<PAGE>
As filed with the Securities and Exchange Commission on November 1, 2000
Registration Statement No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DRUGMAX.COM, INC.
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(Name of Small Business Issuer in Its Charter)
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Nevada 7375 34-1755390
--------------------------------- -------------------------- ----------------------------
<S> <C> <C>
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification
of Incorporation or Organization) Classification Code Number) Number)
</TABLE>
12505 Starkey Road, Suite A
Largo, Florida 33773
(727) 533-0431
--------------------------------
(Address and Telephone Number
of Principal Executive Offices)
12505 Starkey Road, Suite A
Largo, Florida 33773
--------------------------------
(Address of Principal Place of Business)
William L. LaGamba, President
DrugMax.com, Inc.
12505 Starkey Road, Suite A
Largo, Florida 33773
(727) 533-0431
--------------------------------
(Name, Address and Telephone
Number of Agent for Service)
Please Send Copies of Communications to:
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<S> <C>
Gregory C. Yadley, Esq. R. Alan Higbee, Esq.
Julio C. Esquivel, Esq. David M. Doney, Esq.
Shumaker, Loop & Kendrick, LLP Fowler, White, Gillen, Boggs, Villareal and Banker, P.A.
101 East Kennedy Blvd. Suite 2800 501 East Kennedy Blvd., Suite 1700
Tampa, Florida 33602 Tampa, Florida 33602
Telephone: (813) 229-7600 Telephone: (813) 228-7411
Facsimile: (813) 229-1660 Facsimile: (813) 228-9401
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Title of each class of Proposed maximum Proposed
securities to be Amount to be offering price per maximum aggregate Amount of
registered registered share/(1)/ offering price/(1)/ registration fee
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<S> <C> <C> <C> <C>
Common Stock, $.001
par value 2,300,000 $6.41 $14,743,000 $3,892.15
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</TABLE>
_____________
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(c).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
securities and exchange commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated October ____, 2000
[GRAPHIC OMITTED]
DRUGMAX.COM, INC.
2,000,000 Shares of Common Stock
This is a public offering of common stock of DrugMax.com, Inc. DrugMax is
offering a total of 1,600,000 shares of common stock with this prospectus. The
selling stockholders identified in this prospectus are offering an additional
400,000 shares of common stock of DrugMax. See "Selling Stockholders." We will
not receive any of the proceeds from the sale of shares by the selling
stockholders.
This is a firm commitment underwriting. The underwriters named in this
prospectus have an option for 45 days to purchase up to 300,000 additional
shares of our common stock at the offering price to cover any over-allotments.
Our common stock is currently quoted on the Nasdaq SmallCap Stock Market
under the symbol "DMAX." We have applied to have our common stock included for
quotation on the Nasdaq National Market, also under the symbol "DMAX." On
October _____, 2000, the last reported closing sale price of our common stock,
as reported, by Nasdaq, was $_______ per share. See "Market for the Common
Stock."
Your investment in our common stock involves a high degree of risk. Before
investing in our common stock, you should consider carefully the risks described
under "Risk Factors" beginning on page _____.
<TABLE>
<CAPTION>
=============================================================================================
TERMS OF THE OFFERING
---------------------------------------------------------------------------------------------
PER SHARE TOTAL
---------------------------------------------------------------------------------------------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discounts and Commissions $ $
Proceeds to DrugMax $ $
Proceeds to Selling Stockholders $ $
=============================================================================================
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
UTENDAHL CAPITAL PARTNERS, L.P.
The date of this prospectus is _________________________, 2000.
<PAGE>
TABLE OF CONTENTS
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Page Page
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Summary............................................... 1 Business.........................................
Risk Factors.......................................... Management.......................................
Use of Proceeds....................................... Selling Stockholders.............................
Capitalization........................................ Security Ownership of Management
Market for the Common Stock........................... and Certain Beneficial Owners....................
Dividend Policy....................................... Description of Capital Stock.....................
Selected Consolidated Financial Data.................. Underwriting.....................................
Selected Pro Forma Condensed Legal Matters....................................
Consolidated Financial Data......................... Experts..........................................
Management's Discussion and Additional Information...........................
Analysis of Financial Condition Index to Financial Statements....................
and Results of Operations...........................
</TABLE>
You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This prospectus may be used only where it is
legal to sell these securities. The information in this prospectus may only be
accurate on the date of this prospectus.
Information contained on our web sites does not constitute part of this
prospectus.
Cautionary Statement Regarding Forward-Looking Statements
Some of the statements in this prospectus are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
which provides a "safe harbor" for these types of statements. These forward-
looking statements include statements in the "Summary," "Business," and other
sections of this prospectus relating to our expansions and acquisition strategy,
business development and projected capital expenditures, as well as trends in
Internet use and electronic commerce. These forward-looking statements also
include statements relating to our performance in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Use of
Proceeds," and "Business" sections of this prospectus. Forward-looking
statements include statements regarding the intent, belief or current
expectations of DrugMax or our management (including statements preceded by,
followed by or including forward-looking terminology such as "may," "will,"
"should," "believe," "expect," "plan," "intend," "anticipate," "estimate,"
"continue," "future" or similar expressions or comparable terminology) with
respect to various matters. All forward-looking statements in this prospectus
are based on information available to us on the date of this prospectus. Please
note that matters set forth under the caption "Risk Factors" constitute
cautionary statements identifying important factors with respect to the forward-
looking statements, including certain risks and uncertainties, that could cause
actual results to differ materially from those in such forward-looking
statements.
i
<PAGE>
Prospectus Summary
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our Consolidated Financial Statements, Pro Forma Consolidated
Financial Statements and related Notes appearing elsewhere in this prospectus.
Because this is only a summary, you should read the rest of this prospectus
before you invest in our common stock. Read the entire prospectus carefully,
especially the risks described under "Risk Factors." Unless otherwise indicated,
the information in this prospectus (a) has been adjusted to give retroactive
effect to a number of stock splits and reverse stock splits as described in Note
9 to our Consolidated Financial Statements appearing elsewhere in this
prospectus and (b) assumes that the underwriter's over-allotment option has not
been exercised.
Our Business
Drugmax.com, Inc. primarily is an e-commerce business providing: (1)
the wholesale distribution of pharmaceuticals, over-the-counter products, health
and beauty care products, and nutritional supplements and (2) one of the first
business-to-business online trade exchanges for the same products, dedicated
exclusively to manufacturers, distributors, wholesalers and retailers in the
pharmaceuticals and over-the-counter product markets. We also continue to
derive a significant portion of revenue from our traditional "brick and mortar"
full-line wholesale distribution business. We utilize our competitive advantage
of being one of the early entrants into the Internet business-to-business
pharmaceutical market, leveraging our existing infrastructure, technology,
relationships, marketing and management resources. We believe that the
combination of our traditional wholesale distribution business with both our
online wholesale distribution business and our e-commerce trade exchange
provides the "clicks and mortar" combination that will allow us to aggressively
market and distribute our products and services. During the fiscal year ended
March 31, 2000, and the three months ended June 30, 2000, we generated revenues
of $21.1 million and $28.8 million, respectively.
In general, we distribute our products primarily to independent
pharmacies in the continental United States, and secondarily to small and
medium-sized pharmacy chains, alternate care facilities and other wholesalers
and retailers. Since the early December 1999 launch of our website,
www.drugmax.com, over 9,000 independent pharmacies, small regional pharmacy
chains, wholesalers and distributors have registered to purchase products
through our site. We believe we have been successful in attracting potential
customers to our site because we have designed our site as an online source for
a select group of products, typically higher cost and margin products, which
make up a large percentage of our targeted customers sales. In addition, we
maintain an inventory of over 20,000 stock keeping units, and continue to serve
our customers as a primary, full-line wholesale distributor through a
combination of our e-commerce venues and traditional distribution methods.
Our online trade exchange, DrugMaxTrading.com, established in August
2000, offers one of the first business-to-business online trade exchanges for
pharmaceuticals, over-the-counter products, health and beauty care products, and
nutritional supplements dedicated exclusively to manufacturers, distributors,
wholesalers and retailers in the pharmaceutical and over-the-counter product
markets. DrugMaxTrading.com allows our trade exchange members to lower their
overall costs of doing business while providing them with wider market access
and the best available prices. Capitalizing on the efficiencies of the Internet
and our strategic alliances, DrugMaxTrading.com aggregates a variety of product
and market participant information, and, in doing so, facilitates the execution
of mutually beneficial online transactions among trade exchange members in an
open-market format.
Through DrugMaxTrading.com, we provide our members with three online
trading options:
. The Best Buy System is powered by an online catalog of products.
Product information is uploaded into the DrugMaxTrading.com
database by multiple vendors, and a corresponding system for
purchasers automatically searches for the desired product and
provides information on, and the ability to, acquire the lowest
price.
. Through our Closeout System, our members can offer and purchase
viable products approaching expiration. Based on the expiration
date, the price of the product will decrease daily as the
expiration date approaches, giving buyers the most favorable
pricing and sellers a channel for end-of-life management.
1
<PAGE>
. The Auction System provides our members with the opportunity to
participate in auctions as inventory is placed for sale.
Although we expect our wholesale distribution business to continue to
provide the primary source of revenues for the foreseeable future, we believe
that our new e-commerce trade exchange ultimately will provide greater profits
than our wholesale distribution operations.
Our key business objectives are:
. to become a leading business-to-business e-commerce provider of
pharmaceuticals, over-the-counter products, health and beauty
care products and nutritional supplements; and
. to own and operate a leading online trade exchange for
pharmaceuticals, over-the-counter products, health and beauty
care products and nutritional supplements.
Industry Trends
Pharmaceutical and Healthcare Markets. According to IMS Health, a
-------------------------------------
company specializing in information services for the pharmaceutical and health
care industries, the United States is the world's largest pharmaceutical market,
with 1998 sales of $111 billion, including diagnostics and over-the-counter
drugs. That figure is expected to rise to $163 billion in 2002, an increase of
46%. The National Association of Chain Drug Stores reported that total
pharmaceuticals drug sales for 1999 exceeded a record $121 billion. This
continued growth rate of the sales of pharmaceutical products was attributed to
a number of factors including:
. the value added by the introduction of new drugs into the
marketplace, which more than offsets the value lost by
medications losing patent protection;
. new patterns of drug lifestyle management, resulting in higher
sales occurring earlier in the life cycle of a medication;
. increased money spent on direct-to-consumer marketing
initiatives; and
. an unprecedented period of investment by pharmaceutical companies
worldwide.
Currently, the pharmaceuticals and health care products markets are
serviced primarily by traditional full-line wholesalers.
Internet. The Internet has emerged as the fastest growing
--------
communications medium in history and is dramatically changing how businesses and
individuals communicate and share information. International Data Corporation
estimates that the number of Internet users will grow from 97 million at the end
of 1998 to 320 million by 2002. The Internet has created new opportunities for
conducting commerce, such as business-to-consumer and person-to-person e-
commerce. Recently, the widespread adoption of intranets and the acceptance of
the Internet as a business communications platform has created a foundation for
business-to-business e-commerce that offers the potential for organizations to
streamline complex processes, lower costs and improve productivity. Internet-
based business-to-business e-commerce is poised for rapid growth and is expected
to represent a significantly larger opportunity than business-to-consumer or
person-to-person e-commerce. According to Gartner Group, business-to-business e-
commerce revenue was $145 billion in 1998 and by 2004 will represent about 7.0%
of the total global sales transactions, estimated to be $7 trillion. Gartner
Group estimates that in 2000 business-to-business revenues will be $403 billion,
a figure that should rise to $953 billion in 2001, $2 trillion in 2002 and
nearly $4 trillion in 2003.
Our principal executive offices are located at 12505 Starkey Road,
Suite A, Largo, Florida 33773, and our telephone number is (727) 533-0431. Our
web sites are www.drugmax.com and www.DrugMaxTrading.com. The information
contained on our web sites does not constitute part of this prospectus.
2
<PAGE>
The Offering
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<S> <C>
Common Stock Offered by DrugMax........................ 1,600,000 shares
Common Stock Offered by Selling Stockholders........... 400,000 shares
Total Shares Offered................................... 2,000,000 shares
Common Stock Outstanding After this Offering........... _____________ shares/(1)/
Use of Proceeds........................................ We intend to use the proceeds primarily for working capital, as well as
future strategic acquisitions, business expansion and marketing.
Nasdaq Symbol (2)...................................... DMAX
</TABLE>
(1) Does not include 500,000 shares which are being held in escrow in
connection with our acquisition of Becan Distributors, Inc. See
"Business-Recent Material Acquisitions."
(2) Our common stock is currently quoted on the Nasdaq SmallCap Market
under the symbol "DMAX." We have applied to have our common stock
included for quotation on the Nasdaq National Market, also under the
symbol "DMAX."
Risk Factors
Investing in our common stock involves a high degree of risk. For
a discussion of certain risks that you should consider before buying shares of
our common stock, see "Risk Factors" beginning at page ____ of this prospectus.
3
<PAGE>
Summary Consolidated Financial Data
The following table shows our summary financial data which you should read
together with "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," our Consolidated Financial
Statements and Pro Forma Consolidated Financial Statements and related Notes,
and the other financial data included elsewhere in this prospectus.
The as adjusted balance sheet data gives effect to our sale of 1,600,000
shares of common stock at an assumed public offering price of $___________ per
share in this offering and our application of the estimated net proceeds.
<TABLE>
<CAPTION>
September 8, 1998
(date of inception) Year Ended Three Months Ended
through March 31, March 31, June 30,
1999/(1)/ 2000 1999 2000
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues................................... $ 37,118 $21,050,547 $ 33,899 $28,816,653
Cost of goods sold......................... 14,496 20,906,771 14,786 27,813,691
-------------- ------------ ----------- ------------
Gross profit............................... 22,622 143,776 19,113 1,002,962
Selling, general and administrative
expenses.................................. 128,858 2,076,653 101,308 2,363,190
-------------- ------------ ----------- ------------
Loss from operations....................... (106,236) (1,932,877) (82,195) (1,360,228)
Total other income (expense), net.......... 1,761 (56,067) (254) (159,601)
------------- ------------ ----------- ------------
Net loss................................... $ (104,475) $(1,988,944) $ (82,449) $(1,519,829)
============= =========== =========== ============
Basic and diluted net loss per share....... $ (0.08) $ (0.51) $ (0.02) $ (0.24)
============= ============ ============ ============
Basic and diluted weighted average number
of common shares outstanding.............. 1,372,230 3,875,445 5,351,028 6,374,780
============= ============= ============ ============
<CAPTION>
As of As of June 30, 2000
March 31, 2000 Actual As Adjusted
------------------ ----------------- ------------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................ $ 6,020,129 $ 4,124,356
Working capital.......................................... 5,161,409 4,170,868
Total assets............................................. 38,513,912 50,133,906
Long term obligations, less current portion.............. -- 1,471,575 1,471,575
Stockholders' equity..................................... 31,992,740 32,672,618
</TABLE>
_______________
(1) In March 1999, we acquired all of the outstanding stock of
Nutriceuticals.com Corporation, a Florida corporation formed on September
8, 1998. For accounting purposes, this acquisition was treated as an
acquisition of our company by Nutriceuticals and as a recapitalization of
Nutriceuticals. Thus, although we were incorporated in Nevada on October
18, 1993 our date of inception is September 8, 1998, for accounting
purposes. Accordingly, summary consolidated statement of operations data
is not presented for the period prior to September 8, 1998.
4
<PAGE>
Risk Factors
An investment in our common stock involves a high degree of risk. Before
deciding whether to invest, you should read and consider carefully the following
risk factors. If any of the following events actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
General Risks Related To Our Business
We have incurred net losses since inception and may incur additional losses in
the future, which may require us to seek additional financing.
We had revenues of approximately $21.1 million for the year ended March 31,
2000, and $28.8 million for the three months ended June 30, 2000, and losses of
approximately $2.0 million and $1.5 million for such periods. We expect to
continue to invest heavily in brand development, marketing and promotion, as
well as technology and operating infrastructure development. In addition, we
expect to continue to incur expenses relating to strategic acquisitions,
including expenses related to the integration of those acquisitions into our
business. We cannot be certain that we can achieve positive cash flows on a
quarterly or annual basis in the future. If we do not achieve or sustain
positive cash flows, we may be unable to meet our working capital requirements
without obtaining additional financing.
To meet our plans, we will require additional capital in the future which may
not be available to us.
Our expansion and development plans are expected to consume substantial
amounts of capital. We do not presently have adequate cash from operations or
financing activities to meet either our short or long-term capital needs.
Accordingly, we are dependent on and intend to use a substantial portion of the
proceeds of this offering to fund our operations and implement our marketing and
growth strategies. We currently anticipate that the net proceeds we receive
from this offering, together with our existing borrowing arrangements and other
available funds will be sufficient to meet our anticipated needs for working
capital and capital expenditures for at least the next 12 months. Thereafter,
if we are not able to generate sufficient positive cash flows, we likely will
have to obtain additional financing.
Our future capital requirements will depend upon many factors, including,
but not limited to:
. the extent to which we develop and brand our name;
. the frequency with which we make future acquisitions;
. the rate at which we hire additional personnel;
. the rate at which we expand the services that we offer; and
. the extent to which we develop and upgrade our technology.
Because of these factors, our actual revenues and costs are uncertain and
may vary considerably. These variations may significantly affect our future need
for capital.
The actual amount and timing of our future capital requirements may differ
materially from our estimates. In particular, our estimates may be inaccurate as
a result of changes and fluctuations in our revenues, operating costs and
development expenses. Our revenues, operating costs and development expenses
will be negatively affected by any inability to:
. effectively and efficiently manage the expansion of our operations;
5
<PAGE>
. negotiate favorable contracts and relationships with manufacturers,
distributors and wholesalers; and
. obtain brand recognition, attract sufficient numbers of customers or
increase the volume of e-commerce sales of our products and e-commerce
trade exchange services.
Adequate funds may not be available when needed or may not be available on
favorable terms. If funding is insufficient at any time in the future, we may
be unable to develop or enhance our products or services, take advantage of
business opportunities or respond to competitive pressures, any of which could
harm our business.
The requirement for additional capital could have a negative effect on our
stockholders.
We currently anticipate that the net proceeds of this offering, together
with our existing borrowing arrangements and other available funds will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. We may need to raise additional
funds in the future to fund expansion, pursue customer sales, develop new or
enhanced services, respond to competitive pressures or acquire complementary
businesses, technologies or services. If we raise additional funds through the
issuance of equity or convertible securities, the percentage ownership of our
stockholders will be reduced, stockholders may experience additional dilution
and these securities may have powers, preferences and rights that are senior to
those of the rights of our common stock.
We have a limited operating history and may not be able to successfully manage
our business or achieve profitability.
We acquired our primary wholesale distribution operations in two
transactions in November 1999 and April 2000. In addition, we launched our web
site, www.drugmax.com, in December 1999, and our DrugMaxTrading online trade
exchange, at www.DrugMaxTrading.com, in August 2000. Accordingly, we have only
a limited operating history on which to base an evaluation of our business and
prospects. You should consider our prospects in light of the risks, expenses
and difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
electronic commerce. Such risks include, but are not limited to, risks related
to evolving and unpredictable business models and the management of growth. To
address these risks, we must, among other things, develop and maintain a
customer base, implement and successfully execute our business and marketing
strategy, continue to develop and upgrade our technology and transaction-
processing systems, improve our web sites, provide superior customer service and
order fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel. We may not be able to successfully address such
risks, or manage our business to achieve or maintain profitability.
Our management team is relatively unexperienced in e-commerce business, and we
may not be able to hire additional e-commerce experienced personnel in the
future, which may hinder our ability to operate successfully.
We are substantially dependent on the efforts of William LaGamba, President
and Chief Operating Officer, and Jugal K. Taneja, Chairman of the Board and
Chief Executive Officer. Messrs. LaGamba and Taneja have no proven record of
success in the operation of an e-commerce wholesale distributor or online trade
exchange. In addition, our future success depends on our ability to identify,
attract, hire, train, retain and motivate other highly skilled technical,
managerial, editorial, merchandising, marketing and customer service personnel.
We currently have 64 employees and two consultants. The e-commerce market is
highly competitive; attracting and retaining new personnel could be costly in
terms of cash compensation or equity, or such personnel may not be available to
us on any terms. Competition for these individuals is intense, and we may be
unable successfully to attract, assimilate or retain sufficiently qualified
personnel in the future. We do not currently carry key man life insurance for
our principal officers.
Our efforts to raise awareness of the DrugMax brand may not be successful, which
may limit our ability to expand our customer base and attract employees and
acquisition candidates.
We believe that building the DrugMax brand is critical for attracting and
expanding our targeted customer
6
<PAGE>
base and attracting acquisition candidates and employees. If we do not continue
to build the DrugMax brand on a national basis, we may not be able to
effectively implement our strategy. Promotion and enhancement of our name will
depend largely on our success in continuing to provide high quality products and
services. If customers do not perceive our products and services as meeting
their needs, or if we fail to market our services effectively, we will be
unsuccessful in maintaining and strengthening our brand.
We may not be able to complete future strategic acquisitions, delaying our
growth plans.
Our growth to date largely has resulted from acquisitions, and a significant
component of our future growth strategy is to continue to make such
acquisitions. We are continually evaluating possible acquisitions of businesses
or product lines that complement or expand our existing business or product
lines, and we intend to pursue favorable opportunities as they arise. The
evaluation of prospective acquisitions and the negotiation of acquisition
agreements may require substantial expense and management time, and not all
potential acquisitions ultimately are consummated. Further, we cannot guarantee
that suitable acquisition candidates will be found or that acquisitions can be
completed on favorable terms. In addition, even if we are able to complete such
acquisitions, we cannot guarantee that the acquired companies or assets will be
successfully integrated into our company. Acquisitions may be announced or
completed at any time and may be dilutive to earnings per share on a pro forma
basis.
Acquisitions may disrupt or otherwise have a negative impact on our business and
may result in dilution to existing stockholders.
In the past 12 months, we have completed four acquisitions and currently we
have one potential acquisition pending. In the future, we intend to continue to
seek investments in complementary businesses, product lines and technology. If
we buy a company, or an operating division, we could have difficulty in
assimilating the personnel and operations. In addition, the key personnel of an
acquired company may decide not to work for us and customers and vendors of the
acquired company may decide not to do business with us. We could also have
difficulty in assimilating the acquired business, products or technology into
our operations. These difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses. In addition, future
acquisitions could have a negative impact on our business, financial condition
and results of operations. Furthermore, we may have to incur debt or issue
equity securities to pay for any future acquisition, the issuance of which may
be dilutive to our existing stockholders.
If not managed efficiently, our rapid growth may divert management's attention
from the operation of our business which could hinder our ability to operate
successfully.
Our growth has placed, and our anticipated continued growth will continue
to place, significant demands on our managerial and operational resources. Our
failure to manage our growth efficiently may divert management's attention from
the operation of our business and render us unable to keep pace with our
customers' demands.
We rely on manufacturers, distributors and wholesalers for our products, the
unavailability of which could hinder our ability to operate successfully.
We are dependent upon manufacturers, distributors and wholesalers to supply
us with products for resale, and the price, term and supply of these products is
unpredictable. As is common in the industry, we have no long-term or exclusive
arrangements with any manufacturer, distributor or wholesaler that guarantees
the availability of any material portion of our products for resale.
Our markets are highly competitive and we may be unable to compete effectively.
The e-commerce marketplace is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future because barriers
to entry in the e-commerce marketplace are minimal, and current and new
competitors can launch new web sites at a relatively low cost. The
pharmaceutical and over-the-counter product industries are also intensely
competitive. In the pharmaceutical and over-the-counter product industries we
currently compete primarily with other wholesalers and distributors. We also
compete with the growing number of manufacturers that sell their products
directly, either online or through traditional distribution channels. Many of
these manufacturers, wholesalers and distributors are larger and have
substantially greater resources than we do.
7
<PAGE>
Increased competition may reduce our operating margins, as well as cause a loss
to any possible market share and brand recognition. Further, to strategically
respond to changes in the competitive environment, we may sometimes make
pricing, service or marketing decisions or acquisitions that could materially
hurt our business. In addition, companies controlling access to Internet
transactions through network access or web browsers could promote our
competitors or charge us a substantial fee for inclusion in their product or
service offerings. We cannot guarantee that we can compete successfully against
current and future competitors. See "Business--Competition."
Our online trade exchange may not be successful if it is not adopted by a
significant number of buyers and suppliers.
We launched our DrugMaxTrading.com online trade exchange in August 2000. If
we do not successfully attract a significant number of buyers and suppliers to
our online trade exchange, our online trade exchange will not be widely
accepted, which in turn would limit the growth of our e-commerce revenues and
could adversely affect our business, financial condition and operating results.
Whether we can retain and attract buyers and suppliers will depend in large part
on our ability to design, develop and implement a secure, user-friendly
application with features and functionality that buyers and suppliers find
attractive in an e-commerce solution and that provides substantial value to its
users over their traditional procurement methods. Buyers and suppliers may
continue purchasing and selling products through traditional procurement
methods, rather than adopting an e-commerce solution. Buyers and suppliers also
may not use our online trade exchange if they do not perceive it as a neutral
marketplace that does not favor one participant over another.
We may not successfully protect our proprietary rights.
To protect our proprietary rights, we will rely on trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with
our employees, customers, partners and others. After completion of this
offering, we intend to apply for federal registration of the marks "DrugMax" and
"DrugMaxTrading" in the United States. We cannot be certain that federal
registration of these trademarks will be completed or issued. In addition,
effective trademark, service mark, copyright and trade secret protection may be
unavailable in every country in which our products and services are made
available online in the future. We have not applied to register any mark
outside the United States or undertaken any trademark searches to determine
whether any of these marks are available for use or registration outside the
United States.
To date, our business has not been interrupted as the result of any claim
of infringement. However, we cannot guarantee we will not be adversely affected
by the successful assertion of intellectual property rights belonging to others.
The effects of such assertions could include requiring us to alter or withdraw
existing trademarks or products, delaying or preventing the introduction of
products, or forcing us to pay damages if the products have been introduced.
The steps we take to protect our proprietary rights may be inadequate, or third
parties might infringe or misappropriate our trade secrets, copyrights,
trademarks, trade dress and similar proprietary rights. In addition, others
could independently develop substantially equivalent intellectual property. We
may have to litigate in the future to enforce our intellectual property rights,
to protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and the diversion of our management and technical resources which could harm our
business. See "Business-Proprietary Rights."
Risks Related To E-Commerce
We are subject to risks associated with dependence on the Internet and Internet
infrastructure development.
Our success will depend in large part on continued growth in, and the use
of, the Internet. There are critical issues concerning the commercial use of the
Internet which remain unresolved. The issues concerning the commercial use of
the Internet which we expect to affect the development of the market for our
products and services include:
. security . ease of access
. reliability . quality of service
. cost . necessary increases in bandwidth availability
8
<PAGE>
The adoption of the Internet for information retrieval and exchange,
commerce and communications, particularly by those enterprises that have
historically relied upon traditional means of commerce and communications,
generally will require that these enterprises accept a new medium for conducting
business and exchanging information. These entities likely will accept this new
medium only if the Internet provides them with greater efficiency and an
improved arena for commerce and communication.
Demand and market acceptance of the Internet are subject to a high
level of uncertainty and are dependent on a number of factors, including the
growth in access to and acceptance of new interactive technologies, the
development of technologies that facilitate interactive communication between
organizations and targeted audiences and increases in user bandwidth. If the
Internet fails to develop or develops more slowly than we expect as a commercial
or business medium, it may adversely affect our business.
Our future e-commerce operating results are unpredictable, and fluctuations in
our revenues and operating results may cause our stock's trading price to be
highly volatile.
Our revenues and operating results may fluctuate significantly from
time to time due to a number of factors, not all of which are in our control.
These factors include:
. our ability to attract and retain new customers and maintain customer
satisfaction;
. new web sites, services and products introduced by us or by our
competitors;
. price competition;
. our ability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
. traffic levels on our web sites and our ability to convert that traffic
into customers;
. general technical difficulties or system downtime affecting the Internet
or online services or the operation of our web sites;
. the failure of Internet bandwidth to increase significantly over time
and/or an increase in the cost to consumers of obtaining or using
Internet bandwidth;
. government regulations related to use of the Internet for commerce or
sales and distribution of natural products; and
. general economic conditions and economic conditions specific to the
Internet, online commerce and the software industry.
Our failure to produce operating results that meet securities analysts'
or investor expectations in one or more quarters may materially and adversely
affect the price of our common stock.
We are subject to capacity constraint system development risks which may result
in our inability to service our customers and meet our growth expectations.
A key element of our strategy is to generate a high volume of traffic
on, and use of, our web sites. Accordingly, our web site transaction processing
systems and network infrastructure performance, reliability and availability are
critical to our operating results. These factors are also critical to our
reputation and our ability to attract and retain customers and maintain adequate
customer service levels. The volume of goods we sell and the attractiveness of
our product and service offerings will decrease if there are any systems
interruptions that affect the availability of our web sites or our ability to
fulfill orders. We expect to continually enhance and expand our technology and
transaction processing systems, and network infrastructure and other
technologies, to accommodate
9
<PAGE>
increases in the volume of traffic on our web sites. We may be unsuccessful in
these efforts or we may be unable to accurately project the rate or timing of
increases in the use of our web sites. We may also fail timely to expand and
upgrade our systems and infrastructure to accommodate these increases.
Rapid technological change may adversely affect our business and increase our
business costs.
The Internet and the e-commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences
and frequent product and service introductions. If competitors introduce
products and services embodying new technologies or if new industry standards
and practices emerge, then our existing web sites, proprietary technology and
systems may become obsolete. Our future success will depend on our ability to do
the following:
. license and/or internally develop leading technologies useful in our
business;
. enhance our existing services;
. develop new services and technology that address the increasingly
sophisticated and varied needs of our existing and prospective
customers; and
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of our web sites and other proprietary technology entails
significant technical and business risks. We may use new technologies
ineffectively or we may fail to adapt our web sites, proprietary technology and
transaction processing systems to customer requirements or emerging industry
standards. If we face material delays in introducing new services, products and
enhancements, our customers may decide not to use our products and services
and use those of our competitors.
We are subject to risk of system failure which may hinder our ability to operate
successfully.
Our success, in particular our ability to successfully receive and
fulfill orders and provide high-quality customer service, largely depends on the
efficient and uninterrupted operation of our computer and communications
systems. We host and maintain our own web sites. While we contract with a third
party to provide back up web hosting services, our systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. We carry
no business interruption insurance to compensate us for losses that may occur.
In addition, our security mechanisms or those of our suppliers may not prevent
security breaches or service breakdowns. Despite our implementation of security
measures, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. These events could cause
interruptions or delays in our business, loss of data or render us unable to
accept and fulfill orders.
We are subject to risks associated with online commerce security.
A significant barrier to online commerce and communications is the
secure transmission of confidential information over public networks. Our
business may be adversely affected if our security measures do not prevent
security breaches, and we cannot assure that we can prevent all security
breaches. To the extent that our activities, or those of third-party
contractors, involve the storage and transmission of proprietary information,
security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability.
The Internet may become subject to additional government regulation, which could
affect our operations or increase our business costs.
Laws and regulations directly applicable to communications or commerce
over the Internet are becoming more prevalent. The law of the Internet, however,
remains largely unsettled, even in areas where there has been some legislative
action. It may take years to determine whether and how existing laws such as
those governing intellectual property, privacy, libel, contracts and taxation
apply to the Internet. In addition, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws,
both
10
<PAGE>
in the United States and abroad, that may impose additional burdens on companies
conducting business online. The adoption or modification of laws or regulations
relating to the Internet could adversely affect our business.
Risks Related To This Offering
New investors in our common stock will experience immediate and substantial
dilution.
The public offering price is substantially higher than the net tangible
book value per share of our common stock. Assuming a public offering price of
$___ per share, investors purchasing our common stock in this offering will
incur immediate dilution of $_________________ in net tangible book value per
share of our common stock. This dilution figure deducts the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us from the public offering price.
Management and certain stockholders can control our company.
Upon completion of this offering, there will be [_______] shares
outstanding, of which our current directors and executive officers and their
respective affiliates will beneficially own, in the aggregate, approximately
____%. In particular, Jugal K. Taneja, a principal stockholder and our Chairman
of the Board, will beneficially own ____% of our outstanding common stock upon
completion of this offering, and together with his spouse and adult children,
will control _____%. Therefore, if these stockholders act together, they likely
will be able to exercise control over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may also have the
effect of delaying, preventing or deterring a change in control which could
adversely affect the market price of our common stock. See "Security Ownership
of Management and Certain Beneficial Owners."
Our management will have broad discretion in the use of proceeds and it may not
effectively utilize those funds.
Our management will have broad discretion in how we use the net proceeds of
this offering. Investors will be relying on the judgment of our management
regarding the application of the net proceeds of this offering. Our
management's decision regarding use of the net proceeds may not be the most
effective utilization of those funds.
Future public sales of our common stock could adversely affect our stock price.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Such sales might also make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. As of June 30, 2000, we had 6,417,754 shares of common stock
outstanding (excluding the 500,000 common shares held in escrow in connection
with the Becan acquisition). Of these shares, the 2,000,000 shares sold in this
offering, together with _____________ additional shares of our common stock,
will be freely tradable without restriction. The remaining ___________ shares
of our common stock are deemed restricted shares of which __________ shares will
be eligible for sale within 12 months of this offering and the remainder of
____________ shares subsequent to 12 months from this offering. Any additional
shares issued in connection with the Becan acquisition and the potential
acquisition of Penner & Welsch will be restricted shares, eligible for sale
under Rule 144 12 months after issuance. See "Description of Capital Stock--
Shares Eligible for Future Sales."
The trading price of our common stock is likely to remain highly volatile due to
market volatility, which may affect your liquidity and the value of your
investment.
The market price of our common stock has been and will likely continue to
be highly volatile because the stock market in general, and the market for
Internet-related companies in particular, has been highly volatile. Investors
may not be able to resell their shares of our common stock following periods of
volatility because of the market's adverse reaction to such volatility. The
trading prices of many Internet-related companies' stocks have reached
historical highs within the past year and have reflected relative valuations
substantially above historical levels. During the same period, such companies'
stocks have also been highly volatile and have recorded lows well below such
historical highs. Our stock may not trade at the same levels as other Internet-
related companies' stocks,
11
<PAGE>
and Internet-related companies' stocks in general may not sustain their current
market prices. Factors that could cause such volatility may include, among other
things:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new sales models or new products or services;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet industry;
. changes in the market valuations of other Internet companies;
. failure to meet analysts' expectations;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
. capital commitments;
. additions or departures of key personnel;
. sales of common stock; and
. stock market price and volume fluctuations, which are particularly
common among highly volatile securities of Internet companies.
Many of these factors are beyond our control. These broad market and
industry factors may adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of stock, many companies have been the object
of securities class action litigation. If we were to be sued in a securities
class action, it could result in substantial costs and a diversion of our
management's attention and resources.
The underwriter's limited underwriting experience could adversely affect this
offering and the subsequent trading market, resulting in a lack of liquidity or
reduced value of your investment.
Utendahl Capital Partners, L.P., our underwriter, has been actively
engaged in the securities brokerage and investment banking business since 1992.
However, Utendahl has engaged in only limited equity underwriting activities,
and this offering is one of the first public equity offerings in which Utendahl
has acted as the sole managing underwriter. We cannot guarantee that Utendahl's
limited experience will not adversely affect the proposed public offering of the
common stock or the subsequent development of a trading market for the common
stock. Purchasers of stock in this offering may suffer a lack of liquidity in
their investment or a material decrease in the value of such investment.
12
<PAGE>
Use Of Proceeds
We estimate that we will receive net proceeds of approximately $__________
from our sale of the 1,600,000 shares of common stock offered by us with this
prospectus (approximately $_______________ if the underwriter fully exercises
its over-allotment option), after deducting estimated underwriting discounts and
commissions ($_____,000), the underwriter's non-accountable expense allowance
($_____,000) and other estimated offering expenses payable by us ($____,000). We
will not receive any proceeds from the sale of shares of common stock by the
selling stockholders. See "Selling Stockholders." We expect to use the net
proceeds of this offering primarily for working capital, as well as future
strategic acquisitions, business expansion and marketing efforts.
Amounts to be expended for working capital may include:
. cash payments required to acquire and manage our inventory; and
. cash required for accounts receivable financing in support of our
business expansion.
We routinely evaluate potential acquisitions of businesses and product
lines that would complement or expand our business or further our strategic
goals. We may use a portion of the net proceeds of this offering for one or more
such transactions. However, other than with regard to our proposed acquisition
of Penner & Welsch, Inc., we currently have no commitments or agreements with
respect to such transactions. See "Business-Pending Acquisition."
Business expansion includes amounts to be expended for:
. the hiring of additional personnel, including office, accounting,
production, warehouse and management; and
. the pursuit of strategic alliances, partnerships and key contractual
relationships.
We reserve the right to reallocate proceeds to different uses, upon the
discretion of our executive officers and directors. Pending use, we intend to
invest the net proceeds of this offering in interest-bearing bank accounts,
short-term interest-bearing investment grade securities or similar quality
investments. Based upon our current operating plan, we currently anticipate that
the net proceeds of this offering, together with our existing borrowing
arrangements and other available funds will be sufficient to meet our
anticipated needs for working capital and capital expenditures for at least the
next 12 months.
13
<PAGE>
Capitalization
The following table shows our long-term obligations and capitalization as
of June 30, 2000, and as adjusted as of that date to reflect our sale of
1,600,000 shares of common stock and our application of the estimated net
proceeds, after deduction of estimated offering expenses and underwriting
discounts and commissions. You should read the information in the table in
conjunction with the more detailed information regarding our company and the
common stock being sold in this offering and our Consolidated Financial
Statements, Pro Forma Consolidated Financial Statements and related Notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 2000
Actual As Adjusted
----------------- -----------------
<S> <C> <C>
Long-term obligations, less current portion................................ $ 1,471,575 $ 1,471,575
----------------- -----------------
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; no
preferred shares issued and outstanding................................ -- --
Common stock, $.001 par value; 24,000,000 shares authorized,
[6,417,754] shares issued and outstanding, actual; [_________] shares
issued and outstanding, as adjusted(1)(2).............................. 6,419
Additional paid-in capital(3)........................................... 36,279,447
Accumulated deficit..................................................... (3,613,248) (3,613,248)
----------------- -----------------
Total stockholders' equity................................................. 32,672,618
----------------- -----------------
Total capitalization........................................................ $ 34,144,193 $
================= =================
</TABLE>
--------------------------
(1) Does not include 400,000 shares of common stock reserved for future
issuance under our 1999 Stock Option Plan or 350,000 shares issuable upon
exercise of outstanding warrants. See "Description of Capital Stock."
(2) Excludes 500,000 shares held in escrow in connection with the Becan
acquisition to be issued pending the attainment of certain financial
targets for the year ending March 31, 2001. See "Business-Recent
Acquisitions."
(3) Net of $__________ of costs and expenses, and $___________ of underwriter's
discounts and commissions in connection with the sale of common stock
offered by this prospectus.
14
<PAGE>
Market for the Common Stock
Prior to November 19, 1999, our common stock was quoted on the OTC
Electronic Bulletin Board and traded under the symbol "JCOM." From March 1997
through November 1999 there was a very limited market for our common stock. From
April 1999 to November 19, 1999, there were a total of 18 trades reported for
our common stock on the OTC Electronic Bulletin Board.
Since November 19, 1999, our common stock has been listed for trading on
the Boston Stock Exchange and is currently traded on the Nasdaq SmallCap Market
under the symbols "DMA" and "DMAX," respectively. The following table shows the
high and low last reported sale prices for our common stock on the Nasdaq
SmallCap Market for each calendar quarter from November 19, 1999, the date our
stock was first listed for trading on the Nasdaq SmallCap Market, as reported by
Nasdaq.
<TABLE>
<CAPTION>
High Low
------------------ -----------------
<S> <C> <C>
1999
Fourth Quarter (commencing November 19, 1999).............................. $ 18.75 $ 10.25
2000
First Quarter.............................................................. 20.188 13.00
Second Quarter............................................................. 15.00 9.00
Third Quarter.............................................................. 9.875 6.25
Fourth Quarter through October ___, 2000...................................
</TABLE>
On September 30, 2000, there were approximately 550 holders of record of
our common stock. The last reported sale price as reported by Nasdaq on October
____, 2000, was $___________.
We have applied to have our common stock included for quotation on the
Nasdaq National Market, also under the symbol "DMAX."
Dividend Policy
We have not paid any cash dividends on our common stock, and we currently
intend to retain any future earnings to fund the development and growth of our
business. Any future determination to pay dividends on our common stock will
depend upon our results of operations, financial condition and capital
requirements, applicable restrictions under any credit facilities or other
contractual arrangements and such other factors deemed relevant by our Board of
Directors. Our current credit facilities prohibit the payment of dividends.
Prospective investors should not view an investment in the common stock as a
source of income.
15
<PAGE>
Selected Consolidated Financial Data
You should read the following selected consolidated financial data in
conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the year ended March 31, 1999 and the consolidated balance
sheet data as of March 31, 1999 are derived from our Consolidated Financial
Statements for such year, which have been audited by Kirkland, Russ, Murphy &
Tapp, independent auditors, and are included elsewhere in this prospectus, and
are qualified by reference to such Consolidated Financial Statements and the
related Notes. The consolidated statement of operations data for the year ended
March 31, 2000 and the consolidated balance sheet data as of March 31, 2000 are
derived from our Consolidated Financial Statements for such year, which have
been audited by Deloitte & Touche LLP, independent auditors, and are included
elsewhere in this prospectus, and are qualified by reference to such
Consolidated Financial Statements and the related Notes. The selected
consolidated financial data as of and for the three-month periods ended June 30,
1999 and 2000 have been derived from our unaudited condensed consolidated
financial statements for such periods, which are included elsewhere in this
prospectus and are qualified by reference to such unaudited condensed
consolidated financial statements and the related notes. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals that
we consider necessary for a fair presentation of our financial position and
results of operations for the period. The results of operations for the three
months ended June 30, 2000 are not necessarily indicative of results that may be
expected for the full year.
<TABLE>
<CAPTION>
September 8, 1998
(inception) through Year Ended
Consolidated Statement Of Operations Data: March 31, March 31, Three Months Ended June 30,
1999/(1)/ 2000 1999 2000
--------------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues................................... $ 37,118 $ 21,050,547 $ 33,899 $ 28,816,653
Cost of goods sold......................... 14,496 20,906,771 14,786 27,813,691
--------------------- ----------------- --------------- ---------------
Gross profit............................... 22,622 143,776 19,113 1,002,962
Selling, general and administrative
expenses.................................. 128,858 2,076,653 101,308 2,363,190
--------------------- ----------------- --------------- ---------------
Loss from operations....................... (106,236) (1,932,877) (82,195) (1,360,228)
Other income (expenses), net............... 1,761 (56,067) (254) (159,601)
--------------------- ----------------- --------------- ---------------
Loss before income taxes................... (104,475) (1,988,944) (82,449) (1,519,829)
Income taxes............................... -- -- -- --
------------------- ------------------ -------------- ----------------
Net loss................................... $ (104,475) $ (1,988,944) $ (82,449) $ (1,519,829)
=================== ================== ============== ===============
Basic and diluted loss per share........... $ (0.08) $ (0.51) $ (0.02) $ (0.24)
=================== ================== ============== ===============
Basic and diluted weighted average number
of common shares outstanding............... 1,372,230 3,875,445 5,351,028 6,374,780
=================== ================== ============== ===============
<CAPTION>
Consolidated Balance Sheet Data: As of March 31, As of June 30,
1999 2000 1999 2000
--------------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 56,986 $ 6,020,129 $ 14,599 $ 4,124,356
Working capital (deficiency)............... (9,953) 5,161,409 (89,722) 4,170,868
Total assets............................... 135,618 38,513,912 128,570 50,133,906
Long-term obligations, less current
portion.................................... -- -- -- 1,471,575
Stockholders' equity (deficiency).......... 37,927 31,992,740 (44,522) 32,672,618
</TABLE>
__________________
(1) In March 1999, we acquired all of the outstanding stock of
Nutriceuticals.com Corporation, a Florida corporation
16
<PAGE>
formed on September 8, 1998. For accounting purposes, this acquisition was
treated as an acquisition of our company by Nutriceuticals and as a
recapitalization of Nutriceuticals. Thus, although we were incorporated in
Nevada on October 18, 1993 our date of inception is September 8, 1998, for
accounting purposes. Accordingly, selected consolidated statement of
operations data is not presented for the period prior to September 8, 1998.
17
<PAGE>
Selected Unaudited Pro Forma Condensed Consolidated Financial Data
The selected unaudited pro forma condensed consolidated financial data
presented below for the year ended March 31, 2000, and for the three months
ended June 30, 2000, are derived from the unaudited Pro Forma Condensed
Consolidated Financial Statements included elsewhere in this prospectus. The pro
forma condensed consolidated statements of operations data for the year ended
March 31, 2000 and for the three months ended June 30, 2000 give effect to the
acquisitions of Becan Distributors, Inc., VetMall LLC, Desktop Corporation and
Valley Drug Company as if they had occurred on April 1, 1999. The pro forma
results are not necessarily indicative of future operations or the actual
results that would have occurred had the acquisitions taken place at the
beginning of the period. This pro forma condensed consolidated financial data
should be read together with our Consolidated Financial Statements, Pro Forma
Condensed Consolidated Financial Statements and related Notes appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
March 31, 2000 June 30, 2000
-------------------- --------------------
<S> <C> <C>
Revenues.................................................................... $106,293,657 $31,633,651
Gross profit................................................................ 3,906,606 1,064,101
Selling, general and administrative expenses................................ 7,013,352 2,437,958
Goodwill amortization....................................................... 1,310,347 *
Total operating expenses.................................................... 8,323,699 2,437,958
Operating loss ............................................................. (4,417,093) (1,373,856)
Other income (expense), net................................................. 586,668 --
Interest income (expense), net.............................................. (659,590) (142,789)
Net income (loss)........................................................... (4,490,015) (1,516,645)
Basic and diluted net loss per share........................................ $ (0.89) $ (0.24)
Basic and diluted weighted average number of common shares outstanding...... 5,018,708 6,374,780
</TABLE>
________
* Goodwill amortization is included in selling, general and administrative
expenses for the three months ended June 30, 2000.
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Some of the statements in this prospectus are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
which provides a "safe harbor" for these types of statements. These forward-
looking statements include statements made in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section relating to
our expansions and acquisition strategy, business development and projected
capital expenditures, as well as trends in Internet use and electronic commerce.
Forward-looking statements include statements regarding our intent, belief or
current expectations or our management (including statements preceded by,
followed by or including forward-looking terminology such as "may," "will,"
"should," "believe," "expect," "plan," "intend," "anticipate," "estimate,"
"continue," "future" or similar expressions or comparable terminology) with
respect to various matters. All forward-looking statements in this prospectus
are based on information available to us on the date of this prospectus. Please
note that matters set forth under the caption "Risk Factors" constitute
cautionary statements identifying important factors with respect to the forward-
looking statements, including certain risks and uncertainties, that could cause
actual results to differ materially from those in such forward-looking
statements.
We currently derive the bulk of our revenues from traditional and online
sales of pharmaceuticals, over-the-counter products, health and beauty care
products and nutritional supplements. These products are sold primarily to
independent pharmacies and to a lesser extent to other distributors, alternate-
care facilities and hospitals. In the future, we anticipate growing revenues
from our e-commerce related services, including transaction fees from the
operation of our online trade exchange, DrugMaxTrading.com, banner
advertisements, sponsored newsletters, online auctions, slotting fees and other
special e-commerce services related to our online trade exchange. In addition,
we believe that our new online trade exchange model will allow us to leverage
our wholesale distribution business by allowing us to effectively market and
distribute our products. Revenues relating to the sales of our products are
recognized as goods are shipped or when services are provided to the customer,
net of discounts, allowances, returns and credits.
Cost of goods sold is comprised of product and service costs. Selling,
general and administrative costs include various administrative, sales and
marketing and other indirect operating costs.
We were founded in 1993 under the name NuMED Surgical, Inc. as a subsidiary
of NuMED Home Health Care, Inc., a publicly traded company. We were created to
complete the distribution of certain assets and liabilities associated with
NuMED Home Health Care's surgical/medical products division to its stockholders.
NuMED Home Health Care contributed all of those assets and liabilities to us,
and then distributed all of the shares of our common stock to its stockholders.
In connection with the spin off, our common stock was registered under the
Securities Exchange Act of 1934, and we began trading as a public company.
In April 1997, we sold our major product line and subsequently disposed of
all our operating assets because of continued losses caused by increased
competition and the loss of exclusivity of our products. The sale of our major
product line and assets was completed by March 31, 1998, and, accordingly, from
April 1, 1998, to September 8, 1998, we used a liquidation basis of accounting.
In March 1999, we acquired all of the outstanding common stock of
Nutriceuticals, a Florida corporation formed in September 1998 to engage in the
online retailing of natural products over the Internet. For accounting purposes,
this acquisition was treated as an acquisition of our company by Nutriceuticals
and as a recapitalization of Nutriceuticals. Thus, although we were incorporated
in Nevada on October 18, 1993, our date of inception is September 8, 1998, for
accounting purposes.
On March 31, 1999, we acquired HealthSeek.com Corp., which provided web-
based healthcare content and related information to healthcare professionals,
medical patients and consumers. Prior to the acquisition of Nutriceuticals in
March 1999, we had no operations or assets, and since Nutriceuticals and
HealthSeek.com were start-up companies, our revenues were nominal and our
operations were limited during the quarter ended June 30, 1999.
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In November 1999, we acquired all of the outstanding shares of common stock
of Becan Distributors, Inc., a wholesale distributor primarily of pharmaceutical
products and, to a lesser extent, over-the-counter drugs and health and beauty
care products. Becan had net revenues of approximately $31.1 million and $26.5
million for its fiscal year ended March 31, 1999, and for its six months ended
September 30, 1999, respectively. Our results of operations for the fiscal year
ended March 31, 2000, include the results of operations of Becan from November
26, 1999, through March 31, 2000.
In March 2000, we acquired Desktop Corporation and a 70% interest in
VetMall, Inc. Desktop is an Internet e-commerce solutions provider specializing
in the design, development and delivery of technology solutions by providing
custom programming services and web hosting services. VetMall is an e-commerce
pet care product sales distributor. Desktop had revenues and a net loss for the
year ended March 31, 2000, of $2.4 million and $1.9 million, respectively. Our
results of operations for the fiscal year ended March 31, 2000, include the
results of operations of Desktop and VetMall from March 20, 1999 through March
31, 2000.
In April 2000, we acquired Valley Drug Company, a full-line, primary
wholesale distributor of pharmaceuticals, over-the-counter drugs, health and
beauty care products and general merchandise. For the year ended December 31,
1999, and the three months ended March 31, 2000, Valley had revenues of
approximately $50.6 million and $12.3 million, respectively, and a net income
(loss) of approximately $245,000 and ($34,000) for such periods. Our results of
operations for the three months ended June 30, 2000, include the results of
operations of Valley from April 19, 2000, through June 30, 2000.
As a result of our acquisitions and the resulting disparity in assets and
operations from last year to the present, we believe that the year end and
quarterly periods ending March 31, 2000 and 1999 and June 30, 2000 and 1999,
respectively, may not be comparable and should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
prospectus.
Results of Operations
Fiscal Year Ended March 31, 2000 Compared To The Period From September 8, 1998
(date of inception for accounting purposes) through March 31, 1999
Revenues. Revenues increased to approximately $21.1 million for the year
ended March 31, 2000, as compared to $37,000 for the period from September 8,
1998 (date of inception) through March 31, 1999. The increase is primarily
attributable to approximately $20.6 million in revenues generated by Becan from
November 26, 1999 (date of acquisition) through March 31, 2000.
Gross profit. Gross profit increased to $144,000 for the year ended March
31, 2000, as compared to $23,000 for the period from September 8, 1998 (date of
inception) through March 31, 1999. Gross margin was 0.7% for the year ended
March 31, 2000 as compared to 60.9% for the period from September 8, 1998 (date
of inception) through March 31, 1999. The decline was primarily attributable to
an increase in the mix of sales associated with the acquisition of Becan, which
yields a lower gross margin.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $2.1 million for the year
ended March 31, 2000, as compared to $129,000 for the period from September 8,
1998 (date of inception) through March 31, 1999. The increase was primarily due
to additional advertising and promotional expenses, web site support and
development costs, increased payroll expenses and costs associated with fringe
benefits, and amortization of goodwill associated with the acquisition of Becan.
Interest expense. Interest expense was $107,000 for the year ended March
31, 2000. There was no interest expense for the period from September 8, 1998
(date of inception) through March 31, 1999. The increase was a result of
borrowings under our credit facilities for financing of additional working
capital needs with the expansion of our operations, specifically associated with
the acquisition of Becan.
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Income Taxes. We have no income tax provision for the periods presented
due to our net operating losses. These net operating losses may be carried
forward for up to 20 years to offset future taxable income.
Inflation; Seasonality. Management believes that there was no material
effect on operations or the financial condition of DrugMax as a result of
inflation for the fiscal year ended March 31, 2000, and the period from
September 8, 1998 (date of inception) through March 31, 1999. Management also
believes that its business is not seasonal; however, significant promotional
activities can have a direct impact on sales volume in any given quarter.
Three Months Ended June 30, 2000 and 1999
Revenues. We had revenues of approximately $28.8 million for the three
months ended June 30, 2000, as compared to $33,899 for the three months ended
June 30, 1999. The increase is attributable to the acquisitions of Becan in
November 1999, Desktop and VetMall in March 2000, and Valley in April 2000, as
well as additional organic growth within each respective acquired operation. The
quarter to quarter growth of the acquired companies has been enhanced through
the implementation of our e-commerce strategy and the operating synergies of the
acquired companies.
Gross Profit. We had gross profit of approximately $1.0 million for the
three months ended June 30, 2000, as compared to $19,113 for the three months
ended June 30, 1999. The increase is attributable to the acquisitions of Becan
in November 1999, Desktop and VetMall in March 2000 and Valley in April 2000.
Gross margin for the three-month period ended June 30, 2000 was 3.48% as
compared to 56.4% for the same period ended June 30, 1999. The decline in gross
margin is attributable to the variety of product offerings contributing varying
degrees of profit margins from sales generated at Becan, Desktop, VetMall and
Valley.
Selling, general and administrative expenses. We had selling, general and
administrative expenses of approximately $2.4 million for the three months ended
June 30, 2000, as compared to $101,308 for the three months ended June 30, 1999.
The increase was primarily due to additional advertising and promotional
expenses, increased payroll, and amortization of goodwill associated with the
acquisitions of Becan, Desktop, VetMall and Valley.
Interest expense. Interest expense was $223,956 for the three months ended
June 30, 2000, as compared to $589 for the three months ended June 30, 1999. The
increase was a result of borrowings under our credit facilities for the
financing of additional working capital needs associated with the acquisition of
Valley, and to a greater extent, the outstanding debt associated with Valley.
Income Taxes. We have no income tax provision for the periods presented
due to its net operating losses. These net operating losses may be carried
forward for up to 20 years to offset future taxable income.
Inflation; Seasonality. Management believes that there was no material
effect on operations or the financial condition of DrugMax as a result of
inflation for the three months ended June 30, 2000. Management also believes
that its business is not seasonal; however, significant promotional activities
can have a direct impact on sales volume in any given quarter.
Financial Position, Liquidity and Capital Resources
We have financed our operations primarily through proceeds received from a
public offering in November 1999. Gross proceeds from that offering were
approximately $13.8 million, and the net offering proceeds we received were
approximately $11.9 million, after payment of underwriting discounts and
commissions and other offering expenses totaling approximately $1.9 million.
Prior to that, we funded our operations through borrowings from our officers,
directors and affiliates.
Net cash used in operating activities was approximately $3.1 million for
the year ended March 31, 2000. The usage of cash is primarily attributable to
our operating loss as well as an increase in accounts receivable of
approximately $1.9 million, as a result of increased sales associated with the
Becan acquisition, an increase in inventory of $189,000, an increase in due from
affiliates of $8,000, an increase in prepaid expenses and other current assets
of $80,000, a decrease in accrued expenses of $475,000, and a decrease in
deposits of $9,000, partially offset by an increase in accounts payable of
$835,000 associated with the acquisition of Becan.
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Net cash used in operating activities was approximately $1.7 million for
the three months ended June 30, 2000. The usage of cash is primarily
attributable to the operating loss as well as an increase in accounts
receivable as a result of increased sales associated with the Becan and Valley
acquisitions, an increase in prepaid expenses and other current assets and
decreases in accounts payable and accrued expenses, partially offset by
decreases in inventory and stockholder notes receivable. Net cash used in
investing activities for the three months ended June 30 was approximately $1.8
million, representing purchases of property and equipment, an increase in
intangible assets and cash paid for the acquisition of Valley. Net cash provided
by financing activities for the three months ended June 30 was approximately
$1.6 million, representing the net change in revolving line of credit agreements
and an increase in proceeds from affiliates, partially offset by repayments of
long-term obligations.
At March 31, 2000, we had approximately $6.0 million in cash and cash
equivalents as compared to $57,000 at March 31, 1999. Working capital at March
31, 2000 was approximately $5.2 million, inclusive of obligations under our
credit line facilities, as compared to a working capital deficiency of $10,000
at March 31, 1999. We had working capital of $4.2 million and cash and cash
equivalents of $4.1 million at June 30, 2000.
Our principal commitments at March 31, 2000 were leases on our office and
warehouse space. There were no material commitments for capital expenditures at
that date, with the exception of the commitment to acquire Valley for 226,666
shares of our common stock and cash in the amount of approximately $1.7 million.
The acquisition of Valley was completed in April, 2000.
In November 1999, we acquired Becan in exchange for 2,000,000 shares of
restricted common stock and $2.0 million in cash. In addition, we also deposited
1,000,000 shares of our common stock into escrow for future issuance to Dynamic
Health Products, Inc. upon the attainment of certain financial targets for the
fiscal years ending March 31, 2000 and 2001. Currently, 500,000 shares remain in
escrow and 500,000 shares have been returned to us. In March 2000, Becan was
merged into DrugMax.
In October 2000, we obtained from Mellon Bank, N.A. a line of credit and a
$2.0 million term loan to refinance our prior bank indebtedness and to provide
additional working capital and for other general corporate purposes. The new
line of credit enables us to borrow a maximum of $15 million, with borrowings
limited to 85.0% of eligible accounts receivable and 65.0% of eligible
inventory. The term loan is payable over a 36-month period with interest at
0.75% per annum over the base rate, which is the higher of Mellon's prime rate
or the effective federal funds rate plus 0.50% per annum. The revolving credit
facility will bear interest at the floating rate of 0.25% per annum above the
base rate. After we deliver our audited financial statements for the fiscal year
ending March 31, 2001 to Mellon Bank, the applicable margin over the base rate
may change on an annual basis depending on the ratio of funded debt to EBITDA.
At our option, we may instead pay interest at a LIBOR rate plus an applicable
margin, which also varies on the ratio of funded debt to EBITDA. We used the
proceeds from this credit facility to repay our prior credit facilities.
We currently anticipate that the net proceeds of this offering, together
with our existing borrowing arrangements and other available funds will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. Our future liquidity and cash
requirements will depend on a wide range of factors, including the level of
business in existing operations, expansion of facilities and possible
acquisitions. We will principally use the proceeds of this offering for working
capital, as well as strategic acquisitions, business expansion, and marketing.
See "Use of Proceeds."
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Business
Our Business
Drugmax.com, Inc. primarily is an e-commerce business providing: (1) the
wholesale distribution of pharmaceuticals, over-the-counter products, health and
beauty care products, and nutritional supplements and (2) one of the first
business-to-business online trade exchanges for the same products, dedicated
exclusively to manufacturers, distributors, wholesalers and retailers in the
pharmaceuticals and over-the-counter product markets. We also continue to derive
a significant portion of revenue from our traditional "brick and mortar" full-
line wholesale distribution business. We utilize our competitive advantage of
being one of the early entrants into the Internet business-to-business
pharmaceutical market, leveraging our existing infrastructure, technology,
relationships, marketing and management resources. We believe that the
combination of our traditional wholesale distribution business with both our
online wholesale distribution business and our e-commerce trade exchange
provides the "clicks and mortar" combination that will allow us to aggressively
market and distribute our products and services. During the fiscal year ended
March 31, 2000, and the three months ended June 30, 2000, we generated revenues
of $21.1 million and $28.8 million, respectively.
In general, we distribute our products primarily to independent pharmacies
in the continental United States, and secondarily to small and medium-sized
pharmacy chains, alternate care facilities and other wholesalers and retailers.
Since the early December 1999 launch of our website, www.drugmax.com, over 9,000
independent pharmacies, small regional pharmacy chains, wholesalers and
distributors have registered to purchase products through our site. We believe
we have been successful in attracting potential customers to our site because we
have designed our site as an online source for a select group of products,
typically higher cost and margin products, which make up a large percentage of
our targeted customers sales. In addition, we maintain an inventory of over
20,000 stock keeping units, and continue to serve our customers as a primary,
full-line wholesale distributor through a combination of our e-commerce venues
and traditional distribution methods.
Our online trade exchange, DrugMaxTrading.com, established in August 2000,
offers one of the first business-to-business online trade exchanges for
pharmaceuticals, over-the-counter products, health and beauty care products, and
nutritional supplements dedicated exclusively to manufacturers, distributors,
wholesalers and retailers in the pharmaceutical and over-the-counter product
markets. DrugMaxTrading.com allows our trade exchange members to lower their
overall costs of doing business while providing them with wider market access
and the best available prices. Capitalizing on the efficiencies of the Internet
and our strategic alliances, DrugMaxTrading.com aggregates a variety of product
and market participant information, and, in doing so, facilitates the execution
of mutually beneficial online transactions among trade exchange members in an
open-market format.
Our History
We were founded in 1993 under the name NuMED Surgical, Inc. as a subsidiary
of NuMED Home Health Care, Inc., a publicly traded company. We were created to
complete the distribution of certain assets and liabilities associated with
NuMED Home Health Care's surgical/medical products division to its stockholders.
NuMED Home Health Care contributed all of those assets and liabilities to us,
and then distributed all of the shares of our common stock to its stockholders.
In connection with the spin off, our common stock was registered under the
Securities Exchange Act of 1934, and we began trading as a public company.
In April 1997, we sold our major product line and subsequently disposed of
all our operating assets because of continued losses caused by increased
competition and the loss of exclusivity of our products. The sale of our major
product line and assets was completed by March 31, 1998, and, accordingly, from
April 1, 1998, to September 8, 1998, we used a liquidation basis of accounting.
On March 17, 1999, we acquired all of the outstanding common stock of
Nutriceuticals.com Corporation, a Florida corporation formed in September 1998
to engage in the online retailing of natural products over the Internet. For
accounting purposes, this acquisition was treated as an acquisition of our
company by Nutriceuticals and a recapitalization of Nutriceuticals. Thus,
although we were incorporated in Nevada on October 18, 1993, our date of
inception is September 8, 1998 for accounting purposes. After we acquired
Nutriceuticals, we changed our corporate name to Nutriceuticals.com Corporation.
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In November 1999, we acquired all of the outstanding shares of common stock
of Becan Distributors, Inc., a wholesale distributor primarily of
pharmaceuticals and, to a lesser extent, over-the-counter products and health
and beauty care products. Following the acquisition of Becan, we changed our
name to DrugMax.com, Inc. With the acquisition of Becan, we changed our primary
focus from that of an online business-to-consumer retailer of vitamins and other
health products to that of an e-commerce business-to-business wholesale
distributor of pharmaceuticals, over-the-counter products, health and beauty
care products and nutritional supplements. Becan commenced operations in January
1997, and its net revenues for the year ended March 31, 1999, and the six months
ended September 30, 1999, were $31.1 million and $26.5 million, respectively.
Net income for the respective periods was $94,031 and $112,095. See "Business-
Recent Material Acquisitions - Becan" and "Management - Loans and Other
Affiliated Transactions - Becan Distributors, Inc."
In April 19 2000, we acquired Valley Drug Company, a full-line, primary
wholesale distributor of pharmaceuticals, over-the-counter products, health and
beauty care products and general merchandise. This acquisition helped us expand
our customer base, product line and market share, and provided us with the
additional ability to serve our customers as a primary, full-line wholesale
distributor, and offer them the convenience of one-stop shopping. Valley has
been in operation since 1950, and its offices are located in Youngstown, Ohio.
For the year ended December 31, 1999, and the three months ended March 31, 2000,
Valley had revenues of approximately $50.6 million and $12.3 million,
respectively, and net income (loss) of approximately $245,000 and ($34,000) for
such periods.
In August 2000, we launched DrugMaxTrading.com, thus initiating the most
recent phase of our growth strategy. Through DrugMaxTrading.com, we offer one of
the first business-to-business online trade exchange for pharmaceuticals, over-
the-counter products, health and beauty care products and nutritional
supplements, dedicated exclusively to manufacturers, distributors, wholesalers
and retailers in the pharmaceutical and over-the-counter product industries.
Capitalizing on the efficiencies of the Internet and our strategic alliances,
this business-to-business site centralizes manufacturers, distributors,
wholesalers and retailers to facilitate the execution of mutually beneficial
online transactions in an open-market format.
Most recently, on September 13, 2000, we entered into a letter of intent to
purchase substantially all of the assets of Penner & Welsch, Inc., a wholesale
distributor of pharmaceuticals, over-the-counter products and health and beauty
care products headquartered near New Orleans, Louisiana. Penner & Welsch has
filed a voluntary petition for Chapter 11 relief under the United States
Bankruptcy Code. Pursuant to the letter of intent, we will work with Penner &
Welsch, on an exclusive basis, to formulate a bankruptcy reorganization plan
pursuant to which we have planned to purchase, for $750,000 worth of restricted
DrugMax common stock, all of Penner & Welsch's assets and/or equity, without its
liabilities, while keeping Penner & Welsch's customers in continuous service.
The proposed acquisition is still subject to the final approval of the United
States Bankruptcy Court for the Eastern District of Louisiana, and we cannot
guarantee that the transaction will be completed. See "Business-Pending
Acquisition-Penner & Welsch."
Industry Trends
Pharmaceutical and Healthcare Markets. According to IMS Health, a company
-------------------------------------
specializing in information services for the pharmaceutical and health care
industries, the United States is the world's largest pharmaceutical market, with
1998 sales of $111 billion, including diagnostics and over-the-counter drugs.
That figure is expected to rise to $163 billion in 2002, an increase of 46%. The
National Association of Chain Drug Stores reported that total pharmaceuticals
drug sales for 1999 exceeded a record $121 billion. This continued growth rate
of the sales of pharmaceutical products was attributed to a number of factors
including:
. the value added by the introduction of new drugs into the marketplace,
which more than offsets the value lost by medications losing patent
protection;
. new patterns of drug lifestyle management, resulting in higher sales
occurring earlier in the life cycle of a medication;
. increased money spent on direct-to-consumer marketing initiatives; and
. an unprecedented period of investment by pharmaceutical companies
worldwide.
Currently, the pharmaceuticals and health care products markets are
serviced primarily by traditional full-line wholesalers.
Internet. The Internet has emerged as the fastest growing communications
--------
medium in history and is
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dramatically changing how businesses and individuals communicate and share
information. International Data Corporation estimates that the number of
Internet users will grow from 97 million at the end of 1998 to 320 million by
2002. The Internet has created new opportunities for conducting commerce, such
as business-to-consumer and person-to-person e-commerce. Recently, the
widespread adoption of intranets and the acceptance of the Internet as a
business communications platform has created a foundation for business-to-
business e-commerce that offers the potential for organizations to streamline
complex processes, lower costs and improve productivity. Internet-based
business-to-business e-commerce is poised for rapid growth and is expected to
represent a significantly larger opportunity than business-to-consumer or
person-to-person e-commerce. According to Gartner Group, business-to-business
e-commerce revenue was $145 billion in 1998 and by 2004 will represent about
7.0% of the total global sales transactions, estimated to be $7 trillion.
Gartner Group estimates that in 2000 business-to-business revenues will be $403
billion, a figure that should rise to $953 billion in 2001, $2 trillion in 2002
and nearly $4 trillion in 2003. We cannot guarantee that we will benefit from
this growth.
The dynamics of business-to-business e-commerce relationships differ
significantly from those of other e-commerce relationships. Business-to-business
e-commerce solutions frequently automate processes that are fundamental to a
business's operations by replacing various paper-based transactions with
electronic communications. In addition, business-to-business e-commerce
solutions must often be integrated with a customer's existing systems, a process
that can be complex, time-consuming and expensive. Consequently, selection and
implementation of a business-to-business e-commerce solution represents a
significant commitment by the customer, and the costs of switching solutions are
high. In addition, because business transactions are typically recurring and
non-discretionary, the average order size and lifetime value of a business-to-
business e-commerce customer is generally greater than that of a business-to-
consumer e-commerce customer. These solutions are likely to be most readily
accepted by industries characterized by a large number of buyers and sellers, a
high degree of fragmentation among buyers, sellers or both, significant
dependence on information exchange, large transaction volume and user acceptance
of the Internet.
Our Objectives
Our business objectives are:
. to become a leading business-to-business e-commerce provider of
pharmaceuticals, over-the-counter products, health and beauty
care products and nutritional supplements; and
. to own and operate a leading online trade exchange for
pharmaceuticals, over-the-counter products, health and beauty
care products and nutritional supplements.
Our Strategy
To accomplish our objectives, we plan to:
. market our name, products and services to create brand
recognition and generate and capture traffic on our web sites;
. provide quality products at competitive prices and efficient
service through online automation;
. develop strategic relationships that increase our online content
and product offerings;
. maintain technology focus and expertise to improve efficiency and
ease of use of our web sites; and
. attract and retain exceptional employees.
Marketing. We are promoting, advertising and increasing recognition of our
web sites through a variety of marketing and promotional techniques, including:
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. developing co-marketing agreements with major online sites and
services;
. enhancing online content and ease of use of our web sites;
. enhancing customer service and technical support;
. advertising in trade journals and at industry trade shows;
. conducting an ongoing public relations campaign; and
. developing other business alliances and partnerships.
Develop Strategic Relationships. We believe that developing strategic
relationships with a diverse set of partners, which include manufacturers,
distributors, wholesalers and retailers, will assist us in achieving our
objectives because such strategic marketing alliances may enhance our brand
recognition, increase customer sales and expand our online visibility.
Maintain Technology Focus and Expertise. A state-of-the-art interactive
commerce platform is necessary to enhance the services we offer and to expand
the benefits of online reselling of our products. We are continually upgrading
our technology platform to further enhance our customer interaction and support
systems, which we believe offer us a competitive advantage. We will continue to
expend substantial efforts to develop, purchase, license and make technological
advancements to our web sites and our transaction processing systems to enhance
our availability, reliability and site up-time, and to improve the efficiency of
our fulfillment activities.
Attract and Retain Exceptional Employees. Talented employees, management
and directors provide significant advantages in the rapidly evolving electronic
commerce market. We intend to devote substantial efforts to building a talented
employee base.
Sales and Marketing; Customer Service and Support
We sell our products both through e-commerce venues, including our web
sites, www.drugmax.com and www.DrugMaxTrading.com, and through traditional
wholesale distribution lines. We believe our e-commerce, business-to-business
model will allow us to leverage our wholesale distribution business, thus
increasing our ability to effectively market and distribute our products.
We use a variety of programs to stimulate increased traffic to our web
sites and demand for our products, including a direct sales force, telemarketing
and advertising.
Direct Sales. We employ four persons to act as our direct sales force
------------
to target organizations that buy and sell products listed on our web sites.
Telemarketing. We maintain an in-house telemarketing group of eight
-------------
persons for use in customer prospecting, lead generation and lead follow-up.
Advertising. In addition to strategic agreements and traditional
-----------
advertising, we use many online sales and marketing techniques to increase brand
recognition and direct traffic to our online stores. These include purchasing
banner advertising on search engine web sites and Internet directories, direct
links from healthcare home pages, and mass e-mailings. We also advertise in
trade journals, at trade shows and engage in co-branding arrangements.
Customer Service and Support. We believe that we can establish and
maintain long-term relationships with our customers and encourage repeat visits
if, among other things, we have excellent customer support and service. We
currently offer information regarding our products and services and answer
customer questions about the ordering process, and investigate the status of
orders, shipments and payments. A customer can access our staff by
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fax or e-mail by following prompts located on our web sites or by calling our
toll-free telephone line. In the future, we may outsource our customer support
services to a provider of customer support services.
Distribution
Our e-commerce venues and traditional marketing efforts are supported by
three distribution centers, located in Pittsburgh, Pennsylvania, Mandeville,
Louisiana, and Youngstown, Ohio. These locations enable us to deliver
approximately 95% of our products to our customers via next day delivery,
shipped by UPS. The remaining product is distributed by our delivery vans in the
region of eastern Ohio and western Pennsylvania around Youngstown, Ohio, or by
common carrier to more distant customers. In order to reduce inventory
discrepancies and shrinkage, as well as maintain good customer relations, our
shipping department double checks all orders prior to shipment.
Purchasing
We purchase over 20,000 stock keeping units primarily from manufacturers
and secondarily from other wholesalers and distributors. Our purchasing
department constantly monitors the market to take advantage of periodic volume
discounts, market discounts and pricing changes.
DrugMaxTrading.com Business-to-Business Trade Exchange
In August 2000, we initiated the most recent phase of our growth strategy
through the launch of our online trade exchange, DrugMaxTrading.com. Through
DrugMaxTrading.com, we offer one of the first business-to-business online trade
exchanges for pharmaceuticals, over-the-counter products, health and beauty care
products and nutritional supplements, dedicated exclusively to manufacturers,
distributors, wholesalers and retailers in the pharmaceutical and over-the-
counter product industries. Capitalizing on the efficiencies of the Internet and
our strategic alliances, this business-to-business site brings together
manufacturers, distributors, wholesalers, and retailers to facilitate the
execution of mutually beneficial online transactions in an open-market format,
while enabling them to manage their entire buying/selling cycle over the
Internet. Our e-commerce services allow our trade exchange members to lower
their overall costs of doing business while providing them with wider market
access and the best prices available.
Although we expect our wholesale distribution business to continue to
provide the primary source of revenues for the foreseeable future, we believe
that our new e-commerce trade exchange model will ultimately provide greater
profits than our wholesale distribution operations. Through our trade exchange,
we expect to derive these profits from:
. transaction fees from the operation of our online trade exchange;
. banner advertisements;
. sponsored newsletters;
. online auctions;
. slotting fees; and
. other special e-commerce services related to our online trade
exchange.
In addition, we believe that the combination of our e-commerce trade
exchange and our "clicks and mortar" business model and traditional distribution
methods will allow us to aggressively market and distribute our products to new
customers.
Our primary objective is to match buyers and sellers who wish to trade or
exchange goods and services related to the pharmaceutical and over-the-counter
products, health and beauty care products and nutritional supplements
industries. Users can conduct transactions using alternative market-making
mechanisms designed to achieve an optimal price versus volume goal. Our
innovative "Best Buy" technology provides our members with the best prices on
the market, while our "Closeout" and "Auction" technology provides our members
with "Open Market Trading" that allows them unique buying and selling
opportunities.
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Best Buy System. The Best Buy System is an online catalog powered by a
multi-vendor database and a database containing each of our members' personal
buying preferences. The format is designed primarily for recurring product
sales. Product information is uploaded into the DrugMaxTrading.com database by
multiple vendors, and a corresponding system for purchasers automatically
searches for the desired product and provides information on, and the ability
to, acquire the lowest prices available. Once our members are registered, they
can select or "upload" their list of items they wish to buy. The Best Buy System
cross-references their selected items with all the vendors selling these items
and displays the lowest price. Each order is filled by the lowest price
available. If the sales for the lowest selling price exceed the quantity
available by that seller, the seller with the next lowest price will be
contacted to complete the order. The Best Buy System also allows our members to
select items for their "Product Watch" portfolio. These items are items that
they wish to monitor on an ongoing basis.
Closeout System. This format is designed for users that want to sell their
products as quickly as possible. Items such as short-dated inventory are ideal
candidates for closeouts. Through the Closeout System, our members can offer and
purchase products approaching expiration. Based on the expiration date, the
price of the products will decrease daily based on intervals set by the sellers
as the expiration date approaches, giving buyers the best deal and sellers a
channel for end-of-life product management. The sale will continue until the
time limit is over or the items are completely sold.
Auctions. This format is designed for sellers that want a market for their
non-traditional products or who are carrying excess inventory that they need to
sell. It provides our buying members with the opportunity to participate in
auctions as inventory is posed for sale. We provide for both English auctions
and Dutch auctions. In an English auction, as the bidding begins, bids are
ranked in order of price, then quantity and then time. The bidder with the
highest bid, highest quantity and first time will be the winner, as long as the
minimum requirements are met. In a Dutch auction, as the bidding begins, bids
are ranked in order of price, then quantity and then time. The bidders with the
highest bid will be the winner, as long as the minimum requirements are met.
Technology and Security
We host and maintain our web sites and contract with a third party that
provides backup web hosting services. The backup provider delivers a secure
platform for server hosting with uninterruptible power supply and back up
generators, fire suppression, raised floors, heating ventilation and air-
conditioning, separate cooling zones, operations twenty-four-hours-a-day, seven-
days-a-week.
Notwithstanding these precautions, we cannot assure that the security
mechanisms used by us, our customers or our backup provider will prevent
security breaches or service breakdowns. Despite the network security measures
we have implemented, our servers may be vulnerable to computer viruses, physical
or electronic break-ins and similar disruptions. Such a disruption could lead to
interruptions or delays in our service, loss of data, or our inability to accept
and fulfill customer orders. Any of these events could materially affect our
business.
To protect the customer information we receive, we use SSL (Secure Socket
Layer) encrypted protocol, user names and passwords, and other tools. We also
have our own certificate server from Microsoft that encrypts the registration
session to protect the customer information. In addition, we have taken steps to
protect the registration information residing in our servers by using firewalls,
backups and other preventive measures designed to protect the privacy of our
customers. We restrict access to customer personal and financial data to those
authorized employees who have a need for these records. We do not release
information about our customers to third parties without the prior written
consent of our customers unless otherwise required by law.
Competition
In every area of operations, our wholesale distribution business faces
strong competition both in price and service from national, regional and local
full-line, short-line and specialty wholesalers, service merchandisers, self-
warehousing chains and from manufacturers engaged in direct distribution. Many
of our current and potential competitors have longer operating histories and
larger customer bases than we do. In addition, many of our current and potential
competitors have greater brand recognition and significantly greater financial,
marketing and other resources than we do, and may be able to:
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. secure merchandise from vendors on more favorable terms;
. devote greater resources to marketing and promotional campaigns;
and
. adopt more aggressive pricing or inventory availability policies.
In addition, certain of our competitors, such as McKesson HBOC, Inc.,
Cardinal Health, Inc., FreeMarkets, Inc., Ventro Corporation and Bindley Western
Industries, Inc. have developed or may be able to develop e-commerce operations
that compete with ours, and may be able to devote substantially more resources
to web site development and systems development than we can. The online commerce
market is new, rapidly evolving and intensely competitive. We expect competition
to intensify in the future because barriers to entry are minimal, and current
and new competitors can launch new web sites at relatively low cost. We believe
that the critical success factors for companies seeking to create Internet
business-to-business e-commerce solutions include the following.
. breadth and depth of product offerings;
. brand recognition;
. depth of existing customer base; and
. ease of use and convenience.
Unlike other well-publicized product categories such as online book or
compact disc retailing, there is no current market leader in our online
business-to-business market segment. Our immediate goal is to position ourselves
as a leading business-to-business e-commerce provider of, and online trade
exchange for, pharmaceuticals, over-the-counter products, health and beauty care
products and nutritional supplements. To that end, we believe that our early
entry into the online market may enable us to establish critical competitive
advantages over future competitors. Management believes that such competitive
advantages include:
. the establishment of a recognizable brand;
. the development of online marketing and media relationships;
. the development of important relationships with manufacturers,
distributors, wholesalers and content providers; and
. exposure to an existing customer base.
However, competitive pressures created by any one of our current or future
competitors, or by our competitors collectively, could materially affect our
business. We believe that the principal competitive factors in our market are
and will be:
. brand recognition . selection
. speed and accessibility . customer service
. quality of site content . reliability and speed of fulfillment
. convenience . price
Government Regulations and Legal Uncertainties
Internet Regulation. Few laws or regulations are currently directly
applicable to the Internet. However, because of the Internet's popularity and
increasing use, new laws and regulations may be adopted. Such laws and
regulations may cover issues such as:
. user privacy . distribution
. pricing . taxation
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. content . characteristics and quality of products and
. copyrights . services
Laws and regulations directly applicable to electronic commerce or
Internet communications are becoming more prevalent. We believe that our use of
third party material on our portal is permitted under current provisions of
copyright law. However, because legal rights to certain aspects of Internet
content and commerce are not clearly settled, our ability to rely upon
exemptions or defenses under copyright law is uncertain. Also, although not yet
enacted, Congress is considering laws regarding Internet taxation. In addition,
various jurisdictions already have enacted laws that are not specifically
directed to electronic commerce but that could affect our business. The
applicability of many of these laws to the Internet is uncertain and could
expose us to substantial liability. Any new legislation or regulation regarding
the Internet, or the application of existing laws and regulations to the
Internet, could materially adversely affect us. If we were alleged to violate
federal, state or foreign, civil or criminal law, even if we could successfully
defend such claims, it could materially adversely affect us.
Additionally, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission in the same manner as other telecommunications services. Furthermore,
local telephone carriers have petitioned the Federal Communications Commission
to regulate Internet service providers and online service providers in a manner
similar to long distance telephone carriers and to impose access fees on such
providers. If either of these petitions are granted, the costs of communicating
on the Internet could increase substantially. This, in turn, could slow the
growth of use of the Internet. Any such legislation or regulation could
materially adversely affect our business, financial condition and operating
results.
Healthcare Regulation. The manufacturing, packaging, labeling,
advertising, promotion, distribution and sale of most of our products is subject
to regulation by numerous governmental agencies, particularly the United States
Food and Drug Administration, which regulates most of our products under the
Federal Food, Drug and Cosmetic Act, and the United States Federal Trade
Commission, which regulates the advertising of many of our products under the
Federal Trade Commission Act. Our products are also subject to regulation by,
among other regulatory agencies, the Consumer Product Safety Commission, the
United States Department of Agriculture, the United States Department of
Environmental Regulation and the Occupational Safety and Health Administration.
The manufacturing, labeling and advertising of our products is also regulated by
the Occupational Safety and Health Administration through various state and
local agencies as well as foreign countries to which we distribute our products.
Furthermore, we and/or our customers are subject to extensive
licensing requirements and comprehensive regulation governing various aspects of
the healthcare delivery system, including the so called "fraud and abuse" laws.
The fraud and abuse laws preclude:
. persons from soliciting, offering, receiving or paying any
remuneration in order to induce the referral of a patient for
treatment or for inducing the ordering or purchasing of items or
services that are in any way paid for by Medicare or Medicaid,
and
. physicians from making referrals to certain entities with which
they have a financial relationship.
The fraud and abuse laws and regulations are broad in scope and are
subject to frequent modification and varied interpretations. Significant
criminal, civil and administrative sanctions may be imposed for violation of
these laws and regulations.
Our advertising of dietary supplement products is also subject to
regulation by the Federal Trade Commission under the Federal Trade Commission
Act, in addition to state and local regulation. The Federal Trade Commission Act
prohibits unfair methods of competition and unfair or deceptive acts or
practices in or affecting commerce. The Federal Trade Commission Act also
provides that the dissemination or the causing to be disseminated of any false
advertisement pertaining to drugs or foods, which would include dietary
supplements, is an unfair or deceptive act or practice. Under the Federal Trade
Commission's Substantiation Doctrine, an advertiser is required to have a
"reasonable basis" for all objective product claims before the claims are made.
Failure to adequately substantiate claims may be considered either deceptive or
unfair practices. Pursuant to this Federal
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Trade Commission requirement, we are required to have adequate substantiation
for all material advertising claims made for our products.
We may be subject to additional laws or regulations by the Food and
Drug Administration or other federal, state or foreign regulatory authorities,
the repeal of laws or regulations which we consider favorable, such as the
Dietary Supplement Health and Education Act of 1994, or more stringent
interpretations of current laws or regulations, from time to time in the future.
We are unable to predict the nature of such future laws, regulations,
interpretations or applications, nor can we predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on our business in the future. The Food and Drug Administration or
other governmental regulatory bodies could, however, require the reformulation
of certain products to meet new standards, the recall or discontinuance of
certain products not able to be reformulated, imposition of additional record
keeping requirements, expanded documentation of the properties of certain
products, expanded or different labeling and scientific substantiation. Any or
all of such requirements could have a materially adverse affect on our business.
Our products function within the structure of the healthcare financing
and reimbursement system of the United States. As a result of a wide variety of
political, economic and regulatory influences, this system is currently under
intensive scrutiny and subject to fundamental changes. In recent years, the
system has changed significantly in an effort to reduce costs. These changes
include increased use of managed care, cuts in Medicare, consolidation of
pharmaceutical and medical-surgical supply distributors, and the development of
large, sophisticated purchasing groups. In addition, a variety of new approaches
have been proposed to continue to reduce cost, including mandated basic
healthcare benefits and controls on healthcare spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending. We anticipate that Congress and state legislatures will continue to
review and assess alternative healthcare delivery systems and payment methods
and that public debate with respect to these issues will likely continue in the
future. Because of uncertainty regarding the ultimate features of reform
initiatives and their enactment and implementation, we cannot predict which, if
any, of such reform proposals will be adopted, when they may be adopted, or what
impact they may have on us. We expect the healthcare industry to continue to
change significantly in the future. Some of these changes, such as a reduction
in governmental support of healthcare services or adverse changes in legislation
or regulations governing the privacy of patient information, or the delivery of
pricing of pharmaceuticals and healthcare services or mandated benefits, may
cause healthcare industry participants to greatly reduce the amount of our
products and services they purchase or the price they are willing to pay for our
products. Changes in pharmaceutical manufacturers' pricing or distribution
policies could also significantly reduce our income.
While we use our best efforts to adhere to the regulatory and
licensing requirements, as well as any other requirements affecting our
products, compliance with these often requires subjective legislative
interpretation. Consequently, we cannot assure that our compliance efforts will
be deemed sufficient by regulatory agencies and commissions enforcing these
requirements. Violation of these regulations may result in civil and criminal
penalties, which could materially and adversely affect our operations.
Proprietary Rights
We believe that protecting our trademarks and registered domain names
is important to our business strategy of building strong brand name recognition
and that such trademarks have significant value in the marketing of our
products. To protect our proprietary rights, we will rely on copyright,
trademark and trade secret laws, confidentiality agreements with employees and
third parties, and license agreements with consultants, vendors and customers.
Despite such protections, a third party could, without authorization, copy or
otherwise appropriate information from our web sites. The laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States, and effective copyright, trademark and trade secret
protection may not be available in such jurisdictions. Our agreements with
employees, consultants and others who participate in development activities
could be breached, we may not have adequate remedies for any breach, and our
trade secrets may otherwise become known or independently developed by
competitors.
After the completion of this offering, we intend to apply for federal
registration of the marks "DrugMax" and "DrugMaxTrading" in the United States.
We cannot be certain that federal registration of the marks will be completed or
issued. We rely on common law trademark rights to protect our unregistered
trademarks. Common
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law trademark rights generally are limited to the geographic area in which the
trademark is actually used, while a United States federal registration of a
trademark enables the registrant to stop the unauthorized use of the trademark
by any third party anywhere in the United States. Furthermore, the protection
available, if any, in foreign jurisdictions may not be as extensive as the
protection available to us in the United States.
We also utilize the registered domain names www.drugmax.com and
www.DrugMaxTrading.com. Currently, the acquisition and maintenance of domain
names is regulated by governmental agencies and their designees. The regulation
of domain names in the United States and in foreign countries is expected to
change in the near future. These changes could include the introduction of
additional top level domains, which could cause confusion among web users trying
to locate our sites. As a result, we may not be able to maintain our domain
name. Furthermore, the relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear.
Generally, we cannot protect our web addresses for our portal as trademarks
because they are too generic. We may be unable to prevent third parties from
acquiring domain names that are similar to ours. The acquisition of similar
domain names by third parties could cause confusion among web users attempting
to locate our site and could decrease the value of our brand name.
There has been a substantial amount of litigation in the computer
industry regarding intellectual property assets. Third parties may claim
infringement by us with respect to current and future products, trademarks or
other proprietary rights, or we may counterclaim against such parties in such
actions. Any such claims or counterclaims could be time-consuming, result in
costly litigation, diversion of management's attention, cause product release
delays, require us to redesign our products or require us to enter into royalty
or licensing agreements, any of which could have a material adverse effect upon
our business. Such royalty and licensing agreements, if required, may not be
available in terms acceptable to us, or at all.
Employees
We currently employ 64 persons and two consultants. Labor unions do not
represent any of our employees. We consider our employee relations to be good.
Competition for qualified personnel in our industry is intense, particularly for
technical staff responsible for marketing, advertising, web development, and
general and administrative activities.
Facilities
Our principal administrative, marketing and customer service facility
totals approximately 6,500 square feet of office and warehouse space, located at
12505 Starkey Road, Suite A, Largo, Florida 33773. The property is leased under
a three-year lease with a three-year option to renew, which requires monthly
lease payments of approximately $3,800 plus sales and use taxes. The lease
expires in November 2002.
We lease property for our distribution center in Pittsburgh,
Pennsylvania. The leased space consists of approximately 4,000 square feet of
office and warehouse space. The property is leased under a four-year lease that
expires in February 2003. The rent under the lease is approximately $1,650 per
month subject to yearly adjustment for tax expenses.
We lease property for our distribution center in Mandeville, Louisiana.
The leased space consists of approximately 1,200 square feet of office and
warehouse space. This space is leased on a month-to-month basis, and the rent
under the lease is $900 per month.
We lease property for our distribution center in Youngstown, Ohio. The
leased space consists of approximately 30,000 square feet of office and
warehouse space. The lease expires in December, 2008. The rent under the lease
is $6,000 per month.
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Legal Proceedings
From time to time, we may become involved in litigation arising in the
ordinary course of our business. We are not presently involved in any material
legal proceedings.
Recent Material Acquisitions
DrugMax has made the following material acquisitions since April 1, 1999:
Becan.
In November 1999, we acquired Becan Distributors, Inc., a wholesale
distributor of pharmaceuticals, over-the-counter drugs, and health and beauty
care products. Becan was a wholly owned subsidiary of Dynamic Health Products,
Inc., an affiliate of Jugal K. Taneja, who serves as our Chairman of the Board
and is one of our principal stockholder of us. In connection with this
acquisition, we paid Becan's then parent company, Dynamic, the sum of $2.0
million in cash and 2,000,000 shares of our common stock in exchange for all of
the outstanding shares of Becan common stock. In addition, we also deposited
1,000,000 shares of our common stock into escrow for future issuance to Dynamic
upon the attainment of certain financial targets for the fiscal years ending
March 31, 2000 and 2001. Currently, 500,000 shares remain in escrow and 500,000
shares have been returned to us. In March 2000, Becan was merged into DrugMax.
Desktop/VetMall.
In March 2000, we acquired Desktop Corporation in exchange for 99,985
shares of our common stock (20,000 of which remain in escrow pending the
resolution of certain indemnification obligations on the part of the prior
Desktop shareholders) and $100,000 in cash. As a result, we also acquired
Desktop's 50% interest in VetMall, LLC, which was later converted into VetMall,
Inc. At the time of our acquisition, the other 50% interest in VetMall was owned
by W.A. Butler & Company. Simultaneously with the acquisition of Desktop, we
entered into a purchase agreement with Butler, whereby Butler sold to us a 20%
interest in VetMall, in exchange for the payment of $1.0 million in cash plus
the issuance to Butler of 25,000 shares of our common stock. As a result, we own
a 70% interest in VetMall.
In connection with our acquisition of Desktop, we agreed that upon
. the closing of any initial public offering of VetMall or its
successors,
. the sale by DrugMax of all of its shares of VetMall, or
. the sale by VetMall of all or substantially all of its assets,
we will either
(a) transfer to the stockholders of Desktop that were
stockholders of Desktop on the date of our acquisition of
Desktop (in the same proportion as the DrugMax shares of
common stock received by them pursuant to the acquisition
agreement) that number of shares of VetMall's common stock
which, when multiplied by the closing price of VetMall's
common stock on the date the IPO is declared effective by
the SEC or the per share value of such stock on the
closing date of a sale, has a value $4.8 million, or
(b) transfer to the stockholders of Desktop that were
stockholders of Desktop on the date of our acquisition of
Desktop (in the same proportion as the DrugMax shares of
common stock received by them pursuant to the acquisition
agreement) 16% of the common stock of VetMall acquired by
us from those stockholders,
whichever of (a) or (b) has a lower value based on the sales price or the
closing price of VetMall common stock on the date that the IPO is declared
effective by the SEC.
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Desktop, organized in 1995, was engaged in the business of designing and
developing customized Internet solutions. VetMall.com, Inc. provides us a
business-to-business portal designed to link animal health product
manufacturers, distributors, veterinarians and animal owners. VetMall's web
site, www.vetmall.com, provides a site to place and receive product orders, and
to display and exchange information about animal care, services and products.
We purchased Desktop in order to obtain VetMall, which we intended to use
to expand our e-commerce model into the veterinary pharmaceutical and over-the-
counter product markets.
Valley Drug Company.
In April 2000, we acquired Valley Drug Company, a full-line, primary
wholesale distributor of pharmaceuticals, over-the-counter products, health and
beauty care products, and general merchandise. As a result, Valley is now our
wholly-owned subsidiary. In connection with the acquisition, Valley
stockholders received $1.7 million in cash and 217,225 shares of our common
stock.
Pending Acquisition - Penner & Welsch
On September 13, 2000, we entered into a letter of intent to purchase
substantially all of assets of Penner & Welsch, Inc., a wholesale distributor of
pharmaceuticals, over-the-counter products and health and beauty care products,
headquartered near New Orleans, Louisiana. Also on that date, Penner & Welsch
filed a voluntary petition for Chapter 11 relief under the United States
Bankruptcy Code. The case is pending in the United States Bankruptcy Court for
the Eastern District of Louisiana. Pursuant to the letter of intent, we will
work with Penner & Welsch, on an exclusive basis, to formulate a bankruptcy
reorganization plan, pursuant to which we plan to purchase, for $750,000 worth
of restricted DrugMax common stock, all of Penner & Welsch's assets and/or
equity, without its liabilities, while keeping Penner & Welsch's customers in
continuous service.
In addition, on September 13, 2000, we entered into a management agreement
with Penner & Welsch, pursuant to which we will manage the day-to-day operations
of Penner & Welsch, in exchange for a management fee equal to a percentage of
the gross revenues of Penner & Welsch each month. Also on September 13, 2000,
we entered into a financing and security agreement with Penner & Welsch,
pursuant to which we have agreed to provide Penner & Welsch with a secured
revolving line of credit for the sole purpose of purchasing inventory from us,
up to an aggregate amount of $2.5 million as may be requested by Penner & Welsch
and as may be allowed by us in our sole discretion. The line of credit is
secured by a second lien on substantially all of the assets of Penner & Welsch,
second only to Penner & Welsch's primary banking facility, as well as real
estate owned by an affiliate of Penner & Welsch. On September 14, 2000, the
Bankruptcy Court entered an emergency interim order approving the management
agreement and financing and security agreement. However, the bankruptcy plan,
including the proposed acquisition, management agreement and financing and
security agreement, are still subject to the final approval of the United States
Bankruptcy Court for the Eastern District of Louisiana, and we cannot guarantee
that the transaction will be completed or, if completed, that we will
successfully assimilate the additional personnel, operations, acquired
technology and products of Penner & Welsch into our business, or retain key
personnel and customers.
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Management
Directors and Executive Officers
Our executive officers and directors and their ages and positions as of
October 25, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jugal K. Taneja......................... 57 Chairman of the Board and Chief Executive Officer
William L. LaGamba...................... 41 President, Chief Operating Officer and Director
Ronald J. Patrick....................... 52 Chief Financial Officer, Vice President of Finance, Secretary,
Treasurer and Director
Stephen M. Watters...................... 33 Director
Dr. Howard L. Howell, DDS............... 53 Director
Jeffrey K. Peterson..................... 50 Director
Joseph Zappala.......................... 67 Director
</TABLE>
Pursuant to DrugMax's bylaws, each director of DrugMax serves as a director
for a term of one (1) year and until his successor is duly qualified. Officers
shall be appointed annually by the Board of Directors (subject to the terms of
any employment agreement), at our annual meeting, to hold such office until an
officer's successor shall have been duly appointed and qualified, unless an
officer sooner dies, resigns or is removed by the Board. There are no family
relationships among any of our directors and executive offices.
Set forth below is the business experience and other biographical
information regarding our directors and executive officers.
Jugal K. Taneja serves as our Chairman of the Board and since October 2000
has served as our Chief Executive Officer. He also served as our Chief Executive
Officer from inception through April 1995, and again from January 1996 until
August 1999. Further, he served at various times over the years as our President
and Secretary. In addition to his service to DrugMax, Mr. Taneja operates
several other companies. He is presently the Chairman of the Board of Dynamic
Health Products, Inc., a position he has held since Dynamic's inception in 1991.
Through its wholly owned subsidiaries, which include Go2Pharmacy, Inc. (formerly
known as Innovative Health Products, Inc.), Dynamic manufactures and distributes
nutritional and health products. Mr. Taneja also serves as a director of
Go2Pharmacy. Mr. Taneja holds degrees in Petroleum Engineering, Mechanical
Engineering, and a Masters in Business Administration from Rutgers University.
William L. LaGamba is a member of our board of directors and has served as
our President and Chief Operating Officer since October 2000. From March 2000 to
October 2000, he served as our Chief Executive Officer. From November 1999 to
October 2000, he also served as our Secretary and Treasurer. From November 1999
to March 2000, he served as our Chief Operating Officer and Vice President. From
June 1998 until joining DrugMax in November 1999, Mr. LaGamba had served as
Chief Executive Officer of Dynamic. He was also a founder and the President of
Becan from its inception in January 1997 until Becan was acquired by Dynamic in
June 1998. For 14 years prior to January 1997, Mr. LaGamba served in various
capacities for McKesson Drug Company, a large distributor of pharmaceuticals,
health and beauty care products and services, and FoxMeyer Drug Company.
Ronald J. Patrick is a member of our board of directors and has served as
our Chief Financial Officer since our acquisition of Valley in April 2000. He
also has served as our Vice President of Finance, Secretary and Treasurer since
October 2000. He also has served as Chief Financial Officer of Valley since
January 1999. Before becoming Valley's CFO, Mr. Patrick practiced as a Certified
Public Accountant and was part owner of a full service accounting firm for the
past 20 years. He served as Managing Partner for six of those years and as
Coordinator of Consulting Services for the last two years he was with the firm.
Mr. Patrick graduated from Gannon College in 1970 with a degree in Business
Administration and has been licensed to practice as a Certified Public
Accountant since 1974.
Stephen M. Watters serves as one of our directors. He was the President and
a Director of Nutriceuticals.com Corporation from that company's inception in
September 1998, until its merger with and into our
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company in March 1999. From March 1999 to August 2000, Mr. Watters served as our
president. He currently is also a consultant to us. Previously, from September
through November 1998, Mr. Watters was Vice President of Finance of Dynamic.
Prior to his association with Dynamic, Mr. Watters was in the investment banking
and brokerage businesses where he served as Vice President of Sales for Gilford
Securities from February 1998 to September 1998; Vice President of Sales for
Hobbs, Melville Corp. from November 1997 to February 1998; and as branch manager
for sales, with Schneider Securities, Inc. from 1995 to 1997. From April 1992 to
March 1995, Mr. Watters was employed by Bancapital Corp. as an investment
banker. He received his Executive Masters of Business Administration degree from
Case Western Reserve University in 1997.
Howard L. Howell, D.D.S. has served as a director since August 1999. Dr.
Howell has been managing his private orthodontic dentistry practice since 1977.
In addition to the private practice of orthodontics, Dr. Howell is the President
of Howell, Whitehead & Associates, P.A., a multi-office private practice group
specializing in pediatric dentistry and orthodontics. He also serves as Chief
Executive Officer and a Director of Telluride Expeditions Corp., a Colorado-
based travel agency, and as a director of Medcom Facilities Inc., a real estate
holding company. Dr. Howell received his degree from the Medical College of
Virginia.
Jeffrey K. Peterson has served as a director since August 1999. From 1997
to the present, Mr. Peterson served as Vice Chairman of the Board of Directors
and Executive Vice President of Central European Distribution Corporation, a
leading importer and distributor of alcoholic beverages in Poland. Mr. Peterson
also handles investor relations for Central European Distribution Corporation.
Mr. Peterson is also a co-founder of Central European Distribution Corporation's
subsidiary Carey, AGRI International Poland SP Z.O.O., and has served as a
member of its management board since its inception in 1990. Prior thereto, Mr.
Peterson contracted with African, Middle Eastern, South American and Asian
Governments and companies for the supply of American agricultural exports and
selected agribusiness products, such as livestock, feed supplements and
veterinary supplies. In addition, Mr. Peterson has worked with international
banks and with United States governmental entities to facilitate support for
exports from the United States. Mr. Peterson served for three years with the
United States military in southeast Asia prior to attending the University of
South Florida, from which he graduated in 1976.
Joseph Zappala has served as a director since April 2000. Since January
1995, Mr. Zappala has served as Chairman and a member of the board of managers
of CarePlus, LLC, a growing Medicaid and Child Health Plus health maintenance
organization. Mr. Zappala also serves as a director of Go2Pharmacy. Since
January 2000, he has served on the Board of Directors of Amedore Homes, Inc., a
homebuilding company located in the Capitol Region of New York. Mr. Zappala was
on the Boards of Directors of the International Thoroughbreds Association from
June 1997 to January 1999 and Miami Subs, Inc. from June 1995 to July 1999. Mr.
Zappala was appointed by United States President George Bush and served as the
United States Ambassador to Spain from 1989 to 1992. Mr. Zappala has been a
Florida-based business executive for over 35 years with experience in various
industries, including healthcare, banking, real estate and manufacturing.
Key Employees
DrugMax has the following key employees:
Phillip J. Laird has served as the President of Becan since it was acquired
by Dynamic in June 1998. From May 1997 until June 1998, Mr. Laird was the Vice
President of the Diabetes Supply Division of Direct Rx, Inc., the predecessor of
Dynamic. Mr. Laird was also a retail area sales manager for McKesson Drug
Company from November 1996 to May 1997. Similarly, Mr. Laird was a retail area
sales manager for FoxMeyer Drug Company, managing approximately 250 retail
pharmacies with four sales consultants from May 1994 to May 1997. Mr. Laird
received a degree in Business Administration from Robert Morris College,
Pennsylvania, in 1983.
Willem H. Hamers is the Vice President of Discount Rx, Inc., a subsidiary
we acquired in connection with our acquisition of Becan. He has held this
position since Becan founded Discount Rx in August 1998. Before becoming
President of Discount Rx, Mr. Hamers served as the Executive Vice President of
Sales for Penner & Welsch since 1997. Prior thereto, Mr. Hamers was a Sales
Manager for the Slidell Division of McKesson Drug Company from 1996 to 1997, and
he also was a Sales Manager for the Slidell Division of FoxMeyer Drug Company
from 1991 to 1996.
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Ralph A. Blundo has served as the President of Valley since he acquired the
company in January 1999. From 1986 through 1995, Mr. Blundo served as Valley's
Director of Sales and from 1996 to 1998 he served as Vice President of Sales.
During this period he was responsible for new account development and overall
management of the sales staff. Mr. Blundo received a Bachelor of Science degree
in Business Administration from Youngstown State University in 1970.
John P. Cairns has served as the Vice President of Sales of Valley since
January 1999. From 1988 to 1998 Mr. Cairns held the position of Valley's
Territory Sales Manager. Prior to joining Valley, he was the Executive Vice
President for Mincing Trading Corp, a subsidiary of C. Czarnidow, Ltd., a multi-
national commodities trading company.
Committees of the Board of Directors
We have an Audit Committee of the Board of Directors. The Audit Committee
is responsible for, among other things, reviewing our auditing programs,
overseeing the quarterly regulatory reporting process, overseeing internal
audits as necessary, receiving and reviewing the results of each external audit
and reviewing management's response to auditor's recommendations. In January
2000, the Board of Directors appointed Dr. Howard L. Howell and Jeffrey K.
Peterson to serve on the Audit Committee. It is anticipated that Joseph Zappala
will be appointed in the near future to serve as the third member of the Audit
Committee. Messrs. Howell, Peterson and Zappala are all "independent" directors,
as that term is defined in the Rules of the National Association of Securities
Dealers listing standards. This newly formed Audit Committee did not meet during
the fiscal year ended March 31, 2000. On June 12, 2000, the Board of Directors
adopted a written charter for the Audit Committee. In accordance with the
charter and the rules of the Securities and Exchange Commission, and in
connection with the filing of all future Annual Reports on Form 10-KSB, the
Audit Committee will review and discuss DrugMax's audited financial statements
with management, and it will discuss with our independent auditors the matters
required to be discussed by Statements on Auditing Standards. The Audit
Committee will also request the written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), and discuss with the
independent auditors their independence.
Compensation of Directors
Our employee directors do not receive any cash compensation for attending
board meetings. Our non-employee directors receive $500 for each meeting of the
Board of Directors that they attend, plus reimbursement of their reasonable out-
of-pocket expenses incurred in connection with such meetings. Additionally, each
non-employee member serving on a committee of the Board of Directors receives a
fee of $100 per committee meeting that he or she attends. All directors are
eligible to receive stock options under our 1999 Incentive and Non-Statutory
Stock Option Plan. Members of the Board who are also employees of DrugMax, or a
subsidiary of DrugMax, may be granted Incentive Options when and as approved by
the Board of Directors. Non-employee directors are entitled to receive a Non-
Statutory Stock Option for the purchase of 3,000 shares of our common stock upon
their initial election or appointment to the Board. During the fiscal year ended
March 31, 2000, outside directors Howell and Peterson, and former director M.
Lisa Shasteen were each granted five-year options for the purchase of 5,000
shares of common stock at an exercise price of $10.00 per share. Messrs. LaGamba
and Watters were each granted an option to purchase 50,000 shares. See
"Compensation of Executive Officers - Long-term Compensation - Stock Options,"
and "Management-1999 Stock Option Plan."
37
<PAGE>
Compensation of Executive Officers
Summary Compensation Table
Summary Compensation Table
The following summary compensation table sets forth the compensation
awarded to, earned by or paid to our Chief Executive Officers in the past three
fiscal years. No other executive officers of our company received compensation
exceeding $100,000 in any of the past three fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended Securities Underlying
Name And Principal Position March 31 Salary ($) Options (#)
--------------------------- ---------------- ---------- ---------------------
<S> <C> <C> <C>
Jugal K. Taneja, Chairman of the Board (1) 2000 87,500 200,000
1999 -- --
1998 -- --
William L. LaGamba, President and Chief Executive
Officer (2) 2000 45,000 50,000
1999 -- --
1998 -- --
Stephen M. Watters, Director (3) 2000 139,423 50,000
1999 -- --
1998 -- --
</TABLE>
(1) Mr. Taneja serves as our Chairman of the Board and since October 2000
has served as our Chief Executive Officer. Previously, he served as our Chief
Executive Officer, from our inception in October 1993 to April 1995, and again
from January 1996 until August 1999. Compensation for his services to DrugMax
commenced in April 1999.
(2) Mr. LaGamba is our President and Chief Operating Officer. He also
served as our Chief Executive Officer from March 2000 to October 2000.
Compensation for his services to DrugMax commenced in November 1999.
(3) Mr. Watters is a consultant to DrugMax. He also served as our President
from March 1999 to August 2000. From August 1999 to March 2000, Mr. Watters was
our Chief Executive Officer. Compensation for his services to DrugMax also
commenced in April 1999.
Annual Compensation
Employment Agreements and Other Arrangements
Jugal K. Taneja - We have a consulting agreement with Jugal K. Taneja, our
Chairman of the Board and Chief Executive Officer. Mr. Taneja's consulting
agreement provides for an initial three-year term ending April, 2002, and an
annual base salary of $100,000. From our inception in October, 1993, Mr. Taneja
has served DrugMax in multiple capacities, including Chief Executive Officer,
President and Secretary, without any compensation prior to April, 1999. It is
anticipated that Mr. Taneja will continue to devote approximately twenty-five
(25%) of his time to the affairs of DrugMax under his consulting agreement. Mr.
Taneja's consulting agreement contains non-competition provisions that prohibit
him from competing with us under certain circumstances. The period covered by
the non-competition provisions will end three years after Mr. Taneja's
termination.
William L. LaGamba - Mr. LaGamba is our President and Chief Operating
Officer. In January 2000, we entered into an employment agreement with Mr.
LaGamba. Mr. LaGamba's employment agreement provides for an initial three-year
term ending December 2002, an annual base salary of $150,000, plus an annual
performance bonus and stock options as determined by the Board of Directors. Mr.
LaGamba's employment agreement also contains standard termination provisions for
disability, for cause and for good reason. If the employment agreement is
terminated other than for good reason or cause, Mr. LaGamba is entitled to
receive his compensation through the end of the term of the agreement.
38
<PAGE>
Stephen M. Watters - We have a consulting agreement with Mr. Watters, our
former President. The consulting agreement provides for an initial three-year
term ending August 2003, an annual consulting fee of $100,000. Mr. Watters'
consulting agreement also contains standard termination provisions for
disability, for cause and for good reason, and it also contains confidentiality
and non-competition provisions that prohibit him from competing with us under
certain circumstances. The period covered by the non-competition provisions will
end three years after Mr. Watters' termination.
Ronald J. Patrick - Mr. Patrick became our Chief Financial Officer
following our acquisition of Valley Drug Company. He is also the Chief Financial
Officer, Secretary and Treasurer of our wholly-owned subsidiary, Valley. In
connection with our acquisition of Valley, DrugMax authorized an employment
agreement between Mr. Patrick and Valley. Mr. Patrick's employment agreement
with Valley provides for an initial three-year term ending April 2003, an annual
base salary of $125,000, plus such health and other benefits as the Board of
Directors and/or any compensation and stock option committee of Valley may
provide. Mr. Patrick's employment agreement contains standard termination
provisions for disability, for cause, and for good reason, and it also contains
confidentiality provisions prohibiting him from disclosing DrugMax's
confidential information.
Ralph A. Blundo - Mr. Blundo is the President of our wholly owned
subsidiary Valley Drug Company. In connection with our acquisition of Valley,
DrugMax authorized an employment agreement between Mr. Blundo and Valley. Mr.
Blundo's employment agreement with Valley provides for an initial three-year
term ending April 2003, an annual base salary of $125,000, plus such health and
other benefits as the Board of Directors and/or any compensation and stock
option committee of Valley may provide. Mr. Blundo's employment agreement
contains standard termination provisions for disability, for cause, and for good
reason, and it also contains confidentiality provisions prohibiting him from
disclosing DrugMax's confidential information.
Long-term Compensation
Stock Options
The following table sets forth information concerning Incentive and Non-
Statutory Stock Options granted to the executive officers listed in the Summary
Compensation Table above. Messrs. LaGamba and Watters were the only executive
officers of DrugMax who were granted options during our fiscal year ended March
31, 2000 under our 1999 Incentive and Non-Statutory Stock Option Plan:
OPTION GRANTS IN FISCAL 2000
<TABLE>
<CAPTION>
Percent of Total
Name Options Granted Options Granted (3) Exercise Price Expiration Date
---- --------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
William L. LaGamba 50,000 (1) 19.5% $13.00 January 11, 2005
Stephen M. Watters 50,000 (2) 19.5% $14.30 January 11, 2005
</TABLE>
__________________________
(1) One third of such options become exercisable on each of January 12, 2001,
2002 and 2003.
(2) Mr. Watters' options are all currently exercisable.
(3) Based solely on the grant of options for an aggregate of 255,800 shares
under our 1999 Stock Option Plan. Does not include a warrant granted to
Jugal K. Taneja for the purchase of 200,000 shares. See "Management - Loans
and Other Affiliated Transactions--Guaranty by Mr. Taneja of Company's
Credit Facility."
The following table sets forth certain information concerning unexercised
options held at March 31, 2000 by the executive officers listed in the Summary
Compensation Table above (none of whom exercised any options during fiscal
2000):
39
<PAGE>
OPTION VALUES AT MARCH 31, 2000
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised In-the-Money
at March 31, 2000 Options at March 31, 2000
------------------ ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
William L. LaGamba 0 50,000 0 0
Stephen M. Watters 0 50,000 0 0
</TABLE>
1999 Stock Option Plan
On August 13, 1999, the Board of Directors adopted the 1999 Stock Option
Plan. The purpose of the Plan is to attract, retain, develop and reward
superior executive talent by encouraging ownership of our common stock by our
officers, directors and other employees. The Plan authorizes the granting of
both Incentive Stock Options, as defined under Section 422 of the Internal
Revenue Code of 1986, and Non-Statutory Stock Options to purchase common stock.
All employees of DrugMax and its subsidiaries are eligible to participate in the
Plan. The Plan also authorizes the granting of Non-Statutory Stock Options to
non-employee directors and consultants of DrugMax. Pursuant to the Plan, an
option to purchase 3,000 shares of our common stock shall be granted
automatically to each outside director upon their initial election or
appointment to the Board. Any outside director may decline to accept any such
option granted to him or her under the Plan.
The Board of Directors, or a committee of the Board, shall be responsible
for the administration of the Plan. We currently do not have a separate stock
option committee. The Plan is presently being administrated by the Board of
Directors as a whole. The Board (or option committee) is responsible for
determining the terms of each option, including: (a) the directors and employees
to whom options will be granted, (b) the number of shares of the common stock
covered by each option, (c) the vesting period during which each option will be
exercisable, (d) the exercise price, (e) the expiration date, and (f) whether an
option will be an Incentive Stock Option or a Non-Statutory Stock Option.
The purchase price per share of the common stock under each ISO shall be
determined by the Board of Directors, or the stock option committee, provided
however, the purchase price shall not be less than the fair market value of the
common stock on the date the option is granted, (or 110% of the fair market
value in the case of a greater-than-10% stockholder). The price at which shares
may be purchased under a Non-Statutory Stock Option may be less than, equal to,
or greater than the fair market value of the shares of common stock on the date
of such Non-Statutory Stock Option is granted.
Options vest in accordance with the terms set forth in the option agreement
under which they were granted. However, upon the occurrence of a "change in
control" of DrugMax unless otherwise provided in the option agreement, the
maturity of all options then outstanding under the Plan will be accelerated
automatically, so that all such options will become exercisable in full with
respect to all shares that have not been previously exercisable. A "change in
control" includes certain mergers, consolidations, and reorganizations, sales of
assets, or a dissolution of DrugMax. The Board, or option committee, may in its
sole discretion accelerate the date on which any option vests. Incentive Stock
Options granted under the Plan may not be transferred, other than by will or the
laws of descent and distribution in the event of an optionee's death. Non-
Statutory Stock Options may be transferable, to the extent provided in the
option agreement under which the Non-Statutory Stock Option is granted.
An option will expire on the date determined by the Board of Directors, or
option committee, provided however, the expiration date shall not be later than
the tenth anniversary of the date on which the option was granted, (or the fifth
anniversary in the case of an option granted to a greater-than-10% stockholder).
However, upon termination of an optionee's employment with DrugMax (other than
in the case of death or a termination of employment due to the disability of the
optionee), Incentive Stock Options and Non-Statutory Stock Options will expire
ninety (90) days after such termination of employment. The ninety-day expiration
period may be waived by the Board of Directors in the case of a Non-Statutory
Stock Option. Any option granted to an outside director will remain effective
during its entire term, regardless of whether such director continues to serve
as a director.
The Plan presently authorizes 400,000 shares of our common stock for
issuance. As of June 30, 2000, options for an aggregate of 293,300 shares have
been granted to 16 employees and 4 outside directors. A total of
40
<PAGE>
106,700 shares remain available for issuance under the Plan. Unless sooner
terminated, the Plan will expire on August 12, 2009.
Loans and Other Affiliated Transactions
Dynamic Health Products, Inc. and Go2Pharmacy
From September 1998 to November 1999, we operated out of the principal
offices of Dynamic Health Products, Inc., in Largo, Florida. Dynamic provided
us, without charge, office and warehouse space, and the use of Dynamic's general
office equipment.
Dynamic is a manufacturer and distributor of proprietary and nonproprietary
dietary supplements, over-the-counter drugs, and health and beauty care
products. Jugal K. Taneja, a principal stockholder and Chairman of the Board of
DrugMax, is also the Chairman of the Board and a principal stockholder of
Dynamic. Mr. Taneja has beneficial ownership of approximately 36.3% of the
outstanding voting stock of Dynamic. Members of his immediate family own in the
aggregate an additional 23.0% of the outstanding voting stock of Dynamic.
William L. LaGamba, our President and Chief Operating Officer, is also a
stockholder of Dynamic, with beneficial ownership of 14.9% of the outstanding
voting stock of Dynamic. We have entered into a management agreement with
Dynamic pursuant to which Dynamic provides accounting support services to us in
connection with our management responsibilities relating to Penner & Welsch,
Inc. Dynamic is entitled to receive one-third of all fees collected by us from
Penner & Welsch. See "Business - Pending Acquisition - Penner & Welsch."
Go2Pharmacy, Inc. (formerly, Innovative Health Products, Inc.) is a wholly-
owned subsidiary of Dynamic, and it conducts all of Dynamic's manufacturing
operations. Go2Pharmacy recently filed a registration statement with the
Securities and Exchange Commission seeking an initial public offering of its
shares of common stock. If such initial public offering is completed, Dynamic
will own approximately 42.3% of the outstanding shares of common stock of
Go2Pharmacy.
We have entered into a First Right to Manufacture Agreement with
Go2Pharmacy pursuant to which Go2Pharmacy has agreed to manufacture all products
which we require and which it is capable of manufacturing. In addition, we are
the exclusive distributor of Lean Protein Chips, a product manufactured by
Go2Pharmacy, to all independent pharmacies. Purchases of all products by us from
Go2Pharmacy were approximately $580,000 and $24,000 for our fiscal years ended
March 31, 2000 and March 31, 1999, respectively, which purchases represent less
than 1.5% of the products we purchased in each of such years.
Becan Distributors, Inc.
Becan Distributors, Inc., together with its wholly owned subsidiary
Discount Rx, Inc., was a wholesale distributor of pharmaceuticals, over-the-
counter drugs, and health and beauty care products. In November 1999, we
acquired Becan from Dynamic. In March 2000, we merged Becan into DrugMax.
Accordingly, Discount Rx is now a wholly owned subsidiary of DrugMax. Pursuant
to the terms of the purchase agreement for Becan, we acquired all of the
outstanding common stock of Becan in exchange for $2 million in cash and
2,000,000 shares of our common stock. In addition, we deposited 1,000,000
shares of our common stock into escrow for future issuance to Dynamic upon the
attainment of certain financial targets for the fiscal years ended March 31,
2000 and 2001. Currently, 500,000 shares remain in escrow and 500,000 shares
have been returned to us.
Merger with Nutriceuticals
In March 1999, we acquired Nutriceuticals.com Corporation in a merger
transaction pursuant to which we were the surviving corporation. The
stockholders of Nutriceuticals received an aggregate of 2,400,000 shares of our
Common Stock in the merger. Before the merger, Jugal K. Taneja was the Chief
Executive Officer of both corporations. Mr. Taneja was also a principal
stockholder of both corporations, having beneficial ownership of approximately
21.0% of the outstanding common stock of Nutriceuticals prior to the merger.
Members of his immediate family owned in the aggregate an additional 16.8% of
the outstanding common stock of Nutriceuticals before the Merger. As a result of
the merger, immediately after the merger, Mr. Taneja and his family collectively
held approximately 35.0% of the outstanding common stock of the combined
entities.
41
<PAGE>
Guaranty by Mr. Taneja of Company's Credit Facility
In February 2000, we entered into a revolving credit facility with Merrill
Lynch Financial, pursuant to which Merrill Lynch Financial granted us a $5.0
million credit facility. The lender required and obtained a personal guaranty
from Jugal K. Taneja, our Chairman of the Board and Chief Executive Officer. In
consideration for Mr. Taneja's acting as the guarantor, we granted to Mr. Taneja
a warrant to purchase 200,000 shares of our common stock at a price of $16.40
per share, the average closing price over the 30-day period prior to execution
of the guaranty. The warrant is exercisable over a three-year period in equal
annual amounts. In October 2000, we terminated this credit facility.
Indebtedness to Management and Directors
In 1999, Mr. Watters and Mr. Taneja, either directly or through affiliates,
provided us with loans for working capital in the amount of $80,000 and $70,000,
respectively. The principal sum, together with interest on the unpaid principal
balance at an annual rate equal to prime plus one percent, was due and payable
on demand at any time following the earlier to occur of either (a) a public
offering of our common stock or (b) December 31, 1999. Those loans were repaid
with the proceeds of the offering we conducted in November 1999.
Policy Regarding Loans and Other Affiliated Transactions
We currently have three independent directors, and we will maintain at
least two independent directors on our Board. All future material affiliated
transactions and future loans and loan guarantees with our officers, directors,
holders of 5% or more of our voting securities, or their respective affiliates,
will be on terms that are as favorable to DrugMax as those generally available
from unaffiliated third parties; and all such future transactions and loans, and
any forgiveness of such loans, shall be approved or ratified by a majority of
our independent directors who do not have an interest in the transactions and
who will have access, at our expense, to DrugMax's or independent legal counsel.
Further, we do not intend to make any future loans to or guarantee loans on
behalf of our officers, directors and employees, other than (a) advances for
travel, business expense, and similar ordinary operating expenditures; (b) loans
or loan guarantees made for the purchase of our securities; and (c) loans for
relocation.
42
<PAGE>
Selling Stockholders
The following table shows the number of shares of our common stock
beneficially owned by each selling stockholder as of September 30, 2000, the
number of shares that each selling stockholder will sell in this offering and
the number of shares that each selling stockholder will beneficially own upon
completion of this offering. The selling stockholders have furnished to us the
information set forth below, and this information is accurate to the best of our
knowledge. As of September 30, 2000, there were approximately ___________ common
shares issued and outstanding.
<TABLE>
<CAPTION>
Beneficial Ownership Prior Beneficial Ownership After
to Offering (1) Shares to be Offering (1)
Name Shares Percent Sold Shares Percent
---- ------ ------- ---- ------ -------
<S> <C> <C> <C> <C> <C>
Bryan Capital Ltd. Partnership (2) 1,865,500 % 180,000 1,685,500 %
SMW Capital Group, L.P. (3) 1,005,000 % 96,000 909,000 %
21/st/ Century Health Care LLC (4) 300,000 % 30,000 270,000 %
Manju Taneja (5) 210,491 % 22,000 188,491 %
Mandeep Taneja (6) 200,000 % 20,000 180,000 %
Mihir Taneja (6) 200,000 % 20,000 180,000 %
Ronald J. Patrick (7) 109,629 % 11,000 98,629 %
Ralph Blundo (8) 109,629 % 11,000 98,629 %
William L. LaGamba (9) 117,667 % 10,000 107,667 %
</TABLE>
__________________________________
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. To our knowledge, the persons named in
this table have sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by them, subject to community
property laws where applicable and except as indicated in the other
footnotes to this table.
(2) The number of shares beneficially owned by Bryan Capital Ltd. Partnership,
a Nevada limited partnership, does not include 500,000 shares held in
escrow in connection with our acquisition of Becan Distributors, Inc. Mr.
Taneja, our Chairman of the board and Chief Financial Officer, owns all of
the shares of the general partner of Bryan Capital Ltd. Partnership. See
"Business - Recent Material Acquisitions - Becan" and "Management - Loans
and Other Affiliated Transactions - Becan Distributors, Inc."
(3) Stephen M. Watters, one of our directors, is the sole stockholder of the
general partner of SMW Capital Group, L.P.
(4) Jugal Taneja, our Chairman of the Board and Chief Executive Officer, is a
principal of 21/st/ Century Health Care, LLC.
(5) Manju Taneja is the wife of Jugal Taneja, our Chairman of the Board and
Chief Executive Officer.
(6) Mandeep and Mihir Taneja are the adult children of Jugal Taneja, our
Chairman of the Board and Chief Executive Officer.
(7) Ronald J. Patrick is our Chief Financial Officer and Treasurer and one of
our directors.
(8) Ralph Blundo is the President of Valley Drug Company, one of our
subsidiaries.
(9) Mr. LaGamba is our President and Chief Operating Officer. The number of
shares beneficially owned by Mr. LaGamba include 16,667 shares underlying a
stock option which is exercisable within 60 days.
43
<PAGE>
Security Ownership of Management
and Certain Beneficial Owners
The following table presents certain information regarding the beneficial
ownership of our common stock as of September 30, 2000, by (i) each person known
to own beneficially more than 5% of our common stock, (ii) each director and
officer of our company, and (iii) all directors and officers as a group. As of
September 30, 2000, there were approximately ____________ common shares issued
and outstanding.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Owner (1) Percentage of Class
------------------------------------ -------------------- -------------------
<S> <C> <C>
Bryan Capital Ltd. Partnership (2) 1,865,500
6950 Bryan Dairy Road
Largo, Florida 33777
SMW Capital Group, L.P. 1,005,000
12505 Starkey Road, Suite A,
Largo, Florida 33773
Dr. Howard L. Howell (3) 8,000 *
William L. LaGamba (4) 117,667
Stephen M. Watters (5) 1,055,000
Ronald J. Patrick 109,629
Jeffrey K. Peterson (6) 5,000 *
Jugal K. Taneja (7) 2,409,317
Joseph Zappala -- *
All Directors and Officers a group (7 persons) 3,704,613
</TABLE>
____________________________
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. To our knowledge, the persons named in
this table have sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by them, subject to community
property laws where applicable and except as indicated in the other
footnotes to this table. The business address of each of the directors
named above is: c/o DrugMax.com, Inc., 12505 Starkey Road, Suite A, Largo,
Florida 33773.
(2) The number of shares beneficially owned by Bryan Capital Ltd. Partnership,
a Nevada limited partnership, does not include 500,000 shares held in
escrow in connection with our acquisition of Becan Distributors, Inc. Mr.
Taneja, our Chairman of the Board and Chief Executive Officer, owns all of
the shares of the general partner of Bryan Capital Ltd. Partnership. See
"Business -Recent Material Acquisitions - Becan" and "Management - Loans
and Other Affiliated Transactions - Becan Distributors, Inc."
(3) The number of shares beneficially owned by Mr. Howell includes 5,000 shares
underlying a Non-Statutory Stock Option which is immediately exercisable.
(4) The number of shares beneficially owned by Mr. LaGamba include 16,667
shares underlying a stock option which is exercisable within 60 days. It
does not include an additional 33,333 shares under the same option which
are not exercisable within 60 days.
(5) The number of shares beneficially owned by Mr. Watters includes 1,000,000
beneficially owned by SMW Capital Group, L.P. Mr. Watters owns all of the
shares of Summerford Capital, Inc., the general partner of SMW Capital
Group, L.P. The number of shares beneficially owned by Mr. Watters also
includes 50,000 shares underlying Incentive and Non-Statutory Stock Options
which are exercisable within sixty (60) days.
(6) The number of shares beneficially owned by Mr. Peterson includes 5,000
shares underlying a Non-Statutory Stock Option which is immediately
exercisable.
44
<PAGE>
(7) The number of shares beneficially owned by Mr. Taneja includes 1,865,500
shares beneficially owned by Bryan Capital Ltd. Partnership, 300,000 shares
held of record by 21st Century Healthcare Fund, LLC, a limited liability
company of which Jugal K. Taneja is the principal, 8,994 shares held of
record by The First Delhi Trust, a trust established for the benefit of his
children, 18,000 shares beneficially owned by Westminster Trust Company, a
partnership in which Jugal K. Taneja is the general partner, 1,331 shares
held of record by Mr. Taneja, and 215,492 shares held of record by Manju
Taneja, his spouse. Mr. Taneja disclaims voting power with respect to the
shares held of record by his spouse.
45
<PAGE>
Description of Capital Stock
Authorized and Outstanding Capital Stock
We are authorized to issue up to 24,000,000 shares of common stock and
2,000,000 shares of preferred stock. The following description of our capital
stock is not complete and is qualified in its entirety by our articles of
incorporation and bylaws, both of which are included as exhibits to the
registration statement of which this prospectus forms a part, and by applicable
Nevada laws.
Common Stock
As of June 30, 2000, there were approximately 6,417,754 shares of common
stock outstanding held by approximately 550 stockholders of record or
approximately 1,800 beneficial holders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock and the restrictions
imposed under our credit facility, our board of directors may declare a dividend
out of funds legally available and the holders of common stock are entitled to
receive ratably any such dividends. In the event of our liquidation,
dissolution or winding up, holders of our common stock are entitled to share
ratably in all of our assets remaining after we pay our liabilities and
liquidation preferences of any outstanding shares of preferred stock. Holders of
our common stock have no preemptive rights or other subscription rights to
convert their shares into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock.
Preferred Stock
Our board of directors has the authority, without further action by our
stockholders, to issue up to 2,000,000 shares of preferred stock in one or more
series and to fix the privileges and rights of each series. These privileges and
rights may be greater than those of the common stock. Our board of directors,
without further stockholder approval, can issue preferred stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of common stock. This type of "blank check preferred
stock" makes it possible for us to issue preferred stock quickly with terms
calculated to delay or prevent a change in our control or make removal of our
management more difficult. Additionally, if we issue this preferred stock, then
the market price of common stock may decrease, and voting and other rights may
decrease. However, we will not offer preferred stock to our officers, directors,
5% stockholders, or their respective affiliates, except on the same terms as it
is offered to all other existing stockholders or to new stockholders, unless the
issuance of preferred stock is approved by a majority of our independent
directors who do not have an interest in the transaction and who have access, at
our expense, to our or independent legal counsel. We currently have no plans to
issue any preferred stock.
Warrants
In connection with the public offering that we conducted last year, and as
additional compensation to the underwriters in that transaction, we granted
warrants for the purchase of 150,000 shares of common stock to Kashner, Davidson
Securities. The warrants are exercisable, in whole or in part, between November
18, 2000 and November 18, 2004, at an exercise price equal to $16.50 per share
(subject to adjustment under certain circumstances). Kashner, Davidson has the
option to require us to register the common stock underlying the warrants under
certain circumstances.
In addition, in connection with this offering, and as additional
compensation to the underwriters, we will grant to Utendahl Capital Partners,
L.P. (a) a warrant to purchase up to 100,000 shares of common stock at an
exercise price of $8.00 and (b) a warrant to purchase up to 200,000 shares of
common stock at an exercise price per share equal to 165% of the public offering
price of the shares in this offering. The underwriter's warrants will be
exercisable for a period of five years after the date of this prospectus.
We have granted to Jugal Taneja, our Chairman of the Board and Chief
Executive Officer, a warrant to purchase 200,000 shares of our common stock at a
price of $16.40 per share, the average closing price over the 30-day period
prior to execution of the guaranty. The warrant is exercisable over a three-
year period in equal annual amounts. See "Management--Loans and Other
Affiliated Transactions."
46
<PAGE>
We have entered into a Statement of Work and Network Access Agreement with
Purchasepro.com, Inc. dated February 15, 2000. Upon the satisfaction by
Purchasepro.com of its obligations under the agreement, we will grant to
Purchasepro.com warrants to purchase 200,000 shares of our common stock, with an
exercise price of $15.00 per share. Upon issuance, these warrants will be
immediately exercisable.
We have entered into a consulting agreement with Marc Mazur Consulting,
Inc. dated July 7, 2000. Upon the satisfaction by Marc Mazur Consulting of its
obligations under the agreement, we will grant to Marc Mazur Consulting warrants
to purchase 200,000 shares of our common stock, with an exercise price of $10.00
per share. Upon issuance, these warrants will be immediately exercisable.
Indemnification
Our bylaws provide that, to the fullest extent permitted by the Nevada
Revised Statutes, we may indemnify our directors, officers and employees. Our
bylaws further provide that we may similarly indemnify our agents. Our directors
enter into indemnification agreements with us, pursuant to which we will
indemnify our directors to the fullest extent permitted by law. At present,
there is no pending litigation or proceeding involving any of our directors or
officers in which indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a claim for such
indemnification.
While these indemnification provisions provide directors with protection
from awards for monetary damages for breaches of their duty of care, they do not
eliminate such duty. Accordingly, these provisions will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
a director's breach of his or her duty of care.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare
Investors Services. The transfer agent's address is 12039 W. Alameda Parkway,
Lakewood, Colorado 80228, and its telephone number is (303) 986-5400.
Shares Eligible for Future Sales
Sales of a substantial number of shares of common stock in the public
market following the offering made by this prospectus could adversely affect
market prices prevailing from time to time. Furthermore, sales of substantial
amounts of common stock in the public market after various resale restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Based on 6,417,754 shares outstanding on June 30, 2000, there will be
8,017,754 shares of common stock outstanding upon the completion of this
offering, assuming the underwriters do not exercise their over-allotment option
(excludes the 500,000 shares held in escrow in connection with the Becan
acquisition). The 2,000,000 shares sold in this offering will be freely
tradeable without restriction under the Securities Act. In addition,
approximately _______________ additional shares are freely tradeable without
restriction.
The remaining ________ shares outstanding upon completion of the offering
(excluding 500,000 shares in escrow in connection with the Becan acquisition)
will be "restricted securities" as that term is defined in Rule 144 and may not
be sold publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. Of these restricted
securities, _________ shares are eligible for immediate sale pursuant to Rule
144, subject to compliance with the volume limitations and other restrictions
under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
(as defined in Rule 144) for at least one year (including the holding period of
any prior owner, except an affiliate) is entitled to sell, within any three
month period, a number of shares that does not exceed the greater of (i) one
percent of the number of shares of common stock then outstanding, or (ii) the
average weekly trading volume of the common stock on the Nasdaq National Market
during the four calendar weeks preceding the required filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about us. Under Rule 144(k), a person who is not deemed to
have been an affiliate at any time during the 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume and other limitation or notice provisions of Rule 144. In
general, under Rule 701 of the Securities Act as currently in effect, any
employee, consultant or advisor of ours who purchases shares from us in
connection with a compensatory stock or option plan or other written agreement
is eligible to resell
47
<PAGE>
such shares 90 days after the effective date of our initial public offering
(which was completed in June 1998) in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period, contained in
Rule 144.
In connection with our initial public offering, the holders of 5,038,815
shares of common stock (consisting of our directors, officers, 5% holders and
affiliates) entered into lock-up agreements with Kashner Davidson Securities
under which they agreed not to offer, sell or otherwise dispose of any such
shares of common stock, any options or warrants to acquire shares of common
stock or any securities convertible into shares of common stock (or any shares
of common stock issuable upon exercise or conversion of securities) owned by
them for a period of 18 months after the date of the initial public offering.
Kashner Davidson Securities may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to such lock-up
agreements. Kashner Davidson Securities has agreed to release the shares the
Selling Stockholders propose to sell in this Offering from these lock-up
provisions.
In addition, to satisfy the requirement of several state securities
regulations, Mr. Taneja and all of our current 5% stockholders agreed, in
connection with the public offering that we conducted in November, 1999, that
they will not, for a period of two (2) years after that date, offer, pledge,
sell, contract a sale, grant any option for the sale of, or otherwise dispose
of, directly or indirectly, shares of the common stock held by them, or any
security or other instrument which by its terms is convertible into, exercisable
for, or exchangeable for shares of common stock. Provided that our stock will be
accepted for listing on the NASDAQ National Market System, these lock up
arrangements will be terminated simultaneously with the closing of this
offering.
In connection with this offering, the holders of [_____________] shares of
common stock (consisting of our directors, officers, 5% holders and affiliates)
have entered into lock-up agreements with Utendahl Capital Partners, L.P. under
which they have agreed not to offer, sell or otherwise dispose of any such
shares of common stock, any options or warrants to acquire shares of common
stock or any securities convertible into shares of common stock (or any shares
of common stock issuable upon exercise or conversion of securities) owned by
them for a period of 18 months after the date of this prospectus. Utendahl
Capital Partners, L.P. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to such lock-up
agreements. Utendahl Capital Partners, L.P. currently has no plans to release
any portion of the securities subject to such lock-up agreements.
Underwriting
Subject to the terms and conditions set forth in the underwriting
agreement, the underwriter named below, for whom Utendahl Capital Partners, L.P.
is acting as representative, have agreed to purchase from DrugMax and the
Selling Stockholders, and DrugMax and the Selling Stockholders have agreed to
sell to the underwriters, the number of shares of common stock set forth
opposite each underwriter's name below, excluding shares set aside for options
granted for over-allotments.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Utendahl Capital Partners, L.P.
=================
Total 2,000,000
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in DrugMax's business and the receipt
of certain certificates, opinions and letters from DrugMax's counsel and
independent public accountants. The nature of the underwriters' obligation is
such that they are committed to purchase and pay for all the shares of common
stock if any are purchased.
DrugMax has been advised by the representative that the underwriters
propose to offer the shares of common stock directly to the public at the public
offering price set forth on the cover page of this prospectus and to certain
securities dealers at such price less a concession not in excess of $[ ] per
share. The underwriters may allow, and such selected dealers may also allow, a
discount not in excess of $[ ] per share to certain brokers and
48
<PAGE>
dealers. After the public offering of the shares, the public offering price and
other selling terms may be changed by the representative. No change in such
terms shall change the amount of proceeds to be received by DrugMax as set forth
on the cover page of this prospectus.
The Selling Stockholders and Jugal Taneja, our Chairman of the Board and
Chief Executive Officer, have agreed that they will not, without the prior
written consent of Utendahl Capital Partners, L.P. (which consent may be
withheld in its sole discretion) and subject to certain limited exceptions,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
sell short, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or enter into any swap or similar
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of the common stock, for a period of eighteen months after the date
of completion of this offering. Utendahl Capital Partners, L.P., on behalf of
the underwriters, may, in its sole discretion and at anytime without notice,
release all or any portion of the securities subject to these lock-up
agreements. In addition, DrugMax has agreed that, for a period of eighteen
months after the date of completion of this offering, it will not, without the
consent of Utendahl Capital Partners, L.P., make any offering, purchase, or sale
or other disposition of any shares of DrugMax's common stock or other securities
convertible into or exchangeable or exercisable for shares of common stock (or
agreement for such) except for
. the grant of options to purchase shares of common stock
pursuant to our 1999 Stock Option Plan;
. shares of common stock issued pursuant to the exercise of
options granted under such plan;
. shares issued, options granted or shares purchased in
connection with acquisitions; and
. pursuant to the exercise of warrants and options outstanding
prior to the sale of the common stock in this offering.
DrugMax has agreed to issue to the representative, a warrant to purchase up
to 100,000 shares of common stock at an exercise price of $8.00. In addition,
DrugMax has agreed to issue to the representative, a warrant to purchase up to
200,000 shares of common stock at an exercise price per share equal to 165% of
the public offering price of the shares in this offering. The exercise price of
the representative's warrants has been determined by negotiations between
DrugMax and the representative. The exercise price of the representative's
warrants is one of the factors used by the National Association of Securities
Dealers, Inc. under its Corporate Financing Rule to determine whether the total
compensation paid to an underwriter and its associated and related persons for
services in connection with a public offering is excessive. The sole factor
considered by DrugMax and the representative in negotiating the exercise price
of the representative's warrants in this offering was to select an amount that
would not be considered excessive under the National Association of Securities
Dealers, Inc.'s Corporate Financing Rule in light of the total compensation
payable by DrugMax in connection with this offering. The representative's
warrants will be exercisable for a period of five years after the date of this
prospectus. The representative's warrants include a "net" exercise provision
permitting the holders to pay the exercise price by cancellation of a number of
shares with a fair market value equal to the exercise price of the
representative's warrants. The holders of the representative's warrants will
have no voting, dividend or other stockholder rights until the representative's
warrants are exercised. In addition, the underwriters' warrants may not be
sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or
in part, for a period of one year from the date of the prospectus, except to
officers or partners of the underwriters and members of the selling group and/or
their officers or partners. In addition, DrugMax has granted certain rights to
the holders of the representative's warrants to register the common stock
underlying the representative's warrants under the Securities Act. DrugMax has
agreed to pay the representative a non-accountable expense allowance of 1 1/2%
of the total offering proceeds from the sale of shares of common stock by them,
of which DrugMax has already paid $_________.
DrugMax has agreed to retain Utendahl Capital Partners, L.P. as a financial
consultant for a period of thirty-six months to commence on the closing of this
offering, at a monthly fee of $________ all of which $________ shall be payable
in advance on the closing of this offering. Pursuant to this agreement, Utendahl
Capital Partners, L.P. will be obligated to provide general financial advisory
services to DrugMax on an "as needed" basis
49
<PAGE>
with respect to possible future financing or acquisitions by DrugMax and related
matters. The agreement does not require Utendahl Capital Partners, L.P. to
provide any minimum number of hours of consulting services to DrugMax.
Our common stock is currently quoted on the Nasdaq SmallCap Stock Market
under the symbol "DMAX." We have applied to have our common stock included for
quotation on the Nasdaq National Market, also under the symbol "DMAX."
The underwriting agreement provides that DrugMax will indemnify the
underwriters and their controlling persons against certain liabilities under the
Securities Act or will contribute to payments the underwriters and their
controlling persons may be required to make in respect thereof. DrugMax is
generally obligated to indemnify the underwriters and their respective
controlling persons in connection with losses or claims arising out of any
untrue statement of a material fact contained in this prospectus or in related
documents filed with the Securities and Exchange Commission or with any state
securities administrator or arising out of any omission to state in any of such
documents any material fact required to be stated in such documents or necessary
to make the statements made in such documents, in light of the circumstances
under which they were made, not misleading. In addition, DrugMax is generally
obligated to indemnify the underwriters and their respective controlling persons
in connection with losses or claims arising out of any breach of any
representation, warranty agreement or covenant of DrugMax contained in the
underwriting agreement.
Legal Matters
The validity of the common stock offered hereby will be passed upon for us
by [Jones Vargas, Las Vegas, Nevada.] Certain other legal matters will be
passed on for us by our counsel, Shumaker, Loop & Kendrick, LLP, Tampa, Florida.
Certain legal matters will be passed on for the underwriters by Fowler, White,
Gillen, Boggs, Villareal and Banker, P.A., Tampa, Florida.
Experts
The consolidated financial statements as of and for the year ended March
31, 2000, included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and have
been so included in reliance on the report of such firm given upon their
authority as experts in accounting and auditing.
Kirkland, Russ, Murphy & Tapp, Clearwater, Florida, independent auditors,
have audited DrugMax's consolidated financial statements as of and for the
period ended March 31, 1999, as set forth in their report. We have included
DrugMax's consolidated financial statements in the prospectus and elsewhere in
the registration statement in reliance on Kirkland, Russ, Murphy & Tapp's
report, given upon their authority as experts in accounting and auditing.
Brimmer, Burek & Keelan LLP, Tampa, Florida, independent auditors, have
audited Becan Distributors, Inc.'s consolidated financial statements as of and
for the years ended March 31, 1998 and 1999, as set forth in their report. We
have included Becan's consolidated financial statements in the prospectus and
elsewhere in the registration statement in reliance on Brimmer, Burek & Keelan
LLP's report, given upon their authority as experts in accounting and auditing.
Brimmer, Burek & Keelan LLP, Tampa, Florida, independent auditors, have
audited VetMall, Inc.'s consolidated financial statements as of and for the
period ended March 31, 2000, as set forth in their report. We have included
VetMall's consolidated financial statements in the prospectus and elsewhere in
the registration statement in reliance on Brimmer, Burek & Keelan LLP's report,
given upon their authority as experts in accounting and auditing.
Brimmer, Burek & Keelan LLP, Tampa, Florida, independent auditors, have
audited Desktop Corporation's consolidated financial statements as of and for
the years ended March 31, 2000, 1999 and 1998 as set forth in their report. We
have included Desktop's consolidated financial statements in the prospectus and
elsewhere in the registration statement in reliance on Brimmer, Burek & Keelan
LLP's report, given upon their authority as experts in accounting and auditing.
50
<PAGE>
Brimmer, Burek & Keelan LLP, Tampa, Florida, independent auditors, have
audited Valley Drug Company's financial statements as of December 31, 1999, 1998
and 1997, as set forth in their report. We have included Valley's consolidated
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Brimmer, Burek & Keelan LLP's report, given upon their
authority as experts in accounting and auditing.
Change In Independent Auditors
On February 4, 2000, DrugMax engaged Deloitte & Touche LLP as its
independent auditors for the fiscal year ended March 31, 2000, replacing the
firm of Kirkland, Russ, Murphy & Tapp, CPAs, which served as DrugMax's
independent auditors for the fiscal year ended March 31, 1999. The change was
approved by DrugMax's audit committee. The reason for the change to a global
firm was to better position DrugMax for access to the public capital markets.
The report of Kirkland, Russ, Murphy & Tapp, CPAs for the fiscal year ended
March 31, 1999 did not contain any adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principles. We believe there were no disagreements with Kirkland, Russ, Murphy
& Tapp, CPAs within the meaning of Instruction 4 to Item 304 of Regulation S-B
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure in connection with the audit of
DrugMax's financial statements for the fiscal year ended March 31, 1999 or for
any subsequent interim period, which disagreements if not resolved to their
satisfaction would have caused Kirkland, Russ, Murphy & Tapp, CPAs to make
reference to the subject matter of the disagreements in connection with its
report.
During the two most recent fiscal years and through present, there have
been no reportable events (as defined in Item 304(a)(1)(iv) of Regulation S-B)
of the type required to be disclosed by that section. DrugMax had not consulted
with Deloitte & Touche LLP regarding either (a) the application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on DrugMax's financial statements; or
(b) any matter that was either the subject matter of a disagreement (as defined
in Item 304(a)(1)(iv) of Regulation S-B and the related instructions) or a
reportable event (as defined in Item 304(a)(1)(iv) of Regulation S-B).
Additional Information
DrugMax is subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith files reports, proxy or
information statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as at the following regional offices: Seven World Trade Center, New
York, New York 10048, and Citicorp Center, 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C.20549, at prescribed rates. In addition, the Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's Web sit is http://www.sec.gov.
DrugMax has filed with the Commission, a registration statement on Form SB-
2 under the Securities Act of 1933 with respect to the common stock being
offered hereby. As permitted by the rules and regulations of the Commission,
this prospectus does not contain all the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to DrugMax and the common stock offered hereby,
reference is made to the registration statement, and such exhibits and
schedules. A copy of the registration statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission at the addresses set forth above, and copies of all
or any part of the registration statement may be obtained from such offices upon
payment of the fees prescribed by the Commission. In addition, the registration
statement may be accessed at the Commission's web site. Statements contained in
this prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements:
Consolidated Financial Statements of DrugMax.com, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP..................................... F-
Independent Auditors' Report of Kirkland, Russ, Murphy & Tapp............................. F-
Consolidated Balance Sheets as of March 31, 2000 and 1999................................. F-
Consolidated Statements of Operations for the year ended
March 31, 2000 and for the period from September 8, 1998
(date of inception) to March 31, 1999................................................... F-
Statement of Changes in Net Deficiency in Liquidation for the period
From April 1, 1998 to September 7, 1998................................................. F-
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2000 and 1999................................................................. F-
Consolidated Statements of Cash Flows for the year ended
March 31, 2000 and for the period from September 8, 1998
(date of inception) to March 31, 1999................................................... F-
Notes to Consolidated Financial Statements................................................ F-
Financial Statements of Valley Drug Company
Independent Auditors' Report.............................................................. F-
Balance Sheets as of December 31, 1999, 1998 and 1997..................................... F-
Statements of Operations for the years ended December 31, 1999, 1998 and 1997............. F-
Statement of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................................ F-
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................................................ F-
Notes to Financial Statements............................................................. F-
Consolidated Financial Statements of Desktop Corporation and Subsidiary
Independent Auditors' Report............................................................... F-
Consolidated Balance Sheets as of March 31, 2000, 1999 and 1998............................ F-
Consolidated Statements of Operations for the
Years Ended March 31, 2000, 1999 and 1998................................................ F-
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the Years Ended March 31, 2000, 1999 and 1998........................................ F-
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2000, 1999 and 1998............................................................ F-
Notes to Consolidated Financial Statements................................................. F-
</TABLE>
<PAGE>
Financial Statements of VetMall, Inc.
<TABLE>
<S> <C>
Independent Auditors' Report............................................................... F-
Balance Sheet as of March 31, 2000......................................................... F-
Statement of Operations for the period from June 28, 1999
(date of inception) to March 31, 2000.................................................... F-
Statement of Changes in Stockholders'/Members' Equity for the period
From June 28, 1999 (date of inception) to March 31, 2000................................. F-
Statement of Cash Flows for the period from June 28, 1999
(date of inception) to March 31, 2000.................................................... F-
Notes to Financial Statements.............................................................. F-
Consolidated Financial Statements of Becan Distributors, Inc.
Independent Auditors' Report............................................................... F-
Consolidated Balance Sheets as of March 31, 1998 and 1999 and
September 30, 1998 and 1999 (unaudited).................................................. F-
Consolidated Statements of Operations as of March 31, 1998 and 1999 and
September 30, 1998 and 1999 (unaudited).................................................. F-
Consolidated Statements of Changes in Stockholder's Equity as of March 31, 1998 and 1999 and
September 30, 1998 and 1999 (unaudited).................................................. F-
Consolidated Statements of Cash Flows as of March 31, 1998 and 1999 and
September 30, 1998 and 1999 (unaudited).................................................. F-
Notes to Financial Statements.............................................................. F-
Unaudited Condensed Financial Statements:
DrugMax.com, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of June 30, 2000 and March 31, 2000............... F-
Condensed Consolidated Statements of Operations for the three months ended
June 30, 2000 and 1999................................................................... F-
Condensed Consolidated Statements of Cash Flows for the three months ended
June 30, 2000 and 1999................................................................... F-
Notes to Condensed Consolidated Financial Statements ...................................... F-
Valley Drug Company
Balance Sheets as of March 31, 1999 and 2000............................................... F-
Statements of Operations for the three months ended March 31, 1999 and 2000................ F-
Statements of Cash Flows for the three months ended March 31, 1999 and 2000................ F-
Notes to Financial Statements.............................................................. F-
Unaudited Pro Forma Consolidated Financial Information for DrugMax.com, Inc.:
Basis of Presentation of Unaudited Pro Forma Condensed Consolidated Statement
of Operations for Year Ended March 31, 2000.............................................. F-
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended March 31, 2000........................................................ F-
Basis of Presentation of Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 2000................................................. F-
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 2000................................................. F-
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
DrugMax.com, Inc.:
We have audited the accompanying consolidated balance sheet of DrugMax.com, Inc.
and subsidiaries (the "Company") (formerly known as Nutriceuticals.com
Corporation) as of March 31, 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2000,
and the results of its operations and its cash flows for the year ended March
31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 13, the accompanying consolidated financial statements for
the year ended March 31, 2000 have been restated.
/s/ DELOITTE & TOUCHE LLP
-------------------------
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
June 26, 2000
(June 30, 2000 as to Note 13 and
October 27, 2000 as to Note 12)
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
and Board of Directors
Nutriceuticals.com Corporation:
We have audited the accompanying consolidated balance sheet of
Nutriceuticals.com Corporation, as of March 31, 1999, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the period from September 8, 1998 (date of inception) to March 31, 1999, and
the related statement of changes in net deficiency in liquidation for the
period from April 1, 1998 to September 7, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nutriceuticals.com
Corporation as of March 31, 1999, and results of its operations and its cash
flows for the period from September 8, 1998 (date of inception) to March 31,
1999, and results of its changes in net deficiency in liquidation for the
period from April 1, 1998 to September 7, 1998, in conformity with generally
accepted accounting principles.
/s/ KIRKLAND, RUSS, MURPHY & TAPP
---------------------------------
KIRKLAND, RUSS, MURPHY & TAPP
Clearwater, Florida
April 26, 1999
F-4
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---------------- -------------
<S> <C> <C>
ASSETS
Current assets: ....................................
Cash and cash equivalents ......................... $ 6,020,129 $ 56,986
Accounts receivable, net of allowance of
$113,282 and $0 ................................ 4,106,105 9,278
Inventory ......................................... 1,416,241 16,303
Due from affiliates ............................... 13,564 5,171
Prepaid expenses and other current assets ......... 126,542 --
------------ ----------
Total current assets ............................ 11,682,581 87,738
Property and equipment, net ........................ 693,340 47,500
Intangible assets, net ............................. 26,090,635 --
Notes receivable, net .............................. 37,614 --
Deposits ........................................... 9,742 380
------------ ----------
Total assets ....................................... $ 38,513,912 $ 135,618
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 3,170,890 $ 80,186
Accrued expenses .................................. 442,598 17,505
Credit lines payable .............................. 2,391,095 --
Note payable ...................................... 4,872 --
Due to affiliates ................................. 511,717 --
------------ ----------
Total current liabilities ....................... 6,521,172 97,691
------------ ----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.001 par value;
2,000,000 shares authorized; no preferred
shares issued or outstanding .................... -- --
Common stock, $.001 par value;
24,000,000 shares authorized;
6,200,499 and 2,675,514 shares issued
and outstanding ................................. 6,202 2,677
Additional paid-in capital ........................ 34,079,957 139,725
Accumulated deficit ............................... (2,093,419) (104,475)
------------ ----------
Total stockholders' equity ...................... 31,992,740 37,927
------------ ----------
Total liabilities and stockholders' equity ......... $ 38,513,912 $ 135,618
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended March 31, 2000 and for the Period from
September 8, 1998 (date of inception) through March 31, 1999
<TABLE>
<CAPTION>
September 8, 1998
(date of inception)
Year Ended through
March 31, March 31,
2000 1999
----------------- --------------------
<S> <C> <C>
Revenues ................................................ $ 21,050,547 $ 37,118
Cost of goods sold ...................................... 20,906,771 14,496
------------- -----------
Gross profit ......................................... 143,776 22,622
Selling, general and administrative expenses ............ 2,076,653 128,858
------------- -----------
Operating loss .......................................... (1,932,877) (106,236)
------------- -----------
Other income (expense):
Interest income ........................................ 144,340 1,761
Interest expense ....................................... (107,095) --
Other expense .......................................... (93,312) --
------------- -----------
Total other income (expense) ............................ (56,067) 1,761
------------- -----------
Net loss ................................................ $ (1,988,944) $ (104,475)
============= ===========
Basic and diluted net loss per share -
Year ended March 31, 2000 as restated
(see Note 13) ......................................... $ (.51) $ (.08)
============= ===========
Basic and diluted weighted average
number of common shares outstanding -
Year ended March 31, 2000 as restated
(see Note 13) ......................................... 3,875,445 1,372,230
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DRUGMAX.COM, INC.
STATEMENT OF CHANGES IN NET DEFICIENCY IN LIQUIDATION
For the Period from April 1, 1998 through September 7, 1998
<TABLE>
<CAPTION>
Period from
April 1, 1998 to
September 7, 1998
------------------
<S> <C>
Decreases in net assets in liquidation:
Professional fees ...................................................... $ (3,875)
Office expense ......................................................... (60)
----------
Decrease in net assets in liquidation ................................... (3,935)
Beginning net liabilities in liquidation ................................ (8,663)
----------
Ending net liabilities in liquidation ................................... $ (12,598)
==========
Loss per share:
Loss attributable to common stockholders ............................... $ (3,935)
==========
Net loss per common share (basic and diluted) .......................... $ (.02)
==========
Weighted average common shares outstanding (basic and diluted) ......... 175,514
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended March 31, 2000 and March 31, 1999
<TABLE>
<CAPTION>
Additional Net Total
Common Paid-in Accumulated Deficiency in Stockholders'
Stock Capital Deficit Liquidation Equity
---------- ---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1998, on the
liquidation basis of accounting ........... $ -- $ -- $ -- $ (8,663) $ (8,663)
Loss attributable to common
stockholders prior to merger .............. -- -- -- (3,935) (3,935)
Recapitalization at date of merger ......... 177 (12,775) -- 12,598 --
Initial capital contribution, 2,000,000
shares .................................... 2,000 28,000 -- -- 30,000
Sale of 400,000 shares of common
stock ..................................... 400 99,600 -- -- 100,000
Issuance of 100,000 shares for
acquisition of Healthseek ................. 100 24,900 -- -- 25,000
Net loss ................................... -- -- (104,475) -- (104,475)
------- ------------ ------------- --------- ------------
Balances at March 31, 1999 ................. 2,677 139,725 (104,475) -- 37,927
Issuance of 20,000 shares for
acquisition of domain name ................ 20 39,980 -- -- 40,000
Issuance of 2,000,000 shares for
acquisition of Becan ...................... 2,000 19,998,000 -- -- 20,000,000
Issuance of 1,380,000 shares for
public offering net of offering costs
(includes 150,000 warrants issued
to underwriters) .......................... 1,380 11,847,874 -- -- 11,849,254
Issuance of 50,000 shares for
acquisition of Desktop .................... 50 821,850 -- -- 821,900
Issuance of 49,985 shares to retire
Desktop debt .............................. 50 821,603 -- -- 821,653
Issuance of 25,000 shares for
acquisition of 20% of VetMall ............. 25 410,925 -- -- 410,950
Net loss ................................... -- -- (1,988,944) -- (1,988,944)
------- ------------ ------------- --------- ------------
Balances at March 31, 2000 ................. $ 6,202 $ 34,079,957 $ (2,093,419) $ -- $ 31,992,740
======= ============ ============= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended March 31, 2000 and for the Period from
September 8, 1998 (date of inception) through March 31, 1999
<TABLE>
<CAPTION>
For the Period from
September 8, 1998
For the Year (date of inception)
Ended through
March 31, 2000 March 31, 1999
---------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................................................... $ (1,988,944) $ (104,475)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................. 520,927 2,500
Impairment of intangible asset ................................................. 31,667 --
Bad debt expense ............................................................... 115,271 --
Changes in operating assets and liabilities:
Accounts receivable .......................................................... (1,917,319) (9,278)
Inventory .................................................................... (188,560) (16,303)
Due from affiliates .......................................................... (8,393) (5,171)
Prepaid expenses and other current assets .................................... (80,487) --
Note receivable .............................................................. 16,120 --
Deposits ..................................................................... (8,562) (380)
Accounts payable ............................................................. 834,977 69,311
Accrued expenses ............................................................. (474,545) 1,068
------------ ----------
Net cash used in operating activities .......................................... (3,147,848) (62,728)
Cash flows from investing activities:
Purchases of property and equipment .......................................... (182,634) (15,000)
Increase in intangible assets ................................................ (4,584) --
Cash paid for acquisitions, net .............................................. (3,250,045) --
------------ ----------
Net cash used in investing activities .......................................... (3,437,263) (15,000)
Cash flows from financing activities:
Net change under revolving line of credit agreements ......................... 2,391,095 --
Proceeds from issuance of long-term obligations .............................. 23,603 --
Payments of long-term obligations ............................................ (1,725,854) --
Proceeds from related party obligations ...................................... 200,000 --
Payments of related party obligations ........................................ (200,000) --
Initial capital contributions ................................................ -- 30,000
Proceeds from affiliates ..................................................... 10,156 --
Proceeds from issuance of common stock ....................................... 11,849,254 100,000
------------ ----------
Net cash provided by financing activities ...................................... 12,548,254 130,000
------------ ----------
Net increase in cash and cash equivalents ...................................... 5,963,143 52,272
Cash and cash equivalents at beginning of period ............................... 56,986 4,714
------------ ----------
Cash and cash equivalents at end of period ..................................... $ 6,020,129 $ 56,986
============ ==========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................ $ 96,587 $ --
============ ==========
Cash paid for income taxes .................................................... $ -- $ --
============ ==========
Issuance of 2,000,000 shares of common stock for the acquisition of Becan ..... $ 20,000,000 $ --
============ ==========
Issuance of 25,000 shares of common stock for the acquisition of 20% of
VetMall .................................................................... $ 410,950 $ --
============ ==========
Issuance of 50,000 shares of common stock for the acquisition of Desktop ...... $ 821,900 $ --
============ ==========
Issuance of 49,985 shares of common stock to retire Desktop debt .............. $ 821,653 $ --
============ ==========
Issuance of 20,000 shares of common stock to purchase domain name ............. $ 40,000 $ --
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000 AND 1999
NOTE 1 -- BUSINESS AND HISTORY
Business
DrugMax.com, Inc. ("DrugMax") is a business-to-business on-line trade
exchange for pharmaceuticals, over-the-counter products (OTC), health and beauty
aids (HBA), nutritional supplements and pet care products. DrugMax.com, Inc.
brings retailers, manufacturers, wholesalers and major end-users into a single,
efficient marketplace for buying, selling and industry news. DrugMax also
derives a significant portion of revenue from traditional full-line wholesale
distribution business.
History
DrugMax was originally incorporated on October 18, 1993, as a Nevada
corporation under the name of NuMed Surgical, Inc. ("NuMed"). In March 1999,
NuMed's name was changed to Nutriceuticals.com Corporation ("Nutriceuticals").
In January 2000, Nutriceuticals' name was changed to DrugMax.
NuMed was engaged in the research, development and distribution of medical
instruments and surgical supplies to the health care market since February 1991
at which time NuMed operated as a division of NuMed Home Health Care. Effective
March 31, 1997, NuMed adopted a plan of liquidation in which it sold its major
product line and subsequently disposed of all its operating assets by March 31,
1998.
Effective March 1999, NuMed acquired all of the outstanding common stock
of Nutriceuticals, which was organized in the State of Florida on September 8,
1998 (date of inception). Nutriceuticals is engaged in the retailing of
nutritional supplements via the Internet. For accounting purposes, the
acquisition has been treated as an acquisition of NuMed by Nutriceuticals and
as a recapitalization of Nutriceuticals. Additionally, Nutriceuticals was
merged into NuMed and NuMed changed its name to Nutriceuticals. Mr. Jugal K.
Taneja, a principal shareholder and director of DrugMax, had beneficial
ownership of approximately 28% of NuMed prior to the merger and approximately
21% of Nutriceuticals after the merger.
As a result of the merger, each issued and outstanding share of
Nutriceutical's common stock was converted into one share of NuMed's common
stock. The results of operations of the consolidated companies are reflected as
if the above transaction took place at September 8, 1998 (date of inception).
Consequently, for comparative purposes, the consolidated financial statements
have been presented as if DrugMax had been a single entity for all periods
presented.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of DrugMax
(formerly known as Nutriceuticals and Numed) and its wholly-owned subsidiaries:
Healthseek.com Corporation ("Healthseek"); Becan Distributors, Inc. and its
subsidiary Discount RX, Inc. (collectively, "Becan"); and Desktop Corporation
and its subsidiary Desktop Ventures, Inc. (collectively, "Desktop"), as well as
its 70% owned subsidiary, VetMall LLC ("VetMall"), (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
F-10
<PAGE>
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents
The Company considers cash on hand and amounts on deposit with financial
institutions which have original maturities of three months or less to be cash
and cash equivalents.
Accounts Receivable
Accounts receivable are due primarily from independent pharmacies via
traditional distribution channels and from companies and individuals via
e-commerce.
Inventory
Inventory is stated at the lower of cost of market. Cost is determined
using the first-in, first-out basis of accounting.
Property and Equipment
Property and equipment are stated at cost. Provision for depreciation is
computed using the straight line method over the estimated useful lives ranging
from three to seven years.
Maintenance and repairs are charged to operations. Additions and
betterments which extend the useful lives of property and equipment are
capitalized. Upon retirement or disposal of the operating property and
equipment, the cost and accumulated depreciation are eliminated from the
accounts and the resulting gain or loss is reflected in operations.
Computer Software
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use". This SOP is effective for
fiscal years beginning after December 15, 1998 and requires capitalization of
certain costs of computer software developed or obtained for internal use.
Computer software are stated at cost less accumulated amortization.
Amortization is recorded using the straight-line method over an estimated
useful life of three to five years.
Intangible Assets
Intangible assets consist primarily of the excess of cost over the fair
value of net assets acquired (goodwill) relating to the acquisitions (see Note
2). The excess of cost over net assets acquired is amortized over 15 years for
the acquisition of Becan and 5 years for the acquisitions of Desktop and
VetMall using the straight-line method. Accumulated amortization totaled
$485,046 at March 31, 2000.
Impairment of Long-Lived Assets
As events and circumstances change, the Company evaluates the
recoverability of the net carrying value of its property and equipment and its
intangible assets by comparing the carrying values to the estimated future
undiscounted cash flows. A deficiency in these cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of these assets. A loss on impairment would
be recognized by a charge to earnings.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". Under the asset and liability
method of SFAS No. 109, deferred tax
F-11
<PAGE>
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recorded or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts that are more likely than not expected to
be realized.
Earnings (Loss) Per Common Share
Basic earnings per share is calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding for the
period. Diluted earnings per share is calculated by dividing net income (loss)
by the weighted average number of shares of common stock outstanding for the
period, adjusted for the dilutive effect of common stock equivalents, using the
treasury stock method. The Company does not have any dilutive shares
outstanding.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", which is effective for fiscal
years beginning after December 15, 1995. Under SFAS No. 123, the Company may
elect to recognize stock-based compensation expense based on the fair value of
the awards or to account for stock-based compensation under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and disclose in the consolidated financial statements the effects
of SFAS No. 123 as if the recognition provisions were adopted. The Company has
adopted the recognition provisions of APB Opinion No. 25.
Fair Value of Financial Instruments
The estimated fair value of amounts reported in the consolidated financial
statements has been determined by using available market information and
appropriate valuation methodologies. The carrying value of all current assets
and current liabilities approximates fair value because of their short-term
nature.
Revenue Recognition
The Company recognizes revenue when goods are shipped or when services are
provided. Revenue from banner advertising is recognized ratably over the period
the advertising is on the website.
New Accounting Standards
The Financial Accounting Standards Board recently issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 defers
for one year the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The rule now will apply
to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 137 permits early adoption as of the beginning of any fiscal quarter after
its issuance. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, of firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not completed its evaluation of the
impact of SFAS No. 133, if any, on the consolidated financial statements.
F-12
<PAGE>
NOTE 2 -- ACQUISITIONS
Effective March 31, 1999, the Company acquired Healthseek, a Massachusetts
corporation. Healthseek is a health care community website providing information
to health care professionals and consumers. The acquisition was accounted for
using the purchase method of accounting. The Company acquired all of the common
stock of Healthseek, in exchange for 100,000 shares of voting common stock at
$.25 per share and $10,000 cash. In consideration of the sale and transfer of
the shares, the Company acquired the registered domain name Healthseek and all
assets, copyrights and other documentation relating to the website and assumed
all costs and expenses related to the ongoing maintenance of the website.
Healthseek did not have significant historical assets, liabilities or revenues
and expenses during its limited operating history. The purchase price was
allocated to Healthseek's website. Healthseek is a wholly-owned subsidiary of
the Company.
On November 26, 1999, the Company acquired all the issued and outstanding
capital stock of Becan, an Ohio corporation, incorporated in 1997, from Dynamic
Health Products, Inc. ("Dynamic"), an affiliate of Jugal K. Taneja, a principal
shareholder and director of the Company, in exchange for 2,000,000 shares of
restricted common stock of the Company (with an estimated fair value of $10.00
per share) and $2,000,000 cash. Additional consideration of 1,000,000 shares of
common stock of the Company was placed into escrow for future issuance to
Dynamic, upon the attainment by Becan of certain financial targets for the
fiscal years ending March 31, 2000 and 2001. Becan did not attain the financial
target for the year ending March 31, 2000 and 500,000 shares were returned from
escrow to the Company. The remaining 500,000 shares are still held in escrow
pending the attainment of certain financial targets for the year ending March
31, 2001. Becan is a wholesale distributor of pharmaceutical products and to a
lesser extent, over-the-counter drugs and health and beauty care products.
On March 20, 2000, the Company acquired all the issued and outstanding
capital stock of Desktop in exchange for 50,000 shares of the Company's common
stock which includes 20,000 contingent shares. In addition, the following
additional consideration was paid: (i) $100,000 and 31,176 shares of the
Company's common stock at $16.44 per share to satisfy obligations owed to HCT
Capital Corp. ("HCT") by Desktop and VetMall LLC ("VetMall"), an entity owned
50% by Desktop, and (ii) 8,938 and 9,871 shares of the Company's common stock at
$16.44 per share issued to Messrs. Fagala and Miller, respectively, to satisfy
outstanding obligations of Desktop or VetMall. Desktop is an internet e-commerce
solutions provider specializing in the design, development and delivery of
technology solutions by providing custom programming services and web hosting
services.
The Desktop acquisition agreement assigns 20,000 shares of the sellers'
proceeds to a holdback agent. These contingent shares are to be held in escrow,
subject to the indemnification provisions of the agreement, until September 20,
2000. After September 20, 2000, any shares held by the holdback agent which have
not been used to offset certain liabilities are to be released to the selling
shareholders. The acquisition agreement specified that the purchase price would
be adjusted based on changes in the audited liabilities of Desktop. The Company
and the selling shareholders of Desktop are currently negotiating the amount of
the purchase price adjustments as each have interpreted the definition of
liabilities differently and, thus, the purchase price may be adjusted once an
agreement is reached. As of March 31, 2000, the Company has recorded the
purchase price related to the Desktop acquisition based on the 99,985 shares
issued.
VetMall was founded in June 1999 as a Nevada limited liability corporation
known as VetMall LLC, which merged with VetMall, Inc. on March 20, 2000. The
company is an internet-based consumer pet care product sales distributor.
VetMall maintains a web site whereby consumers can order pet care products
which are then shipped directly by the manufacturer. The products are primarily
supplied by one vendor who is a 30% shareholder in VetMall. In addition,
VetMall derives income from advertisers on its web site and from veterinarians
subscribing to listing on its web site.
In addition, upon (i) the closing of any initial public offering (the
"IPO") of VetMall or its successors, (ii) the sale by the Company of all of its
capital stock of Vetmall, or (iii) the sale by VetMall of all or substantially
all of its assets, the Company will either (A) issue to the sellers that number
of shares of the VetMall common stock which, when multiplied by the closing
price of VetMall's common stock on the date the IPO or the sale closes, exceeds
$4,800,000, or (B) pay to the sellers 16% of 50% of the proceeds of the
F-13
<PAGE>
closing of a direct sale to a third party of substantially all of the assets of
VetMall or its successors, whichever of (A) or (B) has a lower value based on
the IPO or sales price of VetMall common stock and the closing price of
VetMall's common stock on the date that the IPO is declared effective by the
Securities and Exchange Commission or the closing of the sale has occurred.
Simultaneously with the acquisition described above, the Company purchased
from W.A. Butler ("Butler") 2,000 membership shares of VetMall, which shares
constituted 20% of the issued and outstanding membership shares of VetMall, in
exchange for the payment of $1,000,000 cash plus the issuance to Butler of
25,000 shares of Company common stock.
As a result of the acquisitions described above, the Company owns through
its ownership of Desktop, a 50% indirect interest in VetMall, together with a
20% direct interest in VetMall.
The business combinations of Becan, Desktop and VetMall were accounted for
by the purchase method of accounting in accordance with APB Opinion No. 16. The
results of operations of the above named businesses are included in the
consolidated financial statements from their respective purchase dates. The
Company acquired the following assets and liabilities (net of cash received of
$52,705) in the above business combinations:
Accounts receivable ................... $ 2,294,779
Inventory ............................. 1,211,378
Property and equipment ................ 489,091
Other assets .......................... 100,589
Goodwill .............................. 26,572,760
Assumption of liabilities ............. (5,364,049)
-------------
Net value of purchased assets ......... 25,304,548
Value of common stock issued .......... (22,054,503)
-------------
Cash paid for acquisitions ............ $ 3,250,045
=============
The unaudited pro forma effect of these acquisitions on the Company's
revenues, net loss and net loss per share, had the acquisitions occurred on
September 8, 1998 and April 1, 1999 is as follows:
<TABLE>
<CAPTION>
For the Period
From September 8, 1999
For the Year (Date of Inception)
Ended through
March 31, 2000 March 31, 1999
---------------- -----------------------
<S> <C> <C>
Revenues ..................................... $ 55,721,470 $ 32,993,811
Net loss ..................................... (4,504,407) (2,042,301)
Basic and diluted net loss per share ......... $ (.94) $ (1.49)
</TABLE>
On April 19, 2000, DrugMax Acquisition Corporation ("Buyer"), a wholly
owned subsidiary of DrugMax, Valley Drug Company ("Valley"), Ronald J.
Patrick ("Patrick") and Ralph A. Blundo ("Blundo", and together with Patrick,
the "Sellers") signed a Merger Purchase Agreement (the "Agreement"). In
connection with the merger, Messrs. Patrick and Blundo, the sole shareholders
of Valley, received an aggregate of 226,666 shares of the Company's common
stock and cash in the amount of $1,700,000. Until such time as their shares of
the Company may be sold pursuant to Rule 144 of the Securities and Exchange
Commission, Messrs. Patrick and Blundo were granted the right to include their
shares in any registration filed by the Company. Concurrent with the merger,
Messrs. Patrick and Blundo each deposited 11,333 shares of the Company's common
stock with an escrow agent (the "Holdback Shares"). If the stockholders' equity
of Valley on April 19, 2000 is less than $541,827, the Company will have the
right to direct the escrow agent to return some or all of the 22,666 Holdback
Shares back to the Company. If the stockholders' equity of Valley on April 19,
2000 is greater than $541,827, the escrow agent will release all of the Holdback
Shares to Messrs. Patrick and Blundo. The Company will account for the
acquisition of Valley as a purchase.
The unaudited pro forma effect of the Valley acquisition on the Company's
revenues, net loss and net loss per share, had the acquisition occurred on
September 8, 1998 and April 1, 1999 is shown below. For purposes of these pro
forma computations (i) Valley's year end financial statements for their years
ended December 31, 1999 and 1998 were used and (ii) Valley's results were
combined with the pro forma effect of the other acquisitions shown above.
<TABLE>
<CAPTION>
For the Period
For the Year From September 8, 1998
Ended (Date of Inception) through
March 31, 2000 March 31, 1999
---------------- ----------------------------
<S> <C> <C>
Revenues ..................................... $106,293,657 $ 80,034,293
Net loss ..................................... (4,490,015) (1,205,450)
Basic and diluted net loss per share ......... $ (.89) $ (.88)
</TABLE>
On April 19, 2000, Desktop distributed all of its shares of VetMall to
DrugMax, resulting in DrugMax then directly owning 70% of VetMall.
Subsequent to March 31, 2000, VetMall ceased selling web site subscriptions
to veterinarians in order to focus its efforts on the development of its new web
site.
NOTE 3 -- RECEIVABLES, NET
At March 31, 2000 and 1999, accounts receivable of the Company consist of
the following:
2000 1999
---- ----
Distribution .................................. $4,219,387 $9,278
Less allowance for doubtful accounts .......... (113,282) --
---------- ------
Total ......................................... $4,106,105 $9,278
========== ======
In connection with the acquisition of Becan, the Company recorded a note
receivable from a customer in the original amount of $53,734. The note bears
interest at 12% and requires payments of $2,500 per month, beginning on May 20,
1999, until all principal and interest is paid in full. As no payments have been
received on the note, in March 2000, a $16,120 allowance was recorded based on
management's estimate of the amount which would be ultimately received.
F-14
<PAGE>
NOTE 4 -- INVENTORIES
Inventories held for resale at March 31, 2000 and 1999 consist of the
following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Pharmaceutical products............................... $1,297,417 $ --
Other products........................................ 118,824 16,303
---------- --------
$1,416,241 $ 16,303
========== ========
</TABLE>
NOTE 5 -- PROPERTY AND EQUIPMENT
At March 31, 2000 and 1999 property and equipment consist of the
following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Furniture and equipment .............................. $ 254,130 $ --
Computer software, including website domain .......... 460,433 50,000
Leasehold improvements ............................... 7,162 --
--------- --------
Total .............................................. $ 721,725 $ 50,000
Accumulated depreciation and amortization ............ (28,385) (2,500)
--------- --------
Property and equipment, net .......................... $ 693,340 $ 47,500
========= ========
</TABLE>
NOTE 6 -- INCOME TAXES
The Company had no income tax expense or benefit for the year ended March
31, 2000 or for the period from September 8, 1998 through March 31, 1999.
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 components of
deferred tax assets and liabilities net of valuation reserves as of March 31,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net operating losses ...................................... $ 560,000 $ 47,000
Net operating losses - acquired ........................... 416,000 --
Use of cash basis method of accounting for income tax
purposes ................................................. (258,505) --
---------- ---------
Net deferred tax asset .................................... 717,495 47,000
Valuation allowance ....................................... (717,495) (47,000)
---------- ---------
Net deferred tax asset after valuation allowance .......... $ -- $ --
========== =========
</TABLE>
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported, if based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
As such, a $717,495 and $47,000 valuation allowance have been established at
March 31, 2000 and March 31, 1999, respectively.
The benefits of the net operating and the acquired tax loss carry forwards
of $1,489,000 and $1,106,000, respectively, expire in various years beginning in
2019. Due to the Company's acquisition of Desktop (see Note 2), the Company's
ability to utilize Desktop's acquired net operating loss carry forward of
$1,106,000 will be limited by IRC Section 382 to $113,000 per year.
NOTE 7 -- DEBT
On March 17, 2000 the Company signed a $1,000,000 line of credit agreement
with First Community Bank of America. The total balance outstanding on this
line of credit amounts to $339,078 as of March 31, 2000. Terms of the agreement
provide for interest to be charged at 1% over the rate of interest (6.3% as of
March 31, 2000) paid on the Company's $1,000,000 certificate of deposit used to
collateralize the loan facility. The balance on the line of credit becomes due
on October 1, 2000. Additionally, in March 2000, the Company entered into a
line of credit with Merrill
F-15
<PAGE>
Lynch. The line of credit enables the Company to borrow a maximum of
$5,000,000, with borrowings limited to 80% of eligible accounts receivable and
50% of inventory (capped at $1,000,000). As of March 31, 2000, the outstanding
principal on the note was $2,052,017 and approximately $1,900,000 was available
for borrowing. Terms of the agreement provide for interest to be charged at the
rate of 30 day commercial paper, plus 2.5% (8.58% as of March 31, 2000). The
Merrill Lynch line of credit expires February 28, 2001, and is subject to
renewal annually thereafter subject to Merrill Lynch's consent. Under the terms
of the Merrill Lynch agreement, DrugMax must maintain certain financial ratio
covenants in addition to others of the type customarily required by lenders for
similar facilities.
The Company also has a note payable which bears interest at 9.63% with a
remaining balance of $4,872 at March 31, 2000. This note is due on June 5,
2000.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has operating leases for facilities that expire at various
dates through 2003. Certain leases provide an option to extend the lease term.
Certain leases provide for payment by the Company of any increases in property
taxes, insurance, and common area maintenance over a base amount and others
provide for payment of all property taxes and insurance by the Company.
Until March 31, 2000, Desktop leased office space in Dallas, Texas.
Desktop has not renewed the lease, and pays $12,000 per month for the office
space on a month-to-month basis. Desktop also leases various computer equipment
with original lease terms ranging from three to five years. These leases expire
at various dates through 2003. The monthly equipment rental expense is
approximately $9,100.
Future minimum lease payments, by year and in aggregate under
non-cancelable operating leases, were the following at March 31, 2000:
Year Ending March 31
--------------------
2001 .............................. $ 174,233
2002 .............................. 131,148
2003 .............................. 62,766
---------
Total minimum lease payments .............. $ 368,147
=========
Total rent expense for the periods ended March 31, 2000 and 1999 was
approximately $29,000 and $0 respectively.
Litigation
The Company is, from time to time, involved in litigation relating to
claims arising out of its operations in the ordinary course of business. The
Company believes that none of the claims that were outstanding as of March 31,
2000 should have a material adverse impact on its financial position or results
of operations.
NOTE 9 -- STOCK AND BENEFIT PLANS
The information regarding the Company's shares of common stock has been
adjusted to give effect to (i) the one-for-fifty reverse split of the Company's
common stock effected in March 1999, (ii) the two-for-one stock split in the
form of a stock dividend effected in April 1999, and (iii) a one-for-two
reverse stock split in October 1999.
Offering
On November 22, 1999, the Company successfully completed a public offering
the ("Offering") of 1,380,000 shares of common stock at a price of $10.00 per
share. Gross proceeds of the Offering were
F-16
<PAGE>
$13.8 million and net offering proceeds received by the Company were
approximately $11.9 million, after payment of underwriting discounts and
commissions and other offering expenses totaling $1,950,747.
Warrants
In connection with the Offering, and as additional compensation to the
underwriters, the Company issued warrants for the purchase of 150,000 shares of
common stock. The warrants will be exercisable, in whole or in part, between
the first and fifth years, at an exercise price of $16.50. The underwriters
shall have the option to require the Company to register the warrants and/or
the common stock underlying the warrants. The warrants had an estimated fair
market value of $1,038,000 on the date of issuance, which was determined under
the Black-Scholes method, and were included in additional paid in capital along
with other issuance costs of the Offering.
On January 23, 2000, the Company granted a director a three-year warrant
to purchase 200,000 shares of common stock at an exercise price of $16.40,
which is equal to the 30 day weighted average of the stock price from January
23, 2000 to February 22, 2000. The grant was made as a result of the director
acting as a guarantor of the $5,000,000 Merrill Lynch line of credit. The
warrants had an estimated fair value of $1,937,016, which was determined using
the Black-Scholes method.
On February 15, 2000, the Company entered into an Agreement with
Purchasepro.com, Inc. ("PPRO") wherein PPRO will design and develop a
"sell-side" private e-marketplace, powered by PPRO, labeled to include the
marks and logos of the Company. The custom e-marketplace will be utilized
within the Company's site. Upon satisfaction by PPRO of its obligations under
the agreement, PPRO's development and unlimited buyer license fee
for private e-Marketplace will be issued in the form of 200,000 of the
Company's warrants. Revenue sharing will take place on transactions and
subscriptions resulting from the Company's marketplace. The warrants shall be
exercisable, in whole or in part, during the term commencing on the date of
project completion (the "Initial Exercise Date"), and ending at 5:00 p.m.,
Pacific Standard Time, six months after the date of completion (the "Exercise
Period"), and shall be void thereafter. In consideration for the hosting,
archiving, maintenance and recurring customization of the private
e-Marketplace, the Company will guarantee PPRO at least $80,000 in annual
transaction revenue. The Company plans to use the sell-side e-marketplace to
primarily sell pharmaceuticals and dietary supplements as well as the value
added services from PPRO's preferred providers.
Stock Options
In August 1999, the Company's Board of Directors adopted a stock option
plan (the "Plan"), which was approved by the Company's shareholders at its
annual meeting in August 2000. The Plan provides for the grant of incentive and
nonqualified stock options to key employees, including officers and directors of
the Company. Under the provisions of the Plan, all options, except for options
granted to "greater-than-10%-stockholders," have an exercise price equal to the
fair market value on the date of the grant and expire ten years after the grant
date. The exercise price of options issued to "greater-than-10%-stockholders"
shall not be less than 110% of the fair market value of the common stock on the
date of the grant, and such options shall expire five years after the date of
the grant. At March 31, 2000, options to acquire up to 400,000 shares of common
stock may be granted pursuant to the Plan.
F-17
<PAGE>
Stock option activity is summarized as follows:
Number of Weighted Average
Shares Exercise Price
INCENTIVE AND NON-QUALIFIED STOCK OPTIONS ----------- -----------------
Outstanding March 31, 1999 ............. -- $ --
Granted ............................... 261,800 13.08
Exercised ............................. -- --
Forfeited ............................. -- --
------- ------
Outstanding March 31, 2000 ............. 261,800 $ 13.08
======= =======
Outstanding options under the Plan vest over a one- to three-year period.
As of March 31, 2000 no options were exercisable. The following is a summary of
stock options outstanding and exercisable as of March 31, 2000:
Weighted Average
Exercise Options Remaining Options
Price Outstanding Contractual Life (Years) Exercisable
------------- ------------- -------------------------- ------------
$10.00 15,000 9.58 --
13.00 195,300 9.75 --
14.30 50,000 4.75 --
14.37 1,500 9.83 --
------- -----
261,800 --
======= =====
Non-exercisable options as of March 31, 2000 become exercisable as
follows:
2001 ......... 111,932
2002 ......... 74,934
2003 ......... 74,934
-------
261,800
=======
The Company applies APB No. 25 in accounting for its warrants and stock
options. Accordingly, no compensation cost has been recognized for the warrants
and options granted to employees and directors because the exercise price
equaled or exceeded the fair market value on the date of the grant. Had
compensation cost been determined on the basis of fair value pursuant to SFAS
No. 123, net loss and net loss per share would have increased as follows for the
year ended March 31, 2000:
Net Loss
Net Loss Per Share
---------------- ----------
As reported ......... $ (1,988,944) $ (0.51)
Pro forma ........... $ (2,484,319) $ (0.64)
The weighted-average fair value of options granted for the year ending
March 31, 2000 was $11.27. The estimated fair value for the above options and
warrants was determined using the Black-Scholes method with the following
weighted-average assumptions used for grants in 2000:
F-18
<PAGE>
Dividend yield .................. 0.00%
Option term ..................... 5-10 years
Warrant term .................... 3 years
Expected volatility ............. 97%
Risk-free interest rate ......... 6.27%-6.56%
NOTE 10 -- RELATED PARTY TRANSACTIONS
In May 1999, 21st Century Healthcare Fund, LLC, an affiliate of a director
of the Company, Jugal K. Taneja, loaned $50,000 to the Company for the purpose
of assisting the Company with its working capital needs. The principal sum,
together with interest on the unpaid principal balance at an annual rate equal
to prime plus one percent, was due and payable on demand at any time following
the earlier to occur of either (i) a public offering of the Company's common
stock, or (ii) December 31, 1999. This note has since been repaid.
In July 1999, Stephen M. Watters, the President of the Company, loaned
$70,000 to the Company for the purpose of assisting the Company with its
working capital needs. The principal sum, together with interest on the unpaid
principal balance at an annual rate equal to prime plus one percent, was due
and payable on demand at any time following the earlier to occur of either (i)
a public offering of the Company's common stock, or (ii) December 31, 1999.
This note has since been repaid.
In August 1999, Carnegie Capital, Ltd., an affiliate of a director of the
Company, Jugal K. Taneja, loaned $20,000 to the Company for the purpose of
assisting the Company with its working capital needs. The principal sum,
together with interest on the unpaid principal balance at an annual rate equal
to prime plus one percent, was due and payable on demand at any time following
the earlier to occur of either (i) a public offering of the Company's common
stock, or (ii) December 31, 1999. This note has since been repaid.
In August 1999, a director of the Company, Howard Howell D.D.S., loaned
$50,000 to the Company for the purpose of assisting the Company with its
working capital needs. The principal sum, together with interest on the unpaid
principal balance at an annual rate equal to prime plus one percent, was due
and payable on demand at any time following the earlier to occur of either (i)
a public offering of the Company's common stock, or (ii) December 31, 1999.
This note has since been repaid.
Innovative Health Products, Inc. ("Innovative"), owned by Dynamic, is the
supplier of substantially all of the manufactured dietary supplements and
health and beauty care products sold by the Company. There presently is an
agreement between the Company and Innovative for the fulfillment of the
Company's customer orders. Purchases of all products by us from Innovative were
approximately $580,000 and $24,000 for the periods ending March 31, 2000 and
1999, respectively. Dynamic is approximately 56% beneficially owned by
Jugal K. Taneja, a director of the Company.
In August 1999, Stephen M. Watters, the President of the Company, loaned
$10,000 to the Company for the purpose of assisting the Company with its
working capital needs. The principal sum, together with interest on the unpaid
principal balance at an annual rate equal to prime plus one percent, was due
and payable on demand at any time following the earlier to occur of either (i)
a public offering of the Company's common stock, or (ii) December 31, 1999.
This note has since been repaid.
NOTE 11 -- SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of
Enterprise and Related Information," which established standards for reporting
information about a Company's operating segments. Operating segments are
defined as components of an enterprise for which separate financial information
is available that is evaluated on a regular basis by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
to an individual segment and in assessing performance of the Segment.
F-19
<PAGE>
During the year ended March 31, 2000, the Company operated two industry
segments: wholesale distribution and computer software development. For the
fiscal year ended March 31, 1999, the Company operated only in the wholesale
distribution segment. The following table reports financial data that
management uses in its business segment analysis. Amounts shown below are as of
and for the year ended March 31, 2000.
Revenue
Distribution ........................................... $ 21,048,147
Software Development ................................... 2,400
------------
Total ................................................. $ 21,050,547
============
Gross Profit ............................................
Distribution ........................................... $ 141,376
Software Development ................................... 2,400
------------
Total ................................................. $ 143,776
============
Operating loss ..........................................
Distribution ........................................... $ (1,898,580)
Software Development ................................... (34,297)
------------
Total ................................................. $ (1,932,877)
============
Assets ..................................................
Distribution ........................................... $ 38,408,017
Software Development ................................... 105,895
------------
Total ................................................. $ 38,513,912
============
Capital expenditures ....................................
Distribution ........................................... $ 182,634
Software Development ................................... --
------------
Total ................................................. $ 182,634
============
NOTE 12 -- SUBSEQUENT EVENTS
On July 7, 2000, the Company entered into a consulting agreement with Marc
Mazur Consulting, Inc. Upon satisfaction by Marc Mazur Consulting, Inc. of its
obligations under the agreement, the Company will grant to Marc Mazur
Consulting, Inc. warrants to purchase 200,000 shares of common stock with an
exercise price of $10.00 per share. Upon issuance, these warrants will be
immediately exercisable.
In August 2000, the audited amount of Valley stockholders' equity as of
April 19, 2000 was determined to be $400,667, which was $141,160 less than the
threshold amount of $541,827 required by the agreement. Therefore, 9,411 of the
holdback shares will be returned to the Company. After consideration of the
return of the holdback shares, a total of 217,255 shares at $10.125 per share
were issued for the acquisition.
On September 13, 2000, the Company entered into a letter of intent to
purchase substantially all of the assets of Penner & Welsch, Inc. ("P&W"), a
wholesale distributor of pharmaceuticals, over-the-counter products and health
and beauty care products, headquartered in New Orleans, LA. Also on that date,
P&W filed a voluntary petition for Chapter 11 relief under the United States
Bankruptcy Code. The case is pending in the United States Bankruptcy Court for
the Eastern District of Louisiana. Pursuant to the letter of intent, the Company
will work with P&W, on an exclusive basis, to formulate a bankruptcy
reorganization plan, pursuant to which the Company offered to purchase, for
$750,000 worth of restricted common stock, all of P&W's assets and/or equity,
without its liabilities, while keeping P&W's customers in continuous service. In
addition, on September 13, 2000, the Company entered into a management agreement
with P&W, pursuant to which it will manage the day-to-day operations of P&W, in
exchange for a management fee equal to three percent of the gross revenues of
P&W each month, with an additional 1% available in months in which certain
operating measures are achieved.
On September 13, 2000, the Company entered into a financing and security
agreement with P&W, pursuant to which the Company has agreed to provide P&W with
a secured revolving line of credit for the sole purpose of purchasing inventory
from the Company, up to an aggregate amount of $2.5 million as may be requested
by P&W and as may be allowed by the Company in its sole discretion. The line of
credit is secured by a second lien on substantially all of the assets of P&W,
second only to P&W's primary banking facility, as well as real estate owned by
an affiliate of P&W. On September 14, 2000, the Bankruptcy Court entered an
emergency interim order approving the management agreement and financing and
security agreement. However, the bankruptcy plan, including the proposed
acquisition, management agreement and financing and security agreement, are
still subject to the final approval of the United States Bankruptcy Court for
the Eastern District of Louisiana, and the Company cannot guarantee that the
transaction will be completed or, if completed, that the Company will
successfully assimilate the additional personnel, operations, acquired
technology and products of P&W into the business, or retain key personnel and
customers.
F-20
<PAGE>
On or about September 19, 2000, the Company informed the selling
shareholders of Desktop that 20,000 shares held under escrow, pursuant to the
acquisition agreement, would not be released as contemplated in the initial
purchase price. Upon final receipt of these shares from the escrow agent,
management anticipates reducing the purchased goodwill by approximately
$329,000.
On October 24, 2000, the Company obtained from Mellon Bank, N.A. ("Mellon")
a line of credit and a $2 million term loan to refinance the prior bank
indebtedness, to provide additional working capital, and for other general
corporate purposes. The new line of credit enables the Company to borrow a
maximum of $15 million, with borrowings limited to 85% of eligible accounts
receivable and 65% of eligible inventory. The term loan is payable in monthly
principal installments of $55,556 commencing on December 1, 2000, and in one
final payment of the remaining principal balance plus all accrued and unpaid
interest thereon on October 24, 2003. The term loan bears interest, payable
monthly, at 0.75% per annum over the base rate, which is the higher of Mellon's
prime rate or the effective federal funds rate plus 0.50% per annum. The
revolving credit facility will bear interest at the floating rate of 0.25% per
annum above the base rate. After the Company delivers the audited consolidated
financial statements for the fiscal year ending March 31, 2001 to Mellon, the
applicable margin over the base rate may change on an annual basis depending on
the ratio of funded debt to EBITDA. At the Company's option, interest may
instead be paid at a LIBOR rate plus an applicable margin, which also varies on
the ratio of funded debt to EBITDA. Under the terms of the agreement, DrugMax is
prohibited from paying dividends, and it must maintain certain financial ratio
covenants in addition to others of the type customarily required by lenders for
similar facilities. On October 27, 2000, proceeds were used to repay the Merrill
Lynch Financial and National City Bank credit facilities, aggregating
approximately $8.9 million, and approximately $5.5 million was available for
borrowing.
NOTE 13 -- RESTATEMENT OF 2000 CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the issuance of the 2000 consolidated financial statements,
management of the Company determined that a clerical error had been made in the
computation of the weighted average shares outstanding and the loss per share.
Accordingly, the accompanying 2000 consolidated financial statements have been
restated to correct this clerical error.
The effects of the restatement are as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
March 31, 2000 March 31, 2000
As Previously Reported As Restated
------------------------ -------------------
<S> <C> <C>
Weighted average shares outstanding ......... 2,102,922 3,875,445
Loss per share .............................. $ (.95) $ (.51)
</TABLE>
F-21
<PAGE>
Financial Statements of Valley Drug Company
Independent Auditors' Report
To the Board of Directors
Valley Drug Company
Youngstown, Ohio
We have audited the accompanying balance sheets of Valley Drug Company as of
December 31, 1999, 1998 and 1997, and the related statements of operations,
stockholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valley Drug Company as of
December 31, 1999, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
BRIMMER, BUREK & KEELAN LLP
Certified Public Accountants
Tampa, Florida
April 28, 2000
F-22
<PAGE>
VALLEY DRUG COMPANY
BALANCE SHEETS
DECEMBER 31, 1999, 1998, 1997
ASSETS
1999 1998 1997
---------- ---------- ----------
Current assets
Cash $ 502 $ 2,137,036 $ 1,459,841
Accounts receivable, net 2,701,754 2,951,469 3,250,507
Inventory 6,339,119 5,994,546 6,350,216
Prepaid and other current assets 21,125 23,786 22,966
---------- ----------- -----------
Total current assets 9,062,500 11,106,837 11,083,530
Property, plant and equipment - net 66,754 23,362 14,649
Notes receivable -- -- 119,542
Stockholder note receivable 70,000 52,000 --
Non-current accounts receivable 254,792 438,092 347,201
Other non-current assets 113,414 990 48,684
----------- ----------- -----------
Total assets $ 9,567,460 $11,621,281 $11,613,606
=========== =========== ===========
F-23
<PAGE>
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------- -------------
<S> <C> <C> <C>
Current liabilities
Line of credit $4,166,000 $ -- $ --
Current portion long-term debt 236,151 1,218,834 1,218,834
Bank overdraft 517,336 -- --
Accounts payable 2,385,618 2,835,381 2,521,603
Accrued expenses 145,190 121,040 235,394
---------- ----------- -----------
Total current liabilities 7,450,295 4,175,255 3,975,831
Long-term debt 1,585,517 -- --
---------- ----------- -----------
Total liabilities 9,035,812 4,175,255 3,975,831
Shareholders' equity
Preferred stock, no par; 250 shares authorized;
0 shares issued and outstanding -- -- --
Common stock, no par; 500 shares authorized;
100 shares issued and outstanding, at
December 31, 1999, 200 shares issued and
outstanding at December 31, 1998 and 1997 -- 100,000 100,000
Additional paid in capital -- -- --
Treasury stock -- (1,951,470) (1,951,470)
Retained earnings 531,648 9,297,496 9,489,245
---------- ----------- -----------
Total shareholders' equity 531,648 7,446,026 7,437,775
---------- ----------- -----------
Total liabilities and
Shareholders' equity $9,567,460 $11,621,281 $11,413,606
========== =========== ===========
</TABLE>
Please read accompanying notes
F-24
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF OPERATIONS
DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------ ------------
<S> <C> <C> <C>
Sales $ 50,572,187 $47,040,482 $48,124,876
Cost of good sold 48,037,331 44,613,313 45,156,477
------------ ----------- -----------
Gross Profit 2,534,856 2,427,169 2,968,399
Operating expenses
Depreciation 11,963 5,278 2,955
General and administrative 1,726,029 1,573,291 1,636,999
------------ ----------- -----------
Total operating expenses 1,737,992 1,578,569 1,639,954
------------ ----------- -----------
Operating income 796,864 848,600 1,328,445
Other income (expense)
Interest income 13,113 97,946 99,181
Interest expense (565,371) (109,695) (109,696)
------------ ----------- -----------
Total other income (expense) (552,258) (11,749) (10,515)
------------ ----------- -----------
Net income $ 244,606 $ 836,851 $ 1,317,930
============ =========== ===========
Basic and diluted income per share $ 2,446.06 $ 4,184.26 $ 6,589.65
============ =========== ===========
Weighted-average shares of
common stock outstanding 100 200 200
============ =========== ===========
</TABLE>
Please read accompanying notes.
F-25
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------------- ------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Balance at 12/31/96 200 $ 100,000 -- $ --
Net income -- -- -- --
Shareholder distributions -- -- -- --
--------- --------- ------- -------------
Balance at 12/31/97 200 100,000 -- --
Net income -- -- -- --
Shareholder distributions -- -- -- --
--------- --------- ------- -------------
Balance at 12/31/98 200 100,000 -- --
Net income -- -- -- --
Shareholder distributions -- -- -- --
Purchase and retirement
of 200 shares (200) (100,000) -- --
Issuance of 100 shares 100 -- -- --
Retirement of 139 shares -- -- -- --
--------- --------- ------- -------------
Balance 12/31/99 100 $ -- -- $ --
========= ========= ======= =============
</TABLE>
F-26
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
DECEMBER 31, 1999, 1998, 1997
TREASURY STOCK
--------------------------------------
RETAINED NUMBER OF
EARNINGS SHARES AMOUNT TOTAL
----------- ---------- ------------ ------------
$ 9,151,315 139 $(1,951,470) $ 7,299,845
1,317,930 -- -- 1,317,930
(980,000) -- -- (980,000)
----------- --------- ----------- -----------
9,489,245 139 (1,951,470) 7,637,775
836,851 -- -- 836,851
(1,028,600) -- -- (1,028,600)
----------- --------- ----------- -----------
9,297,496 139 (1,951,470) 7,446,026
244,606 -- -- 244,606
(7,000) -- -- (7,000)
(7,051,984) -- -- (7,151,984)
----------- --------- ----------- -----------
(1,951,470) (139) 1,951,470 --
----------- --------- ----------- -----------
$ 531,648 -- $ -- $ 531,648
=========== ========= =========== ===========
Please read accompanying notes.
F-27
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1999, 1998, 1997
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 244,606 $ 836,851 $1,317,930
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 11,963 5,278 2,955
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 41,100 208,147 (605,288)
Inventory (344,573) 355,670 328,199
Other current assets 2,661 (820) 6,380
Other assets (112,424) 47,694 (48,259)
Increase (decrease) in:
Accounts payable 67,572 313,778 10,022
Accrued expenses 24,150 (114,354) 65,841
----------- ----------- ----------
Net cash provided by operating activities (64,945) 1,652,244 1,077,780
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (55,355) (13,991) --
Notes receivable acquired (70,000) -- (81,129)
Payments received on notes 52,000 67,542 102,302
----------- ----------- ----------
Net cash provided by (used in) investing activities (73,355) 53,551 21,173
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 4,166,000 -- --
Proceeds from issuance of debt 2,000,000 -- --
Payments on long-term debt (1,397,166) -- --
Purchase and retirement of common stock (6,760,068) -- --
Distribution to shareholders (7,000) (1,028,600) (980,000)
----------- ----------- ----------
Net cash (used in) financing activities (1,998,234) (1,028,600) (980,000)
----------- ----------- ----------
Net increase (decrease) in cash (2,136,534) 677,195 118,953
Cash at beginning of year 2,137,036 1,459,841 1,340,888
----------- ----------- ----------
Cash at end of year $ 502 $ 2,137,036 $1,459,841
=========== =========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 565,371 $ 109,695 $ 109,695
=========== =========== ==========
</TABLE>
Please read accompanying notes.
F-28
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Valley Drug Company (the Company) was incorporated in 1983 as an Ohio
corporation. The Company is a wholesale distributor of pharmaceuticals, over the
counter drugs, and health and beauty care products throughout the United States.
The Company sells primarily to independent retail and regional chain owned drug
stores.
The Company was privately owned until April 19, 2000 and had elected with the
consent of its shareholders to be taxed as an S corporation. On April 19, 2000,
the Company executed an agreement and plan of reorganization with DrugMax.com,
Inc. ("DrugMax") whereby all of the issued and outstanding capital stock of the
Company was exchanged for shares of DrugMax (Note 7). As a result of the
exchange, the Company became a wholly owned subsidiary of DrugMax.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies used in preparing the
accompanying financial statements follows:
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Accounts receivable trade $3,061,342 $3,197,900 $3,528,881
Allowance for doubtful accounts (359,588) (246,431) (278,374)
---------- ---------- ----------
Total accounts receivable $2,701,754 $2,951,469 $3,250,507
========== ========== ==========
</TABLE>
F-29
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Depreciation is provided for using the straight-line method, in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives ranging from three to seven years.
Property and equipment consisted of the following:
1999 1998 1997
---------- ---------- ----------
Furniture and fixtures $ 422,702 $ 414,911 $ 414,911
Leasehold improvements 41,970 28,078 28,078
Equipment 47,663 13,991 --
--------- --------- ---------
512,335 456,980 442,989
Accumulated depreciation (445,581) (433,618) (428,340)
--------- --------- ---------
$ 66,754 $ 23,362 $ 14,649
========= ========= =========
IMPAIRMENT OF ASSETS
The Company's policy is to evaluate whether there has been a permanent
impairment in the value of long-lived assets, certain identifiable intangibles
and goodwill when certain events have taken place that indicate that the
remaining balance may not be recoverable. When factors indicate that the
intangible assets should be evaluated for possible impairment, the Company uses
an estimate of related undiscounted future cash flows. There have been no
impairment losses in 1999, 1998 or 1997.
INCOME TAXES
The Company has elected under the Internal Revenue Code to be taxed as an S
Corporation. Under those provisions, the Company does not pay federal corporate
income taxes on its taxable income. Instead, the shareholders are liable for
individual federal and state income taxes on their proportionate shares of the
Company's taxable income.
CAPITALIZATION
The Company is authorized is issue 500 shares of common stock, without par value
and 250 shares of preferred stock without par value.
COMMON STOCK -The holders of common shares have the sole and exclusive
voting power on all matters to be presented to the shareholders. The
following shares were issued and outstanding at December 31
F-30
<PAGE>
1999 1998 1997
---- ---- ----
Issued 500 500 500
Outstanding 100 200 200
PREFERRED STOCK - The Company's directors may adopt amendments to the
Articles of Incorporation to create one or more series of preferred shares.
The shares of each series to have such designations, privileges,
restrictions and qualifications as determined by the directors. At December
31, 1998 and 1997, none of the preferred shares had been given any
designations, privileges, restrictions or qualifications and no preferred
shares had been issued. The shares were cancelled in January 1999.
REVENUE RECOGNITION
Revenues are recognized when the merchandise is shipped to the customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, however,
management does not believe these differences would have a material effect on
the operating results.
EARNINGS PER COMMON SHARE
Earnings per common share have been computed based upon the weighted-average
number of shares outstanding during the period.
PROPERTY LEASES
The Company leases a property in Youngstown, Ohio that is being utilized by the
Company for offices, warehousing, and shipping for its distribution operations,
consisting of approximately 30,000 square feet. The offices are leased pursuant
to a ten-year lease that expires on December 30, 2008. The Company has an option
to continue the lease on a month to month basis. The rental under the lease is
$6,000 per month. Rent expense was $72,000 for each year presented.
Future minimum lease payments, by year in aggregate under non-cancelable
operating leases consist of the following at December 31, 1999:
YEAR ENDED DECEMBER 31,
----------------------
2001 $ 72,000
2002 72,000
2003 72,000
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company, in estimating its fair value disclosures for financial instruments,
uses the following methods and assumptions:
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES: The
carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses approximate their fair
value due to their relatively short maturity.
LONG-TERM OBLIGATIONS: The fair value of the Company's fixed-rate long-term
obligations is estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar
F-31
<PAGE>
types of borrowing arrangements. At December 31, 1999, 1998 and 1997, the
fair value of the Company's long-term obligations approximated its carrying
value.
CREDIT LINES PAYABLE: The carrying amount of the Company's credit lines
payable approximates fair market value since the interest rate on these
instruments changes with market interest rates.
NOTE 2 - RELATED PARTY TRANSACTIONS
LEASE
The Company leases the building it operates in from the former shareholder for a
period of eight years on a triple net basis at the rate of $6,000 per month.
CUSTOMERS CONTROLLED BY EMPLOYEE
The son of the former owner is currently an employee and owns three customers of
the Company. The sales to those customers are at a price within a maximum of 1/2
percent of the price offered by the Company to similar retail accounts on RX and
OTC items. The sales of those customers for the years ended December 31, 1999,
1998 and 1997 were $3,760,000, $3,351,000 and $2,966,000 respectively.
LOAN GUARANTEES
The revolving line of credit and term loans in the amounts of $4,500,000 and
$2,000,000, respectively are personally guaranteed by the new owners of the
Company.
PROFESSIONAL PHARMACY SOLUTIONS, LLC
The two shareholders of the Company and the VP of Sales own Professional
Pharmacy Solutions (PPS), a pharmacy management company. PPS manages and
operates pharmacies owned by a local hospital. The Company sells pharmaceuticals
to PPS on a cost plus basis. The Company had a receivable of approximately
$125,000 at December 31, 1999. Sales to the pharmacies operated by PPS totaled
approximately $700,000.
NOTE 3 - CONCENTRATIONS OF CREDIT RISK
CASH IN BANK
The Company maintains its checking account in one commercial bank. Cash in this
checking account at times exceeded the $100,000 Federal Deposit Insurance
Corporation's maximum insured balance coverage.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Shareholder loan - Monthly payments
of interest of 9%, due on demand $ -- $ 1,218,834 $ 1,218,834
Bank Term Loan- Monthly
payments of $32,105 including
principal and interest of 8.8% with
a maturity date of January 4, 2002 -
subject to the same covenants,
collateral and guarantees as the
line of credit (Note 4) 1,821,668 -- --
Less current portion of long-term debt (236,151) (1,218,834) (1,218,834)
----------- ----------- -----------
Total long-term debt $1,585,517 $ -- $ --
=========== =========== ===========
</TABLE>
F-32
<PAGE>
The schedule of maturities of long-term debt in the future periods is as
follows:
2000 $ 236,151
2001 257,792
2002 1,327,725
----------
Total $1,821,668
==========
NOTE 5 - LINE OF CREDIT
In January 1999, the Company established a $ 4.5 million revolving credit
facility scheduled to mature in January 2001. The credit available to the
Company is based on a percentage of eligible accounts receivable and inventory.
The facility imposes financial covenants on tangible net worth, leverage, and a
debt service ratio. At December 31, 1999, the Company was not in compliance with
the financial covenants. The bank waived the covenants in the March 1999 letter
to the Company. Minimum borrowing under the agreement is $1,000. The agreement
places limitations on disposition of assets and debt funding to transactions
within the normal course of business and restricts the payment of dividends to
any shareholder of record and any class of common stock during the term of the
agreement. Borrowings accrue interest at 11% and are secured by all assets of
the Company. The shareholders have personally guaranteed the loan. At December
31, 1999, the Company had borrowed $ 4,166,000 under this facility.
The credit line payable is included with current liabilities instead of long-
term liabilities as management believes that this presentation better reflects
the utility of the current assets as the source of repayment for the credit line
payable.
NOTE 6 - YEAR 2000 ISSUE
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company will not be fully determinable until the Year
2000 and thereafter. The Company's software packages and all of the hardware
associated with its operations are Year 2000 compliant. The Company is currently
requesting that all suppliers supply certification statements that comply with
the Year 2000 requirements. If the Year 2000 modifications are not properly
completed either by the Company or entities with which the Company conducts
business, the Company's revenues and financial condition could be adversely
impacted.
NOTE 7 - SUBSEQUENT EVENT
SALE OF COMPANY
On April 19, 2000, the Company was sold to DrugMax.com, Inc. by an exchange of
all of the outstanding shares of the Company for $1,700,000 and 226,666 common
shares of DrugMax.com, Inc. 22,666 of the total shares being received are
subject to a holdback provision. The holdback provision provides for an
adjustment of the sale price based upon an audit of the balance sheet of the
Company as of April 19, 2000. If the audit results in a shareholders equity less
than an agreed upon amount, the sale price is subject to a corresponding
reduction and to be subtracted from the holdback shares.
NOTE 8 - PROFIT SHARING PLAN
The Company maintains a qualified profit sharing plan for the benefit of its
F-33
<PAGE>
employees. The plan provides for discretionary contributions to the plan each
year and covers employees over the age of 21 with at least one year of service.
Vesting is immediate upon participation in the plan. The Company has made a
contribution to the plan for the years ended December 31, 1999, 1998 and 1997 in
the amounts of $30,000, $-0- and $30,000, respectively.
NOTE 9 - CHANGE IN OWNERSHIP AND REFINANCING
On January 4, 1999 the ownership of the Company changed whereby the previous
owners' stock was redeemed by the Company and the new owners were issued no par
common shares so that they owned 100% of the outstanding shares. Simultaneous
with the redemption, the new owner purchased .61 shares of the common stock from
the previous owners. After the redemption and issuance of new shares to the new
owner, 50% of the new owner's shares were sold to another unrelated individual.
In addition, the previously held treasury shares and the newly redeemed shares
were canceled by the Company and the previous 500 no par common shares were
canceled.
The Company obtained a revolving line of credit with a limit of $4,500,000 and
an installment loan of $2,000,000 to obtain the funds to redeem the previous
shareholders stock for the approximate amount of $7 million. In addition to the
cash payment for their stock, they received an assignment of certain customer
receivables totaling $391,917 and their shareholder loan of $1,218,834 was paid
in full. The customer receivables were for three customers owned by the son of
the former owners who is also an employee. As part of the redemption agreement,
the former shareholder signed a covenant not to compete and an employment
agreement. The employment agreement is for $12,000 per year for 63 months. The
former shareholder owns the building in which the Company operates and a lease
was executed for a term of 96 months on triple net terms at an annual rate of
$72,000.
The son of the former owner also executed an employment contract for a period of
96 months at an annual compensation of $48,000 and a covenant not to compete
that runs concurrently with the employment agreement.
NOTE 10 - SUPPLEMENTAL CASH FLOW DISCLOSURE
The statements of cash flows are supplemented by the following non-cash
disclosures.
CHANGE IN OWNERSHIP
1999
-----------
Total consideration $ 7,151,985
Assignment of accounts receivable (391,917)
-----------
Net cash paid $ 6,760,068
===========
The Company retired 139 shares of treasury stock during 1999 with a book value
of $1,951,470.
F-34
<PAGE>
Consolidated Financial Statements of Desktop Corporation and Subsidiary
Independent Auditors' Report
To the Board of Directors
Desktop Corporation and Subsidiary
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Desktop
Corporation and Subsidiary as of March 31, 2000, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated 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 consolidated
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 consolidated financial position of Desktop
Corporation and Subsidiary as of March 31, 2000, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
BRIMMER, BUREK & KEELAN LLP
/s/ BRIMMER, BUREK & KEELAN LLP
-------------------------------
Certified Public Accountants
Tampa, Florida
June 1, 2000
F-35
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000, 1999, 1998
ASSETS
2000 1999 1998
-------- ---------- --------
Current assets
Cash $ 6,578 $ 9,658 $130,576
Accounts receivable - 99% of the
balance at March 31, 2000 is
due from related parties 872,368 705,400 460,272
-------- ---------- --------
Total current assets 878,946 715,058 590,848
-------- ---------- --------
Property and equipment
Software development costs -- 985,748 --
Furniture & fixtures 36,257 30,710 25,670
Computer equipment 125,869 107,678 99,010
-------- ---------- --------
162,126 1,124,136 124,680
Less: accumulated depreciation (83,363) (62,639) (29,339)
-------- ---------- --------
Total property and equipment 78,763 1,061,497 95,341
Other assets
Organizational costs, net 572 2,862 5,152
-------- ---------- --------
Total assets $958,281 $1,779,417 $691,341
======== ========== ========
Please read accompanying notes.
F-36
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000, 1999, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
2000 1999 1998
----------- ---------- --------
Current liabilities
Accounts payable $ 216,024 $ 71,257 $ 6,982
Accrued liabilities 140,122 33,492 52,707
Related party obligations 1,367,074 270,000 75,000
Deferred tax 254,879 204,218 137,826
----------- ---------- --------
Total current liabilities 1,978,099 578,967 272,515
----------- ---------- --------
Long-term liabilities
Deferred tax 3,626 334,326 --
----------- ---------- --------
Total liabilities 1,981,725 913,293 272 515
----------- ---------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Shareholders' equity (deficit)
Preferred stock, Series A, $10 par value;
30,000 shares authorized, 15,000
shares issued and outstanding 150,000 150,000 150,000
Common stock, no par;
100,000 shares authorized,
10,000 shares issued and outstanding 10,000 10,000 10,000
Retained earnings (deficit) (1,183,444) 706,124 258,826
----------- ---------- --------
Total shareholders' equity (deficit) (1,023,444) 866,124 418,826
----------- ---------- --------
Total liabilities and shareholders'
equity (deficit) $ 958,281 $1,779,417 $691,341
=========== ========== ========
Please read accompanying notes.
F-37
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000, 1999, 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue - related party - 93% in
2000, 0% in 1999 and 1998 $ 2,376,906 $ 1,881,832 $ 1,542,095
Cost of sales 18,815 -- --
----------- ----------- -----------
Gross profit 2,358,091 1,881,832 1,542,095
Operating expenses
Depreciation and amortization 31,228 35,589 22,464
Bad debt expense 80,000 -- --
Equipment rent 80,002 34,929 5,863
Facility rent 121,036 61,479 53,672
Insurance 10,905 37,614 31,161
Management fees (nonrecurring) 136,256 -- --
Payroll and related expenses 1,492,037 601,227 988,053
Telephone 54,386 25,661 16,130
Travel 30,980 41,490 18,932
General & administrative expenses 237,559 98,092 77,707
Research & development 1,803,633 93,602 210,940
----------- ----------- -----------
Total operating expenses 4,078,022 1,029,683 1,424,922
----------- ----------- -----------
Income (loss) from operations (1,719,931) 852,149 117,173
----------- ----------- -----------
Other income (expenses)
Miscellaneous income - related party -
74% in 2000, 10% in 1999 and 1998 328,982 16,037 2,403
Interest income 54 2,455 --
Interest expense (50,996) (7,587) (6,180)
Gain on sale of investment
to related party 470,000 -- --
Equity in loss of VetMall (1,182,969) -- --
----------- ----------- -----------
Total other income (expenses) (434,929) 10,905 (3,777)
----------- ----------- -----------
Net income (loss) before income
tax provision (benefit) (2,154,860) 863,054 113,396
Income tax provision (benefit) (280,042) 400,731 31,760
----------- ----------- -----------
Net income (loss) $(1,874,818) $ 462,323 $ 81,636
=========== =========== ===========
</TABLE>
Please read accompanying notes.
F-38
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2000, 1999, 1998
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) per share of
common stock $(187.48) $ 46.23 $ 8.16
======== ======== ========
Weighted average shares of
common stock outstanding 10,000 10,000 10,000
======== ======== ========
Fully diluted earnings per share $(187.48) $ 36.99 $ 6.53
======== ======== ========
Weighted average shares of common
stock outstanding assuming
conversion of preferred shares 10,000 12,499 12,499
======== ======== ========
</TABLE>
Please read accompanying notes.
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK SHAREHOLDERS'
------------------------- ----------------------- ADDITIONAL PAID RETAINED EQUITY
SHARES AMOUNT SHARES AMOUNT IN CAPITAL EARNINGS (DEFICIT) (DEFICIT)
----------- ------------ ---------- ----------- --------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance April 1, 1997 150,000 $ 150,000 10,000 $ 10,000 $ -- $ 189,440 $ 349,440
Preferred stock dividends -- -- -- -- -- (12,250) (12,250)
Net income -- -- -- -- -- 81,636 81,636
----------- ------------ ---------- ----------- --------------- ---------------- ------------
Balance March 31, 1998 150,000 150,000 10,000 10,000 -- 258,826 418,826
Preferred stock dividends -- -- -- -- -- (15,025) (15,025)
Net income -- -- -- -- -- 462,323 462,323
----------- ------------ ---------- ----------- --------------- ---------------- ------------
Balance March 31, 1999 150,000 150,000 10,000 10,000 -- 706,124 866,124
Preferred stock dividends -- -- -- -- -- (14,750) (14,750)
Net loss -- -- -- -- -- (1,874,818) (1,874,818)
----------- ------------ ---------- ----------- --------------- ---------------- ------------
Balance March 31, 2000 150,000 $ 150,000 10,000 $ 10,000 $ -- $ (1,183,444) $ (1,023,444)
----------- ------------ ---------- ----------- --------------- ---------------- ------------
</TABLE>
Please read accompanying notes.
F-39
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,874,818) $ 462,323 $ 81,636
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization expense 31,228 35,589 22,464
Equity in loss of VetMall 1,182,969 -- --
Capitalized software costs written off -
net of accumulated amortization 977,534 -- --
Gain on sale of investment to related party (470,000)
Changes in operating assets and liabilities:
(Increase) decrease:
Accounts receivable (1,349,937) (245,128) (137,752)
Increase (decrease):
Accounts payable 144,768 64,274 3,584
Accrued liabilities 106,632 (19,226) 52,154
Deferred tax liabilities (280,042) 400,731 30,327
----------- ----------- -----------
Net cash provided by (used in)
operating activities (1,531,666) 698,563 52,413
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (23,738) (13,708) (43,481)
Capitalization of software development costs -- (985,748) --
Investment in VetMall (10,000) -- --
Proceeds from sale of investment to related party 480,000 -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities 446,262 (999,456) (43,481)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party obligations, net 1,097,074 195,000 --
Proceeds from capital stock issued -- -- 10,000
Preferred stock dividends paid (14,750) (15,025) (12,250)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,082,324 179,975 (2,250)
----------- ----------- -----------
Net increase (decrease) in cash (3,080) (120,918) 6,682
Cash at beginning of year 9,658 130,576 123,894
----------- ----------- -----------
Cash at end of year $ 6,578 $ 9,658 $ 130,576
=========== =========== ===========
</TABLE>
Please read accompanying notes.
F-40
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Supplemental Disclosures:
Operating activities reflect the following:
Cash paid for interest $53,496 $ 7,587 $ 6,180
======= ======= =======
Income taxes $ -0- $ 1,433 $ -0-
======= ======= =======
</TABLE>
Please read accompanying notes.
F-41
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Desktop Corporation (the "Company") was founded in June 1995, as a Texas
Corporation. It is an Internet e-commerce solutions provider specializing in the
design, development and delivery of technology solutions by providing custom
programming services and web hosting services. Desktop Ventures, Inc. was formed
in June 1999, as a Texas corporation and as a wholly-owned subsidiary of the
Company.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of Desktop
Corporation and its wholly-owned subsidiary Desktop Ventures, Inc. Significant
intercompany balances and transactions have been eliminated in consolidation.
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 reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Management assesses accounts receivable, at least annually, to determine whether
an allowance for credit loss is warranted. At March 31, 2000, 1999 and 1998, no
allowance was considered necessary. At March 31, 2000, 99% of the balance of
accounts receivable was due from VetMall, Inc., a related company (see Note 3.)
INVESTMENTS
The Company owns 50% of the common stock of VetMall, Inc. ("VetMall"), a Florida
corporation, formed on March 7, 2000, and accounts for its investment using the
equity method. Under the equity method, the Company recognizes its share in the
net earnings or losses of VetMall as they occur rather than as distributions are
received. Distributions received are accounted for as a reduction of the
investment rather than as income. Losses from this investment have been offset
against the VetMall receivable. VetMall hosts an e-commerce web site which
provides a link between the consumer, the veterinarian and the distributor that
facilitates the sale of pet products.
REVENUE RECOGNITION
Revenue from consulting services is recognized when the services are performed.
Service revenues, primarily related to web hosting services, are recognized on a
straight-line basis over the contract period. Product revenue from software
sold, leased, or otherwise marketed is recognized when the product is delivered
and/or installed on the customer's equipment.
SOFTWARE DEVELOPED TO BE SOLD, LEASED, OR OTHERWISE MARKETED
Costs incurred in connection with development of software to be sold, leased, or
otherwise marketed are capitalized once the technological feasibility of
F-42
<PAGE>
significant features of the system has been established. Likewise, betterments
or improvements that significantly improve the marketability or extend the
estimated useful life of the system are capitalized. Other normal maintenance
and support costs are expensed as incurred.
Amortization of capitalized software development costs is recorded at the
greater of the amount computed by the straight-line method over the estimated
useful life of the software or the amount computed by using the ratio that
current gross revenues bear to the sum of estimated future gross revenues and
current gross revenues. As indicated in Note 2, it is reasonably possible that
estimates of anticipated future gross revenues, the remaining estimated economic
life of the product, or both could be revised significantly as additional
information becomes available from operations. As a result, the carrying amounts
of the capitalized software costs could be reduced materially.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), establishes standards for reporting comprehensive income
which is defined as the change in equity of an enterprise except those resulting
from stockholder transactions. All components of comprehensive income are
required to be reported in the income statement. The Company adopted this
Standard effective April 1, 1998. During fiscal 2000, 1999 and 1998, the Company
did not engage in any transactions required to be reported under this Standard.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per share are computed using the basic and diluted calculations
on the face of the statement of operations. Basic earning (loss) per share are
calculated by dividing net income (loss) available to common stockholders by the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding for the
period, adjusted for the dilutive effect of common stock equivalents, using the
treasury stock method.
ADVERTISING
The Company charges advertising costs to expense as incurred. The amount of
advertising expense for the fiscal years ended March 31, 2000, 1999 and 1998 was
approximately $690, $1,700 and $14,900, respectively.
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures and computer equipment
and are stated at cost. Depreciation is provided for using the straight-line
method over the estimated useful lives of the assets, ranging from five to seven
years.
Expenditures for maintenance, repairs and minor replacements are charged to
operations as incurred. Expenditures for major replacements and betterments are
capitalized and depreciated over the extended useful lives of the assets. The
cost and accumulated depreciation of assets retired or sold are eliminated from
the related asset accounts at the time of retirement or sale, and the resulting
gain or loss is recorded.
IMPAIRMENT OF ASSETS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived
Assets To Be Disposed Of" (SFAS 121), the Company's policy is to evaluate
whether there has been a permanent impairment in the value of long-lived assets,
certain identifiable intangibles and goodwill when certain events have taken
place that indicate that the remaining unamortized balance may not be
recoverable. When factors indicate that the intangible assets should be
evaluated for possible impairment, the Company uses an estimate of related
undiscounted cash flows. Factors considered in the valuation include current
F-43
<PAGE>
operating results, trends and anticipated undiscounted future cash flows. During
the year ended March 31, 2000 the Company determined software development costs
would not be recovered (see Note 2). There were no impairment losses recorded
for the fiscal years ended March 31, 1999 or 1998.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company utilizes the guidance provided by Statement of Financial Accounting
Standards No. 109, "Accounting For Income Taxes" (SFAS 109). Under the liability
method specified by SFAS 109, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax basis of assets
and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities.
CONCENTRATION OF CREDIT RISK
Due to the nature of the Company's business, a majority of sales are
attributable to one or two significant customers. The Company derived
approximately 90% of its revenues for the fiscal year ended March 31, 2000 from
VetMall. For the fiscal year ended March 31, 1999, 85% of the Company's revenues
were attributable to two significant customers. For the fiscal year ended March
31, 1998, two significant customers provided 77% of the Company's revenues. Due
to these concentrations, the loss of one customer could significantly affect the
Company's income and profits. The Company is employing additional efforts since
the purchase of the Company by DrugMax.com, Inc.
CONCENTRATION OF CREDIT RISK (CONTINUED)
("DrugMax") (see Note 5) to increase its customer base, thereby minimizing the
impact of these concentrations.
NOTE 2 - SOFTWARE DEVELOPMENT COSTS
Software development costs consist entirely of costs associated with the
Company's e-commerce vertical market solution. During the fiscal years ended
March 31, 2000 and 1999 the Company developed software to work in a specific
industry, but anticipated using core applications with modifications to service
various other industries. In March 1999, the Company entered into a license
agreement with a large distributor of veterinary products to utilize certain
parts of the product for field processing of product orders.
Through the fiscal year ended March 31, 2000, the Company had incurred
approximately $1,289,200 in costs, net of prior amortization, related to the
development of software for distribution of veterinary products by utilizing the
Internet. Management has concluded that the useful life of this software, called
the VetMall Project, is not ascertainable and the Company does not expect to
realize significant future revenue from this software. Therefore, as of March
31, 2000, previously capitalized costs were written off and amounts incurred
during the fiscal year were expensed as research and development costs. Any
future revenue derived from this software will be recognized as income in the
period earned.
F-44
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 3 - RELATED PARTY TRANSACTIONS
Related party obligations as of March 31, 2000, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- ---------
<S> <C> <C> <C>
11% note payable dated February 28, 1997
payable on demand, but if no demand
on March 30, 1998. $ -- $ -- $ 75,000
10% note payable dated September 30, 1998
payable on demand, but if no demand
on March 30, 1999. -- 70,000 --
10% note payable dated February 12, 1999
payable on demand, but if no demand
on June 1, 1999. -- 130,000 --
11% note payable dated March 24, 1999
payable on demand, but if no demand
on May 3, 1999. -- 70,000 --
6% note payable dated February 22, 2000
through April 1, 2000. Thereafter on demand
at 18% per annum. 294,030 -- --
Due to DrugMax.com, Inc. relating to purchase
of companies (see Note 5), non-interest bearing. 1,073,044 -- --
----------- ------------- ----------
$ 1,367,074 $ 270,000 $ 75,000
=========== ============= ==========
</TABLE>
The Company was acquired on March 20, 2000 by DrugMax (see Note 5) in a stock
for stock exchange. As part of the transaction, DrugMax agreed to pay certain
indebtedness of the Company totaling approximately $1,000,000 at the date of
acquisition. The payment was partially in cash and partially in stock of
DrugMax. In addition, DrugMax provided cash advances of approximately $370,000.
As a result, the Company became indebted to DrugMax in the amount of
approximately $1,367,100 as of March 31, 2000. A portion of this obligation was
in the form of a note in the principal amount of $294,030, bearing interest at
6.0% per annum through April 1, 2000, and 18.0% per annum thereafter. The note
is payable on demand. The balance of the Company's obligation to DrugMax is non-
interest bearing.
The Company has licensed certain software (referred to as The VetMall System)
for $200,000, to its 50% owned investment, VetMall, which enables the VetMall
web site to operate. In June 1999, Butler paid $405,000 to acquire the remaining
50% of VetMall. As a result, the Company recognized a capital gain of $400,000.
As part of the VetMall Master Agreement, Butler was required to make a $200,000
capital contribution to VetMall. In addition, if software development costs
exceed $400,000, Butler agreed to assume 50% of the next $400,000 in excess
costs. The agreement was substantially changed upon the acquisition by DrugMax
and future activity with Butler is projected by management to be minimal. In
spite of VetMall's losses, the Company received a $75,000 distribution, which
resulted in a $70,000 capital gain.
In connection with its acquisition of Desktop, DrugMax purchased 200 shares
(20%) of VetMall, Inc. from Butler.
At March 31, 2000 the Company was owed approximately $2,000,000 by VetMall, Inc.
F-45
<PAGE>
for services provided by the Company to VetMall. The receivable from VetMall has
been reduced by the Company's share of VetMall losses. The balance is guaranteed
by the selling shareholders as part of the acquisition (see Note 5).
Accounts receivable trade $ 20,554
Accounts receivable VetMall 2,034,783
-----------
Subtotal 2,055,337
50% interest in VetMall (1,182,969)
-----------
Net receivable $ 872,368
===========
NOTE 4 - INCOME TAX
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 components of income
tax expense (benefit), deferred tax assets and liabilities net of valuation
reserves are as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Current provision $ -- $ -- $ 1,433
Deferred tax expense (benefit) (280,042) 400,731 30,327
--------- --------- ---------
Total income tax expense (benefit) $(280,042) $ 400,731 $ 31,760
========= ========= =========
</TABLE>
The deferred tax liability is comprised
of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax liability
Depreciation $ (3,626) $ (1,964) $ 505
Software development costs -- (332,362) --
Use of cash basis method of accounting
for income tax purposes (254,879) (204,218) (138,331)
--------- --------- ---------
Gross deferred tax liability (258,505) (538,544) (137,826)
--------- --------- ---------
Deferred tax liability $(258,505) $(538,544) $(137,826)
========= ========= =========
</TABLE>
Due to the Company's acquisition by DrugMax (see Note 5), the Company's ability
to utilize the net operating loss ("NOL") carryforward will be significantly
reduced pursuant to Internal Revenue Code Section 382. If not fully utilized,
the NOL will expire March 31, 2019.
The major cause of differences between the aggregate provision for income taxes
and that computed by applying the statutory rate to pretax accounting income is
due to certain expenses that are not deductible for federal income tax.
NOTE 5 - ACQUISITION OF COMPANY BY DRUGMAX
On March 20, 2000, the Company was acquired by DrugMax in exchange for 50,000
shares of DrugMax restricted common stock. In addition, DrugMax agreed to loan
approximately $419,000 to the Company to be used together with additional stock
of DrugMax to satisfy the Company's line of credit and obligations to related
parties totaling approximately $1,000,000. On the same date, DrugMax acquired 40
F-46
<PAGE>
shares in VetMall from a third party, representing 20% of the outstanding stock
of VetMall, for $1,000,000 and 25,000 shares of DrugMax restricted common stock.
The Agreement And Plan Of Reorganization (the "Agreement") provides for an
adjustment to the acquisition price based upon the change in liabilities from
December 31, 1999 to March 20, 2000.
The Agreement also provides for additional compensation to be paid to the
original shareholders of the Company, if VetMall or substantially all of
VetMall's assets are subsequently sold or if VetMall completes an initial public
offering. The maximum amount of additional compensation, which is based on sale
proceeds, cannot exceed $4,800,000.
NOTE 6 - 401K PROFIT SHARING PLAN
The Company has a 401K Qualified Profit Sharing Plan covering all full-time
employees over 21 years of age with at least one year of service. The plan
provides for employee contributions through salary reductions and discretionary
matching contributions by the Company. The Company made contributions for the
years ended March 31, 2000, 1999 and 1998 in the amounts of $31,979, $18,600 and
$19,758, respectively.
NOTE 7- GOING CONCERN
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern. These principles
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. As reflected in the accompanying consolidated
financial statements, the Company incurred a net loss of $1,874,818 during the
fiscal year ended March 31, 2000. In addition, the Company's current liabilities
exceed its current assets by $1,099,153. The ability of the Company to continue
as a going concern is dependent on increasing sales and obtaining additional
capital and financing. DrugMax has committed to provide current operating funds
while the Company expands its business operations and until additional outside
financing is obtained.
The consolidated financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
NOTE 8 - SERIES A PREFERRED STOCK
The Company has authorized 30,000 shares of its $10 par value Series A Preferred
Stock and as of March 31, 2000 has 15,000 shares issued and outstanding. The
stock had an initial 8% cumulative dividend that provides for yearly increases
up to 10% and is convertible to common stock. Interest on unpaid dividends
accrues at the rate of 10% per annum. The initial rate of dividends was $.80 per
share and increases by $.05 per share for the fiscal years 1997 through 2001
with a maximum of $1.00 per share.
Upon consolidation, merger or liquidation, the preferred stock is entitled to a
preferential payment of $10.00 per share plus all unpaid dividends and accrued
interest.
The preferred stock is convertible into common stock based upon the occurrence
of certain events. If there is a public offering of the Company's common stock
in which proceeds are at least $5,000,000 with a purchase price per share of at
least three times the then effective conversion price, the preferred shares are
required to be converted. The initial conversion rate is .1666 shares of common
stock for each share of preferred stock. The conversion rate increases for
certain events and generally is to maintain a conversion into at least 20% of
the Company's common stock outstanding.
There is also a voluntary conversion by the holders of the preferred stock, at
their discretion, at the conversion rate in effect at the time of their
conversion.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
F-47
<PAGE>
Until March 31, 2000, the Company leased office space in Dallas, Texas. The
Company has not renewed the lease, and pays $12,000 per month for the office
space on a month-to-month basis. The Company also leases various computer
equipment with lease terms ranging from three to five years. The monthly
equipment rental expense is approximately $9,100.
Future minimum lease payments, by year in aggregate under non-cancelable
operating leases consist of the following at March 31, 2000:
YEAR ENDED MARCH 31,
--------------------
2001 $108,737
2002 65,652
2003 14,128
--------
$188,517
========
NOTE 10 - INVESTMENT IN UNCONSOLIDATED AFFILIATE
Investment in net assets of affiliated company accounted for under the equity
method, VetMall, amounted to $(1,182,969) at March 31,2000. This deficit was
offset against the receivable from VetMall (see Note 3).
The results of operations and financial position of the Company's equity-basis
affiliate are summarized below:
<TABLE>
<CAPTION>
PERIOD FROM JUNE 28, 1999
(DATE OF INCEPTION) THROUGH
MARCH 31, 2000
----------------------------
<S> <C>
Condensed Income Statement Information:
Revenue $ 577,669
Gross profit $ 118,930
Net loss $(2,365,939)
MARCH 31, 2000
--------------
Condensed Balance Sheet Information:
Current assets $ 6,300
Non-current assets $ 385,156
Current liabilities $ 2,947,395
Stockholders' (Deficit) $(2,555,939)
</TABLE>
NOTE 11 - SUBSEQUENT EVENTS
On April 19, 2000, Desktop Ventures, Inc. distributed all of its shares of
VetMall to the sole shareholder of Desktop Ventures, Inc., the Company.
Immediately subsequent to that distribution, the Company distributed all of its
shares of VetMall to the sole shareholder of the Company, DrugMax, resulting in
DrugMax then owning 70% of VetMall.
F-48
<PAGE>
Financial Statements of VetMall, Inc.
Independent Auditor's Report
To the Board of Directors
VetMall, Inc.
Dallas, Texas
We have audited the accompanying balance sheet of VetMall, Inc. as of March 31,
2000 and the related statement of operations, shareholders' equity, and cash
flows for the period from June 28, 1999 (date of inception) through March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VetMall, Inc. as of March 31,
2000 and the results of its operations and its cash flows for the period from
June 28, 1999 (date of inception) through March 31, 2000 in conformity with
generally accepted accounting principles.
BRIMMER, BUREK & KEELAN LLP
/s/ BRIMMER, BUREK & KEELAN LLP
-------------------------------
Certified Public Accountants
Tampa, Florida
June 1, 2000
F-49
<PAGE>
VETMALL INC.
BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash $ 5,082
Accounts receivable 1,218
---------------
Total current assets 6,300
---------------
Property and equipment
Computer software 434,592
Computer equipment 1,434
---------------
436,026
Accumulated depreciation (50,870)
---------------
Property and equipment, net - 78% acquired from
related party 385,156
---------------
Total assets 391,456
===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable - $2,059,356 due to related party $ 2,947,395
---------------
Total current liabilities 2,947,395
---------------
Total liabilities
2,947,395
---------------
Commitments and contingencies
SHAREHOLDERS' DEFICIT
Common stock, $0.001 par value;
100,000 shares authorized,
200 shares issued and outstanding --
Additional paid-in capital 210,000
Accumulated deficit (2,765,939)
---------------
Total shareholders' deficit (2,555,939)
---------------
Total liabilities and shareholders' deficit $ 391,456
===============
</TABLE>
Please read accompanying notes.
F-50
<PAGE>
VETMALL INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 28, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2000
Revenue $ 577,669
Cost of sales - 82% to related party 458,739
-----------
Gross profit 118,930
Operating expenses
Depreciation and amortization 50,870
Advertising 195,606
Consultants - 84% to related party 1,605,294
Data preparation 151,435
Insurance 23,021
Legal fees 159,455
Software license 200,000
Trade show 30,359
Travel 49,088
General and administrative expenses 19,741
-----------
Total operating expenses 2,484,869
-----------
Net loss $(2,365,939)
===========
Net loss per share of common stock $(11,829.70)
===========
Weighted-average shares of
common stock outstanding 200
===========
Please read accompanying notes.
F-51
<PAGE>
VETMALL INC.
STATEMENT OF CHANGES IN STOCKHOLDERS'/MEMBERS' EQUITY
FOR THE PERIOD FROM JUNE 28, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
COMMON MEMBERS'
STOCK EQUITY
(CORPORATION) (LIMITED TOTAL
NO. OF ADDITIONAL PAID-IN (DEFICIT) LIABILITY SHAREHOLDERS'
SHARES AMOUNT CAPITAL (CORPORATION) (CORPORATION) COMPANY) DEFICIT
------------- ------------------ --------------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 28, 1999 -- $ -- $ -- $ -- $ -- $ --
Members' contribution -- -- -- -- 210,000 210,000
Net loss -- -- -- -- (2,365,939) (2,365,939)
Members' distribution -- -- -- -- (400,000) (400,000)
Common stock issued -- -- -- -- -- --
in exchange for
VetMall, LLC
membership interest -
200 shares at $.001
par value 200 -- 210,000 (2,765,939) 2,555,939 --
------------ ----------------- --------------------- ----------- ----------- ------------
Balance March 31,
2000 200 $ -- $ 210,000 $(2,765,939) $ -- $ (2,555,939)
============ ================= ===================== =========== =========== ===========
</TABLE>
Please read accompanying notes.
F-52
<PAGE>
VETMALL INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 28, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,365,939)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 50,870
(Increase) decrease in:
Accounts receivable, trade (1,218)
Increase (decrease) in:
Accounts payable, trade 411,363
-------------
Net cash used in operating activities (1,904,924)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of computer hardware and software - 78%
related party (436,025)
-------------
Net cash used in investing activities (436,025)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Accounts payable, related parties 2,536,032
Capital contribution 210,000
Members' distribution (400,000)
-------------
Net cash provided by financing activities 2,346,032
-------------
Net increase in cash 5,083
Cash beginning of period --
-------------
Cash end of period $ 5,083
=============
Please read accompanying notes.
F-53
<PAGE>
VETMALL INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
VetMall, Inc. (the "Company") was founded in June 1999 as a Nevada limited
liability corporation known as VetMall, LLC, which merged with VetMall, Inc. on
March 20, 2000. The Company is an internet-based consumer pet care product sales
distributor. It maintains a web site whereby consumers can order pet care
products which are then shipped directly by the manufacturer. The products are
primarily supplied by one vendor who is a 30% shareholder in the Company. In
addition, the Company derives income from advertisers on its web site and from
veterinarians subscribing to listing on its web site.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
ACCOUNTS RECEIVABLE
Management assesses accounts receivable to determine whether an allowance for
credit loss is warranted. At March 31, 2000, no allowance was considered
necessary.
REVENUE RECOGNITION
Revenue from sales of products is recognized when the product is shipped to the
customer. Revenue from advertising is recognized as advertising is posted to the
web site. Revenue from veterinarian subscriptions is recognized upon the signing
of subscriptions and the receipt of funds.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), establishes standards for reporting comprehensive income
which is defined as the change in equity of an enterprise except those resulting
from stockholder transactions. All components of comprehensive income are
required to be reported in the income statement. The Company adopted this
Standard effective at its inception on June 28, 1999. During the period ended
March 31, 2000, the Company did not engage in any transactions required to be
reported under this Standard.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per share are computed using the basic and diluted calculations
on the face of the statement of operations giving effect to the conversion of
the LLC membership interests into equivalent shares of the corporation,
retroactive to its inception. Basic earning (loss) per share are calculated by
dividing net income (loss) available to common stockholders by the weighted
average number of shares of common stock outstanding for the period.
PROPERTY AND EQUIPMENT
F-54
<PAGE>
Depreciation is provided using the straight-line method, in amounts sufficient
to relate the cost of depreciable assets to operations over their estimated
service lives ranging from three to five years.
ADVERTISING
The Company charges advertising costs to expense as incurred. The amount of
advertising expense for the period from June 28, 1999 (date of inception)
through March 31, 2000 was approximately $195,600.
IMPAIRMENT OF ASSETS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived
Assets To Be Disposed Of" (SFAS 121), the Company's policy is to evaluate
whether there has
IMPAIRMENT OF ASSETS (CONTINUED)
been a permanent impairment in the value of long-lived assets, certain
identifiable intangibles or goodwill when certain events have taken place that
indicate that the remaining unamortized balance may not be recoverable. When
factors indicate that the intangible assets should be evaluated for possible
impairment, the Company uses an estimate of related undiscounted cash flows.
Factors considered in the valuation include current operating results, trends
and anticipated undiscounted future cash flows. There have been no impairment
losses for the period from June 28, 1999 (date of inception) through March 31,
2000.
NOTE 2 - COMPUTER SOFTWARE AND EQUIPMENT
Computer software and equipment were purchased substantially from a related
party (see Note 3) and consist of the following:
Computer software $ 434,592
Computer equipment 1,434
---------
436,026
Accumulated depreciation (50,870)
---------
Property and equipment, net $ 385,156
=========
NOTE 3 - RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS
The Company was formed as a joint venture between W. Butler Company ("Butler")
and Desktop Corporation ("Desktop") in June 1999 to create a web based
e-commerce web site to provide for sales of Butler's pet care products and
subscription services to veterinarians. The initial funding of the Company was a
cash contribution of $200,000 from Butler. In addition, the Company has an
obligation to Butler of approximately $450,000 for Company expenses paid
directly by Butler. The other shareholder, Desktop, contributed cash in the
amount of $10,000 and provided consulting services. The Company purchased
certain of its web enabling software from Desktop for approximately $400,000. At
March 31, 2000, Butler owned 30% of the Company, Desktop owned 50% of the
Company, DrugMax owned 20% of the Company directly and an additional 50%
indirectly, through its ownership of Desktop.
The Company obtained a license from Desktop for the use of certain e-commerce
software and related code, which enables the operation of its web site. The
Company paid Desktop $200,000 for the license. The license agreement was
terminated upon the purchase of Desktop by DrugMax.
The Company purchases its products from Butler. Total purchases from Butler for
the period from June 28, 1999 (date of inception) through March 31, 2000 were
F-55
<PAGE>
approximately $2,900.
At March 31, 2000, the Company owed approximately $2,000,000 to DrugMax for
consulting services provided and software purchases.
NOTE 4 - SALE OF COMPANY
On March 20, 2000, DrugMax became an indirect owner of 50% of the Company,
through DrugMax's acquisition of all the issued and outstanding stock of
Desktop. Simultaneously, DrugMax purchased an additional direct 20% interest in
the Company, from Butler. In conjunction with DrugMax's acquisition of ownership
in the Company, the Company merged with VetMall, Inc. (a Florida corporation)
and distributed 200 shares of VetMall, Inc. common stock to the former holders
of membership interests in the limited liability company. Subsequent to March
31, 2000, the portion of stock of VetMall, Inc. that was owned by Desktop was
distributed to DrugMax. As a result of these transactions, DrugMax directly
owned 70% of the Company as of April 19, 2000.
NOTE 5 - INCOME TAXES
The Company was originally incorporated as a Nevada limited liability company on
June 28, 1999. A limited liability company is taxed as a partnership for Federal
Income Tax purposes. The Company merged into a Florida corporation as of March
20, 2000 and the limited liability company terminated. Since the company was not
subject to income tax until it became a corporation, no provision for income tax
expense and deferred tax liability has been recorded.
NOTE 6 - GOING CONCERN
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern. These principles
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. As reflected in the accompanying financial
statements, the Company incurred a net loss of $2,365,939 during the period from
June 28, 1999 (date of inception) through March 31, 2000. In addition, the
Company's current liabilities exceed its current assets by $2,941,095. The
ability of the Company to continue as a going concern is dependent upon
increasing sales and obtaining additional capital and financing. DrugMax has
committed to provide current operating funds while the Company expands its
business operations.
These financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
NOTE 7 - CONCENTRATION OF CREDIT RISK
The Company derived all of its advertising revenue from one pet product supplier
and has received all of its subscription revenue from approximately 1,800
independent veterinarians. In addition, it purchases its products from Butler
(see Note 3.) Due to the concentration of these sources of revenue and supply,
the Company may be at risk in the event these sources cease to be customers or
to provide products. The Company is working on expanding its business model to
include business-to-business web sites and is seeking alternative suppliers to
minimize credit risk in the future.
NOTE 8 - SUBSEQUENT EVENTS
In June 2000, the Company developed a new business-to-business web site, which
the Company expects will be launched in July 2000, at the Company's web site
address, www.vetmarket.com, which will provide for the sale of products from
manufacturers to veterinarians.
Subsequent to March 31, 2000, the Company ceased selling web site subscriptions
to veterinarians in order to focus its efforts on the development of its new web
site.
On November 26, 1999, DrugMax.com, Inc. ("DrugMax") acquired all the issued and
F-56
<PAGE>
outstanding shares of Becan Distributors, Inc. and its subsidiary, Discount Rx,
Inc. (collectively "Becan") for $2,000,000 in cash and 2,000,000 shares of
DrugMax common stock. The acquisition is accounted for as a purchase.
On March 20, 2000, DrugMax acquired all the issued and outstanding shares of
Desktop Corporation and its subsidiary, Desktop Ventures, Inc. (collectively
"Desktop") for stock and payment of certain Desktop liabilities. Desktop
provides consulting and software development services.
Simultaneous with the Desktop acquisition, DrugMax acquired a 20% interest in
VetMall, Inc. ("VetMall") a website management company. Since Desktop already
owned a 50% interest in VetMall, the acquisition of the additional 20% interest
gave DrugMax a controlling interest in VetMall.
F-57
<PAGE>
Consolidated Financial Statements of Becan Distributors, Inc.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Becan Distributors, Inc. and Subsidiary
Pittsburgh, Pennsylvania
We have audited the accompanying consolidated balance sheet of Becan
Distributors, Inc. and Subsidiary as of March 31, 1999, and the related
consolidated statement of operations, shareholder's equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
financial statements of Becan Distributors, Inc. as of March 31, 1998 were
audited by other auditors whose report dated June 28, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Becan Distributors, Inc. and Subsidiary as of March 31, 1999, and the
consolidated results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Brimmer, Burek, Keelan & McNally LLP
August 6, 1999
(Except for Note 7, as to which
the date is September 10, 1999)
F-58
<PAGE>
BECAN DISTRIBUTORS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
---------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash........................................ $ 208,372 $ 69,010 $ 20,739 $ 120,983
Accounts receivable......................... 876,505 1,640,823 948,124 2,511,246
Inventory................................... 445,776 1,178,801 674,495 1,655,155
Prepaid and other current assets............ -- -- 15,525 63,317
---------- ---------- ---------- ----------
Total current assets....................... 1,530,653 2,888,634 1,658,883 4,350,701
Property, plant and equipment -- net........ 4,616 34,533 20,861 34,051
Other assets -- net......................... 2,547 24,028 3,617 15,937
---------- ---------- ---------- ----------
Total assets............................... $1,537,816 $2,947,195 $1,683,361 $4,400,689
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable............................ $1,022,121 $1,249,343 $ 901,344 $2,653,800
Accrued expenses............................ 9,763 20,487 7,253 31,825
Notes payable............................... 185,000 -- -- --
Due to affiliates........................... 200,000 64,980 213,242 --
Accrued income tax.......................... -- 21,994 -- --
Line of credit payable...................... -- 1,448,931 430,000 1,461,509
---------- ---------- ---------- ----------
Total current liabilities.................. 1,416,884 2,805,735 1,551,839 4,147,134
Shareholder's equity
Common stock, no par; 850 shares
authorized; 642.85 shares issued and
outstanding, 500 shares issued and
outstanding at March 31, 1998.............. 50,000 85,000 85,000 85,000
Retained earnings............................ 70,932 56,460 46,522 168,555
---------- ---------- ---------- ----------
Total shareholder's equity................. 120,932 141,460 131,522 253,555
---------- ---------- ---------- ----------
Total liabilities and shareholder's equity. $1,537,816 $2,947,195 $1,683,361 $4,400,689
========== ========== ========== ==========
</TABLE>
Please read accompanying notes.
F-59
<PAGE>
BECAN DISTRIBUTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
------------------------- -------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales................................. $10,389,518 $31,074,861 $12,214,804 $26,518,953
Cost of good sold..................... 9,985,401 30,199,867 11,842,877 25,913,464
----------- ----------- ----------- -----------
Gross profit......................... 404,117 874,994 371,927 605,489
Operating expenses.................... 299,748 659,158 268,698 397,246
----------- ----------- ----------- -----------
Income from operations................ 104,369 215,836 103,229 208,243
Interest income....................... -- -- 18 2,061
Other income (expenses), net.......... -- -- 12,000 (240)
Interest expense...................... 15,631 99,811 (31,155) (97,969)
----------- ----------- ----------- -----------
Net income before income taxes........ 88,738 116,025 84,092 112,095
Income tax............................ -- 21,994 -- --
----------- ----------- ----------- -----------
Net income............................ $ 88,738 $ 94,031 $ 84,092 $ 112,095
=========== =========== =========== ===========
Net income per share of common stock.. $ 177.47 $ 157.97 $ 130.81 $ 174.37
=========== =========== =========== ===========
Weighted-average shares of common
stock outstanding.................... 500.00 595.23 642.85 642.85
=========== =========== =========== ===========
</TABLE>
Please read accompanying notes.
F-60
<PAGE>
BECAN DISTRIBUTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS
----------- -------- ----------
<S> <C> <C> <C>
Balance at 3/31/98.............. 500.00 $50,000 $ 70,932
Common stock issued for cash.... 142.85 35,000 --
Net income...................... -- -- 84,092
Dividends....................... -- -- (108,503)
------ ------- ---------
Balance at 9/30/98 (unaudited).. 642.85 85,000 46,522
Net income...................... -- -- 9,938
------ ------- ---------
Balance at 3/31/99.............. 642.85 85,000 56,460
Net income...................... -- -- 112,095
------ ------- ---------
Balance at 9/30/99 (unaudited).. 642.85 $85,000 $ 168,555
====== ======= =========
</TABLE>
Please read accompanying notes.
F-61
<PAGE>
BECAN DISTRIBUTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
1998 1999 1998 1999
--------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 88,738 $ 94,031 $ 84,092 $ 112,095
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Depreciation and amortization expense............ 1,004 3,682 570 10,377
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable............................. (829,726) (764,318) (68,127) (870,423)
Prepaid expenses and other assets............... (2,547) (21,481) (17,545) (63,317)
Inventory....................................... (423,426) (733,025) (228,719) (476,354)
Increase (decrease) in:
Accounts payable................................ 900,282 227,222 (120,777) 1,404,457
Accrued income tax.............................. -- 21,994 -- --
Accrued expenses................................ 3,371 10,724 (2,510) (10,656)
--------- ----------- --------- ---------
Net cash provided (used) by operating activities.. (262,304) (1,161,171) (353,016) 106,179
--------- ----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment............................. (5,620) (33,599) (18,281) (6,512)
Decrease in other assets.......................... -- -- (1,075) 4,708
--------- ----------- --------- ---------
Net cash provided (used) by investing activities.. (5,620) (33,599) (19,356) (1,804)
--------- ----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt.................... -- -- -- --
Proceeds from affiliate loan...................... 200,000 64,980 39,742 --
Payment of affiliate loan......................... -- -- -- (64,980)
Proceeds from issuance of common stock............ 50 35,000 35,000 --
Principal payments on notes payable............... -- (200,000) -- --
Dividends paid.................................... -- (108,503) (108,503) --
Net change in revolving line of credit............ 93,000 1,263,931 245,000 12,578
Payments of related party obligations............. -- -- (26,500) --
--------- ----------- --------- ----------
Net cash provided (used) by financing activities.. 293,050 1,055,408 184,739 (52,402)
--------- ----------- --------- ---------
Net increase (decrease) in cash................... 25,126 (139,362) (187,633) 51,973
Cash at beginning of year......................... 183,246 208,372 208,372 69,010
--------- ----------- --------- ---------
Cash at end of year............................... $ 208,372 $ 69,010 $ 20,739 $ 120,983
========= =========== ========= =========
</TABLE>
Please read accompanying notes.
F-62
<PAGE>
BECAN DISTRIBUTORS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30
------------------ ------------------------
1998 1999 1998 1999
-------- -------- -------- --------
(UNAUDITED)
SUPPLEMENTAL INFORMATION:
Interest paid.............. $ 15,631 $ 99,811 $ 31,155 $ 97,969
======== ======== ======== ========
Taxes paid................. $ -- $ -- $ -- $ --
======== ======== ======== ========
Please read accompanying notes.
F-63
<PAGE>
BECAN DISTRIBUTORS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1999 AND SEPTEMBER 30, 1999 (UNAUDITED)
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Becan Distributors, Inc. was incorporated January 18, 1997 as an Ohio
corporation. Discount Rx, Inc., a wholly owned subsidiary of Becan Distributors,
Inc. was incorporated August 17, 1998 as a Louisiana corporation. Becan
Distributors, Inc. and Subsidiary (the "Company") is a wholesale distributor of
pharmaceuticals, over the counter drugs, and health and beauty care products
throughout the United States. The Company sells primarily to independent retail
and regional chain owned drug stores.
The Company was privately owned until June 26, 1998 and had elected with the
consent of its shareholders to be taxed as an S corporation. On June 26, 1998,
the Company executed an agreement and plan of reorganization with Nu-Wave Health
Products, Inc. ("Nu-Wave") whereby all of the issued and outstanding capital
stock of the Company was exchanged for 1,500,000 shares of Nu-Wave Health
Products, Inc. As a result of the exchange, the Company became a wholly owned
subsidiary of Nu-Wave and changed its year end from December 31 to March 31 so
as to coincide with the year end of Nu-Wave. In August 1998, Nu-Wave changed its
name to Dynamic Health Products, Inc.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies used in preparing the
accompanying financial statements follows:
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Becan Distributors, Inc. and
its wholly owned Subsidiary, Discount Rx, Inc. Significant intercompany balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, however,
management does not believe these differences would have a material effect on
the operating results.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
F-64
<PAGE>
ACCOUNTS RECEIVABLE
The Company has not experienced any bad debts from receivables during its
existence and feels that no allowance for uncollectible amounts is required.
Therefore, no provision has been made for bad debts.
INCOME TAXES
The Company was an S corporation until the date of acquisition by Nu-Wave on
June 26, 1998. Therefore, income tax expense reflects the activity from June 27,
1998 through March 31, 1999. The Company has no deferred tax assets or
liabilities at March 31, 1999 and March 31, 1998, or September 30, 1999.
COMPREHENSIVE INCOME
Financial Accounting Standards No. 130 establishes standards for reporting
comprehensive income which is defined as the change in equity of an enterprise
except those resulting from stockholder transactions. All components of
comprehensive income are required to be reported in the income statement. The
Company adopted this Standard effective April 1, 1998. During 1998, the Company
did not engage in any transactions required to be reported under this new
Standard.
EARNINGS PER COMMON SHARE
Earnings per common share has been computed based upon the weighted-average
number of shares outstanding during the period.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided for using the straight-line method, in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives ranging from three to seven years.
IMPAIRMENT OF ASSETS
The Company's policy is to evaluate whether there has been a permanent
impairment in the value of long-lived assets, certain identifiable intangibles
and goodwill when certain events have taken place that indicate that the
remaining balance may not be recoverable. When factors indicate that the
intangible assets should be evaluated for possible impairment, the Company uses
an estimate of related undiscounted future cash flows. There have been no
impairment losses in the fiscal year ended March 31, 1999 and for the six months
ended September 30, 1999.
ADVERTISING
The Company charges advertising costs to expense as incurred. The amount of
advertising expense for the fiscal years ended March 31, 1999 and March 31, 1998
was $63,175 and $39,422, respectively, and $2,372 for the six months ended
September 30, 1999.
REVENUE RECOGNITION
Revenues are recognized when the merchandise is shipped to the customer.
PROPERTY LEASES
The Company leases a property in Pittsburgh, Pennsylvania that is being
utilized by Becan for offices, warehousing, and shipping for its distribution
operations, consisting of approximately 4,024 square feet. The offices are
F-65
<PAGE>
leased pursuant to a four year lease that expires on February 28, 2003. The
Company has an option to continue the lease on a month to month basis or renew
the lease at the end of the four year term. The rental under the lease is $1,658
per month subject to yearly adjustment for tax expenses.
The Company leases a property in Mandeville, Louisiana that is being utilized
by Discount Rx for offices, warehousing, and shipping for its distribution
operations, consisting of approximately 1,200 square feet. The offices are
leased on a month to month basis. The rental under the lease is $900 per month.
Future minimum lease payments, by year in aggregate under non-cancelable
operating leases consist of the following at March 31, 1999:
YEAR ENDED MARCH 31,
---------------------------
2000 ......... $18,238
2001 ......... $19,896
2002 ......... $19,896
2003 ......... $18,238
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements for the
year ended March 31, 1998 to conform to the presentation at March 31, 1999 and
September 30, 1999.
NOTE 2 -- RELATED PARTY TRANSACTIONS
The Company buys over the counter drugs and health and beauty care products
for resale from an affiliated corporation. Purchases from the affiliate for the
year ended March 31, 1999 were $154,162, and $166,288 for the six months ended
September 30, 1999.
The Company has a verbal agreement to pay management fees to its parent
company (Dynamic Health Products, Inc., formerly Nu-Wave) for various legal,
accounting and administrative services. The agreement is for a monthly payment
of $15,000 and started October 1, 1998. The agreement is to be reviewed
periodically and adjusted at the discretion of the parent company. The amount of
management fees for the year ended March 31, 1999 was $90,000, and $90,000 for
the six months ended September 30, 1999.
The Company owes approximately $64,980 to affiliated corporations for
management fees and products purchased during the year. During the current
fiscal year, the Company had various borrowing arrangements with stockholders of
the Company. At the beginning of the year the amount of the indebtedness to
stockholders was approximately $200,000. During the year an additional $75,000
was borrowed from stockholders or entities controlled by stockholders. The
entire stockholder indebtedness was paid off during the year and all borrowing
arrangements with stockholders and related entities were cancelled. Interest
paid to those related parties for the year was $20,128.
An officer of the Company had an employment agreement whereby, he was entitled
to purchase additional shares of the company based upon the financial
performance of the Company compared to certain agreed upon projections. Prior to
the date of the reorganization with Nu-Wave in June 1998, the employment
agreement was terminated and the officer purchased an additional 142.85 shares
of common stock for $35,000 in full settlement of the employment agreement and
obligations thereunder. The officer subsequently became the Chief Executive
Officer of the parent company.
F-66
<PAGE>
The Company completed an agreement and reorganization with Nu-Wave Health
Products, Inc. ("Nu-Wave") on June 26, 1998 whereby all of the issued and
outstanding common stock of the Company was exchanged for 1,500,000 shares of
common stock of Nu-Wave. As a result, the Company became a wholly owned
subsidiary of Nu-Wave and changed its year-end from December 31 to March 31 so
as to coincide with the year-end of Nu-Wave. After the exchange, the former
shareholders of the Company owned approximately 84% of the parent company.
NOTE 3 -- INCOME TAXES
Income taxes for the year ended March 31, 1999 differ from the amounts
computed by applying the effective U.S. federal income tax rates of 15 to 34% to
income before income taxes as a result of the following:
Computed tax expense at the statutory rate .............. $ 27,698
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit ......... 5,440
Effect of permanent differences and portion of income
attributable to S Corporation status ................... (11,144)
-------
Income tax expense ...................................... $ 21,994
=======
The Company and its parent file a consolidated federal income tax return.
Income tax expense in the Company's income statement has been allocated on the
basis of separate company net income before tax.
The Company has no deferred tax assets or liabilities at March 31, 1999 and
September 30, 1999.
NOTE 4 -- LINE OF CREDIT
In November 1998, the Company established a $2.0 million revolving credit
facility scheduled to mature in November 2001. The credit available to the
Company is based on a percentage of eligible accounts receivable and inventory.
The facility imposes no financial covenants. Minimum borrowing under the
agreement is $1,000,000. The agreement places limitations on disposition of
assets and debt funding to transactions within the normal course of business and
restricts the payment of dividends to any shareholder of record and any class of
Common stock during the term of the agreement. All borrowings accrue interest at
prime (7.75% at March 31, 1999) plus 1.25% and are secured by all assets of the
Company. The Company had borrowed $1,448,931 under this facility at March 31,
1999 and $1,461,509 at September 30, 1999.
The credit line payable is included with current liabilities instead of long-
term liabilities as management believes that this presentation better reflects
the utility of the current assets as the source of repayment for the credit line
payable.
The line of credit is personally guaranteed by Jugal Taneja, the Chairman of
the Board of the parent company.
The Company had a secured $700,000 demand line of credit with Mellon Bank,
N.A., dated March 16, 1998 through February 28, 1999. At March 31, 1998 $185,000
was borrowed against the line of credit. This line of credit is renewable
annually by mutual agreement of the parties. In November 1998, any outstanding
obligations under this line of credit were satisfied from proceeds of the new
$2,000,000 credit facility.
NOTE 5 -- CONCENTRATIONS OF CREDIT RISK
F-67
<PAGE>
CASH IN BANK
The Company maintains its checking accounts in two commercial banks. Cash in
these checking accounts at times exceeded the $100,000 Federal Deposit Insurance
Corporation's maximum insured balance coverage.
Concentrations of credit risk with respect to sales are limited due to the
distribution of sales over a large customer base as of March 31, 1999 and
September 30, 1999. For the year ended March 31, 1999 and for the six months
ended September 30, 1999, one customer represented approximately 11.07% of
revenues derived from distribution.
NOTE 6 -- YEAR 2000 ISSUE
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the Year 2000. The potential
effect of the Year 2000 issue on the Company will not be fully determinable
until the Year 2000 and thereafter. The Company's software packages and all of
the hardware associated with its operations are Year 2000 compliant. The Company
is currently requesting that all suppliers supply certification statements that
comply with the Year 2000 requirements. If the Year 2000 modifications are not
properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.
NOTE 7 -- PENDING SALE OF COMPANY
On September 8, 1999, an agreement was signed between Nutriceuticals.com
Corporation ("Nutriceuticals") and Dynamic Health Products, Inc., the sole
stockholder of the Company whereby the Company will be sold to Nutriceuticals.
The terms of the agreement call for the acquisition of all the outstanding stock
of the Company by Nutriceuticals. If the sale is consummated as planned, the
Company would become a wholly owned subsidiary of Nutriceuticals. The sale is
subject to the consummation of a public offering by Nutriceuticals.
F-68
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,124,356 $ 6,020,129
Accounts receivable, net 7,805,881 4,106,105
Inventory 8,000,307 1,416,241
Due from affiliates 12,899 13,564
Prepaid expenses and other current assets 217,138 126,542
--------------- --------------
Total current assets 20,160,581 11,682,581
Property and equipment, net 770,012 693,340
Intangible assets (primarily goodwill), net 29,057,457 26,090,635
Stockholder notes receivable 100,000 -
Notes receivable 37,614 37,614
Deposits 8,242 9,742
--------------- --------------
Total assets $ 50,133,906 $ 38,513,912
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,433,611 $ 3,170,890
Accrued expenses 532,612 442,598
Credit lines payable 8,222,733 2,391,095
Notes payable - current portion 236,147 4,872
Due to affiliates 564,610 511,717
--------------- --------------
Total current liabilities 15,989,713 6,521,172
Notes payable - long term 1,471,575 -
--------------- --------------
Total liabilities 17,461,288 6,521,172
--------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; - -
no preferred shares issued or outstanding
Common stock, $.001 par value; 24,000,000 shares authorized; 6,419 6,202
6,417,754 and 6,200,499 shares issued and outstanding
Additional paid-in capital 36,279,447 34,079,957
Accumulated deficit (3,613,248) (2,093,419)
--------------- --------------
Total stockholders' equity 32,672,618 31,992,740
--------------- --------------
Total liabilities and stockholders' equity $ 50,133,906 $ 38,513,912
=============== ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-69
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
--------------------- -------------------
<S> <C> <C>
Net revenues $ 28,816,653 $ 33,899
Cost of goods sold 27,813,691 14,786
---------------- -----------
Gross profit 1,002,962 19,113
Selling, general and administrative expenses 2,363,190 101,308
---------------- -----------
Operating loss (1,360,228) (82,195)
---------------- -----------
Other income (expense):
Interest income 64,355 335
Interest expense (223,956) (589)
---------------- -----------
Total other income (expense) (159,601) (254)
---------------- -----------
Net loss $ (1,519,829) $ (82,449)
================ ===========
Basic and diluted net loss per share $ (0.24) $ (0.02)
================ ===========
Basic and diluted weighted average number of
common shares outstanding 6,374,780 5,351,028
================ ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-70
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,519,829) $ (82,449)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 708,625 2,500
Changes in operating assets and liabilities:
Accounts receivable, net (210,216) (9,760)
Inventory 106,570 (2,860)
Due from affiliates 665 -
Prepaid expenses and other current assets (68,600) (25,399)
Stockholder notes receivable 70,000 -
Deposits 1,500 180
Accounts payable (697,834) (17,572)
Accrued expenses (90,878) 42,973
------------------- -------------------
Net cash used in operating activities (1,699,997) (92,387)
Cash flows from investing activities:
Purchases of property and equipment (62,451) -
Increase in intangible assets (2,038) -
Cash paid for acquisitions, net (1,757,481) -
------------------- -------------------
Net cash used in by investing activities (1,821,970) -
Cash flows from financing activities:
Net change under revolving line of credit agreements 1,617,638 -
Payments of long-term obligations (44,337) -
Proceeds from related party obligation - 50,000
Proceeds from affiliates 52,893 -
------------------- -------------------
Net cash provided by financing activities 1,626,194 50,000
------------------- -------------------
Net decrease in cash and cash equivalents (1,895,773) (42,387)
Cash and cash equivalents at beginning of period 6,020,129 56,986
------------------- -------------------
Cash and cash equivalents at end of period $ 4,124,356 $ 14,599
=================== ===================
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 234,464 $ -
=================== ===================
Cash paid for income taxes $ - $ -
=================== ===================
Issuance of 217,255 shares of common stock for the acquisition of
Valley Drug Company $ 2,199,707 $ -
=================== ===================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-71
<PAGE>
DrugMax.com, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended June 30, 2000 and 1999
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of DrugMax.com, Inc. and its subsidiaries, Discount Rx, Inc., Valley
Drug Company, Desktop Corporation, and VetMall, Inc. (collectively the
"Company"). All intercompany balances and transactions have been eliminated.
In March 2000 Becan Distributors, Inc., the Company's wholly owned
subsidiary, was merged into the Company. All Becan financial activity has been
included as a division of the Company.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. 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 items) considered necessary for a fair presentation have
been included. Interim results are not necessarily indicative of the results
that may be expected for a full year. These statements should be read in
conjunction with the consolidated financial statements and footnotes as of and
for the year ended March 31, 2000 and as of and for the period September 8, 1998
through March 31, 1999, included elsewhere in this prospectus.
NOTE B - RECENTLY ISSUED AUTHORITATIVE GUIDANCE
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 provides guidance related to revenue recognition issues
based on interpretations and practices followed by the SEC. Management has
determined that the adoption of SAB101 did not have a material impact on its
June 30, 2000 condensed consolidated financial statements.
NOTE C - ACQUISITIONS
On April 19, 2000, DrugMax Acquisition Corporation ("Buyer"), a wholly
owned subsidiary of DrugMax, Valley Drug Company ("Valley"), Ronald J. Patrick
("Patrick") and Ralph A. Blundo ("Blundo" and together with Patrick, the
"Sellers") signed a Merger Purchase Agreement (the "Agreement"). In connection
with the merger, the Sellers received an aggregate of 226,666 shares of the
Company's common stock and cash in the amount of $1.7 million. The Sellers were
granted the right to include their shares in any registration filed by the
Company until such time as their shares of the Company may be sold pursuant to
Rule 144 of the General Rules and Regulations promulgated under the Securities
Act of 1933, as amended. In addition, the Sellers deposited 22,666 shares of the
Company's common stock with an escrow agent (the "Holdback Shares"). Based on
audited financial statements of Valley as of April 19, 2000, the stockholders'
equity amounted to $400,667 which was $141,160 less than the threshold amount of
$541,827 required by the Agreement. Therefore, 9,411 of the Holdback Shares will
be returned to the Company. After consideration of the return of the Holdback
Shares, a total of 217,255 shares at $10.125 per share were issued for the
acquisition. The acquisition was accounted for using the purchase method of
accounting and accordingly $3.6 million of goodwill was recorded. The goodwill
will be amortized over fifteen (15) years.
F-72
<PAGE>
The results of operations of Valley are included in the unaudited condensed
consolidated financial statements from the purchase date. The Company acquired
the following assets and liabilities (net of cash received of $502) in the above
business combination:
<TABLE>
<S> <C>
Accounts receivable $ 3,478,637
Inventory 6,690,636
Property and equipment 67,146
Other assets 266,380
Goodwill 3,557,023
Assumption of liabilities (10,102,634)
-------------------
Net value of purchased assets 3,957,188
Fair value of common stock issued 2,199,707
-------------------
Cash paid for acquisitions $ 1,757,481
===================
</TABLE>
The unaudited pro forma effect of the Valley acquisition on the Company's
revenues, net loss and net loss per share, had the acquisition occurred on
April 1, 1999 is as follows:
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
June 30, 2000 June 30, 1999
-------------------- ------------------
<S> <C> <C>
Revenues 31,633,652 $12,676,946
Net loss 1,486,171 80,580
Basic and diluted net loss per share ($.23) ($.02)
</TABLE>
NOTE D - INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109
("SFAS 109"), Accounting for Income Taxes. Under SFAS 109, the Company uses the
asset and liability method which recognizes the amount of current and deferred
taxes payable or refundable at the date of the financial statements as a result
of all events that have been recognized in the consolidated financial statements
and as measured by the provisions of enacted tax laws.
The Company has a gross deferred tax asset as of June 30, 2000, which
represents the potential future tax benefit associated with its operating losses
to date. Management has evaluated the available evidence regarding the future
taxable income and other possible sources of realization of deferred tax assets.
A 100 percent valuation has been established by management against the gross
deferred tax asset, as it is more likely than not the deferred tax asset will
not be realized.
The Company continually reviews the adequacy of the valuation allowance and
will recognize deferred tax asset benefits only when a reassessment indicates
that it is more likely than not that the benefits will be realized. The Company
will recognize a deferred tax asset only when such reassessments indicate that
the benefits will be realizable.
NOTE E - COMMITMENTS AND CONTINGENCIES
In conjunction with the Valley acquisition, the Company agreed to become an
additional guarantor of the outstanding bank indebtedness of Valley. As of June
30, 2000, Valley maintains a revolving line of credit and a term loan with
National City Bank with a combined outstanding balance of approximately $6.1
million. The revolving line of credit and term loan are also personally
guaranteed by the former owners of Valley.
F-73
<PAGE>
NOTE F - SEGMENT INFORMATION
During the three months ended June 30, 2000, the Company operated two
industry segments: wholesale distribution and computer software development. The
Company operated only in the wholesale distribution segment through March 20,
2000. The following table reports financial data that management uses in its
business segment analysis.
There were no inter-segment sales or transfers during the first three
months of fiscal year 2000 or 1999. Operating loss by business segment excludes
interest income, interest expense, and other income and expenses.
Summarized financial information by business segment is as follows:
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended June
June 30, 2000 30, 1999
---------------- -----------------
<S> <C> <C>
Revenue from external customers
Distribution.......................... $28,718,856 $ 33,899
Software Development.................. 97,797 --
-------------- --------------
Total................................. $28,816,653 $ 33,899
============== ==============
Segment loss from operations
Distribution.......................... $ 841,257 $ 82,195
Software Development.................. 518,971 --
-------------- --------------
Total................................. $ 1,360,228 $ 82,195
============== ==============
<CAPTION>
June 30, 2000 March 31, 2000
-------------- ----------------
Assets
Distribution.......................... $50,060,809 $38,408,017
Software Development.................. 73,097 105,895
-------------- ----------------
Total................................. $50,133,906 $38,513,912
============== ================
</TABLE>
NOTE G - SUBSEQUENT EVENTS
SUBSEQUENT EVENTS
On July 7, 2000, the Company entered into a consulting agreement with Marc Mazur
Consulting, Inc. Upon satisfaction by Marc Mazur Consulting, Inc. of its
obligations under the agreement, the Company will grant to Marc Mazur
Consulting, Inc. warrants to purchase 200,000 shares of common stock with an
exercise price of $10.00 per share. Upon issuance, these warrants will be
immediately exercisable.
In August 2000, the audited amount of Valley stockholders' equity as of April
19, 2000 was determined to be $400,667, which was $141,160 less than the
threshold amount of $541,827 required by the agreement. Therefore, 9,411 of the
holdback shares will be returned to the Company. After consideration of the
return of the holdback shares, a total of 217,255 shares at $10,125 per share
were issued for the acquisition.
On September 13, 2000, the Company entered into a letter of intent to purchase
substantially all of the assets of Penner & Welsch, Inc. ("P&W"), a wholesale
distributor of pharmaceuticals, over-the-counter products and health and beauty
care products, headquartered in New Orleans, LA. Also on that date, P&W filed a
voluntary petition for Chapter 11 relief under the United States Bankruptcy
Code. The case is pending in the United States Bankruptcy Court for the Eastern
District of Louisiana. Pursuant to the letter of intent, the Company will work
with P&W, on an exclusive basis, to formulate a bankruptcy reorganization plan,
pursuant to which the Company offered to purchase, for $750,000 worth of
restricted common stock, all of P&W's assets and/or equity, without its
liabilities, while keeping P&W's customers in continuous service. In addition,
on September 13, 2000, the Company entered into a management agreement with P&W,
pursuant to which it will manage the day-to-day operations of P&W, in exchange
for a management fee equal to three percent of the gross revenues of P&W each
month, with an additional 1% available in months in which certain operating
measures are achieved.
On September 13, 2000, the Company entered into a financing and security
agreement with P&W, pursuant to which the Company has agreed to provide P&W with
a secured revolving line of credit for the sole purpose of purchasing inventory
from the Company, up to an aggregate amount of $2.5 million as may be requested
by P&W and as may be allowed by the Company in its sole discretion. The line of
credit is secured by a second lien on substantially all of the assets of P&W,
second only to P&W's primary banking facility, as well as real estate owned by
an affiliate of P&W. On September 14, 2000, the Bankruptcy Court entered an
emergency interim order approving the management agreement and financing and
security agreement. However, the bankruptcy plan, including the proposed
acquisition, management agreement and financing and security agreement, are
still subject to the final approval of the United States Bankruptcy Court for
the Eastern District of Louisiana, and the Company cannot guarantee that the
transaction will be completed or, if completed, that the Company will
successfully assimilate the additional personnel, operations, acquired
technology and products of P&W into the business, or retain key personnel and
customers.
On or about September 19, 2000, the Company informed the selling shareholders of
Desktop that 20,000 shares held under escrow, pursuant to the acquisition
agreement, would not be released as contemplated in the initial purchase price.
Upon final receipt of these shares from the escrow agent, management anticipates
reducing the purchased goodwill by approximately $329,000.
On October 24, 2000, the Company obtained from Mellon Bank, N.A. ("Mellon") a
line of credit and a $2 million term loan to refinance the prior bank
indebtedness, to provide additional working capital, and for other general
corporate purposes. The new line of credit enables the Company to borrow a
maximum of $15 million, with borrowings limited to 85% of eligible accounts
receivable and 65% of eligible inventory. The term loan is payable in monthly
principal installments of $55,556 commencing on December 1, 2000, and in one
final payment of the remaining principal balance plus all accrued and unpaid
interest thereon on October 24, 2003. The term loan bears interest, payable
monthly, at 0.75% per annum over the base rate, which is the higher of Mellon's
prime rate or the effective federal funds rate plus 0.50% per annum. The
revolving credit facility will bear interest at the floating rate of 0.25% per
annum above the base rate. After the Company delivers the audited consolidated
financial statements for the fiscal year ending March 31, 2001 to Mellon, the
applicable margin over the base rate may change on an annual basis depending on
the ratio of funded debt to EBITDA. At the Company's option, interest may
instead be paid at a LIBOR rate plus an applicable margin, which also varies on
the ratio of funded debt to EBITDA. Under the terms of the agreement, DrugMax
is prohibited from paying dividends, and it must maintain certain financial
ratio covenants in addition to others of the type customarily required by
lenders for similar facilities. On October 27, 2000, proceeds were used to
repay the Merrill Lynch Financial and National City Bank credit facilities,
aggregating approximately $8.9 million, and approximately $5.5 million was
available for borrowing.
NOTE H - LOSS PER SHARE
Basic net loss per common share is computed by dividing loss available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted net loss per common share is calculated by dividing
loss available to common stockholders by the weighted average number of shares
of common stock outstanding during the period, adjusted for the dilutive effect
of common stock equivalents, using the treasury stock method. The Company does
not have any dilutive shares outstanding.
F-74
<PAGE>
VALLEY DRUG COMPANY
BALANCE SHEETS
MARCH 31, 2000 AND 1999
ASSETS
2000 1999
---------- ----------
Current assets (unaudited) (unaudited)
Cash $ 500 $ -
Accounts receivable, net 2,899,271 2,759,761
Inventory 6,585,222 7,097,160
Prepaid and other current assets 21,125 41,411
---------- -----------
Total current assets 9,506,118 9,898,332
Property, plant and equipment - net 67,951 65,893
Shareholder note receivable 70,000 -
Non-current accounts receivable 265,553 21,639
Other non-current assets 72,860 59,798
---------- -----------
Total assets $9,982,482 $10,045,662
========== ===========
F-75
<PAGE>
VALLEY DRUG COMPANY
BALANCE SHEETS
MARCH 31, 2000 AND 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
---------- -----------
Current liabilities (unaudited) (unaudited)
Line of credit $4,368,000 $ 3,933,468
Current portion long-term debt 254,912 220,000
Bank overdraft - 895,868
Accounts payable 3,177,225 3,283,954
Accrued expenses 174,779 126,553
---------- -----------
Total current liabilities 7,974,916 8,459,843
Long-term debt 1,510,083 1,744,518
---------- -----------
Total liabilities 9,484,999 10,204,361
Shareholders' equity
Common stock, no par; 500 shares authorized;
100 shares issued and outstanding, at
March 31, 2000 and 1999 - -
Retained earnings 497,483 (158,699)
---------- -----------
Total shareholders' equity 497,483 (158,699)
---------- -----------
Total liabilities and Shareholders' equity $9,982,482 $10,045,662
========== ===========
Please read accompanying notes
F-76
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
----------- -----------
Sales $12,264,706 $12,285,830
Cost of good sold 11,673,984 11,798,602
----------- -----------
Gross Profit 590,722 487,228
Operating expenses
Depreciation 4,100 -
General and administrative 460,460 541,450
----------- -----------
Total operating expenses 464,560 541,450
----------- -----------
Operating income (loss) 126,162 (54,222)
Other income (expense)
Interest income 5,922 1,703
Interest expense (166,249) (92,959)
----------- -----------
Total other income (expense) (160,327) (91,256)
----------- -----------
Net loss $ (34,165) $ (145,478)
=========== ===========
Basic and diluted loss per share $ (341.65) $ (1,454.78)
=========== ===========
Weighted average shares of
common stock outstanding 100 100
=========== ===========
Please read accompanying notes.
F-77
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (34,165) $ (145,478)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and amortization expense 11,150 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (197,517) 21,223
Inventory (246,103) (1,339,876)
Other current assets - (17,625)
Other assets 22,749 136,213
Increase (decrease) in:
Accounts payable 274,272 448,573
Accrued expenses 29,589 963,861
--------- -----------
Net cash provided (used) by operating activities (140,025) 66,891
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,303) (42,531)
Notes receivable acquired - (70,000)
Payments received on notes - 52,000
--------- -----------
Net cash provided (used) by investing activities (5,303) (60,531)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 202,000 3,933,468
Proceeds from issuance of debt - 2,000,000
Payments on long-term debt (56,674) (1,254,316)
Purchase and retirement of common stock - (6,760,068)
--------- -----------
Net cash provided (used) by financing activities 145,326 (2,080,916)
--------- -----------
Net increase (decrease) in cash (2) (2,074,556)
Cash at beginning of period 502 2,137,036
--------- -----------
Cash at end of period $ 500 $ 62,480
========= ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 166,249 $ 92,959
========= ===========
Please read accompanying notes.
F-78
<PAGE>
VALLEY DRUG COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation S-B.
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
items) considered necessary for a fair presentation have been included. Interim
results are not necessarily indicative of the results that may be expected for a
full year. These statements should be read in conjunction with the financial
statements and footnotes for the year ended December 31, 1999 which are included
elsewhere herein.
NOTE B - RECENTLY ISSUED AUTHORITATIVE GUIDANCE
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance related to revenue recognition issues based on
interpretations and practices followed by the SEC. Management has determined
that the adoption of SAB 101 did not have a material impact on its March 31,
2000 condensed financial statements.
NOTE C - ACQUISITION
On April 19, 2000, the Company was acquired by DrugMax.com, Inc.
NOTE D - INCOME TAXES
The Company was privately owned until April 19, 2000 and had elected with the
consent of its shareholders to be taxed as an S corporation. On April 19, 2000,
the Company executed an agreement and plan of reorganization with DrugMax.com,
Inc. ("DrugMax") whereby all of the issued and outstanding capital stock of the
Company was exchanged for shares of DrugMax (Note 7). As a result of the
exchange, the Company became a wholly owned subsidiary of DrugMax. Under those
provisions, the Company does not pay federal corporate income taxes on its
taxable income. Instead, the shareholders are liable for individual federal and
state income taxes on their proportionate shares of the Company's taxable
income.
NOTE E - LOSS PER SHARE
Basic and diluted net loss per common share is computed by dividing loss
available to common stockholders by the weighted-average number of common shares
outstanding during the period.
NOTE F - LINE OF CREDIT
In January 1999, the Company established a $ 4.5 million revolving credit
facility scheduled to mature in January 2002. The credit available to the
Company is based on a percentage of eligible accounts receivable and inventory.
The facility imposes financial covenants on tangible net worth, leverage, and a
debt service ratio. Minimum borrowing under the agreement is $1,000. The
agreement places limitations on disposition of assets and debt funding to
transactions within the normal course of business and restricts the payment of
dividends to any shareholder of record and any class of common stock during the
term of the agreement. Borrowings accrue interest at 11% and are secured by all
assets of the Company. The shareholders have personally guaranteed the loan.
F-79
<PAGE>
Basis of Presentation of Unaudited Pro Forma Condensed Consolidated Financial
Statements for the Year Ended March 31, 2000.
The unaudited pro forma data presented in the unaudited pro forma condensed
Consolidated statements of operations are included in order to illustrate the
effect on the Company's financial statements of the transactions described
below:
On November 26, 1999, DrugMax.com, Inc. ("DrugMax") acquired all the issued and
outstanding shares of Becan Distributors, Inc. and its subsidiary, Discount Rx,
Inc. (collectively "Becan") for $2,000,000 in cash and 2,000,000 shares of
DrugMax common stock. The acquisition is accounted for as a purchase.
On March 20, 2000, DrugMax acquired all the issued and outstanding shares of
Desktop Corporation and its subsidiary, Desktop Ventures, Inc. (collectively
"Desktop") for stock and payment of certain Desktop liabilities. Desktop
provides consulting and software development services. The acquisition is
accounted for as a purchase.
Simultaneous with the Desktop acquisition, DrugMax acquired a 20% interest in
VetMall, Inc. ("VetMall") a web site management company. Since Desktop already
owned a 50% interest in VetMall, the acquisition of the additional 20% interest
gave DrugMax a controlling interest in VetMall. The acquisition is accounted for
as a purchase.
On April 19, 2000, DrugMax acquired all the issued and outstanding stock of
Valley Drug Company for $1,700,000 and 226,666 shares of DrugMax common stock.
The acquisition is accounted for as a purchase.
For purposes of the statement of operations the adjustments are presented as if
DrugMax had acquired Becan, Desktop, VetMall and Valley as of April 1, 1999.
The pro forma information is based on the following historical financial
statements after giving effect to the transactions using the purchase method of
accounting and the assumptions and adjustments in the accompanying notes to the
unaudited pro forma condensed consolidated financial statements.
The audited consolidated financial statements of DrugMax (as filed in
DrugMax's Form 10-KSB/A, for the fiscal year ended March 31, 2000),
The unaudited consolidated financial statements of Becan which were
provided by Becan, for the period April, 1999 through November 26, 1999.
The audited consolidated financial statements of Desktop for the fiscal
year ended March 31, 2000 (filed with Form 8-K/A of DrugMax filed on June
29, 2000) which have been provided by Desktop,
The audited financial statements of VetMall for the period from June 28,
1999 (date of inception) through March 31, 2000 (filed with Form 8-K/A of
DrugMax filed on June 29, 2000) which were provided by VetMall, and
The December 31, 1999 audited financial statements of Valley for the year
ended December 31, 1999 (filed with this report under Item 7 (a)) which
have been provided by Valley.
These unaudited pro forma condensed consolidated financial statements may not be
indicative of the results that actually would have occurred if the acquisitions
had occurred on the dates indicated or of the results which may be obtained in
the future.
In the opinion of management, all adjustments have been made that are necessary
to present fairly the pro forma data.
F-80
<PAGE>
The Unaudited Pro Forma Condensed Consolidated Financial Statements should be
read in conjunction with the financial statements and related notes of the
respective companies.
Becan's statement of operations includes only activity from April 1, 1999
through November 26, 1999 (date of acquisition). The VetMall statement of
operations is for the period from June 28, 1999 (date of inception) through
March 20, 2000 (date of acquisition). The Desktop statement of operations is for
the period from April 1, 1999 to March 20, 2000 (date of acquisition). All
activity of Becan, Desktop and VetMall subsequent to the respective dates of
acquisition is included in DrugMax's March 31, 2000 consolidated statement of
operations. Valley's statement of operations is for the year ended December 31,
1999. The minority interest for 30% of VetMall has not been recognized because
of VetMall's shareholders' deficit.
Adjustments reflect the following:
(a) Elimination of intercompany revenues and expenses and equity in loss of
affiliate to reflect the consolidation of Desktop and VetMall due to the common
ownership created by the acquisition.
(b) Amortization expense related to goodwill arising from the Becan acquisition
(15 year life.)
(c) Amortization expense related to goodwill arising from the Desktop
acquisition (5 year life.)
(d) Amortization expense related to goodwill arising from the VetMall
acquisition (5 year life.)
(e) Amortization expense related to goodwill arising from the Valley acquisition
(15 year life.)
(f) Tax benefit lost as result of the acquisition and the corresponding
limitation on Desktop's net operating loss carry forwards.
(g) Weighted average shares of common stock outstanding was calculated based on
the assumption that the shares issued in connection with the acquisitions were
outstanding for the entire period.
F-81
<PAGE>
DRUGMAX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
DRUGMAX BECAN DESKTOP VETMALL
APRIL 1, 1999 APRIL 1, 1999 APRIL 1, 1999 JUNE 28, 1999
MARCH 31, 2000 NOVEMBER 26, 1999 MARCH 20, 2000 MARCH 20, 2000
--------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues $21,050,547 $ 33,721,393 $ 2,374,506 $ 574,706
Cost of sales 20,906,771 32,965,395 18,815 458,739
----------- ------------ ------------ --------------
Gross profit 143,776 755,998 2,355,691 115,967
----------- ------------ ------------ --------------
Operating expenses:
Selling, general and administrative expense 2,076,653 421,994 2,572,164 2,314,856
Goodwill amortization-Becan --
Goodwill amortization-Desktop
Goodwill amortization-VetMall --
Goodwill amortization-Valley Drug --
----------- ------------ ------------ --------------
Total operating expenses 2,076,653 421,994 2,572,164 2,314,856
----------- ------------ ------------ --------------
Operating income (loss) (1,932,877) 334,004 (216,473) (2,198,889)
Interest income 144,340 5,455 54
Interest expense (107,095) (99,090) (50,996)
Other income and (expenses), net (93,312) (8,377) 798,982
Equity in loss of affiliate -- (1,099,444)
----------- ------------ ------------ -------------
Income (loss) before income tax (1,988,944) 231,992 (567,877) (2,198,889)
Income tax provision -- -- 280,042
----------- ------------ ------------ ------------
Net income (loss) $(1,988,944) $ 231,992 $ (287,835) $(2,198,889)
=========== ============ ============ ===========
Basic and diluted net income (loss)
per share $ (0.51)
===========
Basic and diluted weighted average
number of shares outstanding 3,875,445
===========
</TABLE>
<TABLE>
<CAPTION>
VALLEY DRUG PROFORMA
JANUARY 1, 1999 CONSOLIDATED
DECEMBER 31, 1999 ADJUSTMENTS MARCH 31, 2000
----------------- ----------- --------------
<S> <C> <C> <C>
Net revenues $50,572,187 $ (1,999,682) (a) $106,293,657
Cost of sales 48,037,331 102,387,051
----------- ---------- ------------
Gross profit 2,534,856 (1,999,682) 3,906,606
----------- ---------- ------------
Operating expenses:
Selling, general and administrative expense 1,737,992 (2,110,307) (a) 7,013,352
Goodwill amortization-Becan 126,663 (b) 126,663
Goodwill amortization-Desktop 568,925 (c) 568,925
Goodwill amortization-VetMall 384,545 (d) 384,545
Goodwill amortization-Valley Drug 230,214 (e) 230,214
----------- ---------- ------------
Total operating expenses 1,737,992 (799,960) 8,323,699
----------- ---------- ------------
Operating income (loss) 796,864 (1,199,722) (4,417,093)
Interest income 13,113 -- 162,962
Interest expense (565,371) -- (822,552)
Other income and (expenses), net (110,625) (a) 586,668
Equity in loss of affiliate 1,099,444 (a) --
----------- ---------- ------------
Income (loss) before income tax 244,606 (210,903) (4,490,015)
Income tax provision (280,042) (f) --
----------- ---------- ------------
Net income (loss) $ 244,606 $ (490,945) $ (4,490,015)
=========== ========== ============
Basic and diluted net income (loss)
per share $ (0.89)
===========
Basic and diluted weighted average
number of shares outstanding (g) 5,018,708
===========
</TABLE>
F-82
<PAGE>
Basis of Presentation of Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Three Months Ended June 30, 2000.
The unaudited pro forma data presented in the unaudited pro forma condensed
consolidated statements of operations are included in order to illustrate the
effect on the Company's financial statements of the transaction described below:
On April 19,2000, DrugMax.com,Inc. (DrugMax) acquired all the issued and
outstanding shares of Valley Drug Company (Valley) for $1,700,000 and 217,225
shares of common stock. The acquisition is accounted for as a purchase.
For purposes of the statement of operations the adjustments are presented as if
DrugMax had acquired Valley as of April 1, 2000.
The pro form information is based on the following historical financial
statements after giving effect to the transaction using the purchase method of
accounting and the assumptions and adjustments in the accompanying notes to the
unaudited pro forma condensed consolidated financial statements.
The unaudited condensed consolidated financial statements of DrugMax
(as filed on DrugMax's Form 10QSB, for the three months ended June 30, 2000),
The audited financial statements of Valley for the period ended April
18, 2000.
These pro forma condensed consolidated financial statements may not be
indicative of the results that actually would have occurred if the acquisition
had occurred on the date indicated or of the results which may be obtained in
the future.
In the opinion of management, all adjustments have been made that are necessary
to present fairly the pro forma data.
Valley's statement of operations includes only activity from April 1, 2000
through April 19, 2000 (date of acquisition).
F-83
<PAGE>
DrugMax.com Inc.
Pro Forma Unaudited Condensed Consolidated Statement of Operations
June 30, 2000
<TABLE>
<CAPTION>
DrugMax Valley Drug
Three Months Ended 04/01/2000 to Pro forma
06/30/00 04/18/2000
---------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $28,816,653 $2,816,998 $31,633,651
Cost of goods sold 27,813,691 2,755,859 30,569,550
---------------------------------------------------------------------
Gross profit 1,002,962 61,139 1,064,101
Selling, general and administrative expenses 2,363,190 74,768 2,437,958
---------------------------------------------------------------------
Operating (loss) before other income and expense (1,360,228) (13,628) (1,373,856)
---------------------------------------------------------------------
Other income (expense):
Interest income 64,355 (996) 63,359
Interest expense (223,956) 17,808 (206,148)
---------------------------------------------------------------------
Total other income (expense) (159,601) 16,812 (142,789)
---------------------------------------------------------------------
Net income (loss) $(1,519,829) $ 3,184 $(1,516,645)
=====================================================================
Basic and diluted net loss per share $ (0.24) $ (0.24)
=====================================================================
Basic and diluted weighted average number of
common shares outstanding 6,374,780 6,374,780
=====================================================================
</TABLE>
The pro forma statement reflects the inclusion of Valley Drug Company's results
of operations for the 18 days of April preceding DrugMax's acquisition of
Valley. Since the majority of Valley's activity for the quarter, was already
included in DrugMax's consolidated statement of operations for the quarter ended
June 30, 2000, no additional adjustments were considered necessary.
F-84
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 78.7502 of the Nevada Revised Statutes permits a corporation to
include in our charter documents, and in agreements between the corporation and
our directors and officers, provisions expanding the scope of indemnification
beyond the indemnification specifically provided by the current law.
Article XI of our Bylaws provides for the indemnification of officers,
directors and third parties acting on our behalf if such person acted in good
faith and in a manner reasonably believed to be in, and not opposed to, our best
interest and, with respect to any criminal action or proceeding, the indemnified
party had no reason to believe his or her conduct was unlawful.
In addition to providing for indemnification in our Bylaws, we may purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee, or agent of we, or is or was serving at the request of we as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against any liability asserted
against such person and incurred by such person in any such capacity or arising
out of his or her status as such. Further, we may enter into indemnification
agreements with our directors and executive officers in the future.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee.
Description Amount
----------- ------
Securities and Exchange Commission filing fee................. $ 3,943.00
NASD filing fee............................................... 1,493.65
Nasdaq listing fee............................................
Blue Sky filing fees and expenses.............................
Legal fees and expenses.......................................
Underwriter's expenses........................................
Accounting fees and expenses..................................
Printing, postage, and mailing expenses.......................
Stock transfer agent fees and certificates....................
Miscellaneous.................................................
Total......................................................... $
Item 26. Recent Sales of Unregistered Securities.
During the past three years, DrugMax has issued unregistered securities to
a limited number of persons as described below. The following information
regarding DrugMax's shares of common stock has been adjusted to give effect to
(i) the one-for-fifty reverse split of DrugMax's common stock effected in March
1999, (ii) the two-for-one stock split in the form of a stock dividend effected
in April 1999, and (iii) a one-for-two reverse stock split in October 1999.
(1) On March 18, 1999, DrugMax issued an aggregate of 2,400,000 shares of
common stock to 14 investors in connection with the merger of Nutriceuticals.com
Corporation, a Florida corporation, with and into DrugMax.
(2) On March 31, 1999, DrugMax issued an aggregate of 100,000 shares of common
stock, to one investor in connection with the acquisition of Healthseek.com
Corporation, a Massachusetts corporation.
II-1
<PAGE>
(3) On August 16, 1999, DrugMax issued an aggregate of 20,000 shares of common
stock to Lyntren Communications, Inc. in connection with the acquisition of the
Nutriceuticals.com domain name.
(4) On November 26, 1999, DrugMax issued an aggregate of 2,000,000 shares of
common stock to Dynamic Health Products, a Florida corporation, in connection
with the acquisition of Becan Distributors, Inc.
(5) On March 20, 2000, DrugMax issued an aggregate of 50,000 shares of common
stock in connection with the acquisition of Desktop Corporation.
(6) On March 20, 2000, DrugMax issued an aggregate of 49,985 shares of common
stock to retire debt associated with the acquisition of Desktop Corporation.
(7) On March 20, 2000 DrugMax issued 25,000 shares of common stock in
connection with the acquisition of VetMall.
(8) On April 19, 2000 DrugMax issued 217,225 shares of common stock in
connection with the acquisition of Valley Drug Company.
None of the foregoing transactions involved any underwriter, underwriting
discounts or commissions or any public offering, and DrugMax believes that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof. The recipients in such transactions
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access to information
about DrugMax.
Item 27. Exhibits.
The following exhibits are filed with this registration statement:
1.1 Underwriting Agreement between DrugMax.com, Inc. and Utendahl Capital
Partners, L.P.(*)
2.1 Agreement and Plan of Merger by and between NuMed Surgical, Inc. and
Nutriceuticals.com Corporation, dated as of January 15, 1999. (1)
2.2 Agreement and Plan of Reorganization between DrugMax and Eric Egnet dated
March 31, 1999. (1)
2.3 Agreement and Plan of Reorganization dated September 8, 1999 by and between
Nutriceuticals.com Corporation and Dynamic Health Products, Inc. (2)
2.4 Agreement and Plan of Reorganization between DrugMax.com, Inc., Jimmy L.
Fagala, K. Sterling Miller, and HCT Capital Corp. dated as of March 20,
2000. (3)
2.5 Stock Purchase Agreement between DrugMax.com, Inc. and W.A. Butler Company
dated as of March 20, 2000. (3)
2.6 Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition
Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A. Blundo
dated as of April 19, 2000. (4)
3.1 Articles of Incorporation of NuMed Surgical, Inc., filed October 18, 1993.
(1)
3.2 Articles of Amendment to the Articles of Incorporation of NuMed Surgical,
Inc., filed March 18, 1999. (1)
3.3 Articles of Merger of NuMed Surgical, Inc. and Nutriceuticals.com
Corporation, filed March 18, 1999. (1)
II-2
<PAGE>
3.4 Certificate of Decrease in Number of Authorized Shares of Common Stock of
Nutriceuticals.com Corporation, filed October 29, 1999. (5)
3.5 Articles of Amendment to Articles of Incorporation of Nutriceuticals.com
Corporation, filed January 11, 2000. (8)
3.6 Articles and Plan of Merger of Becan Distributors, Inc. and DrugMax.com,
Inc., filed March 29, 2000. (8)
3.7 Amended and Restated Bylaws, dated November 11, 1999. (5)
4.1 Specimen of Stock Certificate. (8)
4.2 Form of Representative's Warrant Agreement. (*)
5.1 Opinion of [Shumaker, Loop & Kendrick, LLP], re: legality of securities
registered *
10.1 Consulting Agreement by and between DrugMax.com, Inc. and Stephen M.
Watters dated as of August 10, 2000.
10.2 Employment Agreement by and between Nutriceuticals.com Corporation and
William L. LaGamba dated January 1, 2000. (7)
10.3 Employment Agreement by and between Valley Drug Company and Ronald J.
Patrick dated April 19, 2000. (8)
10.4 Employment Agreement by and between Valley Drug Company and Ralph A.
Blundo dated April 19, 2000. (8)
10.5 Consulting Agreement by and between DrugMax.com, Inc. and Jugal K. Taneja,
dated as of April 1, 1999. (1)
10.6 Loan and Security Agreement among DrugMax.com, Inc. and Valley Drug
Company and Mellon Bank, N.A. dated October 24, 2000.
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Brimmer, Burek, Keelan & McNally LLP, independent auditors
(Valley)
23.3 Consent of Brimmer, Burek, Keelan & McNally LLP, independent auditors
(VetMall)
23.4 Consent of Brimmer, Burek, Keelan & McNally LLP, independent auditors
(Desktop)
23.5 Consent of Brimmer, Burek, Keelan & McNally LLP, independent auditors
(Becan)
23.6 Consent of Kirkland, Russ, Murphy & Tapp, independent auditors
23.7 Consent of Shumaker, Loop & Kendrick, LLP (included in Exhibit 5.1) *
24 Powers of Attorney (reference is made to the signature page)
27 Financial Data Schedule**
99.1 DrugMax.com, Inc.1999 Incentive and Non-Statutory Stock Option Plan. (8)
________________
* To be filed by amendment.
** Contained in electronically filed version only.
II-3
<PAGE>
(1) Incorporated by reference to DrugMax's Registration Statement on Form SB-2,
filed June 29, 1999, File Number 0-24362, as amended.
(2) Incorporated by reference to Amendment No. 1 to DrugMax's Registration
Statement on Form SB-2, filed on September 13, 1999, File No. 0-24362.
(3) Incorporated by reference to DrugMax's Report on Form 8-K, filed April 6,
2000, File Number 0-24362.
(4) Incorporated by reference to DrugMax's Report on Form 8-K, filed May 3,
2000, File Number 0-24362.
(5) Incorporated by reference to Amendment No. 2 to DrugMax's Registration
Statement on Form SB-2, filed on November 12, 1999, File No. 0-24362.
(6) Incorporated by reference to DrugMax's Report on Form 8-K, filed February
8, 2000, File No. 0-24362.
(7) Incorporated by reference to DrugMax's Form 10-KSB, filed June 29, 2000,
File No. 0-24362.
(8) Incorporated by reference to DrugMax's Form 10-KSB, filed July 14, 2000,
File No. 0-24362.
Item 28. Undertakings.
(1) For determining any liability under the Securities Act, we hereby undertake
to treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
(2) Insofar as indemnification for liabilities arising from the Securities Act
may be permitted to our directors, officers, and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the 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 us of
expenses incurred or paid by one of our directors, officers or controlling
persons 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, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(3) For determining any liability under the Securities Act, we hereby undertake
to treat 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 us under Rule 424(b)(1) or (4) or Rule 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in the city of Largo,
State of Florida, on October 31, 2000.
DrugMax.com, Inc.
By: /s/ William L. LaGamba
-----------------------------------
William L. LaGamba, President and
Chief Operating Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints each of
William L. LaGamba and Jugal K. Taneja his attorney-in-act, with the power of
substitution, to sign any amendments, including post-effective amendments, to
this registration statement, and any registration statement filed pursuant to
Rule 462(b) of the Securities Act related hereto, and to file the same with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute or substitutes may do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated.
Signatures Title Date
---------- ----- ----
By: /s/ Jugal K. Taneja Chairman of the Board October 31, 2000
------------------------ and Chief Executive
Jugal K. Taneja Officer
By: /s/ William L. LaGamba President and October 31, 2000
------------------------ Chief Operating Officer
William L. LaGamba
By: /s/ Ronald J. Patrick Director October 31, 2000
------------------------
Ronald J. Patrick
By: /s/ Stephen M. Watters Director October 31, 2000
------------------------
Stephen M. Watters
By: /s/ Howard L. Howell DDS Director October 31, 2000
-------------------------
Dr. Howard L. Howell, DDS
By: /s/ Jeffrey K. Peterson Director October 31, 2000
------------------------
Jeffrey K. Peterson
By: /s/ Joseph Zappala Director October 31, 2000
------------------------
Joseph Zappala
II-5
