTORS' LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our
certificate of incorporation provides that a director will not be personally
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, except:

- for any breach of the duty of loyalty

- for acts or omissions not in good faith or which involve intentional
misconduct or knowing violations of law

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- for liability under Section 174 of the Delaware General Corporation Law
(relating to unlawful dividends, stock repurchases, or stock redemptions)

- for any transaction from which the director derived any improper personal
benefit.

This provision does not limit or eliminate our rights or those of any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws. In addition, our
by-laws provide that we indemnify each director and such officers, employees,
and agents as the board of directors shall determine from time to time to the
fullest extent provided by the laws of the State of Delaware.

CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation provides
for our board of directors to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors will be elected each year. The stockholders may not amend or repeal
this provision except upon the affirmative vote of holders of not less than 75%
of the outstanding shares of capital stock entitled to vote thereon. Holders of
a majority of the outstanding shares of capital stock entitled to vote with
respect to an election of directors may remove directors only for cause.
Vacancies on the board of directors may be filled only by the remaining
directors and not by our stockholders. Our classified board of directors could
have the effect of increasing the length of time necessary to change the
composition of a majority of the board of directors. In general, at least two
annual meetings of stockholders would be necessary for stockholders to effect
such a change.

SPECIAL MEETINGS OF STOCKHOLDERS. Our certificate of incorporation
provides that special meetings of stockholders may be called only by the
chairman or by a majority of the members of the board of directors. Stockholders
are not permitted to call a special meeting of stockholders, to require that the
chairman call such a special meeting, or to require that the board of directors
request the calling of a special meeting of stockholders.

AMENDMENT OF CERTAIN PROVISIONS. Our certificate of incorporation
generally requires the affirmative vote of the holders of at least 75% of our
outstanding voting stock in order to amend its provisions, including any
provisions concerning

- the classified board

- the amendment of our by-laws

- any proposed compromise or arrangement between us and our creditors

- the liability of directors

- the required vote to amend the certificate of incorporation.

The requirement for approval by at least a 75% shareholder vote will enable the
holders of a minority of the voting securities to prevent the holders of a
majority or more of such securities from amending these provisions of the
certificate of incorporation. After giving effect to the offering, the existing
stockholders will hold in the aggregate approximately 53% (assuming the
underwriters' option to purchase additional shares in the offering is not
exercised) of the voting power. As a result, if two or more of those persons act
in unison, they would have the ability to impede the amendment of any such
provision.

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our by-laws establish an advance notice procedures for

- stockholders to nominate candidates for election as director

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- stockholders to propose topics at stockholders' meetings.

Stockholders must notify our corporate secretary in writing prior to the
meeting at which the matters are to be acted upon or the directors are to be
elected. The notice must contain the information specified in our by-laws. To be
timely, the notice must be received at our principal executive offices not less
than 90 days prior to the anniversary of the immediately preceding annual
meeting of stockholders. If the annual meeting is called for a date that is not
within 30 days of the anniversary date of the prior year's meeting, the notice
must be received not later than the tenth day following the day on which we
notify stockholders of the date of the annual meeting, either by mail or other
public disclosure. In the case of a special meeting of stockholders called to
elect directors, the stockholder notice must be received not later than the
tenth day following the day on which we notify stockholders of the date of the
special meeting, either by mail or other public disclosure. These provisions may
preclude some stockholders from bringing matters before the stockholders at an
annual or special meeting or from nominating candidates for director at an
annual or special meeting.

AMENDMENT TO BY-LAWS PROVISIONS. Our certificate of incorporation provides
that our by-laws are subject to adoption, amendment, repeal or rescission either
by (a) a majority of the authorized number of directors or (b) the affirmative
vote of the holders of not less than 75% of the outstanding shares of voting
stock. The 75% vote will allow the holders of a minority of the voting
securities to prevent the holders of a majority or more of voting securities
from amending the by-laws. After giving effect to the offering, the existing
stockholders will hold in the aggregate approximately 53% of the outstanding
voting power (assuming the underwriters' option to purchase additional shares in
the offering is not exercised). Accordingly, if two or more of those persons act
in unison, they would have the ability to impede the amendment of the by-laws.

ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION. As a Delaware corporation, we are subject to Section 203 of the
Delaware General Corporation Law which, in general, prevents an interested
stockholder (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) from engaging in a business combination
(as defined) for three years following the date that person became an interested
stockholder unless various conditions are satisfied. Our certificate of
incorporation and by-law provisions and Delaware law could diminish the
opportunities for a stockholder to participate in certain tender offers,
including tender offers at prices above the then-current fair market value of
our common stock that could result from takeover attempts. In addition, our
certificate of incorporation allows our board of directors to issue, without
further stockholder approval, preferred stock that could have the effect of
delaying, deferring or preventing a change of control. The issuance of preferred
stock also could adversely affect the voting power of the holders of our common
stock, including the loss of voting control to others. We have no present plans
to issue any preferred stock. The provisions of our certificate of incorporation
and by-laws, as well as certain provisions of Delaware law, may have the effect
of discouraging or preventing an acquisition, or disposition of, our business.
These provisions, which may be in the best interests of all our stockholders,
could limit the price that investors might be willing to pay in the future for
shares of our common stock.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is Continental Stock
Transfer and Trust Company. Its telephone number is (212) 509-4000.

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering, we will have outstanding 32,000,000 shares
of common stock (34,250,000 shares if the underwriters' option to purchase
additional shares in the offering is exercised in full). Of these shares, the
15,000,000 shares sold in the offering will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the company, which will be subject to the
limitations of Rule 144 under the Securities Act. The remaining outstanding
shares of common stock (the "Restricted Shares") will be "restricted securities"
as defined in Rule 144 under the Securities Act and may not be resold in the
absence of registration under the Securities Act or pursuant to an exemption
from such registration, including exemptions provided by Rule 144 under the
Securities Act. In addition, we and the controlling stockholders, directors and
executive officers have agreed not to offer, sell, contract to sell or otherwise
dispose of any common stock or any securities convertible into or exchangeable
for common stock for a period of 360 days after the date of this prospectus
without the prior written consent of Lehman Brothers Inc.

Immediately following this offering, the controlling stockholders will own
17,000,000 Restricted Shares, representing approximately 53% (50% if the
underwriters' option to purchase additional shares in the offering is exercised
in full) of the then outstanding shares of common stock. In addition, options to
acquire 3,574,000 shares of common stock were granted prior to the consummation
of the offering. We intend to register under the Securities Act all of the
shares of the common stock issuable upon exercise of stock options granted or to
be granted under the stock option plan, which will allow such shares, other than
those held by members of management who are deemed to be "affiliates", to be
eligible for resale under the Securities Act without restriction or further
registration upon issuance to participants.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares must be aggregated) who has beneficially owned Restricted Shares
for at least one year, including "affiliates", would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:

- 1% percent of the then outstanding shares of the common stock
(approximately 320,000 shares immediately after the offering) or

- the reported average weekly trading volume of our common stock during the
four calendar weeks preceding a sale by such person.

Sales under Rule 144 are also subject to manner-of-sale provisions, notice
requirements, and the availability of current public information about us. Under
Rule 144, however, a person (or persons whose shares must be aggregated) who has
held Restricted Shares for a minimum of two years and who is not, and for three
months prior to the sale of such shares has not been, an affiliate is free to
sell such shares without regard to the volume, manner-of-sale, and other
limitations contained in Rule 144. As defined in Rule 144 under the Securities
Act, an "affiliate" of an issuer is a person that directly, or indirectly
through the use of one or more intermediaries, controls, is controlled by or is
under common control with such issuer.

Prior to the offering, there has been no established market for the common
stock and no predictions can be made about the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of the common stock prevailing

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from time to time. Nevertheless, sales of substantial amounts of the common
stock in the public market, or the perception that such sales may occur, may
have an adverse impact on the market price for the common stock.

See "Related Party Transactions -- Registration Rights" for a description
of the registration rights of our controlling stockholders and option holders.

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UNDERWRITING

Subject to the terms and conditions set forth in an agreement among us and
the underwriters, each of the underwriters named below, for whom Lehman Brothers
Inc., Credit Suisse First Boston Corporation and Salomon Smith Barney Inc. are
acting as representatives, has severally agreed to purchase from us the
aggregate number of shares of common stock set forth opposite its name below:

NUMBER OF
UNDERWRITERS SHARES
- ------------ ----------

Lehman Brothers Inc........................................
Credit Suisse First Boston Corporation.....................
Salomon Smith Barney Inc. .................................
----------
Total................................................. 15,000,000
==========

The underwriting agreement provides that the underwriters' obligation to
purchase shares of common stock depends on the satisfaction of the conditions
contained in the underwriting agreement, and that if the underwriters purchase
any of the shares of common stock under the underwriting agreement, then they
must purchase all of the shares of common stock that they have agreed to
purchase under the underwriting agreement. The conditions contained in the
underwriting agreement include the requirement that the representations and
warranties we make to the underwriters are true, that there is no material
change in the financial markets and that we deliver customary closing documents
to the underwriters.

The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and at that price less a concession not in excess of $ per share
of common stock to other dealers. The underwriters may allow, and these dealers
may reallow, concessions not in excess of $ per share of common stock to
brokers and dealers. After the offering, the underwriters may change the
offering price, concessions and other selling terms. The common stock is offered
subject to receipt and acceptance by the underwriters and to other conditions,
including the right to reject orders in whole or in part.

We have granted a 30-day option to the underwriters to purchase up to an
aggregate of 2,250,000 additional shares of common stock exercisable at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this prospectus. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the underwriter's initial commitment as indicated in the
table above, and we will be obligated, under the option, to sell those shares of
common stock to the underwriters. The underwriters may purchase these shares
only to cover over-allotments made in connection with the offering.

The underwriting agreement provides that we and our controlling
stockholders will indemnify the underwriters against certain liabilities under
the Securities Act or will contribute to payments that the underwriters may be
required to make in respect of these liabilities.

58
60

All of our directors, executive officers and controlling stockholders have
agreed pursuant to lock-up agreements not to sell or offer to sell or otherwise
dispose of any shares of common stock, or any securities which may be converted
into or exchanged for shares of common stock, subject to exceptions, for a
period of 360 days after the date of this prospectus without the prior written
consent of Lehman Brothers Inc.

In addition, we have agreed that for a period of 360 days after the date of
this prospectus we will not, without the prior written consent of Lehman
Brothers Inc., offer, sell or otherwise dispose of any shares of common stock or
any securities which may be converted into or exchanged for shares of common
stock, except for the shares of common stock offered in this offering and the
shares issued and options granted pursuant to our stock option plan or to
newly-hired management level employees.

Prior to the offering, there has been no public market for our common
stock. Consequently, the initial offering price for the common stock will be
determined by negotiation among us and the representatives of the underwriters.
Among the factors considered in such negotiations will be the following:

- our results of operations in recent periods

- estimates of our business potential and earnings prospects and the
industry in which we compete

- an overall assessment of our management

- the general state of the securities markets at the time of the offering

- the prices of similar securities of generally comparable companies.

We intend to apply for listing of our common stock on the New York Stock
Exchange, under the symbol "KRX." However, we cannot assure you that an active
or orderly trading market will develop for the common stock or that our common
stock will trade in the public markets subsequent to the offering at or above
the initial offering price.

Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information relating to this offering to
its brokerage customers, by way of outgoing emails, pager messages, and postings
on Fidelity's Internet web pages. A copy of the preliminary prospectus in
electronic format will be made available on the Internet website hosted by
Fidelity, which is accessible to all Fidelity brokerage customers. All final
prospectuses will be delivered to Fidelity brokerage customers by regular mail.
Brokerage customers of Fidelity may not place indications of interest, orders
and confirmations by online means and such customer transactions are only made
possible by telephone conversations with Fidelity representatives.

Until the distribution of the shares is completed, rules of the Securities
and Exchange Commission may limit the ability of the underwriters and selling
group members to bid for and purchase shares. As an exception to these rules,
the representatives are permitted to engage in transactions that stabilize the
price of the shares. These transactions may consist of bids or purchases for the
purposes of pegging, fixing or maintaining the price of the shares.

The underwriters may create a short position in the shares in connection
with the offering, which means that they may sell more shares than are set forth
on the cover page of this prospectus. If the underwriters create a short
position, then the representatives may reduce that short position by purchasing
shares in the open market. The representatives

59
61

also may elect to reduce any short position by exercising all or part of the
underwriters' option to purchase additional shares.

The representatives may impose a penalty bid on underwriters and selling
group members. This means that if the representatives purchase shares in the
open market to reduce the underwriters' short position or to stabilize the price
of the shares, it may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares as part of the
offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage purchasers in an offering from reselling
their shares.

Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the shares. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.

LEGAL MATTERS

Edwards & Angell, LLP (a limited liability partnership including
professional corporations), New York, New York, will pass upon the validity of
the common stock and other legal matters related to the offering for us. Paul,
Weiss, Rifkind, Wharton & Garrison, New York, New York, will pass upon legal
matters relating to the offering for the underwriters.

EXPERTS

The financial statements and schedules as of July 31, 1999 and October 31,
1998 and for the nine months ended July 31, 1999 and the two years ended October
31, 1998 included in this prospectus and elsewhere in the registration statement
have been audited by BDO Seidman, LLP, independent certified public accountants,
as indicated in their reports appearing in this prospectus and elsewhere in the
registration statement and have been included in reliance upon the authority of
that firm as experts in accounting and auditing.

60
62

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares of
common stock offered under this prospectus. This prospectus does not contain all
the information set forth in the registration statement and the schedules and
exhibits to the registration statement. For more information with respect to us
and our common stock, we refer you to the registration statement and to the
schedules and exhibits to the registration statement. Statements contained in
this prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance we refer you to the copy of
the contract or other document filed as an exhibit to the registration
statement. You may inspect a copy of the registration statement and the exhibits
and schedules to the registration statement without charge at the SEC's
principal office in Washington, DC, and copies of all or any part of the
registration statement may be obtained from the public reference section of the
SEC at 450 Fifth Street, NW, Washington, DC 20549 upon payment of fees
prescribed by the SEC. In addition, the SEC maintains a web site that contains
reports, proxy statements, information statements and other information that is
filed electronically with the SEC. The web site can be accessed at
http://www.sec.gov. The SEC's toll free investor information service can be
reached at 1-800-SEC-0330.

Information contained on our website does not constitute part of this
prospectus.

Upon completion of the offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file periodic and other reports, proxy statements and other information
with the SEC.

We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent certified public accountants.

61
63

INDEX TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
FINANCIAL STATEMENTS:
Balance sheets -- October 31, 1998 and July 31, 1999...... F-3
Statements of operations for the years ended October 31,
1997 and 1998 and the nine months ended July 31, 1998
(unaudited) and 1999................................... F-4
Statements of stockholders' equity for the years ended
October 31, 1997 and 1998 and for the nine months ended
July 31, 1999.......................................... F-5
Statements of cash flows for the years ended October 31,
1997 and 1998 and for the nine months ended July 31,
1998 (unaudited) and 1999.............................. F-6
Notes to financial statements............................. F-7

F-1
64

[THE FOLLOWING REPORT IS IN THE FORM THAT WILL BE SIGNED PRIOR TO EFFECTIVENESS
OF THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.]

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
QK Healthcare, Inc.
Ronkonkoma, New York

We have audited the accompanying balance sheets of QK Healthcare, Inc. as
of October 31, 1998 and July 31, 1999 and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended October 31, 1998 and for the nine months ended July 31, 1999. These
financial statements are the responsibility of the Company'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, the financial statements referred to above present fairly,
in all material respects, the financial position of QK Healthcare, Inc. as of
October 31, 1998 and July 31, 1999 and the results of their operations and their
cash flows for each of the two years in the period ended October 31, 1998 and
for the nine months ended July 31, 1999 in conformity with generally accepted
accounting principles.

BDO SEIDMAN, LLP

New York, New York
September 28, 1999,
except for the reorganization
discussed in Note 1(a), which is
as of , 1999

F-2
65

QK HEALTHCARE, INC.

BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

OCTOBER 31, JULY 31,
1998 1999
----------- --------

ASSETS
CURRENT:
Cash and cash equivalents............................. $ -- $ --
Accounts receivable, net of allowance for possible
losses of $863 and $1,071.......................... 83,937 83,917
Inventories........................................... 189,703 249,918
Advances to suppliers for future purchases............ 796 2,449
Prepaid expenses and other current assets............. 454 1,463
-------- --------
TOTAL CURRENT ASSETS............................... 274,890 337,747
Property and equipment, less accumulated depreciation
and amortization................................... -- 238
-------- --------
$274,890 $337,985
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Advances from Quality King -- related party........... $241,916 $276,454
Accounts payable...................................... 31,561 58,742
Accrued expenses and other............................ 1,396 2,772
-------- --------
TOTAL CURRENT LIABILITIES.......................... 274,873 337,968
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value -- shares authorized
20,000; none issued and outstanding................ -- --
Common stock, $.001 par value -- shares authorized
100,000; issued and outstanding 17,000............. 17 17
Retained earnings..................................... -- --
-------- --------
TOTAL STOCKHOLDERS' EQUITY......................... 17 17
-------- --------
$274,890 $337,985
======== ========

See accompanying notes to financial statements.

F-3
66

QK HEALTHCARE, INC.

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, JULY 31,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)

Sales, net.............................. $552,488 $772,359 $568,062 $755,088
Cost of sales........................... 516,501 726,967 537,668 701,511
-------- -------- -------- --------
Gross profit............................ 35,987 45,392 30,394 53,577
-------- -------- -------- --------
Operating Expenses:
Warehouse and delivery................ 3,039 4,069 2,976 4,162
Selling, general and administrative... 6,762 7,187 5,849 7,718
-------- -------- -------- --------
Total operating expenses........... 9,801 11,256 8,825 11,880
-------- -------- -------- --------
Income from operations.................. 26,186 34,136 21,569 41,697
Interest expense -- related party....... 12,984 17,370 12,451 15,300
-------- -------- -------- --------
Income before income taxes.............. 13,202 16,766 9,118 26,397
Income taxes............................ 224 285 155 449
-------- -------- -------- --------
Net income.............................. $ 12,978 $ 16,481 $ 8,963 $ 25,948
======== ======== ======== ========
Pro forma for change in tax status:
Historical income before income
taxes.............................. $ 13,202 $ 16,766 $ 9,118 $ 26,397
Pro forma income taxes (Note 6)....... 5,312 6,736 3,672 10,573
-------- -------- -------- --------
Pro forma net income.................. $ 7,890 $ 10,030 $ 5,446 $ 15,824
======== ======== ======== ========
Pro forma basic earnings per share.... $ .46 $ .59 $ .32 $ .93
======== ======== ======== ========
Weighted average number of shares
outstanding........................ 17,000 17,000 17,000 17,000
======== ======== ======== ========

See accompanying notes to financial statements.

F-4
67

QK HEALTHCARE, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT PER SHARE DATA)

COMMON STOCK,
$.001 PAR VALUE
------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- -------- --------

BALANCE, OCTOBER 31, 1996............... 17,000 $ 17 $ -- $ 17
Net income.............................. 12,978 12,978
Distribution to Quality King -- related
party................................. (12,978) (12,978)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1997............... 17,000 17 -- 17
Net income.............................. 16,481 16,481
Distribution to Quality King -- related
party................................. (16,481) (16,481)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1998............... 17,000 17 -- 17
Net income.............................. 25,948 25,948
Distribution to Quality King -- related
party................................. (25,948) (25,948)
-------- -------- -------- --------
BALANCE, JULY 31, 1999.................. 17,000 $ 17 $ -- $ 17
======== ======== ======== ========

See accompanying notes to financial statements.

F-5
68

QK HEALTHCARE, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 12,978 $ 16,481 $ 8,963 $ 25,948
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... -- -- -- 75
Write-off of bad debts..................... 35 122 5 28
Allowance for possible losses.............. 6 169 279 236
Decrease (increase) in:
Accounts receivable...................... (2,011) (35,070) (28,772) (244)
Inventories.............................. (30,256) (68,982) (62,752) (60,215)
Advances to suppliers for future
purchases............................. 1,258 (21) (76) (1,653)
Prepaid expenses and other current
assets................................ 244 (186) 100 (1,009)
Increase (decrease) in:
Accounts payable......................... 6,394 11,562 13,395 27,181
Accrued expenses and other............... 1,013 19 (199) 1,376
-------- -------- -------- --------
Net cash used in operating
activities(1)......................... (10,339) (75,906) (69,057) (8,277)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in property and equipment............ -- -- -- (313)
-------- -------- -------- --------
Net cash used in investing
activities(1)......................... -- -- -- (313)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in advances from Quality
King -- related party...................... 23,317 92,387 78,020 34,538
Distribution to Quality King -- related
party...................................... (12,978) (16,481) (8,963) (25,948)
-------- -------- -------- --------
Net cash provided by financing
activities(1)......................... 10,339 75,906 69,057 8,590
-------- -------- -------- --------
Net increase (decrease) in cash................. -- -- -- --
Cash and cash equivalents, beginning of
period........................................ -- -- -- --
-------- -------- -------- --------
Cash and cash equivalents, end of period........ $ -- $ -- $ -- $ --
======== ======== ======== ========

- -------------------------

(1) The Company did not maintain a separate cash account and accordingly all
receipts and disbursements were allocated from Quality King -- related party
(See Note 1 (a)).

See accompanying notes to financial statements.

F-6
69

QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1998 IS AUDITED)

(IN THOUSANDS EXCEPT PER SHARE DATA)

1. BASIS OF PRESENTATION

(a) BACKGROUND AND BASIS OF PRESENTATION

QK Healthcare, Inc. (the "Company") is a wholesale distributor of selected
healthcare products that are delivered to retailers, wholesale distributors and
pharmacy benefit managers in the United States. The Company procures products on
favorable terms and resells these products within the traditional healthcare
distribution channels. The Company primarily delivers products in bulk shipment
form to customers' warehouses, as compared to customers' individual stores. The
Company's operations consist solely of this single segment.

Prior to its formation the operations of the Company were a division of
Quality King Distributors, Inc. ("Quality King"), an S corporation, which is a
wholesale distributor of hair care products, groceries, health and beauty care
products, and pharmaceuticals. On , 1999 Quality King reorganized
its business (the "Reorganization"). In connection with the Reorganization, the
pharmaceutical business (the "Business") was transferred to a newly-formed S
corporation and its stock was distributed to the stockholders of Quality King.
Subsequent to the Reorganization and in connection with its initial public
offering (the "Offering"), the Company's tax status will change from an S
corporation to a C corporation.

Although the Business was a significant division of Quality King, separate
financial statements were not prepared in prior periods. The accompanying
financial statements have been prepared from the historical accounting records
of Quality King, and present all of the operations of the Business for the two
years in the period ended October 31, 1998, as well as for the nine month
periods ended July 31, 1998 (unaudited) and 1999. The financial statements
reflect various allocated costs and expenses as described herein (see Notes 8
and 9). The Company's management believes the allocations are reasonable and
appropriate; however, these allocated costs and expenses are not necessarily
indicative of costs and expenses that would have been incurred had the Business
been operated as a separate entity. The Reorganization has been retroactively
reflected in these financial statements.

(b) INVENTORY VALUATION

Prior to the formation of the Company, inventory costs were calculated
under the last-in, first-out ("LIFO") method. In connection with the
Reorganization, the Company will change the method used in determining inventory
cost. Management has concluded that for reporting purposes, the first-in,
first-out ("FIFO") method would provide a more accurate valuation of inventory
based on current market prices. The change in inventory costing from the LIFO
method to the FIFO method is considered a change in accounting principle and
requires retroactive restatement of financial statements. As a result,
inventories and cost of sales for all periods presented are reported based on
the FIFO valuation method.

F-7
70
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Pro forma adjustments are presented to reflect a provision for income taxes
based on income before taxes, as if the Company had been a C corporation for all
periods presented.

2. SUMMARY OF ACCOUNTING POLICIES

(a) FISCAL YEAR

The Company, effective November 1, 1998, elected to change its fiscal
year-end for reporting purposes from October 31 to July 31.

(b) INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined
by the FIFO method. The Company's policy is to evaluate and specifically
identify obsolete, slow-moving and non-saleable inventory and to provide a
reserve for impairment.

Revenues are recognized when products are shipped. Provisions for estimated
sales allowances, returns and losses are accrued at the time revenues are
recognized, based on historical experience.

(d) INCOME TAXES

Prior to the Reorganization, the Company had been taxed as an S corporation
pursuant to the Internal Revenue Code and New York State tax laws and,
accordingly, was not subject to Federal and most state income taxes. The Company
had been subject to other New York State income taxes. In connection with the
Offering the Company will become taxed as a C corporation.

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this standard, deferred income taxes are
provided for those items for which the reporting period and methods for income
tax purposes differ from those used for financial statement purposes using the
asset and liability method. Deferred income taxes are insignificant.

(e) PROPERTY AND EQUIPMENT

Property and equipment, which include leasehold improvements, are stated at
cost. Depreciation and amortization are computed by the straight-line and
accelerated methods over the estimated useful lives of the related assets, which
range from 5 to 7 years. Leasehold improvements are amortized over their
estimated useful lives.

(f) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short-term maturity of these
financial instruments. Advances from Quality King approximates fair value as the
effective interest rate on the advances is the same as the rate which Quality
King pays for its borrowings.

F-8
71
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(g) LONG-LIVED ASSETS

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of," long-lived assets (e.g., property and
equipment) are evaluated for impairment when events or changes in circumstances
indicate that the carrying amounts of the assets may not be recoverable through
the estimated undiscounted future cash flows from the use of these assets. When
any such impairment exists, the related assets will be written down to their
fair value. No write-downs have been necessary through July 31, 1999.

(h) COMPUTATION OF PRO FORMA EARNINGS PER COMMON SHARE

Pro forma basic earnings per share includes no dilution and has been
computed by dividing pro forma net income by the weighted average number of
common shares considered to be outstanding for the period. Pro forma diluted
earnings per share is the same as the basic amounts for all periods presented
and thus has not been presented.

(i) CONCENTRATIONS OF CREDIT RISK

The Company is potentially subject to a concentration of credit risk with
respect to its trade receivables, the majority of which are due from wholesale
distributors and drugstore chains. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains allowances to cover potential or anticipated losses for
uncollectible accounts.

(j) USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at 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.

(k) UNAUDITED INTERIM FINANCIAL STATEMENTS

In the opinion of the Company's management, the statement of operations and
the statement of stockholders' equity for the nine months ended July 31, 1998
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the information set forth therein. The results of operations
for the nine months ended July 31, 1998 are not necessarily indicative of the
results for any other period.

F-9
72
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT

Major classes of property and equipment consist of the following:

JULY 31, 1999
-------------

Machinery and equipment.................................... $685
Leasehold improvements..................................... 117
----
802
Less accumulated depreciation and amortization............. 564
----
$238
====

Quality King was deemed to have contributed these assets to the Company as
of November 1, 1998.

4. ADVANCES FROM QUALITY KING -- RELATED PARTY

For all periods presented, Quality King maintained a loan agreement with a
syndicate of banks. In connection with the preparation of the financial
statements of the Company (See Note 1(a)), advances from Quality King (total
assets in excess of other current liabilities) were treated as loans between
Quality King and the Company. Interest expense on these advances was based on
the effective rates paid by Quality King under its loan agreement (see Note 9).
In connection with the Reorganization and concurrent with the Offering, the
Company has entered into a new bank loan agreement (see Note 12(c)).

5. COMMITMENTS AND CONTINGENCIES

(a) LEASE

The Company leases warehouse and office space from a related party under an
agreement which expires on December 31, 2004 (See Note 7). Minimum annual lease
commitments under this lease are $404, plus increases in real estate taxes. Rent
expense allocated to the Company for the years ended October 31, 1997 and 1998
was $212 and $223, respectively, and $159 and $307 for the nine months ended
July 31, 1998 and 1999, respectively. Rent was allocated based on space used by
the Company.

(b) UNION CONTRACTS

The Company's warehouse employees are members of the United Food Commercial
Workers Union. The Company is party to a collective bargaining agreement with
the union, which is effective through August 2002.

F-10
73
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. PRO FORMA INCOME TAXES

The pro forma income taxes represent the amount that would have been
reported had the Company operated as a stand-alone entity and filed Federal and
state income tax returns as a C corporation.

YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
---------------- -----------------
1997 1998 1998 1999
------ ------ ------ -------

Federal.................................. $4,115 $5,218 $2,845 $ 8,191
State.................................... 1,197 1,518 827 2,382
------ ------ ------ -------
Pro forma income taxes................... $5,312 $6,736 $3,672 $10,573
====== ====== ====== =======

The pro forma income taxes on historical income differs from amounts
computed by applying the applicable Federal statutory rates due to state income
taxes.

7. RELATED PARTY TRANSACTIONS

In connection with the Reorganization, Quality King will provide the
Company with various services pursuant to a support services agreement dated
, 1999. These services primarily include computer and warehouse
management and consulting services. Based on the terms of the agreement, the
Company will be obligated to pay a management fee for services rendered by
Quality King. The fee will be based on .065% of net sales of the Company.

The Company also rents warehouse and office space from a related party
pursuant to a sublease agreement (See Note 5(a)).

The Company has an arrangement with an affiliate to provide logistical
assistance relating to certain purchases made by the Company. The Company
reimburses the affiliate for its expenses of approximately $30 per month.

8. ALLOCATIONS

In connection with the preparation of the Company's financial statements as
described in Note 1(a), all balance sheet and income statement accounts that
were directly attributable to the Business were identified and carved-out of the
books and records of Quality King. Those accounts include accounts receivable,
inventories, advances to suppliers for future purchases, prepaid expenses and
other current assets, accounts payable, accrued expenses and other current
liabilities, net sales, cost of sales and certain operating expenses. Management
also identified various other operating expenses that were not directly
attributable to any specific division of Quality King. A portion of these
expenses was allocated to the Company based on different assumptions and
methods. The procedures employed utilized various allocation bases, including
the number of transactions

F-11
74
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

processed, estimated delivery miles and warehouse square footage. The following
table summarizes the expenses which were allocated to the Company:

YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------- -----------------
1997 1998 1998 1999
------ ------ ------ ------

WAREHOUSE AND DELIVERY
Delivery expenses...................... $1,695 $ 854 $ 701 $ 510
Rent................................. 106 213 157 306
Payroll and related expenses......... 99 271 151 236
Repairs and maintenance.............. 53 77 55 162
Union expenses....................... 48 78 59 80
Supplies............................. 29 59 40 89
Other................................ 37 131 62 170
------ ------ ------ ------
$2,067 $1,683 $1,225 $1,553
====== ====== ====== ======
SELLING, GENERAL AND ADMINISTRATIVE:
Payroll and related expenses......... $1,282 $1,479 $1,135 $1,743
Insurance............................ 465 572 482 576
Office expenses...................... 206 279 211 346
Telephone............................ 176 244 170 206
Professional fees.................... 172 275 196 124
Computer services.................... 102 155 115 125
Sales expenses....................... -- 174 74 117
Other................................ 83 93 89 20
------ ------ ------ ------
2,486 3,271 2,472 3,257
------ ------ ------ ------
Total.................................. $4,553 $4,954 $3,697 $4,810
====== ====== ====== ======

The above expenses were allocated as follows:

WAREHOUSE AND DELIVERY

Warehouse expenses, including rent, payroll, repairs and maintenance, union
expenses, and supplies, were primarily allocated based on warehouse square
footage. Payroll taxes were allocated primarily based on payroll dollars. Other
warehouse and delivery expenses, which includes utilities, office expenses,
security and depreciation, were allocated based on warehouse square footage.
Delivery expenses were allocated based on estimated delivery miles.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses, including office payroll,
office expenses, telephone, professional fees, computer services and sales
expense, were allocated primarily based on the ratio of the number of
transactions processed. Officers' payroll was allocated primarily based on an
estimate of the ratio of time apportioned to the Company. Payroll taxes were
allocated based on payroll dollars and the ratio of the number of transactions
processed. Other selling, general and administrative expenses, which include
utilities and depreciation, were allocated based on a ratio of the number of
transactions processed.

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75
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the methods used to allocate expenses:

YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------- -----------------
1997 1998 1998 1999
------ ------ ------ ------

Ratio of the number of transactions
processed............................ $1,480 $2,279 $1,582 $2,231
Estimated delivery miles............... 1,695 853 701 510
Warehouse square footage............... 287 751 465 918
Payroll dollars........................ 344 253 239 440
Estimate of time-officers.............. 359 400 300 300
Inventory ratios....................... 157 194 168 123
Sales ratios........................... 140 145 125 99
Purchases ratios....................... 73 73 57 167
Other.................................. 18 6 60 22
------ ------ ------ ------
Total.................................. $4,553 $4,954 $3,697 $4,810
====== ====== ====== ======

The Company believes that the allocated expenses are reasonable and
approximate those expenses that would have been incurred had the Company
operated as a separate entity.

9. INTEREST EXPENSE

In connection with the preparation of the Company's financial statements
(see Notes 1(a) and 9), interest expense was charged by Quality King to the
Company based on the Company's average monthly balances of accounts receivable,
inventories and advances to suppliers less accounts payable. Interest expense
was based on the effective rates paid by Quality King under its loan agreement
for the respective periods. Interest rates charged for the years ended October
31, 1997 and 1998 were approximately 7.7% and 7.8%, respectively, and for the
nine months ended July 31, 1998 and 1999 were approximately 7.8% and 7.2%,
respectively.

10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS

(a) COMMON STOCK

In connection with the Reorganization, the Company issued 17,000 shares of
common stock, $.001 par value per share.

(b) STOCK OPTION PLAN

The Company established a stock option plan for employees and other persons
who perform services for it. The Company has authorized a maximum of 4,300
shares of common stock for incentive stock options and non-qualified stock
options under this plan.

Concurrent with the Offering, the Company will issue options to purchase an
aggregate of 3,574 shares of common stock. These options will be granted on the
following terms: incentive stock options to purchase 154 shares at an exercise
price equal to the offering price of the shares sold in the Offering that will
vest over four years and will be exercisable for 10 years; incentive stock
options to purchase 410 shares at an exercise price

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QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

equal to the offering price of the shares sold in the Offering that will vest
immediately but will be subject to various restrictions upon sale and will be
exercisable for 10 years; and non-qualified stock options, issued for past
services, to purchase 3,010 shares at an exercise price of $5.00 per share less
than the offering price of the shares sold in the Offering that will vest
immediately but will be subject to various restrictions on sale and will be
exercisable for 10 years.

Since the non-qualified stock options have an exercise price below the
offering price of the shares sold in the Offering, the Company will record a
significant non-recurring non-cash charge to operations in an amount equal to
the excess of the fair value of the common stock underlying the options over the
exercise price of the options. This charge (aggregating $9,030 after income tax
effect) will reduce income from operations in the quarter immediately following
the Offering.

11. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK

For the nine months ended July 31, 1998 and 1999 and the years ended
October 31, 1997 and 1998 two customers accounted for approximately 28%, 32%,
36% and 34% of net sales, respectively. These customers accounted for
approximately the same percentage of accounts receivable at July 31, 1999 and
October 31, 1998, respectively, as their sales for these periods.

12. SUBSEQUENT EVENTS

(a) CORPORATE REORGANIZATION

In conjunction with the Reorganization and immediately prior to the
Offering, the Company declared a dividend of $109,000, which was paid in the
form of promissory notes (the "Notes"). This amount represents a portion of the
undistributed S corporation earnings of Quality King. This amount was calculated
based on the provisions of the Internal Revenue Code which requires an
allocation of undistributed earnings to be based on a ratio of the fair value of
the Company to the fair value of Quality King. In conjunction with the
Reorganization, Quality King will contribute $14,000 to the capital of the
Company.

(b) INITIAL PUBLIC OFFERING

The Company is in the process of filing a registration statement covering
the Offering under which it anticipates generating net proceeds of approximately
$210,000 upon the sale of its common stock.

The net proceeds will be used to pay $95,000 of the Notes (see Note 12(a))
and reduce short-term borrowings assumed from Quality King by $115,000.

In connection with the Reorganization and the Offering, the Company entered
into a loan agreement with a syndicate of lenders. The five year loan agreement
is for $350,000 and provides for borrowings based on 85% of receivables and 65%
of inventory, as defined. Interest accrues at margins above the Federal Funds
rate or prime rate or LIBOR. The loan agreement provides for certain financial
ratios, warranties and other covenants.

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77

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.

[MAP GRAPHIC]

15,000,000 Shares

QK HEALTHCARE, INC.

COMMON STOCK

----------------------------

PROSPECTUS
, 1999

----------------------------

LEHMAN BROTHERS

CREDIT SUISSE FIRST BOSTON

SALOMON SMITH BARNEY

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the common stock registered hereby:

SEC registration fee........................................ $ 71,933
NASD fee.................................................... 26,375
Printing and engraving expenses............................. 170,000
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Blue Sky fees and expenses.................................. *
NYSE listing application fee................................ 84,600
Transfer agent fees and expenses............................ *
Miscellaneous............................................... *
--------
TOTAL.................................................. $ *
========

- -------------------------

* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTOR AND OFFICERS.

Our officers and directors are covered by provisions of the Delaware
General Corporation Law and our certificate of incorporation and by-laws, which
serve to limit, and, in some instances, to indemnify them against, liabilities
which they may incur in their respective capacities. Our certificate of
incorporation limits the liability of our directors to the fullest extent
permitted by Delaware law. Specifically, our directors will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to us or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derives an improper personal
benefit.

Our by-laws provide for the indemnification of our directors and officers
(as well as certain other persons) if the person acted in good faith and in a
manner reasonably believed to be in or not opposed to our best interests, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct was unlawful. In an action by or in the right of us, no
indemnification may be made if the person shall have been adjudged to be liable
to us unless the court in which the action was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for the expenses which the court deems proper. Our by-laws also
provide that any indemnification (unless ordered by a court) may be made by us
only as authorized in the specific case
II-1
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upon a determination that indemnification is proper in the circumstances because
the person has met the applicable standard of conduct. This determination must
be made (i) by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to the action, (ii) if a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by our
stockholders. If an indemnified person has been successful on the merits or
otherwise in defense of any action described above, or in the defense of any
matter in the action, the person will be indemnified against expenses (including
attorneys' fees) incurred in connection with the action, without the necessity
of authorization in the specific case. Expenses incurred in defending or
investigating a threatened or pending action may be paid by us in advance of the
final disposition of the action upon receipt of an undertaking by the person to
repay the amount if it is ultimately determined that indemnification is not
proper. The indemnification and advancement of expenses provided by or granted
under our by-laws are not exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, contract, vote of stockholders or disinterested directors or
otherwise, it being our policy that indemnification of the persons specified in
the by-laws shall be made to the fullest extent permitted by law. The
indemnification and advancement of expenses provided by our by-laws, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director or officer and inure to the benefit of the heirs,
executors and administrators of that person.

We carry directors' and officers' liability insurance.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In connection with the Reorganization of Quality King, the pharmaceutical
business of Quality King was transferred prior to the effective date of this
registration statement to QK Healthcare, Inc., a newly-formed S corporation, and
17,000,000 shares of common stock of QK Healthcare, Inc. were distributed to the
shareholders of Quality King. The issuance of the shares was a transaction
exempt from the registration requirements under Section 4(2) of the Securities
Act.

In connection with the Reorganization, $109 million of the undistributed S
corporation earnings of Quality King were allocated to QK Healthcare, Inc. Prior
to the offering, we declared a distribution to our existing stockholders, in the
aggregate amount of $109 million which was paid by delivery to them of
promissory notes in such aggregate amount. The issuance of the notes was a
transaction exempt from the registration requirements under Section 4(2) of the
Securities Act.

Stock options to purchase an aggregate of 3,574,000 shares of our common
stock have been granted to our employees under our stock option plan effective
upon the closing of this offering. These options were granted on the following
terms:

- Incentive stock options to purchase 154,000 shares at an exercise price
equal to the initial offering price of the shares in the offering will
vest in four equal annual installments and will be exercisable for 10
years;

- Incentive stock options to purchase 410,000 shares at an exercise price
equal to the initial offering price of the shares in the offering will be
fully vested and exercisable for 10 years but will be subject to various
restrictions on resale of the shares acquired upon exercise of the
options; and

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81

- Non-qualified stock options to purchase 3,010,000 shares at an exercise
price $5.00 less than the initial offering price of the shares in the
offering will be fully vested and exercisable for 10 years but will be
subject to various restrictions on resale of the shares acquired upon
exercise of the options. The issuance of the options was a transaction
exempt from the registration requirements under Section 4(2) of the
Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

a. Exhibits:

1.1* Form of Underwriting Agreement
2.1 Plan of Reorganization
3.1 Form of Amended and Restated Certificate of Incorporation
3.2 By-Laws
4.1 Form of Registration Rights Agreement between the Company
and Arlene, Stephen and Glenn Nussdorf, as trustees
4.2 Form of Promissory Notes to Controlling Stockholders
5.1* Opinion of Edwards & Angell, LLP
10.1 Form of Support Services Agreement between the Company and
Quality King Distributors, Inc.
10.2 Form of Indemnification, Noncompetition and Tax Cooperation
Agreement among Quality King Distributors, Inc., QK
Healthcare, Inc. and Pro's Choice Beauty Care, Inc.
10.3 Form of Sublease with Quality King Distributors, Inc.
10.4 Form of Stock Option Plan
10.5 Form of incentive stock option agreements with four year
vesting
10.6 Form of incentive stock option agreements with immediate
vesting
10.7 Form of non-qualified stock option agreements
10.8 Form of Employment Agreement between the Company and Michael
Sosnowik
10.9* Bank Loan Agreement
23.1* Consent of Edwards & Angell, LLP (included in Exhibit 5.1)
23.2 Consent of BDO Seidman, LLP
24.1** Power of Attorney
27.1** Financial Data Schedule
99.1** Consent of Dennis Erani
99.2** Consent of Brian Finn

- -------------------------

* To be filed by amendment

** Previously filed

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82

b. Financial Statement Schedules

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

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83

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Ronkonkoma,
State of New York, on December 3, 1999.

QK Healthcare, Inc.

By: /s/ MICHAEL W. KATZ

-----------------------------------

Name: Michael W. Katz

Title: Vice
President -- Administration

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities indicated on December 3, 1999.

* Chairman, Chief Executive Officer and
- --------------------------------------------------- Director (Principal Executive
Glenn Nussdorf Officer)

/s/ MICHAEL W. KATZ Vice President -- Administration,
- --------------------------------------------------- Chief Financial Officer and Treasurer
Michael W. Katz (Principal Financial Officer)

/s/ DENNIS BARKEY Vice President, Chief Accounting
- --------------------------------------------------- Officer (Principal Accounting
Dennis Barkey Officer)

* President and Director
- ---------------------------------------------------
Michael Sosnowik

* Director
- ---------------------------------------------------
Arlene Nussdorf

* Director
- ---------------------------------------------------
Stephen Nussdorf

*By: /s/ MICHAEL W. KATZ
---------------------------------------------
Michael W. Katz,
Attorney-in-Fact

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84

[THE FOLLOWING OPINION IS IN THE FORM THAT WILL BE SIGNED PRIOR TO EFFECTIVENESS
OF THE REGISTRATION STATEMENT.]

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

The audit referred to in our report to QK Healthcare, Inc. (the "Company"),
dated September 28, 1999, except for Note 1 which is as of ,
which is contained in the Prospectus constituting part of this Registration
Statement included the audit of the schedule listed under Item 16(b) for the
nine months ended July 31, 1999 and the years ended October 31, 1998 and 1997,
respectively. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.

In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.

BDO SEIDMAN, LLP

New York, New York

December 3, 1999

S-1
85

SCHEDULE II

QK HEALTHCARE, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSE(a) WRITE-OFFS CHANGES END OF PERIOD
- ----------- ---------- ---------- ---------- ------- -------------

Reserves and allowances deducted from
asset accounts:
Allowance for possible losses
Year ended October 31, 1997......... $845,000 $ 6,000 $ 35,000 $-- $ 816,000
Year ended October 31, 1998......... $816,000 $169,000 $122,000 $-- $ 863,000
Nine months ended July 31, 1999..... $863,000 $236,000 $ 28,000 $-- $1,071,000

- -------------------------

(a) charged to bad debts

S-2