SMITH C D DRUG CO
S-1/A, 1998-07-21
DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES
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<PAGE>
 
     
  AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1998     
                                                   
                                                REGISTRATION NO. 333-56129     
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                --------------
                                
                             AMENDMENT NO. 1     
                                       
                                    TO     
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                                --------------
                          
                       C.D. SMITH HEALTHCARE, INC.     
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
         MISSOURI                    5122                   44-0437360
     (STATE OR OTHER     (PRIMARY STANDARD INDUSTRIAL    (I.R.S. EMPLOYER
       JURISDICTION       CLASSIFICATION CODE NUMBER)   IDENTIFICATION NO.)
   OF INCORPORATION OR
      ORGANIZATION)
 
                             3907 S. 48TH TERRACE
                                 P.O. BOX 789
                             ST. JOSEPH, MO 64503
                                (816) 232-5471
   (ADDRESS INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                               ROBERT C. FARLEY
                            CHIEF EXECUTIVE OFFICER
                             3907 S. 48TH TERRACE
                                 P.O. BOX 789
                             ST. JOSEPH, MO 64503
                                (816) 232-5471
 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
 
                                  COPIES TO:
<TABLE>
<S>                                                <C>
              SHARI L. WRIGHT, ESQ.                            KATHERINE M. SEABORN, ESQ.
        BLACKWELL SANDERS PEPER MARTIN LLP                      GARDERE & WYNNE, L.L.P.
               TWO PERSHING SQUARE                                  1601 ELM STREET
           2300 MAIN STREET, SUITE 1100                         3000 THANKSGIVING TOWER
           KANSAS CITY, MISSOURI 64108                          DALLAS, TEXAS 75201-4761
                  (816) 983-8000                                     (214) 999-3000
</TABLE>
 
  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement is declared effective.
 
  If the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
 
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
       
                                --------------
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH 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.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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   , 1998     
 
PROSPECTUS
         , 1998
                                
                             4,750,000 SHARES     
                           
                        C.D. SMITH HEALTHCARE, INC.     
 
 
[LOGO OF C.D. SMITH DRUG COMPANY APPEARS HERE]


                                  COMMON STOCK
   
  Of the 4,750,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby (the "Offering"), 3,500,000 shares are being
sold by C.D. Smith Healthcare, Inc. (the "Company") and 1,250,000 shares are
being sold by certain shareholders of the Company (the "Selling Shareholders").
The Company will not receive any proceeds from the sale of shares by the
Selling Shareholders. See "Principal and Selling Shareholders."     
   
  Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $16.00 and $18.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price.     
   
  Application has been made for the Common Stock to be approved for listing on
the New York Stock Exchange ("NYSE") under the trading symbol "CDH."     
 
  SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
 
THESE  SECURITIES HAVE NOT BEEN APPROVED  OR DISAPPROVED BY THE SECURITIES  AND
 EXCHANGE  COMMISSION   OR  ANY  STATE  SECURITIES  COMMISSION  NOR   HAS  THE
  SECURITIES  AND  EXCHANGE COMMISSION  OR  ANY STATE  SECURITIES  COMMISSION
   PASSED   UPON  THE  ACCURACY   OR  ADEQUACY   OF  THIS   PROSPECTUS.  ANY
    REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
                                PRICE     UNDERWRITING   PROCEEDS   PROCEEDS TO
                               TO THE    DISCOUNTS AND    TO THE    THE SELLING
                               PUBLIC    COMMISSIONS(1) COMPANY(2)  SHAREHOLDERS
- --------------------------------------------------------------------------------
<S>                          <C>         <C>            <C>         <C>
Per Share..................   $             $            $            $
Total(3)...................  $            $             $           $
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
    Underwriters against certain liabilities, including liabilities under the
    Securities Act of 1933, as amended. See "Underwriting."
   
(2) Before deducting expenses payable by the Company estimated at $1,650,000.
           
(3) The Company has granted the Underwriters an option, exercisable within 30
    days of the date hereof, to purchase up to 712,500 additional shares of
    Common Stock, at the Price to the Public less Underwriting Discounts and
    Commissions, solely to cover over-allotments, if any. If such option is
    exercised in full, the total Price to the Public, Underwriting Discounts
    and Commissions and Proceeds to the Company will be $       , $        and
    $       , respectively. See "Underwriting."     
 
  The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as, and if delivered to and accepted by them,
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be in New York, New York on or about        , 1998.
 
DONALDSON, LUFKIN & JENRETTE
       
                                 BT ALEX. BROWN
 
                                                               WHEAT FIRST UNION
<PAGE>
 
 
 
 
                             [INSIDE FRONT COVER]
                                     [MAP]
 
 
 
  The Company intends to furnish its shareholders 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 fiscal year.
 
  CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
 
                               PROSPECTUS SUMMARY
   
  The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Investors should carefully consider the information set forth
under the heading "Risk Factors." Unless otherwise indicated, all information
in this Prospectus (i) assumes that the Underwriters' overallotment option is
not exercised, (ii) reflects the exercise of warrants (the "Churchill
Warrants") to purchase 1,080,078 shares of Common Stock held by Churchill ESOP
Capital Partners ("Churchill") and (iii) has been adjusted to give effect to a
51-for-1 Common Stock split. The exercise of the Churchill Warrants and the
Common Stock split will be effected immediately prior to consummation of the
Offering. References throughout this Prospectus to fiscal years refer to the
Company's fiscal years ending on the last day of February of such year. Unless
otherwise indicated, references to the "Company" or "C.D. Smith" refer to C.D.
Smith Healthcare, Inc. and its subsidiaries.     
 
                                  THE COMPANY
   
  C.D. Smith is a leading regional full-line, full-service wholesale
distributor of pharmaceuticals and related products. The Company distributes
over 25,000 SKUs to more than 3,000 customers located predominantly in the
midwestern United States and New England. The Company believes that it is the
primary supplier to a majority of its customers, which include independent
pharmacies, health care institutions and regional and national chain
pharmacies. According to the 1998 Drug Store Market Guide, the Company is the
second largest pharmaceutical wholesale distributor in metropolitan Kansas City
and Boston and the third largest in Chicago. For fiscal 1998, the Company's pro
forma net sales and operating income were $762.3 million and $15.3 million,
respectively.     
   
  Since being acquired by its management and employees in 1991, C.D. Smith has
grown from a small pharmaceutical distributor serving rural customers into a
full-line, full-service regional wholesale distributor with a major presence in
both rural and urban markets within its core territories. From 1994 through
fiscal 1998, the Company's net sales grew internally (excluding the effect of
acquisitions) at a compound annual rate of approximately 50.3%. The Company has
achieved this growth principally by gaining new customers within its
territories, converting customer relationships from secondary to primary
supplier status and expanding its service territories.     
 
  The Company attributes its success since 1991 primarily to the implementation
of a comprehensive program aimed at meeting the specific needs of its
customers. As a part of this program, the Company significantly expanded its
sales and customer service staff. At May 31, 1998, C.D. Smith employed 37
direct sales representatives with an average of 28 years of industry experience
who are supported by 25 telemarketers and customer service professionals. The
Company added multiple operating shifts to extend the hours for customer order
placement and to expand the territories in which it can offer reliable next-day
delivery. The Company also broadened its product offerings and upgraded its
customer ordering and information systems to enhance its ability to serve as a
primary supply source. In 1994, the Company built a state-of-the-art
distribution facility to accommodate its growth and has achieved key measures
of efficiency that significantly exceed industry averages. The Company believes
that providing exceptional customer service distinguishes C.D. Smith from other
wholesale distributors and is key to its continued growth.
 
  In October 1997, the Company acquired General Drug Company, a full-service
wholesale distributor with operations in the greater Chicago and Boston markets
(the "General Drug Companies"). As part of this transaction (the "General Drug
Acquisition"), the Company also acquired SBS Pharmaceuticals, Inc. ("SBS"), a
pharmaceuticals repackaging and distribution business. C.D. Smith is currently
integrating the operations of the General Drug Companies and believes it will
realize substantial synergies by increasing the efficiency of the acquired
distribution facilities, obtaining greater volume purchasing discounts and
eliminating duplicative overhead functions. In addition, the Company is
implementing its program of enhanced customer service in Chicago and Boston,
which it believes will accelerate sales growth in those markets. In Chicago,
the Company doubled the size of its sales force and added a second operating
shift to accommodate late-day orders, commence Saturday deliveries and increase
the territories served by the facility. In Boston, the Company has divested the
 
                                       3
<PAGE>
 
marginally profitable tobacco and candy business, which has provided
significant additional warehouse capacity for pharmaceuticals and related
products. The Company also intends to expand the sales force and add a second
operating shift in Boston.
   
  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 over $74.6 billion in 1997. In addition, the
percentage of pharmaceutical sales through wholesale distributors increased to
approximately 80.0% in 1997, up from 45.0% in 1970. At the same time, there has
been substantial consolidation of full-line pharmaceutical wholesale
distributors in the United States, from approximately 139 at the end of 1980 to
approximately 54 at the end of 1997. Industry analysts expect this
consolidation trend to continue. The Company believes that it is well-
positioned to capitalize on industry consolidation and intends to make
additional selective acquisitions.     
 
OPERATING STRATEGY
 
  The Company's objective is to build on its position as a leading regional
wholesale distributor to become a national pharmaceutical services company. The
principal elements of the Company's strategy are as follows:
 
    Provide High Levels of Customer Service. C.D. Smith believes that its
  customer service focus is a significant competitive advantage, especially
  with independent pharmacy customers who may not receive personalized
  service from national wholesale distributors. C.D. Smith's experienced
  direct sales force makes regular personal visits to current and prospective
  customers and is supported by a knowledgeable in-house customer service
  staff. The Company operates its distribution facilities to meet its
  customers' requirements for accurate same-day or next-day delivery. The
  Company believes that its commitment to customer service has enabled it to
  achieve primary supplier status with many of its customers, resulting in
  significant net sales growth.
     
    Increase Sales from Existing Facilities. C.D. Smith intends to leverage
  its existing infrastructure and expertise to increase sales from each of
  its distribution facilities. Prior to their acquisition by the Company,
  each of the Chicago and Boston facilities operated a single shift, served
  customers within a small geographic area and carried a more limited
  inventory, which typically positioned them as secondary suppliers. The
  Company believes that adding a second operating shift and developing a
  customer-oriented sales force will enable both of these facilities to
  increase net sales by achieving primary supply relationships with customers
  in significantly expanded service territories. Similarly, C.D. Smith
  believes it can apply the General Drug Companies' greater experience with
  managed care and other institutional customers to increase net sales in its
  midwestern region.     
 
    Continue Selective Acquisitions. The Company believes that it is well-
  positioned to make selective acquisitions to expand into new territories
  and to further penetrate current market territories. Through its
  participation in national industry groups and OptiSourceSM, a Company-
  operated generic pharmaceutical buying group that includes 16 other
  regional wholesale distributors, C.D. Smith maintains significant contact
  with numerous regional and local distributors and has identified several
  attractive acquisition candidates.
 
    Offer Broad Line of Products and Services. C.D. Smith provides its
  customers a broad line of over 25,000 SKUs of branded and generic
  pharmaceuticals, over-the-counter health care products and health and
  beauty aids from more than 1,000 vendors. The Company believes its products
  and services enable it to be the primary supplier to the majority of its
  customers and to further leverage its regional presence by meeting the
  secondary supply needs of many significant customers. Through OptiSource,
  the Company obtains lower wholesale prices through volume purchasing and
  maintains a major presence in the distribution of the rapidly growing
  generic pharmaceutical product category. Through SBS, the Company buys
  approximately 140 pharmaceuticals in bulk and repackages them into
  quantities requested by selected wholesalers. The Company is also
  developing its own private label program designed to help independent
  pharmacies compete more aggressively with regional and national chain
  pharmacies by providing store identification, promotional and advertising
  programs and a private label brand of over-the-counter pharmaceuticals and
  health and beauty aids.
 
                                       4
<PAGE>
 
 
    Expand Pharmaceutical Services. The Company intends to offer
  pharmaceutical services beyond its current product and service offerings.
  The Company believes that it can leverage its expertise in the
  pharmaceutical industry and its large, concentrated customer base to offer
  additional pharmacy-related services, such as pharmacy benefits management,
  managed care pharmaceutical formulary management and health care
  institution unit of use packaging. The Company intends to expand its
  service offerings through internal development and selective acquisitions.
   
  The Company believes that its operating strategy can be implemented without
significant additional capital investment (other than possible acquisitions)
and without incurring significant additional operating costs would not be
offset by anticipated revenue growth.     
 
  The Company is a Missouri corporation with its corporate headquarters located
at 3907 South 48th Terrace, St. Joseph, Missouri 64503. The telephone number is
(816) 232-5471.
 
                                  THE OFFERING
 
<TABLE>   
<S>                                              <C>
Common Stock offered:
 By the Company................................. 3,500,000 shares
 By the Selling Shareholders.................... 1,250,000 shares
  Total......................................... 4,750,000 shares
Common Stock to be outstanding after this
 Offering....................................... 10,579,270 shares(1)
Use of Proceeds(2).............................. To repay certain outstanding indebtedness. See
                                                 "Use of Proceeds."
Proposed NYSE symbol............................ CDH
</TABLE>    
 
- --------------------
   
(1) Excludes 848,578 shares subject to options issued under the Company's
    Amended and Restated 1996 Equity Compensation Plan, all of which are
    immediately exercisable at a weighted average exercise price of $0.73 per
    share. See "Management--Executive Compensation--Equity Compensation Plan"
    and "Principal and Selling Shareholders."     
(2) The Company will not receive any of the proceeds from the sale of Common
    Stock by the Selling Shareholders. See "Principal and Selling
    Shareholders."
 
                                  RISK FACTORS
 
  Prospective purchasers of the Common Stock should consider carefully all of
the information set forth in the Prospectus and in particular, should evaluate
the specific factors set forth under the caption "Risk Factors" hereinafter,
which provide a discussion of certain risks involved in an investment in the
Common Stock.
 
                                       5
<PAGE>
 
               SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL DATA
 
  The following summary financial information sets forth selected consolidated
financial data and selected consolidated pro forma financial data with respect
to the Company. The pro forma Statement of Operations Data and Other Operating
Data, as adjusted, gives effect to the Offering, including the application of
the net proceeds therefrom, the exercise of the Churchill Warrants and the
General Drug Acquisition as if they occurred on March 1, 1997. The financial
data should be read in conjunction with the consolidated financial statements
of the Company and related notes thereto and the pro forma consolidated
statement of income of the Company and related notes thereto included elsewhere
in this Prospectus. The pro forma financial data is provided for comparative
purposes only and is not necessarily indicative of the results which would have
occurred had the General Drug Acquisition, the exercise of the Churchill
Warrants and the Offering been consummated on March 1, 1997, nor is it
necessarily indicative of future results.
 
<TABLE>   
<CAPTION>
                                                                                             THREE MONTHS
                                          FISCAL YEAR ENDED                  PRO FORMA (2)      ENDED
                         --------------------------------------------------- ------------- -----------------
                         FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,  MAY 31,  MAY 31,
                             1995         1996         1997       1998(1)        1998       1997      1998
                                      (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                      <C>          <C>          <C>          <C>          <C>           <C>      <C>
STATEMENT OF OPERATIONS
 DATA:
 Net sales..............   $171,977     $224,163     $301,523     $544,090     $762,259    $88,430  $206,866
 Gross profit...........      7,751       10,682       14,739       27,423       39,928      3,928     9,946
 Selling, general and
  administrative
  expense...............      7,868        7,975        9,986       15,879       22,848      2,513     6,013
 Depreciation and
  amortization..........        155          221          279          923        1,731         82       431
 Special charges(3).....        --           --           --           --           --         --        817
 Operating income
  (loss)................       (272)       2,486        4,474       10,621       15,349      1,333     2,685
 Interest expense.......      1,041        1,478        1,571        4,646        8,756        500     2,105
 Net income (loss)......   $   (864)    $    634     $  1,930     $  3,997     $  4,392    $   542  $    394
 Net income (loss) per
  share(4):
   Basic................   $  (0.08)    $   0.07     $   0.29     $   0.67     $   0.74    $  0.09  $   0.07
                           ========     ========     ========     ========     ========    =======  ========
   Diluted..............   $  (0.08)    $   0.07     $   0.28     $   0.56     $   0.61    $  0.08  $   0.05
                           ========     ========     ========     ========     ========    =======  ========
 Shares used in
  computing net income
  (loss) per share(4):
   Basic................     10,200        9,500        6,700        5,963        5,963      5,991     5,904
                           ========     ========     ========     ========     ========    =======  ========
   Diluted..............     10,200        9,500        6,872        7,166        7,166      6,614     8,023
                           ========     ========     ========     ========     ========    =======  ========
AS ADJUSTED DATA(5):
 Interest expense.......                                                       $  2,870             $    695
 Net income.............                                                          8,148                1,294
 Net income per share:
   Basic................                                                       $   0.77             $   0.12
                                                                               ========             ========
   Diluted..............                                                       $   0.72             $   0.11
                                                                               ========             ========
 Shares used in
  computing net income
  per share:
   Basic................                                                         10,638               10,579
                                                                               ========             ========
   Diluted..............                                                         11,256               11,363
                                                                               ========             ========
OTHER OPERATING DATA:
 Sales growth...........      126.8%        30.3%        34.5%        80.4%         --        41.5%    133.9%
 Same-store sales
  growth(6).............      126.8%        30.3%        34.5%        28.2%         --        41.5%     29.0%
 EBITDA(7)..............   $   (174)    $  2,748     $  4,879     $ 11,833     $ 17,328    $ 1,456  $  3,181
 Days sales
  outstanding(8)........       19.5         17.8         17.2         20.8         23.9       15.9      23.8
 Gross profit margin....        4.5%         4.8%         4.9%         5.0%         5.2%       4.4%      4.8%
 Operating expenses as
  a percentage of net
  sales.................        4.7%         3.7%         3.4%         3.0%         3.2%       2.9%      3.1%(9)
 Operating income
  (loss) margin.........       (0.2)%        1.1%         1.5%         2.0%         2.0%       1.5%      1.7%(9)
</TABLE>    
 
<TABLE>   
<CAPTION>
                                                           AT MAY 31, 1998
                                                         --------------------
                                                                      AS
                                                          ACTUAL  ADJUSTED(5)
                                                            (IN THOUSANDS)
<S>                  <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>      <C>
BALANCE SHEET DATA:
 Current assets........................................  $136,768  $137,923
 Working capital.......................................    65,787    66,942
 Total assets..........................................   171,625   171,899
 Total indebtedness....................................    93,530    39,469
 Shareholders' equity..................................     7,559    61,893
</TABLE>    
 
                                       6
<PAGE>
 
- ---------------------
   
(1) Includes five months of operating results of the General Drug Companies
    following their acquisition by the Company on October 3, 1997 (the
    "Acquisition Date").     
   
(2) Adjusted to give effect to the General Drug Acquisition as though it
    occurred on March 1, 1997.     
   
(3) Reflects a $592 severance payment to a former officer and a $225 loss on
    the sale of the tobacco and candy business of the General Drug Companies.
           
(4) See Notes 1 and 11 of notes to the consolidated financial statements of
    the Company for information concerning the calculation of net income
    (loss) per share.     
   
(5) Adjusted to give effect to the exercise of the Churchill Warrants, the
    Offering and the exercise by management of options to purchase 94,922
    shares, including application of the net proceeds therefrom, as though
    they occurred on March 1, 1997.     
          
(6) Reflects growth of net sales from distribution facilities that have been
    operated by the Company for the full year in each comparable period.     
          
(7) EBITDA represents income before interest expense, income taxes,
    depreciation and amortization. The Company believes that EBITDA is a
    measure commonly used in the pharmaceutical wholesale distribution
    industry by financial analysts, investors and other interested parties for
    measuring and comparing financial information such as liquidity, operating
    performance and leverage. EBITDA is not intended to represent cash flow
    from operations as defined by generally accepted accounting principles and
    should not be used as an alternative to net income as an indicator of
    operating performance or to cash flows as a measure of liquidity. EBITDA
    amounts shown for the Company may not be comparable to similarly titled
    measures reported for other companies as such calculations may not be made
    on the same basis.     
   
(8) Days sales outstanding is calculated using the average of the month-end
    accounts receivable balances for the respective fiscal periods.     
   
(9) Calculation excludes special charges described in footnote (3).     
       
                                       7
<PAGE>
 
                                 RISK FACTORS
 
  Prospective purchasers of the Common Stock offered hereby should consider
carefully the factors described in this section as well as the other
information contained in this Prospectus.
 
COMPETITION
 
  The wholesale distribution of pharmaceuticals, health and beauty aids and
other health care products is highly competitive. The Company competes with
numerous national and regional distributors, some of which are larger and have
substantially greater financial resources than the Company. In addition, the
Company competes with numerous distributors, direct-selling manufacturers and
other specialty distributors. Competitive factors include price, service and
delivery, credit terms, breadth of product line, customer support and
marketing programs. A price decrease by a competitor, or an increase in the
other competitive factors, could have a material adverse effect on the
Company. There can be no assurance that the Company will not encounter
increased competition in the future that could adversely affect the Company's
business. See "Business--Competition."
 
EXPANSION THROUGH ACQUISITIONS
 
  The Company intends to expand, in part, through selective acquisitions of
wholesale pharmaceutical distributors. The Company continually evaluates
strategic acquisition opportunities; however, the Company has no binding
commitments, understandings or other arrangements to acquire any business or
other material assets. There can be no assurance that the Company will be able
to identify attractive acquisition candidates or complete the acquisition of
any such candidate on terms favorable to the Company. Growth through
acquisitions involves numerous risks, including difficulties in the
integration of the operations, systems and personnel, including key
management, of the acquired businesses and the diversion of management's
attention from other business concerns. In the event that the Company acquires
businesses whose employees are parties to collective bargaining agreements,
the Company would be subject to risks inherent in such arrangements, including
strikes or work stoppages. A substantial portion of the Company's capital
resources could be used for acquisitions. The Company may require additional
debt or equity financing for future acquisitions, which additional financing
may not be available on terms favorable to the Company, if at all.
 
EXPANSION INTO NEW MARKETS
 
  The General Drug Acquisition provided the Company greater access to certain
urban markets and different categories of customers than previously served.
Expansion into these markets and service of these customers presents different
challenges than the Company previously experienced in growing its net sales.
Accordingly, there can be no assurance that the Company will be able to grow
the operations acquired in the General Drug Acquisition at a similar rate to
that achieved in its St. Joseph operations, if at all.
 
PHARMACEUTICAL WHOLESALE DISTRIBUTION INDUSTRY
 
  Like most wholesale distributors, the Company achieves small gross margins,
making it vulnerable to increases in its fixed operating costs and decreases
in its net sales, which could result from industry-wide price decreases,
customer losses or governmental regulation such as imposed price ceilings. In
addition, as a wholesale distributor, the Company is largely dependent on
service and financial support provided by a small number of pharmaceutical
manufacturers. A cessation or substantial decrease in the supply of products
or financial support provided to the Company by one or more of these
manufacturers could have a material adverse effect on the Company's operations
and financial results.
 
  Although much of the Company's sales are delivered using internal
transportation, a substantial portion of sales is delivered to customers using
third-party shippers. In the event these third-party shippers were to become
unavailable for any reason, the Company could experience a material adverse
effect on its business operations and financial condition.
 
                                       8
<PAGE>
 
DEPENDENCE ON KEY PERSONNEL; EMPLOYEES
 
  The Company is dependent on its senior and regional management, the loss of
certain of whom could have a material adverse effect on the Company. The
Company maintains key personnel life insurance on Robert C. Farley in the
amount $1.0 million. In addition, the Company has long-term employment
agreements with its key executives that contain noncompetition clauses. There
can be no assurance that, over time, the Company will be able to retain all of
its senior and regional management. See "Management."
 
  The Company has collective bargaining agreements covering approximately 80
employees, which subject the Company to risks inherent in such arrangements,
including strikes and work stoppages. See "Business--Employees."
 
CONCENTRATION ON INDEPENDENT PHARMACIES
 
  Approximately 57.7% of the Company's net sales in fiscal 1998 (49.6%, pro
forma for the General Drug Acquisition) were to independent pharmacies. Due
primarily to industry consolidation, increased competition and pricing
pressures, the number of independent pharmacies in the United States has
decreased from approximately 32,000 in 1990 to approximately 21,000 in 1997.
Further reduction in the number of independent pharmacies in the Company's
markets could have a material adverse effect on the Company's business and
financial condition.
 
DEPENDENCE ON SYSTEMS
 
  The Company's success depends, in part, on the accuracy and proper
utilization of its management information systems, as well as those of its
vendors and customers. The Company's ability to manage its inventory and
accounts receivable collection, to purchase, sell and ship on an efficient and
timely basis and maintain a cost-efficient operation is dependent upon the
quality and utilization of the information generated by its management
information systems. The Company believes that its management information
systems, coupled with planned enhancements, will be sufficient to sustain its
present operations and its anticipated growth for the foreseeable future,
although no assurance can be given to that effect. See "Business--Management
Information Systems."
 
  The Company is in the process of modifying the software in its management
information systems to be Year 2000 compliant. There can be no assurance that
the Company will complete such modifications in a timely fashion. Failure of
the Company, its vendors or its customers to have in place Year 2000 compliant
systems could have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
 
COVENANT RESTRICTIONS IN CREDIT FACILITY
 
  The Company's existing credit facility (the "Credit Facility") restricts the
Company from paying dividends, could limit the ability of the Company to
effect future debt or equity financings and may otherwise restrict corporate
activities, including the ability to respond to competitive market conditions,
to provide for capital expenditures beyond those permitted or to take
advantage of acquisitions or other business opportunities. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
   
NONRECURRING AND OTHER CHARGES     
   
  Upon closing of the Offering (expected to occur during the second quarter of
fiscal 1999), the Company will incur an extraordinary charge of approximately
$2.0 million (net of income taxes) related to prepayment of the Company's
subordinated debt and to write-off the unamortized debt issuance costs in
connection with the retirement of debt. In addition, earnings during fiscal
1999 will be reduced by interest charges on the subordinated debt until its
repayment with the proceeds of this offering and by the higher interest
charges on the Credit Facility until it can be reduced. See footnote (10) to
Pro Forma Consolidated Statement of Income.     
 
                                       9
<PAGE>
 
POTENTIAL VOLATILITY OF FUTURE QUARTERLY OPERATING RESULTS
 
  The Company's results of operations have in the past and will in the future
fluctuate on a quarterly basis as a result of a number of factors, including
the sale of seasonal items, such as during the cold and flu season, the timing
and scope of new customer volumes, the timing and amounts of price
adjustments, the timing and amount of other cost changes and the impact of
interest rate changes. Fluctuations in quarterly operating results could have
a disproportionate impact on the Company's results of operations for the full
year and could affect the market price of the Common Stock in a manner
unrelated to the longer term operating performance of the Company.
 
POSSIBLE VOLATILITY OF STOCK PRICE
 
  The trading price of the Common Stock could be subject to wide fluctuations
in response to announcements of increases in the cost of inventory, new
products distributed by the Company or its competitors, acquisitions proposed
by the Company or its competitors, variations in the Company's quarterly
results of operations or changes in financial estimates by securities analysts
and other events or factors. The stock market has experienced extreme price
and volume fluctuations in recent years, often unrelated to the performance of
the companies affected. Stock market volatility unrelated to the operating
performance of the Company may adversely affect the market price of the Common
Stock.
 
SHARES ELIGIBLE FOR FUTURE SALE
 
  No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices of the Common Stock. The shares held
by management and the Company's Employee Stock Ownership Plan (the "ESOP") are
subject to restrictions on any public sale or distribution of Common Stock for
a period of 180 days beginning on the effective date of the Registration
Statement. See "Shares Eligible for Future Sale."
 
CONCENTRATION OF OWNERSHIP
   
  Upon completion of the Offering, the ESOP and certain members of management
of the Company will own beneficially an aggregate of approximately 56.0% of
the Company's outstanding Common Stock. If the ESOP participants and the
management shareholders were to vote all of their shares in a similar manner,
they would effectively control the Company. In most circumstances, they would
have sufficient voting power to elect the entire Board of Directors of the
Company and, in general, to determine (without the consent of the Company's
other shareholders) the outcome of any corporate transaction or other matter
submitted to the shareholders for approval, other than a merger,
consolidation, or the sale of all or substantially all of the Company's
assets, each of which, under Missouri law, requires the affirmative vote of
holders of two-thirds of the outstanding stock. See "Principal and Selling
Shareholders."     
 
GOVERNMENT REGULATION
 
  The wholesale drug distribution industry is subject to regulation by
federal, state and local governmental agencies. The distribution of controlled
substances and prescription pharmaceuticals requires licenses and permits as
well as the implementation of an oversight and compliance program mandated by
the Prescription Drug Marketing Act of 1987. In general, regulations pertain
to the purchase, safe storage and distribution of controlled substances and
pharmaceuticals that are monitored through periodic site inspections conducted
by the Food and Drug Administration (the "FDA") and the Drug Enforcement
Agency (the "DEA"). Failure to comply with these requirements and regulations
could have a material adverse effect on the Company by resulting in penalties
such as fines, restrictions on operations or closures.
 
  Although the Company has implemented an extensive compliance program
administered by its Chief Compliance Officer, there can be no assurance that
the Company will be successful in complying with all
 
                                      10
<PAGE>
 
applicable government regulations or that the Company will obtain and maintain
all material licenses and permits applicable to the Company's business.
 
DILUTION
   
  Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in net tangible book value per share of Common Stock from
the initial public offering price. The existing shareholders of the Company
will experience an increase in net tangible book value per share as a result
of the Offering. Assuming an offering price of $17.00 per share (the midpoint
of the range of prices set forth on the cover of this Prospectus), the
dilution in net tangible book value to purchasers of Common Stock in the
Offering would be $13.58 per share to new investors purchasing shares of
Common Stock in the Offering, and existing shareholders of the Company would
experience an increase in net tangible book value of $6.14 per share as a
result of the Offering. See "Dilution" and "Principal and Selling
Shareholders."     
 
ABSENCE OF PUBLIC MARKET FOR THE COMMON STOCK
 
  Prior to the Offering, there has been no public market for the Common Stock.
Although the Company has applied to list the Common Stock on Nasdaq, there can
be no assurance that an active or liquid trading market in the Common Stock
will develop upon completion of the Offering or, if developed, that it will be
sustained. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Underwriters and
may not be indicative of the market price for the Common Stock after the
Offering. The market price for shares of the Company's Common Stock may be
highly volatile depending on changes in general market and industry
conditions. See "Underwriting."
 
CERTAIN ANTI-TAKEOVER EFFECTS
 
  The Company's Amended Articles of Incorporation and Amended and Restated
Bylaws and Missouri statutes contain certain provisions that may discourage or
render more difficult an unfriendly tender offer, proxy contest, merger or
change in control of the Company, which could be in the best interests of the
Company's shareholders. These provisions include the ability to issue "blank
check" preferred stock, a classified board of directors and limitations on the
manner of calling and the matters to be considered at a meeting of
shareholders. See "Description of Capital Stock."
 
                                      11
<PAGE>
 
                                   DILUTION
   
  The net tangible book value of the Company at May 31, 1998, adjusted for the
exercise of the Churchill Warrants, was approximately $(2.72) per share. Net
tangible book value per share is determined by dividing the tangible net worth
of the Company (total tangible assets less total liabilities) by the number of
shares of Common Stock outstanding. After giving effect to the sale of
3,500,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $17.00 per share and the application by the
Company of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company as of May 31, 1998, would have been $3.42 per share.
This represents an immediate increase in net tangible book value per share of
$6.14 to existing shareholders and an immediate dilution of $13.58 per share
to new investors purchasing shares of Common Stock in the Offering. The
following table illustrates this per share dilution:     
 
<TABLE>   
      <S>                                                   <C>     <C>
      Assumed initial public offering price per share.............  $17.00
        Net tangible book value per share before the
         Offering.......................................... $(2.72)
        Increase in net tangible book value per share
         attributable to price paid by investors in the
         Offering..........................................   6.14
                                                            ------
      Pro forma net tangible book value per share after the
       Offering...................................................    3.42
                                                                    ------
      Dilution in net tangible book value per share to investors
       in the Offering............................................  $13.58
                                                                    ======
</TABLE>    
   
  The following table sets forth the difference between the existing
shareholders and the purchasers of shares in this Offering with respect to the
number of shares purchased from the Company, the total cash consideration paid
to the Company for such shares and the average price per share paid (assuming
an initial public offering price of $17.00 per share):     
<TABLE>   
<CAPTION>
                                                                       AVERAGE
                                SHARES PURCHASED  TOTAL CONSIDERATION PRICE PER
                               ------------------ ------------------- SHARE PAID
                                 NUMBER   PERCENT   AMOUNT    PERCENT
      <S>                      <C>        <C>     <C>         <C>     <C>
      Existing
       shareholders(1)(2).....  7,079,270  66.9%  $   242,122    0.4%   $ 0.03
      New investors...........  3,500,000  33.1    59,500,000   99.6    $17.00
                               ---------- ------  -----------  -----
          Total............... 10,579,270 100.0%  $59,742,122  100.0%
                               ========== ======  ===========  =====
</TABLE>    
- ---------------------
   
(1) Sales by the Selling Shareholders in this Offering will reduce the number
    of shares held by existing shareholders of the Company to 5,829,270, or
    55.1% of the total number of shares outstanding after this Offering, and
    will increase the number of shares held by new investors to 4,750,000
    shares, or 44.9% of the total number of shares outstanding after this
    Offering. See "Principal and Selling Shareholders."     
   
(2) Excludes 848,578 shares subject to options under the Company's Amended and
    Restated 1996 Equity Compensation Plan, all of which are immediately
    exercisable at a weighted average exercise price of $0.73 per share. See
    "Management--Executive Compensation--Equity Compensation Plan" and
    "Principal and Selling Shareholders."     
 
                                      12
<PAGE>
 
                                USE OF PROCEEDS
   
  The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock it is offering hereby (after deducting underwriting discounts and
commissions and estimated offering expenses) will be approximately $53.7
million (approximately $64.9 million if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$17.00 per share. The net proceeds will be used (i) to retire the $12.0
million outstanding principal amount of the senior subordinated note due
Churchill, which has a maturity date of October 3, 2004 and bears interest at
a rate of 12.0% per annum and (ii) reduce the amount outstanding under the
Credit Facility (approximately $78.4 million as of May 31, 1998, with varying
interest rates) by approximately $41.7 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for a description of the Credit Facility.     
 
                                DIVIDEND POLICY
 
  The timing, amount and form of dividends will be determined by the Company's
Board of Directors and will depend on, among other things, the Company's
results of operations, financial condition, cash and capital expenditure
requirements, certain corporate and tax law requirements and other factors
(including factors outside of the Company's control) deemed relevant by the
Board of Directors. It is currently anticipated that earnings will be retained
for use in the business and that no dividends will be paid in the foreseeable
future. The Credit Facility prohibits the Company from paying any cash or
stock dividends.
 
                                CAPITALIZATION
   
  The following table sets forth the capitalization of the Company as of May
31, 1998, on an actual basis and as adjusted to give effect to the sale by the
Company of 3,500,000 shares in the Offering at an assumed initial public
offering price of $17.00 per share, less underwriters' discounts and
commissions and estimated offering expenses, the retirement of the Company's
treasury shares and the application of the estimated net proceeds therefrom as
set forth in "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and notes
thereto appearing elsewhere in this Prospectus.     
 
<TABLE>   
<CAPTION>
                                                              MAY 31, 1998
                                                          ---------------------
                                                           ACTUAL   AS ADJUSTED
                                                             (IN THOUSANDS)
      <S>                                                 <C>       <C>
      Long-term debt:
        Revolving line of credit......................... $ 78,449   $ 36,764
        Term notes payable, including current portion....    2,705      2,705
        Subordinated note payable(1).....................    9,807        --
        Churchill Warrants(1)............................    2,569        --
                                                          --------   --------
          Total indebtedness.............................   93,530     39,469
                                                          --------   --------
      Shareholders' equity:
        Preferred stock, par value $0.01 per share,
         10,000,000 shares authorized, no shares issued
         and outstanding.................................      --         --
        Common stock, par value $0.01 per share,
         90,000,000 shares authorized, 10,200,000 shares
         issued, actual; 10,579,270 shares issued, as
         adjusted(2).....................................      102        106
        Additional paid-in capital.......................       98     55,257
        Retained earnings(1).............................    8,872      6,911
        Treasury stock, at cost 4,295,730 shares actual;
         none as adjusted................................   (1,133)    (1,133)
        Note receivable from ESOP........................     (380)      (380)
                                                          --------   --------
          Total shareholders' equity.....................    7,559     61,893
                                                          --------   --------
            Total capitalization......................... $101,089   $101,362
                                                          ========   ========
</TABLE>    
- ---------------------
   
(1) The subordinated note payable has a principal amount of $12.0 million but
    was recorded net of a discount of $2.6 million, which was the value
    allocated to the Churchill Warrants. Upon exercise of the Churchill
    Warrants, the $2.6 million allocated value will be reclassified into
    shareholders' equity. The subordinated note payable will be redeemed at
    its principal amount of $12.0 million. This redemption will result in an
    extraordinary charge of $2.0 million, net of taxes, which will reduce
    retained earnings accordingly.     
   
(2) Excludes 848,578 shares subject to options under the Company's Amended and
    Restated 1996 Equity Compensation Plan, all of which are immediately
    exercisable at a weighted average exercise price of $0.73 per share. See
    "Management--Executive Compensation--Equity Compensation Plan" and
    "Principal and Selling Shareholders."     
 
                                      13
<PAGE>
 
                     SELECTED CONSOLIDATED FINANCIAL DATA
   
  The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" as of and for each of the fiscal
years in the four-year period ended February 28, 1998 are derived from the
audited consolidated financial statements of the Company. The data for the
twelve-month period ended February 28, 1994 is derived from the unaudited
consolidated financial statements of the Company due to a change in the
Company's fiscal year in 1994 from September 30 to February 28. The data for
the three-month periods ended May 31, 1997 and 1998 are derived from the
unaudited consolidated financial statements of the Company. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. Operating
results for the three months ended May 31, 1998 are not necessarily indicative
of the results that may be expected for the entire year ending February 28,
1999. The fiscal 1998 information includes the results of operations of the
General Drug Companies since their acquisition on October 3, 1997. This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company, including the notes thereto, included elsewhere in
this Prospectus.     
 
<TABLE>   
<CAPTION>
                                                                                              THREE MONTHS
                                                FISCAL YEAR ENDED                                ENDED
                         ------------------------------------------------------------------ -----------------
                         FEBRUARY 28,   FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, MAY 31,  MAY 31,
                           1994(1)          1995         1996         1997       1998(2)     1997      1998
                                     (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                      <C>            <C>          <C>          <C>          <C>          <C>      <C>
STATEMENT OF OPERATIONS
 DATA:
 Net sales..............   $75,812        $171,977     $224,163     $301,523     $544,090   $88,430  $206,866
 Cost of goods sold.....    71,910         164,226      213,481      286,784      516,667    84,502   196,920
                           -------        --------     --------     --------     --------   -------  --------
 Gross profit...........     3,902           7,751       10,682       14,739       27,423     3,928     9,946
 Operating expenses:....
   Selling, general and
    administrative......     4,138           7,868        7,975        9,986       15,879     2,513     6,013
   Depreciation and
    amortization........       111             155          221          279          923        82       431
   Special charges(3)...       --              --           --           --           --        --        817
                           -------        --------     --------     --------     --------   -------  --------
 Operating income
  (loss)................      (347)           (272)       2,486        4,474       10,621     1,333     2,685
 Other income
  (expense):
   Interest expense.....      (280)         (1,041)      (1,478)      (1,571)      (4,646)     (500)   (2,105)
   Other, net...........      (126)            (57)          41          126          289        41        65
                           -------        --------     --------     --------     --------   -------  --------
 Income (loss) before
  income taxes..........      (753)         (1,370)       1,049        3,029        6,264       874       645
 Income tax provision
  (benefit).............      (152)           (506)         415        1,099        2,267       332       251
                           -------        --------     --------     --------     --------   -------  --------
 Net income (loss)......   $  (601)       $   (864)    $    634     $  1,930     $  3,997   $   542  $    394
                           =======        ========     ========     ========     ========   =======  ========
 Net income (loss) per
  share(4):
   Basic................   $ (0.06)       $  (0.08)    $   0.07     $   0.29     $   0.67   $  0.09  $   0.07
                           =======        ========     ========     ========     ========   =======  ========
   Diluted..............   $ (0.06)       $  (0.08)    $   0.07     $   0.28     $   0.56   $  0.08  $   0.05
                           =======        ========     ========     ========     ========   =======  ========
 Shares used in
  computing net income
  (loss) per share(4):
   Basic................    10,200          10,200        9,500        6,700        5,963     5,991     5,904
                           =======        ========     ========     ========     ========   =======  ========
   Diluted..............    10,200          10,200        9,500        6,872        7,166     6,614     8,023
                           =======        ========     ========     ========     ========   =======  ========
OTHER OPERATING DATA:
 Sales growth...........      25.9%(5)       126.8%        30.3%        34.5%        80.4%     41.5%    133.9%
 Same-store sales
  growth(6).............      25.9%(5)       126.8%        30.3%        34.5%        28.2%     41.5%     29.0%
 EBITDA(7)..............   $  (362)       $   (174)    $  2,748     $  4,879     $ 11,833   $ 1,456  $  3,181
 Net cash provided by
  (used in) operating
  activities............       -- (1)       (2,642)          56       (6,997)      (5,905)    4,659     3,101
 Net cash used in
  investing activities..       -- (1)       (1,354)        (144)        (952)     (29,715)      (38)     (600)
 Net cash provided by
  (used in) financing
  activities............       -- (1)        3,968          182        7,863       35,645    (4,636)   (2,543)
 Days sales
  outstanding(8)........      26.3            19.5         17.8         17.2         20.8      15.9      23.8
 Gross profit margin....       5.1%            4.5%         4.8%         4.9%         5.0%      4.4%      4.8%
 Operating expenses as
  a percentage of net
  sales.................       5.6%            4.7%         3.7%         3.4%         3.0%      2.9%      3.1%(9)
 Operating income
  (loss) margin.........      (0.5)%          (0.2)%        1.1%         1.5%         2.0%      1.5%      1.7%(9)
BALANCE SHEET DATA:
 Current assets.........   $16,478        $ 25,108     $ 32,255     $ 46,811     $133,995   $41,350  $136,768
 Working capital........     2,663          10,304       11,696       20,811       67,906    16,749    65,787
 Total assets...........    17,525          27,774       34,910       50,222      168,702    44,794   171,625
 Total indebtedness.....     7,823          11,792       12,135       20,744       95,929    16,494    93,530
 Shareholders' equity...     1,985           1,266        1,884        3,167        7,129     3,745     7,559
</TABLE>    
 
                                      14
<PAGE>
 
- ---------------------
   
(1) In 1994, the Company changed its fiscal year end from September 30 to
    February 28. This information represents the Statement of Operations Data
    and Other Operating Data for the twelve month period ended February 28,
    1994 developed from the Company's internal unaudited financial statements.
    In addition, prior to fiscal 1995, the Company valued its inventory using
    the LIFO method. The 1994 Statement of Operations Data, Other Operating
    Data and Balance Sheet Data have been restated to report the results of
    operations as if inventory was determined using the FIFO method. The 1994
    supplemental cash flow data omitted from Other Operating Data is not
    available due to the change in the fiscal year.     
(2) Includes five months of operating results of the General Drug Companies
    following their acquisition by the Company on October 3, 1997.
   
(3) Reflects a $592 severance payment to a former officer and a $225 loss on
    the sale of the tobacco and candy business of the General Drug Companies.
           
(4) See Notes 1 and 11 of notes to the consolidated financial statements of
    the Company for information concerning the calculation of net income
    (loss) per share.     
   
(5) Represents sales and same-store sales growth for twelve month period ended
    February 28, 1994 as compared to the twelve month period ended September
    30, 1993.     
   
(6) Reflects growth of net sales from distribution facilities that have been
    operated by the Company for the full year in each comparable period.     
   
(7) EBITDA represents income before interest expense, income taxes,
    depreciation and amortization. The Company believes that EBITDA is a
    measure commonly used in the pharmaceutical wholesale distribution
    industry by financial analysts, investors and other interested parties for
    measuring and comparing financial information such as liquidity, operating
    performance and leverage. EBITDA is not intended to represent cash flow
    from operations as defined by generally accepted accounting principles and
    should not be used as an alternative to net income as an indicator of
    operating performance or to cash flows as a measure of liquidity. EBITDA
    amounts shown for the Company may not be comparable to similarly titled
    measures reported for other companies as such calculations may not be made
    on the same basis.     
   
(8) Days sales outstanding is calculated using the average of the month-end
    accounts receivable balances for the respective fiscal periods.     
   
(9) Calculation excludes special charges described in footnote (3).     
 
                                      15
<PAGE>
 
                  PRO FORMA CONSOLIDATED STATEMENT OF INCOME
 
  The following unaudited pro forma consolidated statement of income gives
effect to the General Drug Acquisition, the exercise of the Churchill Warrants
and the Offering, including the application of the net proceeds therefrom, as
though they occurred on March 1, 1997. This pro forma information has been
prepared utilizing the audited consolidated financial statements of the
Company for the fiscal year ended February 28, 1998, the unaudited
consolidated financial statements of the General Drug Companies for the seven
months ended September 30, 1997 and the assumptions and adjustments described
in the accompanying notes. The General Drug Acquisition was accounted for
using the purchase method of accounting. This information should be read in
conjunction with the consolidated financial statements of the Company and
notes thereto that appear elsewhere herein. The pro forma financial data is
provided for comparative purposes only and is not necessarily indicative of
the results which would have occurred had the General Drug Acquisition, the
exercise of the Churchill Warrants and the Offering been consummated on March
1, 1997, nor is it necessarily indicative of future results.
 
<TABLE>   
<CAPTION>
                                              YEAR ENDED FEBRUARY 28, 1998
                          --------------------------------------------------------------------------
                          C.D. SMITH
                             DRUG    GENERAL DRUG ACQUISITION               OFFERING      PRO FORMA
                          COMPANY(1) COMPANIES(2) ADJUSTMENTS   PRO FORMA  ADJUSTMENTS   AS ADJUSTED
                                (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                       <C>        <C>          <C>           <C>        <C>           <C>
Net sales...............   $544,090    $218,169     $   --      $762,259     $  --        $762,259
Cost of goods sold......    516,668     205,663         --       722,331        --         722,331
                           --------    --------     -------     --------     ------       --------
 Gross profit...........     27,422      12,506         --        39,928        --          39,928
Operating expenses:
 Selling, general and
  administrative........     15,878       6,970         --        22,848        --          22,848
 Depreciation and
  amortization..........        923         509         299 (3)    1,731        --           1,731
 Covenants not to
  compete...............        --        2,047      (2,047)(4)      --         --             --
 Employment agreements..        --        3,340      (3,340)(5)      --         --             --
 Management fees........        --          545        (545)(6)      --         --             --
                           --------    --------     -------     --------     ------       --------
Operating income (loss).     10,621        (905)      5,633       15,349        --          15,349
Other income (expense)..
 Interest expense on
  credit facilities.....     (3,834)     (2,026)       (903)(7)   (6,763)     3,893(10)     (2,870)
 Interest expense on
  subordinated debt.....       (812)        --       (1,181)(8)   (1,993)     1,993(10)        --
 Other income (expense).        289         (41)        --           248        --             248
                           --------    --------     -------     --------     ------       --------
                             (4,357)     (2,067)     (2,084)      (8,508)     5,886         (2,622)
                           --------    --------     -------     --------     ------       --------
Income (loss) before
 income taxes...........      6,264      (2,972)      3,549        6,841      5,886         12,727
Income tax provision
 (benefit)..............      2,267      (1,103)      1,285 (9)    2,449      2,130(11)      4,579
                           --------    --------     -------     --------     ------       --------
Net income (loss).......   $  3,997    $ (1,869)    $ 2,264     $  4,392     $3,756       $  8,148
                           ========    ========     =======     ========     ======       ========
Net income per share:
 Basic..................   $   0.67                             $   0.74                  $   0.77
                           ========                             ========                  ========
 Diluted................   $   0.56                             $   0.61                  $   0.72
                           ========                             ========                  ========
Shares used in computing
 net income per share:
 Basic..................      5,963                                5,963                    10,638
                           ========                             ========                  ========
 Diluted................      7,166                                7,166                    11,256
                           ========                             ========                  ========
</TABLE>    
 
                                      16
<PAGE>
 
- ---------------------
(1) Represents the Company's consolidated results of operations for the fiscal
    year ended February 28, 1998, including the General Drug Companies'
    consolidated results of operations following their acquisition by the
    Company on the Acquisition Date.
(2) Represents the General Drug Companies' consolidated results of operations
    (unaudited) from March 1, 1997 through the Acquisition Date.
   
(3) Represents amortization on $25,567 of goodwill over a forty year useful
    life resulting from the General Drug Acquisition for the period March 1,
    1997 through the Acquisition Date, net of the elimination of amortization
    expense related to goodwill and other intangibles of the General Drug
    Companies amounting to $74.     
(4) Represents payments under certain non-compete agreements entered into by
    the former owners of the General Drug Companies which were contractually
    paid and expensed by the Company in their entirety on the Acquisition
    Date.
(5) Represents non-recurring payments by the Company which were contractually
    required as a result of the General Drug Acquisition under certain
    employment agreements entered into by the former owners of the General
    Drug Companies. The employment agreements were eliminated upon acquisition
    by the Company.
(6) Represents management fees paid by the General Drug Companies to a party
    related to its former owner for no specifically identifiable service and
    for which no continuing services are necessary.
   
(7) Represents $738 of incremental interest and $216 of debt issuance cost
    amortization on the financing for the General Drug Acquisition of $16,000
    at 7.9%, less $51 of debt issuance cost amortization on previous debt of
    the General Drug Companies which is eliminated as if the General Drug
    Acquisition occurred on March 1, 1997.     
   
(8) Represents interest at 12.0% and amortization of the discount of $325 on
    the $12,000 subordinated note for the period March 1, 1997 to the
    Acquisition Date related to the subordinated debt issued by the Company to
    finance the General Drug Acquisition.     
(9) Represents the tax effect of the pro forma acquisition adjustments above
    using the Company's effective rate for fiscal 1998 of 36.2%, which
    approximates the rate at which the income associated with the pro forma
    acquisition adjustments would be taxed.
   
(10) Represents the reduced interest expense and elimination of the discount
     on the subordinated note and debt issuance cost amortization expense
     resulting from the use of net proceeds from the Offering to reduce
     outstanding long-term indebtedness as of March 1, 1997. Excludes the
     effect of an extraordinary loss of $1,961, net of taxes, on debt
     extinguishment that will result from the repayment of the subordinated
     note payable with the proceeds from the Offering. At the time of the
     purchase of the subordinated note payable, $2,569 of the proceeds were
     allocated to common stock put warrants. Upon exercise of the Churchill
     Warrant, this amount will be reclassified to shareholders' equity. The
     Company will use $12,000 of the proceeds of the Offering to retire the
     subordinated note payable of $9,807 at May 31, 1998. The difference
     between the amount paid and the net carrying amount plus unamortized debt
     issuance costs of $881 less income taxes at 36.2%, represents the
     extraordinary loss.     
(11) Represents the tax effect of the Offering adjustments described in Note
     10 above, using the Company's effective rate for fiscal 1998 of 36.2%,
     which approximates the rate at which the income associated with the
     Offering adjustments would be taxed.
       
                                      17
<PAGE>
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
  The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" as well as the consolidated financial
statements of the Company and notes thereto contained elsewhere in this
Prospectus.
 
GENERAL
 
  Founded in 1886, C.D. Smith was family-owned and operated until being
acquired by its management and employees in 1991. Since that time, the Company
has grown from a small pharmaceutical distributor serving rural customers into
a full-line, full-service regional wholesale distributor with a major presence
in both rural and urban markets within its core territories. For the twelve
month period ended February 28, 1994 through fiscal 1998, net sales grew from
approximately $75.8 million to approximately $386.7 million (excluding the
impact of the General Drug Acquisition), representing a compound annual growth
rate of approximately 50.3%. Over this time, gross margins have remained in
the range of 4.5% to 5.1%, while the operating leverage created by this
expanded sales base has enabled the Company to reduce operating expenses as a
percentage of net sales from 5.6% in 1994 to 3.0% in fiscal 1998.
   
  In October 1997, the Company acquired the General Drug Companies for $28.0
million in cash and refinanced an additional $39.5 million of existing debt of
the General Drug Companies. The General Drug Companies are wholesale
distributors with operations in the greater Chicago and Boston markets, with
net sales for the twelve months ended February 28, 1998 of approximately
$375.6 million. The Company is in the process of integrating the operations of
the General Drug Companies, including eliminating duplicative functions and
integrating management information systems, adding additional sales personnel
and second operating shifts at the distribution facilities and evaluating the
profitability of and demand for certain product lines. In May 1998, the
Company sold the tobacco and candy business of the General Drug Companies for
$1.9 million, resulting in a loss of $0.2 million. This business accounted for
approximately $25.2 million of pro forma net sales for the twelve months ended
February 28, 1998 and did not contribute significantly to operating income for
that period.     
 
  The Company derives its net sales from the sale of branded pharmaceuticals
(approximately 84.0% in fiscal 1998), generic pharmaceuticals (approximately
9.0% in fiscal 1998), over-the-counter products and health and beauty aids
(approximately 3.5% in fiscal 1998) and sundries and miscellaneous items
(approximately 3.5% in fiscal 1998). Net sales constitute revenues less
returns and allowances.
 
  Inventories for the C.D. Smith St. Joseph facility are accounted for at the
lower of cost or market, calculated under the FIFO method. Inventories for the
Chicago and Boston facilities are accounted for at the lower of cost or
market, calculated under the LIFO method.
 
                                      18
<PAGE>
 
RESULTS OF OPERATIONS
 
  The following table presents certain items from the statements of income of
the Company, on a consolidated basis, as a percentage of net sales:
 
<TABLE>   
<CAPTION>
                                      FISCAL YEAR ENDED            THREE MONTHS ENDED
                            -------------------------------------- ---------------------
                            FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,  MAY 31,     MAY 31,
                                1996         1997         1998       1997        1998
   <S>                      <C>          <C>          <C>          <C>         <C>
   Net sales...............    100.0%       100.0%       100.0%         100.0%      100.0%
   Cost of goods sold......     95.2         95.1         95.0           95.6        95.2
                               -----        -----        -----      ---------   ---------
   Gross profit............      4.8          4.9          5.0            4.4         4.8
   Operating expenses:
     Selling, general and
      administrative.......      3.6          3.3          2.9            2.8         2.9
     Depreciation and
      amortization.........      0.1          0.1          0.1            0.1         0.2
     Special charges.......      --           --           --             --          0.4
                               -----        -----        -----      ---------   ---------
   Operating income........      1.1          1.5          2.0            1.5         1.3
   Other income (expense):
     Interest expense......     (0.7)        (0.5)        (0.9)          (0.6)       (1.0)
     Other.................      0.1          --           --             0.1         --
                               -----        -----        -----      ---------   ---------
   Income before income
    taxes..................      0.5          1.0          1.1            1.0         0.3
   Provision for income
    taxes..................      0.2          0.4          0.4            0.4         0.1
                               -----        -----        -----      ---------   ---------
   Net income..............      0.3%         0.6%         0.7%           0.6%        0.2%
                               =====        =====        =====      =========   =========
</TABLE>    
   
 THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS ENDED MAY 31, 1997
       
  Net sales for the three months ended May 31, 1998 were $206.9 million, an
increase of 133.9% from $88.4 million for the three months ended May 31, 1997.
Fiscal 1999 first quarter net sales included operations of the General Drug
Companies, which contributed $92.8 million of net sales and represented
approximately 104.9% of the fiscal 1999 first quarter net sales growth.
Excluding the impact of the General Drug Acquisition, net sales increased
29.0% to $114.0 million in the fiscal 1999 first quarter from $88.4 million in
the fiscal 1998 first quarter. This growth is attributable to continued market
share gains in independent pharmacy customers, increased penetration of chain
store and healthcare institution markets and the addition of a new mail order
pharmacy account.     
   
  Gross profit for the fiscal 1999 first quarter was $9.9 million, an increase
of 153.2% from $3.9 million for the fiscal 1998 first quarter, primarily
resulting from the increase in net sales. Gross profit as a percentage of net
sales increased in the fiscal 1999 first quarter to 4.8% compared to 4.4% in
the fiscal 1998 first quarter due to an increase in the amount of discounts
and rebates received, which vary with the timing and volume of inventory
purchases.     
   
  Selling, general and administrative expense for the fiscal 1999 first
quarter was $6.0 million, an increase of 139.3% from $2.5 million for the
fiscal 1998 first quarter, principally due to the operating expenses
associated with the General Drug Acquisition. Selling, general and
administrative expense as a percentage of net sales increased to 2.9% for the
fiscal 1999 first quarter compared to 2.8% of net sales for the fiscal 1998
first quarter. The slight increase in selling, general and administrative
expense for the fiscal 1999 first quarter reflects the Company's investment in
an expanded sales and customer support staff at the General Drug Companies,
offset by cost synergies achieved to date from the General Drug Acquisition.
    
       
       
                                      19
<PAGE>
 
          
  Depreciation and amortization expense increased in the fiscal 1999 first
quarter to $0.4 million from $0.1 million in the fiscal 1998 first quarter.
Depreciation expense increased to $0.3 million from $0.1 million reflecting
depreciation related to the General Drug Acquisition. Amortization expense of
$0.1 million in the fiscal 1999 first quarter reflects the amortization of
goodwill related to the General Drug Acquisition.     
   
  Special charges in the fiscal 1999 first quarter were $0.8 million,
resulting from a $0.6 million severance payment to a former officer and a $0.2
million loss on the sale of the tobacco and candy business of the General Drug
Companies.     
   
  Operating income for the fiscal 1999 first quarter was $2.7 million, an
increase of 101.4% from $1.3 million for the fiscal 1998 first quarter.
Excluding the special charges, operating income was $3.5 million for the
fiscal 1999 first quarter representing a 162.7% increase from the fiscal 1998
first quarter. Operating income as a percentage of net sales was 1.3% for the
fiscal 1999 first quarter and 1.7% of net sales excluding the special charges,
compared to 1.5% of net sales for the fiscal 1998 first quarter.     
   
  Interest expense increased to $2.1 million for the fiscal 1999 first quarter
from $0.5 million for the fiscal 1998 first quarter due to increased borrowing
under the Credit Facility and interest on the subordinated note related to the
General Drug Acquisition financing.     
   
  Income tax expense amounted to $0.3 million for the fiscal 1999 first
quarter, reflecting an effective tax rate of 39.0% compared to $0.3 million
and an effective tax rate of 38.0% in the fiscal 1998 first quarter. The
higher effective rate in fiscal 1999 first quarter is attributable to the
effects of the non-deductibility for tax purposes of goodwill amortization
resulting from the General Drug Acquisition.     
 
 FISCAL YEAR ENDED FEBRUARY 28, 1998 COMPARED TO FISCAL YEAR ENDED FEBRUARY
28, 1997
 
  Net sales for fiscal 1998 were $544.1 million, an increase of 80.4% from
$301.5 million for fiscal 1997. Fiscal 1998 net sales included five months of
operations of the General Drug Companies, which contributed $157.4 million,
representing approximately 52.2% of the 80.4% fiscal 1998 net sales growth.
Net sales excluding the impact of General Drug Acquisition increased 28.2% to
$386.7 million in fiscal 1998 from $301.5 million in fiscal 1997. This growth
is attributable to market share gains in independent pharmacy customers,
increased penetration of the chain store and healthcare institution markets
and the addition of several new regional chain store customers.
 
  Gross profit for fiscal 1998 was $27.4 million, an increase of 86.1% from
$14.7 million for fiscal 1997, primarily resulting from the increase in net
sales. Gross profit as a percentage of net sales increased in fiscal 1998 to
5.0% compared to 4.9% in fiscal 1997 due to the positive impact of the
slightly higher gross margin sales of the General Drug Companies.
   
  Selling, general and administrative expense for fiscal 1998 was $15.9
million, an increase of 59.0% from $10.0 million for fiscal 1997, principally
due to the operating expenses associated with the General Drug Acquisition.
Selling, general and administrative expense as a percentage of net sales
decreased to 2.9% for fiscal 1998 compared to 3.3% in fiscal 1997, reflecting
synergies achieved to date from the General Drug Acquisition.     
 
  Depreciation and amortization expense increased in fiscal 1998 to $0.9
million from $0.3 million in fiscal 1997. Depreciation expense increased to
$0.6 million from $0.3 million, reflecting five months of depreciation related
to the General Drug Acquisition. Amortization expense of $0.3 million in
fiscal 1998 reflects the amortization of goodwill related to the General Drug
Acquisition.
 
  Operating income for fiscal 1998 was $10.6 million, an increase of 137.4%
from $4.5 million for fiscal 1997. Operating income as a percentage of net
sales increased to 2.0% in fiscal 1998 compared to 1.5% in fiscal 1997 due to
the increase in gross margin and the 0.3% decrease in operating expenses as a
percentage of net sales.
 
                                      20
<PAGE>
 
  Interest expense increased to $4.6 million for fiscal 1998 from $1.6 million
for fiscal 1997 due to increased borrowing under the Credit Facility and
interest on the subordinated note related to the General Drug Acquisition
financing.
 
  Income tax expense increased to $2.3 million for fiscal 1998, reflecting an
effective tax rate of 36.2% compared to $1.1 million and an effective tax rate
of 36.3% in fiscal 1997. The Company's St. Joseph facility is located in a tax
enterprise zone where certain state and local tax abatement provisions have
reduced the effective tax rate.
 
 FISCAL YEAR ENDED FEBRUARY 28, 1997 COMPARED TO FISCAL YEAR ENDED FEBRUARY
29, 1996
 
  Net sales for fiscal 1997 were $301.5 million, an increase of 34.5% from
$224.2 million for fiscal 1996. Net sales growth was attributable to continued
customer expansion due to the hiring of additional sales representatives,
increased penetration of the healthcare institution market and the addition of
several chain store customers.
 
  Gross profit for fiscal 1997 was $14.7 million, an increase of 38.0% from
$10.7 million for fiscal 1996, principally resulting from the increase in net
sales. Gross profit as a percentage of net sales increased in fiscal 1997 to
4.9% compared to 4.8% in fiscal 1996.
 
  Selling, general and administrative expense for fiscal 1997 was $10.0
million, an increase of 25.2% from $8.0 million for fiscal 1996, principally
due to increased administrative expenses of $1.4 million in fiscal 1997.
Selling, general and administrative expense as a percentage of net sales
decreased to 3.3% for fiscal 1997 compared to 3.6% in fiscal 1996, principally
due to economies of scale associated with net sales increases.
 
  Depreciation and amortization expense increased to $0.3 million in fiscal
1997 from $0.2 million in fiscal 1996.
 
  Operating income for fiscal 1997 was $4.5 million, an increase of 80.0% from
$2.5 million for fiscal 1996. Operating income as a percentage of net sales
increased to 1.5% in fiscal 1997 compared to 1.1% in fiscal 1996 due to the
0.1% increase in gross margin and the 0.3% decrease in operating expenses as a
percentage of net sales.
 
  Interest expense increased to $1.6 million for fiscal 1997 from $1.5 million
for fiscal 1996 due to increased borrowing on the Company's line of credit to
finance inventory increases necessitated by the increase in net sales.
 
  Income tax expense increased to $1.1 million for fiscal 1997, reflecting an
effective tax rate of 36.3% compared to $0.4 million, and an effective tax
rate of 39.6%, in fiscal 1996. The lower effective tax rate in fiscal 1997 is
attributable to the effects of enterprise zone tax credits obtained and
utilized by the Company in that year.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company has historically met its working capital requirements through a
combination of internally generated funds, borrowings under a revolving credit
facility and trade credit. The Company actively monitors its accounts
receivable and inventory levels to reduce credit risk and optimize working
capital management. The following table illustrates certain key ratios the
Company uses to assess its working capital management:
 
<TABLE>   
<CAPTION>
                                      FISCAL YEAR ENDED            THREE MONTHS ENDED
                            -------------------------------------- ---------------------
                            FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,  MAY 31,     MAY 31,
                                1996         1997       1998(1)      1997        1998
   <S>                      <C>          <C>          <C>          <C>         <C>
   Days Sales
    Outstanding(2).........     17.8         17.2         20.8           15.9        23.8
   Inventory Turns.........     12.2         11.2          9.9           12.1        10.3
   Current Ratio...........      1.6          1.8          2.0            1.7         1.9
</TABLE>    
- ---------------------
(1) Reflects the consolidated operations of the Company. Excluding the impact
    of the General Drug Acquisition, fiscal 1998 days sales outstanding and
    inventory turns were 16.7 and 11.3, respectively.
(2) Days sales outstanding is calculated using the average of the month-end
    accounts receivable balances for the respective fiscal periods.
 
                                      21
<PAGE>
 
   
  Working capital at May 31, 1998 was $65.8 million, a decrease of $2.1
million from working capital of $67.9 million at February 28, 1998. The
decrease in working capital reflects normal fluctuations related to the timing
of inventory receipts, vendor payments and customer accounts receivable
collections.     
 
  Working capital at February 28, 1998 was $67.9 million, an increase of $47.1
million from working capital of $20.8 million on February 28, 1997. This
increase was due primarily to the acquisition of the General Drug Companies
(which had working capital of $33.1 million at the date of acquisition), as
well as increased inventory and receivables attributable to the growth in C.D.
Smith's business during the year. Management believes that it will be able to
bring its consolidated working capital utilization more in line with its
historical levels upon fully integrating the General Drug Companies. From
fiscal 1996 to fiscal 1997, working capital increased by $9.1 million due
primarily to increased net sales volumes.
   
  Other than periodic investments in distribution facilities, the Company has
had relatively low capital expenditure requirements. The Company had $0.7
million of capital expenditures for the three months ended May 31, 1998
primarily for the Company's Year 2000 compliance program and facilities
improvement, compared to $0.1 million for the three months ended May 31, 1997.
The Company had $0.8 million and $1.1 million of capital expenditures in
fiscal 1998 and fiscal 1997, respectively, primarily for distribution
equipment and technology. Historically, C.D. Smith has invested in technology-
related assets financed primarily by operating leases. The Company anticipates
expending approximately $1.3 million within the next year for the construction
of new corporate headquarters in St. Joseph.     
 
  In fiscal 1998, the Company acquired the equity interests of the General
Drug Companies for $28.0 million, which was financed through borrowing under
its Credit Facility of $16.0 million and the issuance of a subordinated note
for $12.0 million. In addition, the Company refinanced approximately $39.5
million of indebtedness of the General Drug Companies through its Credit
Facility.
   
  The Credit Facility consists of a revolving line of credit and various term
notes which expire or mature in October 2000 and is secured by substantially
all of the assets of the Company. The revolving line of credit has a maximum
availability of $90.0 million based on eligible inventory and accounts
receivable. As of May 31, 1998, approximately $78.4 million was outstanding on
the revolving line of credit, excluding the net effects of bank overdraft
(checks issued but not presented at the bank) and unapplied lockbox receipts
totaling $13.7 million. The Company will use approximately $41.7 million of
the net proceeds from this Offering to reduce outstanding borrowings under its
Credit Facility. The revolving portion of the Credit Facility carries an
interest rate at the bank's prime rate or LIBOR plus 175 basis points.
Principal on the term notes, approximately $2.7 million at May 31, 1998, is
payable monthly based on an amortized term of seven to fifteen years plus
interest ranging from 50 basis points below prime to the bank's prime rate.
The Credit Facility contains certain financial covenants and other covenants
which restrict the Company's ability to pay dividends and take certain
extraordinary actions. The Company believes it is currently in compliance with
all covenants.     
   
  The $12.0 million subordinated note issued in conjunction with the General
Drug Acquisition bears interest at 12.0%, matures on October 3, 2004 and has
detachable warrants with a nominal exercise price to acquire 1,080,078 shares
of Common Stock. The estimated fair value of the warrants at the time of
issuance was $2.6 million, and it was recorded as a discount on the
subordinated note, resulting in an effective interest rate of 17.9% on the
subordinated note. The Company will use $12.0 million of the net proceeds of
the Offering to repay the subordinated note.     
 
  The Company believes that it has adequate capital resources at its disposal
to meet currently anticipated capital expenditures, routine business growth
and current projected debt service requirements.
 
YEAR 2000 COMPLIANCE
 
  The Company, its vendors and customers use software and related technologies
throughout their businesses that will be affected by the Year 2000 problem,
which is common to most businesses, and concerns the inability
 
                                      22
<PAGE>
 
of information systems, primarily computer software programs, to properly
recognize and process date-sensitive information as the year 2000 approaches.
This inability could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
 
  Management has developed a plan to modify the Company's management
information systems to properly recognize the Year 2000 and believes that,
with modifications to existing software and conversions to new software, the
Year 2000 issue can be mitigated. The Company will use both internal and
external resources to test and reprogram or replace the software for Year 2000
modifications. Management currently expects the project to be substantially
complete by late 1998 and that the cost of the Year 2000 initiative, including
both costs for modification of existing software and for the conversions to
new software, will not be material to the Company's results of operations or
financial position. Furthermore, this project is not expected to have a
significant effect on operations.
 
  The Company will initiate formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. However, there can be no assurance that the systems of other companies
will be timely converted.
 
  The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates. However,
there can be no assurance that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
 
RECENTLY ISSUED PRONOUNCEMENTS
 
  In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
encourages (but does not require) companies to adopt a fair value based method
of accounting for stock-based compensation plans, in place of the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). If the fair value based method of accounting
is not adopted, SFAS 123 requires companies to disclose pro forma calculations
in the notes to their financial statements of net income and net income per
share as if the fair value based method of accounting had been applied. The
Company has elected to follow APB 25 and related interpretations in accounting
for its employee stock options because the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
 
  In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
128"), which requires the presentation of earnings per share by all companies
that have issued common stock or potential common stock if those securities
trade in a public market either on a stock exchange or in the over-the-counter
market. This statement supersedes APB Opinion No. 15, "Earnings per Share."
The earnings per share amounts for all prior years have been presented as
required by SFAS 128.
   
  Other recent pronouncements of the FASB, which are not required to be
adopted until 1998, include SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"), and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The Company does not
have any material other comprehensive income as defined by SFAS 130 at May 31,
1998.     
 
                                      23
<PAGE>
 
   
  SFAS 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," and establishes new standards for the way that public
companies report selected information about operating segments in annual
financial statements and requires that those companies report selected
information about segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company has
not yet determined the effects, if any, the adoption will have on required
disclosures within the Company's financial statements. However, SFAS 131
disclosures are required in the Company's financial statements for the three
months ended May 31, 1998.     
 
                                      24
<PAGE>
 
                                   BUSINESS
 
OVERVIEW
 
  C.D. Smith is a leading regional full-line, full-service wholesale
distributor of pharmaceuticals and related products. The Company distributes
over 25,000 SKUs to more than 3,000 customers located predominantly in the
midwestern United States and New England. The Company believes that it is the
primary supplier to a majority of its customers, which include independent
pharmacies, health care institutions and regional and national chain
pharmacies. According to the 1998 Drug Store Market Guide, the Company is the
second largest pharmaceutical wholesale distributor in metropolitan Kansas
City and Boston and the third largest in Chicago. For fiscal 1998, the
Company's pro forma net sales and operating income were $762.3 million and
$13.9 million, respectively.
   
  Since being acquired by its management and employees in 1991, C.D. Smith has
grown from a small pharmaceutical distributor serving rural customers into a
full-line, full-service regional wholesale distributor with a major presence
in both rural and urban markets within its core territories. From 1994 through
fiscal 1998, the Company's net sales grew internally (excluding the effect of
acquisitions) at a compound annual rate of approximately 50.3%. The Company
has achieved this growth principally by gaining new customers within its
territories, converting customer relationships from secondary to primary
supplier status and expanding its service territories.     
 
  The Company attributes its success since 1991 primarily to the
implementation of a comprehensive program aimed at meeting the specific needs
of its customers. As a part of this program, the Company significantly
expanded its sales and customer service staff. At May 31, 1998, C.D. Smith
employed 37 direct sales representatives with an average of 28 years of
industry experience who are supported by 25 telemarketers and customer service
professionals. The Company added multiple operating shifts to extend the hours
for customer order placement and to expand the territories in which it can
offer reliable next-day delivery. The Company also broadened its product
offerings and upgraded its customer ordering and information systems to
enhance its ability to serve as a primary supply source. In 1994, the Company
built a state-of-the-art distribution facility to accommodate its growth and
has achieved key measures of efficiency that significantly exceed industry
averages. The Company believes that providing exceptional customer service
distinguishes C.D. Smith from other wholesale distributors and is key to its
continued growth.
 
  In October 1997, the Company acquired General Drug Company, a full-service
wholesale distributor with operations in the greater Chicago and Boston
markets. As part of the General Drug Acquisition, the Company also acquired
SBS, a pharmaceuticals repackaging and distribution business. C.D. Smith is
currently integrating the operations of the General Drug Companies, and
believes it will realize substantial synergies by increasing the efficiency of
the acquired distribution facilities, obtaining greater volume purchasing
discounts and eliminating duplicative overhead functions. In addition, the
Company is implementing its program of enhanced customer service in Chicago
and Boston, which it believes will accelerate sales growth in those markets.
In Chicago, the Company doubled the size of its sales force and added a second
operating shift to accommodate late-day orders, commence Saturday deliveries
and increase the territories served by the facility. In Boston, the Company
has divested the marginally profitable tobacco and candy business, which has
provided significant additional warehouse capacity for pharmaceuticals and
related products. The Company also intends to expand the sales force and add a
second operating shift in Boston.
 
OPERATING STRATEGY
 
  The Company's objective is to build on its position as a leading regional
wholesale distributor to become a national pharmaceutical services company.
The principal elements of the Company's strategy are as follows:
 
    Provide High Levels of Customer Service. C.D. Smith believes that its
  customer service focus is a significant competitive advantage, especially
  with independent pharmacy customers who may not receive personalized
  service from national wholesale distributors. C.D. Smith's experienced
  direct sales force makes
 
                                      25
<PAGE>
 
  regular personal visits to current and prospective customers and is
  supported by a knowledgeable in-house customer service staff. The Company
  operates its distribution facilities to meet its customers' requirements
  for accurate same-day or next-day delivery. The Company believes that its
  commitment to customer service has enabled it to achieve primary supplier
  status with many of its customers, resulting in significant net sales
  growth.
 
    Increase Sales from Existing Facilities. C.D. Smith intends to leverage
  its existing infrastructure and expertise to increase sales from each of
  its distribution facilities. Prior to their acquisition by the Company,
  each of the Chicago and Boston facilities operated a single shift, served
  customers within a small geographic area and carried a more limited
  inventory, which typically positioned them as secondary suppliers. The
  Company believes that adding a second operating shift and developing a
  customer-oriented sales force will enable both of these facilities to
  increase net sales by achieving primary supply relationships with customers
  in significantly expanded service territories. Similarly, C.D. Smith
  believes it can apply the General Drug Companies' greater experience with
  managed care and other institutional customers to increase net sales in its
  midwestern region.
 
    Continue Selective Acquisitions. The Company believes that it is well-
  positioned to make selective acquisitions to expand into new territories
  and to further penetrate current market territories. Through its
  participation in national industry groups and OptiSourceSM, a Company-
  operated generic pharmaceutical buying group that includes 16 other
  regional wholesale distributors, C.D. Smith maintains significant contact
  with numerous regional and local distributors and has identified several
  attractive acquisition candidates.
 
    Offer Broad Line of Products and Services. C.D. Smith provides its
  customers a broad line of over 25,000 SKUs of branded and generic
  pharmaceuticals, over-the-counter health care products and health and
  beauty aids from more than 1,000 vendors. The Company believes its products
  and services enable it to be the primary supplier to the majority of its
  customers and to further leverage its regional presence by meeting the
  secondary supply needs of many significant customers. Through OptiSource,
  the Company obtains lower wholesale prices through volume purchasing and
  maintains a major presence in the distribution of the rapidly growing
  generic pharmaceutical product category. Through SBS, the Company buys
  approximately 140 pharmaceuticals in bulk and repackages them into
  quantities requested by selected wholesalers. The Company is also
  developing its own private label program designed to help independent
  pharmacies compete more aggressively with regional and national chain
  pharmacies by providing store identification, promotional and advertising
  programs and a private label brand of over-the-counter pharmaceuticals and
  health and beauty aids.
 
    Expand Pharmaceutical Services. The Company intends to offer
  pharmaceutical services beyond its current product and service offerings.
  The Company believes that it can leverage its expertise in the
  pharmaceutical industry and its large, concentrated customer base to offer
  additional pharmacy-related services, such as pharmacy benefits management,
  managed care pharmaceutical formulary management and health care
  institution unit of use packaging. The Company intends to expand its
  service offerings through internal development and selective acquisitions.
   
  The Company believes that its operating strategy can be implemented without
significant additional capital investment (other than possible acquisitions)
and without incurring significant additional operating costs that would not be
offset by anticipated revenue growth.     
 
INDUSTRY OVERVIEW
   
  Industry Growth. Wholesale drug distributors are the most important
distribution channel for pharmaceutical manufacturers, handling approximately
80.0% of the $83.4 billion of prescription drug sales for the twelve months
ended June 1997. Wholesale pharmaceutical distribution industry sales
increased from $2.4 billion in 1970 to $30.2 billion in 1990 and reached
approximately $74.6 billion in 1997, representing a compound annual growth
rate of approximately 13.5%. The principal factors contributing to this growth
are (i) the aging of the population, (ii) introduction of new pharmaceuticals,
(iii) increased emphasis on effective drug therapies as a part of cost
containment efforts, (iv) increased utilization by pharmaceutical
manufacturers of wholesale distributors and (v) rising pharmaceutical costs.
    
                                      26
<PAGE>
 
  Aging of Population. The number of individuals over 65 in the United States
  has grown 68.2% from 20.1 million in 1970 to 33.8 million in 1996. This age
  group, which is projected to grow to 39.6 million individuals by 2010,
  spends approximately 3.7 times as much per capita on pharmaceuticals and
  medical supplies as the rest of the population.
 
  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 FDA and
  introduced into the market, this trend is expected to continue.
 
  Cost Containment Efforts. In response to rising health care costs,
  governmental and private payors have adopted cost containment measures that
  encourage the use of efficient drug therapies to prevent or treat diseases.
  While national attention has been focused on the overall increase in
  aggregate health care costs, the Company believes that drug therapy has had
  a beneficial impact on overall health care costs by reducing expensive
  surgeries and prolonged hospital stays. Pharmaceuticals currently account
  for approximately 8.0% of overall health care costs, and manufacturers'
  emphasis on research and development is expected to continue the
  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 offer their customers
  and suppliers more efficient distribution and inventory management. As a
  result, from 1980 to 1997, the percentage of total pharmaceutical sales
  through wholesale distributors increased from approximately 57.0% to
  approximately 80.0%.
 
  Rising Pharmaceutical Costs. The Company believes that price increases by
  pharmaceutical manufacturers will 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 have attempted to recoup costs
  associated with the development, clinical testing and FDA approval of new
  products. For example, the average retail price of a prescription has
  increased from $22.06 in 1990 to $32.12 in 1997.
 
  Industry Consolidation. While sales by wholesale distributors have been
steadily increasing, the industry has been experiencing consolidation over the
last two decades. The number of full-service pharmaceutical wholesalers in the
United States has declined from approximately 139 at the end of 1980 to
approximately 54 at December 31, 1997. This trend has been driven in large
part by the significant economies of scale available to large regional and
national distributors. Industry analysts expect this trend to continue.
 
  Market Segments and Customer Benefits. Wholesale distributors serve three
major market segments: independent pharmacies and drugstores (approximately
34.4% of the market), retail chains (approximately 25.7% of the market) and
health care institutions (approximately 36.4% of the market). These customers
benefit from the service of wholesale distributors because the distributors
provide access to a single source for pharmaceutical and health care products
from hundreds of different manufacturers. In addition, wholesale distributors
lower customer inventory costs, provide efficient and timely product delivery
and improve inventory and purchasing information. Customers also benefit from
value-added programs developed by wholesale distributors to reduce costs and
increase operating efficiencies for the customer. These programs include
packaging, stockless inventory and pharmacy computer systems. Industry
analysts estimate wholesale distributors save the health care delivery system
an estimated $17.0 billion per year compared to purchasing directly from
manufacturers.
 
                                      27
<PAGE>
 
   
  Independent pharmacies and drugstores are typically smaller, community
oriented businesses that are most reliant on marketing, merchandising and
support programs of wholesale distributors. Industry sales to independent
pharmacies have increased, in part, due to the improved competitiveness of
remaining stores, although the number of independent pharmacies has declined.
The following chart presents the number of independent pharmacies and industry
sales to those stores from 1988 to 1997:     

<TABLE>    
<CAPTION>

                           1988     1989     1990     1991     1992     1993     1994     1995     1996     1997
<S>                     <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Pharmacies               34,000   33,500   32,500   30,750   27,000   26,000   25,000   23,067   21,975   20,857
Sales                   $ 9,808  $10,292  $10,987  $12,382  $13,568  $14,203  $14,269  $15,442  $17,004  $18,234
</TABLE>     

   Source: National Wholesale Druggists' Association

  Retail chains include national and regional chain drugstores, supermarkets,
mass merchandisers and discount stores. The institutional market segment
includes a diverse group of medical care providers such as hospitals, nursing
homes, long-term care and rehabilitation facilities, clinics, HMOs and home
health care providers.

PRODUCTS AND SERVICES

  The Company distributes over 25,000 SKUs of branded and generic
pharmaceuticals, over-the-counter health care products and health and beauty
aids. Branded and generic pharmaceutical products generate approximately 85.0%
and 8.0%, respectively, of the Company's net sales and comprise approximately
10,000 SKUs. In addition, the Company supplies a complete line of over-the-
counter health care products and health and beauty aids, including cosmetics,
toiletries, personal health products, home health products, sundries and
seasonal items.

  Customers rely on C.D. Smith for dependable same-day or next-day delivery of
pharmaceuticals and other products. Customers may place orders through a
variety of means, including voice telephone interaction with an inside sales
representative, automated touch-tone telephone order placement, hand-held
electronic order entry devices or an interface to the Company's proprietary
CoDeS(R) PC-based customer ordering and information system. The CoDeS system
allows customers to obtain real-time pricing, product availability and
promotional information. CoDeS also allows customers to electronically enter
and track orders and review their purchasing histories.
   
  The Company provides customers with a number of other value-added services
that it believes enhance independent pharmacies' ability to compete
effectively and create customer loyalty. These services include generic drug
sourcing, which allows customers to benefit from the lowest available pricing;
pharmaceutical repackaging; store modernization and planning services; OTC
product merchandising, which includes shelf labeling and plan-o-grams; and
various customer reports, such as inventory tracking, regulatory compliance
and purchasing history.     


                                      28

<PAGE>
 
  OptiSourceSM. C.D. Smith leads a collective generic buying program called
OptiSource which, as of May 31, 1998, included 16 other regional wholesale
distributors. The collective buying power of the consortium enables
participants to achieve lower purchase prices comparable to those obtained by
much larger competitors. The Company's operation of OptiSource has increased
its visibility with manufacturers and has allowed the Company to offer generic
pharmaceuticals at more competitive prices, an increasingly important element
of the gross margin mix.
 
  SBS Pharmaceuticals. The Company operates SBS, a pharmaceutical repackaging
and distribution business acquired in the General Drug Acquisition. Through
this business, the Company achieves product cost savings by buying over 140
branded and generic pharmaceutical products in bulk and increases sales by
providing wholesale customers with product quantities and labeling at a lower
price than that available from the manufacturer. Management believes that it
can increase sales to present SBS customers and attract new customers by
expanding the number of pharmaceuticals offered for repackaging and increasing
its investment in inventory to facilitate timely delivery. In addition, the
Company intends to target chain pharmacies and health care institutions by
marketing existing services and offering unit of use packaging.
 
OPERATIONS
 
  The Company operates three distribution centers with advanced material
handling systems for receiving, storing and distributing the approximately
25,000 SKUs which comprise its product offerings. The St. Joseph, Missouri
facility, built in 1994, was designed to minimize order fill time by
segregating products according to inventory turn rate. The facility operates
three shifts and employs bar code scanning technology to automate the
receiving process and update inventory levels. This facility's operating
efficiency, as measured by inventory turns, sales per square foot and sales
per employee, significantly exceeds the industry average. In most cases,
customer orders may be received as late as 9:00 p.m., and deliveries are made
six days per week.
 
  The Company's Chicago and Boston facilities were acquired in the General
Drug Acquisition. In these facilities, the Company is implementing its
operating model, which includes the reorganization of inventory by turn rate
and other efficiencies to minimize order pick time. The Chicago distribution
center recently increased SKUs and added a second operating shift and a sixth
day of operation to increase customer service levels. The second shift enables
the Company to extend order deadlines and expand the territories in which
next-day deliveries can be provided. The Boston distribution center currently
operates one shift, five days per week. The Company anticipates adding a
second shift in the second quarter of this fiscal year to provide for similar
growth opportunities as those identified for the Chicago facility. In Boston,
the Company sold the tobacco and candy business in the first quarter of fiscal
1999 to provide significant additional warehouse capacity for pharmaceuticals
and related products.
 
  The combination of investments in information technology, inventory
management systems and facility operations has increased the Company's order
fill rate in recent years. In fiscal 1998, the St. Joseph facility achieved an
order fill rate for branded pharmaceuticals, adjusted for manufacturers'
backorders, of approximately 99.6%, up from approximately 97.0% in 1994.
 
CUSTOMERS AND MARKETS
 
  The Company's customer base consists of over 3,000 independent pharmacies,
regional and national chain pharmacies, supermarkets, mass merchandisers,
hospitals, nursing homes and health care institutions. The Company's ten
largest customers accounted for approximately 21.0% of pro forma fiscal 1998
net sales, with no one customer accounting for more than approximately 7.0%.
 
  C.D. Smith believes it is the primary supplier to the majority of its
customers and derives a majority of its net sales from customers for whom it
provides in excess of 70.0% of their pharmaceutical and other needs. The
Company also serves as a secondary supplier to several large chain drugstores,
supermarkets and mass
 
                                      29
<PAGE>
 
merchandisers for items the primary supplier does not carry or periodically
cannot supply. The secondary supply relationships typically have lower sales
volume per order but provide higher gross margins. The Company believes a
substantial percentage of the Company's sales growth has come from converting
customer relationships from secondary to primary supplier status.
 
  The Company historically has focused its marketing efforts on independent
pharmacies, a customer base which the Company believes is not adequately
served by the largest national pharmaceutical wholesalers, who typically focus
on large chain customers and often require high minimum monthly purchases.
Since 1991, the Company has expanded from a principally rural customer base
into the major metropolitan areas of its core midwestern states and increased
market share with retail chains, health care institutions and mass
merchandisers. The General Drug Companies historically had strong
relationships with government and managed care customers who typically place a
greater emphasis on price, flexible delivery options and contract and
formulary support. Consequently, the General Drug Companies were less focused
on establishing primary supply relationships with independent pharmacies and
related marketing efforts were geographically limited. The Company believes
that it will be able to apply the areas of expertise of the acquired
operations, as well as its expertise with independent pharmacies, across all
of its geographic markets, thereby attracting new customers and increasing net
sales.
   
  The table below presents pro forma fiscal 1998 net sales by class of trade
and distribution region as if the General Drug Acquisition occurred at the
beginning of the fiscal year. The pro forma information is provided for
comparative purposes only and is not necessarily indicative of the results
which would have occurred had the General Drug Acquisition been consummated on
March 1, 1997, nor is it necessarily indicative of future results. The net
sales information presented below for the St. Joseph distribution facility was
derived by applying the percentages of net sales by class of trade for
calendar 1997 to total net sales for fiscal 1998.     
 
<TABLE>   
<CAPTION>
                               ST.     % OF            % OF               % OF           % OF                % OF
                              JOSEPH  TOTAL  CHICAGO  TOTAL   BOSTON     TOTAL    SBS   TOTAL  CONSOLIDATED TOTAL
                                                               (IN THOUSANDS)
   <S>                       <C>      <C>    <C>      <C>    <C>         <C>    <C>     <C>    <C>          <C>
   Independent pharmacies..  $298,855  77.4% $ 59,877  43.6% $ 53,892     24.9% $   --    -- %   $412,624    54.1%
   Retail chains(1)........    64,619  16.7%    7,553   5.5%   15,959      7.4%     --    -- %     88,131    11.6%
   Health care
    institutions(2)........    22,647   5.9%   21,565  15.7%   85,897     39.8%     --    -- %    130,109    17.1%
   Governments.............       --    0.0%   24,264  17.6%    4,721      2.2%     --    -- %     28,985     3.8%
   Miscellaneous...........       569   0.0%   24,223  17.6%   55,548(3)  25.7%  22,070 100.0%    102,410    13.4%
                             -------- ------ -------- ------ --------    ------ ------- ------   --------   ------
    Total all classes......  $386,690 100.0% $137,482 100.0% $216,017    100.0% $22,070 100.0%   $762,259   100.0%
                             ======== ====== ======== ====== ========    ====== ======= ======   ========   ======
</TABLE>    
- ---------------------
(1) Includes chain pharmacies, supermarkets and mass merchandisers.
(2) Includes clinics, nursing homes, hospitals and HMOs.
(3) Includes tobacco and candy business and dock to dock sales, which
    accounted for $25.2 million and $25.9 million, respectively, of
    consolidated net sales.
 
SUPPLIERS
 
  C.D. Smith purchases pharmaceutical and other products from over 1,000
suppliers. The Company utilizes sophisticated inventory tracking and control
software to assist its purchasing personnel in analyzing demand history,
projecting future demand and identifying investment-buying opportunities. The
Company's system is automated to eliminate virtually all manual elements of
the purchase order process. In addition, the Company uses electronic data
interchange with its pharmaceutical suppliers for substantially all of its
purchases. Automatic inventory replenishment levels have been set for the
majority of non-seasonal SKUs. The Company believes that its strengthened
capitalization following the Offering will allow the Company to increase
investment buying of inventory in anticipation of supplier price increases,
potentially resulting in gross margin improvement.
   
  The Company generally sets an inventory level for each item to minimize the
potential for unfilled orders. The overall level of inventory is affected by
the expected sales level for each inventory item within specified     
 
                                      30
<PAGE>
 
   
vendor delivery lead times plus a safety stock which takes into account
historical sales volatility, inventory carrying costs and the vendor's
performance in meeting scheduled deliveries. Orders for inventory stock
replenishment are generally made daily with each vendor after consideration of
the required inventory level for that vendor's supplied items and applicable
minimum or efficient order quantities. Delivery times vary by vendor and
inventory item and generally range from seven days to four weeks. The Company
maintains item-specific information about inventory requirements and delivery
schedules as a part of its inventory management information system.     
 
  The Company's ten largest suppliers account for approximately 50.0% of its
purchases with no single supplier accounting for more than 10.0% of purchases.
Historically, the Company has not experienced significant difficulty in
obtaining desired products from suppliers. The Company believes that its
relationships with its suppliers are good.
 
SALES AND MARKETING
 
  The Company has expanded its outside sales force contact with customers,
emphasizing frequent on-site personal interaction and consultation on
merchandising, stocking and inventory management. The Company believes that
customers have relied upon such consultation to improve marketing at the
retail level. The internal customer service staff emphasizes rapid response to
customer inquiries and efficient order placement.
 
  Internal marketing programs are designed to give customers access to special
price and promotional offerings of the manufacturers to better plan inventory
investments. Information on manufacturer promotional programs is rapidly
disseminated to the Company's direct sales representatives to give them a
competitive advantage in customer interactions.
 
  The Company has a combined sales, marketing, order entry and customer
service staff of 62 persons. The St. Joseph organization consists of 25
industry sales representatives supported by an order entry and customer
service staff of eight persons. The Chicago and Boston direct sales forces and
order entry staffs include 12 and 17 persons, respectively.
 
MANAGEMENT INFORMATION SYSTEMS
 
  The Company invests in management information systems to increase
efficiency, improve customer access to information, decrease the time and
labor cost of receiving orders and improve the speed with which inventory is
received, stocked and monitored. The information systems are intended to
provide for a seamless, integrated tracking of customer order entry,
purchasing, restocking and invoice preparation.
 
  The Company's proprietary on-line customer interface software, CoDeS, allows
direct customer connectivity to the Company's mainframe computer in St. Joseph
to obtain pricing, product availability and promotional information and on-
line order entry. The CoDeS software is designed to reside on a customer site
PC supported by dial-up modem. Complete customer order tracking and purchase
history is available through the software system.
 
  The Company's information systems environment utilizes an IBM AS400
mainframe with integrated links to the PC-based local area network. The
Company has recently purchased an IBM AS400E server for intranet use, sales
force automation and intercompany communication. In the distribution centers,
laser scanners utilizing bar coding information update inventory receiving
data. Extensive use of electronic mail, paperless imaging systems and an
automated broadcast faxing system have reduced cost and labor associated with
customer and vendor interactions and increased the amount and timeliness of
information available to the external sales force. Electronic commerce and
other Internet applications will be implemented in the near future. The
Company has engaged various consultants and is implementing a plan to achieve
Year 2000 compliance by the end of calendar 1998.
 
COMPETITION
 
  The wholesale distribution of pharmaceuticals, health and beauty aids and
other health care products is highly competitive. The Company competes with
numerous national and regional distributors, some of which
 
                                      31
<PAGE>
 
are larger and have substantially greater financial resources than the
Company. The five largest national pharmaceutical wholesale distributors are
McKesson Corporation, Cardinal Health, Inc., Bergen Brunswig Corporation,
AmeriSource Health Corporation and Bindley Western Industries, Inc. In
addition, the Company competes with numerous distributors, direct-selling
manufacturers and other specialty distributors. Competitive factors include
price, service and delivery, credit terms, breadth of product line, customer
support and marketing programs.
 
EMPLOYEES
   
  As of May 31, 1998, the Company employed approximately 305 persons, of which
approximately 297 were full-time employees. Approximately 80 of the Company's
employees in its Chicago and Boston distribution facilities are covered by
collective bargaining agreements. One of these agreements expired on March 31,
1998. The previous contract terms are being honored during negotiations, which
are expected to be completed at the end of the summer. The remaining
agreements expire at various times through September 2000. The Company
believes that all remaining collective bargaining agreements will be
negotiated upon expiration on contract terms that will not have a material
adverse impact on the Company, and the Company believes that its relationship
with its employees is good.     
 
FACILITIES
 
  The Company owns its headquarters and distribution facility in St. Joseph.
The building encompasses 73,500 square feet with approximately 19,500 square
feet allocated to offices and 54,000 square feet of distribution and warehouse
space. The distribution facility is considered to be adequate for operations
for the foreseeable future, and the design of the facility allows for
additional expansion. The Company is in the process of designing and
constructing a facility for new corporate headquarters in St. Joseph which
will consist of approximately 10,000 square feet of office space.
 
  The Company owns its Chicago distribution center, which includes two
adjoining buildings on a contiguous site totaling 62,000 square feet.
Approximately 16,000 square feet house the administrative and office function
and 46,000 square feet are used for warehouse and distribution functions. The
distribution facility is considered to be efficient and adequate for
operations for the foreseeable future.
 
  The Boston facility includes 10,000 square feet of office space and a
distribution facility encompassing 35,000 square feet. The building is leased
by the Company through 2004 with a five-year renewal option, and it is
considered adequate for the foreseeable future.
 
GOVERNMENT REGULATION
 
  The wholesale drug distribution industry is subject to regulation by
federal, state and local governmental agencies. The distribution of controlled
substances and prescription pharmaceuticals requires licenses and permits as
well as the implementation of an oversight and compliance program mandated by
the Prescription Drug Marketing Act of 1987. In general, regulations pertain
to the purchase, safe storage and distribution of controlled substances and
pharmaceuticals that are monitored through periodic site inspections conducted
by the FDA and the DEA. Failure to comply with these regulations could have a
material adverse effect on the Company by resulting in penalties such as
fines, restrictions on operations or closures.
 
  The Company has implemented an extensive compliance program administered by
its Chief Compliance Officer. The Company believes that it is in material
compliance with all applicable government regulations and has all material
permits and licenses.
 
LITIGATION
 
  The Company is a party from time to time in legal proceedings in the
ordinary course of business. There are no pending legal proceedings involving
the Company which have or are expected by management to have a material
adverse effect upon the business, financial condition or operations of the
Company.
 
                                      32
<PAGE>
 
                                  MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
  Set forth below is certain information concerning the executive officers and
directors of the Company.
 
<TABLE>   
<CAPTION>
          NAME      AGE                        POSITION
      <S>           <C> <C>
      Robert C.     52  Chief Executive Officer, President and Chairman of
       Farley(1)         the Board
      S. Jeanne     44  Chief Financial Officer, Vice President, Treasurer and
       Mathiesen         Director
       (2)
      Delora J.     39  Chief Compliance Officer, Vice President, Secretary
       Jamison(3)        and Director
      Richard M.    46  Vice President--Trade Relations
       Meehan
      Eric M. Far-  25  Vice President--Strategy and Corporate Development
       ley
      Richard H.    42  President--James Brudnick Company, Inc., a wholly
       Brudnick          owned subsidiary (Boston)
      Joseph A.     46  President--General Drug Company, a wholly owned
       Harris            subsidiary (Chicago)
      Barbara J.    50  Director
       Mowry (4)
      David R.      55  Director
       Parker (5)
      J. Duane      49  Director
       Weeks (6)
</TABLE>    
- ---------------------
(1) Became a director in 1991; term expires in 2001.
(2) Became a director in 1995; term expires in 1999.
(3) Became a director in 1995; term expires in 2000.
   
(4) Became a director in 1998; term expires in 1999.     
   
(5) Became a director in 1998; term expires in 2001.     
   
(6) Became a director in 1998; term expires in 2000.     
 
  The Company intends to add three outside directors by the end of June 1998.
 
  Robert C. Farley, Chief Executive Officer, President and Chairman of the
Board. Mr. Farley became Chief Executive Officer in 1992. Prior to such time,
he was Chief Financial Officer of the Company since 1986. He serves on the
National Wholesale Druggists' Association ("NWDA") Board of Directors and the
NWDA Government Affairs Committee. Mr. Farley is a wholesaler advisor to the
Missouri Board of Pharmacy, is past Vice President of the Heart of America
ESOP Chapter and was named Ernst & Young LLP's 1996 Entrepreneur of the Year
for Kansas/Western Missouri. Mr. Farley is the father of Eric M. Farley.
 
  S. Jeanne Mathiesen, Chief Financial Officer, Vice President, Treasurer and
Director. Ms. Mathiesen joined the Company in 1993 as Chief Financial Officer
and Treasurer. From 1991 until joining the Company, Ms. Mathiesen was an audit
manager and firm administrator with the accounting firm of Grant Thornton in
Kansas City, Missouri. She previously was a partner in an Orange County,
California, certified public accounting firm for ten years. Ms. Mathiesen is a
licensed CPA in the state of Missouri and is a member of the American
Institute of Certified Public Accountants and the Financial Executives
Institute.
 
  Delora J. Jamison, Chief Compliance Officer, Vice President, Secretary and
Director. Ms. Jamison joined the Company in 1990, has served in various
executive capacities since that time and currently serves as the Company's
Chief Compliance Officer. She previously served as an executive with the St.
Joseph, Missouri YWCA. Ms. Jamison's responsibilities include oversight of the
Company's Corporate Ethics and Business Practices program and administration
of human resources, employee benefits and regulatory compliance. She is a
member of the Ethics Officer Association, national and local chapters of the
Society for Human Resource Management and currently serves on the NWDA Health
Care Information Privacy Task Force.
 
  Richard M. Meehan, Vice President--Trade Relations. Mr. Meehan joined the
Company in 1991 following ten years with Twin City Wholesale Drug Company in
Minneapolis, Minnesota, where he was Group Vice President of Sales and
Marketing. His responsibilities include administering the OptiSource program.
He serves
 
                                      33
<PAGE>
 
on the Manufacturing Committee for Wholesale Alliance Coalition and serves
from time to time on wholesale advisor boards for Novopharm USA Inc., Barr
Laboratories, Inc., Glaxo Wellcome plc, Apothecon, Inc. and Geneva
Pharmaceuticals, Inc.
 
  Eric M. Farley, Vice President--Strategy and Corporate Development. Mr.
Farley joined the Company on a full-time basis in 1994 and has worked in
various functions on a part-time basis since 1988. In 1997 he became Vice
President of Purchasing and in May 1998 he assumed the duties of Vice
President--Strategy and Corporate Development. In that position, he is
responsible for acquisition consolidation in addition to his duties in
corporate purchasing. Mr. Farley is the son of Robert C. Farley.
 
  Richard H. Brudnick, President--James Brudnick Company, Inc. Mr. Brudnick
joined the Company in October 1997 as a result of the General Drug
Acquisition. Mr. Brudnick has held the position of President of James Brudnick
Company, Inc. since 1985. He has overall responsibility for the Company's New
England operations. He is past chairman of the NWDA Government Affairs
Committee and past member of the NWDA OTC Marketing Committee. He has served
on the wholesale advisory boards of Eli Lilly and Company, Boehringer
Ingelheim Corporation, Parke-Davis, a division of Warner-Lambert Company and
Schering-Plough Corporation.
 
  Joseph A. Harris, President, General Drug Company. Mr. Harris joined the
Company in October 1997 as a result of the General Drug Acquisition. Mr.
Harris has held the position of President of General Drug Company since 1994.
He joined General Drug Company in 1982 as sales manager and became Executive
Vice President in 1990. He is President of Premier Buying Group, a generic
pharmaceutical buying group and Board Vice President of the Generic Division
of National Pharmacy Alliance.
   
  Barbara J. Mowry, Director. Ms. Mowry has been a director of the Company
since July 1998. She is the President and Chief Executive Officer of Requisite
Technology, which provides businesses with easy-to-find products and service
information that accelerate the adoption of business-to-business electronic
commerce. Prior to starting with Requisite Technology in 1998, she worked for
TCI Communications from 1995 to 1997 as President, New Products Division and
Senior Vice President, Customer Satisfaction. Ms. Mowry also served as Chief
Executive Officer and Founder of The Mowry Company from 1990 to 1995.     
   
  David R. Parker, Director. Mr. Parker has been a director of the Company
since July 1998. He has also been Chairman of the Board of ProSource, Inc., a
provider of foodservice distribution services to chain restaurants in North
America, since 1992. ProSource, Inc. merged into AmeriServe Food Distribution,
Inc. in the second quarter of 1998. Mr. Parker currently serves as Vice
Chairman of AmeriServe Food Distribution, Inc. Mr. Parker also serves on the
Board of Directors of several other companies, including Premark
International, Inc., a diversified manufacturer of consumer and industrial
products, Tupperware Corporation, one of the world's largest direct sellers of
food storage containers, and Applied Graphics Technologies, Inc., a leading
provider of outsourced digital media asset management services.     
   
  J. Duane Weeks, Director. Mr. Weeks has been a director of the Company since
July 1998. Mr. Weeks is currently Managing Partner of Genesia Consulting, a
management consulting firm specializing in supply chain management and
organizational effectiveness. From 1996 to March 1998, he was President of
General Electric Capital Logistics Corporation, whose parent is General
Electric Capital Corporation, a wholly-owned subsidiary of General Electric
Company. Prior to being employed by General Electric Capital Logistics
Corporation, Mr. Weeks was employed by Compaq Computer Corporation as Vice
President, Worldwide Logistics from 1994 to 1995, and as Vice President,
Corporate Re-Engineering, from 1994 to 1996. From 1992 to 1994, he served as
Vice President, Consumer Products, for Cleveland Consulting Associates and as
Vice President, Consumer Products Consulting, for Computer Science
Corporation.     
 
BOARD TERM AND COMMITTEES
 
  The Company's Amended Articles of Incorporation provide for a staggered
Board of Directors, whereby the directors are divided into three classes (as
nearly equal in number as possible), to serve for terms of three years or
until their successors are elected and qualified.
 
                                      34
<PAGE>
 
   
  In June 1998, the Board of Directors appointed a Compensation Committee to
make recommendations to the Board of Directors concerning salaries and
incentive compensation for officers and employees of the Company. The
Compensation Committee consists of Mr. Duane Weeks, Mr. David Parker and Ms.
Barbara Mowry. The Audit Committee of the Board of Directors reviews the
results and scope of audits and other accounting related services. The Audit
Committee consists of Mr. Weeks, Mr. Parker and Ms. Mowry.     
 
COMPENSATION OF DIRECTORS
   
  Outside directors will receive $10,000 upon joining the Board of Directors
and an additional $20,000 annual retainer, paid quarterly. Each outside
director, upon completion of the Offering, will receive an immediately vested
option to purchase that number of shares of Common Stock which equals $100,000
divided by the Offering price with an exercise price equal to the Offering
price. Management directors will receive no additional compensation for their
service on the Board.     
 
EXECUTIVE COMPENSATION
 
  The following table sets forth the compensation paid to the Chief Executive
Officer of the Company and each of the other four most highly compensated
executive officers of the Company during the fiscal year ended February 28,
1998 (the "Named Executive Officers").
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>   
<CAPTION>
                                         ANNUAL        LONG TERM
                                      COMPENSATION    COMPENSATION
                                    ----------------- ------------
                                                       SECURITIES
                                                       UNDERLYING      OTHER
NAME AND PRINCIPAL POSITION          SALARY   BONUS     OPTIONS     COMPENSATION
<S>                                 <C>      <C>      <C>           <C>
Robert C. Farley................... $227,603 $372,471                 $10,693(1)
 Chief Executive Officer
Lee Keith(2)....................... $151,077 $168,302   127,500(2)        --
 President and Chief Operating
 Officer
Richard M. Meehan.................. $135,719 $111,080                 $10,693(1)
 Vice President
S. Jeanne Mathiesen................ $120,273 $117,811                 $10,693(1)
 Chief Financial Officer
Delora J. Jamison.................. $ 91,552 $117,811                 $10,298(1)
 Chief Compliance Officer
</TABLE>    
- ---------------------
   
(1) Company contributions to 401(k) plan and ESOP.     
   
(2) Mr. Keith resigned his positions as President and Chief Operating Officer
    in April 1998. The grant of options to purchase 127,500 shares was
    rescinded at such time.     
 
                     OPTION GRANTS DURING 1998 FISCAL YEAR
 
  The following table represents the options granted to the Named Executive
Officers during the fiscal year ended February 28, 1998 and the value of the
options:
 
<TABLE>   
<CAPTION>
                         NUMBER OF
                         SECURITIES % OF TOTAL
                         UNDERLYING   OPTIONS
                          OPTIONS   GRANTED IN                                  GRANT DATE
NAME                      GRANTED   FISCAL YEAR EXERCISE PRICE EXPIRATION DATE PRESENT VALUE
<S>                      <C>        <C>         <C>            <C>             <C>
Lee Keith(1)............  127,500      45.0%        $2.08            N/A            N/A
</TABLE>    
- ---------------------
   
(1) Mr. Keith resigned his positions as President and Chief Operating Officer
    in April 1998. The grant of options to purchase 127,500 shares was
    rescinded at such time.     
 
                                      35
<PAGE>
 
                      1998 FISCAL YEAR-END OPTION VALUES
 
  The following table sets forth information with respect to the Named
Executive Officers concerning unexercised options held at the end of fiscal
1998. No options were exercised during fiscal 1998.
 
<TABLE>   
<CAPTION>
                          NUMBER OF SECURITIES       VALUE OF UNEXERCISED IN-
                         UNDERLYING UNEXERCISED        THE-MONEY OPTIONS AT
                      OPTIONS AT FEBRUARY 28, 1998      FEBRUARY 28, 1998
NAME                  EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
<S>                   <C>                          <C>
Robert C. Farley.....          204,000/0                   $3,378,240/0
Lee Keith(3).........          127,500/0                        -- / --
Richard M. Meehan....          204,000/0                    3,378,240/0
S. Jeanne Mathiesen..          127,500/0                    2,111,400/0
Delora J. Jamison....          127,500/0                    2,111,400/0
</TABLE>    
- ---------------------
   
(1) Unless otherwise indicated, all options have an exercise price of $0.44
    per share and a term of ten years.     
   
(2) Based on the proposed initial public offering price of $17.00 per share.
           
(3) Mr. Keith resigned his positions as President and Chief Operating Officer
    in April 1998. The grant of options to purchase 127,500 shares was
    rescinded at such time. The exercise price of Mr. Keith's options were
    $2.08.     
   
EQUITY COMPENSATION PLAN     
   
  The Company's Board of Directors and shareholders have approved the
Company's Amended and Restated 1996 Equity Compensation Plan (the "Equity
Compensation Plan"). Management believes that the Equity Incentive Plan is an
important part of the Company's management compensation program by helping to
attract and retain motivated, highly competent employees. By providing stock
options and other equity-related compensation, management believes that the
participants will have a strong incentive to create shareholder value.     
   
  The Equity Compensation Plan allows the grant of stock options and stock
appreciation rights (collectively, "Awards") to eligible participants. The
number of shares authorized to be issued pursuant to Awards granted under the
Equity Compensation Plan is 2,000,000. If an Award expires or is canceled
without having been fully exercised or vested, the unvested or canceled shares
generally will be available thereafter for grants of Awards. The number of
shares available for grant under the Equity Compensation Plan, as well as
outstanding Awards and the numerical limits for individual grants, will be
adjusted as appropriate to reflect any stock splits, stock dividends,
recapitalizations, reorganizations or other changes to the capital structure
of the Company.     
   
  The Equity Compensation Plan currently is administered by the Board of
Directors but may be administered by a committee designated by the Board of
Directors. Subject to the terms of the Equity Compensation Plan, the Board or
the Committee has the sole discretion to determine the employees who will be
granted Awards, the size and types of such Awards and the terms and conditions
of such Awards. The exercise price of options must be at least equal to the
fair market value of the Common Stock as of the date of grant. Employees of
the Company and its affiliates (i.e., any person or entity controlling,
controlled by or under common control with the Company) are eligible to be
selected to receive Awards.     
   
  Under the Equity Compensation Plan, the Board of Directors of the Company
has approved options for eight employees totaling 943,500 shares. These
options have varying exercise prices and are all immediately exercisable. The
Named Executive Officers have received the following options: Mr. Farley--
204,000; Mr. Keith--127,500 (this option was rescinded effective with Mr.
Keith's resignation); Mr. Meehan--204,000; Ms. Mathiesen--127,500; and Ms.
Jamison--127,500. The actual number of employees who will receive Awards under
the Equity Compensation Plan cannot be determined because selection for
participation in the Equity Compensation Plan is in the sole discretion of the
Board of Directors or the Committee.     
 
                                      36
<PAGE>
 
EMPLOYMENT AND NONCOMPETE AGREEMENTS
   
  Robert C. Farley, Chief Executive Officer, President and Chairman of the
Board of the Company, has an employment agreement for an initial term through
February 28, 1999, renewable for successive one-year terms thereafter unless
either Mr. Farley or the Company gives notice of nonrenewal at least 60 days
prior to the end of the initial term or any renewal thereof. The initial base
salary was $300,000, and is adjusted annually at the discretion of the Board
of Directors. Additional compensation is at the discretion of the Board of
Directors. The employment agreement contains a noncompetition provision
pursuant to which Mr. Farley has agreed that during the period of his
employment, and (i) if he elects to receive severance payments pursuant to the
provisions of the employment agreement or (ii) if he resigns other than for
good reason (as defined), or if he is terminated for cause (as defined), for a
period of two years, he will not, directly or indirectly, compete with a
business similar to that of the Company. Mr. Farley has also agreed that for
such time period he will not directly or indirectly solicit or recruit the
employees of the Company. If Mr. Farley is terminated by the Company without
cause (as defined), he may receive, as severance, his salary for the remaining
period of the employment agreement. If Mr. Farley terminates his employment
under certain circumstances, he is entitled to receive a lump sum severance
payment equal to two year's current base salary.     
   
  Richard M. Meehan, Vice President--Trade Relations of the Company, has an
employment agreement on substantially the same terms as the agreement with Mr.
Farley, except that Mr. Meehan's employment agreement is annually extended by
one year (unless Mr. Meehan or the Company gives notice of nonrenewal at least
60 days prior to the end of such one-year period) so that the remaining term
of Mr. Meehan's employment agreement is always at most three years and at
least two years. In addition, the noncompetition and non-solicitation
severance period for Mr. Meehan is three years. The initial base salary was
$131,300, and is adjusted annually at the discretion of the Board of
Directors. Additional compensation is at the discretion of the Board of
Directors.     
   
  S. Jeanne Mathiesen, Chief Financial Officer, Vice President and Treasurer
of the Company, has an employment agreement for an initial term through
February 28, 2000, renewable for successive one-year terms thereafter unless
either Ms. Mathiesen or the Company gives notice of nonrenewal at least 60
days prior to the end of the initial term or any renewal thereof. The initial
base salary was $115,000, and is adjusted annually at the discretion of the
Board of Directors. Additional compensation is at the discretion of the Board
of Directors. The employment agreement contains a noncompetition provision
pursuant to which Ms. Mathiesen has agreed that during the period of her
employment and for a two-year period thereafter, she will not, directly or
indirectly, compete with a business similar to that of the Company. Ms.
Mathiesen has also agreed that for such time period she will not directly or
indirectly solicit or recruit the employees of the Company. If Ms. Mathiesen
is terminated by the Company without cause, she may receive, as severance, her
salary for the remaining period of the employment agreement. If Ms. Mathiesen
terminates her employment under certain circumstances, she is entitled to
receive a lump severance payment equal to one year's current base salary. The
Company and Ms. Mathiesen have also entered into a change in control severance
agreement in which, if Ms. Mathiesen's employment with the Company is
terminated within the twelve month period following any such change in
control, she will receive a lump severance payment equal to two year's current
base salary upon a change in control of the Company.     
   
  Delora J. Jamison, Chief Compliance Officer, Vice President and Secretary of
the Company, has an employment agreement and a change in control severance
agreement, both of which are on substantially the same terms as the agreements
with Ms. Mathiesen. The initial base salary was $85,000, and is adjusted
annually at the discretion of the Board of Directors. Additional compensation
is at the discretion of the Board of Directors.     
   
  Richard H. Brudnick, President of James Brudnick Company, Inc., a wholly
owned subsidiary of the Company, has an employment agreement for an initial
term through February 28, 2000, renewable for successive two-year terms
thereafter unless either Mr. Brudnick or the subsidiary gives notice of
nonrenewal at least 180 days prior to the end of the initial term or any
renewal thereof. The initial base salary was $176,000, and is adjusted
annually at the discretion of the Board of Directors. Additional compensation
is at the discretion of the Board of Directors. The employment agreement
contains a noncompetition provision pursuant to which Mr. Brudnick has agreed
that during the period of his employment and, if he elects to receive
severance payments     
 
                                      37
<PAGE>
 
pursuant to the provisions of the employment agreement, for a period of two
years thereafter, he will not, directly or indirectly, compete with a business
similar to that of James Brudnick Company, Inc. Mr. Brudnick also agrees that
for such period he will not directly or indirectly solicit or recruit the
employees of such subsidiary. If Mr. Brudnick is terminated by such subsidiary
without cause, he may receive, as severance, his salary for the remaining
period of the employment agreement. If Mr. Brudnick terminates his employment
under certain circumstances, he is entitled to receive a lump sum severance
payment equal to one year's current base salary. If Mr. Brudnick terminates
his employment or is terminated within six months following a change in
control, he is entitled to receive a lump sum severance payment of one year's
current base salary.
   
  Joseph A. Harris, President of the General Drug Company, a wholly owned
subsidiary of the Company, has an employment Agreement on substantially the
same terms as the employment agreement with Mr. Brudnick. The initial base
salary was $176,000, and is adjusted annually at the discretion of the Board
of Directors. Additional compensation is at the discretion of the Board of
Directors.     
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
   
  Prior to June 1998, the Board of Directors did not have a Compensation
Committee. Previously, all executive compensation decisions were made by the
Board of Directors. The Compensation Committee currently consists of Mr.
Weeks, Mr. Parker and Ms. Mowry. No members of the Compensation Committee are
executive officers of the Company.     
 
                             CERTAIN TRANSACTIONS
   
  On October 3, 1997, Churchill purchased a senior subordinated note in the
sum of $12.0 million to assist the Company in financing the General Drug
Acquisition. In connection therewith, the Company issued to Churchill a
warrant to purchase approximately 13.0% of the fully-diluted equity of the
Company in exchange for the purchase of the note. The maturity date for the
subordinated note is October 3, 2004, with yearly payments of principal at the
end of each fiscal year of the Company commencing with the fiscal year ending
February 28, 1999. Each installment is to be in an amount equal to 30.0% of
the Company's excess cash profit, as defined in the subordinated note.
Interest is payable at 12.0% per annum and certain penalty provisions are in
place in the event of late payment. The Company plans to repay the
subordinated note with the proceeds of the Offering. In addition, Churchill
will exercise the Churchill Warrant to purchase 1,080,078 shares of Common
Stock and sell the stock acquired thereby in this Offering as a Selling
Shareholder. Churchill has no relationship or affiliation with the Company
other than its status as a lender and shareholder.     
   
  The ESOP entered into an agreement with the Company in 1991 to borrow $1.4
million (the "ESOP Note") for the purpose of acquiring 5,946,600 shares of
Common Stock. The maturity date for the ESOP Note is January 1, 2000, with
monthly payments of principal of $12,089, plus interest at 0.5% below the
prime lending rate defined in the ESOP Note. As of May 31, 1998, there was
$379,841 outstanding on the ESOP Note.     
 
  Joseph A. Harris, the President of General Drug Company, was a partner in a
family partnership which received $116,000 in connection with the cancellation
of a limited partnership interest as a result of the General Drug Acquisition.
 
  Richard H. Brudnick, President of James Brudnick Company, Inc., received
$116,000 in connection with the cancellation of a limited partnership interest
as a result of the General Drug Acquisition. He held the limited partnership
interest with his wife, Cynthia L. Brudnick, as joint tenants with right of
survivorship.
   
  For the five months ended February 28, 1998, the James Brudnick Company,
Inc. made aggregate lease payments of $61,465 to Irving S. Brudnick as Trustee
of the Bershim Realty Trust for its Boston distribution facility. Irving S.
Brudnick is the father of Richard H. Brudnick. The Company believes these
lease payments are as favorable to the Company as those which would have been
made in an arms length transaction with an unrelated third party.     
 
                                      38
<PAGE>
 
                      PRINCIPAL AND SELLING SHAREHOLDERS
   
  The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 31, 1998 and as adjusted to reflect
the sale by the Company of 3,500,000 shares offered hereby, by (i) each
shareholder of the Company who beneficially owns more than 5.0% of the Common
Stock, (ii) each director, (iii) each Named Executive Officer, (iv) another
member of management who will be a Selling Shareholder and (v) all executive
officers and directors as a group. Except as otherwise indicated, each named
beneficial owner has sole voting and investment power with respect to the
shares listed.     
 
<TABLE>   
<CAPTION>
                                           SHARES    PERCENT                 SHARES    PERCENT
                                        BENEFICIALLY  OWNED               BENEFICIALLY  OWNED
                                        OWNED PRIOR  PRIOR TO SHARES SOLD OWNED AFTER   AFTER
                  NAME                  TO OFFERING  OFFERING IN OFFERING THE OFFERING OFFERING
   <S>                                  <C>          <C>      <C>         <C>          <C>
   ESOP(1)............................   5,582,970     70.4%         --    5,582,970     48.9%
   Robert C. Farley(2)................     816,510     10.3       75,000     741,510      6.5
   Lee Keith(3).......................         --       --           --          --       --
   Richard M. Meehan(4)...............     423,045      5.3       31,230     391,815      3.4
   S. Jeanne Mathiesen(5).............     197,268      2.5       21,231     176,037      1.5
   Delora J. Jamison(6)...............     287,487      3.6       21,231     266,256      2.3
   Churchill ESOP Capital Partners(7).   1,080,078     13.6    1,080,078         --       --
    2400 Metropolitan Centre
    333 South Seventh St.
    Minneapolis, MN 55402
   Robert B. Orr(8)...................     295,137      3.7       21,230     273,907      2.4
   J. Duane Weeks.....................         --       --           --          --       --
   David R. Parker....................         --       --           --          --       --
   Barbara J. Mowry...................         --       --           --          --       --
   All directors and executive offi-
    cers as a group (11 persons)(9)...   1,844,466     23.3%     148,692   1,695,774     14.8%
</TABLE>    
- ---------------------
   
(1) Of the shares held of record by the ESOP, 4,007,070 shares have been
    allocated to 112 participants in the ESOP (the "Allocated Shares") as of
    December 31, 1997 and 1,575,900 shares are unallocated (the "Unallocated
    Shares"). The Allocated Shares are voted by each participant to which the
    shares are allocated. The Unallocated Shares and any Allocated Shares
    which are not voted are voted by George K. Baum & Company Trust Company,
    the trustee of the ESOP, for or against the matter in the same proportion
    as those Allocated Shares which have been voted.     
   
(2) Includes 204,000 shares subject to immediately exercisable options and
    291,210 shares allocated under the ESOP as of December 31, 1997. Mr.
    Farley's address is the same as the Company's address.     
(3) Mr. Keith resigned his position with the Company in April 1998.
   
(4) Includes 204,000 shares subject to immediately exercisable options and
    219,045 shares allocated under the ESOP as of December 31, 1997. All
    shares sold in the Offering will be acquired pursuant to the exercise of
    options. Mr. Meehan's address is the same as the Company's address.     
   
(5) Includes 127,500 shares subject to immediately exercisable options and
    69,768 shares allocated under the ESOP as of December 31, 1997. All shares
    sold in the Offering will be acquired pursuant to the exercise of options.
           
(6) Includes 127,500 shares subject to immediately exercisable options and
    159,987 shares allocated under the ESOP as of December 31, 1997. All
    shares sold in the Offering will be acquired pursuant to the exercise of
    options.     
   
(7) Shares subject to immediately exercisable warrants which will be exercised
    concurrent with the closing of the Offering. Churchill is an institutional
    limited partnership which includes, as general and limited partners, a
    large number of institutions and high net-worth individuals, none of whom
    are affiliated with the Company.     
   
(8) Includes 127,500 shares subject to immediately exercisable options and
    167,637 shares allocated under the ESOP as of December 31, 1997. Mr. Orr
    is President of a subsidiary of the Company. All shares sold in the
    Offering will be acquired pursuant to the exercise of options.     
   
(9) Includes 943,500 shares subject to immediately exercisable options (of
    which 94,922 will be exercised and sold in the Offering) and 758,166
    shares allocated under the ESOP as of December 31, 1997.     
 
                                      39
<PAGE>
 
                         DESCRIPTION OF CAPITAL STOCK
 
  The following summary of certain provisions of the Common Stock does not
purport to be complete and is subject to, and qualified in its entirety by,
the provisions of the Company's Amended Articles of Incorporation, which are
included as an exhibit to the Registration Statement of which this Prospectus
is a part and by the provisions of applicable law.
 
COMMON AND PREFERRED STOCK
 
  The Amended Articles of Incorporation of the Company provide for the
authorized capital stock of the Company of 90,000,000 shares of Common Stock
and 10,000,000 shares of Preferred Stock, the designation and terms of which
may be set by the Board of Directors.
 
  Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by shareholders. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
liquidation rights of holders of Preferred Stock then outstanding, if any.
Holders of shares of Common Stock are entitled to receive such dividends as
the Board of Directors may declare in its discretion out of funds legally
available therefor, subject to the prior rights of holders of Preferred Stock
then outstanding, if any.
 
  The rights, preferences and privileges of holders of Common Stock will be
subject to and may be adversely affected by the rights of the holders of
shares of any series of preferred stock that the Company may designate and
issue in the future.
   
  As of May 31, 1998, there were 5,904,270 shares of Common Stock outstanding
(excluding 943,500 shares subject to outstanding options, all of which are
immediately exercisable) held of record by two shareholders. Upon the closing
of the Offering and after giving effect to the sale of 3,500,000 shares
pursuant to the Offering, there will be outstanding 10,579,270 shares of
Common Stock (excluding 848,578 shares subject to outstanding options, all of
which are immediately exercisable). There is no Preferred Stock currently
outstanding. Certain members of management will exercise options to purchase
94,922 shares in connection with the sale of such shares in the Offering.     
 
LIMITATIONS ON CHANGE OF CONTROL
 
  Certain provisions of the General and Business Corporation Law of Missouri
(the "MGBCL") and the Amended Articles of Incorporation could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise and the removal of incumbent officers and directors.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to first negotiate with the Company. The
Company believes that the benefits of increased protection of the Company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
 
  The Company's Board of Directors is divided into three classes, with
staggered three-year terms. The number of directors shall be not less than
three nor more than nine, with the classes to be as nearly equal in number as
possible. As a result, only one class of directors will be elected at each
annual meeting of shareholders of the Company, with the other classes
continuing for the remainder of their respective three-year terms. The
classification of the Board of Directors makes it more difficult for the
Company's existing shareholders to replace the Board of Directors as well as
for another party to obtain control of the Company by replacing the Board of
Directors. Because the Board of Directors has the power to retain and
discharge officers of the Company, these provisions could also make it more
difficult for existing shareholders or another party to effect a change in
management.
 
                                      40
<PAGE>
 
  The Amended Articles of Incorporation provide that shareholder action can be
taken only at an annual or a special meeting of shareholders and cannot be
taken by written consent and that special meetings of shareholders can be
called only by the President, the Board of Directors or holders of 50.0% of
the outstanding voting stock. The Company's Amended and Restated Bylaws
provide that the business permitted to be conducted at any special meeting of
shareholders will be limited to those matters specified in the notice of such
meeting authorized by the Board of Directors. The Amended and Restated Bylaws
set forth an advance notice procedure with regard to the nomination, other
than by or at the direction of the Board of Directors, of candidates for
election as directors and with regard to business to be brought before an
annual meeting of shareholders of the Company. Shareholders will not be
permitted to fill vacancies on the Board of Directors caused by resignation or
newly created directorships.
 
  The Amended Articles of Incorporation contain provisions requiring the
affirmative vote of the holders of at least 80.0% of the voting stock of the
Company to amend the foregoing provisions of the Amended Articles of
Incorporation.
 
  In addition to the provisions of the Amended Articles of Incorporation, the
MGBCL contains a business combination statute that protects domestic
corporations from unsolicited takeovers by prohibiting certain transactions.
The statute restricts certain "Business Combinations" between a corporation
and an "Interested Shareholder" and its "Affiliates" and "Associates" (as
defined therein). A "Business Combination" includes a merger or consolidation,
certain sales, leases, exchanges, mortgages, transfers, pledges and similar
dispositions of corporate assets or stock and any reclassifications,
recapitalization and reorganizations that increase the proportionate voting
power of the Interested Shareholder. An "Interested Shareholder" includes any
person or entity which beneficially owns or controls 20.0% or more of the
outstanding voting shares of the corporation. Pursuant to the Missouri
business combination statute, a Missouri corporation may not, for a period of
five years following the Interested Shareholder's stock acquisition date,
engage in a Business Combination with an Interested Shareholder other than (i)
a Business Combination approved by the board of directors prior to the date on
which the Interested Shareholder acquired such status, (ii) a Business
Combination approved by the holders of a majority of the outstanding voting
stock (other than voting stock beneficially owned by the Interested
Shareholder or its Affiliates or Associates) at a meeting called no earlier
than five years after the date on which the Interested Shareholder acquired
such status or (iii) a Business Combination that satisfies certain detailed
fairness and procedural requirements. Notwithstanding the foregoing, unless
the board of directors of the corporation approved such Business Combination
prior to the date on which the Interested Shareholder acquired such status, no
such Business Combination may be engaged in for a period of five years after
such date.
 
  The MGBCL exempts from its business combination provisions: (i) corporations
not having a class of voting stock registered under Section 12 of the Exchange
Act, (ii) corporations which adopt provisions in their original articles of
incorporation or, under certain circumstances, adopt amendments to their
bylaws expressly electing not to be covered by the statute and (iii) certain
circumstances in which a shareholder inadvertently becomes an Interested
Shareholder.
 
  The MGBCL also contains a control share acquisition statute which provides
that persons who acquire a specified percentage of the shares of a Missouri
corporation subject to this statute, unless acquired in an exempt transaction,
will not have the right to vote such shares, unless certain disclosure
requirements are met and the retention or restoration of voting rights is
approved by holders of a majority of the outstanding voting stock and a
majority of the outstanding voting stock after exclusion of the interested
shares.
 
TRANSFER AGENT AND REGISTRAR
   
  The transfer agent and the registrar for the Company's Common Stock is UMB
Bank, National Association.     
 
LISTING
   
  The Company has applied for listing of the Common Stock on the NYSE under
the symbol "CDH."     
 
                                      41
<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE
   
  Upon closing of the Offering, the Company will have outstanding 10,579,270
shares of Common Stock (assuming no exercise of outstanding stock options
other than 94,922 shares sold by Selling Stockholders). Of these shares, the
4,750,000 shares of Common Stock sold in the Offering will be freely tradeable
without restriction under the Securities Act of 1933 as amended (the
"Securities Act") by persons other than "affiliates" of the Company. The
remaining 5,829,270 shares of Common Stock (the "Restricted Shares") were
acquired in transactions exempt from registration under the Securities Act and
may not be resold unless they are registered under the Securities Act, or are
sold pursuant to an applicable exemption from registration, such as Rule 144
under the Securities Act. The existing shareholders, including the ESOP and
certain of its participants, are subject to restrictions on any public sale or
distribution of Common Stock for a period of at least 180 days following the
effective date of the Registration Statement.     
   
  In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for at least one year or any person
who may be deemed an affiliate of the Company is entitled, subject to certain
conditions, to sell within any three-month period a number of shares which
does not exceed the greater of (i) 1.0% of the Company's then outstanding
shares of Common Stock (approximately 105,792 shares immediately after the
Offering, assuming no exercise of outstanding stock options) or (ii) the
average weekly trading volume of the Common Stock in the over-the-counter
market during the four calendar weeks preceding such sale. Sales under Rule
144 are also subject to certain manner-of-sale provisions, notice requirements
and the availability of public information about the Company.     
   
  Beginning 90 days after the date of this Prospectus and subject to the
agreements of the holders thereof not to sell such shares for 180 days
following the effective date of the Registration Statement, 246,300 of the
Restricted Shares will be eligible for sale in the public market under Rule
144, provided the conditions of that rule have been met. A total of 1,822,200
of the Restricted Shares are subject to lock-up agreements with the
Underwriters that prohibit their sale or other disposition for 180 days from
the date of this Prospectus without the prior written consent of the
Representatives. An additional 4,007,070 shares held in the ESOP and allocated
to participant accounts are eligible for distribution only if a vested
employee terminates service or is over the age of 65.     
 
  Prior to the Offering, there has been no market for the Common Stock and no
predictions can be made as to the effect, if any, that market sales of shares
or the availability of shares for sale would have on the prevailing market
price. Nevertheless, sales of substantial amounts of the Common Stock in the
public market could adversely affect the prevailing market price and could
impair the Company's ability to raise capital at that time through the sale of
its equity securities.
 
                                      42
<PAGE>
 
                                 UNDERWRITING
 
  Subject to the terms and conditions of an Underwriting Agreement, dated
             , 1998 (the "Underwriting Agreement"), the Underwriters named
below, who are represented by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), BT Alex. Brown and Wheat First Union, a division of Wheat
First Securities, Inc. (the "Representatives"), have severally agreed to
purchase from the Company and the Selling Shareholders the respective number
of shares of Common Stock set forth opposite their names below.
 
<TABLE>   
<CAPTION>
                                                                       NUMBER OF
                                                                       SHARES TO
                                                                          BE
      UNDERWRITERS                                                     PURCHASED
      <S>                                                              <C>
      Donaldson, Lufkin & Jenrette Securities Corporation.............
      BT Alex. Brown..................................................
      Wheat First Securities, Inc.....................................
                                                                       ---------
          Total....................................................... 4,750,000
                                                                       =========
</TABLE>    
 
  The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Common Stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased.
 
  The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including
the Underwriters) at such price less a concession not in excess of $       per
share. The Underwriters may allow and such dealers may re-allow, to certain
other dealers a concession not in excess of $        per share. After the
initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without
notice. The Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
   
  The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable within 30 days after the date of this Prospectus, to
purchase, from time to time, in whole or in part, up to an aggregate of
712,500 additional shares of Common Stock at the initial public offering price
less underwriting discounts and commissions. The Underwriters may exercise
such option solely to cover over allotments, if any, made in connection with
the Offering. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
its pro rata portion of such additional shares based on such Underwriter's
percentage underwriting commitment as indicated in the preceding table.     
 
  The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
 
  Each of the Company, its executive officers and directors and certain
shareholders of the Company (including the Selling Shareholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer
or dispose of, directly or indirectly, any shares of Common
 
                                      43
<PAGE>
 
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers
all or a portion of the economic consequences associated with the ownership of
any Common Stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Common Stock, or such
other securities, in cash or otherwise) for a period of 180 days after the
date of this Prospectus without the prior written consent of DLJ. In addition,
during such period, the Company has also agreed not to file any registration
statement with respect to, and each of its executive officers, directors and
certain shareholders of the Company (including the Selling Shareholders) has
agreed not to make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock without DLJ's prior written
consent.
 
  Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company and the
Representatives. The factors to be considered in determining the initial
public offering price include the history of and the prospects for the
industry in which the Company competes, the past and present operations of the
Company, the historical results of operations of the Company, the prospects
for future earnings of the Company, the recent market prices of securities of
generally comparable companies and the general condition of the securities
markets at the time of the Offering.
   
  Application has been made for the Common Stock to be approved for listing on
the NYSE under the trading symbol "CDH."     
 
  Other than in the United States, no action has been taken by the Company,
the Selling Shareholders or the Underwriters that would permit a public
offering of the shares of Common Stock offered hereby in any jurisdiction
where action for that purpose is required. The shares of Common Stock offered
hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus or any other offering material or advertisements in connection with
the offer and sale of any such shares of Common Stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the Offering of
the Common Stock and the distribution of this Prospectus. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
shares of Common Stock offered hereby in any jurisdiction in which such an
offer or a solicitation is unlawful.
 
  In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. The Underwriters may bid for and purchase shares of
Common Stock in the open market to cover such syndicate short position or to
stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed Common Stock in syndicate
covering transactions, in stabilization transactions or otherwise. These
activities may stabilize or maintain the market price of the Common Stock
above independent market levels. The Underwriters are not required to engage
in these activities and may end any of these activities at any time.
 
                                      44
<PAGE>
 
                                 LEGAL MATTERS
 
  The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Blackwell Sanders Peper Martin LLP,
Kansas City, Missouri. Certain legal matters will be passed upon for the
Underwriters by Gardere & Wynne, L.L.P., Dallas, Texas.
 
                                    EXPERTS
 
  The consolidated financial statements and schedules of the Company at
February 28, 1998 and 1997 and for each of the three years in the period ended
February 28, 1998, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein and are included in reliance
upon such reports given upon the authority of such firm as experts in
accounting and auditing.
 
  The consolidated financial statements of Gimbel Investor Group L.P. at April
30, 1997 and 1996 and for each of the three years in the period ended April
30, 1997, appearing in this Prospectus and Registration Statement have been
audited by Blackman Kallick Bartelstein, LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
 
                            ADDITIONAL INFORMATION
 
  The Company has filed a registration statement on Form S-1 (together with
all amendments, schedules and exhibits thereto, the "Registration Statement")
with the Securities and Exchange Commission (the "SEC") pursuant to the
Securities Act, with respect to the Common Stock offered hereby. This
Prospectus, which is a part of the Registration Statement, does not contain
all the information set forth in the Registration Statement, certain parts of
which have been omitted in accordance with the rules and regulations of the
SEC. The Registration Statement is available for inspection and copying at the
Public Reference Room of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein or therein are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference. The SEC maintains
a World Wide Web site on the Internet at http:\\www.sec.gov that contains
information concerning the Company.
 
                                      45
<PAGE>
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>   
<CAPTION>
                                                                           PAGE
<S>                                                                        <C>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL
 STATEMENTS FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 28,
 1997 AND FEBRUARY 29, 1996
  Report of Independent Auditors.........................................   F-2
  Consolidated Balance Sheets at February 28, 1998 and February 28, 1997.   F-3
  Consolidated Statements of Income for the Fiscal Years ended February
   28, 1998, February 28, 1997 and February 29, 1996.....................   F-4
  Consolidated Statements of Shareholders' Equity for the Fiscal Years
   ended February 28, 1998, February 28, 1997 and February 29, 1996......   F-5
  Consolidated Statements of Cash Flows for the Fiscal Years ended
   February 28, 1998, February 28, 1997 and February 29, 1996............   F-6
  Notes to Consolidated Financial Statements.............................   F-7
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED
 FINANCIAL STATEMENTS AS OF MAY 31, 1998
  Condensed Consolidated Balance Sheets..................................  F-17
  Condensed Consolidated Statements of Income............................  F-18
  Condensed Consolidated Statements of Cash Flows........................  F-19
  Notes to Condensed Consolidated Financial Statements...................  F-20
GIMBEL INVESTOR GROUP L.P. CONSOLIDATED FINANCIAL STATEMENTS FOR THE
 FISCAL YEARS ENDED APRIL 30, 1997, 1996 AND 1995
  Independent Auditors' Report...........................................  F-21
  Consolidated Balance Sheets at April 30, 1997 and 1996.................  F-22
  Consolidated Statements of Income for the Fiscal Years ended April 30,
   1997, 1996 and 1995...................................................  F-23
  Consolidated Statements of Partners' Capital for the Fiscal Years ended
   April 30, 1997, 1996 and 1995.........................................  F-24
  Consolidated Statements of Cash Flows for the Fiscal Years ended April
   30, 1997, 1996 and 1995...............................................  F-25
  Notes to Consolidated Financial Statements.............................  F-26
GIMBEL INVESTOR GROUP L.P. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE PERIOD FROM MAY 1, 1997 TO OCTOBER 3, 1997
  Consolidated Statement of Operations for the period from May 1, 1997 to
   October 3, 1997.......................................................  F-32
  Consolidated Statement of Cash Flows for the period from May 1, 1997 to
   October 3, 1997.......................................................  F-33
</TABLE>    
 
                                      F-1
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders
C.D. Smith Drug Company and Subsidiaries
 
  We have audited the accompanying consolidated balance sheets of C.D. Smith
Drug Company and subsidiaries (the "Company") as of February 28, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended February 28,
1998. These consolidated 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 consolidated 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 consolidated financial position of C.D. Smith
Drug Company and subsidiaries at February 28, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 28, 1998, in conformity with
generally accepted accounting principles.
 
Kansas City, Missouri
April 10, 1998, except for
 Note 11 as to which the
 date is           , 1998
 
                                          The foregoing report is in the form
                                          that will be signed upon completion
                                          of the change in the Company's
                                          capital stock and the 51-for-1
                                          common stock split as described in
                                          Note 11 to the consolidated
                                          financial statements.
 
                                                              Ernst & Young LLP
 
                                          Kansas City, Missouri
                                          June 1, 1998
 
                                      F-2
<PAGE>
 
                    C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                           FEBRUARY 28,
                                                     -------------------------
                                                         1998         1997
                                                     ------------  -----------
<S>                                                  <C>           <C>
ASSETS (NOTE 4)
Current assets:
  Cash.............................................. $     42,243  $    17,437
  Trade accounts and notes receivable, less
   allowance for doubtful receivables of $650,384 in
   1998 and $248,933 in 1997........................   56,059,092   15,400,134
  Other receivables.................................    3,298,940      525,410
  Refundable income taxes...........................      542,762          --
  Merchandise inventory.............................   73,671,570   30,733,499
  Prepaid expenses..................................      380,307      134,677
                                                     ------------  -----------
    Total current assets............................  133,994,914   46,811,157
Property and equipment, net (Note 3)................    6,723,476    3,175,196
Other assets:
  Goodwill, net of accumulated amortization of
   $266,330 in 1998 (Note 2)........................   25,301,231          --
  Deferred income taxes (Note 7)....................      786,000          --
  Debt issuance costs net of accumulated
   amortization of $154,515 in 1998.................    1,502,196          --
  Other.............................................      393,867      235,335
                                                     ------------  -----------
    Total assets.................................... $168,701,684  $50,221,688
                                                     ============  ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable.................................. $ 60,554,993  $23,599,940
  Accrued expenses..................................    2,708,626    1,664,935
  Income taxes payable..............................          --       334,035
  Deferred income taxes (Note 7)....................    2,380,000       96,000
  Current portion of long-term debt (Note 4)........      445,072      305,072
                                                     ------------  -----------
    Total current liabilities.......................   66,088,691   25,999,982
Line of credit (Note 4).............................   80,880,927   19,436,574
Long-term debt, less current portion (Note 4).......    2,371,036    1,002,777
Deferred income taxes...............................          --       615,000
Subordinated note payable (Note 5)..................    9,663,026          --
Common stock put warrants (Note 6)..................    2,569,000          --
Shareholders' equity (Notes 4, 8 and 12):
  Preferred stock, $.01 par value:
   Authorized shares--10,000,000
   Issued and outstanding shares--none..............          --           --
  Common stock, $.01 par value:
   Authorized shares--90,000,000
   Issued shares--10,200,000........................      102,000      102,000
  Additional paid-in capital........................       98,000       98,000
  Retained earnings.................................    8,478,444    4,481,731
  Treasury stock, at cost, 4,295,730 shares in 1998
   and 4,208,979 shares in 1997.....................   (1,133,331)    (953,195)
                                                     ------------  -----------
                                                        7,545,113    3,728,536
  Less note receivable from ESOP....................     (416,109)    (561,181)
                                                     ------------  -----------
                                                        7,129,004    3,167,355
                                                     ------------  -----------
    Total liabilities and shareholders' equity...... $168,701,684  $50,221,688
                                                     ============  ===========
</TABLE>
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
 
                    C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>   
<CAPTION>
                                      YEAR ENDED     YEAR ENDED    YEAR ENDED
                                     FEBRUARY 28,   FEBRUARY 28,  FEBRUARY 29,
                                         1998           1997          1996
                                     -------------  ------------  ------------
<S>                                  <C>            <C>           <C>
Net sales........................... $ 544,090,215  $301,523,181  $224,163,431
Cost of goods sold..................   516,667,769   286,784,687   213,481,167
                                     -------------  ------------  ------------
Gross profit........................    27,422,446    14,738,494    10,682,264
Operating expenses:
  Selling, general and
   administrative...................    15,878,659     9,985,350     7,975,655
  Depreciation and amortization.....       923,178       279,280       220,609
                                     -------------  ------------  ------------
                                        16,801,837    10,264,630     8,196,264
                                     -------------  ------------  ------------
Operating income....................    10,620,609     4,473,864     2,486,000
Other income (expense):
  Interest income...................       238,352       142,385        82,684
  Interest expense on credit
   facilities.......................    (3,834,459)   (1,571,214)   (1,478,483)
  Interest expense on subordinated
   debt (Note 5)....................     (812,026)           --            --
  Other, net........................        51,101       (15,842)      (40,720)
                                     -------------  ------------  ------------
                                       (4,357,032)    (1,444,671)   (1,436,519)
                                     -------------  ------------  ------------
Income before income taxes..........     6,263,577     3,029,193     1,049,481
Income tax provision (Note 7).......     2,266,864     1,099,190       415,377
                                     -------------  ------------  ------------
Net income.......................... $   3,996,713  $  1,930,003  $    634,104
                                     =============  ============  ============
Net income per share (Note 11):
  Basic............................. $        0.67  $       0.29  $       0.07
                                     =============  ============  ============
  Diluted........................... $        0.56  $       0.28  $       0.07
                                     =============  ============  ============
</TABLE>    
 
 
                            See accompanying notes.
 
                                      F-4
<PAGE>
 
                    C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
 
<TABLE>
<CAPTION>
                                   ADDITIONAL                            NOTE
                           COMMON   PAID-IN    RETAINED   TREASURY    RECEIVABLE
                           STOCK    CAPITAL    EARNINGS     STOCK     FROM ESOP     TOTAL
                          -------- ---------- ---------- -----------  ----------  ----------
<S>                       <C>      <C>        <C>        <C>          <C>         <C>
Balance at March 1,
 1995...................  $102,000  $98,000   $1,917,624 $       --   $(851,325)  $1,266,299
 Net income.............       --       --       634,104         --         --       634,104
 Collections on note
  receivable............       --       --           --          --     145,072      145,072
 Purchase of treasury
  stock.................       --       --           --     (161,400)       --      (161,400)
                          --------  -------   ---------- -----------  ---------   ----------
Balances at February 29,
 1996...................   102,000   98,000    2,551,728    (161,400)  (706,253)   1,884,075
 Net income.............       --       --     1,930,003         --         --     1,930,003
 Collections on note
  receivable............       --       --           --          --     145,072      145,072
 Purchase of treasury
  stock.................       --       --           --     (791,795)       --      (791,795)
                          --------  -------   ---------- -----------  ---------   ----------
Balances at February 28,
 1997...................   102,000   98,000    4,481,731    (953,195)  (561,181)   3,167,355
 Net income.............       --       --     3,996,713         --         --     3,996,713
 Collections on note
  receivable............       --       --           --          --     145,072      145,072
 Purchase of treasury
  stock.................       --       --           --     (180,136)       --      (180,136)
                          --------  -------   ---------- -----------  ---------   ----------
Balances at February 28,
 1998...................  $102,000  $98,000   $8,478,444 $(1,133,331) $(416,109)  $7,129,004
                          ========  =======   ========== ===========  =========   ==========
</TABLE>
 
 
                            See accompanying notes.
 
                                      F-5
<PAGE>
 
                    C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                    YEAR ENDED     YEAR ENDED     YEAR ENDED
                                   FEBRUARY 28,   FEBRUARY 28,   FEBRUARY 29,
                                       1998           1997           1996
                                   -------------  -------------  -------------
<S>                                <C>            <C>            <C>
OPERATING ACTIVITIES
Net income.......................  $   3,996,713  $   1,930,003  $     634,104
Adjustments to reconcile net
 income to net cash provided by
 (used in) operating activities:
  Depreciation...................        653,478        279,280        220,609
  Amortization...................        656,241            --             --
  Net gain on sale of property
   and equipment.................         (7,775)           --             --
  Provision for doubtful
   accounts......................        200,825        222,900         37,480
  Deferred income taxes..........        (44,496)       243,000        288,000
  Changes in operating assets and
   liabilities, net of the
   effects from the General Drug
   Acquisition:
    Trade accounts and notes
     receivable..................     (5,277,838)    (4,856,823)      (426,660)
    Other receivables............      1,826,376        (52,164)      (371,735)
    Refundable income taxes......        808,531            --             --
    Merchandise inventory........     (1,984,843)   (10,110,601)    (6,285,443)
    Prepaid expenses.............         34,642         71,233         76,790
    Other........................          5,598         62,545         78,203
    Accounts payable.............     (1,627,988)     4,709,217      4,763,476
    Accrued expenses.............     (4,810,404)       245,963        965,724
    Income taxes payable.........       (334,035)       258,402         75,633
                                   -------------  -------------  -------------
Net cash provided by (used in)
 operating activities............     (5,904,975)    (6,997,045)        56,181
INVESTING ACTIVITIES
Purchases of property and
 equipment.......................       (819,275)    (1,109,324)      (288,634)
Proceeds from sale of property
 and equipment...................         56,875         12,500            --
Collections on note receivable
 from ESOP.......................        145,072        145,072        145,072
Net cash paid in the General Drug
 Acquisition, including
 transaction costs...............    (29,097,392)           --             --
                                   -------------  -------------  -------------
Net cash used in investing
 activities......................    (29,714,720)      (951,752)      (143,562)
FINANCING ACTIVITIES
Borrowings on line of credit.....    576,864,146    306,643,441    223,438,779
Principal payments on line of
 credit..........................   (551,639,405)  (298,517,612)  (222,864,039)
Proceeds from issuance of long-
 term debt.......................      1,859,996        800,000            --
Principal payments on long-term
 debt............................     (1,603,389)      (271,440)      (231,425)
Proceeds from issuance of
 subordinated note payable with
 common stock put warrants.......     12,000,000            --             --
Payments of debt issuance costs..     (1,656,711)           --             --
Purchases of treasury stock......       (180,136)      (791,795)      (161,400)
                                   -------------  -------------  -------------
Net cash provided by financing
 activities......................     35,644,501      7,862,594        181,915
                                   -------------  -------------  -------------
Increase (decrease) in cash......         24,806        (86,203)        94,534
Cash at beginning of year........         17,437        103,640          9,106
                                   -------------  -------------  -------------
Cash at end of year..............  $      42,243  $      17,437  $     103,640
                                   =============  =============  =============
SUPPLEMENTAL DISCLOSURES OF CASH
 FLOW INFORMATION
Cash paid during the year for:
  Interest.......................  $   4,025,577  $   1,523,760  $   1,460,469
                                   =============  =============  =============
  Income taxes...................  $   1,814,000  $     597,788  $      55,000
                                   =============  =============  =============
Cash received during the year
 for:
  Income tax refund..............  $         --   $         --   $      58,962
                                   =============  =============  =============
</TABLE>
                            See accompanying notes.
 
                                      F-6
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. SIGNIFICANT ACCOUNTING POLICIES
 
 DESCRIPTION OF BUSINESS
 
  C.D. Smith Drug Company ("C.D. Smith"), a Missouri corporation, and its
subsidiaries (collectively referred to as the "Company") are regional full-
line, full-service wholesale distributors of pharmaceuticals and related
products. The Company's customers consist primarily of independent pharmacies,
health care institutions and regional and national chain pharmacies located in
its core territories of the midwestern United States and New England.
 
 PRINCIPLES OF CONSOLIDATION
 
  The consolidated financial statements include C.D. Smith and its wholly
owned subsidiaries, C.D.S. Transportation, Inc. and G.D. Holdings of Delaware,
Inc., ("Holdings"). Holdings owns 100% of the common stock of General Drug
Company and its wholly owned subsidiaries, James Brudnick Company, Inc. and
SBS Pharmaceuticals, Inc. (collectively referred to as "the General Drug
Companies"). All significant intercompany balances and transactions have been
eliminated upon consolidation. As discussed in Note 2, the General Drug
Companies were acquired in October 1997 (the "General Drug Acquisition") in
connection with the acquisition of Gimbel Investor Group, L.P. ("Gimbel").
   
 REVENUE RECOGNITION     
   
  The Company recognizes sales when products are shipped.     
 
 INVENTORIES
   
  Inventories are stated at the lower of cost, which approximates the first-
in, first-out ("FIFO") method, or market.     
       
 PROPERTY AND EQUIPMENT
   
  Property and equipment are stated on the basis of cost. Depreciation is
provided over the estimated useful lives of the assets using the straight-line
method. Generally, the estimated useful lives are five to forty years for
buildings and improvements, five to fifteen years for machinery and equipment,
five years for vehicles, and three to seven years for office equipment.     
   
 OTHER RECEIVABLES     
   
  Other receivables consist principally of rebates receivable from
manufacturers, which are recognized when earned.     
 
 GOODWILL
 
  Goodwill, resulting from the General Drug Acquisition, is being amortized
over its estimated life of 40 years using the straight-line method.
 
 DEBT ISSUANCE COSTS
 
  Debt issuance costs of approximately $1.6 million were incurred in obtaining
financing for the General Drug Acquisition (see Note 2). These financing costs
are being amortized to interest expense over the term of the different debt
instruments, which range from three to seven years, using the straight-line
method.
 
                                      F-7
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
       
 INCOME TAXES
 
  The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the liability method is used in accounting for income
taxes, whereby deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
 
 USE OF ESTIMATES
 
  The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
 
 CREDIT CONCENTRATIONS
 
  The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. Credit
losses are provided for in the Company's consolidated financial statements and
consistently have been within management's expectations.
 
 FINANCIAL INSTRUMENTS
 
  The carrying value of the Company's financial instruments, including cash,
trade accounts and notes receivable, accounts payable and long-term debt, as
reported in the accompanying consolidated balance sheets, approximates fair
value.
 
 CASH
 
  The Company maintains both a lockbox account for cash received from
customers and a controlled disbursement checking account. Cash received from
customers in the lockbox account is used to reduce borrowings on the revolving
line of credit (see Note 4). At February 28, 1998 and 1997, cash received from
customers in the lockbox account of $6,012,976 and $227,787, respectively, has
been recorded as a reduction in the balance of the revolving line of credit in
the accompanying consolidated balance sheets. The controlled disbursement
account allows for daily advances from the revolving line of credit in amounts
sufficient to cover checks presented for payment at the bank each day. The
amount of checks issued but not presented at the bank, totaling $13,492,420
and $3,289,327 at February 28, 1998 and 1997, respectively, has been included
in the balance of line-of-credit borrowings in the accompanying consolidated
balance sheets.
 
 EMPLOYEE STOCK OWNERSHIP PLAN
 
  The Company has elected to follow Statement of Position ("SOP") 76-3,
"Accounting Practices for Certain Employee Stock Ownership Plans," issued by
the American Institute of Certified Public Accountants ("AICPA"). The amount
contributed or committed to be contributed to the C.D. Smith Drug Company
Employee Stock Ownership Plan ("ESOP") with respect to a given year is charged
to expense. The compensation and interest elements of the contribution are
separately reported. See Note 8.
 
 STOCK-BASED COMPENSATION
 
  The Company has elected to follow Accounting Principals Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options because, as
discussed in Note 10, the alternative fair value accounting provided for under
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, compensation expense is recorded over the
related vesting period when the exercise price is less than the estimated fair
value of the stock at the date of grant. The Company
 
                                      F-8
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
has established the exercise prices of options granted at fair value, as
determined by the Board of Directors, giving consideration to the valuation of
the Company's common stock completed by an independent appraiser within the
year in which the stock options were granted. In accordance with APB No. 25,
the Company has recorded no compensation expense related to options granted.
See Note 10.
 
 EARNINGS PER SHARE
 
  In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to SFAS No. 128
requirements.
 
  The following table sets forth the computation of basic and diluted earnings
per share in accordance with SFAS No. 128:
 
<TABLE>
<CAPTION>
                                             YEAR ENDED YEAR ENDED  YEAR ENDED
                                              FEBRUARY   FEBRUARY  FEBRUARY 29,
                                              28, 1998   28, 1997      1996
                                             ---------- ---------- ------------
      <S>                                    <C>        <C>        <C>
      Numerator (basic and diluted):
        Net income.......................... $3,996,713 $1,930,003  $ 634,104
                                             ========== ==========  =========
      Denominator:
        Denominator for basic earnings per
         share--weighted average shares
         outstanding........................  5,963,481  6,699,564  9,499,821
        Effect of dilutive securities:
          Stock options.....................    697,272    172,635        --
          Warrants..........................    505,257        --         --
                                             ---------- ----------  ---------
      Dilutive potential common shares......  1,202,529    172,635        --
                                             ---------- ----------  ---------
      Denominator for diluted earnings per
       share................................  7,166,010  6,872,199  9,499,821
                                             ========== ==========  =========
      Net income per share--basic........... $      .67 $      .29  $     .07
                                             ========== ==========  =========
      Net income per share--diluted......... $      .56 $      .28  $     .07
                                             ========== ==========  =========
</TABLE>
 
  All shares held by the ESOP are considered outstanding for purposes of
computing earnings per share.
 
 RECLASSIFICATIONS
 
  Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
 
 NEW ACCOUNTING PRONOUNCEMENTS
 
  In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income," which requires that an enterprise report, by
major components and as a single total, the change in its net assets during
the period from nonowner sources, and 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. Adoption of these statements will not 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. Both
statements are effective for the Company's fiscal year ending February 28,
1999, with earlier application permitted.
 
                                      F-9
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
2. THE GENERAL DRUG ACQUISITION
   
  Effective October 3, 1997, C.D. Smith consummated the General Drug
Acquisition, purchasing all outstanding partnership interests in Gimbel, which
owns 100% of the outstanding stock of Holdings, the parent company of the
General Drug Companies, for $28 million in cash. The transaction was accounted
for using the purchase method. The purchase price was allocated to net assets
acquired on the basis of their estimated fair values. Inventories of the
General Drug Companies, previously accounted for using the last-in, first-out
method, were valued at replacement cost and deferred taxes were recorded for
the resulting difference from the tax basis of such inventories. In addition,
the recorded amounts of goodwill were written off. The excess of the purchase
price, including approximately $1.1 million of transaction costs, over the
fair market value of the net assets acquired amounted to $25,567,561 and has
been recorded as goodwill. All operations acquired from Gimbel are conducted
within the General Drug Companies. Gimbel and Holdings had no material assets
or liabilities aside from those related to their investment in the General
Drug Companies. The General Drug Companies' results of operations have been
included in the consolidated results of operations since the date of
acquisition.     
 
  The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the General Drug
Companies as if the General Drug Acquisition had occurred at the beginning of
the fiscal year ended February 28, 1997. Pro forma adjustments principally
give effect to amortization of goodwill, interest expense on debt issued to
fund the acquisition, the exclusion of certain compensation and noncompete
expenses contractually required as a result of the General Drug Acquisition
and 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 this acquisition been completed as of these
dates or which may occur in the future.
 
<TABLE>   
<CAPTION>
                                                             FEBRUARY 28,
                                                       -------------------------
                                                           1998         1997
                                                       ------------ ------------
      <S>                                              <C>          <C>
      Net sales....................................... $762,259,269 $693,213,000
      Gross profit....................................   39,928,433   37,420,424
      Operating income................................   15,349,299   13,566,260
      Net income......................................    4,392,426    3,657,979
      Net income per share:
        Basic......................................... $       0.74 $       0.55
        Diluted.......................................         0.61         0.53
</TABLE>    
 
3. PROPERTY AND EQUIPMENT
 
  Property and equipment at February 28, 1998 and 1997 consists of the
following:
 
<TABLE>
<CAPTION>
                                                           1998         1997
                                                        -----------  ----------
      <S>                                               <C>          <C>
      Land............................................. $   273,500  $  135,000
      Building and improvements........................   3,736,708   1,694,909
      Machinery and equipment..........................   1,398,209     908,542
      Vehicles.........................................     326,102     180,009
      Office equipment.................................   2,485,602   1,135,757
                                                        -----------  ----------
                                                          8,220,121   4,054,217
      Less accumulated depreciation....................  (1,496,645)   (879,021)
                                                        -----------  ----------
                                                        $ 6,723,476  $3,175,196
                                                        ===========  ==========
</TABLE>
 
4. LINE OF CREDIT AND LONG-TERM DEBT
 
  In connection with the General Drug Acquisition the Company refinanced its
senior credit facility with a group of lending institutions providing for a
revolving line of credit and certain term notes. All existing debt of the
General Drug Companies was refinanced through the new credit facility. Under
the terms of the new facility, which expires in October 2000, the Company may
borrow up to approximately $90 million, in addition to the
 
                                     F-10
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
amounts outstanding under the term notes described below, based on eligible
inventory and accounts receivable balances (the "borrowing base"). At February
28, 1998, the borrowing base amounted to approximately $102 million. The
Company must pay an aggregate commitment fee of .2% per annum on the unused
balance of the credit facility plus an agency fee of $10,000 per month. At
February 28, 1998, availability under the revolving line of credit was
$16,747,000, excluding the effects of outstanding checks and lockbox receipts
included in outstanding line-of-credit borrowings, as discussed in Note 1.
Generally, advances bear interest at the lender's prime rate (8.5% at February
28, 1998) 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 1.75% if LIBOR loans are purchased. Such interest periods are of
a one-, two-, or three-month duration. The line of credit borrowings,
amounting to $80,880,927 and bearing interest at a weighted average LIBOR-
based rate of 7.79% at February 28, 1998, are collateralized by substantially
all assets of the Company and its subsidiaries. Beginning in October 2000, the
senior credit facility can be renewed for one-year terms upon mutual consent.
 
  At February 28, 1997, C.D. Smith maintained a credit facility with a lending
institution providing for a revolving line of credit and two term notes. Under
the terms of the facility, which was to expire in February 2000, C.D. Smith
could borrow up to $32 million, including the amounts outstanding under the
term notes, based on eligible inventory and accounts receivable balances. At
February 28, 1997, the borrowing base amounted to approximately $27 million.
Interest on borrowings under the revolving line of credit was payable monthly
at the lender's prime rate (8.25% at February 28, 1997) plus 1.1%. Line-of-
credit borrowings of $19,436,574 at February 28, 1997 were collateralized by
substantially all assets of C.D. Smith and had been personally guaranteed up
to $1 million by the Chief Executive Officer ("CEO") of C.D. Smith.
 
  The agreement governing the senior credit facility contains several
covenants which, among other things, restrict capital expenditures and
dividend payments and require the Company to maintain certain specified levels
of net worth, interest and debt service coverage and minimum levels of stock
ownership by the ESOP and the CEO. This agreement also limits cash dividends,
loans or cash transfers from the General Drug Companies to C.D. Smith, other
than purchases and sales between the companies in the normal course of
business. At February 28, 1998, restricted net assets of the General Drug
Companies were approximately $22.5 million.
 
  The Company's long-term debt at February 28, all of which is due October
2000, unless extended by mutual consent of the Company and the lending
institutions, consists of the following:
 
<TABLE>
<CAPTION>
                                                              FEBRUARY 28,
                                                          ---------------------
                                                             1998       1997
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   Notes payable to lending institutions under term note
    provisions of the senior credit facility described
    above, in monthly installments of $12,089, plus in-
    terest at .5% below the bank's prime rate, collater-
    alized by 1,575,900 shares of common stock held by
    the ESOP............................................  $  416,109 $  561,181
   Notes payable to lending institutions under term note
    provisions of the senior credit facility described
    above, in monthly installments of $16,667, plus in-
    terest at the bank's prime rate, collateralized by
    certain warehouse equipment.........................     933,332    746,668
   Notes payable to lending institutions under term note
    provisions of the senior credit facility described
    above, in monthly installments aggregating $8,333,
    plus interest at the bank's prime rate, collateral-
    ized by certain real estate.........................   1,466,667        --
                                                          ---------- ----------
                                                           2,816,108  1,307,849
   Less current portion.................................     445,072    305,072
                                                          ---------- ----------
                                                          $2,371,036 $1,002,777
                                                          ========== ==========
</TABLE>
 
                                     F-11
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The prime rate of the lending institutions providing the term debt discussed
above was 8.50% at February 28, 1998.
 
  Principal maturities of long-term debt, other than borrowings under the line
of credit which expires in October 2000, for each of the next three years are
as follows:
 
<TABLE>
<CAPTION>
                      YEAR ENDING
                      FEBRUARY 28             AMOUNT
                      -----------           ----------
             <S>                            <C>
             1999.......................... $  445,072
             2000..........................    445,072
             2001..........................  1,925,964
</TABLE>
 
5. SUBORDINATED NOTE PAYABLE
 
  In conjunction with the General Drug Acquisition, C.D. Smith issued a
subordinated note payable due October 3, 2004 in the principal amount of $12
million with detachable stock warrants (see Note 6) to an investment group.
Interest at 12% per annum is payable quarterly. Principal installments are due
and payable 90 days after the end of each fiscal year, commencing with the
fiscal year ending February 28, 1999, in an amount equal to 30% of "Excess
Cash Flow" as defined below subject to certain conditions. "Excess Cash Flow"
is generally defined in the related agreement as consolidated earnings before
interest expense, income taxes, depreciation and amortization ("EBITDA") minus
current tax liabilities, interest paid, principal payments and capital
expenditures. The estimated fair value of the warrants at October 3, 1997,
amounting to $2,569,000, was recorded as a discount on the subordinated debt.
The discount is being amortized to interest expense over the seven-year term
using the interest method resulting in an effective interest rate of 17.9% on
the subordinated debt. The amount of unamortized discount at February 28, 1998
is $2,336,974.
 
  The subordinated note agreement contains several covenants which are similar
to the covenants associated with the Company's senior credit facility (see
Note 4).
 
6. COMMON STOCK PUT WARRANTS
   
  The detachable common stock warrants to purchase 1,246,236 shares of common
stock of the Company (1,080,078 in the event the initial public offering
discussed in Note 11 is completed) discussed in Note 5 are subject to certain
antidilution and other adjustments, as defined in the related agreement. The
warrants are exercisable on October 3, 2002, or earlier if certain events
occur as defined in the agreement, at a price of $0.0004 per share. After the
fifth anniversary of the closing of the General Drug Acquisition, the holders
have an option to put the warrants to the Company at a price based on a
multiple of EBITDA less indebtedness and certain other amounts as defined in
the agreement. Once the warrants have been put to the Company, the put price
is payable no earlier than 90 days but no later than 100 days of the put date.
Additionally, after the sixth anniversary of the closing, the Company has the
option to exercise a call right to purchase from the holders all or any
portion of such warrant securities, and the holders are obligated to sell at a
price determined in a similar manner to that of the put option. The $2,569,000
value of these put warrants is presented as a liability in the accompanying
consolidated balance sheet due to the holder's option to require settlement in
cash. The Company is accreting the recorded amount of the warrants to the
highest redemption price of the put warrant using the interest method. No
accretion was necessary at February 28, 1998 as the redemption price
calculated per the agreement did not exceed the recorded amount of the
warrants.     
 
7. INCOME TAXES
 
  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company files its
consolidated income tax return on a fiscal year ending September 30. However,
for purposes of computing deferred taxes in the accompanying consolidated
financial statements, the tax bases of assets and liabilities are determined
as if the Company were filing a tax return as of the balance sheet date.
 
                                     F-12
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company's effective tax rate differed from the statutory federal income
tax rate as follows:
 
<TABLE>
<CAPTION>
                                          YEAR ENDED   YEAR ENDED   YEAR ENDED
                                         FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
                                             1998         1997         1996
                                         ------------ ------------ ------------
   <S>                                   <C>          <C>          <C>
   Federal income tax statutory rate....     34.0%        34.0%        34.0%
   State income taxes, net of federal
    tax benefit.........................      2.5          2.0          4.3
   Other, net...........................      (.3)          .3          1.3
                                            -----         ----         ----
                                            36.2%         36.3%        39.6%
                                            =====         ====         ====
</TABLE>
 
  The lower state income tax rate in 1998 and 1997 is attributable to the
effects of enterprise zone tax credits obtained and utilized by the Company in
those years.
 
  Significant components of the Company's deferred tax assets and liabilities
as of February 28, 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                           1998        1997
                                                        -----------  ---------
      <S>                                               <C>          <C>
      Deferred tax assets:
        Allowance for doubtful receivables............. $   241,000  $  91,000
        Uniform capitalization costs...................      95,000     53,000
        Amortization of tax basis noncompete asset.....   1,677,000        --
        Vacation accrual...............................     129,000     55,000
                                                        -----------  ---------
      Total deferred tax assets........................   2,142,000    199,000
      Deferred tax liabilities:
        Inventory......................................  (3,259,000)  (733,000)
        Depreciation...................................    (477,000)  (177,000)
                                                        -----------  ---------
      Total deferred tax liabilities...................  (3,736,000)  (910,000)
                                                        -----------  ---------
      Net deferred tax liability....................... $(1,594,000) $(711,000)
                                                        ===========  =========
</TABLE>
  The income tax provision (benefit) for 1998, 1997 and 1996 consists of the
following:
 
<TABLE>
<CAPTION>
                                                  CURRENT   DEFERRED    TOTAL
                                                 ---------- --------  ----------
      <S>                                        <C>        <C>       <C>
      1998
      Federal................................... $2,068,965 $(38,692) $2,030,273
      State.....................................    242,395   (5,804)    236,591
                                                 ---------- --------  ----------
                                                 $2,311,360 $(44,496) $2,266,864
                                                 ========== ========  ==========
      1997
      Federal................................... $  781,154 $224,816  $1,005,970
      State.....................................     75,036   18,184      93,220
                                                 ---------- --------  ----------
                                                  $ 856,190 $243,000  $1,099,190
                                                 ========== ========  ==========
      1996
      Federal................................... $  119,820 $226,965  $  346,785
      State.....................................      7,557   61,035      68,592
                                                 ---------- --------  ----------
                                                 $  127,377 $288,000  $  415,377
                                                 ========== ========  ==========
</TABLE>
 
                                     F-13
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
8. EMPLOYEE BENEFIT PLANS
 
 EMPLOYEE STOCK OWNERSHIP PLAN
 
  The Company has an ESOP covering substantially all employees with over one
year of service. Under the ESOP, the Company initially obtained a term loan
from an outside bank in 1991 (see Note 4) and disbursed the proceeds to the
ESOP in exchange for a note receivable for purposes of acquiring shares from
the original shareholders. Shares held as collateral under the term loan are
released each year in the proportion of principal and interest paid in the
current year to the principal and interest remaining to be paid over the life
of the loan. The Company is obligated to make annual contributions sufficient
to enable the ESOP to repay the loan with interest at .5% below the prime
rate. The ESOP currently owns 5,582,970 shares of stock in the Company, of
which 4,007,070 are allocated. ESOP contributions totaling $145,072 were
expensed during each of the three years in the period ended February 28, 1998.
 
  The estimated repurchase obligation for allocated shares which are vested at
February 28, 1998 is approximately $6.2 million. The loan and receivable are
recorded in the Company's consolidated balance sheets as long-term debt and a
reduction in shareholders' equity, respectively.
 
 DEFINED CONTRIBUTION PLAN
 
  The Company maintains a defined contribution 401(k) plan which covers
substantially all C.D. Smith employees with at least one year of service and,
effective January 1, 1998, substantially all nonunion employees of General
Drug Company with at least one year of prior service. Under the plan,
employees may elect to contribute a percentage of their annual salary subject
to Internal Revenue Code ("IRC") maximum limitations. The plan provides for
employer matching and discretionary contributions, the amounts of which are to
be determined annually by the Board of Directors. During the 1997 plan year,
the Company matched 50% of employee contributions up to 4% of qualified
compensation.
 
  James Brudnick Company, Inc. also maintains a defined contribution plan
which covers substantially all employees with at least six months of service.
The plan provides for employer discretionary contributions, the amounts of
which are to be determined annually by the Company's Board of Directors.
 
  Contribution expense, representing employer contributions under the above
plans, was $96,830 and $13,666 for the years ended February 28, 1998 and 1997,
respectively. No matching discretionary contributions were provided for the
year ended February 29, 1996.
 
 MULTIEMPLOYER PLANS
 
  The Company also participates in two multiemployer, union administered,
pension plans that principally cover warehouse workers and drivers at the
General Drug Companies. The Company recognizes as an expense the required
contributions for these plans, the amounts of which were insignificant for the
year ended February 28, 1998.
 
                                     F-14
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
9. LEASES
 
  The Company has entered into noncancelable operating leases for certain
facilities, computer equipment and vehicles.
 
  Future minimum rental payments under these noncancelable operating leases
are as follows:
 
<TABLE>
<CAPTION>
      YEAR ENDING
      FEBRUARY 28                                                       AMOUNT
      -----------                                                     ----------
      <S>                                                             <C>
      1999........................................................... $  494,698
      2000...........................................................    372,032
      2001...........................................................    246,823
      2002...........................................................    189,371
      2003...........................................................    160,189
      Thereafter.....................................................    147,516
                                                                      ----------
      Total.......................................................... $1,610,629
                                                                      ==========
</TABLE>
 
  Total rent expense for the years ended February 28, 1998 and 1997 and
February 29, 1996 was $417,767, $285,129 and $353,859, respectively.
 
10. STOCK OPTIONS
 
  The Company has established the C.D. Smith Drug Company 1996 Equity
Compensation Plan pursuant to which options to purchase up to 1,530,000 shares
of common stock may be granted to employees at prices which approximate the
fair value of the shares on the dates of grant. The terms and vesting
provisions of these options are determined by the Board of Directors and may
vary by optionee; however, no term may be longer than 10 years from the date
of grant.
 
  In August 1996, C.D. Smith granted to certain members of management
nonqualified stock options to purchase 790,500 shares of common stock at $0.44
per share. In October 1997, C.D. Smith granted additional nonqualified stock
options to purchase 280,500 shares of common stock at $2.08 per share. The
weighted average exercise price of options outstanding at February 28, 1998 is
$0.87 per share.
 
  No options were exercised or canceled during the years ended February 28,
1998 and 1997. All options become immediately exercisable upon the date of
grant. The weighted average fair values of options granted during the years
ended February 28, 1998 and 1997, determined in accordance with SFAS No. 123,
equaled $.12 and $0.58, respectively. The weighted-average remaining
contractual life at February 28, 1998 was 8.72 years.
 
  The fair values of options granted were estimated at the date of grant using
the Minimum Value Option Pricing Model with the following weighted-average
assumptions: a risk-free interest rate of 6.10% and 6.50% for the years ended
February 28, 1998 and 1997, respectively, and a weighted-average expected life
of five years for each of the years ended February 28, 1998 and 1997. Under
the Minimum Value Option Pricing Model, the volatility factor is excluded. The
Company assumed a 0% dividend yield over the expected life of the options.
 
  The Minimum Value Option Pricing Model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
 
                                     F-15
<PAGE>
 
                   C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
 
  For purposes of the pro forma disclosures required under SFAS No. 123, the
estimated fair value of the options is expensed in the year of grant as the
options are immediately vested upon date of grant. For the years ended
February 28, 1998 and 1997, the Company's pro forma net income equals
$3,893,619 and $1,871,848, respectively, pro forma net income per share-basic
equals $0.65 and $0.28, respectively, and pro forma net income per share-
diluted equals $0.54 and $0.27, respectively.
 
11. PENDING PUBLIC OFFERING OF COMMON STOCK
   
  During June 1998, the Company filed a registration statement with the
Securities and Exchange Commission for an underwritten initial public offering
of 4,750,000 shares of common stock, 3,500,000 shares of which are to be
offered by the Company (the Offering). The Board of Directors and shareholders
have approved a change in the Company's capital stock to authorize 90,000,000
shares of $.01 par value common stock and 10,000,000 shares of $.01 par
preferred stock and to effect a 51-for-1 common stock split in the form of a
stock dividend immediately prior to consummation of the Offering. All share
and per share information included in the accompanying consolidated financial
statements has been adjusted to give retroactive effect to the common stock
split.     
 
                                     F-16
<PAGE>
 
                    
                 C.D. SMITH DRUG COMPANY AND SUBSIDIARIES     
       
                      
                   CONDENSED CONSOLIDATED BALANCE SHEETS     
 
<TABLE>   
<CAPTION>
                                                         MAY 31,
                                                          1998     FEBRUARY 28,
                                                       (UNAUDITED)     1998
                                                       ----------- ------------
                                                            (IN THOUSANDS,
                                                        EXCEPT PER SHARE DATA)
<S>                                                    <C>         <C>
ASSETS
Current assets:
  Cash................................................  $    --     $      42
  Trade accounts and notes receivable, less allowance
   of $665 at May 31, 1998 and $650 at February 28,
   1998...............................................    52,363       56,059
  Other receivables...................................     3,927        3,299
  Refundable income taxes.............................       --           543
  Merchandise inventory...............................    79,943       73,672
  Prepaid expenses and other..........................       535          380
                                                        --------    ---------
    Total current assets..............................   136,768      133,995
Property and equipment, net...........................     7,051        6,724
Other assets:
  Goodwill, net.......................................    25,141       25,301
  Debt issuance costs, net............................     1,409        1,502
  Other assets........................................     1,256        1,180
                                                        --------    ---------
    Total assets......................................  $171,625    $ 168,702
                                                        ========    =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................  $ 65,740    $  60,555
  Accrued expenses....................................     2,600        2,709
  Income taxes payable................................       112          --
  Deferred income taxes...............................     2,084        2,380
  Current portion of long-term debt...................       445          445
                                                        --------    ---------
    Total current liabilities.........................    70,981       66,089
Line of credit .......................................    78,449       80,881
Long-term debt, less current portion..................     2,260        2,371
Subordinated note payable.............................     9,807        9,663
Common stock put warrants.............................     2,569        2,569
Shareholders' equity:
  Common stock, $.01 par value........................       102          102
  Additional paid-in capital..........................        98           98
  Retained earnings...................................     8,872        8,478
  Treasury stock......................................    (1,133)      (1,133)
                                                        --------    ---------
                                                           7,939        7,545
  Less note receivable from ESOP......................      (380)        (416)
                                                        --------    ---------
                                                           7,559        7,129
                                                        --------    ---------
    Total liabilities and shareholders' equity........  $171,625    $ 168,702
                                                        ========    =========
</TABLE>    
                             
                          See accompanying notes.     
 
                                      F-17
<PAGE>
 
                    
                 C.D. SMITH DRUG COMPANY AND SUBSIDIARIES     
                   
                CONDENSED CONSOLIDATED STATEMENTS OF INCOME     
                                   
                                (UNAUDITED)     
 
<TABLE>   
<CAPTION>
                                                                THREE MONTHS
                                                               ENDED MAY 31,
                                                              -----------------
                                                                1998     1997
                                                              --------  -------
                                                               (IN THOUSANDS,
                                                              EXCEPT PER SHARE
                                                                   DATA)
<S>                                                           <C>       <C>
Net sales.................................................... $206,866  $88,430
Cost of goods sold...........................................  196,920   84,502
                                                              --------  -------
Gross profit.................................................    9,946    3,928
Operating expenses:
  Selling, general and administrative........................    6,013    2,513
  Depreciation and amortization..............................      431       82
  Special charges (Note 3)...................................      817      --
                                                              --------  -------
                                                                 7,261    2,595
                                                              --------  -------
Operating income.............................................    2,685    1,333
Other income (expense):
  Interest income............................................       94       42
  Interest expense on credit facilities......................   (1,593)    (500)
  Interest expense on subordinated debt......................     (512)     --
  Other, net.................................................      (29)      (1)
                                                              --------  -------
                                                                (2,040)    (459)
                                                              --------  -------
Income before income taxes...................................      645      874
Income tax provision.........................................      251      332
                                                              --------  -------
Net income................................................... $    394  $   542
                                                              ========  =======
Net income per share (Notes 2 and 4):
  Basic...................................................... $   0.07  $  0.09
                                                              ========  =======
  Diluted.................................................... $   0.05  $  0.08
                                                              ========  =======
</TABLE>    
                             
                          See accompanying notes.     
 
                                      F-18
<PAGE>
 
                    
                 C.D. SMITH DRUG COMPANY AND SUBSIDIARIES     
                 
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
                                   
                                (UNAUDITED)     
 
<TABLE>   
<CAPTION>
                                                                THREE MONTHS
                                                               ENDED MAY 31,
                                                                1998     1997
                                                              --------  -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.................... $  3,101  $ 4,659
INVESTING ACTIVITIES
Purchases of property and equipment..........................     (690)     (74)
Proceeds from sale of property and equipment.................       54      --
Collections on note receivable from ESOP.....................       36       36
                                                              --------  -------
Net cash used in investing activities........................     (600)     (38)
FINANCING ACTIVITIES
Borrowings on line of credit.................................  214,423   83,867
Principal payments on line of credit......................... (216,855) (88,423)
Proceeds from issuance of long-term debt.....................      --       --
Principal payments on long-term debt.........................     (111)     (80)
                                                              --------  -------
Net cash used in financing activities........................   (2,543)  (4,636)
                                                              --------  -------
Decrease in cash.............................................      (42)     (15)
Cash at beginning of period..................................       42       17
                                                              --------  -------
Cash at end of period........................................ $    --   $     2
                                                              ========  =======
</TABLE>    
                             
                          See accompanying notes.     
 
                                      F-19
<PAGE>
 
                    
                 C.D. SMITH DRUG COMPANY AND SUBSIDIARIES     
              
           NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
                                  
                               (UNAUDITED)     
                                  
                               MAY 31, 1998     
   
1. BASIS OF PRESENTATION     
   
  The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended May 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended February 28,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto, included herein.     
          
2. NET INCOME PER SHARE     
          
  The following table sets forth the computation of basic and diluted net
income per share:     
 
<TABLE>   
<CAPTION>
                                                                  THREE MONTHS
                                                                      ENDED
                                                                     MAY 31,
                                                                   1998   1997
                                                                  ------ ------
                                                                   (AMOUNTS IN
                                                                   THOUSANDS,
                                                                   EXCEPT PER
                                                                   SHARE DATA)
<S>                                                               <C>    <C>
Numerator (basic and diluted):
  Net income..................................................... $  394 $  541
                                                                  ====== ======
Denominator:
  Denominator for basic earnings per share--weighted average
   shares outstanding............................................  5,904  5,991
  Effect of dilutive securities:
    Stock options................................................    873    623
    Warrants.....................................................  1,246    --
                                                                  ------ ------
Dilutive potential common shares.................................  2,119    623
                                                                  ------ ------
Denominator for diluted earnings per share.......................  8,023  6,614
                                                                  ====== ======
Net income per share--basic...................................... $ 0.07 $ 0.09
                                                                  ====== ======
Net income per share--assuming dilution.......................... $ 0.05 $ 0.08
                                                                  ====== ======
</TABLE>    
   
3. SPECIAL CHARGES     
   
  Special charges of $817 include $592 for a severance payment to a former
officer and a $225 loss on the sale of the tobacco and candy business of the
General Drug Companies, which was sold for $1,900 in May 1998.     
   
4. PENDING PUBLIC OFFERING OF COMMON STOCK     
   
  During June 1998, the Company filed a registration statement with the
Securities and Exchange Commission for an underwritten initial public offering
of 4,750,000 shares of common stock, 3,500,000 shares of which are to be
offered by the Company (the Offering). The Board of Directors and shareholders
have approved a change in the Company's capital stock to authorize 90,000,000
shares of $0.01 par value common stock and 10,000,000 shares of $0.01 par
preferred stock and to effect a 51-for-1 common stock split in the form of a
stock dividend immediately prior to consummation of the Offering. All share
and per share information included in the accompanying condensed consolidated
financial statements has been adjusted to give retroactive effect to the
common stock split. In connection with the Offering, the Company changed its
name to C.D. Smith Healthcare, Inc.     
 
                                     F-20
<PAGE>
 
                         INDEPENDENT AUDITOR'S REPORT
 
Partners
Gimbel Investor Group
Chicago, Illinois
 
  We have audited the accompanying consolidated balance sheets of Gimbel
Investor Group, L.P. and Subsidiary (the "Group") as of April 30, 1997 and
1996, and the related consolidated statements of income, partners' capital and
cash flows for each of the three years in the period ended April 30, 1997.
These financial statements are the responsibility of the Group'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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gimbel
Investor Group, L.P. and Subsidiary as of April 30, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in
the period ended April 30, 1997, in conformity with generally accepted
accounting principles.
 
                                          Blackman Kallick Bartlestein, LLP
 
Chicago, Illinois
May 26, 1998
 
                                     F-21
<PAGE>
 
                   GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               APRIL 30,
                                                        -----------------------
                                                           1997        1996
ASSETS                                                  ----------- -----------
<S>                                                     <C>         <C>
Current Assets
  Accounts receivable (net of allowance for doubtful
   accounts of $456,335
   and $616,544 for 1997 and 1996, respectively)....... $29,943,802 $30,122,633
  Inventories..........................................  35,072,165  37,062,079
  Prepaid expenses and other current assets............     532,072     485,104
                                                        ----------- -----------
    Total Current Assets...............................  65,548,039  67,669,816
Property and Equipment (net)...........................   2,522,880   2,399,466
Other Assets...........................................   3,320,270   3,122,515
                                                        ----------- -----------
                                                        $71,391,189 $73,191,797
                                                        =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
  Current portion of long-term debt.................... $   249,246 $    55,187
  Accounts payable.....................................  28,238,551  33,500,230
  Accrued expenses.....................................     636,511   1,171,117
                                                        ----------- -----------
    Total Current Liabilities..........................  29,124,308  34,726,534
Long-Term Debt, less current portion...................  36,582,560  34,467,707
                                                        ----------- -----------
    Total Liabilities..................................  65,706,868  69,194,241
Partners' Capital......................................   5,684,321   3,997,556
                                                        ----------- -----------
                                                        $71,391,189 $73,191,797
                                                        =========== ===========
</TABLE>
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-22
<PAGE>
 
                   GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                  YEARS ENDED APRIL 30,
                                          --------------------------------------
                                              1997         1996         1995
                                          ------------ ------------ ------------
<S>                                       <C>          <C>          <C>
Net sales................................ $372,921,546 $347,545,827 $343,925,741
Cost of sales............................  351,318,560  326,704,375  325,183,287
                                          ------------ ------------ ------------
Gross profit.............................   21,602,986   20,841,452   18,742,454
Operating expenses
  Selling, general and administrative....   11,584,734   10,883,847    9,283,265
  Depreciation and amortization..........      831,330    1,118,007    1,293,421
  Covenants not to compete...............    1,050,000    1,110,000    1,292,320
  Management fees........................      818,777      754,502      706,451
                                          ------------ ------------ ------------
    Operating Income.....................    7,318,145    6,975,096    6,166,997
                                          ------------ ------------ ------------
Other expenses
  Interest expense.......................    3,464,141    3,324,016    3,629,922
  Miscellaneous, net.....................      243,854      767,679      789,119
                                          ------------ ------------ ------------
    Total Other Expenses.................    3,707,995    4,091,695    4,419,041
                                          ------------ ------------ ------------
Income before income taxes...............    3,610,150    2,883,401    1,747,956
Income taxes.............................    1,423,385    1,121,677      799,512
                                          ------------ ------------ ------------
Net income............................... $  2,186,765 $  1,761,724 $    948,444
                                          ============ ============ ============
</TABLE>
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-23
<PAGE>
 
                   GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
 
<TABLE>
<CAPTION>
                                                                     PARTNERS'
                                                                      CAPITAL
                                                                     ----------
<S>                                                                  <C>
Balance at April 30, 1994........................................... $1,997,388
  Net Income........................................................    948,444
                                                                     ----------
Balance at April 30, 1995...........................................  2,945,832
  Contributed Capital...............................................  1,790,000
  Partners' Distribution............................................ (2,500,000)
  Net Income........................................................  1,761,724
                                                                     ----------
Balance at April 30, 1996...........................................  3,997,556
  Partners' Distribution............................................   (500,000)
  Net Income........................................................  2,186,765
                                                                     ----------
Balance at April 30, 1997........................................... $5,684,321
                                                                     ==========
</TABLE>
 
 
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-24
<PAGE>
 
                   GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                            YEARS ENDED APRIL 30
                                  -------------------------------------------
                                      1997           1996           1995
                                  -------------  -------------  -------------
<S>                               <C>            <C>            <C>
OPERATING ACTIVITIES
Net income....................... $   2,186,765  $   1,761,724  $     948,444
Adjustments to reconcile net
 income to net cash provided by
 (used in) operating activities
  Depreciation...................       636,388        566,097        515,954
  Amortization...................       194,942        551,910        777,467
  Loss on sale of property and
   equipment.....................        25,759         35,055         16,584
  Deferred income taxes..........      (313,641)      (583,000)       (83,120)
  Changes in operating assets and
   liabilities
    Accounts receivable..........       178,831       (890,221)        76,413
    Inventories..................     1,989,914     (4,829,427)      (522,287)
    Prepaid expenses and other
     assets......................       (36,123)        66,598         11,012
    Accounts payable.............    (5,261,679)     8,546,533     (4,206,345)
    Accrued expenses.............      (534,606)       336,547       (200,749)
                                  -------------  -------------  -------------
Net cash provided by (used in)
 operating activities............      (933,450)     5,561,816     (2,666,627)
                                  -------------  -------------  -------------
INVESTING ACTIVITIES
Purchase of assets of T & S
 Wholesale, Inc..................           --        (461,685)           --
Purchase of property and
 equipment.......................      (779,426)      (751,074)      (390,545)
Other............................        (6,263)        44,779        (46,985)
                                  -------------  -------------  -------------
Net cash used in investing
 activities......................      (785,689)    (1,167,980)      (437,530)
                                  -------------  -------------  -------------
FINANCING ACTIVITIES
Proceeds from issuance of long-
 term debt.......................   390,218,671    361,356,000    355,625,000
Repayments of long-term debt.....  (387,909,759)  (363,162,055)  (351,894,366)
Financing fees...................       (89,773)       (87,781)      (216,172)
Partners' distribution...........      (500,000)    (2,500,000)           --
Payment to former Brudnick
 stockholders....................           --             --        (410,305)
                                  -------------  -------------  -------------
Net cash provided by (used in)
 financing activities............     1,719,139     (4,393,836)     3,104,157
                                  -------------  -------------  -------------
Net change in cash...............           --             --             --
Cash at beginning of year........           --             --             --
                                  -------------  -------------  -------------
Cash at end of year.............. $         --   $         --   $         --
                                  =============  =============  =============
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-25
<PAGE>
 
                  GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 ORGANIZATION AND BASIS OF PRESENTATION
 
  The consolidated financial statements of Gimbel Investor Group, L.P. and
Subsidiary (the "Group") include the accounts of Gimbel Investor Group, L.P.
and its wholly owned subsidiary, GD Holdings Inc. ("Holdings").
 
  General Drug Company ("General Drug") is a wholly owned subsidiary of
Holdings. James Brudnick Company, Inc. ("Brudnick") and SBS Pharmaceuticals,
Inc. ("SBS") are wholly owned subsidiaries of General Drug. All significant
intercompany accounts and transactions have been eliminated in consolidation.
 
  In December 1995, General Drug formed a wholly owned subsidiary, SBS. SBS
obtained the rights to use Aligen Independent Laboratories' label on its brand
name repackaged products.
 
  On July 24, 1995, the Group purchased substantially all of the assets and
the name of T&S Wholesale, Inc. ("T&S") for $2,429,811. T&S was a tobacco and
candy wholesaler that operated in the Boston area. A trade receivable in the
amount of approximately $2,000,000 was applied against the purchase price. The
purchase price was allocated as follows:
 
<TABLE>
      <S>                                                             <C>
      Accounts receivable............................................ $1,274,891
      Inventory......................................................    453,592
      Fixed assets...................................................     65,000
      Other assets...................................................      2,416
      Goodwill.......................................................    633,912
</TABLE>
 
  The results of operations from both acquisitions are included in the
consolidated income statement from the respective dates of acquisition.
 
 NATURE OF BUSINESS
 
  General Drug and Brudnick are wholesale distributors of prescription and
over-the-counter drugs and related products. Brudnick is also a distributor of
candy and tobacco products, which account for less than 5% of sales. SBS is a
repackager and distributor of brand name pharmaceuticals. All companies
routinely extend credit to their customers. General Drug's customers are
located throughout the midwestern United States. Brudnick operates in the
northeastern United States SBS's customers are national.
 
 INVENTORIES
 
  Inventories, consisting of goods sold for resale, are stated at the lower of
cost or market. Cost is determined by the last-in, first-out ("LIFO") method.
If the first-in, first-out ("FIFO") method, which approximates replacement
cost, had been used, inventories would have been approximately $4,700,000
greater as of April 30, 1997. As of April 30, 1996, inventories under the FIFO
method would have been approximately $3,550,000 greater. Cost for SBS's
inventory is determined by the last-in, first-out ("LIFO") method using 1996
as its base year. Therefore, there is no difference between the LIFO and FIFO
methods as of April 30, 1996.
 
 PROPERTY AND EQUIPMENT
 
  Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets for
financial statement purposes, as indicated in the following tabulation:
 
<TABLE>
<CAPTION>
                                                                           YEARS
      <S>                                                                  <C>
      Warehouse equipment.................................................  5-10
      Transportation equipment............................................     4
      Computer and office equipment.......................................   3-5
      Building and building improvements.................................. 15-30
</TABLE>
 
 
                                     F-26
<PAGE>
 
                  GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 COVENANTS NOT TO COMPETE
 
  The Group's obligation for covenants not to compete is recognized on a
straight-line basis over the terms of the agreements. See Note 8.
 
 GOODWILL
 
  Goodwill purchased in connection with net asset purchases is being amortized
using the straight-line method over a 40-year life.
   
 REVENUE RECOGNITION     
   
  The Company recognizes sales when products are shipped.     
 
 MANAGEMENT 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.
 
 FINANCIAL INSTRUMENTS
 
  A financial instrument is cash, evidence of an ownership interest in an
entity or certain contracts involving future conveyances of cash or other
financial instruments. The carrying values of the Group's financial
instruments approximate their fair values.
 
 NEW ACCOUNTING PRONOUNCEMENTS
 
  In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Group is in the process of evaluating
the specific reporting requirements of SFAS No. 130; however, it believes the
adoption of SFAS No. 130 would have had no impact on the Group's consolidated
results of operations, financial position or cash flows.
 
  In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The Group is in the process of evaluating the
disclosure requirements of SFAS No. 131; however, it believes that its
adoption will have no material impact on its future disclosure requirements.
 
NOTE 2--PROPERTY AND EQUIPMENT
 
  Property and equipment consist of the following:
<TABLE>
<CAPTION>
                                                            1997        1996
      <S>                                                <C>         <C>
      Land.............................................. $  139,043  $  104,500
      Warehouse equipment...............................    328,497     318,287
      Transportation equipment..........................    840,029     850,966
      Computer and office equipment.....................  2,236,172   2,016,325
      Building and building improvements................    996,743     678,826
      Construction in progress..........................     81,807         --
                                                         ----------  ----------
                                                          4,622,291   3,968,904
      Less accumulated depreciation and amortization.... (2,099,411) (1,569,438)
                                                         ----------  ----------
                                                         $2,522,880  $2,399,466
                                                         ==========  ==========
</TABLE>
 
 
                                     F-27
<PAGE>
 
                   GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 3--INTANGIBLE ASSETS
 
  Intangible assets consist of the following and are included in the caption
other assets on the consolidated balance sheets as of April 30, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                        1997          1996
                                                    ------------  ------------
<S>                                                 <C>           <C>
Goodwill arising from the acquisition of Brudnick.  $  2,492,590  $  2,492,590
Goodwill arising from acquisition of T&S..........       633,912       633,912
Other.............................................        70,032        55,113
                                                    ------------  ------------
                                                       3,196,534     3,181,615
Less accumulated amortization.....................      (327,288)     (193,367)
                                                    ------------  ------------
                                                    $  2,869,246  $  2,988,248
                                                    ============  ============
 
NOTE 4--LONG-TERM DEBT
 
  As of April 30, 1997 and 1996 long-term debt consisted of the following:
 
<CAPTION>
                                                        1997          1996
                                                    ------------  ------------
<S>                                                 <C>           <C>
Bank line-of-credit agreement--Borrowings not to
 exceed $16,000,000 or the sum of 80% of eligible
 accounts receivable and 65% of eligible inventory
 ($11,000,000 limit for inventory). Interest
 payable at .75% over the bank's base rate (8.50%
 as of April 30, 1997 and 8.25% as of April 30,
 1996). The agreement expires May 1, 1998 and is
 secured by substantially all of General Drug's
 assets under a loan and security agreement. As of
 April 30, 1997, additional borrowing capacity was
 approximately $1,700,000 under this agreement....  $ 12,471,230  $ 11,599,007
Bank line-of-credit agreement--Borrowings not to
 exceed $5,000,000 or the sum of 80% of eligible
 accounts receivable and 65% of eligible inventory
 ($2,000,000 limit for inventory). Interest
 payable at .75% over the bank's base rate (8.50%
 as of April 30, 1997 and 8.25% as of April 30,
 1996). The agreement expires May 1, 1998 and is
 secured by substantially all of SBS's assets
 under a loan and security agreement. As of April
 30, 1997, additional borrowing capacity was
 approximately $1,200,000 under this agreement....       855,956           --
Bank line-of-credit agreement--Borrowings not to
 exceed $30,000,000 or the sum of 85% of eligible
 accounts receivable and 65% of eligible inventory
 ($18,000,000 limit for inventory). Borrowings are
 subject to minimum excess availability of
 $2,000,000. Interest payable at .75% over the
 bank's base rate (8.50% as of April 30, 1997 and
 8.25% as of April 30, 1996). The agreement
 expires May 1, 1998 and is secured by
 substantially all of Brudnick's assets under a
 loan and security agreement. As of April 30,
 1997, additional borrowing capacity was
 approximately $5,400,000 under this agreement....   $22,556,351   $22,240,465
</TABLE>
 
                                      F-28
<PAGE>
 
                  GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                        1997         1996
                                                     -----------  -----------
      <S>                                            <C>          <C>
      Mortgage note payable--Due in monthly
       installments of $1,668 plus interest at .75%
       over the bank's base rate, which was 8.50% as
       of April 30, 1997 and 8.25% as of April 30,
       1996. Final payment is due May 1, 1998.
       Secured by building and limited guarantee of
       certain related parties, which are related
       through common ownership.....................     399,023      419,035
      Series A subordinated promissory note--
       Convertible to 1% equity interest in the
       Group for each $220,000 of principal balance.
       Interest payable semi-annually at 10%.
       Principal payment due in full February 1999.
       Subordinated to all bank and lending
       institution debt. See Note 7.................     220,000      220,000
      Community Development Block Grant float loan
       demand note--Borrowings not to exceed
       $920,000. Principal plus interest at 3.3% due
       November 1998. Secured by an irrevocable
       letter of credit. See Note 8. As of April 30,
       1997, additional borrowing capacity was
       $600,000 under this agreement................     320,000          --
      Other.........................................       9,246       44,387
                                                     -----------  -----------
                                                      36,831,806   34,522,894
      Less current portion..........................    (249,246)     (55,187)
                                                     -----------  -----------
                                                     $36,582,560  $34,467,707
                                                     ===========  ===========
</TABLE>
 
  Maturities on long-term debt are as follows as of April 30, 1997:
 
<TABLE>
      <S>                                                            <C>
      Year Ending April 30:
        1998........................................................ $   249,246
        1999........................................................  36,582,560
                                                                     -----------
                                                                     $36,831,806
                                                                     ===========
</TABLE>
 
  Under the agreements, General Drug, Brudnick and SBS must maintain specified
minimum ratios and tangible net worth and pay annual agency fees totaling
$55,000. The agreements also impose certain restrictions relating to, among
other things, further indebtedness, liens, pledges or sales of assets, capital
expenditures, dividends, investments and transactions with affiliates.
 
NOTE 5--INCOME TAXES
 
  The components of the provision for income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                  1997        1996       1995
                                               ----------  ----------  --------
      <S>                                      <C>         <C>         <C>
      Current income tax expense
        Federal............................... $1,389,396  $1,315,227  $635,746
        State.................................    347,630     389,450   246,886
      Deferred income tax benefit.............   (313,641)   (583,000)  (83,120)
                                               ----------  ----------  --------
                                               $1,423,385  $1,121,677  $799,512
                                               ==========  ==========  ========
</TABLE>
 
  Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates, applicable to future
years, to differences between the financial reporting and the tax basis of
existing assets and liabilities.
 
                                     F-29
<PAGE>
 
                  GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The consolidated balance sheets as of April 30, 1997 and 1996 include the
following tax effects of cumulative temporary differences:
 
<TABLE>
<CAPTION>
                                              1997                  1996
                                     ---------------------- --------------------
                                       ASSETS   LIABILITIES  ASSETS  LIABILITIES
      <S>                            <C>        <C>         <C>      <C>
      Inventory..................... $      --   $780,543   $    --   $795,438
      Depreciation..................        --    123,935        --    153,623
      Noncompete and goodwill.......  1,079,717       --     776,200       --
      Accounts receivable...........    108,541       --     158,756       --
      Other.........................     41,410       --      25,651       --
                                     ----------  --------   --------  --------
          Total Deferred Taxes...... $1,229,668  $904,478   $960,607  $949,061
                                     ==========  ========   ========  ========
</TABLE>
 
  Principal reasons for variations between the statutory federal rate and the
effective rates were as follows:
 
<TABLE>
<CAPTION>
                                                              1997  1996  1995
                                                              ----  ----  ----
      <S>                                                     <C>   <C>   <C>
      U.S. federal statutory income tax rate................. 34.0% 34.0% 34.0%
      State income taxes, net of federal tax benefit.........  5.5   5.5   5.5
      Income taxes passed through to owners of partnership
       and
       S-corporation.........................................   .1   2.0   4.5
      Other..................................................  (.2) (2.6)  1.7
                                                              ----  ----  ----
                                                              39.4% 38.9% 45.7%
                                                              ====  ====  ====
</TABLE>
 
  Gimbel Investor Group, L.P. is organized as a partnership and Holdings is
organized as an S-corporation under provisions of the Internal Revenue Code.
Accordingly, the accompanying financial statements do not reflect income
taxes, except for state replacement tax, for these entities.
 
NOTE 6--RELATED PARTY TRANSACTIONS
 
 MANAGEMENT FEE
 
  An annual management fee of $600,000 plus a percentage of earnings, subject
to certain minimum earnings criteria, is being paid to a company that is
related by common ownership. Management fee expense was $818,777, $754,502 and
$706,451 for the years ended April 30, 1997, 1996 and 1995, respectively.
 
 HSS CONSULTING
 
  HSS Consulting ("HSS") is related to the Group by common ownership. The
Group purchased approximately $740,000, $700,000 and $1,100,000 of goods from
HSS during the years ended April 30, 1997, 1996 and 1995, respectively, and
charged HSS certain shared expenses. HSS owed the Group approximately $45,710
and $78,000 as of April 30, 1997 and 1996, respectively.
 
  See Note 7 for additional related party disclosures.
 
NOTE 7--CAPITAL TRANSACTIONS
 
  During the year ended April 30, 1996, the Group converted $990,000 of Series
A Subordinated Promissory Notes for a 4.5% equity interest in the Group and
$800,000 of Series B Subordinated Promissory Notes for a 5% equity interest in
the Group.
 
  On September 30, 1997, the remaining $220,000 of Series A Notes were
converted for a 1% equity interest in the Group.
 
                                     F-30
<PAGE>
 
                  GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
 
NOTE 8--COMMITMENTS AND CONTINGENCIES
 
 NONCOMPETE AGREEMENTS
   
  In February 1994, the Group entered into various noncompete agreements in
connection with the acquisition of Brudnick. Per the agreements, monthly
payments of $87,500 must be paid for 60 months.     
 
 LETTER OF CREDIT
 
  The Group entered into a $920,000 Community Development Block Grant float
loan demand note with the City of Chicago. See Note 4. The loan is
collateralized by an irrevocable letter of credit in the amount of $980,720
from American National Bank. The maximum available additional letter of credit
facility amounted to $369,280 as of April 30, 1997.
 
 LEASES
 
  The Group leases a facility under a lease expiring February 1999 for
$147,516 annually. The lease requires monthly rent payments with annual
increases and an annual rent adjustment based upon taxes and operating
expenses. Rent and real estate tax expense was $321,203, $267,787 and $247,532
for the years ended April 30, 1997, 1996 and 1995, respectively.
 
  Future minimum lease payments for its facilities are as follows as of April
30, 1997:
 
<TABLE>
      <S>                                                               <C>
      Year Ending April 30:
      1998............................................................. $155,150
      1999.............................................................  112,500
                                                                        --------
                                                                        $267,650
                                                                        ========
</TABLE>
 
NOTE 9--OTHER CASH FLOW INFORMATION
 
  Cash paid for:
 
<TABLE>
<CAPTION>
                                                   1997       1996       1995
                                                ---------- ---------- ----------
<S>                                             <C>        <C>        <C>
Income Taxes................................... $1,836,131 $1,402,500 $1,425,080
                                                ========== ========== ==========
Interest....................................... $3,851,670 $3,234,603 $3,561,462
                                                ========== ========== ==========
</TABLE>
 
NOTE 10--MAJOR CUSTOMER
 
  For the year ended April 30, 1997, sales to one major customer amounted to
more than 10% of total sales. The amount of revenue from that customer was
$46,284,092. The receivable balance for the major customer was $3,887,961 as
of April 30, 1997. There were no major customers for the years ended April 30,
1996 and 1995.
 
NOTE 11--SUBSEQUENT EVENT
 
  On October 3, 1997, CD Smith Drug Company purchased all outstanding
partnership interests in the Group.
 
                                     F-31
<PAGE>
 
                    
                 GIMBEL INVESTOR GROUP L.P. AND SUBSIDIARY     
                      
                   CONSOLIDATED STATEMENT OF OPERATIONS     
                                   
                                (UNAUDITED)     
               
            FOR THE PERIOD FROM MAY 1, 1997 TO OCTOBER 3, 1997     
 
<TABLE>   
<S>                                                               <C>
Net sales........................................................ $157,827,598
Cost of goods sold...............................................  149,785,128
                                                                  ------------
Gross profit.....................................................    8,042,470
Operating expenses:
  Selling, general and administrative............................    5,127,741
  Covenants not to compete.......................................    1,871,875
  Employment agreements..........................................    3,339,582
  Management fees................................................      254,395
  Depreciation and amortization..................................      339,550
                                                                  ------------
                                                                    10,933,143
                                                                  ------------
Operating loss...................................................   (2,890,673)
Other income (expense):
  Interest expense...............................................   (1,454,079)
  Other, net.....................................................       16,691
                                                                  ------------
                                                                    (1,437,388)
                                                                  ------------
Loss before income taxes.........................................   (4,328,061)
Income tax benefit...............................................   (1,671,009)
                                                                  ------------
Net loss......................................................... $ (2,657,052)
                                                                  ============
</TABLE>    
 
                                      F-32
<PAGE>
 
                   GIMBEL INVESTOR GROUP L.P. AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (UNAUDITED)
               FOR THE PERIOD FROM MAY 1, 1997 TO OCTOBER 3, 1997
 
<TABLE>
<S>                                                              <C>
OPERATING ACTIVITIES
Net loss........................................................ $ (2,657,052)
Adjustments to reconcile net loss to net cash provided by
 operating activities:
  Depreciation..................................................      283,229
  Amortization..................................................      108,439
  Provision for doubtful accounts...............................      123,634
  Deferred income taxes.........................................     (736,108)
  Changes in operating assets and liabilities:
    Accounts receivable.........................................   (3,458,262)
    Other receivables...........................................   (4,599,907)
    Refundable income taxes.....................................   (1,351,293)
    Inventory...................................................     (836,326)
    Prepaid expenses............................................      244,444
    Other.......................................................     (141,885)
    Accounts payable............................................    8,040,973
    Accrued expenses............................................    5,218,990
                                                                 ------------
Net cash provided by operating activities.......................      238,876
INVESTING ACTIVITIES
Purchases of property and equipment.............................   (1,086,124)
                                                                 ------------
Net cash used in investing activities...........................   (1,086,124)
FINANCING ACTIVITIES
Borrowings on line of credit....................................   66,447,400
Principal payments on line of credit............................  (66,094,695)
Proceeds from issuance of long-term debt........................      860,967
Principal payments on long-term debt............................     (337,584)
                                                                 ------------
Net cash provided by financing activities.......................      876,088
Increase in cash................................................       28,840
Cash at beginning of period.....................................          --
                                                                 ------------
Cash at end of period........................................... $     28,840
                                                                 ============
</TABLE>
 
 
                                      F-33
<PAGE>
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
 NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS PROSPEC-
TUS AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED OR TO ANY PERSON TO WHOM IT IS UN-
LAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS OR THAT THERE HAS BEEN NO CHANGE ON
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
 
                                  -----------
 
                               TABLE OF CONTENTS
<TABLE>   
<CAPTION>
                                                                            PAGE
<S>                                                                         <C>
Prospectus Summary........................................................    3
Risk Factors..............................................................    8
Dilution..................................................................   12
Use of Proceeds...........................................................   13
Dividend Policy...........................................................   13
Capitalization............................................................   13
Selected Consolidated and Pro Forma
 Financial Data...........................................................   14
Pro Forma Consolidated
 Statement of Income......................................................   16
Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   18
Business..................................................................   25
Management................................................................   33
Certain Transactions......................................................   38
Principal and Selling Shareholders........................................   39
Description of Capital Stock..............................................   40
Shares Eligible for Future Sale...........................................   42
Underwriting..............................................................   43
Legal Matters.............................................................   45
Experts...................................................................   45
Additional Information....................................................   45
Index to Consolidated Financial Statements................................  F-1
</TABLE>    
 
                                  -----------
 
UNTIL           , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRIT-
ERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
                                
                             4,750,000 SHARES     
 
                                      LOGO
                           
                        C.D. SMITH HEALTHCARE, INC.     
 
                                  COMMON STOCK
 
 
                                ---------------
 
                                   PROSPECTUS
 
                                ---------------
 
DONALDSON, LUFKIN & JENRETTE
       
                                 BT ALEX. BROWN
 
                                                               WHEAT FIRST UNION
 
                                            , 1998
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
 
                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
  The following is a list of the estimated expenses to be paid by the
Registrant in connection with the initial issuance and distribution of the
securities being registered, other than underwriting discounts and
commissions:
 
<TABLE>   
      <S>                                                            <C>
      SEC Registration Fee.......................................... $   29,005
      NASD Fees.....................................................     10,333
      NYSE Listing Fees.............................................    109,100
      Printing and Engraving Expenses...............................    125,000
      Legal Fees and Expenses.......................................    250,000
      Accounting Fees and Expenses..................................    250,000
      Professional Advisory Fees....................................    857,500
      Blue Sky Qualification Fees and Expenses......................      2,500
      Transfer Agent and Registrar's Fees...........................        500
      Miscellaneous.................................................     16,062
                                                                     ----------
          Total..................................................... $1,650,000
                                                                     ==========
</TABLE>    
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
  Section 351.355 of the Missouri Revised Statutes (1986) allows
indemnification of corporate directors and officers by a corporation under
certain circumstances as therein specified against liabilities, expenses,
counsel fees and costs reasonably incurred in connection with or arising out
of any action, suit, proceeding or claim in which such person is made a party
by reason of such person being or having been such director or officer.
 
  Section 351.355 also permits such persons to seek indemnification under any
applicable bylaw, agreement, vote of shareholders or disinterested directors
or otherwise. Section 351.355 also permits corporations to maintain insurance
for officers and directors against liabilities incurred while acting in such
capacities whether or not the corporation would be empowered to indemnify such
person under this section.
 
  The Company's Amended Articles of Incorporation and Amended and Restated
Bylaws contain a provision under which, in certain circumstances, the Company
may indemnify officers and directors from and against any and all of the
expenses, liabilities or other matters covered by said provision.
 
  There is in effect for the Registrant an insurance policy providing
directors and officers with indemnification, subject to certain exclusions and
to the extent not otherwise indemnified by the Registrant, against loss
(including expenses incurred in the defense of claims in connection therewith)
arising from any negligent act, error, omission, misstatement, misleading
statement or breach of duty while acting in their capacity as directors and
officers of the Registrant. The policy also provides for the reimbursement of
the Registrant for liability incurred in the indemnification of its directors
and officers. The Registrant has purchased coverage for liability under the
Securities Act of 1933 (the "Securities Act") in connection with the purchase,
sale, offer or solicitation of an offer to purchase or sell any securities of
the Registrant or an affiliate of the Registrant.
 
  The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, provides for indemnification by the Underwriters of the
Registrant's directors, its officers who sign the Registration Statement and
its controlling persons and by the Registrant of the Underwriters' directors
and their controlling persons against certain liabilities, including
liabilities under the Securities Act, under certain circumstances.
 
                                     II-1
<PAGE>
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
 
  The following table sets forth the Company's sales of unregistered
securities in the last three years:
 
<TABLE>   
<CAPTION>
              SECURITIES SOLD                         PURCHASER             EXEMPTION
   <S>                                     <C>                             <C>
   $12,000,000 Senior Subordinated Note    Churchill ESOP Capital Partners Section 4(2)
   Warrants to Purchase 1,080,078 shares   Churchill ESOP Capital Partners Section 4(2)
    of
    Common Stock (immediately exercisable)
</TABLE>    
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
  (a) A list of exhibits filed as part of this Registration Statement appears
at the end of this Registration Statement.
 
  (b) Financial Statement Schedules
 
    (I) Condensed Financial Information of the Registrant.
 
    (II) Valuation and Qualifying Accounts
 
  All other schedules are omitted because they are inapplicable or the
requested information is shown in the financial statement or noted therein.
 
ITEM 17. UNDERTAKINGS.
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
 
  The undersigned Registrant hereby undertakes:
 
    (1) to provide to the underwriters at the closing specified in the
  underwriting agreement certificates in such denominations and registered in
  such names as required by the underwriter to permit prompt delivery to each
  purchaser.
 
    (2) that for purposes of determining any liability under the Securities
  Act of 1933, the information omitted from the form of prospectus filed as
  part of this Registration Statement in reliance upon Rule 430A and
  contained in a form of prospectus filed by the Registrant pursuant to Rule
  424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
  part of this Registration Statement as of the time it was declared
  effective.
 
    (3) that for the purpose of determining any liability under the
  Securities Act of 1933, each post-effective amendment that contains a form
  of prospectus shall be deemed to be a new Registration Statement relating
  to the securities offered therein and the offering of such securities at
  that time shall be deemed to be the initial bona fide offering thereof.
 
                                     II-2
<PAGE>
 
           SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                            C.D. SMITH DRUG COMPANY
                            CONDENSED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                           FEBRUARY 28,
                                                      ------------------------
                                                         1998         1997
                                                      -----------  -----------
<S>                                                   <C>          <C>
ASSETS
Current assets:
  Cash............................................... $    24,202  $    16,041
  Trade accounts and notes receivable (including
   $290,804 and $57,713 due from subsidiaries in 1998
   and 1997, respectively), less allowances of
   $261,179 in 1998 and $248,933 in 1997.............  21,390,200   15,457,847
  Other receivables..................................     525,384      525,410
  Refundable income taxes............................     542,762          --
  Merchandise inventory..............................  34,340,158   30,733,499
  Prepaid expenses and other.........................     156,379      130,159
                                                      -----------  -----------
    Total current assets.............................  56,979,085   46,862,956
                                                      -----------  -----------
  Property and equipment.............................   4,388,383    3,874,208
  Less accumulated depreciation......................  (1,098,916)    (811,099)
                                                      -----------  -----------
                                                        3,289,467    3,063,109
  Debt issuance costs, net...........................     916,695          --
  Other assets (principally investment in
   subsidiaries).....................................  23,078,091      274,629
                                                      -----------  -----------
    Total assets..................................... $84,263,338  $50,200,694
                                                      ===========  ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable................................... $33,654,112  $23,599,940
  Accrued expenses...................................   1,917,215    1,599,155
  Income taxes payable...............................         --       334,035
  Deferred income taxes..............................     122,000       96,000
  Current portion of long-term debt..................     405,072      320,432
                                                      -----------  -----------
    Total current liabilities........................  36,098,399   25,949,562
                                                      -----------  -----------
Line of credit.......................................  26,440,540   19,436,574
Long-term debt, less current portion.................   1,824,369    1,032,203
Deferred income taxes................................     539,000      615,000
Subordinated note payable............................   9,663,026          --
Common stock put warrants............................   2,569,000          --
Shareholders' equity:
  Preferred stock, $.01 par value....................         --           --
  Common stock, $.01 par value.......................     102,000      102,000
  Additional paid-in capital.........................      98,000       98,000
  Retained earnings..................................   8,478,444    4,481,731
  Treasury stock.....................................  (1,133,331)    (953,195)
                                                      -----------  -----------
                                                        7,545,113    3,728,536
  Less note receivable from ESOP.....................    (416,109)    (561,181)
                                                      -----------  -----------
                                                        7,129,004    3,167,355
                                                      -----------  -----------
    Total liabilities and shareholders' equity....... $84,263,338  $50,200,694
                                                      ===========  ===========
</TABLE>
 
                                      II-3
<PAGE>
 
     SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
 
                            C.D. SMITH DRUG COMPANY
                         CONDENSED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                       YEAR ENDED    YEAR ENDED    YEAR ENDED
                                      FEBRUARY 28,  FEBRUARY 28,  FEBRUARY 29,
                                          1998          1997          1996
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Net sales............................ $386,689,291  $301,523,181  $224,163,431
Cost of goods sold...................  368,431,319   286,784,687   213,481,167
                                      ------------  ------------  ------------
Gross profit.........................   18,257,972    14,738,494    10,682,264
Operating expenses:
  Selling, general and
   administrative....................   11,444,265    10,015,576     7,986,670
  Depreciation and amortization......      305,736       253,725       204,803
                                      ------------  ------------  ------------
                                        11,750,001    10,269,301     8,191,473
                                      ------------  ------------  ------------
Operating income.....................    6,507,971     4,469,193     2,490,791
Other income (expense):
  Income (loss) from subsidiaries....    1,465,162         4,671        (4,791)
  Interest expense on credit
   facilities........................   (2,002,798)   (1,571,214)   (1,478,483)
  Interest expense on subordinated
   debt..............................     (812,026)          --            --
  Other, net.........................      255,425       126,543        41,964
                                      ------------  ------------  ------------
                                        (1,094,237)   (1,440,000)   (1,441,310)
                                      ------------  ------------  ------------
Income before income taxes...........    5,413,734     3,029,193     1,049,481
Income tax provision.................    1,417,021     1,099,190       415,377
                                      ------------  ------------  ------------
Net income........................... $  3,996,713  $  1,930,003  $    634,104
                                      ============  ============  ============
</TABLE>
 
                                      II-4
<PAGE>
 
     SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
 
                            C.D. SMITH DRUG COMPANY
                       CONDENSED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                       YEAR ENDED    YEAR ENDED    YEAR ENDED
                                      FEBRUARY 28,  FEBRUARY 28,  FEBRUARY 29,
                                          1998          1997          1996
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
CASH PROVIDED BY (USED IN) OPERATING
 ACTIVITIES.........................  $  3,403,864  $ (7,067,552) $      4,401
INVESTING ACTIVITIES
Net cash paid in the General Drug
 Acquisition, including transaction
 costs..............................   (29,097,392)          --            --
Purchases of property and equipment.      (532,094)   (1,034,032)     (240,769)
Collections on note receivable from
 ESOP...............................       145,072       145,072       145,072
Other...............................           --         12,500           --
                                      ------------  ------------  ------------
Net cash used in investing
 activities.........................   (29,484,414)     (876,460)      (95,697)
FINANCING ACTIVITIES
Borrowings on line of credit........   406,400,925   306,643,441   223,438,779
Principal payments on line of
 credit.............................  (391,396,959) (298,517,612) (222,864,039)
Proceeds from issuance of long-term
 debt...............................     1,259,996       800,000           --
Principal payments on long-term
 debt...............................      (338,404)     (271,440)     (231,425)
Proceeds from issuance of
 subordinated note payable with
 common stock put warrants..........    12,000,000           --            --
Payments of debt issuance costs.....    (1,656,711)          --            --
Purchases of treasury stock.........      (180,136)     (791,795)     (161,400)
                                      ------------  ------------  ------------
Net cash provided by financing
 activities.........................    26,088,711     7,862,594       181,915
Increase (decrease) in cash.........         8,161       (81,418)       90,619
Cash at beginning of year...........        16,041        97,459         6,840
                                      ------------  ------------  ------------
Cash at end of year.................  $     24,202  $     16,041  $     97,459
                                      ============  ============  ============
</TABLE>
 
                                      II-5
<PAGE>
 
    SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
 
                            C.D. SMITH DRUG COMPANY
 
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
 
1. BASIS OF PRESENTATION
 
  In the parent company-only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The parent company-only financial
statements should be read in conjunction with the Company's consolidated
financial statements.
 
2. THE GENERAL DRUG ACQUISITION
 
  Effective October 3, 1997, the Company purchased all outstanding partnership
interests in Gimbel Investor Group, L.P. ("Gimbel"), which owns 100% of the
outstanding stock of G.D. Holdings Inc. ("Holdings"), the parent company of
General Drug Company and subsidiaries (the "General Drug Companies"), for $28
million in cash ("the General Drug Acquisition"). The transaction was
accounted for using the purchase method. The purchase price was allocated to
net assets acquired on the basis of their estimated fair values. The excess of
the purchase price, including approximately $1.1 million of transaction costs,
over the fair market value of the net assets acquired, amounted to $25,567,561
and has been recorded as goodwill. All operations acquired from Gimbel are
conducted within the General Drug Companies. Gimbel and Holdings had no
material assets or liabilities aside from their investment in the General Drug
Companies. The General Drug Companies' results of operations have been
included in the consolidated results of operations since the date of
acquisition.
 
  In accordance with the principles of push-down accounting, the Company
recorded all goodwill on the financial statements of the subsidiaries. In
addition, $8 million of acquisition indebtedness under the Company's
refinanced senior credit facility (see Note 3) was recorded on the
subsidiaries' financial statements, representing the approximate amount of the
subsidiaries' available borrowing base (see Note 3) at the time of the
acquisition. All debt issuance costs related to the subsidiaries' share of
borrowings under the refinanced credit facility were also pushed down to the
subsidiaries.
 
3. LINE OF CREDIT AND LONG-TERM DEBT
 
  In connection with the General Drug Acquisition, the Company refinanced its
senior credit facility with a group of lending institutions providing for a
revolving line of credit and certain term notes. Under the terms of the new
facility, which expires in October 2000, the Company and its subsidiaries may
borrow up to approximately $90 million, in addition to the amounts outstanding
under the term notes described below, based on eligible inventory and accounts
receivable balances ("the borrowing base"). At February 28, 1998, the
consolidated borrowing base amounted to approximately $102 million. The
Company and its subsidiaries must pay an aggregate commitment fee of .2% per
annum on the unused balance of the credit agreement plus an agency fee of
$10,000 per month. At February 28, 1998, consolidated availability under the
line of credit was $16,747,000, excluding the effects of outstanding checks
and lockbox receipts included in outstanding line-of-credit borrowings.
Generally, advances bear interest at the lender's prime rate (8.5% at February
28, 1998) 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 1.75% if LIBOR loans are purchased. Such interest periods are of
a one-, two-, or three-month duration. The Company line of credit borrowings,
amounting to $26,440,540 and bearing interest at a weighted average LIBOR-
based rate of 7.79% at February 28, 1998, as well as the subsidiaries' line of
credit borrowings amounting to $54,440,387 at February 28, 1998, are
collateralized by substantially all assets of the Company and its
subsidiaries. Beginning in October 2000, the senior credit facility can be
renewed for one-year terms upon mutual consent.
 
  At February 28, 1997, the Company maintained a credit facility with a
lending institution providing for a revolving line of credit and two term
notes. Under the terms of the facility, which was to expire in February
 
                                     II-6
<PAGE>
 
    SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
 
                            C.D. SMITH DRUG COMPANY
 
             NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
 
2000, the Company could borrow up to $32 million, including the amounts
outstanding under the term notes, based on eligible inventory and accounts
receivable balances. At February 28, 1997, the borrowing base amounted to
approximately $27 million. Interest on borrowings under the revolving line of
credit was payable monthly at the lender's prime rate (8.25% at February 28,
1997) plus 1.1%. Line-of-credit borrowings of $19,436,574 at February 28, 1997
were collateralized by substantially all assets of the Company and had been
personally guaranteed up to $1 million by the Chief Executive Officer ("CEO")
of the Company.
 
  The senior credit agreement contains several covenants which, among other
things, restrict capital expenditures and dividend payments and require the
Company and its subsidiaries to maintain certain specified levels of net
worth, interest and debt service coverage and minimum levels of stock
ownership by the C.D. Smith Drug Company Employee Stock Ownership Plan
("ESOP") and the CEO. This agreement also limits cash dividends, loans or cash
transfers from the General Drug Companies to the Company, other than purchases
and sales between the companies in the normal course of business. At February
28, 1998, the restricted net assets of the General Drug Companies were
approximately $22.5 million.
 
  The Company's long-term debt at February 28, all of which is due October
2000, unless extended by mutual consent of the Company and the lending
institutions, consists of the following:
 
<TABLE>   
<CAPTION>
                                                             FEBRUARY 28,
                                                         ---------------------
                                                            1998       1997
                                                         ---------- ----------
<S>                                                      <C>        <C>
Notes payable to lending institutions under term note
 provisions of the senior credit facility described
 above, in monthly installments of $12,089, plus
 interest at .5% below the bank's prime rate,
 collateralized by 30,900 shares of common stock held by
 ESOP................................................... $  416,109 $  561,181
Notes payable to lending institutions under term note
 provisions of the senior credit facility described
 above, in monthly installments of $16,667, plus
 interest at the bank's prime rate, collateralized by
 certain warehouse equipment............................    933,332    746,668
Notes payable to lending institutions under term note
 provisions of the senior credit facility described
 above, in monthly installments aggregating $5,000, plus
 interest at the bank's prime rate, collateralized by
 certain real estate....................................    880,000        --
                                                         ---------- ----------
                                                          2,229,441  1,307,849
Less current portion....................................    405,072    305,072
                                                         ---------- ----------
                                                         $1,824,369 $1,002,777
                                                         ========== ==========
</TABLE>    
 
  The prime rate of the lending institutions providing the term debt discussed
above was 8.50% at February 28, 1998.
 
  Principal maturities of long-term debt for each of the next three years are
as follows:
 
<TABLE>   
<CAPTION>
   YEAR ENDING
   FEBRUARY 28,                                                         AMOUNT
   ------------                                                       ----------
   <S>                                                                <C>
   1999.............................................................. $  405,072
   2000..............................................................    405,072
   2001..............................................................  1,419,297
</TABLE>    
 
 
                                     II-7
<PAGE>
 
    SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
 
                            C.D. SMITH DRUG COMPANY
 
             NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
4. SUBORDINATED NOTE PAYABLE
 
  In conjunction with the General Drug Acquisition, the Company issued a
subordinated note payable due October 3, 2004 in the principal amount of $12
million with detachable stock warrants (see Note 5) to an investment group.
Interest at 12% per annum is payable quarterly. Principal installments are due
and payable 90 days after the end of each fiscal year, commencing with the
fiscal year ending February 28, 1999, in an amount equal to 30% of "Excess
Cash Flow" as defined below subject to certain conditions. "Excess Cash Flow"
is generally defined in the related agreement as consolidated earnings before
interest expense, income taxes, depreciation and amortization ("EBITDA") minus
current tax liabilities, interest paid, principal payments and capital
expenditures. The estimated fair value of the warrants at October 3, 1997,
amounting to $2,569,000, was recorded as a discount on the subordinated debt.
The discount is being amortized to interest expense over the seven-year term
using the interest method resulting in an effective interest rate of 17.9% on
the subordinated debt. The amount of unamortized discount at February 28, 1998
is $2,336,974.
 
  The subordinated note agreement contains several covenants which are similar
to the covenants disclosed in connection with the Company's senior credit
facility (see Note 3).
 
5. COMMON STOCK PUT WARRANTS
   
  The detachable common stock warrants to purchase 1,246,236 shares of common
stock of the Company (1,080,078 shares in the event the Company completes an
initial public offering) discussed in Note 4 are subject to certain
antidilution and other adjustments, as defined in the related agreement. The
warrants are exercisable at a price of $0.0004 per share. After the fifth
anniversary of the closing, the holders have an option to put the warrants to
the Company at a price based on a multiple of EBITDA less indebtedness and
certain other amounts as defined in the agreement. Once the warrants have been
put to the Company, the put price is payable no earlier than 90 days but no
later than 100 days of the put date. Additionally, after the sixth anniversary
of the closing, the Company has the option to exercise a call right to
purchase from the holders all or any portion of such warrant securities, and
the holders are obligated to sell at a price determined in a similar manner to
that of the put option. The $2,569,000 value of these put warrants is
presented as a liability in the accompanying consolidated balance sheet due to
the holder's option to require settlement in cash. The Company is accreting
the recorded amount of the warrants to the highest redemption price of the put
warrant using the interest method. No accretion was necessary at February 28,
1998 as the redemption price calculated per the agreement did not exceed the
recorded amount of the warrants.     
 
                                     II-8
<PAGE>
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
                   C. D. SMITH DRUG COMPANY AND SUBSIDIARIES
                               FEBRUARY 28, 1998
 
<TABLE>   
<CAPTION>
         COL. A             COL. B                  COL. C                  COL. D        COL. E
                                                  ADDITIONS
                          BALANCE AT                       CHARGED TO     DEDUCTIONS
                          BEGINNING      CHARGED TO     OTHER ACCOUNTS --     --        BALANCE AT
      DESCRIPTION         OF PERIOD  COSTS AND EXPENSES     DESCRIBE       DESCRIBE    END OF PERIOD
<S>                       <C>        <C>                <C>               <C>          <C>
Three Months ended May
 31, 1998: Deducted from
 asset accounts:
 Allowance for doubtful
 accounts...............   $650,384       $ 77,000          $    --        $ 62,318(2)   $ 665,066
Year Ended February 28,
 1998: Deducted from
 asset accounts:
 Allowance for doubtful
 accounts...............   $248,933       $200,825          $556,896(1)    $356,270(2)   $ 650,384
Year Ended February 28,
 1997: Deducted from
 asset accounts:
 Allowance for doubtful
 accounts...............   $110,088       $222,900               --        $ 84,055(2)   $ 248,933
Year Ended February 29,
 1996: Deducted from
 asset accounts:
 Allowance for doubtful
 accounts...............   $ 87,063       $ 37,480               --        $ 14,455(2)   $ 110,088
</TABLE>    
(1) Addition to reserves as a result of the General Drug Acquisition.
 
(2) Uncollectible accounts written off, net of recoveries.
 
                                      II-9
<PAGE>
 
                                  SIGNATURES
   
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF ST.
JOSEPH, STATE OF MISSOURI, ON THIS 20TH DAY OF JULY, 1998.     
 
                                          C.D. Smith Drug Company
 
                                                   /s/ Robert C. Farley
                                          By:__________________________________
                                                     Robert C. Farley
                                                 Chief Executive Officer,
                                              President, and Chairman of the
                                                           Board
 
                               POWER OF ATTORNEY
 
  EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY APPOINTS ROBERT C. FARLEY
AND S. JEANNE MATHIESEN AND EACH OF THEM SEVERALLY, ACTING ALONE AND WITHOUT
THE OTHER, HIS OR HER TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL
POWER OF SUBSTITUTION AND RESUBSTITUTION, WITH THE AUTHORITY TO EXECUTE IN THE
NAME OF EACH SUCH PERSON AND TO FILE WITH THE SECURITIES AND EXCHANGE
COMMISSION, TOGETHER WITH ANY EXHIBITS THERETO AND OTHER DOCUMENTS THEREWITH,
ANY AND ALL AMENDMENTS (INCLUDING WITHOUT LIMITATION POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT NECESSARY OR ADVISABLE TO ENABLE
THE REGISTRANT TO COMPLY WITH THE SECURITIES ACT OF 1933, AS AMENDED AND ANY
RULES, REGULATIONS AND REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION
IN RESPECT THEREOF, WHICH AMENDMENTS MAY MAKE SUCH OTHER CHANGES IN THE
REGISTRATION STATEMENT AS THE AFORESAID ATTORNEY-IN-FACT OR AGENT OR HIS
SUBSTITUTE AND SUBSTITUTES EXECUTING THE SAME DEEMS APPROPRIATE.
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
 
<TABLE>   
<CAPTION>
             SIGNATURE                           TITLE                    DATE
<S>                                  <C>                           <C>
        /s/ Robert C. Farley         Chief Executive Officer,        July 20, 1998
____________________________________  President, Chairman of the
          Robert C. Farley            Board and Director
                                      (Principal Executive
                                      Director)
 
      /s/ S. Jeanne Mathiesen        Chief Financial Officer,        July 20, 1998
____________________________________  Treasurer and Director
        S. Jeanne Mathiesen           (Principal Financial and
                                      Accounting Officer)
 
       /s/ Delora J. Jamison         Director                        July 20, 1998
____________________________________
         Delora J. Jamison
         /s/ J. Duane Weeks          Director                        July 20, 1998
____________________________________
           J. Duane Weeks
        /s/ David R. Parker          Director                        July 20, 1998
____________________________________
          David R. Parker
        /s/ Barbara J. Mowry         Director                        July 20, 1998
____________________________________
          Barbara J. Mowry
</TABLE>    
 
                                     II-10
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>   
<CAPTION>
  EXHIBIT  DESCRIPTION
 <C>       <S>                                                         <C>
  **1.1    Form of Underwriting Agreement.
   *3.1    Form of Articles of Incorporation of C.D. Smith
           Healthcare, Inc. (Amended in Their Entirety)
  **3.2    Form of Amended and Restated Bylaws of C.D. Smith
           Healthcare, Inc.
   *4.1    Specimen of Common Stock Certificate.
  **4.2    Note Purchase Agreement, dated October 3, 1997, by and
           between C.D. Smith Drug Company and Churchill ESOP Capi-
           tal Partners.
  **4.3    Warrant Agreement, dated October 3, 1997, by and between
           C.D. Smith Drug Company and Churchill ESOP Capital Part-
           ners.
   *5.1    Opinion of Blackwell Sanders Peper Martin LLP.
 **10.1    C.D. Smith Drug Company Employee Stock Ownership Plan,
           dated December 10, 1991, as amended.
  *10.2    Amended and Restated 1996 Equity Compensation Plan (up-
           dated).
  *10.3    Form of Non-Qualified Stock Option Award Agreement by and
           between C.D. Smith Healthcare, Inc. and the recipient.
 **10.4    Loan and Security Agreement, dated October 3, 1997, by
           and among C.D. Smith Drug Company, General Drug Company,
           SBS Pharmaceuticals, Inc. and James Brudnick Company,
           Inc. as Borrowers and LaSalle Business Credit, Inc. as
           Lender and Agent for the Lenders, Heller Financial, Inc.
           as Lender, American National Bank & Trust Company of Chi-
           cago as Lender and certain other financial institutions
           signatories thereto.
 **10.5    First Amendment to Loan and Security Agreement, dated De-
           cember 27, 1997, by and among C.D. Smith Drug Company,
           General Drug Company, SBS Pharmaceuticals, Inc. and James
           Brudnick Company, Inc. as Borrowers and LaSalle Business
           Credit, Inc. as a Lender and Agent for the Lenders,
           Heller Financial, Inc. as a Lender, American National
           Bank & Trust Company of Chicago as a Lender and certain
           other financial institutions signatories thereto.
 **10.6    Second Amendment to Loan and Security Agreement, dated
           January 8, 1998, by and among C.D. Smith Drug Company,
           General Drug Company, SBS Pharmaceuticals, Inc. and James
           Brudnick Company, Inc. as Borrowers and LaSalle Business
           Credit, Inc. as a Lender and Agent for the Lenders,
           Heller Financial, Inc. as a Lender, American National
           Bank & Trust Company of Chicago as a Lender and certain
           other financial institutions signatories thereto.
 **10.7    Lease for Property Located at 219 Medford Street, Malden,
           Massachusetts, dated February 11, 1994, by and between
           Irving S. Brudnick as Trustee of the Bershim Realty Trust
           and Brudnick Acquisition Corporation.
 **10.8    Employment Agreement, dated September 1, 1995, by and be-
           tween Robert C. Farley and C.D. Smith Drug Company.
 **10.9    Employment Agreement, dated July 8, 1997 and effective as
           of March 1, 1997, by and between Jeanne Mathiesen and
           C.D. Smith Drug Company.
 **10.10   Employment Agreement, dated July 8, 1997 and effective as
           of March 1, 1997, by and between Delora Jamison and C.D.
           Smith Drug Company.
</TABLE>    
 
<PAGE>
 
<TABLE>   
<CAPTION>
EXHIBIT    DESCRIPTION
 <C>       <S>                                                         <C>
 **10.11   Employment Agreement, dated as of November 22, 1996, by
           and between Richard Meehan and C.D. Smith Drug Company.
 **10.12   Severance Compensation Agreement Following Change in Con-
           trol, dated as of January 7, 1997, by and between Jeanne
           Mathiesen and C.D. Smith Drug Company.
 **10.13   Severance Compensation Agreement Following Change in Con-
           trol, dated as of January 7, 1997, by and between Delora
           Jamison and C.D. Smith Drug Company.
 **10.14   Employment Agreement, dated October 3, 1997, by and be-
           tween Joseph Harris and General Drug Company and, in a
           limited capacity, C.D. Smith Drug Company.
 **10.15   Employment Agreement, dated October 3, 1997, by and be-
           tween Richard Brudnick and James Brudnick Company, Inc.
           and, in a limited capacity, C.D. Smith Drug Company.
 **10.16   Acquisition Agreement, dated as of September 11, 1997, by
           and among C.D. Smith Drug Company, G.D. Holdings of Dela-
           ware, Inc., Gimbel Investor Group L.P. and certain part-
           ners of Gimbel Investor Group L.P.
 **10.17   First Amendment to Acquisition Agreement, dated as of Oc-
           tober 3, 1997, by and among C.D. Smith Drug Company, G.D.
           Holdings of Delaware, Inc., Gimbel Investor Group L.P.
           and certain partners of Gimbel Investor Group L.P.
  *10.18   Fourth Amendment to the Loan and Security Agreement,
           dated as of July   , 1998, by and among C.D. Smith Drug
           Company, General Drug Company, SBS Pharmaceuticals, Inc.
           and James Brudnick Company, Inc. as Borrowers and LaSalle
           Business Credit, Inc. as a Lender and Agent for the Lend-
           ers, Heller Financial, Inc. as a Lender, American Na-
           tional Bank & Trust Company of Chicago as a Lender and
           certain other financial institutions signatories thereto.
  *10.19   Amendment to C.D. Smith Healthcare, Inc. Employee Stock
           Ownership Plan, dated July 20, 1998.
 **21.1    List of Subsidiaries.
  *23.1    Consent of Ernst & Young LLP.
  *23.2    Consent of Blackwell Sanders Peper Martin LLP (contained
           in Exhibit 5.1).
  *23.3    Consent of Blackman Kallick Bartelstein, LLP.
  *24.1    Power of Attorney (set forth on the signature page to the
           Registration Statement).
 **27.1    Financial Data Schedule.
</TABLE>    
- ---------------------
   
*Filed herewith     
   
**Filed with the inital filing of this registration statement     

<PAGE>
 
                                  Exhibit 3.1
                                  -----------

                                 AMENDMENT OF
                         ARTICLES OF INCORPORATION OF
                            C.D. SMITH DRUG COMPANY
                          (AMENDED IN THEIR ENTIRETY)


State of Missouri
Secretary of State
Rebecca McDowell Cook
P.O. Box 778
Jefferson City, Missouri 65102


     Pursuant to the provisions of the General and Business Corporation Law of
Missouri, the undersigned corporation certifies the following:

1.   The present name of the corporation is:  C.D. Smith Drug Company (the
     "Corporation").

     The name under which it was originally organized was:   Smith Drug Company

2.   The following amendments to the Corporation's Articles of Incorporation
     were adopted by the shareholders on June 27, 1998.

3.   Of the 115,770 shares outstanding, 115,770 of such shares were entitled to
     vote on the following amendments. There were no classes entitled to vote
     thereon as a class.

4.   The number of shares voted for and against the amendments was as follows:

                  Class                No. Voted For       No. Voted Against

               Common Stock               115,770                  0

5.   The amendments do not provide for an exchange, reclassification or
     cancellation of issued shares, or a reduction of the number of authorized
     shares of any class below the number of issued shares of that class.

6.   The text of the Articles of Incorporation is hereby amended to read in its
     entirety as follows:
<PAGE>
 
                           ARTICLES OF INCORPORATION

                                      OF

                          C.D. SMITH HEALTHCARE, INC.
                        (AS AMENDED IN THEIR ENTIRETY)


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


                                   ARTICLE I

          The name of the corporation is C.D. Smith Healthcare, Inc.

                                  ARTICLE II

     The address of the corporation's registered office in the State of Missouri
is 2300 Main Street, Suite 1100, Kansas City, Missouri 64108 and the name of the
registered agent at that address is BSMWL, Inc.

                                  ARTICLE III

     The names and places of residence of the original several shareholders of
the corporation and the number of shares subscribed by each were as follows:

<TABLE>
<CAPTION>
 
     Names           Places of Residence      Number of Shares
     -----           -------------------    --------------------
<S>                 <C>                     <C>
 
Charles D. Smith    Saint Joseph, Missouri  Five Hundred Shares
Samuel D. Smith     Saint Joseph, Missouri  Three Hundred Shares
Edward C. Smith     Saint Joseph, Missouri  One Hundred Shares
John J. Judson      Saint Joseph, Missouri  One Hundred Shares
</TABLE>

                                  ARTICLE IV

     The total number of shares of stock which the corporation shall have the
authority to issue is one hundred million (100,000,000), of which ninety million
(90,000,000) shares with the par value of $.01 per share shall be designated
"Common Stock" and ten million (10,000,000) shares with the par value of $.01
per share shall be designated "Preferred Stock."
<PAGE>
 
     This Article expressly grants the Board of Directors authority to issue
Preferred Stock from time to time as the preferred stock of any series, and in
connection with the creation of each such series, to fix by the resolution or
resolutions providing for the issue of shares thereof, the number of shares of
such series, and the designations, powers, preferences, and rights, and the
qualifications, limitations, or restrictions of such series, to the full extent
now or hereafter permitted by the General and Business Corporation law of
Missouri.

                                   ARTICLE V

     The shareholders of the corporation shall have no preemptive right to
acquire additional shares of stock of any class or series of the corporation, or
any securities of the corporation convertible into such shares.

                                   ARTICLE VI

     1.  The number of directors to constitute the board of directors shall be
as set forth in the corporation's Bylaws. Directors need not be shareholders
unless the articles of incorporation at any time so require. The number that
constitutes the current board of directors is three.

     2.  Upon the filing of these Articles of Incorporation with the Secretary
of State of the State of Missouri, the board of directors shall be divided into
three classes, designated Class I, Class II and Class III. Each class shall
consist, as nearly as possible, of one-third of the total number of directors
then constituting the entire board of directors. The term of the initial Class I
directors shall expire at the annual stockholders' meeting for year 1, the term
of the initial Class II directors shall expire at the annual stockholders'
meeting for year 2, and the term of the initial Class III directors shall expire
at the annual stockholders' meeting for 3. At each annual stockholders' meeting
beginning with the annual stockholders' meeting for year 1, directors elected to
succeed the directors whose terms expire at such meeting shall be elected for a
full three-year term. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain or attain, to
the extent possible, the equality of the number of directors in each class. In
no case shall a decrease in the number of directors shorten the term of any
incumbent director. A director shall hold office until the annual meeting for
the year in which such director's term expires and until a successor shall be
duly elected and qualified, or until such director's earlier death, resignation
or removal.

     3.  Subject to the rights of the holders of any preferred stock then
outstanding, any vacancies existing on the board of directors for any reason,
including by reason of any increase in the number of directors, shall be filled
only by the board of directors, acting by the affirmative vote of a majority of
the directors then in office. The term of a director elected to fill a vacancy
shall expire upon the expiration of the term of office of the class in which
such vacancy occurred.
<PAGE>
 
                                  ARTICLE VII

     The corporation shall have a perpetual duration.

                                 ARTICLE VIII
                                        
     The purpose of the corporation is to engage in any lawful business.

                                  ARTICLE IX

     The holders of capital stock shall not be entitled to cumulative voting
rights.

                                   ARTICLE X

     The power to adopt, amend or repeal the Bylaws shall be vested solely in
the Board of Directors.

                                  ARTICLE XI

     1.  Indemnification of Directors and Officers Against Liabilities and
Expenses in Actions. Subject to 2 below, the corporation may indemnify any
person who is or was a director or officer of the corporation who is or was a
party, or is threatened to be made a party:

          (a)  to any threatened, pending or completed action, suit or
               proceeding, whether civil, criminal, administrative or
               investigative; or

          (b)  to any threatened, pending or completed action or suit by or in
               the right of the corporation to procure a judgment in its favor,

by reason of the fact that such person is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding.

     The corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the corporation or any other
corporation, partnership, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not the corporation would have the
power to indemnify such person against such expense, liability or loss under the
General Business and Corporation Law of Missouri.
<PAGE>
 
     2.  Limits of Indemnification.  No indemnification shall be made to any
person from or on account of such person's conduct which was finally adjudged to
have been knowingly fraudulent, deliberately dishonest or willful misconduct.
The corporation may in its discretion, by action of its board of directors, deny
to any person the indemnity provided in this Article in the event that such
person fails to notify the corporation within a reasonable period of time of the
commencement of any action, suit or proceeding or threat thereof, is to be made
against the corporation. The failure of such person to so notify the corporation
shall not relieve the corporation from any liability which it may otherwise have
under Mo. Rev. Stat. 351.355, or under any bylaw, any agreement or otherwise.
The corporation shall be entitled to participate in any such action, suit, or
proceeding at its own expense and may employ its own counsel.

     3.  Advancement of Expenses.  Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of the action, suit or proceeding upon receipt of a
written undertaking by or on behalf of the director or officer to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the corporation as provided herein.

     4.   Nonexclusive Right.  The indemnification and advancement of expenses
provided herein shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under these
Articles of Incorporation or any bylaw or any agreement, vote of the
shareholders or otherwise, both as to action in a person's official capacity and
as to action in another capacity while holding the office of director or
officer. The corporation is hereby expressly authorized by the shareholders to
enter into agreements with its present and future directors and officers which
provide further indemnification than is granted herein. Any such agreement
providing for further indemnity entered into pursuant hereto after the date of
approval of this Article by the corporation's shareholders need not be further
approved by the shareholders of the corporation to be fully effective and
enforceable. Such indemnification (whether by agreement or otherwise) shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such person.

                                  ARTICLE XII

     Meetings of shareholders may be held within or without the State of
Missouri, as the bylaws of the corporation may provide. The books of the
corporation may be kept outside the State of Missouri at such place or places as
may be designated from time to time by the Board of Directors or in the bylaws
of the corporation. Election of directors need not be by written ballot unless
the bylaws of the corporation so provide.

     Any action required or permitted to be taken by the shareholders of the
corporation must be effected at a duly called annual or special meeting of
shareholders of the corporation and may not be effected by any consent in
writing by such shareholders.
<PAGE>
 
                                 ARTICLE XIII

     Subject to the rights of the holders of any Preferred Stock then
outstanding, (i) any director, or the entire board of directors, may be removed
from office at any time, but only for Cause, by the affirmative vote of the
holders of record of outstanding shares representing at least a majority of the
voting power of all the shares of capital stock of the corporation then entitled
to vote generally in the election of directors, voting together as a single
class, and (ii) to the extent permitted by law, any director may be removed from
office at any time, but only for Cause, by the affirmative vote of a majority of
the entire board of directors. As used in these Articles of Incorporation, the
term "Cause" means fraud or bad faith in such person's conduct as a director.

                                  ARTICLE XIV

     Special meetings of the stockholders may be called by the President, by the
Board of Directors, or by the holders of not less than 50% of all outstanding
shares entitled to vote at such meeting or by such other officers or persons as
may be provided in the Bylaws.

     No action required or permitted to be taken at any annual meeting nor
special meeting of stockholders of the corporation may be taken without a
meeting, and the power of stockholders to consent in writing without a meeting
is specifically denied.

                                  ARTICLE XV

     No director or officer of the corporation shall be liable to the
corporation for any loss, damage, liability or expense suffered by it on account
of any action taken or omitted to be taken by such person as a director or
officer of the corporation, or of another corporation, partnership, joint
venture, trust or other enterprise (including employee benefit plans) which such
person serves as a director, officer, employee or agent at the request of the
corporation, if such person:

          (a)  exercised the same degree of care and skill as a prudent man
               would have exercised under the circumstances in the conduct of
               his own affairs, or

          (b)  took or omitted to take such action in reliance upon advice of
               counsel for the corporation, or for another corporation,
               partnership, joint venture, trust or other enterprise or upon
               statements made or information furnished by directors, officers,
               employees or agents of the corporation, or of another
               corporation, partnership, joint venture, trust or other
               enterprise (including employee benefit plans) which such person
               had no reasonable grounds to disbelieve.
<PAGE>
 
                                  ARTICLE XVI

     The corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation in the manner now or
hereafter prescribed herein and by the General and Business Corporation Law of
Missouri, and all rights conferred upon shareholders herein are granted subject
to this reservation. Notwithstanding the foregoing or any other provisions of
these Articles of Incorporation or the Bylaws of the corporation, the
affirmative vote of the holders of at least 80% of the voting power of the
shares of the then outstanding voting stock of the corporation, voting together
as a single class, shall be required to amend or repeal, or adopt any provisions
inconsistent with, this Article and Articles V, VI, IX, XI, XIII, XIV and XV.

     IN WITNESS WHEREOF, Robert C. Farley has executed this instrument in his
capacity as President of the Corporation and Delora Jamison has attested said
execution in her capacity as Secretary of the Corporation on the 27th day of
June, 1998.

                                       C.D. SMITH DRUG COMPANY

[Seal]


                                       By: /s/ Robert C. Farley
                                           -------------------------------------
                                             Robert C. Farley, President


ATTEST


/s/ Delora Jamison
- -------------------------------
Delora Jamison, Secretary
<PAGE>
 
STATE OF MISSOURI        )
                         ) ss
COUNTY OF BUCHANAN       )

     I, SANDRA M. McCREREY, a Notary Public, do hereby certify that on this 27th
day of June, 1998, personally appeared before me Robert C. Farley who, being by
me first duly sworn, declared that he is the President of C.D. Smith Drug
Company, that he signed the foregoing document as President of the corporation,
and that the statements contained therein are true. I further certify that on
this 27th day of June, 1998, personally appeared before me Delora Jamison who,
being by me first duly sworn, declared that she is the Secretary of C.D. Smith
Drug Company and that she signed the foregoing document as Secretary of said
corporation, and that the statements contained therein are true.



[Notarial Seal]               /s/ Sandra McCrerey
                              --------------------------------------------------
                              Notary Public

                              My commission expires: March 14, 2002
                                                     ---------------------------

<PAGE>
 
                                                                     EXHIBIT 4.1

Temporary Certificate - Exchangeable for Definitive Engraved Certificate - When 
Ready for Delivery

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

COMMON STOCK                                                      COMMON STOCK
   NUMBER                                                            SHARES

                                    [LOGO]

[CDS-      ]                                                     [            ] 

INCORPORATED UNDER THE LAWS OF               SEE REVERSE FOR CERTAIN DEFINITIONS
    THE STATE OF MISSOURI

                          C.D. SMITH HEALTHCARE, INC.
                                                               CUSIP 12512R 10 6
        THIS CERTIFICATE IS
TRANSFERABLE IN KANSAS CITY, MISSOURI
       OR NEW YORK, NEW YORK



     This Certifies that






     is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE,
                                      OF

                          C.D. SMITH HEALTHCARE, INC.

     transferable only on the books of the Corporation by the holder hereof in 
     person or by duly authorized attorney upon surrender of this Certificate 
     properly endorsed.

          This Certificate is not valid unless countersigned and registered by 
     the Transfer Agent and Registrar.

          Witness the facsimile seal of the Corporation and the signatures of 
     its duly authorized officers.

     Dated

     Countersigned and Registered:
                                  UMB Bank, N.A.
                                  (Kansas City, Missouri)
                                           TRANSFER AGENT AND REGISTRAR


                                                   AUTHORIZED SIGNATURE

     /s/ Delora J. Jamison                                  /s/ Robert C. Farley
                  SECRETARY                                            PRESIDENT

                          C.D. SMITH HEALTHCARE, INC.
                                   CORPORATE

                                     SEAL

                                   MISSOURI

- --------------------------------------------------------------------------------
<PAGE>
 
                          C.D. SMITH HEALTHCARE, INC.

     The record holder of this certificate may obtain from the secretary of the
corporation, upon request and without charge, a full statement of the
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions, of the shares of
each class of stock or series thereof that are authorized to be issued by the
corporation.
________________________________________________________________________________

     The following abbreviations, when used in the inscription on the face of 
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>

<S>                                            <C>                      <C>
TEN COM - as tenants in common                 UNIF GIFT MIN ACT. ____________________ Custodian _____________
TEN ENT - as tenants by the entireties                                  (Cust)                     (Minor)
 JT TEN - as joint tenants with
          right of survivorship and                                     Under Uniform Gifts to Minors
          not as tenants in common
                                                                        Act __________________________________
                                                                                          (State)
</TABLE>

    Additional abbreviations may also be used though not in the above list.


     For Value received, __________________________ hereby sell, assign and 
transfer unto

  PLEASE INSERT SOCIAL SECURITY OR OTHER
     IDENTIFYING NUMBER OF ASSIGNEE.
__________________________________________

________________________________________________________________________________
             PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

_________________________________________________________________________ Shares

of the common stock represented by the within Certificate, and do hereby 

irrevocably constitute and appoint _____________________________________________

____________________________________________________________________ Attorney to

transfer the said stock on the books of the within-named Corporation with full 

power of substitution in the premises.

Dated, ____________________  X _________________________________________________

                             X _________________________________________________
                               NOTICE: THE SIGNATURES(S) TO THIS ASSIGNMENT MUST
                               CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
                               FACE OF THE CERTIFICATE, IN EVERY PARTICULAR
                               WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
                               WHATEVER.






               SIGNATURE GUARANTEED: ___________________________________________
                                     NOTICE: THE SIGNATURE(S) SHOULD BE
                                     GUARANTEED BY AN ELIGIBLE GUARANTOR
                                     INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS
                                     AND LOAN ASSOCIATIONS AND CREDIT UNIONS
                                     WITH MEMBERSHIP IN AN APPROVED SIGNATURE
                                     GUARENTEE MEDALLION PROGRAM), PURSUANT TO
                                     S.E.C. RULE 17Ad-15.





KEEP THIS CERTIFICATE IN A SAFE PLACE, IF IT IS LOST, STOLEN, OR DESTROYED, THE 
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A 
REPLACEMENT CERTIFICATE.

<PAGE>
 
                                  Exhibit 5.1
                                  -----------

                                 July __, 1998


C.D. Smith Healthcare, Inc.
3907 S. 48th Terrace
P.O. Box 789
St. Joseph, MO 64503

Ladies and Gentlemen:

     We refer to the Registration Statement of C. D. Healthcare, Inc. (the 
"Company") on Form S-1 thereto (as amended, the "Registration Statement") filed 
with the Securities and Exchange Commission for the purpose of registering under
the Securities Act of 1933, as amended, 4,750,000 shares (5,462,500 if the 
overallotment option is exercised) of the Company's common stock, par value 
$0.01 per share (the "Common Stock"), of which 3,500,000 shares of Common Stock 
are to be sold by the Company (4,212,500 if the overallotment option is 
exercised) and 1,250,000 shares of Common Stock are to be sold by certain 
selling stockholders of the Company identified in the Registration Statement 
(the "Selling Stockholders").

     We are familiar with the proceedings to date with respect to such proposed 
sale and have examined such records, documents and matters of law and satisfied 
ourselves as to such matters of fact as we have considered relevant for the 
purposes of this opinion.

     We are of the opinion that when the shares of Common Stock have been issued
and sold by the Company as contemplated by the Registration Statement, they will
constitute legally issued, fully paid and non-assessable shares of the Company.
We are further of the opinion that when the shares of Common Stock are to be
sold by the Selling Stockholders as contemplated by the Registration Statement,
at the time of sale they will be legally issued, fully paid and non-assessable
shares by the Company.

     We hereby consent to the reference to us under the heading "Legal Matters" 
in the prospectus constituting a part of the Registration Statement and to the 
filing of this opinion as Exhibit 5.1 to the Registration Statement.


                                       Very truly yours,



                                       BLACKWELL SANDERS PEPER MARTIN LLP

<PAGE>
 
                                 Exhibit 10.2
                                 ------------

                             AMENDED AND RESTATED
                          C.D. SMITH HEALTHCARE, INC.
                         1996 EQUITY COMPENSATION PLAN


                                   SECTION 1
                             PURPOSE AND DURATION

     1.1  Effective Date.  This Plan permits the grant of Nonqualified Stock
Options, Incentive Stock Options, and Stock Appreciation Rights.  This Plan
became effective on March 27, 1996, except for those provisions addressing
Incentive Stock Options which shall become effective upon the affirmative vote
of the holders of a majority of the Shares present in person or by proxy and
entitled to vote at a validly held meeting of the stockholders of the Company.

     1.2  Purpose of this Plan.  This Plan is intended to attract, motivate, and
retain employees of the Company and its Affiliates.  This Plan also is designed
to further the growth and financial success of the Company and its Affiliates by
aligning the interests of the Participants, through the ownership of Shares and
through other equity based incentives, with the interests of the Company's
stockholders.

                                   SECTION 2
                                  DEFINITIONS

     The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:

     2.1  "1933 Act" means the Securities Act of 1933, as amended.  Reference to
a specific section of the 1933 Act or regulation thereunder shall include such
section or regulation, any valid regulation promulgated under such section, and
any comparable provision of any future legislation or regulation amending,
supplementing, or superseding such section or regulation.

     2.2  "1934 Act" means the Securities Exchange Act of 1934, as amended.
Reference to a specific section of the 1934 Act or regulation thereunder shall
include such section or regulation, any valid regulation promulgated under such
section, and any comparable provision of any future legislation or regulation
amending, supplementing, or superseding such section or regulation.

     2.3  "Administrator" means the Board or the Committee, as the case may be,
that is appointed in accordance with Section 3.1 to administer the Plan.
 
<PAGE>
 
 
     2.4  "Affiliate" means any corporation or any other entity, including
partnerships and joint ventures, which, directly or indirectly, controls, is
controlled by, or is under common control with, the Company, whether now or
hereafter existing.

     2.5  "Affiliated SAR" means a SAR which is granted in connection with, and
is related to, an Option, and which automatically will be deemed to be exercised
at the same time that such related Option is exercised.

     2.6  "Award" means, individually or collectively, a grant under this Plan
of Nonqualified Stock Options, Incentive Stock Options, or SARs.

     2.7  "Award Agreement" means the written agreement setting forth the terms
and provisions applicable to each Award granted under this Plan.

     2.8  "Board" or "Board of Directors" means the Board of Directors of the
Company.

     2.9  "Change in Control" shall have the meaning assigned to such term in
Section 10.2.

     2.10 "Code" means the Internal Revenue Code of 1986, as amended.
Reference to a specific section of the Code or regulation thereunder shall
include such section or regulation, any valid regulation promulgated under such
section, and any comparable provision of any future legislation or regulation
amending, supplementing, or superseding such section or regulation.

     2.11 "Committee" means the committee, if any, appointed by the Board
pursuant to Section 3.1 to administer this Plan.  The Committee shall consist of
not less than two (2) Directors.  The members of the Committee shall be
appointed from time to time by, and shall serve at the pleasure of, the Board of
Directors.  The Committee shall be comprised solely of Directors who both are
(a) "disinterested persons" under Rule 16b-3, and (b) "outside directors" under
Section 162(m) of the Code.

     2.12 "Company" means C.D. Smith Healthcare, Inc., a Missouri corporation,
and any successor thereto.

     2.13 "Director" means any individual who is a member of the Board of
Directors of the Company.

     2.14 "Disability" shall have the same meaning as given that term in the
long term disability insurance policy of the Company as in effect on the date in
question.

     2.15 "Employee" means any employee of the Company or of an Affiliate,
whether now or hereafter employed.

                                      -2-
<PAGE>
 
 
     2.16 "Exercise Price" means the price at which a Share may be purchased by
a Participant pursuant to the exercise of an Option.

     2.17 "Fair Market Value" means the value determined in good faith by the
Administrator in accordance with uniform and nondiscriminatory standards.  For
federal, state and local income tax reporting purposes, fair market value shall
be determined by the Administrator or its delegate in accordance with uniform
and nondiscriminatory standards adopted by it from time to time.

     2.18 "Fiscal Year" means the fiscal year of the Company.

     2.19 "Freestanding SAR" means a SAR that is granted independently of any
Option.

     2.20 "Grant Date" means, with respect to an Award, the date on which the
Award was granted.

     2.21 "Incentive Stock Option" means an Option to purchase Shares which is
designated as an Incentive Stock Option, and is intended to meet the
requirements of Section 422 of the Code.

     2.22 "Nonqualified Stock Option" means an Option to purchase Shares which
is not an Incentive Stock Option.

     2.23 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option granted pursuant to this Plan.

     2.24 "Participant" means an Employee to whom an outstanding Award has been
granted.

     2.25 "Plan" means the C.D. Smith Drug Company 1996 Equity Compensation
Plan, as set forth in this instrument and as hereafter amended from time to
time.

     2.26 "Retirement" means, in the case of an Employee, a Termination of
Service by reason of the Employee's retirement at or after age sixty-five (65)
or pursuant to any early retirement program instituted by the Company.

     2.27 "Rule 16b-3" means Rule 16b-3 promulgated under the 1934 Act, and any
future regulation amending, supplementing, or superseding such regulation.

     2.28 "Section 16 Person" means a person who, with respect to the Shares,
is subject to Section 16 of the 1934 Act.

     2.29 "Shares" means the shares of common stock of the Company.

     2.30  "Stock Appreciation Right" or "SAR" means an Award, granted either
alone or in connection with a related Option, that is designated as a SAR
pursuant to Section 6.

                                      -3-
<PAGE>
 
 
     2.31 "Subsidiary" means a "subsidiary corporation" as defined in Section
424(f) of the Code, whether now or hereafter existing.

     2.32 "Tandem SAR" means a SAR which is granted in connection with, or
related to, an Option, and which requires forfeiture of the right to purchase an
equal number of Shares under the related Option upon the exercise of such SAR;
or alternatively, which requires the cancellation of an equal amount of SAR upon
the purchase of the Shares subject to the Option.

     2.33 "Termination of Service" or "Terminates" means a cessation of the
employee-employer relationship between an Employee and the Company or an
Affiliate for any reason, including, but not limited to, a cessation by
resignation, discharge, death, Disability, Retirement or the disaffiliation of
an Affiliate, but excluding any such cessation where there is a simultaneous
reemployment by the Company or by an Affiliate.

                                   SECTION 3
                                ADMINISTRATION

     3.1  The Administrator.  Prior to the date, if any, upon which the Company
becomes subject to the 1934 Act, the Plan shall be administered by either the
Board or the Committee. After the date, if any, upon which the Company becomes
subject to the 1934 Act, the Plan and all Awards shall be administered by the
Committee.

     3.2  Authority of the Administrator.  It shall be the duty of the
Administrator to administer this Plan in accordance with the provisions hereof.
The Administrator shall have all powers and discretion necessary or appropriate
to administer this Plan and to control its operation, including, but not limited
to, the power to (a) determine which Employees shall be granted Awards, (b)
prescribe the terms and conditions of the Awards, (c) interpret the terms and
provision of this Plan and of the Awards, (d) adopt rules for the
administration, interpretation and application of this Plan, and (e) interpret,
amend, or revoke any such rules.

     3.3  Delegation by the Administrator.  The Administrator, in its sole
discretion and on such terms and conditions as it may provide, may delegate all
or any part of its authority and powers under this Plan to one or more directors
or officers of the Company; provided, however, that the Administrator may not
delegate its authority and powers (a) with respect to Section 16 Persons, or (b)
in any way which would jeopardize this Plan's qualification under Section 162(m)
of the Code or Rule 16b-3.

     3.4  Decisions Binding.  All determinations and decisions made by the
Administrator, the Board and any delegate of the Administrator appointed
pursuant to Section 3.3 shall be final, conclusive, and binding on all persons,
and shall be given the maximum deference permitted by law.

                                      -4-
<PAGE>
 
 
                                   SECTION 4
                          SHARES SUBJECT TO THIS PLAN

     4.1  Number of Shares. Subject to adjustment as provided in Section 4.3,
the total number of Shares available for grant under this Plan shall not exceed
2,000,000. Shares granted under this Plan may be either authorized but unissued
Shares or treasury Shares, or any combination thereof.

     4.2  Lapsed Awards. If an Award is cancelled, terminates, expires or lapses
for any reason (with the exception of the termination of a Tandem SAR upon
exercise of the related Option, or the termination of a related Option upon
exercise of the corresponding Tandem SAR), any Shares subject to such Award
thereafter shall be available to be the subject of a subsequent Award.

     4.3  Adjustments in Awards and Authorized Shares.  In the event of any
merger, reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, stock split, Share combination, or other change in
the corporate structure of the Company affecting the Shares, the Administrator
shall adjust the number and class of Shares which may be delivered under this
Plan, the number, class, and price of Shares subject to outstanding Awards, and
the numerical limits of Sections 4.1, 5.1, and 6.1.1 in such manner as the
Administrator in its sole discretion shall determine to be advisable or
appropriate to prevent the dilution or diminution of such Awards.
Notwithstanding the preceding, the number of Shares subject to any Award always
shall be a whole number.

     4.4  Adjustments upon Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation, or the sale of substantially all of
the assets of the Company, the Board of Directors, in its discretion, may
require the successor corporation to either (i) assume each outstanding Award or
(ii) substitute an equivalent award by the successor corporation or a Parent or
Subsidiary of the successor corporation. If an Award is not assumed or
substituted in the event of a merger or sale of assets, the Award shall become
immediately exercisable and the Administrator shall notify the Participant that
the Award shall be fully exercisable for a period of fifteen (15) days from the
date of such notice, and the Award shall terminate upon the expiration of such
period unless exercised. For the purposes of this paragraph, the Award shall be
considered assumed if, following the merger or sale of assets, the Award or the
merger or acquisition agreement confers the right to purchase or receive, for
each Share subject to the Award immediately prior to the merger or sale of
assets, equal consideration (whether stock, cash, or other securities or
property) as received in the merger or sale of assets by holders of each Share
of common stock held on the effective date of the transaction (and if holders of
Shares were offered a choice of consideration, the type of consideration chosen
by the holders of a majority of the outstanding Shares); provided, however, that
if such consideration received in the merger or sale of assets was not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Award, for each Share subject to the award,
to be solely

                                      -5-
<PAGE>
 
 
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of common stock in the
merger or sale of assets.

                                   SECTION 5
                                 STOCK OPTIONS

     5.1  Grant of Options. Subject to the terms and provisions of this Plan,
Options may be granted to Employees at any time and from time to time as
determined by the Administrator in its sole discretion. The Administrator in its
sole discretion shall determine the number of Shares subject to each Option;
provided, however, that during any Fiscal Year, no Participant shall be granted
Options covering more than 100,000 Shares. The Administrator may grant Incentive
Stock Options, Nonqualified Stock Options, or any combination thereof.

     5.2  Award Agreement.  Each Option shall be evidenced by an Award
Agreement that shall specify the Exercise Price, the expiration date of the
Option, the number of Shares to which the Option pertains, any conditions to
exercise of the Option and such other terms and conditions as the Administrator
in its sole discretion shall determine.  The Award Agreement also shall specify
whether the Option is intended to be an Incentive Stock Option or a Nonqualified
Stock Option.

     5.3  Exercise Price. Subject to the provisions of this Section 5.3, the
Exercise Price per Share for each Option shall be determined by the
Administrator in its sole discretion.

          5.3.1  Nonqualified Stock Options.  In the case of a Nonqualified
     Stock Option, the Exercise Price per Share shall be not less than one
     hundred percent (100%) of the Fair Market Value of a Share on the Grant
     Date.

          5.3.2  Incentive Stock Options.  In the case of an Incentive Stock
     Option, the Exercise Price per Share shall be not less than one hundred
     percent (100%) of the Fair Market Value of a Share on the Grant Date;
     provided, however, that if on the Grant Date, the Employee (together with
     persons whose stock ownership is attributed to the Employee pursuant to
     Section 424(d) of the Code) owns stock possessing more than 10% of the
     total combined voting power of all classes of stock of the Company or any
     of its Subsidiaries, the Exercise Price per Share shall be not less than
     one hundred ten percent (110%) of the Fair Market Value of a Share on the
     Grant Date.

          5.3.3  Substitute Options.  Notwithstanding the provisions of Sections
     5.3.1 and 5.3.2, in the event that the Company or an Affiliate consummates
     a transaction described in Section 424(a) of the Code (e.g., the
     acquisition of property or stock from an unrelated corporation), persons
     who become Employees on account of such transaction may be granted Options
     in substitution for options granted by such former employer.  If such
     substitute Options are granted, the Administrator, in its sole discretion
     and consistent with Section 424(a) of the Code, may determine that such
     substitute Options shall have an

                                      -6-
<PAGE>
 
 
     Exercise Price per Share less than one hundred (100%) of the Fair Market
     Value of the Shares on the Grant Date.

          5.4    Expiration of Options.

          5.4.1  Expiration Dates.  Each Option shall terminate upon the earlier
     of the first to occur of the following events:

               (a)  The date for termination of the Option set forth in the
          Award Agreement; or

               (b)  The expiration of ten (10) years from the Grant Date (except
          as provided in Section 5.8 regarding Incentive Stock Options); or

               (c)  The expiration of one (1) year from the date of the
          Optionee's Termination of Service for a reason other than the
          Optionee's death, Disability or Retirement (except as provided in
          Section 5.8 regarding Incentive Stock Options); or

               (d)  The expiration of three (3) years from the date of the
          Optionee's Termination of Service by reason of Disability, death, or
          Retirement (except as provided in Section 5.8 regarding Incentive
          Stock Options).

          5.4.2  Administrator Discretion.  Subject to the limits of Section
     5.4.1, the Administrator in its sole discretion (a) shall provide in each
     Award Agreement when each Option expires and becomes unexercisable and (b)
     may, after an Option is granted, extend the maximum term of the Option
     (subject to Section 5.8 regarding Incentive Stock Options), provided
     however, in the case of Incentive Stock Options, that the maximum term of
     the Option may not be extended if the Fair Market Value per Share is
     greater than the Exercise Price per Share.

     5.5  Exercisability of Options.  Options granted under this Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Administrator shall determine in its sole discretion; provided however, that
all Options granted under this Plan shall become immediately exercisable upon
death or Disability or (subject to the limitations set forth in Section 10.1) as
of the first date that a Change in Control shall be deemed to have occurred.
After an Option is granted, the Administrator in its sole discretion may
accelerate the exercisability of the Option.  However, in no event may any
Option granted to a Section 16 Person be exercisable until at least six (6)
months following the Grant Date or such shorter period as may be permissible
while maintaining compliance with Rule 16b-3.

     5.6  Payment.  Options shall be exercised by the Participant's delivery of
a written notice of exercise to the Secretary of the Company or its designee,
setting forth the number of Shares with respect to which the Option is to be
exercised, accompanied by full payment for the

                                      -7-
<PAGE>
 
 
Shares.  Upon the exercise of any Option, the Exercise Price shall be payable to
the Company in full in cash or by certified or cashiers check.  The
Administrator in its sole discretion also may permit exercise (a) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Exercise Price, (b) by delivery of an executed
promissory note representing indebtedness of the Participant to the Company, (c)
by any other means which the Administrator in its sole discretion determines (i)
to provide legal consideration for the Shares, and (ii) to be consistent with
the purposes of this Plan, or (d) any combination of the methods of payment set
forth in this Section.  As soon as practicable after receipt of a written
notification of exercise and full payment for the Shares purchased, the Company
shall deliver to the Participant or to the Participant's designated broker,
Share certificates (which may be in book entry form) representing such Shares.

      5.7 Share Transferability.  The Administrator may impose transfer
restrictions on any Shares acquired pursuant to the exercise of an Option as it
may deem advisable or appropriate in its sole discretion, including, but not
limited to, restrictions related to applicable Federal securities laws, the
requirements of any national securities exchange or system upon which Shares are
then listed or traded, and any blue sky or state securities laws.

     5.8  Certain Additional Provisions for Incentive Stock Options.

          5.8.1  Eligible Participants.  Incentive Stock Options may be granted
     only to persons who are employees of the Company or a Subsidiary on the
     Grant Date.

          5.8.2  Exercisability. The aggregate Fair Market Value of the Shares
     (as determined on the applicable Grant Date) with respect to which
     Incentive Stock Options are exercisable for the first time by any Employee
     during any calendar year (under all plans of the Company and its
     Subsidiaries) shall not exceed $100,000.

          5.8.3  Termination of Service.  No Incentive Stock Option may be
     exercised more than three (3) months after the Participant's Termination of
     Service for any reason other than Disability or death, unless (a) the
     Participant dies during such three-month period, and (b) the Award
     Agreement or the Administrator permits later exercise.  No Incentive Stock
     Option may be exercised more than one (1) year after the Participant's
     termination of employment on account of Disability or death, unless (a) the
     Participant dies during such one-year period, and (b) the Award Agreement
     or the Administrator permits later exercise.

          5.8.4  Expiration. No Incentive Stock Option may be exercised after
     the expiration of ten (10) years from the Grant Date; provided, however,
     that if the Option is granted to an Employee who, together with persons
     whose stock ownership is attributed to the Employee pursuant to Section
     424(d) of the Code, owns stock possessing more than 10% of the total
     combined voting power of all classes of stock of the Company or any of its

                                      -8-
<PAGE>
 
 
     Subsidiaries, the Option may not be exercised after the expiration of five
     (5) years from the Grant Date.

                                   SECTION 6
                           STOCK APPRECIATION RIGHTS

     6.1  Grant of SARs. Subject to the terms and conditions of this Plan, a SAR
may be granted to Employees at any time and from time to time as shall be
determined by the Administrator in its sole discretion. The Administrator may
grant Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination
thereof.

          6.1.1  Number of Shares. The Administrator shall have complete
     discretion to determine the number of SARs granted to any Participant,
     provided that during any Fiscal Year, no Participant shall be granted SARs
     covering more than 30,000 Shares.

          6.1.2  Exercise Price and Other Terms. The Administrator, subject to
     the provisions of this Plan, shall have complete discretion to determine
     the terms and conditions of SARs granted under this Plan; provided,
     however, that the exercise price per Share of a Freestanding SAR shall be
     not less than one hundred percent (100%) of the Fair Market Value of a
     Share on the Grant Date; provided further, that all SARs granted under this
     Plan shall become immediately exercisable upon death or Disability or
     (subject to the limitations set forth in Section 10.1) as of the first date
     that a Change in Control shall be deemed to have occurred. The exercise
     price per Share of Tandem or Affiliated SARs shall equal the Exercise Price
     per Share of the related Option. In no event shall a SAR granted to a
     Section 16 Person become exercisable until at least six (6) months after
     the Grant Date or such shorter period as may be permissible while
     maintaining compliance with Rule 16b-3.

     6.2  Exercise of Tandem SARs. Tandem SARs may be exercised for all or part
of the Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable. With respect to a Tandem SAR granted in connection with an
Incentive Stock Option: (a) the Tandem SAR shall expire no later than the
expiration of the underlying Incentive Stock Option; (b) the value of the payout
with respect to the Tandem SAR shall be for no more than one hundred percent
(100%) of the difference between the Exercise Price per Share of the underlying
Incentive Stock Option and the Fair Market Value per Share of the Shares subject
to the underlying Incentive Stock Option at the time the Tandem SAR is
exercised; (c) the Tandem SAR shall be exercisable only when the Fair Market
Value per Share of the Shares subject to the Incentive Stock Option exceeds the
Exercise Price per Share of the Incentive Stock Option; and (d) any transfer of
the Tandem SAR shall be ineffective unless accompanied by a transfer of the
related Incentive Stock Option.

                                      -9-
<PAGE>
 
 
     6.3  Exercise of Affiliated SARs. An Affiliated SAR shall be deemed to be
exercised upon the exercise of the related Option. The deemed exercise of an
Affiliated SAR shall not necessitate a reduction in the number of Shares subject
to the related Option.

     6.4  Exercise of Freestanding SARs. Freestanding SARs shall be exercisable
on such terms and conditions as the Administrator in its sole discretion shall
determine; provided, however, that no SAR granted to a Section 16 Person shall
be exercisable until at least six (6) months after the Grant Date or such
shorter period as may be permissible while maintaining compliance with Rule 
16b-3.

     6.5  SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement
that shall specify the exercise price per share, the term of the SAR, the
conditions of exercise, and such other terms and conditions as the Administrator
in its sole discretion shall determine.

     6.6  Expiration of SARs. A SAR granted under this Plan shall expire on the
date set forth in the Award Agreement, which date shall be determined by the
Administrator in its sole discretion. Notwithstanding the foregoing, the terms
and provisions of Section 5.4 also shall apply to SARs.

     6.7  Payment of SAR Amount. Upon exercise of a SAR, a Participant shall be
entitled to receive payment from the Company in an amount determined by
multiplying (i) the positive difference between the Fair Market Value of a Share
on the date of exercise and the exercise price per Share by (ii) the number of
Shares with respect to which the SAR is exercised. At the sole discretion of the
Administrator, the payment upon SAR exercise may be in cash, in Shares of
equivalent value, or in any combination thereof.

                                   SECTION 7
                                 MISCELLANEOUS

     7.1  Deferrals. The Administrator in its sole discretion may permit a
Participant to defer receipt of the payment of cash or the delivery of Shares
that would otherwise be due to such Participant under an Award. Any such
deferral election shall be made at least one year prior to the due date, and
shall be subject to such rules and procedures as shall be determined by the
Administrator in its sole discretion.

     7.2  No Effect on Employment or Service. Nothing in this Plan shall
interfere with or limit in any way the right of the Company to terminate any
Participant's employment at any time, with or without cause. For purposes of
this Plan, transfer of employment of a Participant between the Company and any
of its Affiliates (or between Affiliates) shall not be deemed a Termination of
Service. Employment with the Company and its Affiliates is on an at-will basis
only, unless otherwise provided by an applicable employment agreement between
the Participant and the Company or its Affiliate, as the case may be.

                                     -10-

<PAGE>
 
 
     7.3  Participation. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to receive a
future Award.

     7.4  Indemnification. Each person who is or shall have been a member of the
Committee or the Board shall be indemnified and held harmless by the Company
against and from (a) any loss, cost, liability or expense (including attorneys'
fees) that may be imposed upon or reasonably incurred by him or her in
connection with or resulting from any claim, action, suit or proceeding to which
he or she may be a party or in which he or she may be involved by reason of any
action taken or failure to act under this Plan or any Award Agreement, and (b)
from any and all amounts paid by him or her in settlement thereof, with the
Company's prior written approval, or paid by him or her in satisfaction of any
judgment in any such claim, action, suit, or proceeding against him or her;
provided, however, that he or she shall give the Company an opportunity, at its
own expense, to handle and defend the same before he or she undertakes to handle
and defend it on his or her own behalf. The foregoing right of indemnification
shall not be exclusive of any other rights of indemnification to which such
persons may be entitled under the Company's incorporation documents or Bylaws,
by contract, as a matter of law or otherwise, or under any power that the
Company may have to indemnify them or hold them harmless.

     7.5  Successors. All obligations of the Company under this Plan, with
respect to Awards granted hereunder, shall be binding on any successor of the
Company, whether the existence of such successor is the result of a direct or
indirect purchase, merger, consolidation or otherwise, of all or substantially
all of the business or assets of the Company.

     7.6  Beneficiary Designations. If permitted by the Administrator, a
Participant under this Plan may name a beneficiary or beneficiaries to whom any
vested but unpaid Award shall be paid in the event of the Participant's death.
Each such designation shall revoke all prior designations by the Participant,
and shall be effective only if given in a form and manner acceptable to the
Administrator. In the absence of any such designation, any vested benefits
remaining unpaid at the Participant's death shall be paid to the Participant's
estate and, subject to the terms of this Plan and of the applicable Award
Agreement, any unexercised vested Award may be exercised by the administrator or
executor of the Participant's estate. In each case, the named beneficiary or
beneficiaries or the executor of the Participant's estate, as the case may be,
shall have the right to exercise, pursuant to the terms hereof and the terms of
any applicable Award Agreement, the Awards made hereunder.

     7.7  Nontransferability of Awards. Unless specifically provided otherwise
by the Administrator in the Award Agreement, no Award granted under this Plan
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will, by the laws of descent and distribution, or to
the limited extent provided in Section 7.6. Unless otherwise provided for in the
Award Agreement, all rights with respect to an Award granted to a Participant
shall be available during his or her lifetime only to the Participant. In no
event may Incentive Stock Options be transferred, except as provided in this
Section 7.7.

                                     -11-

<PAGE>
 
 
     7.8  No Rights as Stockholder. No Participant nor any beneficiary thereof
shall have any of the rights or privileges of a stockholder of the Company with
respect to any Shares issuable pursuant to an Award or the exercise thereof,
unless and until certificates representing such Shares shall have been issued,
recorded on the records of the Company or its transfer agents or registrars, and
delivered to the Participant or his or her beneficiary.

                                   SECTION 8
                      AMENDMENT, TERMINATION, AND DURATION

     8.1  Amendment, Suspension, or Termination. The Board in its sole
discretion may amend or terminate this Plan, or any part thereof, at any time
and for any reason; provided, however, that if and to the extent required to
maintain this Plan's qualification under Rule 16b-3 or to comply with Section
422(b)(1) of the Code, any such amendment shall be subject to stockholder
approval. The amendment, suspension or termination of this Plan shall not,
without the consent of the Participant, alter or impair any rights or
obligations under any Award theretofore granted to such Participant. No Award
may be granted during any period of suspension or after termination of this
Plan. 

     8.2  Duration of this Plan. This Plan shall become effective on the date
specified herein, and subject to Section 8.1, shall remain in effect thereafter;
provided, however, that without further stockholder approval, no Incentive Stock
Option may be granted under this Plan after the tenth anniversary of the
effective date of this Plan.

                                   SECTION 9
                                TAX WITHHOLDING

     9.1  Withholding Requirements. Prior to the delivery of any Shares or cash
pursuant to an Award or the exercise thereof, the Company shall have the power
and the right to deduct or withhold, or require a Participant to remit to the
Company, an amount sufficient to satisfy Federal, state, and local taxes,
including the Participant's Social Security tax obligation, required to be
withheld with respect to such Award or the exercise thereof.

     9.2  Withholding Arrangements. The Administrator, in its sole discretion
and pursuant to such procedures as it may specify from time to time, may permit
a Participant to satisfy such tax withholding obligation, in whole or in part,
by (a) electing to have the Company withhold otherwise deliverable Shares, or
(b) delivering to the Company Shares then owned by the Participant having a Fair
Market Value equal to the amount required to be withheld. The amount of the
withholding requirement shall be deemed to include any amount that the
Administrator agrees may be withheld at the time any such election is made, not
to exceed the amount determined by using the maximum federal, state, or local
marginal income tax rates applicable to the Participant with respect to the
Award on the date that the amount of tax to be withheld is to be determined. The
Fair Market Value of the Shares to be withheld or delivered shall be determined
as of the date that the taxes are required to be withheld.

                                     -12-

<PAGE>
 
 
                                   SECTION 10
                               CHANGE IN CONTROL

     10.1  Change in Control. In the event of a Change in Control of the
Company, all Awards granted under this Plan that are then outstanding and not
then exercisable, or are then subject to restrictions, shall, unless otherwise
provided for in the Agreements applicable thereto, become immediately
exercisable as of the first date that the Change in Control shall be deemed to
have occurred, and shall remain as such for the remaining life of the Award as
provided herein and within the provisions of the related Agreements; provided
however, that the Board of Directors of the Company may limit the applicability
of this Section with respect to that portion of any Award to which Section 280G
of the Code is applicable.

     10.2  Definition. For purposes of Section 10.1 above, a Change in Control
of the Company shall be deemed to have occurred if the conditions set forth in
any one or more of the following shall have been satisfied, unless such
condition shall have received prior approval of a majority vote of the
Continuing Directors, as defined below, indicating that Section 10.1 shall not
apply thereto:

               (a)  any "person" (as such term is used in Section 13(d) of the
          Exchange Act, but excluding the Company, any trustee or other
          fiduciary holding securities under an employee benefit plan of the
          Company, or any corporation owned, directly or indirectly, by the
          stockholders of the Company in substantially the same proportions as
          their ownership of stock of the Company) is or becomes the "beneficial
          owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
          indirectly, of securities of the Company representing thirty percent
          (30%) or more of the combined voting power of the Company's then
          outstanding securities;

               (b)  during any period of two consecutive years (not including
          any period prior to the Effective Date of this Plan), individuals
          ("Existing Directors") who at the beginning of such period constitute
          the Board of Directors, and any new director (an "Approved Director")
          (other than a director designated by a person who has entered into an
          agreement with the Company to effect a transaction described in
          paragraph (a), (b) or (c) of this Section) whose election by the Board
          of Directors or nomination for election by the Company's stockholders
          was approved by a vote of at least two-thirds (2/3) of the directors
          then still in office who either were directors at the beginning of the
          period or whose election or nomination for election previously was so
          approved (Existing Directors together with Approved Directors
          constituting "Continuing Directors"), cease for any reason to
          constitute at least a majority of the Board of Directors; or

               (c)  the stockholders of the Company approve a merger or
          consolidation of the Company with any other person, other than (i) a
          merger or consolidation which would result in the voting securities of
          the Company outstanding

                                     -13-
<PAGE>
 
    
          immediately prior thereto continuing to represent (either by remaining
          outstanding or by being converted into voting securities for the
          surviving entity) more than fifty percent (50%) of the combined voting
          power of the voting securities of the Company or such surviving entity
          outstanding immediately after such merger or consolidation, or (ii) a
          merger in which no "person" (as defined in Section 10.2(a)) acquires
          more than thirty percent (30%) of the combined voting power of the
          Company's then outstanding securities; or

               (d)  the stockholders of the Company approve a plan of complete
          liquidation of the Company or an agreement for the sale or disposition
          by the Company of all or substantially all of the Company's assets or
          any transaction having a similar effect.

                                  SECTION 11
                              LEGAL CONSTRUCTION

     11.1  Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.

     11.2  Severability. In the event any provision of this Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of this Plan, and this Plan shall be construed and enforced
as if the illegal or invalid provision had not been included.

     11.3  Requirements of Law. The grant of Awards and the issuance of Shares
under this Plan shall be subject to all applicable laws, rules and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required from time to time.

     11.4  Securities Law Compliance. With respect to Section 16 Persons, Awards
under this Plan are intended to comply with all applicable conditions of Rule
16b-3. To the extent any provision of this Plan, Award Agreement or action by
the Administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable or appropriate by the Administrator
in its sole discretion.

     11.5  Governing Law. This Plan and all Award Agreements shall be construed
in accordance with and governed by the laws of the State of Missouri, excluding
its conflict of laws provisions.

     11.6  Captions. Captions are provided herein for convenience of reference
only, and shall not serve as a basis for interpretation or construction of this
Plan.

                                     -14-


<PAGE>
 
                                 Exhibit 10.3
                                 ------------

                          C.D. SMITH HEALTHCARE, INC.
                          ---------------------------

                           NONQUALIFIED STOCK OPTION
                                AWARD AGREEMENT

     THIS AWARD AGREEMENT (the "Agreement") is made and entered into effective
this ______ day of __________, 199___ between C.D. Smith Healthcare, Inc., a
Missouri corporation (the "Company"), and _________________________ (the
"Holder") in connection with the grant of an Option under the C.D. Smith
Healthcare, Inc. Amended and Restated 1996 Equity Compensation Plan (the
"Plan").

                                    RECITAL

     The Holder is an employee of the Company or one of its Affiliates and the
Company desires to encourage the Holder to own Shares, to give the Holder added
incentive to advance the interests of the Company, and to grant the Holder a
Nonqualified Stock Option to purchase shares of Stock of the Company under terms
and conditions established by the Administrator.

                                   AGREEMENT

     NOW, THEREFORE, in consideration of this premise, the parties agree that
the following shall constitute the Agreement between the Company and the Holder:

Section 1.  Definitions
             
        Capitalized terms used in this Agreement but not defined shall have the
meaning set forth in the Plan.

Section 2.  Grant Of Nonqualified Stock Option And Termination

     Subject to the terms and conditions set forth herein, the Company grants to
the Holder a Nonqualified Option to purchase from the Company during the period
ending ten (10) years from the date of this Agreement (the "Expiration Date")
________________ shares of Stock at an exercise price of $_____________ per
share, subject to adjustment as provided in Section 9 hereof.
<PAGE>
 
Section 3.  Exercise

     During the Holder's lifetime, this Option may be exercised only by him or
her, as the case may be. This Option, except as specifically provided otherwise
herein, shall become exercisable as follows:

     1. [vesting schedule]

     2. This Option shall become immediately exercisable upon the Holder's death
        or Disability or, subject to the limitations set forth in Section 9.1 of
        the Plan and Section 16 hereof, as of the first date that a Change in
        Control shall be deemed to have occurred.

Section 4.  Notice Of Exercise

        This Option may be exercised in whole or in part, from time to time, in
accordance with Sections 2 and 3 hereof, by written notice to the Secretary of
the Company at the address provided in Section 13 hereof, which notice shall:

          (a) be in the form attached as Exhibit A hereto;

          (b) if the person exercising this Option is not the Holder himself,
contain or be accompanied by evidence satisfactory to the Administrator of such
person's right to exercise this Option; and

          (c) be accompanied by payment in full of the purchase price in the
form of (i) cash; or (ii) a certified or cashier's check to the order of the
Company.

Section 5.  Nontransferability Of Awards

     No Award granted under the Plan may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will, by the
laws of descent and distribution, or to the limited extent provided in Section
7.6 of the Plan. All rights with respect to an Award granted to a Participant
shall be available during his or her lifetime only to the Participant.

[ALTERNATIVE Section 5. Transferability of Options. The Grantee may transfer the
Option to (i) the spouse, children, or grandchildren of the Grantee ("Immediate
Family Members"), (ii) a trust or trusts for the exclusive benefits of such
Immediate Family Members, or (iii) a partnership in which such Immediate Family
Members are the only partners, provided that (y) there may be no consideration
for any such transfer and (z) subsequent transfers of the Option shall be
prohibited, except by will or the laws of descent and distribution. Following
transfer, the Option shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
the

                                       2
<PAGE>
 
purposes of the Option Agreement, the term "Grantee" shall be deemed to refer to
the transferee. The event of a Termination of Service shall continue to be
applied with respect to the original Grantee, following which the Option shall
be exercisable by the transferee only to the extent, and for the periods,
specified in Paragraph 2. Neither the Committee nor the Company shall have any
obligation to provide notice to a transferee of termination of the Option under
the terms of this Option Agreement.

     5.1  Transferees of Stockholders. The Company shall not be required to
transfer any Shares on its books which shall have been sold, assigned or
otherwise transferred in violation of this Option Agreement, or to treat as
owner of such shares of stock, or to accord the right to vote as such owner or
to pay dividends to, any person or organization to which any such Shares shall
have been sold, assigned or otherwise transferred, from and after any sale,
assignment or transfer of any Share made in violation of this Option Agreement.
Any transfer in violation of the terms of this Option Agreement shall be deemed
null and void.]

Section 6.  Status Of Holder
            ----------------

     The Holder shall not be deemed a stockholder of the Company with respect to
any of the Shares subject to this Option, except to the extent that such Shares
shall have been purchased and issued to him or her. The Company shall not be
required to issue or transfer any certificates for Shares purchased upon
exercise of this Option until all applicable requirements of law have been
complied with and such Shares shall have been duly listed on any securities
exchange on which the Shares may then be listed.

Section 7.  No Effect On Capital Structure
            ------------------------------

     This Option shall not affect the right of the Company or any Affiliate
thereof to reclassify, recapitalize or otherwise change its capital or debt
structure or to merge, consolidate, convey any or all of its assets, dissolve,
liquidate, windup, or otherwise reorganize.

Section 8.  Premature Expiration Of Option
            ------------------------------

     8.1  Termination of Services - Disability. If the Holder is Terminated due
to Disability, the portion, if any, of this Option that remains unexercised,
including that portion, if any, that is not yet exercisable, on the date of the
Holder's Termination shall be exercisable through 5:00 p.m. central time on the
date that is three years after the date of such Termination and thereafter this
Option shall terminate and cease to be exercisable.

     8.2  Termination of Services - Death. If the Holder's Termination is due to
his or her death, the portion, if any, of this Option that remains unexercised,
including that portion, if any, that is not yet exercisable, on the date of the
Holder's Termination shall be exercisable by the administrator or executor of
the Holder's estate or, if permitted by the Administrator under Section 7.6 of
the Plan, by the designated beneficiary of the Holder through 5:00 p.m. central

                                       3
<PAGE>
 
time on the date that is three years after the date of such Termination and
thereafter this Option shall terminate and cease to be exercisable.

     8.3  Termination of Services - Retirement. If the Holder is Terminated due
to his Retirement, the portion, if any, of this Option that remains unexercised,
including that portion, if any, that is not yet exercisable, on the date of the
Holder's Termination shall terminate and cease to be exercisable at, from, and
after 5:00 p.m. central time on the date that is one year after the date of such
Termination and thereafter this Option shall terminate and cease to be
exercisable.

     8.4  Termination of Service in General.
          --------------------------------- 

          (a)  If the Holder voluntarily Terminates his employment, the portion,
     if any, of this Option that remains unexercised, including that portion, if
     any, that is not yet exercisable, on the date of the Holder's Termination
     shall expire, terminate, and cease to be exercisable immediately upon such
     Termination.

          (b)  If a Holder is Terminated (with or without cause) the portion, if
     any, of this Option that remains unexercised, including that portion, if
     any, that is not exercisable on the date of the Holder's Termination shall
     expire, terminate, and cease to be exercisable immediately upon such
     Termination.

Section 9.  Adjustments
            -----------

     Notwithstanding any provision herein to the contrary, in the event of any
merger, reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, stock split, Share combination, or other change in
the corporate structure of the Company affecting the Shares, the Administrator
shall adjust the number, class, and price of Shares subject to this Award in
such manner as the Administrator in its sole discretion shall determine to be
advisable or appropriate to prevent the dilution or diminution of such Award.
Notwithstanding the preceding, the number of Shares subject to this Award always
shall be a whole number. In the event of a dispute concerning such adjustment,
the decision of the Administrator shall be conclusive.

Section 10. Administrator Authority
            -----------------------

     Any questions concerning the interpretation of this Agreement, any
adjustments required to be made under Section 9 of this Agreement, and any
controversy which arises under this Agreement shall be settled by the
Administrator in its sole discretion.

Section 11. Incentive Option Qualification
            ------------------------------

     This Option is not intended to qualify as an "incentive stock option"
within the meaning of Section 422 of the Code, and shall not be so construed.

                                       4
<PAGE>
 
Section 12.    Plan Controls
               -------------

     The terms of this Agreement are governed by the terms of the Plan and in
the case of any inconsistency between the terms of this Agreement and the terms
of the Plan, the terms of the Plan shall control.

Section 13.    Notice
               ------

     Whenever any notice is required or permitted hereunder, such notice must be
in writing and personally delivered or sent by mail.  Any notice required or
permitted to be delivered hereunder shall be deemed to be delivered on the date
which it was personally delivered, or, whether actually received or not, on the
third business day after it is deposited in the United States mail, certified or
registered, postage prepaid, addressed to the person who is to receive it at the
address which such person has theretofore specified by written notice delivered
in accordance herewith.  The Company or Holder may change, at any time and from
time to time, by written notice to the other, the address previously specified
for receiving notices.  Until changed in accordance herewith, the Company and
the Holder specify their respective addresses as set forth below:

               Company:       C.D. Smith Healthcare, Inc.
                              3907 South 48th Terrace
                              St. Joseph, Missouri 64503

               Holder:        
                              -----------------------------  
                              -----------------------------    
                              -----------------------------    

Section 14.    Information Confidential
               ------------------------

     As partial consideration for the granting of this Option, the Holder agrees
that he or she will keep confidential all information and knowledge that he or
she has relating to the manner and amount of his or her participation in the
Plan; provided, however, that such information may be disclosed as required by
law and may be given in confidence to the Holder's spouse, tax and financial
advisors, or to a financial institution of the extent that such information is
necessary to secure a loan.

Section 15.    Change In Control
               -----------------

     Upon the occurrence of a Change in Control, (i) this Option shall become
immediately exercisable, (ii) any and all restrictions or limitations on the
exercisability of this Option, including any vesting requirements hereof, shall
become void, and (iii) any and all restrictions or limitations on the
transferability of any Shares acquired upon the exercise of this Option (whether
before or after such Change in Control) shall become void; provided, however,
that the Board of

                                       5
<PAGE>
 
Directors may limit the applicability of this Section with respect to that
portion of any Award to which Section 280G of the Code is applicable.
 
     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and the Holder has hereunto set his or her hand on the day and year first above
written.

                                        C.D. SMITH HEALTHCARE, INC.

 
                                        By:
                                           ---------------------------------
                                        Title:
                                              ------------------------------

                                        HOLDER


                                        ------------------------------------
                                        Name:
                                             -------------------------------

                                       6

<PAGE>
 
                                                                   EXHIBIT 10.18

              FOURTH AMENDMENT TO THE LOAN AND SECURITY AGREEMENT
                          DATED AS OF OCTOBER 3, 1997
             AMONG C. D. SMITH DRUG COMPANY, GENERAL DRUG COMPANY,
            SBS PHARMACEUTICALS, INC., JAMES BRUDNICK COMPANY, INC.,
        LASALLE BUSINESS CREDIT, INC., AS A LENDER AND AS AGENT FOR THE
             LENDERS, HELLER FINANCIAL, INC., AS A LENDER, AMERICAN
             NATIONAL BANK & TRUST COMPANY OF CHICAGO, AS A LENDER,
              AND CERTAIN OTHER FINANCIAL INSTITUTIONS SIGNATORIES
                         THERETO AND CONSENT AND WAIVER


     THIS FOURTH AMENDMENT (the "Amendment") is made as of the ____ day of July,
1998 to the Loan and Security Agreement dated October 3, 1997 (as amended from
time to time, the "Loan Agreement"; unless otherwise defined herein, capitalized
terms used herein shall have the meanings ascribed to them in the Loan
Agreement) among C. D. Smith Drug Company ("CDS"), General Drug Company, SBS
Pharmaceuticals, Inc., James Brudnick Company, Inc. (collectively, "Borrowers"),
Heller Financial, Inc., as a Lender, American National Bank & Trust Company of
Chicago, as a Lender, certain financial institutions signatories thereto from
time to time (collectively, "Lenders"), and LaSalle Business Credit, Inc.
(individually as a Lender and, in its capacity as agent for Lenders, "Agent").

     WHEREAS it is proposed that CDS should authorize the offer, sale, issuance
and delivery through Donaldson, Lufkin & Jenrette Securities Corporation, BT
Alex Brown and Wheat First Union (the "Underwriters") of an initial public
offering of certain authorized but unissued shares of common stock of CDS, par
value $.01 per share ("Common Stock"), on the New York Stock Exchange or the
Nasdaq National Market, plus the grant to the Underwriters of a thirty (30) day
option to purchase shares to cover over-allotments, if any, on a firm commitment
basis (the "Offering");

     WHEREAS it is proposed that contingent on an application (the 
"Application") in respect of the Offering being made to The Nasdaq Stock Market,
Inc. or the New York Stock Exchange, CDS take certain steps to give effect to
the Offering by undertaking a common stock split (the "Common Stock Split") and
amending, its Articles of Incorporation (the "Amended Articles") and by amending
and restating its Bylaws (the "Amended Bylaws");

     WHEREAS the Borrowers have agreed with Churchill ESOP Capital Partners
("Churchill") that the Subordinated Debt Documents (as defined in the Loan
Agreement) be amended and the parties' rights and obligations thereunder be
waived and released (as appropriate) (the "Churchill Release") and the
liabilities of the Borrowers to Churchill under the Subordinated Debt Documents
be prepaid (the "Churchill Prepayment"), for the purposes of effecting the
Offering, the Application, the Common Stock Split, the Amended Articles and the
Amended Bylaws (together with the Churchill Release and the Churchill
Prepayment, the "Proposals"); and
<PAGE>
 
     WHEREAS, in order to effect and ratify the Proposals the Borrowers have
requested that Agent and Lenders amend the Loan Agreement in certain respects,
consent to the Proposals and waive and release certain of the parties' rights
and obligations thereunder and under the Other Agreements, and Agent and Lenders
have agreed to do so subject to the terms and conditions hereof.

     NOW, THEREFORE, in consideration of the foregoing, and the mutual covenants
herein contained, and such other consideration as the parties mutually agree,
the parties hereto agree as follows:

     1.  Amendment.  Borrowers, Agent and Lenders agree to amend the Loan
Agreement as follows:

     (a)  Section 11(k) of the Loan Agreement is hereby amended by amending and
          restating clause (B) by deleting the phrase "CDS may issue stock
          options pursuant to the Employment Agreements" and adding in its place
          the following:

               CDS may issue stock options pursuant to the Amended and Restated
               1996 Equity Compensation Plan;

     (b)  Section 11(k) of the Loan Agreement is hereby further amended by 
          adding the following three additional exceptions to the provisions at
          the end of the Section:

                    (C) CDS may enter into all customary and necessary
               agreements and arrangements in order to effect the Offering
               including, without limitation to the generality of the foregoing,
               an agreement with the Underwriters to underwrite the Offering,
               subject to certain limitations of their liability and certain
               indemnities granted by CDS in their favor;

                    (D) CDS may issue any shares, warrants or other rights to
               receive or purchase any shares of any class of its stock pursuant
               to and in order to effect the Common Stock Split and the
               Offering; and

                    (E) CDS may issue shares of Common Stock to Churchill in
               connection with the exercise by Churchill of the Warrant issued
               to Churchill by CDS as one of the Subordinated Debt Documents;

     (c)  Section 11(n) of the Loan Agreement is hereby amended to delete the
          following phrases in their entirety: (i) "amend its articles of
          incorporation (except as otherwise contemplated by Section 6.10 of the
          Note Purchase Agreement) or" and (ii) "and CDS shall not amend or
          modify the Subordinated Debt Documents";

                                       2
<PAGE>
 
     (d)  Section 14 of Exhibit A - Special Provisions of the Loan Agreement is
          hereby amended to delete the Section in its entirety; and

     (e)  Schedule 10(z) to the Loan Agreement is hereby amended by amending and
          restating the first sentence of paragraph 3 as follows:

               CDS has established the C.D. Smith Drug Company Amended and
               Restated 1996 Equity Compensation Plan whereby options to
               purchase up to 2,000,000 shares of common stock may be granted to
               employees at prices equal to the fair market value of the shares
               on the dates of grant.
 
     2.   Consent; Waiver of Rights and Release of Liability.   The Agent and
Lenders (and each of them) hereby consent to the Proposals and the actions
described in Section 1(b) of this Amendment taken or to be taken by the
Borrowers in order to effect the Proposals and waive any Event of Default that
would arise under Sections 12(b) or 12(c) of the Loan Agreement as a result of
the consummation of the Proposals but for said consent.

     3.   Representations and Warranties of Borrowers.  Each Borrower represents
and warrants that, as of the date hereof, after giving effect to the
consummation of the transactions contemplated hereby and the other agreements
executed in connection herewith:

     (a)  Such Borrower has the right and power and is duly authorized to enter
          into this Amendment;

     (b)  No Event of Default or an event or condition which upon notice, lapse
          of time or both will constitute an Event of Default has occurred and
          is continuing;

     (c)  The execution, delivery and performance by such Borrower of this
          Amendment (i) have been duly authorized by all necessary action on its
          part; (ii) do not and will not, by the lapse of time, giving of notice
          or otherwise, violate the provisions of the terms of its Amended
          Articles of Incorporation or Amended Bylaws, or of any mortgage,
          indenture, security agreement, contract, undertaking or other
          agreement to which such Borrower is a party; (iii) do not and will
          not, by lapse of time, the giving of notice or otherwise, contravene
          any governmental restriction to which such Borrower or any of its
          properties may be subject, and (iv) do not and will not, except as
          contemplated in the Loan Agreement, result in the imposition of any
          lien, charge, security interest or encumbrance upon any of such
          Borrower's properties under any indenture, mortgage, deed of trust,
          loan or credit agreement or other agreement or instrument to which
          such Borrower is a party or which purports to be binding on such
          Borrower or any of its properties;

                                       3
<PAGE>
 
     (d)  No consent, license, registration or approval of any governmental
          authority, bureau or agency is required in connection with the
          execution, delivery, performance, validity or enforceability of this
          Amendment and the other agreements executed by any Borrower in
          connection herewith; and

     (e)  This Amendment executed by any Borrower in connection herewith has 
          been duly executed and delivered by such Borrower and is enforceable
          against such Borrower in accordance with their terms.

     (f)  All information, reports and other documents heretofore furnished to
          Agent by each Borrower in connection with the Loan Agreement, as
          amended by this Amendment, and the Other Agreements are in all
          material respects complete and correct. Each Borrower has disclosed to
          Agent every fact of which it has knowledge which would reasonably be
          expected to materially and adversely affect the business, operations
          or financial condition of such Borrower or the ability of such
          Borrower to perform its obligations under the Loan Agreement, as
          amended by this Amendment, or under any of the Other Agreements.

     4.   Conditions Precedent.  This Amendment shall become effective as of the
date of this Amendment upon the satisfaction of the following conditions
precedent in form and substance satisfactory to Agent, which Agent acknowledges
have been so satisfied:

     (a)  Agent shall have received the reaffirmation of each of the Guarantees
          dated as of October 3, 1997, executed by H.S.S. Consulting Services
          Incorporated and C.D.S. Transportation, Inc., respectively, in the
          form of the Acknowledgment and Acceptance attached to this Amendment.

     (b)  No Event of Default or event which, with the giving of notice or the
          passage of time, or both, would become an Event of Default, shall have
          occurred and be continuing, and, after giving effect to the amendments
          contained herein, no Event of Default or event which, with the giving
          of notice or the passage of time, or both, would become an Event of
          Default, shall have occurred and be continuing, it being acknowledged
          and agreed that the Proposals have been consented to by the Agent and
          the Lenders and do not and will not constitute Events of Default.

     (c)  Borrowers shall have executed and delivered all such other documents,
          instruments and agreements as Agent shall reasonably require to
          maintain its perfected security interest in the Collateral.

     5.   Notification of Name Change.  CDS acknowledges its obligation under
Section 10(m) of the Loan Agreement to notify the Agent in writing of the change
in its name that will take effect upon acceptance of the Amended Articles by the
Missouri Secretary of State within ten days of such name change.

                                       4
<PAGE>
 
     6.   Fees and Expenses.  Borrowers agree to pay all reasonable and properly
incurred legal fees and other expenses, whether for in-house or outside counsel,
incurred by Agent and Lenders in connection with this Amendment.

     7.   Loan Agreement Remains in Force.  Except as specifically amended
hereby, all of the terms and conditions of the Loan Agreement shall remain in
full force and effect and this Amendment shall not be a waiver of any rights or
remedies which Agent or Lenders have provided for in the Loan Agreement and all
such terms and conditions are herewith ratified, adopted, approved and accepted.

     8.   No Novation.  This Amendment and all other agreements executed by any
Borrower on the date hereof are not intended to nor shall be construed to create
a novation or accord and satisfaction, and shall only be a modification and
extension of the existing Obligations of such Borrower to Lenders.

     9.   Entire Agreement.  This Amendment and the other documents it refers to
comprise the entire agreement relating to the subject matter they cover and
supersede any and all prior written or oral agreements among Agent, Lenders and
Borrowers relating thereto.

     10.  Severability.  Any provision of this Amendment that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.

     Except as expressly provided for herein, the terms and conditions of the
Loan Agreement shall remain in full force and effect.

                                       5
<PAGE>
 
     IN WITNESS WHEREOF, Borrowers and Lenders have caused this Amendment to be
duly executed in their proper duly authorized officers as of the day and year
first set forth above.

C. D. SMITH DRUG COMPANY       LASALLE BUSINESS CREDIT, INC., AS
                               AGENT AND LENDER


By /s/Jeanne Mathiesen         By /s/Catherine Saccani
  --------------------------     -------------------------------
Its [CFO]                      Its [Vice President]
    ------------------------       -----------------------------


SBS PHARMACEUTICALS, INC.      AMERICAN NATIONAL BANK & TRUST
                               COMPANY OF CHICAGO


By /s/Jeanne Mathiesen         By /s/M. Martha Gaskin
  --------------------------     --------------------------------
Its [Treasurer]                Its [Vice-President]
    ------------------------       ------------------------------


GENERAL DRUG COMPANY           HELLER FINANCIAL, INC., AS A
                               LENDER


By /s/Jeanne Mathiesen         By /s/Elizabeth Geannopulos
  --------------------------     ---------------------------------
Its [Treasurer]                Its [Vice President]
    ------------------------      -------------------------------


JAMES BRUDNICK COMPANY, INC.



By  /s/Jeanne Mathiesen
   -------------------------
Its [Treasurer]
     -----------------------

                                       6
<PAGE>
 
                         ACKNOWLEDGMENT AND ACCEPTANCE

     Each of the undersigned has executed and delivered to Agent a Guaranty
dated October 3, 1997 (each, a "Guaranty") with respect to the Liabilities of 
C. D. Smith Drug Company, Inc., General Drug Company, SBS Pharmaceuticals, Inc.
and James Brudnick Company, Inc. (collectively, "Borrowers") under the Loan and
Security Agreement dated October 3, 1997 among Borrowers, Agent and Lenders (as
amended from time to time, the "Loan Agreement"). Each of the undersigned hereby
acknowledges receipt of the foregoing Fourth Amendment to Loan and Security
Agreement (the "Amendment"), accepts and agrees to be bound by the terms
thereof, ratifies and confirms all obligations under its Guaranty, and agrees
that its Guaranty shall continue in full force and effect upon the effectiveness
of the Amendment. Terms used by not defined herein shall have the meaning
ascribed to such terms in the Loan Agreement.


                              Acknowledged and Agreed to this ____ day of
                              July, 1998.


                              H.S.S. CONSULTING SERVICES
                              INCORPORATED



                              By /s/Jeanne Mathiesen
                                 ------------------------------
                              Its [Treasurer]
                                  -----------------------------



                              C.D.S. TRANSPORTATION, INC.



                              By /s/Jeanne Mathiesen
                                -------------------------------
                              Its [Treasurer]
                                  -----------------------------

                                       7

<PAGE>


                                 Exhibit 10.19
                                 -------------
 
                          C.D. SMITH HEALTHCARE, INC.
                         EMPLOYEE STOCK OWNERSHIP PLAN
                       AMENDMENT DATED ____________, 1998

     This Amendment is adopted the ____ day of ____________, 1998, by and
between C.D. Smith Healthcare, Inc. (hereinafter the "Company") and George K.
Baum Trust Company (hereinafter the "Trustee");

     WHEREAS, the Company and the Trustee heretofore entered into the C.D. Smith
Drug Company Employee Stock Ownership Plan (the "Plan"); and

     WHEREAS, pursuant to the terms of the Plan, the Company reserved the right
to amend the Plan from time to time in its discretion; and

     WHEREAS, the Company now desires to amend the Plan to reflect the initial
public offering and listing of its stock on the New York Stock Exchange, the
change of its name and the name of the Plan, and to make certain other changes
to the Plan.

     NOW, THEREFORE, in consideration of these premises, the Plan is hereby
amended as follows, effective upon adoption of the Amendment unless otherwise
noted:

     1.   Section 1.01 is deleted in its entirety and a new Section 1.01 is
added to read as follows:

          1.01  "Plan" means the retirement plan established and continued by
          the Employer in the form of this Agreement, designated as the C.D.
          SMITH HEALTHCARE, INC. EMPLOYEE STOCK OWNERSHIP PLAN.  The Employer
          has designed this Plan to invest primarily in Employer Securities.

     2.   Section 1.02 is deleted in its entirety and a new Section 1.02 is
added to read as follows:

          1.02  "Employer" means C.D. Smith Healthcare, Inc., and any employer
          that, with the consent of C.D. Smith Healthcare, Inc. adopts this Plan
          for the benefit of its eligible Employees.

     3.   Section 1.06 is deleted in its entirety and a new Section 1.06 is
added to read as follows:

          1.06  "Employee" means any employee of an Employer. Notwithstanding
          anything in this Plan or any other communication, documentation, or
          anything else, the only employees who may be eligible if they
          otherwise meet the eligibility requirements of the Plan shall be
          persons classified by the Employer as common-law employees and who
          are on the W-2 payroll of the Employer.  However, such term excludes
          any person classified by the Employer as an independent contractor or
          contract employee.  Such exclusion shall apply regardless of whether
          or not                   
<PAGE>
 
          such persons are on the W-2 payroll of the Employer. This limitation
          on the definition of Employee shall be controlling for purposes of
          this Plan, regardless of whether or not the person is later determined
          by the Internal Revenue Service, other agency, arbitrator or a court
          to be a common-law employee of the Employer. Notwithstanding anything
          in this Plan or any other communication, documentation, or anything
          else, the only employees who may be eligible if they otherwise meet
          the eligibility requirements of the Plan shall be persons classified
          by the Employer as common-law employees and who are on the W-2 payroll
          of the Employer. However, such term excludes any person classified by
          the Employer as an independent contractor or contract employee. Such
          exclusion shall apply regardless of whether or not such persons are on
          the W-2 payroll of the Employer. This limitation on the definition of
          Employee shall be controlling for purposes of this Plan, regardless of
          whether or not the person is later determined by the Internal Revenue
          Service, other agency, arbitrator or a court to be a common-law
          employee of the Employer.

     4.   Section 1.19 is deleted in its entirety and a new Section 1.19 is
added to read as follows:

          1.19  "Trust Fund" means all property of every kind held or acquired
          by the Employer's Plan, other than incidental benefit insurance
          contracts.  This Plan creates a single Trust for all Employers
          participating under the C.D. SMITH HEALTHCARE, INC. EMPLOYEE STOCK
          OWNERSHIP PLAN.  However, the Trustee will maintain separate records
          of account in order to reflect properly each Participant's Accrued
          Benefit derived from each participating Employer.

     5.   Section 1.28 is deleted in its entirety and a new Section 1.28 is
added to read as follows:

          1.28  Leased Employees.  The Plan does not treat a Leased Employee as
          an Employee of the Employer.  A Leased Employee is an individual (who
          otherwise is not an Employee of the Employer) who, pursuant to a
          leasing agreement between the Employer and any other person, has
          performed services for the Employer (or for the Employer and any
          persons related to the Employer within the meaning of Code Section
          144(a)(3)) on a substantially full time basis for at least one year
          and who is subject to the primary direction and control of the
          Employer.

     6.   A new paragraph is added at the end of Section 2.01 to read as
follows:

          If a Leased Employee who is not a Participant becomes eligible to
          participate in the Plan by reason of a change in employment
          classification, he will participate in the Plan immediately if he has
          satisfied the eligibility conditions of Section 2.01 and would have
          been a Participant had he not been an Excluded Employee during his
          period of Service. Furthermore, the Plan takes into account all of the

                                       2
<PAGE>
 
          Participant's included Years of Service with the Employer as a Leased
          Employee for purposes of vesting credit under Article V.

     7.   Section 9.11[E] is deleted in its entirety.  Section 9.11[F] is
renumbered as Section 9.11[E].

     8.   The third full paragraph of Section 10.03(A)(1) is deleted in its
entirety and a new third paragraph is added to Section 10.03(A)(1) to read as
follows:

          In the event an offer shall be received by the Trustee for the sale or
          other disposition of other Employer Securities owned by the Trust,
          whether such offer shall be in the form of cash in exchange for
          Employer Securities pursuant to a proposed purchase and sale, or for
          cash and/or other property pursuant to a proposed transfer, exchange,
          merger, consolidation or otherwise, the Advisory Committee shall
          direct the Trustee with respect to whether or not to accept such offer
          and to engage in such sale or other disposition of Employer
          Securities, provided that the consideration to be received by the
          Trust as a result of such sale or other disposition must be at least
          equal to the fair market value of such Employer Securities as
          determined by an independent appraiser so long as such securities are
          not readily tradable on an established securities market, as of the
          date of such sale or other disposition (as determined in good faith by
          the Advisory Committee and the direction).  In the event the Trustee
          is unable to make payments of principal and/or interest on a Exempt
          Loan when due, the Advisory Committee may direct the Trustee to sell
          any Leveraged Securities that have not yet been allocated to
          Participants' Employer Securities Accounts or to obtain another Exempt
          Loan in an amount sufficient to make such payments.

     9.   Section 10.08 is deleted in its entirety and a new Section 10.08 is
added to read as follows:

          10.08 Distribution of Trust Funds; Valuation of Employer Securities.
          The Trustee will make all distributions of benefits under the Plan in
          Employer Securities valued at fair market value at the time of the
          distribution unless a special valuation is required.  The Trustee will
          pay in cash any fractional security share to which a Participant or
          his Beneficiary is entitled.  In the event the Trustee is to make a
          distribution in shares of Employer Securities, the Trustee may apply
          any balance in a Participant's General Investments Account to provide
          whole shares of Employer Securities at the then fair market value.

          If the Employer's charter or bylaws restrict ownership of
          substantially all shares of Employer Securities to Employees and the
          trust, as described in Code Section 409(h)(2), the Trustee will make
          the distribution of a Participant's Accrued Benefit entirely in cash.

          Notwithstanding the proceeding provisions of this Section 10.08, the
          Trustee, if directed in writing by the Advisory Committee, will pay,
          in cash, any cash 

                                       3
<PAGE>
 
          dividends on Employer Securities allocated, or allocable to
          Participants' Employer Securities Accounts, irrespective of whether a
          Participant is fully vested in his Employer Securities Account. The
          Advisory Committee's direction must state whether the Trustee is to
          pay the cash dividend distributions currently, or within the 90 day
          period following the close of the Plan Year in which the Employer pays
          the dividends to the Trust. The Advisory Committee may request the
          Employer to pay dividends on Employer Securities directly to
          Participants.

     10.  Section 10.15 is deleted in its entirety and a new Section 10.15 is
added to read as follows:

          10.15  Participant Voting Direction Rights-Employer Securities.  With
          respect to the voting of Employer Securities which are not part of a
          registration-type class of securities (as defined in Code Section
          409(d)(4)), a Participant has the right to direct the Trustee
          regarding the voting of such Employer Securities allocated to his
          Employer Securities Account with respect to any corporate matter which
          involves the approval or disapproval of any corporate merger or
          consolidation, recapitalization, reclassification, liquidation,
          dissolution, sale of substantially all assets of a trade or business,
          or such similar transaction as the Treasury may prescribe in
          regulations.  As to any Employer Securities allocated to the
          Participant's Employer Securities Account which are part of a
          registration-type class of securities or any Employer Securities which
          were acquired with the proceeds of a securities acquisition loan (as
          defined in Section 133(b) of the Code) made after July 10, 1989, the
          voting direction rights provided in this Section 10.15 extend to all
          corporate matters requiring a vote to stockholders.  The Advisory
          Committee shall direct the Trustee with respect to the voting of
          Employer Securities which are not part of a registration-type class of
          securities and which either are held by the suspense account (and not
          allocated to individual Participant Employer Securities Accounts) and
          Employer Securities or are so allocated but which are not directed as
          to voting by the respective Participants.  As to any shares which are
          part of a registration-type class of securities, shares allocated to
          the accounts of Participants who have not timely instructed the
          Trustee how to vote them and any unallocated shares will be voted in
          the same proportions as the shares for which the Trustee has received
          timely instructions.

     11.  Section 6.02 is deleted in its entirety and a new Section 6.02 is
added to read as follows:


          6.02.  Method of Payment of Accrued Benefit.  Subject to the annuity
          distribution requirements, if any, prescribed by Section 6.04, and any
          restrictions prescribed by Section 6.03, a Participant or Beneficiary
          may elect distribution as follows, subject to Section 10.08, and the
          other applicable rules herein:

          (i)  If the Participant's benefit is $3,500 or less, the Trustee will
               pay the entire benefit in cash in one lump sum payment as soon as
               administratively

                                       4
<PAGE>
 
       practicable after the first day of the third month of the Plan Year
       following the Plan Year in which the Participant separates from service.

(ii)   If the Participant's benefit is greater than $3,500, unless the
       Participant elects to receive a lump sum distribution pursuant to (iii)
       below, upon the Participant's written consent, the Trustee will pay the
       benefit in five substantially equal annual installments beginning as soon
       as administratively practicable after the first day of the sixth Plan
       Year following the Plan Year in which the Participant separates from
       service, pursuant to Section 6.05.

(iii)  If the Participant's benefit is greater than $3,500, the Participant may
       elect to have the Trustee distribute his entire benefit in a lump sum at
       any time as soon as administratively feasible following his Separation
       from Service. Any Participant who receives a lump sum distribution in the
       year in which he separates from service and whose account receives an
       allocation of the Employer's contribution for the Plan Year in which he
       separates from service, shall receive an additional distribution of such
       additional allocation in the first plan year following his separation
       from service.

       The distribution options permitted under this Section 6.02 are available
       only if the present value of the Participant Nonforfeitable Accrued
       Benefit, at the time of the distribution to the Participant, exceeds
       $3,500. A Participant or Beneficiary may elect to receive an installment
       distribution in the form of a Nontransferable Annuity Contract. Under an
       installment distribution, the Participant or Beneficiary, at any time,
       may elect to accelerate the payment of all, or any portion, of the
       Participant's unpaid Nonforfeitable Accrued Benefit, subject to the
       requirements of Section 6.04.

       (A)  Minimum Distribution Requirements for Participants. The Advisory
            Committee may not direct the Trustee to distribute the Participant's
            Nonforfeitable Accrued Benefit, nor may the Participant elect to
            have the Trustee distribute his Nonforfeitable Accrued Benefit,
            under a method of payment which, as of the Required Beginning Date,
            does not satisfy the minimum distribution requirements under Code
            (S)401(a)(9) and the applicable Treasury regulations. The minimum
            distribution for a calendar year equals the Participant's
            Nonforfeitable Accrued Benefit as of the latest valuation date
            preceding the beginning of the calendar year divided by the
            Participant's life expectancy or, if applicable, the joint and last
            survivor expectancy of the Participant and his designated
            Beneficiary (as determined under Article VIII, subject to the
            requirements of the Code (S)401(a)(9) regulations). The Advisory
            Committee will increase the Participant's Nonforfeitable Accrued
            Benefit, as determined on the relevant

                                       5
<PAGE>
 
                    valuation date, for contributions or forfeitures allocated
                    after the valuation date and by December 31 of the valuation
                    calendar year, and will decrease the valuation by
                    distributions made after the valuation date and by December
                    31 of the valuation calendar year. For purposes of this
                    valuation, the Advisory Committee will treat any portion of
                    the minimum distribution for the first distribution calendar
                    year made after the close of that year as a distribution
                    occurring in that first distribution calendar year. In
                    computing a minimum distribution, the Advisory Committee
                    must use the unisex life expectancy multiples under Treas.
                    Reg. (S)1.72-9. The Advisory Committee, only upon the
                    Participant's written request, will compute the minimum
                    distribution for a calendar year subsequent to the first
                    calendar year for which the Plan requires a minimum
                    distribution by redetermining the applicable life
                    expectancy. However, the Advisory Committee may not
                    redetermine the joint life and last survivor expectancy of
                    the Participant and a nonspouse designated Beneficiary in a
                    manner which takes into account any adjustment to a life
                    expectancy other than the Participant's life expectancy.

                    If the Participant's spouse is not his designated
                    Beneficiary, a method of payment to the Participant (whether
                    by Participant election or by Advisory Committee direction)
                    may not provide more than incidental benefits to the
                    Beneficiary. For Plan Years beginning after December 31,
                    1988, the Plan must satisfy the Minimum Distribution
                    Incidental Benefit ("MDIB") requirement in the Treasury
                    regulations issued under Code (S)401(a)(9) for distributions
                    made on or after the Participant's Required Beginning Date
                    and before the Participant's death. To satisfy the MDIB
                    requirement, the Advisory Committee will compute the minimum
                    distribution required by this Section 6.02(A) by
                    substituting the applicable MDIB divisor for the applicable
                    life expectancy factor, if the MDIB divisor is a lesser
                    number. Following the Participant's death, the Advisory
                    Committee will compute the minimum distribution required by
                    this Section 6.02(A) solely on the basis of the applicable
                    life expectancy factor and will disregard the MDIB factor.
                    For Plan Years beginning prior to January 1, 1989, the Plan
                    satisfies the incidental benefits requirement if the
                    distributions to the Participant satisfied the MDIB
                    requirement or if the present value of the retirement
                    benefits payable solely to the Participant is greater than
                    50% of the present value of the total benefits payable to
                    the Participant and his Beneficiaries. The Advisory
                    Committee must determine whether benefits to the Beneficiary
                    are incidental as of the date the Trustee is to commence
                    payment of the retirement benefits to the Participant, or

                                       6
<PAGE>
 
                    as of any date the Trustee redetermined the payment period
                    to the Participant.

                    The minimum distribution for the first distribution calendar
                    year is due by the Participant's Required Beginning Date.
                    The minimum distribution for each subsequent distribution
                    calendar year, including the calendar year in which the
                    Participant's Required Beginning Date occurs, is due by
                    December 31 of that year. If the Participant receives
                    distribution in the form of a Nontransferable Annuity
                    Contract, the distribution satisfies this Section 6.02(A) if
                    the contract complies with the requirements of Code
                    (S)401(a)(9) and the applicable Treasury regulations.

               (B)  Minimum Distribution Requirements for Beneficiaries. The
                    method of distribution to the Participant's Beneficiary must
                    satisfy Code (S)401(a)(9) and the applicable Treasury
                    regulations. If the Participant's death occurs after his
                    Required Beginning Date or, if earlier, the date the
                    Participant commences an irrevocable annuity pursuant to
                    Section 6.04, the method of payment to the Beneficiary must
                    provide for completion of payment over a period which does
                    not exceed the payment period which had commenced for the
                    Participant. If the Participant's death occurs prior to his
                    Required Beginning Date, and the Participant had not
                    commenced an irrevocable annuity pursuant to Section 6.04,
                    the method of payment to the Beneficiary, subject to Section
                    6.04, must provide for completion of payment to the
                    Beneficiary over a period not exceeding: (i) 5 years after
                    the date of the Participant's death; or (ii) if the
                    Beneficiary is a designated Beneficiary, the designated
                    Beneficiary's life expectancy. The Advisory Committee may
                    not direct payment of the Participant's Nonforfeitable
                    Accrued Benefit over a period described in clause (ii)
                    unless the Trustee will commence payment to the designated
                    Beneficiary no later than the December 31 following the
                    close of the calendar year in which the Participant's death
                    occurred or, if later, and the designated Beneficiary is the
                    Participant's surviving spouse, December 31 of the calendar
                    year in which the Participant would have attained age 
                    70 1/2. If the Trustee will make distribution in accordance
                    with clause (ii), the minimum distribution for a calendar
                    year equals the Participant's Nonforfeitable Accrued Benefit
                    as of the latest valuation date preceding the beginning of
                    the calendar year divided by the designated Beneficiary's
                    life expectancy. The Advisory Committee must use the unisex
                    life expectancy multiples under Treas. Reg. (S)1.72-9 for
                    purposes of applying this paragraph. The Advisory Committee,
                    only upon the written request of the Participant or of the
                    Participant's surviving spouse, will recalculate the life
                    expectancy of the Participant's surviving spouse not more

                                       7
<PAGE>
 
                    frequently than annually, but may not recalculate the life
                    expectancy of a nonspouse designated Beneficiary after the
                    Trustee commences payment to the designated Beneficiary. The
                    Advisory Committee will apply this paragraph by treating any
                    amount paid to the Participant's child, which becomes
                    payable to the Participant's surviving spouse upon the
                    child's attaining the age of majority, as paid to the
                    Participant's surviving spouse. Upon the Beneficiary's
                    written request, the Advisory Committee must direct the
                    Trustee to accelerate payment of all, or any portion, of the
                    Participant's unpaid Accrued Benefit, as soon as
                    administratively practicable following the effective date of
                    that request.

     12.  Section 6.03(A) is deleted in its entirety and a new Section 6.03(A)
is added to read as follows:

               (A)  Participant Elections After Separation from Service.
                    Distributions of Employer Securities shall be made pursuant
                    to Sections 6.02 and 6.05 and the other applicable rules
                    herein. In addition, the Participant may elect to have the
                    Trustee commence distribution as of any date following his
                    attainment of the normal retirement age of 65. The
                    Participant may reconsider an election at any time prior to
                    the annuity starting date and elect to commence distribution
                    as of any other date, but not earlier than the date
                    described in the first sentence of this Paragraph (A).
                    Following his attainment of Normal Retirement Age, a
                    Participant who has separated from Service may elect
                    distribution as of any date, irrespective of the
                    restrictions otherwise applicable under this Section
                    6.03(A). If the Participant is partially-vested in his
                    Accrued Benefit, the Participant's earliest distribution
                    date under this Paragraph (A) is the first distribution date
                    after the Participant incurs a Forfeiture Break in Service
                    (as defined in Section 5.08).

     13.  Effective March 31, 1999, Section 6.03(B) is deleted in its entirety
and a new Section 6.03(B) is added to read as follows:

               (B)  Participant Elections Prior to Separation from Service. For
                    purposes of this paragraph, the terms "direct rollover" and
                    "eligible rollover distribution" shall have the meanings
                    ascribed to them in Section 6.08. Any Participant who is
                    100% vested in his Account, until he retires, has a
                    continuing election to direct the Trustee to pay directly to
                    an individual retirement account specified by the
                    Participant in a direct rollover up to 20% of his
                    Nonforfeitable Accrued Benefit (to the extent a direction
                    amount exceeds the amount to which a prior direction under
                    this Section 6.03(B) applies), provided that the payment is
                    an eligible rollover distribution and further provided, that
                    in no

                                       8
<PAGE>
 
                    event shall the Advisory Committee grant such request from a
                    Participant who has previously made a withdrawal pursuant to
                    this Section 6.03(B) unless, subsequent to the Plan Year in
                    which the Participant's most recent such request was made
                    and granted, the Participant has been a Participant in the
                    Plan for at least an additional twenty four (24) months. A
                    Participant may make an election under this paragraph on a
                    form prescribed by the Advisory Committee at any time during
                    the Plan Year for which his election is to be effective. In
                    his written election, the Participant must specify the
                    percentage or dollar amount he wishes the Trustee to
                    distribute. The Participant's election relates solely to the
                    percentage or dollar amount specified in his election form
                    and his right to elect to have directly rolled over an
                    amount, if any, for a particular Plan Year greater than the
                    dollar amount or percentage specified in his election form
                    terminates on the Accounting Date. The Trustee must pay the
                    amount specified by the Participant in a direct rollover in
                    accordance with the Participant's election under this
                    paragraph as soon as administratively practicable after the
                    Participant files his written election with the Advisory
                    Committee. The Trustee will distribute the balance of the
                    Participant's Accrued Benefit not distributed pursuant to
                    his election(s) under this Section 6.03(B) in accordance
                    with the other distribution provisions of this Plan.

     The Company and the Trustee hereby agree to the provisions of this
Amendment, and in witness of their Agreement, the Company and the Trustee has
signified their acceptance, as of the day and year first above appearing.

                                       C.D. SMITH HEALTHCARE, INC.


                                       By:  ____________________________
                                       Title:  _________________________


                                       GEORGE K. BAUM TRUST COMPANY


                                       By:  ____________________________
                                       Title:  _________________________


                                       9

<PAGE>
 

                                 Exhibit 23.1




                        Consent of Independent Auditors


We consent to the reference to our firm under the caption "Experts" and to the 
use of our reports dated April 10, 1998 (except Note 12, as to which the date is
      , 1998), in the Registration Statement (Form S-1 No. 33-    ) and related 
Prospectus of C.D. Smith Drug Company for the registration of    shares of its
common stock.


                                                       Ernst & Young LLP

Kansas City, Missouri

The foregoing consent is in the form that will be signed upon the completion of 
the change in the Company's capital stock and the common stock split described 
in Note 12 to the consolidated financial statements.

                                                       /s/ Ernst & Young LLP

                                                       Ernst & Young LLP

Kansas City, Missouri 
July 20, 1998

<PAGE>
 

                                                                    Exhibit 23.3

        [LETTERHEAD OF BLACKMAN KALLICK BARTELSTEIN, LLP APPEARS HERE]




                        Consent of Independent Auditors

We consent to the reference to our firm under the caption "Experts" and to the 
use of our report dated May 26, 1998 in the Registration Statement (Form S-1 No.
33-     ) and related Prospectus of C.D. Smith Drug Company for the registration
of    shares of its common stock.


                                    /s/ Blackman Kallick Bartelstein, LLP
                                    -------------------------------------
                                    Blackman Kallick Bartelstein, LLP



Chicago, Illinois
July 20, 1998                                     


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