QK HEALTHCARE INC, S-1, 1999-10-12

QK HEALTHCARE INC
S-1, 1999-10-12

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 1999

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

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)

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

2060 NINTH AVENUE
RONKONKOMA, NEW YORK 11779
(516) 439-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

MICHAEL W. KATZ
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
QK HEALTHCARE, INC.
2060 NINTH AVENUE
RONKONKOMA, NEW YORK 11779
(516) 439-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

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

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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. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $.001 per share................. $258,750,000 $71,932.50
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</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o).
------------------------

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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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 October 12, 1999

PROSPECTUS

QK HEALTHCARE, INC.

COMMON STOCK

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This is our initial public offering of shares of common stock. We are offering
shares.

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

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public offering price................................. $ $
Underwriting discounts................................ $ $
Proceeds to QK Healthcare, Inc........................ $ $
</TABLE>

We have granted the underwriters a 30-day option to purchase up to
additional shares of common stock on the same terms and conditions as
set forth above solely to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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

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LEHMAN BROTHERS

, 1999
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............. 3
Risk Factors.................... 9
Use of Proceeds................. 16
Dividend Policy................. 16
Capitalization.................. 17
Dilution........................ 18
Selected Historical Financial
Data.......................... 19
Pro Forma Financial
Information................... 21
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 25
</TABLE>

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business........................ 34
Management...................... 42
Related Party Transactions...... 48
Principal Stockholders.......... 50
Description of Capital Stock.... 51
Shares Eligible for Future
Sale.......................... 54
Underwriting.................... 56
Legal Matters................... 58
Experts......................... 58
Where You Can Find More
Information................... 59
Index to Financial Statements... F-1
</TABLE>

ABOUT THIS PROSPECTUS

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.

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 under "Risk Factors" and elsewhere in this prospectus.

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

2
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PROSPECTUS SUMMARY

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

THE COMPANY

We are a national wholesale distributor of selected healthcare products to
retailers, wholesale distributors and pharmacy benefit managers. 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 and resell those products within the traditional
healthcare distribution channels. We carry a focused merchandise inventory of
approximately 2,000 stock keeping units ("SKUs"), unlike traditional wholesale
distributors that generally stock 20,000-25,000 SKUs of pharmaceutical and other
healthcare products. Consistent with our strategy, we offer our customers a
limited range of inventory, delivery and purchasing services 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.

We acquire products from our extensive network of over 300 suppliers,
including most of the major pharmaceutical manufacturers and wholesale
distributors. We primarily stock products that we acquire on favorable terms by
taking advantage of manufacturers' incentive discounts, various market
opportunities and anticipated price increases. We believe that our ability to
commit capital in significant amounts and in short time periods makes us an
important partner to members of our network. Unlike most of our customers who
are limited to specific inventory levels for each product, we can acquire and
hold significant inventory levels of specific products if it is financially
advantageous to do so.

Our purchasing and sales systems, together with our extensive knowledge of
the pharmaceutical industry, are critical parts of our capabilities. Our
experienced buying team relies heavily on our proprietary management information
system that provides real-time decision support in the selection, quantity and
timing of our product purchases. The team utilizes our proprietary management
information system that is based on a system internally-developed by Quality
King over 25 years which was customized to meet the needs of our pharmaceutical
business. Our direct sales force, complemented by our telemarketing activities
and our internet services, ensures effective communication of our product
offerings to our customers. We believe our information system provides our sales
personnel with a competitive advantage in customer interactions by providing
them with
3
<PAGE> 5

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

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

INDUSTRY OVERVIEW

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

- Aging population

- Introduction of new pharmaceuticals

- Cost containment efforts that stress drug therapies

- Pharmaceutical price increases by drug manufacturers.

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

STRATEGY

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

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

- Focus on providing selective lines of products

- Increase our product offerings

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

- Expand our internet and telemarketing marketing sales activities.
4
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HISTORY AND REORGANIZATION

From 1987 until 1999, 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. Quality King
has been owned by the Nussdorf family since its formation in 1961. On
, 1999, Quality King reorganized its businesses, which included
transferring the pharmaceutical business to us, a newly-formed S corporation,
and distributing our stock to the stockholders of Quality King. As a result of
the reorganization, the pharmaceutical business is now conducted independently
from Quality King with our own employees. However, Quality King does provide
computer and warehouse management and consulting services to us pursuant to a
support services agreement.

In connection with the reorganization, $109 million of Quality King's
estimated undistributed S corporation earnings were allocated to us. A
distribution in that amount was paid to our controlling stockholders prior to
this offering in the form of promissory notes. A portion of the proceeds of this
offering will be used to pay $95 million of these notes.

Our offices are located at 2060 Ninth Avenue, Ronkonkoma, New York 11779.
Our phone number is (516) 439-2000.

THE OFFERING

Common stock offered............ shares

Common stock outstanding after
the offering.................... shares

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

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

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

- shares underlying options outstanding at the closing of
this offering at a weighted average exercise price of $ per share

- shares available for future grant under our option plan

- shares subject to a 30-day option granted to the
underwriters to cover over-allotments, if any.
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table sets forth a summary of selected historical and pro
forma financial data for each of the four years in the period ended October 31,
1998 and for the nine months ended July 31, 1998 and 1999. The summary
historical financial data have been prepared from the historical accounting
records of Quality King. Although we were a significant division of Quality
King, separate financial statements were not prepared in prior periods. In
connection with the preparation of our financial statements, as described in
Note 1(a) of the Notes to the Financial Statements, all balance sheet and income
statement accounts that were directly attributable to our pharmaceutical
business were identified and carved-out of the books and records of Quality
King. 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 attributable to any specific division of Quality
King. A portion of these expenses was allocated to us based on assumptions and
methods that we consider reasonable and appropriate. The procedures employed
utilized various allocation bases including number of transactions processed,
theoretical delivery miles and warehouse square footage.

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

The summary historical and pro forma financial data should be read 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 SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
TWELVE MONTHS ENDED OCTOBER 31, JULY 31,
----------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
----------- ----------- -------- -------- ----------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales, net............................ $168,983 $328,307 $552,488 $772,359 $568,062 $755,088
-------- -------- -------- -------- -------- --------
Gross profit.......................... 6,953 16,767 35,987 45,392 30,394 53,577
-------- -------- -------- -------- -------- --------
Operating expenses:
Warehouse and delivery.............. 945 1,832 3,039 4,069 2,976 4,162
Selling, general and
administrative................... 2,208 10,376(3) 6,762 7,187 5,849 7,718
-------- -------- -------- -------- -------- --------
Total operating expenses......... 3,153 12,208 9,801 11,256 8,825 11,880
-------- -------- -------- -------- -------- --------
Income from operations................ 3,800 4,559 26,186 34,136 21,569 41,697
Interest expense -- related
party(1)............................ 3,937 7,649 12,984 17,370 12,451 15,300
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes..... (137) (3,090) 13,202 16,766 9,118 26,397
Income taxes (benefit)(2)............. (2) (53) 224 285 155 449
-------- -------- -------- -------- -------- --------
Net income (loss)..................... $ (135) $ (3,037) $ 12,978 $ 16,481 $ 8,963 $ 25,948
======== ======== ======== ======== ======== ========
Pro forma for change in tax status:
Historical income (loss) before
income taxes..................... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 9,118 $ 26,397
Pro forma income taxes
(benefit)(4)..................... (15) (1,194) 5,312 6,736 3,672 10,573
-------- -------- -------- -------- -------- --------
Pro forma net income (loss)......... $ (122) $ (1,896) $ 7,890 $ 10,030 $ 5,446 $ 15,824
======== ======== ======== ======== ======== ========
Pro forma basic earnings (loss)
per share...........................
======== ======== ======== ======== ======== ========
Weighted average number of shares
outstanding.........................
======== ======== ======== ======== ======== ========
Pro forma for the reorganization and
the offering(5):
Pro forma net income................ $ 15,457 $ 19,584
========
Pro forma basic earnings per
share............................
Pro forma weighted average number of
shares outstanding...............
OTHER DATA(6):
Gross margin.......................... 4.1% 5.1% 6.5% 5.9% 5.4% 7.1%
Income from operations margin......... 2.2% 1.4% 4.7% 4.4% 3.8% 5.5%
</TABLE>

<TABLE>
<CAPTION>
JULY 31, 1999
--------------
PRO FORMA,
AS ADJUSTED(7)
--------------
<S> <C>
BALANCE SHEET DATA:
Total assets................................................ $337,985
Advances from Quality King -- related party................. $ 0
Total debt.................................................. $161,471
Stockholders' equity........................................ $115,000
</TABLE>

7
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(IN THOUSANDS, EXCEPT SHARE DATA AND RATIOS)
- -------------------------

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

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

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

(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.

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

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

(7) Gives effect to the following transactions:

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

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

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

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

- the refinancing of the balance of the short-term borrowings assumed from
Quality King with borrowings under our Credit Facility.
8
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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.

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

The pharmaceutical distribution business is very competitive. We compete
with discount wholesale distributors, traditional wholesale distributors and
manufacturers on the basis of price and product availability. Some 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, we
may be required to lower our prices, thereby adversely affecting our financial
results. The development of alternative distribution channels, such as
internet-based electronic commerce, could also have a material adverse effect on
our markets and, as a result, our operating performance.

OUR SUCCESS DEPENDS UPON RETAINING THE PRINCIPAL MEMBERS OF OUR MANAGEMENT

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 have a material adverse effect on our business. Except for
Mr. Sosnowik, who has an employment agreement which expires on ,
2003, we do not have employment agreements with any of our executive officers.
We also do not have life insurance policies on the lives of any members of our
management team.

OUR SUCCESS DEPENDS UPON THE AVAILABILITY OF FUNDS UNDER OUR BANK FINANCING

We have had negative cash flow from operations of $10.3 million, $75.9
million and $8.3 million for the years ended October 31, 1997 and 1998 and the
nine months ended July 31, 1999, respectively. We expect our cash flow from
operations to continue to be negative for the foreseeable future. As a result,
we are dependent on our $ million revolving line of credit (the "Credit
Facility") for cash to fund our operations. As of , 1999, on a pro
forma basis giving effect to this offering, the application of its net proceeds
and other related transactions, we would have had approximately $ million
outstanding under the Credit Facility and approximately $ of additional
funds available to us under the Credit Facility. Borrowings under the Credit
Facility are subject to the satisfaction of various conditions, including the
absence of a material adverse change in our business. When the Credit Facility
expires in , we will need to refinance the Credit Facility and/or
raise additional funds. If funds from these sources are unavailable or not
available in sufficient amounts or on acceptable terms, we may be required to
significantly curtail our operations.

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OUR CREDIT FACILITY IMPOSES VARIOUS RESTRICTIONS WHICH AFFECT OUR OPERATIONS AND
LIMIT OUR ABILITY TO PAY DIVIDENDS

The Credit Facility contains numerous financial and operating covenants
that limit our discretion with respect to business matters. These covenants
place significant restrictions on, among other things, our ability to incur
additional indebtedness, to pay dividends and other distributions, to repay
other obligations, to enter into sale and leaseback transactions, 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 Credit Facility also requires us to meet various financial ratios and
tests. Our ability to comply with these and other provisions may be affected by
changes in economic or business conditions or other events beyond our control. A
failure to comply with any of these ratios and tests could result in
acceleration of indebtedness under the Credit Facility as well as the
acceleration of any other outstanding debt. If outstanding debt were to be
accelerated, our assets may not be sufficient to repay in full such
indebtedness. Our obligations under the Credit Facility are collateralized by a
first priority pledge of and security interest in substantially all of our
assets.

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

Our balance sheet is highly leveraged with approximately $211 million in
aggregate short-term obligations and $115 million of stockholders' equity at
July 31, 1999 on a pro forma basis giving effect to this offering, the
application of its net proceeds and other related transactions. We may incur
significant additional indebtedness under the Credit Facility. Our leverage
could negatively effect our operations in a number of ways, including:

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

- A large part of our cash flow must be dedicated to interest payments on
our debt, which reduces our funds available for other corporate purposes

- Our debt is at variable or floating interest rates 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 PROFITABILITY

During the nine months ended July 31, 1999, our largest 20 customers
accounted for approximately 83% of our net sales and one customer, McKesson HBOC
Corporation, accounted for approximately 24% of our net sales. As is customary
in our industry, we generally do not have long-term contracts with our
customers. Significant declines in the level of purchases by one or more of
these customers or the loss of one of these customers through industry
consolidation could have a material adverse effect on our business, financial
condition or results of operations. Also, an adverse change in the financial
condition or bankruptcy of any of these customers, including an adverse change
as a result

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of a change in governmental or private reimbursement programs, could have a
material adverse effect on our business, financial condition or results of
operations.

OUR SUCCESS DEPENDS, IN PART, ON OUR MANAGEMENT INFORMATION SYSTEM

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.
The ability to manage our inventories and accounts receivable collections, to
purchase, sell and ship on an efficient and timely basis and to maintain a
cost-efficient operation is dependent upon the quality and utilization of the
information generated by our management information system. We cannot be sure
that our management information system will be sufficient to sustain our present
operations and our anticipated growth for the foreseeable future. If our system
is not sufficient, our business, financial condition or results of operations
could be materially adversely affected.

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

We have recently experienced a period of rapid growth and it is our
objective to continue that growth. This growth has placed, and will continue to
place, strains on our management, operations and systems. 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. Failure
to manage our growth effectively could have a material adverse effect on our
business, financial condition or results of operations.

RECENT OPTION GRANTS WILL NEGATIVELY IMPACT FUTURE EARNINGS

Upon consummation of this offering, options to purchase up to shares
of our common stock will be granted to members of senior management for past
services. These options will have an exercise price below the initial offering
price of our common stock being sold in this offering. As a result, we will be
required to take a non-cash charge against our earnings in the first quarter
following this offering in an amount equal to the excess of the initial offering
price over the exercise price of the options. We expect the amount of this
non-cash charge to be significant.

OUR RELATIONSHIP WITH QUALITY KING POSES RISKS

Three of our directors, including our Chairman of the Board, are executive
officers and/or directors of Quality King. These directors and related entities
are the controlling stockholders of both our company and Quality King. We
currently have, and will continue to have, a variety of contractual
relationships with Quality King, including an indemnification, noncompetition
and tax cooperation agreement by which we and Quality King indemnify and hold
harmless each other from various obligations and contingent liabilities, and a
support services agreement relating to computer and warehouse management and
consulting services Quality King provides to us. 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.

11
<PAGE> 13

Our Chairman of the Board intends to allocate his business time between
Quality King and us. In addition, under the support services agreement, 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. Therefore, 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.

Under the 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 have a material adverse
effect on our business, financial condition or results of operations.

WE DEPEND ON THIRD-PARTY SHIPPERS FOR OUR SUCCESS

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 a material adverse effect on our business, financial condition or
results of operations.

THE PHARMACEUTICAL WHOLESALE DISTRIBUTION INDUSTRY IS SUBJECT TO MARGIN
PRESSURES

Like most wholesale distributors, our gross margins are often small. As a
result, we are vulnerable to increases in our fixed operating costs and
decreases in our net sales, which could result from industry-wide price
decreases, customer losses or governmental regulation such as imposed price
ceilings. In addition, a cessation or substantial decrease in the supply of
products could have a material adverse effect on our business, financial
condition or results of operations.

IF WE ARE UNABLE TO EFFECTIVELY ADAPT TO CHANGES IN THE HEALTHCARE INDUSTRY, OUR
CONTINUED SUCCESS COULD BE MATERIALLY ADVERSELY AFFECTED

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. Our inability to
react effectively to these and other changes in the healthcare industry or the
inability of our customers or suppliers to react effectively to these and other
changes could adversely affect our business, financial condition or results of
operations. We cannot predict whether any healthcare reform efforts will be
enacted and what effect any such reforms may have on us, our customers and
suppliers.

OUR CONTROLLING STOCKHOLDERS CAN EXERCISE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS

After this offering, Glenn, Stephen and Arlene Nussdorf will beneficially
own in the aggregate approximately % 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.

12
<PAGE> 14

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 could result in penalties such as fines,
restrictions on operations or closures, which could have a material adverse
effect on our business, financial condition or results of operations.

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

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

Our internal year 2000 compliance review focused on reviewing our internal
computer information and security systems for year 2000 compliance, and
developing and implementing remediation programs to resolve year 2000 issues in
a timely manner. We also contacted most of our third party suppliers and
customers and requested their written assurances that their systems are year
2000 compliant. To date, our aggregate year 2000 expenditures have been
primarily driven by the cost of conducting the year 2000 compliance review. The
cost of our year 2000 preparation was not material to our results of operations.

Any failure by our suppliers to correct their year 2000 problems could
result in an interruption in, or a failure of, our normal business activities
or operations. These interruptions and failures could damage our relationships
with our customers. Due to the general uncertainty inherent in the year 2000
problem resulting from the readiness of third-parties, we are unable to
determine at this time whether any year 2000 failures will harm us.

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

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

Our success depends, in part, upon our ability to provide prompt, accurate
and complete service to our customers on a price-competitive basis. Any
continuing disruption in either our computer system or our telephone system
could adversely affect our ability to receive and process customer orders and
ship products on a timely basis. Any such disruption could adversely affect our
relations with our customers, potentially resulting in reductions in orders from
customers or loss of customers and could have a material adverse effect on our
business, financial condition or results of operations.

13
<PAGE> 15

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

After this offering, our controlling stockholders will own beneficially
approximately % of the outstanding shares of our common stock ( % if
the underwriters' over-allotment option 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. Sales of substantial amounts of common
stock, or the perception that such sales could occur at the expiration of such
360-day period, may materially adversely affect the prevailing market price of
our common stock from time to time.

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 pro forma net tangible book value per share of our common stock. As a
result, purchasers of the common stock pursuant to this offering will experience
immediate and substantial dilution in the pro forma net tangible book value per
share of common stock from the initial public offering price. The pro forma net
tangible book value dilution to new investors in the offering will be $ per
share at an assumed initial public offering price of $ per share. See
"Dilution."

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

Prior to this offering, there has not been a public market for our common
stock. We will make an application for listing the common stock on the New York
Stock Exchange, but we cannot predict the extent to which a trading market will
develop or how liquid that market might become. The initial public offering
price will be determined by negotiations between the representative of the
underwriters and us and may not be indicative of prices that will prevail in the
trading market.

The market price for shares of our common stock may be volatile. The 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

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

In recent years the stock market has experienced significant price and volume
fluctuations which are often unrelated to the operating performance of specific
companies.

14
<PAGE> 16

ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BY-LAWS AND CREDIT
FACILITY COULD DISCOURAGE OR PREVENT AN ACQUISITION OF OUR COMPANY

Provisions of our certificate of incorporation and by-laws may inhibit
changes of control that are not approved by our board of directors. These
include provisions classifying our board of directors and requiring advance
notice for nomination of directors and stockholder proposals. In addition, as a
Delaware corporation, we are subject to Section 203 of the Delaware General
Corporation Law which generally prevents a stockholder owning 15% or more of a
corporation's outstanding voting stock from engaging in a business combination
for three years following the date that person acquired their 15% or greater
interest unless certain conditions are satisfied. Our certificate of
incorporation and by-law provisions and Delaware law could diminish the
opportunities for a stockholder to participate in 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. In addition, a change in control of our company will
constitute an event of default under our Credit Facility. The provisions of our
certificate of incorporation and by-laws, the default provisions of our Credit
Facility, and 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.

15
<PAGE> 17

USE OF PROCEEDS

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

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

- The balance to reduce our short-term borrowings.

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

We assumed a portion of Quality King's short-term borrowings under its
revolving credit facility in an amount equal to the advances to us from Quality
King. We will repay $ 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 Credit Facility.
The short-term borrowings assumed from Quality King bear interest at either
LIBOR plus 1 3/8% or the prime rate (approximately 6.7% as of July 31, 1999),
which is the rate under the Quality King revolving credit facility. Amounts
outstanding under Quality King's revolving credit facility are due June 30,
2001.

The amount of our short-term borrowings will be determined at the closing
of this offering and will be 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 prior to the closing of this offering will
be $ .

DIVIDEND POLICY

We expect to use $95 million of the net proceeds from this offering to pay
a portion of the Notes issued to our controlling stockholders in connection with
the $109 million dividend which was declared on , 1999 to distribute
the portion of Quality King's undistributed S corporation earnings that were
allocated to us. Other than the $109 million dividend to our controlling
stockholders, we have not made any dividends or distributions 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 be dependent 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 Credit Facility.

16
<PAGE> 18

CAPITALIZATION

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

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

- the capital contribution of $14 million by Quality King

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

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

- the refinancing of the balance of the short-term borrowings assumed from
Quality King with borrowings under our Credit Facility.

This table should be read 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.

<TABLE>
<CAPTION>
, 1999
-----------------------
PRO FORMA,
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Advances from Quality King............................... $ $
Short-term borrowings(1).................................
Notes payable to stockholders(2).........................
Stockholders' equity.....................................
-------- --------
Total capitalization................................... $ $
======== ========
</TABLE>

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

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

The amount of our short-term borrowings will be determined at the closing of
this offering and will be 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 prior to our closing will be
$ .

(2) Consists of promissory notes issued to our controlling stockholders in
connection with the S corporation distribution made prior to this offering.
The Notes bear interest at LIBOR plus 1 1/2% payable quarterly over seven
years. The Notes require a mandatory prepayment of $95 million upon
consummation of this offering.

17
<PAGE> 19

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 $ per share initial offering price of the
common stock in this offering and the net tangible book value of common stock
immediately after completing the offering. Dilution in this case results from
the fact that the per share offering price of the common stock its substantially
in excess of the book value per share attributable to the existing stockholders
for the presently outstanding stock.

On , 1999, our pro forma net tangible book value, which
reflects the Reorganization and the related transactions discussed in "Pro Forma
Financial Information" other than this offering, was approximately $ and
the pro forma per share net tangible book value based on shares of common
stock was approximately $ per share.

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

<TABLE>
<S> <C>
Assumed initial public offering price per share of common
stock..................................................... $
Pro forma net tangible book value per share of common stock
before the offering....................................... $
Increase in pro forma net tangible book value per share of
common stock attributable to investors in the offering....
Pro forma net tangible book value per share of common stock
after the offering(1).....................................
Dilution per share to the new investors.....................
</TABLE>

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

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

The foregoing discussion and table do not give effect to shares of common
stock reserved for issuance upon the exercise of options to be granted in the
future under our stock option plan. Options to purchase shares will be
granted prior to consummation of the offering. See "Management -- Stock Option
Plan."

18
<PAGE> 20

SELECTED HISTORICAL FINANCIAL DATA

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

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

The historical financial data have been prepared from the historical
accounting records of Quality King. Although we were a significant division of
Quality King, separate financial statements were not prepared in prior periods.
In connection with the preparation of our financial statements, as described in
Note 1(a) of the Notes to the Financial Statements, all balance sheet and income
statement accounts that were directly attributable to our pharmaceutical
business were identified and carved-out of the books and records of Quality
King. 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 attributable to any specific division of Quality
King. A portion of these expenses was allocated to us based on assumptions and
methods that we consider reasonable and appropriate. The procedures employed
utilized various allocation bases including number of transactions processed,
theoretical delivery miles and warehouse square footage.

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

The selected financial data presented below should be read 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.

19
<PAGE> 21

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
TWELVE MONTHS ENDED OCTOBER 31, JULY 31,
----------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
----------- ----------- -------- -------- ----------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales, net............................. $168,983 $328,307 $552,488 $772,359 $568,062 $755,088
-------- -------- -------- -------- -------- --------
Gross profit........................... 6,953 16,767 35,987 45,392 30,394 53,577
-------- -------- -------- -------- -------- --------
Operating expenses:
Warehouse and delivery............... 945 1,832 3,039 4,069 2,976 4,162
Selling, general and
administrative.................... 2,208 10,376(3) 6,762 7,187 5,849 7,718
-------- -------- -------- -------- -------- --------
Total operating expenses.......... 3,153 12,208 9,801 11,256 8,825 11,880
-------- -------- -------- -------- -------- --------
Income from operations................. 3,800 4,559 26,186 34,136 21,569 41,697
Interest expense-related party(1)...... 3,937 7,649 12,984 17,370 12,451 15,300
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes...... (137) (3,090) 13,202 16,766 9,118 26,397
Income taxes (benefit)(2).............. (2) (53) 224 285 155 449
-------- -------- -------- -------- -------- --------
Net income (loss)...................... $ (135) $ (3,037) $ 12,978 $ 16,481 $ 8,963 $ 25,948
======== ======== ======== ======== ======== ========
Pro forma for change in tax status:
Historical income (loss) before
income taxes...................... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 9,118 $ 26,397
Pro forma income taxes
(benefit)(4)...................... (15) (1,194) 5,312 6,736 3,672 10,573
-------- -------- -------- -------- -------- --------
Pro forma net income (loss).......... $ (122) $ (1,896) $ 7,890 $ 10,030 $ 5,446 $ 15,824
======== ======== ======== ======== ======== ========
Pro forma basic earnings (loss) per
share.............................
======== ======== ======== ======== ======== ========
Weighted average number of shares
outstanding.......................
======== ======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
----------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
----------- ----------- -------- -------- ----------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets......................... $67,033 $140,198 $170,922 $274,890 $262,138 $337,747
Total assets........................... $67,033 $140,198 $170,922 $274,890 $262,138 $337,985
Advances from Quality King -- related
party................................ $53,854 $126,229 $149,547 $241,933 $227,566 $276,471
Stockholders' equity...................
</TABLE>

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

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

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

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

20
<PAGE> 22

PRO FORMA FINANCIAL INFORMATION

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

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

- the capital contribution of $14 million by Quality King

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

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

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

- the refinancing of the balance of the short-term borrowings assumed from
Quality King with borrowings under our Credit Facility.

The accompanying pro forma condensed balance sheet gives effect to these
transactions as if they had occurred at July 31, 1999. The accompanying pro
forma condensed statements of operations for the nine months ended July 31, 1999
and the year ended October 31, 1998 give effect to these transactions as if they
had occurred at November 1, 1997. See "Use of Proceeds." The pro forma financial
information does not reflect the non-recurring non-cash management compensation
charge relating to the non-qualified options granted to our senior managers for
past services. This charge will be recorded in the first quarter ending
immediately after this offering.

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.
This pro forma information should be read 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.

21
<PAGE> 23

QK HEALTHCARE, INC.

PRO FORMA CONDENSED BALANCE SHEET
JULY 31, 1999
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------- PRO FORMA,
HISTORICAL REORGANIZATION OFFERING AS ADJUSTED
---------- -------------- --------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current
Cash..................................... $ -- $ 210,000(4) $ --
(210,000)(5)
Other current............................ 337,747 337,747
-------- ---------
Total current.............................. 337,747 337,747
Other non-current assets................... 238 238
-------- ---------
$337,985 $ 337,985
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Advances from Quality King -- related
party................................. $276,471 $ (14,000)(2) $ --
(262,471)(3)
Short-term borrowings.................... 262,471(3) (115,000)(5) 147,471(6)
Notes payable to stockholders............ -- 97,000(1) (95,000)(5) 2,000
Other current liabilities................ 61,514 61,514
-------- ---------
Total current liabilities.................. 337,985 210,985
-------- ---------
Long-term liabilities
Notes payable to stockholders............ -- 12,000(1) 12,000
-------- ---------
337,985 222,985
---------
STOCKHOLDERS' EQUITY
Common stock.............................
Additional paid-in capital............... -- 14,000(2) 210,000(4) 224,000
Retained earnings (deficit).............. -- (109,000)(1) (109,000)
-------- ---------
Total stockholders' equity................. -- 115,000
-------- ---------
$337,985 $ 337,985
======== =========
</TABLE>

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

(1) Reflects the declaration of the $109,000 dividend payable to our controlling
stockholders.

(2) Reflects a $14,000 capital contribution by Quality King.

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

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

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

(6) Upon completion of this offering, we will enter into a new credit facility
and use the initial borrowings under that facility to repay the balance of
the short-term borrowings assumed from Quality King.

22
<PAGE> 24

QK HEALTHCARE, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA,
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Sales, net............................................... $755,088 $755,088
-------- --------
Gross profit............................................. 53,577 53,577
Operating expenses....................................... 11,880 11,880
-------- --------
Income from operations................................... 41,697 41,697
Interest expense......................................... 15,300 9,090(1)(2)
-------- --------
Income before income taxes............................... 26,397 32,607
Income taxes............................................. 449 554
-------- --------
Net income............................................... $ 25,948 $ 32,053
======== ========
Pro forma:
Income before income taxes............................. $ 26,397 $ 32,607
Pro forma income taxes(3).............................. 10,573 13,023
-------- --------
Pro forma net income................................... $ 15,824 $ 19,584
======== ========
Pro forma basic earnings per share..................... $
========
Pro forma weighted average number of shares
outstanding(4)......................................
========
</TABLE>

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

(1) Adjusted to give effect to the interest savings from the use of $115,000 of
the net proceeds from this offering to reduce the advances from Quality
King. In connection with the Reorganization, we will assume a portion of the
Quality King indebtedness representing such advances. Simultaneously with
the closing of this offering, we will refinance such indebtedness with
borrowings under the Credit Facility. The interest expense reduction was
calculated using Quality King's effective interest rate of 7.2%. The
interest rate of the Credit Facility is substantially the same as the rate
under the Quality King credit agreement.

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

(3) 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.

(4) Adjusted to give effect to the sale of shares of common
stock.

23
<PAGE> 25

QK HEALTHCARE, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA,
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Sales, net............................................... $772,359 $772,359
-------- --------
Gross profit............................................. 45,392 45,392
Operating expenses....................................... 11,256 11,256
-------- --------
Income from operations................................... 34,136 34,136
Interest expense......................................... 17,370 8,400(1)(2)
-------- --------
Income before provision for income taxes................. 16,766 25,736
Provision for income taxes............................... 285 438
-------- --------
Net income............................................... $ 16,481 $ 25,298
======== ========
Pro forma:
Income before income taxes............................. $ 16,766 $ 25,736
Pro forma income taxes(3).............................. 6,736 10,279
-------- --------
Pro forma net income................................... $ 10,030 $ 15,457
======== ========
Pro forma basic earnings per share..................... $
========
Pro forma weighted average number of shares
outstanding(4)......................................
========
</TABLE>

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

(1) Adjusted to give effect to the interest savings from the use of $115,000 of
the net proceeds from this offering to reduce the advances from Quality
King. In connection with the Reorganization, we will assume a portion of the
Quality King indebtedness representing such advances. Simultaneously with
the closing of this offering we will refinance such indebtedness with
borrowings under the Credit Facility. The interest expense reduction was
calculated using Quality King's effective interest rate of 7.8%. The
interest rate of the Credit Facility is substantially the same as the rate
under the Quality King credit agreement.

(4) Adjusted to give effect to the sale of shares of common
stock.

24
<PAGE> 26

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

OVERVIEW

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

HISTORY AND REORGANIZATION

In 1961 Bernard and Ruth Nussdorf formed Quality King Distributors, Inc.
Prior to the offering, Quality King was a promotional wholesale distributor with
four separate divisions: hair care products; groceries; health and beauty care
products; and pharmaceuticals. The pharmaceutical business was formed 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, the pharmaceutical business is now conducted independently from
Quality King with our own employees. However, Quality King does provide computer
and warehouse management and consulting services to us pursuant to a support
services agreement. See "Related Party Transactions -- Agreements with Quality
King" for a discussion of this agreement.

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

In connection with the Reorganization, $109 million of the estimated
undistributed S corporation earnings of Quality King were allocated to QK
Healthcare, Inc., which is

25
<PAGE> 27

also an S corporation. This $109 million was based on (i) approximately $75.6
million, representing all of the previously earned and undistributed S
corporation earnings allocated to us through October 31, 1998, and (ii) an
amount (estimated to be approximately $33.4 million) equal to the undistributed
S corporation earnings allocated to us for the period from November 1, 1998
through the day preceding the closing date of the offering. On ,
1999, we declared a distribution (the "Distribution") to our existing
stockholders in the aggregate amount of $109 million. The Distribution was paid
to our existing stockholders by delivery of promissory notes in the aggregate
amount of the Distribution (the "Notes"). The Notes mature on ,
2006 and require the mandatory prepayment of $95 million upon the closing of
this offering. The Notes bear interest at an annual rate of LIBOR plus 1 1/2%. A
portion of the proceeds from this offering will be used to pay $95 million of
these Notes. For more information relating to the Distribution, see Note 12(a)
of the Notes to the Financial Statements.

IMPACT OF THE REORGANIZATION AND OFFERING

Upon consummation of this offering, options to purchase up to
shares will be granted to members of senior management for past
services. These options will vest 100% upon grant and will have an exercise
price $ below the initial public offering price of our stock being sold
in this offering. As a result, we will be required to record a non-cash charge
against earnings in an amount equal to the excess of the initial public offering
price over the exercise price of the options. We expect the amount of the
non-cash charge to be significant.

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

26
<PAGE> 28

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------------------- --------------------
1996 1997 1998 1998 1999
----------- ----- ----- ----------- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Gross profit................. 5.1 6.5 5.9 5.4 7.1
----- ----- ----- ----- -----
Operating expenses:
Warehouse and delivery..... 0.6 0.6 0.6 0.6 0.6
Selling, general and
administrative.......... 3.1 1.2 0.9 1.0 1.0
----- ----- ----- ----- -----
Total operating
expenses.............. 3.7 1.8 1.5 1.6 1.6
----- ----- ----- ----- -----
Income from operations....... 1.4 4.7 4.4 3.8 5.5
Interest expense -- related
party...................... 2.3 2.3 2.3 2.2 2.0
----- ----- ----- ----- -----
Income (loss) before income
taxes...................... (0.9) 2.4 2.1 1.6 3.5
Income taxes (benefit)....... 0.0 0.0 0.0 0.0 0.1
----- ----- ----- ----- -----
Net income (loss)............ (0.9)% 2.4% 2.1% 1.6% 3.4%
===== ===== ===== ===== =====
Pro forma for change in tax
status:
Historical income (loss)
before income taxes..... (0.9)% 2.4% 2.1% 1.6% 3.5%
Pro forma income taxes
(benefit)............... (0.4)% 1.0% 0.9% 0.7% 1.4%
----- ----- ----- ----- -----
Pro forma net income
(loss).................. (0.5)% 1.4% 1.2% 0.9% 2.1%
===== ===== ===== ===== =====
</TABLE>

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

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

GROSS PROFIT. Gross profit increased $23.2 million or 76% from $30.4
million for the nine months ended July 31, 1998 to $53.6 million for the nine
months ended July 31, 1999. Gross profit as a percentage of net sales increased
from 5.4% for the nine months ended July 31, 1998 to 7.1% for the nine months
ended July 31, 1999. The increase in gross profit was the result of the
increased sales volumes, lower inventory costs due to an

27
<PAGE> 29

expansion in our supplier base which led to improved pricing opportunities, and
a more profitable product mix.

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

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

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

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

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

NET SALES. Net sales increased $219.9 million or 40% from $552.5 million
for the year ended October 31, 1997 to $772.4 million for the year ended October
31, 1998. The increase was primarily attributable to the expansion of our
product offerings, increased volumes on our existing products and the expansion
of our customer base. 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.

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

28
<PAGE> 30

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

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

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

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

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

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

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

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

29
<PAGE> 31

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Our principal capital requirements have been to fund working capital needs
to support internal growth. Due to our rapid growth, we have had negative cash
flow from operations of $10.3 million, $75.9 million and $8.3 million for the
years ended October 31, 1997 and 1998 and the nine months ended July 31, 1999,
respectively. We expect our cash flow from operations to continue to be negative
for the foreseeable future.

Our principal working capital needs are for inventories and accounts
receivable. We sell inventory to our customers on various payment terms. This
requires significant working capital to finance inventory purchases and carry
the accounts receivable. Although we monitor closely the creditworthiness of our
major customers, there can be no assurance that we will not incur some
collection losses on major customer accounts receivable in the future.

30
<PAGE> 32

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED OCTOBER 31, JULY 31,
------------------------ -----------------------
1997 1998 1998 1999
---------- ---------- ----------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Data:
Net sales...................... $552,488 $772,359 $568,062 $755,088
Net cash used in operating
activities.................. 10,339 75,906 69,057 8,277
Balance Sheet data (at period
end):
Accounts receivable............ 49,159 83,937 77,646 83,917
Inventories.................... 120,721 189,703 183,473 249,918
Accounts payable............... 19,999 31,561 33,394 58,742
Advances from Quality King..... 149,547 241,933 227,566 276,471
</TABLE>

CAPITAL RESOURCES

Historically, we have financed our operations through advances from Quality
King. In connection with the Reorganization, we assumed a portion of Quality
King's short-term borrowings under its revolving credit facility in an amount
equal to the advances to us from Quality King. We will repay $ 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 Credit Facility.

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

31
<PAGE> 33

We intend to use the proceeds of this offering

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

- to pay a portion of the short-term borrowings we assumed from Quality
King in connection with the Reorganization.

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

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

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

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

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

YEAR 2000 COMPLIANCE

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

32
<PAGE> 34

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

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

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market
rates and prices, such as commodity prices, foreign currency exchange and
interest rates. We are not exposed to market risks from changes in commodity
prices or foreign currency exchange rates. We do not hold derivative financial
instruments nor do we hold securities for trading or speculative purposes. We
are exposed to risk from changes in interest rates from borrowings under our
variable rate Credit Facility. If the outstanding balance at July 31, 1999 of
$276 million was the average balance for the following twelve month period and
we experienced a 1% increase in average interest rates, the interest expense for
that period would have increased by $2.8 million. Under our current policies, we
do not believe it is necessary to hedge our exposure against potential future
interest rate increases.

33
<PAGE> 35

BUSINESS

GENERAL

We are a national wholesale distributor of selected healthcare products to
retailers, wholesale distributors and pharmacy benefit managers ("PBMs"). 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 and resell those products within the traditional
healthcare distribution channels. We carry a focused merchandise inventory of
approximately 2,000 SKUs, unlike traditional wholesale distributors that
generally stock 20,000 - 25,000 SKUs 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. Pharmaceuticals have grown from
8.6% to 10.0% of overall healthcare costs from 1990 to 1997. According to the
U.S. Health Care Financing Administration, 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. The factors causing this growth include the
following:

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

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

- 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

34
<PAGE> 36

to have a beneficial impact on overall healthcare costs by reducing
expensive surgeries and prolonged hospital stays.

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

PHARMACEUTICAL REIMBURSEMENT ENVIRONMENT. Government and private payors
are facing the challenges of controlling healthcare spending in the face of
rising healthcare costs and increased spending on pharmaceuticals. In addition,
the influence of third-party payors upon pharmaceutical spending has increased
as the percentage of retail prescriptions paid for by them has increased from
49.5% in 1993 to 70.9% in 1997. 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 1994 to 1997, the average
gross margin received by pharmaceutical retailers from third-party payor sales
decreased from 21% to 18%. The rapid growth of mail-order pharmacies has caused
additional pricing pressure. From 1993 to 1997, mail-order pharmaceutical sales
increased at a compound annual growth rate of 20.6% from $4.4 billion to $9.3
billion.

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

PHARMACEUTICAL DISTRIBUTION CHAIN. The changing reimbursement environment
together with the rapid growth of the pharmaceutical industry has led to
increased competition among the principal participants in the pharmaceutical
distribution chain -- pharmaceutical retailers, wholesalers and manufacturers.
This has led these participants to search 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

35
<PAGE> 37

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 56.3% of the approximately $88 billion of prescription drug
sales for the year ended December 31, 1997. Manufacturers actively seek
additional wholesale relationships to increase their sales and to manage
their inventory levels.

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

STRATEGY

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

- 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, biological products
and medical/surgical 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

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<PAGE> 38

business beyond our existing customer base of the major retail drugstore
chains, wholesalers, grocery chains and mass merchandisers, and PBMs. 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 which was customized to meet the needs of our pharmaceutical
business. Our customized system provides real-time decision support to assist in
the selection, quantity and timing of our purchases by supplying the following
information to our experienced buying team:

- the historical sales and inventory patterns of our customers

- current market prices

- general supply information at various price levels

- expectations with respect to price increases

- expected carrying times and carrying costs.

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

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 and delivery practices

- our large warehouse capacity.

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<PAGE> 39

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

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

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

Internal marketing programs are designed to give our customers access to
manufacturers' special price and promotional offerings to enable them to better
plan inventory investments. Information on manufacturers' promotional programs
is disseminated to our direct sales representatives to give them a competitive
advantage in customer interactions.

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

CUSTOMER RELATIONSHIPS. We strive to be a valued supplier to our
customers. Our fulfillment rate for the nine months ended July 31, 1999 was in
excess of 99.5%. We currently sell to over 300 customers, including retail
drugstore chains, traditional wholesale distributors, grocery chains and mass
merchandisers, and PBMs. 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 sets forth our net sales and sales mix by customer
category for the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1998 JULY 31, 1999
---------------- ----------------
NET SALES % NET SALES %
--------- --- --------- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Retail Chains............................... $349.1 45% $332.4 44%
Distributors................................ 328.7 43 284.6 38
PBMs and other.............................. 94.6 12 138.1 18
------ --- ------ ---
Total............................. $772.4 100% $755.1 100%
====== === ====== ===
</TABLE>

During the year ended October 31, 1998 and the nine months ended July 31,
1999, our 20 largest customers accounted for approximately 91% and 83%,
respectively, of our net sales. McKesson HBOC Corporation, our largest customer
during these past two fiscal years, accounted for approximately 25% of our net
sales in the year ended October 31,

38
<PAGE> 40

1998 and approximately 24% in the nine months ended July 31, 1999. We believe
that our 20 largest customers purchase less than 1% of their total purchases
from us.

PRODUCTS

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

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

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1998 JULY 31, 1999
---------------- ----------------
NET SALES % NET SALES %
--------- --- --------- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Branded..................................... $720.3 93% $702.3 93%
Generic..................................... 46.5 6 40.8 5
Medical/surgical and other.................. 5.6 1 12.0 2
------ --- ------ ---
Total............................. $772.4 100% $755.1 100%
====== === ====== ===
</TABLE>

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. Most of our products are shipped 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 the Nussdorf
family. 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

39
<PAGE> 41

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, satellite fleet communications, and general ledger. 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 ANSIX12 EDI files.

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

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

COMPETITION

Our business is highly competitive. Our principal competitors include
national and regional wholesale distributors and manufacturers, many of which
have or may obtain significantly greater financial and marketing resources than
us. The five largest national pharmaceutical wholesale distributors are McKesson
HBOC 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 of
1987, including specific

40
<PAGE> 42

labeling, packaging and recordkeeping requirements and the obligation to
register with the federal government as a distributor of controlled substances.
Finally, we are required to maintain licenses and permits for the distribution
of pharmaceutical products and controlled substances under the laws of each
state in which we operate.

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

EMPLOYEES

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

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

LEGAL PROCEEDINGS

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

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<PAGE> 43

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth 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.

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Glenn Nussdorf...................... 45 Chairman of the Board, Chief
Executive Officer and Director
Michael Sosnowik.................... 43 President and Director
Michael Katz........................ 51 Vice President, Chief Financial
Officer and Treasurer
Salvatore LaDuca.................... 37 Senior Vice President, Purchasing
Michael Ross........................ 45 Vice President, Sales and Marketing
Dennis Barkey....................... 44 Vice President, Chief Accounting
Officer
Arlene Nussdorf..................... 36 Director
Stephen Nussdorf.................... 48 Director
Dennis Erani........................ 55 Director -- Nominee
Brian Finn.......................... 39 Director -- Nominee
</TABLE>

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

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

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

42
<PAGE> 44

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

Mr. Michael Katz became our 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 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 Drug Association.

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

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

Mr. Stephen Nussdorf became a director upon consummation of the
Reorganization. Mr. Nussdorf joined Quality King in 1972 and has served Quality
King in various capacities in all divisions of its business. Mr. Nussdorf
presently also serves in the Office of The Chief Executive and as a Director of
Model Reorg, Inc., an affiliate of Quality King

43
<PAGE> 45

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 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 to 1997 Mr. Finn was a Managing Director and
Co-Head of Mergers & Acquisitions at the investment banking firm of Credit
Suisse First Boston. 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.

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

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<PAGE> 46

COMPENSATION OF EXECUTIVE OFFICERS

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

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2)
--------------------------- ---- --------- --------
<S> <C> <C> <C>
Glenn Nussdorf................................... 1999 $400,032 --
Chief Executive Officer 1998 $400,032 --
Michael Sosnowik................................. 1999 $749,996 $795,137
President 1998 $706,728 $827,950
Michael Katz..................................... 1999 $ 87,543 --
Vice President, Chief Financial Officer and
Treasurer 1998 $ 73,190 --
Salvatore LaDuca................................. 1999 $436,940 --
Senior Vice President, Purchasing 1998 $516,814 --
Michael Ross..................................... 1999 $287,874 --
Vice President, Sales and Marketing 1998 $172,179 --
</TABLE>

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

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

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

STOCK OPTION PLAN. Pursuant to our stock option plan, employees and other
persons who perform services for us are eligible to be granted incentive stock
options (as defined in Section 422 of the Internal Revenue Code) and
non-qualified stock options. Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, our stock option plan authorizes the
grant of options with respect to a maximum of 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, 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

45
<PAGE> 47

aggregate exercise price of the option. No stock options may be granted under
the stock option plan after July 31, 2009.

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

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

STOCK OPTION AWARDS TO DATE. Stock options to purchase an aggregate of
shares of our common stock have been granted to of our
employees under our stock option plan as of the effective date of this offering.
These options, which include noncompetition agreements, were granted on the
following terms:

- Incentive stock options to purchase 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 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 will be subject to
various restrictions on resale of the shares as described below

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

Since the exercise price of the non-qualified stock options is below the
initial offering price of the stock being sold in this offering, upon the
closing of the offering we will be required to incur a non-cash charge against
our earnings in an amount equal to the difference between the initial offering
price of the shares and the exercise price of the options. We expect the amount
of the non-cash charge to be significant.

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

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

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

- 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

46
<PAGE> 48

issued upon exercise of the holder's options terminate as of the date of
the applicable event

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

EMPLOYMENT AGREEMENT

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

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

47
<PAGE> 49

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

AGREEMENTS WITH QUALITY KING

In connection with the Reorganization, we have entered into the agreements
described below with Quality King. We have adopted a policy that, following this
offering, all future material agreements between us and Quality King or its
other affiliates, including the members of the Nussdorf family, 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 have
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.

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

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<PAGE> 50

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

SUBLEASE. In connection with the Reorganization, we have 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 the
Nussdorf family.

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 "piggyback" registration rights which allow
them to join 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. Under these piggyback rights, each option holder may register
and sell up to the same percentage of such option holder's aggregate number of
shares held or then issuable upon exercise of his options as is then being sold
by the controlling stockholders. We are required to pay expenses other than
underwriting discounts and commissions incurred by us in connection with these
registrations. In connection with such registrations, we will indemnify the
option holders against various liabilities, including liabilities under the
Securities Act.

TRANSACTIONS WITH AFFILIATES

We have an arrangement with a company controlled by the Nussdorf family to
provide us with logistical assistance relating to various purchases. We pay a
monthly fee of approximately $30,000 for such services.

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<PAGE> 51

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 shares of common stock outstanding and
shares of common stock outstanding immediately following 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.

<TABLE>
<CAPTION>
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
- ---- ------------ ------------------- ---------- ---------
<S> <C> <C> <C> <C>
Glenn Nussdorf Trust dated
November 1, 1998(1)........ -- 16.67%
Glenn Nussdorf Trust dated
November 2, 1998(1)........ -- 16.67%
Stephen Nussdorf Trust dated
November 1, 1998(1)........ -- 16.67%
Stephen Nussdorf Trust dated
November 2, 1998(1)........ -- 16.67%
Arlene Nussdorf Trust dated
November 1, 1998(1)........ -- 16.67%
Arlene Nussdorf Trust dated
November 2, 1998(1)........ -- 16.67%
</TABLE>

50
<PAGE> 52

<TABLE>
<CAPTION>
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
- ---- ------------ ------------------- ---------- ---------
<S> <C> <C> <C> <C>
Glenn Nussdorf(1)............ 100%
Michael Sosnowik............. --
Michael Katz................. --
Salvatore LaDuca............. --
Michael Ross................. --
Stephen Nussdorf(1).......... 100%
Arlene Nussdorf(1)........... 100%
Dennis Erani................. --
Brian Finn................... --
All directors and executive
officers as a group (9
persons)...................
</TABLE>

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

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

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 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. The holders of our common stock have no conversion, sinking
fund, redemption, preemptive or subscription rights. 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.

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<PAGE> 53

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 (including sinking fund provisions), the redemption price or
prices, the liquidation preferences, 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: (i) for any breach of the duty of loyalty, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violations of law, (iii) for liability under Section 174 of the Delaware
General Corporation Law (relating to unlawful dividends, stock repurchases, or
stock redemptions), or (iv) 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.

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<PAGE> 54

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 (i) the classified board, (ii) the amendment of our
by-laws, (iii) any proposed compromise or arrangement between us and our
creditors, (iv) the liability of directors, and (v) 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
% (assuming the underwriters' over-allotment option is not exercised) of
the voting power. As a result, if two or more of those persons act in unison,
they would have the ability to impede the amendment of any such provision.

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our by-laws establish an advance notice procedure for the
nomination, other than by or at the direction of our board of directors or a
committee thereof, of candidates for election as director as well as for other
stockholder proposals to be considered at stockholders' meetings. Notice of
stockholder proposals and director nominations must be timely given in writing
to our secretary prior to the meeting at which the matters are to be acted upon
or the directors are to be elected, and must contain the information specified
in our by-laws. To be timely, notice must be received at our principal executive
offices (a) in the case of an annual meeting, not less than 90 days prior to the
anniversary of the immediately preceding annual meeting of stockholders,
provided however that in the event the annual meeting is called for a date that
is not within 30 days before or after such anniversary date, notice by the
stockholder in order to be timely must be received not later than the close of
business on the tenth day following the day on which such notice of the date of
the annual meeting was mailed or public disclosure of the date of the annual
meeting was made, whichever first occurs; and (b) in the case of a special
meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the tenth day following the day on which notice of
the date of the special meeting was mailed or public disclosure of the date of
the special meeting was made, whichever first occurs. These provisions may
preclude some stockholders from bringing matters before the stockholders at an
annual or special meeting or from making nominations for directors 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 % of the outstanding
voting power (assuming the underwriters' over-allotment option is not
exercised). Accordingly, if two or more of those persons act in unison, they
would have the ability to impede the amendment of the by-laws.

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<PAGE> 55

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.

SHARES ELIGIBLE FOR FUTURE SALE

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

Immediately following this offering, the controlling stockholders will own
Restricted Shares, representing approximately % ( % if
the underwriters' over-allotment option is exercised in full) of the then
outstanding shares of common stock. In addition, options to acquire
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

54
<PAGE> 56

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
(i) 1% percent of the then outstanding shares of the common stock (approximately
shares immediately after the offering) or (ii) the reported
average weekly trading volume of our common stock during the four calendar weeks
preceding a sale by such person. Sales under Rule 144 are also subject to
manner-of-sale provisions, notice requirements, and the availability of current
public information about us. Under Rule 144, however, a person (or persons whose
shares must be aggregated) who has held Restricted Shares for a minimum of two
years and who is not, and for three months prior to the sale of such shares has
not been, an affiliate is free to sell such shares without regard to the volume,
manner-of-sale, and other limitations contained in Rule 144. As defined in Rule
144 under the Securities Act, an "affiliate" of an issuer is a person that
directly, or indirectly through the use of one or more intermediaries, controls,
is controlled by or is under common control with such issuer.

Prior to the offering, there has been no established market for the common
stock and no predictions can be made about the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of the common stock prevailing 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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<PAGE> 57

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. is acting as representative, has severally agreed to purchase from us the
aggregate number of shares of common stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Lehman Brothers Inc.........................................

--------
Total..................................................
========
</TABLE>

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 over-allotment option to the underwriters to
purchase up to an aggregate of 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 over-allotment
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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<PAGE> 58

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 representative of the underwriters.
Among the factors considered in such negotiations will be the following:

- our results of operations in recent periods

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

- an overall assessment of our management

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

- the prices of similar securities of generally comparable companies.

We intend to apply for listing of our common stock on the New York Stock
Exchange, under the symbol "QK." 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.

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 representative is 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 representative may reduce that short position by purchasing
shares in the open market. The representative also may elect to reduce any short
position by exercising all or part of the over-allotment option.

The representative may impose a penalty bid on underwriters and selling
group members. This means that if the representative purchases 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

57
<PAGE> 59

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 representative 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 this offering for the underwriters.

EXPERTS

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

58
<PAGE> 60

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.

59
<PAGE> 61

INDEX TO FINANCIAL STATEMENTS

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

F-1
<PAGE> 62

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

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying balance sheets of QK Healthcare, Inc. as
of October 31, 1998 and July 31, 1999 and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended October 31, 1998 and for the nine months ended July 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of QK Healthcare, Inc. as of
October 31, 1998 and July 31, 1999 and the results of their operations and their
cash flows for each of the two years in the period ended October 31, 1998 and
for the nine months ended July 31, 1999 in conformity with generally accepted
accounting principles.

BDO SEIDMAN, LLP

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

F-2
<PAGE> 63

QK HEALTHCARE, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1998 1999
----------- --------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents............................. $ -- $ --
Accounts receivable, net of allowance for possible
losses of $863 and $1,071.......................... 83,937 83,917
Inventories........................................... 189,703 249,918
Advances to suppliers for future purchases............ 796 2,449
Prepaid expenses and other current assets............. 454 1,463
-------- --------
TOTAL CURRENT ASSETS............................... 274,890 337,747
Property and equipment, less accumulated depreciation
and amortization................................... -- 238
-------- --------
$274,890 $337,985
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Advances from Quality King -- related party........... $241,933 $276,471
Accounts payable...................................... 31,561 58,742
Accrued expenses and other............................ 1,396 2,772
-------- --------
TOTAL CURRENT LIABILITIES.......................... 274,890 337,985
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value -- shares authorized
20,000,000; issued and outstanding none............ -- --
Common stock, $.001 par value -- shares authorized
100,000,000; issued and outstanding................
Retained earnings..................................... -- --
-------- --------
TOTAL STOCKHOLDERS' EQUITY.........................
-------- --------
$274,890 $337,985
======== ========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE> 64

QK HEALTHCARE, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, JULY 31,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales, net.............................. $552,488 $772,359 $568,062 $755,088
Cost of sales........................... 516,501 726,967 537,668 701,511
-------- -------- -------- --------
Gross profit............................ 35,987 45,392 30,394 53,577
-------- -------- -------- --------
Operating Expenses:
Warehouse and delivery................ 3,039 4,069 2,976 4,162
Selling, general and administrative... 6,762 7,187 5,849 7,718
-------- -------- -------- --------
Total operating expenses........... 9,801 11,256 8,825 11,880
-------- -------- -------- --------
Income from operations.................. 26,186 34,136 21,569 41,697
Interest expense -- related party....... 12,984 17,370 12,451 15,300
-------- -------- -------- --------
Income before income taxes.............. 13,202 16,766 9,118 26,397
Income taxes............................ 224 285 155 449
-------- -------- -------- --------
Net income.............................. $ 12,978 $ 16,481 $ 8,963 $ 25,948
======== ======== ======== ========
Pro forma for change in tax status:
Historical income before income
taxes.............................. $ 13,202 $ 16,766 $ 9,118 $ 26,397
Pro forma income taxes (Note 6)....... 5,312 6,736 3,672 10,573
-------- -------- -------- --------
Pro forma net income.................. $ 7,890 $ 10,030 $ 5,446 $ 15,824
======== ======== ======== ========
Pro forma basic earnings per share.... $ $ $ $
======== ======== ======== ========
Weighted average number of shares
outstanding........................
======== ======== ======== ========
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE> 65

QK HEALTHCARE, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK,
$.001 PAR VALUE
------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1996............... $ -- $
Net income.............................. 12,978 12,978
Distribution to Quality King -- related
party................................. (12,978) (12,978)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1997............... --
Net income.............................. 16,481 16,481
Distribution to Quality King -- related
party................................. (16,481) (16,481)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1998............... --
Net income.............................. 25,948 25,948
Distribution to Quality King -- related
party................................. (25,948) (25,948)
-------- -------- -------- --------
BALANCE, JULY 31, 1999.................. $ -- $
======== ======== ======== ========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 66

QK HEALTHCARE, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 12,978 $ 16,481 $ 8,963 $ 25,948
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... -- -- -- 75
Write-off of bad debts..................... 35 122 5 28
Allowance for possible losses.............. 6 169 279 236
Decrease (increase) in:
Accounts receivable...................... (2,011) (35,070) (28,772) (244)
Inventories.............................. (30,256) (68,982) (62,752) (60,215)
Advances to suppliers for future
purchases............................. 1,258 (21) (76) (1,653)
Prepaid expenses and other current
assets................................ 244 (186) 100 (1,009)
Increase (decrease) in:
Accounts payable......................... 6,394 11,562 13,395 27,181
Accrued expenses and other............... 1,013 19 (199) 1,376
-------- -------- -------- --------
Net cash used in operating
activities(1)......................... (10,339) (75,906) (69,057) (8,277)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in property and equipment............ -- -- -- (313)
-------- -------- -------- --------
Net cash used in investing
activities(1)......................... -- -- -- (313)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in advances from Quality
King -- related party...................... 23,317 92,387 78,020 34,538
Distribution to Quality King -- related
party...................................... (12,978) (16,481) (8,963) (25,948)
-------- -------- -------- --------
Net cash provided by financing
activities(1)......................... 10,339 75,906 69,057 8,590
-------- -------- -------- --------
Net increase (decrease) in cash................. -- -- -- --
Cash and cash equivalents, beginning of
period........................................ -- -- -- --
-------- -------- -------- --------
Cash and cash equivalents, end of period........ $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>

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

(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
<PAGE> 67

QK HEALTHCARE, INC.

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

1. BASIS OF PRESENTATION

(a) BACKGROUND AND BASIS OF PRESENTATION

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

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

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

(b) INVENTORY VALUATION

Prior to the formation of the Company, inventory costs were calculated
under the last-in, first-out ("LIFO") method. In connection with the
Reorganization, the Company will change the method used in determining inventory
cost. Management has concluded that for reporting purposes, the first-in,
first-out ("FIFO") method would result in a better measurement of the results of
operations of the Company. 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
<PAGE> 68
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

2. SUMMARY OF ACCOUNTING POLICIES

(a) FISCAL YEAR

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

(b) INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined
by the FIFO method.

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

(d) INCOME TAXES

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

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

(e) PROPERTY AND EQUIPMENT

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

(f) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

F-8
<PAGE> 69
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(g) LONG-LIVED ASSETS

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

(h) COMPUTATION OF PRO FORMA EARNINGS PER COMMON SHARE

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

(i) CONCENTRATIONS OF CREDIT RISK

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

(j) USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(k) UNAUDITED INTERIM FINANCIAL STATEMENTS

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

F-9
<PAGE> 70
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT

Major classes of property and equipment consist of the following:

<TABLE>
<CAPTION>
JULY 31, 1999
-------------
<S> <C>
Machinery and equipment.................................... $685
Leasehold improvements..................................... 117
----
802
Less accumulated depreciation and amortization............. 564
----
$238
====
</TABLE>

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

4. ADVANCES FROM QUALITY KING -- RELATED PARTY

For all periods presented, Quality King maintained a credit 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 credit agreement (see Note
9). In connection with the Reorganization and concurrent with the Offering, the
Company has entered into a new credit facility (see Note 12(c)).

5. COMMITMENTS AND CONTINGENCIES

(a) LEASE

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

(b) UNION CONTRACTS

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

F-10
<PAGE> 71
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.

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
---------------- -----------------
1997 1998 1998 1999
------ ------ ------ -------
<S> <C> <C> <C> <C>
Federal.................................. $4,115 $5,218 $2,845 $ 8,191
State.................................... 1,197 1,518 827 2,382
------ ------ ------ -------
Pro forma income taxes................... $5,312 $6,736 $3,672 $10,573
====== ====== ====== =======
</TABLE>

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

7. RELATED PARTY TRANSACTIONS

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

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

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

8. ALLOCATIONS

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

F-11
<PAGE> 72
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

processed, theoretical delivery miles and warehouse square footage. The
following represents certain expenses which were allocated to the Company:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------- -----------------
1997 1998 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Warehouse and delivery................. $2,067 $1,683 $1,225 $1,553
Selling, general and administrative.... 2,486 3,228 2,472 3,257
------ ------ ------ ------
Total.................................. $4,553 $4,911 $3,697 $4,810
====== ====== ====== ======
</TABLE>

9. INTEREST EXPENSE

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

10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS

(a) COMMON STOCK

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

(b) STOCK OPTION PLAN

The Company established a stock option plan for employees and other persons
who perform services for it. The Company has authorized a maximum of
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 shares of common stock. These options will be granted on the
following terms: incentive stock options to purchase shares at an
exercise price equal to the offering price of the shares sold in the Offering
that will vest over four years and will be exercisable for 10 years; incentive
stock options to purchase 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
shares at an exercise price of $ 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

F-12
<PAGE> 73
QK HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

common stock underlying the options over the exercise price of the options. This
charge (aggregating $ ) will reduce income from operations in the
quarter immediately following the Offering and increase additional paid-in
capital.

11. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK

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

12. SUBSEQUENT EVENTS

(a) S CORPORATION DISTRIBUTION

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

(b) INITIAL PUBLIC OFFERING

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

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

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

F-13
<PAGE> 74

[MAP GRAPHIC]

QK HEALTHCARE, INC.

COMMON STOCK

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

PROSPECTUS
, 1999

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

LEHMAN BROTHERS
<PAGE> 75

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:

<TABLE>
<S> <C>
SEC registration fee........................................ $71,933
NASD fee.................................................... 26,375
Printing and engraving expenses............................. *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Blue Sky fees and expenses.................................. *
NYSE listing application fee................................ *
Transfer agent fees and expenses............................ *
Miscellaneous............................................... *
-------
TOTAL.................................................. $ *
=======
</TABLE>

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

* To be filed by amendment

ITEM 14. INDEMNIFICATION OF DIRECTOR AND OFFICERS.

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

Our by-laws provide for the indemnification of our directors and officers
(as well as certain other persons) if the person acted in good faith and in a
manner reasonably believed to be in or not opposed to our best interests, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct was unlawful. In an action by or in the right of us, no
indemnification may be made if the person shall have been adjudged to be liable
to us unless the court in which the action was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for the expenses which the court deems proper. Our by-laws also
provide that any indemnification (unless ordered by a court) may be made by us
only as authorized in the specific case

II-1
<PAGE> 76

upon a determination that indemnification is proper in the circumstances because
the person has met the applicable standard of conduct. This determination must
be made (i) by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to the action, (ii) if a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by our
stockholders. If an indemnified person has been successful on the merits or
otherwise in defense of any action described above, or in the defense of any
matter in the action, the person will be indemnified against expenses (including
attorneys' fees) incurred in connection with the action, without the necessity
of authorization in the specific case. Expenses incurred in defending or
investigating a threatened or pending action may be paid by us in advance of the
final disposition of the action upon receipt of an undertaking by the person to
repay the amount if it is ultimately determined that indemnification is not
proper. The indemnification and advancement of expenses provided by or granted
under our by-laws are not exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, contract, vote of stockholders or disinterested directors or
otherwise, it being our policy that indemnification of the persons specified in
the by-laws shall be made to the fullest extent permitted by law. The
indemnification and advancement of expenses provided by our by-laws, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director or officer and inure to the benefit of the heirs,
executors and administrators of that person.

We carry directors' and officers' liability insurance.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

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

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

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

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

- Incentive stock options to purchase 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

II-2
<PAGE> 77

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

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

a. Exhibits:

<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
2.1* Plan of Reorganization
3.1* Amended and Restated Articles of Incorporation
3.2* By-Laws
4.1* Registration Rights Agreement between the Company and
Arlene, Stephen and Glenn Nussdorf, as trustees
5.1* Opinion of Edwards & Angell, LLP
10.1* Support Services Agreement between the Company and Quality
King Distributors, Inc.
10.2* Indemnification, Noncompetition and Tax Coordination
Agreement among Quality King Distributors, QK Healthcare,
Inc. and Pro's Choice Beauty Care, Inc.
10.3* Sublease with Quality King Distributors, Inc.
10.4* 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* Employment Agreement between the Company and Michael
Sosnowik
10.9* Credit 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 (included on signature page)
27.1 Financial Data Schedule
99.1 Consent of Dennis Erani
99.2 Consent of Brian Finn
</TABLE>

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

* To be filed by amendment

b. Financial Statement Schedules

II-3
<PAGE> 78

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
<PAGE> 79

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ronkonkoma, State of New
York, on October 12, 1999.

QK Healthcare, Inc.

By: /s/ GLENN NUSSDORF
-----------------------------------
Name: Glenn Nussdorf
Title: Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Glenn Nussdorf, Michael W. Katz and Patricia
Kantor each of them individually, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead in any and all capacities to sign any or all amendments
(including post-effective amendments and any registration statements filed
pursuant to Rule 462(b) that incorporates this registration statement by
reference) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or their substitutes,
may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on October 12, 1999.

/s/ H. GLENN NUSSDORF Chairman, Chief Executive Officer and
- --------------------------------------------------- Director (Principal Executive
H. Glenn Nussdorf Officer)

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

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

</TABLE>

II-5
<PAGE> 80
<TABLE>
<S> <C>
/s/ MICHAEL SOSNOWIK President and Director
- ---------------------------------------------------
Michael Sosnowik

/s/ ARLENE NUSSDORF Director
- ---------------------------------------------------
Arlene Nussdorf

/s/ STEPHEN NUSSDORF Director
- ---------------------------------------------------
Stephen Nussdorf
</TABLE>

II-6
<PAGE> 81

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

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

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

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

BDO SEIDMAN, LLP

New York, New York
October 12, 1999

S-1
<PAGE> 82

SCHEDULE II

QK HEALTHCARE, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSE(A) WRITE-OFFS CHANGES END OF PERIOD
- ----------- ---------- ---------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
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 July 31, 1999............ $863,000 $236,000 $ 28,000 $-- $1,071,000
</TABLE>

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

(a) charged to bad debts

S-2

<PAGE> 1
Exhibit 23.2

[THE FOLLOWING CONSENT IS IN THE FORM THAT WILL BE SIGNED UPON EFFECTIVENESS OF
THE REGISTRATION STATEMENT]

CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

QK Healthcare, Inc.
Ronkonkoma, New York

We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement (Form S-1 No. 333- ) of our report dated September 28,
1999, except for the reorganization discussed in Note 1 which is as of ___,
1999, relating to the financial statements of QK Healthcare, Inc., which is
contained in that Prospectus, and of our report dated September 28, 1999,
relating to the schedule, which is contained in Part II of the Registration
Statement.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

BDO Seidman, LLP

New York, New York

October 12, 1999

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
balance sheet as of July 31, 1999 and the audited statement of operations for
the nine months ended July 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 84,988
<ALLOWANCES> 1,071
<INVENTORY> 249,918
<CURRENT-ASSETS> 337,747
<PP&E> 802
<DEPRECIATION> 564
<TOTAL-ASSETS> 337,985
<CURRENT-LIABILITIES> 337,985
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 755,088
<TOTAL-REVENUES> 755,088
<CGS> 701,511
<TOTAL-COSTS> 701,511
<OTHER-EXPENSES> 11,880
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,300
<INCOME-PRETAX> 26,397
<INCOME-TAX> 449
<INCOME-CONTINUING> 25,948
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,948
<EPS-BASIC> 0
<EPS-DILUTED> 0

</TABLE>

<PAGE> 1
Exhibit 99.1

CONSENT OF DENNIS ERANI

I consent to references to me as a Director-Nominee in the Registration
Statement (Form S-1) and the related Prospectus of QK Healthcare, Inc. for the
registration of _________ shares of its Common Stock.

By: /s/ Dennis Erani
_________________
Dennis Erani

October 12, 1999

<PAGE> 1
Exhibit 99.2

CONSENT OF BRIAN FINN

I consent to references to me as a Director-Nominee in the Registration
Statement (Form S-1) and the related Prospectus of QK Healthcare, Inc. for the
registration of ________________ shares of its Common Stock.

By: /s/ Brian Finn
_________________________
Brian Finn

October 9, 1999