-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HxyzKLCCKuBkaOa4QTU6Q5Ftx7UIlNZeC/AebXAdTeP0NuSplNwJT9cEnAf/FHv0 9ljfZAjV7taWcGQ073rUjw== /in/edgar/work/20001101/0000931763-00-002362/0000931763-00-002362.txt : 20001106 0000931763-00-002362.hdr.sgml : 20001106 ACCESSION NUMBER: 0000931763-00-002362 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20001101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRUGMAX COM INC CENTRAL INDEX KEY: 0000921878 STANDARD INDUSTRIAL CLASSIFICATION: [8000 ] IRS NUMBER: 341755390 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-49102 FILM NUMBER: 751083 BUSINESS ADDRESS: STREET 1: 12505 STARKEY RD STREET 2: SUITE A CITY: LARGO STATE: FL ZIP: 33773 BUSINESS PHONE: 7275330431 MAIL ADDRESS: STREET 1: 6950 BRYAN DAIRY ROAD CITY: LARGO STATE: FL ZIP: 33777 FORMER COMPANY: FORMER CONFORMED NAME: NUTRICEUTICALS COM CORP DATE OF NAME CHANGE: 19990629 FORMER COMPANY: FORMER CONFORMED NAME: NUMED SURGICAL INC DATE OF NAME CHANGE: 19940419 SB-2 1 0001.txt FORM SB-2 As filed with the Securities and Exchange Commission on November 1, 2000 Registration Statement No. 333-__________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- DRUGMAX.COM, INC. ----------------- (Name of Small Business Issuer in Its Charter)
Nevada 7375 34-1755390 - --------------------------------- -------------------------- ---------------------------- (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification of Incorporation or Organization) Classification Code Number) Number)
12505 Starkey Road, Suite A Largo, Florida 33773 (727) 533-0431 -------------------------------- (Address and Telephone Number of Principal Executive Offices) 12505 Starkey Road, Suite A Largo, Florida 33773 -------------------------------- (Address of Principal Place of Business) William L. LaGamba, President DrugMax.com, Inc. 12505 Starkey Road, Suite A Largo, Florida 33773 (727) 533-0431 -------------------------------- (Name, Address and Telephone Number of Agent for Service) Please Send Copies of Communications to: Gregory C. Yadley, Esq. R. Alan Higbee, Esq. Julio C. Esquivel, Esq. David M. Doney, Esq. Shumaker, Loop & Kendrick, LLP Fowler, White, Gillen, Boggs, Villareal and Banker, P.A. 101 East Kennedy Blvd. Suite 2800 501 East Kennedy Blvd., Suite 1700 Tampa, Florida 33602 Tampa, Florida 33602 Telephone: (813) 229-7600 Telephone: (813) 228-7411 Facsimile: (813) 229-1660 Facsimile: (813) 228-9401
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.[_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.[_] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------- Title of each class of Proposed maximum Proposed securities to be Amount to be offering price per maximum aggregate Amount of registered registered share/(1)/ offering price/(1)/ registration fee - --------------------------------------------------------------------------------------------------------------------- Common Stock, $.001 par value 2,300,000 $6.41 $14,743,000 $3,892.15 - ---------------------------------------------------------------------------------------------------------------------
_____________ (1) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(c). The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the securities and exchange commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to completion, dated October ____, 2000 [GRAPHIC OMITTED] DRUGMAX.COM, INC. 2,000,000 Shares of Common Stock This is a public offering of common stock of DrugMax.com, Inc. DrugMax is offering a total of 1,600,000 shares of common stock with this prospectus. The selling stockholders identified in this prospectus are offering an additional 400,000 shares of common stock of DrugMax. See "Selling Stockholders." We will not receive any of the proceeds from the sale of shares by the selling stockholders. This is a firm commitment underwriting. The underwriters named in this prospectus have an option for 45 days to purchase up to 300,000 additional shares of our common stock at the offering price to cover any over-allotments. Our common stock is currently quoted on the Nasdaq SmallCap Stock Market under the symbol "DMAX." We have applied to have our common stock included for quotation on the Nasdaq National Market, also under the symbol "DMAX." On October _____, 2000, the last reported closing sale price of our common stock, as reported, by Nasdaq, was $_______ per share. See "Market for the Common Stock." Your investment in our common stock involves a high degree of risk. Before investing in our common stock, you should consider carefully the risks described under "Risk Factors" beginning on page _____.
============================================================================================= TERMS OF THE OFFERING - --------------------------------------------------------------------------------------------- PER SHARE TOTAL - --------------------------------------------------------------------------------------------- Public Offering Price $ $ Underwriting Discounts and Commissions $ $ Proceeds to DrugMax $ $ Proceeds to Selling Stockholders $ $ =============================================================================================
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. UTENDAHL CAPITAL PARTNERS, L.P. The date of this prospectus is _________________________, 2000. TABLE OF CONTENTS
Page Page ---- ---- Summary............................................... 1 Business......................................... Risk Factors.......................................... Management....................................... Use of Proceeds....................................... Selling Stockholders............................. Capitalization........................................ Security Ownership of Management Market for the Common Stock........................... and Certain Beneficial Owners.................... Dividend Policy....................................... Description of Capital Stock..................... Selected Consolidated Financial Data.................. Underwriting..................................... Selected Pro Forma Condensed Legal Matters.................................... Consolidated Financial Data......................... Experts.......................................... Management's Discussion and Additional Information........................... Analysis of Financial Condition Index to Financial Statements.................... and Results of Operations...........................
You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This prospectus may be used only where it is legal to sell these securities. The information in this prospectus may only be accurate on the date of this prospectus. Information contained on our web sites does not constitute part of this prospectus. Cautionary Statement Regarding Forward-Looking Statements Some of the statements in this prospectus are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for these types of statements. These forward- looking statements include statements in the "Summary," "Business," and other sections of this prospectus relating to our expansions and acquisition strategy, business development and projected capital expenditures, as well as trends in Internet use and electronic commerce. These forward-looking statements also include statements relating to our performance in the "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Use of Proceeds," and "Business" sections of this prospectus. Forward-looking statements include statements regarding the intent, belief or current expectations of DrugMax or our management (including statements preceded by, followed by or including forward-looking terminology such as "may," "will," "should," "believe," "expect," "plan," "intend," "anticipate," "estimate," "continue," "future" or similar expressions or comparable terminology) with respect to various matters. All forward-looking statements in this prospectus are based on information available to us on the date of this prospectus. Please note that matters set forth under the caption "Risk Factors" constitute cautionary statements identifying important factors with respect to the forward- looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements. i Prospectus Summary You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our Consolidated Financial Statements, Pro Forma Consolidated Financial Statements and related Notes appearing elsewhere in this prospectus. Because this is only a summary, you should read the rest of this prospectus before you invest in our common stock. Read the entire prospectus carefully, especially the risks described under "Risk Factors." Unless otherwise indicated, the information in this prospectus (a) has been adjusted to give retroactive effect to a number of stock splits and reverse stock splits as described in Note 9 to our Consolidated Financial Statements appearing elsewhere in this prospectus and (b) assumes that the underwriter's over-allotment option has not been exercised. Our Business Drugmax.com, Inc. primarily is an e-commerce business providing: (1) the wholesale distribution of pharmaceuticals, over-the-counter products, health and beauty care products, and nutritional supplements and (2) one of the first business-to-business online trade exchanges for the same products, dedicated exclusively to manufacturers, distributors, wholesalers and retailers in the pharmaceuticals and over-the-counter product markets. We also continue to derive a significant portion of revenue from our traditional "brick and mortar" full-line wholesale distribution business. We utilize our competitive advantage of being one of the early entrants into the Internet business-to-business pharmaceutical market, leveraging our existing infrastructure, technology, relationships, marketing and management resources. We believe that the combination of our traditional wholesale distribution business with both our online wholesale distribution business and our e-commerce trade exchange provides the "clicks and mortar" combination that will allow us to aggressively market and distribute our products and services. During the fiscal year ended March 31, 2000, and the three months ended June 30, 2000, we generated revenues of $21.1 million and $28.8 million, respectively. In general, we distribute our products primarily to independent pharmacies in the continental United States, and secondarily to small and medium-sized pharmacy chains, alternate care facilities and other wholesalers and retailers. Since the early December 1999 launch of our website, www.drugmax.com, over 9,000 independent pharmacies, small regional pharmacy chains, wholesalers and distributors have registered to purchase products through our site. We believe we have been successful in attracting potential customers to our site because we have designed our site as an online source for a select group of products, typically higher cost and margin products, which make up a large percentage of our targeted customers sales. In addition, we maintain an inventory of over 20,000 stock keeping units, and continue to serve our customers as a primary, full-line wholesale distributor through a combination of our e-commerce venues and traditional distribution methods. Our online trade exchange, DrugMaxTrading.com, established in August 2000, offers one of the first business-to-business online trade exchanges for pharmaceuticals, over-the-counter products, health and beauty care products, and nutritional supplements dedicated exclusively to manufacturers, distributors, wholesalers and retailers in the pharmaceutical and over-the-counter product markets. DrugMaxTrading.com allows our trade exchange members to lower their overall costs of doing business while providing them with wider market access and the best available prices. Capitalizing on the efficiencies of the Internet and our strategic alliances, DrugMaxTrading.com aggregates a variety of product and market participant information, and, in doing so, facilitates the execution of mutually beneficial online transactions among trade exchange members in an open-market format. Through DrugMaxTrading.com, we provide our members with three online trading options: . The Best Buy System is powered by an online catalog of products. Product information is uploaded into the DrugMaxTrading.com database by multiple vendors, and a corresponding system for purchasers automatically searches for the desired product and provides information on, and the ability to, acquire the lowest price. . Through our Closeout System, our members can offer and purchase viable products approaching expiration. Based on the expiration date, the price of the product will decrease daily as the expiration date approaches, giving buyers the most favorable pricing and sellers a channel for end-of-life management. 1 . The Auction System provides our members with the opportunity to participate in auctions as inventory is placed for sale. Although we expect our wholesale distribution business to continue to provide the primary source of revenues for the foreseeable future, we believe that our new e-commerce trade exchange ultimately will provide greater profits than our wholesale distribution operations. Our key business objectives are: . to become a leading business-to-business e-commerce provider of pharmaceuticals, over-the-counter products, health and beauty care products and nutritional supplements; and . to own and operate a leading online trade exchange for pharmaceuticals, over-the-counter products, health and beauty care products and nutritional supplements. Industry Trends Pharmaceutical and Healthcare Markets. According to IMS Health, a ------------------------------------- company specializing in information services for the pharmaceutical and health care industries, the United States is the world's largest pharmaceutical market, with 1998 sales of $111 billion, including diagnostics and over-the-counter drugs. That figure is expected to rise to $163 billion in 2002, an increase of 46%. The National Association of Chain Drug Stores reported that total pharmaceuticals drug sales for 1999 exceeded a record $121 billion. This continued growth rate of the sales of pharmaceutical products was attributed to a number of factors including: . the value added by the introduction of new drugs into the marketplace, which more than offsets the value lost by medications losing patent protection; . new patterns of drug lifestyle management, resulting in higher sales occurring earlier in the life cycle of a medication; . increased money spent on direct-to-consumer marketing initiatives; and . an unprecedented period of investment by pharmaceutical companies worldwide. Currently, the pharmaceuticals and health care products markets are serviced primarily by traditional full-line wholesalers. Internet. The Internet has emerged as the fastest growing -------- communications medium in history and is dramatically changing how businesses and individuals communicate and share information. International Data Corporation estimates that the number of Internet users will grow from 97 million at the end of 1998 to 320 million by 2002. The Internet has created new opportunities for conducting commerce, such as business-to-consumer and person-to-person e- commerce. Recently, the widespread adoption of intranets and the acceptance of the Internet as a business communications platform has created a foundation for business-to-business e-commerce that offers the potential for organizations to streamline complex processes, lower costs and improve productivity. Internet- based business-to-business e-commerce is poised for rapid growth and is expected to represent a significantly larger opportunity than business-to-consumer or person-to-person e-commerce. According to Gartner Group, business-to-business e- commerce revenue was $145 billion in 1998 and by 2004 will represent about 7.0% of the total global sales transactions, estimated to be $7 trillion. Gartner Group estimates that in 2000 business-to-business revenues will be $403 billion, a figure that should rise to $953 billion in 2001, $2 trillion in 2002 and nearly $4 trillion in 2003. Our principal executive offices are located at 12505 Starkey Road, Suite A, Largo, Florida 33773, and our telephone number is (727) 533-0431. Our web sites are www.drugmax.com and www.DrugMaxTrading.com. The information contained on our web sites does not constitute part of this prospectus. 2 The Offering Common Stock Offered by DrugMax........................ 1,600,000 shares Common Stock Offered by Selling Stockholders........... 400,000 shares Total Shares Offered................................... 2,000,000 shares Common Stock Outstanding After this Offering........... _____________ shares/(1)/ Use of Proceeds........................................ We intend to use the proceeds primarily for working capital, as well as future strategic acquisitions, business expansion and marketing. Nasdaq Symbol (2)...................................... DMAX
(1) Does not include 500,000 shares which are being held in escrow in connection with our acquisition of Becan Distributors, Inc. See "Business-Recent Material Acquisitions." (2) Our common stock is currently quoted on the Nasdaq SmallCap Market under the symbol "DMAX." We have applied to have our common stock included for quotation on the Nasdaq National Market, also under the symbol "DMAX." Risk Factors Investing in our common stock involves a high degree of risk. For a discussion of certain risks that you should consider before buying shares of our common stock, see "Risk Factors" beginning at page ____ of this prospectus. 3 Summary Consolidated Financial Data The following table shows our summary financial data which you should read together with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our Consolidated Financial Statements and Pro Forma Consolidated Financial Statements and related Notes, and the other financial data included elsewhere in this prospectus. The as adjusted balance sheet data gives effect to our sale of 1,600,000 shares of common stock at an assumed public offering price of $___________ per share in this offering and our application of the estimated net proceeds.
September 8, 1998 (date of inception) Year Ended Three Months Ended through March 31, March 31, June 30, 1999/(1)/ 2000 1999 2000 ---------------- ---------------- -------------- -------------- Consolidated Statement of Operations Data: Revenues................................... $ 37,118 $21,050,547 $ 33,899 $28,816,653 Cost of goods sold......................... 14,496 20,906,771 14,786 27,813,691 -------------- ------------ ----------- ------------ Gross profit............................... 22,622 143,776 19,113 1,002,962 Selling, general and administrative expenses.................................. 128,858 2,076,653 101,308 2,363,190 -------------- ------------ ----------- ------------ Loss from operations....................... (106,236) (1,932,877) (82,195) (1,360,228) Total other income (expense), net.......... 1,761 (56,067) (254) (159,601) ------------- ------------ ----------- ------------ Net loss................................... $ (104,475) $(1,988,944) $ (82,449) $(1,519,829) ============= =========== =========== ============ Basic and diluted net loss per share....... $ (0.08) $ (0.51) $ (0.02) $ (0.24) ============= ============ ============ ============ Basic and diluted weighted average number of common shares outstanding.............. 1,372,230 3,875,445 5,351,028 6,374,780 ============= ============= ============ ============ As of As of June 30, 2000 March 31, 2000 Actual As Adjusted ------------------ ----------------- ------------------ Consolidated Balance Sheet Data: Cash and cash equivalents................................ $ 6,020,129 $ 4,124,356 Working capital.......................................... 5,161,409 4,170,868 Total assets............................................. 38,513,912 50,133,906 Long term obligations, less current portion.............. -- 1,471,575 1,471,575 Stockholders' equity..................................... 31,992,740 32,672,618
_______________ (1) In March 1999, we acquired all of the outstanding stock of Nutriceuticals.com Corporation, a Florida corporation formed on September 8, 1998. For accounting purposes, this acquisition was treated as an acquisition of our company by Nutriceuticals and as a recapitalization of Nutriceuticals. Thus, although we were incorporated in Nevada on October 18, 1993 our date of inception is September 8, 1998, for accounting purposes. Accordingly, summary consolidated statement of operations data is not presented for the period prior to September 8, 1998. 4 Risk Factors An investment in our common stock involves a high degree of risk. Before deciding whether to invest, you should read and consider carefully the following risk factors. If any of the following events actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. General Risks Related To Our Business We have incurred net losses since inception and may incur additional losses in the future, which may require us to seek additional financing. We had revenues of approximately $21.1 million for the year ended March 31, 2000, and $28.8 million for the three months ended June 30, 2000, and losses of approximately $2.0 million and $1.5 million for such periods. We expect to continue to invest heavily in brand development, marketing and promotion, as well as technology and operating infrastructure development. In addition, we expect to continue to incur expenses relating to strategic acquisitions, including expenses related to the integration of those acquisitions into our business. We cannot be certain that we can achieve positive cash flows on a quarterly or annual basis in the future. If we do not achieve or sustain positive cash flows, we may be unable to meet our working capital requirements without obtaining additional financing. To meet our plans, we will require additional capital in the future which may not be available to us. Our expansion and development plans are expected to consume substantial amounts of capital. We do not presently have adequate cash from operations or financing activities to meet either our short or long-term capital needs. Accordingly, we are dependent on and intend to use a substantial portion of the proceeds of this offering to fund our operations and implement our marketing and growth strategies. We currently anticipate that the net proceeds we receive from this offering, together with our existing borrowing arrangements and other available funds will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. Thereafter, if we are not able to generate sufficient positive cash flows, we likely will have to obtain additional financing. Our future capital requirements will depend upon many factors, including, but not limited to: . the extent to which we develop and brand our name; . the frequency with which we make future acquisitions; . the rate at which we hire additional personnel; . the rate at which we expand the services that we offer; and . the extent to which we develop and upgrade our technology. Because of these factors, our actual revenues and costs are uncertain and may vary considerably. These variations may significantly affect our future need for capital. The actual amount and timing of our future capital requirements may differ materially from our estimates. In particular, our estimates may be inaccurate as a result of changes and fluctuations in our revenues, operating costs and development expenses. Our revenues, operating costs and development expenses will be negatively affected by any inability to: . effectively and efficiently manage the expansion of our operations; 5 . negotiate favorable contracts and relationships with manufacturers, distributors and wholesalers; and . obtain brand recognition, attract sufficient numbers of customers or increase the volume of e-commerce sales of our products and e-commerce trade exchange services. Adequate funds may not be available when needed or may not be available on favorable terms. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business. The requirement for additional capital could have a negative effect on our stockholders. We currently anticipate that the net proceeds of this offering, together with our existing borrowing arrangements and other available funds will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. We may need to raise additional funds in the future to fund expansion, pursue customer sales, develop new or enhanced services, respond to competitive pressures or acquire complementary businesses, technologies or services. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution and these securities may have powers, preferences and rights that are senior to those of the rights of our common stock. We have a limited operating history and may not be able to successfully manage our business or achieve profitability. We acquired our primary wholesale distribution operations in two transactions in November 1999 and April 2000. In addition, we launched our web site, www.drugmax.com, in December 1999, and our DrugMaxTrading online trade exchange, at www.DrugMaxTrading.com, in August 2000. Accordingly, we have only a limited operating history on which to base an evaluation of our business and prospects. You should consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as electronic commerce. Such risks include, but are not limited to, risks related to evolving and unpredictable business models and the management of growth. To address these risks, we must, among other things, develop and maintain a customer base, implement and successfully execute our business and marketing strategy, continue to develop and upgrade our technology and transaction- processing systems, improve our web sites, provide superior customer service and order fulfillment, respond to competitive developments, and attract, retain and motivate qualified personnel. We may not be able to successfully address such risks, or manage our business to achieve or maintain profitability. Our management team is relatively unexperienced in e-commerce business, and we may not be able to hire additional e-commerce experienced personnel in the future, which may hinder our ability to operate successfully. We are substantially dependent on the efforts of William LaGamba, President and Chief Operating Officer, and Jugal K. Taneja, Chairman of the Board and Chief Executive Officer. Messrs. LaGamba and Taneja have no proven record of success in the operation of an e-commerce wholesale distributor or online trade exchange. In addition, our future success depends on our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. We currently have 64 employees and two consultants. The e-commerce market is highly competitive; attracting and retaining new personnel could be costly in terms of cash compensation or equity, or such personnel may not be available to us on any terms. Competition for these individuals is intense, and we may be unable successfully to attract, assimilate or retain sufficiently qualified personnel in the future. We do not currently carry key man life insurance for our principal officers. Our efforts to raise awareness of the DrugMax brand may not be successful, which may limit our ability to expand our customer base and attract employees and acquisition candidates. We believe that building the DrugMax brand is critical for attracting and expanding our targeted customer 6 base and attracting acquisition candidates and employees. If we do not continue to build the DrugMax brand on a national basis, we may not be able to effectively implement our strategy. Promotion and enhancement of our name will depend largely on our success in continuing to provide high quality products and services. If customers do not perceive our products and services as meeting their needs, or if we fail to market our services effectively, we will be unsuccessful in maintaining and strengthening our brand. We may not be able to complete future strategic acquisitions, delaying our growth plans. Our growth to date largely has resulted from acquisitions, and a significant component of our future growth strategy is to continue to make such acquisitions. We are continually evaluating possible acquisitions of businesses or product lines that complement or expand our existing business or product lines, and we intend to pursue favorable opportunities as they arise. The evaluation of prospective acquisitions and the negotiation of acquisition agreements may require substantial expense and management time, and not all potential acquisitions ultimately are consummated. Further, we cannot guarantee that suitable acquisition candidates will be found or that acquisitions can be completed on favorable terms. In addition, even if we are able to complete such acquisitions, we cannot guarantee that the acquired companies or assets will be successfully integrated into our company. Acquisitions may be announced or completed at any time and may be dilutive to earnings per share on a pro forma basis. Acquisitions may disrupt or otherwise have a negative impact on our business and may result in dilution to existing stockholders. In the past 12 months, we have completed four acquisitions and currently we have one potential acquisition pending. In the future, we intend to continue to seek investments in complementary businesses, product lines and technology. If we buy a company, or an operating division, we could have difficulty in assimilating the personnel and operations. In addition, the key personnel of an acquired company may decide not to work for us and customers and vendors of the acquired company may decide not to do business with us. We could also have difficulty in assimilating the acquired business, products or technology into our operations. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition, future acquisitions could have a negative impact on our business, financial condition and results of operations. Furthermore, we may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which may be dilutive to our existing stockholders. If not managed efficiently, our rapid growth may divert management's attention from the operation of our business which could hinder our ability to operate successfully. Our growth has placed, and our anticipated continued growth will continue to place, significant demands on our managerial and operational resources. Our failure to manage our growth efficiently may divert management's attention from the operation of our business and render us unable to keep pace with our customers' demands. We rely on manufacturers, distributors and wholesalers for our products, the unavailability of which could hinder our ability to operate successfully. We are dependent upon manufacturers, distributors and wholesalers to supply us with products for resale, and the price, term and supply of these products is unpredictable. As is common in the industry, we have no long-term or exclusive arrangements with any manufacturer, distributor or wholesaler that guarantees the availability of any material portion of our products for resale. Our markets are highly competitive and we may be unable to compete effectively. The e-commerce marketplace is new, rapidly evolving and intensely competitive. We expect competition to intensify in the future because barriers to entry in the e-commerce marketplace are minimal, and current and new competitors can launch new web sites at a relatively low cost. The pharmaceutical and over-the-counter product industries are also intensely competitive. In the pharmaceutical and over-the-counter product industries we currently compete primarily with other wholesalers and distributors. We also compete with the growing number of manufacturers that sell their products directly, either online or through traditional distribution channels. Many of these manufacturers, wholesalers and distributors are larger and have substantially greater resources than we do. 7 Increased competition may reduce our operating margins, as well as cause a loss to any possible market share and brand recognition. Further, to strategically respond to changes in the competitive environment, we may sometimes make pricing, service or marketing decisions or acquisitions that could materially hurt our business. In addition, companies controlling access to Internet transactions through network access or web browsers could promote our competitors or charge us a substantial fee for inclusion in their product or service offerings. We cannot guarantee that we can compete successfully against current and future competitors. See "Business--Competition." Our online trade exchange may not be successful if it is not adopted by a significant number of buyers and suppliers. We launched our DrugMaxTrading.com online trade exchange in August 2000. If we do not successfully attract a significant number of buyers and suppliers to our online trade exchange, our online trade exchange will not be widely accepted, which in turn would limit the growth of our e-commerce revenues and could adversely affect our business, financial condition and operating results. Whether we can retain and attract buyers and suppliers will depend in large part on our ability to design, develop and implement a secure, user-friendly application with features and functionality that buyers and suppliers find attractive in an e-commerce solution and that provides substantial value to its users over their traditional procurement methods. Buyers and suppliers may continue purchasing and selling products through traditional procurement methods, rather than adopting an e-commerce solution. Buyers and suppliers also may not use our online trade exchange if they do not perceive it as a neutral marketplace that does not favor one participant over another. We may not successfully protect our proprietary rights. To protect our proprietary rights, we will rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others. After completion of this offering, we intend to apply for federal registration of the marks "DrugMax" and "DrugMaxTrading" in the United States. We cannot be certain that federal registration of these trademarks will be completed or issued. In addition, effective trademark, service mark, copyright and trade secret protection may be unavailable in every country in which our products and services are made available online in the future. We have not applied to register any mark outside the United States or undertaken any trademark searches to determine whether any of these marks are available for use or registration outside the United States. To date, our business has not been interrupted as the result of any claim of infringement. However, we cannot guarantee we will not be adversely affected by the successful assertion of intellectual property rights belonging to others. The effects of such assertions could include requiring us to alter or withdraw existing trademarks or products, delaying or preventing the introduction of products, or forcing us to pay damages if the products have been introduced. The steps we take to protect our proprietary rights may be inadequate, or third parties might infringe or misappropriate our trade secrets, copyrights, trademarks, trade dress and similar proprietary rights. In addition, others could independently develop substantially equivalent intellectual property. We may have to litigate in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and the diversion of our management and technical resources which could harm our business. See "Business-Proprietary Rights." Risks Related To E-Commerce We are subject to risks associated with dependence on the Internet and Internet infrastructure development. Our success will depend in large part on continued growth in, and the use of, the Internet. There are critical issues concerning the commercial use of the Internet which remain unresolved. The issues concerning the commercial use of the Internet which we expect to affect the development of the market for our products and services include: . security . ease of access . reliability . quality of service . cost . necessary increases in bandwidth availability 8 The adoption of the Internet for information retrieval and exchange, commerce and communications, particularly by those enterprises that have historically relied upon traditional means of commerce and communications, generally will require that these enterprises accept a new medium for conducting business and exchanging information. These entities likely will accept this new medium only if the Internet provides them with greater efficiency and an improved arena for commerce and communication. Demand and market acceptance of the Internet are subject to a high level of uncertainty and are dependent on a number of factors, including the growth in access to and acceptance of new interactive technologies, the development of technologies that facilitate interactive communication between organizations and targeted audiences and increases in user bandwidth. If the Internet fails to develop or develops more slowly than we expect as a commercial or business medium, it may adversely affect our business. Our future e-commerce operating results are unpredictable, and fluctuations in our revenues and operating results may cause our stock's trading price to be highly volatile. Our revenues and operating results may fluctuate significantly from time to time due to a number of factors, not all of which are in our control. These factors include: . our ability to attract and retain new customers and maintain customer satisfaction; . new web sites, services and products introduced by us or by our competitors; . price competition; . our ability to upgrade and develop our systems and infrastructure and attract new personnel in a timely and effective manner; . traffic levels on our web sites and our ability to convert that traffic into customers; . general technical difficulties or system downtime affecting the Internet or online services or the operation of our web sites; . the failure of Internet bandwidth to increase significantly over time and/or an increase in the cost to consumers of obtaining or using Internet bandwidth; . government regulations related to use of the Internet for commerce or sales and distribution of natural products; and . general economic conditions and economic conditions specific to the Internet, online commerce and the software industry. Our failure to produce operating results that meet securities analysts' or investor expectations in one or more quarters may materially and adversely affect the price of our common stock. We are subject to capacity constraint system development risks which may result in our inability to service our customers and meet our growth expectations. A key element of our strategy is to generate a high volume of traffic on, and use of, our web sites. Accordingly, our web site transaction processing systems and network infrastructure performance, reliability and availability are critical to our operating results. These factors are also critical to our reputation and our ability to attract and retain customers and maintain adequate customer service levels. The volume of goods we sell and the attractiveness of our product and service offerings will decrease if there are any systems interruptions that affect the availability of our web sites or our ability to fulfill orders. We expect to continually enhance and expand our technology and transaction processing systems, and network infrastructure and other technologies, to accommodate 9 increases in the volume of traffic on our web sites. We may be unsuccessful in these efforts or we may be unable to accurately project the rate or timing of increases in the use of our web sites. We may also fail timely to expand and upgrade our systems and infrastructure to accommodate these increases. Rapid technological change may adversely affect our business and increase our business costs. The Internet and the e-commerce industry are characterized by rapid technological change, changes in user and customer requirements and preferences and frequent product and service introductions. If competitors introduce products and services embodying new technologies or if new industry standards and practices emerge, then our existing web sites, proprietary technology and systems may become obsolete. Our future success will depend on our ability to do the following: . license and/or internally develop leading technologies useful in our business; . enhance our existing services; . develop new services and technology that address the increasingly sophisticated and varied needs of our existing and prospective customers; and . respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of our web sites and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our web sites, proprietary technology and transaction processing systems to customer requirements or emerging industry standards. If we face material delays in introducing new services, products and enhancements, our customers may decide not to use our products and services and use those of our competitors. We are subject to risk of system failure which may hinder our ability to operate successfully. Our success, in particular our ability to successfully receive and fulfill orders and provide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems. We host and maintain our own web sites. While we contract with a third party to provide back up web hosting services, our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. We carry no business interruption insurance to compensate us for losses that may occur. In addition, our security mechanisms or those of our suppliers may not prevent security breaches or service breakdowns. Despite our implementation of security measures, our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. These events could cause interruptions or delays in our business, loss of data or render us unable to accept and fulfill orders. We are subject to risks associated with online commerce security. A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. Our business may be adversely affected if our security measures do not prevent security breaches, and we cannot assure that we can prevent all security breaches. To the extent that our activities, or those of third-party contractors, involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. The Internet may become subject to additional government regulation, which could affect our operations or increase our business costs. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel, contracts and taxation apply to the Internet. In addition, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both 10 in the United States and abroad, that may impose additional burdens on companies conducting business online. The adoption or modification of laws or regulations relating to the Internet could adversely affect our business. Risks Related To This Offering New investors in our common stock will experience immediate and substantial dilution. The public offering price is substantially higher than the net tangible book value per share of our common stock. Assuming a public offering price of $___ per share, investors purchasing our common stock in this offering will incur immediate dilution of $_________________ in net tangible book value per share of our common stock. This dilution figure deducts the estimated underwriting discounts and commissions and estimated offering expenses payable by us from the public offering price. Management and certain stockholders can control our company. Upon completion of this offering, there will be [_______] shares outstanding, of which our current directors and executive officers and their respective affiliates will beneficially own, in the aggregate, approximately ____%. In particular, Jugal K. Taneja, a principal stockholder and our Chairman of the Board, will beneficially own ____% of our outstanding common stock upon completion of this offering, and together with his spouse and adult children, will control _____%. Therefore, if these stockholders act together, they likely will be able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying, preventing or deterring a change in control which could adversely affect the market price of our common stock. See "Security Ownership of Management and Certain Beneficial Owners." Our management will have broad discretion in the use of proceeds and it may not effectively utilize those funds. Our management will have broad discretion in how we use the net proceeds of this offering. Investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering. Our management's decision regarding use of the net proceeds may not be the most effective utilization of those funds. Future public sales of our common stock could adversely affect our stock price. If our stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could fall. Such sales might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. As of June 30, 2000, we had 6,417,754 shares of common stock outstanding (excluding the 500,000 common shares held in escrow in connection with the Becan acquisition). Of these shares, the 2,000,000 shares sold in this offering, together with _____________ additional shares of our common stock, will be freely tradable without restriction. The remaining ___________ shares of our common stock are deemed restricted shares of which __________ shares will be eligible for sale within 12 months of this offering and the remainder of ____________ shares subsequent to 12 months from this offering. Any additional shares issued in connection with the Becan acquisition and the potential acquisition of Penner & Welsch will be restricted shares, eligible for sale under Rule 144 12 months after issuance. See "Description of Capital Stock-- Shares Eligible for Future Sales." The trading price of our common stock is likely to remain highly volatile due to market volatility, which may affect your liquidity and the value of your investment. The market price of our common stock has been and will likely continue to be highly volatile because the stock market in general, and the market for Internet-related companies in particular, has been highly volatile. Investors may not be able to resell their shares of our common stock following periods of volatility because of the market's adverse reaction to such volatility. The trading prices of many Internet-related companies' stocks have reached historical highs within the past year and have reflected relative valuations substantially above historical levels. During the same period, such companies' stocks have also been highly volatile and have recorded lows well below such historical highs. Our stock may not trade at the same levels as other Internet- related companies' stocks, 11 and Internet-related companies' stocks in general may not sustain their current market prices. Factors that could cause such volatility may include, among other things: . actual or anticipated variations in quarterly operating results; . announcements of technological innovations; . new sales models or new products or services; . changes in financial estimates by securities analysts; . conditions or trends in the Internet industry; . changes in the market valuations of other Internet companies; . failure to meet analysts' expectations; . announcements by us or our competitors of significant acquisitions, strategic partnerships or joint ventures; . capital commitments; . additions or departures of key personnel; . sales of common stock; and . stock market price and volume fluctuations, which are particularly common among highly volatile securities of Internet companies. Many of these factors are beyond our control. These broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of stock, many companies have been the object of securities class action litigation. If we were to be sued in a securities class action, it could result in substantial costs and a diversion of our management's attention and resources. The underwriter's limited underwriting experience could adversely affect this offering and the subsequent trading market, resulting in a lack of liquidity or reduced value of your investment. Utendahl Capital Partners, L.P., our underwriter, has been actively engaged in the securities brokerage and investment banking business since 1992. However, Utendahl has engaged in only limited equity underwriting activities, and this offering is one of the first public equity offerings in which Utendahl has acted as the sole managing underwriter. We cannot guarantee that Utendahl's limited experience will not adversely affect the proposed public offering of the common stock or the subsequent development of a trading market for the common stock. Purchasers of stock in this offering may suffer a lack of liquidity in their investment or a material decrease in the value of such investment. 12 Use Of Proceeds We estimate that we will receive net proceeds of approximately $__________ from our sale of the 1,600,000 shares of common stock offered by us with this prospectus (approximately $_______________ if the underwriter fully exercises its over-allotment option), after deducting estimated underwriting discounts and commissions ($_____,000), the underwriter's non-accountable expense allowance ($_____,000) and other estimated offering expenses payable by us ($____,000). We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See "Selling Stockholders." We expect to use the net proceeds of this offering primarily for working capital, as well as future strategic acquisitions, business expansion and marketing efforts. Amounts to be expended for working capital may include: . cash payments required to acquire and manage our inventory; and . cash required for accounts receivable financing in support of our business expansion. We routinely evaluate potential acquisitions of businesses and product lines that would complement or expand our business or further our strategic goals. We may use a portion of the net proceeds of this offering for one or more such transactions. However, other than with regard to our proposed acquisition of Penner & Welsch, Inc., we currently have no commitments or agreements with respect to such transactions. See "Business-Pending Acquisition." Business expansion includes amounts to be expended for: . the hiring of additional personnel, including office, accounting, production, warehouse and management; and . the pursuit of strategic alliances, partnerships and key contractual relationships. We reserve the right to reallocate proceeds to different uses, upon the discretion of our executive officers and directors. Pending use, we intend to invest the net proceeds of this offering in interest-bearing bank accounts, short-term interest-bearing investment grade securities or similar quality investments. Based upon our current operating plan, we currently anticipate that the net proceeds of this offering, together with our existing borrowing arrangements and other available funds will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. 13 Capitalization The following table shows our long-term obligations and capitalization as of June 30, 2000, and as adjusted as of that date to reflect our sale of 1,600,000 shares of common stock and our application of the estimated net proceeds, after deduction of estimated offering expenses and underwriting discounts and commissions. You should read the information in the table in conjunction with the more detailed information regarding our company and the common stock being sold in this offering and our Consolidated Financial Statements, Pro Forma Consolidated Financial Statements and related Notes appearing elsewhere in this prospectus.
June 30, 2000 Actual As Adjusted ----------------- ----------------- Long-term obligations, less current portion................................ $ 1,471,575 $ 1,471,575 ----------------- ----------------- Stockholders' equity: Preferred stock, $.001 par value; 2,000,000 shares authorized; no preferred shares issued and outstanding................................ -- -- Common stock, $.001 par value; 24,000,000 shares authorized, [6,417,754] shares issued and outstanding, actual; [_________] shares issued and outstanding, as adjusted(1)(2).............................. 6,419 Additional paid-in capital(3)........................................... 36,279,447 Accumulated deficit..................................................... (3,613,248) (3,613,248) ----------------- ----------------- Total stockholders' equity................................................. 32,672,618 ----------------- ----------------- Total capitalization........................................................ $ 34,144,193 $ ================= =================
- -------------------------- (1) Does not include 400,000 shares of common stock reserved for future issuance under our 1999 Stock Option Plan or 350,000 shares issuable upon exercise of outstanding warrants. See "Description of Capital Stock." (2) Excludes 500,000 shares held in escrow in connection with the Becan acquisition to be issued pending the attainment of certain financial targets for the year ending March 31, 2001. See "Business-Recent Acquisitions." (3) Net of $__________ of costs and expenses, and $___________ of underwriter's discounts and commissions in connection with the sale of common stock offered by this prospectus. 14 Market for the Common Stock Prior to November 19, 1999, our common stock was quoted on the OTC Electronic Bulletin Board and traded under the symbol "JCOM." From March 1997 through November 1999 there was a very limited market for our common stock. From April 1999 to November 19, 1999, there were a total of 18 trades reported for our common stock on the OTC Electronic Bulletin Board. Since November 19, 1999, our common stock has been listed for trading on the Boston Stock Exchange and is currently traded on the Nasdaq SmallCap Market under the symbols "DMA" and "DMAX," respectively. The following table shows the high and low last reported sale prices for our common stock on the Nasdaq SmallCap Market for each calendar quarter from November 19, 1999, the date our stock was first listed for trading on the Nasdaq SmallCap Market, as reported by Nasdaq.
High Low ------------------ ----------------- 1999 Fourth Quarter (commencing November 19, 1999).............................. $ 18.75 $ 10.25 2000 First Quarter.............................................................. 20.188 13.00 Second Quarter............................................................. 15.00 9.00 Third Quarter.............................................................. 9.875 6.25 Fourth Quarter through October ___, 2000...................................
On September 30, 2000, there were approximately 550 holders of record of our common stock. The last reported sale price as reported by Nasdaq on October ____, 2000, was $___________. We have applied to have our common stock included for quotation on the Nasdaq National Market, also under the symbol "DMAX." Dividend Policy We have not paid any cash dividends on our common stock, and we currently intend to retain any future earnings to fund the development and growth of our business. Any future determination to pay dividends on our common stock will depend upon our results of operations, financial condition and capital requirements, applicable restrictions under any credit facilities or other contractual arrangements and such other factors deemed relevant by our Board of Directors. Our current credit facilities prohibit the payment of dividends. Prospective investors should not view an investment in the common stock as a source of income. 15 Selected Consolidated Financial Data You should read the following selected consolidated financial data in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statement of operations data for the year ended March 31, 1999 and the consolidated balance sheet data as of March 31, 1999 are derived from our Consolidated Financial Statements for such year, which have been audited by Kirkland, Russ, Murphy & Tapp, independent auditors, and are included elsewhere in this prospectus, and are qualified by reference to such Consolidated Financial Statements and the related Notes. The consolidated statement of operations data for the year ended March 31, 2000 and the consolidated balance sheet data as of March 31, 2000 are derived from our Consolidated Financial Statements for such year, which have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere in this prospectus, and are qualified by reference to such Consolidated Financial Statements and the related Notes. The selected consolidated financial data as of and for the three-month periods ended June 30, 1999 and 2000 have been derived from our unaudited condensed consolidated financial statements for such periods, which are included elsewhere in this prospectus and are qualified by reference to such unaudited condensed consolidated financial statements and the related notes. The unaudited financial statements include all adjustments, consisting of normal recurring accruals that we consider necessary for a fair presentation of our financial position and results of operations for the period. The results of operations for the three months ended June 30, 2000 are not necessarily indicative of results that may be expected for the full year.
September 8, 1998 (inception) through Year Ended Consolidated Statement Of Operations Data: March 31, March 31, Three Months Ended June 30, 1999/(1)/ 2000 1999 2000 --------------------- ----------------- --------------- --------------- Revenues................................... $ 37,118 $ 21,050,547 $ 33,899 $ 28,816,653 Cost of goods sold......................... 14,496 20,906,771 14,786 27,813,691 --------------------- ----------------- --------------- --------------- Gross profit............................... 22,622 143,776 19,113 1,002,962 Selling, general and administrative expenses.................................. 128,858 2,076,653 101,308 2,363,190 --------------------- ----------------- --------------- --------------- Loss from operations....................... (106,236) (1,932,877) (82,195) (1,360,228) Other income (expenses), net............... 1,761 (56,067) (254) (159,601) --------------------- ----------------- --------------- --------------- Loss before income taxes................... (104,475) (1,988,944) (82,449) (1,519,829) Income taxes............................... -- -- -- -- ------------------- ------------------ -------------- ---------------- Net loss................................... $ (104,475) $ (1,988,944) $ (82,449) $ (1,519,829) =================== ================== ============== =============== Basic and diluted loss per share........... $ (0.08) $ (0.51) $ (0.02) $ (0.24) =================== ================== ============== =============== Basic and diluted weighted average number of common shares outstanding............... 1,372,230 3,875,445 5,351,028 6,374,780 =================== ================== ============== =============== Consolidated Balance Sheet Data: As of March 31, As of June 30, 1999 2000 1999 2000 --------------------- ------------------ --------------- ------------------ Cash and cash equivalents.................. $ 56,986 $ 6,020,129 $ 14,599 $ 4,124,356 Working capital (deficiency)............... (9,953) 5,161,409 (89,722) 4,170,868 Total assets............................... 135,618 38,513,912 128,570 50,133,906 Long-term obligations, less current portion.................................... -- -- -- 1,471,575 Stockholders' equity (deficiency).......... 37,927 31,992,740 (44,522) 32,672,618
__________________ (1) In March 1999, we acquired all of the outstanding stock of Nutriceuticals.com Corporation, a Florida corporation 16 formed on September 8, 1998. For accounting purposes, this acquisition was treated as an acquisition of our company by Nutriceuticals and as a recapitalization of Nutriceuticals. Thus, although we were incorporated in Nevada on October 18, 1993 our date of inception is September 8, 1998, for accounting purposes. Accordingly, selected consolidated statement of operations data is not presented for the period prior to September 8, 1998. 17 Selected Unaudited Pro Forma Condensed Consolidated Financial Data The selected unaudited pro forma condensed consolidated financial data presented below for the year ended March 31, 2000, and for the three months ended June 30, 2000, are derived from the unaudited Pro Forma Condensed Consolidated Financial Statements included elsewhere in this prospectus. The pro forma condensed consolidated statements of operations data for the year ended March 31, 2000 and for the three months ended June 30, 2000 give effect to the acquisitions of Becan Distributors, Inc., VetMall LLC, Desktop Corporation and Valley Drug Company as if they had occurred on April 1, 1999. The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisitions taken place at the beginning of the period. This pro forma condensed consolidated financial data should be read together with our Consolidated Financial Statements, Pro Forma Condensed Consolidated Financial Statements and related Notes appearing elsewhere in this prospectus.
Year Ended Three Months Ended March 31, 2000 June 30, 2000 -------------------- -------------------- Revenues.................................................................... $106,293,657 $31,633,651 Gross profit................................................................ 3,906,606 1,064,101 Selling, general and administrative expenses................................ 7,013,352 2,437,958 Goodwill amortization....................................................... 1,310,347 * Total operating expenses.................................................... 8,323,699 2,437,958 Operating loss ............................................................. (4,417,093) (1,373,856) Other income (expense), net................................................. 586,668 -- Interest income (expense), net.............................................. (659,590) (142,789) Net income (loss)........................................................... (4,490,015) (1,516,645) Basic and diluted net loss per share........................................ $ (0.89) $ (0.24) Basic and diluted weighted average number of common shares outstanding...... 5,018,708 6,374,780
________ * Goodwill amortization is included in selling, general and administrative expenses for the three months ended June 30, 2000. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Some of the statements in this prospectus are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for these types of statements. These forward- looking statements include statements made in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section relating to our expansions and acquisition strategy, business development and projected capital expenditures, as well as trends in Internet use and electronic commerce. Forward-looking statements include statements regarding our intent, belief or current expectations or our management (including statements preceded by, followed by or including forward-looking terminology such as "may," "will," "should," "believe," "expect," "plan," "intend," "anticipate," "estimate," "continue," "future" or similar expressions or comparable terminology) with respect to various matters. All forward-looking statements in this prospectus are based on information available to us on the date of this prospectus. Please note that matters set forth under the caption "Risk Factors" constitute cautionary statements identifying important factors with respect to the forward- looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements. We currently derive the bulk of our revenues from traditional and online sales of pharmaceuticals, over-the-counter products, health and beauty care products and nutritional supplements. These products are sold primarily to independent pharmacies and to a lesser extent to other distributors, alternate- care facilities and hospitals. In the future, we anticipate growing revenues from our e-commerce related services, including transaction fees from the operation of our online trade exchange, DrugMaxTrading.com, banner advertisements, sponsored newsletters, online auctions, slotting fees and other special e-commerce services related to our online trade exchange. In addition, we believe that our new online trade exchange model will allow us to leverage our wholesale distribution business by allowing us to effectively market and distribute our products. Revenues relating to the sales of our products are recognized as goods are shipped or when services are provided to the customer, net of discounts, allowances, returns and credits. Cost of goods sold is comprised of product and service costs. Selling, general and administrative costs include various administrative, sales and marketing and other indirect operating costs. We were founded in 1993 under the name NuMED Surgical, Inc. as a subsidiary of NuMED Home Health Care, Inc., a publicly traded company. We were created to complete the distribution of certain assets and liabilities associated with NuMED Home Health Care's surgical/medical products division to its stockholders. NuMED Home Health Care contributed all of those assets and liabilities to us, and then distributed all of the shares of our common stock to its stockholders. In connection with the spin off, our common stock was registered under the Securities Exchange Act of 1934, and we began trading as a public company. In April 1997, we sold our major product line and subsequently disposed of all our operating assets because of continued losses caused by increased competition and the loss of exclusivity of our products. The sale of our major product line and assets was completed by March 31, 1998, and, accordingly, from April 1, 1998, to September 8, 1998, we used a liquidation basis of accounting. In March 1999, we acquired all of the outstanding common stock of Nutriceuticals, a Florida corporation formed in September 1998 to engage in the online retailing of natural products over the Internet. For accounting purposes, this acquisition was treated as an acquisition of our company by Nutriceuticals and as a recapitalization of Nutriceuticals. Thus, although we were incorporated in Nevada on October 18, 1993, our date of inception is September 8, 1998, for accounting purposes. On March 31, 1999, we acquired HealthSeek.com Corp., which provided web- based healthcare content and related information to healthcare professionals, medical patients and consumers. Prior to the acquisition of Nutriceuticals in March 1999, we had no operations or assets, and since Nutriceuticals and HealthSeek.com were start-up companies, our revenues were nominal and our operations were limited during the quarter ended June 30, 1999. 19 In November 1999, we acquired all of the outstanding shares of common stock of Becan Distributors, Inc., a wholesale distributor primarily of pharmaceutical products and, to a lesser extent, over-the-counter drugs and health and beauty care products. Becan had net revenues of approximately $31.1 million and $26.5 million for its fiscal year ended March 31, 1999, and for its six months ended September 30, 1999, respectively. Our results of operations for the fiscal year ended March 31, 2000, include the results of operations of Becan from November 26, 1999, through March 31, 2000. In March 2000, we acquired Desktop Corporation and a 70% interest in VetMall, Inc. Desktop is an Internet e-commerce solutions provider specializing in the design, development and delivery of technology solutions by providing custom programming services and web hosting services. VetMall is an e-commerce pet care product sales distributor. Desktop had revenues and a net loss for the year ended March 31, 2000, of $2.4 million and $1.9 million, respectively. Our results of operations for the fiscal year ended March 31, 2000, include the results of operations of Desktop and VetMall from March 20, 1999 through March 31, 2000. In April 2000, we acquired Valley Drug Company, a full-line, primary wholesale distributor of pharmaceuticals, over-the-counter drugs, health and beauty care products and general merchandise. For the year ended December 31, 1999, and the three months ended March 31, 2000, Valley had revenues of approximately $50.6 million and $12.3 million, respectively, and a net income (loss) of approximately $245,000 and ($34,000) for such periods. Our results of operations for the three months ended June 30, 2000, include the results of operations of Valley from April 19, 2000, through June 30, 2000. As a result of our acquisitions and the resulting disparity in assets and operations from last year to the present, we believe that the year end and quarterly periods ending March 31, 2000 and 1999 and June 30, 2000 and 1999, respectively, may not be comparable and should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this prospectus. Results of Operations Fiscal Year Ended March 31, 2000 Compared To The Period From September 8, 1998 (date of inception for accounting purposes) through March 31, 1999 Revenues. Revenues increased to approximately $21.1 million for the year ended March 31, 2000, as compared to $37,000 for the period from September 8, 1998 (date of inception) through March 31, 1999. The increase is primarily attributable to approximately $20.6 million in revenues generated by Becan from November 26, 1999 (date of acquisition) through March 31, 2000. Gross profit. Gross profit increased to $144,000 for the year ended March 31, 2000, as compared to $23,000 for the period from September 8, 1998 (date of inception) through March 31, 1999. Gross margin was 0.7% for the year ended March 31, 2000 as compared to 60.9% for the period from September 8, 1998 (date of inception) through March 31, 1999. The decline was primarily attributable to an increase in the mix of sales associated with the acquisition of Becan, which yields a lower gross margin. Selling, general and administrative expenses. Selling, general and administrative expenses increased to approximately $2.1 million for the year ended March 31, 2000, as compared to $129,000 for the period from September 8, 1998 (date of inception) through March 31, 1999. The increase was primarily due to additional advertising and promotional expenses, web site support and development costs, increased payroll expenses and costs associated with fringe benefits, and amortization of goodwill associated with the acquisition of Becan. Interest expense. Interest expense was $107,000 for the year ended March 31, 2000. There was no interest expense for the period from September 8, 1998 (date of inception) through March 31, 1999. The increase was a result of borrowings under our credit facilities for financing of additional working capital needs with the expansion of our operations, specifically associated with the acquisition of Becan. 20 Income Taxes. We have no income tax provision for the periods presented due to our net operating losses. These net operating losses may be carried forward for up to 20 years to offset future taxable income. Inflation; Seasonality. Management believes that there was no material effect on operations or the financial condition of DrugMax as a result of inflation for the fiscal year ended March 31, 2000, and the period from September 8, 1998 (date of inception) through March 31, 1999. Management also believes that its business is not seasonal; however, significant promotional activities can have a direct impact on sales volume in any given quarter. Three Months Ended June 30, 2000 and 1999 Revenues. We had revenues of approximately $28.8 million for the three months ended June 30, 2000, as compared to $33,899 for the three months ended June 30, 1999. The increase is attributable to the acquisitions of Becan in November 1999, Desktop and VetMall in March 2000, and Valley in April 2000, as well as additional organic growth within each respective acquired operation. The quarter to quarter growth of the acquired companies has been enhanced through the implementation of our e-commerce strategy and the operating synergies of the acquired companies. Gross Profit. We had gross profit of approximately $1.0 million for the three months ended June 30, 2000, as compared to $19,113 for the three months ended June 30, 1999. The increase is attributable to the acquisitions of Becan in November 1999, Desktop and VetMall in March 2000 and Valley in April 2000. Gross margin for the three-month period ended June 30, 2000 was 3.48% as compared to 56.4% for the same period ended June 30, 1999. The decline in gross margin is attributable to the variety of product offerings contributing varying degrees of profit margins from sales generated at Becan, Desktop, VetMall and Valley. Selling, general and administrative expenses. We had selling, general and administrative expenses of approximately $2.4 million for the three months ended June 30, 2000, as compared to $101,308 for the three months ended June 30, 1999. The increase was primarily due to additional advertising and promotional expenses, increased payroll, and amortization of goodwill associated with the acquisitions of Becan, Desktop, VetMall and Valley. Interest expense. Interest expense was $223,956 for the three months ended June 30, 2000, as compared to $589 for the three months ended June 30, 1999. The increase was a result of borrowings under our credit facilities for the financing of additional working capital needs associated with the acquisition of Valley, and to a greater extent, the outstanding debt associated with Valley. Income Taxes. We have no income tax provision for the periods presented due to its net operating losses. These net operating losses may be carried forward for up to 20 years to offset future taxable income. Inflation; Seasonality. Management believes that there was no material effect on operations or the financial condition of DrugMax as a result of inflation for the three months ended June 30, 2000. Management also believes that its business is not seasonal; however, significant promotional activities can have a direct impact on sales volume in any given quarter. Financial Position, Liquidity and Capital Resources We have financed our operations primarily through proceeds received from a public offering in November 1999. Gross proceeds from that offering were approximately $13.8 million, and the net offering proceeds we received were approximately $11.9 million, after payment of underwriting discounts and commissions and other offering expenses totaling approximately $1.9 million. Prior to that, we funded our operations through borrowings from our officers, directors and affiliates. Net cash used in operating activities was approximately $3.1 million for the year ended March 31, 2000. The usage of cash is primarily attributable to our operating loss as well as an increase in accounts receivable of approximately $1.9 million, as a result of increased sales associated with the Becan acquisition, an increase in inventory of $189,000, an increase in due from affiliates of $8,000, an increase in prepaid expenses and other current assets of $80,000, a decrease in accrued expenses of $475,000, and a decrease in deposits of $9,000, partially offset by an increase in accounts payable of $835,000 associated with the acquisition of Becan. 21 Net cash used in operating activities was approximately $1.7 million for the three months ended June 30, 2000. The usage of cash is primarily attributable to the operating loss as well as an increase in accounts receivable as a result of increased sales associated with the Becan and Valley acquisitions, an increase in prepaid expenses and other current assets and decreases in accounts payable and accrued expenses, partially offset by decreases in inventory and stockholder notes receivable. Net cash used in investing activities for the three months ended June 30 was approximately $1.8 million, representing purchases of property and equipment, an increase in intangible assets and cash paid for the acquisition of Valley. Net cash provided by financing activities for the three months ended June 30 was approximately $1.6 million, representing the net change in revolving line of credit agreements and an increase in proceeds from affiliates, partially offset by repayments of long-term obligations. At March 31, 2000, we had approximately $6.0 million in cash and cash equivalents as compared to $57,000 at March 31, 1999. Working capital at March 31, 2000 was approximately $5.2 million, inclusive of obligations under our credit line facilities, as compared to a working capital deficiency of $10,000 at March 31, 1999. We had working capital of $4.2 million and cash and cash equivalents of $4.1 million at June 30, 2000. Our principal commitments at March 31, 2000 were leases on our office and warehouse space. There were no material commitments for capital expenditures at that date, with the exception of the commitment to acquire Valley for 226,666 shares of our common stock and cash in the amount of approximately $1.7 million. The acquisition of Valley was completed in April, 2000. In November 1999, we acquired Becan in exchange for 2,000,000 shares of restricted common stock and $2.0 million in cash. In addition, we also deposited 1,000,000 shares of our common stock into escrow for future issuance to Dynamic Health Products, Inc. upon the attainment of certain financial targets for the fiscal years ending March 31, 2000 and 2001. Currently, 500,000 shares remain in escrow and 500,000 shares have been returned to us. In March 2000, Becan was merged into DrugMax. In October 2000, we obtained from Mellon Bank, N.A. a line of credit and a $2.0 million term loan to refinance our prior bank indebtedness and to provide additional working capital and for other general corporate purposes. The new line of credit enables us to borrow a maximum of $15 million, with borrowings limited to 85.0% of eligible accounts receivable and 65.0% of eligible inventory. The term loan is payable over a 36-month period with interest at 0.75% per annum over the base rate, which is the higher of Mellon's prime rate or the effective federal funds rate plus 0.50% per annum. The revolving credit facility will bear interest at the floating rate of 0.25% per annum above the base rate. After we deliver our audited financial statements for the fiscal year ending March 31, 2001 to Mellon Bank, the applicable margin over the base rate may change on an annual basis depending on the ratio of funded debt to EBITDA. At our option, we may instead pay interest at a LIBOR rate plus an applicable margin, which also varies on the ratio of funded debt to EBITDA. We used the proceeds from this credit facility to repay our prior credit facilities. We currently anticipate that the net proceeds of this offering, together with our existing borrowing arrangements and other available funds will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. Our future liquidity and cash requirements will depend on a wide range of factors, including the level of business in existing operations, expansion of facilities and possible acquisitions. We will principally use the proceeds of this offering for working capital, as well as strategic acquisitions, business expansion, and marketing. See "Use of Proceeds." 22 Business Our Business Drugmax.com, Inc. primarily is an e-commerce business providing: (1) the wholesale distribution of pharmaceuticals, over-the-counter products, health and beauty care products, and nutritional supplements and (2) one of the first business-to-business online trade exchanges for the same products, dedicated exclusively to manufacturers, distributors, wholesalers and retailers in the pharmaceuticals and over-the-counter product markets. We also continue to derive a significant portion of revenue from our traditional "brick and mortar" full- line wholesale distribution business. We utilize our competitive advantage of being one of the early entrants into the Internet business-to-business pharmaceutical market, leveraging our existing infrastructure, technology, relationships, marketing and management resources. We believe that the combination of our traditional wholesale distribution business with both our online wholesale distribution business and our e-commerce trade exchange provides the "clicks and mortar" combination that will allow us to aggressively market and distribute our products and services. During the fiscal year ended March 31, 2000, and the three months ended June 30, 2000, we generated revenues of $21.1 million and $28.8 million, respectively. In general, we distribute our products primarily to independent pharmacies in the continental United States, and secondarily to small and medium-sized pharmacy chains, alternate care facilities and other wholesalers and retailers. Since the early December 1999 launch of our website, www.drugmax.com, over 9,000 independent pharmacies, small regional pharmacy chains, wholesalers and distributors have registered to purchase products through our site. We believe we have been successful in attracting potential customers to our site because we have designed our site as an online source for a select group of products, typically higher cost and margin products, which make up a large percentage of our targeted customers sales. In addition, we maintain an inventory of over 20,000 stock keeping units, and continue to serve our customers as a primary, full-line wholesale distributor through a combination of our e-commerce venues and traditional distribution methods. Our online trade exchange, DrugMaxTrading.com, established in August 2000, offers one of the first business-to-business online trade exchanges for pharmaceuticals, over-the-counter products, health and beauty care products, and nutritional supplements dedicated exclusively to manufacturers, distributors, wholesalers and retailers in the pharmaceutical and over-the-counter product markets. DrugMaxTrading.com allows our trade exchange members to lower their overall costs of doing business while providing them with wider market access and the best available prices. Capitalizing on the efficiencies of the Internet and our strategic alliances, DrugMaxTrading.com aggregates a variety of product and market participant information, and, in doing so, facilitates the execution of mutually beneficial online transactions among trade exchange members in an open-market format. Our History We were founded in 1993 under the name NuMED Surgical, Inc. as a subsidiary of NuMED Home Health Care, Inc., a publicly traded company. We were created to complete the distribution of certain assets and liabilities associated with NuMED Home Health Care's surgical/medical products division to its stockholders. NuMED Home Health Care contributed all of those assets and liabilities to us, and then distributed all of the shares of our common stock to its stockholders. In connection with the spin off, our common stock was registered under the Securities Exchange Act of 1934, and we began trading as a public company. In April 1997, we sold our major product line and subsequently disposed of all our operating assets because of continued losses caused by increased competition and the loss of exclusivity of our products. The sale of our major product line and assets was completed by March 31, 1998, and, accordingly, from April 1, 1998, to September 8, 1998, we used a liquidation basis of accounting. On March 17, 1999, we acquired all of the outstanding common stock of Nutriceuticals.com Corporation, a Florida corporation formed in September 1998 to engage in the online retailing of natural products over the Internet. For accounting purposes, this acquisition was treated as an acquisition of our company by Nutriceuticals and a recapitalization of Nutriceuticals. Thus, although we were incorporated in Nevada on October 18, 1993, our date of inception is September 8, 1998 for accounting purposes. After we acquired Nutriceuticals, we changed our corporate name to Nutriceuticals.com Corporation. 23 In November 1999, we acquired all of the outstanding shares of common stock of Becan Distributors, Inc., a wholesale distributor primarily of pharmaceuticals and, to a lesser extent, over-the-counter products and health and beauty care products. Following the acquisition of Becan, we changed our name to DrugMax.com, Inc. With the acquisition of Becan, we changed our primary focus from that of an online business-to-consumer retailer of vitamins and other health products to that of an e-commerce business-to-business wholesale distributor of pharmaceuticals, over-the-counter products, health and beauty care products and nutritional supplements. Becan commenced operations in January 1997, and its net revenues for the year ended March 31, 1999, and the six months ended September 30, 1999, were $31.1 million and $26.5 million, respectively. Net income for the respective periods was $94,031 and $112,095. See "Business- Recent Material Acquisitions - Becan" and "Management - Loans and Other Affiliated Transactions - Becan Distributors, Inc." In April 19 2000, we acquired Valley Drug Company, a full-line, primary wholesale distributor of pharmaceuticals, over-the-counter products, health and beauty care products and general merchandise. This acquisition helped us expand our customer base, product line and market share, and provided us with the additional ability to serve our customers as a primary, full-line wholesale distributor, and offer them the convenience of one-stop shopping. Valley has been in operation since 1950, and its offices are located in Youngstown, Ohio. For the year ended December 31, 1999, and the three months ended March 31, 2000, Valley had revenues of approximately $50.6 million and $12.3 million, respectively, and net income (loss) of approximately $245,000 and ($34,000) for such periods. In August 2000, we launched DrugMaxTrading.com, thus initiating the most recent phase of our growth strategy. Through DrugMaxTrading.com, we offer one of the first business-to-business online trade exchange for pharmaceuticals, over- the-counter products, health and beauty care products and nutritional supplements, dedicated exclusively to manufacturers, distributors, wholesalers and retailers in the pharmaceutical and over-the-counter product industries. Capitalizing on the efficiencies of the Internet and our strategic alliances, this business-to-business site centralizes manufacturers, distributors, wholesalers and retailers to facilitate the execution of mutually beneficial online transactions in an open-market format. Most recently, on September 13, 2000, we entered into a letter of intent to purchase substantially all of the assets of Penner & Welsch, Inc., a wholesale distributor of pharmaceuticals, over-the-counter products and health and beauty care products headquartered near New Orleans, Louisiana. Penner & Welsch has filed a voluntary petition for Chapter 11 relief under the United States Bankruptcy Code. Pursuant to the letter of intent, we will work with Penner & Welsch, on an exclusive basis, to formulate a bankruptcy reorganization plan pursuant to which we have planned to purchase, for $750,000 worth of restricted DrugMax common stock, all of Penner & Welsch's assets and/or equity, without its liabilities, while keeping Penner & Welsch's customers in continuous service. The proposed acquisition is still subject to the final approval of the United States Bankruptcy Court for the Eastern District of Louisiana, and we cannot guarantee that the transaction will be completed. See "Business-Pending Acquisition-Penner & Welsch." Industry Trends Pharmaceutical and Healthcare Markets. According to IMS Health, a company ------------------------------------- specializing in information services for the pharmaceutical and health care industries, the United States is the world's largest pharmaceutical market, with 1998 sales of $111 billion, including diagnostics and over-the-counter drugs. That figure is expected to rise to $163 billion in 2002, an increase of 46%. The National Association of Chain Drug Stores reported that total pharmaceuticals drug sales for 1999 exceeded a record $121 billion. This continued growth rate of the sales of pharmaceutical products was attributed to a number of factors including: . the value added by the introduction of new drugs into the marketplace, which more than offsets the value lost by medications losing patent protection; . new patterns of drug lifestyle management, resulting in higher sales occurring earlier in the life cycle of a medication; . increased money spent on direct-to-consumer marketing initiatives; and . an unprecedented period of investment by pharmaceutical companies worldwide. Currently, the pharmaceuticals and health care products markets are serviced primarily by traditional full-line wholesalers. Internet. The Internet has emerged as the fastest growing communications -------- medium in history and is 24 dramatically changing how businesses and individuals communicate and share information. International Data Corporation estimates that the number of Internet users will grow from 97 million at the end of 1998 to 320 million by 2002. The Internet has created new opportunities for conducting commerce, such as business-to-consumer and person-to-person e-commerce. Recently, the widespread adoption of intranets and the acceptance of the Internet as a business communications platform has created a foundation for business-to- business e-commerce that offers the potential for organizations to streamline complex processes, lower costs and improve productivity. Internet-based business-to-business e-commerce is poised for rapid growth and is expected to represent a significantly larger opportunity than business-to-consumer or person-to-person e-commerce. According to Gartner Group, business-to-business e-commerce revenue was $145 billion in 1998 and by 2004 will represent about 7.0% of the total global sales transactions, estimated to be $7 trillion. Gartner Group estimates that in 2000 business-to-business revenues will be $403 billion, a figure that should rise to $953 billion in 2001, $2 trillion in 2002 and nearly $4 trillion in 2003. We cannot guarantee that we will benefit from this growth. The dynamics of business-to-business e-commerce relationships differ significantly from those of other e-commerce relationships. Business-to-business e-commerce solutions frequently automate processes that are fundamental to a business's operations by replacing various paper-based transactions with electronic communications. In addition, business-to-business e-commerce solutions must often be integrated with a customer's existing systems, a process that can be complex, time-consuming and expensive. Consequently, selection and implementation of a business-to-business e-commerce solution represents a significant commitment by the customer, and the costs of switching solutions are high. In addition, because business transactions are typically recurring and non-discretionary, the average order size and lifetime value of a business-to- business e-commerce customer is generally greater than that of a business-to- consumer e-commerce customer. These solutions are likely to be most readily accepted by industries characterized by a large number of buyers and sellers, a high degree of fragmentation among buyers, sellers or both, significant dependence on information exchange, large transaction volume and user acceptance of the Internet. Our Objectives Our business objectives are: . to become a leading business-to-business e-commerce provider of pharmaceuticals, over-the-counter products, health and beauty care products and nutritional supplements; and . to own and operate a leading online trade exchange for pharmaceuticals, over-the-counter products, health and beauty care products and nutritional supplements. Our Strategy To accomplish our objectives, we plan to: . market our name, products and services to create brand recognition and generate and capture traffic on our web sites; . provide quality products at competitive prices and efficient service through online automation; . develop strategic relationships that increase our online content and product offerings; . maintain technology focus and expertise to improve efficiency and ease of use of our web sites; and . attract and retain exceptional employees. Marketing. We are promoting, advertising and increasing recognition of our web sites through a variety of marketing and promotional techniques, including: 25 . developing co-marketing agreements with major online sites and services; . enhancing online content and ease of use of our web sites; . enhancing customer service and technical support; . advertising in trade journals and at industry trade shows; . conducting an ongoing public relations campaign; and . developing other business alliances and partnerships. Develop Strategic Relationships. We believe that developing strategic relationships with a diverse set of partners, which include manufacturers, distributors, wholesalers and retailers, will assist us in achieving our objectives because such strategic marketing alliances may enhance our brand recognition, increase customer sales and expand our online visibility. Maintain Technology Focus and Expertise. A state-of-the-art interactive commerce platform is necessary to enhance the services we offer and to expand the benefits of online reselling of our products. We are continually upgrading our technology platform to further enhance our customer interaction and support systems, which we believe offer us a competitive advantage. We will continue to expend substantial efforts to develop, purchase, license and make technological advancements to our web sites and our transaction processing systems to enhance our availability, reliability and site up-time, and to improve the efficiency of our fulfillment activities. Attract and Retain Exceptional Employees. Talented employees, management and directors provide significant advantages in the rapidly evolving electronic commerce market. We intend to devote substantial efforts to building a talented employee base. Sales and Marketing; Customer Service and Support We sell our products both through e-commerce venues, including our web sites, www.drugmax.com and www.DrugMaxTrading.com, and through traditional wholesale distribution lines. We believe our e-commerce, business-to-business model will allow us to leverage our wholesale distribution business, thus increasing our ability to effectively market and distribute our products. We use a variety of programs to stimulate increased traffic to our web sites and demand for our products, including a direct sales force, telemarketing and advertising. Direct Sales. We employ four persons to act as our direct sales force ------------ to target organizations that buy and sell products listed on our web sites. Telemarketing. We maintain an in-house telemarketing group of eight ------------- persons for use in customer prospecting, lead generation and lead follow-up. Advertising. In addition to strategic agreements and traditional ----------- advertising, we use many online sales and marketing techniques to increase brand recognition and direct traffic to our online stores. These include purchasing banner advertising on search engine web sites and Internet directories, direct links from healthcare home pages, and mass e-mailings. We also advertise in trade journals, at trade shows and engage in co-branding arrangements. Customer Service and Support. We believe that we can establish and maintain long-term relationships with our customers and encourage repeat visits if, among other things, we have excellent customer support and service. We currently offer information regarding our products and services and answer customer questions about the ordering process, and investigate the status of orders, shipments and payments. A customer can access our staff by 26 fax or e-mail by following prompts located on our web sites or by calling our toll-free telephone line. In the future, we may outsource our customer support services to a provider of customer support services. Distribution Our e-commerce venues and traditional marketing efforts are supported by three distribution centers, located in Pittsburgh, Pennsylvania, Mandeville, Louisiana, and Youngstown, Ohio. These locations enable us to deliver approximately 95% of our products to our customers via next day delivery, shipped by UPS. The remaining product is distributed by our delivery vans in the region of eastern Ohio and western Pennsylvania around Youngstown, Ohio, or by common carrier to more distant customers. In order to reduce inventory discrepancies and shrinkage, as well as maintain good customer relations, our shipping department double checks all orders prior to shipment. Purchasing We purchase over 20,000 stock keeping units primarily from manufacturers and secondarily from other wholesalers and distributors. Our purchasing department constantly monitors the market to take advantage of periodic volume discounts, market discounts and pricing changes. DrugMaxTrading.com Business-to-Business Trade Exchange In August 2000, we initiated the most recent phase of our growth strategy through the launch of our online trade exchange, DrugMaxTrading.com. Through DrugMaxTrading.com, we offer one of the first business-to-business online trade exchanges for pharmaceuticals, over-the-counter products, health and beauty care products and nutritional supplements, dedicated exclusively to manufacturers, distributors, wholesalers and retailers in the pharmaceutical and over-the- counter product industries. Capitalizing on the efficiencies of the Internet and our strategic alliances, this business-to-business site brings together manufacturers, distributors, wholesalers, and retailers to facilitate the execution of mutually beneficial online transactions in an open-market format, while enabling them to manage their entire buying/selling cycle over the Internet. Our e-commerce services allow our trade exchange members to lower their overall costs of doing business while providing them with wider market access and the best prices available. Although we expect our wholesale distribution business to continue to provide the primary source of revenues for the foreseeable future, we believe that our new e-commerce trade exchange model will ultimately provide greater profits than our wholesale distribution operations. Through our trade exchange, we expect to derive these profits from: . transaction fees from the operation of our online trade exchange; . banner advertisements; . sponsored newsletters; . online auctions; . slotting fees; and . other special e-commerce services related to our online trade exchange. In addition, we believe that the combination of our e-commerce trade exchange and our "clicks and mortar" business model and traditional distribution methods will allow us to aggressively market and distribute our products to new customers. Our primary objective is to match buyers and sellers who wish to trade or exchange goods and services related to the pharmaceutical and over-the-counter products, health and beauty care products and nutritional supplements industries. Users can conduct transactions using alternative market-making mechanisms designed to achieve an optimal price versus volume goal. Our innovative "Best Buy" technology provides our members with the best prices on the market, while our "Closeout" and "Auction" technology provides our members with "Open Market Trading" that allows them unique buying and selling opportunities. 27 Best Buy System. The Best Buy System is an online catalog powered by a multi-vendor database and a database containing each of our members' personal buying preferences. The format is designed primarily for recurring product sales. Product information is uploaded into the DrugMaxTrading.com database by multiple vendors, and a corresponding system for purchasers automatically searches for the desired product and provides information on, and the ability to, acquire the lowest prices available. Once our members are registered, they can select or "upload" their list of items they wish to buy. The Best Buy System cross-references their selected items with all the vendors selling these items and displays the lowest price. Each order is filled by the lowest price available. If the sales for the lowest selling price exceed the quantity available by that seller, the seller with the next lowest price will be contacted to complete the order. The Best Buy System also allows our members to select items for their "Product Watch" portfolio. These items are items that they wish to monitor on an ongoing basis. Closeout System. This format is designed for users that want to sell their products as quickly as possible. Items such as short-dated inventory are ideal candidates for closeouts. Through the Closeout System, our members can offer and purchase products approaching expiration. Based on the expiration date, the price of the products will decrease daily based on intervals set by the sellers as the expiration date approaches, giving buyers the best deal and sellers a channel for end-of-life product management. The sale will continue until the time limit is over or the items are completely sold. Auctions. This format is designed for sellers that want a market for their non-traditional products or who are carrying excess inventory that they need to sell. It provides our buying members with the opportunity to participate in auctions as inventory is posed for sale. We provide for both English auctions and Dutch auctions. In an English auction, as the bidding begins, bids are ranked in order of price, then quantity and then time. The bidder with the highest bid, highest quantity and first time will be the winner, as long as the minimum requirements are met. In a Dutch auction, as the bidding begins, bids are ranked in order of price, then quantity and then time. The bidders with the highest bid will be the winner, as long as the minimum requirements are met. Technology and Security We host and maintain our web sites and contract with a third party that provides backup web hosting services. The backup provider delivers a secure platform for server hosting with uninterruptible power supply and back up generators, fire suppression, raised floors, heating ventilation and air- conditioning, separate cooling zones, operations twenty-four-hours-a-day, seven- days-a-week. Notwithstanding these precautions, we cannot assure that the security mechanisms used by us, our customers or our backup provider will prevent security breaches or service breakdowns. Despite the network security measures we have implemented, our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Such a disruption could lead to interruptions or delays in our service, loss of data, or our inability to accept and fulfill customer orders. Any of these events could materially affect our business. To protect the customer information we receive, we use SSL (Secure Socket Layer) encrypted protocol, user names and passwords, and other tools. We also have our own certificate server from Microsoft that encrypts the registration session to protect the customer information. In addition, we have taken steps to protect the registration information residing in our servers by using firewalls, backups and other preventive measures designed to protect the privacy of our customers. We restrict access to customer personal and financial data to those authorized employees who have a need for these records. We do not release information about our customers to third parties without the prior written consent of our customers unless otherwise required by law. Competition In every area of operations, our wholesale distribution business faces strong competition both in price and service from national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self- warehousing chains and from manufacturers engaged in direct distribution. Many of our current and potential competitors have longer operating histories and larger customer bases than we do. In addition, many of our current and potential competitors have greater brand recognition and significantly greater financial, marketing and other resources than we do, and may be able to: 28 . secure merchandise from vendors on more favorable terms; . devote greater resources to marketing and promotional campaigns; and . adopt more aggressive pricing or inventory availability policies. In addition, certain of our competitors, such as McKesson HBOC, Inc., Cardinal Health, Inc., FreeMarkets, Inc., Ventro Corporation and Bindley Western Industries, Inc. have developed or may be able to develop e-commerce operations that compete with ours, and may be able to devote substantially more resources to web site development and systems development than we can. The online commerce market is new, rapidly evolving and intensely competitive. We expect competition to intensify in the future because barriers to entry are minimal, and current and new competitors can launch new web sites at relatively low cost. We believe that the critical success factors for companies seeking to create Internet business-to-business e-commerce solutions include the following. . breadth and depth of product offerings; . brand recognition; . depth of existing customer base; and . ease of use and convenience. Unlike other well-publicized product categories such as online book or compact disc retailing, there is no current market leader in our online business-to-business market segment. Our immediate goal is to position ourselves as a leading business-to-business e-commerce provider of, and online trade exchange for, pharmaceuticals, over-the-counter products, health and beauty care products and nutritional supplements. To that end, we believe that our early entry into the online market may enable us to establish critical competitive advantages over future competitors. Management believes that such competitive advantages include: . the establishment of a recognizable brand; . the development of online marketing and media relationships; . the development of important relationships with manufacturers, distributors, wholesalers and content providers; and . exposure to an existing customer base. However, competitive pressures created by any one of our current or future competitors, or by our competitors collectively, could materially affect our business. We believe that the principal competitive factors in our market are and will be: . brand recognition . selection . speed and accessibility . customer service . quality of site content . reliability and speed of fulfillment . convenience . price Government Regulations and Legal Uncertainties Internet Regulation. Few laws or regulations are currently directly applicable to the Internet. However, because of the Internet's popularity and increasing use, new laws and regulations may be adopted. Such laws and regulations may cover issues such as: . user privacy . distribution . pricing . taxation 29 . content . characteristics and quality of products and . copyrights . services Laws and regulations directly applicable to electronic commerce or Internet communications are becoming more prevalent. We believe that our use of third party material on our portal is permitted under current provisions of copyright law. However, because legal rights to certain aspects of Internet content and commerce are not clearly settled, our ability to rely upon exemptions or defenses under copyright law is uncertain. Also, although not yet enacted, Congress is considering laws regarding Internet taxation. In addition, various jurisdictions already have enacted laws that are not specifically directed to electronic commerce but that could affect our business. The applicability of many of these laws to the Internet is uncertain and could expose us to substantial liability. Any new legislation or regulation regarding the Internet, or the application of existing laws and regulations to the Internet, could materially adversely affect us. If we were alleged to violate federal, state or foreign, civil or criminal law, even if we could successfully defend such claims, it could materially adversely affect us. Additionally, several telecommunications carriers are seeking to have telecommunications over the Internet regulated by the Federal Communications Commission in the same manner as other telecommunications services. Furthermore, local telephone carriers have petitioned the Federal Communications Commission to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees on such providers. If either of these petitions are granted, the costs of communicating on the Internet could increase substantially. This, in turn, could slow the growth of use of the Internet. Any such legislation or regulation could materially adversely affect our business, financial condition and operating results. Healthcare Regulation. The manufacturing, packaging, labeling, advertising, promotion, distribution and sale of most of our products is subject to regulation by numerous governmental agencies, particularly the United States Food and Drug Administration, which regulates most of our products under the Federal Food, Drug and Cosmetic Act, and the United States Federal Trade Commission, which regulates the advertising of many of our products under the Federal Trade Commission Act. Our products are also subject to regulation by, among other regulatory agencies, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Department of Environmental Regulation and the Occupational Safety and Health Administration. The manufacturing, labeling and advertising of our products is also regulated by the Occupational Safety and Health Administration through various state and local agencies as well as foreign countries to which we distribute our products. Furthermore, we and/or our customers are subject to extensive licensing requirements and comprehensive regulation governing various aspects of the healthcare delivery system, including the so called "fraud and abuse" laws. The fraud and abuse laws preclude: . persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or for inducing the ordering or purchasing of items or services that are in any way paid for by Medicare or Medicaid, and . physicians from making referrals to certain entities with which they have a financial relationship. The fraud and abuse laws and regulations are broad in scope and are subject to frequent modification and varied interpretations. Significant criminal, civil and administrative sanctions may be imposed for violation of these laws and regulations. Our advertising of dietary supplement products is also subject to regulation by the Federal Trade Commission under the Federal Trade Commission Act, in addition to state and local regulation. The Federal Trade Commission Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. The Federal Trade Commission Act also provides that the dissemination or the causing to be disseminated of any false advertisement pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the Federal Trade Commission's Substantiation Doctrine, an advertiser is required to have a "reasonable basis" for all objective product claims before the claims are made. Failure to adequately substantiate claims may be considered either deceptive or unfair practices. Pursuant to this Federal 30 Trade Commission requirement, we are required to have adequate substantiation for all material advertising claims made for our products. We may be subject to additional laws or regulations by the Food and Drug Administration or other federal, state or foreign regulatory authorities, the repeal of laws or regulations which we consider favorable, such as the Dietary Supplement Health and Education Act of 1994, or more stringent interpretations of current laws or regulations, from time to time in the future. We are unable to predict the nature of such future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. The Food and Drug Administration or other governmental regulatory bodies could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation of the properties of certain products, expanded or different labeling and scientific substantiation. Any or all of such requirements could have a materially adverse affect on our business. Our products function within the structure of the healthcare financing and reimbursement system of the United States. As a result of a wide variety of political, economic and regulatory influences, this system is currently under intensive scrutiny and subject to fundamental changes. In recent years, the system has changed significantly in an effort to reduce costs. These changes include increased use of managed care, cuts in Medicare, consolidation of pharmaceutical and medical-surgical supply distributors, and the development of large, sophisticated purchasing groups. In addition, a variety of new approaches have been proposed to continue to reduce cost, including mandated basic healthcare benefits and controls on healthcare spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending. We anticipate that Congress and state legislatures will continue to review and assess alternative healthcare delivery systems and payment methods and that public debate with respect to these issues will likely continue in the future. Because of uncertainty regarding the ultimate features of reform initiatives and their enactment and implementation, we cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted, or what impact they may have on us. We expect the healthcare industry to continue to change significantly in the future. Some of these changes, such as a reduction in governmental support of healthcare services or adverse changes in legislation or regulations governing the privacy of patient information, or the delivery of pricing of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to greatly reduce the amount of our products and services they purchase or the price they are willing to pay for our products. Changes in pharmaceutical manufacturers' pricing or distribution policies could also significantly reduce our income. While we use our best efforts to adhere to the regulatory and licensing requirements, as well as any other requirements affecting our products, compliance with these often requires subjective legislative interpretation. Consequently, we cannot assure that our compliance efforts will be deemed sufficient by regulatory agencies and commissions enforcing these requirements. Violation of these regulations may result in civil and criminal penalties, which could materially and adversely affect our operations. Proprietary Rights We believe that protecting our trademarks and registered domain names is important to our business strategy of building strong brand name recognition and that such trademarks have significant value in the marketing of our products. To protect our proprietary rights, we will rely on copyright, trademark and trade secret laws, confidentiality agreements with employees and third parties, and license agreements with consultants, vendors and customers. Despite such protections, a third party could, without authorization, copy or otherwise appropriate information from our web sites. The laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and effective copyright, trademark and trade secret protection may not be available in such jurisdictions. Our agreements with employees, consultants and others who participate in development activities could be breached, we may not have adequate remedies for any breach, and our trade secrets may otherwise become known or independently developed by competitors. After the completion of this offering, we intend to apply for federal registration of the marks "DrugMax" and "DrugMaxTrading" in the United States. We cannot be certain that federal registration of the marks will be completed or issued. We rely on common law trademark rights to protect our unregistered trademarks. Common 31 law trademark rights generally are limited to the geographic area in which the trademark is actually used, while a United States federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third party anywhere in the United States. Furthermore, the protection available, if any, in foreign jurisdictions may not be as extensive as the protection available to us in the United States. We also utilize the registered domain names www.drugmax.com and www.DrugMaxTrading.com. Currently, the acquisition and maintenance of domain names is regulated by governmental agencies and their designees. The regulation of domain names in the United States and in foreign countries is expected to change in the near future. These changes could include the introduction of additional top level domains, which could cause confusion among web users trying to locate our sites. As a result, we may not be able to maintain our domain name. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Generally, we cannot protect our web addresses for our portal as trademarks because they are too generic. We may be unable to prevent third parties from acquiring domain names that are similar to ours. The acquisition of similar domain names by third parties could cause confusion among web users attempting to locate our site and could decrease the value of our brand name. There has been a substantial amount of litigation in the computer industry regarding intellectual property assets. Third parties may claim infringement by us with respect to current and future products, trademarks or other proprietary rights, or we may counterclaim against such parties in such actions. Any such claims or counterclaims could be time-consuming, result in costly litigation, diversion of management's attention, cause product release delays, require us to redesign our products or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon our business. Such royalty and licensing agreements, if required, may not be available in terms acceptable to us, or at all. Employees We currently employ 64 persons and two consultants. Labor unions do not represent any of our employees. We consider our employee relations to be good. Competition for qualified personnel in our industry is intense, particularly for technical staff responsible for marketing, advertising, web development, and general and administrative activities. Facilities Our principal administrative, marketing and customer service facility totals approximately 6,500 square feet of office and warehouse space, located at 12505 Starkey Road, Suite A, Largo, Florida 33773. The property is leased under a three-year lease with a three-year option to renew, which requires monthly lease payments of approximately $3,800 plus sales and use taxes. The lease expires in November 2002. We lease property for our distribution center in Pittsburgh, Pennsylvania. The leased space consists of approximately 4,000 square feet of office and warehouse space. The property is leased under a four-year lease that expires in February 2003. The rent under the lease is approximately $1,650 per month subject to yearly adjustment for tax expenses. We lease property for our distribution center in Mandeville, Louisiana. The leased space consists of approximately 1,200 square feet of office and warehouse space. This space is leased on a month-to-month basis, and the rent under the lease is $900 per month. We lease property for our distribution center in Youngstown, Ohio. The leased space consists of approximately 30,000 square feet of office and warehouse space. The lease expires in December, 2008. The rent under the lease is $6,000 per month. 32 Legal Proceedings From time to time, we may become involved in litigation arising in the ordinary course of our business. We are not presently involved in any material legal proceedings. Recent Material Acquisitions DrugMax has made the following material acquisitions since April 1, 1999: Becan. In November 1999, we acquired Becan Distributors, Inc., a wholesale distributor of pharmaceuticals, over-the-counter drugs, and health and beauty care products. Becan was a wholly owned subsidiary of Dynamic Health Products, Inc., an affiliate of Jugal K. Taneja, who serves as our Chairman of the Board and is one of our principal stockholder of us. In connection with this acquisition, we paid Becan's then parent company, Dynamic, the sum of $2.0 million in cash and 2,000,000 shares of our common stock in exchange for all of the outstanding shares of Becan common stock. In addition, we also deposited 1,000,000 shares of our common stock into escrow for future issuance to Dynamic upon the attainment of certain financial targets for the fiscal years ending March 31, 2000 and 2001. Currently, 500,000 shares remain in escrow and 500,000 shares have been returned to us. In March 2000, Becan was merged into DrugMax. Desktop/VetMall. In March 2000, we acquired Desktop Corporation in exchange for 99,985 shares of our common stock (20,000 of which remain in escrow pending the resolution of certain indemnification obligations on the part of the prior Desktop shareholders) and $100,000 in cash. As a result, we also acquired Desktop's 50% interest in VetMall, LLC, which was later converted into VetMall, Inc. At the time of our acquisition, the other 50% interest in VetMall was owned by W.A. Butler & Company. Simultaneously with the acquisition of Desktop, we entered into a purchase agreement with Butler, whereby Butler sold to us a 20% interest in VetMall, in exchange for the payment of $1.0 million in cash plus the issuance to Butler of 25,000 shares of our common stock. As a result, we own a 70% interest in VetMall. In connection with our acquisition of Desktop, we agreed that upon . the closing of any initial public offering of VetMall or its successors, . the sale by DrugMax of all of its shares of VetMall, or . the sale by VetMall of all or substantially all of its assets, we will either (a) transfer to the stockholders of Desktop that were stockholders of Desktop on the date of our acquisition of Desktop (in the same proportion as the DrugMax shares of common stock received by them pursuant to the acquisition agreement) that number of shares of VetMall's common stock which, when multiplied by the closing price of VetMall's common stock on the date the IPO is declared effective by the SEC or the per share value of such stock on the closing date of a sale, has a value $4.8 million, or (b) transfer to the stockholders of Desktop that were stockholders of Desktop on the date of our acquisition of Desktop (in the same proportion as the DrugMax shares of common stock received by them pursuant to the acquisition agreement) 16% of the common stock of VetMall acquired by us from those stockholders, whichever of (a) or (b) has a lower value based on the sales price or the closing price of VetMall common stock on the date that the IPO is declared effective by the SEC. 33 Desktop, organized in 1995, was engaged in the business of designing and developing customized Internet solutions. VetMall.com, Inc. provides us a business-to-business portal designed to link animal health product manufacturers, distributors, veterinarians and animal owners. VetMall's web site, www.vetmall.com, provides a site to place and receive product orders, and to display and exchange information about animal care, services and products. We purchased Desktop in order to obtain VetMall, which we intended to use to expand our e-commerce model into the veterinary pharmaceutical and over-the- counter product markets. Valley Drug Company. In April 2000, we acquired Valley Drug Company, a full-line, primary wholesale distributor of pharmaceuticals, over-the-counter products, health and beauty care products, and general merchandise. As a result, Valley is now our wholly-owned subsidiary. In connection with the acquisition, Valley stockholders received $1.7 million in cash and 217,225 shares of our common stock. Pending Acquisition - Penner & Welsch On September 13, 2000, we entered into a letter of intent to purchase substantially all of assets of Penner & Welsch, Inc., a wholesale distributor of pharmaceuticals, over-the-counter products and health and beauty care products, headquartered near New Orleans, Louisiana. Also on that date, Penner & Welsch filed a voluntary petition for Chapter 11 relief under the United States Bankruptcy Code. The case is pending in the United States Bankruptcy Court for the Eastern District of Louisiana. Pursuant to the letter of intent, we will work with Penner & Welsch, on an exclusive basis, to formulate a bankruptcy reorganization plan, pursuant to which we plan to purchase, for $750,000 worth of restricted DrugMax common stock, all of Penner & Welsch's assets and/or equity, without its liabilities, while keeping Penner & Welsch's customers in continuous service. In addition, on September 13, 2000, we entered into a management agreement with Penner & Welsch, pursuant to which we will manage the day-to-day operations of Penner & Welsch, in exchange for a management fee equal to a percentage of the gross revenues of Penner & Welsch each month. Also on September 13, 2000, we entered into a financing and security agreement with Penner & Welsch, pursuant to which we have agreed to provide Penner & Welsch with a secured revolving line of credit for the sole purpose of purchasing inventory from us, up to an aggregate amount of $2.5 million as may be requested by Penner & Welsch and as may be allowed by us in our sole discretion. The line of credit is secured by a second lien on substantially all of the assets of Penner & Welsch, second only to Penner & Welsch's primary banking facility, as well as real estate owned by an affiliate of Penner & Welsch. On September 14, 2000, the Bankruptcy Court entered an emergency interim order approving the management agreement and financing and security agreement. However, the bankruptcy plan, including the proposed acquisition, management agreement and financing and security agreement, are still subject to the final approval of the United States Bankruptcy Court for the Eastern District of Louisiana, and we cannot guarantee that the transaction will be completed or, if completed, that we will successfully assimilate the additional personnel, operations, acquired technology and products of Penner & Welsch into our business, or retain key personnel and customers. 34 Management Directors and Executive Officers Our executive officers and directors and their ages and positions as of October 25, 2000 are as follows:
Name Age Position ---- --- -------- Jugal K. Taneja......................... 57 Chairman of the Board and Chief Executive Officer William L. LaGamba...................... 41 President, Chief Operating Officer and Director Ronald J. Patrick....................... 52 Chief Financial Officer, Vice President of Finance, Secretary, Treasurer and Director Stephen M. Watters...................... 33 Director Dr. Howard L. Howell, DDS............... 53 Director Jeffrey K. Peterson..................... 50 Director Joseph Zappala.......................... 67 Director
Pursuant to DrugMax's bylaws, each director of DrugMax serves as a director for a term of one (1) year and until his successor is duly qualified. Officers shall be appointed annually by the Board of Directors (subject to the terms of any employment agreement), at our annual meeting, to hold such office until an officer's successor shall have been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board. There are no family relationships among any of our directors and executive offices. Set forth below is the business experience and other biographical information regarding our directors and executive officers. Jugal K. Taneja serves as our Chairman of the Board and since October 2000 has served as our Chief Executive Officer. He also served as our Chief Executive Officer from inception through April 1995, and again from January 1996 until August 1999. Further, he served at various times over the years as our President and Secretary. In addition to his service to DrugMax, Mr. Taneja operates several other companies. He is presently the Chairman of the Board of Dynamic Health Products, Inc., a position he has held since Dynamic's inception in 1991. Through its wholly owned subsidiaries, which include Go2Pharmacy, Inc. (formerly known as Innovative Health Products, Inc.), Dynamic manufactures and distributes nutritional and health products. Mr. Taneja also serves as a director of Go2Pharmacy. Mr. Taneja holds degrees in Petroleum Engineering, Mechanical Engineering, and a Masters in Business Administration from Rutgers University. William L. LaGamba is a member of our board of directors and has served as our President and Chief Operating Officer since October 2000. From March 2000 to October 2000, he served as our Chief Executive Officer. From November 1999 to October 2000, he also served as our Secretary and Treasurer. From November 1999 to March 2000, he served as our Chief Operating Officer and Vice President. From June 1998 until joining DrugMax in November 1999, Mr. LaGamba had served as Chief Executive Officer of Dynamic. He was also a founder and the President of Becan from its inception in January 1997 until Becan was acquired by Dynamic in June 1998. For 14 years prior to January 1997, Mr. LaGamba served in various capacities for McKesson Drug Company, a large distributor of pharmaceuticals, health and beauty care products and services, and FoxMeyer Drug Company. Ronald J. Patrick is a member of our board of directors and has served as our Chief Financial Officer since our acquisition of Valley in April 2000. He also has served as our Vice President of Finance, Secretary and Treasurer since October 2000. He also has served as Chief Financial Officer of Valley since January 1999. Before becoming Valley's CFO, Mr. Patrick practiced as a Certified Public Accountant and was part owner of a full service accounting firm for the past 20 years. He served as Managing Partner for six of those years and as Coordinator of Consulting Services for the last two years he was with the firm. Mr. Patrick graduated from Gannon College in 1970 with a degree in Business Administration and has been licensed to practice as a Certified Public Accountant since 1974. Stephen M. Watters serves as one of our directors. He was the President and a Director of Nutriceuticals.com Corporation from that company's inception in September 1998, until its merger with and into our 35 company in March 1999. From March 1999 to August 2000, Mr. Watters served as our president. He currently is also a consultant to us. Previously, from September through November 1998, Mr. Watters was Vice President of Finance of Dynamic. Prior to his association with Dynamic, Mr. Watters was in the investment banking and brokerage businesses where he served as Vice President of Sales for Gilford Securities from February 1998 to September 1998; Vice President of Sales for Hobbs, Melville Corp. from November 1997 to February 1998; and as branch manager for sales, with Schneider Securities, Inc. from 1995 to 1997. From April 1992 to March 1995, Mr. Watters was employed by Bancapital Corp. as an investment banker. He received his Executive Masters of Business Administration degree from Case Western Reserve University in 1997. Howard L. Howell, D.D.S. has served as a director since August 1999. Dr. Howell has been managing his private orthodontic dentistry practice since 1977. In addition to the private practice of orthodontics, Dr. Howell is the President of Howell, Whitehead & Associates, P.A., a multi-office private practice group specializing in pediatric dentistry and orthodontics. He also serves as Chief Executive Officer and a Director of Telluride Expeditions Corp., a Colorado- based travel agency, and as a director of Medcom Facilities Inc., a real estate holding company. Dr. Howell received his degree from the Medical College of Virginia. Jeffrey K. Peterson has served as a director since August 1999. From 1997 to the present, Mr. Peterson served as Vice Chairman of the Board of Directors and Executive Vice President of Central European Distribution Corporation, a leading importer and distributor of alcoholic beverages in Poland. Mr. Peterson also handles investor relations for Central European Distribution Corporation. Mr. Peterson is also a co-founder of Central European Distribution Corporation's subsidiary Carey, AGRI International Poland SP Z.O.O., and has served as a member of its management board since its inception in 1990. Prior thereto, Mr. Peterson contracted with African, Middle Eastern, South American and Asian Governments and companies for the supply of American agricultural exports and selected agribusiness products, such as livestock, feed supplements and veterinary supplies. In addition, Mr. Peterson has worked with international banks and with United States governmental entities to facilitate support for exports from the United States. Mr. Peterson served for three years with the United States military in southeast Asia prior to attending the University of South Florida, from which he graduated in 1976. Joseph Zappala has served as a director since April 2000. Since January 1995, Mr. Zappala has served as Chairman and a member of the board of managers of CarePlus, LLC, a growing Medicaid and Child Health Plus health maintenance organization. Mr. Zappala also serves as a director of Go2Pharmacy. Since January 2000, he has served on the Board of Directors of Amedore Homes, Inc., a homebuilding company located in the Capitol Region of New York. Mr. Zappala was on the Boards of Directors of the International Thoroughbreds Association from June 1997 to January 1999 and Miami Subs, Inc. from June 1995 to July 1999. Mr. Zappala was appointed by United States President George Bush and served as the United States Ambassador to Spain from 1989 to 1992. Mr. Zappala has been a Florida-based business executive for over 35 years with experience in various industries, including healthcare, banking, real estate and manufacturing. Key Employees DrugMax has the following key employees: Phillip J. Laird has served as the President of Becan since it was acquired by Dynamic in June 1998. From May 1997 until June 1998, Mr. Laird was the Vice President of the Diabetes Supply Division of Direct Rx, Inc., the predecessor of Dynamic. Mr. Laird was also a retail area sales manager for McKesson Drug Company from November 1996 to May 1997. Similarly, Mr. Laird was a retail area sales manager for FoxMeyer Drug Company, managing approximately 250 retail pharmacies with four sales consultants from May 1994 to May 1997. Mr. Laird received a degree in Business Administration from Robert Morris College, Pennsylvania, in 1983. Willem H. Hamers is the Vice President of Discount Rx, Inc., a subsidiary we acquired in connection with our acquisition of Becan. He has held this position since Becan founded Discount Rx in August 1998. Before becoming President of Discount Rx, Mr. Hamers served as the Executive Vice President of Sales for Penner & Welsch since 1997. Prior thereto, Mr. Hamers was a Sales Manager for the Slidell Division of McKesson Drug Company from 1996 to 1997, and he also was a Sales Manager for the Slidell Division of FoxMeyer Drug Company from 1991 to 1996. 36 Ralph A. Blundo has served as the President of Valley since he acquired the company in January 1999. From 1986 through 1995, Mr. Blundo served as Valley's Director of Sales and from 1996 to 1998 he served as Vice President of Sales. During this period he was responsible for new account development and overall management of the sales staff. Mr. Blundo received a Bachelor of Science degree in Business Administration from Youngstown State University in 1970. John P. Cairns has served as the Vice President of Sales of Valley since January 1999. From 1988 to 1998 Mr. Cairns held the position of Valley's Territory Sales Manager. Prior to joining Valley, he was the Executive Vice President for Mincing Trading Corp, a subsidiary of C. Czarnidow, Ltd., a multi- national commodities trading company. Committees of the Board of Directors We have an Audit Committee of the Board of Directors. The Audit Committee is responsible for, among other things, reviewing our auditing programs, overseeing the quarterly regulatory reporting process, overseeing internal audits as necessary, receiving and reviewing the results of each external audit and reviewing management's response to auditor's recommendations. In January 2000, the Board of Directors appointed Dr. Howard L. Howell and Jeffrey K. Peterson to serve on the Audit Committee. It is anticipated that Joseph Zappala will be appointed in the near future to serve as the third member of the Audit Committee. Messrs. Howell, Peterson and Zappala are all "independent" directors, as that term is defined in the Rules of the National Association of Securities Dealers listing standards. This newly formed Audit Committee did not meet during the fiscal year ended March 31, 2000. On June 12, 2000, the Board of Directors adopted a written charter for the Audit Committee. In accordance with the charter and the rules of the Securities and Exchange Commission, and in connection with the filing of all future Annual Reports on Form 10-KSB, the Audit Committee will review and discuss DrugMax's audited financial statements with management, and it will discuss with our independent auditors the matters required to be discussed by Statements on Auditing Standards. The Audit Committee will also request the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and discuss with the independent auditors their independence. Compensation of Directors Our employee directors do not receive any cash compensation for attending board meetings. Our non-employee directors receive $500 for each meeting of the Board of Directors that they attend, plus reimbursement of their reasonable out- of-pocket expenses incurred in connection with such meetings. Additionally, each non-employee member serving on a committee of the Board of Directors receives a fee of $100 per committee meeting that he or she attends. All directors are eligible to receive stock options under our 1999 Incentive and Non-Statutory Stock Option Plan. Members of the Board who are also employees of DrugMax, or a subsidiary of DrugMax, may be granted Incentive Options when and as approved by the Board of Directors. Non-employee directors are entitled to receive a Non- Statutory Stock Option for the purchase of 3,000 shares of our common stock upon their initial election or appointment to the Board. During the fiscal year ended March 31, 2000, outside directors Howell and Peterson, and former director M. Lisa Shasteen were each granted five-year options for the purchase of 5,000 shares of common stock at an exercise price of $10.00 per share. Messrs. LaGamba and Watters were each granted an option to purchase 50,000 shares. See "Compensation of Executive Officers - Long-term Compensation - Stock Options," and "Management-1999 Stock Option Plan." 37 Compensation of Executive Officers Summary Compensation Table Summary Compensation Table The following summary compensation table sets forth the compensation awarded to, earned by or paid to our Chief Executive Officers in the past three fiscal years. No other executive officers of our company received compensation exceeding $100,000 in any of the past three fiscal years.
Fiscal Year Ended Securities Underlying Name And Principal Position March 31 Salary ($) Options (#) --------------------------- ---------------- ---------- --------------------- Jugal K. Taneja, Chairman of the Board (1) 2000 87,500 200,000 1999 -- -- 1998 -- -- William L. LaGamba, President and Chief Executive Officer (2) 2000 45,000 50,000 1999 -- -- 1998 -- -- Stephen M. Watters, Director (3) 2000 139,423 50,000 1999 -- -- 1998 -- --
(1) Mr. Taneja serves as our Chairman of the Board and since October 2000 has served as our Chief Executive Officer. Previously, he served as our Chief Executive Officer, from our inception in October 1993 to April 1995, and again from January 1996 until August 1999. Compensation for his services to DrugMax commenced in April 1999. (2) Mr. LaGamba is our President and Chief Operating Officer. He also served as our Chief Executive Officer from March 2000 to October 2000. Compensation for his services to DrugMax commenced in November 1999. (3) Mr. Watters is a consultant to DrugMax. He also served as our President from March 1999 to August 2000. From August 1999 to March 2000, Mr. Watters was our Chief Executive Officer. Compensation for his services to DrugMax also commenced in April 1999. Annual Compensation Employment Agreements and Other Arrangements Jugal K. Taneja - We have a consulting agreement with Jugal K. Taneja, our Chairman of the Board and Chief Executive Officer. Mr. Taneja's consulting agreement provides for an initial three-year term ending April, 2002, and an annual base salary of $100,000. From our inception in October, 1993, Mr. Taneja has served DrugMax in multiple capacities, including Chief Executive Officer, President and Secretary, without any compensation prior to April, 1999. It is anticipated that Mr. Taneja will continue to devote approximately twenty-five (25%) of his time to the affairs of DrugMax under his consulting agreement. Mr. Taneja's consulting agreement contains non-competition provisions that prohibit him from competing with us under certain circumstances. The period covered by the non-competition provisions will end three years after Mr. Taneja's termination. William L. LaGamba - Mr. LaGamba is our President and Chief Operating Officer. In January 2000, we entered into an employment agreement with Mr. LaGamba. Mr. LaGamba's employment agreement provides for an initial three-year term ending December 2002, an annual base salary of $150,000, plus an annual performance bonus and stock options as determined by the Board of Directors. Mr. LaGamba's employment agreement also contains standard termination provisions for disability, for cause and for good reason. If the employment agreement is terminated other than for good reason or cause, Mr. LaGamba is entitled to receive his compensation through the end of the term of the agreement. 38 Stephen M. Watters - We have a consulting agreement with Mr. Watters, our former President. The consulting agreement provides for an initial three-year term ending August 2003, an annual consulting fee of $100,000. Mr. Watters' consulting agreement also contains standard termination provisions for disability, for cause and for good reason, and it also contains confidentiality and non-competition provisions that prohibit him from competing with us under certain circumstances. The period covered by the non-competition provisions will end three years after Mr. Watters' termination. Ronald J. Patrick - Mr. Patrick became our Chief Financial Officer following our acquisition of Valley Drug Company. He is also the Chief Financial Officer, Secretary and Treasurer of our wholly-owned subsidiary, Valley. In connection with our acquisition of Valley, DrugMax authorized an employment agreement between Mr. Patrick and Valley. Mr. Patrick's employment agreement with Valley provides for an initial three-year term ending April 2003, an annual base salary of $125,000, plus such health and other benefits as the Board of Directors and/or any compensation and stock option committee of Valley may provide. Mr. Patrick's employment agreement contains standard termination provisions for disability, for cause, and for good reason, and it also contains confidentiality provisions prohibiting him from disclosing DrugMax's confidential information. Ralph A. Blundo - Mr. Blundo is the President of our wholly owned subsidiary Valley Drug Company. In connection with our acquisition of Valley, DrugMax authorized an employment agreement between Mr. Blundo and Valley. Mr. Blundo's employment agreement with Valley provides for an initial three-year term ending April 2003, an annual base salary of $125,000, plus such health and other benefits as the Board of Directors and/or any compensation and stock option committee of Valley may provide. Mr. Blundo's employment agreement contains standard termination provisions for disability, for cause, and for good reason, and it also contains confidentiality provisions prohibiting him from disclosing DrugMax's confidential information. Long-term Compensation Stock Options The following table sets forth information concerning Incentive and Non- Statutory Stock Options granted to the executive officers listed in the Summary Compensation Table above. Messrs. LaGamba and Watters were the only executive officers of DrugMax who were granted options during our fiscal year ended March 31, 2000 under our 1999 Incentive and Non-Statutory Stock Option Plan: OPTION GRANTS IN FISCAL 2000
Percent of Total Name Options Granted Options Granted (3) Exercise Price Expiration Date ---- --------------- ------------------- ---------------- --------------- William L. LaGamba 50,000 (1) 19.5% $13.00 January 11, 2005 Stephen M. Watters 50,000 (2) 19.5% $14.30 January 11, 2005
__________________________ (1) One third of such options become exercisable on each of January 12, 2001, 2002 and 2003. (2) Mr. Watters' options are all currently exercisable. (3) Based solely on the grant of options for an aggregate of 255,800 shares under our 1999 Stock Option Plan. Does not include a warrant granted to Jugal K. Taneja for the purchase of 200,000 shares. See "Management - Loans and Other Affiliated Transactions--Guaranty by Mr. Taneja of Company's Credit Facility." The following table sets forth certain information concerning unexercised options held at March 31, 2000 by the executive officers listed in the Summary Compensation Table above (none of whom exercised any options during fiscal 2000): 39 OPTION VALUES AT MARCH 31, 2000
Number of Unexercised Options Value of Unexercised In-the-Money at March 31, 2000 Options at March 31, 2000 ------------------ ---------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ------------ ------------- William L. LaGamba 0 50,000 0 0 Stephen M. Watters 0 50,000 0 0
1999 Stock Option Plan On August 13, 1999, the Board of Directors adopted the 1999 Stock Option Plan. The purpose of the Plan is to attract, retain, develop and reward superior executive talent by encouraging ownership of our common stock by our officers, directors and other employees. The Plan authorizes the granting of both Incentive Stock Options, as defined under Section 422 of the Internal Revenue Code of 1986, and Non-Statutory Stock Options to purchase common stock. All employees of DrugMax and its subsidiaries are eligible to participate in the Plan. The Plan also authorizes the granting of Non-Statutory Stock Options to non-employee directors and consultants of DrugMax. Pursuant to the Plan, an option to purchase 3,000 shares of our common stock shall be granted automatically to each outside director upon their initial election or appointment to the Board. Any outside director may decline to accept any such option granted to him or her under the Plan. The Board of Directors, or a committee of the Board, shall be responsible for the administration of the Plan. We currently do not have a separate stock option committee. The Plan is presently being administrated by the Board of Directors as a whole. The Board (or option committee) is responsible for determining the terms of each option, including: (a) the directors and employees to whom options will be granted, (b) the number of shares of the common stock covered by each option, (c) the vesting period during which each option will be exercisable, (d) the exercise price, (e) the expiration date, and (f) whether an option will be an Incentive Stock Option or a Non-Statutory Stock Option. The purchase price per share of the common stock under each ISO shall be determined by the Board of Directors, or the stock option committee, provided however, the purchase price shall not be less than the fair market value of the common stock on the date the option is granted, (or 110% of the fair market value in the case of a greater-than-10% stockholder). The price at which shares may be purchased under a Non-Statutory Stock Option may be less than, equal to, or greater than the fair market value of the shares of common stock on the date of such Non-Statutory Stock Option is granted. Options vest in accordance with the terms set forth in the option agreement under which they were granted. However, upon the occurrence of a "change in control" of DrugMax unless otherwise provided in the option agreement, the maturity of all options then outstanding under the Plan will be accelerated automatically, so that all such options will become exercisable in full with respect to all shares that have not been previously exercisable. A "change in control" includes certain mergers, consolidations, and reorganizations, sales of assets, or a dissolution of DrugMax. The Board, or option committee, may in its sole discretion accelerate the date on which any option vests. Incentive Stock Options granted under the Plan may not be transferred, other than by will or the laws of descent and distribution in the event of an optionee's death. Non- Statutory Stock Options may be transferable, to the extent provided in the option agreement under which the Non-Statutory Stock Option is granted. An option will expire on the date determined by the Board of Directors, or option committee, provided however, the expiration date shall not be later than the tenth anniversary of the date on which the option was granted, (or the fifth anniversary in the case of an option granted to a greater-than-10% stockholder). However, upon termination of an optionee's employment with DrugMax (other than in the case of death or a termination of employment due to the disability of the optionee), Incentive Stock Options and Non-Statutory Stock Options will expire ninety (90) days after such termination of employment. The ninety-day expiration period may be waived by the Board of Directors in the case of a Non-Statutory Stock Option. Any option granted to an outside director will remain effective during its entire term, regardless of whether such director continues to serve as a director. The Plan presently authorizes 400,000 shares of our common stock for issuance. As of June 30, 2000, options for an aggregate of 293,300 shares have been granted to 16 employees and 4 outside directors. A total of 40 106,700 shares remain available for issuance under the Plan. Unless sooner terminated, the Plan will expire on August 12, 2009. Loans and Other Affiliated Transactions Dynamic Health Products, Inc. and Go2Pharmacy From September 1998 to November 1999, we operated out of the principal offices of Dynamic Health Products, Inc., in Largo, Florida. Dynamic provided us, without charge, office and warehouse space, and the use of Dynamic's general office equipment. Dynamic is a manufacturer and distributor of proprietary and nonproprietary dietary supplements, over-the-counter drugs, and health and beauty care products. Jugal K. Taneja, a principal stockholder and Chairman of the Board of DrugMax, is also the Chairman of the Board and a principal stockholder of Dynamic. Mr. Taneja has beneficial ownership of approximately 36.3% of the outstanding voting stock of Dynamic. Members of his immediate family own in the aggregate an additional 23.0% of the outstanding voting stock of Dynamic. William L. LaGamba, our President and Chief Operating Officer, is also a stockholder of Dynamic, with beneficial ownership of 14.9% of the outstanding voting stock of Dynamic. We have entered into a management agreement with Dynamic pursuant to which Dynamic provides accounting support services to us in connection with our management responsibilities relating to Penner & Welsch, Inc. Dynamic is entitled to receive one-third of all fees collected by us from Penner & Welsch. See "Business - Pending Acquisition - Penner & Welsch." Go2Pharmacy, Inc. (formerly, Innovative Health Products, Inc.) is a wholly- owned subsidiary of Dynamic, and it conducts all of Dynamic's manufacturing operations. Go2Pharmacy recently filed a registration statement with the Securities and Exchange Commission seeking an initial public offering of its shares of common stock. If such initial public offering is completed, Dynamic will own approximately 42.3% of the outstanding shares of common stock of Go2Pharmacy. We have entered into a First Right to Manufacture Agreement with Go2Pharmacy pursuant to which Go2Pharmacy has agreed to manufacture all products which we require and which it is capable of manufacturing. In addition, we are the exclusive distributor of Lean Protein Chips, a product manufactured by Go2Pharmacy, to all independent pharmacies. Purchases of all products by us from Go2Pharmacy were approximately $580,000 and $24,000 for our fiscal years ended March 31, 2000 and March 31, 1999, respectively, which purchases represent less than 1.5% of the products we purchased in each of such years. Becan Distributors, Inc. Becan Distributors, Inc., together with its wholly owned subsidiary Discount Rx, Inc., was a wholesale distributor of pharmaceuticals, over-the- counter drugs, and health and beauty care products. In November 1999, we acquired Becan from Dynamic. In March 2000, we merged Becan into DrugMax. Accordingly, Discount Rx is now a wholly owned subsidiary of DrugMax. Pursuant to the terms of the purchase agreement for Becan, we acquired all of the outstanding common stock of Becan in exchange for $2 million in cash and 2,000,000 shares of our common stock. In addition, we deposited 1,000,000 shares of our common stock into escrow for future issuance to Dynamic upon the attainment of certain financial targets for the fiscal years ended March 31, 2000 and 2001. Currently, 500,000 shares remain in escrow and 500,000 shares have been returned to us. Merger with Nutriceuticals In March 1999, we acquired Nutriceuticals.com Corporation in a merger transaction pursuant to which we were the surviving corporation. The stockholders of Nutriceuticals received an aggregate of 2,400,000 shares of our Common Stock in the merger. Before the merger, Jugal K. Taneja was the Chief Executive Officer of both corporations. Mr. Taneja was also a principal stockholder of both corporations, having beneficial ownership of approximately 21.0% of the outstanding common stock of Nutriceuticals prior to the merger. Members of his immediate family owned in the aggregate an additional 16.8% of the outstanding common stock of Nutriceuticals before the Merger. As a result of the merger, immediately after the merger, Mr. Taneja and his family collectively held approximately 35.0% of the outstanding common stock of the combined entities. 41 Guaranty by Mr. Taneja of Company's Credit Facility In February 2000, we entered into a revolving credit facility with Merrill Lynch Financial, pursuant to which Merrill Lynch Financial granted us a $5.0 million credit facility. The lender required and obtained a personal guaranty from Jugal K. Taneja, our Chairman of the Board and Chief Executive Officer. In consideration for Mr. Taneja's acting as the guarantor, we granted to Mr. Taneja a warrant to purchase 200,000 shares of our common stock at a price of $16.40 per share, the average closing price over the 30-day period prior to execution of the guaranty. The warrant is exercisable over a three-year period in equal annual amounts. In October 2000, we terminated this credit facility. Indebtedness to Management and Directors In 1999, Mr. Watters and Mr. Taneja, either directly or through affiliates, provided us with loans for working capital in the amount of $80,000 and $70,000, respectively. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (a) a public offering of our common stock or (b) December 31, 1999. Those loans were repaid with the proceeds of the offering we conducted in November 1999. Policy Regarding Loans and Other Affiliated Transactions We currently have three independent directors, and we will maintain at least two independent directors on our Board. All future material affiliated transactions and future loans and loan guarantees with our officers, directors, holders of 5% or more of our voting securities, or their respective affiliates, will be on terms that are as favorable to DrugMax as those generally available from unaffiliated third parties; and all such future transactions and loans, and any forgiveness of such loans, shall be approved or ratified by a majority of our independent directors who do not have an interest in the transactions and who will have access, at our expense, to DrugMax's or independent legal counsel. Further, we do not intend to make any future loans to or guarantee loans on behalf of our officers, directors and employees, other than (a) advances for travel, business expense, and similar ordinary operating expenditures; (b) loans or loan guarantees made for the purchase of our securities; and (c) loans for relocation. 42 Selling Stockholders The following table shows the number of shares of our common stock beneficially owned by each selling stockholder as of September 30, 2000, the number of shares that each selling stockholder will sell in this offering and the number of shares that each selling stockholder will beneficially own upon completion of this offering. The selling stockholders have furnished to us the information set forth below, and this information is accurate to the best of our knowledge. As of September 30, 2000, there were approximately ___________ common shares issued and outstanding.
Beneficial Ownership Prior Beneficial Ownership After to Offering (1) Shares to be Offering (1) Name Shares Percent Sold Shares Percent - ---- ------ ------- ---- ------ ------- Bryan Capital Ltd. Partnership (2) 1,865,500 % 180,000 1,685,500 % SMW Capital Group, L.P. (3) 1,005,000 % 96,000 909,000 % 21/st/ Century Health Care LLC (4) 300,000 % 30,000 270,000 % Manju Taneja (5) 210,491 % 22,000 188,491 % Mandeep Taneja (6) 200,000 % 20,000 180,000 % Mihir Taneja (6) 200,000 % 20,000 180,000 % Ronald J. Patrick (7) 109,629 % 11,000 98,629 % Ralph Blundo (8) 109,629 % 11,000 98,629 % William L. LaGamba (9) 117,667 % 10,000 107,667 %
__________________________________ (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. To our knowledge, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and except as indicated in the other footnotes to this table. (2) The number of shares beneficially owned by Bryan Capital Ltd. Partnership, a Nevada limited partnership, does not include 500,000 shares held in escrow in connection with our acquisition of Becan Distributors, Inc. Mr. Taneja, our Chairman of the board and Chief Financial Officer, owns all of the shares of the general partner of Bryan Capital Ltd. Partnership. See "Business - Recent Material Acquisitions - Becan" and "Management - Loans and Other Affiliated Transactions - Becan Distributors, Inc." (3) Stephen M. Watters, one of our directors, is the sole stockholder of the general partner of SMW Capital Group, L.P. (4) Jugal Taneja, our Chairman of the Board and Chief Executive Officer, is a principal of 21/st/ Century Health Care, LLC. (5) Manju Taneja is the wife of Jugal Taneja, our Chairman of the Board and Chief Executive Officer. (6) Mandeep and Mihir Taneja are the adult children of Jugal Taneja, our Chairman of the Board and Chief Executive Officer. (7) Ronald J. Patrick is our Chief Financial Officer and Treasurer and one of our directors. (8) Ralph Blundo is the President of Valley Drug Company, one of our subsidiaries. (9) Mr. LaGamba is our President and Chief Operating Officer. The number of shares beneficially owned by Mr. LaGamba include 16,667 shares underlying a stock option which is exercisable within 60 days. 43 Security Ownership of Management and Certain Beneficial Owners The following table presents certain information regarding the beneficial ownership of our common stock as of September 30, 2000, by (i) each person known to own beneficially more than 5% of our common stock, (ii) each director and officer of our company, and (iii) all directors and officers as a group. As of September 30, 2000, there were approximately ____________ common shares issued and outstanding.
Amount and Nature of Name and Address of Beneficial Owner Beneficial Owner (1) Percentage of Class ------------------------------------ -------------------- ------------------- Bryan Capital Ltd. Partnership (2) 1,865,500 6950 Bryan Dairy Road Largo, Florida 33777 SMW Capital Group, L.P. 1,005,000 12505 Starkey Road, Suite A, Largo, Florida 33773 Dr. Howard L. Howell (3) 8,000 * William L. LaGamba (4) 117,667 Stephen M. Watters (5) 1,055,000 Ronald J. Patrick 109,629 Jeffrey K. Peterson (6) 5,000 * Jugal K. Taneja (7) 2,409,317 Joseph Zappala -- * All Directors and Officers a group (7 persons) 3,704,613
____________________________ * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. To our knowledge, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and except as indicated in the other footnotes to this table. The business address of each of the directors named above is: c/o DrugMax.com, Inc., 12505 Starkey Road, Suite A, Largo, Florida 33773. (2) The number of shares beneficially owned by Bryan Capital Ltd. Partnership, a Nevada limited partnership, does not include 500,000 shares held in escrow in connection with our acquisition of Becan Distributors, Inc. Mr. Taneja, our Chairman of the Board and Chief Executive Officer, owns all of the shares of the general partner of Bryan Capital Ltd. Partnership. See "Business -Recent Material Acquisitions - Becan" and "Management - Loans and Other Affiliated Transactions - Becan Distributors, Inc." (3) The number of shares beneficially owned by Mr. Howell includes 5,000 shares underlying a Non-Statutory Stock Option which is immediately exercisable. (4) The number of shares beneficially owned by Mr. LaGamba include 16,667 shares underlying a stock option which is exercisable within 60 days. It does not include an additional 33,333 shares under the same option which are not exercisable within 60 days. (5) The number of shares beneficially owned by Mr. Watters includes 1,000,000 beneficially owned by SMW Capital Group, L.P. Mr. Watters owns all of the shares of Summerford Capital, Inc., the general partner of SMW Capital Group, L.P. The number of shares beneficially owned by Mr. Watters also includes 50,000 shares underlying Incentive and Non-Statutory Stock Options which are exercisable within sixty (60) days. (6) The number of shares beneficially owned by Mr. Peterson includes 5,000 shares underlying a Non-Statutory Stock Option which is immediately exercisable. 44 (7) The number of shares beneficially owned by Mr. Taneja includes 1,865,500 shares beneficially owned by Bryan Capital Ltd. Partnership, 300,000 shares held of record by 21st Century Healthcare Fund, LLC, a limited liability company of which Jugal K. Taneja is the principal, 8,994 shares held of record by The First Delhi Trust, a trust established for the benefit of his children, 18,000 shares beneficially owned by Westminster Trust Company, a partnership in which Jugal K. Taneja is the general partner, 1,331 shares held of record by Mr. Taneja, and 215,492 shares held of record by Manju Taneja, his spouse. Mr. Taneja disclaims voting power with respect to the shares held of record by his spouse. 45 Description of Capital Stock Authorized and Outstanding Capital Stock We are authorized to issue up to 24,000,000 shares of common stock and 2,000,000 shares of preferred stock. The following description of our capital stock is not complete and is qualified in its entirety by our articles of incorporation and bylaws, both of which are included as exhibits to the registration statement of which this prospectus forms a part, and by applicable Nevada laws. Common Stock As of June 30, 2000, there were approximately 6,417,754 shares of common stock outstanding held by approximately 550 stockholders of record or approximately 1,800 beneficial holders. Subject to preferences that may be applicable to any outstanding shares of preferred stock and the restrictions imposed under our credit facility, our board of directors may declare a dividend out of funds legally available and the holders of common stock are entitled to receive ratably any such dividends. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in all of our assets remaining after we pay our liabilities and liquidation preferences of any outstanding shares of preferred stock. Holders of our common stock have no preemptive rights or other subscription rights to convert their shares into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. Preferred Stock Our board of directors has the authority, without further action by our stockholders, to issue up to 2,000,000 shares of preferred stock in one or more series and to fix the privileges and rights of each series. These privileges and rights may be greater than those of the common stock. Our board of directors, without further stockholder approval, can issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. This type of "blank check preferred stock" makes it possible for us to issue preferred stock quickly with terms calculated to delay or prevent a change in our control or make removal of our management more difficult. Additionally, if we issue this preferred stock, then the market price of common stock may decrease, and voting and other rights may decrease. However, we will not offer preferred stock to our officers, directors, 5% stockholders, or their respective affiliates, except on the same terms as it is offered to all other existing stockholders or to new stockholders, unless the issuance of preferred stock is approved by a majority of our independent directors who do not have an interest in the transaction and who have access, at our expense, to our or independent legal counsel. We currently have no plans to issue any preferred stock. Warrants In connection with the public offering that we conducted last year, and as additional compensation to the underwriters in that transaction, we granted warrants for the purchase of 150,000 shares of common stock to Kashner, Davidson Securities. The warrants are exercisable, in whole or in part, between November 18, 2000 and November 18, 2004, at an exercise price equal to $16.50 per share (subject to adjustment under certain circumstances). Kashner, Davidson has the option to require us to register the common stock underlying the warrants under certain circumstances. In addition, in connection with this offering, and as additional compensation to the underwriters, we will grant to Utendahl Capital Partners, L.P. (a) a warrant to purchase up to 100,000 shares of common stock at an exercise price of $8.00 and (b) a warrant to purchase up to 200,000 shares of common stock at an exercise price per share equal to 165% of the public offering price of the shares in this offering. The underwriter's warrants will be exercisable for a period of five years after the date of this prospectus. We have granted to Jugal Taneja, our Chairman of the Board and Chief Executive Officer, a warrant to purchase 200,000 shares of our common stock at a price of $16.40 per share, the average closing price over the 30-day period prior to execution of the guaranty. The warrant is exercisable over a three- year period in equal annual amounts. See "Management--Loans and Other Affiliated Transactions." 46 We have entered into a Statement of Work and Network Access Agreement with Purchasepro.com, Inc. dated February 15, 2000. Upon the satisfaction by Purchasepro.com of its obligations under the agreement, we will grant to Purchasepro.com warrants to purchase 200,000 shares of our common stock, with an exercise price of $15.00 per share. Upon issuance, these warrants will be immediately exercisable. We have entered into a consulting agreement with Marc Mazur Consulting, Inc. dated July 7, 2000. Upon the satisfaction by Marc Mazur Consulting of its obligations under the agreement, we will grant to Marc Mazur Consulting warrants to purchase 200,000 shares of our common stock, with an exercise price of $10.00 per share. Upon issuance, these warrants will be immediately exercisable. Indemnification Our bylaws provide that, to the fullest extent permitted by the Nevada Revised Statutes, we may indemnify our directors, officers and employees. Our bylaws further provide that we may similarly indemnify our agents. Our directors enter into indemnification agreements with us, pursuant to which we will indemnify our directors to the fullest extent permitted by law. At present, there is no pending litigation or proceeding involving any of our directors or officers in which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. While these indemnification provisions provide directors with protection from awards for monetary damages for breaches of their duty of care, they do not eliminate such duty. Accordingly, these provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director's breach of his or her duty of care. Transfer Agent and Registrar The transfer agent and registrar for our common stock is Computershare Investors Services. The transfer agent's address is 12039 W. Alameda Parkway, Lakewood, Colorado 80228, and its telephone number is (303) 986-5400. Shares Eligible for Future Sales Sales of a substantial number of shares of common stock in the public market following the offering made by this prospectus could adversely affect market prices prevailing from time to time. Furthermore, sales of substantial amounts of common stock in the public market after various resale restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Based on 6,417,754 shares outstanding on June 30, 2000, there will be 8,017,754 shares of common stock outstanding upon the completion of this offering, assuming the underwriters do not exercise their over-allotment option (excludes the 500,000 shares held in escrow in connection with the Becan acquisition). The 2,000,000 shares sold in this offering will be freely tradeable without restriction under the Securities Act. In addition, approximately _______________ additional shares are freely tradeable without restriction. The remaining ________ shares outstanding upon completion of the offering (excluding 500,000 shares in escrow in connection with the Becan acquisition) will be "restricted securities" as that term is defined in Rule 144 and may not be sold publicly unless they are registered under the Securities Act or are sold pursuant to Rule 144 or another exemption from registration. Of these restricted securities, _________ shares are eligible for immediate sale pursuant to Rule 144, subject to compliance with the volume limitations and other restrictions under Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned "restricted securities" (as defined in Rule 144) for at least one year (including the holding period of any prior owner, except an affiliate) is entitled to sell, within any three month period, a number of shares that does not exceed the greater of (i) one percent of the number of shares of common stock then outstanding, or (ii) the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume and other limitation or notice provisions of Rule 144. In general, under Rule 701 of the Securities Act as currently in effect, any employee, consultant or advisor of ours who purchases shares from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell 47 such shares 90 days after the effective date of our initial public offering (which was completed in June 1998) in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144. In connection with our initial public offering, the holders of 5,038,815 shares of common stock (consisting of our directors, officers, 5% holders and affiliates) entered into lock-up agreements with Kashner Davidson Securities under which they agreed not to offer, sell or otherwise dispose of any such shares of common stock, any options or warrants to acquire shares of common stock or any securities convertible into shares of common stock (or any shares of common stock issuable upon exercise or conversion of securities) owned by them for a period of 18 months after the date of the initial public offering. Kashner Davidson Securities may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to such lock-up agreements. Kashner Davidson Securities has agreed to release the shares the Selling Stockholders propose to sell in this Offering from these lock-up provisions. In addition, to satisfy the requirement of several state securities regulations, Mr. Taneja and all of our current 5% stockholders agreed, in connection with the public offering that we conducted in November, 1999, that they will not, for a period of two (2) years after that date, offer, pledge, sell, contract a sale, grant any option for the sale of, or otherwise dispose of, directly or indirectly, shares of the common stock held by them, or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of common stock. Provided that our stock will be accepted for listing on the NASDAQ National Market System, these lock up arrangements will be terminated simultaneously with the closing of this offering. In connection with this offering, the holders of [_____________] shares of common stock (consisting of our directors, officers, 5% holders and affiliates) have entered into lock-up agreements with Utendahl Capital Partners, L.P. under which they have agreed not to offer, sell or otherwise dispose of any such shares of common stock, any options or warrants to acquire shares of common stock or any securities convertible into shares of common stock (or any shares of common stock issuable upon exercise or conversion of securities) owned by them for a period of 18 months after the date of this prospectus. Utendahl Capital Partners, L.P. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to such lock-up agreements. Utendahl Capital Partners, L.P. currently has no plans to release any portion of the securities subject to such lock-up agreements. Underwriting Subject to the terms and conditions set forth in the underwriting agreement, the underwriter named below, for whom Utendahl Capital Partners, L.P. is acting as representative, have agreed to purchase from DrugMax and the Selling Stockholders, and DrugMax and the Selling Stockholders have agreed to sell to the underwriters, the number of shares of common stock set forth opposite each underwriter's name below, excluding shares set aside for options granted for over-allotments.
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Utendahl Capital Partners, L.P. ================= Total 2,000,000
The underwriting agreement provides that the obligations of the several underwriters thereunder are subject to certain conditions precedent, including the absence of any material adverse change in DrugMax's business and the receipt of certain certificates, opinions and letters from DrugMax's counsel and independent public accountants. The nature of the underwriters' obligation is such that they are committed to purchase and pay for all the shares of common stock if any are purchased. DrugMax has been advised by the representative that the underwriters propose to offer the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to certain securities dealers at such price less a concession not in excess of $[ ] per share. The underwriters may allow, and such selected dealers may also allow, a discount not in excess of $[ ] per share to certain brokers and 48 dealers. After the public offering of the shares, the public offering price and other selling terms may be changed by the representative. No change in such terms shall change the amount of proceeds to be received by DrugMax as set forth on the cover page of this prospectus. The Selling Stockholders and Jugal Taneja, our Chairman of the Board and Chief Executive Officer, have agreed that they will not, without the prior written consent of Utendahl Capital Partners, L.P. (which consent may be withheld in its sole discretion) and subject to certain limited exceptions, offer, pledge, sell, contract to sell, sell any option or contract to purchase, sell short, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, or enter into any swap or similar agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock, for a period of eighteen months after the date of completion of this offering. Utendahl Capital Partners, L.P., on behalf of the underwriters, may, in its sole discretion and at anytime without notice, release all or any portion of the securities subject to these lock-up agreements. In addition, DrugMax has agreed that, for a period of eighteen months after the date of completion of this offering, it will not, without the consent of Utendahl Capital Partners, L.P., make any offering, purchase, or sale or other disposition of any shares of DrugMax's common stock or other securities convertible into or exchangeable or exercisable for shares of common stock (or agreement for such) except for . the grant of options to purchase shares of common stock pursuant to our 1999 Stock Option Plan; . shares of common stock issued pursuant to the exercise of options granted under such plan; . shares issued, options granted or shares purchased in connection with acquisitions; and . pursuant to the exercise of warrants and options outstanding prior to the sale of the common stock in this offering. DrugMax has agreed to issue to the representative, a warrant to purchase up to 100,000 shares of common stock at an exercise price of $8.00. In addition, DrugMax has agreed to issue to the representative, a warrant to purchase up to 200,000 shares of common stock at an exercise price per share equal to 165% of the public offering price of the shares in this offering. The exercise price of the representative's warrants has been determined by negotiations between DrugMax and the representative. The exercise price of the representative's warrants is one of the factors used by the National Association of Securities Dealers, Inc. under its Corporate Financing Rule to determine whether the total compensation paid to an underwriter and its associated and related persons for services in connection with a public offering is excessive. The sole factor considered by DrugMax and the representative in negotiating the exercise price of the representative's warrants in this offering was to select an amount that would not be considered excessive under the National Association of Securities Dealers, Inc.'s Corporate Financing Rule in light of the total compensation payable by DrugMax in connection with this offering. The representative's warrants will be exercisable for a period of five years after the date of this prospectus. The representative's warrants include a "net" exercise provision permitting the holders to pay the exercise price by cancellation of a number of shares with a fair market value equal to the exercise price of the representative's warrants. The holders of the representative's warrants will have no voting, dividend or other stockholder rights until the representative's warrants are exercised. In addition, the underwriters' warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one year from the date of the prospectus, except to officers or partners of the underwriters and members of the selling group and/or their officers or partners. In addition, DrugMax has granted certain rights to the holders of the representative's warrants to register the common stock underlying the representative's warrants under the Securities Act. DrugMax has agreed to pay the representative a non-accountable expense allowance of 1 1/2% of the total offering proceeds from the sale of shares of common stock by them, of which DrugMax has already paid $_________. DrugMax has agreed to retain Utendahl Capital Partners, L.P. as a financial consultant for a period of thirty-six months to commence on the closing of this offering, at a monthly fee of $________ all of which $________ shall be payable in advance on the closing of this offering. Pursuant to this agreement, Utendahl Capital Partners, L.P. will be obligated to provide general financial advisory services to DrugMax on an "as needed" basis 49 with respect to possible future financing or acquisitions by DrugMax and related matters. The agreement does not require Utendahl Capital Partners, L.P. to provide any minimum number of hours of consulting services to DrugMax. Our common stock is currently quoted on the Nasdaq SmallCap Stock Market under the symbol "DMAX." We have applied to have our common stock included for quotation on the Nasdaq National Market, also under the symbol "DMAX." The underwriting agreement provides that DrugMax will indemnify the underwriters and their controlling persons against certain liabilities under the Securities Act or will contribute to payments the underwriters and their controlling persons may be required to make in respect thereof. DrugMax is generally obligated to indemnify the underwriters and their respective controlling persons in connection with losses or claims arising out of any untrue statement of a material fact contained in this prospectus or in related documents filed with the Securities and Exchange Commission or with any state securities administrator or arising out of any omission to state in any of such documents any material fact required to be stated in such documents or necessary to make the statements made in such documents, in light of the circumstances under which they were made, not misleading. In addition, DrugMax is generally obligated to indemnify the underwriters and their respective controlling persons in connection with losses or claims arising out of any breach of any representation, warranty agreement or covenant of DrugMax contained in the underwriting agreement. Legal Matters The validity of the common stock offered hereby will be passed upon for us by [Jones Vargas, Las Vegas, Nevada.] Certain other legal matters will be passed on for us by our counsel, Shumaker, Loop & Kendrick, LLP, Tampa, Florida. Certain legal matters will be passed on for the underwriters by Fowler, White, Gillen, Boggs, Villareal and Banker, P.A., Tampa, Florida. Experts The consolidated financial statements as of and for the year ended March 31, 2000, included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance on the report of such firm given upon their authority as experts in accounting and auditing. Kirkland, Russ, Murphy & Tapp, Clearwater, Florida, independent auditors, have audited DrugMax's consolidated financial statements as of and for the period ended March 31, 1999, as set forth in their report. We have included DrugMax's consolidated financial statements in the prospectus and elsewhere in the registration statement in reliance on Kirkland, Russ, Murphy & Tapp's report, given upon their authority as experts in accounting and auditing. Brimmer, Burek & Keelan LLP, Tampa, Florida, independent auditors, have audited Becan Distributors, Inc.'s consolidated financial statements as of and for the years ended March 31, 1998 and 1999, as set forth in their report. We have included Becan's consolidated financial statements in the prospectus and elsewhere in the registration statement in reliance on Brimmer, Burek & Keelan LLP's report, given upon their authority as experts in accounting and auditing. Brimmer, Burek & Keelan LLP, Tampa, Florida, independent auditors, have audited VetMall, Inc.'s consolidated financial statements as of and for the period ended March 31, 2000, as set forth in their report. We have included VetMall's consolidated financial statements in the prospectus and elsewhere in the registration statement in reliance on Brimmer, Burek & Keelan LLP's report, given upon their authority as experts in accounting and auditing. Brimmer, Burek & Keelan LLP, Tampa, Florida, independent auditors, have audited Desktop Corporation's consolidated financial statements as of and for the years ended March 31, 2000, 1999 and 1998 as set forth in their report. We have included Desktop's consolidated financial statements in the prospectus and elsewhere in the registration statement in reliance on Brimmer, Burek & Keelan LLP's report, given upon their authority as experts in accounting and auditing. 50 Brimmer, Burek & Keelan LLP, Tampa, Florida, independent auditors, have audited Valley Drug Company's financial statements as of December 31, 1999, 1998 and 1997, as set forth in their report. We have included Valley's consolidated financial statements in the prospectus and elsewhere in the registration statement in reliance on Brimmer, Burek & Keelan LLP's report, given upon their authority as experts in accounting and auditing. Change In Independent Auditors On February 4, 2000, DrugMax engaged Deloitte & Touche LLP as its independent auditors for the fiscal year ended March 31, 2000, replacing the firm of Kirkland, Russ, Murphy & Tapp, CPAs, which served as DrugMax's independent auditors for the fiscal year ended March 31, 1999. The change was approved by DrugMax's audit committee. The reason for the change to a global firm was to better position DrugMax for access to the public capital markets. The report of Kirkland, Russ, Murphy & Tapp, CPAs for the fiscal year ended March 31, 1999 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. We believe there were no disagreements with Kirkland, Russ, Murphy & Tapp, CPAs within the meaning of Instruction 4 to Item 304 of Regulation S-B on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure in connection with the audit of DrugMax's financial statements for the fiscal year ended March 31, 1999 or for any subsequent interim period, which disagreements if not resolved to their satisfaction would have caused Kirkland, Russ, Murphy & Tapp, CPAs to make reference to the subject matter of the disagreements in connection with its report. During the two most recent fiscal years and through present, there have been no reportable events (as defined in Item 304(a)(1)(iv) of Regulation S-B) of the type required to be disclosed by that section. DrugMax had not consulted with Deloitte & Touche LLP regarding either (a) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on DrugMax's financial statements; or (b) any matter that was either the subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions) or a reportable event (as defined in Item 304(a)(1)(iv) of Regulation S-B). Additional Information DrugMax is subject to the informational requirements of the Securities Exchange Act of 1934, and in accordance therewith files reports, proxy or information statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following regional offices: Seven World Trade Center, New York, New York 10048, and Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.20549, at prescribed rates. In addition, the Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web sit is http://www.sec.gov. DrugMax has filed with the Commission, a registration statement on Form SB- 2 under the Securities Act of 1933 with respect to the common stock being offered hereby. As permitted by the rules and regulations of the Commission, this prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to DrugMax and the common stock offered hereby, reference is made to the registration statement, and such exhibits and schedules. A copy of the registration statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at the addresses set forth above, and copies of all or any part of the registration statement may be obtained from such offices upon payment of the fees prescribed by the Commission. In addition, the registration statement may be accessed at the Commission's web site. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. 51 INDEX TO FINANCIAL STATEMENTS Audited Financial Statements: Consolidated Financial Statements of DrugMax.com, Inc. and Subsidiaries
Page ---- Independent Auditors' Report of Deloitte & Touche LLP..................................... F- Independent Auditors' Report of Kirkland, Russ, Murphy & Tapp............................. F- Consolidated Balance Sheets as of March 31, 2000 and 1999................................. F- Consolidated Statements of Operations for the year ended March 31, 2000 and for the period from September 8, 1998 (date of inception) to March 31, 1999................................................... F- Statement of Changes in Net Deficiency in Liquidation for the period From April 1, 1998 to September 7, 1998................................................. F- Consolidated Statements of Stockholders' Equity for the years ended March 31, 2000 and 1999................................................................. F- Consolidated Statements of Cash Flows for the year ended March 31, 2000 and for the period from September 8, 1998 (date of inception) to March 31, 1999................................................... F- Notes to Consolidated Financial Statements................................................ F- Financial Statements of Valley Drug Company Independent Auditors' Report.............................................................. F- Balance Sheets as of December 31, 1999, 1998 and 1997..................................... F- Statements of Operations for the years ended December 31, 1999, 1998 and 1997............. F- Statement of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997........................................................ F- Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........................................................ F- Notes to Financial Statements............................................................. F- Consolidated Financial Statements of Desktop Corporation and Subsidiary Independent Auditors' Report............................................................... F- Consolidated Balance Sheets as of March 31, 2000, 1999 and 1998............................ F- Consolidated Statements of Operations for the Years Ended March 31, 2000, 1999 and 1998................................................ F- Consolidated Statements of Changes in Stockholders' Equity (Deficit) For the Years Ended March 31, 2000, 1999 and 1998........................................ F- Consolidated Statements of Cash Flows for the Years Ended March 31, 2000, 1999 and 1998............................................................ F- Notes to Consolidated Financial Statements................................................. F-
Financial Statements of VetMall, Inc. Independent Auditors' Report............................................................... F- Balance Sheet as of March 31, 2000......................................................... F- Statement of Operations for the period from June 28, 1999 (date of inception) to March 31, 2000.................................................... F- Statement of Changes in Stockholders'/Members' Equity for the period From June 28, 1999 (date of inception) to March 31, 2000................................. F- Statement of Cash Flows for the period from June 28, 1999 (date of inception) to March 31, 2000.................................................... F- Notes to Financial Statements.............................................................. F- Consolidated Financial Statements of Becan Distributors, Inc. Independent Auditors' Report............................................................... F- Consolidated Balance Sheets as of March 31, 1998 and 1999 and September 30, 1998 and 1999 (unaudited).................................................. F- Consolidated Statements of Operations as of March 31, 1998 and 1999 and September 30, 1998 and 1999 (unaudited).................................................. F- Consolidated Statements of Changes in Stockholder's Equity as of March 31, 1998 and 1999 and September 30, 1998 and 1999 (unaudited).................................................. F- Consolidated Statements of Cash Flows as of March 31, 1998 and 1999 and September 30, 1998 and 1999 (unaudited).................................................. F- Notes to Financial Statements.............................................................. F- Unaudited Condensed Financial Statements: DrugMax.com, Inc. and Subsidiaries Condensed Consolidated Balance Sheets as of June 30, 2000 and March 31, 2000............... F- Condensed Consolidated Statements of Operations for the three months ended June 30, 2000 and 1999................................................................... F- Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2000 and 1999................................................................... F- Notes to Condensed Consolidated Financial Statements ...................................... F- Valley Drug Company Balance Sheets as of March 31, 1999 and 2000............................................... F- Statements of Operations for the three months ended March 31, 1999 and 2000................ F- Statements of Cash Flows for the three months ended March 31, 1999 and 2000................ F- Notes to Financial Statements.............................................................. F- Unaudited Pro Forma Consolidated Financial Information for DrugMax.com, Inc.: Basis of Presentation of Unaudited Pro Forma Condensed Consolidated Statement of Operations for Year Ended March 31, 2000.............................................. F- Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Year Ended March 31, 2000........................................................ F- Basis of Presentation of Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Three Months Ended June 30, 2000................................................. F- Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Three Months Ended June 30, 2000................................................. F-
F-2 INDEPENDENT AUDITORS' REPORT To the Stockholders DrugMax.com, Inc.: We have audited the accompanying consolidated balance sheet of DrugMax.com, Inc. and subsidiaries (the "Company") (formerly known as Nutriceuticals.com Corporation) as of March 31, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2000, and the results of its operations and its cash flows for the year ended March 31, 2000 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 13, the accompanying consolidated financial statements for the year ended March 31, 2000 have been restated. /s/ DELOITTE & TOUCHE LLP - ------------------------- DELOITTE & TOUCHE LLP Certified Public Accountants Tampa, Florida June 26, 2000 (June 30, 2000 as to Note 13 and October 27, 2000 as to Note 12) F-3 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors Nutriceuticals.com Corporation: We have audited the accompanying consolidated balance sheet of Nutriceuticals.com Corporation, as of March 31, 1999, and the related consolidated statement of operations, stockholders' equity and cash flows for the period from September 8, 1998 (date of inception) to March 31, 1999, and the related statement of changes in net deficiency in liquidation for the period from April 1, 1998 to September 7, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nutriceuticals.com Corporation as of March 31, 1999, and results of its operations and its cash flows for the period from September 8, 1998 (date of inception) to March 31, 1999, and results of its changes in net deficiency in liquidation for the period from April 1, 1998 to September 7, 1998, in conformity with generally accepted accounting principles. /s/ KIRKLAND, RUSS, MURPHY & TAPP - --------------------------------- KIRKLAND, RUSS, MURPHY & TAPP Clearwater, Florida April 26, 1999 F-4 DRUGMAX.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 2000 and 1999
2000 1999 ---------------- ------------- ASSETS Current assets: .................................... Cash and cash equivalents ......................... $ 6,020,129 $ 56,986 Accounts receivable, net of allowance of $113,282 and $0 ................................ 4,106,105 9,278 Inventory ......................................... 1,416,241 16,303 Due from affiliates ............................... 13,564 5,171 Prepaid expenses and other current assets ......... 126,542 -- ------------ ---------- Total current assets ............................ 11,682,581 87,738 Property and equipment, net ........................ 693,340 47,500 Intangible assets, net ............................. 26,090,635 -- Notes receivable, net .............................. 37,614 -- Deposits ........................................... 9,742 380 ------------ ---------- Total assets ....................................... $ 38,513,912 $ 135,618 ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................. $ 3,170,890 $ 80,186 Accrued expenses .................................. 442,598 17,505 Credit lines payable .............................. 2,391,095 -- Note payable ...................................... 4,872 -- Due to affiliates ................................. 511,717 -- ------------ ---------- Total current liabilities ....................... 6,521,172 97,691 ------------ ---------- Commitments and contingencies (Note 8) Stockholders' equity: Preferred stock, $.001 par value; 2,000,000 shares authorized; no preferred shares issued or outstanding .................... -- -- Common stock, $.001 par value; 24,000,000 shares authorized; 6,200,499 and 2,675,514 shares issued and outstanding ................................. 6,202 2,677 Additional paid-in capital ........................ 34,079,957 139,725 Accumulated deficit ............................... (2,093,419) (104,475) ------------ ---------- Total stockholders' equity ...................... 31,992,740 37,927 ------------ ---------- Total liabilities and stockholders' equity ......... $ 38,513,912 $ 135,618 ============ ==========
See accompanying notes to consolidated financial statements. F-5 DRUGMAX.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended March 31, 2000 and for the Period from September 8, 1998 (date of inception) through March 31, 1999
September 8, 1998 (date of inception) Year Ended through March 31, March 31, 2000 1999 ----------------- -------------------- Revenues ................................................ $ 21,050,547 $ 37,118 Cost of goods sold ...................................... 20,906,771 14,496 ------------- ----------- Gross profit ......................................... 143,776 22,622 Selling, general and administrative expenses ............ 2,076,653 128,858 ------------- ----------- Operating loss .......................................... (1,932,877) (106,236) ------------- ----------- Other income (expense): Interest income ........................................ 144,340 1,761 Interest expense ....................................... (107,095) -- Other expense .......................................... (93,312) -- ------------- ----------- Total other income (expense) ............................ (56,067) 1,761 ------------- ----------- Net loss ................................................ $ (1,988,944) $ (104,475) ============= =========== Basic and diluted net loss per share - Year ended March 31, 2000 as restated (see Note 13) ......................................... $ (.51) $ (.08) ============= =========== Basic and diluted weighted average number of common shares outstanding - Year ended March 31, 2000 as restated (see Note 13) ......................................... 3,875,445 1,372,230 ============= ===========
See accompanying notes to consolidated financial statements. F-6 DRUGMAX.COM, INC. STATEMENT OF CHANGES IN NET DEFICIENCY IN LIQUIDATION For the Period from April 1, 1998 through September 7, 1998
Period from April 1, 1998 to September 7, 1998 ------------------ Decreases in net assets in liquidation: Professional fees ...................................................... $ (3,875) Office expense ......................................................... (60) ---------- Decrease in net assets in liquidation ................................... (3,935) Beginning net liabilities in liquidation ................................ (8,663) ---------- Ending net liabilities in liquidation ................................... $ (12,598) ========== Loss per share: Loss attributable to common stockholders ............................... $ (3,935) ========== Net loss per common share (basic and diluted) .......................... $ (.02) ========== Weighted average common shares outstanding (basic and diluted) ......... 175,514 ==========
See accompanying notes to consolidated financial statements. F-7 DRUGMAX.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended March 31, 2000 and March 31, 1999
Additional Net Total Common Paid-in Accumulated Deficiency in Stockholders' Stock Capital Deficit Liquidation Equity ---------- ---------------- ----------------- --------------- ---------------- Balances at March 31, 1998, on the liquidation basis of accounting ........... $ -- $ -- $ -- $ (8,663) $ (8,663) Loss attributable to common stockholders prior to merger .............. -- -- -- (3,935) (3,935) Recapitalization at date of merger ......... 177 (12,775) -- 12,598 -- Initial capital contribution, 2,000,000 shares .................................... 2,000 28,000 -- -- 30,000 Sale of 400,000 shares of common stock ..................................... 400 99,600 -- -- 100,000 Issuance of 100,000 shares for acquisition of Healthseek ................. 100 24,900 -- -- 25,000 Net loss ................................... -- -- (104,475) -- (104,475) ------- ------------ ------------- --------- ------------ Balances at March 31, 1999 ................. 2,677 139,725 (104,475) -- 37,927 Issuance of 20,000 shares for acquisition of domain name ................ 20 39,980 -- -- 40,000 Issuance of 2,000,000 shares for acquisition of Becan ...................... 2,000 19,998,000 -- -- 20,000,000 Issuance of 1,380,000 shares for public offering net of offering costs (includes 150,000 warrants issued to underwriters) .......................... 1,380 11,847,874 -- -- 11,849,254 Issuance of 50,000 shares for acquisition of Desktop .................... 50 821,850 -- -- 821,900 Issuance of 49,985 shares to retire Desktop debt .............................. 50 821,603 -- -- 821,653 Issuance of 25,000 shares for acquisition of 20% of VetMall ............. 25 410,925 -- -- 410,950 Net loss ................................... -- -- (1,988,944) -- (1,988,944) ------- ------------ ------------- --------- ------------ Balances at March 31, 2000 ................. $ 6,202 $ 34,079,957 $ (2,093,419) $ -- $ 31,992,740 ======= ============ ============= ========= ============
See accompanying notes to consolidated financial statements. F-8 DRUGMAX.COM, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Year Ended March 31, 2000 and for the Period from September 8, 1998 (date of inception) through March 31, 1999
For the Period from September 8, 1998 For the Year (date of inception) Ended through March 31, 2000 March 31, 1999 ---------------- -------------------- Cash flows from operating activities: Net loss ....................................................................... $ (1,988,944) $ (104,475) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .................................................. 520,927 2,500 Impairment of intangible asset ................................................. 31,667 -- Bad debt expense ............................................................... 115,271 -- Changes in operating assets and liabilities: Accounts receivable .......................................................... (1,917,319) (9,278) Inventory .................................................................... (188,560) (16,303) Due from affiliates .......................................................... (8,393) (5,171) Prepaid expenses and other current assets .................................... (80,487) -- Note receivable .............................................................. 16,120 -- Deposits ..................................................................... (8,562) (380) Accounts payable ............................................................. 834,977 69,311 Accrued expenses ............................................................. (474,545) 1,068 ------------ ---------- Net cash used in operating activities .......................................... (3,147,848) (62,728) Cash flows from investing activities: Purchases of property and equipment .......................................... (182,634) (15,000) Increase in intangible assets ................................................ (4,584) -- Cash paid for acquisitions, net .............................................. (3,250,045) -- ------------ ---------- Net cash used in investing activities .......................................... (3,437,263) (15,000) Cash flows from financing activities: Net change under revolving line of credit agreements ......................... 2,391,095 -- Proceeds from issuance of long-term obligations .............................. 23,603 -- Payments of long-term obligations ............................................ (1,725,854) -- Proceeds from related party obligations ...................................... 200,000 -- Payments of related party obligations ........................................ (200,000) -- Initial capital contributions ................................................ -- 30,000 Proceeds from affiliates ..................................................... 10,156 -- Proceeds from issuance of common stock ....................................... 11,849,254 100,000 ------------ ---------- Net cash provided by financing activities ...................................... 12,548,254 130,000 ------------ ---------- Net increase in cash and cash equivalents ...................................... 5,963,143 52,272 Cash and cash equivalents at beginning of period ............................... 56,986 4,714 ------------ ---------- Cash and cash equivalents at end of period ..................................... $ 6,020,129 $ 56,986 ============ ========== Supplemental disclosure of cash flow information: Cash paid for interest ........................................................ $ 96,587 $ -- ============ ========== Cash paid for income taxes .................................................... $ -- $ -- ============ ========== Issuance of 2,000,000 shares of common stock for the acquisition of Becan ..... $ 20,000,000 $ -- ============ ========== Issuance of 25,000 shares of common stock for the acquisition of 20% of VetMall .................................................................... $ 410,950 $ -- ============ ========== Issuance of 50,000 shares of common stock for the acquisition of Desktop ...... $ 821,900 $ -- ============ ========== Issuance of 49,985 shares of common stock to retire Desktop debt .............. $ 821,653 $ -- ============ ========== Issuance of 20,000 shares of common stock to purchase domain name ............. $ 40,000 $ -- ============ ==========
See accompanying notes to consolidated financial statements. F-9 DRUGMAX.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2000 AND 1999 NOTE 1 -- BUSINESS AND HISTORY Business DrugMax.com, Inc. ("DrugMax") is a business-to-business on-line trade exchange for pharmaceuticals, over-the-counter products (OTC), health and beauty aids (HBA), nutritional supplements and pet care products. DrugMax.com, Inc. brings retailers, manufacturers, wholesalers and major end-users into a single, efficient marketplace for buying, selling and industry news. DrugMax also derives a significant portion of revenue from traditional full-line wholesale distribution business. History DrugMax was originally incorporated on October 18, 1993, as a Nevada corporation under the name of NuMed Surgical, Inc. ("NuMed"). In March 1999, NuMed's name was changed to Nutriceuticals.com Corporation ("Nutriceuticals"). In January 2000, Nutriceuticals' name was changed to DrugMax. NuMed was engaged in the research, development and distribution of medical instruments and surgical supplies to the health care market since February 1991 at which time NuMed operated as a division of NuMed Home Health Care. Effective March 31, 1997, NuMed adopted a plan of liquidation in which it sold its major product line and subsequently disposed of all its operating assets by March 31, 1998. Effective March 1999, NuMed acquired all of the outstanding common stock of Nutriceuticals, which was organized in the State of Florida on September 8, 1998 (date of inception). Nutriceuticals is engaged in the retailing of nutritional supplements via the Internet. For accounting purposes, the acquisition has been treated as an acquisition of NuMed by Nutriceuticals and as a recapitalization of Nutriceuticals. Additionally, Nutriceuticals was merged into NuMed and NuMed changed its name to Nutriceuticals. Mr. Jugal K. Taneja, a principal shareholder and director of DrugMax, had beneficial ownership of approximately 28% of NuMed prior to the merger and approximately 21% of Nutriceuticals after the merger. As a result of the merger, each issued and outstanding share of Nutriceutical's common stock was converted into one share of NuMed's common stock. The results of operations of the consolidated companies are reflected as if the above transaction took place at September 8, 1998 (date of inception). Consequently, for comparative purposes, the consolidated financial statements have been presented as if DrugMax had been a single entity for all periods presented. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of DrugMax (formerly known as Nutriceuticals and Numed) and its wholly-owned subsidiaries: Healthseek.com Corporation ("Healthseek"); Becan Distributors, Inc. and its subsidiary Discount RX, Inc. (collectively, "Becan"); and Desktop Corporation and its subsidiary Desktop Ventures, Inc. (collectively, "Desktop"), as well as its 70% owned subsidiary, VetMall LLC ("VetMall"), (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date F-10 of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers cash on hand and amounts on deposit with financial institutions which have original maturities of three months or less to be cash and cash equivalents. Accounts Receivable Accounts receivable are due primarily from independent pharmacies via traditional distribution channels and from companies and individuals via e-commerce. Inventory Inventory is stated at the lower of cost of market. Cost is determined using the first-in, first-out basis of accounting. Property and Equipment Property and equipment are stated at cost. Provision for depreciation is computed using the straight line method over the estimated useful lives ranging from three to seven years. Maintenance and repairs are charged to operations. Additions and betterments which extend the useful lives of property and equipment are capitalized. Upon retirement or disposal of the operating property and equipment, the cost and accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in operations. Computer Software In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". This SOP is effective for fiscal years beginning after December 15, 1998 and requires capitalization of certain costs of computer software developed or obtained for internal use. Computer software are stated at cost less accumulated amortization. Amortization is recorded using the straight-line method over an estimated useful life of three to five years. Intangible Assets Intangible assets consist primarily of the excess of cost over the fair value of net assets acquired (goodwill) relating to the acquisitions (see Note 2). The excess of cost over net assets acquired is amortized over 15 years for the acquisition of Becan and 5 years for the acquisitions of Desktop and VetMall using the straight-line method. Accumulated amortization totaled $485,046 at March 31, 2000. Impairment of Long-Lived Assets As events and circumstances change, the Company evaluates the recoverability of the net carrying value of its property and equipment and its intangible assets by comparing the carrying values to the estimated future undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The impairment write-down would be the difference between the carrying amounts and the fair value of these assets. A loss on impairment would be recognized by a charge to earnings. Income Taxes The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax F-11 assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recorded or settled. Valuation allowances are established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. Earnings (Loss) Per Common Share Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. The Company does not have any dilutive shares outstanding. Stock Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation", which is effective for fiscal years beginning after December 15, 1995. Under SFAS No. 123, the Company may elect to recognize stock-based compensation expense based on the fair value of the awards or to account for stock-based compensation under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and disclose in the consolidated financial statements the effects of SFAS No. 123 as if the recognition provisions were adopted. The Company has adopted the recognition provisions of APB Opinion No. 25. Fair Value of Financial Instruments The estimated fair value of amounts reported in the consolidated financial statements has been determined by using available market information and appropriate valuation methodologies. The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. Revenue Recognition The Company recognizes revenue when goods are shipped or when services are provided. Revenue from banner advertising is recognized ratably over the period the advertising is on the website. New Accounting Standards The Financial Accounting Standards Board recently issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 defers for one year the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The rule now will apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 137 permits early adoption as of the beginning of any fiscal quarter after its issuance. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, of firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not completed its evaluation of the impact of SFAS No. 133, if any, on the consolidated financial statements. F-12 NOTE 2 -- ACQUISITIONS Effective March 31, 1999, the Company acquired Healthseek, a Massachusetts corporation. Healthseek is a health care community website providing information to health care professionals and consumers. The acquisition was accounted for using the purchase method of accounting. The Company acquired all of the common stock of Healthseek, in exchange for 100,000 shares of voting common stock at $.25 per share and $10,000 cash. In consideration of the sale and transfer of the shares, the Company acquired the registered domain name Healthseek and all assets, copyrights and other documentation relating to the website and assumed all costs and expenses related to the ongoing maintenance of the website. Healthseek did not have significant historical assets, liabilities or revenues and expenses during its limited operating history. The purchase price was allocated to Healthseek's website. Healthseek is a wholly-owned subsidiary of the Company. On November 26, 1999, the Company acquired all the issued and outstanding capital stock of Becan, an Ohio corporation, incorporated in 1997, from Dynamic Health Products, Inc. ("Dynamic"), an affiliate of Jugal K. Taneja, a principal shareholder and director of the Company, in exchange for 2,000,000 shares of restricted common stock of the Company (with an estimated fair value of $10.00 per share) and $2,000,000 cash. Additional consideration of 1,000,000 shares of common stock of the Company was placed into escrow for future issuance to Dynamic, upon the attainment by Becan of certain financial targets for the fiscal years ending March 31, 2000 and 2001. Becan did not attain the financial target for the year ending March 31, 2000 and 500,000 shares were returned from escrow to the Company. The remaining 500,000 shares are still held in escrow pending the attainment of certain financial targets for the year ending March 31, 2001. Becan is a wholesale distributor of pharmaceutical products and to a lesser extent, over-the-counter drugs and health and beauty care products. On March 20, 2000, the Company acquired all the issued and outstanding capital stock of Desktop in exchange for 50,000 shares of the Company's common stock which includes 20,000 contingent shares. In addition, the following additional consideration was paid: (i) $100,000 and 31,176 shares of the Company's common stock at $16.44 per share to satisfy obligations owed to HCT Capital Corp. ("HCT") by Desktop and VetMall LLC ("VetMall"), an entity owned 50% by Desktop, and (ii) 8,938 and 9,871 shares of the Company's common stock at $16.44 per share issued to Messrs. Fagala and Miller, respectively, to satisfy outstanding obligations of Desktop or VetMall. Desktop is an internet e-commerce solutions provider specializing in the design, development and delivery of technology solutions by providing custom programming services and web hosting services. The Desktop acquisition agreement assigns 20,000 shares of the sellers' proceeds to a holdback agent. These contingent shares are to be held in escrow, subject to the indemnification provisions of the agreement, until September 20, 2000. After September 20, 2000, any shares held by the holdback agent which have not been used to offset certain liabilities are to be released to the selling shareholders. The acquisition agreement specified that the purchase price would be adjusted based on changes in the audited liabilities of Desktop. The Company and the selling shareholders of Desktop are currently negotiating the amount of the purchase price adjustments as each have interpreted the definition of liabilities differently and, thus, the purchase price may be adjusted once an agreement is reached. As of March 31, 2000, the Company has recorded the purchase price related to the Desktop acquisition based on the 99,985 shares issued. VetMall was founded in June 1999 as a Nevada limited liability corporation known as VetMall LLC, which merged with VetMall, Inc. on March 20, 2000. The company is an internet-based consumer pet care product sales distributor. VetMall maintains a web site whereby consumers can order pet care products which are then shipped directly by the manufacturer. The products are primarily supplied by one vendor who is a 30% shareholder in VetMall. In addition, VetMall derives income from advertisers on its web site and from veterinarians subscribing to listing on its web site. In addition, upon (i) the closing of any initial public offering (the "IPO") of VetMall or its successors, (ii) the sale by the Company of all of its capital stock of Vetmall, or (iii) the sale by VetMall of all or substantially all of its assets, the Company will either (A) issue to the sellers that number of shares of the VetMall common stock which, when multiplied by the closing price of VetMall's common stock on the date the IPO or the sale closes, exceeds $4,800,000, or (B) pay to the sellers 16% of 50% of the proceeds of the F-13 closing of a direct sale to a third party of substantially all of the assets of VetMall or its successors, whichever of (A) or (B) has a lower value based on the IPO or sales price of VetMall common stock and the closing price of VetMall's common stock on the date that the IPO is declared effective by the Securities and Exchange Commission or the closing of the sale has occurred. Simultaneously with the acquisition described above, the Company purchased from W.A. Butler ("Butler") 2,000 membership shares of VetMall, which shares constituted 20% of the issued and outstanding membership shares of VetMall, in exchange for the payment of $1,000,000 cash plus the issuance to Butler of 25,000 shares of Company common stock. As a result of the acquisitions described above, the Company owns through its ownership of Desktop, a 50% indirect interest in VetMall, together with a 20% direct interest in VetMall. The business combinations of Becan, Desktop and VetMall were accounted for by the purchase method of accounting in accordance with APB Opinion No. 16. The results of operations of the above named businesses are included in the consolidated financial statements from their respective purchase dates. The Company acquired the following assets and liabilities (net of cash received of $52,705) in the above business combinations: Accounts receivable ................... $ 2,294,779 Inventory ............................. 1,211,378 Property and equipment ................ 489,091 Other assets .......................... 100,589 Goodwill .............................. 26,572,760 Assumption of liabilities ............. (5,364,049) ------------- Net value of purchased assets ......... 25,304,548 Value of common stock issued .......... (22,054,503) ------------- Cash paid for acquisitions ............ $ 3,250,045 ============= The unaudited pro forma effect of these acquisitions on the Company's revenues, net loss and net loss per share, had the acquisitions occurred on September 8, 1998 and April 1, 1999 is as follows:
For the Period From September 8, 1999 For the Year (Date of Inception) Ended through March 31, 2000 March 31, 1999 ---------------- ----------------------- Revenues ..................................... $ 55,721,470 $ 32,993,811 Net loss ..................................... (4,504,407) (2,042,301) Basic and diluted net loss per share ......... $ (.94) $ (1.49)
On April 19, 2000, DrugMax Acquisition Corporation ("Buyer"), a wholly owned subsidiary of DrugMax, Valley Drug Company ("Valley"), Ronald J. Patrick ("Patrick") and Ralph A. Blundo ("Blundo", and together with Patrick, the "Sellers") signed a Merger Purchase Agreement (the "Agreement"). In connection with the merger, Messrs. Patrick and Blundo, the sole shareholders of Valley, received an aggregate of 226,666 shares of the Company's common stock and cash in the amount of $1,700,000. Until such time as their shares of the Company may be sold pursuant to Rule 144 of the Securities and Exchange Commission, Messrs. Patrick and Blundo were granted the right to include their shares in any registration filed by the Company. Concurrent with the merger, Messrs. Patrick and Blundo each deposited 11,333 shares of the Company's common stock with an escrow agent (the "Holdback Shares"). If the stockholders' equity of Valley on April 19, 2000 is less than $541,827, the Company will have the right to direct the escrow agent to return some or all of the 22,666 Holdback Shares back to the Company. If the stockholders' equity of Valley on April 19, 2000 is greater than $541,827, the escrow agent will release all of the Holdback Shares to Messrs. Patrick and Blundo. The Company will account for the acquisition of Valley as a purchase. The unaudited pro forma effect of the Valley acquisition on the Company's revenues, net loss and net loss per share, had the acquisition occurred on September 8, 1998 and April 1, 1999 is shown below. For purposes of these pro forma computations (i) Valley's year end financial statements for their years ended December 31, 1999 and 1998 were used and (ii) Valley's results were combined with the pro forma effect of the other acquisitions shown above.
For the Period For the Year From September 8, 1998 Ended (Date of Inception) through March 31, 2000 March 31, 1999 ---------------- ---------------------------- Revenues ..................................... $106,293,657 $ 80,034,293 Net loss ..................................... (4,490,015) (1,205,450) Basic and diluted net loss per share ......... $ (.89) $ (.88)
On April 19, 2000, Desktop distributed all of its shares of VetMall to DrugMax, resulting in DrugMax then directly owning 70% of VetMall. Subsequent to March 31, 2000, VetMall ceased selling web site subscriptions to veterinarians in order to focus its efforts on the development of its new web site. NOTE 3 -- RECEIVABLES, NET At March 31, 2000 and 1999, accounts receivable of the Company consist of the following: 2000 1999 ---- ---- Distribution .................................. $4,219,387 $9,278 Less allowance for doubtful accounts .......... (113,282) -- ---------- ------ Total ......................................... $4,106,105 $9,278 ========== ====== In connection with the acquisition of Becan, the Company recorded a note receivable from a customer in the original amount of $53,734. The note bears interest at 12% and requires payments of $2,500 per month, beginning on May 20, 1999, until all principal and interest is paid in full. As no payments have been received on the note, in March 2000, a $16,120 allowance was recorded based on management's estimate of the amount which would be ultimately received. F-14 NOTE 4 -- INVENTORIES Inventories held for resale at March 31, 2000 and 1999 consist of the following:
2000 1999 ---- ---- Pharmaceutical products............................... $1,297,417 $ -- Other products........................................ 118,824 16,303 ---------- -------- $1,416,241 $ 16,303 ========== ========
NOTE 5 -- PROPERTY AND EQUIPMENT At March 31, 2000 and 1999 property and equipment consist of the following:
2000 1999 ---- ---- Furniture and equipment .............................. $ 254,130 $ -- Computer software, including website domain .......... 460,433 50,000 Leasehold improvements ............................... 7,162 -- --------- -------- Total .............................................. $ 721,725 $ 50,000 Accumulated depreciation and amortization ............ (28,385) (2,500) --------- -------- Property and equipment, net .......................... $ 693,340 $ 47,500 ========= ========
NOTE 6 -- INCOME TAXES The Company had no income tax expense or benefit for the year ended March 31, 2000 or for the period from September 8, 1998 through March 31, 1999. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities net of valuation reserves as of March 31, 2000 and 1999 are as follows:
2000 1999 ---- ---- Net operating losses ...................................... $ 560,000 $ 47,000 Net operating losses - acquired ........................... 416,000 -- Use of cash basis method of accounting for income tax purposes ................................................. (258,505) -- ---------- --------- Net deferred tax asset .................................... 717,495 47,000 Valuation allowance ....................................... (717,495) (47,000) ---------- --------- Net deferred tax asset after valuation allowance .......... $ -- $ -- ========== =========
SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets reported, if based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As such, a $717,495 and $47,000 valuation allowance have been established at March 31, 2000 and March 31, 1999, respectively. The benefits of the net operating and the acquired tax loss carry forwards of $1,489,000 and $1,106,000, respectively, expire in various years beginning in 2019. Due to the Company's acquisition of Desktop (see Note 2), the Company's ability to utilize Desktop's acquired net operating loss carry forward of $1,106,000 will be limited by IRC Section 382 to $113,000 per year. NOTE 7 -- DEBT On March 17, 2000 the Company signed a $1,000,000 line of credit agreement with First Community Bank of America. The total balance outstanding on this line of credit amounts to $339,078 as of March 31, 2000. Terms of the agreement provide for interest to be charged at 1% over the rate of interest (6.3% as of March 31, 2000) paid on the Company's $1,000,000 certificate of deposit used to collateralize the loan facility. The balance on the line of credit becomes due on October 1, 2000. Additionally, in March 2000, the Company entered into a line of credit with Merrill F-15 Lynch. The line of credit enables the Company to borrow a maximum of $5,000,000, with borrowings limited to 80% of eligible accounts receivable and 50% of inventory (capped at $1,000,000). As of March 31, 2000, the outstanding principal on the note was $2,052,017 and approximately $1,900,000 was available for borrowing. Terms of the agreement provide for interest to be charged at the rate of 30 day commercial paper, plus 2.5% (8.58% as of March 31, 2000). The Merrill Lynch line of credit expires February 28, 2001, and is subject to renewal annually thereafter subject to Merrill Lynch's consent. Under the terms of the Merrill Lynch agreement, DrugMax must maintain certain financial ratio covenants in addition to others of the type customarily required by lenders for similar facilities. The Company also has a note payable which bears interest at 9.63% with a remaining balance of $4,872 at March 31, 2000. This note is due on June 5, 2000. NOTE 8 -- COMMITMENTS AND CONTINGENCIES Operating Leases The Company has operating leases for facilities that expire at various dates through 2003. Certain leases provide an option to extend the lease term. Certain leases provide for payment by the Company of any increases in property taxes, insurance, and common area maintenance over a base amount and others provide for payment of all property taxes and insurance by the Company. Until March 31, 2000, Desktop leased office space in Dallas, Texas. Desktop has not renewed the lease, and pays $12,000 per month for the office space on a month-to-month basis. Desktop also leases various computer equipment with original lease terms ranging from three to five years. These leases expire at various dates through 2003. The monthly equipment rental expense is approximately $9,100. Future minimum lease payments, by year and in aggregate under non-cancelable operating leases, were the following at March 31, 2000: Year Ending March 31 -------------------- 2001 .............................. $ 174,233 2002 .............................. 131,148 2003 .............................. 62,766 --------- Total minimum lease payments .............. $ 368,147 ========= Total rent expense for the periods ended March 31, 2000 and 1999 was approximately $29,000 and $0 respectively. Litigation The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of the claims that were outstanding as of March 31, 2000 should have a material adverse impact on its financial position or results of operations. NOTE 9 -- STOCK AND BENEFIT PLANS The information regarding the Company's shares of common stock has been adjusted to give effect to (i) the one-for-fifty reverse split of the Company's common stock effected in March 1999, (ii) the two-for-one stock split in the form of a stock dividend effected in April 1999, and (iii) a one-for-two reverse stock split in October 1999. Offering On November 22, 1999, the Company successfully completed a public offering the ("Offering") of 1,380,000 shares of common stock at a price of $10.00 per share. Gross proceeds of the Offering were F-16 $13.8 million and net offering proceeds received by the Company were approximately $11.9 million, after payment of underwriting discounts and commissions and other offering expenses totaling $1,950,747. Warrants In connection with the Offering, and as additional compensation to the underwriters, the Company issued warrants for the purchase of 150,000 shares of common stock. The warrants will be exercisable, in whole or in part, between the first and fifth years, at an exercise price of $16.50. The underwriters shall have the option to require the Company to register the warrants and/or the common stock underlying the warrants. The warrants had an estimated fair market value of $1,038,000 on the date of issuance, which was determined under the Black-Scholes method, and were included in additional paid in capital along with other issuance costs of the Offering. On January 23, 2000, the Company granted a director a three-year warrant to purchase 200,000 shares of common stock at an exercise price of $16.40, which is equal to the 30 day weighted average of the stock price from January 23, 2000 to February 22, 2000. The grant was made as a result of the director acting as a guarantor of the $5,000,000 Merrill Lynch line of credit. The warrants had an estimated fair value of $1,937,016, which was determined using the Black-Scholes method. On February 15, 2000, the Company entered into an Agreement with Purchasepro.com, Inc. ("PPRO") wherein PPRO will design and develop a "sell-side" private e-marketplace, powered by PPRO, labeled to include the marks and logos of the Company. The custom e-marketplace will be utilized within the Company's site. Upon satisfaction by PPRO of its obligations under the agreement, PPRO's development and unlimited buyer license fee for private e-Marketplace will be issued in the form of 200,000 of the Company's warrants. Revenue sharing will take place on transactions and subscriptions resulting from the Company's marketplace. The warrants shall be exercisable, in whole or in part, during the term commencing on the date of project completion (the "Initial Exercise Date"), and ending at 5:00 p.m., Pacific Standard Time, six months after the date of completion (the "Exercise Period"), and shall be void thereafter. In consideration for the hosting, archiving, maintenance and recurring customization of the private e-Marketplace, the Company will guarantee PPRO at least $80,000 in annual transaction revenue. The Company plans to use the sell-side e-marketplace to primarily sell pharmaceuticals and dietary supplements as well as the value added services from PPRO's preferred providers. Stock Options In August 1999, the Company's Board of Directors adopted a stock option plan (the "Plan"), which was approved by the Company's shareholders at its annual meeting in August 2000. The Plan provides for the grant of incentive and nonqualified stock options to key employees, including officers and directors of the Company. Under the provisions of the Plan, all options, except for options granted to "greater-than-10%-stockholders," have an exercise price equal to the fair market value on the date of the grant and expire ten years after the grant date. The exercise price of options issued to "greater-than-10%-stockholders" shall not be less than 110% of the fair market value of the common stock on the date of the grant, and such options shall expire five years after the date of the grant. At March 31, 2000, options to acquire up to 400,000 shares of common stock may be granted pursuant to the Plan. F-17 Stock option activity is summarized as follows: Number of Weighted Average Shares Exercise Price INCENTIVE AND NON-QUALIFIED STOCK OPTIONS ----------- ----------------- Outstanding March 31, 1999 ............. -- $ -- Granted ............................... 261,800 13.08 Exercised ............................. -- -- Forfeited ............................. -- -- ------- ------ Outstanding March 31, 2000 ............. 261,800 $ 13.08 ======= ======= Outstanding options under the Plan vest over a one- to three-year period. As of March 31, 2000 no options were exercisable. The following is a summary of stock options outstanding and exercisable as of March 31, 2000: Weighted Average Exercise Options Remaining Options Price Outstanding Contractual Life (Years) Exercisable - ------------- ------------- -------------------------- ------------ $10.00 15,000 9.58 -- 13.00 195,300 9.75 -- 14.30 50,000 4.75 -- 14.37 1,500 9.83 -- ------- ----- 261,800 -- ======= ===== Non-exercisable options as of March 31, 2000 become exercisable as follows: 2001 ......... 111,932 2002 ......... 74,934 2003 ......... 74,934 ------- 261,800 ======= The Company applies APB No. 25 in accounting for its warrants and stock options. Accordingly, no compensation cost has been recognized for the warrants and options granted to employees and directors because the exercise price equaled or exceeded the fair market value on the date of the grant. Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, net loss and net loss per share would have increased as follows for the year ended March 31, 2000: Net Loss Net Loss Per Share ---------------- ---------- As reported ......... $ (1,988,944) $ (0.51) Pro forma ........... $ (2,484,319) $ (0.64) The weighted-average fair value of options granted for the year ending March 31, 2000 was $11.27. The estimated fair value for the above options and warrants was determined using the Black-Scholes method with the following weighted-average assumptions used for grants in 2000: F-18 Dividend yield .................. 0.00% Option term ..................... 5-10 years Warrant term .................... 3 years Expected volatility ............. 97% Risk-free interest rate ......... 6.27%-6.56% NOTE 10 -- RELATED PARTY TRANSACTIONS In May 1999, 21st Century Healthcare Fund, LLC, an affiliate of a director of the Company, Jugal K. Taneja, loaned $50,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. In July 1999, Stephen M. Watters, the President of the Company, loaned $70,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. In August 1999, Carnegie Capital, Ltd., an affiliate of a director of the Company, Jugal K. Taneja, loaned $20,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. In August 1999, a director of the Company, Howard Howell D.D.S., loaned $50,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. Innovative Health Products, Inc. ("Innovative"), owned by Dynamic, is the supplier of substantially all of the manufactured dietary supplements and health and beauty care products sold by the Company. There presently is an agreement between the Company and Innovative for the fulfillment of the Company's customer orders. Purchases of all products by us from Innovative were approximately $580,000 and $24,000 for the periods ending March 31, 2000 and 1999, respectively. Dynamic is approximately 56% beneficially owned by Jugal K. Taneja, a director of the Company. In August 1999, Stephen M. Watters, the President of the Company, loaned $10,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. NOTE 11 -- SEGMENT INFORMATION The Company adopted SFAS No. 131, "Disclosures About Segments of Enterprise and Related Information," which established standards for reporting information about a Company's operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the Segment. F-19 During the year ended March 31, 2000, the Company operated two industry segments: wholesale distribution and computer software development. For the fiscal year ended March 31, 1999, the Company operated only in the wholesale distribution segment. The following table reports financial data that management uses in its business segment analysis. Amounts shown below are as of and for the year ended March 31, 2000. Revenue Distribution ........................................... $ 21,048,147 Software Development ................................... 2,400 ------------ Total ................................................. $ 21,050,547 ============ Gross Profit ............................................ Distribution ........................................... $ 141,376 Software Development ................................... 2,400 ------------ Total ................................................. $ 143,776 ============ Operating loss .......................................... Distribution ........................................... $ (1,898,580) Software Development ................................... (34,297) ------------ Total ................................................. $ (1,932,877) ============ Assets .................................................. Distribution ........................................... $ 38,408,017 Software Development ................................... 105,895 ------------ Total ................................................. $ 38,513,912 ============ Capital expenditures .................................... Distribution ........................................... $ 182,634 Software Development ................................... -- ------------ Total ................................................. $ 182,634 ============ NOTE 12 -- SUBSEQUENT EVENTS On July 7, 2000, the Company entered into a consulting agreement with Marc Mazur Consulting, Inc. Upon satisfaction by Marc Mazur Consulting, Inc. of its obligations under the agreement, the Company will grant to Marc Mazur Consulting, Inc. warrants to purchase 200,000 shares of common stock with an exercise price of $10.00 per share. Upon issuance, these warrants will be immediately exercisable. In August 2000, the audited amount of Valley stockholders' equity as of April 19, 2000 was determined to be $400,667, which was $141,160 less than the threshold amount of $541,827 required by the agreement. Therefore, 9,411 of the holdback shares will be returned to the Company. After consideration of the return of the holdback shares, a total of 217,255 shares at $10.125 per share were issued for the acquisition. On September 13, 2000, the Company entered into a letter of intent to purchase substantially all of the assets of Penner & Welsch, Inc. ("P&W"), a wholesale distributor of pharmaceuticals, over-the-counter products and health and beauty care products, headquartered in New Orleans, LA. Also on that date, P&W filed a voluntary petition for Chapter 11 relief under the United States Bankruptcy Code. The case is pending in the United States Bankruptcy Court for the Eastern District of Louisiana. Pursuant to the letter of intent, the Company will work with P&W, on an exclusive basis, to formulate a bankruptcy reorganization plan, pursuant to which the Company offered to purchase, for $750,000 worth of restricted common stock, all of P&W's assets and/or equity, without its liabilities, while keeping P&W's customers in continuous service. In addition, on September 13, 2000, the Company entered into a management agreement with P&W, pursuant to which it will manage the day-to-day operations of P&W, in exchange for a management fee equal to three percent of the gross revenues of P&W each month, with an additional 1% available in months in which certain operating measures are achieved. On September 13, 2000, the Company entered into a financing and security agreement with P&W, pursuant to which the Company has agreed to provide P&W with a secured revolving line of credit for the sole purpose of purchasing inventory from the Company, up to an aggregate amount of $2.5 million as may be requested by P&W and as may be allowed by the Company in its sole discretion. The line of credit is secured by a second lien on substantially all of the assets of P&W, second only to P&W's primary banking facility, as well as real estate owned by an affiliate of P&W. On September 14, 2000, the Bankruptcy Court entered an emergency interim order approving the management agreement and financing and security agreement. However, the bankruptcy plan, including the proposed acquisition, management agreement and financing and security agreement, are still subject to the final approval of the United States Bankruptcy Court for the Eastern District of Louisiana, and the Company cannot guarantee that the transaction will be completed or, if completed, that the Company will successfully assimilate the additional personnel, operations, acquired technology and products of P&W into the business, or retain key personnel and customers. F-20 On or about September 19, 2000, the Company informed the selling shareholders of Desktop that 20,000 shares held under escrow, pursuant to the acquisition agreement, would not be released as contemplated in the initial purchase price. Upon final receipt of these shares from the escrow agent, management anticipates reducing the purchased goodwill by approximately $329,000. On October 24, 2000, the Company obtained from Mellon Bank, N.A. ("Mellon") a line of credit and a $2 million term loan to refinance the prior bank indebtedness, to provide additional working capital, and for other general corporate purposes. The new line of credit enables the Company to borrow a maximum of $15 million, with borrowings limited to 85% of eligible accounts receivable and 65% of eligible inventory. The term loan is payable in monthly principal installments of $55,556 commencing on December 1, 2000, and in one final payment of the remaining principal balance plus all accrued and unpaid interest thereon on October 24, 2003. The term loan bears interest, payable monthly, at 0.75% per annum over the base rate, which is the higher of Mellon's prime rate or the effective federal funds rate plus 0.50% per annum. The revolving credit facility will bear interest at the floating rate of 0.25% per annum above the base rate. After the Company delivers the audited consolidated financial statements for the fiscal year ending March 31, 2001 to Mellon, the applicable margin over the base rate may change on an annual basis depending on the ratio of funded debt to EBITDA. At the Company's option, interest may instead be paid at a LIBOR rate plus an applicable margin, which also varies on the ratio of funded debt to EBITDA. Under the terms of the agreement, DrugMax is prohibited from paying dividends, and it must maintain certain financial ratio covenants in addition to others of the type customarily required by lenders for similar facilities. On October 27, 2000, proceeds were used to repay the Merrill Lynch Financial and National City Bank credit facilities, aggregating approximately $8.9 million, and approximately $5.5 million was available for borrowing. NOTE 13 -- RESTATEMENT OF 2000 CONSOLIDATED FINANCIAL STATEMENTS Subsequent to the issuance of the 2000 consolidated financial statements, management of the Company determined that a clerical error had been made in the computation of the weighted average shares outstanding and the loss per share. Accordingly, the accompanying 2000 consolidated financial statements have been restated to correct this clerical error. The effects of the restatement are as follows:
For the Year Ended For the Year Ended March 31, 2000 March 31, 2000 As Previously Reported As Restated ------------------------ ------------------- Weighted average shares outstanding ......... 2,102,922 3,875,445 Loss per share .............................. $ (.95) $ (.51)
F-21 Financial Statements of Valley Drug Company Independent Auditors' Report To the Board of Directors Valley Drug Company Youngstown, Ohio We have audited the accompanying balance sheets of Valley Drug Company as of December 31, 1999, 1998 and 1997, and the related statements of operations, stockholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Valley Drug Company as of December 31, 1999, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. BRIMMER, BUREK & KEELAN LLP Certified Public Accountants Tampa, Florida April 28, 2000 F-22 VALLEY DRUG COMPANY BALANCE SHEETS DECEMBER 31, 1999, 1998, 1997 ASSETS 1999 1998 1997 ---------- ---------- ---------- Current assets Cash $ 502 $ 2,137,036 $ 1,459,841 Accounts receivable, net 2,701,754 2,951,469 3,250,507 Inventory 6,339,119 5,994,546 6,350,216 Prepaid and other current assets 21,125 23,786 22,966 ---------- ----------- ----------- Total current assets 9,062,500 11,106,837 11,083,530 Property, plant and equipment - net 66,754 23,362 14,649 Notes receivable -- -- 119,542 Stockholder note receivable 70,000 52,000 -- Non-current accounts receivable 254,792 438,092 347,201 Other non-current assets 113,414 990 48,684 ----------- ----------- ----------- Total assets $ 9,567,460 $11,621,281 $11,613,606 =========== =========== =========== F-23 LIABILITIES AND SHAREHOLDER'S EQUITY
1999 1998 1997 ----------- ------------- ------------- 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 ========== =========== ===========
Please read accompanying notes F-24 VALLEY DRUG COMPANY STATEMENTS OF OPERATIONS DECEMBER 31, 1999, 1998, 1997
1999 1998 1997 -------------- ------------ ------------ 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 ============ =========== ===========
Please read accompanying notes. F-25 VALLEY DRUG COMPANY STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY DECEMBER 31, 1999, 1998, 1997
COMMON STOCK PREFERRED STOCK --------------------- ------------------------ NUMBER OF NUMBER OF SHARES AMOUNT SHARES AMOUNT --------- --------- --------- ------------- 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 $ -- -- $ -- ========= ========= ======= =============
F-26 VALLEY DRUG COMPANY STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY DECEMBER 31, 1999, 1998, 1997 TREASURY STOCK -------------------------------------- RETAINED NUMBER OF EARNINGS SHARES AMOUNT TOTAL ----------- ---------- ------------ ------------ $ 9,151,315 139 $(1,951,470) $ 7,299,845 1,317,930 -- -- 1,317,930 (980,000) -- -- (980,000) ----------- --------- ----------- ----------- 9,489,245 139 (1,951,470) 7,637,775 836,851 -- -- 836,851 (1,028,600) -- -- (1,028,600) ----------- --------- ----------- ----------- 9,297,496 139 (1,951,470) 7,446,026 244,606 -- -- 244,606 (7,000) -- -- (7,000) (7,051,984) -- -- (7,151,984) ----------- --------- ----------- ----------- (1,951,470) (139) 1,951,470 -- ----------- --------- ----------- ----------- $ 531,648 -- $ -- $ 531,648 =========== ========= =========== =========== Please read accompanying notes. F-27 VALLEY DRUG COMPANY STATEMENTS OF CASH FLOWS DECEMBER 31, 1999, 1998, 1997 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 =========== =========== ==========
Please read accompanying notes. F-28 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:
1999 1998 1997 ------------ ------------ ------------ 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 ========== ========== ==========
F-29 VALLEY DRUG COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Depreciation is provided for using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives ranging from three to seven years. Property and equipment consisted of the following: 1999 1998 1997 ---------- ---------- ---------- Furniture and fixtures $ 422,702 $ 414,911 $ 414,911 Leasehold improvements 41,970 28,078 28,078 Equipment 47,663 13,991 -- --------- --------- --------- 512,335 456,980 442,989 Accumulated depreciation (445,581) (433,618) (428,340) --------- --------- --------- $ 66,754 $ 23,362 $ 14,649 ========= ========= ========= IMPAIRMENT OF ASSETS The Company's policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain events have taken place that indicate that the remaining balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted future cash flows. There have been no impairment losses in 1999, 1998 or 1997. INCOME TAXES The Company has elected under the Internal Revenue Code to be taxed as an S Corporation. Under those provisions, the Company does not pay federal corporate income taxes on its taxable income. Instead, the shareholders are liable for individual federal and state income taxes on their proportionate shares of the Company's taxable income. CAPITALIZATION The Company is authorized is issue 500 shares of common stock, without par value and 250 shares of preferred stock without par value. COMMON STOCK -The holders of common shares have the sole and exclusive voting power on all matters to be presented to the shareholders. The following shares were issued and outstanding at December 31 F-30 1999 1998 1997 ---- ---- ---- Issued 500 500 500 Outstanding 100 200 200 PREFERRED STOCK - The Company's directors may adopt amendments to the Articles of Incorporation to create one or more series of preferred shares. The shares of each series to have such designations, privileges, restrictions and qualifications as determined by the directors. At December 31, 1998 and 1997, none of the preferred shares had been given any designations, privileges, restrictions or qualifications and no preferred shares had been issued. The shares were cancelled in January 1999. REVENUE RECOGNITION Revenues are recognized when the merchandise is shipped to the customer. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, however, management does not believe these differences would have a material effect on the operating results. EARNINGS PER COMMON SHARE Earnings per common share have been computed based upon the weighted-average number of shares outstanding during the period. PROPERTY LEASES The Company leases a property in Youngstown, Ohio that is being utilized by the Company for offices, warehousing, and shipping for its distribution operations, consisting of approximately 30,000 square feet. The offices are leased pursuant to a ten-year lease that expires on December 30, 2008. The Company has an option to continue the lease on a month to month basis. The rental under the lease is $6,000 per month. Rent expense was $72,000 for each year presented. Future minimum lease payments, by year in aggregate under non-cancelable operating leases consist of the following at December 31, 1999: YEAR ENDED DECEMBER 31, ---------------------- 2001 $ 72,000 2002 72,000 2003 72,000 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company, in estimating its fair value disclosures for financial instruments, uses the following methods and assumptions: CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES: The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their relatively short maturity. LONG-TERM OBLIGATIONS: The fair value of the Company's fixed-rate long-term obligations is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar F-31 types of borrowing arrangements. At December 31, 1999, 1998 and 1997, the fair value of the Company's long-term obligations approximated its carrying value. CREDIT LINES PAYABLE: The carrying amount of the Company's credit lines payable approximates fair market value since the interest rate on these instruments changes with market interest rates. NOTE 2 - RELATED PARTY TRANSACTIONS LEASE The Company leases the building it operates in from the former shareholder for a period of eight years on a triple net basis at the rate of $6,000 per month. CUSTOMERS CONTROLLED BY EMPLOYEE The son of the former owner is currently an employee and owns three customers of the Company. The sales to those customers are at a price within a maximum of 1/2 percent of the price offered by the Company to similar retail accounts on RX and OTC items. The sales of those customers for the years ended December 31, 1999, 1998 and 1997 were $3,760,000, $3,351,000 and $2,966,000 respectively. LOAN GUARANTEES The revolving line of credit and term loans in the amounts of $4,500,000 and $2,000,000, respectively are personally guaranteed by the new owners of the Company. PROFESSIONAL PHARMACY SOLUTIONS, LLC The two shareholders of the Company and the VP of Sales own Professional Pharmacy Solutions (PPS), a pharmacy management company. PPS manages and operates pharmacies owned by a local hospital. The Company sells pharmaceuticals to PPS on a cost plus basis. The Company had a receivable of approximately $125,000 at December 31, 1999. Sales to the pharmacies operated by PPS totaled approximately $700,000. NOTE 3 - CONCENTRATIONS OF CREDIT RISK CASH IN BANK The Company maintains its checking account in one commercial bank. Cash in this checking account at times exceeded the $100,000 Federal Deposit Insurance Corporation's maximum insured balance coverage. NOTE 4 - NOTES PAYABLE Notes payable consist of the following:
1999 1998 1997 ------------ ------------ ------------ 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 $ -- $ -- =========== =========== ===========
F-32 The schedule of maturities of long-term debt in the future periods is as follows: 2000 $ 236,151 2001 257,792 2002 1,327,725 ---------- Total $1,821,668 ========== NOTE 5 - LINE OF CREDIT In January 1999, the Company established a $ 4.5 million revolving credit facility scheduled to mature in January 2001. The credit available to the Company is based on a percentage of eligible accounts receivable and inventory. The facility imposes financial covenants on tangible net worth, leverage, and a debt service ratio. At December 31, 1999, the Company was not in compliance with the financial covenants. The bank waived the covenants in the March 1999 letter to the Company. Minimum borrowing under the agreement is $1,000. The agreement places limitations on disposition of assets and debt funding to transactions within the normal course of business and restricts the payment of dividends to any shareholder of record and any class of common stock during the term of the agreement. Borrowings accrue interest at 11% and are secured by all assets of the Company. The shareholders have personally guaranteed the loan. At December 31, 1999, the Company had borrowed $ 4,166,000 under this facility. The credit line payable is included with current liabilities instead of long- term liabilities as management believes that this presentation better reflects the utility of the current assets as the source of repayment for the credit line payable. NOTE 6 - YEAR 2000 ISSUE The Year 2000 issue relates to limitations in computer systems and applications that may prevent proper recognition of the Year 2000. The potential effect of the Year 2000 issue on the Company will not be fully determinable until the Year 2000 and thereafter. The Company's software packages and all of the hardware associated with its operations are Year 2000 compliant. The Company is currently requesting that all suppliers supply certification statements that comply with the Year 2000 requirements. If the Year 2000 modifications are not properly completed either by the Company or entities with which the Company conducts business, the Company's revenues and financial condition could be adversely impacted. NOTE 7 - SUBSEQUENT EVENT SALE OF COMPANY On April 19, 2000, the Company was sold to DrugMax.com, Inc. by an exchange of all of the outstanding shares of the Company for $1,700,000 and 226,666 common shares of DrugMax.com, Inc. 22,666 of the total shares being received are subject to a holdback provision. The holdback provision provides for an adjustment of the sale price based upon an audit of the balance sheet of the Company as of April 19, 2000. If the audit results in a shareholders equity less than an agreed upon amount, the sale price is subject to a corresponding reduction and to be subtracted from the holdback shares. NOTE 8 - PROFIT SHARING PLAN The Company maintains a qualified profit sharing plan for the benefit of its F-33 employees. The plan provides for discretionary contributions to the plan each year and covers employees over the age of 21 with at least one year of service. Vesting is immediate upon participation in the plan. The Company has made a contribution to the plan for the years ended December 31, 1999, 1998 and 1997 in the amounts of $30,000, $-0- and $30,000, respectively. NOTE 9 - CHANGE IN OWNERSHIP AND REFINANCING On January 4, 1999 the ownership of the Company changed whereby the previous owners' stock was redeemed by the Company and the new owners were issued no par common shares so that they owned 100% of the outstanding shares. Simultaneous with the redemption, the new owner purchased .61 shares of the common stock from the previous owners. After the redemption and issuance of new shares to the new owner, 50% of the new owner's shares were sold to another unrelated individual. In addition, the previously held treasury shares and the newly redeemed shares were canceled by the Company and the previous 500 no par common shares were canceled. The Company obtained a revolving line of credit with a limit of $4,500,000 and an installment loan of $2,000,000 to obtain the funds to redeem the previous shareholders stock for the approximate amount of $7 million. In addition to the cash payment for their stock, they received an assignment of certain customer receivables totaling $391,917 and their shareholder loan of $1,218,834 was paid in full. The customer receivables were for three customers owned by the son of the former owners who is also an employee. As part of the redemption agreement, the former shareholder signed a covenant not to compete and an employment agreement. The employment agreement is for $12,000 per year for 63 months. The former shareholder owns the building in which the Company operates and a lease was executed for a term of 96 months on triple net terms at an annual rate of $72,000. The son of the former owner also executed an employment contract for a period of 96 months at an annual compensation of $48,000 and a covenant not to compete that runs concurrently with the employment agreement. NOTE 10 - SUPPLEMENTAL CASH FLOW DISCLOSURE The statements of cash flows are supplemented by the following non-cash disclosures. CHANGE IN OWNERSHIP 1999 ----------- Total consideration $ 7,151,985 Assignment of accounts receivable (391,917) ----------- Net cash paid $ 6,760,068 =========== The Company retired 139 shares of treasury stock during 1999 with a book value of $1,951,470. F-34 Consolidated Financial Statements of Desktop Corporation and Subsidiary Independent Auditors' Report To the Board of Directors Desktop Corporation and Subsidiary Dallas, Texas We have audited the accompanying consolidated balance sheets of Desktop Corporation and Subsidiary as of March 31, 2000, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Desktop Corporation and Subsidiary as of March 31, 2000, 1999 and 1998, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. BRIMMER, BUREK & KEELAN LLP /s/ BRIMMER, BUREK & KEELAN LLP ------------------------------- Certified Public Accountants Tampa, Florida June 1, 2000 F-35 DESKTOP CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, 2000, 1999, 1998 ASSETS 2000 1999 1998 -------- ---------- -------- Current assets Cash $ 6,578 $ 9,658 $130,576 Accounts receivable - 99% of the balance at March 31, 2000 is due from related parties 872,368 705,400 460,272 -------- ---------- -------- Total current assets 878,946 715,058 590,848 -------- ---------- -------- Property and equipment Software development costs -- 985,748 -- Furniture & fixtures 36,257 30,710 25,670 Computer equipment 125,869 107,678 99,010 -------- ---------- -------- 162,126 1,124,136 124,680 Less: accumulated depreciation (83,363) (62,639) (29,339) -------- ---------- -------- Total property and equipment 78,763 1,061,497 95,341 Other assets Organizational costs, net 572 2,862 5,152 -------- ---------- -------- Total assets $958,281 $1,779,417 $691,341 ======== ========== ======== Please read accompanying notes. F-36 DESKTOP CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, 2000, 1999, 1998 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 2000 1999 1998 ----------- ---------- -------- Current liabilities Accounts payable $ 216,024 $ 71,257 $ 6,982 Accrued liabilities 140,122 33,492 52,707 Related party obligations 1,367,074 270,000 75,000 Deferred tax 254,879 204,218 137,826 ----------- ---------- -------- Total current liabilities 1,978,099 578,967 272,515 ----------- ---------- -------- Long-term liabilities Deferred tax 3,626 334,326 -- ----------- ---------- -------- Total liabilities 1,981,725 913,293 272 515 ----------- ---------- -------- Commitments and contingencies SHAREHOLDERS' EQUITY (DEFICIT) Shareholders' equity (deficit) Preferred stock, Series A, $10 par value; 30,000 shares authorized, 15,000 shares issued and outstanding 150,000 150,000 150,000 Common stock, no par; 100,000 shares authorized, 10,000 shares issued and outstanding 10,000 10,000 10,000 Retained earnings (deficit) (1,183,444) 706,124 258,826 ----------- ---------- -------- Total shareholders' equity (deficit) (1,023,444) 866,124 418,826 ----------- ---------- -------- Total liabilities and shareholders' equity (deficit) $ 958,281 $1,779,417 $691,341 =========== ========== ======== Please read accompanying notes. F-37 DESKTOP CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2000, 1999, 1998
2000 1999 1998 ----------- ----------- ----------- 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 =========== =========== ===========
Please read accompanying notes. F-38 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. DESKTOP CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
TOTAL PREFERRED STOCK COMMON STOCK SHAREHOLDERS' ------------------------- ----------------------- ADDITIONAL PAID RETAINED EQUITY SHARES AMOUNT SHARES AMOUNT IN CAPITAL EARNINGS (DEFICIT) (DEFICIT) ----------- ------------ ---------- ----------- --------------- ------------------ ------------ 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) ----------- ------------ ---------- ----------- --------------- ---------------- ------------
Please read accompanying notes. F-39 DESKTOP CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
2000 1999 1998 ----------- ----------- ----------- 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 =========== =========== ===========
Please read accompanying notes. F-40 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. F-41 DESKTOP CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000, 1999 AND 1998 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Desktop Corporation (the "Company") was founded in June 1995, as a Texas Corporation. It is an Internet e-commerce solutions provider specializing in the design, development and delivery of technology solutions by providing custom programming services and web hosting services. Desktop Ventures, Inc. was formed in June 1999, as a Texas corporation and as a wholly-owned subsidiary of the Company. PRINCIPALS OF CONSOLIDATION The consolidated financial statements include the accounts of Desktop Corporation and its wholly-owned subsidiary Desktop Ventures, Inc. Significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. ACCOUNTS RECEIVABLE Management assesses accounts receivable, at least annually, to determine whether an allowance for credit loss is warranted. At March 31, 2000, 1999 and 1998, no allowance was considered necessary. At March 31, 2000, 99% of the balance of accounts receivable was due from VetMall, Inc., a related company (see Note 3.) INVESTMENTS The Company owns 50% of the common stock of VetMall, Inc. ("VetMall"), a Florida corporation, formed on March 7, 2000, and accounts for its investment using the equity method. Under the equity method, the Company recognizes its share in the net earnings or losses of VetMall as they occur rather than as distributions are received. Distributions received are accounted for as a reduction of the investment rather than as income. Losses from this investment have been offset against the VetMall receivable. VetMall hosts an e-commerce web site which provides a link between the consumer, the veterinarian and the distributor that facilitates the sale of pet products. REVENUE RECOGNITION Revenue from consulting services is recognized when the services are performed. Service revenues, primarily related to web hosting services, are recognized on a straight-line basis over the contract period. Product revenue from software sold, leased, or otherwise marketed is recognized when the product is delivered and/or installed on the customer's equipment. SOFTWARE DEVELOPED TO BE SOLD, LEASED, OR OTHERWISE MARKETED Costs incurred in connection with development of software to be sold, leased, or otherwise marketed are capitalized once the technological feasibility of F-42 significant features of the system has been established. Likewise, betterments or improvements that significantly improve the marketability or extend the estimated useful life of the system are capitalized. Other normal maintenance and support costs are expensed as incurred. Amortization of capitalized software development costs is recorded at the greater of the amount computed by the straight-line method over the estimated useful life of the software or the amount computed by using the ratio that current gross revenues bear to the sum of estimated future gross revenues and current gross revenues. As indicated in Note 2, it is reasonably possible that estimates of anticipated future gross revenues, the remaining estimated economic life of the product, or both could be revised significantly as additional information becomes available from operations. As a result, the carrying amounts of the capitalized software costs could be reduced materially. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), establishes standards for reporting comprehensive income which is defined as the change in equity of an enterprise except those resulting from stockholder transactions. All components of comprehensive income are required to be reported in the income statement. The Company adopted this Standard effective April 1, 1998. During fiscal 2000, 1999 and 1998, the Company did not engage in any transactions required to be reported under this Standard. EARNINGS (LOSS) PER COMMON SHARE Earnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earning (loss) per share are calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. ADVERTISING The Company charges advertising costs to expense as incurred. The amount of advertising expense for the fiscal years ended March 31, 2000, 1999 and 1998 was approximately $690, $1,700 and $14,900, respectively. PROPERTY AND EQUIPMENT Property and equipment consists of furniture, fixtures and computer equipment and are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets, ranging from five to seven years. Expenditures for maintenance, repairs and minor replacements are charged to operations as incurred. Expenditures for major replacements and betterments are capitalized and depreciated over the extended useful lives of the assets. The cost and accumulated depreciation of assets retired or sold are eliminated from the related asset accounts at the time of retirement or sale, and the resulting gain or loss is recorded. IMPAIRMENT OF ASSETS In accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of" (SFAS 121), the Company's policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain events have taken place that indicate that the remaining unamortized balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted cash flows. Factors considered in the valuation include current F-43 operating results, trends and anticipated undiscounted future cash flows. During the year ended March 31, 2000 the Company determined software development costs would not be recovered (see Note 2). There were no impairment losses recorded for the fiscal years ended March 31, 1999 or 1998. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. INCOME TAXES The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes" (SFAS 109). Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. CONCENTRATION OF CREDIT RISK Due to the nature of the Company's business, a majority of sales are attributable to one or two significant customers. The Company derived approximately 90% of its revenues for the fiscal year ended March 31, 2000 from VetMall. For the fiscal year ended March 31, 1999, 85% of the Company's revenues were attributable to two significant customers. For the fiscal year ended March 31, 1998, two significant customers provided 77% of the Company's revenues. Due to these concentrations, the loss of one customer could significantly affect the Company's income and profits. The Company is employing additional efforts since the purchase of the Company by DrugMax.com, Inc. CONCENTRATION OF CREDIT RISK (CONTINUED) ("DrugMax") (see Note 5) to increase its customer base, thereby minimizing the impact of these concentrations. NOTE 2 - SOFTWARE DEVELOPMENT COSTS Software development costs consist entirely of costs associated with the Company's e-commerce vertical market solution. During the fiscal years ended March 31, 2000 and 1999 the Company developed software to work in a specific industry, but anticipated using core applications with modifications to service various other industries. In March 1999, the Company entered into a license agreement with a large distributor of veterinary products to utilize certain parts of the product for field processing of product orders. Through the fiscal year ended March 31, 2000, the Company had incurred approximately $1,289,200 in costs, net of prior amortization, related to the development of software for distribution of veterinary products by utilizing the Internet. Management has concluded that the useful life of this software, called the VetMall Project, is not ascertainable and the Company does not expect to realize significant future revenue from this software. Therefore, as of March 31, 2000, previously capitalized costs were written off and amounts incurred during the fiscal year were expensed as research and development costs. Any future revenue derived from this software will be recognized as income in the period earned. F-44 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:
2000 1999 1998 ------------- ------------- --------- 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 =========== ============= ==========
The Company was acquired on March 20, 2000 by DrugMax (see Note 5) in a stock for stock exchange. As part of the transaction, DrugMax agreed to pay certain indebtedness of the Company totaling approximately $1,000,000 at the date of acquisition. The payment was partially in cash and partially in stock of DrugMax. In addition, DrugMax provided cash advances of approximately $370,000. As a result, the Company became indebted to DrugMax in the amount of approximately $1,367,100 as of March 31, 2000. A portion of this obligation was in the form of a note in the principal amount of $294,030, bearing interest at 6.0% per annum through April 1, 2000, and 18.0% per annum thereafter. The note is payable on demand. The balance of the Company's obligation to DrugMax is non- interest bearing. The Company has licensed certain software (referred to as The VetMall System) for $200,000, to its 50% owned investment, VetMall, which enables the VetMall web site to operate. In June 1999, Butler paid $405,000 to acquire the remaining 50% of VetMall. As a result, the Company recognized a capital gain of $400,000. As part of the VetMall Master Agreement, Butler was required to make a $200,000 capital contribution to VetMall. In addition, if software development costs exceed $400,000, Butler agreed to assume 50% of the next $400,000 in excess costs. The agreement was substantially changed upon the acquisition by DrugMax and future activity with Butler is projected by management to be minimal. In spite of VetMall's losses, the Company received a $75,000 distribution, which resulted in a $70,000 capital gain. In connection with its acquisition of Desktop, DrugMax purchased 200 shares (20%) of VetMall, Inc. from Butler. At March 31, 2000 the Company was owed approximately $2,000,000 by VetMall, Inc. F-45 for services provided by the Company to VetMall. The receivable from VetMall has been reduced by the Company's share of VetMall losses. The balance is guaranteed by the selling shareholders as part of the acquisition (see Note 5). Accounts receivable trade $ 20,554 Accounts receivable VetMall 2,034,783 ----------- Subtotal 2,055,337 50% interest in VetMall (1,182,969) ----------- Net receivable $ 872,368 =========== NOTE 4 - INCOME TAX Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of income tax expense (benefit), deferred tax assets and liabilities net of valuation reserves are as follows:
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. NOTE 5 - ACQUISITION OF COMPANY BY DRUGMAX On March 20, 2000, the Company was acquired by DrugMax in exchange for 50,000 shares of DrugMax restricted common stock. In addition, DrugMax agreed to loan approximately $419,000 to the Company to be used together with additional stock of DrugMax to satisfy the Company's line of credit and obligations to related parties totaling approximately $1,000,000. On the same date, DrugMax acquired 40 F-46 shares in VetMall from a third party, representing 20% of the outstanding stock of VetMall, for $1,000,000 and 25,000 shares of DrugMax restricted common stock. The Agreement And Plan Of Reorganization (the "Agreement") provides for an adjustment to the acquisition price based upon the change in liabilities from December 31, 1999 to March 20, 2000. The Agreement also provides for additional compensation to be paid to the original shareholders of the Company, if VetMall or substantially all of VetMall's assets are subsequently sold or if VetMall completes an initial public offering. The maximum amount of additional compensation, which is based on sale proceeds, cannot exceed $4,800,000. NOTE 6 - 401K PROFIT SHARING PLAN The Company has a 401K Qualified Profit Sharing Plan covering all full-time employees over 21 years of age with at least one year of service. The plan provides for employee contributions through salary reductions and discretionary matching contributions by the Company. The Company made contributions for the years ended March 31, 2000, 1999 and 1998 in the amounts of $31,979, $18,600 and $19,758, respectively. NOTE 7- GOING CONCERN The Company's financial statements have been prepared in conformity with principles of accounting applicable to a going concern. These principles contemplate the realization of assets and liquidation of liabilities in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company incurred a net loss of $1,874,818 during the fiscal year ended March 31, 2000. In addition, the Company's current liabilities exceed its current assets by $1,099,153. The ability of the Company to continue as a going concern is dependent on increasing sales and obtaining additional capital and financing. DrugMax has committed to provide current operating funds while the Company expands its business operations and until additional outside financing is obtained. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. NOTE 8 - SERIES A PREFERRED STOCK The Company has authorized 30,000 shares of its $10 par value Series A Preferred Stock and as of March 31, 2000 has 15,000 shares issued and outstanding. The stock had an initial 8% cumulative dividend that provides for yearly increases up to 10% and is convertible to common stock. Interest on unpaid dividends accrues at the rate of 10% per annum. The initial rate of dividends was $.80 per share and increases by $.05 per share for the fiscal years 1997 through 2001 with a maximum of $1.00 per share. Upon consolidation, merger or liquidation, the preferred stock is entitled to a preferential payment of $10.00 per share plus all unpaid dividends and accrued interest. The preferred stock is convertible into common stock based upon the occurrence of certain events. If there is a public offering of the Company's common stock in which proceeds are at least $5,000,000 with a purchase price per share of at least three times the then effective conversion price, the preferred shares are required to be converted. The initial conversion rate is .1666 shares of common stock for each share of preferred stock. The conversion rate increases for certain events and generally is to maintain a conversion into at least 20% of the Company's common stock outstanding. There is also a voluntary conversion by the holders of the preferred stock, at their discretion, at the conversion rate in effect at the time of their conversion. NOTE 9 - COMMITMENTS AND CONTINGENCIES F-47 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. F-48 Financial Statements of VetMall, Inc. Independent Auditor's Report To the Board of Directors VetMall, Inc. Dallas, Texas We have audited the accompanying balance sheet of VetMall, Inc. as of March 31, 2000 and the related statement of operations, shareholders' equity, and cash flows for the period from June 28, 1999 (date of inception) through March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of VetMall, Inc. as of March 31, 2000 and the results of its operations and its cash flows for the period from June 28, 1999 (date of inception) through March 31, 2000 in conformity with generally accepted accounting principles. BRIMMER, BUREK & KEELAN LLP /s/ BRIMMER, BUREK & KEELAN LLP ------------------------------- Certified Public Accountants Tampa, Florida June 1, 2000 F-49 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. F-50 VETMALL INC. STATEMENT OF OPERATIONS FOR THE PERIOD FROM JUNE 28, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2000 Revenue $ 577,669 Cost of sales - 82% to related party 458,739 ----------- Gross profit 118,930 Operating expenses Depreciation and amortization 50,870 Advertising 195,606 Consultants - 84% to related party 1,605,294 Data preparation 151,435 Insurance 23,021 Legal fees 159,455 Software license 200,000 Trade show 30,359 Travel 49,088 General and administrative expenses 19,741 ----------- Total operating expenses 2,484,869 ----------- Net loss $(2,365,939) =========== Net loss per share of common stock $(11,829.70) =========== Weighted-average shares of common stock outstanding 200 =========== Please read accompanying notes. F-51 VETMALL INC. STATEMENT OF CHANGES IN STOCKHOLDERS'/MEMBERS' EQUITY FOR THE PERIOD FROM JUNE 28, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2000
COMMON MEMBERS' STOCK EQUITY (CORPORATION) (LIMITED TOTAL NO. OF ADDITIONAL PAID-IN (DEFICIT) LIABILITY SHAREHOLDERS' SHARES AMOUNT CAPITAL (CORPORATION) (CORPORATION) COMPANY) DEFICIT ------------- ------------------ --------------------- ------------ ------------- ------------ 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) ============ ================= ===================== =========== =========== ===========
Please read accompanying notes. F-52 VETMALL INC. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JUNE 28, 1999 (DATE OF INCEPTION) THROUGH MARCH 31, 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,365,939) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 50,870 (Increase) decrease in: Accounts receivable, trade (1,218) Increase (decrease) in: Accounts payable, trade 411,363 ------------- Net cash used in operating activities (1,904,924) ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of computer hardware and software - 78% related party (436,025) ------------- Net cash used in investing activities (436,025) ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Accounts payable, related parties 2,536,032 Capital contribution 210,000 Members' distribution (400,000) ------------- Net cash provided by financing activities 2,346,032 ------------- Net increase in cash 5,083 Cash beginning of period -- ------------- Cash end of period $ 5,083 ============= Please read accompanying notes. F-53 VETMALL INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS VetMall, Inc. (the "Company") was founded in June 1999 as a Nevada limited liability corporation known as VetMall, LLC, which merged with VetMall, Inc. on March 20, 2000. The Company is an internet-based consumer pet care product sales distributor. It maintains a web site whereby consumers can order pet care products which are then shipped directly by the manufacturer. The products are primarily supplied by one vendor who is a 30% shareholder in the Company. In addition, the Company derives income from advertisers on its web site and from veterinarians subscribing to listing on its web site. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. ACCOUNTS RECEIVABLE Management assesses accounts receivable to determine whether an allowance for credit loss is warranted. At March 31, 2000, no allowance was considered necessary. REVENUE RECOGNITION Revenue from sales of products is recognized when the product is shipped to the customer. Revenue from advertising is recognized as advertising is posted to the web site. Revenue from veterinarian subscriptions is recognized upon the signing of subscriptions and the receipt of funds. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), establishes standards for reporting comprehensive income which is defined as the change in equity of an enterprise except those resulting from stockholder transactions. All components of comprehensive income are required to be reported in the income statement. The Company adopted this Standard effective at its inception on June 28, 1999. During the period ended March 31, 2000, the Company did not engage in any transactions required to be reported under this Standard. EARNINGS (LOSS) PER COMMON SHARE Earnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations giving effect to the conversion of the LLC membership interests into equivalent shares of the corporation, retroactive to its inception. Basic earning (loss) per share are calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. PROPERTY AND EQUIPMENT F-54 Depreciation is provided using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives ranging from three to five years. ADVERTISING The Company charges advertising costs to expense as incurred. The amount of advertising expense for the period from June 28, 1999 (date of inception) through March 31, 2000 was approximately $195,600. IMPAIRMENT OF ASSETS In accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of" (SFAS 121), the Company's policy is to evaluate whether there has IMPAIRMENT OF ASSETS (CONTINUED) been a permanent impairment in the value of long-lived assets, certain identifiable intangibles or goodwill when certain events have taken place that indicate that the remaining unamortized balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted cash flows. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. There have been no impairment losses for the period from June 28, 1999 (date of inception) through March 31, 2000. NOTE 2 - COMPUTER SOFTWARE AND EQUIPMENT Computer software and equipment were purchased substantially from a related party (see Note 3) and consist of the following: Computer software $ 434,592 Computer equipment 1,434 --------- 436,026 Accumulated depreciation (50,870) --------- Property and equipment, net $ 385,156 ========= NOTE 3 - RELATED PARTY TRANSACTIONS RELATED PARTY TRANSACTIONS The Company was formed as a joint venture between W. Butler Company ("Butler") and Desktop Corporation ("Desktop") in June 1999 to create a web based e-commerce web site to provide for sales of Butler's pet care products and subscription services to veterinarians. The initial funding of the Company was a cash contribution of $200,000 from Butler. In addition, the Company has an obligation to Butler of approximately $450,000 for Company expenses paid directly by Butler. The other shareholder, Desktop, contributed cash in the amount of $10,000 and provided consulting services. The Company purchased certain of its web enabling software from Desktop for approximately $400,000. At March 31, 2000, Butler owned 30% of the Company, Desktop owned 50% of the Company, DrugMax owned 20% of the Company directly and an additional 50% indirectly, through its ownership of Desktop. The Company obtained a license from Desktop for the use of certain e-commerce software and related code, which enables the operation of its web site. The Company paid Desktop $200,000 for the license. The license agreement was terminated upon the purchase of Desktop by DrugMax. The Company purchases its products from Butler. Total purchases from Butler for the period from June 28, 1999 (date of inception) through March 31, 2000 were F-55 approximately $2,900. At March 31, 2000, the Company owed approximately $2,000,000 to DrugMax for consulting services provided and software purchases. NOTE 4 - SALE OF COMPANY On March 20, 2000, DrugMax became an indirect owner of 50% of the Company, through DrugMax's acquisition of all the issued and outstanding stock of Desktop. Simultaneously, DrugMax purchased an additional direct 20% interest in the Company, from Butler. In conjunction with DrugMax's acquisition of ownership in the Company, the Company merged with VetMall, Inc. (a Florida corporation) and distributed 200 shares of VetMall, Inc. common stock to the former holders of membership interests in the limited liability company. Subsequent to March 31, 2000, the portion of stock of VetMall, Inc. that was owned by Desktop was distributed to DrugMax. As a result of these transactions, DrugMax directly owned 70% of the Company as of April 19, 2000. NOTE 5 - INCOME TAXES The Company was originally incorporated as a Nevada limited liability company on June 28, 1999. A limited liability company is taxed as a partnership for Federal Income Tax purposes. The Company merged into a Florida corporation as of March 20, 2000 and the limited liability company terminated. Since the company was not subject to income tax until it became a corporation, no provision for income tax expense and deferred tax liability has been recorded. NOTE 6 - GOING CONCERN The Company's financial statements have been prepared in conformity with principles of accounting applicable to a going concern. These principles contemplate the realization of assets and liquidation of liabilities in the normal course of business. As reflected in the accompanying financial statements, the Company incurred a net loss of $2,365,939 during the period from June 28, 1999 (date of inception) through March 31, 2000. In addition, the Company's current liabilities exceed its current assets by $2,941,095. The ability of the Company to continue as a going concern is dependent upon increasing sales and obtaining additional capital and financing. DrugMax has committed to provide current operating funds while the Company expands its business operations. These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. NOTE 7 - CONCENTRATION OF CREDIT RISK The Company derived all of its advertising revenue from one pet product supplier and has received all of its subscription revenue from approximately 1,800 independent veterinarians. In addition, it purchases its products from Butler (see Note 3.) Due to the concentration of these sources of revenue and supply, the Company may be at risk in the event these sources cease to be customers or to provide products. The Company is working on expanding its business model to include business-to-business web sites and is seeking alternative suppliers to minimize credit risk in the future. NOTE 8 - SUBSEQUENT EVENTS In June 2000, the Company developed a new business-to-business web site, which the Company expects will be launched in July 2000, at the Company's web site address, www.vetmarket.com, which will provide for the sale of products from manufacturers to veterinarians. Subsequent to March 31, 2000, the Company ceased selling web site subscriptions to veterinarians in order to focus its efforts on the development of its new web site. On November 26, 1999, DrugMax.com, Inc. ("DrugMax") acquired all the issued and F-56 outstanding shares of Becan Distributors, Inc. and its subsidiary, Discount Rx, Inc. (collectively "Becan") for $2,000,000 in cash and 2,000,000 shares of DrugMax common stock. The acquisition is accounted for as a purchase. On March 20, 2000, DrugMax acquired all the issued and outstanding shares of Desktop Corporation and its subsidiary, Desktop Ventures, Inc. (collectively "Desktop") for stock and payment of certain Desktop liabilities. Desktop provides consulting and software development services. Simultaneous with the Desktop acquisition, DrugMax acquired a 20% interest in VetMall, Inc. ("VetMall") a website management company. Since Desktop already owned a 50% interest in VetMall, the acquisition of the additional 20% interest gave DrugMax a controlling interest in VetMall. F-57 Consolidated Financial Statements of Becan Distributors, Inc. INDEPENDENT AUDITORS' REPORT To the Board of Directors Becan Distributors, Inc. and Subsidiary Pittsburgh, Pennsylvania We have audited the accompanying consolidated balance sheet of Becan Distributors, Inc. and Subsidiary as of March 31, 1999, and the related consolidated statement of operations, shareholder's equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The financial statements of Becan Distributors, Inc. as of March 31, 1998 were audited by other auditors whose report dated June 28, 1999, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Becan Distributors, Inc. and Subsidiary as of March 31, 1999, and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Brimmer, Burek, Keelan & McNally LLP August 6, 1999 (Except for Note 7, as to which the date is September 10, 1999) F-58 BECAN DISTRIBUTORS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
MARCH 31, SEPTEMBER 30, ---------------------- ----------------------- 1998 1999 1998 1999 ---------- ---------- ----------- ---------- (UNAUDITED) ASSETS Current assets Cash........................................ $ 208,372 $ 69,010 $ 20,739 $ 120,983 Accounts receivable......................... 876,505 1,640,823 948,124 2,511,246 Inventory................................... 445,776 1,178,801 674,495 1,655,155 Prepaid and other current assets............ -- -- 15,525 63,317 ---------- ---------- ---------- ---------- Total current assets....................... 1,530,653 2,888,634 1,658,883 4,350,701 Property, plant and equipment -- net........ 4,616 34,533 20,861 34,051 Other assets -- net......................... 2,547 24,028 3,617 15,937 ---------- ---------- ---------- ---------- Total assets............................... $1,537,816 $2,947,195 $1,683,361 $4,400,689 ========== ========== ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Accounts payable............................ $1,022,121 $1,249,343 $ 901,344 $2,653,800 Accrued expenses............................ 9,763 20,487 7,253 31,825 Notes payable............................... 185,000 -- -- -- Due to affiliates........................... 200,000 64,980 213,242 -- Accrued income tax.......................... -- 21,994 -- -- Line of credit payable...................... -- 1,448,931 430,000 1,461,509 ---------- ---------- ---------- ---------- Total current liabilities.................. 1,416,884 2,805,735 1,551,839 4,147,134 Shareholder's equity Common stock, no par; 850 shares authorized; 642.85 shares issued and outstanding, 500 shares issued and outstanding at March 31, 1998.............. 50,000 85,000 85,000 85,000 Retained earnings............................ 70,932 56,460 46,522 168,555 ---------- ---------- ---------- ---------- Total shareholder's equity................. 120,932 141,460 131,522 253,555 ---------- ---------- ---------- ---------- Total liabilities and shareholder's equity. $1,537,816 $2,947,195 $1,683,361 $4,400,689 ========== ========== ========== ==========
Please read accompanying notes. F-59 BECAN DISTRIBUTORS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED MARCH 31, SEPTEMBER 30, ------------------------- ------------------------- 1998 1999 1998 1999 ----------- ----------- ------------ ----------- (UNAUDITED) Sales................................. $10,389,518 $31,074,861 $12,214,804 $26,518,953 Cost of good sold..................... 9,985,401 30,199,867 11,842,877 25,913,464 ----------- ----------- ----------- ----------- Gross profit......................... 404,117 874,994 371,927 605,489 Operating expenses.................... 299,748 659,158 268,698 397,246 ----------- ----------- ----------- ----------- Income from operations................ 104,369 215,836 103,229 208,243 Interest income....................... -- -- 18 2,061 Other income (expenses), net.......... -- -- 12,000 (240) Interest expense...................... 15,631 99,811 (31,155) (97,969) ----------- ----------- ----------- ----------- Net income before income taxes........ 88,738 116,025 84,092 112,095 Income tax............................ -- 21,994 -- -- ----------- ----------- ----------- ----------- Net income............................ $ 88,738 $ 94,031 $ 84,092 $ 112,095 =========== =========== =========== =========== Net income per share of common stock.. $ 177.47 $ 157.97 $ 130.81 $ 174.37 =========== =========== =========== =========== Weighted-average shares of common stock outstanding.................... 500.00 595.23 642.85 642.85 =========== =========== =========== ===========
Please read accompanying notes. F-60 BECAN DISTRIBUTORS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
COMMON STOCK ----------------------- NUMBER OF RETAINED SHARES AMOUNT EARNINGS ----------- -------- ---------- Balance at 3/31/98.............. 500.00 $50,000 $ 70,932 Common stock issued for cash.... 142.85 35,000 -- Net income...................... -- -- 84,092 Dividends....................... -- -- (108,503) ------ ------- --------- Balance at 9/30/98 (unaudited).. 642.85 85,000 46,522 Net income...................... -- -- 9,938 ------ ------- --------- Balance at 3/31/99.............. 642.85 85,000 56,460 Net income...................... -- -- 112,095 ------ ------- --------- Balance at 9/30/99 (unaudited).. 642.85 $85,000 $ 168,555 ====== ======= =========
Please read accompanying notes. F-61 BECAN DISTRIBUTORS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED MARCH 31, SEPTEMBER 30, 1998 1999 1998 1999 --------- ----------- --------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................ $ 88,738 $ 94,031 $ 84,092 $ 112,095 Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization expense............ 1,004 3,682 570 10,377 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable............................. (829,726) (764,318) (68,127) (870,423) Prepaid expenses and other assets............... (2,547) (21,481) (17,545) (63,317) Inventory....................................... (423,426) (733,025) (228,719) (476,354) Increase (decrease) in: Accounts payable................................ 900,282 227,222 (120,777) 1,404,457 Accrued income tax.............................. -- 21,994 -- -- Accrued expenses................................ 3,371 10,724 (2,510) (10,656) --------- ----------- --------- --------- Net cash provided (used) by operating activities.. (262,304) (1,161,171) (353,016) 106,179 --------- ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment............................. (5,620) (33,599) (18,281) (6,512) Decrease in other assets.......................... -- -- (1,075) 4,708 --------- ----------- --------- --------- Net cash provided (used) by investing activities.. (5,620) (33,599) (19,356) (1,804) --------- ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt.................... -- -- -- -- Proceeds from affiliate loan...................... 200,000 64,980 39,742 -- Payment of affiliate loan......................... -- -- -- (64,980) Proceeds from issuance of common stock............ 50 35,000 35,000 -- Principal payments on notes payable............... -- (200,000) -- -- Dividends paid.................................... -- (108,503) (108,503) -- Net change in revolving line of credit............ 93,000 1,263,931 245,000 12,578 Payments of related party obligations............. -- -- (26,500) -- --------- ----------- --------- ---------- Net cash provided (used) by financing activities.. 293,050 1,055,408 184,739 (52,402) --------- ----------- --------- --------- Net increase (decrease) in cash................... 25,126 (139,362) (187,633) 51,973 Cash at beginning of year......................... 183,246 208,372 208,372 69,010 --------- ----------- --------- --------- Cash at end of year............................... $ 208,372 $ 69,010 $ 20,739 $ 120,983 ========= =========== ========= =========
Please read accompanying notes. F-62 BECAN DISTRIBUTORS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED MARCH 31, SEPTEMBER 30 ------------------ ------------------------ 1998 1999 1998 1999 -------- -------- -------- -------- (UNAUDITED) SUPPLEMENTAL INFORMATION: Interest paid.............. $ 15,631 $ 99,811 $ 31,155 $ 97,969 ======== ======== ======== ======== Taxes paid................. $ -- $ -- $ -- $ -- ======== ======== ======== ======== Please read accompanying notes. F-63 BECAN DISTRIBUTORS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 AND 1999 AND SEPTEMBER 30, 1999 (UNAUDITED) NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Becan Distributors, Inc. was incorporated January 18, 1997 as an Ohio corporation. Discount Rx, Inc., a wholly owned subsidiary of Becan Distributors, Inc. was incorporated August 17, 1998 as a Louisiana corporation. Becan Distributors, Inc. and Subsidiary (the "Company") is a wholesale distributor of pharmaceuticals, over the counter drugs, and health and beauty care products throughout the United States. The Company sells primarily to independent retail and regional chain owned drug stores. The Company was privately owned until June 26, 1998 and had elected with the consent of its shareholders to be taxed as an S corporation. On June 26, 1998, the Company executed an agreement and plan of reorganization with Nu-Wave Health Products, Inc. ("Nu-Wave") whereby all of the issued and outstanding capital stock of the Company was exchanged for 1,500,000 shares of Nu-Wave Health Products, Inc. As a result of the exchange, the Company became a wholly owned subsidiary of Nu-Wave and changed its year end from December 31 to March 31 so as to coincide with the year end of Nu-Wave. In August 1998, Nu-Wave changed its name to Dynamic Health Products, Inc. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies used in preparing the accompanying financial statements follows: PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of Becan Distributors, Inc. and its wholly owned Subsidiary, Discount Rx, Inc. Significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, however, management does not believe these differences would have a material effect on the operating results. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. F-64 ACCOUNTS RECEIVABLE The Company has not experienced any bad debts from receivables during its existence and feels that no allowance for uncollectible amounts is required. Therefore, no provision has been made for bad debts. INCOME TAXES The Company was an S corporation until the date of acquisition by Nu-Wave on June 26, 1998. Therefore, income tax expense reflects the activity from June 27, 1998 through March 31, 1999. The Company has no deferred tax assets or liabilities at March 31, 1999 and March 31, 1998, or September 30, 1999. COMPREHENSIVE INCOME Financial Accounting Standards No. 130 establishes standards for reporting comprehensive income which is defined as the change in equity of an enterprise except those resulting from stockholder transactions. All components of comprehensive income are required to be reported in the income statement. The Company adopted this Standard effective April 1, 1998. During 1998, the Company did not engage in any transactions required to be reported under this new Standard. EARNINGS PER COMMON SHARE Earnings per common share has been computed based upon the weighted-average number of shares outstanding during the period. PROPERTY, PLANT AND EQUIPMENT Depreciation is provided for using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives ranging from three to seven years. IMPAIRMENT OF ASSETS The Company's policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain events have taken place that indicate that the remaining balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted future cash flows. There have been no impairment losses in the fiscal year ended March 31, 1999 and for the six months ended September 30, 1999. ADVERTISING The Company charges advertising costs to expense as incurred. The amount of advertising expense for the fiscal years ended March 31, 1999 and March 31, 1998 was $63,175 and $39,422, respectively, and $2,372 for the six months ended September 30, 1999. REVENUE RECOGNITION Revenues are recognized when the merchandise is shipped to the customer. PROPERTY LEASES The Company leases a property in Pittsburgh, Pennsylvania that is being utilized by Becan for offices, warehousing, and shipping for its distribution operations, consisting of approximately 4,024 square feet. The offices are F-65 leased pursuant to a four year lease that expires on February 28, 2003. The Company has an option to continue the lease on a month to month basis or renew the lease at the end of the four year term. The rental under the lease is $1,658 per month subject to yearly adjustment for tax expenses. The Company leases a property in Mandeville, Louisiana that is being utilized by Discount Rx for offices, warehousing, and shipping for its distribution operations, consisting of approximately 1,200 square feet. The offices are leased on a month to month basis. The rental under the lease is $900 per month. Future minimum lease payments, by year in aggregate under non-cancelable operating leases consist of the following at March 31, 1999: YEAR ENDED MARCH 31, - --------------------------- 2000 ......... $18,238 2001 ......... $19,896 2002 ......... $19,896 2003 ......... $18,238 RECLASSIFICATIONS Certain reclassifications have been made to the financial statements for the year ended March 31, 1998 to conform to the presentation at March 31, 1999 and September 30, 1999. NOTE 2 -- RELATED PARTY TRANSACTIONS The Company buys over the counter drugs and health and beauty care products for resale from an affiliated corporation. Purchases from the affiliate for the year ended March 31, 1999 were $154,162, and $166,288 for the six months ended September 30, 1999. The Company has a verbal agreement to pay management fees to its parent company (Dynamic Health Products, Inc., formerly Nu-Wave) for various legal, accounting and administrative services. The agreement is for a monthly payment of $15,000 and started October 1, 1998. The agreement is to be reviewed periodically and adjusted at the discretion of the parent company. The amount of management fees for the year ended March 31, 1999 was $90,000, and $90,000 for the six months ended September 30, 1999. The Company owes approximately $64,980 to affiliated corporations for management fees and products purchased during the year. During the current fiscal year, the Company had various borrowing arrangements with stockholders of the Company. At the beginning of the year the amount of the indebtedness to stockholders was approximately $200,000. During the year an additional $75,000 was borrowed from stockholders or entities controlled by stockholders. The entire stockholder indebtedness was paid off during the year and all borrowing arrangements with stockholders and related entities were cancelled. Interest paid to those related parties for the year was $20,128. An officer of the Company had an employment agreement whereby, he was entitled to purchase additional shares of the company based upon the financial performance of the Company compared to certain agreed upon projections. Prior to the date of the reorganization with Nu-Wave in June 1998, the employment agreement was terminated and the officer purchased an additional 142.85 shares of common stock for $35,000 in full settlement of the employment agreement and obligations thereunder. The officer subsequently became the Chief Executive Officer of the parent company. F-66 The Company completed an agreement and reorganization with Nu-Wave Health Products, Inc. ("Nu-Wave") on June 26, 1998 whereby all of the issued and outstanding common stock of the Company was exchanged for 1,500,000 shares of common stock of Nu-Wave. As a result, the Company became a wholly owned subsidiary of Nu-Wave and changed its year-end from December 31 to March 31 so as to coincide with the year-end of Nu-Wave. After the exchange, the former shareholders of the Company owned approximately 84% of the parent company. NOTE 3 -- INCOME TAXES Income taxes for the year ended March 31, 1999 differ from the amounts computed by applying the effective U.S. federal income tax rates of 15 to 34% to income before income taxes as a result of the following: Computed tax expense at the statutory rate .............. $ 27,698 Increase (decrease) in taxes resulting from: State income taxes, net of federal tax benefit ......... 5,440 Effect of permanent differences and portion of income attributable to S Corporation status ................... (11,144) ------- Income tax expense ...................................... $ 21,994 ======= The Company and its parent file a consolidated federal income tax return. Income tax expense in the Company's income statement has been allocated on the basis of separate company net income before tax. The Company has no deferred tax assets or liabilities at March 31, 1999 and September 30, 1999. NOTE 4 -- LINE OF CREDIT In November 1998, the Company established a $2.0 million revolving credit facility scheduled to mature in November 2001. The credit available to the Company is based on a percentage of eligible accounts receivable and inventory. The facility imposes no financial covenants. Minimum borrowing under the agreement is $1,000,000. The agreement places limitations on disposition of assets and debt funding to transactions within the normal course of business and restricts the payment of dividends to any shareholder of record and any class of Common stock during the term of the agreement. All borrowings accrue interest at prime (7.75% at March 31, 1999) plus 1.25% and are secured by all assets of the Company. The Company had borrowed $1,448,931 under this facility at March 31, 1999 and $1,461,509 at September 30, 1999. The credit line payable is included with current liabilities instead of long- term liabilities as management believes that this presentation better reflects the utility of the current assets as the source of repayment for the credit line payable. The line of credit is personally guaranteed by Jugal Taneja, the Chairman of the Board of the parent company. The Company had a secured $700,000 demand line of credit with Mellon Bank, N.A., dated March 16, 1998 through February 28, 1999. At March 31, 1998 $185,000 was borrowed against the line of credit. This line of credit is renewable annually by mutual agreement of the parties. In November 1998, any outstanding obligations under this line of credit were satisfied from proceeds of the new $2,000,000 credit facility. NOTE 5 -- CONCENTRATIONS OF CREDIT RISK F-67 CASH IN BANK The Company maintains its checking accounts in two commercial banks. Cash in these checking accounts at times exceeded the $100,000 Federal Deposit Insurance Corporation's maximum insured balance coverage. Concentrations of credit risk with respect to sales are limited due to the distribution of sales over a large customer base as of March 31, 1999 and September 30, 1999. For the year ended March 31, 1999 and for the six months ended September 30, 1999, one customer represented approximately 11.07% of revenues derived from distribution. NOTE 6 -- YEAR 2000 ISSUE The Year 2000 issue relates to limitations in computer systems and applications that may prevent proper recognition of the Year 2000. The potential effect of the Year 2000 issue on the Company will not be fully determinable until the Year 2000 and thereafter. The Company's software packages and all of the hardware associated with its operations are Year 2000 compliant. The Company is currently requesting that all suppliers supply certification statements that comply with the Year 2000 requirements. If the Year 2000 modifications are not properly completed either by the Company or entities with which the Company conducts business, the Company's revenues and financial condition could be adversely impacted. NOTE 7 -- PENDING SALE OF COMPANY On September 8, 1999, an agreement was signed between Nutriceuticals.com Corporation ("Nutriceuticals") and Dynamic Health Products, Inc., the sole stockholder of the Company whereby the Company will be sold to Nutriceuticals. The terms of the agreement call for the acquisition of all the outstanding stock of the Company by Nutriceuticals. If the sale is consummated as planned, the Company would become a wholly owned subsidiary of Nutriceuticals. The sale is subject to the consummation of a public offering by Nutriceuticals. F-68 DRUGMAX.COM, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 March 31, 2000 --------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 4,124,356 $ 6,020,129 Accounts receivable, net 7,805,881 4,106,105 Inventory 8,000,307 1,416,241 Due from affiliates 12,899 13,564 Prepaid expenses and other current assets 217,138 126,542 --------------- -------------- Total current assets 20,160,581 11,682,581 Property and equipment, net 770,012 693,340 Intangible assets (primarily goodwill), net 29,057,457 26,090,635 Stockholder notes receivable 100,000 - Notes receivable 37,614 37,614 Deposits 8,242 9,742 --------------- -------------- Total assets $ 50,133,906 $ 38,513,912 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,433,611 $ 3,170,890 Accrued expenses 532,612 442,598 Credit lines payable 8,222,733 2,391,095 Notes payable - current portion 236,147 4,872 Due to affiliates 564,610 511,717 --------------- -------------- Total current liabilities 15,989,713 6,521,172 Notes payable - long term 1,471,575 - --------------- -------------- Total liabilities 17,461,288 6,521,172 --------------- -------------- Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value; 2,000,000 shares authorized; - - no preferred shares issued or outstanding Common stock, $.001 par value; 24,000,000 shares authorized; 6,419 6,202 6,417,754 and 6,200,499 shares issued and outstanding Additional paid-in capital 36,279,447 34,079,957 Accumulated deficit (3,613,248) (2,093,419) --------------- -------------- Total stockholders' equity 32,672,618 31,992,740 --------------- -------------- Total liabilities and stockholders' equity $ 50,133,906 $ 38,513,912 =============== ==============
See accompanying notes to unaudited condensed consolidated financial statements. F-69 DRUGMAX.COM, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Three Months Ended June 30, 2000 June 30, 1999 --------------------- ------------------- Net revenues $ 28,816,653 $ 33,899 Cost of goods sold 27,813,691 14,786 ---------------- ----------- Gross profit 1,002,962 19,113 Selling, general and administrative expenses 2,363,190 101,308 ---------------- ----------- Operating loss (1,360,228) (82,195) ---------------- ----------- Other income (expense): Interest income 64,355 335 Interest expense (223,956) (589) ---------------- ----------- Total other income (expense) (159,601) (254) ---------------- ----------- Net loss $ (1,519,829) $ (82,449) ================ =========== Basic and diluted net loss per share $ (0.24) $ (0.02) ================ =========== Basic and diluted weighted average number of common shares outstanding 6,374,780 5,351,028 ================ ===========
See accompanying notes to unaudited condensed consolidated financial statements. F-70 DRUGMAX.COM, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Three Months Ended June 30, 2000 June 30, 1999 ------------------- ------------------- Cash flows from operating activities: Net loss $ (1,519,829) $ (82,449) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 708,625 2,500 Changes in operating assets and liabilities: Accounts receivable, net (210,216) (9,760) Inventory 106,570 (2,860) Due from affiliates 665 - Prepaid expenses and other current assets (68,600) (25,399) Stockholder notes receivable 70,000 - Deposits 1,500 180 Accounts payable (697,834) (17,572) Accrued expenses (90,878) 42,973 ------------------- ------------------- Net cash used in operating activities (1,699,997) (92,387) Cash flows from investing activities: Purchases of property and equipment (62,451) - Increase in intangible assets (2,038) - Cash paid for acquisitions, net (1,757,481) - ------------------- ------------------- Net cash used in by investing activities (1,821,970) - Cash flows from financing activities: Net change under revolving line of credit agreements 1,617,638 - Payments of long-term obligations (44,337) - Proceeds from related party obligation - 50,000 Proceeds from affiliates 52,893 - ------------------- ------------------- Net cash provided by financing activities 1,626,194 50,000 ------------------- ------------------- Net decrease in cash and cash equivalents (1,895,773) (42,387) Cash and cash equivalents at beginning of period 6,020,129 56,986 ------------------- ------------------- Cash and cash equivalents at end of period $ 4,124,356 $ 14,599 =================== =================== Supplemental disclosure of cash flow information: Cash paid during period for interest $ 234,464 $ - =================== =================== Cash paid for income taxes $ - $ - =================== =================== Issuance of 217,255 shares of common stock for the acquisition of Valley Drug Company $ 2,199,707 $ - =================== ===================
See accompanying notes to unaudited condensed consolidated financial statements. F-71 DrugMax.com, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements For the Three Months Ended June 30, 2000 and 1999 NOTE A - BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of DrugMax.com, Inc. and its subsidiaries, Discount Rx, Inc., Valley Drug Company, Desktop Corporation, and VetMall, Inc. (collectively the "Company"). All intercompany balances and transactions have been eliminated. In March 2000 Becan Distributors, Inc., the Company's wholly owned subsidiary, was merged into the Company. All Becan financial activity has been included as a division of the Company. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and footnotes as of and for the year ended March 31, 2000 and as of and for the period September 8, 1998 through March 31, 1999, included elsewhere in this prospectus. NOTE B - RECENTLY ISSUED AUTHORITATIVE GUIDANCE In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance related to revenue recognition issues based on interpretations and practices followed by the SEC. Management has determined that the adoption of SAB101 did not have a material impact on its June 30, 2000 condensed consolidated financial statements. NOTE C - ACQUISITIONS On April 19, 2000, DrugMax Acquisition Corporation ("Buyer"), a wholly owned subsidiary of DrugMax, Valley Drug Company ("Valley"), Ronald J. Patrick ("Patrick") and Ralph A. Blundo ("Blundo" and together with Patrick, the "Sellers") signed a Merger Purchase Agreement (the "Agreement"). In connection with the merger, the Sellers received an aggregate of 226,666 shares of the Company's common stock and cash in the amount of $1.7 million. The Sellers were granted the right to include their shares in any registration filed by the Company until such time as their shares of the Company may be sold pursuant to Rule 144 of the General Rules and Regulations promulgated under the Securities Act of 1933, as amended. In addition, the Sellers deposited 22,666 shares of the Company's common stock with an escrow agent (the "Holdback Shares"). Based on audited financial statements of Valley as of April 19, 2000, the stockholders' equity amounted to $400,667 which was $141,160 less than the threshold amount of $541,827 required by the Agreement. Therefore, 9,411 of the Holdback Shares will be returned to the Company. After consideration of the return of the Holdback Shares, a total of 217,255 shares at $10.125 per share were issued for the acquisition. The acquisition was accounted for using the purchase method of accounting and accordingly $3.6 million of goodwill was recorded. The goodwill will be amortized over fifteen (15) years. F-72 The results of operations of Valley are included in the unaudited condensed consolidated financial statements from the purchase date. The Company acquired the following assets and liabilities (net of cash received of $502) in the above business combination: Accounts receivable $ 3,478,637 Inventory 6,690,636 Property and equipment 67,146 Other assets 266,380 Goodwill 3,557,023 Assumption of liabilities (10,102,634) ------------------- Net value of purchased assets 3,957,188 Fair value of common stock issued 2,199,707 ------------------- Cash paid for acquisitions $ 1,757,481 ===================
The unaudited pro forma effect of the Valley acquisition on the Company's revenues, net loss and net loss per share, had the acquisition occurred on April 1, 1999 is as follows:
For the Three For the Three Months Ended Months Ended June 30, 2000 June 30, 1999 -------------------- ------------------ Revenues 31,633,652 $12,676,946 Net loss 1,486,171 80,580 Basic and diluted net loss per share ($.23) ($.02)
NOTE D - INCOME TAXES The Company has adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. Under SFAS 109, the Company uses the asset and liability method which recognizes the amount of current and deferred taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the consolidated financial statements and as measured by the provisions of enacted tax laws. The Company has a gross deferred tax asset as of June 30, 2000, which represents the potential future tax benefit associated with its operating losses to date. Management has evaluated the available evidence regarding the future taxable income and other possible sources of realization of deferred tax assets. A 100 percent valuation has been established by management against the gross deferred tax asset, as it is more likely than not the deferred tax asset will not be realized. The Company continually reviews the adequacy of the valuation allowance and will recognize deferred tax asset benefits only when a reassessment indicates that it is more likely than not that the benefits will be realized. The Company will recognize a deferred tax asset only when such reassessments indicate that the benefits will be realizable. NOTE E - COMMITMENTS AND CONTINGENCIES In conjunction with the Valley acquisition, the Company agreed to become an additional guarantor of the outstanding bank indebtedness of Valley. As of June 30, 2000, Valley maintains a revolving line of credit and a term loan with National City Bank with a combined outstanding balance of approximately $6.1 million. The revolving line of credit and term loan are also personally guaranteed by the former owners of Valley. F-73 NOTE F - SEGMENT INFORMATION During the three months ended June 30, 2000, the Company operated two industry segments: wholesale distribution and computer software development. The Company operated only in the wholesale distribution segment through March 20, 2000. The following table reports financial data that management uses in its business segment analysis. There were no inter-segment sales or transfers during the first three months of fiscal year 2000 or 1999. Operating loss by business segment excludes interest income, interest expense, and other income and expenses. Summarized financial information by business segment is as follows:
For the Three For the Three Months Ended Months Ended June June 30, 2000 30, 1999 ---------------- ----------------- Revenue from external customers Distribution.......................... $28,718,856 $ 33,899 Software Development.................. 97,797 -- -------------- -------------- Total................................. $28,816,653 $ 33,899 ============== ============== Segment loss from operations Distribution.......................... $ 841,257 $ 82,195 Software Development.................. 518,971 -- -------------- -------------- Total................................. $ 1,360,228 $ 82,195 ============== ============== June 30, 2000 March 31, 2000 -------------- ---------------- Assets Distribution.......................... $50,060,809 $38,408,017 Software Development.................. 73,097 105,895 -------------- ---------------- Total................................. $50,133,906 $38,513,912 ============== ================
NOTE G - SUBSEQUENT EVENTS SUBSEQUENT EVENTS On July 7, 2000, the Company entered into a consulting agreement with Marc Mazur Consulting, Inc. Upon satisfaction by Marc Mazur Consulting, Inc. of its obligations under the agreement, the Company will grant to Marc Mazur Consulting, Inc. warrants to purchase 200,000 shares of common stock with an exercise price of $10.00 per share. Upon issuance, these warrants will be immediately exercisable. In August 2000, the audited amount of Valley stockholders' equity as of April 19, 2000 was determined to be $400,667, which was $141,160 less than the threshold amount of $541,827 required by the agreement. Therefore, 9,411 of the holdback shares will be returned to the Company. After consideration of the return of the holdback shares, a total of 217,255 shares at $10,125 per share were issued for the acquisition. On September 13, 2000, the Company entered into a letter of intent to purchase substantially all of the assets of Penner & Welsch, Inc. ("P&W"), a wholesale distributor of pharmaceuticals, over-the-counter products and health and beauty care products, headquartered in New Orleans, LA. Also on that date, P&W filed a voluntary petition for Chapter 11 relief under the United States Bankruptcy Code. The case is pending in the United States Bankruptcy Court for the Eastern District of Louisiana. Pursuant to the letter of intent, the Company will work with P&W, on an exclusive basis, to formulate a bankruptcy reorganization plan, pursuant to which the Company offered to purchase, for $750,000 worth of restricted common stock, all of P&W's assets and/or equity, without its liabilities, while keeping P&W's customers in continuous service. In addition, on September 13, 2000, the Company entered into a management agreement with P&W, pursuant to which it will manage the day-to-day operations of P&W, in exchange for a management fee equal to three percent of the gross revenues of P&W each month, with an additional 1% available in months in which certain operating measures are achieved. On September 13, 2000, the Company entered into a financing and security agreement with P&W, pursuant to which the Company has agreed to provide P&W with a secured revolving line of credit for the sole purpose of purchasing inventory from the Company, up to an aggregate amount of $2.5 million as may be requested by P&W and as may be allowed by the Company in its sole discretion. The line of credit is secured by a second lien on substantially all of the assets of P&W, second only to P&W's primary banking facility, as well as real estate owned by an affiliate of P&W. On September 14, 2000, the Bankruptcy Court entered an emergency interim order approving the management agreement and financing and security agreement. However, the bankruptcy plan, including the proposed acquisition, management agreement and financing and security agreement, are still subject to the final approval of the United States Bankruptcy Court for the Eastern District of Louisiana, and the Company cannot guarantee that the transaction will be completed or, if completed, that the Company will successfully assimilate the additional personnel, operations, acquired technology and products of P&W into the business, or retain key personnel and customers. On or about September 19, 2000, the Company informed the selling shareholders of Desktop that 20,000 shares held under escrow, pursuant to the acquisition agreement, would not be released as contemplated in the initial purchase price. Upon final receipt of these shares from the escrow agent, management anticipates reducing the purchased goodwill by approximately $329,000. On October 24, 2000, the Company obtained from Mellon Bank, N.A. ("Mellon") a line of credit and a $2 million term loan to refinance the prior bank indebtedness, to provide additional working capital, and for other general corporate purposes. The new line of credit enables the Company to borrow a maximum of $15 million, with borrowings limited to 85% of eligible accounts receivable and 65% of eligible inventory. The term loan is payable in monthly principal installments of $55,556 commencing on December 1, 2000, and in one final payment of the remaining principal balance plus all accrued and unpaid interest thereon on October 24, 2003. The term loan bears interest, payable monthly, at 0.75% per annum over the base rate, which is the higher of Mellon's prime rate or the effective federal funds rate plus 0.50% per annum. The revolving credit facility will bear interest at the floating rate of 0.25% per annum above the base rate. After the Company delivers the audited consolidated financial statements for the fiscal year ending March 31, 2001 to Mellon, the applicable margin over the base rate may change on an annual basis depending on the ratio of funded debt to EBITDA. At the Company's option, interest may instead be paid at a LIBOR rate plus an applicable margin, which also varies on the ratio of funded debt to EBITDA. Under the terms of the agreement, DrugMax is prohibited from paying dividends, and it must maintain certain financial ratio covenants in addition to others of the type customarily required by lenders for similar facilities. On October 27, 2000, proceeds were used to repay the Merrill Lynch Financial and National City Bank credit facilities, aggregating approximately $8.9 million, and approximately $5.5 million was available for borrowing. NOTE H - LOSS PER SHARE Basic net loss per common share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is calculated by dividing loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. The Company does not have any dilutive shares outstanding. F-74 VALLEY DRUG COMPANY BALANCE SHEETS MARCH 31, 2000 AND 1999 ASSETS 2000 1999 ---------- ---------- Current assets (unaudited) (unaudited) Cash $ 500 $ - Accounts receivable, net 2,899,271 2,759,761 Inventory 6,585,222 7,097,160 Prepaid and other current assets 21,125 41,411 ---------- ----------- Total current assets 9,506,118 9,898,332 Property, plant and equipment - net 67,951 65,893 Shareholder note receivable 70,000 - Non-current accounts receivable 265,553 21,639 Other non-current assets 72,860 59,798 ---------- ----------- Total assets $9,982,482 $10,045,662 ========== =========== F-75 VALLEY DRUG COMPANY BALANCE SHEETS MARCH 31, 2000 AND 1999 LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 ---------- ----------- Current liabilities (unaudited) (unaudited) Line of credit $4,368,000 $ 3,933,468 Current portion long-term debt 254,912 220,000 Bank overdraft - 895,868 Accounts payable 3,177,225 3,283,954 Accrued expenses 174,779 126,553 ---------- ----------- Total current liabilities 7,974,916 8,459,843 Long-term debt 1,510,083 1,744,518 ---------- ----------- Total liabilities 9,484,999 10,204,361 Shareholders' equity Common stock, no par; 500 shares authorized; 100 shares issued and outstanding, at March 31, 2000 and 1999 - - Retained earnings 497,483 (158,699) ---------- ----------- Total shareholders' equity 497,483 (158,699) ---------- ----------- Total liabilities and Shareholders' equity $9,982,482 $10,045,662 ========== =========== Please read accompanying notes F-76 VALLEY DRUG COMPANY STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited) 2000 1999 ----------- ----------- Sales $12,264,706 $12,285,830 Cost of good sold 11,673,984 11,798,602 ----------- ----------- Gross Profit 590,722 487,228 Operating expenses Depreciation 4,100 - General and administrative 460,460 541,450 ----------- ----------- Total operating expenses 464,560 541,450 ----------- ----------- Operating income (loss) 126,162 (54,222) Other income (expense) Interest income 5,922 1,703 Interest expense (166,249) (92,959) ----------- ----------- Total other income (expense) (160,327) (91,256) ----------- ----------- Net loss $ (34,165) $ (145,478) =========== =========== Basic and diluted loss per share $ (341.65) $ (1,454.78) =========== =========== Weighted average shares of common stock outstanding 100 100 =========== =========== Please read accompanying notes. F-77 VALLEY DRUG COMPANY STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited) 2000 1999 --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (34,165) $ (145,478) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization expense 11,150 - Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (197,517) 21,223 Inventory (246,103) (1,339,876) Other current assets - (17,625) Other assets 22,749 136,213 Increase (decrease) in: Accounts payable 274,272 448,573 Accrued expenses 29,589 963,861 --------- ----------- Net cash provided (used) by operating activities (140,025) 66,891 --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (5,303) (42,531) Notes receivable acquired - (70,000) Payments received on notes - 52,000 --------- ----------- Net cash provided (used) by investing activities (5,303) (60,531) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on line of credit 202,000 3,933,468 Proceeds from issuance of debt - 2,000,000 Payments on long-term debt (56,674) (1,254,316) Purchase and retirement of common stock - (6,760,068) --------- ----------- Net cash provided (used) by financing activities 145,326 (2,080,916) --------- ----------- Net increase (decrease) in cash (2) (2,074,556) Cash at beginning of period 502 2,137,036 --------- ----------- Cash at end of period $ 500 $ 62,480 ========= =========== SUPPLEMENTAL INFORMATION: Cash paid for interest $ 166,249 $ 92,959 ========= =========== Please read accompanying notes. F-78 VALLEY DRUG COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the financial statements and footnotes for the year ended December 31, 1999 which are included elsewhere herein. NOTE B - RECENTLY ISSUED AUTHORITATIVE GUIDANCE In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance related to revenue recognition issues based on interpretations and practices followed by the SEC. Management has determined that the adoption of SAB 101 did not have a material impact on its March 31, 2000 condensed financial statements. NOTE C - ACQUISITION On April 19, 2000, the Company was acquired by DrugMax.com, Inc. NOTE D - INCOME TAXES The Company was privately owned until April 19, 2000 and had elected with the consent of its shareholders to be taxed as an S corporation. On April 19, 2000, the Company executed an agreement and plan of reorganization with DrugMax.com, Inc. ("DrugMax") whereby all of the issued and outstanding capital stock of the Company was exchanged for shares of DrugMax (Note 7). As a result of the exchange, the Company became a wholly owned subsidiary of DrugMax. Under those provisions, the Company does not pay federal corporate income taxes on its taxable income. Instead, the shareholders are liable for individual federal and state income taxes on their proportionate shares of the Company's taxable income. NOTE E - LOSS PER SHARE Basic and diluted net loss per common share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding during the period. NOTE F - LINE OF CREDIT In January 1999, the Company established a $ 4.5 million revolving credit facility scheduled to mature in January 2002. The credit available to the Company is based on a percentage of eligible accounts receivable and inventory. The facility imposes financial covenants on tangible net worth, leverage, and a debt service ratio. Minimum borrowing under the agreement is $1,000. The agreement places limitations on disposition of assets and debt funding to transactions within the normal course of business and restricts the payment of dividends to any shareholder of record and any class of common stock during the term of the agreement. Borrowings accrue interest at 11% and are secured by all assets of the Company. The shareholders have personally guaranteed the loan. F-79 Basis of Presentation of Unaudited Pro Forma Condensed Consolidated Financial Statements for the Year Ended March 31, 2000. The unaudited pro forma data presented in the unaudited pro forma condensed Consolidated statements of operations are included in order to illustrate the effect on the Company's financial statements of the transactions described below: On November 26, 1999, DrugMax.com, Inc. ("DrugMax") acquired all the issued and outstanding shares of Becan Distributors, Inc. and its subsidiary, Discount Rx, Inc. (collectively "Becan") for $2,000,000 in cash and 2,000,000 shares of DrugMax common stock. The acquisition is accounted for as a purchase. On March 20, 2000, DrugMax acquired all the issued and outstanding shares of Desktop Corporation and its subsidiary, Desktop Ventures, Inc. (collectively "Desktop") for stock and payment of certain Desktop liabilities. Desktop provides consulting and software development services. The acquisition is accounted for as a purchase. Simultaneous with the Desktop acquisition, DrugMax acquired a 20% interest in VetMall, Inc. ("VetMall") a web site management company. Since Desktop already owned a 50% interest in VetMall, the acquisition of the additional 20% interest gave DrugMax a controlling interest in VetMall. The acquisition is accounted for as a purchase. On April 19, 2000, DrugMax acquired all the issued and outstanding stock of Valley Drug Company for $1,700,000 and 226,666 shares of DrugMax common stock. The acquisition is accounted for as a purchase. For purposes of the statement of operations the adjustments are presented as if DrugMax had acquired Becan, Desktop, VetMall and Valley as of April 1, 1999. The pro forma information is based on the following historical financial statements after giving effect to the transactions using the purchase method of accounting and the assumptions and adjustments in the accompanying notes to the unaudited pro forma condensed consolidated financial statements. The audited consolidated financial statements of DrugMax (as filed in DrugMax's Form 10-KSB/A, for the fiscal year ended March 31, 2000), The unaudited consolidated financial statements of Becan which were provided by Becan, for the period April, 1999 through November 26, 1999. The audited consolidated financial statements of Desktop for the fiscal year ended March 31, 2000 (filed with Form 8-K/A of DrugMax filed on June 29, 2000) which have been provided by Desktop, The audited financial statements of VetMall for the period from June 28, 1999 (date of inception) through March 31, 2000 (filed with Form 8-K/A of DrugMax filed on June 29, 2000) which were provided by VetMall, and The December 31, 1999 audited financial statements of Valley for the year ended December 31, 1999 (filed with this report under Item 7 (a)) which have been provided by Valley. These unaudited pro forma condensed consolidated financial statements may not be indicative of the results that actually would have occurred if the acquisitions had occurred on the dates indicated or of the results which may be obtained in the future. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data. F-80 The Unaudited Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and related notes of the respective companies. Becan's statement of operations includes only activity from April 1, 1999 through November 26, 1999 (date of acquisition). The VetMall statement of operations is for the period from June 28, 1999 (date of inception) through March 20, 2000 (date of acquisition). The Desktop statement of operations is for the period from April 1, 1999 to March 20, 2000 (date of acquisition). All activity of Becan, Desktop and VetMall subsequent to the respective dates of acquisition is included in DrugMax's March 31, 2000 consolidated statement of operations. Valley's statement of operations is for the year ended December 31, 1999. The minority interest for 30% of VetMall has not been recognized because of VetMall's shareholders' deficit. Adjustments reflect the following: (a) Elimination of intercompany revenues and expenses and equity in loss of affiliate to reflect the consolidation of Desktop and VetMall due to the common ownership created by the acquisition. (b) Amortization expense related to goodwill arising from the Becan acquisition (15 year life.) (c) Amortization expense related to goodwill arising from the Desktop acquisition (5 year life.) (d) Amortization expense related to goodwill arising from the VetMall acquisition (5 year life.) (e) Amortization expense related to goodwill arising from the Valley acquisition (15 year life.) (f) Tax benefit lost as result of the acquisition and the corresponding limitation on Desktop's net operating loss carry forwards. (g) Weighted average shares of common stock outstanding was calculated based on the assumption that the shares issued in connection with the acquisitions were outstanding for the entire period. F-81 DRUGMAX.COM, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2000
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 --------------- ------------------ --------------- --------------- Net revenues $21,050,547 $ 33,721,393 $ 2,374,506 $ 574,706 Cost of sales 20,906,771 32,965,395 18,815 458,739 ----------- ------------ ------------ -------------- Gross profit 143,776 755,998 2,355,691 115,967 ----------- ------------ ------------ -------------- Operating expenses: Selling, general and administrative expense 2,076,653 421,994 2,572,164 2,314,856 Goodwill amortization-Becan -- Goodwill amortization-Desktop Goodwill amortization-VetMall -- Goodwill amortization-Valley Drug -- ----------- ------------ ------------ -------------- Total operating expenses 2,076,653 421,994 2,572,164 2,314,856 ----------- ------------ ------------ -------------- Operating income (loss) (1,932,877) 334,004 (216,473) (2,198,889) Interest income 144,340 5,455 54 Interest expense (107,095) (99,090) (50,996) Other income and (expenses), net (93,312) (8,377) 798,982 Equity in loss of affiliate -- (1,099,444) ----------- ------------ ------------ ------------- Income (loss) before income tax (1,988,944) 231,992 (567,877) (2,198,889) Income tax provision -- -- 280,042 ----------- ------------ ------------ ------------ Net income (loss) $(1,988,944) $ 231,992 $ (287,835) $(2,198,889) =========== ============ ============ =========== Basic and diluted net income (loss) per share $ (0.51) =========== Basic and diluted weighted average number of shares outstanding 3,875,445 ===========
VALLEY DRUG PROFORMA JANUARY 1, 1999 CONSOLIDATED DECEMBER 31, 1999 ADJUSTMENTS MARCH 31, 2000 ----------------- ----------- -------------- Net revenues $50,572,187 $ (1,999,682) (a) $106,293,657 Cost of sales 48,037,331 102,387,051 ----------- ---------- ------------ Gross profit 2,534,856 (1,999,682) 3,906,606 ----------- ---------- ------------ Operating expenses: Selling, general and administrative expense 1,737,992 (2,110,307) (a) 7,013,352 Goodwill amortization-Becan 126,663 (b) 126,663 Goodwill amortization-Desktop 568,925 (c) 568,925 Goodwill amortization-VetMall 384,545 (d) 384,545 Goodwill amortization-Valley Drug 230,214 (e) 230,214 ----------- ---------- ------------ Total operating expenses 1,737,992 (799,960) 8,323,699 ----------- ---------- ------------ Operating income (loss) 796,864 (1,199,722) (4,417,093) Interest income 13,113 -- 162,962 Interest expense (565,371) -- (822,552) Other income and (expenses), net (110,625) (a) 586,668 Equity in loss of affiliate 1,099,444 (a) -- ----------- ---------- ------------ Income (loss) before income tax 244,606 (210,903) (4,490,015) Income tax provision (280,042) (f) -- ----------- ---------- ------------ Net income (loss) $ 244,606 $ (490,945) $ (4,490,015) =========== ========== ============ Basic and diluted net income (loss) per share $ (0.89) =========== Basic and diluted weighted average number of shares outstanding (g) 5,018,708 ===========
F-82 Basis of Presentation of Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 2000. The unaudited pro forma data presented in the unaudited pro forma condensed consolidated statements of operations are included in order to illustrate the effect on the Company's financial statements of the transaction described below: On April 19,2000, DrugMax.com,Inc. (DrugMax) acquired all the issued and outstanding shares of Valley Drug Company (Valley) for $1,700,000 and 217,225 shares of common stock. The acquisition is accounted for as a purchase. For purposes of the statement of operations the adjustments are presented as if DrugMax had acquired Valley as of April 1, 2000. The pro form information is based on the following historical financial statements after giving effect to the transaction using the purchase method of accounting and the assumptions and adjustments in the accompanying notes to the unaudited pro forma condensed consolidated financial statements. The unaudited condensed consolidated financial statements of DrugMax (as filed on DrugMax's Form 10QSB, for the three months ended June 30, 2000), The audited financial statements of Valley for the period ended April 18, 2000. These pro forma condensed consolidated financial statements may not be indicative of the results that actually would have occurred if the acquisition had occurred on the date indicated or of the results which may be obtained in the future. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data. Valley's statement of operations includes only activity from April 1, 2000 through April 19, 2000 (date of acquisition). F-83 DrugMax.com Inc. Pro Forma Unaudited Condensed Consolidated Statement of Operations June 30, 2000
DrugMax Valley Drug Three Months Ended 04/01/2000 to Pro forma 06/30/00 04/18/2000 --------------------------------------------------------------------- Net revenues $28,816,653 $2,816,998 $31,633,651 Cost of goods sold 27,813,691 2,755,859 30,569,550 --------------------------------------------------------------------- Gross profit 1,002,962 61,139 1,064,101 Selling, general and administrative expenses 2,363,190 74,768 2,437,958 --------------------------------------------------------------------- Operating (loss) before other income and expense (1,360,228) (13,628) (1,373,856) --------------------------------------------------------------------- Other income (expense): Interest income 64,355 (996) 63,359 Interest expense (223,956) 17,808 (206,148) --------------------------------------------------------------------- Total other income (expense) (159,601) 16,812 (142,789) --------------------------------------------------------------------- Net income (loss) $(1,519,829) $ 3,184 $(1,516,645) ===================================================================== Basic and diluted net loss per share $ (0.24) $ (0.24) ===================================================================== Basic and diluted weighted average number of common shares outstanding 6,374,780 6,374,780 =====================================================================
The pro forma statement reflects the inclusion of Valley Drug Company's results of operations for the 18 days of April preceding DrugMax's acquisition of Valley. Since the majority of Valley's activity for the quarter, was already included in DrugMax's consolidated statement of operations for the quarter ended June 30, 2000, no additional adjustments were considered necessary. F-84 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. Section 78.7502 of the Nevada Revised Statutes permits a corporation to include in our charter documents, and in agreements between the corporation and our directors and officers, provisions expanding the scope of indemnification beyond the indemnification specifically provided by the current law. Article XI of our Bylaws provides for the indemnification of officers, directors and third parties acting on our behalf if such person acted in good faith and in a manner reasonably believed to be in, and not opposed to, our best interest and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his or her conduct was unlawful. In addition to providing for indemnification in our Bylaws, we may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of we, or is or was serving at the request of we as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of his or her status as such. Further, we may enter into indemnification agreements with our directors and executive officers in the future. Item 25. Other Expenses of Issuance and Distribution. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee. Description Amount - ----------- ------ Securities and Exchange Commission filing fee................. $ 3,943.00 NASD filing fee............................................... 1,493.65 Nasdaq listing fee............................................ Blue Sky filing fees and expenses............................. Legal fees and expenses....................................... Underwriter's expenses........................................ Accounting fees and expenses.................................. Printing, postage, and mailing expenses....................... Stock transfer agent fees and certificates.................... Miscellaneous................................................. Total......................................................... $ Item 26. Recent Sales of Unregistered Securities. During the past three years, DrugMax has issued unregistered securities to a limited number of persons as described below. The following information regarding DrugMax's shares of common stock has been adjusted to give effect to (i) the one-for-fifty reverse split of DrugMax's common stock effected in March 1999, (ii) the two-for-one stock split in the form of a stock dividend effected in April 1999, and (iii) a one-for-two reverse stock split in October 1999. (1) On March 18, 1999, DrugMax issued an aggregate of 2,400,000 shares of common stock to 14 investors in connection with the merger of Nutriceuticals.com Corporation, a Florida corporation, with and into DrugMax. (2) On March 31, 1999, DrugMax issued an aggregate of 100,000 shares of common stock, to one investor in connection with the acquisition of Healthseek.com Corporation, a Massachusetts corporation. II-1 (3) On August 16, 1999, DrugMax issued an aggregate of 20,000 shares of common stock to Lyntren Communications, Inc. in connection with the acquisition of the Nutriceuticals.com domain name. (4) On November 26, 1999, DrugMax issued an aggregate of 2,000,000 shares of common stock to Dynamic Health Products, a Florida corporation, in connection with the acquisition of Becan Distributors, Inc. (5) On March 20, 2000, DrugMax issued an aggregate of 50,000 shares of common stock in connection with the acquisition of Desktop Corporation. (6) On March 20, 2000, DrugMax issued an aggregate of 49,985 shares of common stock to retire debt associated with the acquisition of Desktop Corporation. (7) On March 20, 2000 DrugMax issued 25,000 shares of common stock in connection with the acquisition of VetMall. (8) On April 19, 2000 DrugMax issued 217,225 shares of common stock in connection with the acquisition of Valley Drug Company. None of the foregoing transactions involved any underwriter, underwriting discounts or commissions or any public offering, and DrugMax believes that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof. The recipients in such transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access to information about DrugMax. Item 27. Exhibits. The following exhibits are filed with this registration statement: 1.1 Underwriting Agreement between DrugMax.com, Inc. and Utendahl Capital Partners, L.P.(*) 2.1 Agreement and Plan of Merger by and between NuMed Surgical, Inc. and Nutriceuticals.com Corporation, dated as of January 15, 1999. (1) 2.2 Agreement and Plan of Reorganization between DrugMax and Eric Egnet dated March 31, 1999. (1) 2.3 Agreement and Plan of Reorganization dated September 8, 1999 by and between Nutriceuticals.com Corporation and Dynamic Health Products, Inc. (2) 2.4 Agreement and Plan of Reorganization between DrugMax.com, Inc., Jimmy L. Fagala, K. Sterling Miller, and HCT Capital Corp. dated as of March 20, 2000. (3) 2.5 Stock Purchase Agreement between DrugMax.com, Inc. and W.A. Butler Company dated as of March 20, 2000. (3) 2.6 Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A. Blundo dated as of April 19, 2000. (4) 3.1 Articles of Incorporation of NuMed Surgical, Inc., filed October 18, 1993. (1) 3.2 Articles of Amendment to the Articles of Incorporation of NuMed Surgical, Inc., filed March 18, 1999. (1) 3.3 Articles of Merger of NuMed Surgical, Inc. and Nutriceuticals.com Corporation, filed March 18, 1999. (1) II-2 3.4 Certificate of Decrease in Number of Authorized Shares of Common Stock of Nutriceuticals.com Corporation, filed October 29, 1999. (5) 3.5 Articles of Amendment to Articles of Incorporation of Nutriceuticals.com Corporation, filed January 11, 2000. (8) 3.6 Articles and Plan of Merger of Becan Distributors, Inc. and DrugMax.com, Inc., filed March 29, 2000. (8) 3.7 Amended and Restated Bylaws, dated November 11, 1999. (5) 4.1 Specimen of Stock Certificate. (8) 4.2 Form of Representative's Warrant Agreement. (*) 5.1 Opinion of [Shumaker, Loop & Kendrick, LLP], re: legality of securities registered * 10.1 Consulting Agreement by and between DrugMax.com, Inc. and Stephen M. Watters dated as of August 10, 2000. 10.2 Employment Agreement by and between Nutriceuticals.com Corporation and William L. LaGamba dated January 1, 2000. (7) 10.3 Employment Agreement by and between Valley Drug Company and Ronald J. Patrick dated April 19, 2000. (8) 10.4 Employment Agreement by and between Valley Drug Company and Ralph A. Blundo dated April 19, 2000. (8) 10.5 Consulting Agreement by and between DrugMax.com, Inc. and Jugal K. Taneja, dated as of April 1, 1999. (1) 10.6 Loan and Security Agreement among DrugMax.com, Inc. and Valley Drug Company and Mellon Bank, N.A. dated October 24, 2000. 21 Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Brimmer, Burek, Keelan & McNally LLP, independent auditors (Valley) 23.3 Consent of Brimmer, Burek, Keelan & McNally LLP, independent auditors (VetMall) 23.4 Consent of Brimmer, Burek, Keelan & McNally LLP, independent auditors (Desktop) 23.5 Consent of Brimmer, Burek, Keelan & McNally LLP, independent auditors (Becan) 23.6 Consent of Kirkland, Russ, Murphy & Tapp, independent auditors 23.7 Consent of Shumaker, Loop & Kendrick, LLP (included in Exhibit 5.1) * 24 Powers of Attorney (reference is made to the signature page) 27 Financial Data Schedule** 99.1 DrugMax.com, Inc.1999 Incentive and Non-Statutory Stock Option Plan. (8) ________________ * To be filed by amendment. ** Contained in electronically filed version only. II-3 (1) Incorporated by reference to DrugMax's Registration Statement on Form SB-2, filed June 29, 1999, File Number 0-24362, as amended. (2) Incorporated by reference to Amendment No. 1 to DrugMax's Registration Statement on Form SB-2, filed on September 13, 1999, File No. 0-24362. (3) Incorporated by reference to DrugMax's Report on Form 8-K, filed April 6, 2000, File Number 0-24362. (4) Incorporated by reference to DrugMax's Report on Form 8-K, filed May 3, 2000, File Number 0-24362. (5) Incorporated by reference to Amendment No. 2 to DrugMax's Registration Statement on Form SB-2, filed on November 12, 1999, File No. 0-24362. (6) Incorporated by reference to DrugMax's Report on Form 8-K, filed February 8, 2000, File No. 0-24362. (7) Incorporated by reference to DrugMax's Form 10-KSB, filed June 29, 2000, File No. 0-24362. (8) Incorporated by reference to DrugMax's Form 10-KSB, filed July 14, 2000, File No. 0-24362. Item 28. Undertakings. (1) For determining any liability under the Securities Act, we hereby undertake to treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. (2) Insofar as indemnification for liabilities arising from the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (3) For determining any liability under the Securities Act, we hereby undertake to treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us under Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. II-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on our behalf by the undersigned, in the city of Largo, State of Florida, on October 31, 2000. DrugMax.com, Inc. By: /s/ William L. LaGamba ----------------------------------- William L. LaGamba, President and Chief Operating Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints each of William L. LaGamba and Jugal K. Taneja his attorney-in-act, with the power of substitution, to sign any amendments, including post-effective amendments, to this registration statement, and any registration statement filed pursuant to Rule 462(b) of the Securities Act related hereto, and to file the same with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- By: /s/ Jugal K. Taneja Chairman of the Board October 31, 2000 ------------------------ and Chief Executive Jugal K. Taneja Officer By: /s/ William L. LaGamba President and October 31, 2000 ------------------------ Chief Operating Officer William L. LaGamba By: /s/ Ronald J. Patrick Director October 31, 2000 ------------------------ Ronald J. Patrick By: /s/ Stephen M. Watters Director October 31, 2000 ------------------------ Stephen M. Watters By: /s/ Howard L. Howell DDS Director October 31, 2000 ------------------------- Dr. Howard L. Howell, DDS By: /s/ Jeffrey K. Peterson Director October 31, 2000 ------------------------ Jeffrey K. Peterson By: /s/ Joseph Zappala Director October 31, 2000 ------------------------ Joseph Zappala II-5 EX-10.1 2 0002.txt WATTERS CONSULTING AGREEMENT Exhibit 10.1 CONSULTING AGREEMENT THIS AGREEMENT, made, entered into, and effective this 10/th/ day of August, 2000 (the "Effective Date"), by and between STEPHEN WATTERS, an individual resident of Florida (hereinafter referred to as "Consultant"), and DRUGMAX.COM INC., a Nevada corporation with its principal place of business in Largo, Florida (hereinafter referred to as "Corporation"). W I T N E S S E T H: WHEREAS, Consultant has been a valuable employee of the Corporation and the Corporation realizes that Consultant has demonstrated a keen understanding of the Corporation's operations such that it would be desirable to retain Consultant's services under a consulting agreement; WHEREAS, Consultant desires to provide such consulting services for the Corporation as an independent contractor, with the understanding that he shall not be required to devote his full time to the business of the Corporation and shall be free to pursue other personal and business interests; and WHEREAS, Consultant and the Corporation further agree that the employment agreement made as of April 15, 1999 by and between this Corporation, as the Employer, and the Consultant, as the Executive (the "Employment Agreement") shall terminate effective as of the Effective Date of this Agreement, provided however, that all accrued payments under the Employment Agreement shall remain an outstanding obligation of the Corporation. NOW, THEREFORE, in consideration of the premises, the mutual covenants of the parties herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, it is agreed as follows: 1. CONSULTING ARRANGEMENT. The Corporation hereby contracts for the services of Consultant and Consultant agrees to perform such duties and responsibilities and to render advice and consulting as may be requested by the Corporation from time to time during the term of this consulting arrangement in connection with the Corporation's business throughout the United States and world wide ("Consulting Arrangement"). Said consulting services shall include, but not be limited to, [ . . . customer development and sales, warehouse operations, inventory management, and product selection . . . ] Consultant shall use his best efforts to keep the Corporation informed of all corporate business opportunities which shall come to his attention and appear beneficial to the Corporation's business so that the Corporation can obtain the maximum benefits from Consultant's knowledge, experience, and personal contacts. 2. RELATIONSHIP BETWEEN PARTIES. During the term of the Consulting Arrangement, Consultant shall be deemed to be an independent contractor. He shall be free to devote his time, energy and skill to any such person, firm or company as he deems advisable except to the extent he is obligated to devote his time, energy and skill to the Corporation pursuant to the terms of this Agreement. Consultant shall not be considered as having an employee status vis-a-vis the Corporation, or by virtue of the Consulting Arrangement being entitled to participate in any plans, arrangements or distributions by the Corporation pertaining to or in connection with any pension, stock, bonus, profit sharing, welfare benefits, or similar benefits for the regular employees of the Corporation. The Corporation shall not withhold any taxes in connection with the compensation due Consultant hereunder, and Consultant will be responsible for the payment of any such taxes and hereby agrees to indemnify the Corporation against nonpayment thereof. 3. COMPENSATION FOR THE CONSULTING ARRANGEMENT. As part of the consideration for the services to be rendered under the Consulting Arrangement by Consultant and as compensation for the income he could have otherwise earned if he had not agreed to keep himself available to the Corporation hereunder, the Corporation shall pay Consultant compensation at the rate of Eight Thousand Three Hundred Thirty-three Dollars and Thirty-three cents ($8,333.33) per month commencing August 10, 2000, and continuing each month thereafter for a total of thirty-six months. All compensation due to Consultant under this Section 3 shall accrue until such time as the Corporation has sufficient funds therefore. 4. TERM OF CONSULTING ARRANGEMENT. The Consulting Arrangement shall begin effective as of the Effective Date of this Agreement and shall continue for a period of thirty-six (36) months, until August 10, 2003 (the "Consulting Period"). 5. CONFIDENTIALITY COVENANTS. 5.1 Acknowledgments by the Consultant. The Consultant acknowledges that (a) during the Consulting Period and as a part of his Consulting Arrangement, the Consultant will be afforded access to Confidential Information (as defined below); (b) public disclosure of such Confidential Information could have an adverse effect on the Corporation and its business; (c) because the Consultant possesses substantial technical expertise and skill with respect to the Corporation's business, the Corporation desires to obtain exclusive ownership of each Consultant Invention (as defined below), and the Corporation will be at a substantial competitive disadvantage if it fails to acquire exclusive ownership of each Consultant Invention; (d) the provisions of this Section 5 are reasonable and necessary to prevent the improper use or disclosure of Confidential Information and to provide the Corporation with exclusive ownership of all Consultant Inventions. 5.2 Agreements of the Consultant. In consideration of the compensation and benefits to be paid or provided to the Consultant by the Corporation under this Agreement, the Consultant covenants as follows: (a) Confidentiality. (i) During and following the Consulting Period, the Consultant will hold in confidence the Confidential Information and will not disclose it to any person except with the specific prior written consent of the Corporation or except as otherwise expressly permitted by the terms of this Agreement. (ii) Any trade secrets of the Corporation will be entitled to all of the protections and benefits under Chapter 688, Florida Statutes and any other applicable law. If any information that the Corporation deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered Confidential Information for purposes of this Agreement. The Consultant hereby waives any requirement that the Corporation submit proof of the economic value of any trade secret or post a bond or other security. 2 (iii) None of the foregoing obligations and restrictions applies to any part of the Confidential Information that the Consultant demonstrates was or became generally available to the public other than as a result of a disclosure by the Consultant. (iv) The Consultant will not remove from the Corporation's premises (except to the extent such removal is for purposes of the performance of the Consultant's duties at home or while traveling, or except as otherwise specifically authorized by the Corporation) any document, record, notebook, plan, model, component, device, or computer software or code, whether embodied in a disk or in any other form (collectively, the "Proprietary Items"). The Consultant recognizes that, as between the Corporation and the Consultant, all of the Proprietary Items, whether or not developed by the Consultant, are the exclusive property of the Corporation. Upon termination of this Agreement by either party, or upon the request of the Corporation during the Consulting Period, the Consultant will return to the Corporation all of the Proprietary Items in the Consultant's possession or subject to the Consultant's control, and the Consultant shall not retain any copies, abstracts, sketches, or other physical embodiment of any of the Proprietary Items. (b) Consultant Inventions. Each Consultant Invention will belong exclusively to the Corporation. The Consultant acknowledges that all of the Consultant's writing, works of authorship, and other Consultant Inventions are works made for hire and the property of the Corporation, including any copyrights, patents, or other intellectual property rights pertaining thereto. If it is determined that any such works are not works made for hire, the Consultant hereby assigns to the Corporation all of the Consultant's right, title, and interest, including all rights of copyright, patent, and other intellectual property rights, to or in such Consultant Inventions. The Consultant covenants that he will promptly: (i) disclose to the Corporation in writing any Consultant Invention; (ii) assign to the Corporation or to a party designated by the Corporation, at the Corporation's request and without additional compensation, all of the Consultant's right to the Consultant Invention for the United States and all foreign jurisdictions; (iii) execute and deliver to the Corporation such applications, assignments, and other documents as the Corporation may request in order to apply for and obtain patents or other registrations with respect to any Consultant Invention in the United States and any foreign jurisdictions; (iv) sign all other papers necessary to carry out the above obligations; and (v) give testimony and render any other assistance in support of the Corporation's rights to any Consultant Invention. 5.3 Disputes or Controversies. The Consultant recognizes that should a dispute or controversy arising from or relating to this Agreement be submitted for adjudication to any court, arbitration panel, or other third party, the preservation of the secrecy of Confidential Information may be jeopardized. All pleadings, documents, testimony, and records relating to any such adjudication will be maintained in secrecy and will be available for inspection by the Corporation, the Consultant, and their respective attorneys and experts, who 3 will agree, in advance and in writing, to receive and maintain all such information in secrecy, except as may be limited by them in writing. 5.4 Definitions. (a) For the purposes of this Section 5, "Confidential Information" shall mean any and all: (i) trade secrets concerning the business and affairs of the Corporation, product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information, and any other information, however documented, that is a trade secret within the meaning of Chapter 688, Florida Statutes; (ii) information concerning the business and affairs of the Corporation (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials, however documented; and (iii) notes, analysis, compilations, studies, summaries, and other material prepared by or for the Corporation containing or based, in whole or in part, on any information included in the foregoing. (b) For the purposes of this Section 5, "Consultant Invention" shall mean any idea, invention, technique, modification, process, or improvement (whether patentable or not), any industrial design (whether registerable or not), any mask work, however fixed or encoded, that is suitable to be fixed, embedded or programmed in a semiconductor product (whether recordable or not), and any work of authorship (whether or not copyright protection may be obtained for it) created, conceived, or developed by the Consultant, either solely or in conjunction with others, during the Consulting Period, or a period that includes a portion of the Consulting Period, that relates in any way to, or is useful in any manner in, the business then being conducted or proposed to be conducted by the Corporation, and any such item created by the Consultant, either solely or in conjunction with others, following termination of the Consultant's Consulting Arrangement with the Corporation, that is based upon or uses Confidential Information. 6. NON-COMPETITION AND NON-INTERFERENCE 6.1 Acknowledgments by the Consultant. The Consultant acknowledges that: (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character; (b) the Corporation's business is national in scope and its products are marketed throughout the United States and world wide; (c) the Corporation competes with other businesses that are or could be located 4 in any part of the United States and world wide; (d) the provisions of this Section 6 are reasonable and necessary to protect the Corporation's business. 6.2 Covenants of the Consultant. In consideration of the acknowledgments by the Consultant, and in consideration of the compensation and benefits to be paid or provided to the Consultant by the Corporation, the Consultant covenants that he may, directly or indirectly: --- (a) during the Consulting Period, except in the course of his Consulting Arrangement hereunder, and during the Post-Consulting Period (as defined below), engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend the Consultant's name or any similar name to, lend Consultant's credit to or render services or advice to, any business whose products or activities compete in whole or in part with the products or activities of the Corporation anywhere within the United States; provided, however, that the Consultant may purchase or otherwise acquire up to (but not more than) one percent of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934; (b) whether for the Consultant's own account or for the account of any other person, at any time during the Consulting Period and the Post- Consulting Period, solicit business of the same or similar type being carried on by the Corporation, from any person known by the Consultant to be a customer of the Corporation, whether or not the Consultant had personal contact with such person during and by reason of the Consultant's Consulting Arrangement with the Corporation; (c) whether for the Consultant's own account or the account of any other person (i) at any time during the Consulting Period and the Post- Consulting Period, solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is or was an employee of the Corporation at any time during the Consulting Period or in any manner induce or attempt to induce any employee of the Corporation to terminate his Consulting Arrangement with the Corporation; or (ii) at any time during the Consulting Period and for three years thereafter, interfere with the Corporation's relationship with any person, including any person who at any time during the Consulting Period was an employee, contractor, supplier, or customer of the Corporation; or (d) at any time during or after the Consulting Period, disparage the Corporation or any of its shareholders, directors, officers, employees, or agents. For purposes of this Section 6.2, the term "Post-Consulting Period" means the three year period beginning on the date of termination of the Consultant's Consulting Arrangement with the Corporation. If any covenant in this Section 6.2 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against the Consultant. 5 The period of time applicable to any covenant in this Section 6.2 will be extended by the duration of any violation by the Consultant of such covenant. 7. NOTICES. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nation-ally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): 8. OPTIONS. All options (50,000) previously granted to Mr. Watters will become immediately vested per Board approval given on August 10, 2000. 9. OFFICER POSITIONS. Mr. Watters resigns all officer and Board Positions of Drugmax.com, Inc. subsidiaries which include Vetmall.com, Inc. and Desktop Media Inc. If to the Corporation: Drugmax.com Corp. 12505 Starkey Rd., Ste. A Largo, FL 33773 Attention: William LaGamba, CEO Facsimile No.: (727) 531-1280 With a copy to: Schifino & Fleischer, P.A. 201 North Franklin Street Suite 2700 Tampa, FL 33602 Attention: Lina Angelici, Esq. Facsimile No.: (813) 223-3070 If to the Executive: Stephen Watters 12505 Starkey Rd., Ste. A Largo, FL 33773 Facsimile No.: (727) 531-1280 10. BINDING EFFECT. This Agreement shall extend to, shall inure to the benefit of and shall be binding upon all the parties hereto and upon all of their respective heirs, successors and representatives. 11. ENTIRE AGREEMENT. This Agreement, including the agreements incorporated by reference, contains the entire Agreement among the parties hereto with respect to the matters contemplated hereby and supersedes all prior agreements and undertakings between the parties with respect to such matters. This Agreement may not be amended, modified or terminated in whole or in part, except in writing, executed by each of the parties hereto. 6 12. INDEMNIFICATION. Consultant hereby agrees to hold harmless and indemnify Corporation from and against any and all loss, damage, expense, and cost (including reasonable attorneys' fees incurred in connection with the same) incurred by Corporation as a result of Consultant's breach of any covenant or agreement made herein. 13. SPECIFIC PERFORMANCE. The Consultant acknowledges that his obligations hereunder are unique, and that it would be extremely impracticable to measure the resulting damages if he should default in his obligations under this Agreement. Accordingly, in the event of the failure by Consultant to perform his obligations hereunder, which failure constitutes a breach hereof by him, the Corporation may, in addition to any other available rights or remedies, sue in equity for specific performance and, in connection with any such suit, the Consultant expressly waives the defense therein that the Corporation has an adequate remedy at law. 14. SEVERABILITY. Should any part of any provision of this Agreement be declared invalid by a court of competent jurisdiction, such decision or determination shall not affect the validity of any remaining portion of such provision or any other provision and the remainder of the Agreement shall remain in full force and effect and shall be construed in all respects as if such invalid or unenforceable provision or portion thereof were not contained herein. In the event of a declaration of invalidity, the provision or portion thereof declared invalid shall not necessarily be invalidated in its entirety, but shall be observed and performed by the parties to the Agreement to the extent such provision is valid and enforceable. 15. SECTION HEADINGS. The section headings contained herein are for convenience of reference only and shall not be considered any part of the terms of this Agreement. 7 16. CHOICE OF LAW. This Agreement shall be interpreted and performed in accordance with the laws of the State of Florida, and the parties agree, notwithstanding the principles of conflicts of law, that the internal laws of the State of Florida shall govern and control the validity, interpretation, performance, and enforcement of this Agreement. IN WITNESS WHEREOF, Consultant has hereunto put his hand, and the Corporation has caused this instrument to be executed in its corporate name by its duly authorized officer, all as of the day and year first above written. CONSULTANT: /s/ Stephen M. Watters -------------------------------- Stephen M. Watters CORPORATION: DRUGMAX.COM INC. By: /s/ William LaGamba -------------------------------- William LaGamba, CEO 8 EX-10.6 3 0003.txt LOAN AND SECURITY AGREEMENT Exhibit 10.6 LOAN AND SECURITY AGREEMENT Among DRUGMAX.COM, INC., and VALLEY DRUG COMPANY, as Borrowers and THE GUARANTORS FROM TIME TO TIME PARTY HERETO and MELLON BANK, N.A., as Bank Dated as of: October 24, 2000 TABLE OF CONTENTS -----------------
Page ---- 1. DEFINITIONS AND CONSTRUCTION........................................... 1 1.1 Definitions....................................................... 1 1.2 Accounting Terms and Determinations............................... 18 1.3 UCC............................................................... 19 1.4 Construction...................................................... 19 1.5 Schedules and Exhibits............................................ 19 1.6 Obligor's Knowledge............................................... 19 2. THE REVOLVING CREDIT FACILITY.......................................... 19 2.1 The Facility...................................................... 19 2.2 Revolver Note..................................................... 20 2.3 Borrowing Base.................................................... 20 2.4 Sublimits......................................................... 21 2.5 Reserves.......................................................... 21 2.6 Reduction in Advance Rates........................................ 21 3. ADVANCES UNDER THE REVOLVING CREDIT FACILITY........................... 22 3.1 General........................................................... 22 3.2 Borrowing Procedures.............................................. 22 3.3 Funding Procedure................................................. 22 4. THE TERM LOAN.......................................................... 23 4.1 Term Loan......................................................... 23 4.2 Term Note......................................................... 23 4.3 Advance of the Term Loan.......................................... 23 5. USE OF LOAN PROCEEDS................................................... 23 6. LETTERS OF CREDIT...................................................... 23 6.1 General........................................................... 23 6.2 Conditions to Issuance............................................ 23 6.3 Tenor............................................................. 24 6.4 Sublimits......................................................... 24 6.5 Procedure and Documentation....................................... 24 6.6 Reduction of Availability......................................... 24 6.7 Draws............................................................. 24
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Page ---- 6.8 Cash Collateral................................................... 24 6.9 Indemnification................................................... 25 6.10 Obligations Irrevocable........................................... 25 6.11 Risk Under Letters of Credit...................................... 26 7. INTEREST RATE.......................................................... 27 7.1 Interest Rate Options for the Revolving Credit Facility........... 27 7.2 Interest Rate Options for the Term Loan........................... 28 7.3 Base Rate Fall Back............................................... 29 7.4 LIBOR Rate Unascertainable or Unavailable......................... 30 7.5 LIBOR Unlawful.................................................... 30 7.6 Indemnification................................................... 30 7.7 Determinations.................................................... 30 7.8 Default Rate...................................................... 31 7.9 Post Judgment Interest............................................ 31 7.10 Calculations...................................................... 31 7.11 Limitation of Interest to Maximum Lawful Rate..................... 31 8. PAYMENTS AND FEES...................................................... 32 8.1 Interest Payments on the Revolving Credit Facility................ 32 8.2 Principal Payments on the Revolving Credit Facility............... 32 8.3 Interest Payments on the Term Loan................................ 32 8.4 Principal Payments on Term Loan................................... 33 8.5 Letter of Credit Fees............................................. 33 8.6 Facility Fee...................................................... 33 8.7 Collateral Management Fee......................................... 33 8.8 Unused Facility Fee............................................... 33 8.9 Late Charge....................................................... 34 8.10 Termination of Revolving Credit Facility and Termination Fee...... 34 8.11 Prepayment of Term Loan........................................... 34 8.12 Interest and Breakage Costs on LIBOR Rate Loans................... 35 8.13 Payment Method and Application.................................... 35 8.14 Reinstatement of Obligations...................................... 36 8.15 Maintenance of Loan Account; Statements of Obligations............ 36 8.16 Indemnity......................................................... 37 8.17 Loss of Margin.................................................... 37 8.18 Savings Clause.................................................... 38 9. TAXES.................................................................. 38
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Page ---- 10. SECURITY; COLLECTION OF RECEIVABLES AND PROCEEDS OF COLLATERAL............................................................. 39 10.1 Personal Property................................................ 39 10.2 Collateral Assignment of Licenses................................ 41 10.3 Management Support and Validity Agreements....................... 41 10.4 Negotiable Collateral............................................ 41 10.5 Surety........................................................... 41 10.6 Stock Pledges.................................................... 41 10.7 General.......................................................... 42 10.8 Collection of Accounts; Proceeds of Collateral................... 42 11. REPRESENTATIONS AND WARRANTIES......................................... 43 11.1 Valid Organization, Good Standing and Qualification.............. 43 11.2 Licenses......................................................... 44 11.3 Ownership Interests.............................................. 44 11.4 Subsidiaries..................................................... 44 11.5 Financial Statements............................................. 44 11.6 No Material Adverse Change in Financial Condition................ 44 11.7 Pending Litigation or Proceedings................................ 44 11.8 Due Authorization; No Legal Restrictions......................... 45 11.9 Enforceability................................................... 45 11.10 No Default Under Other Obligations, Orders or Governmental Regulations...................................................... 45 11.11 Governmental Consents............................................ 45 11.12 Taxes............................................................ 45 11.13 Title to Collateral.............................................. 46 11.14 Names; Addresses and State of Formation.......................... 46 11.15 Current Compliance............................................... 46 11.16 United States Pension and Benefit Plans.......................... 46 11.17 Leases and Contracts............................................. 46 11.18 Intellectual Property............................................ 47 11.19 Eligible Accounts................................................ 47 11.20 Eligible Inventory............................................... 47 11.21 Business Interruptions........................................... 48 11.22 Business......................................................... 48 11.23 Affiliate Transactions........................................... 48 11.24 Property of Obligors............................................. 48 11.25 Inventory Records................................................ 49 11.26 FEIN............................................................. 49
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Page ---- 11.27 Solvency......................................................... 49 11.28 Subordinated Indebtedness........................................ 49 11.29 Inventory Locations.............................................. 49 11.30 Investment Company Act; Public Utility Holding Company Act....... 50 11.31 Employee Relations............................................... 50 11.32 Investment Property.............................................. 51 11.33 Common Enterprise................................................ 51 11.34 Insurance........................................................ 51 11.35 Web Sites........................................................ 51 11.36 Accuracy of Representations and Warranties....................... 51 12. AFFIRMATIVE COVENANTS.................................................. 51 12.1 Payment of Principal, Interest and Other Amounts Due............. 52 12.2 Claims for Labor and Materials................................... 52 12.3 Existence; Approvals; Qualification; Compliance with Laws........ 52 12.4 Maintenance of Properties........................................ 52 12.5 Intellectual Property............................................ 52 12.6 Insurance........................................................ 53 12.7 Inspections; Examinations........................................ 54 12.8 Pension Plans.................................................... 54 12.9 Bank Accounts.................................................... 55 12.10 Maintenance of Management........................................ 55 12.11 Transactions with Affiliates..................................... 56 12.12 Additional Documents and Future Actions.......................... 56 12.13 Title to Equipment............................................... 56 12.14 Taxes............................................................ 56 12.15 Leases........................................................... 57 12.16 Notices.......................................................... 57 12.17 Assignment of Claims Act......................................... 57 12.18 Additional Guarantors............................................ 57 12.19 Instruments; Promissory Notes.................................... 58 12.20 Future Leases.................................................... 58 12.21 Web Sites........................................................ 58 13. NEGATIVE COVENANTS..................................................... 59 13.1 Limitation on Sale and Leaseback................................. 59 13.2 Limitation on Indebtedness....................................... 59 13.3 Loans............................................................ 60 13.4 Investments...................................................... 60
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Page ---- 13.5 Guaranties..................................................... 60 13.6 Disposition of Assets.......................................... 60 13.7 Merger; Consolidation; Business Acquisitions; Siubsidiaries.... 60 13.8 Liens.......................................................... 61 13.9 Letters of Credit.............................................. 62 13.10 Insurance...................................................... 62 13.11 Default Under Other Indebtedness............................... 62 13.12 Transactions with Affiliates................................... 62 13.13 Name or Chief Executive Address Change......................... 62 13.14 Change in Location of Collateral............................... 62 13.15 Material Adverse Contracts..................................... 63 13.16 Restrictions on Use of Proceeds................................ 63 13.17 Subordinated Indebtedness...................................... 63 13.18 Prepayments; Amendments and License Agreements................. 64 13.19 Distributions; Stock Redemptions............................... 64 13.20 Issuance of Capital Stock...................................... 64 13.21 Prohibited Transactions Under ERISA............................ 64 13.22 Licenses....................................................... 65 13.23 Consignments................................................... 65 13.24 Trademark and Tradename Licenses............................... 65 13.25 Equipment Becoming Fixture..................................... 65 14. FINANCIAL COVENANTS.................................................... 66 14.1 Net Income...................................................... 66 14.2 Stand-Alone Net Income.......................................... 66 14.3 Net Worth....................................................... 67 14.4 Current Ratio................................................... 68 14.5 Capital Expenditures............................................ 68 14.6 Cash on Deposit................................................. 69 14.7 Changes to Financial Covenants.................................. 70 14.8 Most Favored Lender............................................. 70 15. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS.................. 70 15.1 Annual Statements............................................... 70 15.2 Projections and Cash Flow....................................... 71 15.3 Monthly Statements.............................................. 71 15.4 Collateral Reporting............................................ 72 15.5 Tax Returns..................................................... 73 15.6 SEC Reporting................................................... 73
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Page ---- 15.7 Audit Reports.................................................... 15.8 Reports to Governmental Agencies and Other Creditors............. 74 15.9 Requested Information............................................ 74 15.10 Compliance Certificates.......................................... 74 15.11 Accountant's Certificate......................................... 74 74 16. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE OR LETTER OF CREDIT......... 74 16.1 Searches......................................................... 75 16.2 UCC-1 Filings.................................................... 75 16.3 Executed Loan Documents.......................................... 75 16.4 Authorizing Resolutions.......................................... 75 16.5 Governing Documents.............................................. 75 16.6 Material Agreements.............................................. 75 16.7 Good Standing Certificates....................................... 76 16.8 Insurance........................................................ 76 16.9 Collateral Access Agreements..................................... 76 16.10 Opinions of Counsel.............................................. 76 16.11 Tax Returns...................................................... 76 16.12 March 31, 2000 Financial Statements.............................. 76 16.13 July 31, 2000 and August 31, 2000 Financial Statements........... 76 16.14 Licenses, Approvals, Etc......................................... 77 16.15 Excess Availability.............................................. 77 16.16 No Material Adverse Change....................................... 77 16.17 Fees............................................................. 77 16.18 SEC Reporting.................................................... 77 16.19 Reference Checks................................................. 77 16.20 Subordination.................................................... 77 16.21 Equipment Leases................................................. 77 16.22 Releases......................................................... 77 17. CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT.............. 78 17.1 Representations and Warranties................................... 78 17.2 No Default or Event of Default................................... 78 17.3 No Injunction or Order........................................... 78 17.4 No Bankruptcy.................................................... 78
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Page ---- 18. DEFAULT AND REMEDIES................................................... 78 18.1 Events of Default............................................... 78 18.2 Remedies........................................................ 81 18.3 Application of Proceeds......................................... 82 18.4 Sale or Other Disposition of Collateral......................... 82 18.5 Actions With Respect to Accounts................................ 83 18.6 Actions With Respect to Web Sites............................... 85 18.7 Set-Off......................................................... 86 18.8 Turnover of Property Held by Bank............................... 86 18.9 Delay or Omission Not Waiver.................................... 86 18.10 Remedies Cumulative............................................. 87 18.11 Consents, Approvals and Discretion.............................. 87 18.12 Certain Fees, Costs, Expense Expenditures....................... 87 19. INDEMNIFICATION........................................................ 88 20. COMMUNICATIONS AND NOTICES............................................. 89 21. WAIVERS................................................................ 89 21.1 Waivers......................................................... 89 21.2 Forbearance..................................................... 90 21.3 Limitation on Liability......................................... 90 21.4 Waiver of Subrogation........................................... 91 22. SUBMISSION TO JURISDICTION............................................. 91 23. MISCELLANEOUS.......................................................... 91 23.1 Brokers......................................................... 91 23.2 Use of Bank's Name.............................................. 91 23.3 No Joint Venture................................................ 92 23.4 Survival........................................................ 92 23.5 No Assignment................................................... 92 23.6 Assignment or Sale by Bank...................................... 92 23.7 Publicity....................................................... 92 23.8 Injunctive Relief............................................... 92 23.9 Time is of the Essence.......................................... 92 23.10 All Powers Coupled With Interest................................ 93 23.11 Disclosure and Disclaimer Regarding Power of Attorney........... 93
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Page ---- 23.12 Binding Effect....................................................... 93 23.13 Severability......................................................... 93 23.14 No Third Party Beneficiaries......................................... 94 23.15 Modifications........................................................ 94 23.16 Holidays............................................................. 94 23.17 Law Governing........................................................ 94 23.18 Integration.......................................................... 94 23.19 Exhibits and Schedules............................................... 94 23.20 Headings............................................................. 94 23.21 Counterparts; Facsimile Signatures................................... 94 23.22 Joint and Several.................................................... 94 23.23 Limitation on Damages................................................ 95 23.24 Waiver of Right to Trial by Jury..................................... 95
viii LOAN AND SECURITY AGREEMENT --------------------------- THIS LOAN AND SECURITY AGREEMENT is made effective as of October 24, 2000 by and among DRUGMAX.COM, INC., a Nevada corporation ("DrugMax"); VALLEY DRUG COMPANY, an Ohio corporation ("Valley") (DrugMax and Valley being collectively hereinafter referred to as "Borrowers"); each of the GUARANTORS (as defined hereinbelow) from time to time party hereto; and MELLON BANK, N.A. ("Bank"). NOW, THEREFORE, in consideration of the terms and conditions contained herein, and of any extensions of credit now or hereafter made to or for the benefit of Borrowers under this Agreement, the parties hereto, intending to be legally bound hereby, agree as follows: 1. DEFINITIONS AND CONSTRUCTION. ---------------------------- 1.1 Definitions. The following words and phrases ----------- as used in capitalized form in this Agreement, whether in the singular or plural, shall have the meanings indicated: Account Debtor means any Person who is or who may become obligated under, with respect to, or on account of, an Account. Accounts means, with respect to a Person, all of such Person's now owned and hereinafter acquired rights to payment for goods sold or leased or for services rendered which is not evidenced by any instrument or chattel paper, whether or not it has been earned by performance, and any other property or interest in property that is classified as an account pursuant to the UCC. Advances means an advance by Bank under the Revolving Credit Facility, the Term Loan or this Agreement, including without limitation, Base Rate Loans, LIBOR Rate Loans, advances under Letters of Credit, or advances to pay Bank Expenses. Affiliate means, with respect to any Person, (a) any officer, director or managing member of such Person, (b) any Subsidiary of such Person, (c) any other Person (other than a Subsidiary) that, (i) directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such Person, (ii) directly or indirectly beneficially owns or holds twenty percent (20%) or more of any class of Voting Stock of such Person or any Subsidiary of such Person, or (iii) twenty percent (20%) or more of the Voting Stock of which is directly or indirectly beneficially owned or held by such Person or a Subsidiary of such Person, and (d) without limiting the foregoing, with respect to any Obligor, each other Obligor. The term "control" means the possession directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of the Voting Stock, by contract or otherwise. Agreement means this Loan and Security Agreement. Applicable Law means, with respect to any Person, all provisions of constitutions, statutes, regulations and orders of any Governmental Authority applicable to such Person or its property, including, without limitation, all orders and decrees of all courts and arbitrators in proceedings or actions to which such Person is a party. In respect of contracts relating to interest or finance charges that are made or performed in the Commonwealth of Pennsylvania, "Applicable Law" shall mean the laws of the U.S., including without limitation 12 U.S.C. (S)(S) 85 and 86(a), as amended from time to time, and any other statute of the U.S. now or at any time hereinafter prescribing the maximum rates of interest on loans and extensions of credit, and the laws of the Commonwealth of Pennsylvania. Applicable Margin is equal to the percent per annum in excess of the Base Rate or LIBOR Rate as set forth in the following pricing matrix:
Ratio of Revolving Term Funded Credit Facility Loan ------------------- ---------------- Debt to Base LIBOR Base LIBOR Level EBITDA Rate + Rate+ Rate+ Rate+ - ----- ---------------- ------ ----- ----- ----- Level I **3.50:1 .75% 3.00% 1.25% 3.50% Level II ** 3.00 * 3.50:1 .50% 2.75% 1.00% 3.25% Level III ** 2.50:1 * 3.00: 1 .25% 2.50% .75% 3.00% Level IV * 2.00:1 * 2.50:1 .00% 2.25% .50% 2.75% Level V * 2.00:1 .00% 2.00% .25% 2.50%
** denotes greater than or equal to * denotes less than From the Closing Date through the date of receipt of the fiscal year-end March 31, 2001 audited consolidated financial statements of Borrowers, the Applicable Margin for Advances under the Revolving Credit Facility and the Term Loan shall be the Applicable Margin set forth on Level III in the above-described pricing matrix. Thereafter, the Applicable Margin will be based upon the ratio of Funded Debt of Borrowers to EBITDA of Borrowers on an annual basis as reflected on the year-end audited consolidated financial statements of Borrowers delivered to Bank pursuant to Section 15.1 for each fiscal year ending after March 31, 2001, ------------ provided, however, if the year end financial statements are not delivered at the - -------- ------ time specified in Section 15.1 below, then the Applicable Margin for any given ------------ kind of Loan shall be the highest Applicable Margin set forth above for such kind of Loan during any period that the Borrowers are delinquent in the delivery of such financial statements. The adjustment in the Applicable Margin, if any, will be effective five (5) Business Days after receipt by Bank of the consolidated financial statements of Borrowers delivered to Bank pursuant to Section 15.1 below. There shall be no reduction in the Applicable Margin if (a) - ------------ a Default or an Event of Default has occurred and is continuing uncured; (b) Borrowers have not averaged at least $1,000,000.00 of Excess Availability under the Revolving Credit Facility for the 30 days immediately preceding the date of such reduction; or (c) Borrowers do not have at least $1,000,000.00 of Excess Availability under the Revolving Credit Facility on the date of such reduction. 2 Assignment of Patents, Trademarks, Licenses and Copyrights means the collateral assignments of patents, trademarks, licenses and copyrights of even date herewith executed by each Obligor in favor of Bank as security for the Obligations. Availability means, as of the date of determination, the result (so long as such result is a positive number) of (a) the lesser of (i) the Borrowing Base, or (ii) the Maximum Revolving Credit Facility Amount; less (b) ---- the Revolving Credit Facility Usage. Average Unused Portion of Maximum Revolving Credit Facility Amount means, as of any date of determination, (a) the Maximum Revolving Credit Facility Amount, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding under the Revolving Credit Facility during the immediately preceding month, plus (ii) the average Daily Balance of the undrawn principal amount of Letters of Credit that were outstanding during the immediately preceding month. Bank means Mellon Bank, N.A., a national banking association, its successors and assigns. Bank Expenses has the meaning set forth in Section 18.12. ------------- Bankruptcy Code means the United States Bankruptcy Code (11 U.S.C.(S)101 et seq.), as amended, and any successor statute. -- --- Base Rate means the higher of (a) the Bank's Prime Rate in effect from time to time, or (b) the effective Federal Funds Rate in effect from time to time plus .50% per annum, with changes in each case to take effect immediately upon any change in the Prime Rate or the Federal Funds Rate as applicable. Base Rate Loan means Advances made under the Revolving Credit Facility or the Term Loan bearing interest at the Base Rate plus Applicable Margin. Base Rate Loan Request has the meaning set forth in Section ------- 3.2(a) - ------ Benefit Plan means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which any Obligor, any Subsidiary of any Obligor, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. Blocked Account Agreement means an agreement between any Borrower, Bank and a depository institution at which any Borrower maintains a deposit account into which cash, checks or drafts constituting proceeds of such Borrower's Accounts or Inventory are to be deposited as provided in this Agreement, in form and content satisfactory to Bank, limiting the transfer of funds in such deposit account solely as directed by Bank. Books means all of a Person's books and records, including without limitation, ledgers; records indicating, summarizing, or evidencing such Person's properties or assets (including the 3 Collateral) or liabilities; all information relating to such Person's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs or other computer prepared information. Borrowers means DrugMax and Valley, collectively, and their successors and assigns. Borrower means DrugMax and Valley, individually, and their individual successors and assigns. Borrowing Base has the meaning set forth in Section 2.3 ----------- Borrowing Base Certificate means the borrowing base certificate prepared by the Borrowers and submitted to Bank in the form of Exhibit E --------- attached hereto. Business means the wholesale distribution of pharmaceutical products, including over-the-counter pharmaceutical products, health and beauty care products, and nutritional supplements. Business Day means any day that is not a Saturday, Sunday, or other day on which commercial banks in Pennsylvania are authorized or required to close. Capital Expenditures means any expenditure that would be classified as a capital expenditure in accordance with GAAP. Capital Stock means corporate stock and any and all shares, partnership interests, limited partnership interests, membership interests, equity interests, rights, securities or other equivalent evidences of ownership (however designated) issued by any entity (whether a corporation, partnership, limited liability company, limited partnership, business trust or other type of entity). Capitalized Lease means any lease of Property, the obligations for the rental of which are required to be capitalized in accordance with GAAP. Capitalized Lease Obligations means all amounts payable with respect to a Capitalized Lease. Cash Collateral Account has the meaning set forth in Section in Section 10.8(c) - -------------- Change of Control shall be deemed to have occurred at such time ----------------- as (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than one or more of the members of the Management Group, becomes the "beneficial owner" (as defined in Rule 13d- 3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 51% of the total Voting Stock then outstanding of DrugMax or of more than 51% of the total Capital Stock then outstanding of DrugMax; (b) DrugMax ceases to own 100% of all Voting Stock and Capital Stock of Valley; (c) DrugMax ceases to own 100% of all Voting Stock and Capital Stock of Desktop; and (d) DrugMax ceases to own 70% of all Voting Stock and Capital Stock of VetMall. Closing Date means the date of this Agreement. 4 Collateral has the meaning set forth in Section 10.7 ------------ Collateral Access Agreement means a landlord waiver, mortgagee waiver, bailee letter, or acknowledgment agreement of any warehouseman, processor, lessor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in any Obligor's Equipment, Inventory or Books, in each case, in form and substance satisfactory to Bank. Compliance Certificate means a certificate substantially in the form of Exhibit A and delivered by the chief executive officer or chief --------- financial officer of Borrowers, to Bank, as required under Section 15.10. ------------- Contract Period means the period of time commencing on the date of this Agreement and expiring on October 24, 2003. Controlled Substance has the meaning given in Section 802(6) of -------------- Title 21, United States Code (U.S.C.), as amended. Current Assets at a particular date means the aggregate amount of all assets of Borrowers which would be classified as current assets on a consolidated balance sheet of Borrowers at such date, in accordance with GAAP, including without limitation all cash, marketable securities, mutual funds, treasury bills and other investment property. Current Liabilities at any particular date means the liabilities (including tax and other proper accruals) of Borrowers which would be included as current liabilities on a consolidated balance sheet of Borrowers at such date, in accordance with GAAP, including in all cases the outstanding principal balance of the Revolving Credit Facility. Current Ratio means the ratio of Current Assets to Current Liabilities. Daily Balance means the amount of an Obligation owed at the end of a given day. Default means an event, condition or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. Default Rate has the meaning set forth in Section 7.8. ----------- Desktop means Desktop Media Group, Inc., a Florida corporation. Disbursement Letter means an instructional letter executed and delivered by Borrowers to Bank regarding the extensions of credit to be made on the Closing Date, the form and substance of which shall be satisfactory to Bank. Dollars or $ means freely transferable U.S. Dollars. Draw Amount has the meaning set forth in Section 6.7. ----------- 5 EBITDA, shall mean for any period, without duplication, the Net Income of Borrowers (exclusive of extraordinary gains) for such period, plus the ---- aggregate amounts deducted in determining such Net Income in respect of (i) Interest Expense, (ii) Tax Expense, and (iii) depreciation and amortization expenses for such period, each determined on a consolidated basis and in accordance with GAAP. Eligible Accounts means Accounts owed to a Borrower in which Bank has a prior, perfected first priority lien, which have been due no more than ninety (90) days from the original invoice date, are not subject to offsets, deductions, counterclaim, discount, credit, charge back, freight claim, allowance or adjustment, and which are and at all times continue to be acceptable to Bank in all respects; provided, however, that standards of -------- ------- eligibility may be fixed and revised from time to time by Bank in its discretion. Eligible Accounts shall not include: (a) Accounts with 30-day payment terms which have been due more than the lesser of (i) 60 days from the due date, or (ii) 90 days from the original invoice date; (b) Accounts with 7- or 15-day payment terms which have been due more than the lesser of (i) 45 days from the due date, or (ii) 60 days from the original invoice date; (c) Accounts which are evidenced by a note, chattel paper or instrument, unless Bank has a valid perfected first priority security interest in such note, chattel paper or instrument; (d) Accounts which are evidenced by judgments; (e) Accounts with respect to which the applicable Borrower does not have absolute title; (f) any Account which is subject to an unresolved dispute with the Account Debtor; (g) Accounts with respect to which the Account Debtors are not Solvent or are subject to a bankruptcy or similar proceeding; (h) Accounts with respect to which the Account Debtor is another Obligor, an Affiliate of any Obligor or an Affiliate of any member, officer or director of any Obligor; (i) Accounts arising with respect to goods which have not been shipped or services not performed, conditional sales, sale on approval, sales subject to repurchase or return, consignment sales, or similar transactions in which the sale to or the obligation of the Account Debtor to pay is contingent; 6 (j) non-trade receivables; (k) contra-accounts; (l) Accounts subject to the Assignment of Claims Act of 1940, as amended from time to time, or any Applicable Law now or hereafter existing similar in effect thereto, or to any other prohibition (under Applicable Law, by contract or otherwise) against its assignment or requiring notice of or consent to such assignment, unless all such required notices have been given, all such required consents have been received and all other procedures have been complied with that such receivable shall have been duly and validly assigned to Bank, in form and content satisfactory to Bank; (m) Accounts which are not subject to a valid and perfected first priority security interest in favor of Bank; (n) finance charges; (o) lease receivables; (p) Accounts owed by a Person if fifty percent (50%) or more of such Person's Accounts owed to any Borrower have been due more than ninety (90) days past the original invoice date or would be deemed ineligible as a result of subsections (a) or (b) above; ---------------------- (q) Accounts subject to a Lien in favor of any Person (other than Bank); (r) Accounts concentrated in individual Account Debtors which exceed 25% of all then Eligible Accounts; (s) an Account not evidenced by an invoice; (t) Accounts with respect to which the applicable Borrower is in breach of any express or implied representation or warranty with respect to the goods or services the sale of which gave rise to such Account or in breach of any representation or warranty, covenant or other agreement contained in the Loan Documents with respect to such Account; (u) Accounts arising with respect to bill-and-hold sales, unless the applicable Borrower has received and delivered to Bank a bill- and-hold agreement in form and content acceptable to Bank; (v) Accounts with respect to which the Account Debtor is located outside the United States or which are payable in a currency other than U.S. Dollars, unless payment of such 7 Accounts is fully secured by a letter of credit in form and content and issued by a commercial bank reasonably acceptable to Bank; (w) Accounts arising with respect to sales in any state or jurisdiction in which the applicable Borrower is not properly licensed (if required by applicable law) as a wholesale distributor of pharmaceuticals, dangerous drugs or Controlled Substances; and (x) Accounts with respect to which the Account Debtor is determined by Bank in its discretion to be ineligible for any other reason. Eligible Inventory means FIFO Inventory of a Borrower consisting of first quality finished goods held for sale in the ordinary course of such Borrower's business, which are and at all times continue to be acceptable to Bank in all respects; provided, however, that standards of -------- ------- eligibility may be fixed and revised from time to time by Bank in its discretion. An item of Inventory shall not be included in Eligible Inventory if: (a) it is or contains a Controlled Substance; (b) it is not of good and merchantable quality, free from any material defects or damage; (b) it is subject to any licensing, patent, royalty, trademark, tradename, copyright or other agreement with any third parties which restricts Bank's right as a secured party to sell such Inventory after an Event of Default; (c) it consists of goods held on consignment by any Borrower or delivered by any Borrower to a third Person for sale by such third Person on consignment for such Borrower; (d) the applicable Borrower does not have good, valid and marketable title thereto; (e) it is not located at an Eligible Inventory Location; (f) if the Inventory is not located on premises owned by the applicable Borrower, it is not segregated or otherwise separately identifiable from goods of others, if any, stored on such premises; (g) it is not subject to a valid and perfected first priority security interest in favor of the Bank; 8 (h) it consists of goods returned or rejected by a Borrower's customers, or goods classified as "return to vendor", unless such goods are resaleable in the ordinary course of business; (i) it is obsolete or custom item which is not saleable in the ordinary course of business, or constitutes repair or replacement machine parts, packaging and shipping materials or supplies used or consumed in a Borrower's business; (j) it is subject to a Lien in favor of any Person (other than Bank); (k) it consists of bill-and-hold goods; (m) it is slow-moving, as determined by Bank in good faith; (n) it consists of raw materials or work-in- process; (o) it consists of finished goods which do not meet the specifications of the applicable purchase order and cannot be easily resold in the ordinary course of business; (p) it consists of goods produced in violation of the Fair Labor Standards Act and subject to the so-called "hot goods" provision in Title 29 U.S.C. Section 215(a); (q) it consists of goods that are expired; or (r) it consists of goods for which Bank would need a registration, license, permit or consent of another Person to sell or dispose of, other than registrations, licenses, permits or consents to be a wholesale distributor of pharmaceuticals, dangerous drugs, prescription drugs or Controlled Substances. Eligible Inventory Buy-Back Agreement means an agreement in form and content acceptable to Bank pursuant to which a supplier or a publically owned wholesaler of Inventory, whose creditworthiness is acceptable to Bank, agrees to unconditionally repurchase from the applicable Borrower and from Bank as a secured party the Inventory of such Borrower at a price greater than 80% of the cost of such Inventory including all shipping, restocking and other charges. Eligible Inventory Locations means each of the locations described on Schedule 11.29(b), as such Schedule 11.29(b) may be amended from ----------------- ----------------- time to time pursuant to Section 11.29(c). ---------------- Environmental Agreement means that certain Environmental Agreement executed of even date with this Agreement by the Obligors in favor of Bank. 9 Equipment means all of a Person's present and hereafter acquired cars, trucks, vehicles, machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, trailers, tools, dies, jigs, molds, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including, without limitation (a) any interest of such Person in any of the foregoing, and (b) all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. ERISA means the Employee Retirement Income Security Act of 1974, 29 U.S.C.(S)(S)1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. ERISA Affiliate means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of any Obligor under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of any Obligor under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a member of an affiliated service group of which any Obligor is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with any Obligor and whose employees are aggregated with the employees of any Obligor under IRC Section 414(o). ERISA Event means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of any Obligor, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during, a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (or the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of any Obligor, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the IRC by any Obligor or any of its Subsidiaries or any of their ERISA Affiliates. Event of Default has the meaning set forth in Section 18.1. ------------ Excess Availability means, as of any date of determination, the excess, if any, of (i) Availability under the Revolving Credit Facility on such date, minus (ii) the aggregate amount of all accounts payable of Borrowers which ----- are then more than 30 days past due. Federal Funds Rate means the daily rate of interest announced from time to time by the 10 Board of Governors of the Federal Reserve System in publication H.15 as the "Federal Funds Rate." FEIN means Federal Employer Identification Number. Financial Asset means any financial asset, now owned or hereafter acquired that is classified as a "financial asset" pursuant to Chapter 8 (or Article 8) of the UCC. Funded Debt shall mean without duplication, all Indebtedness of Borrowers for borrowed money, and all guaranties of Borrowers of any or all of the foregoing. Funded Debt shall include, without limitation, all Subordinated Indebtedness of Borrowers and Capitalized Lease Obligations of Borrowers. Funding Date means the date, which must be a Business Day, on which the funding of an Advance occurs. GAAP means generally accepted accounting principles in the United States of America, in effect from time to time, consistently applied and maintained. General Intangibles means all of a Person's present and future general intangibles and other personal property (including contract rights, rights arising under common law, statutes, or regulations, licenses, lease rights, permits, approvals, choses or things in action, goodwill, trade secrets, methods, processes, know-how, formulas, label designs, domain names, domain name registrations, patents, patent rights and applications, trade names, brand names, logos, inventions, trademarks and registrations or applications therefor, servicemarks and registrations or applications therefor, copyrights and registrations or applications therefor, blueprints, plans, patterns, drawings, specifications, designs, manufacturing or processing rights, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, software and computer programs, information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, tax refund claims, government subsidy payments, databases, all notes and records with respect to any research and development and all physical embodiments of the foregoing), other than Inventory, Accounts, Equipment and Negotiable Collateral. General Intangibles shall also include, without limitation, all assets necessary to the operation and maintenance of all present and future websites, including without limitation, all equipment, lease agreements, hosting agreements, line leases, intellectual property, copyrights, patents, trademarks, software licenses and general intangibles, and all intellectual property assets described on Schedule -------- 11.18. - ------ Governing Documents means the certificate or articles of incorporation, by-laws, partnership agreement, joint venture agreement, operating agreement or other organizational or governing documents of any Person. 11 Governmental Authority means any nation or government, any federal, state, county, municipal, parish, provincial or other political subdivision thereof and any department, commission, board, court, agency or other instrumentality or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. Guarantor means each of (a) Desktop, (b) VetMall, and (c) each other Person who shall become a "Guarantor" pursuant to or as required under Section ------- 12.18, and their respective successors and assigns. - ----- Indebtedness, as applied to a Person, means: (a) all items (except items of capital stock or of surplus) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined; (b) to the extent not included in the foregoing, all indebtedness, obligations, and liabilities secured by any mortgage, pledge, lien, conditional sale or other title retention agreement or other security interest to which any property or asset owned or held by such Person is subject, whether or not the indebtedness, obligations or liabilities secured thereby shall have been assumed by such Person; and (c) to the extent not included in the foregoing, all indebtedness, obligations and liabilities of others which such Person has directly or indirectly guaranteed, endorsed (other than for collection or deposit in the ordinary course of business), sold with recourse, or agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, stock purchase, capital contribution or otherwise) or otherwise to become directly or indirectly liable. Indemnified Parties has the meaning set forth in Section 19. ---------- Interest Expense as applied to Borrowers means for any period, the amount of interest expense on Indebtedness of Borrowers for such period, determined in accordance with GAAP. Inventory means all present and future inventory in which a Person has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of such Person's present and future raw materials, work in process, finished goods, packaging, packing and shipping materials, goods used or consumed in the Person's business, component parts, supplies and returned, rejected or repossessed goods, wherever located. 12 Inventory Reserves means reserves (determined from time to time by Bank in its discretion) for the estimated costs relating to unpaid freight charges, warehousing or storage charges, taxes, duties, processing charges, handling charges and other similar unpaid costs associated with any Borrower's Inventory. Investment Property means any investment property, now owned or hereafter acquired, that is classified as "investment property" pursuant to the UCC. IRC means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. Lease means any lease of real estate under which any Obligor is the lessee. Leasehold Property means any real estate which is the subject of a Lease. Letters of Credit means the Standby Letters of Credit and the Merchandise Letters of Credit issued by Bank pursuant to this Agreement. LIBOR Loan Request has the meaning set forth in Section 3.2 (a). --------------- LIBOR Rate means with respect to any Advance under the Revolving Credit Facility or the Term Loan accruing interest at a LIBOR Rate plus Applicable Margin as permitted hereunder, for any day during each Rate Period, the per annum rate of interest (computed on a basis of a year of 360 days and actual days elapsed) determined by Bank to be equal to the quotient of (a) the per annum rate of interest estimated in good faith by Bank in accordance with its usual procedures (which determination shall be conclusive) to be the average of the rate per annum for deposits, in an amount denominated in U.S. Dollars comparable to the amount of principal relating to such Rate Period and having maturities comparable to such Rate Period, offered to major money center banks in the London interbank market as referenced by Reuters Screen "LIBOR" at or about 11:00 a.m., London time, two (2) London business days prior to such Rate Period, divided by (b) a number equal to 1.00 minus the LIBOR Reserve Percentage for the relevant Rate Period. In the event that the LIBOR Rate is unavailable or cannot be ascertained, Bank will have the right to designate the LIBOR Rate on such basis as it shall reasonably determine. LIBOR Rate Loan means any Advance under the Revolving Credit Facility or the Term Loan bearing interest at the LIBOR Rate plus Applicable Margin. LIBOR Rate Notification means a written notification from Borrower to be delivered to Bank electing to convert an existing Base Rate Loan to a LIBOR Rate Loan or to continue an existing LIBOR Rate Loan as a new LIBOR Rate Loan for an additional Rate Period, in the form of Exhibit B attached hereto. --------- LIBOR Reserve Percentage means the maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during the relevant Rate 13 Period under Regulation D (and/or other similar regulation) of the Board of Governors of the Federal Reserve System against "Eurocurrency Liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the LIBOR Reserve Percentage shall reflect any other reserves required to be maintained by reason of any regulatory change against (a) any category of liabilities which includes deposits by reference to which the LIBOR Rate is to be determined as provided in the definition of "LIBOR Rate" or (b) any category of extensions of credit or other assets which include loans, the interest rate of which is based on the LIBOR Rate. Licenses means all licenses, permits, consents, approvals and authorizations issued by a Governmental Authority with respect to or in connection with the operation of the Borrowers' Business. Lien means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded, published, registered or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising, from a mortgage, debenture, charge, deed of trust, encumbrance, pledge, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting any real property. Loan Account has the meaning set forth in Section 8.15. ------------ Loan Documents means this Agreement, any Notes executed by Borrowers and payable to Bank, the Pledge Agreements, the Environmental Agreement, the Disbursement Letter, the Letters of Credit, the Subordination Agreements, each Surety Agreement, the Assignment of Patents, Trademarks, Licenses and Copyrights and any other assignment or other agreement entered into, now or in the future, in connection with this Agreement, the Obligations or any of the transactions contemplated hereunder. Loan Request means a Base Rate Loan Request or a LIBOR Rate Loan Request. Loans means all Advances outstanding under the Revolving Credit Facility and the Term Loan, including without limitation Base Rate Loans and LIBOR Rate Loans. Management Group means collectively (a) Jugal K. Taneja, (b) William L. LaGamba, (c) Stephen M. Watters, and (d) Ronald J. Patrick. 14 Material Adverse Change means (a) a material adverse change, as determined by Bank in good faith, in the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of any Obligor, (b) the material impairment, as determined by Bank in good faith, of any Obligor's ability to perform its obligations under the Loan Documents to which it is a party or of the Bank's ability to enforce the Obligations of the Loan Documents or to realize upon the Collateral, (c) a material adverse effect, as determined by Bank in good faith, on the value of the Collateral or the amount that Bank would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral, or (d) a material impairment, as determined by Bank in good faith, of the priority of the Liens in favor of Bank with respect to the Collateral. Maximum Revolving Credit Facility Amount means $15,000,000.00. Merchandise Letter of Credit means a documentary Letter of Credit issued by Bank to support the purchase by a Borrower of Inventory prior to transit to an Eligible Inventory Location, that provides that all draws thereunder must require presentation of customary documentation (including, if applicable, commercial invoices, packing list, certificate of origin, bill of lading or airway bill, customs clearance documents, quota statement, inspection certificate, beneficiaries statement, and bill of exchange, bills of lading, dock warrants, dock receipts, warehouse receipts, or other documents of title) in form and substance satisfactory to Bank and reflecting the passage to such Borrower of title to first quality Inventory conforming to such Borrower's contract with the seller thereof. Multiemployer Plan means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which any Obligor, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. Negotiable Collateral means all of a Person's present and future letters of credit, notes, drafts, instruments, Investment Property, Financial Assets, Capital Stock of direct and indirect Subsidiaries of Borrower, documents, personal property leases (wherein such Person is the lessor), chattel paper, and such Person's Books relating to any of the foregoing. Net Income means income (or loss) after Tax Expense and shall have the meaning given such term by GAAP, provided that, there shall be specifically -------- ---- excluded therefrom (a) gains from the sale of capital assets, (b) net income of any other Person in which the Person or Persons whose net income is being determined has an ownership interest, unless received by the Person or Persons whose net income is being determined in a cash distribution, and (c) any gains arising from extraordinary items, as defined by GAAP. Net Worth shall mean, at any time, net worth as defined by GAAP. Non-Assignable Contracts has the meaning set forth in Section 10.1(e). --------------- Notes means collectively the Revolver Note and Term Note executed and delivered pursuant to Sections 2.2 and 4.2. -------------------- 15 Obligations means all Loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations under any outstanding Letters of Credit, indebtedness arising from any derivative transactions, liabilities (including all amounts charged to the Loan Account pursuant hereto), obligations, fees, charges, costs, or Bank Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties owing by any Obligor to Bank of any kind and description (whether pursuant to or evidenced by the Loan Documents or pursuant to any other agreement between Bank and any Obligor, and irrespective of whether for the payment of money), whether as principal or surety, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from any Obligor to others that Bank may have obtained by assignment or otherwise, and further including all interest not paid when due and all Bank Expenses that any Obligor is required to pay or reimburse by the Loan Documents, by law, or otherwise. Obligors means Borrowers and Guarantors, collectively. Obligor means each Borrower and Guarantor, individually. Operating Agreement means any material equipment lease, advertising contract, supply agreement, employment agreement, collective bargaining agreement or other similar agreement or contract relating to the operation of the Business. Out-Of-Formula Advance means the amount by which the then outstanding Advances and the undrawn amount of Letters of Credit issued under the Revolving Credit Facility exceed the Borrowing Base. Pay-Off Letter means a letter addressed to the appropriate Obligor and to Bank executed by the applicable lender pursuant to which such lender agrees to accept a fixed amount in full satisfaction of all obligations owed by such Obligor to such lender, containing such wire instructions, releases and other provisions as may be required by Bank. PBGC means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. Person means and includes natural persons, legal persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and any governments and agencies and political subdivisions thereof. Plan means any employee benefit plan, program, or arrangement maintained or contributed to by any Obligor or with respect to which it may incur liability. Pledge Agreements means collectively the pledge agreements in form and substance satisfactory to Bank of even date herewith pursuant to which all Capital Stock in each Guarantor and 16 any other Subsidiaries of DrugMax are pledged to Bank as security for the Obligations. Prime Rate means the annual interest rate established from time to time by Bank and generally known by Bank as its "prime rate", whether published by it publicly or only for the internal guidance of its loan officers. The Prime Rate is used merely as a pricing index and is not and should not be considered to represent the lowest or best rate available to a borrower. Property shall mean all types of real, personal or mixed property and all types of tangible or intangible property. Rate Period means for any principal portion of the Revolving Credit Facility or the Term Loan for which Borrowers elect a LIBOR Rate plus Applicable Margin, the period of time for which such rate shall apply to such principal. Rate Periods for principal accruing interest at the LIBOR Rate plus Applicable Margin under the Revolving Credit Facility shall be for periods of one, two, three, or six months and for no other length of time, provided that, no Rate -------- ---- Period may extend beyond the expiration of the Contract Period. Rate Periods for principal accruing interest at the LIBOR Rate plus Applicable Margin under the Term Loan shall be for periods of one, two, three or six months and for no other length of time, provided that, no Rate Period may extend beyond the Term Loan -------- ---- Maturity Date. Reportable Event means any of the events described in Section 4043(c) of ERISA or the regulations thereunder. Reserves means reserves against Availability under the Revolving Credit Facility, established by Bank at its discretion from time to time, including without limitation, Inventory Reserves. Revolver Note has the meaning set forth in Section 2.2. ----------- Revolving Credit Facility means the revolving credit facility established for Borrowers under this Agreement. Revolving Credit Facility Usage means as of the date of determination, the aggregate amount of (a) all outstanding Advances under the Revolving Credit Facility, and (b) the outstanding undrawn amount of all outstanding Letters of Credit. Solvent means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature or fall due, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a 17 transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. Standby Letters of Credit means the standby letters of credit (not Merchandise Letters of Credit) issued by Bank pursuant to this Agreement. Subordinated Indebtedness means Indebtedness of any Obligor which has maturities and terms, and which is subordinated to payment of the Obligations in a manner, approved in writing by Bank, and in each such case any renewals, modifications or amendments thereof which are approved in writing by Bank. Subordination Agreements shall mean the subordination agreements from each Obligor in favor of Bank. Subsidiary of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Capital Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. Surety Agreement has the meaning set forth in Section 10.5 ------------ Tax Expense as applied to Borrowers means for any period, the amount of tax expense of Borrowers for such period, determined in accordance with GAAP. Term Loan has the meaning set forth in Section 4.1. ----------- Term Loan Maturity Date means October 24, 2003. Term Note has the meaning set forth in Section 4.2. ----------- U.S. means the United States of America. UCC means (i) the Uniform Commercial Code as adopted in Pennsylvania, as it may be amended, revised or replaced from time to time, and (ii) the Uniform Commercial Code as in effect from time to time in such other states as any Collateral may be located, as and to the extent applicable. Value means (i) with respect to Eligible Inventory, the lower of cost (determined on a first-in-first-out basis) or market value, determined in all cases in accordance with GAAP, and (ii) with respect to Eligible Accounts, the undisputed unpaid amount of such Eligible Account. VetMall means VetMall, Inc., a Florida corporation. 18 Voting Stock means Capital Stock of a Person having ordinary voting power for the election of the members of its board of directors or other governing body of such Person. 1.2 Accounting Terms and Determinations. Except as otherwise ----------------------------------- provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made in accordance with GAAP, and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP as in effect on the date of determination. All financial statements to be delivered pursuant to this Agreement shall be prepared in accordance with GAAP. 1.3 UCC. Any terms used in this Agreement that are defined in --- the UCC shall be construed and defined as set forth in the UCC unless otherwise defined herein. To the extent that the definitions of any categories or types of collateral are expanded in any revision to, amendment of or new version of the UCC, such changed or expanded definitions will apply to this Agreement as of the effective date of such revision, amendment or new statute. 1.4 Construction. Unless the context of this Agreement clearly ------------ requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. An Event of Default shall "continue" or be "continuing" until such Event of Default has been cured or waived in writing by Bank. Section, subsection, clause, schedule, and exhibit references are to sections, subsections, clauses, schedules and exhibits in this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement, any of the Loan Documents or any other document or agreement shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, supplements, and restatements thereto and thereof, as applicable. 1.5 Schedules and Exhibits. All of the schedules and exhibits ---------------------- attached to this Agreement, as they may from time to time be amended or restated, shall be deemed incorporated herein by reference. 1.6 Obligor's Knowledge. Any statements, representations or ------------------- warranties that are based upon the best knowledge of any Obligor or an officer thereof shall be deemed to have been made after due inquiry by such Obligor or such officer, as applicable, with respect to the matter in question. 2. THE REVOLVING CREDIT FACILITY. ----------------------------- 2.1 The Facility. Subject to the terms and conditions of this ------------ Agreement and the Loan Documents, Bank agrees to establish for Borrowers a revolving credit facility (the "Revolving Credit Facility") pursuant to which during the Contract Period, Bank agrees to extend to Borrowers 19 Advances under the Revolving Credit Facility and pursuant to which Bank agrees to issue Letters of Credit for the account of Borrowers, provided that, the -------- ---- Revolving Credit Facility Usage shall not exceed at any time the lesser of (a) the Borrowing Base, or (b) the Maximum Revolving Credit Facility Amount. 2.2 Revolver Note. Borrowers' obligation to repay Advances and ------------- other extensions of credit under the Revolving Credit Facility shall be further evidenced by a promissory note executed and delivered by Borrowers in the face amount of the Maximum Revolving Credit Facility Amount payable to the order of Bank (the "Revolver Note"), which shall be in a form acceptable to Bank. 2.3 Borrowing Base. The "Borrowing Base" as of the applicable -------------- date of determination shall be determined based upon the following advance rates and calculations: (a) An advance rate of up to 85% of the Value of the Borrowers' Eligible Accounts; plus ---- (b) An advance rate of up to 65% of the Value of the Borrowers' Eligible Inventory not subject to an Eligible Inventory Buy-Back Agreement; plus ---- (c) An advance rate of up to 75% of the Value of the Borrowers' Eligible Inventory subject to an Eligible Inventory Buy-Back Agreement; minus ----- (d) The total outstanding undrawn amount of all Letters of Credit; minus ----- (e) All Reserves. Notwithstanding the foregoing, there shall be no increase of the advance rate for Eligible Inventory subject to an Eligible Inventory Buy-Back Agreement from 65% to 75% (i) unless and until Bank has received the audited annual financial statements required under Section 15.1 for the Borrowers and ------------ their Subsidiaries for the fiscal year ending March 31, 2001; or (ii) if a Default or Event of Default has occurred. Percentages used from time to time in calculating the Borrowing Base are for the sole purpose of determining the maximum amount of Advances under Revolving Credit Facility that may be outstanding from time to time under this Agreement and shall not be evidentiary of or binding upon the Bank with respect to the market value or liquidation value of any Collateral. In the event that Bank has any questions regarding the Borrowers' calculation of the Borrowing Base, funding of Advances under the Revolving Credit Facility shall be subject to a resolution of such questions to Bank's satisfaction. Any request for an Advance under Revolving Credit Facility which, if funded, would result in the unpaid balance 20 of an Advance under Revolving Credit Facility being in excess of the amount allowed by this Agreement may be declined by Bank in its sole discretion without prior notice. 2.4 Sublimits. --------- (a) Eligible Inventory Sublimit. Notwithstanding anything --------------------------- herein or elsewhere to the contrary, the maximum amount of Revolving Credit Facility Usage based upon (i) the Eligible Inventory shall not exceed $6,000,000.00 at any time, (ii) Eligible inventory subject to an Eligible Inventory Buy-Back Agreement shall not exceed an amount to be determined by Bank. (b) Letter of Credit Sublimit. Notwithstanding anything ------------------------- herein or elsewhere to the contrary, the issuance of Letters of Credit under the Revolving Credit Facility by the Bank is subject to the limitations set forth in Section 6 below. - --------- (c) Borrower Sublimits. Each Borrower will only be entitled ------------------ to receive Advances under the Revolving Credit Facility based upon Availability determined by such Borrower's Eligible Accounts and Eligible Inventory. Each Borrower will submit separate Borrowing Base Certificates on a stand-alone basis. 2.5 Reserves. The amount of the Borrowing Base shall be reduced -------- by Reserves established by Bank from time to time at Bank's discretion, including without limitation Inventory Reserves. Such Reserves may be established by Bank from time to time regardless of whether a Default or Event of Default has occurred or is continuing. 2.6 Reduction in Advance Rates. Notwithstanding anything herein -------------------------- or elsewhere to the contrary, Bank may, in its sole discretion, from time to time, among other permissible discretionary actions that Bank may take with respect to the Revolving Credit Facility: (a) reduce the advance rate with respect to Eligible Accounts, among other permissible reasons, to the extent that Bank determines that: (i) the dilution with respect to Borrowers' Accounts for any period (based on the ratio of (A) the aggregate amount of reductions in Accounts other than as a result of payments in cash, to (B) the aggregate amount of total sales) exceeds five percent (5%), in which case Bank shall reduce the advance rate applicable to Eligible Accounts by one percent (1%) for each percent of such dilution in excess of five percent (5%), or (ii) the general creditworthiness of Account Debtors has declined; or (b) reduce the advance rate with respect to Eligible Inventory, among other permissible reasons, to the extent that Bank determines that: (i) the number of days of the turnover of the Inventory for any period has changed in any material respect or (ii) the liquidation value of the Eligible 21 Inventory, or any category thereof, has decreased, or (iii) the nature and quality of Inventory has deteriorated. (c) In determining whether to reduce the advance rate(s), Bank may consider, among other factors, events, conditions, contingencies or risks which are also considered in determining Eligible Accounts, Eligible Inventory or in establishing Reserves. Notwithstanding anything herein or elsewhere to the contrary, Bank may, after the occurrence of a Default or Event of Default, reduce the advance rates with respect to Eligible Accounts and Eligible Inventory. 3. ADVANCES UNDER THE REVOLVING CREDIT FACILITY. -------------------------------------------- 3.1 General. Advances under the Revolving Credit Facility shall ------- be made by Bank to Borrowers in accordance with the procedures set forth below. Within the limitations set forth in this Agreement, Borrowers may borrow, repay and reborrow under the Revolving Credit Facility. 3.2 Borrowing Procedures. -------------------- (a) Form of Request. Borrowers may request an Advance under --------------- the Revolving Credit Facility by delivering to the officer of Bank designated from time to time by Bank, a written Loan Request. Such written request for an Advance shall be in the form of Exhibit C, if the request is for a Base Rate --------- Loan (a "Base Rate Loan Request"), or in the form of Exhibit D if the request is --------- for a LIBOR Rate Loan (a "LIBOR Loan Request"). Such Loan Request forms may be in such other form as Bank may require from time to time upon notice to Borrowers. Each Loan Request received by Bank shall be conclusively presumed to be executed and delivered by a duly authorized officer or employee of Borrowers. Once received by Bank, each Loan Request shall be deemed irrevocable. Notwithstanding the foregoing, Borrowers may request a Base Rate Loan by a telephone request to the offices of Bank designated from time to time by Bank. Each telephone request received by Bank shall be conclusively presumed to be made by a duly authorized officer or employee of Borrowers. Once received by Bank, each telephone Loan Request shall be deemed irrevocable. Bank, at its discretion, may require that each telephone Loan Request be confirmed promptly by Borrowers in writing. (b) Availability. Availability under the Revolving Credit ------------ Facility will be determined by Bank based upon information received by Bank and upon the most recent Borrowing Base Certificate required under Section 15.4, ------------ accompanied by the collateral and back-up information required under such Section. (c) Timing of Request. Each Base Rate Loan Request must be ----------------- received by Bank no later than 12:00 noon Eastern time on the requested Funding Date. Each LIBOR 22 Rate Loan Request must be received by Bank no later than 12:00 noon Eastern time three (3) Business Days prior to the requested Funding Date. 3.3 Funding Procedure. Subject to the conditions set forth in ----------------- this Agreement, Bank shall disburse Advances under the Revolving Credit Facility to Borrowers by transferring into the applicable Borrower's operating account maintained with Bank immediately available funds in the amount of such Advances, or otherwise in accordance with procedures acceptable to Bank. 4. THE TERM LOAN. ------------- 4.1 Term Loan. Subject to the terms and conditions of this --------- Agreement and the Loan Documents, Bank agrees to extend to Borrowers a term loan in the original principal amount of Two Million Dollars ($2,000,000.00) (the "Term Loan"). 4.2 Term Note. Borrowers' obligations to repay the Term Loan --------- shall be further evidenced by a promissory note executed and delivered by Borrowers to Bank in the face amount of $2,000,000.00 (the "Term Note") which shall be in a form acceptable to Bank. 4.3 Advance of the Term Loan. The proceeds of the Term Loan ------------------------ shall be advanced at closing hereunder in accordance with such procedures as Bank may require. 5. USE OF LOAN PROCEEDS. Borrowers agree to use Advances under the -------------------- Revolving Credit Facility and the proceeds of the Term Loan solely (a) to repay existing Indebtedness, (b) to pay closing costs and expenses incurred by the Obligors in connection with the transactions contemplated hereunder, and (c) to provide for future working capital requirements and for other general corporate purposes of Borrowers consistent with the terms and conditions of this Agreement. 6. LETTERS OF CREDIT. ----------------- 6.1 General. Subject to the terms and conditions of this ------- Agreement, Bank agrees to issue from time to time until the expiration of the Contract Period, upon the written request of Borrowers, Letters of Credit for the account of Borrowers. Such Letters of Credit shall be in form and content acceptable to Bank. 6.2 Conditions to Issuance. Bank shall have no obligation to ---------------------- issue any Letter of Credit if: (a) the conditions set forth in Sections 16 and 17 have not ------------------ been satisfied; 23 (b) issuance of such Letter of Credit would violate the terms of any contract, agreement or other document binding upon Bank or any Borrower; (c) any order, judgment or decree of any court, arbitrator or other governmental authority shall purport by its terms to enjoin or restrain issuance of the Letter of Credit; (d) any law, rule, regulation or directive shall prohibit issuance of the Letter of Credit or result in any liability of Bank as a result of such issuance; or (e) Bank shall not have received the required issuance fee set forth in Section 8.5. ----------- 6.3 Tenor. Each Standby Letter of Credit shall have a term not ----- to exceed the earlier to occur of: (a) twelve (12) months, or (b) the expiration date of the Contract Period. Each Merchandise Letter of Credit shall have a term not to exceed the earlier to occur of: (a) ninety (90) days, or (b) the expiration date of the Contract Period. 6.4 Sublimits. Bank shall have no obligation (a) to issue any --------- Letters of Credit, if the aggregate outstanding undrawn amount of all Letters of Credit would exceed $500,000.00; (b) to issue any Letter of Credit, if a Default or Event of Default has occurred; or (c) to issue any Letter of Credit if the Revolving Credit Facility Usage plus the amount of such new Letter of Credit to be issued exceeds (i) the Borrowing Base (as reduced by all Reserves), or (ii) the Maximum Revolving Credit Facility Amount. 6.5 Procedure and Documentation. Each request for issuance of a --------------------------- Letter of Credit must be received at least three (3) Business Days prior to the requested issuance and shall be accompanied by a duly executed letter of credit application in the form required by Bank. Each application shall have noted therein that the application is entered into in accordance with the terms of this Agreement. Borrowers will execute and deliver to Bank such other documents and agreements as may be reasonably required by Bank in connection with the issuance of any Letter of Credit. 6.6 Reduction of Availability. Availability under the Revolving ------------------------- Credit Facility will be reduced by the total outstanding undrawn amount of all Letters of Credit. 6.7 Draws. If Bank receives a request for a draw under any ----- Letter of Credit, Borrowers agree to pay to Bank on the day on which Bank shall honor such draw request, the amount of such draw request (the "Draw Amount") in immediately available funds. Unless Bank receives the Draw Amount in immediately available funds on or before the day on which Bank honors such draw request, the amount advanced by Bank to pay such draw shall be deemed to be a Base Rate Loan under the Revolving 24 Credit Facility, without any requirement that Borrowers request such Loan or otherwise comply with the Loan Request provisions set forth in this Agreement. 6.8 Cash Collateral. In the event that the Revolving Credit --------------- Facility is terminated for any reason, the Contract Period expires or an Event of Default occurs, Borrower will deposit with Bank immediately available funds in an amount equal to 105% of the outstanding undrawn amount of all Letters of Credit. Such funds and any proceeds of Collateral or other payments received by Bank with respect to the Obligations after any such Event of Default, may be held by Bank as cash collateral for the Obligations, including without limitation, the Obligations of Borrowers to Bank related to the Letters of Credit. 6.9 Indemnification. Obligors hereby agree to indemnify, save, --------------- defend, and hold Bank harmless from any loss, cost, expense, or liability, including payments made by Bank, expenses, and attorney's fees incurred by Bank arising out of or in connection with any Letter of Credit, provided that, ------------- Obligors shall not be obligated to indemnify Bank for any loss, cost, expense or liability resulting from Bank's gross negligence or wilful misconduct. Obligors understand and agree that Bank shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following any Borrower's instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. 6.10 Obligations Irrevocable. The obligations of Borrowers to ----------------------- make payments to Bank of each Draw Amount shall be irrevocable and shall not be subject to any qualification or exception whatsoever, including, without limitation, any of the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit, any documents collateral to any Letter of Credit, this Agreement or any of the other Loan Documents; (b) the existence of any claim, set-off, defense, or other right which any Obligor may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or transferee may be acting), Bank, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between any Obligor or any other Person and the beneficiary named in any Letter of Credit); (c) any draft, certificate, or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (d) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; 25 (e) the occurrence of any Default or Event of Default; (f) any amendment, modification, waiver, consent, or any substitution, exchange or release of or failure to perfect any interest in collateral or security, with respect to or under any Letter of Credit or any documents collateral thereto; (g) payment by Bank to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of such Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (h) any failure, omission, delay or lack on the part of Bank to enforce, assert or exercise any right, power or remedy conferred upon Bank under this Agreement, any of the other Loan Documents, any of the Letter of Credit or any documents collateral thereto or any other acts or omissions on the part of Bank; or (i) any other event or circumstance that would, in the absence of this Section 6.10, result in the release or discharge by operation of ------------ law or otherwise of any Obligor or any Person from the performance or observance of any obligation, covenant or agreement contained herein. No setoff, counterclaim, reduction or diminution of any obligation or any defense of any kind or nature which any Obligor has or may have against the beneficiary of any Letter of Credit shall be available hereunder to any Obligor against Bank. 6.11 Risk Under Letters of Credit. ---------------------------- (a) In the administration and handling of Letters of Credit and any security therefor, or any documents or instruments given in connection therewith, Bank shall have the sole right, in its discretion, to take or refrain from taking any and all actions under or upon the Letters of Credit. (b) Subject to other terms and conditions of this Agreement, Bank shall issue the Letters of Credit and shall hold the documents related thereto in its own name and shall make all collections thereunder and otherwise administer the Letters of Credit in accordance with Bank's regularly established practices and procedures and Bank will have no further obligation with respect thereto. In the administration of Letters of Credit, Bank shall not be liable for any action taken or omitted in good faith reliance on the advice of counsel, accountants, appraiser or other experts selected by Bank and Bank may rely upon any notice, communication, certificate or other statement from the Borrower, beneficiaries of Letters of Credit, or any other Person which Bank believes to be authentic. 26 (c) In connection with the issuance and administration of Letters of Credit and the assignments hereunder, Bank makes no representation and shall have no responsibility with respect to (i) the obligations of any Obligor or any other Person or the validity, sufficiency or enforceability of any document or instrument given in connection therewith, or the taking of any action with respect to same, (ii) the financial condition of, any representations made by, or any act or omission of, any Obligor, or any other Person, or (iii) any failure or delay in exercising any rights or powers possessed by Bank in its capacity as issuer of Letters of Credit in the absence of its gross negligence or willful misconduct. 7. INTEREST RATE. ------------- 7.1 Interest Rate Options for the Revolving Credit Facility. ------------------------------------------------------- (a) General. The principal balance of the Revolving Credit ------- Facility will accrue interest at the Borrowers' option (subject to the limitations and conditions set forth herein) at (a) the Base Rate plus Applicable Margin, or (b) the LIBOR Rate plus Applicable Margin. Borrowers may request to have one or more portions of the outstanding balance of the Revolving Credit Facility as hereinafter permitted, accrue interest, at a LIBOR Rate plus Applicable Margin by giving Bank three (3) Business Days prior written notice in the form of a Request for LIBOR Rate Loan (for new Advances) or a LIBOR Rate Notification (for existing advances). (b) Certain Provisions Regarding Interest Rates. Borrowers ------------------------------------------- understand and agree: (i) that subject to the provisions of this Agreement, the Base Rate plus Applicable Margin and the LIBOR Rate plus Applicable Margin may apply simultaneously to different parts of the outstanding principal balance of the Revolving Credit Facility; (ii) that the LIBOR Rate plus Applicable Margin may apply simultaneously to various portions of the outstanding principal balance of the Revolving Credit Facility for various Rate Periods; (iii) that the LIBOR Rate plus Applicable Margin applicable to one portion of the outstanding principal balance of the Revolving Credit Facility or the Term Loan may be different from the LIBOR Rate plus Applicable Margin applicable to a different portion of the outstanding principal balance of the Revolving Credit Facility or the Term Loan; (iv) that LIBOR Rate Loans must be in minimum amounts of $500,000 each and in increments of $100,000 above such minimum; and 27 (v) that no more than an aggregate of four (4) separate LIBOR Rate Loans under the Revolving Credit Facility and the Term Loan shall be permitted to be outstanding at any one time. (c) Certain Limitations. The right of the Borrowers to ------------------- elect a LIBOR Rate plus Applicable Margin shall be limited as follows: (i) Borrowers may not elect to borrow at or to convert to LIBOR Rate plus Applicable Margin if at the time of such conversion or election there shall exist a Default or an Event of Default. (ii) if a LIBOR Rate plus Applicable Margin is elected, such interest rate shall remain in effect for the Rate Period selected and such interest rate shall not otherwise be converted to another interest rate prior to the expiration of the Rate Period except as otherwise required by this Agreement. (iii) any Loan accruing interest at a LIBOR Rate plus the Applicable Margin shall, commencing on the last day of the applicable Rate Period, bear interest at the Base Rate plus Applicable Margin unless prior thereto Bank shall have received a timely notice pursuant to this Section 7.1 ----------- that an elective rate based on the LIBOR Rate plus Applicable Margin shall be effective commencing on such date with respect to any or all of such principal. (iv) Borrowers may not elect a LIBOR Rate plus Applicable Margin for any Rate Period if the effect of such election, (as could reasonably be determined by Borrowers at the time of such election) would be to require Borrowers to make a repayment or prepayment of a LIBOR Rate Loan prior to the end of the relevant Rate Period. Without limiting the generality of the foregoing, no Rate Period may be elected that would end later than the expiration of the Contract Period. 7.2 Interest Rate Options for the Term Loan. --------------------------------------- (a) General. The entire outstanding principal balance of ------- the Term Loan will accrue interest at the Borrowers' option (subject to the limitations and conditions set forth below) at (a) the Base Rate plus Applicable Margin, or (b) the LIBOR Rate plus Applicable Margin. Borrowers may request to have one or more portions of the outstanding balance of the Term Loan accrue interest, at a LIBOR Rate plus Applicable Margin by giving Bank three (3) Business Days prior written notice in the form of a LIBOR Rate Notification. (b) Certain Provisions Regarding Interest Rates. Borrowers ------------------------------------------- understand and agree: 28 (i) that subject to the provisions of this Agreement, the Base Rate plus Applicable Margin and the LIBOR Rate plus Applicable Margin may apply simultaneously to different parts of the outstanding principal balance of the Term Loan; (ii) that the LIBOR Rate plus Applicable Margin may apply simultaneously to various portions of the outstanding principal balance of the Term Loan for various Rate Periods; (iii) that the LIBOR Rate plus Applicable Margin applicable to one portion of the outstanding principal balance of the Revolving Credit Facility or the Term Loan may be different from the LIBOR Rate plus Applicable Margin applicable to a different portion of the outstanding principal balance of the Revolving Credit Facility or the Term Loan; (iv) that LIBOR Rate Loans must be in minimum amounts of $500,000 each and in increments of $100,000 above such minimum; and (v) that no more than an aggregate of four (4) separate LIBOR Rate Loans under the Term Loan and the Revolving Credit Facility shall be permitted to be outstanding at any one time. (c) Certain Limitations. The right of the Borrowers to ------------------- elect a LIBOR Rate plus Applicable Margin shall be limited as follows: (i) Borrowers may not elect to borrow at or convert to a LIBOR Rate plus Applicable Margin if at the time of such election there shall exist a Default or an Event of Default. (ii) if a LIBOR Rate plus Applicable Margin is elected, such interest rate shall remain in effect for Rate Period and such interest rate shall not otherwise be converted to another interest rate prior to the expiration of such Rate Period except as otherwise required by this Agreement. (iii) the portion of the Term Loan accruing interest at a LIBOR Rate plus the Applicable Margin shall, commencing on the last day of the applicable Rate Period, bear interest at the Base Rate unless prior thereto the Bank shall have received a timely notice pursuant to this Section 7.2 that an ----------- elective rate based on the LIBOR Rate plus Applicable Margin shall be effective commencing on such date with respect to such portion. (iv) Borrowers may not elect a LIBOR Rate plus Applicable Margin for any Rate Period if the effect of such election, (as could reasonably be determined by Borrowers 29 at the time of such election) would be to require Borrowers to make a repayment or prepayment of a LIBOR Rate Loan prior to the end of the relevant Rate Period. Without limiting the generality of the foregoing, no Rate Period may be elected that would end later than the expiration of the Term Loan Maturity Date. 7.3 Base Rate Fall Back. With respect to any principal amount of the ------------------- Revolving Credit Facility or the Term Loan (whether an Advance of new funds or an already outstanding amount), if Borrowers fail to request that the LIBOR Rate plus Applicable Margin option be applicable by giving Bank a timely LIBOR Rate Notification or a Request for LIBOR Rate Loan (including a request at the expiration of any applicable Rate Period), such principal amount shall be deemed to accrue interest at the Base Rate plus Applicable Margin. 7.4 LIBOR Rate Unascertainable or Unavailable. If, at any time, Bank ----------------------------------------- shall determine (which determination shall be conclusive) that the LIBOR Rate is unavailable or adequate means for ascertaining the LIBOR Rate do not exist, Bank shall promptly notify Borrowers of such determination. Upon such determination, the right of Borrowers to select and/or maintain Advances based upon the LIBOR Rate plus Applicable Margin shall be suspended until notice from Bank to Borrowers that the LIBOR Rate is again available or ascertainable and, until such time, the outstanding balance of the Revolving Credit Facility and the Term Loan shall accrue interest at the Base Rate plus Applicable Margin. 7.5 LIBOR Unlawful. In the event that, as a result of any change in -------------- any applicable law or regulation or the interpretation thereof, it becomes unlawful for Bank to maintain any advance under the Revolving Credit Facility or the Term Loan at the LIBOR Rate plus Applicable Margin, then Bank shall notify Borrowers thereof and Bank's obligation to make or maintain any Advance under the Revolving Credit Facility or the Term Loan at the LIBOR Rate plus Applicable Margin shall be suspended until such time as Bank may again cause the LIBOR Rate plus Applicable Margin to be applicable and, until such time, such Advances under the Revolving Credit Facility and the Term Loan shall accrue interest at the Base Rate plus Applicable Margin. Promptly after becoming aware that it is no longer unlawful for Bank to maintain Advances under the Revolving Credit Facility and the Term Loan at the LIBOR Rate plus Applicable Margin, Bank shall notify Borrowers and such suspension shall cease to exist. 7.6 Indemnification. Obligors agree to indemnify Bank against any --------------- loss, cost or expense (including, without limitation, loss of margin) which Bank has sustained or incurred as a consequence of: (i) any payment of any LIBOR Rate Loan on a day other than the last day of the corresponding Rate Period, whether or not any such payment is made pursuant to acceleration, upon or after an Event of Default, by reason of an application of proceeds incident to an insured loss or condemnation of property, or for any other reason, and whether or not any such payment is consented to by Bank (unless Bank shall have expressly waived such indemnity in writing); (ii) any attempt by Borrowers to revoke, in whole or part, any LIBOR Rate Notification or Request for LIBOR Rate Loan given pursuant to this Agreement; (iii) any attempt by Borrowers to convert or renew any principal amount accruing 30 interest at the LIBOR Rate plus Applicable Margin on a day other than the last day of the corresponding Rate Period (whether or not such conversion or renewal is consented to by Bank, unless Bank shall have expressly waived such indemnity in writing); (iv) any conversion of any amount earning interest at the LIBOR Rate plus Applicable Margin on a day other than the last day of the corresponding Rate Period; or (v) any Event of Default. 7.7 Determinations. In making the determinations contemplated by -------------- Section 7.6, Bank may make such estimates, assumptions, allocations and the - ----------- like that Bank determines to be appropriate, and Bank's selection thereof in accordance with Section 7.6 and the determinations made by the Bank on the basis ----------- thereof, shall be final, binding and conclusive upon Borrowers, absent manifest error. 7.8 Default Rate. Interest will accrue on the principal balance of ------------ the Revolving Credit Facility and the Term Loan (including any principal balance previously accruing interest at a LIBOR Rate plus Applicable Margin) after the occurrence of an Event of Default or expiration of the Contract Period at a rate of two percent (2%) in excess of the otherwise applicable non-default rate of interest (the "Default Rate"). Obligors acknowledge and agree that the Default Rate is reasonable in light of the increased risk of collection of the sums due under the Revolving Credit Facility and the Term Loan after occurrence of an Event of Default and the costs and expenses of Bank related thereto. 7.9 Post Judgment Interest. Any judgment obtained for sums due ---------------------- hereunder or under the Loan Documents will accrue interest at the applicable Default Rate set forth above until paid. 7.10 Calculations. ------------ (a) Interest will be computed on the basis of a year of 360 days and paid for the actual number of days elapsed. (b) In the event that the actual average monthly principal balance outstanding under the Revolving Credit Facility for any month is less than $5,000,000.00, interest on the Revolving Credit Facility balance shall be calculated based on an assumed average monthly loan balance of $5,000,000.00, with the difference between $5,000,000.00 and the actual average monthly loan balance bearing interest as if it were a Base Rate Loan. 7.11 Limitation of Interest to Maximum Lawful Rate. In no event will --------------------------------------------- the rate of interest payable hereunder exceed the maximum rate of interest permitted to be charged by applicable law (including the choice of law rules) and any interest paid in excess of the permitted rate will be refunded to Borrowers. Such refund will be made by application of the excessive amount of interest paid against any sums outstanding hereunder and will be applied in such order as Bank may determine. If the excessive amount of interest paid exceeds the sums outstanding, the portion exceeding the sums 31 outstanding will be refunded in cash by Bank. Any such crediting or refunding will not cure or waive any Event of Default. Borrowers agree that in determining whether or not any interest payable hereunder exceeds the highest rate permitted by law, any nonprincipal payment, including without limitation prepayment fees and late charges, will be deemed to the extent permitted by law to be an expense, fee, premium or penalty rather than interest. 8. PAYMENTS AND FEES. ----------------- 8.1 Interest Payments on the Revolving Credit Facility. -------------------------------------------------- Borrowers agree to pay to Bank interest on the principal balance of Base Rate Loans under the Revolving Credit Facility on the first day of each calendar month, commencing on the first day of the first calendar month following the date hereof, and on the expiration of the Contract Period. Borrowers agree to pay to Bank interest on the principal balance of LIBOR Rate Loans under the Revolving Credit Facility on the last day of each Rate Period, provided that, -------- ---- for any Rate Period with a duration of more than three months, interest will also be payable every ninetieth (90/th/) day after the commencement of such Rate Period. Bank may, at its option, establish a Reserve for interest accruing on any LIBOR Rate Loans with a Rate Period in excess of one month. 8.2 Principal Payments on the Revolving Credit Facility. Funds --------------------------------------------------- received by Bank in the Cash Collateral Account will be applied by Bank toward repayment of the outstanding principal balance of the Revolving Credit Facility or may be held as cash collateral by Bank. Provided that no Event of Default has occurred, such funds will be applied by Bank to repay the outstanding principal balance of the Revolving Credit Facility, with such payments to be applied first ----- to repay all Loans which are Base Rate Loans, and second to repay all Loans ------ which are LIBOR Rate Loans. To the extent that any sums are applied to repay LIBOR Rate Loans, they shall be applied to LIBOR Rate Loans in the chronological order in which the Rate Periods for such LIBOR Rate Loans expire. Upon the occurrence of an Event of Default, Bank may discontinue such arrangement and may apply such funds to costs, indemnities, fees, interest and principal, constituting Obligations in such order as Bank, in its discretion elects. Provided that no Event of Default has occurred, if all Advances under the Revolving Credit Facility and all other Obligations then due and payable (not including contingent obligations under undrawn Letters of Credit) have been paid in full, and thereafter funds are received by Bank in the Cash Collateral Account, Bank will permit the transfer of such funds to Borrowers' operating account maintained with Bank. Notwithstanding the foregoing, Borrowers agree to pay the outstanding principal balance of the Revolving Credit Facility, together with any accrued and unpaid interest thereon, and any other sums due pursuant to the terms hereof on the earlier to occur of (a) the expiration of the Contract Period, or (b) ON DEMAND after the occurrence of an Event of Default. If any Out-Of-Formula Advance arises or 32 exists under the Revolving Credit Facility for any reason whatsoever, including without limitation inventory or accounts becoming ineligible or any new or increased Reserves, Borrowers agree to repay such Out-Of-Formula Advance immediately upon the earlier to occur of (i) notice or demand by Bank, or (ii) any Borrower has knowledge of such Out-of-Formula Advance. 8.3 Interest Payments on the Term Loan. Borrowers agree to pay ---------------------------------- to Bank interest on the principal balance of Base Rate Loans under the Term Loan on the first day of each calendar month, commencing on the first day of the first calendar month following the date hereof, and on the Term Loan Maturity Date. Borrowers agree to pay to Bank interest on the principal balance of LIBOR Rate Loans under the Term Loan on the last day of each Rate Period, provided -------- that, for any Rate Period with a duration of more than three months, interest - ---- will also be payable every ninetieth (90/th/) day after the commencement of such Rate Period. Bank may, at its option, establish a Reserve for interest accruing on any LIBOR Rate Loans with a Rate Period in excess of one month. 8.4 Principal Payments on Term Loan. Borrowers agree to pay to ------------------------------- Bank the principal balance of the Term Loan in equal and consecutive monthly installments of $55,555.56 each, on the first (1/st/) day of each calendar month, commencing on December 1, 2000, and in one final payment of the remaining principal balance plus all accrued and unpaid interest thereon on the Term Loan Maturity Date. 8.5 Letter of Credit Fees. For each issuance or renewal of a --------------------- Merchandise Letter of Credit, Borrowers agree to pay to Bank an issuance or renewal fee in an amount equal to 0.625% of the face amount of such Merchandise Letter of Credit, payable coincident with and as a condition of the issuance or renewal of such Merchandise Letter of Credit. For each issuance or renewal of a Standby Letter of Credit hereunder, Borrowers agree to pay to Bank an issuance or renewal fee in an amount equal to 2.5% per annum of the face amount of such Standby Letter of Credit, payable coincident with and as a condition of the issuance or renewal of such Standby Letter of Credit. In addition, Borrowers agree to pay to Bank such other fees and charges in connection with the issuance, amendment, negotiation or cancellation of each Merchandise Letter of Credit and Standby Letter of Credit as may be customarily charged by Bank. Upon the occurrence of an Event of Default, at Bank's option, the fees provided for in this Section shall be increased by two percent (2%) for each Merchandise Letter of Credit and each Standby Letter of Credit, as applicable. All of such fees shall be computed on the basis of a year of 360 days. 8.6 Facility Fee. Borrowers agree to pay to Bank a loan facility ------------ fee of $42,500.00 which was fully earned by issuance of the commitment letter to Borrowers by Bank dated July 11, 2000. The $5,000.00 commitment fee which was fully earned by issuance of a revised commitment letter to Borrowers by Bank dated September 19, 2000 will be applied towards costs and expenses of Bank in connection with this transaction. The entire loan facility fee is non-refundable in whole or in part. 33 8.7 Collateral Management Fee. So long as the Revolving Credit ------------------------- Facility has not been terminated pursuant to the terms hereof and the Obligations have not been satisfied in full, Borrowers agree unconditionally pay to Bank a non-refundable monthly collateral management fee of Two Thousand Dollars ($2,000.00) payable monthly in advance. 8.8 Unused Facility Fee. Borrowers agree to pay to Bank an ------------------- unused facility fee in an amount equal to 0.25% per annum times the Average Unused Portion of Maximum Revolving Credit Facility Amount. Such fee will be payable monthly in arrears on the first day of each month, pro-rated for the actual number of days in any partial month. 8.9 Late Charge. In the event that Borrowers fail to pay any ----------- principal, interest or other fees or expenses payable hereunder for a period of at least fifteen (15) days, in addition to paying such sums, Borrowers will pay to Bank a late charge equal to five percent (5%) of such past due payment as compensation for the expenses incident to such past due payment. 8.10 Termination of Revolving Credit Facility and Termination -------------------------------------------------------- Fee. Borrowers may terminate the Revolving Credit Facility upon ninety (90) days - --- written notice to Bank, which notice, once given shall be irrevocable. In the event that (a) the Revolving Credit Facility is terminated by Borrowers for any reason, including without limitation prepayment or refinancing of the Revolving Credit Facility with another lender, or (b) Borrowers default under the Revolving Credit Facility and the Revolving Credit Facility is terminated, Borrowers shall pay to Bank a termination fee calculated as follows: (a) If the termination occurs on or prior to October 24, 2001, the termination fee will be equal to 3% of the Maximum Revolving Credit Amount; (b) If the termination occurs after October 24, 2001, but on or before October 24, 2002, the termination fee will be equal to 2% of the Maximum Revolving Credit Amount; and (c) If the termination occurs after October 24, 2002, but on or before October 23, 2003, the termination fee will be equal to 1% of the Maximum Revolving Credit Amount. In the event the Revolving Credit Facility is terminated as a result of an Event of Default, Bank shall be entitled to receive the termination fee required to be paid under the prior paragraphs. In the event the Revolving Credit Facility is terminated as a result of an Event of Default, expiration of the Contract Period, or otherwise, the outstanding balance of the Revolving Credit Facility and the Term Loan, together with any accrued and unpaid interest thereon and any other sums due pursuant to the terms hereof shall be due and payable immediately. The termination fee shall be presumed to be the amount of damages sustained by Bank as a result of such early termination and Borrowers agree that it is reasonable under the circumstances 34 currently existing. The termination fee provided for in this Section 8.10 shall ------------ be deemed included in the Obligations and shall be secured by the Collateral. 8.11 Prepayment of Term Loan. Borrowers may prepay all or any ----------------------- part of the principal balance of the Term Loan at any time, following delivery of not less than ninety (90) days prior written notice to Bank and upon payment of the applicable fee set forth below. All prepayments will be applied to the regularly scheduled payments in the inverse order in which they are due. The following prepayment fee shall be applicable with respect to the Term Loan. (a) For each prepayment made on or prior to October 24, 2001, the prepayment fee will be equal to three percent (3%) of the principal amount prepaid; (b) For each prepayment made after October 24, 2001 but on or before October 24, 2002, the prepayment fee will be equal to two percent (2%) of the principal amount prepaid; (c) For each prepayment made after October 24, 2002 but on or before October 23, 2003, the prepayment fee will be equal to one percent (1%) of the principal amount prepaid. In the event Bank exercises its right to accelerate payments under the Term Loan following an Event of Default or otherwise, any tender of payment of the amount necessary to repay all or part of the Term Loan made thereafter at any time by any Obligor, its successors or assigns or by anyone on behalf of Borrowers and any receipt by Bank of proceeds of Collateral in payment of the Term Loan shall be deemed to be a voluntary prepayment and in connection therewith Bank shall be entitled to receive the fee required to be paid under the foregoing prepayment restrictions. The prepayment fee shall be presumed to be the amount of damages sustained by Bank as a result of such prepayment and Borrowers agree that it is reasonable under the circumstances currently existing. The prepayment fee provided for in this Section 8.11 shall be deemed included in the Obligations ------------ and shall be secured by the Collateral. 8.12 Interest and Breakage Costs on LIBOR Rate Loans. Borrowers ----------------------------------------------- shall, concurrently with any prepayment of any LIBOR Rate Loans, pay the full amount of all interest accrued on such LIBOR Rate Loans and, if on a day other than the last day of the applicable Rate Period, pay such amounts as are required by Section 7.6. ----------- 8.13 Payment Method and Application. ------------------------------ (a) Cash Collateral Account. All funds and items received ----------------------- or deposited into the Cash Collateral Account will be credited as payments of the principal balance of the Revolving Credit Facility on the next Business Day after which such items are deposited into the Cash 35 Collateral Account. Borrowers will reimburse Bank on demand for the amount of any items credited as provided above and subsequently returned unpaid. Bank may terminate the foregoing arrangement upon notice to Borrowers, in which event funds and items received or deposited into the Cash Collateral Account will be credited as payments of the principal balance for the Revolving Credit Facility when such funds or items are available to Bank as collected funds. (b) Operating Account. Borrowers irrevocably authorize Bank ----------------- to debit from any account maintained by any Borrower with Bank on the applicable due date, all interest payments on the Revolving Credit Facility and all principal and interest payments on the Term Loan. Borrowers also irrevocably authorize Bank to debit from such accounts all Bank Expenses and other Obligations. (c) Other. Bank at its option may make the payments ----- described in subsections (a) and (b) above by advancing such sums to itself as a ----------------------- Base Rate Loan under the Revolving Credit Facility, without any requirement that Borrowers request such Advance or otherwise comply with the borrowing procedures set forth in this Agreement. If (i) there are insufficient funds in such accounts, (ii) Bank for any reason does not debit such accounts, or (iii) Bank for any reason does not make an Advance under the Revolving Credit Facility to make any such payments, then Borrowers will make such payments directly to Bank. (d) Immediately Available Funds. All payments are to be --------------------------- made in immediately available funds. If Bank accepts payment in any other form, such payment shall not be deemed to have been made until the funds comprising such payment have actually been received by or made available to Bank. (e) Event of Default. Upon the occurrence of an Event of ---------------- Default, Bank may apply funds in the Cash Collateral Account and may debit any operating account or other deposit account maintained by any Borrower with Bank to pay costs, indemnities, fees, interest and principal, constituting Obligations, in such order as Bank, in its discretion elects. 8.14 Reinstatement of Obligations. If any Obligor makes a payment ---------------------------- or payments and such payment or payments, or any part thereof, are subsequently invalidated, declared to be fraudulent or preferential, set aside or are required to be repaid to a trustee, receiver, or any other person under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or payments, the obligations or part thereof hereunder intended to be satisfied shall be revived and continued in full force and effect as if said payment or payments had not been made. 8.15 Maintenance of Loan Account; Statements of Obligations. Bank ------------------------------------------------------ shall maintain an account on its books in the name of Borrowers (the "Loan Account") on which Borrowers will be charged with all Advances and Loans made by Bank to Borrowers or for Borrowers' account, 36 including, accrued interest, the Bank Expenses, and any other payment Obligations of Borrowers. Bank shall render monthly statements regarding the Loan Account to Borrowers, including principal, interest, fees, and including an itemization of all charges and expenses constituting the Bank Expenses owing, and such statements shall be conclusively presumed to be correct and accurate, and shall constitute an account stated between Borrowers and Bank unless, within thirty (30) days after receipt thereof by Borrowers, Borrowers shall deliver to Bank written objection thereto describing the error or errors contained in any such statements. 8.16 Indemnity. Borrowers agree to indemnify Bank against any --------- loss or expense which Bank sustains or incurs as a consequence of an Event of Default, including, without limitation, any failure of Borrowers to pay when due (at maturity, by acceleration or otherwise) any principal, interest, fee or any other amount due under this Agreement or the other Loan Documents. If Bank sustains or incurs any such loss or expense it will notify Borrowers in writing of the amount determined in good faith by Bank to be necessary to indemnify it for the loss or expense. Such amount will be due and payable by Borrowers to Bank within ten (10) days after presentation by Bank of a statement setting forth a brief explanation of and its calculation of such amount, which statement shall be conclusively deemed correct absent manifest error. Any amount payable by Borrowers under this Section will bear interest at the Default Rate from the due date until paid, both before and after judgment. 8.17 Loss of Margin. In the event that any present or future law, -------------- rule, regulation, treaty or official directive or the interpretation or application thereof by any central bank, monetary authority or governmental authority, or the compliance with any guideline or request of any central bank, monetary authority or governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to any amounts payable under this Agreement or the other Loan Documents by Borrowers or otherwise with respect to the transactions contemplated under this Agreement or the other Loan Documents (except for taxes on the overall net income of Bank imposed by the U.S. or any political subdivision thereof); or (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit, capital maintenance, capital adequacy, or similar requirement against assets held by, or deposits in or for the account of, or loans or advances or commitment to make loans or advances by, or letters of credit issued or commitment to issue letters of credit by Bank; or (c) imposes upon Bank any other condition with respect to advances or extensions of credit or the commitment to make advances or extensions of credit under this Agreement, and the result of any of the foregoing is to increase the costs of Bank, reduce the income receivable by or return on equity of Bank or impose any expense upon Bank in each case related to any Advances or extensions of credit made by Bank or commitments by Bank to make Advances or extensions of credit 37 under this Agreement, Bank shall so notify Borrowers in writing. Borrowers agree to pay Bank the amount of such increase in cost, reduction in income, reduced return on equity or capital, or additional expense within ten (10) days after presentation by Bank of a statement concerning such increase in cost, reduction in income, reduced return on equity or capital, or additional expense. Such statement shall set forth a brief explanation of the amount and Bank's calculation of the amount (in determining such amount Bank may use any reasonable averaging and attribution methods), which statement shall be conclusively deemed correct absent manifest error. If the amount set forth in such statement is not paid within ten (10) days after such presentation of such statement, interest will be payable on the unpaid amount at the Default Rate from the due date until paid, both before and after judgment. 8.18 Savings Clause. Anything contained in this Agreement or any -------------- other Loan Documents to the contrary notwithstanding, the obligations of each Obligor with respect to the repayment of the outstanding principal balance of the Loans shall be limited to a maximum aggregate amount equal to the greater of (a) the loan proceeds and the value of all other consideration and benefits received by or for the benefit of such Obligor in connection with the financing transactions contemplated hereunder, or (b) the largest amount that would not render its obligations with respect thereto subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state, federal, provincial or other applicable law of any jurisdiction (collectively, the "Fraudulent Transfer Laws"), if and to the extent such Obligor (or trustee on its behalf) has properly invoked the protections of the Fraudulent Transfer Laws. In making such determination, all rights of subrogation and contribution of any Obligor with respect to such obligations shall be deemed to be an asset of such Obligor. 9. TAXES. ----- 9.1 Any and all payments by Borrowers to or for the account of Bank hereunder or under any other Loan Document shall be made free and clear of, and without deduction for, any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of Bank, taxes imposed on its income, and --------- franchise taxes imposed on it, by the jurisdiction under the laws of which Bank is organized or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If Borrowers shall be required by law to deduct any Taxes from or in respect of any sum payable under this Agreement or any other Loan Document to Bank, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 9.1) Bank receives an ----------- amount equal to the sum it would have received had no such deductions been made, (ii) Borrowers shall make such deductions, (iii) Borrowers shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with Applicable Law, and (iv) Borrowers shall furnish to Bank the original or a certified copy of the receipt evidencing payment thereof. 38 9.2 In addition, Borrowers agree to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under this Agreement or any other Loan Document or from the execution or delivery of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). 9.3 BORROWERS AGREE TO INDEMNIFY BANK FOR THE FULL AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED OR ASSERTED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 9 --------- PAID BY BANK AND ANY LIABILITY (INCLUDING PENALTIES, INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO. For purposes of this Section 9.3, ----------- Taxes and Other Taxes shall not include taxes imposed on the income of Bank resulting from payments made to Bank under the Loan Documents. 9.4 Within thirty (30) days after the date of any payment of Taxes or Other Taxes, Borrowers shall furnish to Bank the original or a certified copy of the receipt evidencing such payment. 9.5 Without prejudice to the survival of any other agreement of Borrowers hereunder, the agreements and obligations of Borrowers contained in this Section 9 shall survive the termination of this Agreement and the payment --------- in full of the Obligations. 10 SECURITY; COLLECTION OF RECEIVABLES AND PROCEEDS OF COLLATERAL. -------------------------------------------------------------- 10.1 Personal Property. As security for the full and timely ----------------- payment and performance of all Obligations, each Obligor hereby grants to Bank a first priority perfected security interest in all personal property of such Obligor, wherever located, now owned or hereafter acquired, including without limitation the following: (a) All present and future Accounts, contract rights, chattel paper, instruments and documents and all other rights to the payment of money whether or not yet earned, for services rendered or goods sold, consigned, leased or furnished or otherwise, in all cases together with (i) all goods (including any returned, rejected, repossessed or consigned goods), the sale, consignment, lease or other furnishings of which shall give or may give rise to any of the foregoing, (ii) all rights as a consignor, consignee, unpaid vendor or other lien or in connection therewith, including stoppage in transit, set- off, detinue, replevin and reclamation, (iii) all General Intangibles related thereto, (iv) all credit insurance, guaranties, mortgages, security interests, assignments, and other encumbrances on real or personal property, leases and other agreements or property securing or relating to any of the foregoing, (v) 39 choses-in-action, claims and judgments related to or arising out of any of the foregoing, and (vi) any return or unearned premiums, which may be due upon cancellation of any insurance policies. (b) All present and future Inventory (including but not limited to goods held for sale or lease or furnished or to be furnished under contracts for service), and all documents of title covering any of such goods or Inventory. (c) All present and future General Intangibles. (d) All present and future Equipment, all documents of title covering any of such Equipment and all manuals of operation, maintenance or repair. (e) All present and future rights in all proceeds of all licenses, permits, approvals, license rights, agreements and General Intangibles with respect to which there are valid and enforceable legal or contractual restrictions prohibiting the collateral assignment or granting of a security interest (the "Non-Assignable Contracts"), including without limitation all proceeds from the sale, transfer or liquidation of such Non-Assignable Contracts and the value allocable to such Non-Assignable Contracts in any sale of business or assets. (f) All present and future general ledger sheets, files, records, customer lists, books of account, invoices, bills, certificates or documents of ownership, bills of sale, business papers, correspondence, credit files, tapes, cards, computer runs and all other data and data storage systems whether in the possession of any party to this Agreement or any service bureau. (g) All letters of credit and letter of credit rights, including the right to receive payment thereunder and all documentation related thereto, and all documents of title, negotiable and non-negotiable bills of lading, electronic bills of lading, shipper's rights, rights accruing under the law of agency or estoppel, warranties, claims and insurance proceeds related thereto or associated therewith. (h) Those certain securities described on Schedule -------- 10.1(h) hereto, all additional securities pledged to Bank from time to time, - ------- together with all cash, stock or other dividends paid upon such securities; all securities received in addition to or in exchange for such securities; all subscription rights incident to such securities; any other distribution in respect of such securities in any form; and the proceeds thereof. All of such securities shall be freely assignable and transferable to Bank, and shall be accompanied by such stock pledge agreements and blank stock powers with signatures guaranteed as Bank may require. (i) All documents of title, negotiable and non-negotiable bills of lading, electronic bills of lading, shipper's rights, rights accruing under the law of agency or estoppel, documents, agreements, instruments, warranties and claims now existing or hereafter issued or arising in connection with 40 any Merchandise Letter of Credit now or hereafter issued under this Agreement, and all insurance claims or proceeds related thereto. (j) All deposits, funds, notes, drafts, instruments (including promissory notes), documents, policies, evidences and certificates of insurance, securities, personal property leases and chattel paper and other assets, now or at any time hereafter on deposit with or in the possession or control of Bank or owing by Bank or in transit by mail or carrier to Bank or in the possession of any other Person acting on Bank's behalf, without regard to whether Bank received the same in pledge, for safekeeping, as agent for collection or otherwise, or whether Bank has conditionally released the same, and in all assets in which Bank now has or may at any time hereafter obtain a lien, mortgage, or security interest for any reason. (k) All deposit accounts maintained by such Obligor with any depository institution. (l) All Investment Property. (m) All Financial Assets. (n) All domain names and domain name registration rights, including without limitation, the domain names described on Schedule 11.18. -------------- (o) All products and proceeds of the foregoing. 10.2 Collateral Assignment of Licenses. As further security for --------------------------------- the Obligations, Obligors shall cause to be executed and delivered to Bank, a collateral assignment of all Licenses owned by them which are not subject to enforceable legal or contractual restrictions prohibiting such collateral assignment. 10.3 Management Support and Validity Agreements. As further ------------------------------------------ security for the Obligations, Borrowers shall cause to be executed and delivered to Bank, management support and validity agreements from the following officers of Borrowers (a) Jugal K. Taneja, (b) William L. LaGamba, (c) Stephen M. Watters, and (d) Ronald J. Patrick, all in form and content as satisfactory to the Bank. 10.4 Negotiable Collateral. In the event that any Collateral, --------------------- including proceeds, is evidenced by or consists of Negotiable Collateral, the applicable Obligor, shall immediately endorse and deliver physical possession of such Negotiable Collateral to Bank, together with any stock powers executed in blank as may be required by Bank. 41 10.5 Surety. As further security for the Obligations, Borrowers ------ shall cause to be executed and delivered to Bank, the absolute, unconditional, unlimited surety agreement (the "Surety Agreements") of each Guarantor. Such Surety Agreements will secure all Obligations and shall be in form and content acceptable to Bank. 10.6 Stock Pledges. As further security for the Obligations, ------------- DrugMax shall deliver to Bank a Pledge Agreement granting to Bank a first priority Lien against all Capital Stock now or hereafter owned by DrugMax of each Guarantor and all other Subsidiaries of DrugMax, together with executed blank stock powers with signatures guaranteed. 10.7 General. The collateral described above in Sections 10.1, ------- -------------- 10.2, 10.3, 10.4, 10.5 and 10.6 is collectively referred to herein as the - ------------------------------- "Collateral". The above-described security interests, assignments, Liens and guarantees shall not be rendered void by the fact that no Obligations exist as of any particular date, but shall continue in full force and effect until the Obligations have been repaid, Bank has no agreement or commitment outstanding under the Loan Documents pursuant to which Bank may extend credit to or on behalf of any Obligor and Bank has executed termination statements or releases with respect thereto. Bank agrees to execute and deliver to Obligors, at Obligors' expense, termination statements and releases with respect to all Liens in favor of Bank encumbering the Collateral with reasonable promptness after all Obligations have been fully and finally paid and Bank has no agreement or commitment outstanding to extend credit to or on behalf of any Obligor. IT IS THE EXPRESS INTENT OF THE OBLIGORS THAT ALL OF THE COLLATERAL SHALL SECURE NOT ONLY THE OBLIGATIONS UNDER THE LOAN DOCUMENTS, BUT ALSO ALL OTHER PRESENT AND FUTURE OBLIGATIONS OF ANY OBLIGOR TO BANK. 10.8 Collection of Accounts; Proceeds of Collateral. ---------------------------------------------- (a) General. Obligors will collect their Accounts only in ------- the ordinary course of their business. (b) Lockbox. Borrowers will notify all of their Account ------- Debtors to forward all Accounts collections owed to Borrowers to the lockbox maintained by Bank, and will execute such lockbox agreements as may be required by Bank and will pay to Bank all customary fees in connection with such lockbox arrangements. Immediately upon receipt, Borrowers will forward to Bank all other checks, drafts and other monies received by Borrowers which are proceeds of the Collateral to the lockbox maintained by Bank. Notwithstanding the foregoing, certain Accounts collections owed to Borrowers may be deposited in certain accounts maintained by Borrower with a financial institution acceptable to Bank (the "Blocked Account"), provided that such Blocked Account is subject to a blocked account agreement satisfactory to Bank which will restrict disbursements from such Blocked Account only to Bank. 42 (c) Cash Collateral Account. All Accounts collections of ----------------------- Borrowers and all checks, drafts and other monies received by Borrowers which are proceeds of the Collateral will be deposited in a noninterest bearing cash collateral account maintained at Bank (the "Cash Collateral Account"). Bank will have sole dominion and control over all items and funds in the Cash Collateral Account and such items and funds may be withdrawn only by Bank. Bank will have the right to apply all or any part of such funds towards payment of any of the Obligations, as set forth in Section 8.2. ----------- (d) Credit for Collections. Solely for purposes of ---------------------- calculating interest on the balance of the Revolving Credit Facility, and subject to the provisions of Section 8.13 regarding application of payments, all ------------ items deposited into the Cash Collateral Account will be credited by Bank absent an Event of Default as payments of the principal balance of the Revolving Credit Facility. As compensation for the arrangement set forth in this Section 10.8(d), --------------- Borrowers will pay to Bank a sum equal to one (1) days interest on all such deposits at the interest rate applicable for Base Rate Loans under the Revolving Credit Facility. Borrowers agree to reimburse Bank on demand for the amount of any items credited as provided above and subsequently returned unpaid. Bank may terminate the foregoing arrangement upon notice to Borrowers. (e) Items Held In Trust; Endorsements. Borrowers agree that --------------------------------- all monies, checks, notes, instruments, drafts, chattel paper or other payments relating to or constituting proceeds of any Accounts or other Collateral owned by Borrowers which come into the possession or under the control of any Borrower or any employees, agents or other Persons acting for or in concert with any Borrower shall be received and held in trust for Bank and such items shall be the sole and exclusive property of Bank. Immediately upon receipt of any such notes, instruments or chattel paper, Borrowers and such other Persons shall remit the same or cause the same to be remitted, in kind, to Bank. Borrowers shall deliver or cause to be delivered to Bank, with appropriate endorsement and assignment to Bank with full recourse to Borrowers all instruments, notes and chattel paper constituting an Account or proceeds thereof or of other Collateral. Bank is hereby authorized, after the occurrence of an Event of Default, to open all mail addressed to any Obligor and endorse all checks, drafts or other items for payment on behalf of any Obligor. Bank (and Bank's officers, employees and agents) is granted a power of attorney by Obligors with full power of substitution to execute, after the occurrence of an Event of Default, on behalf of any Obligor and in their name or to endorse their name on any check, draft, instrument, note or other item of payment or to take any other action or sign any document in order to effectuate the foregoing. 11. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to ------------------------------ enter into this Agreement, the Obligors, jointly and severally, make the following representations and warranties which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Closing Date, and at and as of the date of the making or entering into each Advance or Letter of Credit thereafter, as though made on and as of the date of such Advance or Letter of Credit (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement. 43 11.1 Valid Organization, Good Standing and Qualification. Each --------------------------------------------------- Obligor is a corporation duly incorporated, validly existing and in good standing under the laws of the applicable state described on Schedule 11.1, has ------------- full power and authority to execute, deliver and comply with the Loan Documents, and to carry on its business as it is now being conducted and is duly licensed or qualified as a foreign corporation in good standing under the laws of each other jurisdiction described on Schedule 11.1 and in which the character or ------------- location of the properties owned by it or the business transacted by it requires such licensing or qualification. 11.2 Licenses. Each Obligor and their employees, servants and -------- agents have or are in the process of obtaining all licenses, registrations, approvals and other authority as may be necessary to enable them to own and operate the Business and to sell their Inventory in all applicable jurisdictions. DrugMax does not sell or distribute Controlled Substances. Borrowers are currently selling Inventory only in those jurisdictions in which they are registered, licensed or hold permits as a wholesale distributor of pharmaceuticals, prescription drugs or dangerous drugs, or in which such registration, license or permit is not required by applicable law. 11.3 Ownership Interests. The ownership of all Capital Stock, ------------------- debentures, options, warrants, bonds and other securities (debt and equity) of the Obligors and all pledges, proxies, voting trusts, powers of attorney and other agreements affecting the ownership or voting rights of said interests is as set forth on Schedule 11.3. ------------- 11.4 Subsidiaries. Except as set forth on Schedule 11.4, the ------------ ------------- Obligors do not own any Capital Stock in any Person, directly or indirectly (by any Subsidiary or otherwise). All of the outstanding Capital Stock of each Obligor has been validly issued and is fully paid and non-assessable. No Capital Stock of any direct or indirect Subsidiary of DrugMax is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. A Florida corporation named "DrugMax.com, Inc." was formed for DrugMax. The name of that Florida corporation has been changed to "DrugMax, Inc." No stock was ever issued for such corporation. Such Florida corporation owns no assets and conducts no business and will not own any assets or conduct any business. Discount Rx, Inc and HealthSeek.com, Inc. are wholly owned subsidiaries of DrugMax. Such corporations own no material assets and conduct no business operations. 11.5 Financial Statements. Obligors have furnished to Bank -------------------- the audited financial statements of DrugMax and its Subsidiaries certified without qualification by independent public accountants as of March 31, 2000 and all management and comment letters from such accountants in connection therewith, and the internally prepared interim financial statements of Valley as of March 31, 2000. Such financial statements of Borrowers (together with the related notes and comments), are correct and complete, fairly present in all material respects the financial condition and the assets and liabilities of 44 Borrowers at such dates, and have been prepared in accordance with GAAP. With respect to the interim statements, such statements are subject to year-end adjustment and any accompanying footnotes. 11.6 No Material Adverse Change in Financial Condition. There has ------------------------------------------------- been no Material Adverse Change in the financial condition of any Obligor since March 31, 2000. 11.7 Pending Litigation or Proceedings. Except as set forth on --------------------------------- Schedule 11.7, there are no judgments outstanding or actions, suits or - ------------- proceedings pending or, to the best of each Obligor's knowledge, threatened against or affecting any Obligor, at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. 11.8 Due Authorization; No Legal Restrictions. The execution and ---------------------------------------- delivery by the Obligors of the Loan Documents, the consummation of the transactions contemplated by the Loan Documents and the fulfillment and compliance with the respective terms, conditions and provisions of the Loan Documents: (a) have been duly authorized by all requisite corporate action of each of the Obligors, (b) will not conflict with or result in a breach of, or constitute a default (or are not reasonably likely, upon the passage of time or the giving of notice or both to constitute a default) under, any of the terms, conditions or provisions of any Applicable Law or any Obligor's Governing Documents or any lease, indenture, mortgage, loan or credit agreement or instrument to which any Obligor is a party or by which any of them may be bound or affected, or any judgment or order of any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (c) will not result in the creation or imposition of any Lien of any nature whatsoever upon any of the property or assets of any Obligor under the terms or provisions of any such agreement or instrument, except Liens in favor of Bank, and (d) do not require any consent or approval of the stockholders of any Obligor or any other Person, except such consents and approvals which have been properly obtained and are in full force and effect. 11.9 Enforceability. The Loan Documents have been duly executed by -------------- the Obligors and delivered to Bank and constitute legal, valid and binding obligations of the Obligors, enforceable in accordance with their terms. 11.10 No Default Under Other Obligations, Orders or Governmental ---------------------------------------------------------- Regulations. The Obligors are not in violation of their Governing Documents or - ----------- in default in the performance or observance of any of their obligations, covenants or conditions contained in any indenture or other agreement creating, evidencing or securing any Indebtedness or pursuant to which any such Indebtedness is issued. The Obligors are not in violation of or in default under any other agreement or instrument or any judgment or Applicable Law. 11.11 Governmental Consents. Other than the filing of appropriate --------------------- financing statements, no consent, approval or authorization of or designation, declaration or filing with or notice to 45 any Governmental Authority on the part of any Obligor is required in connection with the execution, delivery or performance by the Obligors of the Loan Documents or the consummation of the transactions contemplated thereby. 11.12 Taxes. The Obligors have filed all tax returns which they are ----- required to file and have paid, or made provision for the payment of, all taxes which have become due pursuant to such returns or pursuant to any assessment received by them. Such tax returns are complete and accurate in all material respects. The Obligors do not know of any proposed additional assessment or basis for any assessment of additional material taxes. 11.13 Title to Collateral. The Obligors have rights in and the power ------------------- to transfer the Collateral. The Collateral is and will be owned by the Obligors free and clear of all Liens of any kind, excepting only Liens in favor of Bank and those Liens permitted under Section 13.8. The Obligors will defend the ------------ Collateral against any claims of all Persons or entities other than Bank. 11.14 Names; Addresses and State of Formation. During the past five --------------------------------------- (5) years, the Obligors have not been known by any names (including trade names) other than those set forth in Schedule 11.14 and have not been located at any -------------- addresses other than those set forth on Schedule 11.24(d). The portions of the ----------------- Collateral which are tangible property and the Obligors' Books will at all times be located at the addresses set forth on Schedule 11.24(d); or such other ----------------- location determined by the Obligors after prior notice to Bank and delivery to Bank of any items requested by Bank to maintain perfection and priority of Bank's Lien against and access to the Obligors' Books and records. Schedule -------- 11.24(d) identifies the chief executive offices of the Obligors. No Obligor - -------- currently has any assets located in Texas. DrugMax currently has a sales office in Louisiana. No Inventory is stored at such location. 11.15 Current Compliance. The Obligors are currently in compliance ------------------ with all of the terms and conditions of the Loan Documents. 11.16 United States Pension and Benefit Plans. Except as disclosed on --------------------------------------- Schedule 11.16, (a) the Obligors have no obligations with respect to any Plan, - -------------- (b) no ERISA Events, including, without limitation, any "Reportable Event" or "Prohibited Transaction" (as those terms are defined under ERISA), have occurred in connection with any Plan of any Obligor which might constitute grounds for the termination of any such Plan by the PBGC or for the appointment by any U.S. District Court of a trustee to administer any such Plan, (c) all of the Obligors' Plans meet with the minimum funding standards of Section 302 of ERISA, and (d) the Obligors have no existing liability to the PBGC. The Obligors are not subject to or bound to make contributions to any Multi-Employer Plan. The present value of the aggregate benefit liabilities under any of the Plans, determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified 46 for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term "benefits liabilities" has the meaning specified in Section 4001 of ERISA and the terms "current value" and "present value" have the meanings specified in Section 3 of ERISA. Neither any Obligor nor any ERISA Affiliates have incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under Section 4201 or 4204 of ERISA. 11.17 Leases and Contracts. The Obligors have complied in all -------------------- material respects with the provisions of all material leases, contracts or commitments of any kind (such as employment agreements, collective bargaining agreements, powers of attorney, distribution agreements, license agreements, contracts for future purchase or delivery of goods or rendering of services, bonus, pension and retirement plans or accrued vacation pay, insurance and welfare agreements) to which any Obligor is a party and are not in default thereunder. To the best of each Obligor's knowledge, no other party is in default under any such leases, contracts, licenses or other commitments and no event has occurred which, but for the giving of notice or the passage of time or both, would constitute an event of default thereunder. Schedule 11.17 sets forth -------------- an accurate list of all material leases, contracts and commitments to which any Obligor is a party or by which any of them are bound, including, without limitation, any real or personal property leases to which any Obligor is a party. 11.18 Intellectual Property. Each Obligor owns or possesses the --------------------- irrevocable right to use all of the patents, trademarks, service marks, trade names, copyrights, licenses, franchises and permits and rights with respect to the foregoing necessary to own and operate such Obligor's business and to carry on their business as presently conducted and presently planned to be conducted without conflict with the rights of others. Schedule 11.18 sets forth an -------------- accurate list and description of each such patent, trademark, service mark, trade name, copyright, license, franchise and permit and right with respect to the foregoing, together with all registration or application numbers or information with respect thereto. 11.19 Eligible Accounts. With respect to all Accounts from time to ----------------- time scheduled, listed or referred to as Eligible Accounts in any certificate, statement or report prepared by or for Borrowers and delivered to Bank upon which Borrowers are basing Availability under the Revolving Credit Facility, Borrowers warrant and represent that such Accounts meet the definition of Eligible Accounts, set forth in this Agreement. If any Accounts previously scheduled, listed or referred to in any certificate, statement or report prepared by or for Borrowers and delivered to Bank and upon which Borrowers are at that time basing Availability under the Revolving Credit Facility are thereafter discovered not to have complied with such definition on the date such certificate, statement or report was prepared or certified, the Borrowers will promptly (a) notify Bank upon obtaining knowledge thereof, (b) amend any certificate, statement or report previously prepared by or for Borrowers and delivered to Bank stating that such Account constituted an Eligible Account to reflect the fact that such Account is not eligible, and (c) pay to Bank any Out- Of-Formula Advance which may occur as a result of such Account no longer being eligible. 47 11.20 Eligible Inventory. With respect to any Inventory from time to ------------------ time scheduled, listed or referred to as Eligible Inventory in any certificate, statement or report prepared by or for Borrowers and delivered to Bank and upon which Borrowers are basing Availability under the Revolving Credit Facility, Borrowers warrant and represent that such Inventory meets the definition of Eligible Inventory set forth in this Agreement. Borrower further warrants and represents that any Eligible Inventory subject to an Eligible Inventory Buy-Back Agreement is segregated and is separately identifiable from other Eligible Inventory. If any Inventory previously scheduled, listed or referred to as Eligible Inventory in any certificate, statement or report prepared by or for Borrowers and delivered to Bank and upon which Borrowers are at that time basing Availability under the Revolving Credit Facility is thereafter discovered not to have complied with the definition of Eligible Inventory on the date such certificate, statement or report was prepared or certified, Borrowers will promptly (a) notify Bank upon obtaining knowledge that such Inventory is not Eligible Inventory, (b) amend any certificate, statement or report previously prepared by or for Borrowers and delivered to Bank stating that such Inventory constituted Eligible Inventory to reflect the fact that such Inventory is not Eligible Inventory, and (c) pay to Bank any Out-Of-Formula Advance which may occur as a result of such Inventory no longer being Eligible Inventory. 11.21 Business Interruptions. Within five (5) years prior to the date ---------------------- hereof, neither the Business, Collateral nor operations of any Obligor has been materially and adversely affected in any way by any casualty, strike, lockout, combination of workers, order of the United States, or any state or local government, or any political subdivision or agency thereof, directed against any Obligor. There are no pending or threatened material labor disputes, strikes, lockouts or similar occurrences or grievances against the business being operated by any Obligor. 11.22 Business. The Obligors are engaged solely in the Business. -------- 11.23 Affiliate Transactions. Schedule 11.23 sets forth an accurate ---------------------- -------------- list of all transactions of any Obligor, with any Affiliate of any Obligor. 11.24 Property of Obligors. -------------------- (a) Property. Each Obligor is the owner or lessee of all -------- Property and holds or is in the process of acquiring all Licenses necessary to conduct operations of the business owned or operated by it, in each case in conformity in all respects with all Applicable Laws. (b) Licenses. There is set forth in Schedule 11.24(b) a -------- ----------------- description of all Licenses which have been issued or assigned to any Obligor. All of such Licenses are in full force and effect and have been duly issued in the name of, or validly assigned to, the applicable Obligor, no default or breach exists thereunder. 48 (c) Operating Agreements. There is set forth in Schedule -------------------- -------- 11.24(c) a description of all material Operating Agreements relating to the - -------- operation of the business of each Obligor. Each such Operating Agreement is in full force and effect and no event has occurred which is reasonably likely to result in the cancellation or termination of any such Operating Agreement or the imposition thereunder of any liability upon any Obligor. (d) Facility Sites. There is set forth in Schedule 11.24(d) -------------- ----------------- locations of the chief executive office of each Obligor, the locations of all of each Obligor's Property, the places where each Obligor's Books are kept and the locations of all Equipment and offices used in the operation of each Obligor's business. (e) Leases. There is set forth in Schedule 11.24(e) a list of ------ ----------------- all material Leases, together with a complete and accurate address and legal description of each parcel of Leasehold Property subject to such Leases and the name and address of the landlord under each such Lease. Each Lease is in full force and effect, there has been no default in the performance of any of its material terms or conditions by any Obligor, to the best of each Obligor's knowledge, any other party thereto, and no claims of default have been asserted with respect thereto. The present and contemplated use of the Leasehold Property is in compliance with all applicable zoning ordinances and regulations and other Applicable Laws. (f) Operation and Maintenance of Equipment. All of the -------------------------------------- Equipment and other tangible personal property owned by each Obligor is in good operating condition and repair (subject to normal wear and tear) and has been used, operated and maintained in compliance in all material respects with all Applicable Laws. 11.25 Inventory Records. The Obligors keep correct and accurate ----------------- Inventory records itemizing and describing the kind, type, quality, and quantity of the Inventory, and each Obligor's cost therefor. 11.26 FEIN. The FEIN of each Obligor is: ---- DrugMax - 34-1755390 Valley - 34-0737238 Desktop - 59-3658393 VetMall - 59-3654162 11.27 Solvency. Each Obligor is Solvent. No transfer of property is -------- being made by any Obligor and no obligation is being incurred by any Obligor in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of any Obligor. 49 11.28 Subordinated Indebtedness. Schedule 11.28 sets forth an ------------------------- -------------- accurate list of all Subordinated Indebtedness currently owed by Obligors, identifying the payor, the payee, the outstanding principal balance, the applicable interest rate, the payment terms and all collateral or guaranties securing such Subordinated Indebtedness. 11.29 Inventory Locations. ------------------- (a) All Inventory. All of each Obligor's Inventory is currently ------------- located at one of the locations set forth on Schedule 11.29(a). Schedule ----------------- -------- 11.29(a) sets forth the street address and the name of the - -------- owner/lessor/warehouseman, as applicable, for such location. (b) Eligible Inventory Locations. Schedule 11.29(b) sets forth ---------------------------- ----------------- all Eligible Inventory Locations. (c) Additions to Eligible Inventory Locations. Borrowers and ----------------------------------------- Bank may modify Schedule 11.29(b) to add new Eligible Inventory Locations by ----------------- executing a written amendment to this Agreement in form and content acceptable to Bank, provided that Borrowers comply with all of the following conditions: -------- ---- (i) Borrowers execute and deliver to Bank such UCC-1 financing statements or other security documents covering all Inventory and related assets to be located at such new location(s) as may be required by Bank to perfect Bank's Lien in such Inventory and related assets. (ii) Bank receives written confirmation that such new UCC-1 financing statements or other security documents have been filed or registered in the appropriate offices required to perfect or publish Bank's Lien at such new location(s). (iii) Bank receives a search report from a reputable search company confirming that there are no other Liens encumbering any of the assets at such new location(s), except the Lien in favor of Bank. (iv) Bank receives a copy of the lease, sub-lease, warehouse agreement or similar agreement entered into by the applicable Borrower with the owner, lessor or operator of the new location(s). (v) Bank receives evidence satisfactory to Bank that all assets at such new location(s) are covered by the insurance coverage required under Section 12.6(a). --------------- 50 (vi) If the new location is leased by a Borrower or is a warehouse location, Bank receives a Collateral Access Agreement from the owner/lessor or warehouseman of the new location in form and content acceptable to Bank. 11.30 Investment Company Act; Public Utility Holding Company Act. No ---------------------------------------------------------- Obligor is an "investment company" or a company "controlled" by an "investment company" (as each of the quoted terms is defined or used in the Investment Company Act of 1940, as amended). No Obligor is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 11.31 Employee Relations. Each Obligor has an adequate workforce in ------------------ place and is not, except as set forth on Schedule 11.31, party to any collective -------------- bargaining agreement nor has any labor union been recognized as the representative of any Obligor's employees. 11.32 Investment Property. Schedule 11.32 sets forth a correct and ------------------- -------------- complete list of all Investment Property, including any Financial Assets, owned by each Obligor. Each Obligor is the legal and beneficial owner of such Investment Property, including any Financial Assets, as so reflected, free and clear of any Lien (except for Liens in favor of Bank), and has not sold, granted any option with respect to, assigned or transferred or otherwise disposed of any of its rights or interest therein. 11.33 Common Enterprise. The successful operation and condition of ----------------- Borrowers is dependent on the continued successful performance of the functions of the Borrowers as a whole and the successful operation of each Borrower is dependent on the successful performance and operation of the other Borrower. Each Borrower expects to derive benefit (and its board of directors has determined that it may reasonably be expected to derive benefit), directly and indirectly, from successful operations of its Subsidiaries. Each Obligor (other than Borrowers) expects to derive benefit (and the boards of directors or other governing body of each such Obligor has determined that it may reasonably be expected to derive benefit), directly and indirectly, from the credit extended by Bank hereunder, both in their separate capacities and as members with the other Obligors of an interrelated group of companies. Each Obligor has determined that execution, delivery and performance of this Agreement and any other Loan Documents to be executed by such Obligor is within its corporate purpose, will be of direct and indirect benefit to such Obligor and is in its best interest. 11.34 Insurance. No notice of cancellation has been received with --------- respect to any insurance policies required pursuant to Section 12.6 and each ------------ Obligor is in compliance with all conditions contained in such policies. 11.35 Web Sites. Schedule 11.35 sets forth a correct and complete --------- -------------- description of all material information regarding all websites currently operated or maintained by or for each Obligor. 51 11.36 Accuracy of Representations and Warranties. No representation ------------------------------------------ or warranty by any Obligor contained herein or in any certificate or other document furnished by any Obligor pursuant hereto or in connection herewith fails to contain any statement of material fact necessary to make such representation or warranty not misleading in light of the circumstances under which it was made. There is no fact which any Obligor knows or should know and has not disclosed to Bank, which does or may materially and adversely affect any Obligor or any of their operations. 12. AFFIRMATIVE COVENANTS. The Obligors, jointly and severally, covenant --------------------- and agree that, so long as this Agreement has not been terminated and until full and final payment of the Obligations, and unless Bank shall otherwise consent in writing, each Obligor shall comply with the following: 12.1 Payment of Principal, Interest and Other Amounts Due. The ---------------------------------------------------- Obligors will pay when due all Obligations without setoff, deduction or counterclaim and without deduction or withholding for or on account of any federal, state or local taxes. 12.2 Claims for Labor and Materials. The Obligors will pay or cause ------------------------------ to be paid when due all claims for labor, materials and supplies which, if unpaid, might become a Lien upon any of their properties or assets. 12.3 Existence; Approvals; Qualification; Compliance with Laws. Each --------------------------------------------------------- of the Obligors (a) will obtain, preserve and keep in full force and effect its separate corporate existence and all rights, licenses, registrations and franchises necessary to the proper conduct of its business or affairs; (b) will qualify and remain qualified as a foreign corporation in each jurisdiction in which the character or location of the properties owned by it or the business transacted by it requires such qualification; (c) will comply in all material respects with the requirements of all Applicable Laws; and (d) diligently pursue obtaining the licenses described as "pending" on Schedule 11.24(b). ----------------- 12.4 Maintenance of Properties. The Obligors will maintain, ------------------------- preserve, protect and keep or cause to be maintained, preserved, protected and kept their Property used or useful in the conduct of their business in good working order and condition, reasonable wear and tear excepted, and will pay and discharge when due the cost of repairs to and maintenance of the same. 12.5 Intellectual Property. With respect to any and all tradenames, --------------------- domain names, trademarks, registrations, copyrights, patents, patent rights and applications for any of the foregoing, the Obligors shall maintain and protect the same to the extent reasonably required for the operation of the Obligors' business and shall take and assert any and all remedies reasonably available to any Obligor to prevent any other Person from infringing upon or claiming any interest in any such material trademarks, registrations, copyrights, patents, patent rights or application for any of the foregoing. 52 The Obligors will notify Bank promptly of (a) the filing of any patent or trademark application by any Obligor; (b) the grant of any patent or trademark to any Obligor; or (c) any Obligor's intent to abandon a patent or trademark. The Obligors will, if requested by Bank, (i) execute and deliver to Bank assignments, financing statements, patent mortgages or such other documents, in form and substance reasonably acceptable to Bank, necessary to perfect and maintain Bank's security interest in all existing and future patents, patent applications, trademarks, trademark applications, and other General Intangibles owned by any Obligor; and (ii) furnish Bank with evidence satisfactory to Bank that all actions necessary to maintain and protect each trademark and patent owned by any Obligor or its employees have been taken in a timely manner. 12.6 Insurance. --------- (a) Collateral. The Obligors, at their expense, shall keep the ---------- Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, as are ordinarily insured against by other owners in similar businesses, in amounts acceptable to Bank, but in any event in amounts sufficient to cover the value of all of each Obligor's Equipment and Inventory and in amounts sufficient to prevent any Obligor from becoming a co- insurer under such policies. The Obligors also shall maintain business interruption, public liability, product liability, and property damage insurance relating to any Obligor's ownership and use of the Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation. (b) Endorsements, Cancellation or Modification. The Obligors ------------------------------------------ shall cause Bank to be named as loss payee (with a lender's loss payable endorsement) with respect to all Collateral, and additional insured with respect to all liability insurance, as its interests may appear. Every policy of insurance referred to in this Section shall contain an agreement by the insurer that thirty (30) days' written notice will be given Bank by the insurer prior to cancellation or material modification of such insurance coverage. Any modification of any insurance policy or coverage involving any decrease in the amount or scope of coverage, must be approved by Bank in writing prior to the effective date of such modification. (c) General. All such policies of insurance shall be in such ------- form, with such companies, and in such amounts as may be reasonably satisfactory to Bank. Every policy of insurance referred to in this Section shall contain an agreement by the insurer that any loss payable thereunder shall be payable notwithstanding any act or negligence of any Obligor or the Bank which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment. 53 (d) Policies and Evidence of Insurance. The Obligors shall ---------------------------------- cause to be delivered to Bank the insurance policies and all endorsements thereto and evidence of insurance utilizing a current ACORD 27 Evidence of Property Insurance and at least thirty (30) days prior to the expiration of any such insurance, additional policies or duplicates thereof and evidence of insurance utilizing a current ACORD 27 Evidence of Property Insurance confirming the renewal of such insurance and payment of the premiums therefor. (e) Losses; Payments. The Obligors shall direct all insurers ---------------- that in the event of any loss thereunder or the cancellation of any insurance policy, the insurers shall make payments for such loss and pay all return or unearned premiums directly to Bank and not to Obligors and Bank jointly. In the event of any loss, the Obligors will give Bank prompt notice thereof and Bank may make proof of loss whether the same is done by Obligors. Bank is hereby granted a power of attorney by the Obligors with full power of substitution to file any proof of loss in any Obligor's or Bank's name, to endorse any Obligor's name on any check, draft or other instrument evidencing insurance proceeds, and to take any action or sign any document to pursue any insurance loss claim. In the event of any loss, Bank, at its option, may (a) retain and apply all or any part of the insurance proceeds to repay or secure the Obligations, in such order and amounts as Bank may elect, or (b) disburse all or any part of such insurance proceeds to or for the benefit of the applicable Obligor for the purpose of repairing or replacing Collateral after receiving proof satisfactory to Bank of such repair or replacement, in either case without waiving or impairing the Obligations or any provision of this Agreement. Any deficiency thereon shall be paid by Obligors to Bank upon demand. Obligors shall bear the full risk of loss from any loss of any nature whatsoever with respect to the Collateral. (f) Credit Insurance. In the event any Obligor obtains credit ---------------- insurance, such Obligor shall cause all proceeds payable under such insurance policies to be paid to Bank to be applied on account of the Obligations. 12.7 Inspections; Examinations. The Obligors hereby irrevocably ------------------------- authorize all accountants and auditors employed by any Obligor at any time to exhibit and deliver to Bank copies of any and all of such Obligor's financial statements, trial balances or other accounting records of any sort in the accountant's or auditor's possession and copies of all reports submitted to the Obligors by such accountants or auditors, including management letters, "comment" letters and audit reports, and to disclose to Bank any information they may have concerning any Obligor's financial status and business operations. The Obligors further authorize all federal, state and municipal authorities to furnish to Bank copies of reports or examinations relating to any Obligor, whether made by any Obligor or otherwise. The officers or employees of Bank, or such Persons as Bank may designate, may visit and inspect any of the properties of any Obligor, examine (either by Bank's employees or by independent accountants) any of the Collateral or other assets of the Obligors, including the Books of the Obligors, and 54 discuss the affairs, finances and accounts of the Obligors with their officers and with their independent accountants, at such times as Bank may desire. Bank may conduct at any time and from time to time, and the Obligors will fully cooperate with, field examinations of the Inventory, Accounts and business affairs of the Obligors. Obligors agree to pay all costs and expenses of Bank related to such visits, inspections and field examination at a per man per day rate of $600, but not to exceed $15,000.00 during any one-year period, plus out-of-pocket expenses, provided that, after the occurrence of an Event of Default, Obligors -------- ---- agree to pay any and all costs and expenses of Bank related to such visits, inspections and field examination, without limitation. 12.8 Pension Plans. The Obligors will (a) keep in full force and ------------- effect any and all Plans which are presently in existence or may, from time to time, come into existence under ERISA, unless such Plans can be terminated without material liability to any Obligor in connection with such termination (as distinguished from any continuing funding obligation); (b) make contributions to all of their Plans in a timely manner and in a sufficient amount to comply with the requirements of ERISA or other applicable pension laws; (c) comply with all material requirements of ERISA or other applicable pension laws which relate to such Plans so as to preclude the occurrence of any Reportable Event, Prohibited Transaction or material "accumulated funding deficiency" as such term is defined in ERISA; and (d) notify Bank promptly upon receipt by any Obligor of any notice of the institution of any proceeding or other action which is likely to result in the termination of any Plan. 12.9 Bank Accounts. Borrowers will maintain a lockbox with Bank and ------------- their operating accounts, main disbursement accounts, investment accounts and deposit accounts with Bank, unless otherwise agreed by Bank in writing. The Obligors will notify Bank in writing and on a continuing basis, of all deposit accounts, investment accounts and certificates of deposit (including the numbers thereof) maintained with or purchased from any other depository institutions. 12.10 Maintenance of Management. The Obligors will cause their ------------------------- business to be continuously managed by the following persons in the positions described below or such other persons (serving in such positions) as may be reasonably satisfactory to the Bank: Person Position ------ -------- Jugal K. Taneja Consultant to DrugMax Chairman of the Board of DrugMax Chairman of the Board of Desktop William L. LaGamba Chief Executive Officer of DrugMax 55 Chief Executive Officer of Desktop Chief Executive Officer of Vetmall Stephen M. Watters Consultant to DrugMax Vice Chairman of the board of Directors of DrugMax Ronald J. Patrick Chief Financial Officer and Vice President - Finance of DrugMax Chief Financial Officer and Vice President - Finance of Valley Chief Financial Officer and Vice President - Finance of Desktop Chief Financial Officer and Vice President - Finance of VetMall 12.11 Transactions with Affiliates. Borrowers will cause all of their ---------------------------- Indebtedness at any time owed to any Guarantor, Subsidiary, Affiliate, shareholder, director and officer to be subordinated in all respects to all Obligations and will not make any payments thereon, except as approved by Bank in writing. 12.12 Additional Documents and Future Actions. The Obligors will, at --------------------------------------- their sole cost, take such actions and provide Bank from time to time with such agreements, financing statements and additional instruments, documents or information as the Bank may in its reasonable discretion deem necessary or advisable to perfect, protect, maintain or enforce its Lien in the Collateral, to permit Bank to protect or enforce its Lien in the Collateral, or to carry out the terms of the Loan Documents. The Obligors hereby authorize and appoint Bank as their attorney-in-fact, with full power of substitution, to take such actions as Bank may deem advisable to protect the Collateral and its interests thereon and its rights hereunder, to execute on any Obligor's behalf (if necessary) and to file at the Obligors' expense financing statements or applications for registration and amendments thereto, in those public offices deemed necessary or appropriate by Bank to establish, maintain and protect a continuously perfected or published Lien in the Collateral, and to execute on any Obligor's behalf such other documents and notices as Bank may deem advisable to protect the Collateral and its interests therein and its rights hereunder. Such power being coupled with an interest is irrevocable, the Obligors irrevocably authorize the filing of financing statements or applications for registration by Bank describing the Collateral, the filing of initial financing statements in the jurisdiction of any Obligor's legal formation and existence, the filing of a carbon, photographic or other copy of this Agreement, or of a financing statement, as a financing statement and agree that such filing is sufficient as a financing statement. 56 12.13 Title to Equipment. The Obligors will promptly have Bank's ------------------ Lien noted on any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment, and will promptly deliver to Bank the originals thereof. 12.14 Taxes. The Obligors will cause all assessments and taxes, ----- whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against any Obligor or any of their property to be paid in full, before delinquency or before the expiration of any extension period. The Obligors shall make due and timely payment or deposit of all such federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. The Obligors will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that the Obligors have made such payments or deposits. 12.15 Leases. The Obligors will pay when due all rents and other ------ amounts payable under any leases to which any Obligor is a party or by which any Obligor's properties and assets are bound. To the extent that any Obligor fails timely to make payment of such rents and other amounts payable when due under its leases, Bank shall be entitled, in its discretion, to reserve an amount equal to such unpaid amounts against the Availability. 12.16 Notices. Obligors will promptly notify Bank of (a) any -------- action or proceeding brought against any Obligor wherein such action or proceeding would, if determined adversely to such Obligor result in liability of the Obligors in excess of $50,000 individually, or $100,000 in the aggregate for all Obligors, (b) the occurrence of any Event of Default, (c) any fact, condition or event which, with the giving of notice or the passage of time or both, could become an Event of Default, (d) the failure of the Obligors to observe any of their undertakings under the Loan Documents, (e) the occurrence of any Material Adverse Change, (f) any new locations to be added as an additional Eligible Inventory Location; (g) the creation of any new inventions or other events related to the intellectual property of any Obligor; (h) the occurrence of any casualty loss related to the Collateral: (i) the receipt of any notice of the institution or proceeding or other action which may result in the termination of any Plan; (j) any change in the management roles of (k) Jugal K. Taneja, (2) William L. LaGamba, (3) Stephen M. Watters, (4) Ronald J. Patrick as described in Section 12.10 or any change in any other senior management ------------- employees of Obligors; and (l) the receipt of any licenses described as "pending" on Schedule 11.24(b) or the rejection of any license applications ----------------- described as "pending" on Schedule 11.24(b). ----------------- 12.17 Assignment of Claims Act. Each Obligor shall promptly ------------------------ execute any documents or instruments and shall take such steps or actions reasonably required by Bank so that all monies due or to become due under any contract with the U.S., the District of Columbia or any other Governmental Authority, will be assigned to Bank and notice given thereof in accordance with the 57 requirements of the Assignment of Claims Act of 1940, as amended, or any other laws, rules or regulations relating to the assignment of any such contract and monies due to or to become due. 12.18 Additional Guarantors. In the event that any Obligor shall form --------------------- or acquire any new Subsidiary after the date hereof or any existing Subsidiary shall acquire any assets or engage in any business activities, the applicable Obligors will cause such Subsidiary to become a "Guarantor" hereunder pursuant to an Assumption Agreement in the form and content as required by Bank (an "Assumption Agreement") pursuant to which such Subsidiary shall agree to be bound as a "Guarantor" by all provisions of this Agreement and the other Loan Documents and the applicable Obligors shall cause such Subsidiary to execute a Surety Agreement similar in form to the Surety Agreements executed by the other Guarantors. Together with the Assumption Agreement for each Subsidiary, the applicable Obligor shall deliver such proof of corporate action, incumbency of officers, opinions of counsel, UCC-1 financing statements, a Pledge Agreement in favor of Bank, blank stock powers, original Capital Stock certificates and other documents as the Bank shall request. The applicable Obligor hereby agrees to immediately pledge to the Bank under a Pledge Agreement and thereby grant a security interest to Bank in any and all of its ownership interests of any Subsidiary which becomes a "Guarantor" hereunder pursuant to this Section. 12.19 Instruments; Promissory Notes. The Obligors will cause any ----------------------------- instruments or notes received by or payable to such Obligor to be delivered to Bank appropriately endorsed to the order of Bank. 12.20 Future Leases. The Obligors will deliver to Bank, promptly -------------- after the execution by an Obligor, as lessee, of any Lease, an executed copy thereof. 12.21 Web Sites. With respect to each website operated or ---------- maintained by any Obligor, such Obligor agrees as follows: (a) To maintain and operate each website to meet the security and performance standards set forth on Schedule 11.35. Obligors warrant and --------------- covenant that they will maintain their websites in continuous operation providing at least its current level of functionality with respect to Obligors business operations. Obligors further warrant and covenant that they shall not obtain a license for use in connection with the use of their websites of any software, data, service mark, trademark or copyright unless (i) such license allows the use of the right licensed for the use intended by Obligors; or (ii) either (A) such license is a mass-market license readily obtainable through retail establishments for a one time payment of less than $500 USD or (B) the license provides that the Obligors may grant Bank a security interest in and to the license rights, the Bank may receive an assignment of the license rights, and the Bank may assign such rights to a third party in connection with a disposition of the Collateral. 58 (b) Not to move the location of any servers servicing any website from the locations described on Schedule 11.35 unless Obligors comply -------------- with the provisions of Section 13.14. Obligors agree to furnish to the Bank, if -------------- requested, a website hosting service waiver and recognition of rights with respect to any collateral that is or may be located on equipment in the possession of a website hosting service, such waiver and recognition of rights to be in such form and upon such terms as are acceptable to Bank. (c) Not to change the method used by any Obligor of hosting any website from the method described on Schedule 11.35, unless such change has -------------- been approved by Bank in writing. (d) To permit Bank, its employees and any consultants retained by Bank to review and inspect all website components, including without limitations all computer hardware and all intellectual property interests or, at the request of the Bank, provide Bank with a complete "mirror" image of the website accessible to Bank at all times. (e) To maintain in full force and effect, to comply with and to cause all other parties to comply with all operating agreements, maintenance agreements, equipment leases, hosting contracts, line connection leases or agreements, content or software licenses and all other agreements related to the ownership, operation and maintenance of any website by an Obligor (collectively, the "Website Agreements"). (f) To deliver to Bank fully executed estoppel, waiver and consent agreements from all hosting services, equipment lessors and maintenance providers, in form and content acceptable to Bank. (g) To notify Bank immediately of any defaults by any party to any Website Agreement. (h) Obligors shall maintain for the benefit of Bank, if requested, a back-up copy of all data comprising their website with a third- party escrow agent acceptable to Bank and execute and deliver a data escrow agreement with such third-party escrow agent in such form and upon such terms as are acceptable to Bank. 13. NEGATIVE COVENANTS. The Obligors, jointly and severally, ------------------ covenant and agree that, so long as this Agreement has not been terminated and until full and final payment of the Obligations, and unless Bank shall otherwise consent in writing, each Obligor shall comply with the following: 59 13.1 Limitation on Sale and Leaseback. The Obligors will not enter --------------------------------- into any arrangement whereby any of them will sell or transfer any real property or improvements thereon or other fixed assets owned by any of them and then or thereafter rent or lease as lessee such property, improvements or assets or any part thereof which any of them shall intend to use for substantially the same purposes as the property sold or transferred. 13.2 Limitation on Indebtedness. The Obligors will not have at any -------------------------- time outstanding to any Person other than Bank, any Indebtedness for borrowed money, Capitalized Lease Obligations, or any outstanding letters of credit, except: (a) Existing Indebtedness for borrowed money and Capitalized Lease Obligations described on Schedule 13.2; ------------- (b) Future purchase money Indebtedness and Capitalized Lease Obligations not to exceed $100,000 in the aggregate principal amount during any fiscal year, incurred to finance Capital Expenditures permitted under Section ------- 14.5, provided that, Bank shall have the right of first refusal to provide such - ---- -------- ---- financing on reasonably competitive terms; and (c) Indebtedness for borrowed money in an amount not to exceed $100,000 outstanding at any time in the aggregate which is subordinated in right of payment and in right to exercise all remedies to all Obligations, pursuant to a Subordination Agreement in form and content acceptable to Bank. Any of such existing permitted Indebtedness may not be refinanced or replaced without the consent of the Bank. Notwithstanding anything herein or elsewhere to the contrary neither Borrower may make any loans to the other Borrower, to any other Obligor or to any Affiliate of any Obligor. 13.3 Loans. The Obligors will not make or have outstanding any ----- loans or advances in the nature of loans to any Person including, without limitation, any officer, shareholder, director, employee or Affiliate of such Obligor, except (a) advances made to the Obligors' employees in the ordinary course of any Obligor's business and other loans to the Obligors' employees in an aggregate outstanding amount not to exceed $50,000 at any time, and (b) loans described on Schedule 13.3. Notwithstanding anything here or elsewhere to the ------------- contrary neither Borrower may make any loans to the other Borrower, to any other Obligor or any Affiliate of any Obligor. 13.4 Investments. Obligors will not have or make any investments ----------- in all or any portion of the capital stock or securities of any Person, or any loans, advances or extensions of credit to any Person, except investments listed on Schedule 13.4 attached hereto. ------------- 60 13.5 Guaranties. The Obligors will not directly or indirectly ----------- guarantee, endorse (other than for collection or deposit in the ordinary course of business), discount, sell with recourse or for less than the face value or agree (contingently or otherwise) to purchase or repurchase or otherwise acquire, or otherwise become directly or indirectly liable for, or agree (contingently or otherwise) to supply or advance funds (whether by loan, stock purchase, capital contribution or otherwise) in respect of, any Indebtedness, obligations or liabilities of any Person, except in connection with the Surety Agreements. 13.6 Disposition of Assets. The Obligors will not sell, lease, ---------------------- transfer, or otherwise dispose any of their Property, except for (a) sales of Inventory to customers in the ordinary course of business, (b) disposition of assets by any Obligor to another Obligor, or (c) the disposition of obsolete Equipment with a "book" value of up to $25,000 each and $50,000 in the aggregate in any one fiscal year. 13.7 Merger; Consolidation; Business Acquisitions; Subsidiaries. The ---------------------------------------------------------- Obligors will not (a) merge into or consolidate with any Person, except for the merger of one Borrower into another Borrower, (b) acquire any portion of the Capital Stock of any person or a material portion of assets or business of any Person, or the operating business or division of any Person, or any Property not used or useful in the operation of the Business, (c) permit any Person to merge into any of them, except for the merger of one Borrower into another Borrower, (d) form any Subsidiaries, without complying with Section 12.18, (e) change any ------------- of their respective states of formation or incorporation, (f) materially change the principal nature of their business or engage in any business other than the Business, (g) permit any Subsidiary to engage in any business activity, acquire any assets or, acquire any ownership or investment interests in any Person, without the prior written consent of Bank, or (h) purchase or permit any Subsidiary to purchase the assets or stock of Penner & Welsch, Inc. without the Bank's prior written consent. 13.8 Liens. The Obligors will not create, incur or permit to exist ------ any Lien of any kind on their property or assets, whether now owned or hereafter acquired, or upon any income, profits or proceeds therefrom, except: (a) Liens held by Bank; (b) Deposits made in the ordinary course of business (i) in connection with worker's compensation, unemployment insurance, social security and other like laws or (ii) to secure the performance of statutory obligations, not incurred in connection with either (A) the borrowing of money or (B) the deferred purchase price of goods or Inventory; (c) Encumbrances consisting of zoning restrictions, easements, reservations, servitudes, restrictions on the use of real property or minor irregularities of title thereto, none of which impairs the use of such property by any Obligor in the operation of their business; 61 (d) Liens listed on Schedule 13.8 attached hereto; ------------- (e) Purchase money Liens or Capitalized Leases, provided that: -------- ---- (i) the property subject to any of the foregoing is acquired or leased by such Obligor in the ordinary course of its business and the Lien on any such property is created contemporaneously with such acquisition; (ii) the purchase money Indebtedness or principal portion of the Capitalized Lease Obligations so created shall not exceed 100% of the lesser of cost or fair market value as of the time of acquisition or lease of the property covered thereby; (iii) the purchase money Indebtedness or Capitalized Lease Obligations shall only be secured by the property so acquired or leased; (iv) the purchase money Indebtedness or Capitalized Lease Obligations are permitted by the provisions of Sections 13.2 and 14.5; and ---------------------- (v) no Default or Event of Default then exist. The Obligors shall not enter into any agreement with any other Person which shall prohibit the Obligors from granting, creating or suffering to exist, or otherwise restrict in any way (whether by covenant, by identifying such event as a default under such agreement or otherwise) the ability of the Obligors to grant, create or suffer to exist, any lien, security interest or other charge or encumbrance upon or with respect to any of their assets in favor of the Bank. 13.9 Letters of Credit. The Obligors will not apply for or obtain ----------------- any letters of credit, except Merchandise Letters of Credit or standby letters of credit issued by Bank. 13.10 Insurance. The Obligors shall not take out separate insurance ---------- concurrent in form or contributing in the event of casualty loss with that required to be maintained under Section 12.6 unless Bank is named as loss payee ------------ (with a lender's loss payable endorsement). The Obligors shall promptly notify Bank whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and originals of such policies shall be provided promptly to Bank. 13.11 Default Under Other Indebtedness. The Obligors will not permit --------------------------------- any of their Indebtedness to be in default. If any Indebtedness of the Obligors is declared or becomes due and payable before its expressed maturity by reason of default or otherwise or to the knowledge of any Obligor, the holder of any such Indebtedness shall have the right (or upon the giving of notice or the passage of time, 62 or both, shall have the right) to declare such Indebtedness to be so due and payable, the Obligors will promptly give Bank written notice of such declaration, acceleration or right of declaration. 13.12 Transactions with Affiliates. Except for the transactions ---------------------------- described on Schedule 11.23, the Obligors will not enter into or conduct any -------------- transaction with any Affiliate without the prior written consent of Bank. Obligors will only enter into or conduct transactions with Affiliates on terms which are reasonable and customary for arms-length transactions between parties who are not affiliated. Borrowers will not sell Inventory to each other for a purchase price in excess of their cost. 13.13 Name or Chief Executive Address Change. The Obligors will not -------------------------------------- change their names, FEIN numbers, or chief executive addresses except upon thirty (30) days prior written notice to Bank and delivery to Bank of any items requested by Bank to maintain perfection and priority of Bank's first priority Lien in the Obligors' Accounts, General Intangibles and similar assets and access to the Obligors' Books, including without limitation, new UCC-1 financing statements and Collateral Access Agreements. 13.14 Change in Location of Collateral. Obligors will not change -------------------------------- the location at which any of their inventory, equipment or other personal property is located except upon thirty (30) days prior written notice to Bank and, provided that Obligors comply with all of the following conditions: -------- ---- (a) The applicable Obligor executes and delivers to Bank such UCC-1 financing statements covering all Inventory and related assets of the applicable Obligor to be located at such new location(s) as may be required by Bank to perfect Bank's Lien in such inventory and related assets. (b) Bank receives written confirmation that such new UCC-1 financing statements have been filed in the appropriate offices required to perfect Bank's Lien at such new location(s). (c) Bank receives a search report from a reputable search company confirming that there are no other Liens encumbering any of such applicable Obligor's assets at such new location(s), except the Lien in favor of Bank. (d) Bank receives a copy of the lease, sub-lease, warehouse agreement or similar agreement entered into by the applicable Obligor with the owner, lessor or operator of the new location(s). (e) Bank receives evidence satisfactory to Bank that all assets of the applicable Obligor at such new location(s) are covered by the insurance coverage required under Section 12.6. ------------ 63 (f) Bank receives a Collateral Access Agreement from the owner/lessor of the new location in form and content acceptable to Bank. 13.15 Material Adverse Contracts. The Obligors will not become or --------------------------- be a party to any contract or agreement which has a materially adverse impact on any Obligor's ability to perform under this Agreement or any other Loan Document. 13.16 Restrictions on Use of Proceeds. Borrowers will not carry or ------------------------------- purchase with the proceeds of the Revolving Credit Facility or the Term Loan any "margin security" within the meaning of Regulations U, T or X of the Board of Governors of the Federal Reserve System. 13.17 Subordinated Indebtedness. Borrower (a) will not make any ------------------------- payments on the Subordinated Indebtedness except as permitted under the Subordination Agreements, and (b) will not breach any of the terms of any Subordination Agreements. 13.18 Prepayments; Amendments and License Agreements. The Obligors ----------------------------------------------- will not: (a) Prepay, redeem, retire, defease, purchase, or otherwise acquire any Indebtedness for borrowed money owing to any third Person, other than the Obligations in accordance with this Agreement; (b) Directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning any Indebtedness for borrowed money to make such terms or conditions more onerous or expensive for the Obligors; (c) Amend, modify or waive any material term or provision of their respective Governing Documents in a manner materially adverse to the Obligors or Bank; or (d) Amend, modify or waive any term or provision of any of Licenses. 13.19 Distributions; Stock Redemptions. The Obligors will not make -------------------------------- any distribution or declare or pay any dividends (in cash or other property, other than Capital Stock) on, or purchase, acquire, redeem, or retire any of such Obligor's Capital Stock, of any class, whether now or hereafter outstanding. 13.20 Issuance of Capital Stock. No Subsidiary of DrugMax will issue -------------------------- any Capital Stock unless all of such Capital Stock is pledged to Bank pursuant to a Pledge Agreement substantially identical to the Pledge Agreements and the original certificates evidencing such pledged Capital 64 Stock are delivered to Bank together with executed blank stock powers. Obligors will not issue any Capital Stock which would result in any Change in Control. 13.21 Prohibited Transactions Under ERISA. The Obligors will not ----------------------------------- directly or indirectly: (a) engage, or permit any Subsidiary of DrugMax to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Section 406 of ERISA or 4975 of the IRC for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC), whether or not waived; (c) fail, or permit any Subsidiary of DrugMax to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; (d) terminate, or permit any Subsidiary of DrugMax to terminate, any Benefit Plan where such event would result in any liability of any Obligor, any Subsidiary of DrugMax or any ERISA Affiliate under Title IV of ERISA; (e) fail, or permit any Subsidiary of DrugMax to fail, to make any required contribution or payment to any Multiemployer Plan; (f) fail, or permit any Subsidiary of DrugMax to fail, to pay any required installment or any other payment required under Section 412 of the IRC on or before the due date for such installment or other payment; (g) amend, or permit any Subsidiary of DrugMax to amend, a Plan resulting in an increase in current liability for the plan year such that any Obligor, any Subsidiary of DrugMax or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the IRC; or (h) withdraw, or permit any Subsidiary of DrugMax to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA. 65 13.22 Licenses. No Obligor will enter into any license, -------- royalty or similar agreements regarding any patents, trademarks, tradenames, copyrights or other General Intangibles owned by such Obligor, which grants any exclusive rights to use such General Intangibles to any Person. 13.23 Consignments. Obligors will not (a) consign any Inventory ------------ for sale, (b) sell any Inventory on sale or return, sale on approval, or other conditional terms of sale or (c) reflect any Inventory held by them on consignment for another Person as Inventory owned by an Obligor. 13.24 Trademark and Tradename Licenses. No Obligor will enter -------------------------------- into any license or similar right to use or royalty agreement with respect to any trademark or tradename owned by such Obligor without the prior written consent of Bank. 13.25 Equipment Becoming Fixture. Obligors will not permit any -------------------------- item of equipment owned by such Obligor to become a fixture to real estate or an accession to other property, except for equipment which may become a trade fixture to premises leased by such Obligor but with respect to which the landlord has waived any right of ownership or security interest. 14. FINANCIAL COVENANTS. Except with the prior written consent of ------------------- Bank, Borrowers will comply with the following: 14.1 Net Income. Borrowers will have Net Income, determined on a ---------- consolidated basis with respect to the two (2) Borrowers only and not including any Guarantor or other Subsidiary, of not less than the following amounts for the following periods (if a loss is indicated, the loss will not be greater than the specified amount): Amount Period ------ ------ ($670,000) Fiscal quarter ending June 30, 2000 ($300,000) Fiscal quarter ending September 30, 2000 $25,000 Fiscal quarter ending December 31, 2000 $445,000 Fiscal quarter ending March 31, 2001 ($500,000) Fiscal year ending March 31, 2001 $70,000 Fiscal quarter ending June 30, 2001 $90,000 Fiscal quarter ending September 30, 2001 $70,000 Fiscal quarter ending December 31, 2001 $545,000 Fiscal quarter ending March 31, 2002 66 $ 775,000 Fiscal year ending March 31, 2002 $ 75,000 Fiscal quarter ending June 30, 2002 $ 85,000 Fiscal quarter ending September 30, 2002 $ 105,000 Fiscal quarter ending December30, 2002 $ 570,000 Fiscal quarter ending March 31, 2003 $ 835,000 Fiscal year ending March 31, 2003 $ 180,000 Fiscal quarter ending June 30, 2003 and for each fiscal quarter thereafter $1,000,000 Fiscal quarter ending March 31, 2004 each fiscal quarter thereafter 14.2 Stand-Alone Net Income. Each Borrower, on a ---------------------- stand-alone basis and not consolidated with any Guarantor or other Subsidiary, will have Net Income of not less than the following amounts for the following periods (if a loss is indicated, the loss will not be greater than the specified amount): Amount Period ------ ------ DrugMax Valley ------- ------ ($850,000) $155,000 Fiscal quarter ending June 30, 2000 ($650,000) $150,000 Fiscal quarter ending September 30, 2000 ($300,000) $100,000 Fiscal quarter ending December 31, 2000 $ 150,000 $100,000 Fiscal quarter ending March 31, 2000 ($200,000) $100,000 Fiscal quarter ending June 30, 2001 ($200,000) $100,000 Fiscal quarter ending September 30, 2001 ($200,000) $100,000 Fiscal quarter ending December 31, 2001 $300,000 $100,000 Fiscal quarter ending March 31, 2002 ($100,000) $ 75,000 Fiscal quarter ending June 30, 2002 ($100,000) $ 75,000 Fiscal quarter ending September 30, 2002 ($100,000) $ 75,000 Fiscal quarter ending December 31, 2002 67 $350,000 $100,000 Fiscal quarter ending March 31, 2003 $ 0 $ 75,000 Each of the first three (3) fiscal quarters in each fiscal year thereafter $400,000 $ 75,000 Each of the fourth fiscal quarters in each fiscal quarter thereafter 14.3 Net Worth. Borrowers will maintain Net Worth, determined --------- on a consolidated basis with respect to the two (2) Borrowers only and not including any Guarantor or other Subsidiary, of not less than the following amounts for the following periods: Amount Period ------ ------ $33,554,000 As of June 30, 2000 $33,254,000 As of September 30, 2000 and all times thereafter through December 30, 2000 $33,279,000 As of December 31, 2000 and all times thereafter through March 30, 2001 $33,724,000 As of March 31, 2000 and all times thereafter through June 29, 2001 $33,794,000 As of June 30, 2001 and all times thereafter through September 29, 2001 $33,884,000 As of September 30, 2001 and all times thereafter through December 29, 2001 $33,954,000 As of December 30, 2001 and all times thereafter March 30, 2002 $34,499,000 As of March 31, 2002 and all times thereafter through March 30, 2002 $34,574,000 As of June 30, 2002 and all times thereafter through September 29, 2002 $34,659,000 As of September 30, 2002 and all times thereafter through December 29, 2002 68 Amount Period ------ ------ $34,764,000 As of December 31, 2002 and all times thereafter through March 30, 2003 $35,334,000 As of March 31, 2003 and all times thereafter through March 30, 2004 $36,334,000 As of March 31, 2004 and all times thereafter through March 30, 2004 As of the end of each fiscal year commencing with the fiscal year ending March 31, 2005 and continuing throughout the next fiscal year until but not including the next fiscal year end, the minimum Net Worth requirement will be increased by $1,000,000 per year. 14.4 Current Ratio. Borrowers will maintain a Current Ratio, ------------- determined on a consolidated basis with respect to the two (2) Borrowers only and not including any Guarantor or other Subsidiary, of not less than 1.25 to 1.0 as of the Closing Date and at all times thereafter. 14.5 Capital Expenditures. Borrowers will not cause, suffer or -------------------- permit their aggregate Capital Expenditures, determined on a consolidated basis, to exceed the following amount for the following periods: Amount Period ------ ------ $300,000 Fiscal year ending March 31, 2001 $300,000 Fiscal year ending March 31, 2002 and for each fiscal year end thereafter Such permitted Capital Expenditures are on a non-cumulative basis as to any unused portions in any fiscal year. 14.6 Cash on Deposit. As a condition of closing and at all --------------- times thereafter, Borrowers shall maintain Bank as their sole bank of account (except for certain payroll accounts as permitted by Bank) and shall deposit with Bank in separate segregated accounts all cash-on-hand of Borrowers. In addition, Borrowers will at all times maintain on deposit with Bank in a separate segregated account a minimum of $2,000,000 in cash. The minimum cash deposit amount shall be reduced in accordance with the following schedule: 69 Amount Minimum of Cash Trigger Event Reduction Deposit ------------- --------- ------- Receipt by Bank of the consolidated $500,000.00 $1,500,000.00 and consolidating annual audited financial statements of Borrowers and the compliance certificate for the fiscal year ended March 31, 2001 Receipt by Bank of the consolidated $500,000.00 $1,000,000.00 and consolidating internally prepared quarterly financial statements of Borrowers and the compliance certificate for the quarter ended September 30, 2001 Receipt by Bank of the consolidated $500,000.00 $ 500,000.00 and consolidating internally prepared quarterly financial statements of Borrowers and the compliance certificate for the quarter ended December 31, 2001 Receipt by Bank of the consolidated $500,000.00 $ 0 and consolidating annual audited financial statements of Borrowers and the compliance certificate for the fiscal year ended March 31, 2002 Notwithstanding the foregoing, there shall be no reductions in the minimum cash deposit amount unless (i) no Default or Event of Default has occurred and Borrowers are then in compliance with all of the terms of the Loan Documents, and (ii) Borrowers have averaged at least $1,000,000 of Excess Availability under the Revolving Credit Facility for the thirty (30) days preceding the date scheduled for any reduction and as of the date of such reduction. 14.7 Changes to Financial Covenants. Bank may condition extension of ------------------------------ the Revolving Credit Facility after the Contract Period upon revision of the foregoing financial covenants, as Bank in its sole discretion may require. 14.7 Most Favored Lender. Borrowers agree promptly to notify Bank of ------------------- any agreement for Indebtedness for borrowed money to which any Borrower is a party or under which it is 70 obligated and to provide Bank with a copy of such agreement. If such agreement contains or at any time is amended to contain financial covenants more restrictive than those contained in this Section 14, upon Bank's request, ---------- Borrowers agree to amend this Agreement accordingly so that the covenants contained herein are substantially the same as those contained in such other agreements for Indebtedness for borrowed money. 15. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS. The Obligors ---------------------------------------------------- will maintain books of record and account in which full, correct and current entries in accordance with GAAP will be made of all of their dealings, business and affairs, and the Obligors will deliver to Bank the following: 15.1 Annual Statements. As soon as available and in any event within ----------------- one hundred thirty-five (135) days after the end of each fiscal year of Borrowers: (a) the audited, consolidated and consolidating income and retained earnings statements of Borrowers and their Subsidiaries for such fiscal year, (b) the audited, consolidated and consolidating balance sheet of Borrowers and their Subsidiaries as at the end of such fiscal year, and (c) the audited, consolidated and consolidating statement of cash flow of Borrowers and their Subsidiaries for such fiscal year, setting forth in comparative form the corresponding figures as at the end of the previous fiscal year, all in reasonable detail. The foregoing statements and balance sheets shall be prepared in accordance with GAAP and the consolidated statements shall be audited by independent certified public accountants of recognized standing acceptable to Bank in the reasonable exercise of its discretion with respect to which such accountants shall deliver their unqualified opinion which shall not include any "going-concern" opinion. Borrowers shall deliver to Bank drafts of the above-described annual statement within ninety (90) days after the end of each fiscal year of Borrowers. 15.2 Projections and Cash Flow. As soon as available and in any event ------------------------- within sixty (60) days prior to the end of each fiscal year of Borrowers, projections of profit and loss statements, cash flows and balance sheets and Availability of Borrowers and their Subsidiaries prepared on a month-by-month basis for the next succeeding twelve (12) months, prepared by the chief financial officer of Borrowers. Borrowers have furnished to Bank initial projections dated as of the date hereof containing the information required by this Section. Borrowers represent and covenant that (a) the initial projections required by this Section have been prepared by the chief financial officer of Borrowers and represent the best available good faith estimate of Borrowers regarding the course of Borrowers' businesses for the periods covered thereby; (b) all future projections required by this Section shall be prepared by or under 71 the direction of the chief financial officer of Borrowers and shall represent the best available good faith estimate of Borrowers regarding the course of Borrowers' business for the periods covered thereby; (c) the assumptions set forth in the initial projections are and the assumptions set forth in the future projections delivered hereafter shall be reasonable and realistic based on then current economic conditions; (d) Borrowers know of no reason why Borrowers should not be able to achieve the performance levels set forth in the initial projections and Borrowers shall have no knowledge at the time of delivery of future projections of any reason why Borrowers shall not be able to meet the performance levels set forth in said projections; and (e) Borrowers have sufficient capital as may be required for their ongoing business and to pay their existing and anticipated debts as they mature. 15.3 Monthly Statements. As soon as available and in any event ------------------ within thirty (30) days after the close of each calendar month; (a) the consolidated and consolidating income and retained earnings statements of Borrowers and their Subsidiaries for such month, (b) the consolidated and consolidating balance sheet of Borrowers and their Subsidiaries as of the end of such month, and (c) the consolidated and consolidating statement of cash flow of Borrowers and their Subsidiaries for such month, setting forth in comparative form the corresponding figures as of the end of the corresponding month of the previous fiscal year (if applicable) and the projected figures based upon the projections required under Section 15.2, all in ------------ reasonable detail, subject to year end adjustments and certified by the chief financial officer of Borrowers to be, to the best of his knowledge, accurate in all material respects and to have been prepared in accordance with GAAP. 15.4 Collateral Reporting. Each Borrower on a stand-alone basis -------------------- shall provide the Bank with the following documents at the following times in form satisfactory to the Bank: (a) with each request for an Advance under the Revolving Credit Facility, but no less frequently than on a weekly basis, or more frequently if requested by the Bank, a report of: (i) the Borrower's sales, credits and collections since the last such report, and (ii) Borrowing Base Certificate. 72 (b) by the 15/th/ day of each month (with respect to the previous month), or more frequently if requested by Bank: (i) an aging of the Borrower's accounts; (ii) an aging of the Borrower's accounts payable. (iii) a reconciliation to the previous month's aging of the Borrower's accounts and to the Borrower's general ledger; and (iv) a calculation of ineligible Accounts with supporting detail sufficient for Bank to verify all calculations. (c) with each request for an Advance under the Revolving Credit Facility, but no less frequently than on a weekly basis, or more frequently if requested by the Bank, a report of: (i) Inventory by category and location, with additional detail showing additions to and deletions from Inventory; and (ii) Inventory subject to Eligible Inventory Buy-Back Agreements. (d) by the 15/th/ day of each month (with respect to the previous month), or more frequently if requested by Bank: (i) an Inventory reconciliation to: (A) the previous month's report of the Borrower's Inventory; (B) the Borrower's general ledger; (C) the perpetual inventory system; (ii) a calculation of ineligible Inventory; and (iii) a reconciliation of the perpetual inventory system values to the general ledger values. (e) upon request, copies of invoices in connection with the Borrower's Accounts, customer statements, credit memos, remittance advices and reports, deposit slips, shipping and 73 delivery documents in connection with the Borrower's Accounts and for inventory acquired by the Borrowers, purchase orders and invoices. (f) upon request, a statement of the balance of each of the intercompany Accounts. (g) other reports as to the Collateral of the Borrower as the Bank shall reasonably request from time to time. (h) with the delivery of each of the foregoing, a certificate of the Borrower executed by an officer thereof certifying as to the accuracy and completeness of the foregoing. If any of the Borrower's records or reports of the Collateral are prepared by an accounting service or other agent, the Borrower hereby authorizes such service or agent to deliver such records, reports, and related documents to the Bank. 15.5 Tax Returns. Copies of each Obligor's federal income tax ----------- returns, and any amendments thereto, within thirty (30) days of the filing thereof with the Internal Revenue Service. 15.6 SEC Reporting. Borrowers' Form 10-Q Quarterly Reports, Form 10-K ------------- Annual Reports, and Form 8-K Current Reports, and any other filings made by Borrowers with the Securities and Exchange Commission, if any, as soon as the same are filed, or any other information that is provided by Borrowers to their shareholders. 15.7 Audit Reports. Promptly upon receipt thereof, one copy of each ------------- other report submitted to any Obligor, by independent accountants, including management letters, "comment" letters, in connection with any annual, interim or special audit report made by them of the Books of any Obligor. 15.8 Reports to Governmental Agencies and Other Creditors. With ---------------------------------------------------- reasonable promptness, copies of all such financial reports, statements and returns which Borrowers or any guarantor shall file with any federal or state department, commission, board, bureau, agency or instrumentality and any report or statement delivered by Borrowers or any Guarantor to any supplier or other creditor in connection with any payment restructuring. 15.9 Requested Information. With reasonable promptness, all such --------------------- other data and information in respect of the condition, operation and affairs of any Obligor as Bank may reasonably request from time to time. 15.10 Compliance Certificates. Within the periods provided in ----------------------- Sections 15.1 and 15.3 above, a certificate of the chief financial officer of - ---------------------- Borrowers (a) stating that Borrowers have observed, performed and complied with each and every undertaking contained herein, (b) setting forth the 74 information and computations (in sufficient detail) required in order to establish whether Borrowers were operating in compliance with the financial covenants in Section 14 of this Agreement, (c) certifying that as of the date of ---------- such certification, there does not exist any Default or Event of Default, and (d) certifying as to the state of incorporation or formation of each Obligor. Such certificate will be in the form of Exhibit A attached hereto. --------- 15.11 Accountant's Certificate. Simultaneously with the ------------------------ delivery of certified financial statements required by Section 15.1, copies of a ------------ certificate of the accountants who audited such statements stating that (a) they have checked the computations delivered by the Obligors in compliance with Section 15.1, and (b) in making the examination necessary for their audit or - ------------ review of such financial statements for such year, nothing came to their attention of a financial or accounting nature that caused them to believe that (i) any Obligor was not in compliance with the terms, covenants, provisions or conditions of any of the Loan Documents, or (ii) there shall have occurred any condition or event which would constitute an Event of Default, or, if so, specifying in such certificate all such instances of non-compliance and the nature and status thereof. Such certificate shall be unqualified and shall not include any "going-concern" opinion of the accountants. 16. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE OR LETTER OF CREDIT. --------------------------------------------------------------- The obligation of (a) Bank to make the initial Advance or (b) Bank to issue the initial Letter of Credit is subject to the fulfillment, to the satisfaction of Bank, of each of the following conditions on or before the Closing Date. All of such agreements, documents and other items must be in form, content and all other respects satisfactory to Bank. 16.1 Searches. Bank shall have received copies of record -------- searches (including UCC searches, patent searches, trademark searches, copyright searches and judgments, suits, bankruptcy, litigation, tax and other lien searches) against each Obligor. 16.2 UCC-1 Filings. Bank shall have received confirmation ------------- from a service organization retained by Bank to file financing statements and fixture filings that such filings have been made in all relevant jurisdictions. 16.3. Executed Loan Documents. Bank shall have received ----------------------- each of the following documents, duly executed, and each such document shall be in full force and effect: (a) the Notes; (b) the Disbursement Letter; 75 (c) the Pay-Off Letter, together with UCC termination statements, canceled notes and other documentation evidencing the termination by any lenders or other secured parties of Liens in and to the properties and assets of any Obligor; (d) each Pledge Agreement accompanied by original stock certificates and stock powers; (e) each of the Surety Agreements; (f) each of the Subordination Agreements; (g) the Environmental Agreement; and (h) any and all other Loan Documents. 16.4 Authorizing Resolutions. Bank shall have received a ----------------------- certificate from the Secretary of each Obligor attesting to the resolutions of each Obligor's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which each Obligor, respectively, is a party and authorizing specific officers of such Obligor to execute the same. 16.5 Governing Documents. Bank shall have received copies ------------------- of each Obligor's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Obligor. 16.6 Material Agreements. Bank shall have received copies ------------------- of all material agreements, leases and other documents related to the Obligors. 16.7 Good Standing Certificates. Bank shall have received -------------------------- certificates of status with respect to each Obligor, each dated within 15 days of the Closing Date, such certificates to be issued by the appropriate officer of each jurisdiction in which such Obligor is required to be qualified or licensed which certificates shall indicate that such Obligor is in good standing in such jurisdictions. 16.8 Insurance. Bank shall have received loss payee --------- endorsements as well as the relevant policies and evidence of insurance, together with the endorsements thereto, as are required by Section 12.6. ------------ 16.9 Collateral Access Agreements. Bank shall have ---------------------------- received such Collateral Access Agreements from lessors, warehousemen, bailees, and other third persons as Bank may require with respect to all Eligible Inventory Locations. 76 16.10 Opinions of Counsel. Bank shall have received ------------------- opinions of the Obligors' general and local counsels. 16.11 Tax Returns. Bank shall have received satisfactory ----------- evidence that all tax returns required to be filed by Borrowers have been timely filed and all taxes upon Borrowers or their properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency. 16.12 March 31, 2000 Financial Statements. Borrowers shall ----------------------------------- have delivered to Bank the audited year end financial statements of Borrowers and their Subsidiaries (including VetMall and Desktop) prepared in accordance with GAAP and in a form satisfactory to the Bank for the fiscal year ending March 31, 2000, which financial statements shall be on a consolidated and consolidating basis and which shall (a) show a consolidated net loss for Borrowers and their Subsidiaries of not more than $2,000,000, (b) show a consolidated net loss for the Borrowers only (not including any of the Subsidiaries) of not more than $2,000,000, (c) show a Net Worth for Borrowers and their Subsidiaries on a consolidated basis of not less than $31,900,000, and (d) be substantially in accordance with the unaudited draft statements previously submitted to Bank by Borrowers. 16.13 July 31, 2000 and August 31, 2000 Financial ------------------------------------------- Statements. Borrowers shall have delivered to Bank internally prepared financial - ---------- statements of Borrowers prepared in accordance with GAAP and in a form satisfactory to the Bank for the calendar months ended July 31, 2000 and August 31, 2000, which financial statements shall be on a consolidated and consolidating basis and shall show a consolidated EBITDA for the two (2) Borrowers only and not including any other Persons, of not less than $220,000 in the aggregate for both months and that the Borrowers have substantially achieved the results anticipated by their business plan for such months as previously furnished to Bank. 16.14 Licenses, Approvals, Etc. Bank shall have received ------------------------- copies of all licenses, approvals, consents, authorizations and filings of Obligors required or necessary for the operation of their business. 16.15 Excess Availability. At the time of funding and after ------------------- considering closing costs and all other then current expenditures (including after payment of past due trade creditors), Borrowers shall have Excess Availability under the Revolving Credit Facility, plus available cash on hand on deposit with Bank (excluding any previously pledged cash) of a minimum aggregate amount of $5,500,000. 16.16 No Material Adverse Change. Bank shall have received -------------------------- evidence that no Material Adverse Change nor any material change in the value of the Collateral shall have occurred from the date of financial information and projections originally provided to Bank; 77 16.17 Fees. All fees and expenses payable under the Loan ---- Documents on the Closing Date and as of the funding of the Loans or issuing such Letter of Credit shall have been paid. 16.18 SEC Reporting. Bank shall have received copies of any ------------- and all 10-K, 10-Q or other reports filed or required to be filed with the Securities Exchange Commission or other regulatory agency by DrugMax. 16.19 Reference Checks. Bank shall have received satisfactory ---------------- reference checks on management, equity investors, and each of the Obligors. 16.20 Subordination. Bank shall have received evidence that ------------- all shareholder and Affiliate debt owed by Borrowers is subordinated to all Obligations on terms and conditions acceptable to the Bank. 16.21 Equipment Leases. Bank shall have received copies of ---------------- all equipment leases of Borrowers. 16.22 Releases. UCC-3 terminations and such other releases -------- of all prior Liens, as have been requested by Bank, shall be delivered to Bank on the Closing Date in appropriate form with all signatures and other information needed for recordation. 16.23 Merger. Bank shall have received satisfactory evidence ------ that (a) Becan Distributors, Inc. has been merged into DrugMax, (b) Desktop Corporation has been merged into Desktop, and (c) such mergers have not resulted in any Material Adverse Change to such entities. 16.24 Other Documents. All other documents and legal matters --------------- in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded. By completing the closing hereunder, or by making advances hereunder, Bank does not thereby waive a breach of any warranty or representation made by the Obligors hereunder or any agreement, document, or instrument delivered to Bank or otherwise referred to herein, and any claims and rights of Bank resulting from any breach or misrepresentation by any Obligor are specifically reserved by Bank. 17. CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT. In ---------------------------------------------------------- addition to, but not in limitation of, any other conditions set forth in this Agreement, the obligation of (a) Bank to make any Advance, or (b) Bank to issue any Letter of Credit is subject to the fulfillment, to the satisfaction of Bank, of each of the following conditions: 17.1 Representations and Warranties. The representations and ------------------------------ warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects 78 on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); 17.2 No Default or Event of Default. No Default or Event of ------------------------------ Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; 17.3 No Injunction or Order. No injunction, writ, ---------------------- restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any governmental authority against any Obligor, Bank, or any of their Affiliates; and 17.4 No Bankruptcy. No proceeding under any bankruptcy, ------------- reorganization, arrangement of debt, insolvency, readjustment of debt, or receivership law shall have been filed by or against any Obligor. 18. DEFAULT AND REMEDIES. -------------------- 18.1 Events of Default. The occurrence of any one or more of ----------------- the following events shall constitute an Event or Events of Default hereunder: (a) The failure of Borrowers to pay when due and payable or when declared due and payable, any portion of the Obligations, whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees, costs, indemnities, or other amounts constituting Obligations; (b) The failure of any Obligor to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between any Obligor and Bank; (c) The failure of any Obligor to pay any Indebtedness for borrowed money due to any third Person or Capitalized Lease Obligations or the existence of any other event of default under any loan, security agreement, mortgage, Capitalized Lease or other agreement pertaining thereto binding any Obligor, after the expiration of any notice and/or grace periods permitted in such documents; (d) The failure of any Obligor to pay or perform any other obligation to Bank under any other agreement or note or otherwise arising, whether or not related to this Agreement, after the expiration of any notice and/or grace periods permitted in such documents; (e) The adjudication of any Obligor as a bankrupt or insolvent, or the entry of an Order for Relief against any Obligor or the entry of an order appointing a receiver or trustee for any 79 Obligor of any of their property or approving a petition seeking reorganization or other similar relief under the Bankruptcy Code or other similar laws of the U.S. or any state or any other competent jurisdiction; (f) A proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt, debt moratorium or receivership law is filed by or against any Obligor, or any Obligor makes an assignment for the benefit of creditors, or any Obligor takes any action to authorize any of the foregoing; (g) The suspension of the operation of any Obligor's Business; (h) Any Obligor becomes unable to meet its debts as they mature or fall due, or the admission in writing by any Obligor to such effect, or any Obligor calling any meeting of all or any material portion of their creditors for the purpose of debt restructure or moratorium; (i) All, or any part of the Collateral or the assets of any Obligor are attached, seized, subjected to a writ or distress warrant, or levied upon, or come within the possession or control of any, receiver, trustee, custodian or assignee for the benefit of creditors or become subject to any Lien which is not otherwise permitted under Section 13.8; ------------ (j) The entry of a final judgment for the payment of money against any Obligor in excess of $50,000 which, within ten (10) days after such entry, shall not have been discharged or execution thereof stayed pending appeal or shall not have been discharged within five (5) days after the expiration of any such stay; (k) Any representation or warranty of in any of the Loan Documents is discovered to be untrue in any material respect or any statement, certificate or data furnished by any Obligor pursuant hereto is discovered to be untrue in any material respect as of the date as of which the facts therein set forth are stated or certified; (l) Any Obligor voluntarily or involuntarily dissolves or is dissolved, terminates or is terminated; (m) Any Obligor is enjoined, restrained, or in any way prevented by the order of any court or any administrative or regulatory agency, the effect of which order restricts any Obligor from conducting all or any material part of their business; (n) A material breach by any Obligor occurs under any material agreement, document or instrument, whether heretofore, now or hereafter existing between any Obligor and any other Person; 80 (o) A Material Adverse Change occurs; (p) A Change in Control occurs; (q) Any material uninsured damage to, or loss, theft, or destruction of, any of the Collateral occurs; (r) Any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty loss occurs resulting in the cessation or substantial curtailment of production or other revenue producing activities at any facility of any Obligor for more than thirty (30) consecutive days; (s) The loss, suspension, revocation or failure to renew any license or permit now held or hereafter acquired by any Obligor, which loss, suspension, revocation or failure to renew is likely to result in a Material Adverse Change; (t) Any projection delivered to Bank pursuant hereto indicates that Borrower will not be able to comply with the financial covenants set forth in Section 14; ---------- (u) Any breach by any Obligor under any of the Subordination Agreements; (v) The validity or enforceability of this Agreement, or any of the Loan Documents, is contested by any Obligor, or any Obligor denies that they have any or any further liability or obligation hereunder or thereunder; (w) The indictment or threatened indictment of any Obligor under any criminal statute, or the commencement or threatened commencement of criminal or civil proceedings against any Obligor pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any property of any Obligor, or any Obligor engages or participates in any "check kiting" activity regardless of whether a criminal investigation has been commenced; or (x) Any breach by any Obligor under any of the Website Agreements. 18.2 Remedies. Upon the occurrence of an Event of Default, or -------- at any time thereafter, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by the Obligors: (a) Declare the entire unpaid principal of the Revolving Credit Facility, the Term Loan, all other Obligations (including without limitations all contingent reimbursement obligations under any Letters of Credit, or any part thereof), all interest accrued thereon, all fees due hereunder and all other 81 obligations of Borrowers to Bank hereunder or under any other Loan Document otherwise arising immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between any Obligor and Bank; (c) Cease issuing Letters of Credit; (d) Convert any Loans earning interest at LIBOR Rate plus Applicable Margin to Loans earning interest at the Base Rate plus Applicable Margin and require Borrower to indemnify Bank against any loss, cost or expense which Bank has sustained or incurred as a consequence of such conversion in accordance with Section; (e) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Bank, but without affecting the Bank's rights and security interests in the Collateral and without affecting the Obligations; (f) Reduce the amount of the Revolving Credit Facility or the advance rates for the calculation of Availability under the formula set forth in Section 8.12, or require additional Reserves; ------------ (g) Increase the applicable interest rates up to the Default Rate; (h) Hold, as cash collateral, any and all balances and deposits of the Obligors held by Bank, and any amounts received in the Cash Collateral Account, to secure the full and final repayment of all of the Obligations; (i) Enter the premises occupied by the Obligors and take possession of the Collateral and any records relating thereto; and/or (j) Exercise each and every right and remedy granted to it under the Loan Documents, under the Uniform Commercial Code and under any other applicable law or at equity. If an Event of Default occurs under Sections 18.1(e) or 18.1(f), all of --------------------------- the Obligations shall become immediately due and payable. 18.3 Application of Proceeds. All proceeds from each sale of, ----------------------- or other realization upon, all or any part of the Collateral following an Event of Default shall be applied or paid over as follows: 82 (a) First: to the payment of all costs and expenses ----- incurred in connection with such sale or other realization, including attorneys' fees; and (b) Second: to the payment of the Obligations (with ------ the Obligors remaining liable for any deficiency) as Bank may elect; and (c) Third: the balance (if any) of such proceeds ----- shall be paid, subject to any duty imposed by law, or otherwise to whomsoever shall be entitled thereto. 18.4 Sale or Other Disposition of Collateral. The sale, lease --------------------------------------- or other disposition of the Collateral, or any part thereof, by Bank after an Event of Default may be for cash, credit or any combination thereof, and Bank may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, may set-off the amount of such purchase price against the Obligations then owing. Any sales of the Collateral may be adjourned from time to time with or without notice. Bank may cause the Collateral to remain on any Obligor's premises or otherwise or to be removed and stored at premises owned by other persons, at Borrowers' expense, pending sale or other disposition of the Collateral. Any Obligor at Bank's request, shall assemble the Collateral consisting of Inventory and tangible assets and make such assets available to Bank at a place to be designated by Bank. Bank shall have the right to conduct such sales on any Obligor's premises, at the Obligors' expense, or elsewhere, on such occasion or occasions as Bank may see fit. With respect to any Obligors' owned or leased premises, the Obligors hereby grant Bank a license, effective upon the occurrence of an Event of Default, and to the extent not prohibited by the terms of any applicable lease, to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise. Any notice required to be given by Bank of a sale, lease or other disposition or other intended action by Bank with respect to any of the Collateral which is given pursuant to Section 20 below, at least five (5) ---------- Business Days prior to such proposed action, shall constitute fair and reasonable notice to the Obligors of any such action. The net proceeds realized by Bank upon any such sale or other disposition, after deduction for the expenses of retaking, holding, storing, transporting, preparing for sale, selling or otherwise disposing of the Collateral incurred by Bank in connection therewith and all other costs and expenses related thereto including attorney fees, shall be applied in such order as Bank, in its discretion, elects, toward satisfaction of the Obligations. Bank shall account to the Obligors for any surplus realized upon such sale or other disposition, and the Obligors shall remain liable for any deficiency. The commencement of any action, legal or equitable, or the rendering of any judgment or decree for any deficiency shall not affect Bank's Lien in the Collateral. The Obligors agree that Bank has no obligation to preserve rights to the Collateral against any other parties or to clean-up or otherwise prepare any of the Collateral for sale. 83 If Bank sells any of the Collateral upon credit, the Obligors will be credited only with payments actually made by or on behalf of the purchaser, received by Bask and applied to the indebtedness owed by such purchaser to Bank. If the purchaser fails to pay for any of the Collateral, Bank may resell the Collateral. Bank will not be considered to have offered to retain the Collateral in satisfaction of the Obligations, unless Bank has entered into a written agreement with the Obligors to that effect. Bank is hereby granted a license or other right to use, after an Event of Default, without charge, any Obligor's labels, General Intangibles, intellectual property, Equipment, real estate, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Inventory or other Collateral and any Obligor's rights under all contracts, licenses, approvals, permits, leases and franchise agreements, to the extent assignable, shall inure to Bank's benefit. Bank shall be under no obligation to marshall any assets in favor of any Obligor or any other party or against or in payment of any or all of the Obligations. 18.5 Actions With Respect to Accounts. The Obligors hereby -------------------------------- irrevocably make, constitute, and appoint Bank (and any of Bank's designated officers, employees or agents) as their true and lawful attorney-in-fact, with full power of substitution, with power to sign their name and to take any of the following actions, in their name or the name of Bank, as Bank may determine, without notice to any Obligor and at the Obligors' expense: (a) Verify the validity and amount of or any other matter relating to the Collateral by mail, telephone, telecopy or otherwise; (b) Notify all Account Debtors that the Obligors' Accounts have been assigned to Bank (for the pro rata benefit of Bank's) and that Bank has a Lien therein; (c) Direct all Account Debtors to make payment of all the Obligors' Accounts directly to Bank and forward invoices directly to such Account Debtors; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of such Accounts; (e) After the occurrence of an Event of Default, notify the U.S. Postal Service to change the address for delivery of mail addressed to any Obligor to such address as Bank may designate: 84 (f) After the occurrence of an Event of Default, have access to any lockbox or postal boxes into which any Obligor's mail is deposited and receive, open and dispose of all mail addressed to any Obligor (any sums received pursuant to the exercise of the rights provided in the Loan Documents may, at Bank's option, be deposited in the Cash Collateral Account); (g) After the occurrence of an Event of Default, take control in any manner of any rejected, returned, stopped in transit or repossessed goods relating to any Accounts; (h) After the occurrence of an Event of Default, enforce payment of and collect any Accounts, by legal proceedings or otherwise, and for such purpose Bank may: (i) Demand payment of any Accounts or direct any Account Debtors to make payment of Accounts directly to Bank; (ii) Receive and collect all monies due or to become due to any Obligor; (iii) Exercise all of any Obligor's rights and remedies with respect to the collection of Accounts, (iv) Settle, adjust, compromise, extend, renew, discharge or release the Accounts; (v) Sell or assign the Accounts on such terms, for such amount and at such times as Bank deems advisable; (vi) Prepare, file and sign any Obligor's name or names on any Proof of Claim or similar document in any proceeding filed under federal or state bankruptcy, insolvency, reorganization or other similar law as to any Account Debtor; (vii) Prepare, file and sign any Obligor's name or names on any Notice of Lien, Claim of Mechanic's Lien, Assignment or Satisfaction of Lien or Mechanic's Lien or similar document in connection with the Collateral; (viii) Endorse the name of any Obligor upon any chattel papers, documents, instruments, invoices, freight bills, bills of lading or similar documents or agreements relating to the Accounts or goods pertaining thereto or upon any checks or other media of payment or evidences of a security interest that may come into Bank's possession; (ix) Sign the name of any Obligor to verifications of Accounts and notices thereof sent by Account Debtors to such Obligor; or 85 (x) Take all other actions necessary or desirable to protect any Obligor's or Bank's interest in the Accounts. The Obligors ratify and approve all acts of said attorneys and agree that said attorneys shall not be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law, except such attorneys' gross negligence or willful misconduct. The Obligors agree to assist Bank in the collection and enforcement of their Accounts and not to hinder, delay or impede Bank in its collection or enforcement of said Accounts. 18.6 Actions With Respect to Web Sites. Each Obligor hereby --------------------------------- irrevocably makes, constitutes and appoints Bank (and any of Bank's designated officers, employees or agents) as their true and lawful attorney-in-fact, with full power of substitution, with power to sign its name and to take any of the following actions, in its name or the name of Bank, as Bank may determine, without notice to any Obligor and at the Obligors' expense, after the occurrence of any Event of Default: (a) Take control of and exercise any rights of any Obligor under any or all of the Website Agreements; (b) Take any action to maintain and recover any website related information and to insure that any website is properly maintained; (c) Amend, modify, alter, delete or otherwise take any action with respect to the content contained on any website; (d) Enter into any agreements which Bank deems advisable to continue the operation and maintenance of any website, with all of the costs, expenses and fees related to such new agreements to be paid by the Obligors and to constitute Obligations under this Agreement; and (e) Take all other actions necessary or desirable in Bank's discretion to protect any Obligor's or Bank's interest in any assets comprising or related to any website. The Obligors ratify and approve all acts of said attorneys' and agree that said attorney shall not be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law, except such attorneys' gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable. The Obligors agree to assist Bank in the exercise of all rights and remedies to enable the Bank to operate and maintain any such website. 18.7 Set-Off. Without limiting the rights of Bank under Applicable ------- Law, the Obligors grant to Bank and agree that Bank may, unless prohibited by applicable law, without notice to any Obligor 86 (such notice being expressly waived), and without constituting a retention of any Collateral in satisfaction of any Obligations (within the meaning of Section 9-505 of the UCC) exercise a right of set-off, a lien against and a security interest in all property of the Obligors now or at any time in Bank's possession in any capacity whatsoever, including but not limited to any balance of any deposit, trust or agency account, or any other account with Bank as security for the Obligations. At any time and from time to time following the occurrence of an Event of Default or Default, Bank may without notice or demand, set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Bank to or for the credit of any Obligor against any or all of the Obligations. 18.8 Turnover of Property Held by Bank. The Obligors irrevocably --------------------------------- authorize any Affiliate of Bank, unless prohibited by Applicable Law, upon and following the occurrence of an Event of Default or a Default, at the request of Bank and without further notice, to turn over to Bank any property of any Obligor held by such Affiliate, including without limitation, funds and securities for any Obligor's account and to debit, for the benefit of Bank, any deposit account maintained by any Obligor with such Affiliate (even if such deposit account is not then due or there results a loss or reduction of interest or the imposition of a penalty in accordance with Applicable Law to the early withdrawal of time deposits), in the amount requested by Bank up to the amount of the Obligations, and to pay or transfer such amount or property to Bank for application to the Obligations. 18.9 Delay or Omission Not Waiver. Neither the failure nor any delay ---------------------------- on the part of Bank to exercise any right, remedy, power or privilege under the Loan Documents upon the occurrence of any Event of Default or otherwise shall operate as a waiver thereof or impair any such right, remedy, power or privilege. No waiver of any Event of Default shall affect any later Event of Default or shall impair any rights of Bank. No single, partial or full exercise of any rights, remedies, powers and privileges by the Bank shall preclude further or other exercise thereof. No course of dealing between Bank and any Obligor shall operate as or be deemed to constitute a waiver of Bank's rights under the Loan Documents or affect the duties or obligations of the Obligors. 18.10 Remedies Cumulative. The rights, remedies, powers and privileges ------------------- provided for herein shall not be deemed exclusive, but shall be cumulative and shall be in addition to all other rights, remedies, powers and privileges in Bank's favor at law or in equity. 18.11 Consents, Approvals and Discretion. Whenever the Bank's consent ---------------------------------- or approval is required or permitted or any documents are required to be acceptable to Bank, consent, approval or acceptability shall be at the sole and absolute discretion of Bank. Except as otherwise specifically provided herein, whenever any determination or act is at Bank's discretion, such determination or act shall be at Bank's sole and absolute discretion. 87 18.12 Certain Fees, Costs, Expense Expenditures. The Obligors agree to ----------------------------------------- pay on demand all cost and expenses of Bank (the "Bank Expenses"), including without limitation: (a) all costs, expenses and fees (including attorneys' fees and other legal costs, expenses and charges) incurred or paid by Bank in connection with (i) advising, structuring, drafting, preparing, reviewing, negotiating, administering the Loan Documents or any waivers, consents, amendments, extensions, modifications or restatements related thereto; (ii) interpreting, enforcing, protecting, preserving, defending or terminating any of the Loan Documents or any of Bank's rights and remedies related thereto, irrespective of whether suit is brought (including without limitation, all costs and expenses and attorneys' fees related to any "workout," "restructuring," insolvency or similar proceeding involving any Obligor); (iii) legal advice relating to the rights and responsibilities of Bank; (iv) the preparation for negotiations regarding, consultations concerning or the defense or prosecution of any legal proceedings involving, any claim (including third-party claims) made or threatened against Bank related to or involving the Loan Documents, the transactions contemplated under the Loan Documents, Bank's relationship with the Obligors, or any actions taken pursuant to the Loan Documents by Bank; (b) all costs, expenses and fees incurred or paid by Bank for photocopying; notarization; couriers; messengers; telecommunications; public record searches (including without limitation, real estate, tax lien, litigation, UCC, bankruptcy, patent, trademark or copyright searches); filing; recording; publication; appraisals (including without limitation personal property, real estate, trademark, tradename, and inventory appraisals or reappraisals); real estate surveys or updates; real estate title insurance reports or bring-downs, commitments, policies and endorsements; environmental audits, surveys or updates; and accounting or other professional advisors; (c) all costs, expenses and fees incurred or paid by Bank in connection with the disbursement of funds under the Loan Documents (by wire transfer or otherwise); the dishonoring of checks, drafts or other items of payment; correction or cure of any Default or Event of Default or enforcement of the Loan Documents; gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale or advertising to sell any of the Collateral (regardless of whether the sale is consummated); or exercising any rights or remedies under the Loan Documents; and (d) all costs, expenses and other payments incurred or made by Bank to any warehouseman, landlord, lessor or owner of any property at which any of the Collateral is located to enable Bank to obtain access, store, warehouse, ship, sell or otherwise preserve, protect and dispose of such Collateral (including without limitation all lease payments, access charges, utility charges and safety and security charges). In the event any Obligor shall fail to pay taxes, insurance, assessments, fees, costs or expenses which it is required to pay hereunder, or fails to keep the Collateral free from Liens (except as expressly permitted herein), or fails to maintain or repair the Collateral as required hereby, or otherwise breaches any 88 obligations under the Loan Documents, Bank in its discretion, may make expenditures for such purposes and the amount so expended (including reasonable attorney's fees and expenses, filing fees and other charges) shall be payable by the Obligors on demand and shall constitute part of the Obligations. With respect to any amount required to be paid by Obligors under this Section, in the event Obligors fail to pay such amount within five (5) days after demand, at Bank's option, all of said amounts required to be paid by Obligors, may be charged by Bank as a Base Rate Loan under the Revolving Credit Facility and Borrowers shall also pay to Bank interest thereon at the Default Rate. 19. INDEMNIFICATION. The Obligors agree to indemnify and hold harmless, --------------- Bank, its parents and Affiliates and their officers, directors, shareholders, employees and agents (collectively, the "Indemnified Parties"), from and against any and all claims, liabilities, losses, damages, costs and expenses (whether or not such Indemnified Party is a party to any litigation), including without limitation attorney's fees and costs and costs of investigation, document production, attendance at depositions or other discovery, incurred by any Indemnified Party with respect to, arising out of or as a consequence of (a) this Agreement or any of the other Loan Documents, including without limitation, any failure of any Obligor to pay when due (at maturity, by acceleration or otherwise) any principal, interest, fee or any other amount due under this Agreement or the other Loan Documents, or any other Event of Default; (b) the use by Borrower of any proceeds advanced hereunder; (c) the transactions contemplated hereunder; or (d) any claim, demand, action or cause of action being asserted against any Indemnified Party by any other Person in connection with the transactions contemplated hereunder. Notwithstanding anything herein or elsewhere to the contrary, the Obligors shall not be obligated to indemnify or hold harmless any Indemnified Party from any liability, loss or damage resulting from the gross negligence, wilful misconduct or unlawful actions of such Indemnified Party or any violations by such Indemnified Party or Bank of any securities laws or other laws and regulations concerning financial institutions. Any amount payable to Bank under this Section will bear interest at the Default Rate from the due date until paid. The Obligors' obligations under this Section shall survive termination of this Agreement and repayment of the Obligations. 20. COMMUNICATIONS AND NOTICES. All notices, requests and other -------------------------- communications made or given in connection with the Loan Documents shall be in writing and, unless receipt is stated herein to be required, shall be deemed to have been validly given if delivered personally to the individual or division or department to whose attention notices to a party are to be addressed, or by private carrier, or registered or certified mail, return receipt requested, or by telecopy with the original forwarded by first-class mail, in all cases, with charges prepaid, addressed as follows, until some other address (or individual or division or department for attention) shall have been designated by notice given by one party to the other: 89 To Obligors: 12505 Starkey Road, Suite A Largo, FL 33773 Attention: William L. LaGamba With a copy of any notice of an Event of Default to be given for information purposes and not for notice purposes to: Shumaker, Loop & Kendrick, LLP 2800 Bank of America Plaza 101 East Kennedy Boulevard Tampa, FL 33602 Attention: Gregory C. Yadley, Esquire To Bank: Mellon Bank, N.A. 1735 Market Street, 6th Floor Philadelphia, PA 19101-7899 Attention: Stephen A. Caffrey, Vice President ALL "PAYMENT IN FULL" CHECKS OR OTHER MEDIA OF PAYMENT MUST BE SENT TO BANK ONLY TO THE ABOVE ADDRESS. 21. WAIVERS. 21.1 Waivers. In connection with any proceedings under the Loan ------- Documents, including without limitation any action by Bank in replevin, foreclosure or other court process or in connection with any other action related to the Loan Documents or the transactions contemplated hereunder, the Obligors waive, to the extent permitted by applicable law: (a) all errors, defects and imperfections of a procedural nature in such proceedings; (b) all benefits under any present or future laws exempting any property, real or personal, or any part of any proceeds thereof from attachment, levy or sale under execution, or providing for any stay of execution to be issued on any judgment recovered under 90 any of the Loan Documents or in any replevin or foreclosure proceeding, or otherwise providing for any valuation, appraisal or exemption; (c) presentment for payment, demand, notice of demand, notice of nonpayment, protest and notice of protest of any of the Loan Documents, including the Notes; (d) any requirement for bonds, security or sureties required by statute, court rule or otherwise; (e) any demand for possession of Collateral prior to commencement of any suit; (f) all rights to claim or recover attorney's fees and costs in the event that any Obligor is successful in any action to remove, suspend or prevent the enforcement of a judgment entered by confession; and (g) any right to require Bank to pursue any third Person for payment of the Obligations or payment with respect to any of the Collateral. 21.2 Forbearance. Bank may release, compromise, forbear with respect ----------- to, waive, suspend, extend or renew any of the terms of the Loan Documents, without notice to or consent of any Obligor, other than Borrowers. 21.3 Limitation on Liability. The Obligors shall be responsible for ----------------------- and Bank is hereby released from any claim or liability in connection with: (a) Safekeeping any Collateral; (b) Any loss or damage to any Collateral; (c) Any diminution in value of the Collateral; or (d) Any act or default of another Person. Bank shall only be liable for any act or omission on their part constituting gross negligence or wilful misconduct. In the event any Obligor brings suit against Bank in connection with the transactions contemplated hereunder and Bank is found not to be liable, the Obligors will indemnify and hold Bank harmless from all costs and expenses, including attorney's fees, incurred by Bank in connection with such suit. This Agreement is not intended to obligate Bank to take any action with respect to the Collateral or 91 to incur expenses or perform any obligation or duty of any Obligor. Obligors' obligations under this Section shall survive termination of this Agreement and repayment of the Obligations. 21.4 Waiver of Subrogation. The Obligors hereby waive any right to --------------------- subrogation, reimbursement, contribution or indemnity from any Obligor in connection with any Obligor's obligations under the Loan Documents. 22. SUBMISSION TO JURISDICTION. The Obligors hereby consent to the -------------------------- jurisdiction of any state or federal court located within the Commonwealth of Pennsylvania, and irrevocably agree that, subject to the Bank's election, all actions or proceedings relating to the Loan Documents or the transactions contemplated hereunder shall be litigated in such courts, and the Obligors waive any objection which they may have based on lack of personal jurisdiction, improper venue or forum non conveniens to the conduct of any proceeding in any -------------------- such court and waive personal service of any and all process upon them and consent that all such service of process be made by mail or messenger directed to them at the address set forth in Section 20. Nothing contained in this ---------- Section shall affect the right of Bank to serve legal process in any other manner permitted by law or affect the right of Bank to bring any action or proceeding against any Obligor or their property in the courts of any other jurisdiction. 23. MISCELLANEOUS. -------------- 23.1 Brokers. The transaction contemplated hereunder was brought about ------- and entered into by Bank and the Obligors acting as principals and without any brokers, agents or finders being the effective procuring cause hereof. The Obligors represent to Bank that the Obligors have not committed Bank to the payment of any brokerage fee or commission in connection with this transaction. If any such claim is made against Bank by any broker, finder or agent or any other Person, the Obligors agree to indemnify, defend and hold Bank harmless against any such claim, at the Obligors' own cost and expense, including Bank's attorneys' fees. The Obligors further agree that until any such claim or demand is adjudicated in Bank's favor, the amount claimed and/or demanded shall be deemed part of the Obligations secured by the Collateral. 23.2 Use of Bank's Name. The Obligors shall not use the name of Bank ------------------ or the name of any Affiliate of Bank in connection with any of their business or activities except as may otherwise be required by the rules and regulations of the Securities and Exchange Commission or any like regulatory body and except as may be required in their dealings with any governmental agency. 23.3 No Joint Venture. Nothing contained herein is intended to permit ---------------- or authorize any Obligor to make any contract on behalf of Bank, nor shall this Agreement be construed as creating a partnership, joint venture or making Bank an investor in any Obligor. 92 23.4 Survival. All covenants, agreements, representations and -------- warranties made by the Obligors in the Loan Documents or made by or on their behalf in connection with the transactions contemplated herein shall be true at all times this Agreement is in effect and shall survive the execution and delivery of the Loan Documents, any investigation at any time made by Bank or on their behalf and the making by Bank of the loans or advances to Borrowers. All statements contained in any certificate, statement or other document delivered by or on behalf of the Obligors pursuant hereto or in connection with the transactions contemplated hereunder shall be deemed representations and warranties by the Obligors. 23.5 No Assignment. The Obligors may not assign any of their rights ------------- hereunder without the prior written consent of Bank shall not be required to lend hereunder except to Borrowers as they presently exist. 23.6 Assignment or Sale by Bank. Bank may sell, assign or --------------------------- participate all or a portion of its interest in the Loan Documents and in connection therewith may make available to any prospective purchaser, assignee or participant any information relative to Obligors in its possession. In the event that Bank sells or assigns any portion of the Loans, Obligors shall (a) execute and deliver to Bank and/or to the applicable purchaser or assignee, such substitute or replacement Notes, Surety Agreements or other Loan Documents, and (b) execute and deliver to Bank such amendments to the Loan Documents as Bank may request to reflect such sale or assignment. 23.7 Publicity. Obligors agree that Bank may disclose the fact of the --------- financing under this Agreement in the form of a "tombstone" announcement in the print media, whether individually or part of a general advertisement. 23.8 Injunctive Relief. Each of the Obligors expressly acknowledges ----------------- and agrees that an action for damages for any breach of the requirements of Section 10.8 shall not be an adequate remedy at law. In the event of any such - ------------ breach, each of the Obligors agrees to the fullest extent allowed by law that Bank shall be entitled to injunctive relief to restrain such breach and require compliance with such requirements. 23.9 Time is of the Essence. Time is of the essence in the Obligors' ---------------------- performance of their obligations under the Loan Documents. 23.10 All Powers Coupled With Interest. All powers of attorney and -------------------------------- other authorizations granted to Bank and any Persons designated by Bank pursuant to any provisions of this Agreement or any of the other Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Obligations remain unpaid or unsatisfied. 93 23.11 Disclosure and Disclaimer Regarding Power of Attorney. Obligors ----------------------------------------------------- acknowledge and certify as follows: (a) The Loan Documents contain provisions authorizing Bank to act as Obligors' attorney-in-fact or agent (collectively such powers are herein after referred to as the "Power of Attorney"). (b) The purpose of the Power of Attorney is to give Bank broad powers to execute documents, handle or sell property and otherwise act in the name of the Obligors. (c) The Power of Attorney is coupled with an interest and, as such, Bank, in exercising any of its rights under the Power of Attorney is not a fiduciary of the Obligors. Bank may exercise any of its rights under the Power of Attorney for the sole benefit of Bank, without regard to the interests of the Obligors. (d) The Loan Agreement and the other Loan Documents are being executed in connection with a commercial loan or other financial transaction for business purposes and not primarily for personal, family or household purposes. (e) Any rights the Obligors may have to the specific provisions set forth in 20 Pa. C.S. 5601 et seq., as amended (specifically including Act 39 of 1999) are hereby forever waived and relinquished. (f) The Obligors have read and understand the Power of Attorney and this subsection regarding disclosure and disclaimer regarding the Power of Attorney. (g) The Obligors have consulted with legal counsel regarding the Power of Attorney and this subsection regarding disclosure and disclaimer regarding the Power of Attorney. 23.12 Binding Effect. This Agreement and all rights and powers -------------- granted hereby will bind and inure to the benefit of the parties hereto and their respective permitted successors and assigns and shall bind all Persons who become bound as a borrower, guarantor or other obligor under this Agreement. 23.13 Severability. The provisions of this Agreement and all other ------------ Loan Documents are deemed to be severable, and the invalidity or unenforceability of any provision shall not affect or impair the remaining provisions which shall continue in full force and effect. 23.14 No Third Party Beneficiaries. The rights and benefits of this ---------------------------- Agreement and the Loan Documents shall not inure to the benefit of any third party. 94 23.15 Modifications. Any modification or amendment of this ------------- Agreement or any of the Loan Documents shall be in writing signed by the parties hereto. 23.16 Holidays. If the day provided herein for the payment of any -------- amount or the taking of any action falls on a Saturday, Sunday or public holiday at the place for payment or action, then the due date for such payment or action will be the next succeeding Business Day. 23.17 Law Governing. This Agreement has been made, executed and ------------- delivered in the Commonwealth of Pennsylvania and will be construed in accordance with and governed by the laws of such Commonwealth, without regard to any rules or principles regarding conflicts of law or any rule or canon of construction which interprets agreements against the draftsman. 23.18 Integration. The Loan Documents shall be construed as integrated ----------- and complementary of each other, and as augmenting and not restricting Bank's rights, powers, remedies and security. The Loan Documents contain the entire understanding of the parties thereto with respect to the matters contained therein and supersede all prior agreements and understandings between the parties with respect to the subject matter thereof and do not require parol or extrinsic evidence in order to reflect the intent of the parties. In the event of any inconsistency between the terms of this Agreement and the terms of the other Loan Documents, the terms of this Agreement shall prevail. 23.19 Exhibits and Schedules. All exhibits and schedules attached ---------------------- hereto are hereby made a part of this Agreement. 23.20 Headings. The headings of the Articles, Sections, paragraphs and -------- clauses of this Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Agreement. 23.21 Counterparts; Facsimile Signatures. The Loan Documents and any ---------------------------------- notice or communication under the Loan Documents may be executed in one or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument. Delivery of a photocopy or telecopy of an executed counterpart of a signature page to any Loan Document shall be effective as delivery of a manually executed counterpart of such Loan Document. 23.22 Joint and Several. The obligations of the Obligors under this ----------------- Agreement shall be joint and several obligations. 23.23 Limitation on Damages. The Obligors and Bank agree that, in any --------------------- action, suit or proceeding, in respect of or arising out of this Agreement, the Loan Documents or the transactions contemplated hereunder, each mutually waives to the fullest extent permitted by law, any claim for consequential, punitive or special damages. 95 23.24 Waiver of Right to Trial by Jury. THE OBLIGORS AND BANK WAIVE -------------------------------- ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER ANY OF THE LOAN DOCUMENTS OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE OBLIGORS OR BANK WITH RESPECT TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. THE OBLIGORS AND BANK AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE OBLIGORS AND BANK TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. THE OBLIGORS ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT THEY FULLY UNDERSTAND ITS TERMS, CONTENT AND EFFECT, AND THAT THEY VOLUNTARILY AND KNOWINGLY AGREE TO THE TERMS OF THIS SECTION. 96 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BORROWERS: --------- DRUGMAX.COM,INC By:___________________________________________ Ronald J. Patrick, Vice President - Finance VALLEY DRUG COMPANY By: ___________________________________________ Ronald J. Patrick, Vice President - Finance GUARANTORS ---------- DESKTOP MEDIA GROUP, INC. By: ___________________________________________ Ronald J. Patrick, Vice President - Finance VETMALL, INC. By: ___________________________________________ Ronald J. Patrick, Vice President - Finance 97 BANK: ---- MELLON BANK, N.A. By:_______________________________ Name/Title:_______________________ 98 EXHIBITS -------- Exhibit A - Form of Covenant Compliance Certificate Exhibit B - Form of LIBOR Rate Notification Exhibit C - Form of Base Rate Loan Request Exhibit D - Form of LIBOR Rate Loan Request Exhibit E - Form of Borrowing Base Certificate SCHEDULES --------- Schedule 10.1(h) - Pledged Securities Schedule 11.1 - States of Formation Schedule 11.3 - Ownership Interests Schedule 11.4 - Subsidiaries Schedule 11.7 - Litigation Schedule 11.14 - Names and States of Formation Schedule 11.16 - Pension and Benefit Plans Schedule 11.17 - Leases and Contracts Schedule 11.18 - Intellectual Property Schedule 11.23 - Affiliate Transactions Schedule 11.24(b) - Licenses Schedule 11.24(c) - Operating Agreements Schedule 11.24(d) - Facility Sites Schedule 11.24(e) - Leases Schedule 11.28 - Subordinated Indebtedness Schedule 11.29(a) - All Inventory Locations Schedule 11.29(b) - Eligible Inventory Locations Schedule 11.31 - Collective Bargaining Agreements Schedule 11.32 - Investment Property Schedule 11.35 - Web Sites Schedule 13.2 - Permitted Indebtedness Schedule 13.3 - Permitted Loans Schedule 13.4 - Permitted Investments Schedule 13.8 - Permitted Liens EX-21 4 0004.txt LIST OF SUBSIDIARIES Exhibit 21 Subsidiaries of DrugMax.com, Inc. --------------------------------- Subsidiary State of Incorporation ---------- ---------------------- Valley Drug Company Ohio Desktop Media Group, Inc. Florida VetMall, Inc./1/ Florida Healthseek.com Massachusetts Discount Rx Louisiana ___________________________________ 1. DrugMax.com, Inc. owns 70% of the outstanding common stock of VetMall, Inc. EX-23.1 5 0005.txt CONSENT OF DELOITTE Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of DrugMax.com, Inc. on Form SB-2 of our report dated June 26, 2000 (June 30, 2000 as to Note 13 and October 27, 2000 as to Note 12) appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Tampa, Florida November 1, 2000 EX-23.2 6 0006.txt CONSENT VALLEY Exhibit 23.2 Accountants' Consent The Board of Directors DrugMax.com, Inc. Largo, Florida We consent to the use of our report dated April 28, 2000 relating to the balance sheets 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 of Valley Drug Company in Form SB-2 of DrugMax.com, Inc. and the reference to our firm under the heading "experts" in the prospectus. BRIMMER, BUREK & KEELAN LLP Tampa, Florida November 1, 2000 EX-23.3 7 0007.txt CONSENT VETMALL Exhibit 23.3 Accountants' Consent The Board of Directors DrugMax.com, Inc. Largo, Florida We consent to the use of our report dated June 1, 2000 relating to the balance sheet as of March 31, 2000 and the related statement of operations, shareholder's equity and cash flows for the period then ended of VetMall, Inc. in Form SB-2 of DrugMax.com, Inc. and the reference to our firm under the heading "experts" in the prospectus. BRIMMER, BUREK & KEELAN LLP Tampa, Florida November 1, 2000 EX-23.4 8 0008.txt CONSENT DESKTOP Exhibit 23.4 Accountants' Consent The Board of Directors DrugMax.com, Inc. Largo, Florida We consent to the use of our report dated June 1, 2000 relating to the consolidated balance sheets as of March 31, 2000, 1999 and 1998 and the related consolidated statements of operations, shareholder's equity and cash flows for the years then ended of DeskTop Corporation and Subsidiary in Form SB-2 of DrugMax.com, Inc. and the reference to our firm under the heading "experts" in the prospectus. BRIMMER, BUREK & KEELAN LLP Tampa, Florida November 1, 2000 EX-23.5 9 0009.txt CONSENT BECAN Exhibit 23.5 Accountants' Consent The Board of Directors DrugMax.com, Inc. Largo, Florida We consent to the use of our report dated August 6, 1999 relating to the consolidated balance sheet as of March 31, 1999 and the related consolidated statement of operations, shareholder's equity and cash flows for the year then ended of Becan Distributors, Inc. and Subsidiary in Form SB-2 of DrugMax.com, Inc. and the reference to our firm under the heading "experts" in the prospectus. BRIMMER, BUREK & KEELAN LLP Tampa, Florida November 1, 2000 EX-23.6 10 0010.txt CONSENT OF KIRKLAND, RUSS Exhibit 23.6 [KIRKLAND RUSS MURPHY & TAPP LETERHEAD] Board of Directors Nutriceuticals.com Corporation We consent to the use of our reports included herein and to the reference to our firm under the heading "experts" in the prospectus. /s/ Kirkland, Russ, Murphy & Tapp Clearwater, Florida October 27, 2000 -----END PRIVACY-ENHANCED MESSAGE-----