AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 2000

REGISTRATION NO. 333-88769
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 3

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
EXECUTIVE 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:

PATRICIA L. KANTOR, ESQ. JOHN C. KENNEDY, ESQ.
EDWARDS & ANGELL, LLP PAUL, WEISS, RIFKIND, WHARTON & GARRISON
750 LEXINGTON AVE. 1285 AVENUE OF THE AMERICAS
NEW YORK, NY 10022-1200 NEW YORK, NEW YORK 10019
(212) 308-4411 (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. [ ]
------------------------

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 April 25, 2000

PROSPECTUS

13,400,000 SHARES

QK HEALTHCARE, INC.

COMMON STOCK
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This is our initial public offering of shares of common stock. We are
offering 13,400,000 shares.

No public market currently exists for our shares. The New York Stock
Exchange has approved the shares for listing 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 2,010,000 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 ,
2000.
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LEHMAN BROTHERS
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY

, 2000
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TABLE OF CONTENTS

PAGE
----

Prospectus Summary.............. 3
Risk Factors.................... 9
Use of Proceeds................. 16
Dividend Policy................. 16
Capitalization.................. 17
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...................... 44
Related Party Transactions...... 50
Principal Stockholders.......... 52
Description of Capital Stock.... 54
Shares Eligible for Future
Sale.......................... 57
Underwriting.................... 59
Legal Matters................... 61
Experts......................... 61
Where You Can Find More
Information................... 62
Index to Financial Statements... F-1

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Until , 2000, 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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4

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." All information in this prospectus
reflects the transfer of the pharmaceutical business of Quality King
Distributors, Inc. to us as a result of 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. 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 channel for 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
purchase significant amounts of inventory 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 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
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interactions by providing them with current 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 fiscal
1999, our annual net sales grew from $169.0 million to $1,012.8 million,
representing a compound annual growth rate of 56%. Our income from operations
grew over this period from $3.8 million to $55.3 million, representing a
compound annual growth rate of 95%.

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

- Efforts to minimize healthcare costs 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 selling and purchasing products from 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.

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

THE OFFERING

Common stock offered............ 13,400,000 shares

Common stock outstanding after
the offering.................... 36,400,000 shares

Use of proceeds................. We intend to use the net proceeds from this
offering to reduce our short-term borrowings
and to prepay $60 million of the notes
issued to our controlling stockholders in
connection with the dividend paid to them in
the form of promissory notes prior to this
offering. See "Use of Proceeds."

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 , 2000 and
excludes:

- 2,550,000 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

- 1,380,000 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

- 970,000 shares available for future grant under our option plan

- 2,010,000 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 five years in the period ended October 31, 1999 and for the
three months ended January 31, 1999 and 2000. 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 preparing 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 certain operating expenses. Management also identified various
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, warehouse square footage and other methods.

Prior to January 31, 2000, 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)

THREE MONTHS ENDED
TWELVE MONTHS ENDED OCTOBER 31, JANUARY 31,
------------------------------------------------------------ -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- -------- -------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)

STATEMENT OF OPERATIONS DATA:
Sales, net............................. $168,983 $328,307 $552,488 $772,359 $1,012,818 $235,252 $294,582
-------- -------- -------- -------- ---------- -------- --------
Gross profit........................... 6,953 16,767 35,987 45,392 70,760 17,271 19,085
-------- -------- -------- -------- ---------- -------- --------
Operating expenses:
Warehouse and delivery............... 945 1,832 3,039 4,069 5,321 1,223 1,131
Selling, general and
administrative..................... 2,208 10,376(1) 6,762 7,187 10,124 2,542 2,595
-------- -------- -------- -------- ---------- -------- --------
Total operating expenses........... 3,153 12,208 9,801 11,256 15,445 3,765 3,726
-------- -------- -------- -------- ---------- -------- --------
Income from operations................. 3,800 4,559 26,186 34,136 55,315 13,506 15,359
Interest expense -- related party(2)... 3,937 7,649 12,984 17,370 20,737 4,692 5,672
-------- -------- -------- -------- ---------- -------- --------
Income (loss) before income taxes...... (137) (3,090) 13,202 16,766 34,578 8,814 9,687
Income taxes (benefit)(3).............. (2) (53) 224 285 237 154 84
-------- -------- -------- -------- ---------- -------- --------
Net income (loss)...................... $ (135) $ (3,037) $ 12,978 $ 16,481 $ 34,341 $ 8,660 $ 9,603
======== ======== ======== ======== ========== ======== ========
Pro forma for change in tax status:
Historical income (loss) before
income taxes....................... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 34,578 $ 8,814 $ 9,687
Pro forma income taxes
(benefit)(4)....................... (15) (1,194) 5,312 6,736 13,850 3,530 3,879
-------- -------- -------- -------- ---------- -------- --------
Pro forma net income (loss).......... $ (122) $ (1,896) $ 7,890 $ 10,030 $ 20,728 $ 5,284 $ 5,808
======== ======== ======== ======== ========== ======== ========
Pro forma basic earnings per share..... $ .68 $ .19
========== ========
Pro forma weighted average number of
shares outstanding(5)................ 30,333 30,333
========== ========
Pro forma for the reorganization and
the offering(6):
Pro forma net income................. $ 23,940 $ 6,731
Pro forma basic earnings per share... $ .66 $ .19
Pro forma weighted average number of
shares outstanding................. 36,400 36,400
Pro forma diluted earnings per
share.............................. $ .64 $ .18
Pro forma weighted average diluted
shares outstanding................. 37,250 37,250

OTHER DATA(7):
Gross margin........................... 4.1% 5.1% 6.5% 5.9% 7.0% 7.3% 6.5%
Income from operations margin.......... 2.2% 1.4% 4.7% 4.4% 5.5% 5.7% 5.2%

JANUARY 31, 2000
-----------------------------
PRO FORMA,
HISTORICAL AS ADJUSTED(8)
----------- --------------
(UNAUDITED) (UNAUDITED)

BALANCE SHEET DATA:
Total assets................................................ $430,599 $435,699
Advances from Quality King -- related party................. $292,994 $ 0
Total debt.................................................. $292,994 $209,694
Stockholders' equity........................................ $ 23 $ 88,423

(See
footnotes on next page)
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9

- -------------------------
(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 an assumed principal amount equal to 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) Reflects 23,000 shares outstanding as of October 31, 1999 and January 31,
2000 and the issuance of 7,333 shares representing that portion of the
shares sold in the offering (at an assumed initial offering price of $15.00
per share) the proceeds of which will be deemed to be utilized to fund the
payment of the dividend declared to our controlling stockholders in the
amount of $110,000.

(6) Adjusted to give effect to the interest savings from the application of
$126,000 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, 1998. We calculated the reduction using Quality King's
effective interest rate. Pro forma weighted average diluted shares
outstanding reflects 23,000 shares outstanding as of October 31, 1999 and
January 31, 2000 and the issuance of 13,400 shares representing the total
number of shares sold in the offering.

(7) 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.

(8) Gives effect to the following transactions:

- the declaration of the $110,000 dividend to our controlling stockholders
paid by delivery of promissory notes

- the capital contribution of $7,300 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 prepay $60,000 of
the promissory notes delivered to our 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, WE WILL HAVE A SIGNIFICANT DEFICIT IN OUR
STOCKHOLDERS' EQUITY AND LESS OF THE PROCEEDS WILL BE AVAILABLE FOR USE IN OUR
BUSINESS

In connection with the reorganization and the offering, we declared a
dividend to our controlling stockholders of $110 million. We paid the dividend
to our controlling stockholders in the form of promissory notes. The dividend
resulted in a deficit of approximately $110 million in our stockholders' equity.
We intend to use a portion of the proceeds of this offering to prepay $60
million of these notes with the remaining principal of $50 million to be paid in
equal quarterly installments commencing June 30, 2001. As a result, $60 million
of the $186 million net proceeds of the offering and funds needed to pay the
remaining obligation will not be available to meet the working capital or growth
needs of our business. If such proceeds and funds were available, we could use
them to further reduce our debt levels and/or to finance our inventories and
receivables. Because these proceeds and funds 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 CAUSE OUR
SALES AND MARGINS TO DECLINE

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, we could lose sales or customers and our 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.

WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE
SIGNIFICANTLY WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE

Our quarterly revenues and operating results have varied and are likely to
continue to vary significantly due to other risk factors described in this
section and our purchasing methods. We primarily stock products that we acquire
on favorable terms by taking advantage of manufacturers' incentive discounts,
various market opportunities and anticipated price increases. Since our buying
opportunities vary from time to time, our inventory levels and resulting sales
opportunities will also vary. As a result, our quarterly operating results may
fluctuate significantly from quarter to quarter and may be below the
expectations of public market analysts and investors. If this occurs, our
stock's trading price could fluctuate significantly.

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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 2004, 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.

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 and $75.9 million for the years ended October 31,
1997 and 1998 and $11.2 million and $14.9 million for the three months ended
January 31, 1999 and 2000. Due primarily to an increase in trade credit, we
reported $8.3 million of cash provided by operations for the year ended October
31, 1999. However, we expect our cash flow from operations 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 January 31, 2000, after giving effect to this offering, the
application of its net proceeds and other related transactions, we would have
had approximately $159.7 million of debt outstanding and approximately $137.5
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 2004, 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 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

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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.

SINCE WE ARE HIGHLY LEVERAGED, DEBT AND INTEREST EXPENSE WILL REDUCE FUNDS
AVAILABLE FOR CORPORATE PURPOSES AND LIMIT OUR FLEXIBILITY

We have a significant amount of indebtedness. Our total debt was
approximately $209.7 million and stockholders' equity was approximately $88.4
million at January 31, 2000 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 agreement. Our
indebtedness could negatively affect our operations in the following ways:

- 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 year ended October 31, 1999, our largest 20 customers accounted
for approximately 88% of our net sales and one customer, McKessonHBOC
Corporation, accounted for approximately 25% 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 PURCHASING AND SALES OPERATIONS COULD BE DISRUPTED

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

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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 CAUSE OUR SALES AND MARGINS TO DECLINE

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, 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 RESULT IN A CHARGE AGAINST OUR FUTURE EARNINGS

Upon consummation of this offering, options to purchase up to 2,550,000
shares of our common stock will be granted to members of 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 $7.65 million net charge against our earnings in the
first quarter following this offering.

OUR RELATIONSHIP WITH QUALITY KING POSES CONFLICTS OF INTERESTS FOR THREE OF OUR
DIRECTORS

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

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14

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, 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.

CONTROL BY OUR EXISTING STOCKHOLDERS WILL LIMIT YOUR ABILITY TO INFLUENCE THE
OUTCOME OF MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DISCOURAGE POTENTIAL
ACQUISITIONS OF OUR COMPANY BY THIRD PARTIES

After this offering, Glenn, Stephen and Arlene Nussdorf will beneficially
own in the aggregate approximately 63% 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. This concentration of
ownership could have the effect of delaying or preventing a change in control of
our company or otherwise discouraging a potential acquiror from attempting to
obtain control of us, which in turn could have an adverse effect on the market
price of our common stock or prevent our stockholders from realizing a premium
over the market price for their shares.

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,

13
15

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.

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 63% of the outstanding shares of our common stock
(60% 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 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 26,700,000 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 $12.57 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."

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OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT
OR ABOVE THE OFFERING PRICE

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.

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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17

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 $186 million
(approximately $214 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:

- $60 million (up to $80 million if the underwriters' option to purchase
additional shares in the offering is exercised) to prepay a portion of
the notes that we issued to our controlling stockholders in connection
with the declaration of a $110 million dividend at the time of the
reorganization.

- The balance to reduce our short-term borrowings, which we assumed from
Quality King in connection with the reorganization.

The notes bear interest at an annual rate of 8 1/2% and mature in 2006.
Principal and accrued interest will be paid in quarterly installments commencing
June 30, 2001. The notes require a mandatory prepayment of $60 million upon
consummation of this offering. In addition, if the underwriters exercise their
option to purchase additional shares in the offering, the notes require a
mandatory prepayment of the first $20 million from the proceeds of the exercise
of the option. For more information relating to the dividend to our controlling
stockholders, 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 $126 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 7.8% as of January 31,
2000), 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
$166 million.

DIVIDEND POLICY

We expect to use $60 million (up to $80 million if the underwriters' option
to purchase additional shares in the offering is exercised) of the net proceeds
from this offering to prepay a portion of the notes that we issued to our
controlling stockholders in connection with the declaration of a $110 million
dividend. Other than the $110 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 as of
January 31, 2000, on an actual basis and on a pro forma as adjusted basis to
reflect the reorganization and the offering. The pro forma adjustments reflect
the following:

(i) the reorganization:

- the capital contribution of $7.3 million by Quality King

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

(ii) the offering:

- the declaration of a $110 million dividend to our controlling
stockholders payable by delivery of promissory notes

- the application of the net offering proceeds to prepay $60 million
of the notes to the controlling stockholders and to reduce the
short-term borrowings assumed from Quality King

- the issuance to key management of options to purchase 2,550,000
shares of common stock at an exercise price $5.00 less than the
initial offering price of the shares in the offering.

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.

JANUARY 31, 2000
------------------------------------------------------
PRO FORMA ADJUSTMENTS(1)
--------------------------- PRO FORMA
ACTUAL REORGANIZATION OFFERING AS ADJUSTED
-------- -------------- --------- -----------
(IN THOUSANDS)

Advances from Quality King........... $$292,994 $ (7,300) $ -- $ --
(285,694)
Short-term borrowings(2)............. -- 285,694 (126,000) 159,694
Notes payable to stockholders -
short-term(3)...................... -- -- (60,000) --
60,000
-------- --------- --------- ---------
Total short-term borrowings.......... 292,994 (7,300) (126,000) 159,694
-------- --------- --------- ---------
Notes payable to stockholders - long-
term(3)............................ -- -- 50,000 50,000
-------- --------- --------- ---------
Total debt........................... 292,994 (7,300) (76,000) 209,694
-------- --------- --------- ---------
Stockholders' equity(4)
Common stock, $.001 par value,
shares authorized 100,000; 23,000
issued and outstanding on an actual
basis; 36,400 issued and
outstanding on a pro-forma as
adjusted basis..................... 23 -- 13 36
Additional paid-in capital......... -- 7,300 185,987 206,037
12,750
Retained earnings (deficit)........ -- -- (7,650) (117,650)
(110,000)
-------- --------- --------- ---------
Total Stockholders' equity........... 23 7,300 81,100 88,423
-------- --------- --------- ---------
Total capitalization................. $293,017 $ -- $ 5,100 $ 298,117
======== ========= ========= =========

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

(1) See "Pro Forma Financial Information -- Pro Forma Condensed Balance Sheet"
for additional information about the pro forma adjustments.

(2) 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

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our aggregate accounts receivable and inventories. The bank loan agreement
will expire four and a half years after the consummation of this offering.
Interest payable on amounts outstanding under the bank loan agreement are
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 $166 million.

(3) Consists of promissory notes issued to our controlling stockholders in
connection with the dividend to our controlling stockholders. The notes bear
interest at an annual rate of 8 1/2% and mature in 2006. Principal and
accrued interest will be paid in quarterly installments commencing June 30,
2001.

(4) The amount in the pro forma as adjusted column excludes 2,010,000 shares
subject to an option granted to the underwriters to purchase additional
shares in the offering.

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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 is
substantially in excess of the book value per share attributable to the existing
stockholders for the presently outstanding stock.

On January 31, 2000, 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 $7.3 million
and the pro forma per share net tangible book value based on 23,000,000 shares
of common stock outstanding was approximately $.32 per share.

As of January 31, 2000, without taking into account any changes in our net
tangible book value subsequent to that date other than: 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, a
dividend to our controlling stockholders of $110 million, and the net effect on
net tangible book value of the issuance of options to key management at an
exercise price $5.00 per share less than the assumed initial offering price, the
pro forma net tangible book value of each of the outstanding shares of common
stock would have been $2.43 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 $2.43 per share after the offering.
That is, their investment would have been diluted by approximately $12.57 per
share. At the same time, existing stockholders would have realized an increase
in net tangible book value of $2.11 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............................. $ .32
Increase in pro forma net tangible book value per share
of common stock attributable to investors in the
offering.............................................. 2.11
-----
Pro forma net tangible book value per share of common
stock after the offering(1)(2)........................ 2.43
------
Dilution per share to the new investors................. $12.57
======

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

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

(2) Does not give effect to the 2,010,000 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 3,930,000 shares
of common stock issuable upon exercise of options granted to management as
discussed under "Management -- Stock Option Plan" or the 970,000 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 1999 and our results of operations
for the years ended October 31, 1997, 1998 and 1999 from our audited financial
statements that appear elsewhere in this prospectus. We derived the following
selected financial information with respect to our financial position as of
January 31, 2000 and our results of operations for the three months ended
January 31, 1999 and 2000 from our unaudited 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, 1996 and January 31, 1999, 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.

Our operating results for the three months ended January 31, 1999 and 2000
are not necessarily indicative of the results of operations for any other
period. In our opinion, the unaudited operating results for the three months
ended January 31, 1999 and 2000 contain 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
preparing 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 January 31, 2000, 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)

THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
------------------------------------------------------------ -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- -------- -------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)

STATEMENT OF OPERATIONS
DATA:
Sales, net.................. $168,983 $328,307 $552,488 $772,359 $1,012,818 $235,252 $294,582
-------- -------- -------- -------- ---------- -------- --------
Gross profit................ 6,953 16,767 35,987 45,392 70,760 17,271 19,085
-------- -------- -------- -------- ---------- -------- --------
Operating expenses:
Warehouse and delivery.... 945 1,832 3,039 4,069 5,321 1,223 1,131
Selling, general and
administrative.......... 2,208 10,376(1) 6,762 7,187 10,124 2,542 2,595
-------- -------- -------- -------- ---------- -------- --------
Total operating
expenses............. 3,153 12,208 9,801 11,256 15,445 3,765 3,726
-------- -------- -------- -------- ---------- -------- --------
Income from operations...... 3,800 4,559 26,186 34,136 55,315 13,506 15,359
Interest expense-related
party(2).................. 3,937 7,649 12,984 17,370 20,737 4,692 5,672
-------- -------- -------- -------- ---------- -------- --------
Income (loss) before income
taxes..................... (137) (3,090) 13,202 16,766 34,578 8,814 9,687
Income taxes (benefit)(3)... (2) (53) 224 285 237 154 84
-------- -------- -------- -------- ---------- -------- --------
Net income (loss)........... $ (135) $ (3,037) $ 12,978 $ 16,481 $ 34,341 $ 8,660 $ 9,603
======== ======== ======== ======== ========== ======== ========
Pro forma for change in tax
status:
Historical income (loss)
before income taxes..... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 34,578 $ 8,814 $ 9,687
Pro forma income taxes
(benefit)(4)............ (15) (1,194) 5,312 6,736 13,850 3,530 3,879
-------- -------- -------- -------- ---------- -------- --------
Pro forma net income
(loss).................. $ (122) $ (1,896) $ 7,890 $ 10,030 $ 20,728 $ 5,284 $ 5,808
======== ======== ======== ======== ========== ======== ========
Pro forma basic earnings
per share............... $ .68 $ .19
========== ========
Pro forma weighted average
number of shares
outstanding(5).......... 30,333 30,333
========== ========

OCTOBER 31, JANUARY 31,
------------------------------------------------------------ -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- -------- -------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)

BALANCE SHEET DATA:
Current assets.............. $67,033 $140,198 $170,922 $274,890 $ 391,665 $317,351 $430,239
Total assets................ $67,033 $140,198 $170,922 $274,890 $ 391,921 $317,623 $430,599
Advances from Quality
King -- related party..... $53,831 $126,211 $149,524 $241,910 $ 268,349 $262,024 $292,994
Stockholders' equity........ $ 23 $ 23 $ 23 $ 23 $ 23 $ 23 $ 23

- -------------------------
(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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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 capital contribution of $7.3 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:

- the declaration of the $110 million dividend to our controlling
stockholders paid by delivery of promissory notes

- this offering and the application of its net proceeds to prepay $60
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 2,550,000 shares of
common stock at an exercise price $5.00 per share less than the initial
offering price of the shares in the offering.

The accompanying pro forma condensed balance sheet gives effect to these
transactions as if they had occurred at January 31, 2000. The accompanying pro
forma condensed statements of operations for the year ended October 31, 1999 and
the three months ended January 31, 2000 give effect to these transactions as if
they had occurred at November 1, 1998. 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

JANUARY 31, 2000

(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

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

ASSETS
Current
Cash........................................... $ -- $ 186,000(1) $ --
(186,000)(2)
Other current.................................. 430,239 430,239
-------- ---------
Total current.................................... 430,239 430,239
Deferred income taxes............................ -- 5,100(3) 5,100
Other non-current assets......................... 360 360
-------- -------- --------- ---------
$430,599 $ -- $ 5,100 $ 435,699
======== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Advances from Quality King -- related party.... $292,994 $ (7,300)(4) $ --
(285,694)(4)
Short-term borrowings.......................... 285,694(4) (126,000)(2) 159,694
Notes payable to stockholders.................. -- (60,000)(2) --
60,000(5)
Other current liabilities...................... 137,582 137,582
-------- -------- --------- ---------
Total current liabilities........................ 430,576 (7,300) (126,000) 297,276
Long-term liabilities
Notes payable to stockholders.................. -- 50,000(5) 50,000
-------- -------- --------- ---------
430,576 (7,300) (76,000) 347,276
-------- -------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, shares
authorized 100,000; 23,000 issued and
outstanding on a historical basis, 36,400
issued and outstanding on a pro-forma as
adjusted basis............................... 23 13(1) 36
Additional paid-in capital..................... -- 7,300(4) 185,987(1) 206,037
12,750(3)
Retained earnings (deficit).................... --(6) (7,650)(3) (117,650)
(110,000)(5)
-------- -------- --------- ---------
Total stockholders' equity....................... 23 7,300 81,100 88,423
-------- -------- --------- ---------
$430,599 $ -- $ 5,100 $ 435,699
======== ======== ========= =========

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

(1) Reflects the estimated net proceeds from the sale of 13,400 shares of common
stock in this offering, aggregating $186,000, net of $15,000 of expenses,
including underwriting discounts and commissions.

(2) Reflects use of proceeds from this offering to pay $60,000 of the notes due
to our controlling stockholders for dividends and to reduce short-term
borrowings assumed from Quality King by $126,000.

(3) Reflects the issuance of options to purchase 2,550 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 $12,750 ($7,650 after related tax effect) and an increase in additional
paid-in capital.

(4) In connection with the reorganization, we assumed $285,694 of Quality King's
short-term borrowings that are included in advances from Quality King. This
represents the amount that we could borrow using Quality King's borrowing
base formula at our levels of inventory and accounts receivable. Quality
King forgave the remaining $7,300 of its historical advances to us, which is
reflected as a capital contribution by Quality King to us.

(5) As part of the reorganization and offering, we declared a dividend to our
controlling stockholders in the amount of $110,000. At our discretion, we
declared the dividend to be payable in the form of six promissory notes of
$18,333 each. A portion of the proceeds of this offering will be used to pay
$60,000 of these notes with the remaining principal of $50,000 to be paid in
equal quarterly installments commencing June 30, 2001 from funds generated
through operations.

(6) Prior to the reorganization, we operated as a division of Quality King. As a
division, our arrangement with Quality King was that all accumulated net
income was distributed by increases in our advances from Quality King.
Therefore, we began operating as a separate company with no accumulated
retained earnings.

23
25

QK HEALTHCARE, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

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

Sales, net........................... $1,012,818 $1,012,818
---------- ----------
Gross profit......................... 70,760 70,760
Operating expenses(1)................ 15,445 15,445
---------- ----------
Income from operations............... 55,315 55,315
Interest expense..................... 20,737 $(9,072)(2) 15,389
3,724(3)
---------- ------- ----------
Income before income taxes........... 34,578 5,348 39,926
Income taxes......................... 237 37(4) 274
---------- ------- ----------
Net income........................... $ 34,341 $ 5,311 $ 39,652
========== ======= ==========
Pro forma:
Income before income taxes......... $ 34,578 $ 5,348 $ 39,926
Pro forma income taxes............. 13,850 2,136(5) 15,986
---------- ------- ----------
Pro forma net income............... $ 20,728 $ 3,212 $ 23,940
========== ======= ==========
Pro forma basic earnings per
share........................... $ .66
==========
Pro forma weighted average shares
outstanding..................... 36,400(6)
==========
Pro forma diluted earnings per
share........................... $ .64
==========
Pro forma weighted average diluted
shares outstanding.............. 37,250(7)
==========

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

(1) Pro forma operating expenses do not reflect adjustments for the new support
service agreement and the new employment contracts discussed elsewhere in
this prospectus since the on-going charges relating to these agreements
would not be materially different from the amounts allocated.

(2) Reflects the interest savings from the use of $126,000 of the net proceeds
from this offering to reduce the advances assumed from Quality King in
connection with the reorganization. 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.

(3) Reflects the net additional interest expense related to the notes payable to
our controlling stockholders ($50,000 x 8.5%) reduced by the interest
savings related to the reduction of advances assumed from Quality King
($7,300 x 7.2%).

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

(5) Reflects additional income taxes, primarily current, on the net interest
savings noted in (2) and (3) above, 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.

(6) Reflects 23,000 shares outstanding as of October 31, 1999 and the issuance
of 13,400 shares representing the total number of shares sold in the
offering.

(7) Reflects the dilutive effect (850 shares) of the issuance of stock options
to purchase 2,550 shares granted to key management personnel.

24
26

QK HEALTHCARE, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS

THREE MONTHS ENDED JANUARY 31, 2000

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

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

Sales, net........................... $ 294,582 $ 294,582
---------- ----------
Gross profit......................... 19,085 19,085
Operating expenses(1)................ 3,726 3,726
---------- ----------
Income from operations............... 15,359 15,359
Interest expense..................... 5,672 $(2,457)(2) 4,135
920(3)
---------- ------- ----------
Income before income taxes........... 9,687 1,537 11,224
Income taxes......................... 84 13(4) 97
---------- ------- ----------
Net income........................... $ 9,603 $ 1,524 $ 11,127
========== ======= ==========
Pro forma:
Income before income taxes......... $ 9,687 $ 1,537 $ 11,224
Pro forma income taxes............. 3,879 614(5) 4,493
---------- ------- ----------
Pro forma net income............... $ 5,808 $ 923 $ 6,731
========== ======= ==========
Pro forma basic earnings per
share........................... $ .19
==========
Pro forma weighted average shares
outstanding..................... 36,400(6)
==========
Pro forma diluted earnings per
share........................... $ .18
==========
Pro forma weighted average diluted
shares outstanding.............. 37,250(7)
==========

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

(2) Reflects the interest savings from the use of $126,000 of the net proceeds
from this offering to reduce the advances assumed from Quality King in
connection with the reorganization. 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 under our bank
loan agreement is substantially the same as the rate under the Quality King
bank loan agreement.

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

(6) Reflects 23,000 shares outstanding as of January 31, 2000 and the issuance
of 13,400 shares representing the total number of shares sold in the
offering.

(7) Reflects the dilutive effect (850 shares) of the issuance of stock options
to purchase 2,550 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
fiscal 1999, our annual net sales grew from $169.0 million to $1,012.8 million,
representing a compound annual growth rate of 56%. Our income from operations
grew over this period from $3.8 million to $55.3 million, representing a
compound annual growth rate of 95%.

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 $9.0 million, $10.2
million, and $15.7 million in the years ended October 31, 1997, 1998, and 1999,
respectively, and $3.0 million and $5.0 million for the three months ended
January 31, 1999 and 2000, respectively. 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 and the offering, we declared a
dividend to our controlling stockholders of $110 million (the "Distribution").
We paid the Distribution by delivery of promissory notes to our existing
stockholders in the aggregate amount of the Distribution (the "Notes"). Each of
our six existing stockholders, which are trusts of our Chief Executive Officer
and directors, Glenn, Stephen and Arlene Nussdorf, will receive

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28

$18.333 million of the Notes. The Notes mature in 2006 and require the mandatory
prepayment of $60 million upon the closing of this offering. The Notes bear
interest at an annual rate of 8 1/2%. We will use a portion of the proceeds from
this offering to pay $60 million (up to $80 million if the underwriters' option
to purchase additional shares in the offering is exercised) 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
2.55 million shares to members of our 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 $7.65
million in the first quarter following this offering.

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.

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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 THREE MONTHS ENDED
OCTOBER 31, JANUARY 3,
--------------------- -------------------------
1997 1998 1999 1999 2000
----- ----- ----- ----------- -----------
(UNAUDITED) (UNAUDITED)

Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Gross profit......................... 6.5 5.9 7.0 7.3 6.5
----- ----- ----- ----- -----
Operating expenses:
Warehouse and delivery............. 0.6 0.6 0.5 0.5 0.4
Selling, general and
administrative.................. 1.2 0.9 1.0 1.1 0.9
----- ----- ----- ----- -----
Total operating expenses........ 1.8 1.5 1.5 1.6 1.3
----- ----- ----- ----- -----
Income from operations............... 4.7 4.4 5.5 5.7 5.2
Interest expense -- related party.... 2.3 2.3 2.1 2.0 1.9
----- ----- ----- ----- -----
Income before income taxes........... 2.4 2.1 3.4 3.7 3.3
Income taxes......................... 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Net income........................... 2.4% 2.1% 3.4% 3.7% 3.3%
===== ===== ===== ===== =====
Pro forma for change in tax status:
Historical income before income
taxes........................... 2.4% 2.1% 3.4% 3.7% 3.3%
Pro forma income taxes............. 1.0% 0.9% 1.4% 1.5% 1.3%
----- ----- ----- ----- -----
Pro forma net income............... 1.4% 1.2% 2.0% 2.2% 2.0%
===== ===== ===== ===== =====

Our industry has experienced significant growth in recent years due to the
aging of the U.S. population, the continuing introduction of new pharmaceutical
products and pharmaceutical price increases by drug manufacturers. We expect
this growth to continue. At the same time, cost containment measures by
third-party payors have created pricing pressures on pharmaceutical retailers
and healthcare institutions. We are unable to determine the effects of these
trends on our future operations, liquidity and capital resources.

THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1999

NET SALES. Net sales increased $59.3 million or 25% from $235.3 million
for the three months ended January 31, 1999 to $294.6 million for the three
months ended January 3, 2000. Additional resources were made available to us
during the quarter ended January 31, 2000 through additional advances from
Quality King. The additional advances along with the increases in trade credit
that we established enabled us to purchase more products and resulted in
additional net sales.

GROSS PROFIT. Gross profit increased $1.8 million or 10% from $17.3
million for the three months ended January 31, 1999 to $19.1 million for the
three months ended January 31, 2000. Gross profit as a percentage of net sales
decreased from 7.3% for the three months ended January 31, 1999 to 6.5% for the
three months ended January 31,

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30

2000. The decrease in the gross profit as a percentage of net sales is primarily
attributable to a more favorable impact of manufacturer price increases along
with a more profitable product mix for the three months ended January 31, 1999
when compared to sales for the three months ended January 31, 2000.

OPERATING EXPENSES. Operating expenses were $3.8 million for the three
months ended January 31, 1999 compared to $3.7 million for the three months
ended January 31, 2000. Selling, general and administrative expenses were $2.5
million for the three months ended January 31, 1999 compared to $2.6 million for
the three months ended January 31, 2000. The modest increase in selling, general
and administrative expenses reflects the fact that a large portion of these
costs are fixed without regard to sales volume. Warehouse and delivery expenses
were $1.2 million for the three months ended January 31, 1999 compared to $1.1
million for the three months ended January 31, 2000. The decrease is primarily
attributable to cost saving measures implemented by us during the current fiscal
year.

INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations increased $1.9 million or 14% from $13.5 million for the three
months ended January 31, 1999 to $15.4 million for the three months ended
January 31, 2000. Income from operations as a percentage of net sales decreased
from 5.7% for the three months ended January 31, 1999 to 5.2% for the three
months ended January 31, 2000.

INTEREST EXPENSE. Interest expense increased $1.0 million or 21% from $4.7
million for the three months ended January 31, 1999 to $5.7 for the three months
ended January 31, 2000. This increase resulted primarily from a $36.7 million
increase in the average advances from Quality King from $256.4 million for the
three months ended January 31, 1999 to $293.1 million for the three months ended
January 31, 2000. Additionally, interest rate increases imposed on Quality King
during the current fiscal year were passed along to us.

INCOME TAXES. Our pro forma income taxes increased $0.4 million or 11%
from $3.5 million for the three months ended January 31, 1999 to $3.9 million
for the three months ended January 31, 2000. This increase was the result of the
increase in our earnings.

YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998

NET SALES. Net sales increased $240.4 million or 31% from $772.4 million
for the year ended October 31, 1998 to $1,012.8 million for the year ended
October 31, 1999. This increase was primarily attributable to increased sales to
our existing customers. Additional resources were made available to us during
the year ended October 31, 1999 through additional advances from Quality King,
enabling us to purchase more products on favorable terms.

GROSS PROFIT. Gross profit increased $25.4 million or 56% from $45.4
million for the year ended October 31, 1998 to $70.8 million for the year ended
October 31, 1999. Gross profit as a percentage of net sales increased from 5.9%
for the year ended October 31, 1998 to 7.0% for the year ended October 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.

29
31

OPERATING EXPENSES. Operating expenses increased $4.2 million or 37% from
$11.3 million for the year ended October 31, 1998 to $15.5 million for the year
ended October 31, 1999. This increase was due to a 31% increase in warehouse and
delivery expenses and a 41% 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 $21.2 million or 62% from $34.1 million for the year
ended October 31, 1998 to $55.3 million for the year ended October 31, 1999.
Income from operations as a percentage of net sales increased from 4.4% for the
year ended October 31, 1998 to 5.5% for the year ended October 31, 1999.

INTEREST EXPENSE. Interest expense increased $3.3 million or 19% from
$17.4 million for the year ended October 31, 1998 to $20.7 million for the year
ended October 31, 1999. This increase resulted primarily from a $65.2 million
increase in the average advances from Quality King from $221.8 million for the
year ended October 31, 1998 to $287.0 million for the year ended October 31,
1999.

INCOME TAXES. Our pro forma income taxes increased $7.2 million or 108%
from $6.7 million for the year ended October 31, 1998 to $13.9 million for the
year ended October 31, 1999. This increase was the result of the increase in our
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

30
32

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.

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
and $75.9 million for the years ended October 31, 1997 and 1998 and $11.2
million and $14.9 million for the three months ended January 31, 1999 and 2000.
Due primarily to an increase in trade credit, we reported $8.3 million of cash
provided by operations for the year ended October 31, 1999. Since we expect our
growth to continue, we expect our cash flow from operations 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, 1998 and 1999 and January 31, 1999
and 2000 and our

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33

results of operations for the years ended October 31, 1997, 1998 and 1999 and
the three months ended January 31, 1999 and 2000.

THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
-------------------------------- -------------------------
1997 1998 1999 1999 2000
-------- -------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)

Operating Data:
Net sales....................... $552,488 $772,359 $1,012,818 $235,252 $294,582
Net cash provided by (used in)
operating activities......... (10,339) (75,906) 8,268 (11,159) (14,908)
Balance Sheet data (at period
end):
Accounts receivable............. 49,159 83,937 107,605 101,654 115,885
Inventories..................... 120,721 189,703 279,067 212,805 305,763
Accounts payable................ 19,999 31,561 119,719 52,075 133,961
Advances from Quality King...... 149,524 241,910 268,349 262,024 292,994

CAPITAL RESOURCES

Historically, we have financed our operations through advances from Quality
King. In connection with the Reorganization, we assumed $285,694 of Quality
King's short-term borrowings that are included in advances from Quality King.
This represents the amount that we could borrow using Quality King's borrowing
base formula at our levels of inventory and accounts receivable. Quality King
forgave the remaining advances of $7,300, which was treated as a capital
contribution by Quality King to us. We will repay approximately $126 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 entered 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.
The loan agreement provides for up to $350 million of revolving loans. This loan
is secured by first priority liens on all of our tangible and intangible assets.
The bank loan agreement will expire four and a half years from the consummation
of this offering. Advances under the bank loan agreement are limited to agreed
upon percentages of our accounts receivable and inventory. The interest rate per
annum is, at our option, either LIBOR plus 1.5%, or the prime rate. We are
required to pay fees in connection with the bank loan agreement, including a
commitment fee of .25% on the unutilized portion of the loan. The bank loan
agreement has mandatory prepayment provisions in the event of the issuance of
debt or equity securities or the sale of assets. The new bank loan agreement
also contains a number of financial covenants which, among other things, 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 provides that a change of control will constitute an event of default.

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34

We intend to use the proceeds of this offering

- to pay $60 million (up to $80 million if the underwriters' option to
purchase additional shares in the offering is exercised) of the Notes due
to our controlling stockholders, which bear interest at an annual rate of
8.5% and which were issued in connection with the declaration of a $110
million dividend

- to pay $126 million of the short-term borrowings we assumed from Quality
King in connection with the Reorganization.

The remaining $50 million ($30 million if the underwriters' option to
purchase additional shares in the offering is exercised in full) of principal on
the Notes will be payable in 20 equal quarterly installments commencing June 30,
2001. Interest on the Notes will accrue for the first 12 months. Such accrued
interest will be payable in equal quarterly installments commencing June 30,
2001. After the first 12 months, interest will be payable quarterly. The Notes
will be subordinated to all of our outstanding and future indebtedness.

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.

THREE MONTHS ENDED JANUARY 31, 2000. Net cash used in operations was $14.9
million for the three months ended January 31, 2000. This amount was primarily
the result of net income of $9.6 million, an increase in accounts receivable and
inventories of $35.1 million and an increase in accounts payable of $14.2
million from October 31, 1999. The increases in inventories and sales resulted
from our taking advantage of what we considered to be increased purchasing
opportunities. The funding required for the increase in inventories, through
advances from Quality King, was partially offset by the increase in accounts
payable.

YEAR ENDED OCTOBER 31, 1999. Net cash provided by operations was $8.3
million for the year ended October 31, 1999. This amount was primarily the
result of net income of $34.3 million, an increase in accounts receivable and
inventories of $113.2 million from October 31, 1998, and an increase in accounts
payable of $88.2 million from October 31, 1998. The increase in inventories is
due to our maximizing purchasing opportunities. These inventory increases were
funded primarily through trade credit.

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
$103.9 million from 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

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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.

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 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 January 31,
2000 of $293 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 $2.9 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 25.6 million in 1980 to 34.4 million in 1998.(2)
This age group, which is projected to grow to 39.8 million individuals by
2010, spends approximately 2.3 times more per capita on pharmaceuticals
and medical supplies than the rest of the population.(3)(,)(4)

- 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

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

1 Source: U.S. Health Care Financing Administration, National Health
Expenditures Projections: 1998-2008, Tables 1 and 14a.

2 Source: U.S. Bureau of the Census, Statistical Abstracts of the United
States: 1999 (119th Edition), Table 14.

3 Source: U.S. Bureau of the Census, Statistical Abstracts of the United
States: 1999 (119th Edition), Table 24.

4 Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey,
1998, Table 4500.

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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.

- 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%.(5)

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.(6) 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%.(7) 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.(8)

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 --

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

5 Source: IMS Health 1998 Year-in-Review U.S. Prescription Market, page 8.

6 Source: IMS Health as cited in 1999 National Wholesale Druggists'
Association Industry Profile and Healthcare Fact Book ("IMS"), page 79.

7 Source: Food Marketing Institute's Supermarket Pharmacy Survey Report,
1995-1999.

8 Source: IMS, page 119.

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38

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.

- 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.(9) 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

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

9 Source: IMS, pages 18 and 88.

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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 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

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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.

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 17 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.

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CUSTOMER RELATIONSHIPS. We strive to be a valued supplier to our
customers. Our fulfillment rate for the year ended October 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.

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

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

Retail Chains............................... $349.1 45% $ 381.9 38%
Distributors................................ 328.7 43 481.7 47
Other, including Pharmacy Benefit
Managers.................................. 94.6 12 149.2 15
------ --- -------- ---
Total............................. $772.4 100% $1,012.8 100%
====== === ======== ===

During the years ended October 31, 1998 and 1999, our 20 largest customers
accounted for approximately 91% and 88%, 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 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:

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

Branded..................................... $720.3 93% $ 933.8 92%
Generic..................................... 46.5 6 62.9 6
Medical/surgical and other.................. 5.6 1 16.1 2
------ --- -------- ---
Total............................. $772.4 100% $1,012.8 100%
====== === ======== ===

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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 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.

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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, 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 March 31, 2000, we had approximately 101 employees, of which 17 were
employed in sales and purchasing positions, 31 were employed in administrative
and clerical positions, and 53 were employed at our warehouse and distribution
facility. In addition, 24 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.

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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........................ 52 Executive Vice President, Chief
Financial Officer and Treasurer
Salvatore LaDuca.................... 37 Senior Vice President, Purchasing
Michael Ross........................ 46 Senior Vice President, Sales and
Marketing
Dennis Barkey....................... 44 Senior Vice President, Chief
Accounting Officer
Arlene Nussdorf..................... 36 Director
Stephen Nussdorf.................... 49 Director
Dennis Erani........................ 56 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

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46

operations of long-term care and correctional institution pharmacies. Mr.
Sosnowik is a licensed pharmacist and member of the American Pharmaceutical
Association, the 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 Executive Vice President, 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 Senior 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 Senior 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 year ended October
31, 1999:

SUMMARY COMPENSATION TABLE

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

Glenn Nussdorf................................... 1999 $400,027 --
Chief Executive Officer
Michael Sosnowik................................. 1999 $749,996 $585,550
President
Michael Katz..................................... 1999 $ 97,923 --
Executive Vice President, Chief Financial
Officer and Treasurer
Salvatore LaDuca................................. 1999 $528,821 --
Senior Vice President, Purchasing
Michael Ross..................................... 1999 $353,912 --
Senior Vice President, Sales and Marketing

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

(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 for the year ended October
31, 1999. Prior to the Reorganization, Messrs. Nussdorf, Katz and Ross
performed services for various divisions of Quality King. Salaries were
allocated to the various divisions for these executives. The aggregated
salaries for Messrs. Nussdorf, Katz and Ross for the year ended October 31,
1999 were $500,032, $269,240 and $793,526, respectively. After the
consummation of the 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 4,900,000 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 stock owned by the optionee
for at least six months or by a combination of the foregoing,

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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 October 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 3,930,000 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 and non-qualified stock options to purchase 230,000 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 425,000 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 2,550,000 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

- Non-qualified stock options to purchase 725,000 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.

Since the exercise price of 2,550,000 of the non-qualified stock options is
below the initial offering price of the stock being sold in this offering, we
will be required to incur a net charge of $7,650,000 against our earnings in the
first quarter following this offering.

The option agreements provide that any shares acquired upon exercise of the
fully vested options may not be resold for 39 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 24th month after the date of grant

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- 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

- 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 we file a registration statement with respect to shares to be sold by
us within 36 months of the offering, each of the option holders will have
the right to sell up to 25% of their initial shares of our common stock
under the registration statement

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 (i) a
non-qualified stock option to purchase 1,000,000 shares of our common stock at
an exercise price $5.00 less than the initial offering price of the shares sold
in this offering; (ii) a non-qualified stock option to purchase 235,000 shares
of our common stock at an exercise price equal to the initial offering price of
the shares sold in this offering; and (iii) an incentive stock option to
purchase 65,000 shares of our common stock at an exercise price equal to the
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 the fourth anniversary of the effective
date of this offering. 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 and this offering, we declared a
dividend to our controlling stockholders of $110 million. We paid the dividend
to our controlling stockholders in the form of promissory notes. The promissory
notes mature in 2006 and require the mandatory prepayment of $60 million upon
consummation of this offering. In addition, if the underwriters exercise their
option to purchase additional shares in the offering, the promissory notes
require the mandatory prepayment of the first $20 million from the proceeds of
the exercise of the option. The promissory notes bear interest at an annual rate
of 8 1/2%. A portion of the proceeds from this offering will be used to prepay
$60 million of these promissory notes (up to $80 million if the underwriters'
option to purchase additional shares in the offering is exercised). The balance
of the promissory notes will be payable in equal quarterly installments
commencing June 30, 2001. 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. This agreement is for five years, subject to
renewal. 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
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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 five years and after that period
may terminate the agreement only upon 365 days notice.

This agreement also provides that Quality King will pay us a commission of
1% 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. In addition, the option holders have the right to sell up to 25%
of their initial shares under any registration statement filed by us with
respect to shares to be sold by us within 36 months of the offering. 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 23,000,000 shares of common stock outstanding before the
offering and 36,400,000 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)......... 3,833,333 -- 16.67% 10.53%
Glenn Nussdorf Trust dated
November 2, 1998(1)......... 3,833,333 -- 16.67% 10.53%
Stephen Nussdorf Trust dated
November 1, 1998(1)......... 3,833,333 -- 16.67% 10.53%
Stephen Nussdorf Trust dated
November 2, 1998(1)......... 3,833,333 -- 16.67% 10.53%
Arlene Nussdorf Trust dated
November 1, 1998(1)......... 3,833,333 -- 16.67% 10.53%
Arlene Nussdorf Trust dated
November 2, 1998(1)......... 3,833,333 -- 16.67% 10.53%

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Glenn Nussdorf(1)............. 23,000,000 -- 100% 63.19%
Michael Sosnowik.............. -- 1,300,000 -- 3.45%
Michael Katz.................. -- 300,000 -- *
Salvatore LaDuca.............. -- 600,000 -- 1.62%
Michael Ross.................. -- 600,000 -- 1.62%
Stephen Nussdorf(1)........... 23,000,000 -- 100% 63.19%
Arlene Nussdorf(1)............ 23,000,000 -- 100% 63.19%
Dennis Erani.................. -- -- -- --
Brian Finn.................... -- -- -- --
All directors and executive
officers as a group (8
persons).................... 23,000,000 2,950,000 100% 65.95%

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

* Less than 1%

(1) Stephen and Arlene Nussdorf are co-trustees under each of the Glenn
Nussdorf Trusts dated November 1, 1998 and November 2, 1998; Glenn and
Arlene Nussdorf are co-trustees under each of the Stephen Nussdorf Trusts
dated November 1, 1998 and November 2, 1998; and Glenn and Stephen Nussdorf
are co-trustees under each of 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 36.4 million 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 63% (60% if the
underwriters' option to purchase additional shares in the offering is exercised
in full) 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 release of our proxy statement to
stockholders for 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 63% of the outstanding
voting power (60% if the underwriters' option to purchase additional shares in
the offering is exercised in full). 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 36,400,000 shares
of common stock (38,410,000 shares if the underwriters' option to purchase
additional shares in the offering is exercised in full). Of these shares, the
13,400,000 shares sold in the offering (15,410,000 shares if the underwriters'
option to purchase additional shares is exercised in full) 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
23,000,000 Restricted Shares, representing approximately 63% (60% 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 3,930,000 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 364,000 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

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availability of shares for sale will have on the market price of the common
stock prevailing 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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60

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................................................. 13,400,000
==========

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 2,010,000 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.

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61

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.

Our common stock has been approved for listing 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

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62

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 October 31, 1999 and 1998 and
for the three years ended October 31, 1999 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.

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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.

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64

INDEX TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
FINANCIAL STATEMENTS:
Balance sheets -- October 31, 1998 and 1999 and January
31, 2000............................................... F-3
Statements of operations for the years ended October 31,
1997, 1998 and 1999 and for the three months ended
January 31, 1999 and 2000.............................. F-4
Statements of stockholders' equity for the years ended
October 31, 1997, 1998 and 1999 and for the three
months ended January 31, 1999 and 2000................. F-5
Statements of cash flows for the years ended October 31,
1997, 1998 and 1999 and for the three months ended
January 31, 1999 and 2000.............................. F-6
Notes to financial statements............................. F-7

F-1
65

[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 1999 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended October 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 1999 and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1999 in
conformity with generally accepted accounting principles.

BDO SEIDMAN, LLP
New York, New York
January 5, 2000,
except for the reorganization
discussed in Note 1(a), which is
as of , 2000

F-2
66

QK HEALTHCARE, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

PRO FORMA(1)
OCTOBER 31, ------------
------------------- JANUARY 31, JANUARY 31,
1998 1999 2000 2000
-------- -------- ----------- ------------
(UNAUDITED) (UNAUDITED)

ASSETS
CURRENT:
Cash and cash equivalents........ $ -- $ -- $ --
Accounts receivable, net of
allowance for possible losses
of $863 and $1,071............ 83,937 107,605 115,885
Inventories...................... 189,703 279,067 305,763
Advances to suppliers for future
purchases..................... 796 1,148 2,222
Prepaid expenses and other
current assets................ 454 3,845 6,369
-------- -------- ---------
TOTAL CURRENT ASSETS.......... 274,890 391,665 430,239
Property and equipment, less
accumulated depreciation and
amortization.................. -- 256 360
-------- -------- ---------
$274,890 $391,921 $ 430,599
======== ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT:
Advances from Quality King --
related party................. $241,910 $268,349 $ 292,994
Accounts payable................. 31,561 119,719 133,961
Accrued expenses and other....... 1,396 3,830 3,621
-------- -------- ---------
TOTAL CURRENT LIABILITIES..... 274,867 391,898 430,576
-------- -------- ---------
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
23,000........................ 23 23 23 23

Retained earnings (deficit)...... -- -- -- (110,000)
-------- -------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY.... 23 23 23 $(109,977)
-------- -------- --------- =========
$274,890 $391,921 $ 430,599
======== ======== =========

(1) Reflects the declaration of $110,000 dividend [see Note 12(a)].

See accompanying notes to financial statements.

F-3
67

QK HEALTHCARE, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31
-------------------------------- -------------------------
1997 1998 1999 1999 2000
-------- -------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)

Sales, net.................... $552,488 $772,359 $1,012,818 $235,252 $294,582
Cost of sales................. 516,501 726,967 942,058 $217,981 $275,497
-------- -------- ---------- -------- --------
Gross profit.................. 35,987 45,392 70,760 17,271 19,085
-------- -------- ---------- -------- --------
Operating Expenses:
Warehouse and delivery...... 3,039 4,069 5,321 1,223 1,131
Selling, general and
administrative........... 6,762 7,187 10,124 2,542 2,595
-------- -------- ---------- -------- --------
Total operating
expenses............... 9,801 11,256 15,445 3,765 3,726
-------- -------- ---------- -------- --------
Income from operations........ 26,186 34,136 55,315 13,506 15,359
Interest expense -- related
party....................... 12,984 17,370 20,737 4,692 5,672
-------- -------- ---------- -------- --------
Income before income taxes.... 13,202 16,766 34,578 8,814 9,687
Income taxes.................. 224 285 237 154 84
-------- -------- ---------- -------- --------
Net income.................... $ 12,978 $ 16,481 $ 34,341 $ 8,660 $ 9,603
======== ======== ========== ======== ========
Pro forma for change in tax
status:
Historical income before
income taxes............. $ 13,202 $ 16,766 $ 34,578 $ 8,814 $ 9,687
Pro forma income taxes (Note
6)....................... 5,312 6,736 13,850 3,530 3,879
-------- -------- ---------- -------- --------
Pro forma net income........ $ 7,890 $ 10,030 $ 20,728 $ 5,284 $ 5,808
======== ======== ========== ======== ========
Pro forma basic earnings per
share.................... $ .68 $ .19
========== ========
Pro forma weighted average
number of shares
outstanding [Note
1(c)].................... 30,333 30,333
========== ========

See accompanying notes to financial statements.

F-4
68

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............... 23,000 $ 23 $ -- $ 23
Net income.............................. 12,978 12,978
Distribution to Quality King -- related
party................................. (12,978) (12,978)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1997............... 23,000 23 -- 23
Net income.............................. 16,481 16,481
Distribution to Quality King -- related
party................................. (16,481) (16,481)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1998............... 23,000 23 -- 23
Net income.............................. 34,341 34,341
Distribution to Quality King -- related
party................................. (34,341) (34,341)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1999............... 23,000 23 -- 23
Net income (unaudited).................. 9,603 9,603
Distribution to Quality King-related
party (unaudited)..................... (9,603) (9,603)
-------- -------- -------- --------
BALANCE, JANUARY 31, 2000 (UNAUDITED)... 23,000 $ 23 $ - $ 23
======== ======== ======== ========

See accompanying notes to financial statements.

F-5
69

QK HEALTHCARE, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------ -------------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)

CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income........................ $ 12,978 $ 16,481 $ 34,341 $ 8,660 $ 9,603
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation................... -- -- 110 23 30
Provision for possible
losses....................... 6 169 136 118 98
Decrease (increase) in:
Accounts receivable.......... (1,976) (34,948) (23,804) (17,835) (8,378)
Inventories.................. (30,256) (68,982) (89,364) (23,102) (26,696)
Advances to suppliers for
future purchases.......... 1,258 (21) (352) (1,837) (1,074)
Prepaid expenses and other
current assets............ 244 (186) (3,391) 195 (2,524)
Increase (decrease) in:
Accounts payable............. 6,394 11,562 88,158 20,514 14,242
Accrued expenses and other... 1,013 19 2,434 2,105 (209)
-------- -------- -------- ------- -------
Net cash provided by (used
in) operating
activities(1)............. (10,339) (75,906) 8,268 (11,159) (14,908)
-------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase in property and
equipment...................... -- -- (366) (295) (134)
-------- -------- -------- ------- -------
Net cash used in investing
activities(1)............. -- -- (366) (295) (134)
-------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase in advances from Quality
King -- related party.......... 23,317 92,387 26,439 20,114 24,645
Distribution to Quality
King -- related party.......... (12,978) (16,481) (34,341) (8,660) (9,603)
-------- -------- -------- ------- -------
Net cash provided by (used
in) financing
activities(1)............. 10,339 75,906 (7,902) 11,454 15,042
-------- -------- -------- ------- -------
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
70

QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS
(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. 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 three
years in the period ended October 31, 1999, and the unaudited three months ended
January 31, 1999 and 2000. 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
71
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Pro Forma Balance Sheet as of January 31, 2000 reflects the declaration
of a $110,000 dividend payable to the controlling stockholders [see Note 12(a)].

Pro forma income taxes in the Statement of Operations reflects a provision
for income taxes based on income before taxes, as if the Company had been a C
corporation for all periods presented (see Note 6).

Pro forma net income per share for the year ended October 31, 1999 and for
the three months ended January 31, 2000 includes no dilution and has been
computed by dividing the pro forma net income by the weighted average number of
common shares considered to be outstanding for the period (23,000) and adjusted
to include the estimated number of shares (7,333) representing that portion of
the shares sold by the Company in the offering the proceeds of which will be
deemed to be utilized to fund the payment of the $110,000 dividend to the
controlling stockholders. Pro forma diluted net income per share is the same as
the basic earnings per share.

2. SUMMARY OF ACCOUNTING POLICIES

(a) 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.

(b) REVENUE RECOGNITION

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.

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.

(d) 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-8
72
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(e) 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) 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 January 31, 2000.

(g) 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.

(h) 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.

(i) UNAUDITED INTERIM FINANCIAL STATEMENTS

The financial statements and related notes thereto as of January 31, 2000
and for the three months ended January 31, 1999 and 2000 are unaudited and have
been prepared on a basis consistent with the Company's annual financial
statements. In the opinion of the Company's management, such financial
statements contain all adjustments (consisting only of normal accruals)
necessary to present fairly the information set forth therein. The results of
operations for the three months ended January 31, 1999 and 2000 are not
necessarily indicative of the results for any other period.

F-9
73
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT

Major classes of property and equipment consist of the following:

OCTOBER 31, 1999 JANUARY 31, 2000
---------------- ----------------
(UNAUDITED)

Machinery and equipment.................. $722 $ 722
Leasehold improvements................... 133 307
---- ------
855 1,029
Less accumulated depreciation and
amortization........................... 599 669
---- ------
$256 $ 360
==== ======

Quality King was deemed to have contributed certain 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, 1998 and
1999 was $212, $223 and $424, respectively, and $106 and $101 for the three
months ended January 31, 1999 and 2000, 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
74
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 THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
--------------------------- -------------------------
1997 1998 1999 1999 2000
------ ------ ------- ----------- -----------

Federal.................... $4,115 $5,218 $10,729 $2,735 $3,005
State...................... 1,197 1,518 3,121 795 874
------ ------ ------- ------ ------
Pro forma income taxes..... $5,312 $6,736 $13,850 $3,530 $3,879
====== ====== ======= ====== ======

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. 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 processed, estimated delivery miles, warehouse square
footage and other methods as

F-11
75
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

indicated below. The following table summarizes the expenses which were
allocated to the Company:

THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
---------------------------- -------------------------
1997 1998 1999 1999 2000
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)

WAREHOUSE AND DELIVERY
Delivery expenses....... $1,695 $ 854 $ 600 $ 229 $ 119
Rent.................... 106 213 417 $ 106 102
Payroll and related
expenses............. 99 271 310 73 68
Repairs and
maintenance.......... 53 77 121 -- 1
Union expenses.......... 48 78 109 24 29
Utilities............... -- 47 105 30 52
Supplies................ 29 59 103 107 49
Depreciation............ 18 34 81 16 --
Other................... 19 50 65 -- 2
------ ------ ------ ------ ------
$2,067 $1,683 $1,911 $ 585 $ 422
====== ====== ====== ====== ======
SELLING, GENERAL AND
ADMINISTRATIVE:
Payroll and related
expenses............. $1,282 $1,479 $2,368 $ 670 $ 677
Insurance............... 465 572 797 122 235
Office expenses......... 206 279 509 175 151
Telephone............... 176 244 274 56 80
Computer services....... 102 155 259 25 42
Professional fees....... 172 275 180 85 63
Sales expenses.......... -- 174 147 38 40
Other................... 83 93 52 -- 3
------ ------ ------ ------ ------
2,486 3,271 4,586 1,171 1,291
------ ------ ------ ------ ------
Total..................... $4,553 $4,954 $6,497 $1,756 $1,713
====== ====== ====== ====== ======

The above expenses were allocated as follows:

WAREHOUSE AND DELIVERY

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

F-12
76
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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.

The following table summarizes the methods used to allocate expenses:

THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------ -------------------------
1997 1998 1999 1999 2000
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)

Ratio of the number of transactions
processed........................... $1,480 $2,279 $3,191 $ 672 $ 752
Warehouse square footage.............. 287 751 1,216 303 252
Estimated delivery miles.............. 1,695 853 600 229 119
Payroll dollars....................... 344 253 572 161 223
Estimate of time-officers............. 359 400 400 100 108
Sales ratios.......................... 140 145 178 231 192
Purchases ratios...................... 73 73 165 7 28
Inventory ratios...................... 157 194 155 53 39
Other................................. 18 6 20 -- --
------ ------ ------ ------ ------
Total................................. $4,553 $4,954 $6,497 $1,756 $1,713
====== ====== ====== ====== ======

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 4), 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, 1998 and 1999 were approximately 7.7%, 7.8% and 7.2%, respectively,
and for the three months ended January 31, 1999 and 2000 were approximately 7.3%
and 7.8%, respectively.

10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS

(a) COMMON STOCK

In connection with the Reorganization, the Company issued 23,000 shares of
common stock, $.001 par value per share, to the stockholders of Quality King.
The shares issued in the Reorganization are reflected in the historical
financial statements as issued in the

F-13
77
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

earliest period presented. The Reorganization, including the issuance of common
stock, has been retroactively reflected in these financial statements since the
stockholders of Quality King are also the stockholders of the Company.

(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 4,900
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 3,930 shares of common stock. These options will be granted on the
following terms: incentive and non-qualified stock options to purchase 230
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 and non-qualified stock options to purchase 1,150 shares at an
exercise price 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 2,550 shares at an exercise price $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 $7,650 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 three years ended October 31, 1997, 1998 and 1999 and the three
months ended January 31, 1999 and 2000, two customers accounted for
approximately 36%, 34%, 33%, 34% and 31% of net sales, respectively. These
customers accounted for approximately the same percentage of accounts receivable
for all periods presented, as their sales for these periods.

12. SUBSEQUENT EVENTS

(a) CORPORATE REORGANIZATION

In connection with the Reorganization and the Offering, the Company
declared a dividend to the controlling stockholders of $110,000. The Company
paid the dividend to the controlling stockholders in the form of promissory
notes (the "Notes") [see Note 12(b)]. The Notes mature in 2006 and require the
mandatory prepayment of $60,000 upon the closing of the Offering. The Notes bear
interest at an annual rate of 8 1/2%. Principal and accrued interest will be
paid in quarterly installments commencing in June 2001.

The historical advances from Quality King of $292,994 at January 31, 2000
was based on the difference between the assets and liabilities to third parties.
In connection

F-14
78
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

with the Reorganization, Quality King forgave advances of $7,300, which was
treated as a capital contribution by Quality King.

(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
$186,000 upon the sale of its common stock.

The net proceeds will be used to pay $60,000 of the Notes [see Note 12(a)]
and reduce short-term borrowings assumed from Quality King by $126,000.

In connection with the Reorganization and the Offering, the Company entered
into a loan agreement with a syndicate of lenders. The loan agreement is for
$350,000 and has a term of four and a half years. The loan agreement provides
for borrowings based on 85% of receivables and 65% of inventory, as defined.
Interest accrues at the prime rate or at LIBOR plus a margin of 1.5%. The loan
agreement provides for certain financial ratios, warranties and other covenants.

F-15
79

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.
80

[MAP GRAPHIC]

13,400,000 Shares

QK HEALTHCARE, INC.

COMMON STOCK

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

PROSPECTUS
, 2000

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

LEHMAN BROTHERS
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
81

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................................................... 26,697
Printing and engraving expenses............................ 170,000
Accounting fees and expenses............................... 1,660,000
Legal fees and expenses.................................... 270,000
Blue Sky fees and expenses................................. 4,000
NYSE listing application fee............................... 84,600
Transfer agent fees and expenses........................... 5,000
Directors' and Officers' Insurance Incremental Premium for
Offering................................................. 600,000
Miscellaneous.............................................. 47,770
----------
TOTAL................................................. $2,940,000
==========

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 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
II-1
82

(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 and the Offering, 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 23,000,000 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 and the Offering, we declared a
dividend to our controlling stockholders of $110 million, payable in the form of
promissory notes. The notes require the mandatory prepayment of $60 million upon
the closing of this Offering. 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 3,930,000 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 and non-qualified stock options to purchase 230,000 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 and non-qualified stock options to purchase 1,150,000 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

- Non-qualified stock options to purchase 2,550,000 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
II-2
83

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

*** Re-filed with revisions

II-3
84

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.

II-4
85

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 April 25, 2000.

QK Healthcare, Inc.

By: /s/ MICHAEL W. KATZ
-----------------------------------
Name: Michael W. Katz
Title: Executive Vice President

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 April 25, 2000.

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

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

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

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

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

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

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

II-5
86

[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 January 5, 2000, 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 three years
ended October 31, 1999, 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

January 5, 2000

S-1
87

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
Year ended October 31, 1999..... $ 863,000 $136,000 $ 72,000(b) $-- $1,071,000

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

(a) provision for possible losses.

(b) write off net of $102,000 recovery.

S-2
88

EXHIBIT INDEX

SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------

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

* To be filed by amendment

** Previously filed

*** Re-filed with revisions