-----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, NME5O9PQz4/e46PaZoeIIS18RWhYrkoztFx38GHXYKGV6ElssdGt3OYwNqhfDRkk dHVooEoxSB4dV3S0uEP2ZQ== /in/edgar/work/0001021408-00-003618/0001021408-00-003618.txt : 20001116 0001021408-00-003618.hdr.sgml : 20001116 ACCESSION NUMBER: 0001021408-00-003618 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 10QSB SEC ACT: SEC FILE NUMBER: 001-15445 FILM NUMBER: 768480 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 10QSB 1 0001.txt FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 or [_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT For the transition period from ______ to ______ Commission File Number 1-15445 DRUGMAX.COM, INC., (Exact Name of Small Business Issuer as Specified in Its Charter) STATE OF NEVADA 34-1755390 --------------- ---------- (State or other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 12505 Starkey Road, Suite A, Largo, Florida 33773 ------------------------------------------------- (Address of Principal Executive Offices) (727) 533-0431 ------------- (Issuer's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. [X] Yes [_] No As of September 30, 2000, there were 6,417,754 outstanding shares of the Issuer's common stock, par value $.001 per share. Transitional Small Business Disclosure Formats (check one): Yes [_] No [X] DRUGMAX.COM, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 March 31, 2000 ---------------------- ---------------------- ASSETS Current assets: Cash and cash equivalents $ 5,475,136 $ 6,020,129 Accounts receivable, net of allowance for doubtful accounts of $472,870 and $113,282 10,399,412 4,106,105 Inventory 9,262,283 1,416,241 Due from affiliates 50,349 13,564 Prepaid expenses and other current assets 409,377 126,542 ---------------------- ---------------------- Total current assets 25,596,557 11,682,581 Property and equipment, net 719,422 693,340 Intangible assets (primarily goodwill), net 28,432,960 26,090,635 Stockholder notes receivable 100,000 - Notes receivable - 37,614 Deposits 8,242 9,742 ---------------------- ---------------------- Total assets $ 54,857,181 $ 38,513,912 ====================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 12,326,942 $ 3,170,890 Accrued expenses 496,688 442,598 Credit lines payable 7,828,668 2,391,095 Notes payable - current portion 236,147 4,872 Due to affiliates 529,370 511,717 ---------------------- ---------------------- Total current liabilities 21,417,815 6,521,172 Notes payable - long term 1,394,358 - ---------------------- ---------------------- Total liabilities 22,812,173 6,521,172 ---------------------- ---------------------- 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; 6,417,754 and 6,200,499 shares issued and outstanding 6,419 6,202 Additional paid-in capital 36,279,447 34,079,957 Accumulated deficit (4,240,858) (2,093,419) ---------------------- ---------------------- Total stockholders' equity 32,045,008 31,992,740 ---------------------- ---------------------- Total liabilities and stockholders' equity $ 54,857,181 $ 38,513,912 ====================== ======================
See accompanying notes to unaudited condensed consolidated financial statements. -2- DRUGMAX.COM, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Three Months Ended For the Six Months Ended For the Six Months Ended September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 ---------------------------------------------------------------------------------- -------------------------- Net revenues $ 38,827,714 $ 16,799 $ 67,862,991 $ 50,697 Cost of goods sold 37,463,122 11,804 65,495,437 26,590 ------------------ ------------------ ------------------ ------------------ Gross profit 1,364,592 4,995 2,367,554 24,107 Selling, general and administrative expenses 1,819,256 168,810 4,182,445 270,117 ------------------ ------------------ ------------------ ------------------ Operating loss (454,664) (163,815) (1,814,891) (246,010) ------------------ ------------------ ------------------ ------------------ Other income (expense): Interest income 74,689 224 139,043 559 Other Income 20 360 20 360 Interest expense (247,655) (3,827) (471,611) (4,417) ------------------ ------------------ ------------------ ------------------ Total other expense (172,946) (3,243) (332,548) (3,498) ------------------ ------------------ ------------------ ------------------ Net loss $ (627,610) $ (167,058) $ (2,147,439) $ (249,508) ================== ================== ================== ================== Basic and diluted loss per share $ (0.10) $ (0.06) (0.34) (0.09) ================== ================== ================== ================== Basic and diluted weighted average number of common shares outstanding 6,417,754 2,687,794 6,396,385 2,681,496 ================== ================== ================== ==================
See accompanying notes to unaudited condensed consolidated financial statements. -3- DRUGMAX.COM, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months For the Six Months Ended Ended September 30, 2000 September 30, 1999 ----------------------- ----------------------- Cash flows from operating activities: Net loss $ (2,147,439) $ (249,508) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,433,279 6,648 Changes in operating assets and liabilities net of effects from purchase of Valley Drug Company: Accounts receivable, net (2,814,670) (1,572) Inventory (1,155,406) (6,989) Due from affiliates (36,785) - Prepaid expenses and other current assets (249,917) (197,927) Shareholder notes receivable 70,000 - Notes receivable 37,615 - Deposits 1,500 180 Accounts payable 5,195,498 62,719 Accrued expenses (126,802) 112,770 ----------------------- ----------------------- Net cash provided by (used in) operating activities 206,873 (273,679) Cash flows from investing activities: Purchases of property and equipment (63,895) - Increase in intangible assets (50,163) - Cash paid for acquisitions, net (1,757,481) - ----------------------- ----------------------- Net cash used in investing activities (1,871,539) - Cash flows from financing activities: Net change under revolving line of credit agreements 1,223,573 - Payments of long-term obligations (121,553) - Repayment of principal on note payable - (2,277) Proceeds from related party obligation - 200,000 Proceeds from issuance of note payable - 23,603 Proceeds from affiliates 17,653 - ----------------------- ----------------------- Net cash provided by financing activities 1,119,673 221,326 ----------------------- ----------------------- Net decrease in cash and cash equivalents (544,993) (52,353) Cash and cash equivalents at beginning of period 6,020,129 56,986 ----------------------- ----------------------- Cash and cash equivalents at end of period $ 5,475,136 $ 4,633 ======================= ======================= Supplemental disclosures of cash flow information: Cash paid during period for interest $ 482,119 $ 189 ======================= ======================= Cash paid for income taxes $ - $ - ======================= ======================= Supplemental schedule of non-cash investing and financing activities: DrugMax.com, Inc. purchased all of the capital stock of Valley Drug Company for $1,757,481 in cash plus 217,255 shares of its common stock. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 14,059,822 Cash and stock issued for Valley capital stock 3,957,188 ---------------------- Liabilities Assumed $ 10,102,634 ======================
See accompanying notes to unaudited condensed consolidated financial statements -4- DrugMax.com, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements For the Three-and Six-Month Periods Ended September 30, 2000 and 1999. NOTE A-BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of DrugMax.com, Inc. and its wholly-owned subsidiaries: Discount Rx, Inc., Valley Drug Company, Desktop Corporation and its subsidiary Desktop Ventures, Inc, and Desktop Media Group, Inc.; and its 70% owned subsidiary VetMall, Inc. (collectively referred to as the "Company"). All intercompany balances and transactions have been eliminated. In March 2000, Becan Distributors, Inc., the Company's wholly owned subsidiary, was merged into the Company. All Becan financial activity has been included as a division of the Company. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company's Form 10-KSB/A as of and for the year ended March 31, 2000, and as of and for the period September 8, 1998 through March 31, 1999. NOTE B - RECENTLY ISSUED AUTHORITATIVE GUIDANCE In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101, as amended, provides guidance related to revenue recognition issues based on interpretations and practices followed by the SEC. Management has determined that the adoption of SAB 101 did not have a material impact on its September 30, 2000, condensed consolidated financial statements. In June 1998, the Financial Accounting Standards Board ("FASB") issued, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities.", which will be effective for the Company on April 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 as amended by SFAS 137 and 138, requires, among other things, that all derivatives be recognized in the consolidated balance sheets as either assets or liabilities and measured at fair value. The corresponding derivative gains and losses should be reported based upon the hedge relationship, if such a relationship exists. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133, are required to be reported in income. The Company is in the process of quantifying the impact of SFAS 133 on its consolidated financial statements. In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation". FIN 44 clarifies the application of APB Opinion No. 25 regarding (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a stock option plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. Management believes that the adoption of FIN 44 will not have a material effect on the financial position or results of operations of the Company. NOTE C - ACQUISITIONS In November 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. Becan had net revenues of approximately $31.1 million and $26.5 million for its fiscal year ended March 31, 1999, and for its six months ended September 30, 1999, -5- respectively. Results of operations for the fiscal year ended March 31, 2000, include the results of operations of Becan from November 26, 1999, through March 31, 2000. In March 2000, the Company acquired Desktop Corporation ("Desktop") and a 70% interest in VetMall, Inc. ("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 is an e-commerce pet care product sales distributor. Desktop had revenues and a net loss for the year ended March 31, 2000, of $2.4 million and ($1.9) million, respectively. Results of operations for the fiscal year ended March 31, 2000, include the results of operations of Desktop and VetMall from March 20, 2000 through March 31, 2000. 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, the Sellers received an aggregate of 226,666 shares of the Company's common stock and cash in the amount of $1.7 million. The Sellers were granted the right to include their shares in any registration filed by the Company until such time as their shares of the Company may be sold pursuant to Rule 144 of the General Rules and Regulations promulgated under the Securities Act of 1933, as amended. In addition, the Sellers deposited 22,666 shares of the Company's common stock with an escrow agent (the "Holdback Shares"). Based on audited financial statements of Valley as of April 19, 2000, the stockholders' equity amounted to $400,667 which was $141,160 less than the threshold amount of $541,827. Therefore, 9,411 of the Holdback Shares will be returned to the Company. After consideration of the return of the Holdback Shares, a total of 217,255 shares at $10.125 per share were issued for the acquisition. The acquisition was accounted for using the purchase method of accounting and accordingly $3.6 million of goodwill was recorded. The goodwill will be amortized over fifteen (15) years. The results of operations of Valley are included in the condensed consolidated financial statements from the purchase date. The Company acquired the following assets and liabilities (net of cash received of $502) in the above business combination: Accounts receivable $ 3,478,637 Inventory 6,690,636 Property and equipment 67,146 Other assets 266,380 Goodwill 3,557,023 Assumption of liabilities (10,102,634) -------------- Net value of purchased assets 3,957,188 Fair value of common stock issued 2,199,707 -------------- Cash paid for acquisitions $ 1,757,481 ============== The unaudited pro forma effects of the acquisitions of Becan, Valley, Desktop and VetMall on the Company's revenues, net (loss) income and net (loss) income per share, had the acquisitions occurred on April 1, 1999 are as follows:
For the Six For the Six Months Ended Months Ended September 30, September 30, 2000 1999 ----------------- ---------------- Revenues $ 70,679,990 $ 52,039,842 Net (loss) income (2,285,667) 294,455 Basic and diluted net (loss) income per share ($.36) $.06
NOTE D - IMPAIRMENT OF LONG-LIVED ASSETS As events and circumstances change, the Company evaluates the recoverability of the net carrying value of its property and equipment and its intangible assets by comparing the carrying values to the estimated future undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the -6- 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. NOTE E - INCOME TAXES The Company has adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. Under SFAS 109, the Company uses the asset and liability method which recognizes the amount of current and deferred taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the consolidated financial statements and as measured by the provisions of enacted tax laws. The Company has a gross deferred tax asset as of September 30, 2000, which represents the potential future tax benefit associated with its operating losses to date. Management has evaluated the available evidence regarding the Company's future taxable income and other possible sources of realization of deferred tax assets. As a result of the evaluation, a 100 percent valuation allowance has been established by management against the gross deferred tax asset, as it is more likely than not that the deferred tax asset will not be realized. The Company continually reviews the adequacy of the valuation allowance and will recognize deferred tax asset benefits only when a reassessment indicates that it is more likely than not that the benefits will be realized. NOTE F - COMMITMENTS AND CONTINGENCIES 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 web 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. On April 19, 2000, in conjunction with the Valley acquisition, the Company agreed to become an additional guarantor of the outstanding bank indebtedness of Valley. As of September 30, 2000, Valley maintains a revolving line of credit and a term loan with National City Bank with a combined outstanding balance of approximately $5,682,500. The revolving line of credit and term loan are also personally guaranteed by the former owners of Valley. In October 2000, the line of credit and term loan with National City Bank were paid in full with the proceeds from the Mellon Bank, N.A. refinancing (See Subsequent Events Footnote). On July 7, 2000, the Company entered into a consulting agreement with Marc Mazur Consulting, Inc. ("Mazur"). Upon satisfaction by Mazur of its obligations under the agreement, the Company will grant to Mazur warrants to purchase 200,000 shares of the Company's common stock with an exercise price of $10.00 per share. Upon issuance, these warrants will be immediately exercisable. On August 10, 2000, the Company entered into a Consulting Agreement with Stephen M. Watters ("Watters") for an annual fee of $100,000, payable monthly, for a term of thirty-six months, terminating August 10, 2003. The Consulting Agreement terminates the Employment Agreement by and between the Company and Watters dated April 15, 1999. On September 13, 2000, the Company entered into a letter of intent to purchase substantially all of the assets of Penner & Welsch, Inc. ("P&W"), a wholesale distributor of pharmaceuticals, over-the-counter products and health and beauty care products, headquartered near New Orleans, Louisiana. Also on that date, P&W filed a voluntary petition for Chapter 11 relief under the United States Bankruptcy Code. The case is pending in the United States Bankruptcy Court for the Eastern District of Louisiana. Pursuant to the letter of intent, the Company will work with P&W, on an exclusive basis, to formulate a bankruptcy reorganization plan, pursuant to which the Company -7- offered to purchase, for $750,000 worth of restricted DrugMax common stock, all of P&W's assets and/or equity, without its liabilities, while keeping P&W's customers in continuous service. While the Company expects that any plan of reorganization filed by P&W will conform with the terms of the Company's letter of intent, it can not guarantee that when filed, such plan of reorganization will in fact conform to the terms of the Company's letter of intent, nor can the Company guarantee that the Bankruptcy Court will confirm a bankruptcy reorganization plan that is acceptable to the Company or that the Bankruptcy Court will approve the transactions contemplated by the letter of intent. In addition, even if the contemplated transactions are completed, the Company can not guarantee that it will successfully assimilate the additional personnel, operations, acquired technology and products of P&W into the Company's business, or retain key personnel and customers. In addition, on September 13, 2000, the Company entered into a management agreement with P&W, pursuant to which it will manage the day-to-day operations of P&W, in exchange for a management fee equal to a percentage of the gross revenues of P&W each month. Also on September 13, 2000, the Company entered into a financing and security agreement with P&W, pursuant to which the Company agreed to provide P&W with a secured revolving line of credit for the sole purpose of purchasing inventory from the Company, up to an aggregate amount of $2.5 million as may be requested by P&W and as may be allowed by the Company in its sole discretion. The line of credit is secured by a second lien on substantially all of the assets of P&W, second only to P&W's primary banking facility, as well as real estate owned by an affiliate of P&W. On October 31, 2000, the Bankruptcy Court entered a final order approving the management agreement and financing and security agreement. NOTE G - SEGMENT INFORMATION The Company is organized into two strategic business units which have separate management teams and infrastructures that offer different products and services. Each segment requires different employee skills, technology, and marketing strategies. The wholesale distribution segment includes traditional wholesale, as well as internet-based distribution operations. The computer software development segment includes the design, development and delivery of technology solutions through custom programming services and web hosting services. The Company evaluates the performance of each segment based upon profit or loss from operations before income taxes and non-recurring gains or losses. There has been no change in the basis of segmentation or in the measurement of segment losses since the Company's last annual report on Form 10-KSB/A. Summarized financial information by business segment is as follows:
For the Three For the Three For the Six For the Six Months Ended Months Ended Months Ended Months Ended September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 ------------------ ------------------ ------------------ ------------------ Revenues from external customers Distribution $ 38,701,038 $ 16,799 $ 67,638,518 $ 50,697 Software Development 126,676 -- 224,473 -- -------------- -------------- -------------- -------------- Total $ 38,827,714 $ 16,799 $ 67,862,991 $ 50,697 ============== ============== ============== ============== Segment loss from operations Distribution $ (448,745) $ (163,815) $ (1,290,001) $ (246,010) Software Development (5,919) -- (524,890) -- -------------- -------------- -------------- -------------- Total $ (454,664) $ (163,815) $ (1,814,891) $ (246,010) ============== ============== ============== ============== September 30, 2000 March 31, 2000 ------------------ -------------- Assets Distribution $ 54,687,538 $ 38,408,017 Software Development 169,643 105,895 -------------- -------------- Total $ 54,857,181 $ 38,513,912 ============== ===============
-8- There were no inter-segment sales or transfers during either the three-or six-month periods ended September 30, 2000 or 1999. Operating loss by business segment excludes interest income, interest expense, and other income and expenses. NOTE H - SIGNIFICANT EVENTS In August 2000, the Company established its online trade exchange, DrugMaxTrading.com, which offers one of the first business-to-business online trade exchanges for pharmaceuticals, over-the-counter products, health and beauty care products, and nutritional supplements dedicated exclusively to manufacturers, distributors, wholesalers and retailers in the pharmaceutical and over-the-counter product markets. DrugMaxTrading.com allows the Company's trade exchange members to lower their overall costs of doing business while providing them with wider market access and competitively priced products. Capitalizing on the efficiencies of the Internet and its strategic alliances, DrugMaxTrading.com aggregates a variety of product and market participant information, and, in doing so, facilitates the execution of mutually beneficial online transactions among trade exchange members in an open-market format. The DrugMaxTrading.com web site, though complete, was not yet processing business as of September 30, 2000. On or about September 19, 2000, the Company informed the selling shareholders of Desktop that 20,000 shares held under escrow, pursuant to the acquisition agreement, would not be released as contemplated in the initial purchase price. Upon final receipt of these shares from the escrow agent, management anticipates reducing the purchased goodwill by approximately $329,000. NOTE I - SUBSEQUENT EVENTS In October 2000, the Company obtained from Mellon Bank, N.A. ("Mellon") a line of credit and a $2 million term loan to refinance its prior bank indebtedness and to provide additional working capital and for other general corporate purposes. The new line of credit enables the Company to borrow a maximum of $15 million, with borrowings limited to 85% of eligible accounts receivable and 65% of eligible inventory. The term loan is payable in monthly principal installments of $55,556 commencing on December 1, 2000, and in one final payment of the remaining principal balance plus all accrued and unpaid interest thereon on October 24, 2003. The term loan bears interest, payable monthly, at 0.75% per annum over the base rate, which is the higher of Mellon's prime rate or the effective federal funds rate plus 0.50% per annum. The revolving credit facility will bear interest at the floating rate of 0.25% per annum above the base rate. After the Company delivers its audited financial statements for the fiscal year ending March 31, 2001 to Mellon, the applicable margin over the base rate may change on an annual basis depending on the ratio of funded debt to EBITDA. At the Company's option, it may instead pay interest at a LIBOR rate plus an applicable margin, which also varies on the ratio of funded debt to EBITDA. On October 27, 2000, proceeds were used to repay the Merrill Lynch Financial and National City Bank credit facilities, aggregating approximately $8.9 million, and approximately $5.5 million was available for borrowing. On November 1, 2000, the Company filed a registration statement with the Securities and Exchange Commission for a proposed secondary offering of 2,000,000 shares of the Company's common stock. Of the 2,000,000 offered shares, the Company will offer 1,600,000 shares and certain selling stockholders will offer 400,000 shares. The Company will not receive any proceeds from the sale of shares by the selling stockholders. Utendahl Capital Partners, L.P. is the lead managing underwriter of the proposed offering. The Company expects to use the net proceeds of this offering primarily for working capital, as well as future strategic acquisitions, business expansion and marketing efforts. There can be no assurance as to the completion of the secondary offering. On November 6, 2000, the Company extended the $1,000,000 line of credit agreement with First Community Bank of America for an additional period of six months with a due date of April 1, 2001. Terms and conditions of the agreement provide for interest to be charged at 1% over the rate of interest (6.3% as of September 30, 2000) paid on the Company's $1,000,000 certificate of deposit used to collateralize the loan facility, in accordance with the Security Agreement dated March 17, 2000. The certificate of deposit matures on March 15, 2001. The total balance outstanding on this line of credit was approximately $996,000 as of September 30, 2000. -9- NOTE J - LOSS PER SHARE Basic net loss per common share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is calculated by dividing loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. The Company does not have any dilutive shares outstanding as of September 30, 2000 and 1999, respectively. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. The following management discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented elsewhere in this Form 10-QSB. Certain oral statements made by management from time to time and certain statements contained herein that are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements, including those in Management's Discussion and Analysis of Financial Condition and Results of Operations, are statements regarding the intent, belief or current expectations, estimates or projections of the Company, its Directors or its Officers about the Company and the industry in which it operates, and assumptions made by management, and include among other items, (a) the Company's strategies regarding growth and business expansion, including future acquisitions; (b) the Company's financing plans; (c) trends affecting the Company's financial condition or results of operations; (d) the Company's ability to continue to control costs and to meet its liquidity and other financing needs; (e) the declaration and payment of dividends; (f) the Company's use of proceeds from the currently contemplated equity offering, and (g) the Company's ability to respond to changes in customer demand and regulations. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that the anticipated results will occur. When used in this report, the words "expects," "anticipates," intends," "plans," "believes," "seeks," "estimates," and similar expressions are generally intended to identify forward-looking statements. Important factors that could cause the actual results to differ materially from those in the forward-looking statements include, among other items, (i) changes in the regulatory and general economic environment related to the health care industry; (ii) conditions in the capital markets, including the interest rate environment and the availability of capital; (iii) changes in the competitive marketplace that could affect the Company's revenue and/or cost bases, such as increased competition, lack of qualified marketing, management or other personnel, and increased labor and raw materials costs; (iv) changes in technology or customer requirements, which could render the Company's technologies noncompetitive or obsolete; (v) new product introductions, product sales mix and the geographic mix of sales and (vi) our customers' willingness to accept our Internet platform. Further information relating to factors that could cause actual results to differ from those anticipated is included but not limited to information under the headings "Business" and "Risk Factors" in the Company's Form 10-KSB/A for the year ended March 31, 2000, and the Company's Registration Statement on Form SB-2, as well as information contained in this Form 10-QSB. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Overview DrugMax.com, Inc. is primarily an e-commerce business providing: (1) the wholesale distribution of pharmaceuticals, over-the-counter products, health and beauty care products, veterinary products, and nutritional supplements and (2) one of the first business-to-business online trade exchanges for the same products, dedicated exclusively to manufacturers, distributors, wholesalers and retailers in the pharmaceuticals and over-the-counter product markets. The Company will continue to derive a significant portion of revenue from its traditional "brick and mortar" full-line wholesale distribution business. The Company utilizes its competitive advantage of being one of the early entrants into the Internet business-to-business pharmaceutical market, leveraging its existing infrastructure, technology, relationships, marketing and management resources. The Company believes that the combination of its traditional wholesale distribution business with both its online wholesale distribution business and its e-commerce trade -10- exchange provides the "click and mortar" combination that will allow it to aggressively market and distribute its products and services. In general, the Company distributes its products primarily to independent pharmacies in the continental United States, and secondarily to small and medium-sized pharmacy chains, alternate care facilities and other wholesalers and retailers. Since the early December 1999 launch of its website, www.drugmax.com, over 9,000 independent pharmacies, small regional pharmacy chains, wholesalers and distributors have registered to purchase products through the Company's web site. The Company believes it has been successful in attracting potential customers to its web site because it has designed its web site as an online source for a select group of products, typically higher cost and margin products, which make up a large percentage of the Company's targeted customers sales. In addition, the Company maintains an inventory of over 20,000 stock keeping units, and continues to serve its customers as a primary, full- line wholesale distributor through a combination of its e-commerce venues and traditional distribution methods. The Company's online trade exchange, DrugMaxTrading.com, established in August 2000, offers one of the first business-to-business online trade exchanges for pharmaceuticals, over-the-counter products, health and beauty care products, and nutritional supplements dedicated exclusively to manufacturers, distributors, wholesalers and retailers in the pharmaceutical and over-the- counter product markets. DrugMaxTrading.com allows the Company's trade exchange members to lower their overall costs of doing business while providing them with wider market access and competively priced products. The DrugMaxTrading.com concept capitalizes on the efficiencies of the Internet and its strategic alliances, offering a variety of product and market participant information, and, in doing so, facilitates the execution of mutually beneficial online transactions among trade exchange members in an open-market format. Results of Operations Three- and Six-Month Periods Ended September 30, 2000 and 1999. Revenues. The Company generated revenues of $38.8 million and $67.9 million, respectively, for the three- and six-month periods ended September 30, 2000, compared to $16,799 and $50,697, respectively, for the three- and six-month periods ended September 30, 1999. The increase in primarily is attributable to the acquisitions of Becan in November 1999, Desktop and VetMall in March 2000, and Valley in April 2000, as well as additional organic growth within each respective acquired operation. Gross Profit. The Company secured gross profits of $1.4 million and $2.4 million, respectively, for the three- and six-month periods ended September 30, 2000, compared to $4,995 and $24,107, respectively, for the three- and six-month periods ended September 30, 1999. Gross margins for both the three- and six- month periods ended September 30, 2000 was 3.5%, compared to 29.7% and 47.6% for the three- and six-month periods ended September 30, 1999, respectively. The increase in gross profit is attributable to the acquisitions of Becan in November 1999, Desktop and VetMall in March 2000, and Valley in April 2000. The quarter-to-quarter growth of gross profits generated by the acquired companies has been enhanced through the implementation of the Company's e-commerce strategy and the operating synergies recognized post acquisition. -11- The decline in the gross margin percentages is attributable to the variety of product offerings of acquired companies which contribute varying degrees of profit margins from sales generated. Selling, general and administrative expenses. The Company incurred selling, general and administrative expenses of $1.8 million and $4.2 million for the three- and six-month periods ended September 30, 2000, respectively, compared to $168,810 and $270,117 for the three- and six-month periods ended September 30, 1999, respectively. These costs typically include various administrative, sales, marketing and other indirect operating costs. The increase between periods was primarily due to additional advertising and promotional expenses, increased payroll, and amortization of goodwill associated with the acquisitions of Becan, Desktop, VetMall and Valley. Interest expense. Interest expense was $247,655 and $471,611, respectively, for the three- and six-month periods ended September 30, 2000, compared to $3,827 and $4,417, respectively, for the three- and six-month periods ended September 30, 1999. The increase between periods was a result of borrowings under the Company's credit facilities for the financing of additional working capital needs associated with the various acquisitions made by the Company, and to a greater extent, the outstanding debt assumed with the Valley acquisition. Net loss per share. The net loss per share for the quarter ended September 30, 2000, amounted to $(.10) per share compared to $(.24) per share for the quarter ended June 30, 2000, an improvement of $.14 per share. Income Tax. The Company has no income tax provision for the periods presented due to its recurring net operating losses. These net operating losses may be carried forward for up to 15 years to offset future taxable income. Inflation; Seasonality. Management believes that there was no material effect on operations or the financial condition of the Company as a result of inflation for the three or six months ended September 30, 2000. Management also believes that its business is not seasonal; however, significant promotional activities can have a direct impact on sales volume in any given quarter. Financial Condition, Liquidity and Capital Resources The Company's operations produced positive cash flow for the quarter ended September 30, 2000. The significant improvement from prior periods was attributable to growth of the Company's core business, control over corporate expenditures and management's ability to maintain acceptable gross margins. The Company had previously financed its operations primarily through proceeds received from a public offering in November 1999. Net proceeds from that offering were approximately $11.9 million. The Company has working capital, and cash and cash equivalents, of $4.2 million and $5.5 million at September 30, 2000, respectively. Cash provided from operating activities was $206,873 for the six months ended September 30, 2000. The favorable increase in cash provided from operations is principally attributable to the Company's net loss for such period offset by depreciation and amortization, as well as an increase in accounts receivable and inventory resulting from increased sales associated with the Becan and Valley acquisitions, an increase in prepaid expenses and other current assets, and a decrease in accrued expenses, offset by an increase in accounts payable and decreases in notes receivable. Net cash used in investing activities of $1,871,539 primarily represents the cash paid for the acquisition of Valley. Net cash provided by financing activities was $1,119,673 for the six months ended September 30, 2000, representing the net change in revolving line of credit agreements and proceeds from affiliates, which was offset by repayments of long-term obligations. 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 was approximately $996,000 as of September 30, 2000. Terms of the agreement provide for interest to be charged at 1% over the rate of interest (6.3% as of September 30, 2000) paid on the Company's $1,000,000 certificate of deposit held by First Community Bank of America and used to collateralize the credit facility. The balance on the line of credit became due on October 1, 2000. On November 6, 2000, documents were executed to extend the line of credit agreement for an additional six-month period with a due date of April 1, 2001. 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 September 30, 2000 the outstanding principal on the note was approximately $2,780,500 and approximately $774,500 available for borrowing. Terms of the -12- agreement provide for interest to be charged at the rate of 30-day commercial paper, plus 2.5% (9.06% as of September 30, 2000.) The Merrill Lynch line of credit was paid in full in October 2000, through the Mellon Bank, N.A. refinancing. As part of the acquisition of Valley, the Company agreed to become an additional guarantor of the outstanding bank indebtedness of Valley. As of September 30, 2000, Valley maintained a revolving line of credit and a term loan with National City Bank with a combined outstanding balance of approximately $5,682,500. In October 2000, the National City Bank line of credit was paid in full through the Mellon Bank N.A. refinancing. In October 2000, the Company obtained from Mellon Bank, N.A. ("Mellon") a line of credit and a $2.0 million term loan to refinance its prior bank indebtedness and to provide additional working capital and for other general corporate purposes. The new line of credit enables the Company to borrow a maximum of $15 million, with borrowings limited to 85% of eligible accounts receivable and 65% of eligible inventory. The term loan is payable over a 36- month period with interest at 0.75% per annum over the base rate, which is the higher of Mellon's prime rate or the effective federal funds rate plus 0.50% per annum. The revolving credit facility will bear interest at the floating rate of 0.25% per annum above the base rate. After the Company delivers its audited financial statements for the fiscal year ending March 31, 2001, to Mellon, the applicable margin over the base rate may change on an annual basis depending on the ratio of funded debt to EBITDA. At the Company's option, it may instead pay interest at a LIBOR rate plus an applicable margin, which also varies on the ratio of funded debt to EBITDA. The Company used the proceeds from this credit facility to repay its prior credit facilities. On November 1, 2000, the Company filed a registration statement with the Securities and Exchange Commission for a proposed secondary offering of 2,000,000 shares of the Company's common stock. Of the 2,000,000 offered shares, the Company will offer 1,600,000 shares and certain selling stockholders will offer 400,000 shares. The Company will not receive any proceeds from the sale of shares by the selling stockholders. Utendahl Capital Partners, L.P. is the lead managing underwriter of the proposed offering. There can be no assurance as to the completion of the secondary offering. PART II - OTHER INFORMATION Item 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 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-one 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 Nutricueticals.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 investor in connection with the acquisition of Healthseek.com Corporation, a Massachusetts corporation. -13- (3) On August 16, 1999, the Company issued an aggregate of 20,000 shares of common stock to Lyntren Communications, Inc. in connection with the acquisition of the Nutriceuticals.com domain name. (4) On November 26, 1999, the Company issued an aggregate of 2,000,000 shares of common stock to Dynamic Health Products, a Florida corporation, in connection with the acquisition of Becan Distributors, Inc. (5) On March 20, 2000, the Company issued an aggregate of 50,000 shares of common stock in connection 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 connection with the acquisition of VetMall. (8) On April 19, 2000, the Company issued 217,225 shares of common stock in connection with the acquisition of Valley Drug Company. None of the foregoing transactions involved any underwriter, underwriting discounts or commissions or any public offering, and 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 to information about the Company. Item 3. - DEFAULTS UPON SENIOR SECURITIES Not applicable Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of the Stockholders of the Company was held on August 10, 2000. At the meeting, the following actions were taken by the shareholders: William L. LaGamba, Stephen M. Watters, Ronald J. Patrick, Howard L. Howell, DDS, Jeffery K Peterson, Jugal K. Taneja and Joseph Zappala were elected as Directors to the serve until the next annual meeting and until their respective successors are elected and qualified or until their earlier resignation, removal from office or death. The votes cast for and against each were as follows: For Against Abstain --- ------- ------- William L. LaGamba 4,112,983 0 0 Stephen M. Watters 4,112,983 0 0 Ronald J. Patrick 4,112,983 0 0 Howard L. Howell, DDS 4,112,983 0 0 Jeffery K Peterson 4,112,983 0 0 Jugal K. Taneja 4,112,983 0 0 Joseph Zappala 4,112,983 0 0 The Company's 1999 Incentive and Non-Statutory Stock Option Plan was approved and the issuance of 400,000 shares of Common Stock covered by the plan was authorized. The voting on the proposal was as follows: For Against Abstain -- ------- ------- 4,112,983 0 0 -14- Item 5. OTHER INFORMATION. In August 2000, the Company relocated the business offices of Desktop Corporation and VetMall, Inc. from Dallas, Texas, to the Florida location at 12505 Starkey Road, Suite A, Largo, Florida 33773. The move was made in order to consolidate the Company's operations and to reduce overhead. Item 6. 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 of Reorganization between DrugMax.com, Inc., Jimmy L. Fagala, K. Sterling Miller, and HCT Capital Corp. dated as of March 20, 2000. (3) 2.5 Stock Purchase Agreement between DrugMax.com, Inc. and W.A. Butler Company dated as of March 20, 2000. (3) 2.6 Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A. Blundo dated as of April 19, 2000. (4) 2.7 Letter of Intent to acquire Penner & Welsch, Inc. by Discount RX, Inc., a wholly-owned subsidiary of DrugMax.com, Inc., dated September 13, 2000.* 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. (8) 3.6 Articles and Plan of Merger of Becan Distributors, Inc. and DrugMax.com, Inc., filed March 29, 2000. (8) 3.7 Amended and Restated Bylaws, dated November 11, 1999. (5) 4.2 Specimen of Stock Certificate. (8) 10.1 Employment Agreement by and between Nutriceuticals.com Corporation and William L. LaGamba dated January 1, 2000. (7) -15- 10.3 Employment Agreement by and between Valley Drug Company and Ronald J. Patrick dated April 19, 2000. (8) 10.4 Employment Agreement by and between Valley Drug Company and Ralph A. Blundo dated April 19, 2000. (8) 10.5 Consulting Agreement by and between Nutriceuticals.com Corporation and Jugal K. Taneja, dated as of April 1, 1999. (1) 10.6 Loan and Security Agreement in favor of Merrill Lynch Business Financial Services, Inc. from the Company dated February 15, 2000. (8) 10.7 Security Agreement in favor of First Community Bank of America from the Company dated March 17, 2000. (8) 10.8 Consulting Agreement by and between DrugMax.com, Inc. and Stephen M. Watters dated August 10, 2000.(9) 10.9 Loan and Security Agreement among DrugMax.com, Inc. and Valley Drug Company and Mellon Bank, N.A., dated October 24, 2000. (9) 10.10 Note in favor of First Community Bank of America from the Company dated November 6, 2000.* 10.11 Management Agreement between Discount RX and Penner & Welsch, Inc. dated September 13, 2000.* 21.0 Subsidiaries of DrugMax.com, Inc. (9) 27.1 Financial Data Schedule (for SEC use only). * 99.1 DrugMax.com, Inc.1999 Incentive and Non-Statutory Stock Option Plan. (8) ___________________________ * 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-KSB, filed June 29, 2000, File No. 0-24362. (8) Incorporated by reference to the Company's Form 10-KSB/A, filed July 14, 2000, File No. 0-24362. -16- (9) Incorporated by reference to the Company's Registration Statement on Form SB-2, filed on November 1, 2000. (b) Reports on Form 8-K. - ------------------------ During the three months ended September 30, 2000, the Company filed the following one (1) report on Form 8-K: Form 8-K dated September 14, 2000, pursuant to which the Company reported that it had entered into a Letter of Intent and Management Agreement with Penner & Welsch, Inc. -17- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DrugMax.com, Inc. Date: November 13, 2000 By: /s/ Jugal K. Taneja --------------------- ------------------------------------ Jugal K. Taneja Chief Executive Officer Date: November 13, 2000 By: /s/ Ronald J. Patrick --------------------- ------------------------------------ Ronald J. Patrick Chief Financial Officer, Vice President of Finance, Secretary and Treasurer -18- Index to Exhibits Exhibit No. Description --- ----------- 2.7 Letter of Intent to acquire Penner & Welsch, Inc. by Discount RX, Inc., a wholly-owned subsidiary of DrugMax.com, Inc., dated September 13, 2000. 10.10 Note in favor of First Community Bank of America from the Company dated November 6, 2000. 10.11 Management Agreement between Discount RX and Penner & Welsch, Inc. dated September 13, 2000. 27.1 Financial Data Schedule (for SEC use only). EX-2.7 2 0002.txt LETTER OF INTENT EXHIBIT 2.7 Discount Rx, Inc. 12505 Starkey Road, Suite A Largo, FL 33773 September 13, 2000 Penner & Welsch, Inc. 10016 River Road St. Rose, LA 70087 Gentlemen: On behalf of Discount Rx, Inc. ("DRx"), we are pleased to provide you with the following proposal relating to our acquisition of Penner & Welsch, Inc. ("P&W"). We are prepared to work with P&W on an exclusive basis to formulate a bankruptcy reorganization plan (the "Plan") to purchase P&W's assets and/or equity, without its liabilities (the "Acquisition"), to obtain the best possible payment to P&W's creditors, while keeping P&W's customers and to the extent possible, its employees, in continuous service. We also agree to work with you to finalize the necessary arrangements and documentation and to execute definitive transaction documents based on the terms, and within the time frame, set forth below. The following paragraphs reflect our understanding of the matters described therein, but do not constitute a complete statement of, or a legally binding or enforceable agreement or commitment on the part of either DRx or P&W, except as specifically contemplated below. The principal terms of our proposal are as follows: 1. Consideration. The purchase price will be as follows: ------------- a. DRx will cause its parent company, DrugMax.com, Inc., to issue such number of shares of its common stock, $.001 par value per share (the "Common Stock") to P&W as set forth below. The number of shares of Common Stock to be delivered to P&W on the Closing Date shall be calculated by dividing $750,000 by the five-day average closing price of the Common Stock during the five trading days preceding the Closing Date. b. The shares of Common Stock will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws on the grounds that the issuance of the Common Stock is exempt from registration pursuant to Section 4(2) of the Securities Act under the Securities Act. Accordingly, P&W agrees that it will not transfer such shares of Common Stock unless it is in compliance with all applicable securities laws and agrees to enter into a one year lock-up agreement. Page 2 c. P&W will be required to make various standard representations with regard to its investment in the Common Stock in the definitive agreement. 2. Management Agreement. As soon as possible after the bankruptcy of P&W is -------------------- filed, P&W shall move the Bankruptcy Court for approval to retain DRx as its manager and agent to manage P&W's day-to-day business affairs during the pendency of the bankruptcy case. The terms and conditions of such management agreement (the "Management Agreement") shall be acceptable to DRx, in its sole discretion, and shall be substantially in the form of the Management Agreement attached hereto as Exhibit A. 3. Debtor-in-Possession Financing. ------------------------------ a. Upon interim approval of the Management Agreement and of the following financing facility by the Bankruptcy Court, DRx agrees to provide P&W with debtor-in-possession financing upon terms to be mutually agreed upon between the parties (the "DIP Financing Facility"). DRx shall not be required to provide any inventory pursuant to the DIP Financing Facility until the same is approved by the Banrkuptcy Court. The DIP Financing Facility shall be on such terms and conditions as are acceptable to DRx, in its sole discretion. b. All sums payable to DRx pursuant to the DIP Financing Facility shall become immediately due and payable upon the earlier to occur of the following: i. Confirmation of a competing plan in the P&W bankruptcy case; ii. Acceptance by P&W of a competing offer for the assets; iii. Proposal by P&W of a plan that contemplates a sale to another party; iv. Termination of the Management Agreement, provided that if the Management Agreement is terminated without default on the part of P&W, P&W will have thirty (30) days in which to repay the sums due to DRx; v. Conversion of the P&W bankruptcy to a case under Chapter 7 of the United States Bankruptcy Code; or vi. Appointment of a trustee or of an examiner with expanded power in the P&W bankruptcy case; vii. Any event of default pursuant to the terms of the loan documents; viii. An uncured event of default under any cash collateral order or under any forbearance agreement approved by the bankruptcy court; ix. Upon the filing of a Plan by any party other than P&W, the Manger or the Manager's affiliates; x. Any uncured event of default by P&W under it's lease with Greg John's Real Estate, LLC ("Realty") or a default by Realty under its mortgage or forbearance or related agreement with Hibernia National Bank with respect to the property identified on Exhibit B --------- attached hereto; Page 3 xi. The incurring of indebtedness by P&W outside the ordinary course of business or without the consent the Company hereunder; or xii. The dismissal of the P&W bankruptcy case for any reason, without the written consent of the Company hereunder. c. In order to secure the advances to be made under the DIP Financing Facility, P&W will grant DRx a security interest in and to all of P&W's assets, including, without limitation, inventory, accounts receivable, customer accounts and lists, trademarks, patents, copyrights and other intellectual property rights, leases, and Realty shall grant DRx a security interest in its immovable property including all furniture, fixtures and equipment situated thereon and all rents, revenues and profits therefrom, and all property incorporated into the immovable property described on Exhibit "B" hereto, which security ----------- interests shall be junior only to properly perfected, pre- existing, pre-petition security interests in favor of Hibernia National Bank. In addition to being secured the obligations of P&W to DRx under the DIP Financing Facility shall have the highest priority as expenses of administration pursuant to the provisions of sections 503(b), 507(a)(1) and 364(c)(2) and (3) of the United States Bankruptcy Code, and in any event shall be given administrative expense priority, and no expenses of administration of the bankruptcy case shall be granted a status pari passu or higher or greater than that of DRx. d. It shall be a condition to DRx's obligations to provide the DIP Financing Facility and to enter into the Management Agreement that (a) the Debtor, as debtor-in-possession, for itself, its estate, its successors (including, but not limited to a Chapter 7 trustee, Chapter 11 trustee, an examiner, or receiver) and assigns and any parties claiming by or through them and the Official Committee of Unsecured Creditors, and all entities claiming by or through any of them, be barred forever from questioning or contesting the existence, validity, priority, perfection, extent and enforceability of any of DRx's post- petition claims or security interests and (b) the Debtor, as debtor-in-possession, for itself, its estates, its successors (including, but not limited to a Chapter 7 trustee, Chapter 11 trustee, an examiner, or receiver) and assigns and any parties claiming by or through them and the Official Committee of Unsecured Creditors be barred forever from asserting any claim or cause of action against DRx now existing under applicable state or federal law and whether arising pre or post petition. It shall be a further condition to the Dip Financing Facility that all security interests and liens granted by P&W to DRx be duly perfected and enforceable and that the collateral related to same not be subject to any setoff, recoupment, reclamation, defense, claim, counterclaim or any other defense or objection of any type, kind or nature whatsoever, other than as may be exercised or asserted by Hibernia National Bank, and not be subject to avoidance pursuant to applicable state and federal laws. Page 4 4. Mutual Cooperation. As soon as reasonably practicable after the ------------------ commencement of P&W's bankruptcy case, P&W shall pursue diligently Bankruptcy Court approval of the Management Agreement, the DIP Financing Facility and a Plan incorporating the Acquisition agreement, all as set forth hereinabove. P&W and DRx shall cooperate and take any and all steps reasonably necessary and/or appropriate in order to obtain Bankruptcy Court approval of the foregoing. P&W shall not set off claims or demands upon DRx during the bankruptcy case or following confirmation, but instead P&W shall work cooperatively with DRx including but not limited to the service upon DRx and it's counsel of all pleadings filed in the P&W bankruptcy case by any party in interest, and P&W shall act in defense of DRx to the fullest extent allowed by law with respect to all contractual agreements set forth herein or as may arise and be executed in the future. 5. Structure. The parties will use their best efforts to structure the --------- acquisition in the form of a tax deferred statutory merger (the "Merger") under Section 368 of the Internal revenue code, or any other structure reasonably requested by DRx, and to preserve all Net Operating Losses for the benefit of DRx. The Company agrees that the purchaser may either be DRx or an affiliate of DRx. The Acquisition shall be free and clear of any and all liabilities, liens, claims, interests, and encumberances, except those specifically identified and approved in writing by DRx. 6. Definitive Documents. Our offer is made subject to the execution of -------------------- definitive documentation. The definitive documents will contain such representations, warranties, covenants and other agreements on behalf of P&W and its stockholders as are satisfactory to both parties in their sole discretion, and the Closing will be subject to customary conditions, including: (a) the parties coming to agreement on the definitive documents; (b) obtaining of necessary consents or approvals of government bodies, lenders, lessors or other third parties, including any applicable bankruptcy court approval by final order; (c) satisfactory completion of DRx's and P&W's due diligence investigation; (d) delivery of customary legal opinions, closing certificates and other documentation; (e) the approval of the Merger by the requisite number of stockholders of P&W as required by law; and (f) employees of P&W entering into mutually satisfactory employment, noncompetition and confidentiality agreements and arrangements with DRx. 7. Conditions. The closing of the Acquisition shall occur as soon as ---------- practicably but in no event earlier than the first date upon which all of the following conditions are fulfilled. a. The Bankruptcy Court in the P&W bankruptcy proceeding renders a final, non-appealable judgment confirming a Plan providing for the Acquisition; Page 5 b. All agreements and arrangements with third parties necessary to ensure a transparent transition of P&W's customers to DRx have been executed. 8. Binding Provisions. Upon the execution of counterparts of this Letter by ------------------ you, the following lettered paragraphs will constitute a legally binding and enforceable agreement of DRx and P&W, in recognition of the significant costs to be borne by DRx and P&W in pursuing this transaction and of their mutual undertakings as to the matters described therein. a. Access and Due Diligence. Each party will afford the other's ------------------------ employees, auditors, legal counsel and other authorized representatives all reasonable opportunity and access during normal business hours to inspect, investigate and audit the assets, liabilities, contracts, operations and business of the other. This letter is contingent upon such due diligence as the parties deem necessary, appropriate or required. The parties will proceed as quickly as possible to complete the necessary reviews. In the event any party is not satisfied with any element of such due diligence, such party may notify the other party in writing and this Letter will terminate. b. Consents. DRx and P&W will cooperate with one another and proceed, as -------- promptly as is reasonably practicable, to seek to obtain all necessary consents and approvals from all required third parties, and to endeavor to comply with all other legal or contractual requirements for or preconditions to the execution and consummation of the definitive documents. c. Closing. The parties agree to use their best efforts to close the ------- Acquisition Agreement as quickly as commercially reasonable, but in no event shall the Closing occur later than April 30, 2001 ("the Closing Deadline") without the prior written consent of DRx. Should the Acquisition Agreement fail to Close on or prior to the Closing Deadline as may be extended from time to time, all obligations of DRx hereunder shall cease and DRx shall have no further obligations hereunder whatsoever, including any obligation to provide DIP Financing, all DIP Financing shall mature and be due and payable, without demand or notice, the same being waived, on the day following the Closing Deadline. d. Termination of Letter. If definitive acquisition documents are not --------------------- signed on or before April 30, 2001, either party hereto may terminate this Letter, and thereafter this Letter shall have no force and effect and the parties shall have no further obligations hereunder. e. Miscellaneous. This agreement shall be governed by and construed in ------------- accordance with the laws of the State of Louisiana without regard to the conflict of laws Page 6 provisions thereof and may be amended, modified or waived only by a separate writing executed by each of the parties hereto. f. Entire Agreement. This Letter of Intent contains the entire ----------------- understanding between the parties hereto and supersedes any prior understandings and agreements between them respecting the subject matter hereof. By signing below, you represent that P&W's Board of Directors has approved the execution of this Letter, and that you agree to work together with us exclusively until the Expiration Date (or such later date as the parties may mutually agree) to reach definitive documents, subject to the terms and conditions set forth in this letter. During this period, we expect both parties to devote substantial time and resources to providing and analyzing any information reasonably required by the other, and to finalizing documentation. Our proposal will terminate at 5:00 (Eastern time) on September 15, 2000, if you have not countersigned and returned a copy of this letter to us. Except as set froth in paragraph 8 of this Letter, there is no binding agreement between P&W and DRx. We and our counsel are prepared to move forward immediately to finalize the definitive terms of the transactions referred to hereinabove, and we look forward to working with you to complete such a transaction as promptly as possible. If you have any questions about our offer, please do not hesitate to call me at (727) 533-0431. You may also contact our counsel, Julio C. Esquivel, at Shumaker, Loop & Kendrick, LLP at (813) 227-2325. Very truly yours, Discount Rx, Inc. By: ---------------------------------- Jugal Taneja, Chairman of the Board Acknowledged and agreed to: Penner & Welsch, Inc. By: -------------------------------- Gregory M. Johns, President Dated: September ____, 2000 Page 7 JOINDER ------- DrugMax.com, Inc., a Nevada corporation, hereby joins in this Letter of Intent for the limited purpose of agreeing to the issuance of shares pursuant to the provisions of Section 1. DRUGMAX.COM, INC. By:________________________ Jugal Taneja Chairman of the Board EX-10.10 3 0003.txt NOTE IN FAVOR OF FIRST COMMUNITY BANK OF AMERICA EXHIBIT 10.10 - ------------------------------------------------------------------------------------------------------------------------------------ DRUGMAX.COM, INC. FIRST COMMUNITY BANK OF AMERICA ACCOUNT #: 9932-0106 12505 STARKEY ROAD SUITE A 6100 4TH STREET NORTH Loan Number 25408 ----------------------- LARGO, FL 33703 ST. PETERSBURG, FL 33703 Date OCTOBER 1, 2000 ------------------------------ Maturity Date APRIL 1, 2001 --------------------- Loan Amount $ 1,000,000.00 --------------------- Renewal Of 25408 ------------------------ BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS "I" includes each borrower above, joint and "You" means the lender, its successors and severally. assigns. - ------------------------------------------------------------------------------------------------------------------------------------ For value received, I promise to pay to you, or your order, at your address listed above the PRINCIPAL sum of ONE MILLION AND --------------- NO/100** * * * * * * * * * * * * * * * * * * * * * * * * * * * * Dollars $ 1,000,000.00 - ---------------------------------------------------------------- -------------- [_] Single Advance: I will receive all of this principal sum on ________________. No additional advances are contemplated under this note. [XX] Multiple Advance: The principal sum shown above is the maximum amount of principal I can borrow under this note. On OCTOBER ---------- 1, 2000 ______________ I will receive the amount of $ 996,094.78 and future principal advances are contemplated. ------- ---------- Conditions: The conditions for future advances are AS PER THE TERMS OF THE LINE OF CREDIT AGREEMENT OF EVEN DATE ---------------------------------------------------------------------------- ______________________________________________________________________________________________________________________________ [XX] Open End Credit: You and I agree that I may borrow up to the maximum amount of principal more than one time. This feature is subject to all other conditions and expires on APRIL 1, 2001. ------------- [_] Closed End Credit: You and I agree that I may borrow up to the maximum only one time (and subject to all other conditions). INTEREST: I agree to pay interest on the outstanding principal balance from OCTOBER 1, 2000 at the rate of 7.000% per year until --------------- ----- FIRST CHANGE DATE. - ----------------- [XX] Variable Rate: This rate may then change as stated below. [XX] Index Rate: The future rate will be 1.000% OVER the following index rate: RATE OF INTEREST PAID ON FIRST COMMUNITY BANK ----------- --------------------------------------------- OF AMERICA ------------------------------------------------------------------------------------------------------------------------------ CERTIFICATE OF DEPOSIT#30028380 ------------------------------------------------------------------------------------------------------------------------------ [_] No Index: The future rate will not be subject to any internal or external index. It will be entirely in your control. [XX] Frequency and Timing: The rate on this note may change as often as MONTHLY ----------------------------------------------------- A change in the interest rate will take effect ON THE SAME DAY ----------------------------------------------------------------------- [_] Limitations: During the term of this loan, the applicable annual interest rate will be more than __________ % or less than _______________%. The rate may not change more than _________________% each ____________________________________. Effect of Variable Rate: A change in the interest rate will have the following effect on the payments: [XX] The amount of each scheduled payment will change. [XX] The amount of the final payment will change. [_] _______________________________________________________________________________________________________________________. ACCRUAL METHOD: Interest will be calculated on a ACTUAL/365 basis. ---------- POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note owing after maturity, and until paid in full, as stated below: [_] on the same fixed or variable rate basis in effect before maturity (as indicated above). [XX] at a rate equal to 18%_________________________________________________________________________________________________. [XX] LATE CHARGE: If a payment is made more than 10 days after it is due, I agree to pay a late charge of 5.000% OF THE LATE PAYMENT -- WITH A MINIMUM OF $15.00 ------------------------------------------------------------------------------------------------------------------------------. [XX] ADDITIONAL CHARGES: In addition to interest, I agree to pay the following charges which [_] are [XX] are not included in the principal amount above: LOAN FEE $125.00 ------------------------------------------------------------------------------------------------------. PAYMENTS: I agree to pay this note as follows: [XX] Interest: I agree to pay accrued interest ON THE 1ST DAY OF EACH MONTH BEGINNING NOVEMBER 1, 2000 ------------------------------------------------------------------------------------ ______________________________________________________________________________________________________________________________ [XX] Principal: I agree to pay the principal APRIL 1, 2001 -------------------------------------------------------------------------------------- ______________________________________________________________________________________________________________________________ [_] Installments: I agree to pay this note in ____________ payments. The first payment will be in the amount of $ ________________ and will be due __________________________________________________. A payment of $ __________________ will be due ____________ ________________________________________________________ thereafter. The final payment of the entire unpaid balance of principal and interest will be due ________________________________________________________________________________. ADDITIONAL TERMS: - ----------------------------------------------------------------- [XX] SECURITY: This note is separately secured by (describe PURPOSE: The purpose of this loan is BUSINESS: SHORT TERM -------------------------- separate document by type and date): SECURITY AGREEMENT WORKING CAPITAL/RENEWAL ---------------------------------------------------------------. DATED MARCH 17, 2000 SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2). I have received a copy on today's date. (This section is for your internal use. Failure to list a separate security document does not mean the agreement will not secure this note.) - ----------------------------------------------------------------- DRUGMAX.COM, INC. ---------------------------------------------------------------- Signature for Lender BY: /s/ William Lagamba ---------------------------------------------------------------- _________________________________________________________________ WILLIAM LAGAMBA, PRESIDENT ________________________________________________________________ _________________________________________________________________ ________________________________________________________________
(page 1 of 2) DEFINITIONS: As used on page 1, "[x]" means the terms that apply to this loan. "I," "me" or " my" means each Borrower who signs this note and each other person or legal entity (including guarantors, endorsers, and sureties) who agrees to pay this note (together referred to as "us"). "You" or "your" means the Lender and its successors and assigns. APPLICABLE LAW: The law of the state of Florida will govern this note. Any term of this note which is contrary to applicable law will not be effective, unless the law permits you and me to agree to such a variation. If any provision of this agreement cannot be enforced according to its terms, this fact will not affect the enforceability of the remainder of this agreement. No modification of this agreement may be made without your express written consent. Time is of the essence in this agreement. PAYMENTS: Each payment I make on this note will first reduce the amount I owe you for charges which are neither interest nor principle. The remainder of each payment will then reduce accrued unpaid interest, and then unpaid principle. If you and I agree to a different application of payments, we will describe our agreement on this note. I may prepay a part of, or the entire balance of this loan without penalty, unless we specify to the contrary on this note. Any partial prepayment will not excuse or reduce any later scheduled payment until this note is paid in full (unless, when I make the prepayment, you and I agree in writing to the contrary). INTEREST: Interest accrues on the principal remaining unpaid from time to time, until paid in full. If I receive the principal in more than one advance, each advance will start to earn interest only when I receive the advance. The interest rate in effect on this note at any given time will apply to the entire principal advanced at that time. Notwithstanding anything to the contrary, I do not agree to pay and you do not intend to charge any rate of interest that is higher than the maximum rate of interest you could charge under applicable law for the extension of credit that is agreed to here (either before or after maturity). If any notice of interest accrual is sent and is in error, we mutually agree to correct it, and if you actually collect more interest than allowed by law and this agreement, you agree to refund it to me. INDEX RATE: The index will serve only as a device for setting the rate on this note. You do not guarantee by selecting this index, or the margin, that the rate on this note will be the same rate you charge on any other loans or class of loans to me or other borrowers. ACCRUAL METHOD: The amount of interest that I will pay on this loan will be calculated using the interest rate and accrual method stated on page 1 of this note. For the purpose of interest calculation, the accrual method will determine the number of days in a "year." If no accrual method is stated, then you may use any reasonable accrual method for calculating interest. POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate" (shown on page 1) applies, the term "maturity" means the date of the last scheduled payment indicated on page 1 of this note or the date you accelerate payment on the note, whichever is earlier. SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that you will make only one advance of principal. However, you may add other amounts to the principal if you make any payments described in the "PAYMENTS BY LENDER" paragraph below. MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect that you will make more than one advance of principal. If this is closed end credit, repaying a part of the principal will not entitle me to additional credit. PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am obligated to pay (such as property insurance premiums), then you may treat those payments made by you as advances and add them to the unpaid principal under this note, or you may demand immediate payment of the charges. SET-OFF: I agree that you may set off any amount due and payable under this note against any right I have to receive money from you. "Right to receive money from you" means: (1) any deposit account balance I have with you; (2) any money owed to me on an item presented to you or in your possession for collection or exchange; and (3) any repurchase agreement or other nondeposit obligation. "Any amount due and payable under this note" means the total amount of which you entitled to demand payment under the terms of this note at the time you set off. This total includes any balance the due date for which you properly accelerate under this note. If my right to receive money from you is also owned by someone who has not agreed to pay this note, your right of set-off will apply to my interest in the obligation and to any other amounts I could withdraw on my sole request or endorsement. Your right of set-off does not apply to an account or other obligation where my rights are only as a representative. It also does not apply to any Individual Retirement Account or other tax-deferred retirement account. You will not be liable for the dishonor of any check when the dishonor occurs because you set off this debt against any of my accounts. I agree to hold you harmless from any such claims arising as a result of your exercise of your right of set-off. REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a residence that is personal property, the existence of a default and your remedies for such a default will be determined by applicable law, by the terms of any separate instrument creating the security interest and, to the extent not prohibited by law and not contrary to the terms of the separate security instrument, by the "Default" and "Remedies" paragraphs herein. DEFAULT: I will be in default if any one or more of the following occur: (1) I fail to make a payment on time or in the amount due; (2) I fail to keep the property insured, if required; (3) I fail to pay, or keep any promise, on any debt or agreement I have with you; (4) any other creditor of mine attempts to collect any debt I owe him through court proceedings; (5) I die, am declared incompetent, make an assignment for the benefit of creditors, or become insolvent (either because my liabilities exceed my assets or I am unable to pay my debts as they become due): (6) I make any written statement or provide any financial information that is untrue or inaccurate at the time it was provided; (7) I do or fail to do something which causes you to believe that you will have difficulty collecting the amount I owe you; (8) any collateral securing this note is used in a manner or for a purpose which threatens confiscation by a legal authority; (9) I change my name or assume an additional name without first notifying you before making such a change; (10) I fail to plant, cultivate and harvest crops in due season; (11) any loan proceeds are used for a purpose that will contribute to excessive erosion of highly erodible land or to the conversion of wetlands to produce an agricultural commodity, as further explained in 7 C.F.R. Part 1940, Subpart G, Exhibit M. REMEDIES: If I am default on this note you have, but are not limited to, the following remedies: (1) You may demand immediate payment of all I owe you under this note (principal, accrued unpaid interest and other accrued charges). (2) You may set off this debt against any right I have to the payment of money from you, subject to the terms of the "Set-off" paragraph herein. (3) You may demand security, additional security, or additional parties to be obligated to pay this note as a condition for not using any other remedy. (4) You may refuse to make advances to me or allow purchases on credit by me. (5) You may use any remedy you have under state or federal law. By selecting any one or more of these remedies you do not give up your right to later use any other remedy. By waiving your right to declare an event to be a default, you do not waive your right to later consider the event as a default if it continues or happens again. COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection, replevin or any other or similar type of cost if I am in default. In addition, if you hire an attorney to collect this note, I also agree to pay any reasonable fee you incur with such attorney plus court costs (except where prohibited by law). I agree that reasonable attorney's fees shall be construed to mean 10% of the principal sum named in this note, or such larger fee that the court may determine to be reasonable and just. To the extent permitted by the United States Bankruptcy Code, I also agree to pay the reasonable attorney's fees and costs you incur to collect this debt as awarded by any court exercising jurisdiction under the Bankruptcy Code. WAIVER: I give up my rights to require you to do certain things. I will not require you to: (1) demand payment of amounts due (presentment); (2) obtain official certification of nonpayment (protest); or (3) give notice that amounts due have not been paid (notice of dishonor). I waive any defenses I have based on suretyship or impairment of collateral. To the extent permitted by law, I also waive my right to a trial by jury in respect to any litigation arising from this note and any other agreement executed in conjunction with this credit transaction. OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone else has also agreed to pay it (by, for example, signing this form or a separate guarantee or endorsement). You may sue me alone, or anyone else who is obligated on this note, or any number of us together, to collect this note. You may do so without any notice that it has not been paid (notice of dishonor). You may without notice release any party to this agreement without releasing any other party. If you give up any of your rights, with or without notice, it will not affect my duty to pay this note. Any extension of new credit to any of us, or renewal of this note by all or less than all of us will not release me from my duty to pay it. (Of course, you are entitled to only one payment in full.) I agree that you may at your option extend this note or the debt represented by this note, or any portion of the note or debt, from time to time without limit or notice and for any term without affecting my liability for payment of the note. I will not assign my obligation under this agreement without your prior written approval. CREDIT INFORMATION: I agree and authorize you to obtain credit information about me from time to time (for example, by requesting a credit report) and to report to others your credit experience with me (such as a credit reporting agency). I agree to provide you, upon request, any financial statement or information you may deem necessary. I warrant that the financial statements and information I provide to you are or will be accurate, correct and complete. NOTICE: Unless otherwise required by law, any notice to me shall be given by delivering it or by mailing it by first class mail addressed to me at my last known address. My current address is on page 1. I agree to inform you in writing of any change in my address. I will give any notice to you by mailing it first class to your address stated on page 1 of this agreement, or to any other address that you have designated.
- ------------------------------------------------------------------------------------------------------------ DATE OF PRINCIPAL BORROWER'S PRINCIPAL PRINCIPAL INTEREST INTEREST INTEREST TRANSACTION ADVANCE INITIALS PAYMENTS BALANCE RATE PAYMENTS PAID (not required) THROUGH: - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------ / / $ $ $ % $ / / - ------------------------------------------------------------------------------------------------------------
(page 2 of 2) - ------------------------------------------------------------------------------------------------------------------------------------ DRUGMAX.COM, INC. FIRST COMMUNITY BANK OF AMERICA - --------------------------------- 6100 4TH STREET NORTH 12505 STARKEY ROAD SUITE A ST. PETERSBURG, FL 33703 - --------------------------------- LARGO, FL 33703 Line of Credit No. 25408 - --------------------------------- ----- - --------------------------------- Date OCTOBER 1, 2000 -------------------- BORROWER'S NAME AND ADDRESS LENDERS'S NAME AND ADDRESS Max. Credit Amt. $1,000,000.00 "I" includes each borrower above, "You" means the lender, its successors and assigns. ------------- jointly and severally. Loan Ref. No. 25408 - ----------------------------------------------------------------------------------------------------------------------------------
You have extended to me a line of credit in the AMOUNT of ONE MILLION AND NO/100 $ 1,000,000.00 ------------------------------------------------- --------------. You will make loans to me from time to time until 5:00 Pm. on APRIL 1, 2001. ----- --- ------------ Although the line of credit expires on that date, I will remain obligated to perform all my duties under this agreement so long as I owe you any money advanced according to the terms of this agreement, as evidenced by any note or notes I have signed promising to repay these amounts. This line of credit is an agreement between you and me. It is not intended that any third party receive any benefit from this agreement, whether by direct payment, reliance for future payment or in any other manner. This agreement is not a letter of credit. 1. AMOUNT: This line of credit is: [XX] OBLIGATORY: You may not refuse to make a loan to me under this line of credit unless one of the following occurs: a. I have borrowed the maximum amount available to me; b. This line of credit has expired; c. I have defaulted on the note (or notes) which show my indebtedness under this line of credit; d. I have violated any term of this line of credit or any note or other agreement entered into in connection with this line of credit; e.________________________________________________________________ __________________________________________________________________ __________________________________________________________________ [_] DISCRETIONARY: You may refuse to make a loan to me under this line of credit once the aggregate outstanding advances equal or exceed ________________________________________ $ _______________. Subject to the obligatory or discretionary limitations above, this line of credit is: [XX] OPEN-END (Business or Agricultural only): I may borrow up to the maximum amount of principal more than one time. [_] CLOSED-END: I may borrow up to the maximum only one time. 2. PROMISSORY NOTE: I will repay any advances made according to this line of credit agreement as set out in the promissory note, I signed on OCTOBER 1, --------- 2000, or any note(s) I sign at a later time which represent advances under ---- this agreement. The note(s) set(s) out the terms relating to maturity, interest rate, repayment and advances. If indicated on the promissory note, the advances will be made as follows: _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 3. RELATED DOCUMENTS: I have signed the following documents in connection with this line of credit and note(s) entered into in accordance with this line of credit: [_] security agreement dated_________________________ [XX] SAVINGS ASSIGNMENT DATED 3/17/00 --------------------------------- [_] mortgage dated___________________________________ [XX] SECURITY AGREEMENT DATED 3/17/00 --------------------------------- [_] guaranty dated___________________________________ [_] ________________________________
4. REMEDIES: If I am in default on the note(s) you may: a. take any action as provided in the related documents; b. without notice to me, terminate this line of credit. By selecting any of these remedies you do not give up your right to later use any other remedy. By deciding not to use any remedy should I default, you do not waive your right to later consider the event a default, if it happens again. 5. COSTS AND FEES: If you hire an attorney to enforce this agreement I will pay your reasonable attorney's fees, where permitted by law. I will also pay your court costs and costs of collection, where permitted by law. 6. COVENANTS: For as long as this line of credit is in effect or I owe you money for advances made in accordance with the line of credit, I will do the following: a. maintain books and records of my operations relating to the need for this line of credit; b. permit you or any of your representatives to inspect and/or copy these records; c. provide to you any documentation requested by you which support the reason for making any advance under this line of credit; d. permit you to make any advance payable to the seller (or seller and me) of any items being purchased with that advance; e. ______________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ 7. NOTICES: All notices or other correspondence with me should be sent to my address stated above. The notice or correspondence shall be effective when deposited in the mail, first class, or delivered to me in person. 8. MISCELLANEOUS: This line of credit may not be changed except by a written agreement signed by you and me. The law of the state in which you are located will govern this agreement. Any term of this agreement which is contrary to applicable law will not be effective, unless the law permits you and me to agree to such a variation. SIGNATURES: I AGREE TO THE TERMS OF THIS FOR THE LENDER LINE OF CREDIT. I HAVE RECEIVED A COPY ON TODAY'S DATE. /s/ Scott C. Boyle DRUGMAX.COM, INC. - ------------------------------ ------------------------------------ SCOTT C. BOYLE Title PRESIDENT/CEO BY /s/ William Lagamba ------------------------ ------------------------------------ WILLIAM LAGAMBA, PRESIDENT ------------------------------------ (page 1 of 1) EX-10.11 4 0004.txt MANAGEMENT AGREEMENT EXHIBIT 10.11 MANAGEMENT AGREEMENT -------------------- THIS MANAGEMENT AGREEMENT (the "Agreement") made on September 13, 2000, and effective as of the "Effective Date" (as defined below), is by and between Penner & Welsch, Inc., a Louisiana corporation (the "Company"), and Discount Rx, Inc., a Louisiana corporation (the "Manager"). BACKGROUND: ---------- A. The Company operates a business which includes the purchase and resale of generic and brand name pharmaceuticals (the "Business"). B. The Company and Manager have entered into a Letter of Intent of even date herewith (the "Letter of Intent"), a copy of which is attached hereto as Exhibit A, pursuant to which Manager may purchase substantially all of the - --------- assets of the Company. C. The Company desires to engage Manager to manage the Business and Manager desires to accept such engagement, in each case on the terms and conditions hereinafter set forth. NOW, THEREFORE, the Company and Manager, in consideration of the covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, agree as follows: 1. Appointment. ----------- (a) The Company hereby appoints Manager and Manager hereby accepts such appointment, in each case on the terms and conditions hereinafter provided, as the exclusive manager of the Business. (b) The performance of all activities by the Manager hereunder shall be for the account of the Company. (c) The relationship of the Company and Manager shall be that of principal and agent, and nothing contained in this Agreement shall be construed to create a partnership or joint venture between them or their successors in interest. (d) Notwithstanding anything else herein to the contrary, the Company shall have full responsibility and commensurate authority to act as debtor and debtor-in-possession in bankruptcy. Manager shall cooperate and coordinate with the Company to enable the Company to carry out its responsibilities in bankruptcy. 2. Term; Termination. ----------------- 1 (a) The term (the "Term") of this Agreement shall commence as of the date this Agreement is approved by a Bankruptcy Court having jurisdiction over the Company (the "Effective Date") and shall continue until the earlier of the Closing under the Letter of Intent or the termination of the Letter of Intent pursuant to its terms, unless this Agreement is otherwise terminated in accordance with the terms and conditions hereof. (b) This Agreement may be terminated as follows: (i) by the Company at any time if Manager shall have materially breached, or shall be in material default of, any of its agreements, obligations or other undertakings hereunder, and such breach or default shall have continued, in the reasonable determination of the Company, for more than twenty (20) calendar days following written notice thereof from the Company to Manager; (ii) by either party upon not less than ten (10) days prior written notice from the other party; (iii) immediately upon the termination or expiration of the Letter of Intent or upon the termination of the DIP financing to be provided by Manager to the Company or (iv) by the Company if Manager fails to close on the sale contemplated by the Letter of Intent by April 30, 2001. (c) If the Company terminates this Agreement for any reason other than pursuant to Section 2(b)(i) or 2(b)(iv) of this Agreement, the Company shall pay the Manager a fee equal to five percent (5%) of the product of two (2) times the Company's average monthly gross revenues during the six months preceding August 31, 2000. (d) Upon any termination of Manager's position during the Term hereof or otherwise, Manager shall do the following: (i) Immediately pay over to the Company all monies collected and held by Manager for the account of the Company pursuant to the terms and conditions of this Agreement; (ii) Deliver to the Company a full accounting with respect to the Business in accordance with Section 4 hereof, covering the period following the date of the last accounting furnished to the Company; and (iii) Deliver to the Company all books, records, agreements, papers and other property and documents of the Company with respect to the Business then in the custody of Manager. 3. Duties of Manager. Manager shall be authorized to perform all ----------------- business, administrative and management services and to take all actions necessary for the management and operation of the Business. Manager shall perform its duties and responsibilities hereunder in a commercially reasonable manner consistent with industry standards and will not enter into any transaction not in the ordinary course of business without first obtaining approval of the Bankruptcy Court. Without limiting the foregoing, Manager shall be authorized to: 2 (a) Institute, with the Company's prior written consent, legal actions in the name and at the expense of the Company. (b) With the Company's prior written consent, hire and fire all personnel necessary to adequately staff the Business, paying, on behalf of the Company, all wages, salaries and withholding taxes required under Federal, State and local laws, rules and regulations with respect to such personnel. All employees hired shall be "at will" employees of the Company. (c) Maintain in full force and effect and pay the premiums for fire and extended coverage, liability, business interruption and other insurance with respect to the Business, in such amounts, with such deductibles and with such companies as Manager shall reasonably determine. (d) Comply with all terms, covenants and obligations of the Company as tenant or lessee under any Lease applicable to the Business or the personal property used in the operation of the Business, including, but not limited to, making all lease or rental payments in a timely manner. (e) Make contracts and pay all proper charges (after carefully checking all bills to determine that the charges are proper) for utilities, supplies, inventory and services used in the operation of the Business, including, but not limited to, entering into contracts for and paying all proper charges for heating, air conditioning and ventilating service, gas and electricity service, water service and sewage treatment, fuel, telephone, extermination, rubbish removal, sprinkler system service and maintenance, window cleaning, and security, as well as purchasing, on behalf of the Company, all equipment, tools, appliances, inventory, materials and supplies that are necessary or desirable to properly manage, operate and maintain the Business, provided, however, that without the prior written consent of the Company, the Manager shall not enter into contracts with an initial term of more than six (6) months if such contracts cannot be terminated by the Company without penalty. (f) Prepare or cause to be prepared and filed for the Company with regard to its employees on or after the Effective Date, the following: (i) all Federal, state and local payroll and wage tax returns; and (ii) all reports and documents under the U.S. Social Security Act. (g) Collect all sales and rental revenues, receipts and collections from the Business and deposit the same into a segregated account maintained by Manager for the benefit of the Company (the "Management Account"), all of which accounts shall be Debtor-in-Possession accounts with Hibernia National Bank that comply with applicable bankruptcy law and U.S. Trustee requirements, paying therefrom all costs and expenses incurred by Manager in the performance of its duties under this Agreement, including those costs and expenses pursuant to this Section 3 and the Manager's Fee pursuant to Section 7 below. - --------- --------- (h) Generally, and except as expressly prohibited herein or by specific notice from the Company, do all things in connection with any of the foregoing, necessary to manage 3 and administer the day-to-day operations of the Business and to execute all documents on behalf of the Company in connection therewith, and sign or accept all checks, notes and drafts on the Company's behalf. The actual costs to satisfy all of Manager's duties as provided herein shall be borne by the Company from the proceeds of the operations of the Business and paid by Manager from the Management Account, as set forth in Section 7. - --------- 4. Books and Records; Accounting; Operating Budgets. ------------------------------------------------ (a) During the Term hereof, Manager shall establish and maintain, in accordance with good accounting practices on a consistent basis, adequate books and records in which shall be recorded all of the receipts and disbursements arising from the operation of the Business, such books and records shall in all instances be maintained by Manager for no less than one (1) year; provided, however, that upon the termination of this Agreement or the closing of the acquisition agreement contemplated by the Manager and the Company, the Manager may deliver all such documents to the Company and upon delivery the Manager shall have no further obligations pursuant to this Paragraph 4(a). (b) During the entire term hereof, Manager shall supply and furnish the Company detailed monthly statements of receipts and disbursements for the Business on or before the twentieth (20/th/) day of the calendar month following the end of the month to which such statement relates. Such statements shall constitute monthly reports for the Company to use if appropriate for bankruptcy purposes and shall show or contain, in reasonable detail, the following: (i) a list of each disbursement made on behalf of the Company (including disbursements to Manager for compensation or reimbursement of expenses); (ii) the balance of the Management Account; and (iii) all other financial information reasonably requested from time to time by the Company. 5. Banking. All monies collected by Manager hereunder (except payments to ------- Manager pursuant to Section 7 hereof) shall be deposited forthwith by Manager upon receipt into the Management Account which shall be maintained at an institution that is an approved as a depository for debtors in possession by the office of the United States Trustee for New Orleans, Louisiana. The Management Account shall be maintained by Manager, and no withdrawals shall be made therefrom by Manager except pursuant to and for the purpose of carrying out this Agreement. If the funds in the Management Account together with sales/rental income from the Business are not sufficient for the payment by Manager of the proper costs and charges to be paid by it hereunder as and when due, in the reasonable determination of Manager, and for the payment of its compensation as provided for herein, Manager may, at its sole option, deposit in the Management Account sufficient funds and/or deliver product, at Manager's discretion, to pay the proper costs and charges to be paid by Manager under this Agreement. The Company shall as soon as is practicable move in the Bankruptcy Court for an order approving debtor-in-possession financing ("DIP Financing") pursuant to Section 364 of the United States Bankruptcy Code with respect to Manager's advancement of funds pursuant to this Section 5, up to the maximum 4 amount outstanding at any one time of $2,500,000 consistent with this Section 5. Manager shall be a secured creditor with respect to all funds advanced pursuant to this Section 5. Alternatively, in the event the Letter of Intent is approved by the Bankruptcy Court and there is a closing with respect thereto, then Manager shall have the right to offset from the Purchase Price (as defined in the Letter of Intent) these advanced monies. 6. Purchases; Rebates; Contracts. Manager shall be permitted to supply ----------------------------- the Company with inventory. However, all purchases of supplies and inventory and contracts for labor and materials shall be made at competitive prices. Without limiting of the foregoing, no item used in the operation of the Business shall be charged to the Company at a price which is more than 1.05 times Manager's cost. All discounts, rebates and other payments and gifts (except payments to Manager pursuant to Section 7 hereof) received by Manager, or by any of Manager's officers, employees or agents, in connection with the operation of the Business shall belong to and be treated as the property of the Company. 7. Compensation; Expenses. ---------------------- (a) During the Term hereof, Manager shall receive a monthly management fee (the "Management Fee") as compensation for services rendered under this Agreement in an amount, determined on a monthly basis, equal to three percent (3%) of the gross revenues of the Business for the respective calendar month. The Management Fee shall be computed monthly and paid to Manager out of the Management Account within ten (10) days of the end of each month. In addition, for each month during the term of this Agreement in which the Company's EBITDA exceeds $___________, the Manager shall receive an additional 1% of total gross revenues for such month, computed on a monthly basis. (b) All actual and reasonable costs and expenses of the ownership and operation of the Business, inclusive of all costs and expenses as may be incurred by Manager pursuant to this Agreement, shall be the sole and exclusive responsibility of the Company and shall be paid out of the Management Account. Manager shall not be required to make any advance or payment to or for the account of the Company except out of the funds available in the Management Account, and the Manager shall not be obligated to incur any liability or obligation for the Company's account without assurance that necessary funds for the discharge thereof will be provided by the Company. Manager shall not be entitled to reimbursement from the Company for the those costs and expenses specifically related to Manager's own general office overhead and staff not located at the offices of, or employed by, the Company; provided that Manager shall be entitled to reimbursement for reasonable travel and lodgings related to its duties hereunder. 8. Decisions by the Company. Manager shall be permitted to rely upon the ------------------------ authority of any party authorized to act on behalf of the Company, including, without limitation Gregory Michael Johns. The Company shall not, without the prior written consent of Manager, have any right or authority to enter into any contracts or other agreements with third parties relating to the Company, its operation or otherwise binding upon the Manager. 5 9. Insurance. The Company shall, at its own expense, at all times procure --------- and maintain adequate public liability, indemnity and property insurance and shall procure an appropriate clause in, or endorsement on, each of its policies, whereby the insurer waives subrogation or consents to a waiver of the right of recovery against Manager, and the Company hereby agrees that it will not make any claim against or seek to recover from Manager for any loss or damage to property of the type covered by such insurance, except losses or damages attributable to Manager's intentional negligence or intentional misconduct. 10. Indemnification. --------------- (a) The Company acknowledges that all contracts, acts and undertakings of Manager, if authorized hereby and made specifically in connection with the operation of the Business and pursuant to this Agreement, are made on behalf of and as agent for the Company. (b) The Company hereby agrees to indemnify, defend and save harmless Manager from and against any and all costs, expenses, liabilities or claims, including, but not limited to, attorneys' fees and court costs, arising out of or in any way connected with Manager's performance of its duties and obligations hereunder, provided that the Company's indemnity and hold harmless obligation shall not extend to matters arising out of or in any way connected with the intentional misconduct or fraud of Manager. (c) The obligations of Manager and the Company under this Section 11 shall survive termination of this Agreement. 1.1 Notices. Any notice, request, consent or communication ------- (collectively a "Notice") under this Agreement shall be effective only if it is in writing and (i) personally delivered, (ii) sent by certified or registered mail, return receipt requested, postage prepaid, (iii) sent by a nationally recognized overnight delivery service, with delivery confirmed, or (iv) telexed or telecopied, with receipt confirmed, addressed as follows: (a) If to the Company: Gregory Michael Johns, President PENNER & WELSCH, Inc. 10016 River Road St. Rose, LA 70087 Telephone: 504-471-0745 Telecopier: 504-471-0001 with a copy to: Douglas S. Draper Heller, Draper, Hayden, Patrick & Horn, LLC 2500 Poydras Center 650 Poydras Street 6 New Orleans, LA 70130 Telephone: 504-568-1888 Telecopier 504-522-0949 (b) If to Manager, to: William L. LaGamba, Chief Executive Officer Discount Rx, Inc. 12505 Starkey Road, Suite A St. Petersburg, Florida Telephone: 727-533-0431 Telecopier: 727-531-1280 with a copy to: Julio C. Esquivel, Esq. Shumaker Loop & Kendrick 101 East Kennedy Boulevard, Suite 2800 Tampa, Florida 33672 Telephone: 813-229-7600 Telecopier: 813-229-1660 or such other persons or addresses as shall be furnished in writing by any party to the other party. A Notice shall be deemed to have been given as of the date when (i) personally delivered, (ii) five (5) days after the date when deposited with the United States mail properly addressed, (iii) when receipt of a Notice sent by an overnight delivery service is confirmed by such overnight delivery service, or (iv) when receipt of the telex or telecopy is confirmed, as the case may be, unless the sending party has actual knowledge that a Notice was not received by the intended recipient. 11. Partial Invalidity. The invalidity or unenforceability of a portion of ------------------ this Agreement shall not affect the validity or enforceability of the remainder hereof. 12. Titles and Captions. All Section titles or captions contained in this ------------------- Agreement are for convenience only and are not deemed part of the context hereof. 13. Pronouns and Plurals. All pronouns and any variations thereof are -------------------- deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or persons may require. 14. Amendments. This Agreement may be amended only by a written document ---------- signed by Manager and the Company. 15. Assignment. Manager shall not assign its interest in this Agreement ---------- other than to an affiliate of Manager without the prior written consent of the Company, which consent shall 7 not be unreasonably withheld. 16. Governing Law; Parties at Interest. This Agreement shall be governed ---------------------------------- by and be construed and enforced in accordance with the laws of the State of Florida,, and shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 17. Conditions Precedent and Subsequent. This Agreement shall not be ----------------------------------- effective unless and until the Bankruptcy Court has entered an order approving it. 18. Entire Agreement. This Agreement contains the entire understanding ---------------- between the parties hereto and supersedes any prior understandings and agreements between them respecting the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of this 14th day of September, 2000. MANAGER: Discount Rx, Inc. By:________________________________ Jugal Taneja, Chairman of the Board COMPANY: Penner & Welsch, Inc. By:________________________________ Gregory M. Johns, President 8 EX-27.1 5 0005.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the 10-QSB of DrugMax.com, Inc. for the 6 months ended September 30, 2000 and is qualified in its entirety by reference to such financial statements. 6-MOS MAR-31-2001 SEP-30-2000 5,475,136 0 10,872,282 472,870 9,262,283 29,000,928 852,765 133,343 54,857,181 21,417,815 0 0 0 6,419 32,038,589 54,857,181 67,862,991 67,862,991 65,495,437 65,495,437 4,043,382 0 471,611 (2,147,439) 0 (2,147,439) 0 0 0 (2,147,439) (0.34) (0.34)
-----END PRIVACY-ENHANCED MESSAGE-----