UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-24362
DRUGMAX.COM, INC.,
formerly known as Nutriceuticals.com Corporation
(Name of small business issuer in its charter)
STATE OF NEVADA 34-1755390
(State of or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12505 Starkey Road, Suite A, Largo, Florida 33773
(Address of Principal Executive Officers) (Zip Code)
Issuer's telephone number: (727) 533-0431
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common stock, Par value $.001 per share
(Title of Class)
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers
in response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $21,050,547.
Number of shares outstanding of the Issuer's common stock at $.001 par
value as of June 15, 2000 was 6,398,647. The aggregate market value of the
common stock held by non-affiliates of the registrant (approximately 2,859,832
shares) was approximately $31,815,631, as computed by the closing price of such
common stock, $11.125, as of June 15, 2000.
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CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for "forward-looking statements" to encourage companies
to provide prospective information, so long as such information is identified as
forward-looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statement(s).
Drugmax.com, Inc. ("the Company") desires to take advantage of the safe harbor
provisions of the Act.
Except for historical information, the Company's Annual Report on Form
10-KSB for the year ended March 31, 2000, the Company's quarterly reports on
Form 10-QSB, the Company's current reports on Form 8-K, periodic press releases,
as well as other public documents and statements, may contain forward-looking
statements within the meaning of the Act.
In addition, representatives of the Company, from time to time,
participate in speeches and calls with market analysts, conferences with
investors and potential investors in the Company's securities, and other
meetings and conferences. Some of the information presented in such speeches,
calls, meetings and conferences may be forward-looking within the meaning of the
Act.
It is not reasonably possible to itemize all of the many factors and
specific events that could affect the Company and/or the Company's industry as a
whole. In some cases, information regarding certain important factors that could
cause actual results to differ materially from those projected, forecasted,
estimated, budgeted or otherwise expressed in forward-looking statements made by
or on behalf of the Company may appear or be otherwise conveyed together with
such statements. The additional factors set forth in Part I under "Risk Factors"
(in addition to other possible factors not listed) could affect the Company's
actual results and cause such results to differ materially from those projected,
forecasted, estimated, budgeted or otherwise expressed in forward-looking
statements made by or on behalf of the Company.
PART I
Item 1. BUSINESS.
The Company was founded in 1993 under the name NuMED Surgical, Inc. to
engage in the research, development and distribution of medical instruments and
surgical supplies to the health care market. We were created when NuMED Home
Health Care, Inc., a publicly held company, spun off to its stockholders all of
the assets and liabilities of its surgical/medical products division
(reorganized as NuMED Surgical, Inc.), and the assets and liabilities of a
wholly-owned subsidiary, NuMED Technologies, Inc. The spin off was effected at
the advice of Home Health Care's financial advisors, to separate Home Health
Care's service line of business from its equipment business. Prior to the spin
off, we had no operations or business other than as a division or wholly-owned
subsidiary of NuMED Home Health Care. In connection with the spin off, our
common stock was registered on SEC Form 10-SB, under Section 12(g) of the
Securities Exchange Act of 1934.
On March 31, 1997, the Company adopted a plan of liquidation in which
the Company sold its major product line and subsequently disposed of all its
operating assets. The Company ceased operations on April 1, 1997 and liquidated
its major product line because of continued losses caused by increased
competition and the loss of exclusivity of its products. Also, the Company had
inadequate internal resources to pursue one of its products and was not able
to find an acceptable industry partner to enter into a joint venture with to
pursue development of this product. The sale of the Company's major product line
and assets was consummated by March 31, 1998 and accordingly, from April 1, 1998
to September 8, 1998 the Company used a liquidation basis of accounting.
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On March 18, 1999, the Company acquired in a merger all of the
outstanding common stock of Nutriceuticals.com Corporation, a Florida
corporation ("Nutriceuticals of Florida"). Nutriceuticals of Florida was
organized in September 1998 to engage in the online retailing of natural
products over the Internet.
After acquiring Nutriceuticals of Florida, the Company changed its
corporate name to Nutriceuticals.com Corporation. On March 31, 1999, the Company
acquired Healthseek.com Corp., which was founded in 1995 to provide web-based
healthcare content and related information to healthcare professionals, medical
patients, and consumers.
On November 26, 1999, the Company acquired all of the outstanding
shares of common stock of Becan Distributors, Inc. ("Becan"), a wholesale
distributor primarily of pharmaceutical products and to a lesser extent,
over-the-counter drugs, and health and beauty care products. With the
acquisition of Becan, Becan became a wholly-owned subsidiary and the Company
changed its focus from being an online retailer to an online
business-to-business wholesale portal in which manufacturers, distributors,
wholesalers, and retailers can improve their trading efficiency by exchanging
goods and services through a secure public and private channel, the DrugMax.com
web site. We believe that by creating a wholesale portal:
o manufacturers, distributors, wholesalers, and retailers will be able to
list their products and start transacting business on the Internet
quickly and at a low cost;
o manufacturers, wholesalers, and distributors will have an efficient
system to dispose of problematic inventories in a rapidly growing
Internet market;
o manufacturers, distributors, wholesalers, and retailers will have an
effective mechanism to turn close-out items into cash; and
o buyers will have a means of getting the lowest possible price as
determined by the market.
Becan commenced operations in January 1997 and its net revenues for the
year ended March 31, 1999 and the period ended November 25, 1999 were $31.1
million and $33.7 million, respectively. Net income for the respective periods
was $94,031 and $22,829. See "Acquisitions-Becan".
In January, 2000 Nutriceuticals changed its name to DrugMax.com, Inc.,
and in March, 2000 Becan was merged into DrugMax, and Becan no longer operates
as a wholly-owned subsidiary of the Company.
On March 20, 2000, we diversified our operations by acquiring all of
the issued and outstanding shares of common stock of Desktop Corporation
("Desktop"), a Texas corporation located in Dallas, Texas. Desktop, in addtion
to being a designer and developer of customized internet solutions, owned at the
time 50% of the outstanding shares of common stock of VetMall, Inc. ("VetMall"),
with the remaining shares being owned by W.A. Butler & Company ("Butler"), one
of the nation's largest veterinary products distributors. Concurrent with the
acquisition of Desktop, we acquired an additional 20% interest in VetMall from
Butler. VetMall.com is the web site owned by VetMall and is a
business-to-business portal linking animal health product manufacturers,
distributors, and veterinarians. VetMall will provide a web site to place and
receive product orders, and to display and exchange information about animal
care, services and products. VetMall will launch its web site in the second
quarter of 2000. See "Acquisitions-DeskTop".
On April 19, 2000 the Company expanded its operations by acquiring all
of the issued and outstanding shares of common stock of Valley Drug Company
("Valley"), a full-line primary wholesale distributor of pharmaceuticals,
over-the-counter drugs, health and beauty aid products and general merchandise.
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 $50.5 million and
$12.3 million, respectively, and net income of approximately $500,000 and
$75,000 for such periods. This acquisition gave the Company an additional source
of products and manufacturer relationships.
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The Company's objective is to become a leading owner and operator of
(i) an online portal for pharmaceuticals, over-the-counter drugs, health and
beauty care products and private label nutritional supplements, and (ii) through
its acquisition of VetMall, an online portal linking animal health care product
manufacturers to distributors and veterinarians. To accomplish this, the Company
will endeavor to provide:
o an electronic commerce marketplace - a new way of doing business
through Internet technology that eliminates territorial and regional
borders;
o quality products at competitive prices;
o efficient service through online automation; and
o a community environment for news, information and online forums.
Industry Overview
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, though the Company may not benefit from this growth. 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 Forrester Research, Inc., an
independent national research organization (WWW.FORRESTER.COM),
business-to-business e-commerce is expected to grow from $43 billion in 1998 to
$1.3 trillion in 2003, accounting for more than 90% of the dollar value of
e-commerce in the United States by 2003, though the Company may not 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.
Pharmaceuticals and Health Care Products Industry
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 (OTC products). That figure is
expected to rise to $163 billion in 2002, for an increase of 46%. The National
Association of Chain Drug Stores reported that total prescription drug sales for
1999 are expected to exceed a record $121.6 billion, an increase of 18%. This
continued growth rate of the sales of pharmaceutical products was attributed to
a
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number of factors including (i) the value added by the introduction of new drugs
into the marketplace, which more than offsets the value lost by medications
losing patent protection; (ii) new patterns of drug lifestyle management,
resulting in higher sales occurring earlier in the life cycle of a medication;
(iii) increased money spent on direct-to-consumer marketing initiatives; and
(iv) an unprecedented period of investment by pharmaceutical companies
worldwide.
Currently, the sale of pharmaceuticals and health care products are
serviced primarily by traditional full-line distributors. A full-line
distributor will carry anywhere from 15,000 to 50,000 SKU's (stock keeping
units), consisting of pharmaceuticals, Rx brand, Rx generic, health and beauty
care, over-the-counter drugs, private label, and various sundry items. The
traditional distributor derives income from sell margins, buy margins and
manufacturer cash discounts. There are over eighty current full line wholesalers
across the United States that compete in selling pharmaceuticals and health care
products. The wholesalers currently sell more than $300 billion of the
aforementioned products annually. Through the acquisition of Becan, we intend to
provide manufacturers, distributors, wholesalers and retailers with an online
solution for exchanging goods and services.
The DrugMax.com Solution
Through the acquisition of Becan, the Company launched the first
business-to-business wholesale online portal for pharmaceuticals,
over-the-counter drugs, health and beauty care products and private label
nutritional supplements. Our acquisition of Valley enabled us to expand our
operations. The Company's objective is to apply new Internet tools to the
existing distribution systems of such products to improve their trading
efficiency and create a community in which the wholesale and the retail markets
can exchange ideas, goods and services, advertise and promote their products.
Parties can exchange information and goods through a secure public and private
channel, the DrugMax.com web site. Policies and practices are being structured
to provide buyers and sellers with an unbiased and fair environment in which to
conduct their day-to-day business. Our initial marketing efforts will be to make
pharmaceuticals, over-the-counter drugs, health and beauty care products, and
private label nutritional supplements available to manufacturers, distributors,
wholesalers and retailers.
We have created a new web site which is being used by our
business-to-business portal. This site enables us to carry out the following
models:
o Catalog: creates value by aggregating suppliers and buyers. Works
best in industry characterized by fragmented buyers and sellers
who transact frequently for relatively small-ticket items. Also
works well for situations where demand is predictable and prices
do not fluctuate too frequently;
o Auction: creates value by spatial matching of buyers and sellers.
Works best in industries or settings where one-of-a-kind,
non-standard, or perishable products need to be bought or sold
among businesses that have a very different perception of value
for the product, i.e. capital equipment, used products, unsaleable
returned products and hard-to-find products; and
o Exchange: creates value by timely matching of supply and demand.
Works best where demand and prices are volatile by allowing
businesses to manage excess supply and peak-load demand. We
believe that customers will favor sites that allow buyers and
sellers to choose the appropriate market-making mechanism.
We intend to utilize our advantage as an early entrant as a
business-to-business e-commerce to leverage our infrastructure, technology,
marketing and management resources thereby achieving economies of scale and
attracting an increased audience, making our site more appealing to a broad
array of advertisers and e-commerce customers.
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Strategy
The Company's objective is to be a leading online business-to-business
portal for pharmaceutical, over-the-counter drugs, health and beauty care
products, and private label nutritional supplements. The Company's business
strategy, as a result of the Becan and Valley acquisitions, is to expand the
existing distribution system by applying new internet tools to the system
thereby creating an internet portal in which manufacturers, distributors,
wholesalers and retailers can exchange goods and services through a secure
public and private channel, the DrugMax.com web site. The Company will implement
this strategy by the following:
o create brand recognition and generate traffic to our web sites;
o develop strategic relationships;
o maintain technology focus and expertise; and
o attract and retain exceptional employees.
Create Brand Recognition and Generate Traffic to Our Web Sites. We must
build awareness of our web sites to attract and expand our Internet customer
base. We are promoting advertising and increasing recognition of our web sites
through a variety of marketing and promotional techniques, including:
o co-marketing agreements with major online sites and services;
o online content and ease of use of our Web sites;
o enhancing customer service and technical support;
o advertising in trade journals, leading web sites and other traditional
media;
o conducting an ongoing public relations campaign;
o developing other business alliances and partnerships.
Develop Strategic Relationships. We believe that developing strategic
relationships with a diverse set of partners, including customers
(manufacturers, distributors, wholesalers and retailers), on-line portals, broad
band access providers and on-line content providers, is critical to our success
because such strategic marketing alliances may enhance our brand recognition,
increase customer sales and expand our online visibility. As a result, we intend
to enter into relationships with Internet access providers, search engines and
other high traffic web sites. See "Business--Marketing and Sales."
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 in the
process of upgrading our technology platform to further enhance our customer
interaction
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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.
We cannot assure you that we will be successful in our strategic
efforts.
Online Store
Customers currently enter our online store at www.drugmax.com which was
launched in December 1999. The Company offers the following e-commerce services
for its customers: wholesale market place, auctions, industry news and analysis,
trade show information and a business classified section.
Marketing and Sales
We are using a variety of programs to stimulate demand for our
products, including a direct sales force, telesales and advertising.
Direct Sales. As a result of our recent public offering we have
employed approximately 8 persons who act as our direct sales force to target
organizations that buy and sell products listed on our Web sites.
Telesales. We maintain an in-house telesales group of approximately 11
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 and
direct links from healthcare home pages.
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Customer Service and Support
The Company believes it can establish and maintain long-term
relationships with its customers and encourage repeat visits if, among other
things, we have good customer support and service. The Company currently offers
online information regarding our products and services. We answer customer
questions about the ordering process, and investigate the status of orders,
shipments and payments. A customer can access our staff by fax or e-mail by
following prompts located on our web sites, or by calling our toll free
telephone line. We may eventually increase the level of, and outsource, our
customer support services through a provider of customer support services.
Technology and Security
We currently provide a scaleable business solution for mission critical
Internet connectivity. We contracted with a provider to deliver a secure back-up
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 or our customers 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 description 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 would materially hurt our business, results
of operations and financial condition.
The Company is greatly aware of the importance of securing and
utilizing the most sophisticated information technology solutions available on
the market. Toward that goal, we are exploring new and innovative solutions that
can improve the reliability, efficiency and scalability of our Web sites. As we
intend to create a highly enjoyable and secure shopping experience for our
customers, we are committed to achieving and maintaining technological
leadership in the e-commerce industry.
Competition
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. In addition, the industry is intensely competitive. 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. In addition, as more people use the
Internet and other online services, certain larger, well established and well
financed entities may:
o acquire online competitors or suppliers;
o invest in online competitors or suppliers; or
o form joint ventures with online competitors or suppliers.
Certain of our actual or potential competitors, such as McKesson HBOC,
Inc., Bergen Brunswig Corp., and Cardinal Health, Inc., may be able to:
<PAGE>
o secure merchandise from vendors on more favorable terms;
o devote greater resources to marketing and promotional campaigns;
o adopt more aggressive pricing or inventory availability policies; and
o devote substantially more resources to web site and systems development
than we can.
In addition, new technologies and expansion of existing technologies,
such as price comparison programs that select specific titles from a variety of
web sites, may direct customers to online resellers which compete with us and
may increase competition. 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 assure that we can
compete successfully against current and future competitors. Failure to compete
successfully against our current and future competitors could materially hurt
our business.
Government Regulations and Legal Uncertainties
We are subject to various laws and regulations relating to our
business. 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:
o user privacy;
o pricing;
o content;
o copyrights;
o distribution; and
o characteristics and quality of products and services.
In addition, the growth of the Internet and electronic commerce,
coupled with publicity regarding Internet fraud, may lead to the enactment of
more stringent consumer protection laws. These laws may impose additional
burdens on our business. The enactment of any additional laws or regulations may
impede the growth of the Internet, which could decrease our potential revenues
from electronic commerce or otherwise adversely affect our business, financial
condition and operating results.
Laws and regulations directly applicable to electronic commerce or
Internet communications are becoming more prevalent. The most recent session of
Congress enacted Internet laws regarding on-line copyright infringement.
Although not yet enacted, Congress is considering laws regarding Internet
taxation. The European Union recently enacted new privacy regulations. These are
all recent enactments, and there is uncertainty regarding their marketplace
impact. 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.
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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.
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.
Additionally, 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.
Strategic Alliance
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 labeled to include the marks and logos of the
Company and powered by PPRO. The custom e-marketplace will be utilized within
the Company's site. 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 and 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 health
supplements as well as the value added services from PPRO's preferred providers.
Employees
As of March 31, 2000, the Company had 36 employees. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its employee relations to be good.
In each case, the employees are permitted to participate in employee
benefit plans of the Company that may be in effect from time to time, to the
extent eligible. Each of the employees are eligible for grant of stock options
in accordance with the provisions of the Company's 1999 Stock Option Plan, as
determined by the Administrator of the Plan.
In August 1999, the Company's Board of Directors adopted the Company's
1999 Stock Option Plan, which is subject to approval by the Company's
shareholders at its next annual meeting in August, 2000. The purpose of the 1999
Plan is to enable the Company to attract and retain top-quality executive
employees, officers, directors and consultants and to provide such executive
employees, officers, directors and consultants with an incentive to enhance
stockholder return. The 1999 Plan provides for the grant to officers, directors,
or other key
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employees and consultants of the Company, of options to purchase an aggregate of
400,000 shares of common stock.
ACQUISITIONS
The Company has made the following material acquisitions:
Becan
On November 26, 1999, we acquired all of the common stock of Becan, a
wholesale distributor of pharmaceuticals, over-the-counter drugs, and health and
beauty care products. Becan was a wholly-owned subsidiary of Dynamic, an
affiliate of Jugal K. Taneja, a principal shareholder and director of our
Company. In connection with this acquisition we paid Becan's then parent
company, Dynamic, the sum of $2,000,000 in cash, and 2,000,000 (post one-for-two
reverse stock split) 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 by Becan of certain financial targets for the fiscal years
ending March 31, 2000 and 2001. Becan did not attain its financial target for
the fiscal year ending March 31, 2000 and as a result 500,000 shares were
returned to the Company. In March, 2000, Becan was merged into the Company and
no longer operates as a wholly-owned subsidiary of the Company.
For the year ended March 31, 1999 and the period ended November 25,
1999, Becan had revenues of $31.1 million and $33.7 million, respectively and
net income of $94,031 and $22,829 for such periods.
Business: Becan was incorporated in November 1996, in Ohio and commenced
operations in January 1997. Becan was acquired by Dynamic in June 1998. Becan
was a wholesale distributor of pharmaceuticals, over-the-counter drugs, and
health and beauty care products. In August 1998, Becan formed Discount Rx, Inc.,
a Louisiana corporation which also acts as a wholesale distributor of
pharmaceuticals, and to a lesser extent, over-the-counter, and health and beauty
care products. Becan operates two distribution centers, one of which is a 4,024
square foot leased facility located in Pittsburgh, Pennsylvania, used by Becan,
and the other is a 1,200 square foot leased facility located in Mandeville,
Louisiana, used by Discount Rx. Both of these facilities are used for the
wholesale distribution of pharmaceuticals and health and beauty care products.
The products which Becan and Discount Rx wholesale are acquired from various
manufacturers, including Bergen Brunswig Drug Company, Pharmserv Inc., Merck &
Co, Inc., and Abbott Laboratories.
Product Line: Becan and its subsidiary Discount Rx offer over sixty branded
pharmaceuticals to their customers, along with diabetic test strips, a limited
number of generic pharmaceuticals, a line of nutriceuticals, and a line of
exclusive over-the-counter products. The branded pharmaceuticals account for
ninety percent of the sales for both companies. While diabetic test strips
account for five percent, generics for one percent, nutriceuticals for two
percent, and the exclusive over-the-counter products account for two percent.
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In addition to strengthening their core business, the branded
pharmaceuticals, both Becan and Discount Rx are engaged in growing the
nutriceuticals business, which is one of the fastest growing categories within
their customer base. Both companies have agreements with licensed alternate
source facilities from which they purchase and sell merchandise to.
Market for Product Line: Substantially all of both companies' total sales are to
independent pharmacies.
The overall market for Becan is defined as the Continental U.S.,
however initial concentration has been on accounts in central and eastern United
States.
Sales and Marketing: Becan and Discount Rx utilize a combination of inside sales
and marketing, field sales calls, and independent contractors for its sales and
marketing efforts. The majority of Becan's day to day sales is accomplished
through its inside sales efforts. All of Becan's sales efforts focus on
retaining the existing sales base and developing new customers.
Distribution: Becan and Discount Rx have two distribution locations, one in
Pittsburgh, Pennsylvania, and the other in Mandeville, Louisiana, respectively.
These locations are strategically located to enable the companies to deliver
approximately ninety-five percent of the product to their customers via next day
delivery, shipped by way of ground UPS. The remaining product (large
over-the-counter orders) is distributed via bulk shipments that are delivered
via common carriers. In all instances a minimum order quantity is required to
offset delivery costs and ensure profitability.
Management Information Systems: Becan and Discount Rx use two different
management tools to regulate their inventories, one provided by their accounting
software, and the other an in-house system. The in-house system tracks purchases
and sales, and calculates average purchases against sales, including a growth
factor, and then suggests the appropriate inventory to purchase. Using these
systems, both Becan and Discount Rx provide their customers with an inventory
fill rate that surpasses the industry average. Both companies also track price
increases. This allows both companies to forecast when a price increase will
take place, and allows them to purchase the appropriate inventory to take
advantage of those price increases.
Competition: There are a number of suppliers within each of Becan's and Discount
Rx's market areas that provide branded pharmaceuticals and other products to
independent pharmacies, internet pharmacies, clinics and other licensed outlets.
Both Becan and Discount Rx have developed a niche market within the market of
the other suppliers by offering their customers the needed product at below
market prices.
Valley Drug Company
On April 19, 2000 we acquired all of the issued and outstanding shares
of common stock of Valley Drug Company ("Valley"), a full line primary wholesale
distributor of pharmaceuticals, over-the-counter drugs, health and beauty aid
products, and general merchandise. In connection with the merger, Valley
shareholders received $1.7 million in cash and 226,666 shares of the Company's
common stock. Ten percent of the shares issued have been placed in escrow for
120 days pending determination of the final price. Management of the Company
determined that it is in the best interest of the Company to consummate the
Merger to strengthen the Company's marketing and business development expertise,
enable it to expand its presence in the online Business-to-Business segment, and
provide additional sources of revenues for the Company.
For the year ended December 31, 1999 and the 3 months ended March 31,
2000, Valley had revenues of $50.6 million and $12.3 million, respectively, and
net income of $500,000 and $75,000 for such
<PAGE>
periods. The acquisition has been accounted for using the purchase method of
accounting. We recorded goodwill of approximately $5 million, which will be
amortized over 15 years.
Business: Valley was incorporated in the State of Ohio in 1950 and operations
commenced immediately from its warehouse / office located in Youngstown, Ohio.
The facility has approximately 30,000 square feet of warehouse, receiving, and
shipping space devoted to the distribution of pharmaceuticals, over the counter
remedies, health and beauty aids, and general merchandise. As a primary
wholesaler, Valley purchases its inventory for resale directly from the
pharmaceutical manufacturers and delivers orders to its customers daily via its
fleet of delivery vans.
Product Line: Valley offers over 20,000 items for resale. Over 90% of its annual
revenues are generated from the sale of both branded and generic pharmaceutical
products. The remainder of annual revenues are generated from sales of health
and beauty aids, over the counter merchandise and other revenue enhancements,
such as store advertising, film development and greeting card programs.
Market for Product Line: Historically, over 85% of Valley's total sales are to
independent pharmacies, 10% to hospitals, and 5% to nursing homes. Valley's
customer base covers a region of eastern Ohio and western Pennsylvania. A 75
mile radius surrounding Youngstown, Ohio has been the Company's market
concentration, which allows for daily delivery of product at a manageable cost.
The current re-surgence of the independent pharmacies have provided
opportunities to Valley to expand its customer base.
Sales and Marketing: Valley utilizes an inside sales team for its sales and
marketing efforts. A team of 5 salespersons diligently work daily to maintain
current customer relations, expand sales to existing customers, and search out
new opportunities, Unique to the industry, Valley salesmen visit the stores of
each account at least bi-weekly.
Distribution: All of Valley's sales orders are shipped from its one warehouse
located in Youngstown,Ohio. The location is strategically located in order to
provide next day delivery via its delivery vans and to service the major markets
which surround it geographically.
Management Information System: Valley's information system is maintained on an
IBM AS 400 platform. Accounting for sales, purchases, perpetual inventory
transactions, cash receipts and disbursements and sophisticated management
reports are provided timely for analytical and bookeeping purposes. Also, the
order entry system was designed specifically for Valley and allows its customers
to order product 24 hours per day either via fax, telxon recorder or phone
modem. It has the capabilities of receiving orders over the internet.
The system provides data to management enabling it to review sales
trends and customer base, monitor inventory levels, credit and collection
issues, and purchasing frequency and cost anticipation. Communication and
availability of data is possible through a local area network ring.
DeskTop
On March 20, 2000, we acquired all of the issued and outstanding
capital stock of DeskTop Corporation, a Texas corporation, in exchange for a
total of 99,985 shares of Company common stock and $100,000.
DeskTop, organized in 1995, is engaged in the business of designing and
developing customized internet solutions. Its revenues and income (loss) for the
year ended March 31, 2000 were $2.4 million and $(1.9) million, respectively. In
July, 1999 DeskTop and W.A. Butler & Company, one of the nation's largest
veterinary product distributor, caused to be formed VetMall LLC, each owning a
50% interest. During the period from inception to acquisition of DeskTop by the
Company, the LLC (later converted to a newly formed Florida corporation VetMall,
Inc.) was developing a web site, VetMall.com, a business-to-business
<PAGE>
portal linking animal health product manufacturers, distributors, and
veterinarians. VetMall provides a site to place and receive product orders, and
to display and exchange information about animal care, services and products.
In connection with the acquisition, the Company agreed that 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 the shares acquired,
regardless of the form of such transaction, 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 VetMall's 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) transfer to the Sellers 16% of 50% of the
proceeds of the 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 of DeskTop, the Company entered
into a stock purchase agreement with Butler, whereby Butler sold to the Company
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's common stock. As a result, the Company owns through its ownership of
DeskTop, a 70% interest in VetMall.
Business: The Company intends to offer animal product manufacturers,
distributors, veterinarians, and animal owners a single point of communication
through VetMall.com for displaying information on current and new products and
services, placing and receiving product orders, and learning about product usage
and animal care.
The key to successful integration of this business-to-business (B2B)
model involves the inclusion of distributors and manufacturers. Desktop has
already developed a B2B communication system linking VetMall.com to Butler and
will soon begin to target key manufacturers. As a board member of the American
Veterinary Distributors Association (AVDA), Butler is positioned to assist
VetMall in associating with other major distributors.
The web site is designed for veterinarians to order products online,
perform research, and communicate with other veterinarians through online chat,
email, or question and answer sessions. Currently, all online order processing
options are very cumbersome and time consuming. By integrating current online
order processing solutions into VetMall, a veterinarian will be able to have a
one stop solution. Because of distributor agreements in place with many of the
top manufacturers, it is not possible for a single distributor
<PAGE>
to offer all product lines.
VetMall has already created over 2,000 web sites for veterinary clinics
in the U.S. These web sites will be offered free to veterinarians. By creating
e-commerce enabled web sites for each veterinarian, VetMall will provide a
platform that will allow a local veterinarian to compete with the big pet stores
but with a twist. The veterinarian can still prescribe online, set their own
prices, and collect income without the inventory costs. VetMall intends to
become the veterinarians back office and pharmacy.
Market: VetMall.com is designed to strengthen and facilitate relationships among
the animal product manufacturers and distributors and the approximately 44,000
veterinarians who practice in approximately 31,000 clinics, hospitals, and
mobile facilities. It has been estimated that there are approximately 61 million
households which own pets and that the market in terms of annual retail sales
for products and service relating to pets is as much as $31 billion. This market
is viewed by the Company as attractive for penetration by the VetMall.com
concept. VetMall.com has already enlisted over 4,000 veterinarians, representing
over 2000 clinics as members of VetMall.com.
Competition: The major internet competition for VetMall at this time is in the
pet products arena. VetMall will have to compete, in part, against traditional
independent pet products retailers, pet product superstores, large discount and
other mass market retailers that carry pet products as part of a broader array
of merchandise, and on-line retail and B2B web sites.
RISK FACTORS
The Company's operations are subject to the following risk factors:
Unpredictability of Future Operating Results. The Company's revenues
and operating results may fluctuate significantly from quarter to quarter due to
a number of factors, not all of which are in the Company's control. These
factors include: the Company's ability to attract and retain new customers and
maintain customer satisfaction; new web sites, services and products introduced
by the Company or by its
<PAGE>
competitors; price competition; decreases in the level of growth, use of, or
consumer acceptance of, the Internet and other online services for the purchase
of consumer products; the Company's ability to upgrade and develop its systems
and infrastructure and attract new personnel in a timely and effective manner;
traffic levels on its Web site and its ability to convert that traffic into
customers; technical difficulties or system downtime affecting the Internet or
online services, generally, or the operation of the Company's Web site; 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.
Establishment of Company Brands. A growing number of Internet sites,
many of which already have well-established brands, offer products and services
that compete with those of the Company. As a result, the Company believes it
must establish, maintain and enhance its DrugMax.com brand. The Company's
success in promoting and maintaining its brands or any other brand that it may
use in the future will depend largely on its ability to provide a high quality
online experience supported by dedicated customer service. The Company cannot
assure that it will be able to meet these goals. In addition, to attract and
retain online users and to promote and maintain its current brands or future
brands, the Company may need to substantially increase its marketing
expenditures to create and maintain strong brand loyalty among its customers.
The Company's business could be adversely affected if its marketing efforts are
unproductive or if it cannot increase its brand awareness.
Highly Competitive Markets. The online commerce market is new, rapidly
evolving and intensely competitive. The Company anticipates that competition
will intensify in the future because barriers to entry are minimal, and current
and new competitors can launch new web sites at a relatively low cost. In
addition, the natural products industry is intensely competitive. The Company
currently competes primarily with traditional resellers of pharmaceutical ,
other online resellers of pharmaceutical and other vendors.
Dependence on the Internet and Internet Infrastructure Development. The
Company's 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 the Company expects to affect the development of the market
for its products and services include: security, ease of access, reliability,
quality of service, cost, and necessary increases in bandwidth availability.
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 area of 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 consumer 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 the Company expects as a
commercial or business medium, it could adversely affect the Company's business.
Online Commerce Security and Credit Card Fraud. A significant barrier
to online commerce and communications is the secure transmission of confidential
information over public networks. The Company's business may be adversely
affected if its security measures do not prevent security breaches and it cannot
assure that it can prevent all security breaches. To the extent that the
Company's activities, or those of third-party contractors, involve the storage
and transmission of proprietary information (such as credit card numbers),
security breaches could damage the Company's reputation, and expose the Company
to a risk of loss or litigation and possible liability. Under current credit
card practices, a merchant is liable for fraudulent credit card transactions
where, as is the case with the transactions the Company processes,
<PAGE>
that a merchant does not obtain a cardholder's signature. Fraudulent use of
credit card data in the future could adversely affect the Company's business.
Protection of Proprietary Rights. The Company regards its copyrights,
service marks, trademarks, trade dress, trade secrets and similar intellectual
property as critical to its success. To protect its proprietary rights, the
Company will rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others. The Company will pursue the registration of its trademarks
and service marks in the United States. The Company has applied for Federal
registration of the mark "Java Slim." The Company cannot be certain that federal
registration of this service mark or any other service mark will be issued. In
addition, effective trademark, service mark, copyright and trade secret
protection may be unavailable in countries in which the Company's products and
services are available online. The Company has not applied to register any mark
outside the U.S. or performed any trademark searches to determine whether any of
these marks are available for use or registration inside or outside of the
United States.
To date, there have been no interruptions in the Company's business as
the result of any claim of infringement. However, no assurance can be given that
the Company will not be adversely affected by the assertion of intellectual
property rights belonging to others. The effects of such assertions could
include requiring the Company to alter or withdraw existing trademarks or
products, delaying or preventing the introduction of products, or forcing the
Company to pay damages if the products have been introduced.
The steps the Company takes to protect its proprietary rights may be
inadequate, or third parties might infringe or misappropriate its trade secrets,
copyrights, trademarks, trade dress and similar proprietary rights. In addition,
others could independently develop substantially equivalent intellectual
property. The Company may have to litigate in the future to enforce its
intellectual property rights, to protect its 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 the Company's management and
technical resources which could adversely affect its business.
Government Regulation. Laws and regulations directly applicable to
communications or commerce over the Internet are becoming more prevalent. The
most recent session of the U.S. Congress resulted in Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material. The European Union recently enacted its own privacy
regulations. 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 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 the Company's business.
Internet Content Liability. The Company believes that its future
success will depend in part upon its ability to deliver original and compelling
descriptive content (information, articles, editorials, etc.) about the products
it sells on the Internet. Accordingly, the Company anticipates that it will
become a publisher of online content in the foreseeable future. At such time, it
may face potential liability for defamation, negligence, copyright, patent or
trademark infringement, or other claims based on the nature and content of
materials that it publishes or distributes. In the past, plaintiffs have brought
such claims and sometimes successfully litigated them against online services.
In addition, in the event that the Company implements a greater level of
interconnectivity on its Web sites, it will not and cannot practically screen
all of the content its users generate or access, which could expose the Company
to liability with respect to such content. The Company does not presently carry
general liability insurance, and any such insurance obtained in the future may
not cover claims of these types or may be inadequate to indemnify the Company
for all liability that may be imposed on it. If the Company faces liability,
then its reputation and its business may be adversely affected.
<PAGE>
Sales and Other Taxes. The Company does not currently collect sales or
other similar taxes for physical shipments of goods into states other than
Florida. However, one or more local, state or foreign jurisdictions may seek to
impose sales tax collection obligations on the Company and other out of state
companies which engage in online commerce. In addition, any new operations in
states outside Florida, including operations assumed in connection with the
acquisition of Healthseek.com, Desktop, VetMall and Becan could subject the
Company's shipments into such states to state sales taxes under current or
future laws. If one or more states or any foreign country successfully asserts
that the Company should collect sales or other taxes on the sale of our
merchandise, it could adversely affect the Company's business.
Capacity Constraints, Reliance on Internally Developed Systems and
System Development. A key element of the Company's strategy is to generate a
high volume of traffic on, and use of, its web sites. The Company's revenues
depend on the number of its business customers who use its web site to purchase
products offered. Accordingly, its Web site transaction processing systems and
network infrastructure performance, reliability and availability are critical to
its operating results. These factors are also critical to the Company's
reputation and its ability to attract and retain customers and maintain adequate
customer service levels. The volume of goods the Company sells and the
attractiveness of its product and service offerings will decrease if there are
any systems interruptions that affect the availability of the Company's Web
sites or its ability to fulfill orders. The Company has experienced periodic
systems interruptions, which management believes may continue to occur. The
Company will continually enhance and expand its technology and transaction
processing systems, and network infrastructure and other technologies, to
accommodate increases in the volume of traffic on its web sites. The Company
cannot assure that it will be successful in these efforts or that it will be
able to accurately project the rate or timing of increases in the use of its Web
sites. The Company may also fail to timely expand and upgrade its systems and
infrastructure to accommodate these increases.
In addition, the Company cannot predict whether additional network
capacity will be available from third party suppliers as it is needed. Also, the
Company's network or its suppliers' network might be unable to timely achieve or
maintain a sufficiently high capacity of data transmission to timely process
orders, especially if its web site traffic increases. The Company's failure to
achieve or maintain high capacity data transmission could significantly reduce
consumer demand for its services.
The Company's systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events. The Company has no formal disaster
recovery plan and carries no business interruption insurance to compensate it
for losses that may occur. Furthermore, the Company's security mechanisms or
those of its suppliers may not prevent security breaches or service breakdowns.
Despite the Company's implementation of security measures, its servers may be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. These events could cause interruptions or delays in the Company's
business, loss of data or render the Company unable to accept and fulfill
customer orders.
Rapid Technological Change. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of its distribution systems and its online stores. The Internet and the online
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 the
Company's existing web sites, proprietary technology and systems may become
obsolete. The Company's future success will depend on its ability to both
license and/or internally develop leading technologies useful in its business,
enhance its existing services, develop new services and technology that address
the increasingly sophisticated and varied needs of its prospective customers,
and respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of the Company's Web sites and other proprietary
technology entail significant technical and business risks. The Company may use
new technologies ineffectively or may fail to adapt its web sites, proprietary
technology and transaction processing systems to customer requirements or
emerging
<PAGE>
industry standards. If the Company faces material delays in introducing new
services, products and enhancements, its customers may forego the use of its
products and services and use those of the Company's competitors.
Reliance on Strategic Alliances. In an effort to drive traffic to the
Company's Web sites, it has entered into a marketing alliance with
PurchasePro.com, Inc., for the development of a Virtual Private Marketplace
(VPM) and desktop purchasing solution which the Company will offer to its
clients to its DrugMax.com website.
Although the Company believes its strategic alliance with
Purchasepro.com will represent a significant distribution channel for its
pharmaceutical products, it cannot assume that this alliance will meet this
expectation, particularly because Purchasepro.com is new and it is not certain
whether Purchasepro.com will achieve its anticipated positive market presence
and growth. Conversely, if Purchasepro.com is successful, termination of the
Company's alliance with Purchasepro.com could have a material adverse affect on
the Company's business. The Company intends to enter into similar marketing
alliances with others. The inability to enter into similar alliances with others
may also have a material adverse affect on the Company's business.
Possible Future Acquisitions. The Company intends to continue to make
investments in complementary companies, products or technologies. If the Company
acquires a company, it could have difficulty in assimilating that company's
personnel and operations. In addition, the key personnel of an acquired company
may decide not to work for the Company. If the Company makes other types of
acquisitions, it could have difficulty in assimilating the acquired technology
or products into the Company's operations. These difficulties could disrupt the
Company's ongoing business, distract its management and employees and increase
its expenses. In addition, future acquisitions could have a negative impact on
the Company's business, financial condition and results of operations.
Furthermore, the Company may have to incur debt or issue equity securities to
pay for any future acquisition, the issuance of which would be dilutive to the
Company's existing stockholders.
Control By Certain Stockholders. Directors, executive officers and
principal shareholders beneficially owned approximately 62% of the outstanding
shares of the Company's common stock. Therefore, these stockholders will have
significant control over the election of the Company's directors and most of the
Company's corporate actions.
Item 2. PROPERTIES.
The Company does not own or hold any legal or equitable interest in any
real estate. The Company leases its principal administrative, marketing and
customer service facility totaling 3,550 square feet of air-conditioned office
space and 2,950 square feet of air-conditioned warehouse space, located at 12505
Starkey Road, Suite A, Largo, Florida 33773. The term of the lease for the Largo
facility is for three years expiring November 30, 2002 with an initial monthly
lease payment of $3,800. The Company leases for its subsidiary Becan, 1,424
square feet of office and 1,176 square feet of warehouse space located at 203
Parkway West Industrial Park, Pittsburgh, Pa. 15205, for administrative
purposes, and for the sales and distribution of pharmaceutical, beauty, and
over-the-counter drug products. The term of the lease for the Pittsburgh
facility is for 4 years expiring February 28, 2003 with an initial monthly lease
payment of $1,658. The Company leases for its subsidiary, Discount Rx, 1,200
square feet of office space located at 5200 Highway 22, Suite 12A, Mandeville,
La. 70471, for administrative and sales offices. The Mandeville facility costs
$900 each month on a month to month basis. Desktop and VetMall share leased
space consisting of 6,458 square feet of office space located at 12300 Ford
Road, Suite 212, Dallas, Texas 75234 for administrative offices. The Dallas
facility costs $12,108 per month on a month to month basis. The Youngstown
facility is located at 318 West Boardman Street, Youngstown, Ohio 44503 and
consists of
<PAGE>
approximately 30,000 square feet of office (approximately 3,000 air conditioned
space for offices), warehouse and shipping and distribution space. The premises
are leased pursuant to a lease with a 10 year term expiring December 30, 2008
with a monthly lease payment of $6,000. The Company believes the currently
leased properties are adequate for current operations and future growth.
Item 3. LEGAL PROCEEDINGS.
From time to time, the Company may become involved in litigation
arising in the ordinary course of its business. The Company is not presently
subject to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of the shareholders was held on January 11, 2000 for
the purpose of amending the Articles of Incorporation to change the name of the
Company from Nutriceuticals.com Corporation to DrugMax.com, Inc. The vote was
as follows: 3,510,492 in favor; -0- against; -0- abstained. The vote in favor
consisted of approximately 63% of the outstanding shares entitled to vote.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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 March 1999, before we commenced our e-commerce business, there was no
trading market for our common stock. From April 1999 to November 11, 1999, there
were a total of approximately 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 approved for quotation on The Nasdaq Small Cap
Market under the symbols "DMA" and "DMAX," respectively. The following table
sets forth the closing high and low bid prices for the Common Stock on the
Nasdaq Small Cap Market for each calendar quarter from November 19, 1999, the
date of the Company's recent public offering. Prices represent inter-dealer
quotations without adjustment for retail markups, markdowns or commissions and
may not represent actual transactions.
COMMON STOCK
----------------
HIGH LOW
------ ------
1999
Fourth Quarter (commencing November 19, 1999) ...... $19.187 $ 9.00
2000
First Quarter ...................................... $21.25 $13.00
Second Quarter (through June 25) ................... $15.688 $7.875
As of June 15, 2000, there were approximately 553 shareholders of
record of the Company's common stock.
Historically, the Company has not declared or paid any cash dividends
on its common stock. It currently intends to retain any future earnings to fund
the development and growth of its business. Any future determination to pay
dividends on the common stock will depend upon the Company's results of
operations, financial condition and capital requirements.
Recent Sales of Unregistered Securities
During the past three years, the Company has issued unregistered
securities to a limited number of persons as described below. The following
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.
<PAGE>
(1) On March 18, 1999, the Company 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
the Company.
(2) On March 31, 1999, the Company issued an aggregate of 100,000 shares of
common stock, to one (1) investor in connection with the acquisition of
Healthseek.com Corporation, a Massachusetts corporation.
(3) On August 16, 1999, the Company issued an aggregate of 20,000 shares of
common stock to Lyntren Communications, Inc. with the acquisition of
The Nutriceuticals.com domain name.
(4) On November 26, 1999, the Company issued an aggregate of 2,000,000
shares of common stock to Dynamic Health Products, a Florida
corporation, with the acquisition of Becan Distributors, Inc.
(5) On March 20, 2000, the Company issued an aggregate of 50,000 shares of
common stock with the acquisition of Desktop Corporation.
(6) On March 20, 2000, the Company 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 the Company issued 25,000 shares of common stock in
association the acquisition of VetMall.
None of the foregoing transactions involved any underwriter,
underwriting discounts or commissions or any public offering, and the Company
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, through their relationships with the Company, to information
about the Company.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Company derives its revenues from traditional and online sales of
pharmaceuticals, over-the-counter products, health and beauty care products, and
nutritional supplements. Revenues are billed and recognized as product is
shipped to the customer, net of discounts, allowances, returns and credits.
Cost of goods sold is comprised of product costs. Selling, general and
administrative costs include administrative, sales and marketing and other
indirect operating costs.
On November 26, 1999, the Company acquired Becan. The acquisition was
accounted for under the purchase method of accounting. The results of operations
of the Company for the twelve months ended
<PAGE>
March 31, 2000 include the results of operations of Becan from November 27, 1999
through March 31, 2000.
On March 20, 2000, the Company acquired all the issued and outstanding
capital stock of Desktop and VetMall, an entity owned 50% by a wholly-owned
subsidiary of Desktop. Simultaneously with the acquisition of Desktop, the
Company purchased from Butler an additional 20% interest in the issued and
outstanding membership shares of VetMall. The acquisitions of Desktop and
VetMall were accounted for under the purchase method of accounting. The results
of operations of the Company for the year ended March 31, 2000 include the
results of operations of Desktop and VetMall from March 21, 2000 through March
31, 2000.
Fiscal Year Ended March 31, 2000 Compared To The Period From September 8, 1998
(date of inception) through March 31, 1999
Results of Operations
In March 1997, NuMed Surgical, Inc. ("NuMed") adopted a plan of
liquidation by which it sold its major product line and subsequently disposed of
all of its operating assets by March 31, 1998. In March 1999, NuMed acquired all
of the outstanding common stock of Nutriceuticals.com Corporation
("Nutriceuticals Florida"), a Florida corporation, which was organized in
September 1998. NuMed then merged with Nutriceuticals of Florida and changed its
name to Nutriceuticals.com Corporation. In January 2000, Nutriceuticals changed
its name to DrugMax.com, Inc. From April 1, 1998 through September 7, 1998, the
Company's financial statements were accounted for on a liquidation basis.
Revenues. Revenues increased $21.0 million, or 56,612.5%, to
$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 $20.6 million in revenues generated by
Becan from November 26, 1999 (date of acquistion) through March 31, 2000.
Gross profit. Gross profit increased $121,000, or 535.6%, 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
.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 $1.9 million, or 1,511.6%, to $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 primarily a
result of greater borrowings under the Company's credit facilities for financing
of additional working capital needs with the expansion of the Company's
operations, specifically associated with the acquisition of Becan.
The Company has 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.
Management believes that there was no material effect on operations or
the financial condition of the Company 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
<PAGE>
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
On November 22, 1999, the Company successfully completed a public
offering. Gross proceeds of the offering from the sale of common stock of the
Company were $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 approximately $1.9 million.
Prior to that, the Company funded its operations through borrowings from its
officers, directors and affiliates.
Net cash used in operating activities was $3.1 million for the year
ended March 31, 2000. The usage of cash is primarily attributable to the net
operating loss as well as an increase in accounts receivable of $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 and an increase
in accrued expenses of $475,000, partially offset by a decrease in deposits of
$9,000, and an increase in accounts payable of $835,000 associated with the
acquisition of Becan.
Net cash used in investing activities was $3.4 million, representing
purchases of property and equipment of $183,000, an increase in intangible
assets of $5,000, and cash paid for the acquisitions of Becan, Desktop and
VetMall of $3.3 million.
Net cash provided by financing activities was $12.5 million,
representing the net change in revolving line of credit agreements of $2.4
million proceeds from issuance of long-term obligations of $24,000, proceeds
from related party obligations $200,000, proceeds from affiliates of $10,000,
and proceeds from the issuance of common stock $11.8 million, partially offset
by payments of long-term obligations of $1.7 million and payments of related
party obligations of $200,000.
At March 31, 2000, the Company had $6.0 million in cash and cash
equivalents as compared to $57,000 at March 31, 1999. Working capital at March
31, 2000 was $4.9 million, inclusive of obligations under our credit line
facilities, as compared to a working capital deficit of $10,000 at March 31,
1999.
The Company's principal commitments at March 31, 2000 were leases on
its 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 the Company's common stock and cash in the amount
of $1.7 million. The acquisition of Valley was closed on April 19, 2000.
In November 1998, Becan and its subsidiary, Discount, established a
$2,000,000 line of credit to provide additional working capital to support its
continued growth. The note bears interest at the Prime Rate of The Chase
Manhattan Bank in New York, New York, plus 1.25% per annum on the unpaid
outstanding principal of each advance, payable monthly. The note is
collateralized by a blanket lien on all business assets of Becan and is also
collateralized by personal guarantee from a Director of the Company, Jugal K.
Taneja. At March 31, 2000, there was no balance due under this line of credit.
The Company incurred a termination fee of $40,000 for early termination of the
line of credit.
<PAGE>
On September 8, 1999, the Company entered into an Agreement and Plan of
Reorganization with Dynamic Health Products, Inc., a Florida corporation, to
acquire its wholly-owned subsidiary, Becan Distributors, Inc., an Ohio
corporation. On November 26, 1999, the Company acquired Becan in exchange for
2,000,000 shares of restricted common stock and $2,000,000 cash. An additional
500,000 shares of common stock are held in escrow in connection with the
acquisition to be issued pending the attainment, by Becan, of certain financial
targets, for the fiscal year ending March 31, 2001.
In October 1999, the Company established a $100,000 revolving line of
credit with First Community Bank of America, to provide additional working
capital for the Company. In November 1999, the borrowing limit on the line of
credit was increased to $350,000. The note bears interest at 6.5% per annum on
the unpaid outstanding principal of each advance, payable monthly. The note is
secured by a guarantee in the form of a Third Party Pledge Agreement in favor of
First Community Bank of America, from Dynamic Health Products, Inc., of which
Jugal K. Taneja is Chairman and a 33.18% shareholder. The principal on the note
was due and payable on October 10, 2000. This line of credit has since been
repaid and the note satisfied with the establishment of a new revolving line of
credit with First Community Bank of America in March 2000.
In March 2000, the Company obtained a new line of credit with Merrill
Lynch Financial Services to refinance its existing line of credit and to provide
additional working capital for the Company. The new line of credit enables the
Company to borrow a maximum of $5.0 million, with borrowings limited to 80% of
eligible accounts receivable and 50% of inventory (capped at $1.0 million).
Under the terms of the
<PAGE>
commitment, interest is variable at a per annum rate equal to the sum of 2.50%
plus the 30-day Dealer Commercial Paper Rate (as published in The Wall Street
Journal), on the unpaid outstanding principal of each advance, payable monthly.
As of March 31, 2000, the outstanding principal on the note was approximately
$2.0 million and due to limitations under this line, an additional $1.9 million
was available for borrowings.
In March 2000, the Company established a $1.0 million revolving line of
credit with First Community Bank of America, to provide additional working
capital for the Company. The note bears interest at a variable rate, with an
initial rate of 6.3% per annum on the unpaid outstanding principal of each
advance, payable monthly. The note is secured by a $1.0 million certificate of
deposit. Principal on the note is due and payable on October 1, 2000. The note
or any portion thereof may be prepaid without penalty. As of March 31, 2000, the
outstanding principal on the note was approximately $339,000 and $661,000 was
available for borrowings.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See financial statements commencing on page F-1.
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
On February 4, 2000, the Company engaged Deloitte & Touche, LLP as the
Company's independent auditors for the fiscal year ended March 31, 2000,
replacing the firm of Kirkland, Russ, Murphy & Tapp, CPAs, which served as the
Company's independent auditors for the fiscal year ended March 31, 1999. The
change was approved by the Company's audit committee. The reason for the change
to a global firm was to better position the Company 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.
The Company believes there were no disagreements with Kirkland, Russ,
Murphy & Tapp, CPAs within the meaning of Instruction 4 to Item 304 of
Regulation S-K on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure in connection with the
audit of the Company'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)(v) of Regulation S-K) of
the type required to be disclosed by that section. The Company had not consulted
with Deloitte & Touche LLP regarding either (i) the application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on the Company's financial statements;
or (ii) any matter that was either the subject matter of a disagreement (as
defined in Item 304(a)(1)(v) of Regulation S-K and the related instructions) or
a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
A letter of Kirkland, Russ, Murphy & Tapp, CPA's was addressed to the
Securities and Exchange Commission. Such letter states that such firm agrees
with the statements made by the Company.
<PAGE>
PART III
Reference is made to the Company's definitive information statement for
the 2000 annual shareholders meeting involving the election of directors, which
will be filed with the Commission within 120 days after the end of the fiscal
year covered by this Report. The information required by these Items 9 through
12 and contained in such definitive information statement is incorporated herein
by reference.
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed with this report:
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 the Registrant and Eric
Egnet, dated March 31, 1999. (1)
3.1 Articles of Incorporation of NuMed Surgical, Inc., filed October 18,
1993. (1)
3.2 Amended and Restated Bylaws, dated November 11, 1999. (2)
8.1 Letter of Kirkland, Russ, Murphy & Tapp, CPA's addressed to the
Securities and Exchange Commission. (2)
10.1 Employment Agreement by and between Nutriceuticals.com Corporation and
Stephen M. Watters, dated as of April 1, 1999. (1)
10.2 Employment Agreement by and between Nutriceuticals.com Corporation and
William L. LaGamba, dated as of January 1, 2000.
10.3 Consulting Agreement by and between Nutriceuticals.com Corporation and
Jugal K. Taneja, dated as of April 1, 1999. (1)
10.4 Consulting Agreement and Agreement Regarding Ownership of Computer
Software between Healthseek.com Corp. and Eric Egnet, dated as of March
31, 1999. (1)
10.5 Agreement between the Company and Purchasepro.com, Inc., dated February
15, 2000.
10.6 Proposed Nutriceuticals.com Corporation 1999 Incentive and
Non-Statutory Stock Option Plan.(1)
21.1 Subsidiaries of Nutriceuticals.com Corporation. (1)
27.1 Financial Data Schedule (for SEC use only).
(1) Incorporated by reference to the Company's Registration Statement
on Form SB-2, filed June 29, 1999, File Number 0-24362.
(2) Incorporated by Reference to Amendment No. 2 to the Company's
Registration Statement on Form SB-2, filed on November 12, 1999,
File No. 0-24362.
(3) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1999, file number
0-24362.
(b) Reports on Form 8-K.
During the 12 months ended March 31, 2000, the Company filed three (3)
reports on Form 8-K. In addition, the Company filed a Form 8-K on May 3, 2000
relating to the acquisition of Valley Drug Company.
<PAGE>
Form 8-K dated December 10, 1999, with respect to the Company's
November 26, 1999 acquisition of Becan Distributors, Inc.
Form 8-K dated February 8, 2000, with respect to the Company's change
in Registrant's Certifying Accountants.
Form 8-K dated April 6, 2000 with respect to the Company's March 20,
2000 acquisition of Desktop Corporation and VetMall, LLC.
Form 8-K dated May 3, 2000 with respect to the Company's April 19, 2000
acquisition of Valley Drug Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DRUGMAX.COM, INC.
Dated: June 29, 2000 By: /s/ WILLIAM L. LAGAMBA
----------------------
William L. LaGamba, Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ WILLIAM L. LAGAMBA Chief Executive Officer June 29, 2000
------------------------ and Director
William L. LaGamba
/s/ RONALD J. PATRICK Chief Financial Officer June 29, 2000
------------------------ and Director
Ronald J. Patrick
/s/ DR. HOWARD L. HOWELL Director June 29, 2000
------------------------
Dr. Howard L. Howell
/s/ JEFFREY K. PETERSON Director June 29, 2000
------------------------
Jeffrey K. Peterson
/s/ JUGAL K. TANEJA Director June 29, 2000
------------------------
Jugal K. Taneja
/s/ STEPHEN M. WATTERS Director June 29, 2000
------------------------
Stephen M. Watters
<PAGE>
DRUGMAX.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP F-2
Independent Auditors' Report of Kirkland, Russ, Murphy & Tapp F-3
Consolidated Balance Sheets as of March 31, 2000 and 1999 F-4
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-5
Statement of Changes in Net Deficiency in Liquidation for the period
from April 1, 1998 to September 7, 1998 F-6
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2000 and 1999 F-7
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-8
Notes to Consolidated Financial Statements F-9-F-19
Independent Auditors' Report on Supplemental Schedule S-1
Supplemental Schedule - Valuation and Qualifying Accounts S-2
</TABLE>
F-1
<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 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 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.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
June 26, 2000
F-2
<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-3
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,020,129 $ 56,986
Accounts receivable, net 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-4
<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 before other income
and expenses (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 $ (.95) $ (.08)
============ ============
Basic and diluted weighted average
number of common shares outstanding 2,102,922 1,372,230
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DRUGMAX.COM, INC.
STATEMENT OF CHANGES IN NET DEFICIENCY IN LIQUIDATION
For the Period from April 1, 1998 through September 7, 1998
Period from
April 1, 1998 to
September 7, 1998
-----------------
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
=========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended March 31, 2000 and March 31, 1999
<TABLE>
<CAPTION>
Net Total
Common Additional Accumulated Deficiency in Stockholders'
Stock Paid-in 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 (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-7
<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 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-8
<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) and nutritional supplements. DrugMax.com, Inc. brings retailers,
manufacturers, wholesalers and major end-users into a single, efficient
marketplace for buying, selling and industry news.
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. 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 the Company was a single entity for all periods
presented and all significant intercompany accounts and transactions have been
eliminated in consolidation.
F-9
<PAGE>
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"); Desktop Corporation
("Desktop"); and VetMall LLC ("VetMall"); (collectively, the "Company").
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 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
F-10
<PAGE>
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
Periodically, 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 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 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.
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. The fair value of long-term obligations approximates the carrying value,
based on current market prices.
REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped or when services are
provided.
F-11
<PAGE>
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.
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 (post October 1999 one-for-two
reverse stock split) 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. 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. 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.
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.
F-12
<PAGE>
The Desktop 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 they 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 50,000 shares
issued.
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 the shares
acquired from Messrs. Fagala and Miller and HCT, regardless of the form of such
transaction, 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 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:
FOR THE PERIOD
FROM SEPTEMBER 8, 1998
FOR THE YEAR (DATE OF INCEPTION)
ENDED THROUGH
MARCH 31, 2000 MARCH 31, 1999
-------------- ----------------------
Revenues $57,726,515 $32,993,811
Net loss (8,104,135) (2,042,301)
Basic and diluted net
loss per share (3.85) (1.49)
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 amount of $53,734. The note bears interest at
12%. In March 2000, a $16,120 allowance was recorded based on management's
estimate of the amount which would be ultimately received.
NOTE 4 - INVENTORIES
--------------------
Inventories at March 31, 2000 and 1999 consist of legend and generic drugs and
nutritional supplements for resale.
NOTE 5 - PROPERTY AND EQUIPMENT
-------------------------------
At March 31, 2000 and 1999 property and equipment consist of the following:
2000 1999
--------- ---------
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
========= =========
F-13
<PAGE>
NOTE 6 - INCOME TAXES
---------------------
The Company had no income tax expense 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:
2000 1999
--------- --------
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 $ -- $ --
========= ========
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 net operating and acquired tax loss carry forward benefits expire in various
years beginning in 2019. Due to the Company's acquisition of Desktop (see Note
2), the Company's ability to utilize the acquired net operating loss carry
forward of $1,100,000 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 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.
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.
F-14
<PAGE>
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.
F-15
<PAGE>
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 $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. 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 is subject to the approval by the Company's shareholders at
its next 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.
Stock option activity is summarized as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
INCENTIVE AND NON-QUALIFIED STOCK OPTIONS SHARES PRICE
--------- --------
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:
F-16
<PAGE>
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 estimated 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) $ (0.95)
Pro forma $ (2,484,319) $ (1.18)
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:
Dividend yield 0.00 %
Option term 5-10 years
Warrant term 3 years
Expected volatility 97 %
Risk-free interest rate 6.27%-6.56%
F-17
<PAGE>
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. 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.
F-18
<PAGE>
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.
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 before other income
and expenses
Distribution $ (1,898,580)
Software Development (34,297)
------------
Total $ (1,932,877)
============
Assets
Distribution $ 38,666,522
Software Development 105,895
------------
Total $ 38,772,417
============
Capital expenditures
Distribution $ 182,634
Software Development --
------------
Total $ 182,634
============
NOTE 12 - SUBSEQUENT EVENTS
---------------------------
On April 19, 2000, DrugMax Acquisition Corporation ("Buyer"), a wholly owned
subsidiary of the Company, 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 release some or all of the 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 amount of shareholders' equity will be based on audited
financial statements as of April 19, 2000. 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
renvenues, 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 data shown in Note 2.
FOR THE PERIOD
FOR THE YEAR FROM SEPTEMBER 8, 1998
ENDED (DATE OF INCEPTION) THROUGH
MARCH 31, 2000 MARCH 31, 1999
-------------- ---------------------------
Revenues $108,298,702 $80,034,293
Net loss (7,681,947) (1,205,450)
Basic and diluted net
loss per share (3.65) (.88)
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.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
DrugMax.com, Inc.:
We have audited the consolidated financial statements of DrugMax.com, Inc. and
subsidiaries (the "Company") (formerly known as Nutriceuticals.com Corporation)
as of and for the year ended March 31, 2000, and have issued our report thereon
dated June 26, 2000 (included elsewhere in this Form 10-KSB). Our audit also
included the accompanying consolidated financial statement schedule. The
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
June 26, 2000
S-1
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
For the Year Ended March 31, 2000 and the Period from
September 8, 1998 (date of inception) to March 31, 1999
<TABLE>
<CAPTION>
Balance Charged to Charged to Balance
Beginning of Costs and Other at End
Description Period Expenses Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
Period from September 8, 1998
(date of inception) to March 31, 1999:
Allowance for doubtful accounts $ -- $ -- $ -- $ -- $ --
Year ended March 31, 2000:
Allowance for doubtful accounts $ -- $ 99,151 $ 14,131 $ -- $113,282
Allowance for doubtful notes
receivable $ -- $ 16,120 $ -- $ -- $ 16,120
</TABLE>
S-2
