D & K HEALTHCARE RESOURCES INC, S-2, 1998-07-30

D & K HEALTHCARE RESOURCES INC
S-2, 1998-07-30
DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1998

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

Form S-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------------
D & K HEALTHCARE RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C>
DELAWARE 43-1465483
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
</TABLE>

8000 MARYLAND AVENUE, SUITE 920, ST. LOUIS, MISSOURI 63105
(314) 727-3485
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------

J. HORD ARMSTRONG, III
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
D & K HEALTHCARE RESOURCES, INC.
8000 MARYLAND AVENUE, SUITE 920, ST. LOUIS, MISSOURI 63105
(314) 727-3485
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------

With Copies to:

<TABLE>
<S> <C>
JOHN L. GILLIS, JR., ESQ. WILLIAM M. HOLZMAN, ESQ.
ARMSTRONG, TEASDALE, SCHLAFLY & DAVIS NEAL, GERBER & EISENBERG
ONE METROPOLITAN SQUARE, SUITE 2600 TWO NORTH LASALLE STREET
ST. LOUIS, MISSOURI 63102-2740 CHICAGO, ILLINOIS 60602
(314) 621-5070 (312) 269-8000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

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 the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, 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,
please check the following box. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE* OFFERING PRICE* FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share... 1,874,500 shares(1) $19.375 $36,318,437 $10,714
- --------------------------------------------------------------------------------------------------------------------
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</TABLE>

* Estimated solely for the purpose of calculating the registration fee.
(1) Includes 244,500 shares to be issued subject to the exercise of the
Underwriters' over-allotment option, if any.
------------------------

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 SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION, DATED JULY 29, 1998

PROSPECTUS

1,630,000 SHARES

D&K HEALTHCARE RESOURCES LOGO

D & K HEALTHCARE RESOURCES, INC.
COMMON STOCK
------------------

Of the 1,630,000 shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering"), 1,200,000 shares are being
offered by D & K Healthcare Resources, Inc. (the "Company") and 430,000 shares
are being offered by certain stockholders (the "Selling Stockholders"). See
"Principal and Selling Stockholders." The Company will not receive any proceeds
from the sale of shares of Common Stock by the Selling Stockholders.

The Common Stock is quoted on the Nasdaq National Market under the symbol
"DKWD." On July 28, 1998, the last reported sale price of the Common Stock was
$19.875 per share. See "Price Range of Common Stock."
------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------

<TABLE>
<CAPTION>
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UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
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Total(3)................ $ $ $ $
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</TABLE>

(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting estimated expenses of $500,000, all of which are payable by
the Company.
(3) The Company has granted the Underwriters a 30 day option to purchase up to
244,500 additional shares of Common Stock solely to cover over-allotments,
if any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively.
------------------

The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected certificates for the shares of
Common Stock offered hereby will be available for delivery on or about
, 1998 at the offices of Smith Barney, Inc., 333 West 34th Street, New
York, New York 10001.
------------------

SALOMON SMITH BARNEY RAYMOND JAMES & ASSOCIATES, INC.

, 1998
<PAGE> 3

"Med Plus" is a Registered Trademark of D & K Healthcare Resources, Inc.

D&K HEALTHCARE RESOURCES MAP

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the detailed
information and the Consolidated Financial Statements of the Company, including
the notes thereto, included elsewhere in this Prospectus. Unless otherwise
indicated, (i) the information contained in this Prospectus assumes the
Underwriters' over-allotment option is not exercised; (ii) references to "fiscal
1993," "fiscal 1994," "fiscal 1995," "fiscal 1996" and "fiscal 1997" refer to
the Company's fiscal year ended on the Friday closest to March 31 of that year
and references to "fiscal 1998" refer to the Company's fiscal year ended June
30, 1998; and (iii) all references to the Company shall mean D & K Healthcare
Resources, Inc., a Delaware corporation, and its subsidiaries, unless the
context requires otherwise.

THE COMPANY

OVERVIEW

The Company is a leading regional wholesale distributor of pharmaceutical
and related healthcare and beauty aid products to more than 700 retail and
institutional customers in 20 states primarily in the Midwest and South. The
Company also offers a variety of value-added services to its customers,
particularly in the area of cost containment and inventory management. The
Company had net sales of $442.9 million for the nine months ended March 31,
1998, of which 50.1% were to independent pharmacies, 19.8% were to retail
chains, including national pharmacy chains and the pharmacy departments of
supermarkets and mass merchandisers, and 30.1% were to healthcare institutions,
including hospitals, alternate site care facilities, pharmacy benefit management
companies and managed care organizations. The Company operates three
state-of-the-art distribution facilities in Cape Girardeau, Missouri, Lexington,
Kentucky and Minneapolis, Minnesota.

Since its formation in 1987, the Company has expanded the scope and breadth
of its business by consistently providing the highest levels of service to its
customers and suppliers. The Company achieves such high levels of service by (i)
providing its customers with a full continuum of products, value-added services
and support, which enable its customers to compete more effectively; (ii)
focusing on flexibility, which allows the Company to respond quickly to change
and to customize systems to meet its customers' and suppliers' requirements;
(iii) strategically locating the Company's distribution centers and satellite
transfer depots throughout the Midwest and the South, which enables the Company
to ship products to and service its customers promptly and efficiently; and (iv)
attracting and motivating experienced and entrepreneurial management personnel,
who continually seek to improve and expand the Company's business.

In 1996, senior management of the Company initiated a plan to reposition
the Company and significantly improve operating performance. This plan included:
(i) identifying and focusing the Company's efforts on high-growth niche markets;
(ii) centralizing certain management functions, including purchasing, marketing
and information systems at its corporate offices, while decentralizing
executive, sales and operating functions at each of its independently managed
profit centers, including its three regional distribution centers; (iii)
enhancing the depth and breadth of the Company's management team; (iv) creating
new management and employee incentive plans; (v) upgrading the Company's
facilities; and (vi) enhancing the Company's corporate image. Since implementing
these strategic initiatives, net sales and net income have grown in each of the
last eight fiscal quarters as compared to the same periods in the prior years.

The Company believes that its regional-market focus and high level of
customer service provide it with competitive advantages and position it to
benefit from trends impacting the industry. Management believes that the
increasing size of the wholesale pharmaceutical industry's larger participants
hampers the ability of these companies to deliver specialized services to all
their customers. The Company has successfully differentiated itself from its
national competitors through its ability to provide flexible and customized
services to its targeted customer segments. In addition, healthcare providers'
need for value-added services which help contain costs and effectively manage
inventory has given the Company the opportunity to capitalize on its cost
competitiveness and advanced systems. The location and quality of the Company's
distribution facilities and satellite transfer depots throughout the Midwest and
South allow the Company to service its customers' and suppliers' needs promptly
and efficiently. The Company has capitalized on the increased demand for
alternate care providers through its fiscal 1996 investment in Pharmaceutical
Buyers, Inc. ("PBI"). PBI is one of the
3
<PAGE> 5

nation's leading alternate site group purchasing organizations, and the
Company's investment in PBI provides it with access to a higher margin business
segment and insight into alternate site distribution.

The wholesale pharmaceutical distribution industry has experienced rapid
sales growth over the past twelve years, increasing from approximately $14.0
billion in sales in 1985 to more than $73.0 billion in 1997. In addition, the
percentage of pharmaceutical sales made through wholesale distributors rather
than directly by manufacturers increased to approximately 83% in 1997, from 58%
in 1985. The Company believes that there are several major trends currently
affecting the industry, including: (i) continued consolidation of national and
regional wholesale drug distribution companies; (ii) an increasing emphasis on
value-added services that lower healthcare providers' administrative and other
costs associated with medical supply management; (iii) the growing importance of
an efficient distribution model as customers become more cost-conscious; and
(iv) a shift in the delivery of healthcare services from acute care settings to
alternate sites, including physician offices and extended care facilities.

The Company is a Delaware corporation with its principal executive offices
located at 8000 Maryland Avenue, Suite 920, St. Louis, Missouri 63105. Its
telephone number is (314) 727-3485.

GROWTH AND OPERATING STRATEGY

The Company's objective is to become the market leader among regional drug
wholesalers in the geographic areas in which it operates by being the preferred
business partner of both its customers and suppliers. Management has identified
opportunities that it believes will enable the Company to continue to increase
sales, earnings and market share. The Company's strategies include the following
initiatives:

Leverage Its Decentralized Structure. Unlike its more centralized
competitors, the Company is structured as an organization of locally
managed profit centers. The Company's decentralized sales and distribution
network, combined with its centralized procurement and corporate support
staff structure, enable the Company to provide high levels of specialized
customer service while minimizing administrative expenses and maximizing
volume discounts for product purchases. Each of the Company's profit
centers has an executive, sales and operations staff, with incentive
compensation determined by its operating results. Each profit center
utilizes the Company's corporate staff for procurement, marketing,
financial, legal and executive management resources and corporate
coordination of assets and working capital management.

Increase Penetration of Existing Markets. The Company has successfully
increased its sales to existing customers and added new customers in its
existing markets by continually focusing on flexibility, innovation and
service. The Company believes that it attracts and retains customers as a
result of its ability to provide a significantly higher level of service to
its customers than many larger, national wholesale pharmaceutical
distributors. Over the past 24 months, the Company has added significant
new customers in each of the market segments it serves, including Schnucks
Markets, Inc., Anthem Prescription Management, Inc., and the Tennessee
Pharmaceutical Providers Association (the "TPPA"). Although the Company
historically derived a substantial portion of its net sales (e.g.,
approximately 78% in fiscal 1992) from independent pharmacies, in the first
nine months of fiscal 1998, the Company derived approximately 50.1% of its
net sales from independent pharmacies, approximately 19.8% from retail
chains and approximately 30.1% from healthcare institutions. By achieving a
more balanced mix of sales among these three market segments, the Company:
(i) generates efficiencies by replicating its customer sales and service
model; (ii) creates attractive opportunities for the Company's suppliers
which seek to sell a complete range of retail, acute care, home care and
other products to each of their wholesalers; and (iii) attracts a greater
proportion of higher volume customers which provide significant
opportunities for growth.

the TPPA collectively represented 10.8% of the Company's net sales. The
Company also plans to continue to pursue selective acquisitions of
businesses that enable the Company to: (i) enhance and improve the level of
service it provides to its customers and suppliers; and (ii) offer
complementary products and solutions to its customers, making the Company a
primary vendor for its core business lines and related services and
solutions. The Company's investment in PBI provides it with insight into
the operations of alternative site providers and its fiscal 1998
acquisition of Associated Pharmacies, Inc., a wholesale distributor of
pharmaceutical products, expanded the Company's geographic presence in
Arkansas.

Provide High Levels of Customer Service. The Company believes that its
customer service focus provides a significant competitive advantage,
especially with customers who do not receive personalized service from
national wholesale distributors. The Company's experienced local sales
force makes regular personal visits to current and prospective customers
and is supported by a knowledgeable in-house customer service staff. The
Company's state-of-the-art distribution facilities enable the Company to
meet its customers' requirements for accurate next-day delivery. The
Company believes that its commitment to customer service has enabled it to
become the primary supplier to most of its customers, resulting in
significant net sales growth.

Improve Customer Performance Through Value-Added Services. The Company
offers a wide range of services designed to reduce its customers' costs,
enhance their operating efficiencies and assist them in competing
effectively. RESOURCE is the Company's software system that allows
customers to place orders electronically, providing them with a strong link
to the Company and simultaneously reducing their selling and communication
costs. The Company also offers its customers PARTNERS, an automatic
replenishment inventory management program. PARTNERS gives the customer the
opportunity to both improve its margins and significantly reduce its
working capital needs through effective inventory management. SCRIPTMASTER
is the Company's pharmacy management system, which includes computerized
order entry, point-of-sale capabilities, inventory control and pharmacy
disbursement. This service provides cost savings and enhanced efficiencies
to pharmacy customers as well as valuable information on prescription
history for manufacturers. The Company also maintains and provides the "Med
Plus" family of promotional and advertising support programs with which it
plans and coordinates cooperative advertising programs for participating
independent pharmacies and provides various promotional products. These
programs give participating customers access to a suite of advertising and
promotional support programs that may not have been available otherwise.

Maintain Competitive Advantage of Low Cost Structure. The Company
believes it has one of the lowest operating expense to net sales ratios in
the industry. The Company's operating expense to net sales ratio has
declined from 3.97% in 1994 to 3.20% for the first nine months of fiscal
1998. The improved efficiency can be attributed to significant investments
in inventory management systems, computer hardware and software, delivery
systems and warehouse systems. The Company believes there are opportunities
for additional efficiency improvements in the future.

5
<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by:
The Company............................................... 1,200,000 Shares
The Selling Stockholders.................................. 430,000 Shares(1)
Common Stock to be outstanding after the Offering........... 5,126,275 Shares(1)(2)
Use of Proceeds............................................. To repay indebtedness.
See "Use of Proceeds."
Nasdaq National Market symbol............................... DKWD
</TABLE>

- ---------------
(1) Includes 180,000 shares of Common Stock to be issued to J. David McCay upon
his exchange of 18% of the outstanding capital stock of PBI. Mr. McCay, a
director of the Company, intends to effect such exchange immediately prior
to completion of the Offering and to sell such Common Stock in the Offering.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Principal and Selling Stockholders" and "Certain
Transactions."

(2) Does not include: (i) 441,998 shares of Common Stock issuable upon exercise
of options granted under the Company's 1992 Long Term Incentive Plan and
under its 1993 Stock Option Plan; (ii) 22,072 shares of Common Stock
issuable under certain circumstances upon exercise of warrants; (iii) 20,000
shares of Common Stock issuable to Robert E. Korenblat upon his exchange of
2% of the outstanding capital stock of PBI; and (iv) an indeterminate number
of shares of Common Stock issuable to Massachusetts Mutual Life Insurance
Company and its affiliates upon their exchange of 30% of the outstanding
capital stock of PBI. See "Principal and Selling Stockholders," "Certain
Transactions" and "Description of Capital Stock."

RISK FACTORS

Investors should carefully consider the risk factors related to a purchase
of Common Stock of the Company. See "Risk Factors."

6
<PAGE> 8

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table sets forth a summary of certain selected consolidated
financial data for the Company for each of the five fiscal years in the period
ended March 28, 1997, the three months ended June 30, 1997, and the nine months
ended March 28, 1997 and March 31, 1998. The Statement of Operations Data set
forth below for the five year period ended March 28, 1997 and the three month
period ended June 30, 1997 are derived from the audited financial statements of
the Company. The Statement of Operations Data for the nine months ended March
28, 1997 and March 31, 1998, and the Balance Sheet Data as of March 31, 1998
were derived from the unaudited consolidated financial statements of the
Company. The Company believes that the unaudited consolidated financial
statements include all adjustments (consisting only of normal recurring
accruals) necessary for the fair presentation of the information set forth
herein. Results for the nine months ended March 31, 1998 are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole. The following selected financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>

FISCAL YEAR ENDED
---------------------------------------------------------------
APRIL 2, APRIL 1, MARCH 31, MARCH 29, MARCH 28,
1993 1994 1995 1996(1) 1997
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(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $167,940 $ 211,196 $ 319,958 $ 425,333 $ 479,524
Gross profit................ 10,225 11,397 16,095 20,272 21,640
Income from operations...... 1,565 2,077 4,441 1,947 4,224
Income (loss) before income
tax provision (benefit)... 480 713 2,478 (1,498) 1,279
Net income (loss)........... 253 374 1,409 (1,109) 739
Basic earnings (loss) per
share..................... (5) $ 0.16 $ 0.55 $ (0.37) $ 0.24
Diluted earnings (loss) per
share..................... (5) $ 0.16 $ 0.49 $ (0.37) $ 0.24
Weighted average shares
outstanding (basic)....... (5) 2,394,022 2,547,334 2,971,117 3,033,536
Weighted average shares
outstanding (diluted)..... (5) 2,925,439 3,114,129 2,971,117 3,588,943

<CAPTION>
THREE
MONTHS NINE MONTHS ENDED
ENDED -----------------------
JUNE 30, MARCH 28, MARCH 31,
1997(2) 1997 1998(2)
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $ 144,473 $ 373,114 $ 442,908
Gross profit................ 6,016 16,444 21,269
Income from operations...... 1,247 3,199 5,925
Income (loss) before income
tax provision (benefit)... 643 1,055 3,876
Net income (loss)........... 363 627 2,283
Basic earnings (loss) per
share..................... $ 0.12 $ 0.21 $ 0.70
Diluted earnings (loss) per
share..................... $ 0.11 $ 0.20 $ 0.62
Weighted average shares
outstanding (basic)....... 3,054,994 3,039,195 3,244,501
Weighted average shares
outstanding (diluted)..... 3,626,831 3,597,451 3,789,946
</TABLE>

<TABLE>
<CAPTION>
AT MARCH 31, 1998
----------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
-------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $116,693 $119,047 $119,047
Working capital............................................. 41,901 42,861 42,861
Intangible assets........................................... 11,812 24,083 24,083
Total assets................................................ 143,165 154,393 154,393
Long-term debt.............................................. 54,834 61,143 39,343
Stockholders' equity........................................ 13,539 17,116 38,916
</TABLE>

- ---------------
(1) Net income (loss) before income tax provision includes non-recurring
expenses of $1,317 incurred related to fixed overhead expenses and costs
associated with the consolidation of Northern and Krelitz.

(2) In June 1997, the Company changed from a fiscal year ending on the Friday
closest to March 31 in each year to a fiscal year ending June 30 of each
year. The Company began its first full fiscal year on the new basis on July
1, 1997. As a result, the three months ended June 30, 1997 do not fall
within fiscal 1997 or fiscal 1998 and are presented on a stand-alone basis.

(3) Reflects pro forma adjustments for: (i) the issuance of 180,000 shares of
Common Stock to be issued to J. David McCay upon his exchange of 18% of the
outstanding capital stock of PBI; (ii) the acquisition by the Company of an
additional 18% equity interest in PBI; and (iii) the required consolidation
of PBI's balance sheet as of March 31, 1998 with that of the Company as a
result of the increase in the Company's ownership interest in PBI to
approximately 68%.

(4) Reflects the sale of 1,200,000 shares of Common Stock offered by the Company
hereby, based on an assumed public offering price of $19.875 per share, and
the application of the net proceeds therefrom.

(5) The Company completed its initial public offering in fiscal 1993, and
accordingly, this amount is not meaningful.

7
<PAGE> 9

RISK FACTORS

Prospective investors should carefully consider the following risk factors
in addition to the other information set forth in this Prospectus in evaluating
the Company and its business before purchasing shares of the Common Stock
offered hereby. It should be recognized that risks in addition to those set
forth below may be significant, presently or in the future, and the risks set
forth below may affect the Common Stock or the Company to a greater or lesser
extent than indicated.

COMPETITION

The wholesale distribution of pharmaceuticals is highly competitive, with
national and regional distributors competing primarily on the basis of service
and price. Other competitive factors include delivery service, credit terms,
breadth of product line, customer support and merchandising and marketing
programs. The Company competes with large, national distributors such as
McKesson Corporation, Bergen Brunswig Corporation, Cardinal Health, Inc.,
Bindley-Western Industries, Inc. and AmeriSource Health Corporation, as well as
with local and regional wholesalers, manufacturers and generic pharmaceutical
telemarketers and specialty distributors. Certain of the Company's competitors
have significantly greater financial, distribution and marketing resources than
the Company. Additionally, most of the products sold by the Company are
available from multiple sources and most of the Company's customers also utilize
other wholesale distributors. Competitors of the Company could obtain exclusive
rights from manufacturers to market particular products that currently are not
subject to exclusive distribution arrangements and/or currently are distributed
by the Company. In addition, manufacturers could elect to sell a higher
proportion of their products directly to customers, thereby decreasing the
demand for such products from wholesale distributors and increasing competition.
There can be no assurance that the Company will not encounter increased
competition in the future or that increased competition will not have a material
adverse affect on the Company's business, results of operations or financial
condition. See "Business -- Competition."

DEPENDENCE ON RELATIONSHIPS WITH SUPPLIERS

During fiscal 1997 and fiscal 1998, the Company's 10 largest suppliers
accounted for more than 45% and 70% (by dollar volume), respectively, of the
Company's purchases. The Company has agreements with substantially all leading
manufacturers for the wholesale purchase of pharmaceuticals; however, the
Company's ability to purchase pharmaceuticals, or to expand the scope of
pharmaceuticals purchased, from a particular supplier is dependent, to a large
extent, upon such supplier's assessment of the Company's creditworthiness and
the Company's ability to resell the products it purchases. If the Company ceased
to be able to purchase pharmaceuticals from any of its significant suppliers,
such occurrence could have a material adverse effect on the Company's business,
financial condition and results of operations because many suppliers own
exclusive patent rights and are the sole manufacturers of certain
pharmaceuticals. If the Company became unable to purchase patented products from
any such supplier, the Company would be required to purchase such products from
other distributors on less favorable terms, thereby eliminating the Company's
profit margin on the sale of such products. Substantially all of the Company's
agreements with suppliers are terminable by either party upon short notice and
without penalty. See "Business -- Purchasing and Inventory Control."

CONCENTRATION OF CUSTOMERS

During fiscal 1997 and fiscal 1998, the Company's 10 largest customers
accounted for approximately 47.2% and 37.1%, respectively, of the Company's
revenues. The Company's largest customer during fiscal 1997 accounted for
approximately 20.0% of the Company's revenues during that period, and its
largest customer during fiscal 1998, Anthem Prescription Management, Inc.
("Anthem"), accounted for approximately 13.1% of the Company's revenues during
that period. The Company's contracts with its customers generally permit the
customer to terminate the contract or reduce purchasing levels on relatively
short notice without penalty. The termination of a contract by a significant
customer of the Company or a significant decline in the level of purchases made
by a significant customer could have a material adverse effect on the Company's
business, financial condition or results of operations. Additionally, an adverse
change in the
8
<PAGE> 10

financial condition of a significant customer, including an adverse change as a
result of a change in governmental or private reimbursement programs, could have
a material adverse effect on the Company. See "Business -- Customers and
Markets."

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the services of its senior management and on
the relationships between the Company's key personnel and its significant
customers and suppliers. The loss of certain members of the Company's senior
management or of key purchasing or sales personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
As is generally true in the industry, if any of the Company's senior management
or key personnel with an established reputation within the industry were to
leave the Company's employ, there can be no assurance that customers or
suppliers of the Company who have relationships with such person would not
purchase products from such person's new employer, rather than from the Company
or would continue to sell inventory to the Company on terms at least as
favorable as before such person's departure. Only two of the Company's senior
management and key purchasing or sales personnel have entered into employment
agreements or non-competition agreements with the Company and there can be no
assurance that the services of these individuals will continue to be available
to the Company. See "Management."

RISKS OF EXPANSION THROUGH ACQUISITION

One aspect of the Company's growth and operating strategy is to expand
within its geographic markets and into nearby geographic markets through
selected acquisitions of other drug wholesalers and companies in complementary
businesses. There can be no assurance, however, that suitable acquisition
candidates will be identified, that acquisitions can be consummated on
acceptable terms, that any acquired companies can be integrated successfully
into the Company's operations or that the Company will be able to retain an
acquired company's significant customer and supplier relationships or otherwise
realize the intended benefits of any acquisition. Growth through acquisitions
also could divert management's attention away from the Company's core business,
resulting in the Company incurring liabilities that were not known at the time
of acquisition or create tax and accounting problems for the Company. Failure to
accomplish future acquisitions could limit the Company's revenues and earnings
potential. While the Company evaluates possible acquisition candidates from time
to time and has recently signed a letter of intent to acquire a small software
development company, the Company has no commitments, understandings or
arrangements with respect to any other acquisitions.

RISKS INHERENT IN THE WHOLESALE PHARMACEUTICAL DISTRIBUTION INDUSTRY

Over the past decade, participants in the wholesale pharmaceutical
distribution industry have experienced declining gross and operating margins.
Industry sources estimate that the average gross margin of companies in the
industry has decreased from approximately 7.6% in 1987 to approximately 5.4% in
1996. The profitability of wholesale distributors, including the Company, is
largely dependent upon earning volume incentives, cash discounts and rebates
from pharmaceutical manufacturers. The Company's profitability is also
increasingly dependent on its ability to purchase inventory in advance of
anticipated or known manufacturer price increases. Although investment buying
opportunities (for which the Company competes with other wholesalers) may enable
the Company to increase its gross margin when manufacturers increase prices,
such buying requires subjective assessments of future price changes as well as
significant working capital. If the Company's gross margins declined
significantly, its business, results of operations and financial condition could
be materially adversely affected.

The healthcare industry has undergone significant change in recent years as
a result of various efforts to reduce costs, including proposed national
healthcare reform, trends toward managed care, spending cuts in Medicare,
consolidation of pharmaceutical and medical/surgery supply distributors, the
development of large, sophisticated purchasing groups and efforts by traditional
third party payors to contain or reduce healthcare costs. The Company cannot
predict whether these trends will continue or whether any other healthcare
reform efforts will be enacted and what effect any such reforms may have on the
Company, its practices and products

9
<PAGE> 11

or its customers and suppliers. Changes in governmental financial support of
healthcare services, the methods by which such services are delivered, the
prices for such services or other legislation or regulations governing such
services or mandated benefits may have a material adverse effect on the
Company's business, financial condition and results of operations.

DEPENDENCE ON INFORMATION SYSTEMS

The Company is dependent on its information systems to receive and process
customer orders, initiate orders with product suppliers, distribute products to
its customers in a timely and cost-effective manner, track and secure inventory
and maintain compliance with federal and state regulations. Any disruption in
the Company's information systems could have a material adverse effect on the
Company's business, financial condition and results of operations.

REGULATORY MATTERS

The Company, as a distributor of certain controlled substances and
prescription pharmaceuticals, is required to register with and obtain licenses
and permits from certain federal and state agencies and must comply with
operating and security measures prescribed by those agencies. The Company is
also subject to various regulations including the 1987 Prescription Drug
Marketing Act, an amendment to the federal Food, Drug and Cosmetic Act, which
regulates the purchase, storage, security and distribution of prescription
pharmaceuticals. The Company's compliance with these regulations is monitored
through periodic site inspections conducted by various governmental agencies.
Although the Company believes that it is in substantial compliance with all
federal and state statutes and regulations concerning its activities, any
failure to comply with these regulations could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that future changes in applicable laws or regulations will not
materially increase the costs of conducting business or otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations.

NO DIVIDENDS

The Company has never paid a dividend and currently anticipates that all of
its future earnings will be retained for the development and expansion of the
Company's business. The Company is prohibited from paying any cash dividends on
the Common Stock by the terms of its current revolving credit facility. See
"Dividend Policy."

YEAR 2000 ISSUES

The Company is dependent upon its software programs and operating systems
for internal operations (e.g., inventory and warehouse management and processing
product orders with its customers and suppliers). See "-- Dependence on
Information Systems." The Company has made a preliminary determination that it
will not incur any significant costs to make the Company's software programs and
operating systems Year 2000 compliant and is making inquiries regarding the
magnitude of any Year 2000 problems that may be resident in the software
programs and operating systems of its customers and suppliers, or the impact
that any such problems could have on the sales made and services provided by the
Company to such customers or suppliers. The occurrence of Year 2000-related
failures in the software programs and operating systems of any of the Company's
significant customers or suppliers could have a material adverse effect on the
Company's business, financial condition and results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock may be subject to significant
fluctuations in response to various factors, such as quarterly fluctuations in
the Company's operating results, changes in securities analysts' estimates of
the Company's future earnings, the Company's loss of significant customers or
suppliers or significant business developments relating to the Company or its
competitors. The market price of the Common Stock also may be affected by the
Company's ability to meet analysts' expectations and any failure

10
<PAGE> 12

to meet such expectations, even if minor, could have a material adverse effect
on the market price of the Common Stock. Because the number of shares of Common
Stock that will be publicly traded after the Offering is small relative to the
number of publicly traded shares of many other companies, the market price of
the Common Stock may be more susceptible to fluctuation. In addition, the stock
market has experienced a high level of price and volume volatility, and the
market prices of equity securities of many companies have experienced wide price
fluctuations not necessarily related to the operating performance of such
companies. These broad market fluctuations may adversely affect the market price
of the Common Stock. In the past, securities class action lawsuits frequently
have been instituted against companies following periods of volatility in the
market price of such companies' securities. If any such litigation is instigated
against the Company, it could result in substantial costs to the Company and a
diversion of management's attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation and Bylaws contain certain
provisions that reduce the probability of a change of control or an acquisition
of the Company, even if the current directors and executive officers were to
significantly reduce their percentage ownership of the Common Stock as a group.
These provisions include, but are not limited to: (i) the ability of the Board
of Directors to issue preferred stock in one or more series with such rights,
obligations and preferences as the board may determine, without any further vote
or action by the stockholders and (ii) a classified Board of Directors. In
addition, the Company is subject to Section 203 of the Delaware General
Corporation Law which, under certain circumstances, may prohibit a business
combination between the Company and a stockholder owning 15% or more of the
outstanding voting power of the Company. This provision may have the effect of
delaying, deterring, or preventing certain potential acquisitions or a change in
control of the Company, even if the Company's stockholders consider such
transactions to be in their best interests. See "Management -- Board of
Directors and Committees" and "Description of Capital Stock."

FORWARD-LOOKING STATEMENTS

Statements herein regarding the Company's prospective business, market
position and growth and acquisition opportunities are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and involve
substantial risks and uncertainties. Forward-looking statements include
statements contained in the "Prospectus Summary" and "Business" sections of this
Prospectus regarding the Company's ability to: (i) continue to grow through
acquisitions of businesses and integrate acquired businesses successfully into
its existing operations; (ii) optimize its sales mix among customers in the
various market segments of the industry; (iii) capitalize on trends in the
wholesale distribution industry; and (iv) achieve increased economies of scale
and greater cost-effectiveness. Forward-looking statements also include
statements relating to the Company or its operations that are preceded by terms
such as "expects," "believes," "intends" and similar expressions. The Company's
actual results of operation or financial performance may differ materially from
those implied by such forward-looking statements as a result of various factors,
including, without limitation, the following: The wholesale pharmaceutical
distribution industry is very competitive and many of the Company's competitors
have substantially greater resources than the Company. The Company's contracts
with its customers generally enable the customer to terminate the contract or
reduce purchasing levels on relatively short notice without penalty. The
Company's relationships with its customers and suppliers, and its ability to
increase its operating margins, is dependent, to a large extent, upon the
efforts of its senior management and key sales personnel and the continued
availability of inventory investment buying opportunities. Actual results also
may vary as a result of the other factors described under "Risk Factors."

11
<PAGE> 13

USE OF PROCEEDS

The net proceeds from the sale of the 1,200,000 shares of Common Stock
offered by the Company hereby, based on an assumed public offering price of
$19.875 per share and after deducting the underwriting discounts and commissions
and estimated offering expenses, are estimated to be approximately $21.8 million
($26.3 million if the Underwriters' over-allotment option is exercised in full).
The Company intends to use the proceeds to repay a portion of the outstanding
balance under its revolving line of credit. At June 30, 1998, the outstanding
balance was $60.2 million and bore interest at the rate of 6.9375% per annum.
Borrowings under the line of credit were utilized by the Company primarily to
fund working capital requirements.

DIVIDEND POLICY

The Company currently anticipates that, after completion of the Offering,
all of its earnings will be retained for development and expansion of the
Company's business and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. The Company is prohibited from paying
dividends or making other distributions on the Common Stock by the terms of its
current revolving credit facility.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "DKWD" since January 1998. Prior thereto, it was traded on the
Nasdaq Small Cap Market since September 1992. The following table sets forth,
for the periods indicated, the high and low closing sale prices of the Common
Stock, as reported by the Nasdaq Small Cap Market and commencing in January 1998
by the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------------ -------------
<S> <C> <C>
Fiscal 1996
First Quarter............................................. $ 7 1/2 $ 5 3/4
Second Quarter............................................ $ 7 1/2 $ 6 1/4
Third Quarter............................................. $ 8 1/8 $ 6 3/4
Fourth Quarter............................................ $ 8 7/8 $ 7 1/4
Fiscal 1997
First Quarter............................................. $ 8 1/2 $ 5 1/8
Second Quarter............................................ $ 6 1/8 $ 4 5/8
Third Quarter............................................. $ 4 7/8 $ 3 3/8
Fourth Quarter............................................ $ 5 7/8 $ 3 9/16
Three Months Ended June 30, 1997.......................... $ 5 5/8 $ 4 3/8
Fiscal 1998
First Quarter............................................. $ 8 1/8 $ 5 1/8
Second Quarter............................................ $ 9 1/4 $ 7 11/16
Third Quarter............................................. $14 3/4 $ 8 3/8
Fourth Quarter............................................ $23 1/2 $13 3/8
Fiscal 1999
First Quarter (through July 28, 1998)..................... $25 $19 3/8
</TABLE>

On July 28, 1998, the reported closing price of the Common Stock on the
Nasdaq National Market was $19 7/8 per share. As of July 15, 1998, the Company
had approximately 80 holders of record of the Common Stock.

12
<PAGE> 14

CAPITALIZATION

The following table sets forth the consolidated long-term debt and
capitalization of the Company as of March 31, 1998 and as adjusted to reflect:
(i) pro forma adjustments for the issuance of 180,000 shares of Common Stock to
one of the Selling Stockholders in exchange for the acquisition by the Company
of an additional 18% equity interest in PBI and the required consolidation of
PBI's balance sheet as of March 31, 1998 with that of the Company as a result of
the increase in the Company's ownership interest in PBI to approximately 68%;
and (ii) the sale of 1,200,000 shares of Common Stock offered by the Company
hereby at an assumed public offering price of $19.875 and the application of the
estimated net proceeds from such sale as set forth in "Use of Proceeds." See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The table should be read in connection with the Company's
Consolidated Financial Statements and the Notes thereto.

<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current Portion of Long-Term Debt........................... $ 2,794 $ 2,979 $ 2,979
======= ======= =======
Total Long-Term Debt, Less Current Portion.................. 54,834 61,143 39,343
------- ------- -------
Stockholders' Equity
Preferred stock; no par value, 1,000,000 shares
authorized, no shares issued or outstanding............ -- -- --
Common stock; $.01 par value, 10,000,000 shares
authorized, 3,610,395 shares (3,790,395 pro forma and
4,990,395 as adjusted) issued and outstanding(1)....... 36 38 50
Paid-in capital........................................... 13,707 17,282 39,070
Accumulated deficit....................................... (204) (204) (204)
------- ------- -------
Total stockholders' equity............................. 13,539 17,116 38,916
------- ------- -------
Total Capitalization........................................ $68,373 $78,259 $78,259
======= ======= =======
</TABLE>

- ---------------
(1) Does not include: (i) 441,998 shares of Common Stock issuable upon exercise
of options granted under the Company's 1992 Long Term Incentive Plan and
under its 1993 Stock Option Plan; (ii) 22,072 shares of Common Stock
issuable under certain circumstances upon exercise of warrants; (iii) 20,000
shares of Common Stock issuable to Robert E. Korenblat upon his exchange of
2% of the outstanding capital stock of PBI; and (iv) an indeterminate number
of shares of Common Stock issuable to Massachusetts Mutual Life Insurance
Company and its affiliates upon their exchange of 30% of the outstanding
capital stock of PBI. See "Principal and Selling Stockholders," "Certain
Transactions" and "Description of Capital Stock."

13
<PAGE> 15

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated historical financial
data for the Company for each of the five fiscal years in the period ended March
28, 1997, the three months ended June 30, 1997 and the nine months ended March
28, 1997 and March 31, 1998. The Statement of Operations Data set forth below
for the five year period ended March 28, 1997 and the three month period ended
June 30, 1997, and the Balance Sheet Data as of the last day of each of fiscal
1993 through fiscal 1997 and as of the last day of the three month period ended
June 30, 1997 were derived from the audited consolidated financial statements of
the Company. The selected consolidated financial data for the nine months ended
March 28, 1997 and March 31, 1998 were derived from the unaudited consolidated
financial statements of the Company. The Company believes that the unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring accruals) necessary for the fair presentation of the
information set forth therein. Results for the nine months ended March 31, 1998,
are not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole. The following selected financial data
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------
APRIL 2, APRIL 1, MARCH 31, MARCH 29, MARCH 28,
1993 1994 1995 1996(1) 1997
-------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................... $167,940 $ 211,196 $ 319,958 $ 425,333 $ 479,524
Gross profit................ 10,225 11,397 16,095 20,272 21,640
Income from operations...... 1,565 2,077 4,441 1,947 4,224
Income (loss) before income
tax provision............. 480 713 2,478 (1,498) 1,279
Net income (loss)........... 253 374 1,409 (1,109) 739
Basic earnings (loss) per
share..................... (3) $0.16 $0.55 $(0.37) $0.24
Diluted earnings (loss) per
share..................... (3) $0.16 $0.49 $(0.37) $0.24
Weighted average shares
outstanding (basic)....... (3) 2,394,022 2,547,334 2,971,117 3,033,536
Weighted average shares
outstanding (diluted)..... (3) 2,925,439 3,114,129 2,971,117 3,588,943
BALANCE SHEET DATA AT END OF PERIOD:
Current assets.............. $ 31,552 $ 35,569 $ 73,338 $ 68,938 $ 75,333
Working capital............. 9,523 14,154 27,395 25,224 24,270
Total assets................ 39,818 43,352 95,787 94,937 101,466
Long-term debt.............. 13,705 17,858 39,991 43,190 41,530
Stockholders' equity........ 3,704 4,078 8,784 8,033 8,873

<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED ----------------------
JUNE 30, MARCH 28, MARCH 31,
1997(2) 1997 1998(2)
------------ --------- ---------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales................... $ 144,473 $ 373,114 $ 442,908
Gross profit................ 6,016 16,444 21,269
Income from operations...... 1,247 3,199 5,925
Income (loss) before income
tax provision............. 643 1,055 3,876
Net income (loss)........... 363 627 2,283
Basic earnings (loss) per
share..................... $0.12 $0.21 $0.70
Diluted earnings (loss) per
share..................... $0.11 $0.20 $0.62
Weighted average shares
outstanding (basic)....... 3,054,994 3,039,195 3,244,501
Weighted average shares
outstanding (diluted)..... 3,626,831 3,597,451 3,789,946
BALANCE SHEET DATA AT END OF
Current assets.............. $ 73,521 $ 75,333 $ 116,693
Working capital............. 15,514 24,270 41,901
Total assets................ 99,061 101,466 143,165
Long-term debt.............. 31,676 41,530 54,834
Stockholders' equity........ 9,378 8,873 13,539
</TABLE>

(3) The Company completed its initial public offering in fiscal 1993, and
accordingly, this amount is not meaningful.

14
<PAGE> 16

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

OVERVIEW

The Company was founded in December 1987 through the acquisition of Delta
Wholesale Drug, Inc. and W. Kelly Company.

The Company's revenues have grown at a compound annual growth rate of
approximately 30.0%, from $167.9 million in fiscal 1993 to $479.5 million in
fiscal 1997. As compared to the prior fiscal year, revenues grew by
approximately 25.8% in fiscal 1994, 51.5% in fiscal 1995, 32.9% in fiscal 1996
and 12.7% in fiscal 1997. See "Selected Consolidated Financial Data." Such
growth is attributable to internal growth as well as to the Company's
acquisitions of three pharmaceutical wholesale distributors and related
businesses. The Company's internal growth resulted from obtaining new customers
and increasing sales to existing customers, which the Company attributes in part
to its sales and marketing effort and its focus on value-added customer
services.

From fiscal 1993 to fiscal 1997, the Company's gross margins decreased from
6.09% to 4.51%. This decrease is attributable primarily to industry-wide
reductions in selling margins, more aggressive negotiating by customers and
increased sales to healthcare institutions, which typically generate higher
volume but lower gross margins. During this time period, operating margins
decreased as the Company was not able to proportionately reduce its operating
expenses. Operating margins increased from 0.88% in fiscal 1997 to 1.34% for the
first nine months of fiscal 1998 due to operating leverage created by the
Company's expanding sales base. The Company believes that its declining gross
margins and, until recently, operating margins are consistent with industry
averages.

The Company actively evaluates inventory investment buying opportunities to
take advantage of anticipated manufacturer price increases. By taking advantage
of such opportunities, the Company's gross margin may increase when
manufacturers increase prices for products the Company distributes out of
inventory.

The following table sets forth certain statement of operations data for the
last three fiscal years and the nine months ended March 28, 1997 and March 31,
1998, expressed as a percentage of total revenue for each fiscal year.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
MARCH 28, MARCH 31,
FISCAL 1995 FISCAL 1996 FISCAL 1997 1997 1998
----------- ----------- ----------- --------- ---------
(AS A PERCENTAGE OF TOTAL NET SALES)
<S> <C> <C> <C> <C> <C>
Net Sales................................. 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales............................. 94.97% 95.23% 95.49% 95.59% 95.20%
Gross Profit.............................. 5.03% 4.77% 4.51% 4.41% 4.80%
Operating Expenses........................ 3.31% 3.59% 3.31% 3.25% 3.20%
Income from Operations.................... 1.39% 0.46% 0.88% 0.86% 1.34%
Net Income (loss)......................... 0.44% (0.26%) 0.15% 0.17% 0.52%
</TABLE>

The Company's net sales include the sale of branded pharmaceuticals
(approximately % of net sales in fiscal 1998), generic pharmaceuticals
(approximately % of net sales in fiscal 1998) and over-the-counter health and
beauty aids (approximately % of net sales in fiscal 1998). Net sales
constitute revenues less returns and allowances.

Inventories are recorded at the lower of cost or market, with cost being
primarily determined using the last-in, first-out ("LIFO") method. At March 31,
1998, 96.8% of the Company's inventories were stated on a LIFO basis. The
Company uses the LIFO method of accounting for inventories because it believes
that this method more realistically matches current product costs with current
product sales and minimizes the effect of inflationary cost increases on
inventory values.

In November 1995, the Company acquired approximately 50% of the voting and
non-voting capital stock of Pharmaceutical Buyers, Inc. ("PBI"), a
Colorado-based group purchasing organization. PBI's members

15
<PAGE> 17

include long-term care and home infusion providers, home medical equipment
dealers, medical distributors and other healthcare providers. The Company's
investment in PBI initially was accounted for under the equity method; however,
in connection with the Offering, one of the Selling Stockholders has notified
the Company that he intends to exercise his right to exchange his 18% equity
interest in PBI for 180,000 shares of Common Stock. As a result of such
exchange, the Company will own approximately 68% of the capital stock of PBI and
will be required to account for PBI on a consolidated basis as of the date of
exchange. This consolidation will require the Company to record approximately
$6.0 million of additional goodwill, which will result in approximately $200,000
of additional amortization expense in each of the next 22.5 years. See "Certain
Transactions."

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain statement of operations data for the
last eight quarters, and such data expressed as a percentage of total revenue
for each quarter. This data has been derived from the Company's unaudited
quarterly financial statements. In management's opinion, these quarterly
financial statements have been prepared on a basis consistent with the audited
financial statements contained elsewhere herein and include all adjustments,
consisting only of normal recurring accruals, which the Company considers
necessary for a fair presentation of the information presented, when read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus. The results of operations for
any quarter and any quarter-to-quarter trends are not necessarily indicative of
the results to be expected for any future periods.

<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------------------------------------
FISCAL 1997 FISCAL 1998
-------------------------------------------- --------------------------------
6/30/96 9/30/96 12/31/96 3/28/97 6/30/97(1) 9/30/97 12/31/97 3/31/98
-------- -------- -------- -------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............ $106,409 $113,904 $130,756 $128,454 $144,473 $149,024 $138,570 $155,314
Cost of Sales........ 101,213 108,925 125,351 122,394 138,457 142,645 131,754 147,240
Gross Profit......... 5,196 4,979 5,405 6,060 6,016 6,379 6,816 8,074
Operating Expenses... 4,170 4,192 4,390 4,664 4,769 5,010 4,892 5,442
Income from
Operations......... 1,026 787 1,015 1,396 1,247 1,369 1,924 2,632
Net Income........... 113 55 194 378 363 509 712 1,062
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------
FISCAL 1997 FISCAL 1998
-------------------------------------------- --------------------------------
6/30/96 9/30/96 12/31/96 3/28/97 6/30/97(1) 9/30/97 12/31/97 3/31/98
-------- -------- -------- -------- ---------- -------- -------- --------
(AS A PERCENTAGE OF NET SALES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............ 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales........ 95.12 95.63 95.87 95.28 95.84 95.72 95.08 94.80
Gross Profit......... 4.88 4.37 4.13 4.72 4.16 4.28 4.92 5.20
Operating Expenses... 3.92 3.68 3.36 3.63 3.30 3.36 3.53 3.50
Income from
Operations......... 0.96 0.69 0.78 1.09 0.86 0.92 1.39 1.69
Net Income........... 0.11 0.05 0.15 0.29 0.25 0.34 0.51 0.68
</TABLE>

- ---------------
(1) In June 1997, the Company changed from a fiscal year ending on the Friday
closest to March 31 in each year to a fiscal year ending June 30 of each
year. The Company began its first full fiscal year on the new basis on July
1, 1997. As a result, the three months ended June 30, 1997 do not fall
within fiscal 1997 or fiscal 1998 and are presented on a stand-alone basis.

RESULTS OF OPERATIONS

NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE NINE MONTHS ENDED MARCH 28,
1997

Net Sales. Net sales increased $69.8 million, or 18.7%, for the nine months
ended March 31, 1998, compared to the corresponding period of the prior year.
Sales to health care institutions increased $30.5 million, or 29.7%, compared to
the same period in fiscal 1997, due to increased sales to a prescription

16
<PAGE> 18

benefit management customer added as a customer in August 1996 and higher sales
to new and existing hospital, clinic and nursing home accounts. Independent
pharmacy sales increased by $51.5 million, or 30.3%, compared to the same period
in fiscal 1997, from higher sales to new and existing retail accounts, including
$38.6 million to an association of retail pharmacies added as a customer in May
1997 and $4.9 million to independent pharmacies which became customers of the
Company as a result of the Company's acquisition of a drug wholesaler in October
1997. Partially offsetting these sales increases was a net decrease in retail
chain sales of $12.8 million, or 14.1%, compared to the same period in fiscal
1997 primarily due to the termination of the Company's relationship with a large
regional retail chain customer on September 30, 1997 (a decrease of
approximately $45.9 million) partially offset by increased sales to other
existing and new retail chain customers of approximately $33.1 million.
Excluding sales made to the former large regional retail chain customer from the
nine-month period in the prior year, net sales would have increased 38.3% for
the nine months ended March 31, 1998. In addition, during the current nine-month
period the Company had $25.2 million of "dock-to-dock" sales, which are not
included in net sales due to the Company's accounting policy of recording only
the commission on such transactions as a reduction of cost of goods sold. There
were no dock-to-dock sales during the nine months ended March 28, 1997.
Dock-to-dock sales represent bulk sales of pharmaceuticals to self-warehousing
retail chains in which the Company acts only as an intermediary in the order and
subsequent delivery of products to the customers' warehouses. The commission on
dock-to-dock sales is typically lower than the gross profit realized on sales of
products from inventory.

Gross Profit. Gross profit increased 29.3% to $21.3 million for the
nine-month period ended March 31, 1998, compared to the corresponding period of
the prior year. As a percentage of net sales, gross margin increased from 4.41%
to 4.80% for the nine-month period ended March 31, 1998, compared to the
corresponding period of the prior year. The increase in gross margin percentage
was due mainly to a shift in customer mix to higher margin business, higher
sales of more profitable generic pharmaceutical products and bulk sales of
inventory acquired through advantageous purchasing.

Operating Expenses. Operating expenses increased $2.1 million, or 15.8%, to
$15.3 million for the nine-month period ended March 31, 1998, compared to the
corresponding period of the prior year. As a percentage of net sales, operating
expenses decreased from 3.55% to 3.46% for the nine-month period ended March 31,
1998 compared to the corresponding period of the prior year. The increase in
operating expenses for the nine-month period ended March 31, 1998 resulted
primarily from incremental warehouse and distribution costs associated with
increased sales activity, higher personnel and occupancy costs related to
additional managerial positions in several major functional areas of the
Company, and legal fees associated with the conclusion at September 30, 1997, of
the Company's relationship with its previously largest customer.

Net Interest Expense. Net interest expense decreased $154,000 or 6.0% for
the nine-month period ended March 31, 1998, compared to the corresponding period
of the prior year. As a percentage of net sales, net interest expense decreased
from 0.69% to 0.54% for the nine-month period ended March 31, 1998, compared to
the corresponding period of the prior year. The decrease in net interest expense
was primarily the result of amendments to the terms of the Company's senior debt
agreement, which reduced the interest rate on its line of credit from LIBOR plus
2.5% to LIBOR plus 1.5%. In addition, the collection of approximately $9.5
million of accounts receivable on September 30, 1997 from the Company's then
largest customer, with which the Company's relationship was mutually terminated
in September 1997, reduced the Company's working capital requirements and its
borrowings. Also, on April 24, 1998, the interest rate on its senior revolving
credit facility was reduced by 0.25% to LIBOR plus 1.25%.

Other Income, Net. Other income, net decreased from $418,000 to $359,000
for the nine-month period ended March 31, 1998, compared to the corresponding
period of the prior year. The decrease in other income, net was primarily due to
lower recorded earnings from the Company's equity interest in the net income of
PBI during the nine-month period ended March 31, 1998, which totaled $281,000
for the period compared to $410,000 for the same period in 1997.

The Company's effective income tax rate of 41.0%, which was applied to
pretax income in the nine-month period ended March 31, 1998, is the estimated
effective tax rate for fiscal 1998. This rate is greater than the federal income
tax rate of 34% primarily because of the amortization of intangible assets that
are not

17
<PAGE> 19

deductible for federal and state income tax purposes, partially offset by the
Company's equity in the net income of PBI, a portion of which is excludable from
taxable income, and the effect of state income taxes.

The excess of LIFO costs over FIFO costs were $909,000 and $1,048,000,
respectively, for the nine-month periods ended March 31, 1998 and March 28,
1997.

FISCAL 1997 COMPARED TO FISCAL 1996

Net Sales. Net sales increased $54.2 million, or 12.7%, to $479.5 million
in fiscal 1997 compared to fiscal 1996. Sales to healthcare institutions
increased $41.0 million, or 49.1%, primarily due to the addition of a
prescription benefit management customer in August 1996. Retail chain sales
decreased $3.1 million, or 2.3% primarily due to a reduction of $13.7 million in
sales to a group of regional pharmacies which discontinued using the Company as
its primary supplier effective June 30, 1995, offset by a $10.6 million increase
in sales to several retail chains, including $6.0 million to a large regional
retail chain. The remaining increase in sales of $16.3 million in 1997 was due
to the growth in sales to independent pharmacies.

Gross Profit. Gross profit as a percentage of net sales declined from 4.77%
in fiscal 1996 to 4.51% in fiscal 1997. The decrease in gross margin in fiscal
1997 reflected the impact of sales to the new prescription benefit management
customer which yielded relatively low selling margins but generated favorable
working capital benefits by reducing the Company's overall borrowing costs. In
addition, a significant reduction in sales to certain retail chain customers
which carried more favorable selling margins, combined with increased sales to
other retail chain customers which carried lower selling margins, contributed to
the decline in the gross margin in fiscal 1997. Despite the reduction in gross
margin during fiscal 1997, gross margin dollars increased $1.4 million, or 6.7%,
due to overall increased sales levels compared to the prior year. The Company
believes that the declining gross margin is consistent with the experience of
its industry as a whole.

Operating Expenses. As a percentage of net sales, total operating expenses
declined from 4.31% in fiscal 1996 to 3.63% in fiscal 1997. The decrease in
total operating expenses as a percentage of sales was attributable primarily to
$1.3 million of nonrecurring expenses incurred in fiscal 1996 in connection with
the Company's consolidation of its Minnesota facilities. The Company acquired
these facilities when it acquired Northern Drug Company ("Northern") and Krelitz
Industries, Inc. ("Krelitz") in fiscal 1995. The Company consolidated its
Northern and Krelitz operations to eliminate redundant fixed overhead expenses.
The improvement in total operating expenses as a percentage of net sales in
fiscal 1997 also reflected enhanced operating efficiencies in the warehouse and
delivery areas which were realized principally on sales to the Company's large
prescription benefit management customer. In addition, the implementation of
various cost management measures contributed to the decline in operating
expenses during fiscal 1997. Total operating expenses for fiscal 1997 reflected
additional selling, administrative, information services and warehouse costs
associated with supporting increased sales levels. In fiscal 1997, the Company
made significant investments in personnel, computer hardware and software and
warehouse systems which management believes positioned it to realize continued
improvements in its operating expense ratio in future periods. Depreciation and
amortization decreased from $1.8 million in fiscal 1996 to $1.5 million in
fiscal 1997 due to certain adjustments made in fiscal 1996 to the recorded
Northern and Krelitz goodwill balances coupled with the discontinuance of
depreciation on the Northern property which had been held for sale since the
1996 consolidation of the Company's Minnesota facilities.

Net Interest Expense. As a percentage of net sales, net interest expense
decreased from 0.90% in fiscal 1996 to 0.78% in fiscal 1997. This decrease was
reflective of improved utilization of working capital in financing the Company's
increased sales levels and the reduction of relatively high interest term debt,
somewhat offset by the incremental interest cost associated with the Company's
November 1995 investment in PBI and the addition of an equipment loan in fiscal
1997. In addition, the weighted average of the Company's LIBOR and prime
borrowing rates were lower compared to the prior year due to reduced interest
rates which commenced during the last quarter of fiscal 1996 and continued into
fiscal 1997.

Other Income, Net. Other income, net increased $250,000 in fiscal 1997
compared with fiscal 1996 primarily due to $410,000 of income in fiscal 1997
from the Company's investment in PBI compared with $88,000 in the prior year.
These amounts are net of amortization expense of $276,000 and $92,000,
18
<PAGE> 20

respectively, for fiscal 1997 and fiscal 1996 associated with goodwill incurred
in conjunction with the Company's investment in PBI. In addition, the Company
recorded a $287,000 charge in fiscal 1996 to fully reserve for its investment in
a wholesale alliance, after the Company determined that the probability of fully
recovering its investment in the alliance was remote.

The effective tax rates (tax benefit in fiscal 1996) of 42.2% in fiscal
1997, and (26.0%) in fiscal 1996 differed from the statutory blended federal and
state effective rates primarily due to the impact of the amortization of
intangible assets that were not deductible for income tax purposes, partially
offset by the Company's equity in the net income of PBI, a portion of which was
excludable from taxable income.

The effect of price inflation, as measured by the excess of LIFO costs over
FIFO costs, was $1.2 million in fiscal 1997 and $663,000 in fiscal 1996. The
increase in the LIFO provision was due to increased sales levels and to
comparatively higher product price inflation.

FISCAL 1996 COMPARED TO FISCAL 1995

Net Sales. Net sales increased $105.4 million, or 32.9%, to $425.3 million
in fiscal 1996 compared to fiscal 1995. The acquisition of Northern and Krelitz
accounted for $100.6 million, or 95.4%, of the increase in sales for fiscal
1996. During fiscal 1996, the Company's operations, other than Northern and
Krelitz, experienced an increase in net sales of $4.8 million. A $31.3 million
decrease in sales was experienced primarily due to the decision of a group of
regional franchise pharmacies not to renew the Company's status as the group's
primary supplier effective as of June 30, 1995. Sales to a large regional retail
chain increased $19.7 million, or 28.3%, to $89.1 million in fiscal 1996
compared with fiscal 1995. The increase was due to expanded sales and the
inclusion of twelve months of sales in fiscal 1996 compared with ten months in
fiscal 1995. Sales to healthcare institutions increased $8.5 million, or 39.7%,
to $29.9 million in fiscal 1996 compared with the prior year. The addition of
new hospitals and expanded sales to existing hospital customers accounted for
the increase. The remaining increase in sales of $8.7 million was due primarily
to greater sales volume with independent pharmacies and retail chains.

Gross Profit. Gross profit as a percentage of net sales declined from 5.03%
in fiscal 1995 to 4.77% in fiscal 1996. The decrease in gross profit in fiscal
1996 reflected the significant decrease in sales to a group of retail chain
customers, which carried more favorable selling margins, combined with the
significant increase in sales to retail chains and healthcare institutions which
generated lower selling margins. The Company believes that the declining gross
margin is consistent with the experience of its industry as a whole.

Operating Expenses. As a percentage of net sales, operating expenses
increased from 3.64% in fiscal 1995 to 4.31% in fiscal 1996. The increase in
operating expense for fiscal 1996 was attributable primarily to the acquisitions
of Northern and Krelitz. Although the Company experienced an increase in sales
due to the acquisitions, operating expenses were proportionately higher due to
the duplication of certain overhead expenses. Effective October 1995, the
Company consolidated the operations of Northern and Krelitz in Minneapolis,
Minnesota. As a result of such acquisitions and consolidation, the Company
incurred additional nonrecurring expenses of approximately $1.3 million.
Excluding sales and expenses from the acquisitions of Northern and Krelitz,
operating expenses as a percentage of net sales would have been 3.1% for fiscal
1996. Depreciation and amortization increased from $1.1 million in fiscal 1995
to $1.8 million in fiscal 1996. The increase reflects additional depreciation
expense associated with the investment in property and equipment and incremental
goodwill amortization from the Northern and Krelitz acquisitions.

Net Interest Expense. As a percentage of net sales, net interest expense
increased from 0.73% in fiscal 1995 to 0.90% in fiscal 1996. The increase in net
interest expense in fiscal 1996 was the result of higher average borrowings
during the year to finance the increased sales, initial investment and working
capital associated with the acquisitions of Northern and Krelitz and the
investment in PBI coupled with a higher weighted average interest rate as
compared with fiscal 1995.

Other Income, Net. Other income, net increased $113,000 in fiscal 1996
compared to fiscal 1995, which was attributable to $88,000 of income from the
Company's 50% ownership of PBI.

19
<PAGE> 21

The effective tax rates (tax benefit in fiscal 1996) of (26.0%) in fiscal
1996 and 43.1% in fiscal 1995 differed from the statutory blended federal and
state effective rates primarily due to the impact of the amortization of
intangible assets that were not deductible for income tax purposes, partially
offset by the Company's equity in the net income of PBI, a portion of which was
excludable from taxable income.

The effect of price inflation, as measured by the excess of LIFO costs over
FIFO costs, was $663,000 in fiscal 1996 and $446,000 in fiscal 1995. The
increase in the LIFO provision was due to increased sales levels and to
comparatively higher product price inflation.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital requirements generally are met through a
combination of internally generated funds, borrowings from the revolving line of
credit and trade credit from its suppliers. The following ratios are utilized by
the Company as key indicators of the Company's liquidity and working capital
management:

<TABLE>
<CAPTION>
MARCH 29, 1996 MARCH 28, 1997 MARCH 31, 1998
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Working capital (000's).............. $25,224 $24,270 $42,190
Current ratio........................ 1.58 to 1 1.48 to 1 1.57 to 1
</TABLE>

The $17.9 million increase in working capital at March 31, 1998 was due
primarily to an increase in inventories of $26.7 million and an increase in
accounts receivable of $14.5 million, offset by an increase in accounts payable
of $23.8 million. The increase in inventories was due to the increased level of
business and the expansion of inventory investment buying opportunities at
favorable prices during the current fiscal period. The increase in accounts
receivable was primarily due to an increase in net sales. The increase in
accounts payable reflects the timing of cash disbursements and higher inventory
levels.

The decrease in working capital in fiscal 1997 was due primarily to
decreases in accounts receivable and prepaid expenses and other current assets
coupled with increases in accounts payable, current maturities of long-term debt
and accrued expenses, offset by increases in the Company's cash and inventories.

The Company invested $726,000 in capital assets in the nine month period
ended March 31, 1998, $2.2 million in fiscal 1997, and $963,000 in fiscal 1996.
The fiscal 1997 investment included approximately $1.3 million of warehouse and
computer equipment and leasehold and site improvements at the Company's 66,000
square-foot warehouse facility located in Cape Girardeau, Missouri. The Company
believes that continued investment in capital assets is necessary to achieve its
goal of improving operating efficiency and information services capabilities,
thereby improving its productivity and ratio of operating expenses to net sales.

During the three month period ended June 30, 1997, the Company sold an idle
distribution facility with a carrying value of $0.7 million for net cash
proceeds of $0.9 million. The gain on the sale is included in other income, net
in the consolidated statements of operations for the three months ended June 30,
1997.

In December 1996, the Company obtained a $1.5 million equipment loan from a
bank through the Missouri First Link program ("Missouri First") to finance
certain capital expenditures at its leased Cape Girardeau, Missouri facility.
During the first year of the four-year agreement, the Missouri First loan
required monthly interest payments. In December 1997, the Company made a
$182,500 principal payment to Missouri First and in December 1998 is required to
make a $437,500 principal payment. Thereafter, the loan requires monthly
principal payments of $36,458 plus interest until the remaining principal
($875,000) is required to be repaid in December 2000. The Missouri First loan
bears interest at 6.45% per annum.

In November 1997, the Company's revolving line of credit was amended to
increase maximum borrowings from $60 million to $75 million. At March 31, 1998
and June 30, 1997 the unused portion of the line of credit was $22.2 million and
$19.3 million, respectively. Interest on borrowings under the line of credit
were reduced in April 1998 to daily LIBOR plus 1.25%.

20
<PAGE> 22

The Company has initiated the placement of a $45.0 million receivables
purchase facility under an asset securitization structure (the "Securitization")
with its primary lender. Once finalized, the Securitization will have an initial
term of three years, with annual renewal options, and bear interest at the
30-Day LIBOR rate (5.6875% at June 30, 1998) plus program and liquidity fees of
0.71% paid monthly. The Company is required to pay a structuring fee of
$225,000, which will be amortized over the initial term of the arrangement.
Under the Securitization, the Company's accounts receivable will be sold on a
non-recourse basis to a bankruptcy-remote subsidiary of the Company as security
for commercial paper issued by an affiliate of the lender. Based upon the
structure of the arrangement, the subsidiary's assets and liabilities,
consisting of accounts receivable and long-term debt, will not be consolidated
with those of the Company. Also, in conjunction with the Securitization, the
term of the Company's revolving line of credit will be extended to July 2001.
The Securitization is expected to be funded in the first quarter of fiscal 1999.
The Company believes that funds available under the line of credit and the
Securitization facility, together with internally generated funds, will be
sufficient to meet its capital requirements for the foreseeable future.

YEAR 2000

The Company is dependent upon its software programs and operating systems
for internal operations (e.g., inventory and warehouse management) and for
processing product orders with its customers and suppliers. The Company has made
a preliminary determination that it will not incur any significant costs to make
the Company's software programs and operating systems Year 2000 compliant and is
making inquiries regarding the magnitude of any Year 2000 problems that may be
resident in the software programs and operating systems of its customers and
suppliers, or the impact that any such problems could have on the sales made and
services provided by the Company to such customers or suppliers. The occurrence
of Year 2000-related failures in the software programs and operating systems of
any of the Company's significant customers or suppliers could have a material
adverse effect on the Company's business, results of operations or financial
condition.

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board recently issued SFAS No. 130
"Reporting Comprehensive Income," which requires that an enterprise report, by
major component and as a single total, the change in its net assets during the
period from nonowner sources; SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers;
SFAS No. 132 "Employers' Disclosures about Pension and Other Postretirement
Benefits," which standardizes the disclosure requirements for pensions and other
postretirement benefits and expands disclosures on changes in benefit
obligations and fair values of plan assets; and SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities," which requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position at fair value. The Company is required to adopt the
provisions of SFAS 130, 131 and 132 in fiscal 1999 and SFAS 133 in fiscal 2000.
Adoption of these statements is not expected to impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures.

21
<PAGE> 23

BUSINESS

OVERVIEW

The Company believes that its regional-market focus and high level of
customer service provide it with competitive advantages and position it to
benefit from trends impacting the industry. Management believes that the
increasing size of the wholesale pharmaceutical industry's larger participants
hampers the ability of these companies to deliver specialized services to all
their customers. The Company has successfully differentiated itself from its
national competitors through its ability to provide flexible and customized
services to its targeted customer segments. In addition, healthcare providers'
need for value-added services which help contain costs and effectively manage
inventory has given the Company the opportunity to capitalize on its cost
competitiveness and advanced systems. The location and quality of the Company's
distribution facilities and satellite transfer depots throughout the Midwest and
South allow the Company to service its customers' and suppliers' needs promptly
and efficiently. The Company has capitalized on the increased demand for
alternate care providers through its fiscal 1996 investment in PBI. PBI is one
of the nation's leading alternate site group purchasing organizations, and the
Company's investment in PBI provides it with access to a higher margin business
segment and insight into alternate site distribution.

22
<PAGE> 24

management; (iii) the growing importance of an efficient distribution model as
customers become more cost-conscious; and (iv) a shift in the delivery of
healthcare services from acute care settings to alternate sites, including
physician offices and extended care facilities.

GROWTH AND OPERATING STRATEGY

Increase Penetration of Existing Markets. The Company has successfully
increased its sales to existing customers and added new customers in its
existing markets by continually focusing on flexibility, innovation and
service. The Company believes that it attracts and retains customers as a
result of its ability to provide a significantly higher level of service to
its customers than many larger, national wholesale pharmaceutical
distributors. Over the past 24 months, the Company has added significant
new customers in each of the market segments it serves, including Schnucks
Markets, Inc., Anthem Prescription Management, Inc., and the TPPA. Although
the Company historically derived a substantial portion of its net sales
(e.g., approximately 78% in fiscal 1992) from independent pharmacies, in
the first nine months of fiscal 1998, the Company derived approximately
50.1% of its net sales from independent pharmacies, approximately 19.8%
from retail chains and approximately 30.1% from healthcare institutions. By
achieving a more balanced mix of sales among these three market segments,
the Company: (i) generates efficiencies by replicating its customer sales
and service model; (ii) creates attractive opportunities for the Company's
suppliers which seek to sell a complete range of retail, acute care, home
care and other products to each of their wholesalers; and (iii) attracts a
greater proportion of higher volume customers which provide significant
opportunities for growth.

Expand Into New Markets. The Company has expanded and intends to
continue to expand its business into new geographic markets by taking
advantage of opportunities created by shifting populations, changing
demographics and new customer and acquisition prospects. For example, in
fiscal 1997 the Company commenced operations in the eastern half of
Tennessee when the TPPA, an association of retail pharmacies, presented a
new and favorable expansion opportunity. In fiscal 1998, the members of the
TPPA collectively represented 10.8% of the Company's net sales. The Company
also plans to continue to pursue selective acquisitions of businesses that
enable the Company to: (i) enhance and improve the level of service it
provides to its customers and suppliers; and (ii) offer complementary
products and solutions to its customers, making the Company a primary
vendor for its core business lines and related services and solutions. The
Company's investment in PBI provides it with insight into the operations of
alternative site providers and its fiscal 1998 acquisition of Associated
Pharmacies, Inc., a wholesale distributor of pharmaceutical products,
expanded the Company's geographic presence in Arkansas.

23
<PAGE> 25

customer service staff. The Company's state-of-the-art distribution
facilities enable the Company to meet its customers' requirements for
accurate next-day delivery. The Company believes that its commitment to
customer service has enabled it to become the primary supplier to most of
its customers, resulting in significant net sales growth.

Maintain Competitive Advantage of Low Cost Structure. The Company
believes it has one of the lowest operating expense to net sales ratio in
the industry. The Company's operating expense to net sales ratio has
declined from 3.97% in 1994 to 3.20% for the first nine months of fiscal
1998. The improved efficiency can be attributed to significant investments
in inventory management systems, computer hardware and software, delivery
systems and warehouse systems. The Company believes there are opportunities
for additional efficiency improvements in the future.

INDUSTRY OVERVIEW

Wholesale distributors serve three major market segments: independent
pharmacies (approximately 34.4% of the market), retail chains (approximately
25.7% of the market) and healthcare institutions (approximately 36.4% of the
market). These customers benefit from the services of wholesale distributors who
provide access to a single source for pharmaceutical and healthcare products
from hundreds of different manufacturers. In addition, wholesale distributors
lower customer inventory costs, provide efficient and timely product delivery
and provide valuable inventory and purchasing information. Customers also
benefit from value-added programs developed by wholesale distributors to reduce
costs and to increase operating efficiencies for the customer, including
packaging, stockless inventory and pharmacy computer systems. Industry analysts
estimate wholesale distributors save the healthcare delivery system an estimated
$17.0 billion per year compared to purchasing directly from manufacturers.

Wholesale drug distributors are the most important distribution channel for
pharmaceutical manufacturers, accounting for approximately 83.0% of the $83.4
billion of prescription drug sales to retailers and institutions for the twelve
months ended June 1997. Wholesale pharmaceutical distribution industry sales
increased from $2.4 billion in 1970 to more than $73.0 billion in 1997. The
principal factors contributing to this growth are: (i) the aging of the
population; (ii) the introduction of new pharmaceuticals; (iii) increased
emphasis on effective drug therapies as a part of cost containment efforts of
healthcare providers; (iv) increased utilization by pharmaceutical manufacturers
of wholesale distributors; and (v) rising pharmaceutical costs.

Aging of Population. The number of individuals over 65 in the United
States has grown 66.7% from 20.0 million in 1970 to 33.5 million in 1995
and is projected to grow to 39.4 million individuals by the year 2010.

24
<PAGE> 26

Introduction of New Pharmaceuticals. The introduction of new
pharmaceutical compounds has led to consistent growth in their utilization
and corresponding increases in the sales volumes handled by wholesale
distributors. As new pharmaceutical compounds are approved by the United
States Food and Drug Administration ("FDA") and introduced into the market,
this trend is expected to continue.

Cost Containment Efforts. In response to rising healthcare costs,
governmental and private payers 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, the Company believes that drug therapy has had
a beneficial impact on overall healthcare costs by reducing expensive
surgeries and prolonged hospital stays. Pharmaceuticals currently account
for approximately 8.0% of overall healthcare costs, and manufacturers'
emphasis on research and development is expected to result in the continued
introduction of cost effective drug therapies.

Increased Utilization of Wholesale Distributors. Over the past decade,
manufacturers of pharmaceuticals have significantly increased the
distribution of their products through wholesalers as the cost and
complexity of maintaining inventories and arranging for delivery of
pharmaceutical products has risen. Drug wholesalers are generally able to
offer their customers and suppliers more efficient distribution and
inventory management than pharmaceutical manufacturers. As a result, from
1980 to 1997, the percentage of total pharmaceutical sales through
wholesale distributors increased from approximately 57.0% to approximately
83.0%.

Rising Pharmaceutical Costs. The Company believes that price increases
for branded pharmaceutical products by pharmaceutical manufacturers will
continue to equal or exceed the overall Consumer Price Index. The Company
believes that this increase will be due in large part to relatively
inelastic demand in the face of higher prices charged for patented drugs as
manufacturers attempt to recoup costs associated with the development,
clinical testing and FDA approval of new products. From 1990 to 1997, the
average retail price of a prescription increased from $22.06 to $32.12.

PRODUCTS, SERVICES AND VALUE ADDED MARKETING SYSTEMS

The Company's product line consists of more than 25,000 SKUs, including
branded pharmaceuticals, multi-source generics, private label products,
repackaged pharmaceutical products and over-the-counter health and beauty aids.
The Company sells branded pharmaceuticals (approximately % of net sales in
fiscal 1998), generic pharmaceuticals (approximately % of net sales in fiscal
1998) and over-the-counter health and beauty aids (approximately % of net
sales in fiscal 1998).

The Company strives to offer services which enhance the operating
efficiencies of its customers and assist them in competing effectively.
Principal elements in the Company's service offerings to its customers include:
(i) RESOURCE, a proprietary PC based order entry/order confirmation system that
completely automates all order creation, transmission and confirmation
operations; (ii) PARTNERS, a fully automated and customizable replenishment
software system which helps pharmacies more efficiently coordinate product
supply and demand; (iii) FOCUS, a contract management and reporting software
system designed for group purchasing and managed care organizations which
automates functions relating to corporate and group contracts; and (iv)
SCRIPTMASTER, a total pharmacy management software system that provides
prescription management functions, drug and allergy checks, instantaneous
connections to hundreds of third party insurance plans, "just in time" inventory
management, automated accounts receivable, quick pay program monitoring and
central office functions.

The Company offers a broad range of merchandising and marketing services to
its independent pharmacy customers under its "Med Plus" program. Under this
program, the Company plans and coordinates cooperative advertising programs and
provides for the availability of various promotional products. The Company also
offers new product introduction programs, point-of-sale materials, calendars,
blood pressure testing units, trial size programs, automatic new product
distribution, rack jobbing, store fixturing and retail employee training
programs. Other services offered to independent pharmacies under Med Plus
include: retail merchandising, inventory management systems, electronic order
entry, planogramming, shelf labels and price

25
<PAGE> 27

stickers, private label products, monthly feature promotions, home healthcare
marketing programs, store layout assistance, business management reports,
pharmacy computer systems and monthly catalogs.

CUSTOMERS AND MARKETS

The Company's diverse customer base is comprised of over 700 independent
pharmacies, retail chains and healthcare institutions. Independent pharmacies
generally are small, community-based pharmacies, which the Company believes
benefit the most from the Company's sales and value added services. Retail
chains, which the Company believes is the fastest growing segment of the market,
include national pharmacy chains and the pharmacy departments of supermarkets
and mass merchandisers. Healthcare institutions, which currently comprise the
largest segment of the market, consist of hospitals, nursing homes, clinics and
other alternate site care facilities, home health agencies, HMOs and pharmacy
benefit management companies.

The Company believes that diversifying its sales across the various market
segments enables the Company to capture greater market share in the geographic
areas it serves and better serve the faster growing segments of the healthcare
markets. The following table sets forth the Company's sales mix by customer
segment:

<TABLE>
<CAPTION>
NET SALES
----------------------------------------------------------------------------------------
FISCAL YEARS ENDED
----------------------------------------------------------------- NINE MONTHS ENDED
MARCH 31, 1995 MARCH 29, 1996 MARCH 28, 1997 MARCH 31, 1998
------------------- ------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Independent Pharmacies...... $152,488 47.6% $207,423 48.8% $223,708 46.6% $221,956 50.1%
Retail Chains............... 129,153 40.4 134,427 31.6 131,343 27.4 87,651 19.8
Healthcare Institutions..... 38,317 12.0 83,483 19.6 124,473 26.0 133,301 30.2
-------- ----- -------- ----- -------- ----- -------- -----
Total................... $319,958 100.0% $425,333 100.0% $479,524 100.0% $442,908 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>

The Company's senior management is actively involved in identifying and
developing opportunities to expand the Company's business with customers in each
of these market segments, including the preparation of proposals which highlight
customer benefits of the Company's cost-competitiveness, advanced systems and
value-added services. During fiscal 1997 and fiscal 1998, the Company's 10
largest customers accounted for approximately 47.2% and 37.1%, respectively, of
the Company's revenues. The Company's largest customer during fiscal 1997 (with
which the Company's relationship was mutually terminated in September 1997)
accounted for approximately 20.0% of the Company's revenues during fiscal 1997
and Anthem, its largest customer during fiscal 1998, accounted for approximately
13.1% of the Company's revenues during that period.

SALES AND MARKETING

The Company employs sales representatives and customer service
representatives at each of its three distribution centers. In addition to base
salary, the Company's sales personnel receive incentive compensation based upon
increases in the Company's market share and market penetration of the Company.
The corporate vice president of sales and business development works closely
with each business unit to develop sales goals. The Company's sales program
includes regular training to improve customer service and to provide its sales
and customer service representatives with the skills and resources necessary to
increase business with existing customers and establish new customer
relationships. The Company also maintains a telephone service department staffed
with trained personnel which work with customers to answer questions and solve
problems.

The Company's marketing efforts are focused on developing new primary
relationships with its customers. The Company emphasizes frequent personal
interaction of its sales force with customers so that the customer comes to rely
on the Company's dependability, responsiveness, accuracy of order filling and
breadth of product line. Retail customers also rely on the Company's sales force
for consulting services on advertising, merchandising, stocking and inventory
management.

26
<PAGE> 28

The Company believes that its customer service department is a key element
in its marketing program and differentiates it from its national competitors.
The decentralized customer service staff emphasizes rapid response to customer
inquiries and efficient order placement.

OPERATIONS

The Company is structured as an organization of locally managed profit
centers. Each of the Company's profit centers has an executive, sales and
operations staff with management compensation at each profit center determined
by its operating results. The profit centers utilize the Company's corporate
staff for procurement, marketing, financial, legal and executive management
resources and corporate coordination of assets and working capital management.
The Company's decentralized sales and distribution network, combined with its
centralized procurement and corporate support staff structure, enable the
Company to provide high levels of specialized, customer service while minimizing
administrative expenses and maximizing volume discounts for product purchases.

The Company's distribution centers maintain data processing systems and
sophisticated materials handling equipment for receiving, storing and
distributing large quantities and varieties of products. The Company
continuously seeks to improve its warehouse automation technologies to maximize
operational efficiencies on a cost-effective basis. In 1996, the Company
developed state-of-the-art radio transmission and receiving procedures and
barcoding and scanning technologies at one of its distribution centers which
significantly improved accuracy, efficiency and productivity at that center. The
Company subsequently exported this technology to its other distribution centers.

The Company receives 100% of its orders electronically and, upon receipt of
the customer's order at a distribution center, the Company's
warehouse-management system produces a "picking document" containing product
selection, loading and truck routing information. The system also provides
customized price information (geared to each customer's local market) or
individual package price stickers to accompany each shipment to facilitate the
customer's pricing of the items. Virtually all items ordered from the Company's
distribution centers are available and shipped by the Company within 24 hours
after the orders are placed by customers. Orders are delivered to customers by
the Company's fleet of trucks and vans or by contract carriers.

PURCHASING AND INVENTORY CONTROL

The Company utilizes sophisticated inventory-control and purchasing
software. The software perpetually tracks the Company's inventory, analyzes
demand history and projects future demand. The Company's system is designed to
enhance profit margins by eliminating the manual ordering process, allowing for
automatic inventory replenishment and identifying inventory buying
opportunities. The system also improves the Company's fill rate and enhances
inventory management and control.

The Company purchases products from approximately 1,000 manufacturers for
the wholesale purchase of pharmaceuticals and other products. The Company
initiates purchase orders with manufacturers through its information systems.
During fiscal 1997 and fiscal 1998, the Company's ten largest suppliers
accounted for approximately 45% and 70%, respectively, of the Company's
purchases by dollar volume. Historically, the Company has not experienced
difficulty in purchasing desired products from suppliers. The majority of
contracts with suppliers are terminable by either party upon short notice and
without penalty. The Company believes that its relationships with its suppliers
are good.

MANAGEMENT INFORMATION SYSTEMS

Each of the Company's distribution centers operates as a distinct business
with full system functionality: order processing, inventory management, accounts
receivable, accounts payable, general ledger, master file maintenance, external
and internal reporting. Each distribution center houses an AS/400 system and
several PCs. Another AS/400 resides in the Company's corporate office, along
with several PCs and a Local Area Network (LAN). The four AS/400s are connected
via data lines and information is transmitted between locations on a regular
basis. LANs are being installed in the Company's remaining locations over the
next

27
<PAGE> 29

fiscal year in order to facilitate file sharing and e-mail delivery. The
Company's purchasing system resides on the corporate host computer.

COMPETITION

The wholesale distribution of pharmaceuticals, health and beauty aids, and
other healthcare products is highly competitive, with national and regional
distributors competing primarily on the basis of service and price. Other
competitive factors include delivery service, credit terms, breadth of product
line, customer support and merchandising and marketing programs. The Company
competes with large, national distributors such as McKesson Corporation, Bergen
Brunswig Corporation, Cardinal Health, Inc., Bindley-Western Industries, Inc.
and AmeriSource Health Corporation, as well as with local and regional
wholesalers, manufacturers and generic pharmaceutical telemarketers and
specialty distributors. The Company also competes with other wholesale
distributors for purchases of products and financial support in the form of
trade credit from manufacturers. Certain of the Company's competitors have
significantly greater financial and marketing resources than the Company.

EMPLOYEES

As of June 30, 1998, the Company employed 263 persons, 233 of whom were
full-time employees. Approximately 21 of the Company's employees at the
Company's Minneapolis, Minnesota distribution center are covered by a collective
bargaining agreement with the Miscellaneous Drivers, Helpers and Warehousemen's
Union, Local 638, which expires in March 2000. The Company believes that its
employee relations are good.

FACILITIES

The Company conducts its business from a total of eight office, warehouse
and satellite depot facilities. The Company's primary operating facilities
include:

<TABLE>
<CAPTION>
LOCATION DESCRIPTION SQUARE FOOTAGE
-------- ----------- --------------
<S> <C> <C>
Cape Girardeau, Missouri(1).................... Distribution and administration 66,000
Lexington, Kentucky(2)......................... Distribution and administration 37,500
Minneapolis, Minnesota(2)...................... Distribution and administration 63,000
St. Louis, Missouri(1)......................... Corporate offices 7,100
</TABLE>

- ---------------
(1) Leased

(2) Owned

The Company also maintains warehouse and satellite depot facilities in
Missouri, Tennessee, Kentucky and Florida in order to enable it to efficiently
distribute product on a timely basis.

The Company believes its facilities are adequate to support its present
business plans.

REGULATORY MATTERS

The Company, as a distributor of certain controlled substances and
prescription pharmaceuticals, is required to register with and obtain licenses
and permits from certain federal and state agencies and must comply with
operating and security measures prescribed by those agencies. The Company is
also subject to various regulations including the 1987 Prescription Drug
Marketing Act, an amendment to the federal Food, Drug and Cosmetic Act, which
regulates the purchase, storage, security and distribution of prescription
pharmaceuticals. The Company's compliance with these regulations is monitored
through periodic site inspections conducted by various governmental agencies.
Failure to comply with these regulations could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company believes that it is in substantial compliance with all applicable
governmental regulations and has all material permits and licenses required to
conduct its business.

LEGAL PROCEEDINGS

No material legal proceedings are pending against the Company.

28
<PAGE> 30

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
J. Hord Armstrong, III(1)............ 57 Chairman of the Board, Chief Executive Officer,
Treasurer and Director
Martin D. Wilson(2).................. 37 President, Chief Operating Officer, Secretary and
Director
Dennis A. White...................... 48 Vice President and Chief Information Officer
Daniel E. Kreher..................... 33 Vice President, Finance and Administration
Edward W. McManus.................... 50 Vice President, Sales and Business Development
Douglas E. Linton.................... 50 Senior Vice President, Pharmaceutical and Specialty
Services
Richard F. Ford(1)................... 62 Director
Robert E. Korenblat(3)............... 58 Director
Bryan H. Lawrence(3)................. 55 Director
J. David McCay(2).................... 57 Director
Thomas F. Patton(1).................. 50 Director
Elliot H. Stein(2)................... 80 Director
James. M. Usdan(3)................... 48 Director
</TABLE>

- ---------------
(1) Term expires in 1998.

(2) Term expires in 1999.

(3) Term expires in 2000.

J. Hord Armstrong, III has served as the Chairman of the Board, Chief
Executive Officer and Treasurer and as a director of the Company since December
1987. Prior to joining the Company, Mr. Armstrong served as Vice President and
Chief Financial Officer of Arch Mineral Corporation, a coal mining and sales
corporation, from 1981 to 1987 and as its Treasurer from 1978 to 1981. Mr.
Armstrong serves as a Trustee of the St. Louis College of Pharmacy.

Martin D. Wilson has served as President and Chief Operating Officer of the
Company since January 1996, as Secretary since August 1993 and as a director
since 1997. Mr. Wilson previously served as Executive Vice President, Finance
and Administration of the Company from May 1995 to January 1996, as Vice
President, Finance and Administration of the Company from April 1991 to May 1995
and as Controller of the Company from March 1988 to April 1991. Prior to joining
the Company, Mr. Wilson, a certified public accountant, was associated with KPMG
Peat Marwick, a public accounting firm.

Dennis A. White has served as Vice President, Chief Information Officer of
the Company since April 1996. From May 1988 to May 1996, Mr. White served as
Director of Customer Information Services and in various other management
positions with Bergen Brunswig Corporation, a national wholesale drug
distributor.

Daniel E. Kreher has served as Vice President, Finance and Administration
of the Company since November 1996. From August 1987 to November 1996, Mr.
Kreher, a certified public accountant, served as a senior manager and in various
other positions with Price Waterhouse LLP, a public accounting firm.

Edward W. McManus has served as Vice President, Sales and Business
Development of the Company since May 1997. From March 1994 to April 1997, Mr.
McManus served as Vice President Corporate Sales with Managed Healthcare
Associates, a group purchasing organization specializing in long-term care. From

29
<PAGE> 31

January 1982 to February 1994, Mr. McManus served in various sales management
positions with Fujisawa, USA, a pharmaceuticals manufacturer.

Douglas E. Linton has served as Senior Vice President, Pharmaceutical and
Specialty Services of the Company since February 1998, and as Vice President,
Specialty Division from September 1997 to February 1998. Prior thereto, Mr.
Linton served as Vice President, Merchandising of Walker Drug Company from
October 1995 to August 1997, and as Senior Vice President, Supplier Services for
Cardinal Health, Inc. for more than the preceding 5 years.

Richard F. Ford has served as a director of the Company since its founding
in December 1987. Mr. Ford has been engaged in venture capital investing as a
general partner of affiliates of Gateway Venture Partners II, L.P. in St. Louis,
Missouri, since 1984. Mr. Ford also serves as a director of Stifel Financial
Corporation, CompuCom Systems, Inc. and TALX Corporation. Pursuant to the stock
purchase agreement under which Gateway Venture Partners II, L.P. ("Gateway")
made its investment in the Company, the Company agreed to use its best efforts
to cause the election to, and maintain the membership on, the Company's Board of
Directors of a representative of Gateway. Mr. Ford currently represents Gateway
on the Board of Directors of the Company.

Robert E. Korenblat has served as a director of the Company since 1997 and
is the President and Chief Executive Officer of PBI, a Colorado-based group
purchasing organization in which the Company will, following the Offering made
hereby, hold a 68% ownership interest. Mr. Korenblat additionally served as Vice
President of PBI from 1989 to 1991. Mr. Korenblat was elected a director of the
Company in connection with the Company's investment in PBI. See "Certain
Transactions."

Bryan H. Lawrence has served as a director of the Company since its
founding in December 1987. Since September 1997, Mr. Lawrence has been a member
of Yorktown Partners LLC, an investment fund. Prior thereto, he was a Managing
Director of Dillon, Read & Co., Inc., an investment banking firm, for more than
the preceding five years. Mr. Lawrence also serves as a director of Vintage
Petroleum, Inc. and Transmontaigne Oil Company.

J. David McCay has served as a director of the Company since 1997 and is
the founder, director and Chairman of PBI. Since 1983, Mr. McCay has held
various positions with PBI including serving as its President from 1983 to 1994,
as its Chief Executive Officer from 1989 to 1994 and as its Chairman from 1994
to present. Mr. McCay was elected a director of the Company in connection with
the Company's investment in PBI. See "Certain Transactions."

Thomas F. Patton, Ph.D., has served as a director of the Company since
1997. Dr. Patton is President of the St. Louis College of Pharmacy and has
served in that capacity since June 1994. From April 1993 until January 1994 and
from January 1994 until May 1994, Dr. Patton served as Executive Director of
Pharmaceutical Research and Development and as Vice President of Pharmaceutical
Research and Development, respectively, at Dupont-Merck Pharmaceutical Co., a
manufacturer of pharmaceutical products. From March 1990 through March 1993, Dr.
Patton served as Director and Senior Director of Pharmaceutical Research and
Development at Merck and Co., Inc., a manufacturer of pharmaceutical products.
Dr. Patton's career also includes tenures as Professor of Pharmaceutical
Chemistry and Pharmacy Practice at the University of Kansas, Associate Director
of Control Development at the Upjohn Co., a pharmaceutical company, and Vice
President of Operations at Oread Laboratories, Inc., a pharmaceutical company.
Dr. Patton also serves as a director of Jones Pharma, Inc.

Elliot H. Stein has served as a director of the Company since its founding
in 1987. Mr. Stein is Chairman Emeritus, Stifel Financial Corporation, an
investment banking and brokerage corporation, of which he was Chairman of the
Board from January 1986 through May 1988. Prior to such time he was President of
Scherck, Stein & Franc, Inc., a New York Stock Exchange member firm. Mr. Stein
also serves as a director of Angelica Corporation and West Indies Sugar Company.

James M. Usdan has served as a director of the Company since 1997 and has
been the President and Chief Executive Officer of Comprehensive Medical Imaging,
Inc. since June 1998. Prior thereto, Mr. Usdan served as President and Chief
Executive Officer of RehabCare Group, Inc., a St. Louis-based provider of
30
<PAGE> 32

rehabilitation, outpatient and therapist staffing services for more than the
preceding five years. Mr. Usdan is also a director of Metro One
Telecommunications, Inc.

ADVISORY DIRECTOR

Louis B. Susman has served as an advisory director of the Company since
June 1998. As an advisory director, Mr. Susman is entitled to attend and
participate in meetings of the Board of Directors, but he does not have any
voting rights. The Board of Directors of the Company has announced its intention
to nominate Mr. Susman to be elected as a director at the 1998 Annual Meeting of
Stockholders. Mr. Susman has indicated that he is willing to serve as a director
if elected. Mr. Susman currently is Vice Chairman and a Managing Director of
Salomon Brothers Inc. Smith Barney Inc., a managing Underwriter of this
Offering, and Salomon Brothers Inc are affiliated but separately registered
broker/dealers under common control of Salomon Smith Barney Holdings Inc., an
international investment banking and brokerage firm. Mr. Susman has been
employed by Salomon Brothers Inc in various executive capacities since 1989 and
also serves as a director of Drury Inns and U.S. Can Corporation. See
"Underwriting."

BOARD OF DIRECTORS AND COMMITTEES

The Company's bylaws provide for three classes of directors of
approximately equal numbers designated as Class I, Class II, and Class III. Each
director is elected for a three year term and the term of each class expires in
a different year. Messrs. Armstrong, Patton and Ford are Class III directors
whose terms expire in 1998; Messrs. Wilson, Stein and McKay are Class I
directors whose terms expire in 1999; and Messrs. Lawrence, Korenblat and Usdan
are Class II directors whose terms expire in 2000.

The Board of Directors has a standing Audit Committee and a standing Stock
Option and Compensation Committee (the "Compensation Committee"). The members of
the Audit Committee are Messrs. Ford and Stein. The Audit Committee reviews the
scope of the Company's engagement of its independent public accountant and their
reports. The Audit Committee also meets with the financial staff of the Company
to review accounting procedures and reports.

The Compensation Committee is composed of Messrs. Ford and Lawrence. The
Compensation Committee is authorized to review and make recommendations to the
Board of Directors regarding the salaries payable to corporate officers and to
administer the Company's 1992 Long Term Incentive Plan.

DIRECTORS' FEES

Non-employee directors currently receive annual retainers of $5,000 for
serving as directors and fees of $500 for each meeting of the Board attended
($250 if attended telephonically).

31
<PAGE> 33

EXECUTIVE COMPENSATION

The following table sets forth the compensation for each of the last three
fiscal years of the Chief Executive Officer and the four other most highly
compensated executive officers of the Company whose annual salaries and other
reportable compensation exceeded $100,000 in fiscal 1998.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- ------------
SECURITIES ALL
UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUSES OPTIONS(#) COMPENSATION(1)
--------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Hord Armstrong, III.............. 1998 $240,000 $125,000 33,333 $87,500
Chairman of the Board, Chief...... 1997 195,000 -- -- --
Executive Officer and Treasurer... 1996 175,000 -- -- --
Martin D. Wilson,................... 1998 $161,667 $ 70,000 16,666 $21,000
President, Chief Operating
Officer........................ 1997 113,750 -- 33,999 --
and Secretary..................... 1996 90,903 -- 12,666 --
Dennis A. White..................... 1998 $105,000 $ 15,750 17,000 $15,750
Vice President, Chief............. 1997(2) 98,000 -- 17,000 --
Information Officer............... 1996 -- -- -- --
Edward W. McManus................... 1998 $131,000 -- -- $19,650
Vice President, Sales and......... 1997(2) -- -- -- --
Business Development.............. 1996 -- -- -- --
Douglas E. Linton................... 1998 $112,500 $ 33,750 15,000 $22,500
Senior Vice President,
Pharmaceutical................. 1997 -- -- -- --
and Specialty Services............ 1996 -- -- -- --
</TABLE>

- ---------------
(1) Includes contributions made to a defined contribution executive retirement
plan funded by split-dollar life insurance policies.

32
<PAGE> 34

The following table sets forth information concerning stock option grants
made in fiscal 1998 to the individuals named in the Summary Compensation Table.
Options were granted at fair market value on the date of grant, vested
immediately, became exercisable six months after the date of grant and generally
expire ten years after the date of grant.

OPTION GRANTS IN FISCAL 1998

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS VALUE POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATE OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Hord Armstrong, III......... 33,333 18.7% $ 6.625 8/14/07 $138,880 $351,948
Martin D. Wilson............... 16,666 9.4% $ 6.625 8/14/07 $ 69,438 $175,969
Dennis A. White................ 17,000 9.6% $22.500 5/15/08 $240,552 $609,606
Edward W. McManus.............. -- -- --
Douglas E. Linton.............. 15,000 8.4% $ 6.625 8/14/07 $ 62,496 $158,378
</TABLE>

- ---------------
(1) Potential realizable value is calculated based on the term of the option at
the time of grant. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission. Potential realizable value does not represent the Company's
prediction of its stock price performance and does not take into account
appreciation for the fair value of the Common Stock from the date of grant
to date. There can be no assurance that the actual stock price appreciation
over the term of the option will equal or exceed the assumed 5% and 10%
levels.

The following table sets forth information concerning the number of
exercisable and unexercisable stock options at June 30, 1998 as well as the
value of such stock options having an exercise price lower than the last
reported trading price on June 30, 1998 ("in-the-money" options) held by the
executive officers named in the Summary Compensation Table.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT FISCAL
FISCAL YEAR-END YEAR-END(1)
SHARES --------------- ------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- --------------- ------------------
<S> <C> <C> <C> <C>
J. Hord Armstrong, III................. -- -- 33,333/-- $495,828/--
Martin D. Wilson....................... -- -- 65,865/5,000 $1,128,512/$88,750
Dennis A. White........................ -- -- 34,000/17,000 $571,625/--
Edward W. McManus...................... 4,200 $33,075 12,800/-- $203,200/--
Douglas E. Linton...................... -- -- 15,000/-- $223,125/--
</TABLE>

- ---------------
(1) Based on a price per share of $21.50, the closing sale price of the Common
Stock on June 30, 1998.

LONG TERM PERFORMANCE AND STOCK OPTION PLANS

Pursuant to the Company's 1992 Long Term Incentive Plan (the "Incentive
Plan"), the Compensation Committee may grant to officers and key employees of
the Company and its subsidiaries (i) options to purchase shares of the Common
Stock ("Stock Options"), which may or may not qualify as incentive stock options
("ISOs") within the meaning of Section 422 of the Internal Revenue Code, as
amended, (ii) stock

33
<PAGE> 35

appreciation rights ("SARs"), (iii) restricted shares of the Company's Common
Stock ("Restricted Stock"), and (iv) performance awards ("Performance Awards").
Pursuant to the Company's 1993 Stock Option Plan (the "Option Plan" and,
collectively with the Incentive Plan, the "Plans"), the Compensation Committee
or the full Board of Directors may grant to key employees of the Company who are
not "reporting persons" subject to Section 16 of the Exchange Act and to certain
other persons performing services for the Company Stock Options which do not
qualify as ISOs. The Board of Directors has reserved 500,000 and 350,000 shares
of Common Stock, respectively, for issuance pursuant to the Incentive Plan and
the Option Plan, of which an aggregate of 542,031 shares have been issued or are
subject to currently outstanding Stock Options and 307,969 shares remain
available for grant or issuance under the Plans.

The Plans are administered by the Compensation Committee. The Compensation
Committee has the authority to (i) select individuals to receive grants under
the Plans, (ii) establish the terms of grants and (iii) interpret the Plans.

Generally, Stock Options are granted to purchase shares of Common Stock at
a purchase price established by the Compensation Committee or the Board of
Directors at not less than the Fair Market Value (as defined in the Plans) of
the Common Stock on the date of grant, and the term of the Stock Option, which
shall not exceed ten years from date of grant. The Compensation Committee may
grant SARs giving the holder thereof a right to receive, at the time of
surrender, Common Stock equal in value to the difference between the Fair Market
Value of the Common Stock at the date of surrender of the SARs and the "Base
Price" established by the Committee at the time of grant, which may not be less
than Fair Market Value of the Common Stock on the date of grant. SARs may be
issued in conjunction with Stock Options. The Compensation Committee may also
issue shares of Common Stock either as a stock bonus or at a purchase price of
less than Fair Market Value, subject to any restrictions or conditions which may
be specified by the Compensation Committee at the time of grant. The
Compensation Committee may also issue Performance Awards consisting of shares of
Common Stock, monetary units payable in cash or a combination thereof. These
grants would result in the issuance, without payment therefor, of Common Stock
or the payment of cash upon the achievement of certain pre-established
performance criteria during a specified performance period not to exceed five
years.

CERTAIN TRANSACTIONS

In November 1995, the Company acquired approximately 50% of the voting and
non-voting capital stock of PBI and Massachusetts Mutual Life Insurance Company
and certain of its affiliates (collectively, "MassMutual") concurrently acquired
30% of the outstanding voting and nonvoting capital stock of PBI and purchased
senior secured notes and senior secured convertible notes of PBI in principal
amounts of $5.5 million and $1.3 million, respectively. MassMutual owns more
than 5% of the outstanding Common Stock of the Company. See "Principal and
Selling Stockholders." The Company received cash dividends from PBI of $300,000
and $350,000 in fiscal 1997 and 1998, respectively.

In connection with the Company's investment in PBI, the Company entered
into agreements pursuant to which (i) each of J. David McCay and Robert
Korenblat is entitled to exchange the capital stock of PBI owned by him into
shares of Common Stock, at an exchange ratio of 6,666.67 shares of Common Stock
(an aggregate of 200,000 shares of Common Stock) for each share of PBI capital
stock, and (ii) on or after November 30, 1998, MassMutual will be entitled to
exchange shares of capital stock of PBI owned by it for shares of Common Stock,
at an exchange ratio based upon the then fair value of the Common Stock and the
capital stock of PBI. In addition, Messrs. McCay and Korenblat and MassMutual
may require the Company to register under the Securities Act shares of Common
Stock issuable to them (and MassMutual may require the Company to register
530,978 shares of Common Stock currently owned by it) or to include such shares
in any registration statement the Company proposes to file under the Securities
Act, with certain exceptions. Messrs. McCay and Korenblat were elected directors
of the Company in connection with the Company's investment in PBI. In connection
with the Offering, Mr. McCay has notified the Company that he intends to
exchange his 18% ownership interest in PBI for 180,000 shares of Common Stock
and to sell such shares in

34
<PAGE> 36

this Offering, and MassMutual has notified the Company it intends to sell
130,000 shares of Common Stock in the Offering. See "Principal and Selling
Stockholders."

In fiscal 1996, PBI entered into an Employment Agreement (the "Employment
Agreement") with Robert E. Korenblat. The Employment Agreement has an initial
term expiring on December 31, 1998 but is automatically renewable on December 31
of each year until terminated by notice of either party, in which case it will
expire on the December 31 which is two full years after the date of such notice.
Pursuant to the Employment Agreement, Mr. Korenblat serves as President and
Chief Executive Officer of PBI with an annual base salary of not less than
$350,000, which is increased, but not decreased, each year to reflect increases
in the Consumer Price Index. The Employment Agreement also provides for certain
benefits and an annual bonus based on achievement of certain operating profit
and other goals established by PBI's Board of Directors, which bonus may not
exceed, in the aggregate, 180% of base salary. For PBI's fiscal year ended
December 31, 1997, PBI paid Mr. Korenblat a salary of $350,000 plus bonus
compensation of $70,000. The Employment Agreement also contains a
non-competition covenant pursuant to which Mr. Korenblat agrees not to compete
with PBI in the United States, Puerto Rico or any other country where PBI may do
business for a period of two years after termination of Mr. Korenblat's
employment. Mr. Korenblat is entitled to receive $50,000 each April 15 and
October 15 through October 15, 1999 in consideration for his covenant not to
compete.

The Company believes that the transactions set forth above were made on
terms not less favorable to the Company than would have been obtained from
unaffiliated third parties. All future transactions (including loans) between
the Company and its officers, directors, principal stockholders and affiliates
are required to be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors, and must be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.

35
<PAGE> 37

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth as of July 14, 1998, certain information
concerning the beneficial ownership of Common Stock by: (i) each director of the
Company and each of the executive officers named in the Summary Compensation
Table contained elsewhere herein; (ii) all directors and executive officers of
the Company as a group; (iii) each person who is known by the Company to own
beneficially 5% or more of the outstanding Common Stock; and (iv) each Selling
Stockholder. As of July 14, 1998, there were 3,746,275 shares of the Company's
Common Stock outstanding.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1)(2) NUMBER OFFERING(1)(2)
-------------------- OF SHARES --------------------
NUMBER OFFERED NUMBER
NAME OF SHARES PERCENT HEREBY OF SHARES PERCENT
---- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
J. Hord Armstrong, III (3).................... 295,430 7.8% -- 295,430 5.7%
Martin D. Wilson (4).......................... 70,866 1.9% -- 70,866 1.4%
Dennis A. White (4)........................... 51,000 1.3% -- 51,000 1.0%
Edward W. McManus (4)......................... 12,800 * -- 12,800 *
Douglas E. Linton (4)......................... 15,000 * -- 15,000 *
Richard F. Ford (5)........................... 502,270 13.4% (5) 402,270 7.8%
Robert E. Korenblat (6)....................... 22,000 * -- 22,000 *
Bryan H. Lawrence (7)......................... 28,318 * -- 28,318 *
J. David McCay (8)............................ 184,000 4.9% 180,000 4,000 *
Thomas F. Patton.............................. -0- * -- -0- *
Elliot H. Stein (9)........................... 10,000 * -- 10,000 *
James M. Usdan (10)........................... -0- * -- -0- *
All directors and executive officers as a
group (13 persons).......................... 1,208,684 30.2% 928,684 17.3%
The Research Works, Inc.(11).................. 70,000 1.9% 20,000 50,000 1.0%
MassMutual Corporate Investors (12)........... 265,489 7.1% 65,000 200,489 3.9%
Massachusetts Mutual Life Insurance Company
(12)........................................ 265,489 7.1% 65,000 200,489 3.9%
Gateway Venture Partners II, L.P. (5)(13)..... 502,270 13.4% 100,000 402,270 7.8%
</TABLE>

- ---------------
* Less than 1%.

(1) Represents sole voting and investment power unless otherwise noted.

(2) For purposes of this table, each director or executive officer is deemed to
beneficially own shares of Common Stock issuable pursuant to options,
warrants or other convertible securities that are exercisable by such
director or executive officer currently or within 60 days.

(3) Includes 33,333 shares issuable pursuant to stock options that are
exercisable currently or within 60 days; does not include 10,000 shares
that are owned by Mr. Armstrong's wife, as to which Mr. Armstrong disclaims
beneficial ownership.

(4) Consists of shares issuable pursuant to stock options that are exercisable
currently or within 60 days.

(5) Includes 502,270 shares owned of record by Gateway Venture Partners II,
L.P. Mr. Ford serves as a general partner of Gateway Associates L.P., the
general partner of Gateway Venture Partners II, L.P., and may be deemed to
beneficially own such shares. Does not include 1,000 shares that are owned
by Mr. Ford's wife, as to which Mr. Ford disclaims beneficial ownership.
Mr. Ford may be deemed to beneficially own the 100,000 shares being offered
hereby by Gateway Venture Partners II, L.P.

(6) Includes 20,000 shares issuable to Mr. Korenblat upon his exchange of
capital stock of PBI; does not include 2,000 shares held in a trust by Mr.
Korenblat's wife, as to which Mr. Korenblat disclaims beneficial ownership.

(7) Does not include 4,000 shares owned by Mr. Lawrence's wife, as to which Mr.
Lawrence disclaims beneficial ownership.

(8) Includes 180,000 shares of Common Stock issuable to Mr. McCay upon his
exchange of capital stock of PBI for shares of Common Stock of the Company.
Immediately prior to consummation of the Offering, Mr. McCay intends to
effect such exchange and sell such 180,000 shares in the Offering.

(9) Does not include 80,135 shares held by irrevocable trusts for the benefit
of Mr. Stein's adult children, as to which Mr. Stein disclaims beneficial
ownership.

(10) Does not include 500 shares that are owned by Mr. Usdan's spouse, as to
which Mr. Usdan disclaims beneficial ownership.

(11) The Research Works, Inc. is a research firm which acquired its shares of
Common Stock upon the exercise of warrants issued by the Company in
consideration for such firm producing research reports with respect to the
Common Stock. See Note 12 of Notes to Consolidated Financial Statements.

(12) Excludes an indeterminate number of shares of Common Stock into which
shares of PBI held by MassMutual are exchangeable on or after November 30,
1998. MassMutual Corporate Investors is a closed-end investment company for
which Massachusetts Mutual Life Insurance Company serves as an investment
advisor. Each entity owns and is selling the number of shares indicated
opposite its name.

(13) Consists of shares owned of record by Gateway Venture Partners II, L.P.
Richard F. Ford, a director of the Company, serves as a general partner of
Gateway Associates L.P., the General Partner of Gateway Venture Partners
II, L.P., and may be deemed to beneficially own such shares.

36
<PAGE> 38

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred
Stock, no par value. Immediately following the Offering, there will be 5,126,275
shares of Common Stock and no shares of Preferred Stock outstanding.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders. Subject to preferences applicable to
any outstanding Preferred Stock of the Company, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor and to share ratably in any
distributions by the Company in liquidation after all debts and obligations of
the Company have been satisfied. See "Dividend Policy." Holders of Common Stock
have no preemptive, redemption or conversion rights and there are no sinking
fund provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
the Offering will be, fully paid and nonassessable.

The Common Stock is listed on the Nasdaq National Market under the symbol
"DKWD."

PREFERRED STOCK

The Company is authorized to issue, from time to time without stockholder
approval, up to 1,000,000 shares of Preferred Stock with such designations,
rights and preferences as may be determined by the Board of Directors. Any
series of Preferred Stock so authorized may have dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting
power, dividend rights or other rights of the holders of the Common Stock. The
Company has no present intention to issue any shares of its Preferred Stock.

The Board of Directors' authority to issue Preferred Stock enables the
Board to render more difficult or to discourage an attempt to obtain control of
the Company by means of a tender offer, proxy contest, merger or otherwise,
thereby protecting the continuity of the Company's management. The issuance of
Preferred Stock by the Board of Directors pursuant to such authority may
adversely affect the rights of the holders of Common Stock. For example,
Preferred Stock issued by the Company may rank senior in priority to the Common
Stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of Common Stock.
Accordingly, the issuance of Preferred Stock may discourage bids for the Common
Stock or may otherwise adversely affect the market price of the Common Stock.

WARRANTS

The Company currently has outstanding warrants to purchase 22,072 shares of
Common Stock at a price of $0.005 per share. Pursuant to its terms, the warrants
are exercisable only if a merger or sale of all or substantially all of the
assets of the Company occurs on or before December 19, 1999 and, in connection
therewith, the holder of the warrants receives in excess of a 30% compounded
annual rate of return on its investment. The Company does not believe that the
conditions to the exercise of the warrants will be satisfied prior to their
expiration.

TRANSFER AGENT AND REGISTRAR

Harris Trust & Savings Bank, Chicago, Illinois, is the transfer agent and
registrar for the Company's Common Stock.

DELAWARE LAW AND CERTAIN CHARTER PROVISIONS AFFECTING CHANGE OF CONTROL

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless: (i) the interested stockholder
attained such status with the approval of the Board of Directors; (ii) the
business combination is approved in a prescribed manner; or (iii) certain
37
<PAGE> 39

other specified conditions are satisfied. A "business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns or
within three years did own, 15% or more of the corporation's voting stock.

Certain provisions of the Company's Certificate of Incorporation and
By-laws may delay or make more difficult unsolicited acquisitions or changes of
control of the Company. Such provisions may enable the Company to develop its
business in a manner that will foster its long-term growth without disruption
caused by the threat of a takeover not deemed by its Board of Directors to be in
the best interest of the Company and its stockholders. However, such provisions
could have the effect of discouraging third parties from making proposals
involving an unsolicited acquisition or change of control of the Company,
although such proposals, if made, might be considered desirable by a majority of
the Company's stockholders. Such provisions may also have the effect of making
it more difficult for third parties to cause the replacement of the current
Board of Directors of the Company. These provisions include (i) the availability
of capital stock for issuance from time to time at the discretion of the Board
of Directors, (ii) the ability of the Board of Directors to increase the size of
the Board of Directors and to appoint directors to newly created directorships,
and (iii) the existence of a classified Board of Directors.

The fact that the Company's Board of Directors is divided into three
classes, with approximately one-third of the directors elected each year, would
make it more difficult for a person seeking to acquire control of the Company to
elect a majority of the Board of Directors. See "Management -- Board of
Directors and Committees."

The foregoing provisions could have the effect of making it more difficult
for a third-party to acquire, or of discouraging a third-party from acquiring
control of the Company.

38
<PAGE> 40

UNDERWRITING

Upon the terms and subject to the conditions set forth in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase from the Company and the Selling Stockholders, and the
Company and the Selling Stockholders have agreed to sell to such Underwriter,
the number of shares of Common Stock set forth below opposite the name of such
Underwriter:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Smith Barney Inc. ..........................................
Raymond James & Associates, Inc.............................

---------
Total..................................................... 1,630,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all the shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.

The Underwriters propose to offer part of the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and part of the shares to certain dealers at a price which
represents a concession not in excess of $ per share less than the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other brokers and
dealers. After the shares of Common Stock are released for sale to the public,
the offering price and the selling terms may from time to time be changed by the
Underwriters.

The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 244,500
additional shares of Common Stock at the price to public set forth on the cover
page of this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely to cover over-allotments, if any,
in connection with the Offering of the shares offered hereby. To the extent the
Underwriters exercise their over-allotment option, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares to be purchased by
it, as shown in the foregoing table, bears to the total number of shares listed
in such table, and the Company will be obligated, pursuant to the option to sell
such shares to the Underwriters.

The Company, its directors and executive officers and the Selling
Stockholders have agreed to enter into lock-up agreements pursuant to which they
will agree that, subject to certain customary exceptions, they will not, without
the prior written consent of Smith Barney Inc., for a period of 90 days from and
after the date of this Prospectus, sell, offer to sell, contract to sell, or
otherwise dispose of, directly or indirectly, any shares of Common Stock of the
Company or any securities convertible into, or exercisable or exchangeable for,
Common Stock of the Company (other than shares issuable pursuant to a plan for
employees in effect on the date of this Prospectus).

Louis B. Susman, who currently serves as a non-voting, advisory director of
the Company, is Vice Chairman and a Managing Director of Salomon Brothers Inc.
Smith Barney Inc., a managing Underwriter of this Offering, and Salomon Brothers
Inc are affiliated but separately registered broker/dealers under common control
of Salomon Smith Barney Holdings Inc. The Company's Board of Directors has
announced that it intends to nominate Mr. Susman at the 1998 Annual Meeting of
Stockholders for election as a director of the Company. See
"Management -- Advisory Director."

39
<PAGE> 41

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify, or to contribute to payments made by, each other with respect,
subject to certain customary exception, to certain civil liabilities, including
certain civil liabilities under the Securities Act.

In connection with this Offering and in compliance with applicable law, the
Underwriters may over-allot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appear above) and may
effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those which might otherwise prevail in
the open market. Such transactions may include placing bids for the Common Stock
or effecting purchases of the Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock or for the purpose of reducing a
syndicate short position created in connection with the Offering. A syndicate
short position may be covered by exercise of the over-allotment option described
above in lieu of or in addition to open market purchases. The Underwriters are
not required to engage in any of these activities and any such activities, if
commenced, may be discontinued at any time.

The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and does not purport to be a complete statement of its
terms and conditions. A copy of the Underwriting Agreement is on file with the
Securities and Exchange Commission (the "Commission") as an exhibit to the
Registration Statement of which this Prospectus forms a part. See "Additional
Information."

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Armstrong, Teasdale, Schlafly & Davis, St. Louis,
Missouri, a partnership including professional corporations. Certain legal
matters will be passed upon for the Underwriters by Neal, Gerber & Eisenberg,
Chicago, Illinois.

EXPERTS

The audited consolidated financial statements and schedules included and
incorporated by reference in this Prospectus and elsewhere in this registration
statement, to the extent and for the periods indicated in their reports, have
been audited by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.

40
<PAGE> 42

ADDITIONAL INFORMATION

A Registration Statement on Form S-2 (of which this Prospectus is a part),
including amendments thereto, relating to the Common Stock offered hereby has
been filed by the Company with the Commission, Washington, D.C. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any agreement or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such agreement or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement, exhibits and schedules.

The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. A copy of the Registration Statement and the exhibits and schedules
thereto, reports, proxy and information statements and other information filed
by the Company with the Commission may be inspected and copied at the offices of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York,
New York 10048 and 500 West Madison St., Suite 1400, Chicago, Illinois 60661.
Copies of such materials may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, reports, proxy and information statements and
other information concerning the Company may be inspected at the offices of The
Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C. 20006. The Company
is required to file electronic versions of certain documents through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

The Company furnishes its stockholders with annual reports containing
audited financial statements certified by an independent public accounting firm
and quarterly reports containing unaudited financial statements for the first
three quarters of each year.

41
<PAGE> 43

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission are
incorporated by references into this Prospectus of and shall be deemed to be a
part hereof:

(1)Annual Report on Form 10-K for the year ended March 28, 1997 filed with
the Commission on June 26 1997;

(2) Definitive Proxy Statement on Schedule 14A filed with the Commission on
July 11, 1997;

(3) Amendment to its Annual Report on Form 10-K/A for the year ended March
28, 1997 filed with the Commission on March 30, 1998;

(4)Report on Form 8-K filed with the Commission on July 11, 1997;

(5)Transition Report on Form 10-Q for the transition period from March 29,
1997 to June 30, 1997 filed with the Commission on August 14, 1997;

(6) Transition Report on Form 10-Q/A for the transition period from March
29, 1997 to June 30, 1997 filed with the Commission on August 18, 1997;

(7) Report on Form 8-K filed with the Commission on October 2, 1997;

(8) Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
filed with the Commission on November 12, 1997;

(9) Quarterly Report on Form 10-Q for the quarter ended December 31, 1997
filed with the Commission on February 13, 1998;

(10) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
filed with the Commission on May 14, 1998; and

(11) The description of the Company's Common Stock set forth in the
Company's Registration Statement on Form S-1 dated September 1, 1992 (File No.
33-48730), including any amendment or reports filed for the purpose of updating
such description.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any or all of the foregoing documents
incorporated by reference into this Prospectus (without exhibits to such
documents other than exhibits specifically incorporated by reference into such
documents). All such requests shall be directed to: D & K Healthcare Resources,
Inc., 8000 Maryland Avenue, Suite 920, St. Louis, Missouri 63105, attention:
Daniel E. Kreher, Telephone: (314) 727-3485.

42
<PAGE> 44

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
D&K Healthcare Resources, Inc.
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of March 29, 1996, March
28, 1997, June 30, 1997, and March 31, 1998
(unaudited)............................................ F-3
Consolidated Statements of Operations for the years ended
March 31, 1995, March 29, 1996, and March 28, 1997, for
the three months ended June 30, 1997, and for the nine
months ended March 28, 1997 (unaudited), and March 31,
1998 (unaudited)....................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1995, March 29, 1996, and March
28, 1997, for the three months ended June 30, 1997, and
for the nine months ended March 31, 1998 (unaudited)... F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1995, March 29, 1996, and March 28, 1997, for
the three months ended June 30, 1997, and for the nine
months ended March 28, 1997 (unaudited), and March 31,
1998 (unaudited)....................................... F-6
Notes to Consolidated Financial Statements................ F-7
Pharmaceutical Buyers, Inc.
Report of Independent Public Accountants.................. F-22
Balance Sheets as of December 31, 1997 and 1996........... F-23
Statements of Operations for the years ended December 31,
1997 and 1996.......................................... F-24
Statements of Stockholders' Deficit for the years ended
December 31, 1997 and 1996............................. F-25
Statements of Cash Flows for the years ended December 31,
1997 and 1996.......................................... F-26
Notes to Financial Statements............................. F-27
</TABLE>

F-1
<PAGE> 45

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To D&K Healthcare Resources, Inc.:

We have audited the accompanying consolidated balance sheets of D&K
Healthcare Resources, Inc. (a Delaware corporation) and subsidiaries as of June
30, 1997, March 28, 1997, and March 29, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the three
months ended June 30, 1997, and for each of the three fiscal years in the period
ended March 28, 1997. 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 D&K Healthcare Resources,
Inc. and subsidiaries as of June 30, 1997, March 28, 1997, and March 29, 1996,
and the results of their operations and their cash flows for the three months
ended June 30, 1997, and for each of the three fiscal years in the period ended
March 28, 1997, in conformity with generally accepted accounting principles.

/s/ Arthur Andersen LLP
Arthur Andersen LLP

St. Louis, Missouri
July 10, 1998

F-2
<PAGE> 46

D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 29, 1996 MARCH 28, 1997 JUNE 30, 1997 MARCH 31, 1998
-------------- -------------- ------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash (including restricted cash)....... $ 1,947 $ 2,213 $ 1,646 $ 893
Receivables, net of allowance for
doubtful accounts of $868, $697,
$697 and $800, respectively......... 25,150 22,247 29,332 36,729
Inventories............................ 39,500 49,991 41,391 76,722
Prepaid expenses and other current
assets.............................. 2,341 882 1,152 2,349
------- -------- ------- --------
Total current assets................ 68,938 75,333 73,521 116,693
Property and Equipment, net of
accumulated depreciation and
amortization of $4,027, $5,038, $5,194
and $5,815, respectively............... 5,162 6,242 5,419 6,041
Investment in PBI........................ 3,929 4,039 4,090 4,021
Deferred Income Taxes.................... 1,147 889 1,193 4,375
Other Assets............................. 723 338 317 223
Intangible Assets, net of accumulated
amortization........................... 15,038 14,625 14,521 11,812
------- -------- ------- --------
Total assets........................ $94,937 $101,466 $99,061 $143,165
======= ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt... $ 1,209 $ 3,138 $ 3,127 $ 2,794
Accounts payable....................... 35,805 41,410 48,074 65,212
Accrued expenses....................... 2,963 2,673 2,555 3,628
Deferred income taxes.................. 3,737 3,842 4,251 3,158
------- -------- ------- --------
Total current liabilities........... 43,714 51,063 58,007 74,792
Long-Term Debt........................... 43,190 41,530 31,676 54,834
------- -------- ------- --------
86,904 92,593 89,683 129,626
STOCKHOLDERS' EQUITY
Preferred stock; no par value,
1,000,000 shares authorized, no
shares issued or outstanding........ -- -- -- --
Common stock; $.01 per value,
10,000,000 shares authorized,
3,018,051, 3,044,717, 3,056,217 and
3,610,395 shares issued and
outstanding, respectively........... 30 30 30 36
Paid-in capital........................ 11,592 11,693 11,835 13,707
Accumulated deficit.................... (3,589) (2,850) (2,487) (204)
------- -------- ------- --------
Total stockholders' equity.......... 8,033 8,873 9,378 13,539
------- -------- ------- --------
Total liabilities and stockholders'
equity............................ $94,937 $101,466 $99,061 $143,165
======= ======== ======= ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE> 47

D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED MONTHS ENDED
--------------------------------- ------------- -------------------------
MARCH 31, MARCH 29, MARCH 28, JUNE 30, MARCH 28, MARCH 31,
1995 1996 1997 1997 1997 1998
--------- --------- --------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net Sales................... $319,958 $425,333 $479,524 $144,473 $373,114 $442,908
Cost of Sales............... 303,863 405,061 457,884 138,457 356,670 421,639
-------- -------- -------- -------- -------- --------
Gross profit.............. 16,095 20,272 21,640 6,016 16,444 21,269
Depreciation and
Amortization.............. 1,064 1,754 1,523 384 1,135 1,163
Nonrecurring Expenses....... -- 1,317 -- -- -- --
Operating Expenses.......... 10,590 15,254 15,893 4,385 12,110 14,181
-------- -------- -------- -------- -------- --------
Income from operations.... 4,441 1,947 4,224 1,247 3,199 5,925
-------- -------- -------- -------- -------- --------
Other Income (Expense):
Interest expense.......... (2,341) (3,813) (3,738) (903) (2,821) (2,614)
Interest income........... 358 424 338 83 259 206
Equity in net income of
PBI.................... -- 88 410 51 376 281
Other, net................ 20 (144) 45 165 42 78
-------- -------- -------- -------- -------- --------
(1,963) (3,445) (2,945) (604) (2,144) (2,049)
-------- -------- -------- -------- -------- --------
Income (loss) before
income tax provision
(benefit)............ 2,478 (1,498) 1,279 643 1,055 3,876
Income Tax Provision
(Benefit)................. 1,069 (389) 540 280 428 1,593
-------- -------- -------- -------- -------- --------
Net income (loss)......... $ 1,409 $ (1,109) $ 739 $ 363 $ 627 $ 2,283
-------- -------- -------- -------- -------- --------
Basic Earnings (Loss) Per
Share..................... $ 0.55 $ (0.37) $ 0.24 $ 0.12 $ 0.21 $ 0.70
-------- -------- -------- -------- -------- --------
Diluted Earnings (Loss) Per
Share..................... $ 0.49 $ (0.37) $ 0.24 $ 0.11 $ 0.20 $ 0.62
-------- -------- -------- -------- -------- --------
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 48

D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
PAID-IN ACCUMULATED
COMMON STOCK CAPITAL DEFICIT TOTAL
------------ ------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at April 1, 1994.............................. $24 $ 7,943 $(3,889) $ 4,078
Common stock issued in connection with
Acquisitions..................................... 6 3,203 -- 3,209
Stock option and warrant expense.................... -- 67 -- 67
Stock options exercised............................. -- 21 -- 21
Net income.......................................... -- -- 1,409 1,409
--- ------- ------- -------
Balance at March 31, 1995............................. 30 11,234 (2,480) 8,784
Common stock issued................................. -- 122 -- 122
Stock option and warrant expense.................... -- 15 -- 15
Stock options exercised............................. -- 221 -- 221
Net loss............................................ -- -- (1,109) (1,109)
--- ------- ------- -------
Balance at March 29, 1996............................. 30 11,592 (3,589) 8,033
Common stock issued................................. -- 4 -- 4
Stock option and warrant expense.................... -- 3 -- 3
Stock options exercised............................. -- 94 -- 94
Net income.......................................... -- -- 739 739
--- ------- ------- -------
Balance at March 28, 1997............................. 30 11,693 (2,850) 8,873
Common stock issued................................. -- 49 -- 49
Stock option and warrant expense.................... -- 77 -- 77
Stock options exercised............................. -- 16 -- 16
Net income.......................................... -- -- 363 363
--- ------- ------- -------
Balance at June 30, 1997.............................. 30 11,835 (2,487) 9,378
Common stock issued upon debt conversion
(unaudited)...................................... 5 1,745 -- 1,750
Stock options exercised (unaudited)................. 1 127 -- 128
Net income (unaudited).............................. -- -- 2,283 2,283
--- ------- ------- -------
Balance at March 31, 1998 (unaudited)................. $36 $13,707 $ (204) $13,539
=== ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE> 49

D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE
FOR THE YEARS ENDED ENDED NINE MONTHS ENDED
--------------------------------- ------------ -------------------------
MARCH 31, MARCH 29, MARCH 28, JUNE 30, MARCH 28, MARCH 31,
1995 1996 1997 1997 1997 1998
--------- --------- --------- ------------ ----------- -----------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)..................... $ 1,409 $ (1,109) $ 739 $ 363 $ 627 $ 2,283
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities --
Depreciation and amortization....... 1,064 1,754 1,523 384 1,135 1,163
Amortization of debt issuance
costs............................. 75 71 73 20 55 45
Stock option and warrant expense.... 67 15 3 77 -- --
(Gain) loss from sale of assets..... 59 2 (6) (217) (5) (17)
Equity in net income of PBI......... -- (88) (410) (51) (376) (281)
Deferred income taxes............... (172) 655 363 105 -- --
(Increase) decrease in receivables,
net............................... (4,782) 3,197 3,214 (7,069) 3,736 (2,848)
(Increase) decrease in
inventories....................... (2,670) 2,154 (10,491) 8,600 (13,628) (34,152)
(Increase) decrease in prepaid
expenses and other current
assets............................ 205 (76) 1,483 (295) (10) (1,183)
Increase (decrease) in accounts
payable........................... 1,304 (2,192) 4,719 6,664 7,418 16,042
Increase (decrease) in accrued
expenses.......................... 434 (2,212) 754 (69) 391 685
Decrease in other long-term
liabilities....................... (77) -- -- -- -- --
Other, net.......................... 64 866 22 9 2 126
--------- --------- --------- -------- --------- ---------
Net cash flows from operating
activities..................... (3,020) 3,037 1,986 8,521 (655) (18,137)
--------- --------- --------- -------- --------- ---------
Cash Flows from Investing Activities
Payments for acquisitions, net of cash
acquired............................ (18,963) -- -- -- -- (1,255)
Investment in PBI..................... -- (3,842) -- -- -- --
Cash dividend from PBI................ -- -- 300 -- 300 350
Purchases of property and equipment... (601) (963) (2,198) (180) (2,045) (726)
Proceeds from sale of assets.......... -- 10 6 956 6 17
--------- --------- --------- -------- --------- ---------
Net cash flows from investing
activities..................... (19,564) (4,795) (1,892) 776 (1,739) (1,614)
--------- --------- --------- -------- --------- ---------
Cash Flows from Financing Activities
Borrowings under revolving line of
credit.............................. 294,404 307,623 306,471 82,138 236,654 306,694
Repayments under revolving line of
credit.............................. (271,307) (303,213) (306,471) (91,990) (233,409) (284,002)
Proceeds from equipment loan.......... -- -- 1,495 -- 1,495 --
Payments of long-term debt............ (72) (1,563) (1,132) (2) (1,132) (3,777)
Payments of capital lease
obligations......................... (149) (206) (94) (10) (71) --
Payments of other long-term debt...... -- -- (155) -- (155) --
Proceeds from exercise of stock
options............................. 21 221 94 -- 64 83
Payments of deferred debt costs....... (258) -- (36) -- (36) --
--------- --------- --------- -------- --------- ---------
Net cash flows from financing
activities..................... 22,639 2,862 172 (9,864) 3,410 18,998
--------- --------- --------- -------- --------- ---------
Increase (decrease) in cash....... 55 1,104 266 (567) 1,016 (753)
Cash, Beginning of Period............... 788 843 1,947 2,213 1,197 1,646
--------- --------- --------- -------- --------- ---------
Cash, End of Period..................... $ 843 $ 1,947 $ 2,213 $ 1,646 $ 2,213 $ 893
--------- --------- --------- -------- --------- ---------
Supplemental Disclosure of Cash Flow
Information Cash paid (refunded)
during the period for --
Interest.......................... $ 2,083 $ 3,914 $ 3,689 $ 1,029 $ 2,907 $ 2,465
Income taxes, net................. $ 1,320 $ 427 $ (1,089) $ 31 $ (1,099) $ 1,045
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE> 50

D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The consolidated financial statements include the accounts of all divisions
and wholly-owned subsidiaries of D&K Healthcare Resources, Inc. (the Company).
All significant intercompany accounts and transactions are eliminated.

The accompanying unaudited financial statements for the nine month periods
ended March 28, 1997 and March 31, 1998 include all of the information and
disclosures required by generally accepted accounting principles for interim
reporting, which are less than those required for annual reporting. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair representation have been included. The
results of operations for the nine-month period ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.

Concentration of Credit Risk

The Company is a full-service, regional wholesale drug distributor. From
facilities in Missouri, Kentucky, and Minnesota, the Company distributes a broad
range of pharmaceutical products, health and beauty aids and related products to
its customers in more than 20 states. The Company focuses primarily on a target
market sector which includes independent retail, institutional, franchise, chain
store, and alternate site pharmacies in the Midwest and South. The Company
presently operates in one business segment.

The Company had one customer that comprised approximately 21%, 20% and 18%,
respectively, of net sales in 1996, 1997 and for the three months ended June 30,
1997 and approximately 40%, 22% and 35%, respectively, of the March 29, 1996,
March 28, 1997 and June 30, 1997 accounts receivable balances. The supply
agreement with this customer was terminated on September 30, 1997 upon the
acquisition of the customer by a third party. Upon termination of the supply
agreement, the Company collected the entire amount of its then accounts
receivable due from this customer of approximately $9.5 million. In 1995, net
sales to two customers represented approximately 22% and 14% of total net sales,
respectively.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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.

Change in Fiscal Year

On June 30, 1997, the Company changed from a fiscal year ending the Friday
closest to March 31 in each year to a fiscal year ended June 30 of each year.
Fiscal years 1995, 1996 and 1997 ended on March 31, 1995, March 29, 1996 and
March 28, 1997, respectively, and included 52 weeks. References to years relate
to fiscal years rather than calendar years unless otherwise stated.

Bulk Purchases

During 1995 and 1996, the Company purchased pharmaceuticals from an
industry trade association of which an officer of the Company was Chairman of
the Board of Directors. Purchases of pharmaceuticals from this association
amounted to $19.1 million and $5.1 million for 1995 and 1996, respectively. No
material balances were payable to or receivable from this association at March
29, 1996 or March 28, 1997.

F-7
<PAGE> 51
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Name Change to D&K Healthcare Resources, Inc.

In August 1997, through an amendment to its Certificate of Incorporation
and with the approval of its stockholders, the Company changed its corporate
name from D&K Wholesale Drug, Inc. to D&K Healthcare Resources, Inc.

Restricted Cash

Restricted cash of $0.8 million at March 29, 1996, $0.8 million at March
28, 1997 and $1.4 million at June 30, 1997, respectively, represents cash
receipts from customers that must be used to reduce borrowings under the
revolving line of credit and are included in cash.

Revenue Recognition

Revenue is recognized when products are shipped or services are provided to
customers. During fiscal 1995 and the nine months ended March 31, 1998, the
Company had $9.0 million and $25.2 million (unaudited) of "dock-to-dock" sales,
which are excluded from net sales due to the Company's policy of recording only
the commission on such transactions as a reduction against cost of goods sold in
the consolidated statements of operations. Dock-to-dock sales represent large
volume sales of pharmaceuticals to major self-warehousing retail chain
pharmacies whereby the Company acts as an intermediary in the order and
subsequent delivery of products to the customers' warehouses. The Company had no
dock-to-dock sales in 1996, 1997 or in the three-month period ended June 30,
1997.

Inventories

Inventories are comprised of pharmaceutical drugs and related
over-the-counter items which are stated at the lower of cost or market. Cost is
primarily determined using the last-in, first-out method.

Property and Equipment

Property and equipment is stated at cost. Depreciation and amortization are
charged to operations primarily using the straight-line method over the shorter
of the estimated useful lives of the various classes of assets, which vary from
2 to 30 years, or the lease term for leasehold improvements. For income tax
purposes, accelerated depreciation methods are used.

Intangible Assets

Intangible assets are stated at cost less accumulated amortization.
Amortization is determined using the straight-line method over the estimated
useful lives of the related assets.

Long-Lived Assets

If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the carrying value
of the asset will not be recovered, as determined based on projected
undiscounted cash flows related to the asset over its remaining life, the
carrying value of the asset is reduced to its estimated fair value.

Income Taxes

Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective bases
for income tax purposes. Deferred tax assets and liabilities are measured and
recorded using

F-8
<PAGE> 52
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled.

Book Overdrafts

Accounts payable includes book overdrafts (outstanding checks) of $4.7
million, $5.3 million and $7.4 million at March 29, 1996, March 28, 1997 and
June 30, 1997, respectively.

Accounting Change

In its fiscal year ending June 30, 1998, the Company adopted SFAS No. 128
"Earnings Per Share," which requires a dual presentation of basic and diluted
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that would occur if securities or other contracts to issue common stock
were exercised or converted into common stock. All share and per share amounts
have been restated in accordance with the provisions of SFAS No. 128 (see Note
15).

Reclassifications

Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.

NOTE 2. ACQUISITIONS:

In June 1994, the Company entered into a definitive asset purchase
agreement (the "Agreement") with another pharmaceutical distributor whereby the
Company purchased all of the pharmaceutical and non-pharmaceutical inventories
dedicated to servicing a supply agreement and all of the accounts receivable
directly related to a large regional drug store chain. The purchase price of the
assets of $10.8 million approximated their net book values and was financed
through borrowings under the Company's existing credit facilities.

In October 1994, the Company acquired all of the issued and outstanding
common stock of Northern Drug Company (NDC) pursuant to the terms and conditions
of a Stock Purchase Agreement (the "NDC Agreement"). Pursuant to the NDC
Agreement, the Company acquired NDC for aggregate consideration consisting of
$2.5 million in cash, 308,334 shares of the Company's common stock valued at
$1.7 million and the issuance of $0.3 million of 9% subordinated notes. At
closing, the Company also repaid $3.6 million of NDC's debt obligations.

In March 1995, the Company acquired all of the issued and outstanding
common stock of Krelitz Industries, Inc. (KII). The acquisition of KII was
consummated pursuant to the terms and conditions of the Agreement and Plan of
Merger dated February 13, 1995 whereby KII was acquired for an aggregate of $0.3
million in cash, 107,852 shares of the Company's common stock valued at $0.6
million and a $0.1 million non-compete agreement with the former Chairman and
CEO of KII. In addition, the Company exchanged 142,857 shares of its common
stock to retire KII's $1.0 million subordinated mortgage note payable and repaid
$12.4 million of KII's debt obligations.

In February 1996, the Company settled a pre-acquisition lawsuit against KII
resulting in cash payments of $0.3 million and the issuance of 15,000 shares of
common stock valued at $0.1 million. The cost of the settlement was included
within the excess of purchase price over the net assets acquired in KII's
opening balance sheet.

The results of operations for NDC and KII have been included in the
consolidated financial statements since their respective acquisition dates.

F-9
<PAGE> 53
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, NDC and KII as if the
acquisitions had occurred at the beginning of fiscal 1995, with pro forma
adjustments to give effect to amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with related income tax
effects. The unaudited pro forma information has been prepared for comparative
purposes only and does not purport to be indicative of the results of operations
had these transactions been completed as of the assumed dates or which may be
obtained in the future (in thousands, except per share amounts).

<TABLE>
<CAPTION>
MARCH 31, 1995
--------------
<S> <C>
Net sales................................................... $449,347
Net loss.................................................... (1,100)
Net loss per share.......................................... $ (0.37)
</TABLE>

During the nine-month period ended March 31, 1998, the Company made two
acquisitions of pharmaceutical distribution companies for aggregate
consideration of $2.6 million, including cash payments of $1.3 million and the
issuance of notes payable in the amount of $1.3 million.

NOTE 3. INVENTORIES:

Substantially all inventories are stated at the lower of last-in, first-out
(LIFO) cost or market. If the Company had used the first-in, first-out (FIFO)
method of inventory valuation, which approximates current replacement cost,
inventories would have been $5.8 million, $7.0 million and $7.0 million higher
than reported at March 29, 1996, March 28, 1997 and June 30, 1997, respectively.

NOTE 4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 29, 1996 MARCH 28, 1997 JUNE 30, 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Land................................... $ 528 $ 528 $ 383
Building and improvements.............. 3,130 3,296 2,758
Fixtures and equipment................. 4,031 5,669 5,733
Leasehold improvements................. 390 735 735
Vehicles............................... 1,110 1,052 1,004
------- ------- -------
9,189 11,280 10,613
Less -- Accumulated depreciation and
amortization......................... (4,027) (5,038) (5,194)
------- ------- -------
$ 5,162 $ 6,242 $ 5,419
======= ======= =======
</TABLE>

In June 1997, the Company sold the former NDC building, with a carrying
value of $0.7 million, for cash proceeds of $0.9 million. The gain on the sale
is included in other, net in the consolidated statements of operations for the
three months ended June 30, 1997.

NOTE 5. INVESTMENT IN 50% OWNED COMPANY:

In November 1995, the Company completed the purchase of approximately 50%
of the capital stock of Pharmaceutical Buyers, Inc. ("PBI"), a Colorado-based
group purchasing organization. Pursuant to the transaction, the Company acquired
approximately 50% of the voting and non-voting common stock of PBI for $3.75
million in cash. The Company's investment in PBI is accounted for under the
equity method.

F-10
<PAGE> 54
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's equity in the net income of PBI totaled $88,000, $410,000 and
$51,000, respectively, for 1996 and 1997 and for the three months ended June 30,
1997, which is net of amortization of goodwill associated with its investment in
PBI of $92,000, $276,000 and $69,000 for these respective fiscal periods. The
PBI goodwill is being amortized using the straight line method over a period of
25 years. During 1997, the Company received a cash dividend of $300,000 from
PBI, which was recorded as a reduction in the carrying amount of the investment.
In February 1998, the Company received a similar cash dividend of $350,000 from
PBI.

Summarized balance sheet information for PBI for its fiscal year ended
December 31, 1997 and for the period ended June 30, 1997 (unaudited) included
current assets of $3.0 million and $2.5 million, noncurrent assets of $1.0
million and $1.0 million, current liabilities of $1.1 million and $1.2 million
and noncurrent liabilities of $7.0 million and $7.1 million, respectively.
Summarized income statement information for PBI for its fiscal year ended
December 31, 1997 and for the three months ended June 30, 1997 (unaudited)
included net revenues of $5.6 million and $1.3 million and income from
continuing operations and net income of $1.3 million and $0.3 million,
respectively.

The remaining shareholders of PBI have the option to exchange their
ownership interests in PBI for shares of the Company's common stock under the
terms of the original purchase agreement. The potential impact of any such
conversions has been determined to be non-dilutive in all periods presented (see
Note 17).

NOTE 6. OTHER ASSETS:

Other assets include deferred debt issuance costs of $0.6 million, $0.7
million and $0.7 million, respectively, at March 29, 1996, March 28, 1997 and
June 30, 1997 that are amortized over the periods the related debt is
outstanding. Accumulated amortization amounted to $0.4 million, $0.5 million and
$0.5 million, respectively, at March 29, 1996, March 28, 1997 and June 30, 1997.
Amortization of deferred debt issuance costs totaled $75,000 in 1995, $71,000 in
1996, $73,000 in 1997 and $20,000 for the three month period ended June 30,
1997, and is included in interest expense in the Consolidated Statements of
Operations.

NOTE 7. INTANGIBLE ASSETS:

Intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 29, 1996 MARCH 28, 1997 JUNE 30, 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Excess of purchase price over fair
value of net assets acquired......... $16,475 $16,475 $16,475
Less -- Accumulated amortization....... (1,437) (1,850) (1,954)
------- ------- -------
$15,038 $14,625 $14,521
======= ======= =======
</TABLE>

The excess of purchase price over the fair value of net assets acquired is
being amortized using the straight-line method over a period of 40 years.
Amortization of intangible assets totaled $0.2 million in 1995, $0.4 million in
1996, $0.4 million in 1997 and $0.1 million for the three-month period ended
June 30, 1997.

In the third quarter of its fiscal year ending June 30, 1998, the excess of
purchase price over the fair value of net assets acquired was reduced by $4.1
million to reflect the reversal of the deferred tax asset valuation allowance
related to acquired net operating loss, alternative minimum tax and charitable
contribution carryforwards (see Note 14).

F-11
<PAGE> 55
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8. LONG-TERM DEBT:

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 29, 1996 MARCH 28, 1997 JUNE 30, 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Revolving line of credit with banks.... $40,000 $40,000 $30,147
Subordinated notes payable to insurance
company.............................. 2,167 1,083 1,083
Convertible subordinated notes payable
to insurance company................. 1,750 1,750 1,750
Subordinated notes to former
shareholders......................... 325 325 325
Missouri First Link loan............... -- 1,495 1,495
Other, including capital lease
obligations.......................... 157 15 3
------- ------- -------
$44,399 $44,668 $34,803
Less -- Current maturities............. (1,209) (3,138) (3,127)
------- ------- -------
$43,190 $41,530 $31,676
======= ======= =======
</TABLE>

As of June 30, 1997, the revolving line of credit had a maximum borrowing
capacity of $50 million, plus a supplemental facility in an aggregate amount of
up to $10 million during the months of December through June of each year. Under
the loan agreement, the total amount of loans and letters of credit outstanding
at any time may not exceed the lesser of an amount based on percentages of
eligible inventories and accounts receivable (the borrowing base formula), or
$50 million, plus the supplemental facility, if applicable. Generally, advances
bear interest at prime plus .75% per annum (8.25% prime rate at March 29, 1996
and 8.5% prime rate at March 28, 1997) payable monthly. The Company has an
option to pay interest on a specified amount not less than $1 million at the
London Interbank Offered Rate (LIBOR) plus 2.5%. Such interest periods are of a
one-, three-, or six-month duration. In May 1997, the Company amended the terms
of the revolving line of credit such that advances bear interest at the daily
LIBOR plus 1.7% or at the prime rate (8.5% prime rate at June 30, 1997) plus
.50% per annum. At March 29, 1996, March 28, 1997 and June 30, 1997, all of the
Company's borrowings bore interest at a weighted average LIBOR-based rate of
7.837%, 7.938% and 7.388%, respectively. The Company was required to pay an
annual facility fee of $139,000 through December 10, 1995 and $206,000
thereafter. At March 29, 1996, March 28, 1997 and June 30, 1997, the borrowing
base formula amounted to $43.9 million, $50.7 million and $50.0 million,
respectively. At March 29, 1996, March 28, 1997 and June 30, 1997, the unused
portion of the line of credit amounted to $3.9 million, $10.2 million and $19.3
million, respectively. The agreement expires December 10, 2000, and, therefore,
the related debt has been classified as long-term. Beginning December 10, 2000,
the agreement can be renewed for one-year periods upon mutual consent. The
revolving line of credit is secured by all of the Company's eligible accounts
receivable and inventories.

The subordinated notes payable to an insurance company bear interest at
11%, payable semiannually, and are comprised of nonconvertible notes of $1.1
million and convertible notes of $1.75 million. Principal on the nonconvertible
notes was paid in full on December 29, 1997 and the convertible notes payable
were converted into 530,978 shares of the Company's common stock at a price of
$3.30 per share. The debt conversion was recorded as a component of
stockholders' equity in the March 31, 1998 consolidated balance sheets.

In December 1996, the Company obtained a $1.5 million equipment loan from a
bank through the Missouri First Link program ("Missouri First") to finance
certain capital expenditures at its leased Cape Girardeau, Missouri facility.
During the first year of the four-year agreement, which is secured by certain
property and equipment and leasehold improvements, the Missouri First loan bears
interest at 5.95% and requires monthly interest payments. At the end of the
first year of the agreement, the Company must reapply for the Missouri First
program with approval dependent upon the Company meeting certain criteria
related to

F-12
<PAGE> 56
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

job creation and economic development in the Cape Girardeau area. If approved,
the loan will bear interest at a fixed rate of seventy percent of the bank's
current prime rate (8.5% at June 30, 1997) plus 1/2%; otherwise, interest will
be charged at the bank's current prime rate plus 1/2%. The Missouri First loan
requires a principal payment of $183,000 at the end of the first year of the
agreement. If approved for continuation in the Missouri First program, interest
will continue to be paid monthly plus a $438,000 principal reduction at the end
of the second year of the agreement; after such time, the loan requires monthly
payments of $36,000 plus interest until maturity in December 2000. In December
1997, the Missouri First loan was renewed at an annual interest rate of 6.45%.

In October 1994, the Company issued subordinated notes in the amount of
$0.3 million to former shareholders of NDC in connection with the acquisition of
NDC. The notes bear interest at 9%, payable quarterly. Principal on the notes is
due in three equal annual installments beginning October 31, 1997. In addition,
the Company issued unsecured notes in the aggregate principal amount of $0.4
million to certain former shareholders of NDC replacing outstanding debt
obligations of NDC. Such unsecured notes were paid in October 1995 plus interest
at prime plus 1%.

The Company is required under the terms of its debt agreements to comply
with certain financial covenants, including those related to the maintenance of
current ratio, tangible net worth and debt service and interest coverage ratios.
The Company also is limited in its ability to make loans and investments, enter
into leases, make capital expenditures or incur additional debt, among other
things, without the consent of its lenders.

At June 30, 1997, maturities of long-term debt, excluding capital lease
obligations, are as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDING
JUNE 30,
------------------
<S> <C>
1998.......................... $ 3,127
1999.......................... 655
2000.......................... 546
2001.......................... 30,475
-------
$34,803
=======
</TABLE>

At March 29, 1996, March 28, 1997 and June 30, 1997, the fair value of
long-term debt approximated its current carrying value.

NOTE 9. COMMITMENTS AND CONTINGENCIES:

The Company leases office and warehouse space and other equipment through
noncancelable operating leases. Rental expense under operating leases was $0.2
million, $0.4 million, $0.7 million and $0.2 million in 1995, 1996, 1997 and for
the three month period ended June 30, 1997, respectively. Minimum rental
payments under these leases with initial or remaining terms of one year or more
at June 30, 1997, are $2.7 million and payments during the succeeding five years
are: 1998 $0.8 million; 1999 $0.7 million; 2000 $0.4 million; 2001 $0.4 million;
2002 $0.4 million.

There are various pending claims and lawsuits arising out of the normal
course of the Company's business. In the opinion of management, the ultimate
outcome of these claims and lawsuits will not have a material adverse effect on
the financial position or results of operations of the Company.

NOTE 10. NONRECURRING EXPENSES:

In October 1995, the Company completed the consolidation of the operations
of its subsidiaries NDC and KII into one facility in Minneapolis. As a result of
the acquisition and consolidation of NDC and KII, the

F-13
<PAGE> 57
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company incurred additional nonrecurring expenses of $1.3 million. Prior to the
consolidation, the Company incurred approximately $0.8 million of fixed
operating expenses at NDC which are not expected to be incurred at the
consolidated facility. In addition, approximately $0.5 million of costs were
incurred in conjunction with the Company's decision to consolidate NDC and KII.

NOTE 11. STOCK OPTIONS:

In April 1992, the Company adopted a Long-Term Incentive Plan that
authorized the Compensation Committee of the Board of Directors (the Committee)
to grant key employees and officers of the Company incentive or non-qualified
stock options, stock appreciation rights, performance shares, restricted shares
and performance units. Options to purchase up to 200,000 shares of common stock
were authorized under the Long-Term Incentive Plan. The Committee determines the
price and terms at which awards may be granted, along with the duration of the
restriction periods and performance targets. In August 1997, the Company's
shareholders approved an amendment to the Plan to increase the number of shares
available for grant to 500,000 shares. Stock options granted under the Long-Term
Incentive Plan are not exercisable earlier than six months from the date of
grant (except in the case of death or disability of the employee holding the
same), nor later than ten years from the date of grant. In January 1997, 67,999
non-qualified and incentive stock options outstanding under the Company's
Long-Term Incentive Plan, with exercise prices ranging from $3.875 to $7.00 per
share, were canceled and replaced with an equivalent number of non-qualified and
incentive options with an exercise price equal to the then fair market price of
the stock of $3.75 per share.

In February 1993, the Board of Directors of the Company adopted the D&K
Wholesale Drug, Inc. 1993 Stock Option Plan (the 1993 Plan) to grant key
employees of the Company non-qualified stock options to purchase up to 350,000
shares of the Company's common stock. The 1993 Plan is administered by the
Company's Board of Directors, which determines the price and terms at which
awards may be granted. Stock options granted under the 1993 Plan are immediately
exercisable from the date of grant and expire not later than ten years from the
date of grant. The exercise price of all options granted pursuant to the 1993
Plan was equal to the fair market value of stock on the respective dates of
grant. In January 1997, 60,000 non-qualified stock options outstanding under the
1993 Plan with exercise prices ranging from $3.875 to $7.00 per share, were
canceled and replaced with an equivalent number of non-qualified stock options
with an exercise price equal to the fair market price of the stock of $3.75 per
share.

F-14
<PAGE> 58
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Changes in options outstanding under the Company's Long-Term Incentive Plan
and the 1993 Plan are as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at April 1, 1994.................. 58,699 $3.71
Granted Fiscal 1995........................... 113,999 4.68
Canceled Fiscal 1995.......................... (5,500) 3.51
Exercised Fiscal 1995......................... (6,333) 3.38
-------- -----
Outstanding at March 31, 1995................. 160,865 4.42
Granted Fiscal 1996........................... 92,164 7.00
Exercised Fiscal 1996......................... (43,834) 5.05
Canceled Fiscal 1996.......................... (19,998) 6.14
-------- -----
Outstanding at March 29, 1996................. 189,197 5.35
Granted Fiscal 1997........................... 252,332 4.74
Canceled Fiscal 1997.......................... (209,164) 6.31
Exercised Fiscal 1997......................... (25,666) 3.65
-------- -----
Outstanding at March 28, 1997................. 206,699 3.84
Granted three months ended June 30, 1997...... 86,000 5.63
-------- -----
Outstanding at June 30, 1997.................. 292,699 $4.36
======== =====
</TABLE>

Stock options exercisable at March 31, 1995, March 29, 1996, March 28, 1997
and June 30, 1997 were 100,865, 159,197, 179,699 and 231,699, respectively, with
a weighted average exercise price of $3.56, $5.25, $3.78 and $4.20,
respectively. The weighted average remaining contractual terms for all
outstanding options was 8.55 years at June 30, 1997.

In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company has elected to account for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense has been recognized in the
consolidated financial statements for the stock option plans. If the Company had
elected to recognize compensation expense based upon the fair value of the
options granted at the grant date as prescribed by SFAS 123, pro forma net
income (loss) and earnings (loss) per share would have been as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
1996 1997 JUNE 30, 1997
------- ----- ------------------
<S> <C> <C> <C>
Net income (loss) -- as reported............ $(1,109) $ 739 $ 363
Net income (loss) -- pro forma.............. $(1,398) $ 464 $ 208
Earnings (loss) per share:
Basic -- as reported...................... $ (0.37) $0.24 $0.12
Basic -- pro forma........................ $ (0.47) $0.15 $0.07
Diluted -- as reported.................... $ (0.37) $0.24 $0.11
Diluted -- pro forma...................... $ (0.47) $0.15 $0.07
</TABLE>

F-15
<PAGE> 59
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option-pricing model using the following
weighted-average assumptions:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
1996 1997 JUNE 30, 1997
---------- ---------- ------------------
<S> <C> <C> <C>
Risk free interest rates.............. 5.68% 5.78% 5.49%
Expected life of options.............. 6.1 years 6.2 years 6.8 years
Volatility of stock price............. 85% 83% 60%
Expected divided yield................ 0% 0% 0%
Fair value of options................. $5.22 $3.43 $3.59
</TABLE>

Compensation expense based on the fair value of options granted prior to
April 1, 1995 were not included in the preceding pro forma calculations.
Therefore, the resulting pro forma compensation cost may not be representative
of that to be expected in future years.

NOTE 12. WARRANTS:

The Company has outstanding warrants to purchase 22,072 shares of common
stock at a price of $0.005 per share. These warrants are exercisable only at
such time as a principal investor receives, following a merger or sale of all or
substantially all of the assets of the Company, in excess of a 30% compounded
annual rate of return on its investment in common stock of the Company. The
warrants were not exercisable at June 30, 1997, and will expire in December
1999. The Company does not believe the conditions to the exercise of the
warrants will ever be satisfied.

In June 1994, the Company entered into a letter agreement with a research
firm to produce reports with respect to the Company's publicly traded equity
securities. The term of the agreement was 13 months and in consideration for the
research reports, the Company granted the firm warrants to purchase up to 70,000
shares of the Company's common stock at an exercise price equal to the closing
price of the stock on the date of the agreement, which was $4.125 per share. The
warrants are exercisable for a period of three years from the date of the
agreement. The research firm earned the warrants on a vesting schedule over the
13-month term of its services. Fifty percent of the warrants vested on the date
of the agreement, an additional 25% vested upon issuance of a second research
report in November 1994, and the final 25% vested upon issuance of a third
research report in June 1995. The Company recorded expense of $61,000 and $9,000
in 1995 and 1996, respectively, related to these warrants. In June 1997, the
Company agreed to extend the expiration of the warrants through June 1998, in
exchange for additional research reports. The Company recorded expense of
$77,000 based upon the estimated fair value of the warrants, as amended, during
the three-month period ended June 30, 1997. At June 30, 1997, the research firm
was vested in 70,000 warrants at a price of $4.125 per share. The research firm
exercised the warrants in May 1998, resulting in the issuance of 70,000 shares
of common stock of the Company, recorded at $288,750.

NOTE 13. OTHER INCOME (EXPENSE):

The Company recorded a $0.3 million charge in 1996 to fully reserve for its
investment in a wholesale alliance of which the probability of fully recovering
its investment was remote.

F-16
<PAGE> 60
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14. INCOME TAXES:

The components of the income tax provision (benefit) are as follows (in
thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
1995 1996 1997 JUNE 30, 1997
------ ------- ---- ------------------
<S> <C> <C> <C> <C>
Current tax provision (benefit)...... $1,129 $(1,044) $177 $175
Deferred tax provision (benefit)..... (60) 655 363 105
------ ------- ---- ----
Income tax provision (benefit)....... $1,069 $ (389) $540 $280
====== ======= ==== ====
</TABLE>

The actual income tax provision (benefit) differs from the expected income
tax provision (benefit), computed by applying the respective U.S. statutory
Federal tax rates of 34% to income before income tax provision (benefit), as
follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
1995 1996 1997 JUNE 30, 1997
------ ----- ---- ------------------
<S> <C> <C> <C> <C>
Current expected income tax provision
(benefit)........................... $ 843 $(509) $435 $219
Amortization of intangible assets not
deductible for income tax
purposes............................ 65 172 234 58
Equity in net income of 50% owned
company not taxable for income tax
purposes............................ -- (49) (186) (33)
State income taxes net of Federal
benefit............................. 114 (49) 61 29
Other, net............................ 47 46 (4) 7
------ ----- ---- ----
$1,069 $(389) $540 $280
====== ===== ==== ====
</TABLE>

F-17
<PAGE> 61
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At March 29, 1996, March 28, 1997 and June 30, 1997, the tax effects of
temporary differences that give rise to significant portions of the Company's
deferred tax assets and liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
1996 1997 JUNE 30, 1997
------- ------- ------------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................ $ 347 $ 299 $ 279
Accrued liabilities.................................... 302 235 291
Capital lease obligations.............................. 41 29 41
Inventories............................................ 666 671 579
Net operating loss carryforwards....................... 4,172 4,172 4,126
Alternative minimum tax and contribution
carryforwards....................................... 298 201 342
Other.................................................. 19 43 124
------- ------- -------
Total deferred tax assets........................... $ 5,845 $ 5,650 $ 5,782
------- ------- -------
Deferred tax liabilities:
Accounts receivable.................................... -- -- $ (426)
Property and equipment................................. $ (36) $ (167) (90)
Inventories............................................ (4,133) (4,160) (4,157)
Other.................................................. (35) (45) (58)
------- ------- -------
Total deferred tax liabilities...................... $(4,204) $(4,372) $(4,731)
------- ------- -------
Valuation allowance...................................... (4,231) (4,231) (4,109)
------- ------- -------
Net deferred tax liabilities........................... $(2,590) $(2,953) $(3,058)
======= ======= =======
</TABLE>

In connection with the acquisitions of NDC and KII in 1995, net deferred
tax liabilities of $4.1 million were established for the differences in the
income tax basis of assets and liabilities acquired and their carrying amounts
for financial reporting purposes. In addition, deferred tax assets of $4.0
million were recorded with respect to net operating loss carryforwards,
contribution carryforwards, and alternative minimum tax carryforwards that were
generated by NDC and KII prior to the acquisitions. The use of pre-acquisition
operating losses is subject to limitations imposed by the Internal Revenue Code
and if not utilized by the Company, the net operating loss carryforwards will
expire beginning in fiscal year 2007. At March 29, 1996 and March 28, 1997, the
Company recorded a valuation allowance of $4.2 million primarily due to the
uncertainty of utilizing the pre-acquisition operating losses and other
carryforwards. During 1996, the previously recorded valuation allowance
decreased by $1.4 million with a corresponding decrease in the excess purchase
price over the fair value of net assets acquired.

During the three-month period ended June 30, 1997, the Company utilized
$306,000 of the net operating loss carryforwards as a deduction against taxable
income for that period. Accordingly, the recorded valuation allowance and the
excess of purchase price over the fair value of net assets acquired were
adjusted for $122,000 to reflect the utilization at June 30, 1997.

In the third quarter of its fiscal year ending June 30, 1998, based upon
its current taxable earnings and forecasted earnings levels for future years,
the Company determined that it was more likely than not that the remaining
acquired net operating loss, contribution and alternative minimum tax credit
carryforwards would be utilized against consolidated taxable income in the
current and future years. Therefore, the recorded valuation allowance of $4.1
million was released resulting in a corresponding increase to deferred tax
assets and a reduction in the excess of purchase price over the fair value of
net assets acquired. The Company anticipates that it will be able to utilize
$3.2 million of the net operating loss carryforwards for its fiscal year ending
June 30, 1998. The annual net operating loss limitation for future years is $1.0
million.

F-18
<PAGE> 62
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15. EARNINGS (LOSS) PER SHARE:

The Company adopted SFAS 128, "Earnings per Share," in the second quarter
of its fiscal year ending June 30, 1998. All earnings and share amounts have
been restated in accordance with SFAS 128.

The reconciliation of the numerator and denominator of the basic and
diluted earnings per common share computations are as follows (in thousands,
except for per share amounts):

<TABLE>
<CAPTION>
1995
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common
shareholders............................ $1,409 2,547,334 $0.55
EFFECT OF DILUTED SECURITIES:
Options and warrants....................... 35,817
Convertible subordinated notes............. 116 530,978
------ ---------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions................ $1,525 3,114,129 $0.49
------ ---------
</TABLE>

<TABLE>
<CAPTION>
1996
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common
shareholders............................ $(1,109) 2,971,117 $(0.37)
EFFECT OF DILUTED SECURITIES:
Options and warrants(1)....................
Convertible subordinated notes(1)..........
------- ---------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions................ $(1,109) 2,971,117 $(0.37)
------- ---------
</TABLE>

<TABLE>
<CAPTION>
1997
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common
shareholders............................ $739 3,033,536 $0.24
EFFECT OF DILUTED SECURITIES:
Options and warrants....................... 24,429
Convertible subordinated notes............. 116 530,978
---- ---------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions................ $855 3,588,943 $0.24
---- ---------
</TABLE>

- -------------------------
(1) Effect of securities is antidilutive.

F-19
<PAGE> 63
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common
shareholders............................ $363 3,054,994 $0.12
EFFECT OF DILUTED SECURITIES:
Options and warrants....................... 40,859
Convertible subordinated notes............. 29 530,978
---- ---------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions................ $392 3,626,831 $0.11
---- --------- -----
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 28, 1997
(UNAUDITED)
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common
shareholders............................ $627 3,039,195 $0.21
EFFECT OF DILUTED SECURITIES:
Options and warrants....................... 27,278
Convertible subordinated notes............. 87 530,978
---- ---------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions................ $714 3,597,451 $0.20
---- ---------
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common
shareholders................................. $2,283 3,244,501 $0.70
EFFECT OF DILUTED SECURITIES:
Options and warrants....................... 189,475
Convertible subordinated notes............. 60 355,970
------ ---------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions................ $2,343 3,789,946 $0.62
------ ---------
</TABLE>

NOTE 16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

F-20
<PAGE> 64
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

disclosures on changes in benefit obligations and fair values of plan assets;
and SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
which requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position at fair value. The Company is
required to adopt the provisions of SFAS 130, 131 and 132 in fiscal 1999 and
SFAS 133 in fiscal 2000. Adoption of these statements is not expected to impact
the Company's consolidated financial position, results of operations or cash
flows, and any effect will be limited to the form and content of its
disclosures.

NOTE 17. SUBSEQUENT EVENTS:

The Company plans to file a Registration Statement on Form S-2 for the
offering of 1.63 million shares of the Company's common stock for sale to the
public (the Offering). The Offering includes 1.2 million shares to be sold by
the Company, 250,000 shares to be sold by existing shareholders and 180,000
shares to be sold by the holder upon the Company's exchange of such shares for
an additional 18% equity interest in PBI to occur simultaneous with the
Offering. Upon consummation of this transaction, the Company will own 68% of the
capital stock of PBI. Accordingly, the financial statements of PBI will be
consolidated with those of the Company for all periods subsequent to the
transaction.

F-21
<PAGE> 65

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Pharmaceutical Buyers, Inc.:

We have audited the accompanying balance sheets of PHARMACEUTICAL BUYERS,
INC. (an Arkansas corporation) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' deficit and cash flows for the years
then ended. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pharmaceutical Buyers, Inc.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.

/s/ Arthur Andersen LLP
Arthur Andersen LLP

Denver, Colorado
March 6, 1998

F-22
<PAGE> 66

PHARMACEUTICAL BUYERS, INC.

BALANCE SHEETS
DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2)........................ $ 1,190,409 $ 2,077,511
Available-for-sale investments (Note 2)................... 506,085 485,922
Receivables (Note 2)...................................... 1,290,784 1,257,239
Other current assets...................................... 33,313 54,816
------------ ------------
Total current assets................................... 3,020,591 3,875,488
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$206,724 and $154,194, respectively....................... 155,213 159,172
DEFERRED INCOME TAXES (Note 5).............................. 107,721 43,863
OTHER ASSETS, net (Note 2).................................. 719,017 982,568
------------ ------------
Total assets........................................... $ 4,002,542 $ 5,061,091
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 20,163 $ 48,897
Accrued expenses.......................................... 243,547 207,878
Deferred revenue (Note 2)................................. 293,338 245,909
Income taxes payable...................................... 31,977 666,957
Current deferred income taxes (Note 5).................... 293,559 283,380
Current portion of other long-term payables (Note 4)...... 185,290 204,736
------------ ------------
Total current liabilities.............................. 1,067,874 1,657,757
NOTES PAYABLE AND OTHER LONG-TERM PAYABLES (Note 4)......... 6,985,320 8,160,649
------------ ------------
Total liabilities...................................... 8,053,194 9,818,406
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIT (Note 3):
Class A common stock, $.01 par value, 500 shares
authorized, 66 shares issued and outstanding........... 1 1
Class B common stock, $.01 par value, 500 shares
authorized, 84 shares issued and outstanding........... 1 1
Additional paid-in capital................................ 5,766,681 5,766,681
Retained earnings......................................... 2,782,665 2,076,002
Treasury stock............................................ (12,600,000) (12,600,000)
------------ ------------
Total stockholders' deficit............................ (4,050,652) (4,757,315)
------------ ------------
Total liabilities and stockholders' deficit............ $ 4,002,542 $ 5,061,091
============ ============
</TABLE>

The accompanying notes to financial statements are an integral part of this
balance sheet.

F-23
<PAGE> 67

PHARMACEUTICAL BUYERS, INC.

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
REVENUE:
Administrative fees....................................... $4,893,479 $4,815,708
Membership fees........................................... 745,462 686,542
---------- ----------
Total revenue........................................ 5,638,941 5,502,250
---------- ----------
EXPENSES:
Operating................................................. 1,436,791 1,270,420
Selling, general and administrative....................... 1,115,404 1,159,538
Depreciation and amortization............................. 289,136 289,497
---------- ----------
Total expenses....................................... 2,841,331 2,719,455
---------- ----------
Income from operations............................... 2,797,610 2,782,795
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (787,318) (899,352)
Other income, net......................................... 105,285 145,379
---------- ----------
Total other expense, net............................. (682,033) (753,973)
---------- ----------
INCOME BEFORE INCOME TAX PROVISION.......................... 2,115,577 2,028,822
INCOME TAX PROVISION (Note 5)............................... (808,914) (810,881)
---------- ----------
NET INCOME.................................................. $1,306,663 $1,217,941
========== ==========
</TABLE>

The accompanying notes to financial statements are an integral part of this
statement.

F-24
<PAGE> 68

PHARMACEUTICAL BUYERS, INC.

STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------ ------ ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
December 31, 1995......... 150 $2 $5,766,681 $ 858,061 $(12,600,000) $(5,975,256)
Net income............. -- -- -- 1,217,941 -- 1,217,941
--- -- ---------- ---------- ------------ -----------
BALANCES,
December 31, 1996......... 150 2 5,766,681 2,076,002 (12,600,000) (4,757,315)
Net income............. -- -- -- 1,306,663 -- 1,306,663
Dividends paid......... -- -- -- (600,000) -- (600,000)
--- -- ---------- ---------- ------------ -----------
BALANCES,
December 31, 1997......... 150 $2 $5,766,681 $2,782,665 $(12,600,000) $(4,050,652)
=== == ========== ========== ============ ===========
</TABLE>

The accompanying notes to financial statements are an integral part of this
statement.

F-25
<PAGE> 69

PHARMACEUTICAL BUYERS, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $1,306,663 $1,217,941
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization........................ 289,136 289,497
Gain on sales of investments, net.................... -- (11,446)
Deferred income tax benefit.......................... (53,679) (55,187)
Other................................................ (20,163) --
Changes in assets and liabilities --
Increase in receivables........................... (33,545) (154,919)
Decrease (increase) in other assets............... 51,207 (44,790)
Decrease in accounts payable...................... (28,734) (3,688)
Increase (decrease) in accrued expenses........... 35,669 (46,216)
Increase in deferred revenue...................... 47,429 112,259
(Decrease) increase in income taxes payable....... (634,980) 602,317
---------- ----------
Net cash provided by operating activities 959,003... 1,905,768
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (51,330) (60,823)
Proceeds from sales of investments........................ -- 69,249
Purchase of investments................................... -- (543,455)
---------- ----------
Net cash used in investing activities........... (51,330) (535,029)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................ (600,000) --
Payments on notes payable and other long-term payables.... (1,194,775) (168,850)
---------- ----------
Net cash used in financing activities........... (1,794,775) (168,850)
---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS.......................................... (887,102) 1,201,889
CASH AND CASH EQUIVALENTS, at beginning of year............. 2,077,511 875,622
---------- ----------
CASH AND CASH EQUIVALENTS, at end of year................... $1,190,409 $2,077,511
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 798,550 $ 897,164
========== ==========
Cash paid for income taxes................................ $1,497,573 $ 129,200
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
In 1996, the Company contributed to Vista Purchasing
Partners, L.L.C the balance of its accounts receivable
from Vista of $40,379 as its initial contribution to the
joint venture (Note 6)
</TABLE>

The accompanying notes to financial statements are an integral part of this
statement.

F-26
<PAGE> 70

PHARMACEUTICAL BUYERS, INC.

NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996

(1) ORGANIZATION

Pharmaceutical Buyers, Inc. ("PBI" or the "Company"), is a group purchasing
organization. PBI aggregates buying power for its members in order to negotiate
favorable contracts with pharmaceutical and medical supply manufacturers and
distributors. PBI's members include long-term care providers, home infusion
providers, home medical equipment dealers, medical distributors and other
healthcare providers. The Company's revenue is derived from membership fees paid
by members and administrative fees paid by manufacturers and distributors.

In November 1995, in connection with the Stock Purchase and Redemption
Agreement (Note 3), the Company restated and amended its Articles of
Incorporation to authorize 500 shares of $.01 par value Class A voting common
stock and 500 shares of $.01 par value Class B non-voting common stock. On
November 30, 1995, as discussed in Note 3, the Company was recapitalized (the
"Recapitalization") by way of the issuance of debt and equity, and the
repurchase of common stock for the Company's treasury.

(2) SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The accompanying financial statements have been prepared using the accrual
method of accounting. Investment in joint venture is accounted for using the
equity method (Note 6).

Cash and Cash Equivalents and Available-For-Sale Investments

Cash and cash equivalents include cash and investments with original
maturities of three months or less and which are not subject to significant risk
from changes in interest rates. Available-for-sale investments include those
investments expected to be held between three and twelve months. At December 31,
1997 and 1996, all investments were classified as available-for-sale and,
therefore, were accounted for at fair market value. The carrying value of all
investments approximated fair market value.

Property and Equipment

Property and equipment is stated at cost. Depreciation and amortization are
charged to operations using primarily accelerated depreciation methods over the
estimated useful lives of the various classes of assets, which vary from 5 to 39
years.

Non-Compete Agreements

Non-compete agreements have been recorded by the Company as a result of the
Recapitalization discussed in Note 3. Such intangible assets are being amortized
over a four-year period from the date of the Recapitalization (November 30,
1995). At December 31, 1997 and 1996, non-compete agreements of $783,965 are
recorded, net of accumulated amortization of $391,983 and $195,991,
respectively. The noncompete agreements are included in other assets in the
accompanying balance sheets.

Debt Issuance Costs

Costs associated with the debt transactions discussed in Note 4 are being
amortized over the term of the related debt, which approximates the effective
interest method of amortization. At December 31, 1997 and 1996, deferred debt
issuance costs of $388,584 is recorded, net of accumulated amortization of
$77,712 and $42,094, respectively, and is included in other assets in the
accompanying balance sheets.

F-27
<PAGE> 71
PHARMACEUTICAL BUYERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Income Taxes

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective basis for income tax purposes. The Company files their income
tax returns under the cash basis. Deferred tax assets and liabilities are
measured and recorded using enacted tax rates in effect for the year in which
those temporary difference are expected to be recorded or settled.

Receivables and Deferred Revenue

The Company derives its revenue primarily from two sources. The Company
charges annual membership dues to its members. Membership dues are billed in
advance throughout the year depending on the member's anniversary date. The
Company also receives contract administrative fees from medical supply and
pharmaceutical manufacturers and distributors. These fees are usually paid
monthly or quarterly, in arrears, depending on the supplier. The amounts paid to
the Company by manufacturers and distributors are based on the volume of
purchases by the Company's members.

At December 31, 1997 and 1996, the Company had recorded approximately
$1,279,000 and $1,257,000, respectively, of administrative fees receivable. This
amount is based on Company estimates of the volume of purchases by its members
based on information provided by manufacturers and distributors. Management
believes that all administrative fees receivable are fully collectible.
Additionally, as of December 31, 1997 and 1996, approximately $293,000 and
$246,000, respectively, of membership dues have been received in advance, and
are recorded in the accompanying balance sheets as deferred revenue, to be
recognized ratably over their one year membership period.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities, 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.

Asset Impairment

The Company reviews its assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For assets which are held and used in operations, the asset would
be impaired if the undiscounted future cash flows related to the asset did not
exceed the net book value.

(3) RECAPITALIZATION

On November 30, 1995, the Company completed the Recapitalization. As a
result of this Recapitalization, the Company: (1) sold shares of its Class A
common stock and Class B common stock for $6,000,000, (2) repurchased shares of
its Class A common stock for $12,600,000, and (3) borrowed $6,450,000 through
Senior Secured Notes and $1,300,000 through Senior Secured Convertible Notes
from Massachusetts Mutual Life Insurance Company and affiliates ("Mass Mutual"),
due in November 2005 (Note 4).

Also as part of the Agreement, the Company entered into non-compete
agreements with the two original stockholders to be paid over a period ending
October 1999 (Note 4).
F-28
<PAGE> 72
PHARMACEUTICAL BUYERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(4) NOTES PAYABLE AND OTHER LONG-TERM PAYABLES

Notes payable and other long-term payables at December 31 are as follows:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Senior Secured Notes, payable to a stockholder (Mass
Mutual); collateralized by substantially all assets of the
Company; interest payable semi-annually at 10.5%; annual
principal payments commencing November 30, 1999, of
$921,429 until paid in full by November 2005; available
for prepayment subject to a maximum annual and aggregate
prepayment amount, as defined............................. $5,450,000 $6,450,000
Senior Secured Convertible Notes, payable to a stockholder
(Mass Mutual); collateralized by substantially all assets
of the Company; interest payable semi-annually at 10.5%;
due November 30, 2005; available for prepayment subject to
a maximum annual and aggregate prepayment amount, as
defined; convertible into 26 Class A common shares at
$50,000 per share......................................... 1,300,000 1,300,000
Non-compete agreements payable; noninterest bearing
installments (discounted using 10.5% rate); due in
semi-annual installments through 1999..................... 420,610 615,385
---------- ----------
7,170,610 8,365,385
Less: Current portion....................................... (185,290) (204,736)
---------- ----------
$6,985,320 $8,160,649
========== ==========
</TABLE>

Principal repayments of notes payable and other long-term payables at
December 31, 1997, are summarized as follows:

<TABLE>
<S> <C>
1998........................................................ $ 185,290
1999........................................................ 1,156,749
2000........................................................ 921,429
2001........................................................ 921,429
2002........................................................ 921,429
Thereafter.................................................. 3,064,284
----------
$7,170,610
==========
</TABLE>

(5) INCOME TAXES

The income tax provision consists of the following for the years ended
December 31:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Federal.............................................. $735,661 $776,183
State................................................ 126,932 89,885
-------- --------
862,593 866,068
-------- --------
Deferred:
Federal.............................................. (50,824) (52,428)
State................................................ (2,855) (2,759)
-------- --------
(53,679) (55,187)
-------- --------
Income tax provision................................... $808,914 $810,881
======== ========
</TABLE>

F-29
<PAGE> 73
PHARMACEUTICAL BUYERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The significant components of the Company's net deferred liability at
December 31 are as follows:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current deferred tax assets (liabilities):
Administrative fees receivable..................... $(477,155) $(468,950)
Accounts payable................................... 7,521 18,239
Accruals........................................... 85,993 77,538
Deferred revenue................................... 109,415 91,724
Other.............................................. (19,333) (1,931)
--------- ---------
Net current deferred tax liabilities....... $(293,559) $(283,380)
========= =========
Long-term deferred tax assets:
Amortization of non-compete agreements............. $ 107,721 $ 43,863
========= =========
</TABLE>

The following table reconciles the federal statutory income tax rate to the
Company's effective income tax rate:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Provision for income taxes at federal statutory rate........ 34.0% 34.0%
Nondeductible expenses...................................... 0.7 1.5
Nontaxable investment income................................ (0.5) (2.2)
State income taxes, net of federal benefit.................. 3.6 3.3
Other....................................................... 0.4 3.4
---- ----
Effective income tax rate................................... 38.2% 40.0%
==== ====
</TABLE>

(6) RELATED PARTY TRANSACTIONS

The Company leases certain office space from a stockholder. The Company's
management believes that the transaction is arms length and reflects market
rates for similar space. Payments made for this lease were $90,231 and $89,635
for the years ended December 31, 1997 and 1996, respectively. The lease is
noncancellable and expires May 31, 2000.

During 1996, the Company paid fees of $35,008 to DASCO, an entity related
by common ownership, for administrative activities. Also, prior to April 1996,
the Company had a $50,000 certificate of deposit with a bank. This certificate
of deposit served as security for a loan made by the bank to DASCO. In April
1996, DASCO defaulted on the loan and the certificate of deposit was used by the
bank to pay down the loan. Both amounts have been reflected as selling, general
and administrative expenses in the accompanying 1996 statement of operations.
DASCO ceased operations during 1997.

In May 1995, PBI and an entity owned by certain of the Company's officers
(the "Officers") entered into a joint venture agreement and formed Vista
Purchasing Partners, L.L.C. ("Vista"). Vista is owned 50% by PBI and 50% by this
other entity. Vista was formed to pursue related aggregate purchasing
opportunities with hospital-affiliated alternative sites. Vista had
insignificant activity during 1995 and 1997. In 1996, Vista reimbursed PBI for
contract labor costs of $62,000. PBI accounts for its investment in Vista under
the equity method. The Company has recognized $32,378 as its share of Vista's
net losses through December 31, 1997. Subsequent to yearend, Vista's management
decided to cease operations in 1998.

Effective June 1, 1995, the Company entered into an agreement to purchase
the operations of Parental Alimentation Providers Association ("PAPA"). In
accordance with the agreement, PAPA was entitled to all membership dues of
existing PAPA members until June 1, 1996. At June 1, 1996, the Company exercised
its option to purchase the operations of PAPA for no additional consideration.
The operations of PAPA were

F-30
<PAGE> 74
PHARMACEUTICAL BUYERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

merged with those of the Company from that date. During 1996, the Company
reimbursed approximately $41,000 to PAPA for certain costs incurred prior to
June 1, 1996, which are classified as selling, general and administrative
expenses in the accompanying 1996 statement of operations.

During November 1995, in connection with the Recapitalization discussed in
Note 3, the Company entered into a consulting agreement with one of the Officers
for two years with annual payments of $150,000. This agreement expired on
November 30, 1997.

(7) EMPLOYEE BENEFIT PLANS

Deferred Contribution Plan

In August 1996, the Company adopted a 401(k) plan for its employees,
effective January 1, 1996. Under this plan, employees, who are at least 21 years
old and have completed one year of service, as defined, are eligible to
participate in the plan. The Company may contribute a discretionary matching
contribution equal to a percentage of each employee's contribution plus an
additional discretionary amount as determined by the Company. The Company
matched 100% of the employees' contributions totaling approximately $45,000 and
$24,000 during 1997 and 1996, respectively. No additional discretionary payments
were made.

Defined Benefit Plan

In August 1996, the Company terminated its defined benefit pension plan,
and in June 1997, all of the plan's obligations were settled. Prior to its
termination, the terms of the plan stated that in order to be eligible for
benefits under the plan, the employee must be 21 years of age or older, have
completed 20 months of service, and recorded 1,000 hours of service during each
year. The plan was subject to the provisions of the Employee Retirement Income
Security Act of 1974. The Company made contributions to the plan in accordance
with actuarial projections, subject to the requirements of the Internal Revenue
Code, as amended.

In accordance with Statement of Financial Accounting Standards No. 88,
"Employer's Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," the plan's termination triggered a
curtailment gain of approximately $46,000, which is included in other income,
net in the accompanying 1996 statement of operations. The plan's settlement
triggered a settlement loss of approximately $18,000, which is included in other
income, net in the accompanying 1997 statement of operations.

The following table reconciles the funded status of the plan with the
amount reflected in the Company's December 31, 1997 and 1996 balance sheets:

<TABLE>
<CAPTION>
1997 1996
---- ---------
<S> <C> <C>
Accumulated benefit obligation............................. $-- $(453,233)
== =========
Projected benefit obligation............................... $-- $(453,233)
Fair value of plan assets.................................. -- 507,021
-- ---------
Funded status.............................................. -- 53,788
Unrecognized liability..................................... -- 102,673
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions....... -- (141,549)
-- ---------
Prepaid pension asset...................................... $-- $ 14,912
== =========
</TABLE>

F-31
<PAGE> 75
PHARMACEUTICAL BUYERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Net pension (income) cost in 1997 and 1996 is comprised of the following:

<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Service cost.............................................. $ -- $36,796
Interest cost............................................. 16,996 32,534
Return on assets.......................................... (16,111) (56,846)
Other..................................................... (3,596) 24,817
-------- -------
$ (2,711) $37,301
======== =======
</TABLE>

The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5%. The expected
long-term rate of return on assets was 7.5%.

(8) SIGNIFICANT CUSTOMERS

PBI's significant customers which individually comprised more than 10% of
total administrative fees for the years ended December 31, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Customer A.................................................. 26% 24%
Customer B.................................................. 6% 11%
</TABLE>

(9) COMMITMENTS AND CONTINGENCIES

The Company leases office space and other equipment through noncancellable
operating leases. Certain of the leases are with related parties (Note 6).
Rental expense under operating leases was approximately $115,000 and $106,000
for the years ended December 31, 1997 and 1996, respectively.

Minimum rental payments under these leases with initial or remaining terms
of one year or more at December 31, 1997 are as follows:

The Company is currently a defendant in a lawsuit which arose in the normal
course of business, whereby the Company, a pharmaceutical manufacturer and other
group purchasing organizations have been accused of damaging certain retail
pharmacies by not allowing them memberships in buying organizations such as the
Company, which would allow them to receive reduced prices on pharmaceuticals.
Management believes that the outcome of this matter will have no material impact
on the financial position of the Company or its results of operations.

(10) SUBSEQUENT EVENT

On February 11, 1998, the Company's board of directors authorized and
declared a $700,000 cash dividend to the shareholders of record on that date.
The dividend was paid on February 25, 1998. The Company's board of directors
also authorized a $612,500 prepayment on its Senior Secured Notes Payable to
Mass Mutual. The prepayment is to be made during March 1998.

F-32
<PAGE> 76

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

NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 8
Forward-Looking Statements.............. 11
Use of Proceeds......................... 12
Dividend Policy......................... 12
Price Range of Common Stock............. 12
Capitalization.......................... 13
Selected Consolidated Financial Data.... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 15
Business................................ 22
Management.............................. 29
Certain Transactions.................... 34
Principal and Selling Stockholders...... 36
Description of Capital Stock............ 37
Underwriting............................ 39
Legal Matters........................... 40
Experts................................. 40
Additional Information.................. 41
Incorporation of Certain Documents by
Reference............................. 42
Index to Consolidated Financial
Statements............................ F-1
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,630,000 SHARES

D & K LOGO

D & K HEALTHCARE
RESOURCES, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
SALOMON SMITH BARNEY

RAYMOND JAMES & ASSOCIATES, INC.

, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 77

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 10,714
National Association of Securities Dealers, Inc. Fee........ 4,132
Nasdaq National Market Listing Fee.......................... 17,500
Printing Expenses........................................... 125,000
Legal Fees and Expenses..................................... 175,000
Auditors' Fees and Expenses................................. 100,000
Transfer Agent and Registrar Fees........................... 1,000
Miscellaneous Expenses...................................... 66,654
--------
Total.................................................. $500,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the General Corporation Law of the State of Delaware
provides generally and in pertinent part that a Delaware corporation may
indemnify its directors and officers against expenses, judgments, fines and
settlements actually and reasonably incurred by them in connection with any
civil suit or action, except actions by or in the right of the corporation, or
any administrative or investigative proceeding if, in connection with the
matters in issue, they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interest of the corporation, and
in connection with any criminal suit or proceeding, if in connection with the
matters in issue, they had no reasonable cause to believe their conduct was
unlawful. Section 145 further permits a Delaware corporation to grant its
directors and officers additional rights of indemnification through bylaw
provisions and otherwise and to purchase indemnity insurance on behalf of its
directors and officers.

Article 8.B of the registrant's Certificate of Incorporation provides that
the registrant shall, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, as amended from time to time, indemnify all
persons who the registrant may indemnity under Section 145.

Article 8.A of the registrant's Certificate of Incorporation provides that
directors of the Company shall not be personally liable for monetary damages to
the Company or its stockholders for a breach of fiduciary duty as a director,
except for liability as a result of (i) a breach of the director's duty of
loyalty to the Company or its stockholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) an act related to the unlawful stock repurchase or payment of a dividend
under Section 174 of Delaware General Corporation Law; and (iv) transaction from
which the director derived an improper personal benefit.

Article VII of the registrant's By-laws provides, in general, that the
registrant shall indemnify its directors and officers to the full extent allowed
under law.

The Underwriting Agreement provides for indemnification of directors and
officers of the registrant by the Underwriters with respect to information
furnished by the Underwriters for inclusion in this Registration Statement.

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

II-1
<PAGE> 78

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.

ITEM 16. EXHIBITS.

A list of exhibits is set forth in the Exhibit Index appearing elsewhere in
this Registration Statement and is incorporated herein by reference.

ITEM 17. UNDERTAKINGS.

A. The undertaking required by Item 512(h) of Regulation S-K is set forth
in the last paragraph of Item 15 above.

B. 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 of 1933 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 offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE> 79

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of St. Louis and State of Missouri on the 29th day of
July, 1998.

D & K Healthcare Resources, Inc.

By: /s/ J. HORD ARMSTRONG, III

------------------------------------
J. Hord Armstrong, III
Chairman and Chief Executive Officer

Each person whose signature appears below constitutes and appoints J. Hord
Armstrong, III and Martin D. Wilson his true and lawful attorneys-in-fact and
agents, each acting alone, with full powers of substitution and re-substitution
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to sign a Registration Statement pursuant to
Section 462(b) of the Securities Act, 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, each
acting alone, 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, each acting
alone, or his substitute or 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 below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. HORD ARMSTRONG, III Chairman, Chief Executive Officer, July 29, 1998
- --------------------------------------------- Treasurer and Director (Principal
J. Hord Armstrong, III Financial Officer)

/s/ MARTIN D. WILSON President, Chief Operating Officer, July 29, 1998
- --------------------------------------------- Secretary and Director
Martin D. Wilson

/s/ DANIEL E. KREHER Vice President, Finance & Administration July 29, 1998
- --------------------------------------------- (Principal Accounting Officer)
Daniel E. Kreher

/s/ RICHARD F. FORD Director July 29, 1998
- ---------------------------------------------
Richard F. Ford

/s/ BRYAN H. LAWRENCE Director July 29, 1998
- ---------------------------------------------
Bryan H. Lawrence

/s/ ELLIOT H. STEIN Director July 29, 1998
- ---------------------------------------------
Elliot H. Stein

/s/ ROBERT E. KORENBLAT Director July 29, 1998
- ---------------------------------------------
Robert E. Korenblat

/s/ THOMAS F. PATTON Director July 29, 1998
- ---------------------------------------------
Thomas F. Patton

/s/ J. DAVID MCCAY Director July 29, 1998
- ---------------------------------------------
J. David McCay

/s/ JAMES M. USDAN Director July 29, 1998
- ---------------------------------------------
James M. Usdan
</TABLE>

II-3
<PAGE> 80

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ------------------ -----------
<S> <C> <C>
1.1* Form of Underwriting Agreement
2.1 Stock Purchase and Redemption Agreement, dated as of
November 30, 1995, by and among Pharmaceutical Buyers, Inc.,
J. David McCay, The J. David McCay Living Trust, Robert E.
Korenblat and the registrant, filed as Exhibit 2.4 to the
registrant's Annual Report on Form 10-K for the year ended
March 28, 1997 is incorporated herein by this reference
4.1 Form of certificate for Common Stock, filed as Exhibit 4.1
to registrant's Registration Statement on Form S-1 (Reg. No.
33-48730) is incorporated herein by this reference
5.1** Opinion of Armstrong, Teasdale, Schlafly & Davis
10.1 Note Agreement, dated December 29, 1987, regarding
$3,250,000.00 11% Joint and Several Subordinated Notes due
December 29, 1997, and $1,750,000.00 11% Joint and Several
Convertible Subordinated Notes due December 29, 1997, by and
among registrant, Delta Wholesale Drug, Inc., W. Kelly
Company, Wholesale Management Services, Inc. and
Massachusetts Mutual Life Insurance Company, and amendments
thereto, filed as Exhibit 10.3 to the registrant's
Registration Statement on Form S-1 (Reg. No. 33-48730) is
incorporated herein by this reference
10.2 Note Agreement, dated December 29, 1987, regarding
$3,250,000.00 11% Joint and Several Subordinated Notes due
December 29, 1997, and $1,750,000.00 11% Joint and Several
Convertible subordinated Notes due December 29, 1997, by and
among registrant, Delta Wholesale Drug, Inc., W. Kelly
Company, Wholesale Management Services, Inc. and MassMutual
Corporate Investors, and amendments thereto, filed as
Exhibit 10.4 to the registrant's Registration Statement on
Form S-1 (Reg. No. 33-48730) is incorporated herein by this
reference
10.3 Preferred Stock Purchase Agreement, dated December 29, 1987,
by and among registrant, Gateway Venture Properties III,
L.P., J. Hord Armstrong, III and W. VanMeter Alford, Jr.,
filed as Exhibit 10.5 to the registrant's Registration
Statement on Form S-1 (Reg. No. 33-48730) is incorporated
herein by this reference
10.4 Preferred Stock Purchase Agreement, dated December 29, 1987,
by and among registrant, Elliott H. Stein, Robert A. Geddes,
Bryan H. Lawrence, W.G. Heckman, Robert R. Hermann, Inmann
Brandon, J. Hord Armstrong, III and W. VanMeter Alford, Jr.,
filed as Exhibit 10.4 to the registrant's Registration
Statement on Form S-1 (Reg. No. 33-48730) is incorporated
herein by this reference
10.5 D & K Wholesale Drug, Inc. Amended and Restated 1992 Long
Term Incentive Plan, filed as Annex A to the registrant's
1995 Proxy Statement is incorporated herein by this
reference
10.6 Wholesale Distribution Agreement, by and between registrant
and GLAXO INC., filed as Exhibit 10.14 to the registrant's
Registration Statement on Form S-1 (Reg. No. 33-48730) is
incorporated herein by this reference
10.7 Wholesale Distribution Agreement, dated January 1, 1995, by
and between registrant and SmithKline Beecham
Pharmaceuticals, filed as Exhibit 10.7 to the registrant's
Annual Report on Form 10-K for the year ended March 29, 1996
is incorporated herein by this reference
10.8 Wholesale Prime Vendor Agreement, dated September 27, 1993,
by and between registrant and Pfizer Inc., filed as Exhibit
10.16 to the registrant's Annual Report on Form 10-K for the
year ended April 1, 1994 is incorporated herein by this
reference
</TABLE>

II-4
<PAGE> 81

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ------------------ -----------
<S> <C> <C>
10.9 Warehousing and Distribution Service Agreement, dated July
1, 1994, by and between registrant and Eli Lilly and
Company, filed as Exhibit 10.17 to the registrant's Annual
Report on Form 10-K for the year ended April 1, 1994 is
incorporated herein by this reference
10.10 Amendment to Note Agreements, filed as Exhibit 10.21 to the
registrant Registration Statement on Form S-1 (Reg. No.
33-48730) is incorporated herein by reference
10.11 Letter Agreement, dated March 31, 1992, between registrant,
Delta, Kelly, WMSI, Massachusetts Mutual Life Insurance
Company and MassMutual Corporation Investors, filed as
Exhibit 10.26 to registrant's Annual Report on Form 10-K for
the year ended April 2, 1993 is incorporated herein by this
reference
10.12 Letter Agreement dated May 24, 1994, between registrant,
Massachusetts Mutual Life Insurance Company and MassMutual
Corporate Investors, filed as Exhibit 10.30 to the
registrant's Annual Report on Form 10-K for the year ended
April 1, 1994 is incorporated herein by this reference
10.13 Letter Agreement dated February 14, 1995, between
registrant, Massachusetts Mutual Life Insurance Company and
MassMutual Corporate Investors, filed as Exhibit 10.15 to
the registrant's Annual Report on Form 10-K for the year
ended March 31, 1995 is incorporated herein by this
reference
10.14 Letter Agreement dated January 18, 1995, between registrant,
Massachusetts Mutual Life Insurance Company and MassMutual
Corporate Investors, filed as Exhibit 10.16 to the
registrant's Annual Report on Form 10-K for the year ended
March 31, 1995 is incorporated herein by this reference
10.15 Letter Agreement dated June 10, 1994, between registrant,
Massachusetts Mutual Life Insurance Company and MassMutual
Corporate Investors, filed as Exhibit 10.17 to the
registrant's Annual Report on Form 10-K for the year ended
March 31, 1995 is incorporated herein by this reference
10.16 Letter Agreement dated October 10, 1994, between registrant,
Massachusetts Mutual Life Insurance Company and MassMutual
Corporate Investors, filed as Exhibit 10.18 to the
registrant's Annual Report on Form 10-K for the year ended
March 31, 1995 is incorporated herein by this reference
10.17 Supply Agreement dated April 18, 1995 by and between
registrant and M & H Drugs, Inc., filed as Exhibit 10.19 to
the registrant's Annual Report on Form 10-K for the year
ended March 31, 1995 is incorporated herein by this
reference
10.18 Letter Agreement, dated August 31, 1993, by and between
registrant and W. VanMeter Alford, Jr. filed as Exhibit
10.28 to the registrant's Annual Report on Form 10-K for the
year ended April 1, 1994 is incorporated herein by this
reference
10.19 Third Amended and Restated Loan and Security Agreement,
dated as of March 3, 1995, by and among registrant, Northern
Drug Company, Krelitz Industries, Inc. and Shawmut Capital
Corporation, filed as Exhibit 10.21 to the registrant's
Annual Report on Form 10-K for the year ended March 31, 1995
is incorporated herein by this reference
10.20 First Amendment to Third Amendment and Restated Loan and
Security Agreement, dated as of June 9, 1995, by and among
registrant, Northern Drug Company, Krelitz Industries, Inc.
and Shawmut Capital Corporation, filed as Exhibit 10.22 to
the registrant's Annual Report on Form 10-K for the year
ended March 31, 1995 is incorporated herein by this
reference
10.21 Release of All Claims, dated as of June 6, 1995, by and
between registrant and George P. Bray, filed as Exhibit
10.23 to the registrant's Annual Report on Form 10-K for the
year ended March 31, 1995 is incorporated herein by this
reference
</TABLE>

II-5
<PAGE> 82

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ------------------ -----------
<S> <C> <C>
10.22 Second Amendment to Third Amendment and Restated Loan and
Security Agreement and Consent, dated as of November 29,
1995 by and among Shawmut Capital Corporation, the
registrant, Northern Drug Company and Krelitz Industries,
Inc., filed as Exhibit 10.22 to the registrant's Annual
Report on Form 10-K for the year ended March 29, 1996 is
incorporated herein by this reference
10.23 Third Amendment to Third Amendment and Restated Loan and
Security Agreement, Amendment to Pledge Agreement and
Waiver, dated as of July 1996, by and among Fleet Capital
Corporation, the registrant and Krelitz Industries, Inc.,
filed as Exhibit 10.23 to the registrant's Annual Report on
Form 10-K for the year ended March 29, 1996 is incorporated
herein by this reference
10.24 Amendment to and Restatement of Employment Agreement, dated
as of January 2, 1996, by and between the registrant and
Steven B. Goldfine, filed as Exhibit 10.24 to the
registrant's Annual Report on Form 10-K for the year ended
March 29, 1996 is incorporated herein by reference
10.25 D & K Wholesale Drug, Inc. 401(k) Profit Sharing Plan and
Trust, dated January 1, 1995, filed as Exhibit 10.25 to the
registrant's Annual Report on Form 10-K for the year ended
March 29, 1996 is incorporated herein by this reference
10.26 Amended and Restated Lease Agreement, dated as of January
16, 1996 by and between Morhaert Development, L.L.C. and the
registrant, filed as Exhibit 10.26 to the registrant's
Annual Report on Form 10-K for the year ended March 29, 1996
is incorporated herein by this reference
10.27 Fourth Amendment to Third Amendment and Restated Loan and
Security Agreement, dated as of May 1997, by and among Fleet
Capital Corporation, the registrant, and Krelitz Industries,
Inc., filed as Exhibit 10.28 to the registrant's Annual
Report on Form 10-K for the year ended March 28, 1997 is
incorporated herein by this reference
10.28 Loan Agreement dated as of December 23, 1996, by and among
registrant, Krelitz Industries, Inc. and Magna Bank, N.A.,
as Exhibit 10.30 to the registrant's Annual Report on Form
10-K for the year ended March 28, 1997 is incorporated
herein by this reference
10.29* Pharmaceutical Services Agreement between Anthem
Prescription Management, Inc. and D & K Wholesale Drug, Inc.
dated July 16, 1996
10.30* Renewal dated June 26, 1998, to Pharmaceutical Services
Agreement between Anthem Prescription Management, Inc. and
D & K Wholesale Drug, Inc. dated July 16, 1996.
23.1** Consent of Arthur Andersen LLP
23.2** Consent of Armstrong, Teasdale, Schlafly & Davis (included
in Exhibit 5.1)
24.1** Power of Attorney (see page II-3)
</TABLE>

- ---------------
* To be filed by amendment.

** Filed herewith.

II-6

<PAGE> 1
EXHIBIT 5.1

[ARMSTRONG, TEASDALE, SCHLAFLY & DAVIS LETTERHEAD]

July 29, 1998

D&K Healthcare Resources, Inc.
8000 Maryland Avenue, Suite 920
Clayton, Missouri 63105

Re: Registration Statement on Form S-2 for up to 1,874,500
Shares of Common Stock

Ladies and Gentlemen:

We have examined the Registration Statement on Form S-2 (the
"Registration Statement") to be filed by D&K Healthcare Resources, Inc., a
Delaware corporation (the "Company"), with the Securities and Exchange
Commission on or about July 29, 1998, in connection with the registration under
the Securities Act of 1933, as amended, of up to an aggregate of 1,874,500
shares of the Company's Common Stock, $0.01 par value per share (the "Common
Stock"), of which (i) 1,200,000 shares are being offered by the Company, (ii)
430,000 shares are being offered by certain existing stockholders (the
"Selling Stockholders") and (iii) up to 244,500 additional shares may be
offered by the Company pursuant to an over-allotment option granted to the
Underwriters as defined in the Registration Statement.

As your counsel, we have examined the Company's Restated Certificate of
Incorporation and By-Laws, each as amended to the date hereof, and the records
of corporate proceedings and other actions taken by the Company in connection
with the authorization, issuance and sale of the Common Stock. Based upon the
foregoing and in reliance thereon, we are of the opinion that:

1. Subject to (i) compliance with applicable state securities laws and
(ii) receipt from the Securities and Exchange Commission of an order declaring
the Registration Statement effective, the 1,200,000 shares of Common Stock to be
sold by the Company, when issued and sold in the manner described in the

<PAGE> 2

Registration Statement, will be legally issued, fully paid and nonassessable;

2. The 430,000 shares of Common Stock to be sold by the Selling
Stockholders have been legally issued and are fully paid and nonassessable; and

3. The up to 244,500 additional shares of Common Stock subject to the
Underwriters' over-allotment option, if, when and to the extent issued and sold
pursuant to the exercise of such option, will be legally issued, fully paid and
nonassessable.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under the
caption "Legal Matters" in the Prospectus forming a part of said Registration
Statement.

Very truly yours,

/s/ ARMSTRONG, TEASDALE, SCHLAFLY & DAVIS

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our reports
included in this registration statement and to the incorporation by reference
in this registration statement of our reports dated May 8, 1997, included and
incorporated by reference in D&K Healthcare Resources, Inc.'s Form 10-K for the
year ended March 28, 1997, as amended, and to all references to our firm
included in this registration statement.

ARTHUR ANDERSEN LLP

/s/ ARTHUR ANDERSEN LLP

St. Louis, Missouri,
July 29, 1998