SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 29, 2000 (March 23, 2000)
DRUGMAX.COM, INC.,
FORMERLY NUTRICEUTICALS.COM CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 0-24362 34-1755390
------------------------------- ----------- ------------------
(State or other jurisdiction of File Number (I.R.S. Employer
incorporation) Identification No.)
12505 STARKEY ROAD, SUITE A
LARGO, FLORIDA 33773
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (727) 533-0431
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 23, 2000, DrugMax.com, Inc. (the "Company"), K. Sterling
Miller, Jimmy L. Fagala and HCT Capital Corp. ("HCT," and together with Messrs.
Fagala and Miller, the "Sellers") signed an Agreement and Plan of Reorganization
dated March 20, 2000 (the "Agreement") and consummated the transactions
contemplated thereby. Pursuant to the Agreement, Messrs. Fagala and Miller and
HCT sold to the Company all of the issued and outstanding capital stock of
Desktop Corporation ("Desktop") in exchange for a total of 50,000 shares of
Company common stock. In addition, (i) to satisfy obligations owed to HCT by
Desktop and VetMall, LLC ("VetMall"), an entity owned 50% by a wholly-owned
subsidiary of Desktop, the Company paid HCT $100,000 and issued to HCT an
additional 31,176 shares of Company common stock, and (ii) to satisfy
outstanding obligations of Desktop or VetMall to Messrs. Fagala and Miller, the
Company will issue to Messrs. Fagala and Miller 8,938 and 9,871 shares,
respectively, of Company common stock, subject to Messrs. Fagala and Miller
providing to the Company certain backup documentation.
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
entered into a Stock Purchase Agreement with W. A. Butler Company ("Butler") and
consummated the transactions contemplated thereby. Pursuant to the Stock
Purchase Agreement, Butler sold to the Company 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 acquisition described above, the Company owns
through its ownership of Desktop, a 50% indirect interest in VetMall, together
with a 20% direct interest in VetMall. Effective March 23, 2000, the Company and
Butler each exchanged their membership shares in VetMall for the same
proportionate ownership of capital stock issued by VetMall, Inc., a newly-formed
Florida corporation. Thereafter, effective March 30, 2000, VetMall was dissolved
and its assets were distributed to VetMall, Inc.
The Company determined the amount of the consideration paid for the
acquisitions described above based on its determination of the value of Desktop
and VetMall to the Company. The source of funds used by the Company to make the
acquisitions described above was cash on hand.
Desktop is engaged in the business of designing and developing
customized Internet solutions. VetMall owns and operates a Business-to-Business
and Business-to-Consumer Internet web site for veterinary products.
Management of the Company determined that it is in the best interest of
the Company to consummate this acquisition in order to strengthen the Company's
technology infrastructure, enable it to expand into vertical market places and
provide additional sources of revenues for the Company.
The description contained herein of the transactions described above is
qualified in its entirety by reference to the Agreement and the Stock Purchase
Agreement referred to above, copies of which are attached hereto as Exhibits 2.1
and 2.2, respectively, and incorporated herein by reference.
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<PAGE>
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
Here are the financial statements and pro forma financial information,
along with exhibits, to be included on Form 8-K dated April 6, 2000 for the
acquisition of Desktop Corporation and VetMall, Inc.
(a) Financial statements of the businesses acquired, prepared pursuant to
Rule 3.05 of Regulation S-X.
<TABLE>
<CAPTION>
ITEM PAGE
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<S> <C>
Audited consolidated financial statements of Desktop Corporation and Subsidiary
(Desktop Ventures, Inc.):
Report of Brimmer, Burek & Keelan LLP, Independent Auditors 6
Consolidated Balance Sheets as of March 31, 2000, 1999 and 1998 7-8
Consolidated Statements of Operations for the
Years Ended March 31, 2000, 1999 and 1998 9-10
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended March 31, 2000, 1999 and 1998 11
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2000, 1999 and 1998 12-13
Notes to Consolidated Financial Statements 14-24
Audited financial statements of VetMall, Inc.:
Report of Brimmer, Burek & Keelan LLP, Independent Auditors 25
Balance Sheet as of March 31, 2000 26
Statement of Operations for the period from June 28, 1999
(date of inception) to March 31, 2000 27
Statement of Changes in Stockholders'/Members' Equity for the period
from June 28, 1999 (date of inception) to March 31, 2000 28
Statement of Cash Flows for the period from June 28, 1999
(date of inception) to March 31, 2000 29
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<PAGE>
Notes to Financial Statements 30-35
(b) Pro forma financial information required pursuant to Article 11 of
Regulation S-X:
ITEM PAGE
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DrugMax.com, Inc. And Subsidiaries Unaudited Pro Forma Condensed Consolidated
Financial Statements:
Unaudited Pro Forma Condensed Consolidated
Financial Statements 36
Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of December 31, 1999 37-38
Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the
Nine Months ended December 31, 1999 39-41
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Period from September 8, 1998 (date
of inception) through March 31, 1999 42-43
</TABLE>
The unaudited pro forma data presented in the unaudited pro forma
condensed consolidated balance sheets and statements of operations are included
in order to illustrate the effect on the Company's financial statements of the
transactions described below:
The unaudited pro forma condensed consolidated financial statement data
at March 31, 1999 present adjustments for the acquisitions of Becan
Distributors, Inc. and Subsidiary (collectively "Becan") on November
26, 1999 and DeskTop Corporation and Subsidiary (collectively "DeskTop") on
March 20, 2000, by DrugMax.
The adjustments are presented as if DrugMax had acquired Becan and
DeskTop, accounted for as purchases, as of September 8, 1998 (date of
inception). The pro forma information is based on historical financial
statements of DrugMax and Becan and Desktop after giving effect to the
transactions using the purchase method of accounting and the assumptions and
adjustments in the accompanying notes to the pro forma condensed consolidated
financial statements.
The pro forma condensed consolidated financial statements have been
prepared by the Company based upon the consolidated financial statements of
DrugMax (as filed on DrugMax's Form 10-KSB, for the fiscal year ended March 31,
1999) and based upon the consolidated financial statements of Becan (as filed on
DrugMax's Registration Statement on Form SB-2, Amendment No. 4, filed November
19, 1999, Registration Statement No. 333-81835) and based upon the consolidated
financial statements of Desktop (filed with this report under Item 7 (a)) which
have been provided by Desktop.
The pro forma condensed consolidated financial statements for December
31, 1999 have been prepared based upon the acquisitions of DeskTop and VetMall,
Inc. ("VetMall") and include the activity of VetMall from June 28, 1999 (date of
inception) through December 31, 1999. These pro forma condensed consolidated
financial statements may not be indicative of the results that actually would
have occurred if the consolidations had been in effect on the dates indicated or
which may be obtained in the future. The financial statements of VetMall, Inc.
are included under Item 7(a) filed with this report.
In the opinion of management, all adjustments have been made that are
necessary to present fairly the pro forma data.
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<PAGE>
(c) Exhibits in accordance with the provisions of Item 601 of Regulation S-K:
EXHIBITS
2.1 Agreement and Plan of Reorganization between DrugMax.com, Inc., Jimmy
L. Fagala, K. Sterling Miller, and HCT Capital Corp. dated as of March
20, 2000 (without schedules or exhibits.) (1)(2)
2.2 Stock Purchase Agreement between DrugMax.com, Inc. and W. A. Butler
Company dated as of March 20, 2000 (without schedules or exhibits.)
(1)(2)
99.1 Audited Financial Statements of DrugMax.com, Inc., formerly
Nutriceuticals.com Corporation as of March 31, 1999. (3)
99.2 Audited Financial Statements of Becan Distributors, Inc. as of
March 31, 1999. (4)
99.3 Unaudited Financial Statements of DrugMax.com, Inc. and Subsidiaries
as of December 31, 1999. (5)
---------
(1) The Company agrees to supplementally furnish to the Securities and Exchange
Commission upon request a copy of any omitted schedule or exhibit.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 23, 2000, file number 0-24362, filed in Washington, D.C.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB,
filed July 14, 1999, file number 0-24362, filed in Washington, D.C.
(4) Incorporated by reference to the Company's Registration Statement on
Form SB-2, Amendment No. 4, filed November 19, 1999, Registration Statement
No. 333-81835.
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB/A filed June 20, 2000, file number 0-24362, filed in
Washington, D.C.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DRUGMAX.COM, INC.
/s/ WILLIAM L. LAGAMBA
----------------------
William L. LaGamba, Chief Executive Officer
Dated: June 29, 2000
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<PAGE>
Independent Auditors' Report
To the Board of Directors
Desktop Corporation and Subsidiary
Dallas, Texas
We have audited the accompanying consolidated balance sheets of DeskTop
Corporation and Subsidiary as of March 31, 2000, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DeskTop
Corporation and Subsidiary as of March 31, 2000, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
BRIMMER, BUREK & KEELAN LLP
/s/ BRIMMER, BUREK & KEELAN LLP
-------------------------------
Certified Public Accountants
Tampa, Florida
June 1, 2000
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000, 1999, 1998
ASSETS
2000 1999 1998
----------- ----------- -----------
Current assets
Cash $ 6,578 $ 9,658 $ 130,576
Accounts receivable - 99% of the
balance at March 31, 2000 is
due from related parties 872,368 705,400 460,272
----------- ----------- -----------
Total current assets 878,946 715,058 590,848
----------- ----------- -----------
Property and equipment
Software development costs -- 985,748 --
Furniture & fixtures 36,257 30,710 25,670
Computer equipment 125,869 107,678 99,010
----------- ----------- -----------
162,126 1,124,136 124,680
Less: accumulated depreciation (83,363) (62,639) (29,339)
----------- ----------- -----------
Total property and equipment 78,763 1,061,497 95,341
Other assets
Organizational costs, net 572 2,862 5,152
----------- ----------- -----------
Total assets $ 958,281 $ 1,779,417 $ 691,341
=========== =========== ===========
Please read accompanying notes.
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000, 1999, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current liabilities
Accounts payable $ 216,024 $ 71,257 $ 6,982
Accrued liabilities 140,122 33,492 52,707
Related party obligations 1,367,074 270,000 75,000
Deferred tax 254,879 204,218 137,826
----------- ----------- -----------
Total current liabilities 1,978,099 578,967 272,515
----------- ----------- -----------
Long-term liabilities
Deferred tax 3,626 334,326 --
----------- ----------- -----------
Total liabilities 1,981,725 913,293 272 515
----------- ----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Shareholders' equity (deficit)
Preferred stock, Series A, $10 par value;
30,000 shares authorized, 15,000
shares issued and outstanding 150,000 150,000 150,000
Common stock, no par;
100,000 shares authorized,
10,000 shares issued and outstanding 10,000 10,000 10,000
Retained earnings (deficit) (1,183,444) 706,124 258,826
----------- ----------- -----------
Total shareholders' equity (deficit) (1,023,444) 866,124 418,826
----------- ----------- -----------
Total liabilities and shareholders'
equity (deficit) $ 958,281 $ 1,779,417 $ 691,341
=========== =========== ===========
</TABLE>
Please read accompanying notes.
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000, 1999, 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue - related party - 93% in
2000, 0% in 1999 and 1998 $ 2,376,906 $ 1,881,832 $ 1,542,095
Cost of sales 18,815 -- --
----------- ----------- -----------
Gross profit 2,358,091 1,881,832 1,542,095
Operating expenses
Depreciation and amortization 31,228 35,589 22,464
Bad debt expense 80,000 -- --
Equipment rent 80,002 34,929 5,863
Facility rent 121,036 61,479 53,672
Insurance 10,905 37,614 31,161
Management fees (nonrecurring) 136,256 -- --
Payroll and related expenses 1,492,037 601,227 988,053
Telephone 54,386 25,661 16,130
Travel 30,980 41,490 18,932
General & administrative expenses 237,559 98,092 77,707
Research & development 1,803,633 93,602 210,940
----------- ----------- -----------
Total operating expenses 4,078,022 1,029,683 1,424,922
----------- ----------- -----------
Income (loss) from operations (1,719,931) 852,149 117,173
----------- ----------- -----------
Other income (expenses)
Miscellaneous income - related party -
74% in 2000, 10% in 1999 and 1998 328,982 16,037 2,403
Interest income 54 2,455 --
Interest expense (50,996) (7,587) (6,180)
Gain on sale of investment
to related party 470,000 -- --
Equity in loss of VetMall (1,182,969) -- --
----------- ----------- -----------
Total other income (expenses) (434,929) 10,905 (3,777)
----------- ----------- -----------
Net income (loss) before income
tax provision (benefit) (2,154,860) 863,054 113,396
Income tax provision (benefit) (280,042) 400,731 31,760
----------- ----------- -----------
Net income (loss) $(1,874,818) $ 462,323 $ 81,636
=========== =========== ===========
</TABLE>
Please read accompanying notes.
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2000, 1999, 1998
2000 1999 1998
--------- --------- ---------
Net income (loss) per share of
common stock $ (187.48) $ 46.23 $ 8.16
========= ========== =========
Weighted average shares of
common stock outstanding 10,000 10,000 10,000
========= ========== =========
Fully diluted earnings per share $ (187.48) $ 36.99 $ 6.53
========= ========== =========
Weighted average shares of common
stock outstanding assuming
conversion of preferred shares 10,000 12,499 12,499
========= ========== =========
Please read accompanying notes.
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK SHAREHOLDERS'
------------------------- ------------------------- ADDITIONAL PAID RETAINED EQUITY
SHARES AMOUNT SHARES AMOUNT IN CAPITAL EARNINGS (DEFICIT) (DEFICIT)
----------- ----------- ----------- ----------- --------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance April 1, 1997 150,000 $ 150,000 10,000 $ 10,000 $ -- $ 189,440 $ 349,440
Preferred stock dividends -- -- -- -- -- (12,250) (12,250)
Net income -- -- -- -- -- 81,636 81,636
----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance March 31, 1998 150,000 150,000 10,000 10,000 -- 258,826 418,826
Preferred stock dividends -- -- -- -- -- (15,025) (15,025)
Net income -- -- -- -- -- 462,323 462,323
----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance March 31, 1999 150,000 150,000 10,000 10,000 -- 706,124 866,124
Preferred stock dividends -- -- -- -- (14,750) (14,750)
Net loss -- -- -- -- -- (1,874,818) (1,874,818)
----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance March 31, 2000 150,000 $ 150,000 10,000 $ 10,000 $ -- $(1,183,444) $(1,023,444)
=========== =========== =========== =========== ========== =========== ===========
</TABLE>
Please read accompanying notes.
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,874,818) $ 462,323 $ 81,636
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization expense 31,228 35,589 22,464
Equity in loss of VetMall 1,182,969 -- --
Capitalized software costs written off -
net of accumulated amortization 977,534 -- --
Gain on sale of investment to related party (470,000)
Changes in operating assets and liabilities:
(Increase) decrease:
Accounts receivable (1,349,937) (245,128) (137,752)
Increase (decrease):
Accounts payable 144,768 64,274 3,584
Accrued liabilities 106,632 (19,226) 52,154
Deferred tax liabilities (280,042) 400,731 30,327
----------- ----------- -----------
Net cash provided by (used in)
operating activities (1,531,666) 698,563 52,413
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (23,738) (13,708) (43,481)
Capitalization of software development costs -- (985,748) --
Investment in VetMall (10,000) -- --
Proceeds from sale of investment to related party 480,000 -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities 446,262 (999,456) (43,481)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party obligations, net 1,097,074 195,000 --
Proceeds from capital stock issued -- -- 10,000
Preferred stock dividends paid (14,750) (15,025) (12,250)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,082,324 179,975 (2,250)
----------- ----------- -----------
Net increase (decrease) in cash (3,080) (120,918) 6,682
Cash at beginning of year 9,658 130,576 123,894
----------- ----------- -----------
Cash at end of year $ 6,578 $ 9,658 $ 130,576
=========== =========== ===========
</TABLE>
Please read accompanying notes.
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998
------- --------- --------
Supplemental Disclosures:
Operating activities reflect the following:
Cash paid for interest $53,496 $ 7,587 $ 6,180
======= ========= ========
Income taxes $ -0- $ 1,433 $ -0-
======= ========= ========
Please read accompanying notes.
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
DeskTop Corporation (the "Company") was founded in June 1995, as a Texas
Corporation. It is an Internet e-commerce solutions provider specializing in the
design, development and delivery of technology solutions by providing custom
programming services and web hosting services. DeskTop Ventures, Inc. was formed
in June 1999, as a Texas corporation and as a wholly-owned subsidiary of the
Company.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of DeskTop
Corporation and its wholly-owned subsidiary DeskTop Ventures, Inc. Significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Management assesses accounts receivable, at least annually, to determine whether
an allowance for credit loss is warranted. At March 31, 2000, 1999 and 1998, no
allowance was considered necessary. At March 31, 2000, 99% of the balance of
accounts receivable was due from VetMall, Inc., a related company (see Note 3.)
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
The Company owns 50% of the common stock of VetMall, Inc. ("VetMall"), a Florida
corporation, formed on March 7, 2000, and accounts for its investment using the
equity method. Under the equity method, the Company recognizes its share in the
net earnings or losses of VetMall as they occur rather than as distributions are
received. Distributions received are accounted for as a reduction of the
investment rather than as income. Losses from this investment have been offset
against the VetMall receivable. VetMall hosts an e-commerce web site which
provides a link between the consumer, the veterinarian and the distributor that
facilitates the sale of pet products.
REVENUE RECOGNITION
Revenue from consulting services is recognized when the services are performed.
Service revenues, primarily related to web hosting services, are recognized on a
straight-line basis over the contract period. Product revenue from software
sold, leased, or otherwise marketed is recognized when the product is delivered
and/or installed on the customer's equipment.
SOFTWARE DEVELOPED TO BE SOLD, LEASED, OR OTHERWISE MARKETED
Costs incurred in connection with development of software to be sold, leased, or
otherwise marketed are capitalized once the technological feasibility of
significant features of the system has been established. Likewise, betterments
or improvements that significantly improve the marketability or extend the
estimated useful life of the system are capitalized. Other normal maintenance
and support costs are expensed as incurred.
Amortization of capitalized software development costs is recorded at the
greater of the amount computed by the straight-line method over the estimated
useful life of the software or the amount computed by using the ratio that
current gross revenues bear to the sum of estimated future gross revenues and
current gross revenues. As indicated in Note 2, it is reasonably possible that
estimates of anticipated future gross revenues, the remaining estimated economic
life of the product, or both could be revised significantly as additional
information becomes available from operations. As a result, the carrying amounts
of the capitalized software costs could be reduced materially.
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), establishes standards for reporting comprehensive income
which is defined as the change in equity of an enterprise except those resulting
from stockholder transactions. All components of comprehensive income are
required to be reported in the income statement. The Company adopted this
Standard effective April 1, 1998. During fiscal 2000, 1999 and 1998, the Company
did not engage in any transactions required to be reported under this Standard.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per share are computed using the basic and diluted calculations
on the face of the statement of operations. Basic earning (loss) per share are
calculated by dividing net income (loss) available to common stockholders by the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding for the
period, adjusted for the dilutive effect of common stock equivalents, using the
treasury stock method.
ADVERTISING
The Company charges advertising costs to expense as incurred. The amount of
advertising expense for the fiscal years ended March 31, 2000, 1999 and 1998 was
approximately $690, $1,700 and $14,900, respectively.
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures and computer equipment
and are stated at cost. Depreciation is provided for using the straight-line
method over the estimated useful lives of the assets, ranging from five to seven
years.
Expenditures for maintenance, repairs and minor replacements are charged to
operations as incurred. Expenditures for major replacements and betterments are
capitalized and depreciated over the extended useful lives of the assets. The
cost and accumulated depreciation of assets retired or sold are eliminated from
the related asset accounts at the time of retirement or sale, and the resulting
gain or loss is recorded.
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<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF ASSETS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived
Assets To Be Disposed Of" (SFAS 121), the Company's policy is to evaluate
whether there has been a permanent impairment in the value of long-lived assets,
certain identifiable intangibles and goodwill when certain events have taken
place that indicate that the remaining unamortized balance may not be
recoverable. When factors indicate that the intangible assets should be
evaluated for possible impairment, the Company uses an estimate of related
undiscounted cash flows. Factors considered in the valuation include current
operating results, trends and anticipated undiscounted future cash flows. During
the year ended March 31, 2000 the Company determined software development costs
would not be recovered (see Note 2). There were no impairment losses recorded
for the fiscal years ended March 31, 1999 or 1998.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company utilizes the guidance provided by Statement of Financial Accounting
Standards No. 109, "Accounting For Income Taxes" (SFAS 109). Under the liability
method specified by SFAS 109, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax basis of assets
and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities.
CONCENTRATION OF CREDIT RISK
Due to the nature of the Company's business, a majority of sales are
attributable to one or two significant customers. The Company derived
approximately 90% of its revenues for the fiscal year ended March 31, 2000 from
VetMall. For the fiscal year ended March 31, 1999, 85% of the Company's revenues
were attributable to two significant customers. For the fiscal year ended March
31, 1998, two significant customers provided 77% of the Company's revenues. Due
to these concentrations, the loss of one customer could significantly affect the
Company's income and profits. The Company is employing additional efforts since
the purchase of the Company by DrugMax.com, Inc.
- 17 -
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK (CONTINUED)
("DrugMax") (see Note 5) to increase its customer base, thereby minimizing the
impact of these concentrations.
NOTE 2 - SOFTWARE DEVELOPMENT COSTS
Software development costs consist entirely of costs associated with the
Company's e-commerce vertical market solution. During the fiscal years ended
March 31, 2000 and 1999 the Company developed software to work in a specific
industry, but anticipated using core applications with modifications to service
various other industries. In March 1999, the Company entered into a license
agreement with a large distributor of veterinary products to utilize certain
parts of the product for field processing of product orders.
Through the fiscal year ended March 31, 2000, the Company had incurred
approximately $1,289,200 in costs, net of prior amortization, related to the
development of software for distribution of veterinary products by utilizing the
Internet. Management has concluded that the useful life of this software, called
the VetMall Project, is not ascertainable and the Company does not expect to
realize significant future revenue from this software. Therefore, as of March
31, 2000, previously capitalized costs were written off and amounts incurred
during the fiscal year were expensed as research and development costs. Any
future revenue derived from this software will be recognized as income in the
period earned.
- 18 -
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 3 - RELATED PARTY TRANSACTIONS
Related party obligations as of March 31, 2000, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
11% note payable dated February 28, 1997
payable on demand, but if no demand
on March 30, 1998. $ -- $ -- $ 75,000
10% note payable dated September 30, 1998
payable on demand, but if no demand
on March 30, 1999. -- 70,000 --
10% note payable dated February 12, 1999
payable on demand, but if no demand
on June 1, 1999. -- 130,000 --
11% note payable dated March 24, 1999
payable on demand, but if no demand
on May 3, 1999. -- 70,000 --
6% note payable dated February 22, 2000
through April 1, 2000. Thereafter on demand
at 18% per annum. 294,030 -- --
Due to DrugMax.com, Inc. relating to purchase
of companies (see Note 5), non-interest bearing. 1,073,044 -- --
---------- ---------- ----------
$1,367,074 $ 270,000 $ 75,000
========== ========== ==========
</TABLE>
- 19 -
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 3 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company was acquired on March 20, 2000 by DrugMax (see Note 5) in a stock
for stock exchange. As part of the transaction, DrugMax agreed to pay certain
indebtedness of the Company at the date of acquisition. The payment was
partially in cash and partially in stock of DrugMax. In addition, DrugMax
provided cash advances of approximately $235,000. As a result, the Company
became indebted to DrugMax in the amount of approximately $1,367,100 as of March
31, 2000. A portion of this obligation was in the form of a note in the
principal amount of $294,030, bearing interest at 6.0% per annum through April
1, 2000, and 18.0% per annum thereafter. The note is payable on demand. The
balance of the Company's obligation to DrugMax is non-interest bearing.
The Company has licensed certain software (referred to as The VetMall System)
for $200,000, to its 50% owned investment, VetMall, which enables the VetMall
web site to operate. In June 1999, Butler paid $405,000 to acquire the remaining
50% of VetMall. As a result, the Company recognized a capital gain of $400,000.
As part of the VetMall Master Agreement, Butler was required to make a $200,000
capital contribution to VetMall. In addition, if software development costs
exceed $400,000, Butler agreed to assume 50% of the next $400,000 in excess
costs. The agreement was substantially changed upon the acquisition by DrugMax
and future activity with Butler is projected by management to be minimal. In
spite of VetMall's losses, the Company received a $75,000 distribution, which
resulted in a $70,000 capital gain.
In connection with its acquisition of DeskTop, DrugMax purchased 200 shares
(20%) of VetMall, Inc. from Butler.
At March 31, 2000 the Company was owed approximately $2,000,000 by VetMall, Inc.
for services provided by the Company to VetMall. The receivable from VetMall has
been reduced by the Company's share of VetMall losses. The balance is guaranteed
by the selling shareholders as part of the acquisition (see Note 5).
Accounts receivable trade $ 20,554
Accounts receivable VetMall 2,034,783
-----------
Subtotal 2,055,337
50% interest in VetMall (1,182,969)
-----------
Net receivable $ 872,368
===========
- 20 -
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 4 - INCOME TAX
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of income
tax expense (benefit), deferred tax assets and liabilities net of valuation
reserves are as follows:
MARCH 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Current provision $ -- $ -- $ 1,433
Deferred tax expense (benefit) (280,042) 400,731 30,327
--------- --------- ---------
Total income tax expense (benefit) $(280,042) $ 400,731 $ 31,760
========= ========= =========
The deferred tax liability is comprised
of the following:
MARCH 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Deferred tax liability
Depreciation $ (3,626) $ (1,964) $ 505
Software development costs -- (332,362) --
Use of cash basis method of accounting
for income tax purposes (254,879) (204,218) (138,331)
--------- --------- ---------
Gross deferred tax liability (258,505) (538,544) (137,826)
--------- --------- ---------
Deferred tax liability $(258,505) $(538,544) $(137,826)
========= ========= =========
Due to the Company's acquisition by DrugMax (see Note 5), the Company's ability
to utilize the net operating loss ("NOL") carryforward will be significantly
reduced pursuant to Internal Revenue Code Section 382. If not fully utilized,
the NOL will expire March 31, 2019.
The major cause of differences between the aggregate provision for income taxes
and that computed by applying the statutory rate to pretax accounting income is
due to certain expenses that are not deductible for federal income tax.
- 21 -
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 5 - ACQUISITION OF COMPANY BY DRUGMAX
On March 20, 2000, the Company was acquired by DrugMax in exchange for 50,000
shares of DrugMax restricted common stock. In addition, DrugMax agreed to loan
approximately $419,000 to the Company to be used together with additional stock
of DrugMax to satisfy the Company's line of credit and obligations to related
parties totaling approximately $1,000,000. On the same date, DrugMax acquired 40
shares in VetMall from a third party, representing 20% of the outstanding stock
of VetMall, for $1,000,000 and 25,000 shares of DrugMax restricted common stock.
The Agreement And Plan Of Reorganization (the "Agreement") provides for an
adjustment to the acquisition price based upon the change in liabilities from
December 31, 1999 to March 20, 2000.
The Agreement also provides for additional compensation to be paid to the
original shareholders of the Company, if VetMall or substantially all of
VetMall's assets are subsequently sold or if VetMall completes an initial public
offering. The maximum amount of additional compensation, which is based on sale
proceeds, cannot exceed $4,800,000.
NOTE 6 - 401K PROFIT SHARING PLAN
The Company has a 401K Qualified Profit Sharing Plan covering all full-time
employees over 21 years of age with at least one year of service. The plan
provides for employee contributions through salary reductions and discretionary
matching contributions by the Company. The Company made contributions for the
years ended March 31, 2000, 1999 and 1998 in the amounts of $31,979, $18,600 and
$19,758, respectively.
- 22 -
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 7- GOING CONCERN
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern. These principles
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. As reflected in the accompanying consolidated
financial statements, the Company incurred a net loss of $1,874,818 during the
fiscal year ended March 31, 2000. In addition, the Company's current liabilities
exceed its current assets by $1,099,153. The ability of the Company to continue
as a going concern is dependent on increasing sales and obtaining additional
capital and financing. DrugMax has committed to provide current operating funds
while the Company expands its business operations and until additional outside
financing is obtained.
The consolidated financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
NOTE 8 - SERIES A PREFERRED STOCK
The Company has authorized 30,000 shares of its $10 par value Series A Preferred
Stock and as of March 31, 2000 has 15,000 shares issued and outstanding. The
stock had an initial 8% cumulative dividend that provides for yearly increases
up to 10% and is convertible to common stock. Interest on unpaid dividends
accrues at the rate of 10% per annum. The initial rate of dividends was $.80 per
share and increases by $.05 per share for the fiscal years 1997 through 2001
with a maximum of $1.00 per share.
Upon consolidation, merger or liquidation, the preferred stock is entitled to a
preferential payment of $10.00 per share plus all unpaid dividends and accrued
interest.
The preferred stock is convertible into common stock based upon the occurrence
of certain events. If there is a public offering of the Company's common stock
in which proceeds are at least $5,000,000 with a purchase price per share of at
least three times the then effective conversion price, the preferred shares are
required to be converted. The initial conversion rate is .1666 shares of common
stock for each share of preferred stock. The conversion rate increases for
certain events and generally is to maintain a conversion into at least 20% of
the Company's common stock outstanding.
There is also a voluntary conversion by the holders of the preferred stock, at
their discretion, at the conversion rate in effect at the time of their
conversion.
- 23 -
<PAGE>
DESKTOP CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Until March 31, 2000, the Company leased office space in Dallas, Texas. The
Company has not renewed the lease, and pays $12,000 per month for the office
space on a month-to-month basis. The Company also leases various computer
equipment with lease terms ranging from three to five years. The monthly
equipment rental expense is approximately $9,100.
Future minimum lease payments, by year in aggregate under non-cancelable
operating leases consist of the following at March 31, 2000:
YEAR ENDED MARCH 31,
--------------------
2001 $108,737
2002 65,652
2003 14,128
--------
$188,517
========
NOTE 10 - INVESTMENT IN UNCONSOLIDATED AFFILIATE
Investment in net assets of affiliated company accounted for under the equity
method, VetMall, amounted to $(1,182,969) at March 31,2000. This deficit was
offset against the receivable from VetMall (see Note 3).
The results of operations and financial position of the Company's equity-basis
affiliate are summarized below:
PERIOD FROM JUNE 28, 1999
(DATE OF INCEPTION) THROUGH
MARCH 31, 2000
---------------------------
Condensed Income Statement Information:
Revenue $ 577,669
Gross profit $ 118,930
Net loss $ (2,365,939)
MARCH 31, 2000
--------------
Condensed Balance Sheet Information:
Current assets $ 6,300
Non-current assets $ 385,156
Current liabilities $ 2,947,395
Stockholders' (Deficit) $(2,555,939)
NOTE 11 - SUBSEQUENT EVENTS
On April 19, 2000, DeskTop Ventures, Inc. distributed all of its shares of
VetMall to the sole shareholder of DeskTop Ventures, Inc., the Company.
Immediately subsequent to that distribution, the Company distributed all of its
shares of VetMall to the sole shareholder of the Company, DrugMax, resulting in
DrugMax then owning 70% of VetMall.
- 24 -
<PAGE>
Independent Auditor's Report
To the Board of Directors
VetMall, Inc.
Dallas, Texas
We have audited the accompanying balance sheet of VetMall, Inc. as of March 31,
2000 and the related statement of operations, shareholders' equity, and cash
flows for the period from June 28, 1999 (date of inception) through March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VetMall, Inc. as of March 31,
2000 and the results of its operations and its cash flows for the period from
June 28, 1999 (date of inception) through March 31, 2000 in conformity with
generally accepted accounting principles.
BRIMMER, BUREK & KEELAN LLP
/s/ BRIMMER, BUREK & KEELAN LLP
-------------------------------
Certified Public Accountants
Tampa, Florida
June 1, 2000
- 25 -
<PAGE>
VETMALL INC.
BALANCE SHEET
MARCH 31, 2000
ASSETS
Current assets
Cash $ 5,082
Accounts receivable 1,218
-----------
Total current assets 6,300
-----------
Property and equipment
Computer software 434,592
Computer equipment 1,434
-----------
436,026
Accumulated depreciation (50,870)
-----------
Property and equipment, net - 78% acquired from
related party 385,156
-----------
Total assets $ 391,456
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable - $2,059,356 due to related party $ 2,947,395
-----------
Total current liabilities 2,947,395
-----------
Total liabilities 2,947,395
-----------
Commitments and contingencies
SHAREHOLDERS' DEFICIT
Common stock, $0.001 par value;
100,000 shares authorized,
200 shares issued and outstanding --
Additional paid-in capital 210,000
Accumulated deficit (2,765,939)
-----------
Total shareholders' deficit (2,555,939)
-----------
Total liabilities and shareholders' deficit $ 391,456
===========
Please read accompanying notes.
- 26 -
<PAGE>
VETMALL INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 28, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2000
Revenue $ 577,669
Cost of sales - 82% to related party 458,739
-----------
Gross profit 118,930
Operating expenses
Depreciation and amortization 50,870
Advertising 195,606
Consultants - 84% to related party 1,605,294
Data preparation 151,435
Insurance 23,021
Legal fees 159,455
Software license 200,000
Trade show 30,359
Travel 49,088
General and administrative expenses 19,741
-----------
Total operating expenses 2,484,869
-----------
Net loss $(2,365,939)
===========
Net loss per share of common stock $(11,829.70)
===========
Weighted-average shares of
common stock outstanding 200
===========
Please read accompanying notes.
- 27 -
<PAGE>
VETMALL INC.
STATEMENT OF CHANGES IN STOCKHOLDERS'/MEMBERS' EQUITY
FOR THE PERIOD FROM JUNE 28, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2000
<TABLE>
<CAPTION>
COMMON MEMBERS'
STOCK EQUITY
(CORPORATION) ACCUMULATED (LIMITED TOTAL
NO. OF ADDITIONAL PAID-IN (DEFICIT) LIABILITY SHAREHOLDERS'
SHARES AMOUNT CAPITAL (CORPORATION) (CORPORATION) COMPANY) DEFICIT
----------- ----------- -------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 28, 1999 -- $ -- $ -- $ -- $ -- $ --
Members' contribution -- -- -- -- 210,000 210,000
Net loss -- -- -- -- (2,365,939) (2,365,939)
Members' distribution -- -- -- -- (400,000) (400,000)
Common stock issued -- -- -- -- -- --
in exchange for
VetMall, LLC
membership interest -
200 shares at $.001
par value 200 -- 210,000 (2,765,939) 2,555,939 --
----------- ----------- ----------- ----------- ----------- -----------
Balance March 31,
2000 200 $ -- $ 210,000 $(2,765,939) $ -- $(2,555,939)
=========== =========== =========== =========== =========== ===========
</TABLE>
Please read accompanying notes.
- 28 -
<PAGE>
VETMALL INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 28, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,365,939)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 50,870
(Increase) decrease in:
Accounts receivable, trade (1,218)
Increase (decrease) in:
Accounts payable, trade 411,363
-----------
Net cash used in operating activities (1,904,924)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of computer hardware and software - 78%
related party (436,025)
-----------
Net cash used in investing activities (436,025)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Accounts payable, related parties 2,536,032
Capital contribution 210,000
Members' distribution (400,000)
-----------
Net cash provided by financing activities 2,346,032
-----------
Net increase in cash 5,083
Cash beginning of period --
-----------
Cash end of period $ 5,083
===========
Please read accompanying notes.
- 29 -
<PAGE>
VETMALL INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
VetMall, Inc. (the "Company") was founded in June 1999 as a Nevada limited
liability corporation known as VetMall, LLC, which merged with VetMall, Inc. on
March 20, 2000. The Company is an internet-based consumer pet care product sales
distributor. It maintains a web site whereby consumers can order pet care
products which are then shipped directly by the manufacturer. The products are
primarily supplied by one vendor who is a 30% shareholder in the Company. In
addition, the Company derives income from advertisers on its web site and from
veterinarians subscribing to listing on its web site.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
ACCOUNTS RECEIVABLE
Management assesses accounts receivable to determine whether an allowance for
credit loss is warranted. At March 31, 2000, no allowance was considered
necessary.
REVENUE RECOGNITION
Revenue from sales of products is recognized when the product is shipped to the
customer. Revenue from advertising is recognized as advertising is posted to the
web site. Revenue from veterinarian subscriptions is recognized upon the signing
of subscriptions and the receipt of funds.
- 30 -
<PAGE>
VETMALL INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), establishes standards for reporting comprehensive income
which is defined as the change in equity of an enterprise except those resulting
from stockholder transactions. All components of comprehensive income are
required to be reported in the income statement. The Company adopted this
Standard effective at its inception on June 28, 1999. During the period ended
March 31, 2000, the Company did not engage in any transactions required to be
reported under this Standard.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per share are computed using the basic and diluted calculations
on the face of the statement of operations giving effect to the conversion of
the LLC membership interests into equivalent shares of the corporation,
retroactive to its inception. Basic earning (loss) per share are calculated by
dividing net income (loss) available to common stockholders by the weighted
average number of shares of common stock outstanding for the period.
PROPERTY AND EQUIPMENT
Depreciation is provided using the straight-line method, in amounts sufficient
to relate the cost of depreciable assets to operations over their estimated
service lives ranging from three to five years.
ADVERTISING
The Company charges advertising costs to expense as incurred. The amount of
advertising expense for the period from June 28, 1999 (date of inception)
through March 31, 2000 was approximately $195,600.
IMPAIRMENT OF ASSETS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived
Assets To Be Disposed Of" (SFAS 121), the Company's policy is to evaluate
whether there has
- 31 -
<PAGE>
VETMALL INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF ASSETS (CONTINUED)
been a permanent impairment in the value of long-lived assets, certain
identifiable intangibles or goodwill when certain events have taken place that
indicate that the remaining unamortized balance may not be recoverable. When
factors indicate that the intangible assets should be evaluated for possible
impairment, the Company uses an estimate of related undiscounted cash flows.
Factors considered in the valuation include current operating results, trends
and anticipated undiscounted future cash flows. There have been no impairment
losses for the period from June 28, 1999 (date of inception) through March 31,
2000.
NOTE 2 - COMPUTER SOFTWARE AND EQUIPMENT
Computer software and equipment were purchased substantially from a related
party (see Note 3) and consist of the following:
Computer software $ 434,592
Computer equipment 1,434
---------
436,026
Accumulated depreciation (50,870)
---------
Property and equipment, net $ 385,156
=========
- 32 -
<PAGE>
VETMALL INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 3 - RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS
The Company was formed as a joint venture between W. Butler Company ("Butler")
and DeskTop Corporation ("DeskTop") in June 1999 to create a web based
e-commerce web site to provide for sales of Butler's pet care products and
subscription services to veterinarians. The initial funding of the Company was a
cash contribution of $200,000 from Butler. In addition, the Company has an
obligation to Butler of approximately $450,000 for Company expenses paid
directly by Butler. The other shareholder, DeskTop, contributed cash in the
amount of $10,000 and provided consulting services. The Company purchased
certain of its web enabling software from DeskTop for approximately $400,000. At
March 31, 2000, Butler owned 30% of the Company, DeskTop owned 50% of the
Company, DrugMax owned 20% of the Company directly and an additional 50%
indirectly, through its ownership of DeskTop.
The Company obtained a license from DeskTop for the use of certain e-commerce
software and related code, which enables the operation of its web site. The
Company paid DeskTop $200,000 for the license. The license agreement was
terminated upon the purchase of DeskTop by DrugMax.
The Company purchases its products from Butler. Total purchases from Butler for
the period from June 28, 1999 (date of inception) through March 31, 2000 were
approximately $2,900.
At March 31, 2000, the Company owed approximately $2,000,000 to DrugMax for
consulting services provided and software purchases.
NOTE 4 - SALE OF COMPANY
On March 20, 2000, DrugMax became an indirect owner of 50% of the Company,
through DrugMax's acquisition of all the issued and outstanding stock of
Desktop. Simultaneously, DrugMax purchased an additional direct 20% interest in
the Company, from Butler. In conjunction with DrugMax's acquisition of ownership
in the Company, the Company merged with VetMall, Inc. (a Florida corporation)
and distributed 200 shares of VetMall, Inc. common stock to the former holders
of membership interests in the limited liability company. Subsequent to March
31, 2000, the portion of stock of VetMall, Inc. that was owned by DeskTop was
distributed to DrugMax. As a result of these transactions, DrugMax directly
owned 70% of the Company as of April 19, 2000.
- 33 -
<PAGE>
VETMALL INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 5 - INCOME TAXES
The Company was originally incorporated as a Nevada limited liability company on
June 28, 1999. A limited liability company is taxed as a partnership for Federal
Income Tax purposes. The Company merged into a Florida corporation as of March
20, 2000 and the limited liability company terminated. Since the company was not
subject to income tax until it became a corporation, no provision for income tax
expense and deferred tax liability has been recorded.
NOTE 6 - GOING CONCERN
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern. These principles
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. As reflected in the accompanying financial
statements, the Company incurred a net loss of $2,365,939 during the period from
June 28, 1999 (date of inception) through March 31, 2000. In addition, the
Company's current liabilities exceed its current assets by $2,941,095. The
ability of the Company to continue as a going concern is dependent upon
increasing sales and obtaining additional capital and financing. DrugMax has
committed to provide current operating funds while the Company expands its
business operations.
These financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
NOTE 7 - CONCENTRATION OF CREDIT RISK
The Company derived all of its advertising revenue from one pet product supplier
and has received all of its subscription revenue from approximately 1,800
independent veterinarians. In addition, it purchases its products from Butler
(see Note 3.) Due to the concentration of these sources of revenue and supply,
the Company may be at risk in the event these sources cease to be customers or
to provide products. The Company is working on expanding its business model to
include business-to-business web sites and is seeking alternative suppliers to
minimize credit risk in the future.
- 34 -
<PAGE>
VETMALL INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 8 - SUBSEQUENT EVENTS
In June 2000, the Company developed a new business-to-business web site, which
the Company expects will be launched in July 2000, at the Company's web site
address, www.vetmarket.com, which will provide for the sale of products from
manufacturers to veterinarians.
Subsequent to March 31, 2000, the Company ceased selling web site subscriptions
to veterinarians in order to focus its efforts on the development of its new web
site.
- 35 -
<PAGE>
DRUGMAX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On November 26, 1999, DrugMax.com, Inc. ("DrugMax") acquired all the issued and
outstanding shares of Becan Distributors, Inc. and its subsidiary, Discount Rx,
Inc. (collectively "Becan") for $2,000,000 in cash and 2,000,000 shares of
DrugMax common stock. The acquisition is accounted for as a purchase.
On March 20, 2000, DrugMax acquired all the issued and outstanding shares of
DeskTop Corporation and its subsidiary, DeskTop Ventures, Inc. (collectively
"DeskTop") for stock and payment of certain DeskTop liabilities. DeskTop
provides consulting and software development services.
Simultaneous with the DeskTop acquisition, DrugMax acquired a 20% interest in
VetMall, Inc. ("VetMall") a website management company. Since DeskTop already
owned a 50% interest in VetMall, the acquisition of the additional 20% interest
gave DrugMax a controlling interest in VetMall.
The Unaudited Pro Forma Condensed Consolidated Financial Statements do not
purport to be indicative of the combined results of operations that actually
would have occurred if the transactions had been effected at the dates indicated
or to project future results of operations for any period. The Unaudited Pro
Forma Condensed Consolidated Financial Statements should be read in conjunction
with the financial statements and related notes of the respective companies.
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<PAGE>
DRUGMAX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET(1)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DESKTOP PRO FORMA
DRUGMAX CORPORATION VETMALL CONSOLIDATED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 1999 ADJUSTMENTS 1999
---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash $ 8,200,631 $ 17,424 $ 43,972 $ (302,050) (b) $ 6,959,977
(1,000,000) (c)
Accounts receivable, net 5,353,906 21,533 1,418 -- 5,376,857
Due from affiliates 36,487 1,251,512 -- (1,251,512) (a) 36,487
Other receivables 57,652 -- -- -- 57,652
Inventory, net 1,291,968 -- -- -- 1,291,968
Other current assets 168,321 -- -- -- 168,321
------------ ------------ ------------ ------------ ------------
Total current assets 15,108,965 1,290,469 45,390 (2,553,562) 13,891,262
Property and equipment, net 90,138 57,205 406,958 -- 554,301
Software development costs, net -- 1,476,998 -- (1,476,998) --
Investment in consolidated companies (635,892) 635,892 (a) --
Deposits 13,963 -- -- -- 13,963
Intangible assets, net 21,709,690 -- 181,206 -- 21,890,896
Goodwill, DeskTop -- -- -- 2,844,626 (b) 2,844,626
Goodwill, VetMall -- -- -- 1,922,727 (c) 1,922,727
------------ ------------ ------------ ------------ ------------
Total assets $ 36,922,756 $ 2,188,780 $ 633,554 $ 1,372,685 $ 41,117,775
============ ============ ============ ============ ============
</TABLE>
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<PAGE>
DRUGMAX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DESKTOP PRO FORMA
DRUGMAX CORPORATION VETMALL CONSOLIDATED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 1999 ADJUSTMENTS 1999
---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 3,918,827 $ 332,220 $ 344,128 $ -- $ 4,595,175
Line of credit 1,752,785 -- -- -- 1,752,785
Note payable 14,386 -- -- -- 14,386
Loans and notes payable to related parties 31,330 859,683 1,751,209 (1,251,512) (a) 531,027
-- -- -- (859,683) (b)
------------ ------------ ------------ ------------ ------------
Total current liabilities 5,717,328 1,191,903 2,095,337 (2,111,195) 6,893,373
Noncurrent deferred income tax liability -- 315,542 -- -- 315,542
------------ ------------ ------------ ------------ ------------
Total liabilities 5,717,328 1,507,445 2,095,337 (2,111,195) 7,208,915
Stockholders' equity 31,205,428 681,335 (1,461,783) 635,892 (a) 33,908,860
1,925,261 (b)
922,727 (c)
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 36,922,756 $ 2,188,780 $ 633,554 $ 1,372,685 $ 41,117,775
============ ============ ============ ============ ============
</TABLE>
(1) The pro forma consolidated balance sheet gives effect to the DeskTop and
VetMall acquisitions as if they had occurred on December 31, 1999.
DrugMax's balance sheet at December 31, 1999 includes the effects of the
Becan acquisition since it occurred on November 26, 1999.
Adjustments reflect the following:
(a) Elimination of intercompany receivables and payables to reflect the
consolidation of DeskTop and VetMall due to the common ownership
created by the acquisition.
(b) Adjust the historical financial statements for DrugMax's acquisition
of DeskTop Corporation by reflecting the purchase transaction.
(c) Adjust the historical financial statements for DrugMax's acquisition
of the additional 20% interest in VetMall by reflecting the purchase
transaction.
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<PAGE>
DRUGMAX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS(1)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
DRUGMAX BECAN DESKTOP
APRIL 1, 1999 APRIL 1, 1999 APRIL 1, 1999
DECEMBER 31, 1999 (1) NOVEMBER 26, 1999 DECEMBER 31, 1999
--------------------- ------------------ -------------------
<S> <C> <C> <C>
Net revenues $ 7,221,279 $ 33,721,393 $ 1,978,636
Cost of sales 7,139,562 32,965,395 287,758
------------ ------------ ------------
Gross profit 81,717 755,988 1,690,878
Operating expenses:
Selling, general and administrative expense 784,474 421,994 1,620,034
Goodwill amortization -- -- --
-- -- --
-- -- --
------------ ------------ ------------
Total operating expenses 784,474 421,994 1,620,034
------------ ------------ ------------
Income (loss) from continuing operations (702,757) 334,004 70,844
Interest income 39,539 5,455 47
Interest expense (36,575) (99,090) (40,204)
Other income and expenses, net (31,307) (8,377) 226,639
Equity in loss of affiliate -- -- (635,892)
------------ ------------ ------------
Net income (loss) before income tax (731,100) 231,992 (378,566)
Income tax provision -- -- 128,712
------------ ------------ ------------
Net income (loss) $ (731,100) $ 231,992 $ (249,854)
============ ============ ============
Basic and diluted net income (loss)
per share $ (0.23)
============
Weighted average common shares 3,151,616
============
</TABLE>
(CONTINUED)
- 39 -
<PAGE>
DRUGMAX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS(1)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999
(CONTINUED)
<TABLE>
<CAPTION>
VETMALL
JUNE 28, 1999 PROFORMA
DECEMBER 31, 1999 CONDOLIDATED
(2) ADJUSTMENTS DECEMBER 31, 1999
----------------- ------------ -----------------
<S> <C> <C> <C>
Net revenues $ 501,854 $ (1,616,824) (a) $ 41,806,338
Cost of sales 419,246 -- 40,811,961
------------ ------------ ------------
Gross profit 82,608 (1,616,824) 994,377
Operating expenses:
Selling, general and administrative expense 1,354,391 (1,712,324) (a) 2,468,569
Goodwill amortization -- 1,091,232 (b) 1,710,199
426,694 (c)
192,273 (d)
------------ ------------ ------------
Total operating expenses 1,354,391 (2,125) 4,178,768
------------ ------------ ------------
Income (loss) from continuing operations (1,271,783) (1,614,699) (3,184,391)
Interest income -- -- 45,041
Interest expense -- -- (175,869)
Other income and expenses, net -- (95,500) (a) 91,455
Equity in loss of affiliate -- 635,892 (a) --
------------ ------------ ------------
Net income (loss) before income tax (1,271,783) (1,074,307) (3,223,764)
Income tax provision -- (128,712) (e) --
------------ ------------ ------------
Net income (loss) $ (1,271,783) $ (1,203,019) $ (3,223,764)
============ ============ ============
Basic and diluted net income (loss)
per share $ (0.64)
============
Weighted average common shares 5,018,708 (f)
============
</TABLE>
- 40 -
<PAGE>
(1) Becan's statement of operations includes only activity from April 1, 1999
through November 26, 1999 (date of acquisition), because activity subsequent
to this date is included in DrugMax's December 31, 1999 consolidated
statement of operations. The VetMall statement of operations is for the
period from June 28, 1999 (date of inception) through December 31, 1999.
Adjustments reflect the following:
(a) Elimination of intercompany revenues and expenses to reflect the
consolidation of DeskTop and VetMall due to the common ownership
created by the acquisition.
(b) Amortization expense related to goodwill arising from the Becan
acquisition (15 year life.)
(c) Amortization expense related to goodwill arising from the DeskTop
acquisition (5 year life.)
(d) Amortization expense related to goodwill arising from the VetMall
acquisition (5 year life.)
(e) Tax benefit lost as result of acquisitions.
(f) Weighted average shares of common stock outstanding was calculated
based on the assumption that the shares issued in connection with the
acquisitions were outstanding for the entire period.
- 41 -
<PAGE>
DRUGMAX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS(1)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 (DATE OF INCEPTION) THROUGH MARCH 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
DRUGMAX BECAN DESKTOP ADJUSTMENTS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 37,118 $ 18,127,002 $ 1,246,306 $ -- $ 19,410,426
Cost of sales 14,496 17,616,590 -- -- 17,631,086
------------ ------------ ------------ ------------ ------------
Gross profit 22,622 510,412 1,246,306 -- 1,779,340
Operating expenses:
Selling, general and administrative
expense 128,858 390,162 232,924 7,778 (e) 876,734
26,667 (f)
166,667 (g)
1,778 (h)
11,900 (i)
(90,000)(j)
Goodwill amortization-Becan 969,395 (c) 969,395
Goodwill amortization-DeskTop 379,282 (d) 379,282
------------ ------------ ------------ ------------- ------------
Total operating expenses 128,858 390,162 232,924 1,473,467 2,225,411
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations (106,236) 120,250 1,013,382 (1,473,467) (446,071)
Interest income 1,761 900 -- 2,661
Interest expense -- (58,223) (5,292) -- (63,515)
Other income and expenses, net -- 5,653 14,449 -- 20,102
------------ ------------ ------------ ------------ ------------
Net income (loss) before income tax (104,475) 67,680 1,023,439 (1,473,467) (486,823)
Income tax provision -- 12,830 400,731 -- 413,561
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (104,475) $ 54,850 $ 622,708 $ (1,473,467) $ (900,384)
============ ============ ============ ============ ============
Basic and diluted net loss
per share $ (0.08) $ -- $ -- $ -- $ (0.26)
============ ============ ============ ============ ============
Weighted average common shares 1,372,230 (a) 3,488,406 (b)
============ ============
</TABLE>
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<PAGE>
(1) Since DrugMax was incepted on September 8, 1998, the pro forma consolidated
statement of operations is for the period from September 8, 1999 (date of
inception) through March 31, 1999. The historical income statements of
Becan and DeskTop have been adjusted to reflect the same period. Becan's
short period was calculated by multiplying the historical balances by
seven-twelfths. DeskTop's short period was calculated based on the
unaudited activity for the period from September 8, 1998 through March 31,
1999. VetMall did not exist as of March 31, 1999 and therefore is not
included in the pro forma consolidated statement of operations.
Adjustments reflect the following:
(a) The 1,372,230 weighted-average shares of common stock includes the
adjustment for a one-for-two reverse split that occurred in October
1999.
(b) The weighted average shares of common stock outstanding of 3,488,406
assumes that the shares issued to acquire Becan and DeskTop were
outstanding throughout the entire period.
(c) Amortization of goodwill (15 year life) arising from the acquisition
of Becan (excess of purchase price over the fair market value of the
net assets acquired.)
(d) Amortization of goodwill (5 year life) arising from the acquisition of
DeskTop (excess of purchase price over the fair market value of the
net assets acquired.)
(e) Amortization (3 year life) of $35,000 cost of web site domain name
acquired as part of the March 31, 1999 acquisition of HealthSeek.com,
Inc. by DrugMax.
(f) Compensation expense for maintenance of HealthSeek.com web site per
consulting agreement beginning May 1, 1999. The agreement requires an
annual payment of $40,000 and expired on March 31, 2000.
(g) Compensation to be paid based on annual employment agreement with CEO
($150,000) and consulting agreement with a director ($100,000)
(h) Amortization (15 year life) of $40,000 paid to purchase the web site
domain name "www.nutriceuticals.com".
(i) Interest paid to various stockholders and affiliates.
(j) Elimination of management fees paid to Becan's parent for legal,
accounting and administrative services.
- 43 -
