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Executive Summary

Drug wholesaler Harris Wholesale plans to expand its "inventory investment buying" plan following the completion of an initial public offering by parent company Rabco. Harris is looking to inventory investment buying -- "significant purchases" of products for which price increases have been announced but not yet implemented, and the subsequent resale of those products at the prevailing price after the increase takes effect -- as one of several strategies aimed at boosting profits. The company says it is also building its sales to hospitals. While gross margins on sales in that sector generally lag behind those of independent pharmacies, "these sales reflect a high volume business that can operate on a smaller expense base, and therefore, in the opinion of Harris, provide favorable operating margins," the prospectus states. Hospital and institutional drug sales are the fastest growing part of Harris' business. Reporting overall revenues of $ 701 mil. for the six months ended June 30, up 8%, parent Rabco attributes most of the gain to "new hospital and other institutional customers of Harris." The other major component of Rabco's business is medical and surgical products distributor General Medical, where sales slowed due to "the culling of lower margin and credit concern accounts," the prospectus explains. Rabco says that Harris customers include "1,200 independent pharmacies and local chain drug stores, 295 hospitals, 375 alternate-site health care providers, 135 deep discount and mass merchandise retailers and 235 supermarkets." The firm works with 900 suppliers; Lilly, Glaxo, Marion Merrell Dow, SmithKline Beecham, Pfizer, Bristol-Myers Squibb and ICI account for about 47% of products purchased by Harris for resale. Headquartered in Cleveland, Harris employs approximately 800 people. The firm has a 100-person sales force, up from 75 at the time it was acquired in 1988. Management is led by President Donald Meyers, who joined the firm in 1977 after more than 20 years with Bergen Brunswig. The preliminary prospectus, filed with the Securities and Exchange Commission July 15, registers an initial public offering by parent Rabco that could raise over $ 100 mil. The company registered 8.2 mil. shares for sale, at an expected price of $ 13 to $ 15 a share. If the offering goes through at $ 14, Rabco will raise $ 105.8 mil. Salomon Brothers and Bear, Stearns are underwriting. Following the offering, there will be 18.4 mil. shares outstanding, of which 26% will be owned by Rabco President Richard Bernstein. Directors and officers as a group, including Bernstein, will beneficially own approximately 52% of Rabco's stock. No shares are being offered by current shareholders, who have agreed not to "sell or transfer any such shares for three years from the date of this prospectus without the prior written consent of the Representatives or Underwriters." Rabco paid $ 79 mil. for General Medical, according to the prospectus. The firm subsequently acquired drug wholesaler Harris Wholesale on Jan. 1, 1989, for $ 35 mil. in cash and $ 59 mil. in debt. The two acquisitions were funded by the issuance of equity securities worth $ 22.7 mil. and bank borrowings, combining to form a substantial long-term debt picture: as of June 30, long- term debt was $ 199.7 mil. Virtually all the proceeds from the stock sale will go to retire debt, including a $ 2.9 mil. penalty for early repayment and an estimated $ 6.7 mil. write-off of "related deferred debt acquisition costs." The company expects to have long-term debt, excluding current maturities, of approximately $ 110 mil. after the offering, and stockholder equity of $ 65.8 mil. The business appears to be headed for its first year in the black since the 1987 General Medical buy: net income for the six months was $ 1.8 mil., compared with a loss of $ 10 mil. in the year-earlier period. Comparisons are buoyed by reduced spending so far this year: selling, general and administrative costs were down 8.4% for the period, from $ 84.1 mil. in 1990 to $ 77 mil. this year, and interest expense dropped almost $ 1 mil.

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