-----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, GKgdtcn+iBCNao9GfNkq2YRvmngXO+EOfIXtmGYTVgfe2Gen0yLKk952jXP0MBIp YOvZKNNBoE9a8IFI/l+WEg== /in/edgar/work/20000714/0001016843-00-000534/0001016843-00-000534.txt : 20000920 0001016843-00-000534.hdr.sgml : 20000920 ACCESSION NUMBER: 0001016843-00-000534 CONFORMED SUBMISSION TYPE: 10KSB40/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000714 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: 10KSB40/A SEC ACT: SEC FILE NUMBER: 001-15445 FILM NUMBER: 672812 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 10KSB40/A 1 0001.txt WORLD ACCEPTANCE CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-24362 DRUGMAX.COM, INC., formerly known as Nutriceuticals.com Corporation (Name of small business issuer in its charter) STATE OF NEVADA 34-1755390 (State of or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 12505 Starkey Road, Suite A, Largo, Florida 33773 (Address of Principal Executive Officers) (Zip Code) Issuer's telephone number: (727) 533-0431 Securities registered pursuant to Section 12(b) of the Exchange Act: None. Securities registered pursuant to Section 12(g) of the Exchange Act: Common stock, Par value $.001 per share (Title of Class) Indicate by check mark whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its most recent fiscal year were $21,050,547. Number of shares outstanding of the Issuer's common stock at $.001 par value as of June 15, 2000 was 6,398,647. The aggregate market value of the common stock held by non-affiliates of the registrant (approximately 2,859,832 shares) was approximately $31,815,631, as computed by the closing price of such common stock, $11.125, as of June 15, 2000. CAUTIONARY STATEMENTS The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for "forward-looking statements" to encourage companies to provide prospective information, so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statement(s). Drugmax.com, Inc. ("the Company") desires to take advantage of the safe harbor provisions of the Act. Except for historical information, the Company's Annual Report on Form 10-KSB for the year ended March 31, 2000, the Company's quarterly reports on Form 10-QSB, the Company's current reports on Form 8-K, periodic press releases, as well as other public documents and statements, may contain forward-looking statements within the meaning of the Act. In addition, representatives of the Company, from time to time, participate in speeches and calls with market analysts, conferences with investors and potential investors in the Company's securities, and other meetings and conferences. Some of the information presented in such speeches, calls, meetings and conferences may be forward-looking within the meaning of the Act. It is not reasonably possible to itemize all of the many factors and specific events that could affect the Company and/or the Company's industry as a whole. In some cases, information regarding certain important factors that could cause actual results to differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed in forward-looking statements made by or on behalf of the Company may appear or be otherwise conveyed together with such statements. The additional factors set forth in Part I under "Risk Factors" (in addition to other possible factors not listed) could affect the Company's actual results and cause such results to differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed in forward-looking statements made by or on behalf of the Company. PART I Item 1. BUSINESS. The Company was founded in 1993 under the name NuMED Surgical, Inc. to engage in the research, development and distribution of medical instruments and surgical supplies to the health care market. We were created when NuMED Home Health Care, Inc., a publicly held company, spun off to its stockholders all of the assets and liabilities of its surgical/medical products division (reorganized as NuMED Surgical, Inc.), and the assets and liabilities of a wholly-owned subsidiary, NuMED Technologies, Inc. The spin off was effected at the advice of Home Health Care's financial advisors, to separate Home Health Care's service line of business from its equipment business. Prior to the spin off, we had no operations or business other than as a division or wholly-owned subsidiary of NuMED Home Health Care. In connection with the spin off, our common stock was registered on SEC Form 10-SB, under Section 12(g) of the Securities Exchange Act of 1934. On March 31, 1997, the Company adopted a plan of liquidation in which the Company sold its major product line and subsequently disposed of all its operating assets. The Company ceased operations on April 1, 1997 and liquidated its major product line because of continued losses caused by increased competition and the loss of exclusivity of its products. Also, the Company had inadequate internal resources to pursue one of its products and was not able to find an acceptable industry partner to enter into a joint venture with to pursue development of this product. The sale of the Company's major product line and assets was consummated by March 31, 1998 and accordingly, from April 1, 1998 to September 8, 1998 the Company used a liquidation basis of accounting. On March 18, 1999, the Company acquired in a merger all of the outstanding common stock of Nutriceuticals.com Corporation, a Florida corporation ("Nutriceuticals of Florida"). Nutriceuticals of Florida was organized in September 1998 to engage in the online retailing of natural products over the Internet. After acquiring Nutriceuticals of Florida, the Company changed its corporate name to Nutriceuticals.com Corporation. On March 31, 1999, the Company acquired Healthseek.com Corp., which was founded in 1995 to provide web-based healthcare content and related information to healthcare professionals, medical patients, and consumers. On November 26, 1999, the Company acquired all of the outstanding shares of common stock of Becan Distributors, Inc. ("Becan"), a wholesale distributor primarily of pharmaceutical products and to a lesser extent, over-the-counter drugs, and health and beauty care products. With the acquisition of Becan, Becan became a wholly-owned subsidiary and the Company changed its focus from being an online retailer to an online business-to-business wholesale portal in which manufacturers, distributors, wholesalers, and retailers can improve their trading efficiency by exchanging goods and services through a secure public and private channel, the DrugMax.com web site. We believe that by creating a wholesale portal: o manufacturers, distributors, wholesalers, and retailers will be able to list their products and start transacting business on the Internet quickly and at a low cost; o manufacturers, wholesalers, and distributors will have an efficient system to dispose of problematic inventories in a rapidly growing Internet market; o manufacturers, distributors, wholesalers, and retailers will have an effective mechanism to turn close-out items into cash; and o buyers will have a means of getting the lowest possible price as determined by the market. Becan commenced operations in January 1997 and its net revenues for the year ended March 31, 1999 and the period ended November 25, 1999 were $31.1 million and $33.7 million, respectively. Net income for the respective periods was $94,031 and $22,829. See "Acquisitions-Becan". In January, 2000 Nutriceuticals changed its name to DrugMax.com, Inc., and in March, 2000 Becan was merged into DrugMax, and Becan no longer operates as a wholly-owned subsidiary of the Company. On March 20, 2000, we diversified our operations by acquiring all of the issued and outstanding shares of common stock of Desktop Corporation ("Desktop"), a Texas corporation located in Dallas, Texas. Desktop, in addtion to being a designer and developer of customized internet solutions, owned at the time 50% of the outstanding shares of common stock of VetMall, Inc. ("VetMall"), with the remaining shares being owned by W.A. Butler & Company ("Butler"), one of the nation's largest veterinary products distributors. Concurrent with the acquisition of Desktop, we acquired an additional 20% interest in VetMall from Butler. VetMall.com is the web site owned by VetMall and is a business-to-business portal linking animal health product manufacturers, distributors, and veterinarians. VetMall will provide a web site to place and receive product orders, and to display and exchange information about animal care, services and products. VetMall will launch its web site in the second quarter of 2000. See "Acquisitions-DeskTop". On April 19, 2000 the Company expanded its operations by acquiring all of the issued and outstanding shares of common stock of Valley Drug Company ("Valley"), a full-line primary wholesale distributor of pharmaceuticals, over-the-counter drugs, health and beauty aid products and general merchandise. Valley has been in operation since 1950 and its offices are located in Youngstown, Ohio. For the year ended December 31, 1999 and the three months ended March 31, 2000, Valley had revenues of approximately $50.5 million and $12.3 million, respectively, and net income of approximately $500,000 and $75,000 for such periods. This acquisition gave the Company an additional source of products and manufacturer relationships. The Company's objective is to become a leading owner and operator of (i) an online portal for pharmaceuticals, over-the-counter drugs, health and beauty care products and private label nutritional supplements, and (ii) through its acquisition of VetMall, an online portal linking animal health care product manufacturers to distributors and veterinarians. To accomplish this, the Company will endeavor to provide: o an electronic commerce marketplace - a new way of doing business through Internet technology that eliminates territorial and regional borders; o quality products at competitive prices; o efficient service through online automation; and o a community environment for news, information and online forums. Industry Overview The Internet has emerged as the fastest growing communications medium in history and is dramatically changing how businesses and individuals communicate and share information. International Data Corporation estimates that the number of Internet users will grow from 97 million at the end of 1998 to 320 million by 2002, though the Company may not benefit from this growth. The Internet has created new opportunities for conducting commerce, such as business-to-consumer and person-to-person e-commerce. Recently, the widespread adoption of intranets and the acceptance of the Internet as a business communications platform has created a foundation for business-to-business e-commerce that offers the potential for organizations to streamline complex processes, lower costs and improve productivity. Internet-based business-to-business e-commerce is poised for rapid growth and is expected to represent a significantly larger opportunity than business-to-consumer or person-to-person e-commerce. According to Forrester Research, Inc., an independent national research organization (WWW.FORRESTER.COM), business-to-business e-commerce is expected to grow from $43 billion in 1998 to $1.3 trillion in 2003, accounting for more than 90% of the dollar value of e-commerce in the United States by 2003, though the Company may not benefit from this growth. The dynamics of business-to-business e-commerce relationships differ significantly from those of other e-commerce relationships. Business-to-business e-commerce solutions frequently automate processes that are fundamental to a business's operations by replacing various paper-based transactions with electronic communications. In addition, business-to-business e-commerce solutions must often be integrated with a customer's existing systems, a process that can be complex, time-consuming and expensive. Consequently, selection and implementation of a business-to-business e-commerce solution represents a significant commitment by the customer, and the costs of switching solutions are high. In addition, because business transactions are typically recurring and non-discretionary, the average order size and lifetime value of a business-to-business e-commerce customer is generally greater than that of a business-to-consumer e-commerce customer. These solutions are likely to be most readily accepted by industries characterized by a large number of buyers and sellers, a high degree of fragmentation among buyers, sellers or both, significant dependence on information exchange, large transaction volume and user acceptance of the Internet. Pharmaceuticals and Health Care Products Industry According to IMS Health, a company specializing in information services for the pharmaceutical and health care industries, the United States is the world's largest pharmaceutical market, with 1998 sales of $111 billion, including diagnostics and over-the-counter drugs (OTC products). That figure is expected to rise to $163 billion in 2002, for an increase of 46%. The National Association of Chain Drug Stores reported that total prescription drug sales for 1999 are expected to exceed a record $121.6 billion, an increase of 18%. This continued growth rate of the sales of pharmaceutical products was attributed to a number of factors including (i) the value added by the introduction of new drugs into the marketplace, which more than offsets the value lost by medications losing patent protection; (ii) new patterns of drug lifestyle management, resulting in higher sales occurring earlier in the life cycle of a medication; (iii) increased money spent on direct-to-consumer marketing initiatives; and (iv) an unprecedented period of investment by pharmaceutical companies worldwide. Currently, the sale of pharmaceuticals and health care products are serviced primarily by traditional full-line distributors. A full-line distributor will carry anywhere from 15,000 to 50,000 SKU's (stock keeping units), consisting of pharmaceuticals, Rx brand, Rx generic, health and beauty care, over-the-counter drugs, private label, and various sundry items. The traditional distributor derives income from sell margins, buy margins and manufacturer cash discounts. There are over eighty current full line wholesalers across the United States that compete in selling pharmaceuticals and health care products. The wholesalers currently sell more than $300 billion of the aforementioned products annually. Through the acquisition of Becan, we intend to provide manufacturers, distributors, wholesalers and retailers with an online solution for exchanging goods and services. The DrugMax.com Solution Through the acquisition of Becan, the Company launched the first business-to-business wholesale online portal for pharmaceuticals, over-the-counter drugs, health and beauty care products and private label nutritional supplements. Our acquisition of Valley enabled us to expand our operations. The Company's objective is to apply new Internet tools to the existing distribution systems of such products to improve their trading efficiency and create a community in which the wholesale and the retail markets can exchange ideas, goods and services, advertise and promote their products. Parties can exchange information and goods through a secure public and private channel, the DrugMax.com web site. Policies and practices are being structured to provide buyers and sellers with an unbiased and fair environment in which to conduct their day-to-day business. Our initial marketing efforts will be to make pharmaceuticals, over-the-counter drugs, health and beauty care products, and private label nutritional supplements available to manufacturers, distributors, wholesalers and retailers. We have created a new web site which is being used by our business-to-business portal. This site enables us to carry out the following models: o Catalog: creates value by aggregating suppliers and buyers. Works best in industry characterized by fragmented buyers and sellers who transact frequently for relatively small-ticket items. Also works well for situations where demand is predictable and prices do not fluctuate too frequently; o Auction: creates value by spatial matching of buyers and sellers. Works best in industries or settings where one-of-a-kind, non-standard, or perishable products need to be bought or sold among businesses that have a very different perception of value for the product, i.e. capital equipment, used products, unsaleable returned products and hard-to-find products; and o Exchange: creates value by timely matching of supply and demand. Works best where demand and prices are volatile by allowing businesses to manage excess supply and peak-load demand. We believe that customers will favor sites that allow buyers and sellers to choose the appropriate market-making mechanism. We intend to utilize our advantage as an early entrant as a business-to-business e-commerce to leverage our infrastructure, technology, marketing and management resources thereby achieving economies of scale and attracting an increased audience, making our site more appealing to a broad array of advertisers and e-commerce customers. Strategy The Company's objective is to be a leading online business-to-business portal for pharmaceutical, over-the-counter drugs, health and beauty care products, and private label nutritional supplements. The Company's business strategy, as a result of the Becan and Valley acquisitions, is to expand the existing distribution system by applying new internet tools to the system thereby creating an internet portal in which manufacturers, distributors, wholesalers and retailers can exchange goods and services through a secure public and private channel, the DrugMax.com web site. The Company will implement this strategy by the following: o create brand recognition and generate traffic to our web sites; o develop strategic relationships; o maintain technology focus and expertise; and o attract and retain exceptional employees. Create Brand Recognition and Generate Traffic to Our Web Sites. We must build awareness of our web sites to attract and expand our Internet customer base. We are promoting advertising and increasing recognition of our web sites through a variety of marketing and promotional techniques, including: o co-marketing agreements with major online sites and services; o online content and ease of use of our Web sites; o enhancing customer service and technical support; o advertising in trade journals, leading web sites and other traditional media; o conducting an ongoing public relations campaign; o developing other business alliances and partnerships. Develop Strategic Relationships. We believe that developing strategic relationships with a diverse set of partners, including customers (manufacturers, distributors, wholesalers and retailers), on-line portals, broad band access providers and on-line content providers, is critical to our success because such strategic marketing alliances may enhance our brand recognition, increase customer sales and expand our online visibility. As a result, we intend to enter into relationships with Internet access providers, search engines and other high traffic web sites. See "Business--Marketing and Sales." Maintain Technology Focus and Expertise. A state of the art, interactive commerce platform is necessary to enhance the services we offer and to expand the benefits of online reselling of our products. We are in the process of upgrading our technology platform to further enhance our customer interaction and support systems which we believe offer us a competitive advantage. We will continue to expend substantial efforts to develop, purchase, license and make technological advancements to our web sites and our transaction processing systems to enhance our availability, reliability and site up-time, and to improve the efficiency of our fulfillment activities. Attract and Retain Exceptional Employees. Talented employees, management and directors provide significant advantages in the rapidly evolving electronic commerce market. We intend to devote substantial efforts to building a talented employee base. We cannot assure you that we will be successful in our strategic efforts. Online Store Customers currently enter our online store at www.drugmax.com which was launched in December 1999. The Company offers the following e-commerce services for its customers: wholesale market place, auctions, industry news and analysis, trade show information and a business classified section. Marketing and Sales We are using a variety of programs to stimulate demand for our products, including a direct sales force, telesales and advertising. Direct Sales. As a result of our recent public offering we have employed approximately 8 persons who act as our direct sales force to target organizations that buy and sell products listed on our Web sites. Telesales. We maintain an in-house telesales group of approximately 11 persons for use in customer prospecting, lead generation and lead follow-up. Advertising. In addition to strategic agreements and traditional advertising, we use many online sales and marketing techniques to increase brand recognition and direct traffic to our online stores. These include purchasing banner advertising on search engine Web sites and Internet directories and direct links from healthcare home pages. Customer Service and Support The Company believes it can establish and maintain long-term relationships with its customers and encourage repeat visits if, among other things, we have good customer support and service. The Company currently offers online information regarding our products and services. We answer customer questions about the ordering process, and investigate the status of orders, shipments and payments. A customer can access our staff by fax or e-mail by following prompts located on our web sites, or by calling our toll free telephone line. We may eventually increase the level of, and outsource, our customer support services through a provider of customer support services. Technology and Security We currently provide a scaleable business solution for mission critical Internet connectivity. We contracted with a provider to deliver a secure back-up platform for server hosting with uninterruptible power supply and back up generators, fire suppression, raised floors, heating ventilation and air-conditioning, separate cooling zones, operations twenty-four-hours-a-day, seven-days-a-week. Notwithstanding these precautions, we cannot assure that the security mechanisms used by us or our customers will prevent security breaches or service breakdowns. Despite the network security measures we have implemented, our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Such a description could lead to interruptions or delays in our service, loss of data, or our inability to accept and fulfill customer orders. Any of these events would materially hurt our business, results of operations and financial condition. The Company is greatly aware of the importance of securing and utilizing the most sophisticated information technology solutions available on the market. Toward that goal, we are exploring new and innovative solutions that can improve the reliability, efficiency and scalability of our Web sites. As we intend to create a highly enjoyable and secure shopping experience for our customers, we are committed to achieving and maintaining technological leadership in the e-commerce industry. Competition The online commerce market is new, rapidly evolving and intensely competitive. We expect competition to intensify in the future because barriers to entry are minimal, and current and new competitors can launch new Web sites at relatively low cost. In addition, the industry is intensely competitive. Many of our current and potential competitors have longer operating histories and larger customer bases than we do. In addition, many of our current and potential competitors have greater brand recognition and significantly greater financial, marketing and other resources than we do. In addition, as more people use the Internet and other online services, certain larger, well established and well financed entities may: o acquire online competitors or suppliers; o invest in online competitors or suppliers; or o form joint ventures with online competitors or suppliers. Certain of our actual or potential competitors, such as McKesson HBOC, Inc., Bergen Brunswig Corp., and Cardinal Health, Inc., may be able to: o secure merchandise from vendors on more favorable terms; o devote greater resources to marketing and promotional campaigns; o adopt more aggressive pricing or inventory availability policies; and o devote substantially more resources to web site and systems development than we can. In addition, new technologies and expansion of existing technologies, such as price comparison programs that select specific titles from a variety of web sites, may direct customers to online resellers which compete with us and may increase competition. Increased competition may reduce our operating margins, as well as cause a loss to any possible market share and brand recognition. Further, to strategically respond to changes in the competitive environment, we may sometimes make pricing, service or marketing decisions or acquisitions that could materially hurt our business. In addition, companies controlling access to Internet transactions through network access or Web browsers could promote our competitors or charge us a substantial fee for inclusion in their product or service offerings. We cannot assure that we can compete successfully against current and future competitors. Failure to compete successfully against our current and future competitors could materially hurt our business. Government Regulations and Legal Uncertainties We are subject to various laws and regulations relating to our business. Few laws or regulations are currently directly applicable to the Internet. However, because of the Internet's popularity and increasing use, new laws and regulations may be adopted. Such laws and regulations may cover issues such as: o user privacy; o pricing; o content; o copyrights; o distribution; and o characteristics and quality of products and services. In addition, the growth of the Internet and electronic commerce, coupled with publicity regarding Internet fraud, may lead to the enactment of more stringent consumer protection laws. These laws may impose additional burdens on our business. The enactment of any additional laws or regulations may impede the growth of the Internet, which could decrease our potential revenues from electronic commerce or otherwise adversely affect our business, financial condition and operating results. Laws and regulations directly applicable to electronic commerce or Internet communications are becoming more prevalent. The most recent session of Congress enacted Internet laws regarding on-line copyright infringement. Although not yet enacted, Congress is considering laws regarding Internet taxation. The European Union recently enacted new privacy regulations. These are all recent enactments, and there is uncertainty regarding their marketplace impact. In addition, various jurisdictions already have enacted laws that are not specifically directed to electronic commerce but that could affect our business. The applicability of many of these laws to the Internet is uncertain and could expose us to substantial liability. Any new legislation or regulation regarding the Internet, or the application of existing laws and regulations to the Internet, could materially adversely affect us. If we were alleged to violate federal, state or foreign, civil or criminal law, even if we could successfully defend such claims, it could materially adversely affect us. We believe that our use of third party material on our portal is permitted under current provisions of copyright law. However, because legal rights to certain aspects of Internet content and commerce are not clearly settled, our ability to rely upon exemptions or defenses under copyright law is uncertain. Several telecommunications carriers are seeking to have telecommunications over the Internet regulated by the Federal Communications Commission in the same manner as other telecommunications services. Additionally, local telephone carriers have petitioned the Federal Communications Commission to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees on such providers. If either of these petitions are granted, the costs of communicating on the Internet could increase substantially. This, in turn, could slow the growth of use of the Internet. Any such legislation or regulation could materially adversely affect our business, financial condition and operating results. Strategic Alliance On February 15, 2000, the Company entered into an Agreement with Purchasepro.com, Inc. ("PPRO") wherein PPRO will design and develop a "sell-side" private e-marketplace labeled to include the marks and logos of the Company and powered by PPRO. The custom e-marketplace will be utilized within the Company's site. PPRO's development and unlimited buyer license fee for private e-Marketplace will be issued in the form of 200,000 of the Company's warrants and revenue sharing will take place on transactions and subscriptions resulting from the Company's marketplace. The warrants shall be exercisable, in whole or in part, during the term commencing on the date of project completion (the "Initial Exercise Date"), and ending at 5:00 p.m., Pacific Standard Time, six months after the date of completion (the "Exercise Period"), and shall be void thereafter. In consideration for the hosting, archiving, maintenance and recurring customization of the private e-Marketplace, the Company will guarantee PPRO at least $80,000 in annual transaction revenue. The Company plans to use the sell-side e-marketplace to primarily sell pharmaceuticals and health supplements as well as the value added services from PPRO's preferred providers. Employees As of March 31, 2000, the Company had 36 employees. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good. In each case, the employees are permitted to participate in employee benefit plans of the Company that may be in effect from time to time, to the extent eligible. Each of the employees are eligible for grant of stock options in accordance with the provisions of the Company's 1999 Stock Option Plan, as determined by the Administrator of the Plan. In August 1999, the Company's Board of Directors adopted the Company's 1999 Stock Option Plan, which is subject to approval by the Company's shareholders at its next annual meeting in August, 2000. The purpose of the 1999 Plan is to enable the Company to attract and retain top-quality executive employees, officers, directors and consultants and to provide such executive employees, officers, directors and consultants with an incentive to enhance stockholder return. The 1999 Plan provides for the grant to officers, directors, or other key employees and consultants of the Company, of options to purchase an aggregate of 400,000 shares of common stock. ACQUISITIONS The Company has made the following material acquisitions: Becan On November 26, 1999, we acquired all of the common stock of Becan, a wholesale distributor of pharmaceuticals, over-the-counter drugs, and health and beauty care products. Becan was a wholly-owned subsidiary of Dynamic, an affiliate of Jugal K. Taneja, a principal shareholder and director of our Company. In connection with this acquisition we paid Becan's then parent company, Dynamic, the sum of $2,000,000 in cash, and 2,000,000 (post one-for-two reverse stock split) shares of our common stock in exchange for all of the outstanding shares of Becan common stock. In addition, we also deposited 1,000,000 shares of our common stock into escrow for future issuance to Dynamic upon the attainment by Becan of certain financial targets for the fiscal years ending March 31, 2000 and 2001. Becan did not attain its financial target for the fiscal year ending March 31, 2000 and as a result 500,000 shares were returned to the Company. In March, 2000, Becan was merged into the Company and no longer operates as a wholly-owned subsidiary of the Company. For the year ended March 31, 1999 and the period ended November 25, 1999, Becan had revenues of $31.1 million and $33.7 million, respectively and net income of $94,031 and $22,829 for such periods. Business: Becan was incorporated in November 1996, in Ohio and commenced operations in January 1997. Becan was acquired by Dynamic in June 1998. Becan was a wholesale distributor of pharmaceuticals, over-the-counter drugs, and health and beauty care products. In August 1998, Becan formed Discount Rx, Inc., a Louisiana corporation which also acts as a wholesale distributor of pharmaceuticals, and to a lesser extent, over-the-counter, and health and beauty care products. Becan operates two distribution centers, one of which is a 4,024 square foot leased facility located in Pittsburgh, Pennsylvania, used by Becan, and the other is a 1,200 square foot leased facility located in Mandeville, Louisiana, used by Discount Rx. Both of these facilities are used for the wholesale distribution of pharmaceuticals and health and beauty care products. The products which Becan and Discount Rx wholesale are acquired from various manufacturers, including Bergen Brunswig Drug Company, Pharmserv Inc., Merck & Co, Inc., and Abbott Laboratories. Product Line: Becan and its subsidiary Discount Rx offer over sixty branded pharmaceuticals to their customers, along with diabetic test strips, a limited number of generic pharmaceuticals, a line of nutriceuticals, and a line of exclusive over-the-counter products. The branded pharmaceuticals account for ninety percent of the sales for both companies. While diabetic test strips account for five percent, generics for one percent, nutriceuticals for two percent, and the exclusive over-the-counter products account for two percent. In addition to strengthening their core business, the branded pharmaceuticals, both Becan and Discount Rx are engaged in growing the nutriceuticals business, which is one of the fastest growing categories within their customer base. Both companies have agreements with licensed alternate source facilities from which they purchase and sell merchandise to. Market for Product Line: Substantially all of both companies' total sales are to independent pharmacies. The overall market for Becan is defined as the Continental U.S., however initial concentration has been on accounts in central and eastern United States. Sales and Marketing: Becan and Discount Rx utilize a combination of inside sales and marketing, field sales calls, and independent contractors for its sales and marketing efforts. The majority of Becan's day to day sales is accomplished through its inside sales efforts. All of Becan's sales efforts focus on retaining the existing sales base and developing new customers. Distribution: Becan and Discount Rx have two distribution locations, one in Pittsburgh, Pennsylvania, and the other in Mandeville, Louisiana, respectively. These locations are strategically located to enable the companies to deliver approximately ninety-five percent of the product to their customers via next day delivery, shipped by way of ground UPS. The remaining product (large over-the-counter orders) is distributed via bulk shipments that are delivered via common carriers. In all instances a minimum order quantity is required to offset delivery costs and ensure profitability. Management Information Systems: Becan and Discount Rx use two different management tools to regulate their inventories, one provided by their accounting software, and the other an in-house system. The in-house system tracks purchases and sales, and calculates average purchases against sales, including a growth factor, and then suggests the appropriate inventory to purchase. Using these systems, both Becan and Discount Rx provide their customers with an inventory fill rate that surpasses the industry average. Both companies also track price increases. This allows both companies to forecast when a price increase will take place, and allows them to purchase the appropriate inventory to take advantage of those price increases. Competition: There are a number of suppliers within each of Becan's and Discount Rx's market areas that provide branded pharmaceuticals and other products to independent pharmacies, internet pharmacies, clinics and other licensed outlets. Both Becan and Discount Rx have developed a niche market within the market of the other suppliers by offering their customers the needed product at below market prices. Valley Drug Company On April 19, 2000 we acquired all of the issued and outstanding shares of common stock of Valley Drug Company ("Valley"), a full line primary wholesale distributor of pharmaceuticals, over-the-counter drugs, health and beauty aid products, and general merchandise. In connection with the merger, Valley shareholders received $1.7 million in cash and 226,666 shares of the Company's common stock. Ten percent of the shares issued have been placed in escrow for 120 days pending determination of the final price. Management of the Company determined that it is in the best interest of the Company to consummate the Merger to strengthen the Company's marketing and business development expertise, enable it to expand its presence in the online Business-to-Business segment, and provide additional sources of revenues for the Company. For the year ended December 31, 1999 and the 3 months ended March 31, 2000, Valley had revenues of $50.6 million and $12.3 million, respectively, and net income of $500,000 and $75,000 for such periods. The acquisition has been accounted for using the purchase method of accounting. We recorded goodwill of approximately $5 million, which will be amortized over 15 years. Business: Valley was incorporated in the State of Ohio in 1950 and operations commenced immediately from its warehouse / office located in Youngstown, Ohio. The facility has approximately 30,000 square feet of warehouse, receiving, and shipping space devoted to the distribution of pharmaceuticals, over the counter remedies, health and beauty aids, and general merchandise. As a primary wholesaler, Valley purchases its inventory for resale directly from the pharmaceutical manufacturers and delivers orders to its customers daily via its fleet of delivery vans. Product Line: Valley offers over 20,000 items for resale. Over 90% of its annual revenues are generated from the sale of both branded and generic pharmaceutical products. The remainder of annual revenues are generated from sales of health and beauty aids, over the counter merchandise and other revenue enhancements, such as store advertising, film development and greeting card programs. Market for Product Line: Historically, over 85% of Valley's total sales are to independent pharmacies, 10% to hospitals, and 5% to nursing homes. Valley's customer base covers a region of eastern Ohio and western Pennsylvania. A 75 mile radius surrounding Youngstown, Ohio has been the Company's market concentration, which allows for daily delivery of product at a manageable cost. The current re-surgence of the independent pharmacies have provided opportunities to Valley to expand its customer base. Sales and Marketing: Valley utilizes an inside sales team for its sales and marketing efforts. A team of 5 salespersons diligently work daily to maintain current customer relations, expand sales to existing customers, and search out new opportunities, Unique to the industry, Valley salesmen visit the stores of each account at least bi-weekly. Distribution: All of Valley's sales orders are shipped from its one warehouse located in Youngstown,Ohio. The location is strategically located in order to provide next day delivery via its delivery vans and to service the major markets which surround it geographically. Management Information System: Valley's information system is maintained on an IBM AS 400 platform. Accounting for sales, purchases, perpetual inventory transactions, cash receipts and disbursements and sophisticated management reports are provided timely for analytical and bookeeping purposes. Also, the order entry system was designed specifically for Valley and allows its customers to order product 24 hours per day either via fax, telxon recorder or phone modem. It has the capabilities of receiving orders over the internet. The system provides data to management enabling it to review sales trends and customer base, monitor inventory levels, credit and collection issues, and purchasing frequency and cost anticipation. Communication and availability of data is possible through a local area network ring. DeskTop On March 20, 2000, we acquired all of the issued and outstanding capital stock of DeskTop Corporation, a Texas corporation, in exchange for a total of 99,985 shares of Company common stock and $100,000. DeskTop, organized in 1995, is engaged in the business of designing and developing customized internet solutions. Its revenues and income (loss) for the year ended March 31, 2000 were $2.4 million and $(1.9) million, respectively. In July, 1999 DeskTop and W.A. Butler & Company, one of the nation's largest veterinary product distributor, caused to be formed VetMall LLC, each owning a 50% interest. During the period from inception to acquisition of DeskTop by the Company, the LLC (later converted to a newly formed Florida corporation VetMall, Inc.) was developing a web site, VetMall.com, a business-to-business portal linking animal health product manufacturers, distributors, and veterinarians. VetMall provides a site to place and receive product orders, and to display and exchange information about animal care, services and products. In connection with the acquisition, the Company agreed that upon (i) the closing of any initial public offering (the "IPO") of VetMall or its successors, (ii) the sale by the Company of all of the shares acquired, regardless of the form of such transaction, or (iii) the sale by VetMall of all or substantially all of its assets, the Company will either (A) issue to the Sellers that number of shares of VetMall's common stock which, when multiplied by the closing price of VetMall's common stock on the date the IPO or the sale closes, exceeds $4,800,000, or (B) transfer to the Sellers 16% of 50% of the proceeds of the closing of a direct sale to a third party of substantially all of the assets of VetMall or its successors, whichever of (A) or (B) has a lower value based on the IPO or sales price of VetMall common stock and the closing price of VetMall's common stock on the date that the IPO is declared effective by the Securities and Exchange Commission or the closing of the sale has occurred. Simultaneously with the acquisition of DeskTop, the Company entered into a stock purchase agreement with Butler, whereby Butler sold to the Company 20% of the issued and outstanding membership shares of VetMall, in exchange for the payment of $1,000,000 cash plus the issuance to Butler of 25,000 shares of Company's common stock. As a result, the Company owns through its ownership of DeskTop, a 70% interest in VetMall. Business: The Company intends to offer animal product manufacturers, distributors, veterinarians, and animal owners a single point of communication through VetMall.com for displaying information on current and new products and services, placing and receiving product orders, and learning about product usage and animal care. The key to successful integration of this business-to-business (B2B) model involves the inclusion of distributors and manufacturers. Desktop has already developed a B2B communication system linking VetMall.com to Butler and will soon begin to target key manufacturers. As a board member of the American Veterinary Distributors Association (AVDA), Butler is positioned to assist VetMall in associating with other major distributors. The web site is designed for veterinarians to order products online, perform research, and communicate with other veterinarians through online chat, email, or question and answer sessions. Currently, all online order processing options are very cumbersome and time consuming. By integrating current online order processing solutions into VetMall, a veterinarian will be able to have a one stop solution. Because of distributor agreements in place with many of the top manufacturers, it is not possible for a single distributor to offer all product lines. VetMall has already created over 2,000 web sites for veterinary clinics in the U.S. These web sites will be offered free to veterinarians. By creating e-commerce enabled web sites for each veterinarian, VetMall will provide a platform that will allow a local veterinarian to compete with the big pet stores but with a twist. The veterinarian can still prescribe online, set their own prices, and collect income without the inventory costs. VetMall intends to become the veterinarians back office and pharmacy. Market: VetMall.com is designed to strengthen and facilitate relationships among the animal product manufacturers and distributors and the approximately 44,000 veterinarians who practice in approximately 31,000 clinics, hospitals, and mobile facilities. It has been estimated that there are approximately 61 million households which own pets and that the market in terms of annual retail sales for products and service relating to pets is as much as $31 billion. This market is viewed by the Company as attractive for penetration by the VetMall.com concept. VetMall.com has already enlisted over 4,000 veterinarians, representing over 2000 clinics as members of VetMall.com. Competition: The major internet competition for VetMall at this time is in the pet products arena. VetMall will have to compete, in part, against traditional independent pet products retailers, pet product superstores, large discount and other mass market retailers that carry pet products as part of a broader array of merchandise, and on-line retail and B2B web sites. RISK FACTORS The Company's operations are subject to the following risk factors: Unpredictability of Future Operating Results. The Company's revenues and operating results may fluctuate significantly from quarter to quarter due to a number of factors, not all of which are in the Company's control. These factors include: the Company's ability to attract and retain new customers and maintain customer satisfaction; new web sites, services and products introduced by the Company or by its competitors; price competition; decreases in the level of growth, use of, or consumer acceptance of, the Internet and other online services for the purchase of consumer products; the Company's ability to upgrade and develop its systems and infrastructure and attract new personnel in a timely and effective manner; traffic levels on its Web site and its ability to convert that traffic into customers; technical difficulties or system downtime affecting the Internet or online services, generally, or the operation of the Company's Web site; the failure of Internet bandwidth to increase significantly over time and/or an increase in the cost to consumers of obtaining or using Internet bandwidth; government regulations related to use of the Internet for commerce or sales and distribution of natural products; and general economic conditions and economic conditions specific to the Internet, online commerce and the software industry. Establishment of Company Brands. A growing number of Internet sites, many of which already have well-established brands, offer products and services that compete with those of the Company. As a result, the Company believes it must establish, maintain and enhance its DrugMax.com brand. The Company's success in promoting and maintaining its brands or any other brand that it may use in the future will depend largely on its ability to provide a high quality online experience supported by dedicated customer service. The Company cannot assure that it will be able to meet these goals. In addition, to attract and retain online users and to promote and maintain its current brands or future brands, the Company may need to substantially increase its marketing expenditures to create and maintain strong brand loyalty among its customers. The Company's business could be adversely affected if its marketing efforts are unproductive or if it cannot increase its brand awareness. Highly Competitive Markets. The online commerce market is new, rapidly evolving and intensely competitive. The Company anticipates that competition will intensify in the future because barriers to entry are minimal, and current and new competitors can launch new web sites at a relatively low cost. In addition, the natural products industry is intensely competitive. The Company currently competes primarily with traditional resellers of pharmaceutical , other online resellers of pharmaceutical and other vendors. Dependence on the Internet and Internet Infrastructure Development. The Company's success will depend in large part on continued growth in, and the use of, the Internet. There are critical issues concerning the commercial use of the Internet which remain unresolved. The issues concerning the commercial use of the Internet which the Company expects to affect the development of the market for its products and services include: security, ease of access, reliability, quality of service, cost, and necessary increases in bandwidth availability. The adoption of the Internet for information retrieval and exchange, commerce and communications, particularly by those enterprises that have historically relied upon traditional means of commerce and communications, generally will require that these enterprises accept a new medium for conducting business and exchanging information. These entities likely will accept this new medium only if the Internet provides them with greater efficiency and an improved area of commerce and communication. Demand and market acceptance of the Internet are subject to a high level of uncertainty and are dependent on a number of factors, including the growth in consumer access to and acceptance of new interactive technologies, the development of technologies that facilitate interactive communication between organizations and targeted audiences and increases in user bandwidth. If the Internet fails to develop or develops more slowly than the Company expects as a commercial or business medium, it could adversely affect the Company's business. Online Commerce Security and Credit Card Fraud. A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. The Company's business may be adversely affected if its security measures do not prevent security breaches and it cannot assure that it can prevent all security breaches. To the extent that the Company's activities, or those of third-party contractors, involve the storage and transmission of proprietary information (such as credit card numbers), security breaches could damage the Company's reputation, and expose the Company to a risk of loss or litigation and possible liability. Under current credit card practices, a merchant is liable for fraudulent credit card transactions where, as is the case with the transactions the Company processes, that a merchant does not obtain a cardholder's signature. Fraudulent use of credit card data in the future could adversely affect the Company's business. Protection of Proprietary Rights. The Company regards its copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property as critical to its success. To protect its proprietary rights, the Company will rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with its employees, customers, partners and others. The Company will pursue the registration of its trademarks and service marks in the United States. The Company has applied for Federal registration of the mark "Java Slim." The Company cannot be certain that federal registration of this service mark or any other service mark will be issued. In addition, effective trademark, service mark, copyright and trade secret protection may be unavailable in countries in which the Company's products and services are available online. The Company has not applied to register any mark outside the U.S. or performed any trademark searches to determine whether any of these marks are available for use or registration inside or outside of the United States. To date, there have been no interruptions in the Company's business as the result of any claim of infringement. However, no assurance can be given that the Company will not be adversely affected by the assertion of intellectual property rights belonging to others. The effects of such assertions could include requiring the Company to alter or withdraw existing trademarks or products, delaying or preventing the introduction of products, or forcing the Company to pay damages if the products have been introduced. The steps the Company takes to protect its proprietary rights may be inadequate, or third parties might infringe or misappropriate its trade secrets, copyrights, trademarks, trade dress and similar proprietary rights. In addition, others could independently develop substantially equivalent intellectual property. The Company may have to litigate in the future to enforce its intellectual property rights, to protect its trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and the diversion of the Company's management and technical resources which could adversely affect its business. Government Regulation. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The most recent session of the U.S. Congress resulted in Internet laws regarding children's privacy, copyrights, taxation and the transmission of sexually explicit material. The European Union recently enacted its own privacy regulations. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel, contracts and taxation apply to the Internet. In addition, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online. The adoption or modification of laws or regulations relating to the Internet could adversely affect the Company's business. Internet Content Liability. The Company believes that its future success will depend in part upon its ability to deliver original and compelling descriptive content (information, articles, editorials, etc.) about the products it sells on the Internet. Accordingly, the Company anticipates that it will become a publisher of online content in the foreseeable future. At such time, it may face potential liability for defamation, negligence, copyright, patent or trademark infringement, or other claims based on the nature and content of materials that it publishes or distributes. In the past, plaintiffs have brought such claims and sometimes successfully litigated them against online services. In addition, in the event that the Company implements a greater level of interconnectivity on its Web sites, it will not and cannot practically screen all of the content its users generate or access, which could expose the Company to liability with respect to such content. The Company does not presently carry general liability insurance, and any such insurance obtained in the future may not cover claims of these types or may be inadequate to indemnify the Company for all liability that may be imposed on it. If the Company faces liability, then its reputation and its business may be adversely affected. Sales and Other Taxes. The Company does not currently collect sales or other similar taxes for physical shipments of goods into states other than Florida. However, one or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on the Company and other out of state companies which engage in online commerce. In addition, any new operations in states outside Florida, including operations assumed in connection with the acquisition of Healthseek.com, Desktop, VetMall and Becan could subject the Company's shipments into such states to state sales taxes under current or future laws. If one or more states or any foreign country successfully asserts that the Company should collect sales or other taxes on the sale of our merchandise, it could adversely affect the Company's business. Capacity Constraints, Reliance on Internally Developed Systems and System Development. A key element of the Company's strategy is to generate a high volume of traffic on, and use of, its web sites. The Company's revenues depend on the number of its business customers who use its web site to purchase products offered. Accordingly, its Web site transaction processing systems and network infrastructure performance, reliability and availability are critical to its operating results. These factors are also critical to the Company's reputation and its ability to attract and retain customers and maintain adequate customer service levels. The volume of goods the Company sells and the attractiveness of its product and service offerings will decrease if there are any systems interruptions that affect the availability of the Company's Web sites or its ability to fulfill orders. The Company has experienced periodic systems interruptions, which management believes may continue to occur. The Company will continually enhance and expand its technology and transaction processing systems, and network infrastructure and other technologies, to accommodate increases in the volume of traffic on its web sites. The Company cannot assure that it will be successful in these efforts or that it will be able to accurately project the rate or timing of increases in the use of its Web sites. The Company may also fail to timely expand and upgrade its systems and infrastructure to accommodate these increases. In addition, the Company cannot predict whether additional network capacity will be available from third party suppliers as it is needed. Also, the Company's network or its suppliers' network might be unable to timely achieve or maintain a sufficiently high capacity of data transmission to timely process orders, especially if its web site traffic increases. The Company's failure to achieve or maintain high capacity data transmission could significantly reduce consumer demand for its services. The Company's systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. The Company has no formal disaster recovery plan and carries no business interruption insurance to compensate it for losses that may occur. Furthermore, the Company's security mechanisms or those of its suppliers may not prevent security breaches or service breakdowns. Despite the Company's implementation of security measures, its servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. These events could cause interruptions or delays in the Company's business, loss of data or render the Company unable to accept and fulfill customer orders. Rapid Technological Change. To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality and features of its distribution systems and its online stores. The Internet and the online commerce industry are characterized by rapid technological change, changes in user and customer requirements and preferences and frequent product and service introductions. If competitors introduce products and services embodying new technologies or if new industry standards and practices emerge, then the Company's existing web sites, proprietary technology and systems may become obsolete. The Company's future success will depend on its ability to both license and/or internally develop leading technologies useful in its business, enhance its existing services, develop new services and technology that address the increasingly sophisticated and varied needs of its prospective customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of the Company's Web sites and other proprietary technology entail significant technical and business risks. The Company may use new technologies ineffectively or may fail to adapt its web sites, proprietary technology and transaction processing systems to customer requirements or emerging industry standards. If the Company faces material delays in introducing new services, products and enhancements, its customers may forego the use of its products and services and use those of the Company's competitors. Reliance on Strategic Alliances. In an effort to drive traffic to the Company's Web sites, it has entered into a marketing alliance with PurchasePro.com, Inc., for the development of a Virtual Private Marketplace (VPM) and desktop purchasing solution which the Company will offer to its clients to its DrugMax.com website. Although the Company believes its strategic alliance with Purchasepro.com will represent a significant distribution channel for its pharmaceutical products, it cannot assume that this alliance will meet this expectation, particularly because Purchasepro.com is new and it is not certain whether Purchasepro.com will achieve its anticipated positive market presence and growth. Conversely, if Purchasepro.com is successful, termination of the Company's alliance with Purchasepro.com could have a material adverse affect on the Company's business. The Company intends to enter into similar marketing alliances with others. The inability to enter into similar alliances with others may also have a material adverse affect on the Company's business. Possible Future Acquisitions. The Company intends to continue to make investments in complementary companies, products or technologies. If the Company acquires a company, it could have difficulty in assimilating that company's personnel and operations. In addition, the key personnel of an acquired company may decide not to work for the Company. If the Company makes other types of acquisitions, it could have difficulty in assimilating the acquired technology or products into the Company's operations. These difficulties could disrupt the Company's ongoing business, distract its management and employees and increase its expenses. In addition, future acquisitions could have a negative impact on the Company's business, financial condition and results of operations. Furthermore, the Company may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which would be dilutive to the Company's existing stockholders. Control By Certain Stockholders. Directors, executive officers and principal shareholders beneficially owned approximately 62% of the outstanding shares of the Company's common stock. Therefore, these stockholders will have significant control over the election of the Company's directors and most of the Company's corporate actions. Item 2. PROPERTIES. The Company does not own or hold any legal or equitable interest in any real estate. The Company leases its principal administrative, marketing and customer service facility totaling 3,550 square feet of air-conditioned office space and 2,950 square feet of air-conditioned warehouse space, located at 12505 Starkey Road, Suite A, Largo, Florida 33773. The term of the lease for the Largo facility is for three years expiring November 30, 2002 with an initial monthly lease payment of $3,800. The Company leases for its subsidiary Becan, 1,424 square feet of office and 1,176 square feet of warehouse space located at 203 Parkway West Industrial Park, Pittsburgh, Pa. 15205, for administrative purposes, and for the sales and distribution of pharmaceutical, beauty, and over-the-counter drug products. The term of the lease for the Pittsburgh facility is for 4 years expiring February 28, 2003 with an initial monthly lease payment of $1,658. The Company leases for its subsidiary, Discount Rx, 1,200 square feet of office space located at 5200 Highway 22, Suite 12A, Mandeville, La. 70471, for administrative and sales offices. The Mandeville facility costs $900 each month on a month to month basis. Desktop and VetMall share leased space consisting of 6,458 square feet of office space located at 12300 Ford Road, Suite 212, Dallas, Texas 75234 for administrative offices. The Dallas facility costs $12,108 per month on a month to month basis. The Youngstown facility is located at 318 West Boardman Street, Youngstown, Ohio 44503 and consists of approximately 30,000 square feet of office (approximately 3,000 air conditioned space for offices), warehouse and shipping and distribution space. The premises are leased pursuant to a lease with a 10 year term expiring December 30, 2008 with a monthly lease payment of $6,000. The Company believes the currently leased properties are adequate for current operations and future growth. Item 3. LEGAL PROCEEDINGS. From time to time, the Company may become involved in litigation arising in the ordinary course of its business. The Company is not presently subject to any material legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. A special meeting of the shareholders was held on January 11, 2000 for the purpose of amending the Articles of Incorporation to change the name of the Company from Nutriceuticals.com Corporation to DrugMax.com, Inc. The vote was as follows: 3,510,492 in favor; -0- against; -0- abstained. The vote in favor consisted of approximately 63% of the outstanding shares entitled to vote. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Prior to November 19, 1999, our common stock was quoted on the OTC Electronic Bulletin Board and traded under the symbol "JCOM." From March 1997 through March 1999, before we commenced our e-commerce business, there was no trading market for our common stock. From April 1999 to November 11, 1999, there were a total of approximately 18 trades reported for our common stock on the OTC Electronic Bulletin Board. Since November 19, 1999, our common stock has been listed for trading on the Boston Stock Exchange and approved for quotation on The Nasdaq Small Cap Market under the symbols "DMA" and "DMAX," respectively. The following table sets forth the closing high and low bid prices for the Common Stock on the Nasdaq Small Cap Market for each calendar quarter from November 19, 1999, the date of the Company's recent public offering. Prices represent inter-dealer quotations without adjustment for retail markups, markdowns or commissions and may not represent actual transactions. COMMON STOCK ---------------- HIGH LOW ------ ------ 1999 Fourth Quarter (commencing November 19, 1999) ...... $19.187 $ 9.00 2000 First Quarter ...................................... $21.25 $13.00 Second Quarter (through June 25) ................... $15.688 $7.875 As of June 15, 2000, there were approximately 553 shareholders of record of the Company's common stock. Historically, the Company has not declared or paid any cash dividends on its common stock. It currently intends to retain any future earnings to fund the development and growth of its business. Any future determination to pay dividends on the common stock will depend upon the Company's results of operations, financial condition and capital requirements. Recent Sales of Unregistered Securities During the past three years, the Company has issued unregistered securities to a limited number of persons as described below. The following information regarding the Company's shares of common stock has been adjusted to give effect to (i) the one-for-fifty reverse split of the Company's common stock effected in March 1999, (ii) the two-for-one stock split in the form of a stock dividend effected in April 1999, and (iii) a one-for-two reverse stock split in October 1999. (1) On March 18, 1999, the Company issued an aggregate of 2,400,000 shares of common stock to 14 investors in connection with the merger of Nutriceuticals.com Corporation, a Florida corporation, with and into the Company. (2) On March 31, 1999, the Company issued an aggregate of 100,000 shares of common stock, to one (1) investor in connection with the acquisition of Healthseek.com Corporation, a Massachusetts corporation. (3) On August 16, 1999, the Company issued an aggregate of 20,000 shares of common stock to Lyntren Communications, Inc. with the acquisition of The Nutriceuticals.com domain name. (4) On November 26, 1999, the Company issued an aggregate of 2,000,000 shares of common stock to Dynamic Health Products, a Florida corporation, with the acquisition of Becan Distributors, Inc. (5) On March 20, 2000, the Company issued an aggregate of 50,000 shares of common stock with the acquisition of Desktop Corporation. (6) On March 20, 2000, the Company issued an aggregate of 49,985 shares of common stock to retire debt associated with the acquisition of Desktop Corporation. (7) On March 20, 2000 the Company issued 25,000 shares of common stock in association the acquisition of VetMall. None of the foregoing transactions involved any underwriter, underwriting discounts or commissions or any public offering, and the Company believes that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof. The recipients in such transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview The Company derives its revenues from traditional and online sales of pharmaceuticals, over-the-counter products, health and beauty care products, and nutritional supplements. Revenues are billed and recognized as product is shipped to the customer, net of discounts, allowances, returns and credits. Cost of goods sold is comprised of product costs. Selling, general and administrative costs include administrative, sales and marketing and other indirect operating costs. On November 26, 1999, the Company acquired Becan. The acquisition was accounted for under the purchase method of accounting. The results of operations of the Company for the twelve months ended March 31, 2000 include the results of operations of Becan from November 27, 1999 through March 31, 2000. On March 20, 2000, the Company acquired all the issued and outstanding capital stock of Desktop and VetMall, an entity owned 50% by a wholly-owned subsidiary of Desktop. Simultaneously with the acquisition of Desktop, the Company purchased from Butler an additional 20% interest in the issued and outstanding membership shares of VetMall. The acquisitions of Desktop and VetMall were accounted for under the purchase method of accounting. The results of operations of the Company for the year ended March 31, 2000 include the results of operations of Desktop and VetMall from March 21, 2000 through March 31, 2000. Fiscal Year Ended March 31, 2000 Compared To The Period From September 8, 1998 (date of inception) through March 31, 1999 Results of Operations In March 1997, NuMed Surgical, Inc. ("NuMed") adopted a plan of liquidation by which it sold its major product line and subsequently disposed of all of its operating assets by March 31, 1998. In March 1999, NuMed acquired all of the outstanding common stock of Nutriceuticals.com Corporation ("Nutriceuticals Florida"), a Florida corporation, which was organized in September 1998. NuMed then merged with Nutriceuticals of Florida and changed its name to Nutriceuticals.com Corporation. In January 2000, Nutriceuticals changed its name to DrugMax.com, Inc. From April 1, 1998 through September 7, 1998, the Company's financial statements were accounted for on a liquidation basis. Revenues. Revenues increased $21.0 million, or 56,612.5%, to $21.1 million for the year ended March 31, 2000, as compared to $37,000 for the period from September 8, 1998 (date of inception) through March 31, 1999. The increase is primarily attributable to $20.6 million in revenues generated by Becan from November 26, 1999 (date of acquistion) through March 31, 2000. Gross profit. Gross profit increased $121,000, or 535.6%, to $144,000 for the year ended March 31, 2000, as compared to $23,000 for the period from September 8, 1998 (date of inception) through March 31, 1999. Gross margin was .7% for the year ended March 31, 2000 as compared to 60.9% for the period from September 8, 1998 (date of inception) through March 31, 1999. The decline was primarily attributable to an increase in the mix of sales associated with the acquisition of Becan, which yields a lower gross margin. Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.9 million, or 1,511.6%, to $2.1 million for the year ended March 31, 2000, as compared to $129,000 for the period from September 8, 1998 (date of inception) through March 31, 1999. The increase was primarily due to additional advertising and promotional expenses, web site support and development costs, increased payroll expenses and costs associated with fringe benefits, and amortization of goodwill associated with the acquisition of Becan. Interest expense. Interest expense was $107,000 for the year ended March 31, 2000. There was no interest expense for the period from September 8, 1998 (date of inception) through March 31, 1999. The increase was primarily a result of greater borrowings under the Company's credit facilities for financing of additional working capital needs with the expansion of the Company's operations, specifically associated with the acquisition of Becan. The Company has no income tax provision for the periods presented due to its net operating losses. These net operating losses may be carried forward for up to 20 years to offset future taxable income. Management believes that there was no material effect on operations or the financial condition of the Company as a result of inflation for the fiscal year ended March 31, 2000 and the period from September 8, 1998 (date of inception) through March 31, 1999. Management also believes that its business is not seasonal; however, significant promotional activities can have a direct impact on sales volume in any given quarter. Financial Position, Liquidity and Capital Resources On November 22, 1999, the Company successfully completed a public offering. Gross proceeds of the offering from the sale of common stock of the Company were $13.8 million and net offering proceeds received by the Company were approximately $11.9 million, after payment of underwriting discounts and commissions and other offering expenses totaling approximately $1.9 million. Prior to that, the Company funded its operations through borrowings from its officers, directors and affiliates. Net cash used in operating activities was $3.1 million for the year ended March 31, 2000. The usage of cash is primarily attributable to the net operating loss as well as an increase in accounts receivable of $1.9 million, as a result of increased sales associated with the Becan acquisition, an increase in inventory of $189,000, an increase in due from affiliates of $8,000, an increase in prepaid expenses and other current assets of $80,000 and an increase in accrued expenses of $475,000, partially offset by a decrease in deposits of $9,000, and an increase in accounts payable of $835,000 associated with the acquisition of Becan. Net cash used in investing activities was $3.4 million, representing purchases of property and equipment of $183,000, an increase in intangible assets of $5,000, and cash paid for the acquisitions of Becan, Desktop and VetMall of $3.3 million. Net cash provided by financing activities was $12.5 million, representing the net change in revolving line of credit agreements of $2.4 million proceeds from issuance of long-term obligations of $24,000, proceeds from related party obligations $200,000, proceeds from affiliates of $10,000, and proceeds from the issuance of common stock $11.8 million, partially offset by payments of long-term obligations of $1.7 million and payments of related party obligations of $200,000. At March 31, 2000, the Company had $6.0 million in cash and cash equivalents as compared to $57,000 at March 31, 1999. Working capital at March 31, 2000 was $4.9 million, inclusive of obligations under our credit line facilities, as compared to a working capital deficit of $10,000 at March 31, 1999. The Company's principal commitments at March 31, 2000 were leases on its office and warehouse space. There were no material commitments for capital expenditures at that date, with the exception of the commitment to acquire Valley for 226,666 shares of the Company's common stock and cash in the amount of $1.7 million. The acquisition of Valley was closed on April 19, 2000. In November 1998, Becan and its subsidiary, Discount, established a $2,000,000 line of credit to provide additional working capital to support its continued growth. The note bears interest at the Prime Rate of The Chase Manhattan Bank in New York, New York, plus 1.25% per annum on the unpaid outstanding principal of each advance, payable monthly. The note is collateralized by a blanket lien on all business assets of Becan and is also collateralized by personal guarantee from a Director of the Company, Jugal K. Taneja. At March 31, 2000, there was no balance due under this line of credit. The Company incurred a termination fee of $40,000 for early termination of the line of credit. On September 8, 1999, the Company entered into an Agreement and Plan of Reorganization with Dynamic Health Products, Inc., a Florida corporation, to acquire its wholly-owned subsidiary, Becan Distributors, Inc., an Ohio corporation. On November 26, 1999, the Company acquired Becan in exchange for 2,000,000 shares of restricted common stock and $2,000,000 cash. An additional 500,000 shares of common stock are held in escrow in connection with the acquisition to be issued pending the attainment, by Becan, of certain financial targets, for the fiscal year ending March 31, 2001. In October 1999, the Company established a $100,000 revolving line of credit with First Community Bank of America, to provide additional working capital for the Company. In November 1999, the borrowing limit on the line of credit was increased to $350,000. The note bears interest at 6.5% per annum on the unpaid outstanding principal of each advance, payable monthly. The note is secured by a guarantee in the form of a Third Party Pledge Agreement in favor of First Community Bank of America, from Dynamic Health Products, Inc., of which Jugal K. Taneja is Chairman and a 33.18% shareholder. The principal on the note was due and payable on October 10, 2000. This line of credit has since been repaid and the note satisfied with the establishment of a new revolving line of credit with First Community Bank of America in March 2000. In March 2000, the Company obtained a new line of credit with Merrill Lynch Financial Services to refinance its existing line of credit and to provide additional working capital for the Company. The new line of credit enables the Company to borrow a maximum of $5.0 million, with borrowings limited to 80% of eligible accounts receivable and 50% of inventory (capped at $1.0 million). Under the terms of the commitment, interest is variable at a per annum rate equal to the sum of 2.50% plus the 30-day Dealer Commercial Paper Rate (as published in The Wall Street Journal), on the unpaid outstanding principal of each advance, payable monthly. As of March 31, 2000, the outstanding principal on the note was approximately $2.0 million and due to limitations under this line, an additional $1.9 million was available for borrowings. In March 2000, the Company established a $1.0 million revolving line of credit with First Community Bank of America, to provide additional working capital for the Company. The note bears interest at a variable rate, with an initial rate of 6.3% per annum on the unpaid outstanding principal of each advance, payable monthly. The note is secured by a $1.0 million certificate of deposit. Principal on the note is due and payable on October 1, 2000. The note or any portion thereof may be prepaid without penalty. As of March 31, 2000, the outstanding principal on the note was approximately $339,000 and $661,000 was available for borrowings. Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See financial statements commencing on page F-1. Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On February 4, 2000, the Company engaged Deloitte & Touche, LLP as the Company's independent auditors for the fiscal year ended March 31, 2000, replacing the firm of Kirkland, Russ, Murphy & Tapp, CPAs, which served as the Company's independent auditors for the fiscal year ended March 31, 1999. The change was approved by the Company's audit committee. The reason for the change to a global firm was to better position the Company for access to the public capital markets. The report of Kirkland, Russ, Murphy & Tapp, CPAs for the fiscal year ended March 31, 1999 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. The Company believes there were no disagreements with Kirkland, Russ, Murphy & Tapp, CPAs within the meaning of Instruction 4 to Item 304 of Regulation S-K on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure in connection with the audit of the Company's financial statements for the fiscal year ended March 31, 1999 or for any subsequent interim period, which disagreements if not resolved to their satisfaction would have caused Kirkland, Russ, Murphy & Tapp, CPAs to make reference to the subject matter of the disagreements in connection with its report. During the two most recent fiscal years and through present, there have been no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K) of the type required to be disclosed by that section. The Company had not consulted with Deloitte & Touche LLP regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements; or (ii) any matter that was either the subject matter of a disagreement (as defined in Item 304(a)(1)(v) of Regulation S-K and the related instructions) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K). A letter of Kirkland, Russ, Murphy & Tapp, CPA's was addressed to the Securities and Exchange Commission. Such letter states that such firm agrees with the statements made by the Company. PART III Reference is made to the Company's definitive information statement for the 2000 annual shareholders meeting involving the election of directors, which will be filed with the Commission within 120 days after the end of the fiscal year covered by this Report. The information required by these Items 9 through 12 and contained in such definitive information statement is incorporated herein by reference. PART IV Item 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following exhibits are filed with this report: 2.1 Agreement and Plan of Merger by and between NuMed Surgical, Inc. and Nutriceuticals.com Corporation, dated as of January 15, 1999. (1) 2.2 Agreement and Plan of Reorganization between the Registrant and Eric Egnet, dated March 31, 1999. (1) 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 or 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) 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. * 3.6 Articles and Plan of Merger of Becan Distributors, Inc. and DrugMax.com, Inc., filed March 29, 1000. * 3.7 Amended and Restated Bylaws, dated November 11, 1999. (5) 4.1 See Exhibits 3.1 to 3.7 for provisions of the Articles of Incorporation and Bylaws of the Company defining rights of holders of the Company's Common Stock. 4.2 Specimen of Stock Certificate. * 10.1 Employment Agreement by and between Nutriceuticals.com Corporation and Stephen M. Watters, dated as of April 1, 1999. (1) 10.2 Employment Agreement by and between Nutriceuticals.com Corporation and William L. LaGamba, dated January 1, 2000. (7) 10.3 Employment Agreement by and between Valley Drug Company and Ronald J. Patrick, dated April, 19, 2000. * 10.4 Employment Agreement by and between Valley Drug Company and Ralph A. Blundo, dated April 19, 2000. * 10.5 Consulting Agreement by and between Nutriceuticals.com Corporation and Jugal K. Taneja, dated as of April 1, 1999. (1) 10.6 Agreement between DrugMax.com, Inc. and Purchasepro.com, Inc., dated February 15, 2000. (7) 10.7 Loan and Security Agreement in favor of Merrill Lynch Business Financial Services, Inc. from the Company dated February 15, 2000. * 10.8 Security Agreement in favor of First Community Bank of America from the Company dated March 17, 2000. * 16.1 Letter of Kirkland, Russ, Murphy & Tapp, CPA's addressed to the Securities and Exchange Commission. (6) 21.1 Subsidiaries of DrugMax.com, Inc. * 27.1 Financial Data Schedule (for SEC use only). * 99.1 DrugMax.com, Inc.1999 Incentive and Non-Statutory Stock Option Plan. * * Filed herewith. (1) Incorporated by reference to the Company'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 the Company's Registration Statement on Form SB-2, filed on September 13, 1999, File No. 0-24362. (3) Incorporated by reference to the Company's Report on Form 8-K, filed April 6, 2000, File Number 0-24362. (4) Incorporated by reference to the Company's Report on Form 8-K, filed May 3, 2000, File Number 0-24362. (5) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form SB-2, filed on November 12, 1999, File No. 0-24362. (6) Incorporated by reference to the Company's Report on Form 8-K, filed February 8, 2000, File No. 0-24362. (7) Incorporated by reference to the Company's Form 10-KSB405, filed June 29, 2000, File No. 0-24362. (b) Reports on Form 8-K. During the 12 months ended March 31, 2000, the Company filed the following three (3) reports on Form 8-K. Form 8-K dated December 10, 1999, with respect to the Company's November 26, 1999 acquisition of Becan Distributors, Inc. Form 8-K dated February 8, 2000, with respect to the Company's change in Registrant's Certifying Accountants. Form 8-K dated April 6, 2000 with respect to the Company's March 20, 2000 acquisition of Desktop Corporation and VetMall, LLC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DRUGMAX.COM, INC. Dated: June 29, 2000 By: /s/ WILLIAM L. LAGAMBA ---------------------- William L. LaGamba, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ WILLIAM L. LAGAMBA Chief Executive Officer June 29, 2000 - ------------------------ and Director William L. LaGamba /s/ RONALD J. PATRICK Chief Financial Officer June 29, 2000 - ------------------------ and Director Ronald J. Patrick /s/ DR. HOWARD L. HOWELL Director June 29, 2000 - ------------------------ Dr. Howard L. Howell /s/ JEFFREY K. PETERSON Director June 29, 2000 - ------------------------ Jeffrey K. Peterson /s/ JUGAL K. TANEJA Director June 29, 2000 - ------------------------ Jugal K. Taneja /s/ STEPHEN M. WATTERS Director June 29, 2000 - ------------------------ Stephen M. Watters DRUGMAX.COM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report of Deloitte & Touche LLP F-2 Independent Auditors' Report of Kirkland, Russ, Murphy & Tapp F-3 Consolidated Balance Sheets as of March 31, 2000 and 1999 F-4 Consolidated Statements of Operations for the year ended March 31, 2000 and for the period from September 8, 1998 (date of inception) to March 31, 1999 F-5 Statement of Changes in Net Deficiency in Liquidation for the period from April 1, 1998 to September 7, 1998 F-6 Consolidated Statements of Stockholders' Equity for the years ended March 31, 2000 and 1999 F-7 Consolidated Statements of Cash Flows for the year ended March 31, 2000 and for the period from September 8, 1998 (date of inception) to March 31, 1999 F-8 Notes to Consolidated Financial Statements F-9-F-20 Independent Auditors' Report on Supplemental Schedule S-1 Supplemental Schedule - Valuation and Qualifying Accounts S-2
F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders DrugMax.com, Inc.: We have audited the accompanying consolidated balance sheet of DrugMax.com, Inc. and subsidiaries (the "Company") (formerly known as Nutriceuticals.com Corporation) as of March 31, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended March 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2000, and the results of its operations and its cash flows for the year ended March 31, 2000 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 13, the accompanying consolidated financial statements for the year ended March 31, 2000 have been restated. DELOITTE & TOUCHE LLP Certified Public Accountants Tampa, Florida June 26, 2000 (June 30, 2000 as to Note 13) F-2 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors Nutriceuticals.com Corporation: We have audited the accompanying consolidated balance sheet of Nutriceuticals.com Corporation, as of March 31, 1999, and the related consolidated statement of operations, stockholders' equity and cash flows for the period from September 8, 1998 (date of inception) to March 31, 1999, and the related statement of changes in net deficiency in liquidation for the period from April 1, 1998 to September 7, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nutriceuticals.com Corporation as of March 31, 1999, and results of its operations and its cash flows for the period from September 8, 1998 (date of inception) to March 31, 1999, and results of its changes in net deficiency in liquidation for the period from April 1, 1998 to September 7, 1998, in conformity with generally accepted accounting principles. /s/ KIRKLAND, RUSS, MURPHY & TAPP - --------------------------------- KIRKLAND, RUSS, MURPHY & TAPP Clearwater, Florida April 26, 1999 F-3 DRUGMAX.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 2000 and 1999
ASSETS 2000 1999 ------------ ------------ Current assets: Cash and cash equivalents $ 6,020,129 $ 56,986 Accounts receivable, net 4,106,105 9,278 Inventory 1,416,241 16,303 Due from affiliates 13,564 5,171 Prepaid expenses and other current assets 126,542 -- ------------ ------------ Total current assets 11,682,581 87,738 Property and equipment, net 693,340 47,500 Intangible assets, net 26,090,635 -- Notes receivable, net 37,614 -- Deposits 9,742 380 ------------ ------------ Total assets $ 38,513,912 $ 135,618 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,170,890 $ 80,186 Accrued expenses 442,598 17,505 Credit lines payable 2,391,095 -- Note payable 4,872 -- Due to affiliates 511,717 -- ------------ ------------ Total current liabilities 6,521,172 97,691 ------------ ------------ Commitments and contingencies (Note 8) Stockholders' equity: Preferred stock, $.001 par value; 2,000,000 shares authorized; no preferred shares issued or outstanding -- -- Common stock, $.001 par value; 24,000,000 shares authorized; 6,200,499 and 2,675,514 shares issued and outstanding 6,202 2,677 Additional paid-in capital 34,079,957 139,725 Accumulated deficit (2,093,419) (104,475) ------------ ------------ Total stockholders' equity $ 31,992,740 $ 37,927 ------------ ------------ Total liabilities and stockholders' equity $ 38,513,912 $ 135,618 ============ ============
See accompanying notes to consolidated financial statements. F-4 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 before other income and expenses (1,932,877) (106,236) ------------ ------------ Other income (expense): Interest income 144,340 1,761 Interest expense (107,095) -- Other expense (93,312) -- ------------ ------------ Total other income (expense) (56,067) 1,761 ------------ ------------ Net loss $ (1,988,944) $ (104,475) ============ ============ Basic and diluted net loss per share - 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-5 DRUGMAX.COM, INC. STATEMENT OF CHANGES IN NET DEFICIENCY IN LIQUIDATION For the Period from April 1, 1998 through September 7, 1998 Period from April 1, 1998 to September 7, 1998 ----------------- Decreases in net assets in liquidation: Professional fees $ (3,875) Office expense (60) --------- Decrease in net assets in liquidation (3,935) Beginning net liabilities in liquidation (8,663) --------- Ending net liabilities in liquidation $ (12,598) ========= Loss per share: Loss attributable to common stockholders $ (3,935) ========= Net loss per common share (basic and diluted) $ (.02) ========= Weighted average common shares outstanding (basic and diluted) 175,514 ========= See accompanying notes to consolidated financial statements. F-6 DRUGMAX.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended March 31, 2000 and March 31, 1999
Net Total Common Additional Accumulated Deficiency in Stockholders' Stock Paid-in 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 (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-7 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 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-8 DRUGMAX.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2000 AND 1999 NOTE 1 - BUSINESS AND HISTORY - ----------------------------- BUSINESS DrugMax.com, Inc. ("DrugMax") is a business-to-business on-line trade exchange for pharmaceuticals, over-the-counter products (OTC), health and beauty aids (HBA) and nutritional supplements. DrugMax.com, Inc. brings retailers, manufacturers, wholesalers and major end-users into a single, efficient marketplace for buying, selling and industry news. HISTORY DrugMax was originally incorporated on October 18, 1993, as a Nevada corporation under the name of NuMed Surgical, Inc. ("NuMed"). In March 1999, NuMed's name was changed to Nutriceuticals.com Corporation ("Nutriceuticals"). In January 2000, Nutriceuticals' name was changed to DrugMax. NuMed was engaged in the research, development and distribution of medical instruments and surgical supplies to the health care market since February 1991. Effective March 31, 1997, NuMed adopted a plan of liquidation in which it sold its major product line and subsequently disposed of all its operating assets by March 31, 1998. Effective March 1999, NuMed acquired all of the outstanding common stock of Nutriceuticals, which was organized in the State of Florida on September 8, 1998 (date of inception). Nutriceuticals is engaged in the retailing of nutritional supplements via the Internet. For accounting purposes, the acquisition has been treated as an acquisition of NuMed by Nutriceuticals and as a recapitalization of Nutriceuticals. Additionally, Nutriceuticals was merged into NuMed and NuMed changed its name to Nutriceuticals. Mr. Jugal K. Taneja, a principal shareholder and director of DrugMax, had beneficial ownership of approximately 28% of NuMed prior to the merger and approximately 21% of Nutriceuticals after the merger. As a result of the merger, each issued and outstanding share of Nutriceutical's common stock was converted into one share of NuMed's common stock. The results of operations of the consolidated companies are reflected as if the above transaction took place at September 8, 1998 (date of inception). Consequently, for comparative purposes, the consolidated financial statements have been presented as if the Company was a single entity for all periods presented and all significant intercompany accounts and transactions have been eliminated in consolidation. F-9 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------ PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of DrugMax (formerly known as Nutriceuticals and Numed) and its wholly-owned subsidiaries, Healthseek.com Corporation ("Healthseek"); Becan Distributors, Inc. and its subsidiary Discount RX, Inc. (collectively, "Becan"); Desktop Corporation ("Desktop"); and VetMall LLC ("VetMall"); (collectively, the "Company"). USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers cash on hand and amounts on deposit with financial institutions which have original maturities of three months or less to be cash and cash equivalents. ACCOUNTS RECEIVABLE Accounts receivable are due primarily from independent pharmacies via traditional distribution channels and from companies and individuals via e-commerce. INVENTORY Inventory is stated at the lower of cost of market. Cost is determined using the first-in, first-out basis of accounting. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Provision for depreciation is computed using the straight line method over the estimated useful lives ranging from three to seven years. Maintenance and repairs are charged to operations. Additions and betterments which extend the useful lives of property and equipment are capitalized. Upon retirement or disposal of the operating property and equipment, the cost and accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in operations. COMPUTER SOFTWARE In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". This SOP is effective for fiscal years beginning after December 15, 1998 and requires capitalization of certain costs of computer software developed or obtained for internal use. Computer software are stated at cost less accumulated amortization. Amortization is recorded using the straight-line method over an estimated useful life of three to five years. INTANGIBLE ASSETS Intangible assets consist primarily of the excess of cost over the fair value of net assets acquired (goodwill) relating to the acquisitions (see Note 2). The excess of cost over net assets acquired is amortized over 15 years for the F-10 acquisition of Becan and 5 years for the acquisitions of Desktop and VetMall using the straight-line method. Accumulated amortization totaled $485,046 at March 31, 2000. IMPAIRMENT OF LONG-LIVED ASSETS Periodically, the Company evaluates the recoverability of the net carrying value of its property and equipment and its intangible assets by comparing the carrying values to the estimated future undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The impairment write-down would be the difference between the carrying amounts and the fair value of these assets. A loss on impairment would be recognized by a charge to earnings. INCOME TAXES The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recorded or settled. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. EARNINGS (LOSS) PER COMMON SHARE Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. STOCK BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation", which is effective for fiscal years beginning after December 15, 1995. Under SFAS No. 123, the Company may elect to recognize stock-based compensation expense based on the fair value of the awards or to account for stock-based compensation under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and disclose in the consolidated financial statements the effects of SFAS No. 123 as if the recognition provisions were adopted. The Company has adopted the recognition provisions of APB Opinion No. 25. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of amounts reported in the consolidated financial statements has been determined by using available market information and appropriate valuation methodologies. The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. The fair value of long-term obligations approximates the carrying value, based on current market prices. REVENUE RECOGNITION The Company recognizes revenue when goods are shipped or when services are provided. F-11 NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 defers for one year the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The rule now will apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 137 permits early adoption as of the beginning of any fiscal quarter after its issuance. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, of firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not completed its evaluation of the impact of SFAS No. 133, if any, on the consolidated financial statements. NOTE 2 - ACQUISITIONS - --------------------- Effective March 31, 1999, the Company acquired Healthseek, a Massachusetts corporation. Healthseek is a health care community website providing information to health care professionals and consumers. The acquisition was accounted for using the purchase method of accounting. The Company acquired all of the common stock of Healthseek, in exchange for 100,000 (post October 1999 one-for-two reverse stock split) shares of voting common stock at $.25 per share and $10,000 cash. In consideration of the sale and transfer of the shares, the Company acquired the registered domain name Healthseek and all assets, copyrights and other documentation relating to the website and assumed all costs and expenses related to the ongoing maintenance of the website. Healthseek did not have significant historical assets, liabilities or revenues and expenses during its limited operating history. The purchase price was allocated to Healthseek's website. Healthseek is a wholly-owned subsidiary of the Company. On November 26, 1999, the Company acquired all the issued and outstanding capital stock of Becan, an Ohio corporation, incorporated in 1997, from Dynamic Health Products, Inc. ("Dynamic"), an affiliate of Jugal K. Taneja, a principal shareholder and director of the Company, in exchange for 2,000,000 shares of restricted common stock of the Company (with an estimated fair value of $10.00 per share) and $2,000,000 cash. Additional consideration of 1,000,000 shares of common stock of the Company was placed into escrow for future issuance to Dynamic, upon the attainment by Becan of certain financial targets for the fiscal years ending March 31, 2000 and 2001. Becan did not attain the financial target for the year ending March 31, 2000 and 500,000 shares were returned from escrow to the Company. Becan is a wholesale distributor of pharmaceutical products and to a lesser extent, over-the-counter drugs and health and beauty care products. On March 20, 2000, the Company acquired all the issued and outstanding capital stock of Desktop in exchange for 50,000 shares of the Company's common stock. In addition, the following additional consideration was paid: (i) $100,000 and 31,176 shares of the Company's common stock at $16.44 per share to satisfy obligations owed to HCT Capital Corp. ("HCT") by Desktop and VetMall LLC ("VetMall"), an entity owned 50% by Desktop, and (ii) 8,938 and 9,871 shares of the Company's common stock at $16.44 per share issued to Messrs. Fagala and Miller, respectively, to satisfy outstanding obligations of Desktop or VetMall. Desktop is an internet e-commerce solutions provider specializing in the design, development and delivery of technology solutions by providing custom programming services and web hosting services. VetMall was founded in June 1999 as a Nevada limited liability corporation known as VetMall LLC, which merged with VetMall, Inc. on March 20, 2000. The company is an internet-based consumer pet care product sales distributor. VetMall maintains a web site whereby consumers can order pet care products which are then shipped directly by the manufacturer. The products are primarily supplied by one vendor who is a 30% shareholder in VetMall. In addition, VetMall derives income from advertisers on its web site and from veterinarians subscribing to listing on its web site. F-12 The Desktop acquisition agreement specified that the purchase price would be adjusted based on changes in the audited liabilities of Desktop. The Company and the selling shareholders of Desktop are currently negotiating the amount of the purchase price adjustments as they have interpreted the definition of liabilities differently and, thus, the purchase price may be adjusted once an agreement is reached. As of March 31, 2000, the Company has recorded the purchase price related to the Desktop acquisition based on the 50,000 shares issued. In addition, upon (i) the closing of any initial public offering (the "IPO") of VetMall or its successors, (ii) the sale by the Company of all of the shares acquired from Messrs. Fagala and Miller and HCT, regardless of the form of such transaction, or (iii) the sale by VetMall of all or substantially all of its assets, the Company will either (A) issue to the sellers that number of shares of the VetMall common stock which, when multiplied by the closing price of VetMall's common stock on the date the IPO or the sale closes, exceeds $4,800,000, or (B) pay to the sellers 16% of 50% of the proceeds of the closing of a direct sale to a third party of substantially all of the assets of VetMall or its successors, whichever of (A) or (B) has a lower value based on the IPO or sales price of VetMall common stock and the closing price of VetMall's common stock on the date that the IPO is declared effective by the Securities and Exchange Commission or the closing of the sale has occurred. Simultaneously with the acquisition described above, the Company purchased from W.A. Butler ("Butler") 2,000 membership shares of VetMall, which shares constituted 20% of the issued and outstanding membership shares of VetMall, in exchange for the payment of $1,000,000 cash plus the issuance to Butler of 25,000 shares of Company common stock. As a result of the acquisitions described above, the Company owns through its ownership of Desktop, a 50% indirect interest in VetMall, together with a 20% direct interest in VetMall. The business combinations of Becan, Desktop and VetMall were accounted for by the purchase method of accounting in accordance with APB Opinion No. 16. The results of operations of the above named businesses are included in the consolidated financial statements from their respective purchase dates. The Company acquired the following assets and liabilities (net of cash received of $52,705) in the above business combinations: Accounts receivable $ 2,294,779 Inventory 1,211,378 Property and equipment 489,091 Other assets 100,589 Goodwill 26,572,760 Assumption of liabilities (5,364,049) ------------ Net value of purchased assets 25,304,548 Value of common stock issued (22,054,503) ------------ Cash paid for acquisitions $ 3,250,045 ============ The unaudited pro forma effect of these acquisitions on the Company's revenues, net loss and net loss per share, had the acquisitions occurred on September 8, 1998 and April 1, 1999 is as follows: FOR THE PERIOD FROM SEPTEMBER 8, 1998 FOR THE YEAR (DATE OF INCEPTION) ENDED THROUGH MARCH 31, 2000 MARCH 31, 1999 -------------- ---------------------- Revenues $57,726,515 $32,993,811 Net loss (8,104,135) (2,042,301) Basic and diluted net loss per share $ (2.09) $ (1.49) NOTE 3 - RECEIVABLES, NET - ------------------------- At March 31, 2000 and 1999, accounts receivable of the Company consist of the following: 2000 1999 ---------- ---------- Distribution $4,219,387 $ 9,278 Less allowance for doubtful accounts (113,282) -- ---------- ---------- Total $4,106,105 $ 9,278 ========== ========== In connection with the acquisition of Becan, the Company recorded a note receivable from a customer in the amount of $53,734. The note bears interest at 12%. In March 2000, a $16,120 allowance was recorded based on management's estimate of the amount which would be ultimately received. NOTE 4 - INVENTORIES - -------------------- Inventories at March 31, 2000 and 1999 consist of legend and generic drugs and nutritional supplements for resale. NOTE 5 - PROPERTY AND EQUIPMENT - ------------------------------- At March 31, 2000 and 1999 property and equipment consist of the following: 2000 1999 --------- --------- Furniture and equipment $ 254,130 $ -- Computer software, including website domain 460,433 50,000 Leasehold improvements 7,162 -- --------- --------- Total $ 721,725 $ 50,000 Accumulated depreciation and amortization (28,385) (2,500) --------- --------- Property and equipment, net $ 693,340 $ 47,500 ========= ========= F-13 NOTE 6 - INCOME TAXES - --------------------- The Company had no income tax expense for the year ended March 31, 2000 or for the period from September 8, 1998 through March 31, 1999. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities net of valuation reserves as of March 31, 2000 and 1999 are as follows: 2000 1999 --------- -------- Net operating losses $ 560,000 $ 47,000 Net operating losses - acquired 416,000 -- Use of cash basis method of accounting for income tax purposes (258,505) -- --------- -------- Net deferred tax asset 717,495 47,000 Valuation allowance (717,495) (47,000) --------- -------- Net deferred tax asset after valuation allowance $ -- $ -- ========= ======== SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets reported, if based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As such, a $717,495 and $47,000 valuation allowance have been established at March 31, 2000 and March 31, 1999, respectively. The net operating and acquired tax loss carry forward benefits expire in various years beginning in 2019. Due to the Company's acquisition of Desktop (see Note 2), the Company's ability to utilize the acquired net operating loss carry forward of $1,100,000 will be limited by IRC Section 382 to $113,000 per year. NOTE 7 - DEBT - ------------- On March 17, 2000 the Company signed a $1,000,000 line of credit agreement with First Community Bank of America. The total balance outstanding on this line of credit amounts to $339,078 as of March 31, 2000. Terms of the agreement provide for interest to be charged at 1% over the rate of interest (6.3% as of March 31, 2000) paid on the Company's $1,000,000 certificate of deposit used to collateralize the loan facility. The balance on the line of credit becomes due on October 1, 2000. Additionally, in March 2000, the Company entered into a line of credit with Merrill Lynch. The line of credit enables the Company to borrow a maximum of $5,000,000, with borrowings limited to 80% of eligible accounts receivable and 50% of inventory (capped at $1,000,000). As of March 31, 2000, the outstanding principal on the note was $2,052,017 and approximately $1,900,000 was available for borrowing. Terms of the agreement provide for interest to be charged at the rate of 30 day commercial paper, plus 2.5% (8.58% as of March 31, 2000). The Merrill Lynch line of credit expires February 28, 2001, and is subject to renewal annually thereafter subject to Merrill Lynch's consent. The Company also has a note payable which bears interest at 9.63% with a remaining balance of $4,872 at March 31, 2000. This note is due on June 5, 2000. F-14 NOTE 8 - COMMITMENTS AND CONTINGENCIES - -------------------------------------- OPERATING LEASES The Company has operating leases for facilities that expire at various dates through 2003. Certain leases provide an option to extend the lease term. Certain leases provide for payment by the Company of any increases in property taxes, insurance, and common area maintenance over a base amount and others provide for payment of all property taxes and insurance by the Company. Until March 31, 2000, Desktop leased office space in Dallas, Texas. Desktop has not renewed the lease, and pays $12,000 per month for the office space on a month-to-month basis. Desktop also leases various computer equipment with original lease terms ranging from three to five years. These leases expire at various dates through 2003. The monthly equipment rental expense is approximately $9,100. Future minimum lease payments, by year and in aggregate under non-cancelable operating leases, were the following at March 31, 2000: Year Ending March 31 -------------------- 2001 $ 174,233 2002 131,148 2003 62,766 --------- Total minimum lease payments $ 368,147 ========= Total rent expense for the periods ended March 31, 2000 and 1999 was approximately $29,000 and $0 respectively. LITIGATION The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of the claims that were outstanding as of March 31, 2000 should have a material adverse impact on its financial position or results of operations. F-15 NOTE 9 - STOCK AND BENEFIT PLANS - -------------------------------- The information regarding the Company's shares of common stock has been adjusted to give effect to (i) the one-for-fifty reverse split of the Company's common stock effected in March 1999, (ii) the two-for-one stock split in the form of a stock dividend effected in April 1999, and (iii) a one-for-two reverse stock split in October 1999. OFFERING On November 22, 1999, the Company successfully completed a public offering the ("Offering") of 1,380,000 shares of common stock at a price of $10.00 per share. Gross proceeds of the Offering were $13.8 million and net offering proceeds received by the Company were approximately $11.9 million, after payment of underwriting discounts and commissions and other offering expenses totaling $1,950,747. WARRANTS In connection with the Offering, and as additional compensation to the underwriters, the Company issued warrants for the purchase of 150,000 shares of common stock. The warrants will be exercisable, in whole or in part, between the first and fifth years, at an exercise price of $16.50. The underwriters shall have the option to require the Company to register the warrants and/or the common stock underlying the warrants. The warrants had an estimated fair market value of $1,038,000 on the date of issuance, which was determined under the Black-Scholes method, and were included in additional paid in capital along with other issuance costs of the Offering. On January 23, 2000, the Company granted a director a three-year warrant to purchase 200,000 shares of common stock at an exercise price of $16.40, which is equal to the 30 day weighted average of the stock price from January 23, 2000 to February 22, 2000. The grant was made as a result of the director acting as a guarantor of the $5,000,000 Merrill Lynch line of credit. The warrants had an estimated fair value of $1,937,016, which was determined using the Black-Scholes method. On February 15, 2000, the Company entered into an Agreement with Purchasepro.com, Inc. ("PPRO") wherein PPRO will design and develop a "sell-side" private e-marketplace, powered by PPRO, labeled to include the marks and logos of the Company. The custom e-marketplace will be utilized within the Company's site. PPRO's development and unlimited buyer license fee for private e-Marketplace will be issued in the form of 200,000 of the Company's warrants. Revenue sharing will take place on transactions and subscriptions resulting from the Company's marketplace. The warrants shall be exercisable, in whole or in part, during the term commencing on the date of project completion (the "Initial Exercise Date"), and ending at 5:00 p.m., Pacific Standard Time, six months after the date of completion (the "Exercise Period"), and shall be void thereafter. In consideration for the hosting, archiving, maintenance and recurring customization of the private e-Marketplace, the Company will guarantee PPRO at least $80,000 in annual transaction revenue. The Company plans to use the sell-side e-marketplace to primarily sell pharmaceuticals and dietary supplements as well as the value added services from PPRO's preferred providers. STOCK OPTIONS In August 1999, the Company's Board of Directors adopted a stock option plan (the "Plan"), which is subject to the approval by the Company's shareholders at its next annual meeting in August 2000. The Plan provides for the grant of incentive and nonqualified stock options to key employees, including officers and directors of the Company. Under the provisions of the Plan, all options, except for options granted to "greater-than-10%-stockholders," have an exercise price equal to the fair market value on the date of the grant and expire ten years after the grant date. The exercise price of options issued to "greater-than-10%-stockholders" shall not be less than 110% of the fair market value of the common stock on the date of the grant, and such options shall expire five years after the date of the grant. At March 31, 2000, options to acquire up to 400,000 shares of common stock may be granted pursuant to the Plan. Stock option activity is summarized as follows: WEIGHTED AVERAGE NUMBER OF EXERCISE INCENTIVE AND NON-QUALIFIED STOCK OPTIONS SHARES PRICE --------- -------- Outstanding March 31, 1999 -- $ -- Granted 261,800 13.08 Exercised -- -- Forfeited -- -- ------- -------- Outstanding March 31, 2000 261,800 $ 13.08 ======== ======== Outstanding options under the Plan vest over a one- to three-year period. As of March 31, 2000 no options were exercisable. The following is a summary of stock options outstanding and exercisable as of March 31, 2000: F-16 WEIGHTED AVERAGE EXERCISE OPTIONS REMAINING OPTIONS PRICE OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISABLE -------- ----------- ------------------------ ----------- $ 10.00 15,000 9.58 - 13.00 195,300 9.75 - 14.30 50,000 4.75 - 14.37 1,500 9.83 - ------- -------- 261,800 - ======= ======== Non-exercisable options as of March 31, 2000 become exercisable as follows: 2001 ............... 111,932 2002 ............... 74,934 2003 ............... 74,934 ----------- 261,800 =========== The Company applies APB No. 25 in accounting for its warrants and stock options. Accordingly, no compensation cost has been recognized for the warrants and options granted to employees and directors because the estimated price equaled or exceeded the fair market value on the date of the grant. Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, net loss and net loss per share would have increased as follows for the year ended March 31, 2000: Net Loss Net Loss Per Share ------------ ------- As reported $ (1,988,944) $ (0.51) 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: Dividend yield 0.00 % Option term 5-10 years Warrant term 3 years Expected volatility 97 % Risk-free interest rate 6.27%-6.56% F-17 NOTE 10 - RELATED PARTY TRANSACTIONS - ----------------------------------- In May 1999, 21st Century Healthcare Fund, LLC, an affiliate of a director of the Company, Jugal K. Taneja, loaned $50,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. In July 1999, Stephen M. Watters, the President of the Company, loaned $70,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. In August 1999, Carnegie Capital, Ltd., an affiliate of a director of the Company, Jugal K. Taneja, loaned $20,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. In August 1999, a director of the Company, Howard Howell D.D.S., loaned $50,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. Innovative Health Products, Inc. ("Innovative"), owned by Dynamic, is the supplier of substantially all of the manufactured dietary supplements and health and beauty care products sold by the Company. There presently is an agreement between the Company and Innovative for the fulfillment of the Company's customer orders. Dynamic is approximately 56% beneficially owned by Jugal K. Taneja, a director of the Company. In August 1999, Stephen M. Watters, the President of the Company, loaned $10,000 to the Company for the purpose of assisting the Company with its working capital needs. The principal sum, together with interest on the unpaid principal balance at an annual rate equal to prime plus one percent, was due and payable on demand at any time following the earlier to occur of either (i) a public offering of the Company's common stock, or (ii) December 31, 1999. This note has since been repaid. F-18 NOTE 11 - SEGMENT INFORMATION - ----------------------------- The Company adopted SFAS No. 131, "Disclosures About Segments of Enterprise and Related Information," which established standards for reporting information about a Company's operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the Segment. During the year ended March 31, 2000, the Company operated two industry segments: wholesale distribution and computer software development. For the fiscal year ended March 31, 1999, the Company operated only in the wholesale distribution segment. The following table reports financial data that management uses in its business segment analysis. Amounts shown below are as of and for the year ended March 31, 2000. Revenue Distribution $ 21,048,147 Software Development 2,400 ------------ Total $ 21,050,547 ============ Gross Profit Distribution $ 141,376 Software Development 2,400 ------------ Total $ 143,776 ============ Operating loss before other income and expenses Distribution $ (1,898,580) Software Development (34,297) ------------ Total $ (1,932,877) ============ Assets Distribution $ 38,666,522 Software Development 105,895 ------------ Total $ 38,772,417 ============ Capital expenditures Distribution $ 182,634 Software Development -- ------------ Total $ 182,634 ============ NOTE 12 - SUBSEQUENT EVENTS - --------------------------- On April 19, 2000, DrugMax Acquisition Corporation ("Buyer"), a wholly owned subsidiary of the Company, Valley Drug Company ("Valley"), Ronald J. Patrick ("Patrick") and Ralph A. Blundo ("Blundo", and together with Patrick, the "Sellers") signed a Merger Purchase Agreement (the "Agreement"). In connection with the merger, Messrs. Patrick and Blundo, the sole shareholders of Valley, received an aggregate of 226,666 shares of the Company's common stock and cash in the amount of $1,700,000. Until such time as their shares of the Company may be sold pursuant to Rule 144 of the Securities and Exchange Commission, Messrs. Patrick and Blundo were granted the right to include their shares in any registration filed by the Company. Concurrent with the merger, Messrs. Patrick and Blundo each deposited 11,333 shares of the Company's common stock with an escrow agent (the "Holdback Shares"). If the stockholders' equity of Valley on April 19, 2000 is less than $541,827, the Company will have the right to direct the escrow agent to release some or all of the Holdback Shares back to the Company. If the stockholders' equity of Valley on April 19, 2000 is greater than $541,827, the escrow agent will release all of the Holdback Shares to Messrs. Patrick and Blundo. The amount of shareholders' equity will be based on audited financial statements as of April 19, 2000. The Company will account for the acquisition of Valley as a purchase. The unaudited pro forma effect of the Valley acquisition on the Company's renvenues, net loss and net loss per share, had the acquisition occurred on September 8, 1998 and April 1, 1999 is shown below. For purposes of these pro forma computations (i) Valley's year end financial statements for their years ended December 31, 1999 and 1998 were used and (ii) Valley's results were combined with the pro forma data shown in Note 2. FOR THE PERIOD FOR THE YEAR FROM SEPTEMBER 8, 1998 ENDED (DATE OF INCEPTION) THROUGH MARCH 31, 2000 MARCH 31, 1999 -------------- --------------------------- Revenues $108,298,702 $80,034,293 Net loss (7,681,947) (1,205,450) Basic and diluted net loss per share $ (1.98) $ (.88) On April 19, 2000, Desktop distributed all of its shares of VetMall to DrugMax, resulting in DrugMax then directly owning 70% of VetMall. Subsequent to March 31, 2000, VetMall ceased selling web site subscriptions to veterinarians in order to focus its efforts on the development of its new web site. F-19 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-20 INDEPENDENT AUDITORS' REPORT To the Stockholders DrugMax.com, Inc.: We have audited the consolidated financial statements of DrugMax.com, Inc. and subsidiaries (the "Company") (formerly known as Nutriceuticals.com Corporation) as of and for the year ended March 31, 2000, and have issued our report thereon dated June 26, 2000 (June 30, 2000 as to Note 13) (included elsewhere in this Form 10-KSB/A). Our audit also included the accompanying consolidated financial statement schedule. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Certified Public Accountants Tampa, Florida June 26, 2000 S-1 DRUGMAX.COM, INC. AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts For the Year Ended March 31, 2000 and the Period from September 8, 1998 (date of inception) to March 31, 1999
Balance Charged to Charged to Balance Beginning of Costs and Other at End Description Period Expenses Accounts Deductions of Period Period from September 8, 1998 (date of inception) to March 31, 1999: Allowance for doubtful accounts $ -- $ -- $ -- $ -- $ -- Year ended March 31, 2000: Allowance for doubtful accounts $ -- $ 99,151 $ 14,131 $ -- $113,282 Allowance for doubtful notes receivable $ -- $ 16,120 $ -- $ -- $ 16,120
S-2 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 Agreement and Plan of Merger by and between NuMed Surgical, Inc. and Nutriceuticals.com Corporation, dated as of January 15, 1999. (1) 2.2 Agreement and Plan of Reorganization between the Registrant and Eric Egnet, dated March 31, 1999. (1) 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 or 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) 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. * 3.6 Articles and Plan of Merger of Becan Distributors, Inc. and DrugMax.com, Inc., filed March 29, 1000. * 3.7 Amended and Restated Bylaws, dated November 11, 1999. (5) 4.1 See Exhibits 3.1 to 3.7 for provisions of the Articles of Incorporation and Bylaws of the Company defining rights of holders of the Company's Common Stock. 4.2 Specimen of Stock Certificate. * 10.1 Employment Agreement by and between Nutriceuticals.com Corporation and Stephen M. Watters, dated as of April 1, 1999. (1) 10.2 Employment Agreement by and between Nutriceuticals.com Corporation and William L. LaGamba, dated January 1, 2000. (7) 10.3 Employment Agreement by and between Valley Drug Company and Ronald J. Patrick, dated April, 19, 2000. * 10.4 Employment Agreement by and between Valley Drug Company and Ralph A. Blundo, dated April 19, 2000. * 10.5 Consulting Agreement by and between Nutriceuticals.com Corporation and Jugal K. Taneja, dated as of April 1, 1999. (1) 10.6 Agreement between DrugMax.com, Inc. and Purchasepro.com, Inc., dated February 15, 2000. (7) 10.7 Loan and Security Agreement in favor of Merrill Lynch Business Financial Services, Inc. from the Company dated February 15, 2000. * 10.8 Security Agreement in favor of First Community Bank of America from the Company dated March 17, 2000. * 16.1 Letter of Kirkland, Russ, Murphy & Tapp, CPA's addressed to the Securities and Exchange Commission. (6) 21.1 Subsidiaries of DrugMax.com, Inc. * 27.1 Financial Data Schedule (for SEC use only). * 99.1 DrugMax.com, Inc.1999 Incentive and Non-Statutory Stock Option Plan. * * Filed herewith. (1) Incorporated by reference to the Company'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 the Company's Registration Statement on Form SB-2, filed on September 13, 1999, File No. 0-24362. (3) Incorporated by reference to the Company's Report on Form 8-K, filed April 6, 2000, File Number 0-24362. (4) Incorporated by reference to the Company's Report on Form 8-K, filed May 3, 2000, File Number 0-24362. (5) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form SB-2, filed on November 12, 1999, File No. 0-24362. (6) Incorporated by reference to the Company's Report on Form 8-K, filed February 8, 2000, File No. 0-24362. (7) Incorporated by reference to the Company's Form 10-KSB405, filed June 29, 2000, File No. 0-24362. EX-3.5 2 0002.txt EXHIBIT 3.5 FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF NEVADA ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF NUTRICEUTICALS.COM CORPORATION JAN 11 2000 No. C12813-93 - ------------------------------ /s/ Dean Heller DEAN HELLER, SECRETARY OF STATE Pursuant to the provisions of the Nevada Revised Statutes, the undersigned corporation does hereby adopt these Articles of Amendment to the Articles of Incorporation, and the undersigned officers do hereby certify individually and on behalf of the undersigned corporation as follows: 1. The name of the corporation is Nutriceuticals.com Corporation (the "Company"). The Articles of Incorporation of this Corporation were filed by the Department of the State of Nevada and became effective on October 18, 1993. 2. A new Article One to the Articles of Incorporation of this Corporation shall be as follows: ARTICLE ONE The name of the corporation is DrugMax.com, Inc. 3. This Amendment was recommended by the Board of Directors to the Corporation's shareholders on December 6, 1999. 4. On January 11, 2000, the holders of a majority of the outstanding shares of Common Stock of the Corporation, the only class of securities outstanding, adopted this amendment to the Corporation's Articles of Incorporation at a special, duly called and convened meeting of such shareholders. The number of votes cast for the amendment by the shareholders was sufficient for approval. IN WITNESS WHEREOF, the Company has caused these Articles of Amendment to the Articles of Incorporation to be executed this 11th day of January, 2000. NUTRICEUTICALS.COM CORPORATION By: /s/ Stephen M. Watters ----------------------------- Stephen M. Watters, President By: /s/ William L. LaGamba ----------------------------- William L. LaGamba, Secretary EX-3.6 3 0003.txt EXHIBIT 3.6 ARTICLES AND PLAN OF MERGER OF BECAN DISTRIBUTORS, INC. AND DRUGMAX.COM, INC. To the Secretary of State of the State of Nevada Pursuant to the provisions of Chapter 92A, Nevada Revised Statutes, the domestic corporation and the foreign corporation herein named do hereby submit the following Articles of Merger. 1. The following is the Plan of Merger for merging Becan Distributors, Inc. with and into DrugMax.com, Inc. a. DrugMax.com, Inc., which is a business corporation of the State of Nevada and is the parent corporation and the owner of all the outstanding shares of Becan Distributors, Inc, which is a business corporation of the State of Ohio and the subsidiary corporation, hereby merges Becan Distributors, Inc. into DrugMax.com, Inc., pursuant to the provisions of Chapter 92A, Nevada Revised Statutes and pursuant to the provisions of the laws of the jurisdiction of organization of DrugMax.com, Inc. b. The jurisdiction of organization of Becan Distributors, Inc. is the State of Ohio. The jurisdiction of organization of DrugMax.com, Inc. is the State of Nevada. c. The separate existence of Becan Distributors, Inc. shall cease at the effective time of the merger pursuant to the provisions of Chapter 92A, Nevada Revised Statutes, and pursuant to the provisions of the Laws of the jurisdiction of its organization; and DrugMax.com, Inc. shall continue its existence as the surviving corporation pursuant to the provisions of Chapter 92A, Nevada Revised Statues. d. The issued shares of Becan Distributors, Inc. shall not be converted in any manner, but each said share which is issued as of the effective time of the merger shall be surrendered and extinguished. e. The Board of Directors and the proper officers of DrugMax.com, Inc. shall not be converted in any manner, but each said share which is issued as of the effective time of the merger shall be surrendered and extinguished. 2. The said Plan of Merger has been adopted by the Board of Directors of Becan Distributors, Inc. and of DrugMax.com, Inc. DrugMax.com, Inc., is the owner of all of the outstanding shares of Becan Distributors, Inc. Approval by the stockholders of DrugMax.com, Inc. was not required. 3. The merger of Becan Distributors, Inc. with and into DrugMax.com, Inc. is permitted by the laws of the jurisdiction or organization of Becan Distributors, Inc. and has been authorized in compliance with the said laws. 4. DrugMax.com, Inc., as the owner of all of the outstanding shares of Becan Distributors, Inc., has waived the requirements of mailing a copy of the Plan of Merger to itself. Signed on March 29, 2000 Becan Distributors, Inc. By: /s/ William LaGamba ----------------------------- Name: William LaGamba Title: Vice President By: /s/ Stephen M. Watters ----------------------------- Name: Stephen M. Watters Title: Secretary DrugMax.com, Inc. By: /s/ Stephen Watters ----------------------------- Name: Stephen Watters Title: President By: /s/ William LaGamba ----------------------------- Name: William LaGamba Title: Secretary EX-4.2 4 0004.txt EXHIBIT 4.2
[GRAPHIC] - ------------------------------------------------------------------------------------------------------------------------------------ NUTRICEUTICALS.COM CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA 48,000,000 AUTHORIZED SHARES $.001 PAR VALUE [GRAPHIC] [GRAPHIC] NUMBER THIS CERTIFICATE REFLECTS A NAME CHANGE SHARES 10123 TO DRUGMAX.COM, INC. EFFECTIVE 01/11/00 -40,000- CUSIP 262240 10 4 ------------------------- THIS CERTIFIES THAT GARY E. MARKMAN XXXXXXXXXXXXXXXXXXX ------------------------- SEE REVERSE FOR CERTAIN DEFINITIONS Is The Owner of ***FORTY THOUSAND*** *40,000******** **40,000******* ***40,000****** FULLY PAID AND NON-ASSESSABLE SHARES OF $.001 PAR VALUE COMMON STOCK OF ****40,000***** *****40,000**** NUTRICEUTICALS.COM CORPORATION transferable only on the books of the Company in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and Registrar. IN WITNESS WHEREOF, the said Company has caused this Certificate to be executed by the facsimile signatures of its duly authorized officers and to be sealed with the facsimile seal of the Company. Dated: 04/04/2000 [GRAPHIC] /s/ William L. LaGamba NUTRICEUTICALS.COM CORPORATION /s/ Stephen M. Watters SECRETARY CORPORATE PRESIDENT SEAL NEVADA COUNTERSIGNED AND REGISTERED: American Securities Transfer & Trust, Inc. P.O. Box 1596 Denver, Colorado 80201 By /s/ not legible ------------------------------------------------- Transfer Agent & Registrar Authorized Signature - ------------------------------------------------------------------------------------------------------------------------------------
NUTRICEUTICALS.COM CORPORATION The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -.....Custodian... TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act...................... in common (State)
Additional abbreviations may also be used though not in the above list. - -------------------------------------------------------------------------------- For Value Received,_______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [ ] THE SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED (THE "ACT"), AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY, AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND THEY MAY NOT BE SOLD, TRANSFERRED, MADE SUBJECT TO A SECURITY INTEREST, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNLESS AND UNTIL REGISTERED UNDER THE ACT, OR AN OPINION OF COUNSEL FOR THE COMPANY IS RECEIVED THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT. __________________________________________________________________________Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________attorney-in-fact to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated ________________________ __________________________________________________________________ __________________________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed: ________________________________ The signature(s) must be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. EX-10.3 5 0005.txt EXHIBIT 10.3 EMPLOYMENT AGREEMENT RONALD J. PATRICK This Employment Agreement (this "Agreement") is made as of April 19, 2000 by Valley Drug Company, an Ohio corporation (the "Employer"), and Ronald J. Patrick, an individual resident in Pennsylvania (the "Executive"). WITNESSETH 1. EMPLOYMENT. The Employer hereby employs the Employee and the Employee hereby accepts such employment, upon the terms and subject to the conditions set forth in this Agreement. 2. TERM. The term of the employment under this Agreement shall be for a three-year period beginning as of April 19, 2000 and terminating on April 18, 2003, unless such employment is otherwise terminated as provided in paragraphs 8 and 9 of this Agreement. 3. COMPENSATION; REIMBURSEMENT, OTHER BENEFITS (a) The basic compensation to the Employee shall be payable semi-monthly based upon a calendar-year annual base salary of $125,000 (the "Annual Base Salary"). Such salary shall be subject to an annual performance review but any adjustment shall not result in an annual salary less than the Annual Base Salary. The Employee shall also be reimbursed for all reasonable expenses incurred on behalf of the Employer. (b) The Employee shall be entitled to such other benefits as the Board of Directors and/or any compensation and stock option committee of the Board of Directors may from time to time provide to him. 4. DUTIES. The Employee is engaged as the Chief Financial Officer, Secretary and Treasurer of the Employer, and he shall have such duties consistent with such offices as may from time to time be reasonably assigned to him by the Board of Directors of the Employer. Employee's office shall be located at the Employer's facilities in Youngstown, Ohio. 5. EXTENT OF SERVICES. During the term of his employment under this Agreement, the Employee shall devote such time and efforts to the business of the Employer as may be reasonably necessary in the normal course of business. 6. VACATION AND DAYS OFF. The Employee shall be entitled to such vacation time during each fiscal year of the Employer as he may qualify for, in accordance with any vacation policy from time to time established by the Employer's Board of Directors. Notwithstanding the foregoing, the Employee shall be entitled to an annual vacation of not less than four (4) weeks, during which time his compensation shall be paid in full. 7. DISABILITY, ILLNESS AND INCAPACITY. (a) During the term of this Agreement, for any period of disability, illness or incapacity which renders the Employee at least temporarily unable to perform the services required under this Agreement, the Employee shall receive his full compensation as set forth in paragraph 3 of this Agreement, provided, however, if the Employee's disability, illness or incapacity extends beyond a period of ninety (90) day period, to any further compensation under paragraph 3(a) until he returns to a full-time service hereunder, but he shall be entitled only to such disability payments as may be provided by a disability insurance policy or policies, if any, purchased by the Employer. (b) Successive periods of disability, illness or incapacity will be considered separate periods unless the later period of disability, illness or incapacity is due to the same or related cause. (c) If and when the period of disability, illness or incapacity of the Employee totals ninety (90) days, his employment with the Employer will terminate. Notwithstanding the foregoing, if the Employee and the Employer agree, the Employee may thereafter be employed by the Employer upon such terms as may be mutually acceptable. (d) Any dispute regarding the existence, extent or continuance of the disability, illness or incapacity shall be resolved by the determination of a majority of three competent doctors who are not employees of the Employer, one of which shall be selected by the Employer, one of which shall be selected by the Employee and a third selected by the other two doctors. The Employer shall pay the doctor's fees and other charges associated with such determination. 8. DEATH. All rights of the Employee hereunder, shall terminate upon his death, except that the Employer shall pay to the estate of the Employee such compensation and other amounts as would otherwise have been payable to the Employee through the end of the month in which his death occurs. The Employer shall have no additional financial obligation under this Agreement to the Employee or his estate. 9. OTHER TERMINATION. (a) The Employer may terminate the employment of the Employee hereunder without notice for any of the following reasons: (i) The Employee's failure to promptly and adequately perform the duties assigned to him by the Employer pursuant to paragraph 4 above, including, but not limited to, failure to follow the reasonable direction of the Board of Directors of the Employer, or those of any supervisors or superiors of the Employee, provided, however, that the Employer shall 2 give the Employee written notice specifying the area in which the Employee has failed to promptly and adequately perform his duties hereunder and Employee shall have thirty (30) days after receipt thereof to improve his employment to the reasonable satisfaction of the Employer. (ii) The Employee's material breach of any provision of this agreement; or (iii) "Good cause", as defined below. (b) The term "good cause" as used in this Agreement includes, but is not necessarily limited to, habitual absenteeism, a pattern of conduct which tends to hold the Employer up to ridicule in the community, conviction of a felony or any crime of moral turpitude, abuse of, or substantial dependence on, as reasonably determined by the Board of Directors of the Employer, any addictive substance, including but not limited to alcohol, amphetamines, barbiturates, methadone, cannabis, cocaine, PCP, THC, LSD, or other illegal or narcotic drugs. If the Employee disputes any determination of abuse or substantial dependence made by the Board of Directors, the parties hereto agree to abide by the decision of a panel of three physicians who are not employees of the Employer, one of which shall be selected by the Employer, one of which shall be selected by the Employee and a third selected by the other two physicians. The Employee agrees to make himself available for and submit to examinations by such physicians as may be directed by the Employer. The Employee's failure to submit to any such examination shall constitute a material breach of this Agreement. (c) The Employee may terminate this Agreement for "Good Reason". For purposes of this Agreement, Good Reason means (i) a request by the Employer for the Employee to relocate to a facility more than 50 miles form Youngstown, Ohio or (ii) the Employer's material breach of any of its obligations under this Agreement or (iii) the shareholder sells more than 505 of the voting securities of the Employer. (d) If the Employee's employment with the Employer is terminated pursuant to paragraph 9(a), the Employer shall pay to the Employee any compensation earned but not paid to the Employee prior to such termination. Such payment shall be in full and complete discharge of any and all liabilities or obligations of the Employer to the Employee hereunder, and the Employee shall be entitled to no further benefits under this Agreement, except as otherwise specifically provided in the last sentence of paragraph 3(a) and in paragraph 3(b) of this Agreement. If the Employee's employment with the Employer is terminated by the Employer for a reason other than as provided in paragraph 9(a) or by the Employee pursuant to paragraph 9(c), the Employer will compensate the Employee, as severance pay, the Annual Base Salary for the remaining term of this Agreement. Such severance pay will be paid to the Employee at the date of termination. 10. CONFIDENTIALITY. The Employee agrees to keep in strict secrecy and confidence any and all information the Employee assimilates or to which he has access during his employment by the Employer and which has not been publicly disclosed and is not a matter of common knowledge in the fields of work of the Employer. The Employee agrees that both during and after the term of his employment by the Employer, he will not, without the prior written consent 3 of the Employer, disclose any such confidential information to any other person, partnership, joint venture, company, corporation or other organization. 11. WAIVER. The waiver by the Employer of a breach by the Employee of any of the provisions of this Agreement shall not be construed as a waiver of any subsequent breach by the Employee. 12. BINDING EFFECT; ASSIGNMENT. The rights and obligations of the Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Employee. This agreement is a personal employment contract and the rights, obligations and interests of the Employee hereunder may not be sold, assigned, transferred, pledged or hypothecated. 13. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and supersedes all prior agreements and understanding, oral or written with respect to the subject matter hereof. This Agreement may be changed only by an agreement in writing signed by both parties. 14. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretations of this Agreement. 15. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Ohio. 16. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by facsimile, email, or by certified or registered mail, first class, return receipt requested, to the parties at the following addresses, or such other address that a party may hereafter give notice to the other party as provided herein: If to the Employer: Valley Drug Company 318 W. Boardman Street Youngstown, Ohio 44507 Attention: Chairman of the Board (303) 744-2822 With a copy to: DrugMax.com, Inc. 12505 Starkey Road, Suite A Largo, Florida 33773 Attention: William LaGamba, If to the Employee: Ronald J. Patrick 3458 Carmela Drive New Castle, Pennsylvania 16105 (303) 744-2822 4 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date above first written above. EMPLOYER: VALLEY DRUG COMPANY By: /s/ RALPH A. BLUNDO ------------------------ Title: PRESIDENT --------------------- EXECUTIVE: RONALD J. PATRICK /s/ RONALD J. PATRICK - ---------------------------- 5 EX-10.4 6 0006.txt EXHIBIT 10.4 EMPLOYMENT AGREEMENT RALPH A. BLUNDO This Employment Agreement (this "Agreement") is made as of April 19, 2000 by Valley Drug Company, an Ohio corporation (the "Employer"), and Ralph A. Blundo, an individual resident in Ohio (the "Executive"). WITNESSETH 1. EMPLOYMENT. The Employer hereby employs the Employee and the Employee hereby accepts such employment, upon the terms and subject to the conditions set forth in this Agreement. 2. TERM. The term of the employment under this Agreement shall be for a three-year period beginning as of ApriL 19, 2000 and terminating on April 18, 2003, unless such employment is otherwise terminated as provided in paragraphs 8 and 9 of this Agreement. 3. COMPENSATION; REIMBURSEMENT, OTHER BENEFITS (a) The basic compensation to the Employee shall be payable semi-monthly based upon a calendar-year annual base salary of $125,000 (the "Annual Base Salary"). Such salary shall be subject to an annual performance review but any adjustment shall not result in an annual salary less than the Annual Base Salary. The Employee shall also be reimbursed for all reasonable expenses incurred on behalf of the Employer. (b) The Employee shall be entitled to such other benefits as the Board of Directors and/or any compensation and stock option committee of the Board of Directors may from time to time provide to him. 4. DUTIES. The Employee is engaged as the President of the Employer, and he shall have such duties consistent with such offices as may from time to time be reasonably assigned to him by the Board of Directors of the Employer. Employee's office shall be located at the Employer's facilities in Youngstown, Ohio. 5. EXTENT OF SERVICES. During the term of his employment under this Agreement, the Employee shall devote such time and efforts to the business of the Employer as may be reasonably necessary in the normal course of business. 6. VACATION AND DAYS OFF. The Employee shall be entitled to such vacation time during each fiscal year of the Employer as he may qualify for, in accordance with any vacation policy from time to time established by the Employer's Board of Directors. Notwithstanding the foregoing, the Employee shall be entitled to an annual vacation of not less than four (4) weeks, during which time his compensation shall be paid in full. 7. DISABILITY, ILLNESS AND INCAPACITY. (a) During the term of this Agreement, for any period of disability, illness or incapacity which renders the Employee at least temporarily unable to perform the services required under this Agreement, the Employee shall receive his full compensation as set forth in paragraph 3 of this Agreement, provided, however, if the Employee's disability, illness or incapacity extends beyond a period of ninety (90) day period, to any further compensation under paragraph 3(a) until he returns to a full-time service hereunder, but he shall be entitled only to such disability payments as may be provided by a disability insurance policy or policies, if any, purchased by the Employer. (b) Successive periods of disability, illness or incapacity will be considered separate periods unless the later period of disability, illness or incapacity is due to the same or related cause. (c) If and when the period of disability, illness or incapacity of the Employee totals ninety (90) days, his employment with the Employer will terminate. Notwithstanding the foregoing, if the Employee and the Employer agree, the Employee may thereafter be employed by the Employer upon such terms as may be mutually acceptable. (d) Any dispute regarding the existence, extent or continuance of the disability, illness or incapacity shall be resolved by the determination of a majority of three competent doctors who are not employees of the Employer, one of which shall be selected by the Employer, one of which shall be selected by the Employee and a third selected by the other two doctors. The Employer shall pay the doctor's fees and other charges associated with such determination. 8. DEATH. All rights of the Employee hereunder, shall terminate upon his death, except that the Employer shall pay to the estate of the Employee such compensation and other amounts as would otherwise have been payable to the Employee through the end of the month in which his death occurs. The Employer shall have no additional financial obligation under this Agreement to the Employee or his estate. 9. OTHER TERMINATION. (a) The Employer may terminate the employment of the Employee hereunder without notice for any of the following reasons: (i) The Employee's failure to promptly and adequately perform the duties assigned to him by the Employer pursuant to paragraph 4 above, including, but not limited to, failure to follow the reasonable direction of the Board of Directors of the Employer, or those of any supervisors or superiors of the Employee, provided, however, that the Employer shall 2 give the Employee written notice specifying the area in which the Employee has failed to promptly and adequately perform his duties hereunder and Employee shall have thirty (30) days after receipt thereof to improve his employment to the reasonable satisfaction of the Employer. (ii) The Employee's material breach of any provision of this agreement; or (iii) "Good cause", as defined below. (b) The term "good cause" as used in this Agreement includes, but is not necessarily limited to, habitual absenteeism, a pattern of conduct which tends to hold the Employer up to ridicule in the community, conviction of a felony or any crime of moral turpitude, abuse of, or substantial dependence on, as reasonably determined by the Board of Directors of the Employer, any addictive substance, including but not limited to alcohol, amphetamines, barbiturates, methadone, cannabis, cocaine, PCP, THC, LSD, or other illegal or narcotic drugs. If the Employee disputes any determination of abuse or substantial dependence made by the Board of Directors, the parties hereto agree to abide by the decision of a panel of three physicians who are not employees of the Employer, one of which shall be selected by the Employer, one of which shall be selected by the Employee and a third selected by the other two physicians. The Employee agrees to make himself available for and submit to examinations by such physicians as may be directed by the Employer. The Employee's failure to submit to any such examination shall constitute a material breach of this Agreement. (c) The Employee may terminate this Agreement for "Good Reason". For purposes of this Agreement, Good Reason means (i) a request by the Employer for the Employee to relocate to a facility more than 50 miles form Youngstown, Ohio or (ii) the Employer's material breach of any of its obligations under this Agreement or (iii) the shareholder sells more than 505 of the voting securities of the Employer. (d) If the Employee's employment with the Employer is terminated pursuant to paragraph 9(a), the Employer shall pay to the Employee any compensation earned but not paid to the Employee prior to such termination. Such payment shall be in full and complete discharge of any and all liabilities or obligations of the Employer to the Employee hereunder, and the Employee shall be entitled to no further benefits under this Agreement, except as otherwise specifically provided in the last sentence of paragraph 3(a) and in paragraph 3(b) of this Agreement. If the Employee's employment with the Employer is terminated by the Employer for a reason other than as provided in paragraph 9(a) or by the Employee pursuant to paragraph 9(c), the Employer will compensate the Employee, as severance pay, the Annual Base Salary for the remaining term of this Agreement. Such severance pay will be paid to the Employee at the date of termination. 10. CONFIDENTIALITY. The Employee agrees to keep in strict secrecy and confidence any and all information the Employee assimilates or to which he has access during his employment by the Employer and which has not been publicly disclosed and is not a matter of common knowledge in the fields of work of the Employer. The Employee agrees that both during and after the term of his employment by the Employer, he will not, without the prior written consent 3 of the Employer, disclose any such confidential information to any other person, partnership, joint venture, company, corporation or other organization. 11. WAIVER. The waiver by the Employer of a breach by the Employee of any of the provisions of this Agreement shall not be construed as a waiver of any subsequent breach by the Employee. 12. BINDING EFFECT; ASSIGNMENT. The rights and obligations of the Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Employee. This agreement is a personal employment contract and the rights, obligations and interests of the Employee hereunder may not be sold, assigned, transferred, pledged or hypothecated. 13. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and supersedes all prior agreements and understanding, oral or written with respect to the subject matter hereof. This Agreement may be changed only by an agreement in writing signed by both parties. 14. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretations of this Agreement. 15. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Ohio. 16. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by facsimile, email, or by certified or registered mail, first class, return receipt requested, to the parties at the following addresses, or such other address that a party may hereafter give notice to the other party as provided herein: If to the Employer: Valley Drug Company 318 W. Boardman Street Youngstown, Ohio 44507 Attention: Chairman of the Board (303) 744-2822 With a copy to: DrugMax.com, Inc. 12505 Starkey Road, Suite A Largo, Florida 33773 Attention: William LaGamba, If to the Employee: Ralph A. Blundo 136 East Fairfield Drive New Castle, Pennsylvania 16105 4 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date above first written above. EMPLOYER: VALLEY DRUG COMPANY By: /s/ RONALD J. PATRICK ------------------------ Title: SECRETARY - TREASURER --------------------- EXECUTIVE: RALPH A. BLUNDO /s/ RALPH A. BLUNDO - ---------------------------- 5 EX-10.7 7 0007.txt EXHIBIT 10.7 MERRILL LYNCH WCMA(R) LOAN AND SECURITY AGREEMENT WCMA LOAN AND SECURITY AGREEMENT NO. 833-07H26 ("Loan Agreement") dated as of February 15, 2000, between DRUGMAX.COM INC. F/K/A NUTRICEUTICALS.COM CORPORATION, a corporation organized and existing under the laws of the State of Nevada having its principal office at 12505 Starkey Road, Suite A, Largo, FL 33773 ("Customer"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 222 North LaSalle Street, Chicago, IL 60601 ("MLBFS"). In accordance with that certain WORKING CAPITAL MANAGEMENT(R) ACCOUNT AGREEMENT NO. 833-07H26 ("WCMA Agreement") between Customer and MLBFS' affiliate, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S"), Customer has subscribed to the WCMA Program described in the WCMA Agreement. The WCMA Agreement is by this reference incorporated as a part hereof. In conjunction therewith and as part of the WCMA Program, Customer has requested that MLBFS provide, and subject to the terms and conditions herein set forth MLBFS has agreed to provide, a commercial line of credit for Customer (the "WCMA Line of Credit"). Accordingly, and in consideration of the premises and of the mutual covenants of the parties hereto, Customer and MLBFS hereby agree as follows: ARTICLE I. DEFINITIONS 1.1 SPECIFIC TERMS. In addition to terms defined elsewhere in this Loan Agreement, when used herein the following terms shall have the following meanings: (a) "Account Debtor" shall mean any party who is or may become obligated with respect to an Account or Chattel Paper. (b) "Activation Date" shall mean the date upon which MLBFS shall cause the WCMA Line of Credit to be fully activated under MLPF&S' computer system as part of the WCMA Program. (c) "Additional Agreements" shall mean all agreements, instruments, documents and opinions other than this Loan Agreement, whether with or from Customer or any other party, which are contemplated hereby or otherwise reasonably required by MLBFS in connection herewith, or which evidence the creation, guaranty or collateralization of any of the Obligations or the granting or perfection of liens or security interests upon the Collateral or any other collateral for the Obligations. (d) "Bankruptcy Event" shall mean any of the following: (i) a proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or receivership law or statute shall be filed or consented to by Customer or any Guarantor; or (ii) any such proceeding shall be filed against Customer or any Guarantor and shall not be dismissed or withdrawn within sixty (60) days after filing; or (iii) Customer or any Guarantor shall make a general assignment for the benefit of creditors; or (iv) Customer or any Guarantor shall generally fail to pay or admit in writing its inability to pay its debts as they become due; or (v) Customer or any Guarantor shall be adjudicated a bankrupt or insolvent. (e) "Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or other day on which the New York Stock Exchange is regularly closed. (f) "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts, Documents, Instruments, Investment Property and Financial Assets of Customer, howsoever arising, whether now owned or existing or hereafter acquired or arising, and wherever located; together with all parts thereof (including spare parts), all accessories and accessions thereto, all books and records (including computer records) directly related thereto, all proceeds thereof (including, without limitation, proceeds in the form of Accounts and insurance proceeds), and the additional collateral described in Section 3.6 (b) hereof. (g) "Commitment Expiration Date" shall mean March 16, 2000. (h) "Default" shall mean either an "Event of Default" as defined in Section 3.5 hereof, or an event which with the giving of notice, passage of time, or both, would constitute such an Event of Default. (i) "Default Interest Rate" shall mean a rate equal to the sum of the "Interest Rate", as determined below, plus two percent (2%) per annum. (j) "General Funding Conditions" shall mean each of the following conditions to any WCMA Loan by MLBFS hereunder (i) no Default shall have occurred and be continuing or would result from the making of any WCMA Loan hereunder by MLBFS; (ii) there shall not have occurred and be continuing any material adverse change in the business or financial condition of Customer or any Guarantor; (iii) all representations and warranties of Customer or any Guarantor herein or in any Additional Agreements shall then be true and correct in all material respects; (iv) MLBFS shall have received this Loan Agreement and all of the Additional Agreements, duly executed and filed or recorded where applicable, all of which shall be in form and substance reasonably satisfactory to MLBFS; (v) MLBFS shall have received evidence reasonably satisfactory to it as to the ownership of the Collateral and the perfection and priority of MLBFS' liens and security interests thereon, as well as the ownership of and the perfection and priority of MLBFS' liens and security interests on any other collateral for the Obligations furnished pursuant to any of the Additional Agreements; (vi) MLBFS shall have received evidence reasonably satisfactory to it of the insurance required hereby or by any of the Additional Agreements; and (vii) any additional conditions specified in the "WCMA Line of Credit Approval" letter executed by MLBFS with respect to the transactions contemplated hereby shall have been met to the reasonable satisfaction of MLBFS. (k) "Guarantor" shall mean a person or entity who has either guaranteed or provided collateral for any or all of the Obligations; and "Business Guarantor" shall mean any such Guarantor that is a corporation, partnership, proprietorship, limited liability company or other entity regularly engaged in a business activity. (l) "Initial Maturity Date" shall mean the first date upon which the WCMA Line of Credit will expire (subject to renewal in accordance with the terms hereof); to wit: February 28, 2001. (m) "Interest Due Date" shall mean the last Business Day of each calendar month during the term hereof (or, if Customer makes special arrangements with MLPF&S, the last Friday of each calendar month during the term hereof). (n) "Interest Rate" shall mean a variable per annum rate of interest equal to the sum of 2.50% and the 30-day Dealer Commercial Paper Rate. The "30-day Dealer Commercial Paper Rate" shall mean, as of the date of any determination, the interest rate from time to time published in the "Money Rates" section of THE WALL STREET JOURNAL as the "Dealer Commercial Paper" rate for 30-day high-grade unsecured notes sold through dealers by major corporations. The Interest Rate will change as of the date of publication in THE WALL STREET JOURNAL of a 30-day Dealer Commercial Paper Rate that is different from that published on the preceding Business Day. In the event that THE WALL STREET JOURNAL shall, for any reason, fail or cease to publish the 30-day Dealer Commercial Paper Rate, MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate. Upon the occurrence and during the continuance of a Default, the Interest Rate with respect the WCMA Line of Credit may be increased to the "Default Interest Rate", as herein provided. (o) "Line Fee" shall mean a fee of $6,250.00 payable periodically by Customer to MLBFS in accordance with the provisions of Section 2.2 (k) hereof. (p) "Location of Tangible Collateral" shall mean the address of Customer set forth at the beginning of this Loan Agreement, together with any other address or addresses set forth on an exhibit hereto as being a Location of Tangible Collateral. (q) "Maturity Date" shall mean the date of expiration of the WCMA Line of Credit. (r) "Maximum WCMA Line of Credit" shall mean, as of any date of determination thereof, an amount equal to the lesser of (A) $5,000,000.00, or (B) the sum of: (i) 80% of Customer's Accounts and Chattel Paper, as shown on its regular books and records (excluding Accounts over 90 days old, directly or indirectly due from any person or entity not domiciled in the United States or from any shareholder, officer or employee of Customer or any affiliated entity), and (ii) the lesser of 50% of Customer's Inventory as shown on its regular books and records, or $1,000,000.00. (s) "Obligations" shall mean all liabilities, indebtedness and other obligations of Customer to MLBFS, howsoever created, arising or evidenced, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due, primary or secondary or joint or several, and, without limiting the foregoing, shall include interest accruing after the filing of any petition in bankruptcy, and all present and future liabilities, indebtedness and obligations of Customer under this Loan Agreement. (t) "Permitted Liens" shall mean with respect to the Collateral: (i) liens for current taxes not delinquent, other non-consensual liens arising in the ordinary course of business for sums not due, and, if MLBFS' rights to and interest in the Collateral are not materially and adversely affected thereby, any such liens for taxes or other non-consensual liens arising in the ordinary course of business being contested in good faith by appropriate proceedings; (ii) liens in favor of MLBFS; (iii) liens which will be discharged with the proceeds of the initial WCMA Loan; and (iv) any other liens expressly permitted in writing by MLBFS. (u) "Renewal Year" shall mean and refer to the 12-month period immediately following the Initial Maturity Date and each 12-month period thereafter. (v) "WCMA Account" shall mean and refer to the Working Capital Management Account of Customer with MLPF&S identified as Account No. 833-07H26 and any successor Working Capital Management Account of Customer with MLPF&S. (w) "WCMA Loan" shall mean each advance made by MLBFS pursuant to this Loan Agreement. (x) "WCMA Loan Balance" shall mean an amount equal the aggregate unpaid principal amount of all WCMA Loans. 1.2 OTHER TERMS. Except as otherwise defined herein: (i) all terms used in this Loan Agreement which are defined in the Uniform Commercial Code of Illinois ("UCC") shall have the meanings set forth in the UCC, and (ii) capitalized terms used herein which are defined in the WCMA Agreement shall have the meanings set forth in the WCMA Agreement. ARTICLE II. THE WCMA LINE OF CREDIT 2.1 WCMA PROMISSORY NOTE. FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, at the times and in the manner set forth in this Loan Agreement, or in such other manner and at such place as MLBFS may hereafter designate in writing, the following: (a) on the Maturity Date, or if earlier, on the date of termination of the WCMA Line of Credit, the WCMA Loan Balance; (b) interest at the Interest Rate (or, if applicable, at the Default Interest Rate) on the outstanding WCMA Loan Balance, from and including the date on which the initial WCMA Loan is made until the date of payment of all WCMA Loans in full; and (c) on demand, all other sums payable pursuant to this Loan Agreement, including, but not limited to, the periodic Line Fee. Except as otherwise expressly set forth herein, Customer hereby waives presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and formalities in connection with this WCMA Promissory Note and this Loan Agreement. -2- 2.2 WCMA LOANS (a) ACTIVATION DATE. Provided that: (i) the Commitment Expiration Date shall not then have occurred, and (ii) Customer shall have subscribed to the WCMA Program and its subscription to the WCMA Program shall then be in effect, the Activation Date shall occur on or promptly after the date, following the acceptance of this Loan Agreement by MLBFS at its office in Chicago, Illinois, upon which each of the General Funding Conditions shall have been met or satisfied to the reasonable satisfaction of MLBFS. No activation by MLBFS of the WCMA Line of Credit for a nominal amount shall be deemed evidence of the satisfaction of any of the conditions herein set forth, or a waiver of any of the terms or conditions hereof. Customer hereby authorizes MLBFS to pay out of and charge to Customer's WCMA Account on the Activation Date any and all amounts necessary to fully pay off any bank or other financial institution having a lien upon any of the Collateral other than a Permitted Lien. (b) WCMA LOANS. Subject to the terms and conditions hereof, during the period from and after the Activation Date to the first to occur of the Maturity Date or the date of termination of the WCMA Line of Credit pursuant to the terms hereof, and in addition to WCMA Loans automatically made to pay accrued interest, as hereafter provided: (i) MLBFS will make WCMA Loans to Customer in such amounts as Customer may from time to time request in accordance with the terms hereof, up to an aggregate outstanding amount not to exceed the Maximum WCMA Line of Credit, and (ii) Customer may repay any WCMA Loans in whole or in part at any time, and request a re-borrowing of amounts repaid on a revolving basis. Customer may request such WCMA Loans by use of WCMA Checks, FTS, Visa(R) charges, wire transfers, or such other means of access to the WCMA Line of Credit as may be permitted by MLBFS from time to time; it being understood that so long as the WCMA Line of Credit shall be in effect, any charge or debit to the WCMA Account which but for the WCMA Line of Credit would under the terms of the WCMA Agreement result in an overdraft, shall be deemed a request by Customer for a WCMA Loan. (c) CONDITIONS OF WCMA LOANS. Notwithstanding the foregoing, MLBFS shall not be obligated to make any WCMA Loan, and may without notice refuse to honor any such request by Customer, if at the time of receipt by MLBFS of Customer's request: (i) the making of such WCMA Loan would cause the Maximum WCMA Line of Credit to be exceeded; or (ii) the Maturity Date shall have occurred, or the WCMA Line of Credit shall have otherwise been terminated in accordance with the terms hereof; or (iii) Customer's subscription to the WCMA Program shall have been terminated; or (iv) an event shall have occurred and be continuing which shall have caused any of the General Funding Conditions to not then be met or satisfied to the reasonable satisfaction of MLBFS. The making by MLBFS of any WCMA Loan at a time when any one or more of said conditions shall not have been met shall not in any event be construed as a waiver of said condition or conditions or of any Default, and shall not prevent MLBFS at any time thereafter while any condition shall not have been met from refusing to honor any request by Customer for a WCMA Loan. (d) LIMITATION OF LIABILITY. MLBFS shall not be responsible, and shall have no liability to Customer or any other party, for any delay or failure of MLBFS to honor any request of Customer for a WCMA Loan or any other act or omission of MLBFS, MLPF&S or any of their affiliates due to or resulting from any system failure, error or delay in posting or other clerical error, loss of power, fire, Act of God or other cause beyond the reasonable control of MLBFS, MLPF&S or any of their affiliates unless directly arising out of the willful wrongful act or active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer or any other party for any incidental or consequential damages arising from any act or omission by MLBFS, MLPF&S or any of their affiliates in connection with the WCMA Line of Credit or this Loan Agreement. (e) INTEREST. (i) An amount equal to accrued interest on the WCMA Loan Balance shall be payable by Customer monthly on each Interest Due Date, commencing with the Interest Due Date occurring in the calendar month in which the Activation Date shall occur. Unless otherwise hereafter directed in writing by MLBFS on or after the first to occur of the Maturity Date or the date of termination of the WCMA Line of Credit pursuant to the terms hereof, such interest will be automatically charged to the WCMA Account on the applicable Interest Due Date, and, to the extent not paid with free credit balances or the proceeds of sales of any Money Accounts then in the WCMA Account, as hereafter provided, paid by a WCMA Loan and added to the WCMA Loan Balance. All interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. (ii) Upon the occurrence and during the continuance of any Default, but without limiting the rights and remedies otherwise available to MLBFS hereunder or waiving such Default, the interest payable by Customer hereunder shall at the option of MLBFS accrue and be payable at the Default Interest Rate. The Default Interest Rate, once implemented, shall continue to apply to the Obligations under this Loan Agreement and be payable by Customer until the date such Default is either cured or waived in writing by MLBFS. (iii) Notwithstanding any provision to the contrary in this Agreement or any of the Additional Agreements, no provision of this Agreement or any of the Additional Agreements shall require the payment or permit the collection of any amount in excess of the maximum amount of interest permitted to be charged by law ("Excess Interest"). If any Excess Interest is provided for, or is adjudicated as being provided for, in this Agreement or any of the Additional Agreements, then: (A) Customer shall not be obligated to pay any Excess Interest; and (B) any Excess Interest that MLBFS may have received hereunder or under any of the Additional Agreements shall, at the option of MLBFS, be: (1) applied as a credit against the then unpaid WCMA Loan Balance, (2) refunded to the payer thereof, or (3) any combination of the foregoing. (f) PAYMENTS. All payments required or permitted to be made pursuant to this Loan Agreement shall be made in lawful money of the United States. Unless otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may be made by the delivery of checks (other than WCMA Checks), or by means of FTS or wire transfer of funds (other than funds from the WCMA Line of Credit) to MLPF&S for credit to Customer's WCMA Account. Notwithstanding anything in the WCMA Agreement to the contrary, Customer hereby irrevocably authorizes and directs MLPF&S to apply available free credit balances in the WCMA Account to the repayment of the WCMA Loan Balance prior to application for any other purpose. Payments to MLBFS from funds in the WCMA Account shall be deemed to be made by Customer upon the same basis and schedule as funds are made available for investment in the Money Accounts in accordance with the terms of the WCMA Agreement. All funds received by MLBFS from MLPF&S pursuant to the aforesaid authorization shall be applied by MLBFS to repayment of the WCMA Loan Balance. The acceptance by or on behalf of MLBFS of a check or other payment for a lesser amount than shall be due from Customer, regardless of any endorsement or statement thereon or transmitted therewith, shall not be deemed an accord and satisfaction or anything other than a payment on account, and MLBFS or anyone acting on behalf of MLBFS may accept such check or other payment -3- without prejudice to the rights of MLBFS to recover the balance actually due or to pursue any other remedy under this Loan Agreement or applicable law for such balance. All checks accepted by or on behalf of MLBFS in connection with the WCMA Line of Credit are subject to final collection. (9) IRREVOCABLE INSTRUCTIONS TO MLPF&S. In order to minimize the WCMA Loan Balance, Customer hereby irrevocably authorizes and directs MLPF&S, effective on the Activation Date and continuing thereafter so long as this Agreement shall be in effect: (i) to immediately and prior to application for any other purpose pay to MLBFS to the extent of any WCMA Loan Balance or other amounts payable by Customer hereunder all available free credit balances from time to time in the WCMA Account; and (ii) if such available free credit balances are insufficient to pay the WCMA Loan Balance and such other amounts, and there are in the WCMA Account at any time any investments in Money Accounts (other than any investments constituting any Minimum Money Accounts Balance under the WCMA Directed Reserve Program), to immediately liquidate such investments and pay to MLBFS to the extent of any WCMA Loan Balance and such other amounts the available proceeds from the liquidation of any such Money Accounts. (h) STATEMENTS. MLPF&S will include in each monthly statement it issues under the WCMA Program information with respect to WCMA Loans and the WCMA Loan Balance. Any questions that Customer may have with respect to such information should be directed to MLBFS; and any questions with respect to any other matter in such statements or about or affecting the WCMA Program should be directed to MLPF&S. (i) USE OF WCMA LOAN PROCEEDS. The proceeds of each WCMA Loan initiated by Customer shall be used by Customer solely for working capital in the ordinary course of its business, or, with the prior written consent of MLBFS, for other lawful business purposes of Customer not prohibited hereby. CUSTOMER AGREES THAT UNDER NO CIRCUMSTANCES WILL THE PROCEEDS OF ANY WCMA LOAN BE USED: (I) FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OF ANY PERSON WHATSOEVER, OR (II) TO PURCHASE, CARRY OR TRADE IN SECURITIES, OR REPAY DEBT INCURRED TO PURCHASE, CARRY OR TRADE IN SECURITIES, WHETHER IN OR IN CONNECTION WITH THE WCMA ACCOUNT, ANOTHER ACCOUNT OF CUSTOMER WITH MLPF&S OR AN ACCOUNT OF CUSTOMER AT ANY OTHER BROKER OR DEALER IN SECURITIES, OR (III) UNLESS OTHERWISE CONSENTED TO IN WRITING BY MLBFS, TO REPAY ANY DEBT TO MERRILL LYNCH AND CO., INC. OR ANY OF ITS SUBSIDIARIES. (j) RENEWAL AT OPTION OF MLBFS; RIGHT OF CUSTOMER TO TERMINATE. MLBFS may at any time, in its sole discretion and at its sole option, renew the WCMA Line of Credit for one or more Renewal Years; it being understood, however, that no such renewal shall be effective unless set forth in a writing executed by a duly authorized representative of MLBFS and delivered to Customer. Unless any such renewal is accompanied by a proposed change in the terms of the WCMA Line of Credit (other than the extension of the Maturity Date), no such renewal shall require Customer's approval. Customer shall, however, have the right to terminate the WCMA Line of Credit at any time upon written notice to MLBFS. (k) LINE FEES. (i) In consideration of the extension of the WCMA Line of Credit by MLBFS to Customer during the period from the Activation Date to the Initial Maturity Date, Customer has paid or shall pay the Line Fee to MLBFS. If the Line Fee has not heretofore been paid by Customer, Customer hereby authorizes MLBFS, at its option, to either cause the Line Fee to be paid on the Activation Date with a WCMA Loan, or invoice Customer for such Line Fee (in which event Customer shall pay said fee within 5 Business Days after receipt of such invoice). No delay in the Activation Date, howsoever caused, shall entitle Customer to any rebate or reduction in the Line Fee or to any extension of the Initial Maturity Date. (ii) Customer shall pay an additional Line Fee for each Renewal Year. In connection therewith, Customer hereby authorizes MLBFS, at its option, to either cause each such additional Line Fee to be paid with a WCMA Loan on or at any time after the first Business Day of such Renewal Year or invoiced to Customer at such time (in which event Customer shall pay such Line Fee within 5 Business Days after receipt of such invoice). Each Line Fee shall be deemed fully earned by MLBFS on the date payable by Customer, and no termination of the WCMA Line of Credit, howsoever caused, shall entitle Customer to any rebate or refund of any portion of such Line Fee; provided, however, that if Customer shall terminate the WCMA Line of Credit not later than 5 Business Days after the receipt by Customer of notice from MLBFS of a renewal of the WCMA Line of Credit, Customer shall be entitled to a refund of any Line Fee charged by MLBFS for the ensuing Renewal Year. ARTICLE III. GENERAL PROVISIONS 3.1 REPRESENTATIONS AND WARRANTIES Customer represents and warrants to MLBFS that: (a) ORGANIZATION AND EXISTENCE. Customer is a corporation, duly organized and validly existing in good standing under the laws of the State of Nevada and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary; and, where applicable, each Business Guarantor is duly organized, validly existing and in good standing under the laws of the state of its formation and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary. (b) EXECUTION, DELIVERY AND PERFORMANCE. The execution, delivery and performance by Customer of this Loan Agreement and by Customer and each Guarantor of such of the Additional Agreements to which it is a party: (i) have been duly authorized by all requisite action, (ii) do not and will not violate or conflict with any law or other governmental requirement, or any of the agreements, instruments or documents which formed or govern Customer or any such Guarantor, and (iii) do not and will not breach or violate any of the provisions of, and will not result in a default by Customer or any such Guarantor under, any other agreement, instrument or document to which it is a party or by which it or its properties are bound. (c) NOTICES AND APPROVALS. Except as may have been given or obtained, no notice to or consent or approval of any governmental body or authority or other third party whatsoever (including, without limitation, any other creditor) is required in connection with the execution, delivery or performance by Customer or any Guarantor of such of this Loan Agreement and the Additional Agreements to which it is a party. -4- (d) ENFORCEABILITY. This Loan Agreement and such of the Additional Agreements to which Customer or any Guarantor is a party are the respective legal, valid and binding obligations of Customer and such Guarantor, enforceable against it or them, as the case may be, in accordance with their respective terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally or by general principles of equity. (e) COLLATERAL. Except for any Permitted Liens: (i) Customer has good and marketable title to the Collateral, (ii) none of the Collateral is subject to any lien, encumbrance or security interest, and (iii) upon the filing of all Uniform Commercial Code financing statements executed by Customer with respect to the Collateral in the appropriate jurisdiction(s) and/or the completion of any other action required by applicable law to perfect its liens and security interests, MLBFS will have valid and perfected first liens and security interests upon all of the Collateral. (f) FINANCIAL STATEMENTS. Except as expressly set forth in Customer's or any Business Guarantor's financial statements. all financial statements of Customer and each Business Guarantor furnished to MLBFS have been prepared in conformity with generally accepted accounting principles, consistently applied, are true and correct in all material respects, and fairly present the financial condition of it as at such dates and the results of its operations for the periods then ended (subject, in the case of interim unaudited financial statements, to normal year-end adjustments); and since the most recent date covered by such financial statements, there has been no material adverse change in any such financial condition or operation. All financial statements furnished to MLBFS of any Guarantor other than a Business Guarantor are true and correct in all material respects and fairly represent such Guarantor's financial condition as of the date of such financial statements, and since the most recent date of such financial statements, there has been no material adverse change in such financial condition. (g) LITIGATION. No litigation, arbitration, administrative or governmental proceedings are pending or, to the knowledge of Customer, threatened against Customer or any Guarantor, which would, if adversely determined, materially and adversely affect the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any such Guarantor or the continued operations of Customer or any Business Guarantor. (h) TAX RETURNS. All federal, state and local tax returns, reports and statements required to be filed by Customer and each Guarantor have been filed with the appropriate governmental agencies and all taxes due and payable by Customer and each Guarantor have been timely paid (except to the extent that any such failure to file or pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer or any Business Guarantor). (i) COLLATERAL LOCATION. All of the tangible Collateral is located at a Location of Tangible Collateral. (j) NO OUTSIDE BROKER. Except for employees of MLBFS, MLPF&S or one of their affiliates, Customer has not in connection with the transactions contemplated hereby directly or indirectly engaged or dealt with, and was not introduced or referred to MLBFS by, any broker or other loan arranger. Each of the foregoing representations and warranties: (i) has been and will be relied upon as an inducement to MLBFS to provide the WCMA Line of Credit, and (ii) is continuing and shall be deemed remade by Customer concurrently with each request for a WCMA Loan. 3.2 FINANCIAL AND OTHER INFORMATION (a) Customer shall furnish or cause to be furnished to MLBFS during the term of this Loan Agreement all of the following: (i) INTERIM FINANCIAL STATEMENTS. Within 45 days after the close of each fiscal quarter of Customer, a copy of the quarterly audited financial statements of Customer, including in reasonable detail, a balance sheet and statement of retained earnings as at the close of such fiscal quarter and statements of profit and loss and cash flow for such fiscal quarter; (ii) A/R AGINGS. Within 15 days after the close of each fiscal month of Customer, a copy of the Accounts Receivable Aging of Customer as of the end of such fiscal month; (iii) INVENTORY REPORTS. Within 15 days after the close of each fiscal month of Customer, a copy of the Inventory Report (as and to the extent applicable, breaking out Inventory by location, and separately reporting any work in process) of Customer as of the end of such fiscal month; (iv) VERIFICATION OF LIQUIDITY. Within 15 days after the close of each fiscal month of Customer, account statements summarizing the aggregate cash and unencumbered marketable securities owned and controlled by Customer; and (v) OTHER INFORMATION. Such other information as MLBFS may from time to time reasonably request relating to Customer, any Guarantor or the Collateral. (b) GENERAL AGREEMENTS WITH RESPECT TO FINANCIAL INFORMATION. Customer agrees that except as otherwise specified herein or otherwise agreed to in writing by MLBFS: (i) all annual financial statements required to be furnished by Customer to MLBFS hereunder will be prepared by either the current independent accountants for Customer or other independent accountants reasonably acceptable to MLBFS, and (ii) all other financial information required to be furnished by Customer to MLBFS hereunder will be certified as correct by the party who has prepared such information and, in the case of internally prepared information with respect to Customer or any Business Guarantor, certified as correct by their respective chief financial officer. -5- 3.3 OTHER COVENANTS Customer further covenants and agrees during the term of this Loan Agreement that: (a) FINANCIAL RECORDS; INSPECTION. Customer and each Business Guarantor will: (i) maintain at its principal place of business complete and accurate books and records, and maintain all of its financial records in a manner consistent with the financial statements heretofore furnished to MLBFS, or prepared on such other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized representatives, upon reasonable notice and at reasonable times, to inspect its properties (both real and personal), operations, books and records. (b) TAXES. Customer and each Guarantor will pay when due all taxes, assessments and other governmental charges, howsoever designated, and all other liabilities and obligations, except to the extent that any such failure to pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor or the continued operations of Customer or any Business Guarantor. (c) COMPLIANCE WITH LAWS AND AGREEMENTS. Neither Customer nor any Guarantor will violate any law, regulation or other governmental requirement, any judgment or order of any court or governmental agency or authority, or any agreement, instrument or document to which it is a party or by which it is bound, if any such violation will materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer or any Business Guarantor. (d) NO USE OF MERRILL LYNCH NAME. Except upon the prior written consent of MLBFS, neither Customer nor any Guarantor will directly or indirectly publish, disclose or otherwise use in any advertising or promotional material, or press release or interview, the name, logo or any trademark of MLBFS, MLPF&S, Merrill Lynch and Co., Incorporated or any of their affiliates. (e) NOTIFICATION BY CUSTOMER. Customer shall provide MLBFS with prompt written notification of: (i) any Default; (ii) any materially adverse change in the business, financial condition or operations of Customer or any Business Guarantor; (iii) any information which indicates that any financial statements of Customer or any Guarantor fail in any material respect to present fairly the financial condition and results of operations purported to be presented in such statements; and (iv) any change in Customer's outside accountants. Each notification by Customer pursuant hereto shall specify the event or information causing such notification, and, to the extent applicable, shall specify the steps being taken to rectify or remedy such event or information. (f) NOTICE OF CHANGE. Customer shall give MLBFS not less than 30 days prior written notice of any change in the name (including any fictitious name) or principal place of business or residence of Customer or any Guarantor. (g) CONTINUITY. Except upon the prior written consent of MLBFS, which consent will not be unreasonably withheld: (i) neither Customer nor any Business Guarantor shall be a party to any merger or consolidation with, or purchase or otherwise acquire all or substantially all of the assets of, or any material stock, partnership, joint venture or other equity interest in, any person or entity, or sell, transfer or lease all or any substantial part of its assets, if any such action would result in either: (A) a material change in the principal business, ownership or control of Customer or such Business Guarantor, or (B) a material adverse change in the financial condition or operations of Customer or such Business Guarantor; (ii) Customer and each Business Guarantor shall preserve their respective existence and good standing in the jurisdiction(s) of establishment and operation; (iii) neither Customer nor any Business Guarantor shall engage in any material business substantially different from their respective business in effect as of the date of application by Customer for credit from MLBFS, or cease operating any such material business; (iv) neither Customer nor any Business Guarantor shall cause or permit any other person or entity to assume or succeed to any material business or operations of Customer or such Business Guarantor; and (v) neither Customer nor any Business Guarantor shall cause or permit any material change in its controlling ownership. (h) MINIMUM TANGIBLE NET WORTH. Customer's "tangible net worth" shall at all times exceed $5,000,000 00. For the purposes hereof, the term "tangible net worth" shall mean Customer's net worth as shown on Customer's regular financial statements prepared in a manner consistent with the terms hereof, but excluding an amount equal to (i) any assets which are ordinarily classified as "intangible" in accordance with generally accepted accounting principles, and (ii) any amounts now or hereafter directly or indirectly owing to Customer by officers, shareholders or affiliates of Customer. (i) DEBT TO TANGIBLE NET WORTH. The ratio of Customer's total debt to Customer's tangible net worth shall not at any time exceed 2 to 1. (j) LIQUIDITY. The aggregate cash and unencumbered marketable securities and other financial assets directly owned and controlled by Customer (excluding cash, securities and other financial assets in an IRA, 401K or other retirement account) shall at all times exceed $3,000,000.00. (k) NEW VENTURES. Customer shall not be permitted to obtain a WCMA Loan to acquire any additional entities or open any expansion location. 3.4 COLLATERAL (a) PLEDGE OF COLLATERAL. To secure payment and performance of the Obligations, Customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants to MLBFS first liens and security interests in and upon all of the Collateral, subject only to Permitted Liens. (b) LIENS. Except upon the prior written consent of MLBFS, Customer shall not create or permit to exist any lien, encumbrance or security interest upon or with respect to any Collateral now owned or hereafter acquired other than Permitted Liens. (c) PERFORMANCE OF OBLIGATIONS. Customer shall perform all of its obligations owing on account of or with respect to the Collateral; it being understood that nothing herein, and no action or inaction by MLBFS, under this Loan Agreement or otherwise, shall be deemed an assumption by MLBFS of any of Customer's said obligations. -6- (d) SALES AND COLLECTIONS. So long as no Event of Default shall have occurred and be continuing, Customer may in the ordinary course of its business: (i) sell any Inventory normally held by Customer for sale, (ii) use or consume any materials and supplies normally held by Customer for use or consumption, and (iii) collect all of its Accounts. Customer shall take such action with respect to protection of its inventory and the other Collateral and the collection of its Accounts as MLBFS may from time to time reasonably request. (e) ACCOUNT SCHEDULES. Upon the request of MLBFS, made now or at any reasonable time or times hereafter, Customer shall deliver to MLBFS, in addition to the other information required hereunder, a schedule identifying, for each Account and all Chattel Paper subject to MLBFS' security interests hereunder, each Account Debtor by name and address and amount, invoice or contract number and date of each invoice or contract. Customer shall furnish to MLBFS such additional information with respect to the Collateral, and amounts received by Customer as proceeds of any of the Collateral, as MLBFS may from time to time reasonably request. (f) ALTERATIONS AND MAINTENANCE. Except upon the prior written consent of MLBFS, Customer shall not make or permit any material alterations to any tangible Collateral which might materially reduce or impair its market value or utility. Customer shall at all times keep the tangible Collateral in good condition and repair, reasonable wear and tear excepted, and shall pay or cause to be paid all obligations arising from the repair and maintenance of such Collateral, as well as all obligations with respect to any Location of Tangible Collateral, except for any such obligations being contested by Customer in good faith by appropriate proceedings. (g) LOCATION. Except for movements required in the ordinary course of Customer's business, Customer shall give MLBFS 30 days' prior written notice of the placing at or movement of any tangible Collateral to any location other than a Location of Tangible Collateral. In no event shall Customer cause or permit any material tangible Collateral to be removed from the United States without the express prior written consent of MLBFS. (h) INSURANCE. Customer shall insure all of the tangible Collateral under a policy or policies of physical damage insurance providing that losses will be payable to MLBFS as its interests may appear pursuant to a Lenders Loss Payable Endorsement and containing such other provisions as may be reasonably required by MLBFS. Customer shall further provide and maintain a policy or policies of comprehensive public liability insurance naming MLBFS as an additional party insured. Customer and each Business Guarantor shall maintain such other insurance as may be required by law or is customarily maintained by companies in a similar business or otherwise reasonably required by MLBFS. All such insurance policies shall provide that MLBFS will receive not less than 10 days prior written notice of any cancellation, and shall otherwise be in form and amount and with an insurer or insurers reasonably acceptable to MLBFS. Customer shall furnish MLBFS with a copy or certificate of each such policy or policies and, prior to any expiration or cancellation, each renewal or replacement thereof. (i) EVENT OF LOSS. Customer shall at its expense promptly repair all repairable damage to any tangible Collateral. In the event that any tangible Collateral is damaged beyond repair, lost, totally destroyed or confiscated (an "Event of Loss") and such Collateral had a value prior to such Event of Loss of $25,000.00 or more, then, on or before the first to occur of (i) 90 days after the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on which either Customer or MLBFS shall receive any proceeds of insurance on account of such Event of Loss, or any underwriter of insurance on such Collateral shall advise either Customer or MLBFS that it disclaims liability in respect of such Event of Loss, Customer shall, at Customer's option, either replace the Collateral subject to such Event of Loss with comparable Collateral free of all liens other than Permitted Liens (in which event Customer shall be entitled to utilize the proceeds of insurance on account of such Event of Loss for such purpose, and may retain any excess proceeds of such insurance), or deposit into the WCMA Account an amount equal to the actual cash value of such Collateral as determined by either the insurance company's payment (plus any applicable deductible) or, in absence of insurance company payment, as reasonably determined by MLBFS; it being further understood that any such deposit shall be accompanied by a like permanent reduction in the Maximum WCMA Line of Credit. Notwithstanding the foregoing, if at the time of occurrence of such Event of Loss or any time thereafter prior to replacement or line reduction, as aforesaid, an Event of Default shall have occurred and be continuing hereunder, then MLBFS may at its sole option, exercisable at any time while such Event of Default shall be continuing, require Customer to either replace such Collateral or make a deposit into the WCMA Account and reduce the Maximum WCMA Line of Credit, as aforesaid. (j) NOTICE OF CERTAIN EVENTS. Customer shall give MLBFS immediate notice of any attachment, lien, judicial process, encumbrance or claim affecting or involving $25,000.00 or more of the Collateral. (k) INDEMNIFICATION. Customer shall indemnify, defend and save MLBFS harmless from and against any and all claims, liabilities, losses, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) of any nature whatsoever which may be asserted against or incurred by MLBFS arising out of or in any manner occasioned by (i) the ownership, collection, possession, use or operation of any Collateral, or (ii) any failure by Customer to perform any of its obligations hereunder; excluding, however, from said indemnity any such claims, liabilities, etc. arising directly out of the willful wrongful act or active gross negligence of MLBFS. This indemnity shall survive the expiration or termination of this Loan Agreement as to all matters arising or accruing prior to such expiration or termination. 3.5 EVENTS OF DEFAULT The occurrence of any of the following events shall constitute an "Event of Default" under this Loan Agreement: (a) EXCEEDING THE MAXIMUM WCMA LINE OF CREDIT. If the WCMA Loan Balance shall at any time exceed the Maximum WCMA Line of Credit and Customer shall fail to deposit sufficient funds into the WCMA Account to reduce the WCMA Loan Balance below the Maximum WCMA Line of Credit within five (5) Business Days after written notice thereof shall have been given by MLBFS to Customer. (b) OTHER FAILURE TO PAY. Customer shall fail to pay to MLBFS or deposit into the WCMA Account when due any other amount owing or required to be paid or deposited by Customer under this Loan Agreement, or shall fail to pay when due any other Obligations, and any such failure shall continue for more than five (5) Business Days after written notice thereof shall have been given by MLBFS to Customer. -7- (c) FAILURE TO PERFORM. Customer or any Guarantor shall default in the performance or observance of any covenant or agreement on its part to be performed or observed under this Loan Agreement or any of the Additional Agreements (not constituting an Event of Default under any other clause of this Section), and such default shall continue unremedied for ten (10) Business Days after written notice thereof shall have been given by MLBFS to Customer. (d) BREACH OF WARRANTY. Any representation or warranty made by Customer or any Guarantor contained in this Loan Agreement or any of the Additional Agreements shall at any time prove to have been incorrect in any material respect when made. (e) DEFAULT UNDER OTHER AGREEMENT. A default or Event of Default by Customer or any Guarantor shall occur under the terms of any other agreement, instrument or document with or intended for the benefit of MLBFS, MLPF&S or any of their affiliates, and any required notice shall have been given and required passage of time shall have elapsed. (f) BANKRUPTCY EVENT. Any Bankruptcy Event shall occur. (g) MATERIAL IMPAIRMENT. Any event shall occur which shall reasonably cause MLBFS to in good faith believe that the prospect of full payment or performance by Customer or any Guarantor of any of their respective liabilities or obligations under this Loan Agreement or any of the Additional Agreements to which Customer or such Guarantor is a party has been materially impaired. The existence of such a material impairment shall be determined in a manner consistent with the intent of Section 1-208 of the UCC. (h) ACCELERATION OF DEBT TO OTHER CREDITORS. Any event shall occur which results in the acceleration of the maturity of any indebtedness of $100,000.00 or more of Customer or any Guarantor to another creditor under any indenture, agreement, undertaking, or otherwise. (i) SEIZURE OR ABUSE OF COLLATERAL. The Collateral, or any material part thereof, shall be or become subject to any material abuse or misuse, or any levy, attachment, seizure or confiscation which is not released within ten (10) Business Days. 3.6 REMEDIES (a) REMEDIES UPON DEFAULT. Upon the occurrence and during the continuance of any Event of Default, MLBFS may at its sole option do any one or more or all of the following, at such time and in such order as MLBFS may in its sole discretion choose: (i) TERMINATION. MLBFS may without notice terminate the WCMA Line of Credit and all obligations to provide the WCMA Line of Credit or otherwise extend any credit to or for the benefit of Customer (it being understood, however, that upon the occurrence of any Bankruptcy Event the WCMA Line of Credit and all such obligations shall automatically terminate without any action on the part of MLBFS); and upon any such termination MLBFS shall be relieved of all such obligations. (ii) ACCELERATION. MLBFS may declare the principal of and interest on the WCMA Loan Balance, and all other Obligations to be forthwith due and payable, whereupon all such amounts shall be immediately due and payable, without presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate or other notice or formality of any kind, all of which are hereby expressly waived; provided, however, that upon the occurrence of any Bankruptcy Event all such principal, interest and other Obligations shall automatically become due and payable without any action on the part of MLBFS. (iii) EXERCISE OTHER RIGHTS. MLBFS may exercise any or all of the remedies of a secured party under applicable law, including, but not limited to, the UCC, and any or all of its other rights and remedies under this Loan Agreement and the Additional Agreements. (iv) POSSESSION. MLBFS may require Customer to make the Collateral and the records pertaining to the Collateral available to MLBFS at a place designated by MLBFS which is reasonably convenient to Customer, or may take possession of the Collateral and the records pertaining to the Collateral without the use of any judicial process and without any prior notice to Customer. (v) SALE. MLBFS may sell any or all of the Collateral at public or private sale upon such terms and conditions as MLBFS may reasonably deem proper. MLBFS may purchase any Collateral at any such public sale. The net proceeds of any such public or private sale and all other amounts actually collected or received by MLBFS pursuant hereto, after deducting all costs and expenses incurred at any time in the collection of the Obligations and in the protection, collection and sale of the Collateral, will be applied to the payment of the Obligations, with any remaining proceeds paid to Customer or whoever else may be entitled thereto, and with Customer and each Guarantor remaining jointly and severally liable for any amount remaining unpaid after such application. (vi) DELIVERY OF CASH, CHECKS, ETC. MLBFS may require Customer to forthwith upon receipt, transmit and deliver to MLBFS in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, so that such items may be collected by MLBFS) which may be received by Customer at any time in full or partial payment of any Collateral, and require that Customer not commingle any such items which may be so received by Customer with any other of its funds or property but instead hold them separate and apart and in trust for MLBFS until delivery is made to MLBFS. (vii) NOTIFICATION OF ACCOUNT DEBTORS. MLBFS may notify any Account Debtor that its Account or Chattel Paper has been assigned to MLBFS and direct such Account Debtor to make payment directly to MLBFS of all amounts due or becoming due with respect to such Account or Chattel Paper; and MLBFS may enforce payment and collect, by legal proceedings or otherwise, such Account or Chattel Paper. -8- (viii) Control of Collateral. MLBFS may otherwise take control in any lawful manner of any cash or non-cash items of payment or proceeds of Collateral and of any rejected, returned, stopped in transit or repossessed goods included in the Collateral and endorse Customer's name on any item of payment on or proceeds of the Collateral. (b) SET-OFF. MLBFS shall have the further right upon the occurrence and during the continuance of an Event of Default to set-off, appropriate and apply toward payment of any of the Obligations, in such order of application as MLBFS may from time to time and at any time elect, any cash, credit, deposits, accounts, financial assets, investment property, securities and any other property of Customer which is in transit to or in the possession, custody or control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S. Customer hereby collaterally assigns and grants to MLBFS a continuing security interest in all such property as additional Collateral. (c) POWER OF ATTORNEY. Effective upon the occurrence and during the continuance of an Event of Default, Customer hereby irrevocably appoints MLBFS as its attorney-in-fact, with full power of substitution, in its place and stead and in its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion take any action and to execute any instrument which MLBFS may deem necessary or advisable to accomplish the purposes of this Loan Agreement, including, but not limited to, to receive, endorse and collect all checks, drafts and other instruments for the payment of money made payable to Customer included in the Collateral. (d) REMEDIES ARE SEVERABLE AND CUMULATIVE. All rights and remedies of MLBFS herein are severable and cumulative and in addition to all other rights and remedies available in the Additional Agreements, at law or in equity, and any one or more of such rights and remedies may be exercised simultaneously or successively. (e) NOTICES. To the fullest extent permitted by applicable law, Customer hereby irrevocably waives and releases MLBFS of and from any and all liabilities and penalties for failure of MLBFS to comply with any statutory or other requirement imposed upon MLBFS relating to notices of sale, holding of sale or reporting of any sale, and Customer waives all rights of redemption or reinstatement from any such sale. Any notices required under applicable law shall be reasonably and properly given to Customer if given by any of the methods provided herein at least 5 Business Days prior to taking action. MLBFS shall have the right to postpone or adjourn any sale or other disposition of Collateral at any time without giving notice of any such postponed or adjourned date. In the event MLBFS seeks to take possession of any or all of the Collateral by court process, Customer further irrevocably waives to the fullest extent permitted by law any bonds and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession, and any demand for possession prior to the commencement of any suit or action. 3.7 MISCELLANEOUS (a) NON-WAIVER. No failure or delay on the part of MLBFS in exercising any right, power or remedy pursuant to this Loan Agreement or any of the Additional Agreements shall operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Neither any waiver of any provision of this Loan Agreement or any of the Additional Agreements, nor any consent to any departure by Customer therefrom, shall be effective unless the same shall be in writing and signed by MLBFS. Any waiver of any provision of this Loan Agreement or any of the Additional Agreements and any consent to any departure by Customer from the terms of this Loan Agreement or any of the Additional Agreements shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, no notice to or demand on Customer shall in any case entitle Customer to any other or further notice or demand in similar or other circumstances. (b) DISCLOSURE. Customer hereby irrevocably authorizes MLBFS and each of its affiliates, including without limitation MLPF&S to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Customer. In connection with said authorization, the parties recognize that in order to provide a WCMA Line of Credit certain information about Customer is required to be made available on a computer network accessible by certain affiliates of MLBFS, including MLPF&S. (c) COMMUNICATIONS. All notices and other communications required or permitted hereunder shall be in writing, and shall be either delivered personally, mailed by postage prepaid certified mail or sent by express overnight courier or by facsimile. Such notices and communications shall be deemed to be given on the date of personal delivery, facsimile transmission or actual delivery of certified mail, or one Business Day after delivery to an express overnight courier. Unless otherwise specified in a notice sent or delivered in accordance with the terms hereof, notices and other communications in writing shall be given to the parties hereto at their respective addresses set forth at the beginning of this Loan Agreement, or, in the case of facsimile transmission, to the parties at their respective regular facsimile telephone number. (d) FEES, EXPENSES AND TAXES. Customer shall pay or reimburse MLBFS for: (i) all Uniform Commercial Code filing and search fees and expenses incurred by MLBFS in connection with the verification, perfection or preservation of MLBFS' rights hereunder or in the Collateral or any other collateral for the Obligations; (ii) any and all stamp, transfer and other taxes and fees payable or determined to be payable in connection with the execution, delivery and/or recording of this Loan Agreement or any of the Additional Agreements; and (iii) all reasonable fees and out-of-pocket expenses (including, but not limited to, reasonable fees and expenses of outside counsel) incurred by MLBFS in connection with the collection of any sum payable hereunder or under any of the Additional Agreements not paid when due, the enforcement of this Loan Agreement or any of the Additional Agreements and the protection of MLBFS' rights hereunder or thereunder, excluding, however, salaries and normal overhead attributable to MLBFS' employees. Customer hereby authorizes MLBFS, at its option, to either cause any and all such fees, expenses and taxes to be paid with a WCMA Loan, or invoice Customer therefor (in which event Customer shall pay all such fees, expenses and taxes within 5 Business Days after receipt of such invoice). The obligations of Customer under this paragraph shall survive the expiration or termination of this Loan Agreement and the discharge of the other Obligations. (e) RIGHT TO PERFORM OBLIGATIONS. If Customer shall fail to do any act or thing which it has covenanted to do under this Loan Agreement or any representation or warranty on the part of Customer contained in this Loan Agreement shall be breached, MLBFS may, in its sole discretion, after 5 Business -9- Days written notice is sent to Customer (or such lesser notice, including no notice, as is reasonable under the circumstances), do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer upon demand, with interest at the Interest Rate during the period from and including the date funds are so expended by MLBFS to the date of repayment, and all such amounts shall be additional Obligations. The payment or performance by MLBFS of any of Customer's obligations hereunder shall not relieve Customer of said obligations or of the consequences of having failed to pay or perform the same, and shall not waive or be deemed a cure of any Default. (f) FURTHER ASSURANCES. Customer agrees to do such further acts and things and to execute and deliver to MLBFS such additional agreements, instruments and documents as MLBFS may reasonably require or deem advisable to effectuate the purposes of this Loan Agreement or any of the Additional Agreements, or to establish, perfect and maintain MLBFS' security interests and liens upon the Collateral, including, but not limited to: (i) executing financing statements or amendments thereto when and as reasonably requested by MLBFS; and (ii) if in the reasonable judgment of MLBFS it is required by local law, causing the owners and/or mortgagees of the real property on which any Collateral may be located to execute and deliver to MLBFS waivers or subordinations reasonably satisfactory to MLBFS with respect to any rights in such Collateral. (g) BINDING EFFECT. This Loan Agreement and the Additional Agreements shall be binding upon, and shall inure to the benefit of MLBFS, Customer and their respective successors and assigns. Customer shall not assign any of its rights or delegate any of its obligations under this Loan Agreement or any of the Additional Agreements without the prior written consent of MLBFS. Unless otherwise expressly agreed to in a writing signed by MLBFS, no such consent shall in any event relieve Customer of any of its obligations under this Loan Agreement or the Additional Agreements. (h) HEADINGS. Captions and section and paragraph headings in this Loan Agreement are inserted only as a matter of convenience, and shall not affect the interpretation hereof. (i) GOVERNING LAW. This Loan Agreement, and, unless otherwise expressly provided therein, each of the Additional Agreements, shall be governed in all respects by the laws of the State of Illinois. (j) SEVERABILITY OF PROVISIONS. Whenever possible, each provision of this Loan Agreement and the Additional Agreements shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Loan Agreement or any of the Additional Agreements which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Loan Agreement and the Additional Agreements or affecting the validity or enforceability of such provision in any other jurisdiction. (k) TERM. This Loan Agreement shall become effective on the date accepted by MLBFS at its office in Chicago, Illinois, and, subject to the terms hereof, shall continue in effect so long thereafter as the WCMA Line of Credit shall be in effect or there shall be any Obligations outstanding. (1) COUNTERPARTS. This Loan Agreement may be executed in one or more counterparts which, when taken together, constitute one and the same agreement. (m) JURISDICTION; WAIVER. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT (INCLUDING THE WCMA NOTE SET FORTH HEREIN) AND THE ADDITIONAL AGREEMENTS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. CUSTOMER IRREVOCABLY SUBMITS ITSELF TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE AND THE CONVENIENCE OF ANY SUCH FORUM, AND ANY AND ALL RIGHTS TO REMOVE SUCH ACTION FROM STATE TO FEDERAL COURT. CUSTOMER FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND CUSTOMER HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE WCMA LINE OF CREDIT, THIS LOAN AGREEMENT, ANY ADDITIONAL AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS LOAN AGREEMENT. CUSTOMER FURTHER WAIVES THE RIGHT TO BRING ANY NON-COMPULSORY COUNTERCLAIMS. (n) INTEGRATION. THIS LOAN AGREEMENT, TOGETHER WITH THE ADDITIONAL AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. WITHOUT LIMITING THE FOREGOING, CUSTOMER ACKNOWLEDGES THAT EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN: (I) NO PROMISE OR COMMITMENT HAS BEEN MADE TO IT BY MLBFS, MLPF&S OR ANY OF THEIR RESPECTIVE EMPLOYEES, AGENTS OR REPRESENTATIVES TO EXTEND THE AVAILABILITY OF THE WCMA LINE OF CREDIT OR THE MATURITY DATE, OR TO INCREASE THE MAXIMUM WCMA LINE OF CREDIT, OR OTHERWISE EXTEND ANY OTHER CREDIT TO CUSTOMER OR ANY OTHER PARTY; (II) NO PURPORTED EXTENSION OF THE MATURITY DATE, INCREASE IN THE MAXIMUM WCMA LINE OF CREDIT OR OTHER EXTENSION OR AGREEMENT TO EXTEND CREDIT SHALL BE VALID OR BINDING UNLESS EXPRESSLY SET FORTH IN A WRITTEN INSTRUMENT SIGNED BY MLBFS; AND (III) THIS LOAN AGREEMENT SUPERSEDES AND REPLACES ANY AND ALL PROPOSALS, LETTERS OF INTENT AND APPROVAL AND COMMITMENT LETTERS FROM MLBFS TO CUSTOMER, NONE OF WHICH SHALL BE CONSIDERED AN ADDITIONAL AGREEMENT. NO AMENDMENT OR MODIFICATION OF THIS AGREEMENT OR ANY OF THE ADDITIONAL AGREEMENTS TO WHICH CUSTOMER IS A PARTY SHALL BE EFFECTIVE UNLESS IN A WRITING SIGNED BY BOTH MLBFS AND CUSTOMER. -10- IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year first above written. DRUGMAX.COM INC. F/K/A NUTRICEUTICALS.COM CORPORATION By: /s/ WILLIAM LAGAMBA -------------------------------------------------- Signature (1) Signature (2) WILLIAM LAGAMBA -------------------------------------------------- Printed Name Printed Name COO -------------------------------------------------- Title Title STATE OF DISTRICT OF COLUMBIA ) )SS. COUNTY OF ) The foregoing instrument was acknowledged before me this day of 17th FEB AD, 2000 by WILLIAM LAGAMBA of DRUGMAX.COM INC. F/K/A NUTRICEUTICALS.COM CORPORATION, a Nevada corporation, on behalf of the corporation. Said person is personally known to me or has produced DRIVERS LICENSE as identification. /s/ SONDRA LINTON JAVIER - ------------------------- NOTARY PUBLIC - -------------------------- PRINTED NAME OF NOTARY PUBLIC My Commission Expires: SONDRA LINTON JAVIER NOTARY PUBLIC, DISTRICT OF COLUMBIA My Commission Expires January 1, 2003 [SEAL] Accepted at Chicago, Illinois: MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. By: ------------------------- -11- EX-10.8 8 0008.txt EXHIBIT 10.8 EXHIBIT 10.8 SECURITY AGREEMENT (COLLATERAL PLEDGE AGREEMENT) DATE MARCH 17, 2000 -------------- DEBTOR DRUGMAX COM, INC. SECURED FIRST COMMUNITY BANK OF AMERICA ---------------- PARTY ------------------------------- BUSINESS OR RESIDENCE ADDRESS 12505 STARKEY RD., SUITE A ADDRESS 6100 4TH STREET NORTH CITY, CITY, STATE & STATE & ZIP CODE LARGO, FL 33773 ZIP CODE ST. PETERSBURG, FL 33703 1. SECURITY INTEREST AND COLLATERAL. To secure (check one): [ ] the payment and performance of each and every debt, liability and obligation of every type and description which Debtor may now or at any time hereafter owe to Secured Party (whether such debt, liability or obligation now exists or is hereafter created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several; all such debts, liabilities and obligations being herein collectively referred to as the "Obligations"), [XX] the debt, liability or obligation of the Debtor to secured party evidenced by the following: NOTE OF EVEN DATE IN THE AMOUNT OF $1,000,000.00, and any extensions, renewals or replacements thereof (herein referred to as the "Obligations"). Debtor hereby grants Secured Party a security interest (herein called the "Security Interest") in (check one): [ ] all property of any kind now or at any time hereafter owned by Debtor, or in which Debtor may now or hereafter have an interest, which may now be or may at any time hereafter come into the possession or control of Secured Party or into the possession or control of Secured Party's agents or correspondents, whether such possession or control is given for collateral purposes or for safekeeping, together with all rights in connection with such property (herein called the "Collateral"), [XX] the property owned by Debtor and held by Secured Party that is described as follows: FIRST COMMUNITY BANK OF AMERICA CERTIFICATE OF DEPOSIT #30028380, together with all rights in connection with such property (herein called the Collateral"). 2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Debtor represents, warrants and covenants that: (a) Debtor will duly endorse, in blank, each and every instrument constituting Collateral by signing on said instrument or by signing a separate document of assignment or transfer, if required by Secured Party. (b) Debtor is the owner of the Collateral free and clear of all liens. encumbrances, security interests and restrictions, except the Security Interest and any restrictive legend appearing on any instrument constituting Collateral. (c) Debtor will keep the Collateral free and clear of all liens, encumbrances and security interests, except the Security Interest. (d) Debtor will pay, when due, all taxes and other governmental charges levied or assessed upon or against any Collateral. (e) At any time, upon request by Secured Party, Debtor will deliver to Secured Party all notices, financial statements, reports or other communications received by Debtor as an owner or holder of the Collateral. (f) Debtor will upon receipt deliver to Secured Party in pledge as additional Collateral all securities distributed on account of the Collateral such as stock dividends and securities resulting from stock splits, reorganizations and recapitalizations. THIS AGREEMENT CONTAINS ADDITIONAL PROVISIONS SET FORTH ON PAGE 2 HEREOF, ALL OF WHICH ARE MADE A PART HEREOF. DRUGMAX.COM, INC. By /s/ WILLIAM LAGAMBA ------------------- WILLIAM LAGAMBA Title: PRESIDENT/COO ------------- By ------------------- Title: --------------- (page 1 of 2) ADDITIONAL PROVISIONS 3. RIGHTS OF SECURED PARTY. Debtor agrees that Secured Party may at any time, whether before or after the occurrence of an Event of Default and without notice or demand of any kind, (i) notify the obligor on or issuer of any Collateral to make payment to Secured Party of any amounts due or distributable thereon, (ii) in Debtor's name or Secured Party's name enforce collection of any Collateral by suit or otherwise. or surrender, release or exchange all or any part of it, or compromise, extend or renew for any period any obligation evidenced by the Collateral, (iii) receive all proceeds of the Collateral, and (vi) hold any increase or profits received from the Collateral as additional security for the Obligations, except that any money received from the Collateral shall, at Secured Party's option, be applied in reduction of the Obligations, in such order of application as Secured Party may determine, or be remitted to Debtor. 4. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"); (i) Debtor shall fail to pay any or all of the Obligations when due or (if payable on demand) on demand, or shall fail to observe or perform any covenant or agreement herein binding on it; (ii) any representation or warranty by Debtor set forth in this Agreement or made to Secured Party in any financial statements or reports submitted to Secured Party by or on behalf of Debtor shall prove materially false or misleading; (iii) a garnishment summons or a writ of attachment shall be issued against or served upon the Secured Party for the attachment of any property of the Debtor or any indebtedness owing to Debtor; (iv) Debtor or any guarantor of any Obligation shall (A) be or become insolvent (however defined); (B) voluntarily file, or have filed against it involuntarily, a petition under the United States Bankruptcy Code: or (C) if a corporation, partnership or organization, be dissolved or liquidated or, if a partnership, suffer the death of a partner or, if an individual, die; or (D) go out of business; (v) Secured Party shall in good faith believe that the value then realizable by collection or disposition of the Collateral, after deduction of expenses of collection and disposition, is less than the aggregate unpaid balance of all Obligations then outstanding; (vi) Secured Party shall in good faith believe that the prospect of due and punctual payment of any or all of the Obligations is impaired. 5. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default and at any time thereafter, Secured Party may exercise any one or more of the following rights or remedies: (i) declare all unmatured Obligations to be immediately due and payable, and the same shall thereupon be immediately due and payable, without presentment or other notice or demand; (ii) exercise ail voting and other rights as a holder of the Collateral; (iii) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including the right to offer and sell the Collateral privately to purchasers who will agree to take the Collateral for investment and not with a view to distribution and who will agree to the imposition of restrictive legends on the certificates representing the Collateral, and the right to arrange for a sale which would otherwise qualify as exempt from registration under the Securities Act of 1933; and if notice to Debtor of any intended disposition of the Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given at least 10 calendar days prior to the date of intended disposition or other action; (iv) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against the Collateral, against Debtor or against any other person or property. Upon the occurrence of the Event of Default described in Section 4(iv)(B), all Obligations shall be immediately due and payable without demand or notice thereof. 6. MISCELLANEOUS. Any disposition of the Collateral in the manner provided in Section 5 shall be deemed commercially reasonable. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by Secured Party. A waiver signed by Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor shall be deemed sufficiently given if delivered or mailed by registered or certified mail, postage prepaid, to Debtor at its address set forth above or at the most recent address shown on Secured Party's records. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if Secured Party exercises reasonable care in physically safekeeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to preserve any rights Debtor may have against prior parties, to exercise at all or in any particular manner any voting rights which may be available with respect to any Collateral, to realize on the Collateral at ail or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. Debtor will reimburse Secured Party for all expenses (including reasonable attorney's fees and legal expenses) incurred by Secured Party in the protection, defense or enforcement of the Security Interest, including expenses incurred in any litigation or bankruptcy or insolvency proceedings. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective heirs, representatives, successors and assigns and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of Secured Party's acceptance hereof. This Agreement shall be governed by laws of the state in which it is executed and, unless the context otherwise requires, all terms used herein which are defined in Articles 1 and 9 of the Uniform Commercial Code, as in effect in said state, shall have the meanings therein stated. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. If this Agreement is signed by more than one person as Debtor, the term "Debtor" shall refer to each of them separately and to both or all of them jointly, all such persons shall be bound both or severally and jointly with the other(s); and the Obligations shall include all debts, liabilities and obligations owed to Secured Party by a Debtor solely or by both or several or all Debtors jointly or jointly and severally, and all property described in Section I shall be included as part of the Collateral, whether it is owned jointly by both or all Debtors or is owned in whole or in part by one (or more) of them. EX-21 9 0009.txt Exhibit 21 Subsidiaries of DrugMax.com, Inc. - --------------------------------- LIST OF SUBSIDIARIES
State or Jurisdiction of Type of Percent Subsidiary or Partnership Incorporation or Organization Interest * Owned - ------------------------- ----------------------------- -------- ----- Valley Drug Company Ohio C 100% Discount Rx Louisiana C 100% Desktop Media Group, Inc. Florida C 100% Desktop Ventures, Inc. Texas C 100% VetMall, Inc. Florida C 70% - ---------
* C= Corporation, LLC= Limited Liability Company, LP= Limited Partnership Interest, GP= General Partnership Interest. EX-99.1 10 0010.txt EXHIBIT 99.1 DRUGMAX.COM 1999 INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN SECTION 1. PURPOSE This 1999 Incentive and Non-Statutory Stock Option Plan (the "Plan") is intended as a performance incentive for officers and employees of DrugMax.com, a Nevada corporation (the "Company") or its Subsidiaries (as hereinafter defined) and for certain other individuals providing services to or acting as directors of the Company or its Subsidiaries, to enable the persons to whom options are granted (an "Optionee" or "Optionees") to acquire or increase a proprietary interest in the success of the Company. The Company intends that this purpose will be effected by the granting of incentive stock options ("Incentive Options") as defined in Section 422A(b) of the Internal Revenue Code of 1986, as amended (the "Code") and other stock options ("Non-statutory Options") under the Plan. SECTION 2. OPTIONS TO BE GRANTED AND ADMINISTRATION 2.1 OPTIONS TO THE GRANTED. Options granted under the Plan may be either Incentive Options or Non-statutory Options. 2.2 ADMINISTRATION BY THE BOARD. This Plan shall be administered by the Board of Directors of the Company (the "Board"). The Board shall have full and final authority to operate, manage and administer the Plan on behalf of the Company. This authority includes, but is not limited to: (i) the power to grant options conditionally or unconditionally; (ii) the power to prescribe the form or forms of the instruments evidencing options granted under this Plan; (iii) the power to interpret the Plan; (iv) the power to provide regulations for the operation of the incentive features of the Plan, and otherwise to prescribe regulations for interpretation, management and administration of the Plan; (v) the power to delegate responsibility for Plan operation, management and administration on such terms, consistent with the Plan, as the Board may establish; (vi) the power to delegate to other persons the responsibility for performing ministerial acts in furtherance of the Plan's purpose; and (vii) the power to engage the services of persons or organizations in furtherance of the Plan's purpose, including but not limited to, banks, insurance companies, brokerage firms and consultants. In addition, as to each option, the Board shall have full and final authority in its discretion: (i) to determine the number of shares subject to each option; (ii) to determine the time or times at which options will be granted; (iii) to determine the time or times when each option shall become exercisable and the duration of the exercise period, which shall not exceed the limitations specified in Section 5.1.1; and (iv) to determine the option price for the shares subject to each option, which price shall be subject to the applicable requirements, if any, of Section 5.1.4 hereof. 2.3 APPOINTMENT AND PROCEEDINGS OF COMMITTEE. The Board may appoint a Stock Option Committee (the "Committee") which shall consist of at least three members of the Board. 1 The Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed, and may fill vacancies, however caused, in the Committee. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of its members shall constitute a quorum, and all actions of the Committee shall be taken by a majority of its members. Any action may be taken by a written instrument signed by all of the members, and any action so taken shall be as fully effective as if it had been taken by a vote of a majority of the members at a meeting duly called and held. 2.4 POWERS OF COMMITTEE. Subject to the provisions of this Plan and the approval of the Board, the Committee shall have the power to make recommendations to the Board as to whom options should be granted, the number of shares to be covered by each option, the time or times of option grants, and the terms and conditions of each option. In addition, the Committee shall have authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, and to exercise the administrative and ministerial powers of the Board with regard to aspects of the Plan other than the granting of options. The interpretation and construction by the Committee of any provisions of the Plan or of any option granted hereunder and the exercise of any power delegated to it hereunder shall be final, unless otherwise determined by the Board. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted hereunder. SECTION 3. STOCK 3.1 SHARES SUBJECT TO PLANS. The stock subject to the options granted under the Plan shall be shares of the Company's authorized but unissued common stock, par value $.001 per share ("Common Stock"). The total number of shares that may be issued pursuant to options granted under the Plan shall not exceed an aggregate of 400,000 shares of Common Stock. 3.2 LAPSED OR UNEXERCISED OPTIONS. Whenever any outstanding option under the Plan expires, is canceled or is otherwise terminated (other than by exercise), the shares of Common Stock allocable to the unexercised portion of such option shall be restored to the Plan and be available for the grant of other options under the Plan. SECTION 4. ELIGIBILITY 4.1 ELIGIBLE OPTIONEES. Incentive options may be granted only to officers and other employees of the Company or its Subsidiaries, including members of the Board who are also employees of the Company or a Subsidiary. Non-statutory options may be granted to officers or other employees of the Company or its Subsidiaries and to certain other individuals providing services to the Company or its Subsidiaries. Non-employee directors will be granted options to purchase 3,000 shares of the Company's Common Stock upon their initial election or appointment to the Board. 4.2 LIMITATIONS ON 10% STOCKHOLDERS. No Incentive Option shall be granted to an individual who, at the time the Incentive Option is granted, owns (including ownership attributed pursuant to Section 425(d) of the Code) more than 10% of the total combined voting power of all 2 classes of stock of the Company or any parent or Subsidiary of the Company (a "greater-than-10% stockholder"), unless such Incentive Option provides that (i) the purchase price per share shall not be less than 110% of the fair market value of the Common Stock at the time such Incentive Option is granted, and (ii) that such Incentive Option shall not be exercisable to any extent after the expiration of five years from the date it is granted. 4.3 LIMITATION ON EXERCISABLE OPTIONS. The aggregate fair market value (determined at the time the Incentive Option is granted) of the Common Stock with respect to which Incentive Options are exercisable for the first time by any person during any calendar year under the Plan and under any other option plan of the Company (or a parent or subsidiary as defined in Section 425 of the Code) shall not exceed $100,000. Any option granted in excess of the foregoing limitation shall be specifically designated as being a Non-statutory Option. SECTION 5. TERMS OF THE OPTION AGREEMENTS 5.1 MANDATORY TERMS. Each option agreement shall contain such provisions as the Board or the Committee shall from time to time deem appropriate, and shall include provisions relating to the method of exercise, payment of exercise price, adjustments on changes in the Company's capitalization and the effect of a merger, consolidation, liquidation, sale or other disposition of or involving the Company. Option agreements need not be identical, but each option agreement by appropriate language shall include the substance of all of the following provisions: 5.1.1 EXPIRATION. Notwithstanding any other provision of the Plan or of any option agreement, each option shall expire on the date specified in the option agreement, which date shall not be later than the tenth anniversary of the date on which the option was granted (fifth anniversary in the case of a greater-than-10% stockholder). 5.1.2 EXERCISE. Each option shall be deemed exercised when (i) the Company has received written notice of such exercise in accordance with the terms of the option, (ii) full payment of the aggregate option price of the shares of Common Stock as to which the option is exercised has been made, and (iii) arrangements that are satisfactory to the Board or the Committee in its sole discretion have been made for the optionee's payment to the Company of the amount that is necessary for the Company or Subsidiary employing the optionee to withhold in accordance with applicable Federal or state tax withholding requirements. Unless further limited by the Board or the Committee in any option, the option price of any shares of Common Stock purchased shall be paid in cash, by certified or official bank check, by money order, with shares of Common Stock or by a combination of the above; provided further, however, that the Board or the Committee in its sole discretion may accept a personal check in full or partial payment of any shares of Common Stock. If the exercise price is paid in whole or in part with shares, the value of the shares surrendered shall be their fair market value on the date the option is exercised as determined in accordance with Section 5.1.4 hereof. No optionee shall be deemed to be a holder of any shares of Common Stock subject to an option unless and until a stock certificate or certificates for such shares of Common Stock are issued to such person(s) under the terms of the Plan. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in Section 6 hereof. No optionee shall be deemed to be a holder of any shares 3 of Common Stock subject to an option unless and until a stock certificate or certificates for such shares of Common Stock are issued to such person(s) under the terms of the Plan. 5.1.3 EVENTS CAUSING IMMEDIATE EXERCISE. Unless otherwise provided in any option, each outstanding option shall become immediately fully exercisable. 5.1.3.1 if there occurs any transaction (which shall include a series of transactions occurring within 60 days or occurring pursuant to a plan), that has the result that stockholders of the Company immediately before such transaction cease to own at least 51 percent of the voting stock of the Company or of any entity that results from the participation of the Company in a reorganization, consolidation, merger, liquidation or any other form of corporate transaction; 5.1.3.2 if the stockholders of the Company shall approve a plan of merger, consolidation, reorganization, liquidation or dissolution in which the Company does not survive (unless the approved merger, consolidation, reorganization, liquidation or dissolution is subsequently abandoned); or 5.1.3.3 if the stockholders of the Company shall approve a plan for the sale, lease, exchange or other disposition of all or substantially all the property and assets of the Company (unless such plan is subsequently abandoned). The Board or the Committee may in its sole discretion accelerate the date on which any option may be exercised and may accelerate the vesting of any shares of Common Stock subject to any option or previously acquired by the exercise of any option. 5.1.4 PURCHASE PRICE. The purchase price per share of the Common Stock under each Incentive Option shall be not less than the fair market value of the Common Stock on the date the option is granted (110% of the fair market value in the case of a greater-than-10% stockholder). The price at which shares may be purchased pursuant to Non-statutory Options shall be specified by the Board at the time the option is granted, and may be less than, equal to or greater than the fair market value of the shares of Common Stock on the date such Non-statutory Option is granted, but shall not be less than the par value of shares of Common Stock. For the purpose of the Plan, the "fair market value" per share of Common Stock on any date of reference shall be the Closing Price of the Common Stock of the Company which is referred to in either clause (i), (ii) or (iii) below, on the business day immediately preceding such date, or if not referred to in either clause (i), (ii) or (iii) below, "fair market value" per share of Common Stock shall be such value as shall be determined by the Board or the Committee, unless the Board or the Committee in its sole discretion shall determine otherwise in a fair and uniform manner. For this purpose, the Closing Price of the Common Stock on any business day shall be (i) if the Common Stock is listed or admitted for trading on any United States national securities exchange, or if actual transactions are otherwise reported on a consolidated transaction reporting system, the last reported sale price of Common Stock on such exchange or reporting system, as reported in any newspaper of general circulation, (ii) if the Common Stock is quoted on the National Association of Securities Dealers Automated Quotations System ("NASDAQ"), or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high 4 bid and low asked quotations for such day of Common Stock on such system, or (iii) if neither clause (i) or (ii) is applicable, the mean between the high bid and low asked quotations for the Common Stock as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and asked quotations for Common Stock on at least five of the ten preceding days. 5.1.5 TRANSFERABILITY OF OPTIONS. Incentive options granted under the Plan and the rights and privileges conferred thereby may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by applicable laws of descent and distribution, and shall not be subject to execution, attachment or similar process. Upon any attempt so to transfer, assign, pledge, hypothecate or otherwise dispose of any Incentive Option under the Plan or any right or privilege conferred hereby, contrary to the provisions of the Plan, or upon the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby, such option shall thereupon terminate and become null and void. Non-statutory Options shall be transferable to the extent provided in the option agreements under which they are granted. 5.1.6 TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE. Except as may be otherwise expressly provided in the terms and conditions of the option granted to an Optionee, options granted hereunder shall terminate on the earlier to occur of: 5.1.6.1 the date of expiration thereof; or 5.1.6.2 other than the case of death of the Optionee or disability of the Optionee within the meaning of Section 22(e)(3) of the Code ("disability"), (A) 90 days after termination of the employment between the Company and the Optionee in the case of an Incentive Option, and (B) 90 days after termination of the employment or other relationship between the Company and the Optionee, unless such termination provision is waived by resolution adopted by the Board within 30 days of the termination of such relationship, in the case of a Non-statutory Option. Except as may otherwise be expressly provided in the terms and conditions of the option granted to an Optionee, in the event of the death of an Optionee while in an employment or other relationship with the Company and before the date of expiration of such option, such option shall terminate on the earlier of such date of expiration or 180 days following the date of such death. After the death of the Optionee, his executors, administrators or any person or persons to whom his option may be transferred by will or by laws of descent and distribution, shall have the right, at any time prior to such time termination, to exercise the option to the extent the Optionee was entitled to exercise such option immediately prior to his death. Except as may otherwise be expressly provided in the terms and conditions of the option granted to an Optionee, if an Optionee's employment or other relationship with the Company terminates because of a disability, the Optionee's option shall terminate on the earlier of the date of expiration thereof or 180 days following the termination of such relationship; and unless by its terms it sooner terminates and expires during such 180 day period, the Optionee may exercise that portion of his or her option which is exercisable at the time of termination of such relationship. 5 An employment relationship between the Company and the Optionee shall be deemed to exist during any period during which the Optionee is employed by the Company or by any Subsidiary. Whether authorized leave of absence or absence on military government service shall constitute termination of the employment relationship between the Company and the Optionee shall be determined by the Board at the time thereof. 5.1.7 RIGHTS OF OPTIONEES. No Optionee shall be deemed for any purpose to be the owner of any shares of Common Stock subject to any option unless and until (i) the option shall have been exercised pursuant to the terms thereof, (ii) the Company shall have issued and delivered the shares of the Optionee, and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Common Stock. 5.2 CERTAIN OPTIONAL TERMS. The Board may in its discretion provide, upon the grant of any option hereunder, that the Company shall have an option to repurchase all or any number of shares purchased upon exercise of such option. The repurchase price per share payable by the Company shall be such amount or be determined by such formula as is fixed by the Board at the time the option for the shares subject to repurchase was granted. The Board may also provide that the Company shall have a right of first refusal with respect to the transfer or proposed transfer of any shares purchased upon exercise of an option granted hereunder. In the event the Board shall grant options subject to the Company's repurchase rights or rights of first refusal, the certificate or certificates representing the shares purchased pursuant to such option shall carry a legend satisfactory to counsel for the Company referring to the Company's repurchase option. SECTION 6. ADJUSTMENT OF SHARES OF COMMON STOCK 6.1 INCREASE OR DECREASE OF OUTSTANDING SHARES. If at any time while the Plan is in effect or unexercised options are outstanding, there shall be any increase or decrease in the number of issued and outstanding shares of Common Stock through the declaration of a stock dividend or through any recapitalization resulting in a stock split-up, combination or exchange of shares of Common Stock, then and in such event (i) appropriate adjustment shall be made in the maximum number of shares of Common Stock available for grant under the Plan, so that the same percentage of the Company's issued and outstanding shares of Common Stock shall continue to be subject to being so optioned, and (ii) appropriate adjustment shall be made in the number of shares and the exercise price per share of Common Stock thereof then subject to any outstanding option, so that the same percentage of the Company's issued and outstanding shares of Common Stock shall remain subject to purchase at the same aggregate exercise price. 6.2 DISCRETIONARY ADJUSTMENT. Subject to the specific terms of any option, the Board or the Committee may change the terms of options outstanding under this Plan, with respect to the option price or the number of shares of Common Stock subject to the options, or both, when, in the sole discretion of the Board or the Committee, such adjustments become appropriate by reason of a corporate transaction described in Section 5.1.4 hereof. 6.3 CONVERSION OF SHARES. Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of 6 capital stock of any class, either in connection with direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to the number of or exercise price of shares of Common Stock then subject to outstanding options granted under the Plan. 6.4 GENERAL. Without limiting the generality of the foregoing, the existence of outstanding options granted under the Plan shall not affect in any manner the right or power of the Company to make, authorize or consummate (i) any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business; (ii) any merger or consolidation of the Company; (iii) any issue by the Company of debt securities, or preferred or preference stock that would rank above the shares subject to outstanding options; (iv) the dissolution or liquidation of the Company; (v) any sale, transfer or assignment of all or any part of the assets or business of the Company; or (vi) any other corporate act or proceeding, whether of a similar character or otherwise. SECTION 7. AMENDMENT OF THE PLAN The Board may amend the Plan at any time, and from time to time, subject to the limitation that no amendment shall be effective unless approved by the stockholders of the Company in accordance with applicable law and regulations at an annual or special meeting held within 12 months before or after the special meeting held within 12 months before or after the date of adoption of such amendment, in any instance in which such amendment would: (i) increase the number of shares of Common Stock as to which options may be granted under the Plan; of (ii) change in substance the provisions of Section IV hereof relating to eligibility to participate in the Plan. Rights and obligations under any option granted before any amendment of the Plan shall not be altered or impaired by such amendment, except with the consent of the Optionee. SECTION 8. NON-EXCLUSIVITY OF THE PLAN Neither the adoption of the Plan by the Board nor the approval of the Plan by the stockholders of the Company shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including without limitation the granting the stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. SECTION 9. GOVERNMENT AND OTHER REGULATIONS; GOVERNING LAW The obligation of the Company to sell and delivery shares of Common Stock with respect to options granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by government agencies as may be deemed necessary or appropriate by the Board or the Committee. All shares sold under the Plan shall bear appropriate legends. The Plan shall be governed by and construed in accordance with the laws of the State of Florida. 7 SECTION 10. EFFECTIVE DATE OF PLAN The effective date of the Plan is August 13, 1999, the date on which it was approved by the Board. No option may be granted under the Plan after the tenth anniversary of such effective date. 8 -----END PRIVACY-ENHANCED MESSAGE-----