-----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, RPrnDPM7rHZ/PNcbSMUegYKQgrSV0IJ9GbqnelGNUX0b8OzZXQ0+aCTBOjjO+8m9 MouFoo+4C0J0Ie+B6wyiAQ== /in/edgar/work/0001016843-00-000526/0001016843-00-000526.txt : 20000713 0001016843-00-000526.hdr.sgml : 20000713 ACCESSION NUMBER: 0001016843-00-000526 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000703 ITEM INFORMATION: FILED AS OF DATE: 20000712 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: 8-K/A SEC ACT: SEC FILE NUMBER: 001-15445 FILM NUMBER: 671632 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 8-K/A 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): July 3, 2000 (April 19, 2000) DRUGMAX.COM, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEVADA 0-24362 34-1755390 ------------------------------- ----------- ------------------ (State or other jurisdiction of File Number (I.R.S. Employer incorporation) Identification No.) 12505 STARKEY ROAD, SUITE A LARGO, FLORIDA 33773 ---------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (727) 533-0431 Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. Here are the financial statements and pro forma financial information, along with exhibits, to be included on Form 8-K dated April 19, 2000 for the acquisition of Valley Drug Company. (a) Financial statements of the businesses acquired, prepared pursuant to Rule 3.05 of Regulation S-X: ITEM PAGE - ---- ---- Audited financial statements of Valley Drug Company Report of Brimmer, Burek, & Keelan, LLP Independent Auditors Balance Sheets as of December 31, 1999, 1998, 1997 Income Statements for the Years Ended December 31, 1999, 1998 and 1997 Statement of Shareholders' Equity for the Years Ended December 31, 1999, 1998, and 1997 Statements of Cash Flows for the Year Ended December 31, 1999, 1998 and 1997 Notes to Financial Statements (b) Pro forma financial information required pursuant to Article 11 of Regulation S-X: ITEM DrugMax.com, Inc. And Subsidiaries Unaudited Pro Forma Condensed Consolidated Financial Statements Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2000 Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year Ended March 31, 2000 (c) Exhibits in accordance with the provisions of Item 601 of Regulation S-K: EXHIBITS 2.1 Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A. Blundo dated as of April 19, 2000. (1) 10.1 Consent of National City Bank to the Merger dated April 13, 2000. (1) 99.1 Audited Financial Statements of DrugMax.com, Inc. as of March 31, 2000. (2) 99.2 Audited Financial Statements of DeskTop Corporation as of March 31, 2000. (3) 99.3 Audited Financial Statements of VetMall, Inc. as of March 31, 2000. (3) - ------------ (1) Incorporated by reference to the Company's Current Report on Form 8-K, file number 0-24362, filed in Washington, D.C. on May 3, 2000. (2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 2000, file number 0-24362, filed in Washington, D.C. on June 29, 2000. (3) Incorporated by reference to the Company's Current Report on Form 8-K/A, file number 0-24362, filed in Washington, D.C. on June 29, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DRUGMAX.COM, INC. /s/ WILLIAM L. LAGAMBA ---------------------- William L. LaGamba, Chief Executive Officer Dated: July 3, 2000 DRUGMAX.COM, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The unaudited pro forma data presented in the unaudited pro forma condensed Consolidated statements of operations are included in order to illustrate the effect on the Company's financial statements of the transactions described below: On November 26, 1999, DrugMax.com, Inc. ("DrugMax") acquired all the issued and outstanding shares of Becan Distributors, Inc. and its subsidiary, Discount Rx, Inc. (collectively "Becan") for $2,000,000 in cash and 2,000,000 shares of DrugMax common stock. The acquisition is accounted for as a purchase. On March 20, 2000, DrugMax acquired all the issued and outstanding shares of DeskTop Corporation and its subsidiary, DeskTop Ventures, Inc. (collectively "DeskTop") for stock and payment of certain DeskTop liabilities. DeskTop provides consulting and software development services. The acquisition is accounted for as a purchase. Simultaneous with the DeskTop acquisition, DrugMax acquired a 20% interest in VetMall, Inc. ("VetMall") a web site management company. Since DeskTop already owned a 50% interest in VetMall, the acquisition of the additional 20% interest gave DrugMax a controlling interest in VetMall. The acquisition is accounted for as a purchase. On April 19, 2000, DrugMax acquired all the issued and outstanding stock of Valley Drug Company for $1,700,000 and 226,666 shares of DrugMax common stock. The acquisition is accounted for as a purchase. For purposes of the statement of operations the adjustments are presented as if DrugMax had acquired Becan, DeskTop, VetMall and Valley as of April 1, 1999. The pro forma information is based on the following historical financial statements after giving effect to the transactions using the purchase method of accounting and the assumptions and adjustments in the accompanying notes to the pro forma condensed consolidated financial statements. The audited consolidated financial statements of DrugMax (as filed on DrugMax's Form 10-KSB, for the fiscal year ended March 31, 2000), The unaudited consolidated financial statements of Becan which were provided by Becan, The audited consolidated financial statements of Desktop for the fiscal year ended March 31, 2000 (filed with Form 8-K/A filed on June 29, 2000) which have been provided by Desktop, The audited financial statements of VetMall for the period from June 28, 1999 (date of inception) through March 31, 2000 (filed with Form 8-K/A filed on June 29, 2000) which were provided by VetMall, and The December 31, 1999 audited financial statements of Valley for the year ended December 31, 1999 (filed with this report under Item 7 (a)) which have been provided by Valley. These pro forma condensed consolidated financial statements may not be indicative of the results that actually would have occurred if the consolidations had been in effect on the dates indicated or which may be obtained in the future. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data. (1) The pro forma consolidated balance sheet gives effect to the Valley acquisition as if it had occurred on March 31, 2000. Because the Becan, DeskTop and VetMall acquisitions occurred during the fiscal year, the effects of these acquisitions are included in DrugMax's balance sheet at March 31, 2000 Adjustments reflect the following: (a) Adjust the historical financial statements for DrugMax's acquisition of Valley Drug Company by reflecting the purchase transaction. The Unaudited Pro Forma Condensed Consolidated Financial Statements do not purport to be indicative of the combined results of operations that actually would have occurred if the transactions had been effected at the dates indicated or to project future results of operations for any period. The Unaudited Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and related notes of the respective companies. (1) Becan's statement of operations includes only activity from April 1, 1999 through November 26, 1999 (date of acquisition). The VetMall statement of operations is for the period from June 28, 1999 (date of inception) through March 20, 2000 (date of acquisition). The DeskTop statement of operations is for the period from April 1, 1999 to March 20, 2000 (date of acquisition). All activity of Becan, DeskTop and VetMall subsequent to the respective dates of acquisition is included in DrugMax's March 31, 2000 consolidated statement of operations. Valley's statement of operations is for the year ended December 31, 1999. Adjustments reflect the following: (a) Elimination of intercompany revenues and expenses to reflect the consolidation of DeskTop and VetMall due to the common ownership created by the acquisition. (b) Amortization expense related to goodwill arising from the Becan acquisition (15 year life.) (c) Amortization expense related to goodwill arising from the DeskTop acquisition (5 year life.) (d) Amortization expense related to goodwill arising from the VetMall acquisition (5 year life.) (e) Amortization expense related to goodwill arising from the Valley acquisition (15 year life.) (f) Tax benefit lost as result of acquisitions. (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. VALLEY DRUG COMPANY AND SUBSIDIARY INDEX TO FINANCIAL STATEMENTS Independent Auditors' Reports 1 Balance Sheets as of December 31, 1999, 1998 and 1997 2 Income Statements for the years ended December 31, 1999, 1998 and 1997 3 Statement of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 4 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 5 Notes to Financial Statements 6 - 13 Independent Auditors' Report To the Board of Directors Valley Drug Company Youngstown, Ohio We have audited the accompanying balance sheets of Valley Drug Company as of December 31, 1999, 1998 and 1997, and the related statements of operations, shareholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Valley Drug Company as of December 31, 1999, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. BRIMMER, BUREK & KEELAN LLP Certified Public Accountants Tampa, Florida April 28, 2000 1 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 Shareholder note receivable 70,000 52,000 -- Non-current accounts receivable 254,792 438,092 347,201 Other non-current assets 113,414 990 48,684 ----------- ----------- ----------- Total assets $ 9,567,460 $11,621,281 $11,613,606 =========== =========== ===========
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 2 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. 3 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 $ -- -- $ -- ========= ========= ========= =========
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. 4 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. 5 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 =========== =========== ===========
6 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. 7 VALLEY DRUG COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CAPITALIZATION The Company is authorized is issue 500 shares of common stock, without par value and 250 shares of preferred stock without par value. COMMON STOCK -The holders of common shares have the sole and exclusive voting power on all matters to be presented to the shareholders. The following shares were issued and outstanding at December 31 1999 1998 1997 ---------- ---------- ---------- Issued 500 500 500 Outstanding 100 200 200 PREFERRED STOCK - The Company's directors may adopt amendments to the Articles of Incorporation to create one or more series of preferred shares. The shares of each series to have such designations, privileges , restrictions and qualifications as determined by the directors. At December 31, 1998 and 1997, none of the preferred shares had been given any designations, privileges , restrictions or qualifications and no preferred shares had been issued. The shares were cancelled in January 1999. REVENUE RECOGNITION Revenues are recognized when the merchandise is shipped to the customer. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, however, management does not believe these differences would have a material effect on the operating results. EARNINGS PER COMMON SHARE Earnings per common share have been computed based upon the weighted-average number of shares outstanding during the period. 8 VALLEY DRUG COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY LEASES The Company leases a property in Youngstown, Ohio that is being utilized by the Company for offices, warehousing, and shipping for its distribution operations, consisting of approximately 30,000 square feet. The offices are leased pursuant to a ten-year lease that expires on December 30, 2008. The Company has an option to continue the lease on a month to month basis. The rental under the lease is $6,000 per month. Rent expense was $72,000 for each year presented. Future minimum lease payments, by year in aggregate under non-cancelable operating leases consist of the following at December 31, 1999: YEAR ENDED DECEMBER 31, ---------------------- 2001 $ 72,000 2002 72,000 2003 72,000 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company, in estimating its fair value disclosures for financial instruments, uses the following methods and assumptions: CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES: The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their relatively short maturity. LONG-TERM OBLIGATIONS: The fair value of the Company's fixed-rate long-term obligations is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. At December 31, 1999, 1998 and 1997, the fair value of the Company's long-term obligations approximated its carrying value. CREDIT LINES PAYABLE: The carrying amount of the Company's credit lines payable approximates fair market value since the interest rate on these instruments changes with market interest rates. 9 VALLEY DRUG COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 2 - RELATED PARTY TRANSACTIONS LEASE The Company leases the building it operates in from the former shareholder for a period of eight years on a triple net basis at the rate of $6,000 per month. CUSTOMERS CONTROLLED BY EMPLOYEE The son of the former owner is currently an employee and owns three customers of the Company. The sales to those customers are at a price within a maximum of 1/2 percent of the price offered by the Company to similar retail accounts on RX and OTC items. The sales of those customers for the years ended December 31, 1999, 1998 and 1997 were $3,760,000, $3,351,000 and $2,966,000 respectively. LOAN GUARANTEES The revolving line of credit and term loans in the amounts of $4,500,000 and $2,000,000, respectively are personally guaranteed by the new owners of the Company. PROFESSIONAL PHARMACY SOLUTIONS, LLC The two shareholders of the Company and the VP of Sales own Professional Pharmacy Solutions (PPS), a pharmacy management company. PPS manages and operates pharmacies owned by a local hospital. The Company sells pharmaceuticals to PPS on a cost plus basis. The Company had a receivable of approximately $125,000 at December 31, 1999. Sales to the pharmacies operated by PPS totaled approximately $700,000. NOTE 3 - CONCENTRATIONS OF CREDIT RISK CASH IN BANK The Company maintains its checking account in one commercial bank. Cash in this checking account at times exceeded the $100,000 Federal Deposit Insurance Corporation's maximum insured balance coverage. 10 VALLEY DRUG COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 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 $ -- $ -- =========== =========== ===========
The schedule of maturities of long-term debt in the future periods is as follows: 2000 $ 236,151 2001 257,792 2002 1,327,725 ------------ Total $ 1,821,668 ============ 11 VALLEY DRUG COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 5 - LINE OF CREDIT In January 1999, the Company established a $ 4.5 million revolving credit facility scheduled to mature in January 2001. The credit available to the Company is based on a percentage of eligible accounts receivable and inventory. The facility imposes financial covenants on tangible net worth, leverage, and a debt service ratio. At December 31, 1999, the Company was not in compliance with the financial covenants. The bank waived the covenants in the March 1999 letter to the Company. Minimum borrowing under the agreement is $1,000. The agreement places limitations on disposition of assets and debt funding to transactions within the normal course of business and restricts the payment of dividends to any shareholder of record and any class of common stock during the term of the agreement. Borrowings accrue interest at 11% and are secured by all assets of the Company. The shareholders have personally guaranteed the loan. At December 31, 1999, the Company had borrowed $ 4,166,000 under this facility. The credit line payable is included with current liabilities instead of long-term liabilities as management believes that this presentation better reflects the utility of the current assets as the source of repayment for the credit line payable. NOTE 6 - YEAR 2000 ISSUE The Year 2000 issue relates to limitations in computer systems and applications that may prevent proper recognition of the Year 2000. The potential effect of the Year 2000 issue on the Company will not be fully determinable until the Year 2000 and thereafter. The Company's software packages and all of the hardware associated with its operations are Year 2000 compliant. The Company is currently requesting that all suppliers supply certification statements that comply with the Year 2000 requirements. If the Year 2000 modifications are not properly completed either by the Company or entities with which the Company conducts business, the Company's revenues and financial condition could be adversely impacted. NOTE 7 - SUBSEQUENT EVENT SALE OF COMPANY On April 19, 2000, the Company was sold to DrugMax.com, Inc. by an exchange of all of the outstanding shares of the Company for $1,700,000 and 226,666 common shares of DrugMax.com, Inc. 22,666 of the total shares being received are subject to a holdback provision. The holdback provision provides for an adjustment of the sale price based upon an audit of the balance sheet of the Company as of April 19, 2000. If the audit results in a shareholders equity less than an agreed upon amount, the sale price is subject to a corresponding reduction and to be subtracted from the holdback shares. 12 VALLEY DRUG COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 8 - PROFIT SHARING PLAN The Company maintains a qualified profit sharing plan for the benefit of its employees. The plan provides for discretionary contributions to the plan each year and covers employees over the age of 21 with at least one year of service. Vesting is immediate upon participation in the plan. The Company has made a contribution to the plan for the years ended December 31, 1999, 1998 and 1997 in the amounts of $30,000, $-0- and $30,000, respectively. NOTE 9 - CHANGE IN OWNERSHIP AND REFINANCING On January 4, 1999 the ownership of the Company changed whereby the previous owners' stock was redeemed by the Company and the new owners were issued no par common shares so that they owned 100% of the outstanding shares. Simultaneous with the redemption, the new owner purchased .61 shares of the common stock from the previous owners. After the redemption and issuance of new shares to the new owner, 50% of the new owner's shares were sold to another unrelated individual. In addition, the previously held treasury shares and the newly redeemed shares were canceled by the Company and the previous 500 no par common shares were canceled. The Company obtained a revolving line of credit with a limit of $4,500,000 and an installment loan of $2,000,000 to obtain the funds to redeem the previous shareholders stock for the approximate amount of $7 million. In addition to the cash payment for their stock, they received an assignment of certain customer receivables totaling $391,917 and their shareholder loan of $1,218,834 was paid in full. The customer receivables were for three customers owned by the son of the former owners who is also an employee. As part of the redemption agreement, the former shareholder signed a covenant not to compete and an employment agreement. The employment agreement is for $12,000 per year for 63 months. The former shareholder owns the building in which the Company operates and a lease was executed for a term of 96 months on triple net terms at an annual rate of $72,000. The son of the former owner also executed an employment contract for a period of 96 months at an annual compensation of $48,000 and a covenant not to compete that runs concurrently with the employment agreement. 13 VALLEY DRUG COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 10 - SUPPLEMENTAL CASH FLOW DISCLOSURE The statements of cash flows are supplemented by the following non-cash disclosures. CHANGE IN OWNERSHIP 1999 ----------- Total consideration $ 7,151,985 Assignment of accounts receivable (391,917) ----------- Net cash paid $ 6,760,068 =========== The Company retired 139 shares of treasury stock during 1999 with a book value of $1,951,470. 14 DRUGMAX.COM, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1999
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 ------------- ------------- ------------- ------------- Income (loss) from continuing operations (1,932,877) 334,004 (216,473) (2,198,889) Interest income 144,340 5,455 54 Interest expense (107,095) (99,090) (50,996) Other income and expenses, net (93,312) (8,377) 798,982 Equity in loss of affiliate -- (1,099,444) ------------- ------------- ------------- ------------- Net income (loss) before income tax (1,988,944) 231,992 (567,877) (2,198,889) Income tax provision -- -- 280,042 ------------- ------------- ------------- ------------- Net income (loss) $ (1,988,944) $ 231,992 $ (287,835) $ (2,198,889) ============= ============= ============= ============= Basic and diluted net income (loss) per share $ (0.51) ============= 3,875,445 ============= 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 ------------- ------------- ------------- Income (loss) from continuing operations 796,864 (1,199,722) (4,417,093) Interest income 13,113 -- 162,962 Interest expense (565,371) -- (822,552) Other income and expenses, net (110,625) (a) 586,668 Equity in loss of affiliate 1,099,444 (a) -- ------------- ------------- ------------- Net income (loss) before income tax 244,606 (210,903) (4,490,015) Income tax provision (280,042) (f) -- ------------- ------------- ------------- Net income (loss) $ 244,606 $ (490,945) $ (4,490,015) ============= ============= ============= Basic and diluted net income (loss) per share $ (0.89) ============= (g) 5,018,708 =============
-----END PRIVACY-ENHANCED MESSAGE-----