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): July 3, 2000 (April 19, 2000)
DRUGMAX.COM, INC.
------------------------------------------------------
(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
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 19, 2000 for the
acquisition of Valley Drug Company.
(a) Financial statements of the businesses acquired, prepared pursuant to Rule
3.05 of Regulation S-X:
ITEM PAGE
---- ----
Audited financial statements of Valley Drug Company
Report of Brimmer, Burek, & Keelan, LLP Independent Auditors
Balance Sheets as of December 31, 1999, 1998, 1997
Income Statements for the Years Ended December 31, 1999, 1998 and 1997
Statement of Shareholders' Equity for the
Years Ended December 31, 1999, 1998, and 1997
Statements of Cash Flows for the
Year Ended December 31, 1999, 1998 and 1997
Notes to Financial Statements
<PAGE>
(b) Pro forma financial information required pursuant to Article 11 of
Regulation S-X:
ITEM
DrugMax.com, Inc. And Subsidiaries Unaudited Pro Forma Condensed Consolidated
Financial Statements
Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of March 31, 2000
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the Year Ended March 31, 2000
(c) Exhibits in accordance with the provisions of Item 601 of Regulation S-K:
EXHIBITS
2.1 Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition
Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A.
Blundo dated as of April 19, 2000. (1)
10.1 Consent of National City Bank to the Merger dated April 13, 2000. (1)
99.1 Audited Financial Statements of DrugMax.com, Inc. as of March 31, 2000.
(2)
99.2 Audited Financial Statements of DeskTop Corporation as of March 31, 2000.
(3)
99.3 Audited Financial Statements of VetMall, Inc. as of March 31, 2000. (3)
------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K,
file number 0-24362, filed in Washington, D.C. on May 3, 2000.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 2000, file number 0-24362, filed in
Washington, D.C. on June 29, 2000.
(3) Incorporated by reference to the Company's Current Report on Form 8-K/A,
file number 0-24362, filed in Washington, D.C. on June 29, 2000.
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.
<PAGE>
/s/ WILLIAM L. LAGAMBA
----------------------
William L. LaGamba, Chief Executive Officer
Dated: July 3, 2000
<PAGE>
DRUGMAX.COM, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma data presented in the unaudited pro forma condensed
Consolidated statements of operations are included in order to illustrate the
effect on the Company's financial statements of the transactions described
below:
On November 26, 1999, DrugMax.com, Inc. ("DrugMax") acquired all the issued and
outstanding shares of Becan Distributors, Inc. and its subsidiary, Discount Rx,
Inc. (collectively "Becan") for $2,000,000 in cash and 2,000,000 shares of
DrugMax common stock. The acquisition is accounted for as a purchase.
On March 20, 2000, DrugMax acquired all the issued and outstanding shares of
DeskTop Corporation and its subsidiary, DeskTop Ventures, Inc. (collectively
"DeskTop") for stock and payment of certain DeskTop liabilities. DeskTop
provides consulting and software development services. The acquisition is
accounted for as a purchase.
Simultaneous with the DeskTop acquisition, DrugMax acquired a 20% interest in
VetMall, Inc. ("VetMall") a web site management company. Since DeskTop already
owned a 50% interest in VetMall, the acquisition of the additional 20% interest
gave DrugMax a controlling interest in VetMall. The acquisition is accounted for
as a purchase.
On April 19, 2000, DrugMax acquired all the issued and outstanding stock of
Valley Drug Company for $1,700,000 and 226,666 shares of DrugMax common stock.
The acquisition is accounted for as a purchase.
For purposes of the statement of operations the adjustments are presented as if
DrugMax had acquired Becan, DeskTop, VetMall and Valley as of April 1, 1999.
The pro forma information is based on the following historical financial
statements after giving effect to the transactions using the purchase method of
accounting and the assumptions and adjustments in the accompanying notes to the
pro forma condensed consolidated financial statements.
The audited consolidated financial statements of DrugMax (as filed on
DrugMax's Form 10-KSB, for the fiscal year ended March 31, 2000),
The unaudited consolidated financial statements of Becan which were
provided by Becan,
The audited consolidated financial statements of Desktop for the
fiscal year ended March 31, 2000 (filed with Form 8-K/A filed on June
29, 2000) which have been provided by Desktop,
<PAGE>
The audited financial statements of VetMall for the period from June
28, 1999 (date of inception) through March 31, 2000 (filed with Form
8-K/A filed on June 29, 2000) which were provided by VetMall, and
The December 31, 1999 audited financial statements of Valley for the
year ended December 31, 1999 (filed with this report under Item 7 (a))
which have been provided by Valley.
These 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.
In the opinion of management, all adjustments have been made that are necessary
to present fairly the pro forma data.
(1) The pro forma consolidated balance sheet gives effect to the Valley
acquisition as if it had occurred on March 31, 2000. Because the Becan, DeskTop
and VetMall acquisitions occurred during the fiscal year, the effects of these
acquisitions are included in DrugMax's balance sheet at March 31, 2000
Adjustments reflect the following:
(a) Adjust the historical financial statements for DrugMax's acquisition of
Valley Drug Company by reflecting the purchase transaction. 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.
(1) Becan's statement of operations includes only activity from April 1, 1999
through November 26, 1999 (date of acquisition). The VetMall statement of
operations is for the period from June 28, 1999 (date of inception) through
March 20, 2000 (date of acquisition). The DeskTop statement of operations is for
the period from April 1, 1999 to March 20, 2000 (date of acquisition). All
activity of Becan, DeskTop and VetMall subsequent to the respective dates of
acquisition is included in DrugMax's March 31, 2000 consolidated statement of
operations. Valley's statement of operations is for the year ended December 31,
1999.
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) Amortization expense related to goodwill arising from the Valley acquisition
(15 year life.)
(f) Tax benefit lost as result of acquisitions.
<PAGE>
(g) Weighted average shares of common stock outstanding was calculated based on
the assumption that the shares issued in connection with the acquisitions were
outstanding for the entire period.
<PAGE>
VALLEY DRUG COMPANY AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports 1
Balance Sheets as of December 31, 1999, 1998 and 1997 2
Income Statements for the years ended December 31, 1999, 1998 and 1997 3
Statement of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997 4
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 5
Notes to Financial Statements 6 - 13
<PAGE>
Independent Auditors' Report
To the Board of Directors
Valley Drug Company
Youngstown, Ohio
We have audited the accompanying balance sheets of Valley Drug Company as of
December 31, 1999, 1998 and 1997, and the related statements of operations,
shareholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valley Drug Company as of
December 31, 1999, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
BRIMMER, BUREK & KEELAN LLP
Certified Public Accountants
Tampa, Florida
April 28, 2000
1
<PAGE>
VALLEY DRUG COMPANY
BALANCE SHEETS
DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
ASSETS
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current assets
Cash $ 502 $ 2,137,036 $ 1,459,841
Accounts receivable, net 2,701,754 2,951,469 3,250,507
Inventory 6,339,119 5,994,546 6,350,216
Prepaid and other current assets 21,125 23,786 22,966
----------- ----------- -----------
Total current assets 9,062,500 11,106,837 11,083,530
Property, plant and equipment - net 66,754 23,362 14,649
Notes receivable -- -- 119,542
Shareholder note receivable 70,000 52,000 --
Non-current accounts receivable 254,792 438,092 347,201
Other non-current assets 113,414 990 48,684
----------- ----------- -----------
Total assets $ 9,567,460 $11,621,281 $11,613,606
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current liabilities
Line of credit $ 4,166,000 $ -- $ --
Current portion long-term debt 236,151 1,218,834 1,218,834
Bank overdraft 517,336 -- --
Accounts payable 2,385,618 2,835,381 2,521,603
Accrued expenses 145,190 121,040 235,394
------------ ------------ ------------
Total current liabilities 7,450,295 4,175,255 3,975,831
Long-term debt 1,585,517 -- --
------------ ------------ ------------
Total liabilities 9,035,812 4,175,255 3,975,831
Shareholders' equity
Preferred stock, no par; 250 shares authorized;
0 shares issued and outstanding -- -- --
Common stock, no par; 500 shares authorized;
100 shares issued and outstanding, at
December 31, 1999, 200 shares issued and
outstanding at December 31, 1998 and 1997 -- 100,000 100,000
Additional paid in capital -- -- --
Treasury stock -- (1,951,470) (1,951,470)
Retained earnings 531,648 9,297,496 9,489,245
------------ ------------ ------------
Total shareholders' equity 531,648 7,446,026 7,437,775
------------ ------------ ------------
Total liabilities and
Shareholders' equity $ 9,567,460 $ 11,621,281 $ 11,413,606
============ ============ ============
</TABLE>
Please read accompanying notes
2
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF OPERATIONS
DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 50,572,187 $ 47,040,482 $ 48,124,876
Cost of good sold 48,037,331 44,613,313 45,156,477
------------ ------------ ------------
Gross Profit 2,534,856 2,427,169 2,968,399
Operating expenses
Depreciation 11,963 5,278 2,955
General and administrative 1,726,029 1,573,291 1,636,999
------------ ------------ ------------
Total operating expenses 1,737,992 1,578,569 1,639,954
------------ ------------ ------------
Operating income 796,864 848,600 1,328,445
Other income (expense)
Interest income 13,113 97,946 99,181
Interest expense (565,371) (109,695) (109,696)
------------ ------------ ------------
Total other income (expense) (552,258) (11,749) (10,515)
------------ ------------ ------------
Net income $ 244,606 $ 836,851 $ 1,317,930
============ ============ ============
Basic and diluted income per share $ 2,446.06 $ 4,184.26 $ 6,589.65
============ ============ ============
Weighted-average shares of
common stock outstanding 100 200 200
============ ============ ============
</TABLE>
Please read accompanying notes.
3
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------- ------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at 12/31/96 200 $ 100,000 -- $ --
Net income -- -- -- --
Shareholder distributions -- -- -- --
--------- --------- --------- ---------
Balance at 12/31/97 200 100,000 -- --
Net income -- -- -- --
Shareholder distributions -- -- -- --
--------- --------- --------- ---------
Balance at 12/31/98 200 100,000 -- --
Net income -- -- -- --
Shareholder distributions -- -- -- --
Purchase and retirement
of 200 shares (200) (100,000) -- --
Issuance of 100 shares 100 -- -- --
Retirement of 139 shares -- -- -- --
--------- --------- --------- ---------
Balance 12/31/99 100 $ -- -- $ --
========= ========= ========= =========
</TABLE>
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
TREASURY STOCK
-----------------------------
RETAINED NUMBER OF
EARNINGS SHARES AMOUNT TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$ 9,151,315 139 $(1,951,470) $ 7,299,845
1,317,930 -- -- 1,317,930
(980,000) -- -- (980,000)
----------- ----------- ----------- -----------
9,489,245 139 (1,951,470) 7,637,775
836,851 -- -- 836,851
(1,028,600) -- -- (1,028,600)
----------- ----------- ----------- -----------
9,297,496 139 (1,951,470) 7,446,026
244,606 -- -- 244,606
(7,000) -- -- (7,000)
(7,051,984) -- -- (7,151,984)
----------- ----------- ----------- -----------
(1,951,470) (139) 1,951,470 --
----------- ----------- ----------- -----------
$ 531,648 -- $ -- $ 531,648
=========== =========== =========== ===========
</TABLE>
Please read accompanying notes.
4
<PAGE>
VALLEY DRUG COMPANY
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1999, 1998, 1997
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 244,606 $ 836,851 $ 1,317,930
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 11,963 5,278 2,955
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 41,100 208,147 (605,288)
Inventory (344,573) 355,670 328,199
Other current assets 2,661 (820) 6,380
Other assets (112,424) 47,694 (48,259)
Increase (decrease) in:
Accounts payable 67,572 313,778 10,022
Accrued expenses 24,150 (114,354) 65,841
----------- ----------- -----------
Net cash provided by operating activities (64,945) 1,652,244 1,077,780
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (55,355) (13,991) --
Notes receivable acquired (70,000) -- (81,129)
Payments received on notes 52,000 67,542 102,302
----------- ----------- -----------
Net cash provided by (used in) investing activities (73,355) 53,551 21,173
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 4,166,000 -- --
Proceeds from issuance of debt 2,000,000 -- --
Payments on long-term debt (1,397,166) -- --
Purchase and retirement of common stock (6,760,068) -- --
Distribution to shareholders (7,000) (1,028,600) (980,000)
----------- ----------- -----------
Net cash (used in) financing activities (1,998,234) (1,028,600) (980,000)
----------- ----------- -----------
Net increase (decrease) in cash (2,136,534) 677,195 118,953
Cash at beginning of year 2,137,036 1,459,841 1,340,888
----------- ----------- -----------
Cash at end of year $ 502 $ 2,137,036 $ 1,459,841
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 565,371 $ 109,695 $ 109,695
=========== =========== ===========
</TABLE>
Please read accompanying notes.
5
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Valley Drug Company (the Company) was incorporated in 1983 as an Ohio
corporation. The Company is a wholesale distributor of pharmaceuticals, over the
counter drugs, and health and beauty care products throughout the United States.
The Company sells primarily to independent retail and regional chain owned drug
stores.
The Company was privately owned until April 19, 2000 and had elected with the
consent of its shareholders to be taxed as an S corporation. On April 19, 2000,
the Company executed an agreement and plan of reorganization with DrugMax.com,
Inc. ("DrugMax") whereby all of the issued and outstanding capital stock of the
Company was exchanged for shares of DrugMax (Note 7). As a result of the
exchange, the Company became a wholly owned subsidiary of DrugMax.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies used in preparing the
accompanying financial statements follows:
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Accounts receivable trade $ 3,061,342 $ 3,197,900 $ 3,528,881
Allowance for doubtful accounts (359,588) (246,431) (278,374)
----------- ----------- -----------
Total accounts receivable $ 2,701,754 $ 2,951,469 $ 3,250,507
=========== =========== ===========
</TABLE>
6
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Depreciation is provided for using the straight-line method, in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives ranging from three to seven years.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Furniture and fixtures $ 422,702 $ 414,911 $ 414,911
Leasehold improvements 41,970 28,078 28,078
Equipment 47,663 13,991 --
--------- --------- ---------
512,335 456,980 442,989
Accumulated depreciation (445,581) (433,618) (428,340)
--------- --------- ---------
$ 66,754 $ 23,362 $ 14,649
========= ========= =========
</TABLE>
IMPAIRMENT OF ASSETS
The Company's policy is to evaluate whether there has been a permanent
impairment in the value of long-lived assets, certain identifiable intangibles
and goodwill when certain events have taken place that indicate that the
remaining balance may not be recoverable. When factors indicate that the
intangible assets should be evaluated for possible impairment, the Company uses
an estimate of related undiscounted future cash flows. There have been no
impairment losses in 1999, 1998 or 1997.
INCOME TAXES
The Company has elected under the Internal Revenue Code to be taxed as an S
Corporation. Under those provisions, the Company does not pay federal corporate
income taxes on its taxable income. Instead, the shareholders are liable for
individual federal and state income taxes on their proportionate shares of the
Company's taxable income.
7
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CAPITALIZATION
The Company is authorized is issue 500 shares of common stock, without par value
and 250 shares of preferred stock without par value.
COMMON STOCK -The holders of common shares have the sole and exclusive
voting power on all matters to be presented to the shareholders. The
following shares were issued and outstanding at December 31
1999 1998 1997
---------- ---------- ----------
Issued 500 500 500
Outstanding 100 200 200
PREFERRED STOCK - The Company's directors may adopt amendments to the
Articles of Incorporation to create one or more series of preferred
shares. The shares of each series to have such designations, privileges
, restrictions and qualifications as determined by the directors. At
December 31, 1998 and 1997, none of the preferred shares had been given
any designations, privileges , restrictions or qualifications and no
preferred shares had been issued. The shares were cancelled in January
1999.
REVENUE RECOGNITION
Revenues are recognized when the merchandise is shipped to the customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, however,
management does not believe these differences would have a material effect on
the operating results.
EARNINGS PER COMMON SHARE
Earnings per common share have been computed based upon the weighted-average
number of shares outstanding during the period.
8
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY LEASES
The Company leases a property in Youngstown, Ohio that is being utilized by the
Company for offices, warehousing, and shipping for its distribution operations,
consisting of approximately 30,000 square feet. The offices are leased pursuant
to a ten-year lease that expires on December 30, 2008. The Company has an option
to continue the lease on a month to month basis. The rental under the lease is
$6,000 per month. Rent expense was $72,000 for each year presented.
Future minimum lease payments, by year in aggregate under non-cancelable
operating leases consist of the following at December 31, 1999:
YEAR ENDED DECEMBER 31,
----------------------
2001 $ 72,000
2002 72,000
2003 72,000
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company, in estimating its fair value disclosures for financial instruments,
uses the following methods and assumptions:
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES: The
carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses approximate their
fair value due to their relatively short maturity.
LONG-TERM OBLIGATIONS: The fair value of the Company's fixed-rate
long-term obligations is estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. At December 31, 1999, 1998 and 1997,
the fair value of the Company's long-term obligations approximated its
carrying value.
CREDIT LINES PAYABLE: The carrying amount of the Company's credit lines
payable approximates fair market value since the interest rate on these
instruments changes with market interest rates.
9
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 2 - RELATED PARTY TRANSACTIONS
LEASE
The Company leases the building it operates in from the former shareholder for a
period of eight years on a triple net basis at the rate of $6,000 per month.
CUSTOMERS CONTROLLED BY EMPLOYEE
The son of the former owner is currently an employee and owns three customers of
the Company. The sales to those customers are at a price within a maximum of 1/2
percent of the price offered by the Company to similar retail accounts on RX and
OTC items. The sales of those customers for the years ended December 31, 1999,
1998 and 1997 were $3,760,000, $3,351,000 and $2,966,000 respectively.
LOAN GUARANTEES
The revolving line of credit and term loans in the amounts of $4,500,000 and
$2,000,000, respectively are personally guaranteed by the new owners of the
Company.
PROFESSIONAL PHARMACY SOLUTIONS, LLC
The two shareholders of the Company and the VP of Sales own Professional
Pharmacy Solutions (PPS), a pharmacy management company. PPS manages and
operates pharmacies owned by a local hospital. The Company sells pharmaceuticals
to PPS on a cost plus basis. The Company had a receivable of approximately
$125,000 at December 31, 1999. Sales to the pharmacies operated by PPS totaled
approximately $700,000.
NOTE 3 - CONCENTRATIONS OF CREDIT RISK
CASH IN BANK
The Company maintains its checking account in one commercial bank. Cash in this
checking account at times exceeded the $100,000 Federal Deposit Insurance
Corporation's maximum insured balance coverage.
10
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Shareholder loan - Monthly payments
of interest of 9%, due on demand $ -- $ 1,218,834 $ 1,218,834
Bank Term Loan- Monthly
payments of $32,105 including
principal and interest of 8.8% with
a maturity date of January 4, 2002 -
subject to the same covenants,
collateral and guarantees as the
line of credit (Note 4) 1,821,668 -- --
Less current portion of long-term debt (236,151) (1,218,834) (1,218,834)
----------- ----------- -----------
Total long-term debt $ 1,585,517 $ -- $ --
=========== =========== ===========
</TABLE>
The schedule of maturities of long-term debt in the future periods is as
follows:
2000 $ 236,151
2001 257,792
2002 1,327,725
------------
Total $ 1,821,668
============
11
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5 - LINE OF CREDIT
In January 1999, the Company established a $ 4.5 million revolving credit
facility scheduled to mature in January 2001. The credit available to the
Company is based on a percentage of eligible accounts receivable and inventory.
The facility imposes financial covenants on tangible net worth, leverage, and a
debt service ratio. At December 31, 1999, the Company was not in compliance with
the financial covenants. The bank waived the covenants in the March 1999 letter
to the Company. Minimum borrowing under the agreement is $1,000. The agreement
places limitations on disposition of assets and debt funding to transactions
within the normal course of business and restricts the payment of dividends to
any shareholder of record and any class of common stock during the term of the
agreement. Borrowings accrue interest at 11% and are secured by all assets of
the Company. The shareholders have personally guaranteed the loan. At December
31, 1999, the Company had borrowed $ 4,166,000 under this facility.
The credit line payable is included with current liabilities instead of
long-term liabilities as management believes that this presentation better
reflects the utility of the current assets as the source of repayment for the
credit line payable.
NOTE 6 - YEAR 2000 ISSUE
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company will not be fully determinable until the Year
2000 and thereafter. The Company's software packages and all of the hardware
associated with its operations are Year 2000 compliant. The Company is currently
requesting that all suppliers supply certification statements that comply with
the Year 2000 requirements. If the Year 2000 modifications are not properly
completed either by the Company or entities with which the Company conducts
business, the Company's revenues and financial condition could be adversely
impacted.
NOTE 7 - SUBSEQUENT EVENT
SALE OF COMPANY
On April 19, 2000, the Company was sold to DrugMax.com, Inc. by an exchange of
all of the outstanding shares of the Company for $1,700,000 and 226,666 common
shares of DrugMax.com, Inc. 22,666 of the total shares being received are
subject to a holdback provision. The holdback provision provides for an
adjustment of the sale price based upon an audit of the balance sheet of the
Company as of April 19, 2000. If the audit results in a shareholders equity less
than an agreed upon amount, the sale price is subject to a corresponding
reduction and to be subtracted from the holdback shares.
12
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 8 - PROFIT SHARING PLAN
The Company maintains a qualified profit sharing plan for the benefit of its
employees. The plan provides for discretionary contributions to the plan each
year and covers employees over the age of 21 with at least one year of service.
Vesting is immediate upon participation in the plan. The Company has made a
contribution to the plan for the years ended December 31, 1999, 1998 and 1997 in
the amounts of $30,000, $-0- and $30,000, respectively.
NOTE 9 - CHANGE IN OWNERSHIP AND REFINANCING
On January 4, 1999 the ownership of the Company changed whereby the previous
owners' stock was redeemed by the Company and the new owners were issued no par
common shares so that they owned 100% of the outstanding shares. Simultaneous
with the redemption, the new owner purchased .61 shares of the common stock from
the previous owners. After the redemption and issuance of new shares to the new
owner, 50% of the new owner's shares were sold to another unrelated individual.
In addition, the previously held treasury shares and the newly redeemed shares
were canceled by the Company and the previous 500 no par common shares were
canceled.
The Company obtained a revolving line of credit with a limit of $4,500,000 and
an installment loan of $2,000,000 to obtain the funds to redeem the previous
shareholders stock for the approximate amount of $7 million. In addition to the
cash payment for their stock, they received an assignment of certain customer
receivables totaling $391,917 and their shareholder loan of $1,218,834 was paid
in full. The customer receivables were for three customers owned by the son of
the former owners who is also an employee. As part of the redemption agreement,
the former shareholder signed a covenant not to compete and an employment
agreement. The employment agreement is for $12,000 per year for 63 months. The
former shareholder owns the building in which the Company operates and a lease
was executed for a term of 96 months on triple net terms at an annual rate of
$72,000.
The son of the former owner also executed an employment contract for a period of
96 months at an annual compensation of $48,000 and a covenant not to compete
that runs concurrently with the employment agreement.
13
<PAGE>
VALLEY DRUG COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 10 - SUPPLEMENTAL CASH FLOW DISCLOSURE
The statements of cash flows are supplemented by the following non-cash
disclosures.
CHANGE IN OWNERSHIP
1999
-----------
Total consideration $ 7,151,985
Assignment of accounts receivable (391,917)
-----------
Net cash paid $ 6,760,068
===========
The Company retired 139 shares of treasury stock during 1999 with a book value
of $1,951,470.
14
<PAGE>
DRUGMAX.COM, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
DRUGMAX BECAN DESKTOP VETMALL
APRIL 1, 1999 APRIL 1, 1999 APRIL 1, 1999 JUNE 28, 1999
MARCH 31, 2000 NOVEMBER 26, 1999 MARCH 20, 2000 MARCH 20, 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 21,050,547 $ 33,721,393 $ 2,374,506 $ 574,706
Cost of sales 20,906,771 32,965,395 18,815 458,739
------------- ------------- ------------- -------------
Gross profit 143,776 755,998 2,355,691 115,967
Operating expenses:
Selling, general and administrative expense 2,076,653 421,994 2,572,164 2,314,856
Goodwill amortization-Becan --
Goodwill amortization-DeskTop
Goodwill amortization-VetMall --
Goodwill amortization-Valley Drug --
------------- ------------- ------------- -------------
Total operating expenses 2,076,653 421,994 2,572,164 2,314,856
------------- ------------- ------------- -------------
Income (loss) from continuing operations (1,932,877) 334,004 (216,473) (2,198,889)
Interest income 144,340 5,455 54
Interest expense (107,095) (99,090) (50,996)
Other income and expenses, net (93,312) (8,377) 798,982
Equity in loss of affiliate -- (1,099,444)
------------- ------------- ------------- -------------
Net income (loss) before income tax (1,988,944) 231,992 (567,877) (2,198,889)
Income tax provision -- -- 280,042
------------- ------------- ------------- -------------
Net income (loss) $ (1,988,944) $ 231,992 $ (287,835) $ (2,198,889)
============= ============= ============= =============
Basic and diluted net income (loss)
per share $ (0.51)
=============
3,875,445
=============
<CAPTION>
VALLEY DRUG PROFORMA
JANUARY 1, 1999 CONSOLIDATED
DECEMBER 31, 1999 ADJUSTMENTS MARCH 31, 2000
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues $ 50,572,187 $ (1,999,682) (a) $ 106,293,657
Cost of sales 48,037,331 102,387,051
------------- ------------- -------------
Gross profit 2,534,856 (1,999,682) 3,906,606
Operating expenses:
Selling, general and administrative expense 1,737,992 (2,110,307) (a) 7,013,352
Goodwill amortization-Becan 126,663 (b) 126,663
Goodwill amortization-DeskTop 568,925 [c] 568,925
Goodwill amortization-VetMall 384,545 (d) 384,545
Goodwill amortization-Valley Drug 230,214 (e) 230,214
------------- ------------- -------------
Total operating expenses 1,737,992 (799,960) 8,323,699
------------- ------------- -------------
Income (loss) from continuing operations 796,864 (1,199,722) (4,417,093)
Interest income 13,113 -- 162,962
Interest expense (565,371) -- (822,552)
Other income and expenses, net (110,625) (a) 586,668
Equity in loss of affiliate 1,099,444 (a) --
------------- ------------- -------------
Net income (loss) before income tax 244,606 (210,903) (4,490,015)
Income tax provision (280,042) (f) --
------------- ------------- -------------
Net income (loss) $ 244,606 $ (490,945) $ (4,490,015)
============= ============= =============
Basic and diluted net income (loss)
per share $ (0.89)
=============
(g) 5,018,708
=============
</TABLE>
