-----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, P2/6ES4f7SnhCRqj1taHEqRdTvaQzhiqnT7zpfNybXNDm9VYJ0+H9VfIT38DXoRp iyp9MsXrP18zI7kKkKQo3w== 0001021408-01-510227.txt : 20020410 0001021408-01-510227.hdr.sgml : 20020410 ACCESSION NUMBER: 0001021408-01-510227 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRUGMAX COM INC CENTRAL INDEX KEY: 0000921878 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HEALTH SERVICES [8000] IRS NUMBER: 341755390 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-15445 FILM NUMBER: 1789092 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: NUMED SURGICAL INC DATE OF NAME CHANGE: 19940419 FORMER COMPANY: FORMER CONFORMED NAME: NUTRICEUTICALS COM CORP DATE OF NAME CHANGE: 19990629 10QSB 1 d10qsb.txt FORM 10-QSB FOR SEPTEMBER 30, 2001 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, 2001 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, INC., (Formerly 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 October 30, 2001, there were 7,096,833 outstanding shares of the Issuer's common stock, par value $.001 per share. Transitional Small Business Disclosure Formats (check one): Yes [ ] No [X] DRUGMAX, INC. AND SUBSIDIARIES FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS PART I Item 1. Financial Statements.............................................. 3 Condensed Consolidated Balance Sheets September 30, 2001 and March 31, 2001................................. 3 Condensed Consolidated Statements of Operations Three and Six Months Ended September 30, 2001 and 2000................ 4 Condensed Consolidated Statements of Cash Flows Six Months Ended September 30, 2001 and 2000.......................... 5 Notes to Condensed Consolidated Financial Statements...................... 6 Item 2. Management's Discussion and Analysis or Plan of Operations........ 12 Overview................................................................ 12 Results of Operations................................................... 13 Financial Condition, Liquidity and Capital Resources.................... 14 PART II Item 1. Legal Proceedings................................................. 15 Item 2. Changes in Securities and Use of Proceeds......................... 15 Item 3. Submission of Matters To a Vote of Security Holders............... 15 Item 4. Exhibits and Reports on Form 8-K.................................. 16 Signatures................................................................ 19 2 PART I - FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DRUGMAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, March 31, ASSETS 2001 2001 ----------- ----------- Current assets: Cash and cash equivalents $ 822,698 $ 384,307 Restricted cash 1,700,000 2,052,080 Accounts receivable, net of allowance for doubtful accounts of $303,338 and $381,944 15,755,864 14,864,396 Inventory 11,799,846 10,694,155 Due from affiliates 23,664 25,861 Net deferred income tax asset - current 397,780 - Prepaid expenses and other current assets 268,050 373,928 ----------- ----------- Total current assets 30,767,902 28,394,727 Property and equipment, net 405,073 504,906 Intangible assets, net 25,407,542 25,464,249 Stockholder notes receivable 100,000 100,000 Net deferred income tax asset - long-term 712,500 - Other assets 144,888 159,888 Deposits 7,440 7,520 ----------- ----------- Total assets $57,545,345 $54,631,290 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $10,050,899 $11,448,473 Accrued expenses and other current liabilities 356,768 360,911 Credit lines payable 15,001,583 11,944,497 Notes payable - current portion 666,660 666,660 Due to affiliates 518,809 552,658 ----------- ----------- Total current liabilities 26,594,719 24,973,199 Notes payable - long-term portion 784,539 1,111,118 Other long-term liabilities - 1,968,750 ----------- ----------- Total liabilities 27,379,258 28,053,067 ----------- ----------- Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value; 2,000,000 shares authorized; no preferred shares issued or outstanding - - Common stock, $.001 par value; 24,000,000 shares authorized; 6,968,754 and 6,468,754 shares issued and outstanding 6,970 6,470 Additional paid-in capital 38,450,005 36,481,755 Accumulated deficit (8,290,888) (9,910,002) ----------- ----------- Total stockholders' equity 30,166,087 26,578,223 ----------- ----------- Total liabilities and stockholders' equity $57,545,345 $54,631,290 =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 DRUGMAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the For the For the For the Three Months Three Months Six Months Six Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------ ----------- ------------ ----------- Revenues $66,187,701 $38,827,714 $137,064,013 $67,862,991 Cost of goods sold 64,510,873 37,463,122 133,585,897 65,495,437 ---------- ----------- ------------ ---------- Gross profit 1,676,828 1,364,592 3,478,116 2,367,554 ---------- ----------- ------------ ---------- Selling, general and administrative expenses 1,217,208 1,088,536 2,312,787 2,743,100 Amortization expense 28,352 674,043 56,705 1,329,743 Depreciation expense 50,235 56,677 100,054 109,602 ---------- ----------- ------------ ---------- Total operating expenses 1,295,795 1,819,256 2,469,546 4,182,445 ---------- ----------- ------------ ---------- Operating income (loss) 381,033 (454,664) 1,008,570 (1,814,891) ---------- ----------- ------------ ---------- Other income (expense): Interest income 18,383 74,689 41,672 139,043 Other (4,769) 20 (4,769) 20 Interest expense (275,431) (247,655) (536,639) (471,611) ---------- ----------- ------------ ---------- Total other income (expense) - net (261,817) (172,946) (499,736) (332,548) ---------- ----------- ------------ ---------- Income (loss) before income tax benefit 119,216 (627,610) 508,834 (2,147,439) Income tax benefit 616,250 - 1,110,280 - ---------- ----------- ------------ ---------- Net income (loss) $ 735,466 $ (627,610) $ 1,619,114 $(2,147,439) ========== =========== ============ ========== Net income (loss) per common share - basic $ 0.11 $ (0.10) $ 0.23 $ (0.34) ========== =========== ============ ========== Net income (loss) per common share - diluted $ 0.10 $ (0.10) $ 0.23 $ (0.34) ========== =========== ============ ========== Weighted average shares outstanding - basic 6,968,754 6,417,754 6,968,754 6,396,385 ========== =========== ============ ========== Weighted average shares outstanding - diluted 7,152,225 6,417,754 7,150,143 6,396,385 ========== =========== ============ ==========
See accompanying notes to condensed consolidated financial statements. 4 DRUGMAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the For the Six Months Six Months Ended Ended September 30, September 30, 2001 2000 ----------- ------------ Cash flows from operating activities: Net income (loss) $ 1,619,114 $ (2,147,439) Adjustments to reconcile net income (loss) to net cash (used in)/provided by operating activities: Depreciation and amortization 156,759 1,433,279 Loss on disposal of assets 4,769 - Increase in net deferred income tax asset (1,110,280) - Changes in operating assets and liabilities: Increase in accounts receivable, net of allowance for doubtful accounts (891,468) (2,814,670) Increase in inventory (1,105,691) (1,155,406) Decrease/(increase) in due from affiliates 2,197 (36,785) Increase in prepaid expenses and other current assets 120,878 (249,917) Decrease in shareholder notes receivable - 70,000 Decrease in notes receivable - 37,615 Decrease in deposits 80 1,500 (Decrease)/increase in accounts payable (1,397,574) 5,195,498 Decrease in accrued expenses and other liabilities (4,143) (126,802) ----------- ----------- Net cash (used in)/provided by operating activities (2,605,359) 206,873 Cash flows from investing activities: Net change in property and equipment (4,988) (63,895) Increase in intangible assets - (50,163) Cash paid for acquisitions, net - (1,757,481) ----------- ----------- Net cash used in investing activities (4,988) (1,871,539) Cash flows from financing activities: Decrease in restricted cash 352,080 - Net change under revolving line of credit agreements 3,057,086 1,223,573 Payments of long-term obligations - (121,553) Repayment of principal on note payable (326,579) - (Decrease)/increase in due to affiliates (33,849) 17,653 ----------- ----------- Net cash provided by financing activities 3,048,738 1,119,673 ----------- ----------- Net increase/(decrease) in cash and cash equivalents 438,391 (544,993) Cash and cash equivalents at beginning of period 384,307 6,020,129 ----------- ----------- Cash and cash equivalents at end of period $ 822,698 $ 5,475,136 =========== =========== Supplemental disclosures of cash flows information: Cash paid for interest $ 536,639 $ 471,611 =========== =========== Cash paid for income taxes $ - $ - =========== =========== Supplemental schedule of non-cash investing and financing activities: In April 2000, DrugMax, Inc. purchased all of the capital stock of Valley Drug Company for $1,757,481 in cash and 217,255 shares of Company common stock (fair value of $2,199,707) 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 condensed consolidated financial statements. 5 Notes to Condensed Consolidated Financial Statements (Unaudited) For the Three- and Six-Month Periods Ended September 30, 2001 and 2000. NOTE A - BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of DrugMax, Inc. (formerly known as DrugMax.com, Inc., Nutriceuticals and NuMed) and its wholly-owned subsidiaries, Discount Rx, Inc. ("Discount"), Valley Drug Company ("Valley") and its wholly-owned subsidiary Valley Drug Company South ("Valley South"), Desktop Ventures, Inc., and Desktop Media Group, Inc. ("Desktop"); and its 70% owned subsidiary VetMall, Inc. ("VetMall"), (collectively referred to as the "Company"). All significant intercompany accounts and transactions have been eliminated. 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 accounting principles generally accepted in the United States of America 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 included in the Company's Form 10-KSB for the fiscal year ended March 31, 2001. NOTE B - RECENTLY ISSUED AUTHORITATIVE GUIDANCE Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instrument and Hedging Activities" ("SFAS No. 133"), is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective April 1, 2001. The adoption of SFAS No. 133 did not have an impact on the financial position, results of operations, or cash flows of the Company. On June 29, 2001, SFAS No. 141, "Business Combinations" ("SFAS No. 141") was approved by the Financial Accounting Standards Board (FASB). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets with indefinite lives will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. The adoption of SFAS No. 141 did not have an impact on the results of operations or financial position of the Company. As of April 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position and no longer be amortized, but tested for impairment on a periodic basis. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle. Upon adoption, the Company performed the transitional impairment test and determined that no impairment of goodwill existed. In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective April 1, 2001. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization net of the related income tax effect follows: 6
For the For the For the For the Three Months Three Months Six Months Six Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 -------- --------- ---------- ----------- Reported net income (loss) $735,466 $(627,610) $1,619,114 $(2,147,439) Add: Goodwill amortization net of income tax - 665,451 - 1,313,884 ------- --------- --------- ----------- Adjusted net income (loss) $735,466 $ 37,841 $1,619,114 $ (833,555) ======= ========= ========= =========== Basic earnings (loss) per common share Reported net income (loss) $ 0.11 $ (0.10) $ 0.23 $ (0.34) Goodwill amortization, net of income tax - 0.10 - 0.21 ------- --------- --------- ----------- Adjusted net income (loss) $ 0.11 $ - $ 0.23 $ (0.13) ======= ========= ========= =========== Diluted earnings (loss) per common share Reported net income (loss) $ 0.10 $ (0.10) $ 0.23 $ (0.34) Goodwill amortization, net of income tax - 0.10 - 0.21 ------- --------- --------- ----------- Adjusted net income (loss) $ 0.10 $ - $ 0.23 $ (0.13) ======= ========= ========= ===========
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and Long-Lived Assets to be Disposed Of" and will be effective for the Company on April 1, 2002. The Company is assessing the impact, if any, SFAS No. 144 will have on the condensed consolidated financial statements. NOTE C - ACQUISITIONS On April 19, 2000, DrugMax Acquisition Corporation ("Buyer"), a wholly owned subsidiary of the Company, Valley, Ronald J. Patrick ("Patrick") and Ralph A. Blundo ("Blundo" and together with Patrick, the "Sellers") signed a Merger Purchase Agreement. In connection with the merger, the Sellers received 217,255 shares at $10.125 per share and cash in the amount of $1.7 million. The acquisition was accounted for using the purchase value method of accounting and accordingly $3.6 million of goodwill was recorded. The result of operations of the above named business is included in the condensed consolidated financial statements from its purchase date. The unaudited pro forma effect of the acquisition of Valley on the Company's revenues, net loss and net loss per share, before the effects of the change in accounting for amortization of goodwill, had the acquisition occurred on April 1, 2000 is as follows: For the Six Months Ended September 30, 2000 ------------------------ Revenues $ 70,679,990 Net loss ($2,285,667) Basic and diluted net loss per share ($0.36) NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the six-month period ended September 30, 2001, by operating segment, are as follows: Distribution Software Total ------------ -------- ----------- Balance as of March 31, 2001 $25,179,254 $ - $25,179,254 Transition adjustments and other - - - ----------- -------- ----------- Balance as of September 30, 2001 $25,179,254 $ - $25,179,254 =========== ======== =========== 7 The Company has determined that is has two reporting units principally based upon the distribution and software segments. Management further has determined that the distribution reporting units should be reported in the aggregate based upon similar economic characteristics within each company within that segment. Based upon the Company's review of its intangible assets within the transition period, management has determined that it has no intangible assets with a definite life. The Company has deferred loan acquisition costs in the amount of $222,186, net of $117,941 in accumulated amortization, at September 30, 2001. The Company will continue to amortize these deferred loan acquisition costs over life of the related debt instrument. Amortization expense of loan acquisition costs was $28,352 and $56,705, and $8,592 and $15,439, for the three- and six-month periods ended September 30, 2001 and 2000, respectively. NOTE E - INCOME TAXES The Company recognizes deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Temporary differences giving rise to deferred income tax assets and liabilities primarily include certain accrued liabilities and net operating loss carry forwards. The provision for income taxes includes the amount of income taxes payable for the period as determined by applying the provisions of the current tax law to the taxable income for the period and the net change during the period in the Company's deferred income tax assets and liabilities. The Company continually reviews the adequacy of the valuation allowance and is recognizing deferred income tax asset benefits only as reassessment indicates that it is more likely than not that the benefits will be realized. The Company's assessment of its deferred income tax asset valuation allowance indicated that it is more likely than not that future taxable income would be sufficient to utilize the carry forward tax benefits associated with its historical net operating losses. Accordingly, and taking into account reasonable and prudent tax planning strategies and future income projections, the Company reduced the full valuation allowance of $1,312,500 in the six months ended September 30, 2001. During the six months ended September 30, 2001, the Company recorded income tax expense of $202,220, which was offset by the change in the valuation allowance of $1,312,500 for a net income tax benefit of $1,110,280. The resulting current and long-term portions of the net deferred income tax asset of $397,780 and $712,500 respectively have been reported on the accompanying condensed consolidated balance sheet as of September 30, 2001, and represent the amount that management believes more likely than not will be realized over the remaining life of the net operating loss carry forwards. Failure to achieve forecasted taxable income would affect the ultimate realization of the net deferred income tax asset. NOTE F - COMMITMENTS AND CONTINGENCIES On October 24, 2000, the Company obtained from Mellon Bank, N.A. ("Mellon") a line of credit and a $2 million term loan to refinance its prior bank indebtedness, to provide additional working capital and for other general corporate purposes. The credit facility imposes financial covenants on the Company's net worth, net income (loss) and working capital ratios on a quarterly basis. The Company was in compliance with the net worth and working capital ratios as of September 30, 2001, but was not in compliance with the net income (loss) covenant for the three months ended September 30, 2001. Standard Federal Bank National Association ("Standard"), formerly Michigan National Bank, as successor in interest to Mellon, has provided an amendment to the net income (loss) covenant for the three-month period ended September 30, 2001. The amendment only modifies the net income (loss) covenant for the three months ended September 30, 2001, which affords the Company relief with respect to compliance with the net income (loss) covenants. Subsequent to September 30, 2001, the net income (loss) covenants within the Loan and Security Agreement will remain in effect. 8 The Company previously executed an engagement letter with GunnAllen Financial ("GAF") with an effective date of August 20, 2001, for consulting services over a three month period from the effective date, and renewable month to month thereafter until terminated by either party with a thirty day notice. The GAF agreement required that the Company pay to GAF, for consulting services performed, $5,000 per month plus expenses capped at $2,000 per month, and further required the Company to issue a warrant to GAF exercisable for a period of five years to purchase 100,000 shares of the Company's common stock at an exercise price of $5.80 per share. However, on October 12, 2001, the Company terminated the agreement with GAF and informed GAF that GAF was in breach of contract under the Agreement and that, accordingly, no warrants would be issued to GAF and no further fees would be paid to GAF. The Company also demanded the return of all fees previously paid to GAF. At September 30, 2001, no warrants had been issued to GAF. As of October 9, 2001, GAF has not instituted any legal proceedings against the Company, and the Company has made no provision in the accompanying financial statements for resolution of this matter. NOTE G - SEGMENT INFORMATION During the three- and six-month periods ended September 30, 2000, the Company operated two business segments: wholesale distribution and computer software development. During the three- and six-month periods ended September 30, 2001, the Company did not operate the software development segment and has made the determination to concentrate on the Company's core wholesale distribution businesses. The following table reports financial data that management uses in its business segment analysis:
For the For the For the For the Three Months Three Months Six Months Six Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 --------------------------------------------------------------- Revenues from external customers Distribution $66,187,701 $38,701,038 $137,064,013 $67,638,518 Software Development - 126,676 - 224,473 --------------------------------------------------------------- Total $66,187,701 $38,827,714 $137,064,013 $67,862,991 =============================================================== Income (loss) from operations by segment Distribution $ 381,033 $ (448,745) $ 1,008,570 $(1,290,001) Software Development - (5,919) - (524,890) --------------------------------------------------------------- Total $ 381,033 $ (454,664) $ 1,008,570 $(1,814,891) =============================================================== September 30, March 31, 2001 2001 ---------------------------- Assets Distribution $ 57,508,762 $54,568,796 Software Development 36,583 62,494 ---------------------------- Total $ 57,545,345 $54,631,290 ============================ Capital expenditures Distribution $ 7,491 $ 111,576 ============================
There were no inter-segment sales or transfers during either the three- and six-month periods ended September 30, 2001 or 2000. Operating income (loss) by business segment excludes interest income, interest expense, other income and expenses and income taxes. NOTE H - SIGNIFICANT EVENTS On July 16, 2001, in accordance with the Escrow Agreement (the "Agreement") dated November 26, 1999, between the Company and Dynamic Health Products, Inc. ("Dynamic"), 500,000 shares of the Company's common stock were delivered to Dynamic. The shares of stock had been held in escrow pursuant to the Agreement since the 9 acquisition by the Company of Becan Distributors, Inc. from Dynamic on November 26, 1999, pending attainment of certain financial targets by the Company for the fiscal year ended March 31, 2001. The Company attained the financial target for fiscal year ended March 31, 2001; therefore, these shares of stock were released to Dynamic. At March 31, 2001, the Company recorded the entry to increase goodwill and, at the same time, also recorded an increase to long-term liabilities. On July 16, 2001, in conjunction with the actual release of the shares of stock, the Company reclassed the long-term liability to equity which had the effect of increasing common stock by $500 and additional paid-in-capital by $1,968,250. On September 5, 2001, the Company changed its name from DrugMax.com, Inc. to DrugMax, Inc. On September 28, 2001, the Company filed an application with the Securities and Exchange Commission to withdraw its listing and registration on the Boston Stock Exchange ("BSE"). The BSE has reviewed the application and has raised no objection. NOTE I - SUBSEQUENT EVENTS On October 1, 2001, the Company entered into an Employment Agreement with Jugal K. Taneja ("Taneja"), Chief Executive Officer, Chairman of the Board, and majority shareholder, for an annual salary of $144,500, payable bi-weekly, for a term of fifteen months, terminating December 31, 2002. The Employment Agreement terminated the Consulting Agreement by and between Taneja and the Company dated August 16, 1999. On October 25, 2001, Discount (the "Buyer"), purchased (the "Purchase") substantially all of the assets of Penner & Welsch, Inc. a wholesale distributor of pharmaceuticals based in Louisiana ("Penner" or the "Seller"), pursuant to an Agreement for the Purchase and Sale of Assets dated October 12, 2001 ("the Agreement"). As previously reported by the Company, the Seller was a Chapter 11 debtor which had voluntarily filed for Chapter 11 protection in the US Bankruptcy Court for the Eastern Division of Louisiana. Pursuant to the Agreement, the Seller received an aggregate of 125,418 shares of restricted common stock of the Company, valued at $5.98 per share, cash in the amount of $285,615, and forgiveness of $1,525,637 in trade accounts payable owed to the Buyer. The source of the funds used to acquire the Seller's assets was the working capital of the Company. The Agreement, including the nature and amount of the consideration paid to the Seller, was negotiated between the parties and, on October 15, 2001, was approved by the US Bankruptcy Court, Eastern Division of Louisiana. The asset acquisition of Penner was accounted for by the purchase method of accounting in accordance with SFAS No. 141. The preliminary allocation of the purchase price of the assets acquired in the above transaction is as follows: Accounts Receivable................... $ 1,006,546 Inventory............................. 1,230,640 Property and Equipment................ 324,066 ----------- Net value of purchased assets......... 2,561,252 Forgiveness of Trade Payables......... (1,525,637) Value of common stock issued.......... (750,000) ----------- Cash paid for acquisition............. $ 285,615 =========== The unaudited proforma effect of the acquisition of Penner's assets on the Company's revenues, net loss, and net loss per basic and diluted share had the acquisition occurred on April 1, 2000 is as follows:
For the Six Months Ended For the Six Months Ended September 30, 2001 September 30, 2000 ------------------------ ------------------------ Revenues $157,446,983 $102,632,670 Net loss (603,410) (3,801,914) Basic net loss per share (0.09) (0.58) Diluted net loss per share (0.09) (0.58)
The proforma information for the six months ended September 30, 2001, has been presented after the elimination of non-recurring charges as follows: Management fees $612,769 Trustee fees 20,000 Legal fees 175,885 Management expects the operations from this acquisition to be profitable during the remainder of the current and future fiscal periods. The historical proforma financial information is not indicative of the current direction adopted by the Company. Factors affecting the current direction include investment into proper inventory levels, improved fill rate on customer orders, positioning the Company as a primary wholesale distributor to the independent pharmacics in the area, and establishing direct purchasing arrangements with pharmaceutical manufacturers. 10 Simultaneous with the execution of the Agreement, both the Management Agreement and the Financing and Security Agreement between Buyer and Seller, pursuant to which the Buyer was managing and financing the operations of the Seller during the resolution of the bankruptcy proceedings, were terminated. In addition, in connection with the conclusion of the bankruptcy proceedings, McKesson HBOC filed a motion to dismiss its complaint against the Company related to the bankruptcy proceedings and the Agreement. The Company intends to continue to operate the business of the Seller under Valley South. On October 29, 2001, the Company executed a Loan Modification Agreement with Standard, increasing the Company's asset based line of credit from $15 million to $23 million. On October 30, 2001, the Company filed Form RW with the Securities and Exchange Commission requesting consent to withdraw the Company's Registration Statement on Form SB-2 originally filed on November 1, 2000. On November 7, 2001, the Company announced that it has reached an initial agreement with India-based Morepen Laboratories Ltd. ("Morepen"), to form a joint venture company, MorepenMax, Inc. ("MorepenMax"). Morepen will be the majority shareholder of MorepenMax. MorepenMax plans to utilize the Morepen facilities to develop low-cost generic pharmaceuticals in the United States. The Company intends to market and distribute these generic drugs throughout the country. NOTE J - INCOME (LOSS) PER SHARE Basic net income (loss) per common share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing income (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. A reconciliation of the number of shares of common stock used in calculation of basic and diluted net income (loss) per share is presented below:
For the For the For the For the Three Months Three Months Six Months Six Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Basic shares 6,968,754 6,417,754 6,968,754 6,396,385 Additional shares assuming effect of dilutive stock options. 183,471 - 181,389 - --------- --------- --------- --------- Diluted shares 7,152,225 6,417,754 7,150,143 6,396,385 ========= ========= ========= =========
11 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 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 or Plan 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; and (f) 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 inventory 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) customers' willingness to accept the Company's 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 for the year ended March 31, 2001, 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, Inc. is primarily a full-line, wholesale distributor of pharmaceuticals, over-the-counter products, health and beauty care products, and nutritional supplements. The Company expects that it will continue to derive a significant portion of its revenue from its traditional "brick and mortar" full- line wholesale distribution business. However, the Company is also one of the early entrants into the Internet business-to-business pharmaceutical market. The Company utilizes its online capabilities to leverage its existing infrastructure, technology, relationships, marketing and management resources and, accordingly, believes that the combination of its traditional wholesale distribution business with its online wholesale distribution business 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, alternative care facilities and other wholesalers and retailers and maintains an inventory of over 20,000 stock-keeping units, to serve this growing customer base. In addition, since the early December 1999 launch of its web site, www.drugmax.com, over 9,400 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. On October 25, 2001, Discount Rx, Inc. (the "Buyer"), purchased (the "Purchase") substantially all of the assets of Penner & Welsch, Inc., a wholesale distributor of pharmaceuticals based in Louisiana (the "Seller"), pursuant to an Agreement for the Purchase and Sale of Assets dated October 12, 2001 ("the Agreement"). As previously reported by the Company, the Seller was a Chapter 11 debtor which had voluntarily filed for Chapter 11 protection in the US Bankruptcy Court for Eastern Division of Louisiana. Pursuant to the Agreement, the Seller received an aggregate of 125,418 shares of restricted common stock of the Company, valued at $5.98 per share, cash in the amount of $285,615, and forgiveness of $1,525,637 in trade accounts payable owed to the Buyer. The 12 source of the funds used to acquire the Seller's assets was the working capital of the Company. The Agreement, including the nature and amount of the consideration paid to the Seller, was negotiated between the parties and, on October 15, 2001, was approved by the US Bankruptcy Court, Eastern Division of Louisiana. The Company intends to continue to operate the business of the Seller under its new subsidiary Valley South. Results of Operations For the Three- and Six-Month Periods Ended September 30, 2001 and 2000. Revenues. The Company generated revenues of $66.2 million and $137.1 million for the three- and six-month periods ended September 30, 2001, respectively, compared to $38.8 million and $67.9 million, respectively, for the three- and six-month periods ended September 30, 2000. The increase is attributable to the operations of Becan (the Pittsburgh division of the Company), and its wholly owned subsidiary Discount Rx, Inc., and Valley Drug Company, which were acquired in November 1999, and April 2000, respectively. Becan generated revenues of $35.2 million and $70.6 million for the three- and six-month periods ended September 30, 2001, respectively, compared to $22.2 million and $41.2 million, respectively, for the three- and six-month periods ended September 30, 2000. Discount generated revenues of $6.6 million and $15.0 million for the three- and six-month periods ended September 30, 2001, respectively, compared to $2.3 million and $2.4 million, respectively, for the three- and six-month periods ended September 30, 2000. Valley generated revenues of $24.2 million and $51.2 million for the three- and six-month periods ended September 30, 2001, compared $14.3 million and $24.1 million, respectively, from its acquisition through the three- and six-month periods ended September 30, 2000. In addition, approximately $.14 million and $.35 million and $.04 million and $.20 million of gross revenues were generated for the three- and six-months periods ended September 30, 2001 and 2000, respectively, from the Company's remaining operations. Both warehouse locations generated double-digit growth and achieved record sales in the six months ended September 30, 2001, by expanding sales territories, cross selling to common customers, and aggressive marketing. Gross Profit. The Company achieved gross profits of $1.7 million and $3.5 million for the three- and six-month periods ended September 30, 2001, respectively, and $1.4 million and $2.4 million, respectively, for the three- and six-month periods ended September 30, 2000. The increase is attributable to $.46 million and $.94 million in gross profit generated by Becan for the three- and six-month periods ended September 30, 2001 compared to $.34 million and $.58 million, respectively, for the three- and six-month periods ended September 30, 2000. Discount generated $.05 million and $.12 million, respectively in gross profit for the three- and six-month periods ended September 30, 2001, compared to $.03 million and $.02 million, respectively, for the three- and six-month periods ended September 30, 2000. Gross profit generated by Valley for the three- and six-month periods ended September 30, 2001, respectively, were $1.03 million and $2.08 million, compared to $.85 million and $1.57 million, respectively, from its acquisition through the three- and six-month periods ended September 30, 2000. Approximately $.14 million, $.35 million, $.19 million and $.2 million in gross profit for the three- and six-month periods ended September 3, 2001 and 2000, respectively, were generated from the Company's remaining operations. Operating Expense. The Company incurred operating expenses of $1.3 million and $2.5 million for the three- and six-month periods ended September 30, 2001, respectively, compared to $1.8 million and $4.2 million, respectively, for the three- and six-month periods ended September 30, 2000. These expenses include various administrative, sales, marketing and other direct operating expenses of $1,295,795 and $2,469,546 for the three- and six month periods ended September 30, 2001, respectively, compared to $1,153,805 and $2,868,561 for the three- and six-month periods ended September 30, 2000, respectively, net of $665,451 and $1,313,884 associated with goodwill amortization in the three- and six-month periods ended September 30, 2000. Comparatively, the percentage of operating expenses decreased from 2.97% to 1.96%, as compared to revenues, for the three months ended September 30, 2001 and 2000, respectively, and decreased from 4.23% to 1.8% for the six months ended September 2001 and 2000, respectively. The improvement in operating expense ratio reflects increased warehouse efficiencies, economies of scale associated with the Company's growth, and cost control efforts, such as "preferred customer" rates for package delivery, elimination of duplicate services resulting from mergers, and reduction in web site monitoring and setup costs. Interest expense. Interest expense was approximately $275,400 and $536,600 for the three- and six-month periods ended September 30, 2001, respectively, compared to approximately $247,700 and $471,600, respectively, 13 for the three-and six-month periods ended September 30, 2000. The increase was due to additional borrowings against the Company's revolving line of credit and term loan with Standard. Net income/loss per share. The net income per share for the three- and six- month periods ended September 30, 2001 was $.11 and $.23, respectively, for the basic shares, and $.10 and $.23, respectively, for the diluted shares, compared to a net loss per share of $(.10) and $(.34), respectively, for both the basic and diluted shares for the three-and six-month periods ended September 30, 2000. At March 31, 2001, the Company had a deferred income tax asset valuation of $1,312,500. During the three- and six-months periods ended September 30, 2001, the Company reduced the entire valuation allowance, and booked $616,250 and $1,110,280 deferred income tax asset, net of income tax expense of $40,000 and $202,220, respectively for the three- and six-months periods ended September 30, 2001, which provided the Company with net income of $.09 and $.16, respectively per basic and diluted share. The Company's adoption of SFAS No. 142 increased the net income per share by approximately $.06 and $.12, respectively, for both the basic and diluted shares for the three- and six month periods ended September 30, 2001, and would have had the effect of decreasing the basic and diluted net loss by $.10 and $.21, respectively, for both the basic and diluted shares for the three-and six-month periods ended September 30, 2000. Income Taxes. The Company had an estimated gross deferred income tax asset and valuation allowance of approximately $1.3 million as of the fiscal year ended March 31, 2001, which primarily represented the potential future tax benefit associated with its operating losses through the fiscal year ended March 31, 2001. Management has evaluated the available evidence regarding the Company's future taxable income and other possible sources of realization of deferred income tax assets and recognized the full $1.3 million deferred income tax asset, offset by estimated income tax expense, for a net deferred income tax benefit of $616,250 and $1,110,280 for the three - and six-month periods ended September 30, 2001. Inflation and 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 six months ended September 30, 2001 and 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 (defined as net income plus non-cash expenses) for the quarter ended September 30, 2001. The Company's continued financial improvement is attributable to the growth of the Company's core business, control over corporate expenditures and management's ability to maintain acceptable gross margins. The Company has working capital and cash and cash equivalents of $4.2 million and $.8 million at September 30, 2001, respectively, and restricted cash of $1.7 million at September 30, 2001. Net cash used in operating activities was $2,605,359 for the six months ended September 30, 2001. The usage of cash is primarily attributable to an increase in accounts receivable and inventory, increases in prepaid expenses and other current assets, decreases in accounts payable and accrued expenses, partially offset by a decrease in due from affiliates. Net cash used in investing activities of $4,988 for the six months ended September 30, 2001, represents purchases of property and equipment for $7,491, less cash received for the sale of miscellaneous property and equipment no longer used by the Company. Net cash provided by financing activities was $3,048,738 for the six months ended September 30, 2001, representing an increase in the Company's revolving line of credit with Standard. In addition, in accordance with the June 2001 amendment modifying the covenants to the Standard credit facility, a decrease in the restricted cash account requirement provided cash which had previously been restricted, offset by the repayment of principal on the note payable and a decrease in due to affiliates. Standard has provided an amendment to the net income (loss) covenant for the three-month period ended September 30, 2001. The amendment only modifies the net income (loss) covenant for the three months ended September 30, 2001, subsequent to which time the net income (loss) covenants within the Loan and Security Agreement will remain in effect. 14 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. On July 16, 2001, the Company released from escrow 500,000 shares of common stock due to Dynamic Health Products, Inc., a Florida corporation, earned through the contingent consideration clauses of the Becan Distributors, Inc. acquisition. The foregoing transaction did not involve any underwriter, underwriting discounts or commissions or any public offering, and the Company believes that the transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof. The recipient in the transaction represented its 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 the transaction. The recipient had adequate access to information about the Company. Item 3. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of the Stockholders of the Company was held on September 5, 2001. At the meeting, the following actions were taken by the shareholders: Jugal K. Taneja, William L. LaGamba, Stephen M. Watters, Ronald J. Patrick, Howard L. Howell, DDS, Jeffrey K. Peterson and Joseph Zappala were elected as Directors to 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. Joseph Zappala resigned his position as Director at the Annual Meeting citing health reasons. The votes cast for and against each were as follows: For Against Abstain --------- ------- ------- Jugal K. Taneja 2,602,017 -0- 3,093 William L. LaGamba 2,602,017 -0- 3,093 Stephen M. Watters 2,602,017 -0- 3,093 Ronald J. Patrick 2,602,038 -0- 3,072 Howard L. Howell, DDS 2,602,038 -0- 3,072 Jeffrey K. Peterson 2,602,038 -0- 3,072 Joseph Zappala 2,601,333 -0- 3,777 Proposal to approve an Amendment to the Company's 1999 Incentive and Non- Statutory Stock Option Plan to increase by 1,000,000 the number of shares of Common Stock available thereunder. For Against Abstain Not Voted --------- ------- ------- --------- 1,348,169 34,473 8,341 1,214,127 Proposal to approve an Amendment to the Company's Certificate of Incorporation to change the name of the Company from DrugMax.com, Inc. to DrugMax, Inc. For Against Abstain --------- ------- ------- 2,596,878 3,522 4,710 15 Item 4. 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 Agreement for Purchase and Sale of Assets by and between Discount Rx, Inc., and Penner & Welsch, Inc., dated October 12, 2001. (11) 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) 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 Employment Agreement by and between DrugMax, Inc. and Jugal K. Taneja, dated October 1, 2001. * 10.6 Consulting Agreement by and between DrugMax.com, Inc. and Stephen M. Watters dated August 10, 2000. (9) 16 10.7 Loan and Security Agreement among DrugMax.com, Inc. and Valley Drug Company and Mellon Bank, N.A., dated October 24, 2000. (9) 10.8 Second Amended Loan and Security Agreement among DrugMax, Inc., Valley Drug Company, Discount Rx, Inc., Valley Drug Company South, and Standard Federal Bank National Association as successor in interest to Mellon Bank, N.A., dated October 22, 2001. * 21.0 Subsidiaries of DrugMax.com, Inc. (9) 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. (9) Incorporated by reference to the Company's Registration Statement on Form SB-2, filed on November 1, 2000. (10) Incorporated by reference to the Company's Form 10-QSB, filed November 14, 2000, File No. 1-15445. (11) Incorporated by reference to the Company's Report on Form 8-K, filed November 9, 2001. (b) Reports on Form 8-K. During the three months ended September 30, 2001, the Company filed the following two (2) reports on Form 8-K. Form 8-K dated August 7, 2001, with respect to the Company's press release to announce first quarter financial results. Form 8-K, dated September 6, 2001, with respect to the Company's press release to announce the name change from DrugMax.com, Inc. to DrugMax, Inc. Subsequent to September 30, 2001, the Company filed the following five (5) reports on Form 8-K. Form 8-K, dated October 24, 2001, with respect to the Company's press release to announce the asset purchase of Penner & Welsch, Inc. 17 Form 8-K, dated October 29, 2001, with respect to the Company's press release to announce the loan modification agreement with Standard Federal Bank National Association. Form 8-K, dated November 7, 2001, with respect to the Company's press release to announce an agreement with Morepen Laboratories Ltd. Form 8-K, dated November 9, 2001, with respect to the Company's asset purchase of Penner & Welsch, Inc. Form 8-K, dated November 13, 2001, with respect to the Company's press release to announce second quarter financial results. 18 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, Inc. Date: November 13, 2001 By: /s/ Jugal K. Taneja --------------------- ------------------------------------ Jugal K. Taneja Chief Executive Officer Date: November 13, 2001 By: /s/ Ronald J. Patrick --------------------- ------------------------------------ Ronald J. Patrick Chief Financial Officer, Vice President of Finance, Secretary and Treasurer Date: November 13, 2001 By: /s/ William L. LaGamba --------------------- ------------------------------------ William L. LaGamba President and Chief Operations Officer 19 EX-10.5 3 dex105.txt EMPLOYMENT AGREEMENT JUGAL K. TANEJA Exhibit 10.5 EMPLOYMENT AGREEMENT Jugal K. Taneja This Employment Agreement (this "Agreement") is made as of October 1, 2001, by DrugMax, Inc., a Nevada corporation (the "Employer"), and Jugal K. Taneja, an individual resident of Pinellas Park, Florida (the "Employee"). WITNESSETH 1. Employment. The Employer hereby employs the Employee and the Employee hereby accepts such employment, upon the terms and subject to the conditions set forth in this Agreement. By execution of this Agreement, the Consulting Agreement by and between the Employer and the Employee, dated August 16, 1999, with a termination date of April 15, 2002, is hereby cancelled and superseded by this Agreement. 2. Term. The term of the employment under this Agreement shall be for a period of fifteen months beginning October 1, 2001, and terminating on December 31, 2002, unless such employment is otherwise terminated as provided in paragraphs 8 and 9 of this Agreement. 3. Compensation; Reimbursement, Other Benefits. (a) The basic compensation to the Employee shall be payable bi-weekly based upon a calendar-year annual base salary of $144,500 (the "Annual Base Salary"). Such salary shall be subject to an annual performance review but any adjustment shall not result in an annual salary less than the Annual Base Salary. The Employee shall also be reimbursed for all reasonable expenses incurred on behalf of the Employer. (b) The Employee shall be entitled to such other benefits as the Board of Directors and/or any Compensation and Stock Option Committee of the Board of Directors may from time to time provide to him, specifically, the approved recommendations of the Compensation Committee's Bonus plan as set forth on September 19, 2001. 4. Duties. The Employee is engaged as the Chief Executive Officer and Chairman of the Board of the Employer, and shall have such duties consistent with such offices as may from time to time be reasonably assigned to him by the Board of Directors of the Employer. Employee's office shall be located at 6950 Bryan Dairy Road, Largo, Florida 33777. 5. Extent of Services. During the term of his employment under this Agreement, the Employee shall devote such time and efforts to the business of the Employer as may be reasonably necessary in the normal course of business. Employee is Chairman of numerous companies and it is understood that he will not be dedicating his full time efforts to Employer. 6. Vacation and Days Off. The Employee shall be entitled to such vacation time during each fiscal year of the Employer as he may qualify for, in accordance with any vacation policy from time to time established by the Employer's Board of Directors. Notwithstanding the foregoing, the Employee shall be entitled to an annual vacation of not less than four (4) weeks, during which time his compensation shall be paid in full. 7. Disability, Illness and Incapacity. (a) During the term of this Agreement, for any period of disability, illness or incapacity which renders the Employee at least temporarily unable to perform the services required under this Agreement, the Employee shall receive his full compensation as set forth in paragraph 3 of this Agreement, provided, however, if the Employee's disability, illness or incapacity extends beyond a period of ninety (90) day period, to any further compensation under paragraph 3(a) until he returns to a full-time service hereunder, but he shall be entitled only to such disability payments as may be provided by a disability insurance policy or policies, if any, purchased by the Employer. (b) Successive periods of disability, illness or incapacity will be considered separate periods unless the later period of disability, illness or incapacity is due to the same or related cause. (c) If and when the period of disability, illness or incapacity of the Employee totals ninety (90) days, his employment with the Employer will terminate. Notwithstanding the foregoing, if the Employee and the Employer agree, the Employee may thereafter be employed by the Employer upon such terms as may be mutually acceptable. (d) Any dispute regarding the existence, extent or continuance of the disability, illness or incapacity shall be resolved by the determination of a majority of three competent doctors who are not employees of the Employer, one of which shall be selected by the Employer, one of which shall be selected by the Employee and a third selected by the other two doctors. The Employer shall pay the doctor's fees and other charges associated with such determination. 8. Death. All rights of the Employee hereunder, shall terminate upon his death, except that the Employer shall pay to the estate of the Employee such compensation and other amounts as would otherwise have been payable to the Employee through the end of the month in which his death occurs. The Employer shall have no additional financial obligation under this Agreement to the Employee or his estate. 9. Other Termination. (a) The Employer may terminate the employment of the Employee hereunder without notice for any of the following reasons: (i) The Employee's failure to promptly and adequately perform the duties assigned to him by the Employer pursuant to paragraph 4 above, 2 including, but not limited to, failure to follow the reasonable direction of the Board of Directors of the Employer, or those of any supervisors or superiors of the Employee, provided, however, that the Employer shall give the Employee written notice specifying the areas in which the Employee has failed to promptly and adequately perform his duties hereunder and Employee shall have thirty (30) days after receipt thereof to improve his employment to the reasonable satisfaction of the Employer. (ii) The Employee's material breach of any provision of this Agreement; or (iii) "Good cause", as defined below. (b) The term "good cause" as used in this Agreement includes, but is not necessarily limited to, habitual absenteeism, a pattern of conduct which tends to hold the Employer up to ridicule in the community, conviction of a felony or any crime of moral turpitude, abuse of, or substantial dependence on, as reasonably determined by the Board of Directors of the Employer, any addictive substance, including but not limited to alcohol, amphetamines, barbiturates, methadone, cannabis, cocaine, PCP, THC, LSD, or other illegal or narcotic drugs. If the Employee disputes any determination of abuse or substantial dependence made by the Board of Directors, the parties hereto agree to abide by the decision of a panel of three physicians who are not employees of the Employer, one of which shall be selected by the Employer, one of which shall be selected by the Employee and a third selected by the other two physicians. The Employee agrees to make himself available for and submit to examinations by such physicians as may be directed by the Employer. The Employee's failure to submit to any such examination shall constitute a material breach of this Agreement. (c) The Employee may terminate this Agreement for "Good Reason". For purposes of this Agreement, Good Reason means (i) a request by the Employer for the Employee to relocate to a facility more than 50 miles from Youngstown, Ohio or (ii) the Employer's material breach of any of its obligations under this Agreement or (iii) the shareholder sells more than 505 of the voting securities of the Employer. (d) If the Employee's employment with the Employer is terminated pursuant to paragraph 9(a), the Employer shall pay to the Employee any compensation earned but not paid to the Employee prior to such termination. Such payment shall be in full and complete discharge of any and all liabilities or obligations of the Employer to the Employee hereunder, and the Employee shall be entitled to no further benefits under this Agreement, except as otherwise specifically provided in the last sentence of paragraph 3(a) and in paragraph 3(b) of this Agreement. If the Employee's employment with the Employer is terminated by the Employer for a reason other than as provided in paragraph 9(a) or by the Employee pursuant to paragraph 9(c), the Employer will compensate the Employee, as severance pay, the Annual Base Salary for the remaining term of this Agreement. Such severance pay will be paid to the Employee at the date of termination. 3 10. Confidentiality. The Employee agrees to keep in strict secrecy and confidence any and all information the Employee assimilates or to which he has access during his employment by the Employer and which has not been publicly disclosed and is not a matter of common knowledge in the fields of work of the Employer. The Employee agrees that both during and after the term of his employment by the Employer, he will not, without the prior written consent of the Employer, disclose any such confidential information to any other person, partnership, joint venture, company, corporation or other organization. 11. Waiver. The waiver by the Employer of a breach by the Employee of any of the provisions of this Agreement shall not be construed as a waiver of any subsequent breach by the Employee. 12. Binding Effect; Assignment. The rights and obligations of the Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Employee. This agreement is a personal employment contract and the rights, obligations and interests of the Employee hereunder may not be sold, assigned, transferred, pledged or hypothecated. 13. Entire Agreement. This Agreement contains the entire agreement of the parties and supersedes all prior agreements and understanding, oral or written, with respect to the subject matter hereof. This Agreement may be changed only by an agreement in writing signed by both parties. 14. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretations of this Agreement. 15. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Florida. 16. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by facsimile, email, or by certified or registered mail, first class, return receipt requested, to the parties at the following addresses, or such other address that a party may hereafter give notice to the other party as provided herein: If to the Employer: DrugMax, Inc. 12505 Starkey Road Largo, FL 33773 Attention: Chief Operating Officer (727) 533-0431 With a copy to Counsel: Shumaker, Loop & Kendrick LLP 101 E. Kennedy Blvd. Suite 2800 Tampa, Florida 33602 Attention: Julio Esquivel 4 If to the Employee: Jugal K. Taneja 6950 Bryan Dairy Road Largo, Florida 33777 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of this 11th day of October, 2001. EMPLOYER: DRUGMAX, INC. By: /s/ William L. LaGamba -------------------------------------------- William L. LaGamba Title: President and Chief Operating Officer ------------------------------------- EMPLOYEE: /s/ Jugal K. Taneja -------------------------------------------- Jugal K. Taneja 5 EX-10.8 4 dex108.txt SECOND AMENDED LOAN AND SECURITY AGREEMENT Exhibit 10.8 SECOND AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT ------------------------------ THIS SECOND AMENDMENT AND MODIFICATION TO LOAN AND SECURITY AGREEMENT (the "Amendment") is made effective as of October 24, 2001 by and among DRUGMAX, INC., a Nevada corporation, formerly known as DrugMax.com, Inc. ("DrugMax"), VALLEY DRUG COMPANY, an Ohio corporation ("Valley"), DISCOUNT RX, INC., a Louisiana corporation ("Discount RX"), VALLEY DRUG COMPANY SOUTH, a Louisiana corporation ("Valley South") (DrugMax, Valley, Discount RX and Valley South being hereinafter referred to individually as a "Borrower" and collectively as the "Borrowers"), DESKTOP MEDIA GROUP, INC., a Florida corporation ("Desktop"), VETMALL, INC., a Florida corporation ("VetMall") (Desktop and VetMall being hereinafter referred to individually as a "Guarantor" and collectively as the "Guarantors") and STANDARD FEDERAL BANK NATIONAL ASSOCIATION, formerly known as Michigan National Bank, as successor in interest to Mellon Bank, N.A. ("Bank"). BACKGROUND ---------- A. Borrowers, Guarantors and Bank have entered into a Loan and Security Agreement dated October 24, 2000, as amended by (i) that certain letter agreement dated February 13, 2001, and (ii) that certain Amendment and Modification to Loan and Security Agreement dated June 13, 2001 (as amended, the "Loan Agreement"). B. Borrowers and Guarantors have requested and Bank has agreed to further amend the Loan Agreement as provided in this Amendment. C. Capitalized terms not defined in this Amendment will have the meanings set forth in the Loan Agreement. NOW, THEREFORE, intending to be legally bound hereby, Borrowers, Guarantors and Bank agree as follows: (a) Additional Borrowers and Obligors. From and after the date --------------------------------- hereof, Discount RX and Valley South will each be a "Borrower" and an "Obligor" under the Loan Agreement and the other Loan Documents and shall be bound by all representations, warranties, terms, conditions, covenants, agreements and waivers thereof and thereunder with the same force and effect as if Discount RX and Valley South were originally a party thereto. All references to "Borrower", "Borrowers", "Obligor" and "Obligors" in the Loan Agreement and the other Loan Documents shall hereafter be deemed to include, without limitation, Discount RX and Valley South. (a) Additional Security. As security for the full and timely ------------------- payment of the Obligations, each of Discount RX and Valley South hereby grant to Bank a first priority perfected security interest in all personal property of Discount RX and Valley South, wherever located, now owned or hereafter acquired, including without limitation the following: a. All present and future Accounts, contract rights, chattel paper, instruments and documents and all other rights to the payment of money whether or not yet earned, for services rendered or goods sold, consigned, leased or furnished or otherwise, in all cases together with (i) all goods (including any returned, rejected, repossessed or consigned goods), the sale, consignment, lease or other furnishings of which shall give or may give rise to any of the foregoing, (ii) all rights as a consignor, consignee, unpaid vendor or other lien or in connection therewith, including stoppage in transit, set- off, detinue, replevin and reclamation, (iii) all General Intangibles related thereto, (iv) all credit insurance, guaranties, mortgages, security interests, assignments, and other encumbrances on real or personal property, leases and other agreements or property securing or relating to any of the foregoing, (v) choses-in-action, claims and judgments related to or arising out of any of the foregoing, and (vi) any return or unearned premiums, which may be due upon cancellation of any insurance policies. a. All present and future Inventory (including but not limited to goods held for sale or lease or furnished or to be furnished under contracts for service), and all documents of title covering any of such goods or Inventory. a. All present and future General Intangibles. a. All present and future Equipment, all documents of title covering any of such Equipment and all manuals of operation, maintenance or repair. a. All present and future rights in all proceeds of all licenses, permits, approvals, license rights, agreements and General Intangibles with respect to which there are valid and enforceable legal or contractual restrictions prohibiting the collateral assignment or granting of a security interest (the "Non-Assignable Contracts"), including without limitation all proceeds from the sale, transfer or liquidation of such Non-Assignable Contracts and the value allocable to such Non-Assignable Contracts in any sale of business or assets. a. All present and future general ledger sheets, files, records, customer lists, books of account, invoices, bills, certificates or documents of ownership, bills of sale, business papers, correspondence, credit files, tapes, cards, computer runs and all other data and data storage systems whether in the possession of any party to this Agreement or any service bureau. a. All letters of credit and letter of credit rights, including the right to receive payment thereunder and all documentation related thereto, and all documents of title, negotiable and non-negotiable bills of lading, electronic bills of lading, shipper's rights, rights accruing under the law of agency or estoppel, warranties, claims and insurance proceeds related thereto or associated therewith. a. Those certain securities described on Schedule 1 attached ---------- hereto, all additional securities pledged to Bank from time to time, together with all cash, stock or other dividends paid upon such securities; all securities received in addition to or in exchange for such securities; all subscription rights incident to such securities; any other distribution in respect of such securities in any form; and the proceeds thereof. All of such securities shall be freely assignable and transferable to Bank, and shall be accompanied by such stock pledge agreements and blank stock powers with signatures guaranteed as Bank may require. a. All documents of title, negotiable and non-negotiable bills of lading, electronic bills of lading, shipper's rights, rights accruing under the law of agency or estoppel, documents, agreements, instruments, warranties and claims now existing or hereafter issued or arising in connection with any Merchandise Letter of Credit now or hereafter issued under this Agreement, and all insurance claims or proceeds related thereto. a. All deposits, funds, notes, drafts, instruments (including promissory notes), documents, policies, evidences and certificates of insurance, securities, personal property leases and chattel paper and other assets, now or at any time hereafter on deposit with or in the possession or control of Bank or owing by Bank or in transit by mail or carrier to Bank or in the possession of any other Person acting on Bank's behalf, without regard to whether Bank received the same in pledge, for safekeeping, as agent for collection or otherwise, or whether Bank has conditionally released the same, and in all assets in which Bank now has or may at any time hereafter obtain a lien, mortgage, or security interest for any reason. a. All deposit accounts maintained by Discount RX and Valley South with any depository institution. a. All Investment Property. a. All Financial Assets. a. All domain names and domain name registration rights, including without limitation, the domain names described on Schedule 2 attached ---------- hereto. a. All products and proceeds of the foregoing. (a) Amended Defined Terms. --------------------- 1. Maximum Revolving Credit Facility Amount. The defined term ----------------------------------------- "Maximum Revolving Credit Facility Amount" as set forth in Section 1.1 the Loan ----------- Agreement shall be and is hereby amended to read, in its entirety, as follows: "Maximum Revolving Credit Facility Amount means $23,000,000.00." 1. Net Income. The defined term "Net Income" as set forth in ---------- Section 1.1 the Loan Agreement shall be and is hereby amended to read, in its - ----------- entirety, as follows: "Net Income means income (or loss) after Tax Expense and shall have the meaning given such term by GAAP, provided -------- that, there shall be specifically excluded therefrom (a) ---- gains from the sale of capital assets, (b) net income of any other Person in which the Person or Persons whose net income is being determined has an ownership interest, unless received by the Person or Persons whose net income is being determined in a cash distribution, (c) any gains arising from extraordinary items, as defined by GAAP, and (d) any income tax benefit (gains) from net operating loss carry forwards." (a) Additional Defined Terms. The following term shall be added ------------------------ to Section 1.1 the Loan Agreement as an additional defined term in its proper alphabetical order: "Valley South Reserve means a reserve against Availability under the Revolving Credit Facility for Advances based on the Value of the Valley South's Eligible Accounts and Eligible Inventory in an amount equal to $1,000,000; provided however, such reserve may be reduced or -------- ------- released, at the option of Bank in its sole discretion, if Valley South maintains Net Income of not less than $700,000 for the six-month period ending April 30, 2002 and no Default or Event of Default has occurred." (a) Borrowing Base. Section 2.3 of the Loan Agreement shall be -------------- ----------- and is hereby amended to read in its entirety as follows: "2.3 Borrowing Base. The "Borrowing Base" as of the applicable -------------- date of determination shall be determined based upon the following advance rates and calculations: (a) An advance rate of up to 85% of the Value of the Borrowers' Eligible Accounts; plus ---- (b) An advance rate of up to 65% of the Value of the Borrowers' Eligible Inventory; minus ----- (c) The total outstanding undrawn amount of all Letters of Credit; minus ----- (d) All Reserves. Percentages used from time to time in calculating the Borrowing Base are for the sole purpose of determining the maximum amount of Advances under Revolving Credit Facility that may be outstanding from time to time under this Agreement and shall not be evidentiary of or binding upon the Bank with respect to the market value or liquidation value of any Collateral. In the event that Bank has any questions regarding the Borrowers' calculation of the Borrowing Base, funding of Advances under the Revolving Credit Facility shall be subject to a resolution of such questions to Bank's satisfaction. Any request for an Advance under Revolving Credit Facility which, if funded, would result in the unpaid balance of an Advance under Revolving Credit Facility being in excess of the amount allowed by this Agreement may be declined by Bank in its sole discretion without prior notice." (a) Eligible Inventory Sublimit. Section 2.4(a) of the Loan --------------------------- -------------- Agreement shall be and is hereby amended to read in its entirety as follows: "(a) Eligible Inventory Sublimit. Notwithstanding --------------------------- anything herein or elsewhere to the contrary, the maximum amount of Revolving Credit Facility Usage based upon (i) the Eligible Inventory shall not exceed $11,000,000.00 at any time, and (ii) Eligible Inventory of Valley South shall not exceed $3,000,000 at any time; provided however, such -------- ------- $3,000,000 sublimit shall increase up to a maximum amount of $4,000,000 after receipt by Bank of Borrowers' audited annual financial statements required under Section for the ------- Borrowers and their Subsidiaries for the fiscal year ending March 31, 2002 and provided that no Default or Event of Default has occurred." (a) Reserves. Section 2.5 of the Loan Agreement shall be and is -------- ----------- hereby amended to read in its entirety as follows: "2.5 Reserves. The amount of the Borrowing Base shall -------- be reduced by Reserves established by Bank from time to time at Bank's discretion, including without limitation, the Inventory Reserves and the Valley South Reserve. Such Reserves may be established by Bank from time to time regardless of whether a Default or Event of Default has occurred or is continuing." (a) Collateral Management Fee. Section 8.7 of the Loan Agreement ------------------------- ----------- shall be and is hereby amended to read in its entirety as follows: "8.7 Collateral Management Fee. So long as the Revolving ------------------------- Credit Facility has not been terminated pursuant to the terms hereof and the Obligations have not been satisfied in full, Borrowers agree unconditionally pay to Bank a non- refundable monthly collateral management fee of Two Thousand Five Hundred Dollars ($2,500.00) payable monthly in advance." (a) Intercompany Loans. Section 13.3 of the Loan Agreement ------------------- ------------ shall be and is hereby amended to read in its entirety as follows: "13.3 Loans. The Obligors will not make or have outstanding any loans ----- or advances in the nature of loans to any Person including, without limitation, any officer, shareholder, director, employee or Affiliate of such Obligor, except (a) advances made to the Obligors' employees in the ordinary course of any Obligor's business and other loans to the Obligors' employees in an aggregate outstanding amount not to exceed $50,000 at any time, and (b) loans described on Schedule. -------- Notwithstanding anything herein or elsewhere to the contrary, a Borrower may make loans to another Borrower provided that the outstanding amount of all loans from all Borrowers to all other Borrowers does not exceed $1,000,000 in the aggregate at any time." (a) Net Income. Section 14.1 of the Loan Agreement shall be and ---------- ------------ is hereby amended to read in its entirety as follows: "14.1 Net Income. Borrowers will have Net Income, determined on a ---------- consolidated basis with respect to the Borrowers only and not including any Guarantor or other Subsidiary, of not less than the following amounts for the following periods (if a loss is indicated, the loss will not be greater than the specified amount): Amount Period - --------------------- ------------------------- ($670,000) Fiscal quarter ending June 30, 2000 ($300,000) Fiscal quarter ending September 30, 2000 ($237,000) Fiscal quarter ending December 31, 2000 $ (834,000) Fiscal quarter ending March 31, 2001 ($1,915,000) Fiscal year ending March 31, 2001 $ 350,000 Fiscal quarter ending June 30, 2001 $ 300,000 Fiscal quarter ending September 30, 2001 $ 600,000 Fiscal quarter ending December 31, 2001 $ 608,000 Fiscal quarter ending March 31, 2002 $ 2,000,000 Fiscal year ending March 31, 2002 $ 510,000 Fiscal quarter ending June 30, 2002 $ 385,000 Fiscal quarter ending September 30, 2002 $ 490,000 Fiscal quarter ending December 31, 2002 $ 615,000 Fiscal quarter ending March 31, 2003 $ 2,000,000 Fiscal year ending March 31, 2003 $ 500,000 Fiscal quarter ending June 30, 2003 and for each fiscal quarter thereafter $ 2,000,000 Fiscal year ending March 31, 2004 and for each fiscal year thereafter" (a) Stand-Alone Net Income. Section 14.2 of the Loan Agreement ---------------------- ------------ shall be and is hereby amended to read in its entirety as follows: "14.2 Stand-Alone Net Income. Each Borrower, on a ---------------------- stand-alone basis and not consolidated with any other Borrower or any Guarantor or other Subsidiary, will have positive Net Income (and no net losses) for each fiscal quarter commencing with the fiscal quarter ending December 31, 2001." (a) Net Worth. Section 14.3 of the Loan Agreement shall be and --------- ------------ is hereby amended to read in its entirety as follows: "14.3 Net Worth. Borrowers will maintain Net Worth, --------- determined on a consolidated basis with respect to the Borrowers only and not including any Guarantor or other Subsidiary, of not less than the following amounts for the following periods: Amount Period ------ ------ $33,554,000 As of June 30, 2000 $33,254,000 As of September 30, 2000 and at all times thereafter through December 30, 2000 $33,279,000 As of December 31, 2000 and at all times thereafter through March 30, 2001 $26,570,000 As of March 31, 2001 and at all times thereafter through June 29, 2001 $27,417,000 As of June 30, 2001 and at all times thereafter through September 29, 2001 $30,299,000 As of September 30, 2001 and at all times thereafter through December 30, 2001 $31,649,000 As of December 31, 2001 and at all times thereafter through March 30, 2002 $32,257,000 As of March 31, 2002 and at all times thereafter through June 29, 2002 $32,767,000 As of June 30, 2002 and at all times thereafter through September 29, 2002 $33,152,000 As of September 30, 2002 and at all times thereafter through December 30, 2002 $33,642,000 As of December 31, 2002 and at all times thereafter through March 30, 2003 $34,257,000 As of March 31, 2003 and at all times thereafter through March 30, 2004 As of the end of each fiscal year commencing with the fiscal year ending March 31, 2004 and continuing throughout the next fiscal year until but not including the next fiscal year end, the minimum Net Worth requirement will be increased by $2,000,000 per year." (a) Cash on Deposit. Section 14.6 of the Loan Agreement shall --------------- ------------ be and is hereby amended to read in its entirety as follows: "14.6 Cash on Deposit. As a condition of closing and --------------- at all times thereafter, Borrowers shall maintain Bank as their sole bank of account (except for certain payroll accounts as permitted by Bank) and shall deposit with Bank in separate segregated accounts all cash-on-hand of Borrowers. In addition, Borrowers will at all times maintain on deposit with Bank in a separate segregated account a minimum of $2,000,000 in cash." (a) Bank Accounts. Notwithstanding anything to the contrary ------------- contained in the Loan Agreement, Borrowers will maintain a lockbox with LaSalle National Bank and their operating accounts, main disbursement accounts, investment accounts and deposit accounts with LaSalle National Bank, unless otherwise agreed by Bank in writing. The Obligors will notify Bank in writing and on a continuing basis, of all deposit accounts, investment accounts and certificates of deposit (including the numbers thereof) maintained with or purchased from any other depository institutions. (a) P&W Asset Acquisition. Borrowers and Guarantors represent --------------------- and warrant to Bank that Discount RX has entered into a certain Agreement for Purchase and Sale of Assets dated October 12, 2001 (the "Purchase Agreement") with Penner & Welsch, Inc. ("P&W") pursuant to which Discount RX is acquiring substantially all of the operating assets of P&W (the "Acquisition"). Borrowers and Guarantors agree that Discount RX will not complete the Acquisition or use any proceeds of any Advances by Bank to fund the Acquisition unless and until all of the following conditions have been satisfied: a. Bank shall have approved the form and content of all transfer and collateral documents to be executed in connection with the Acquisition. a. The cash portion of the purchase price payable by Discount has been approved by Bank, including without limitation the portion payable for P&W's accounts and inventory. a. Bank shall have received evidence satisfactory to Bank that all bankruptcy court and other approvals required in connection with the Acquisition have been obtained and are in full force and effect, with no stay pending and with all appeal periods, if any, having expired. a. Bank shall have received evidence satisfactory to Bank that all of the assets being acquired pursuant to the Acquisition are being acquired free and clear of all liens, encumbrances, security interests and claims, other than liens in favor of Bank. a. Bank shall have received evidence satisfactory to Bank that all obligations owed by P&W to Hibernia National Bank have been repaid in full and the Hibernia National Bank has no lien, security interest or claim against any of the assets being acquired pursuant to the Acquisition. a. Bank shall have received evidence satisfactory to Bank that McKesson HBOC and its parents, affiliates, subsidiaries, successors and assigns and those who claim by and through McKesson HBOC (collectively, "McKesson") shall have entered into a release or settlement agreement in form and content satisfactory to Bank pursuant to which McKesson shall have released any and all claims McKesson may have against P&W, Discount RX, DrugMax and their respective officers, directors, affiliates, agents, attorneys and managing agents. a. Bank shall have received evidence satisfactory to Bank that all obligations owed by P&W to DrugMax have been repaid or are being repaid simultaneously with the closing of the Acquisition, except for certain obligations incurred prior to the filing of P&W's bankruptcy petition in an amount not to exceed $40,000. a. Bank shall have received an opinion of counsel from bankruptcy counsel to Borrowers in form and content acceptable to Bank covering such matters as Bank may require related to the Acquisition and the bankruptcy of P&W, such opinion shall, inter alia, confirm to Bank that the conditions set forth in this Section 15 have been satisfied. ---------- a. Borrowers shall have satisfied such other conditions as Bank may require. a. Bank shall have received a certificate from the officer of Borrowers responsible for licensing matters certifying to Bank that Discount RX has all licenses necessary for Discount RX to own and operate the business being acquired pursuant to the Acquisition. Borrowers also covenant and agree as follows: (1) Borrowers will cause to be delivered to Bank within five (5) days after completion of the Acquisition copies of all documents entered into in connection with the Acquisition, certified by Borrowers to be accurate and complete, together with such other documents related thereto as Bank may require. (1) Borrowers will not amend, modify, restate or waive any provision of any document entered into in connection with the Acquisition on the River Road Lease (as hereinafter defined), except with the prior written approval of Bank. (1) On or before January 15, 2002, Discount RX will transfer to Valley South all of its assets, including without limitation all assets acquired in connection with the Acquisition and all proceeds thereof, and thereafter Discount RX will not engage in any business activities or acquire or hold any assets without the prior written consent of Bank. Borrowers will deliver to Bank for prior review and approval all documents to be executed in connection with the transfer described in this subsection and all other documents related thereto as Bank may require. (1) On or before January 15, 2002, Valley South will obtain all licenses necessary to enable Valley South to own and operate the business being acquired by Valley South as provided in subsection (iii) above, together with a certificate from the officer of Borrowers responsible for licensing matters certifying to Bank that Valley South has all of such licenses and an opinion of counsel to the same effect, both of which must be in form and content acceptable to Bank. (1) Discount RX and Vall ey South will maintain all of their deposit accounts and disbursement accounts with Bank and, as soon as possible after the closing of the Acquisition, will enter into a lockbox arrangement with Bank for the collection of their accounts. (1) All financial statements delivered by Borrowers to Bank pursuant to the Loan Agreement shall be prepared on a consolidated and consolidating basis. (a) Transfer of Assets to Valley South. Until the transfer of assets ---------------------------------- from Discount RX to Valley South required under Section 15(iii) above has been --------------- completed,(a) the Valley South Reserve shall be established with respect to Availability under the Revolving Credit Facility for Advances based on the Value of Discount RX's Eligible Accounts and Eligible Inventory, and (b) the [20~ Eligible Inventory Sublimit set forth in Section 2.4(a)(ii) of the Loan ------------------ Agreement as amended hereby, of $3,000,000 shall apply to Eligible Inventory of Discount RX. In addition, the calculation of the minimum Net Income of $700,000 for the six-month period ending April 30, 2002 for the release of the Valley South Reserve shall be based upon the combined Net Income of Discount RX and Valley South for such period. (a) Bankruptcy Matters. Borrower hereby represent and warrant to Bank as ------------------ follows: a. In connection with the First Amended Plan of Reorganization (the "Plan") approved in connection with the Chapter 11 bankruptcy filing of P&W, all of the conditions to the Effective Date (as defined in the Plan) as set forth in Article XV of the Plan have occurred or been irrevocably waived in writing by McKesson and Hibernia National Bank. a. The Class 4 claim of Hibernia National Bank under the Plan has been paid in full and Hibernia National Bank has released its lien in and claim against the asset being sold pursuant to the Acquisition. a. McKesson has elected Alternative B in Section 4.3 of ----------- the Plan and has executed and delivered a full and complete written release of all causes of action, known or unknown, between McKesson on the one hand, and P&W, DrugMax, Discount RX, Hibernia National Bank, and other relevant parties described in Section 4.3 of the Plan on the other hand, together with their ----------- affiliates, officers, directors, managing agents, and attorneys. The release includes a release of avoiding actions against McKesson and a dismissal with prejudice of all filed actions, including a dismissal with prejudice of the Adversary Proceeding, the Crossclaim, and the District Court Action (as such terms are defined in the Plan). a. The Confirmation Order confirming the Plan dated October 16, 2001 (the "Order") has not been stayed and no notice of appeal or reconsideration with respect thereto has been filed and/or is pending. a. The Order attached hereto as Exhibit 17(e) is a true ------------ and correct copy of the final executed Order confirming the Plan. a. At closing of the Acquisition, a credit will be given against the consideration to be paid by Discount RX to the Disbursing Agent (as defined in the Plan) in an amount equal to the outstanding balance, including all applicable fees, costs and interest with regard to the Debtor-in-Possession Financing Facility (as defined in the Plan) provided by Discount RX to P&W during its Chapter 11 proceedings of P&W. a. No modifications, amendments or other changes to the Purchase Agreement have been made and all of the transfers and transactions in connection with closing of the Acquisition shall be in strict and complete compliance with the terms of the Purchase Agreement. b. The Order, Plan, Purchase Agreement and all other documents executed in connection therewith are presently in full force and effect, are not subject to stay, and not subject to any order for reconsideration or appeal. The foregoing documents have not been modified or amended from the copies delivered to Bank. a. A true and complete copy of the Plan and Disclosure Statement related to the Plan are attached as Exhibit 17 (i). -------------- a. The terms of the River Road Lease (as hereinafter defined) are not in excess of market rate rental and are otherwise fair and reasonable and no less onerous on the tenant than the terms of a lease negotiated at arms-length between unaffiliated and unrelated parties. (a) Fee. As a condition for Bank entering into this Amendment, --- Borrowers agree to pay to Bank an amendment fee in the amount of Forty Thousand Dollars ($40,000.00), which fee has been fully earned by Bank and shall be due and payable on the date hereof. Bank is hereby irrevocably authorized to deduct such fee from any account of any Borrower maintained with Bank or to advance sums under the Revolving Credit Facility without further notice to Borrowers to pay such fee. (a) Conditions Precedent to Closing. The obligation of Bank to enter ------------------------------- into this Amendment is subject to the fulfillment, to the satisfaction of Bank, of each of the following conditions. All of such agreements, documents and other items must be in form, content and all other respects satisfactory to Bank in its sole discretion. 1. Executed Amendment Documents. Bank shall have received ---------------------------- each of the following documents, duly executed, and each such document shall be in full force and effect: a. the Amended and Restated Revolver Note; a. Stock Pledge Agreement for Valley South together with blank stock powers; a. Surety Agreements; a. Collateral Assignments of Patents, Trademarks, Licenses and Approvals; a. UCC-1 Financing Statements; and a. any and all other documents collateral thereto. 1. Authorizing Resolutions. Bank shall have received a ----------------------- certificate from the Secretary of each Obligor attesting to the resolutions of each Obligor's Board of Directors authorizing its execution, delivery, and performance of this Amendment and authorizing specific officers of such Obligor to execute the same. 1. Insurance. Bank shall have received loss payee --------- endorsements as well as the relevant policies and evidence of insurance, together with the endorsements thereto, in connection with the addition of and Discount RX and Valley South. 1. Collateral Access Agreements. Bank shall have received ---------------------------- such Collateral Access Agreements from lessors, warehousemen, bailees, and other third persons as Bank may require with respect to all Eligible Inventory Locations, including Eligible Inventory Locations maintained by Discount RX and Valley South. 1. Lease Agreement. Bank shall have received a fully --------------- executed lease agreement (the "River Road Lease") between River Road Real Estate, LLC, as lessor and Discount RX and Valley South, as lessees, for certain premises situate at 10016 River Road, St. Rose, Louisiana 70087, the terms of which must be certified by Borrowers to Bank to be no less favorable then terms which would be negotiated between unaffiliated entities. 1. Organizational Documents. Bank shall have received ------------------------ copies of the Articles of Incorporation, By-laws and Incumbency Certificates for Discount RX and Valley South. 1. Searches. Bank shall have received copies of UCC, tax -------- lien and judgment searches performed against each Obligor. In addition, Obligors shall deliver to bank a list and explanation of any lawsuits currently pending involving Discount RX and Valley South and an up-date to the pending litigation analysis delivered to Bank on the Closing Date for the other Obligors. 1. Schedules. Bank shall have received updated Schedules --------- to be appended to the Loan Agreement evidencing any changes from the Schedules appended to the Loan Agreement on the Closing Date. 1. Opinions of Counsel. Bank shall have received opinions ------------------- of the Obligors' general and local counsels. 1. Material Contracts. Bank shall have received fully ------------------ executed copies of all material contracts and leases to which Discount RX or Valley South is a party. 1. Acquisition Purchase Documents. Bank shall have ------------------------------ received executed copies of all documents and agreements entered into in connection with the Acquisition. 1. Bankruptcy Court Documents. Bank shall have received -------------------------- copies of all documents related to the bankruptcy of P&W to the extent they relate to or affect the Acquisition. 1. Pro-Forma Consolidating Opening Balance Sheet. Bank --------------------------------------------- shall have received a pro-forma consolidating opening balance sheet of Borrowers prepared in accordance with GAAP. Such balance sheet shall be presented to Borrowers' accountants for their review and comment with respect to the methodology of accounting for the assets to be purchased by Borrowers and Borrowers shall deliver to Bank any comments or correspondence related to such review from Borrowers' accountants. 1. Projections. Bank shall have received updated ----------- projections of profit and loss statements, cash flows and balance sheets and Availability of Borrowers and their Subsidiaries prepared on a month-by-month basis for the next succeeding twelve (12) months, prepared by the chief financial officer of Borrowers. 1. McKesson Release. Bank shall have received a fully ---------------- executed copy of the McKesson release or settlement agreement described in Section 15(f) above. - -------------- 1. Hibernia Agreement. Bank shall have received evidence ------------------ that all obligations of P&W to Hibernia National Bank have been paid in full and Hibernia National Bank has released or terminated all liens and security interests previously granted in favor of Hibernia National Bank in the assets of P&W. 1. Organizational Chart. Bank shall have received an -------------------- updated organizational chart of Borrowers showing the legal structure of Borrowers and their Subsidiaries, including without limitation, Discount RX and Valley South. 1. Field Examination. Bank shall have received a ----------------- satisfactory field examination of the Inventory, Accounts and business affairs of the Obligors. 1. Licenses, Approvals, Etc. Bank shall have received ------------------------- copies of all licenses, approvals, consents, authorizations and filings of Obligors required or necessary for the operation of their business. 1. Excess Availability. As of the date hereof, Borrowers ------------------- shall have Excess Availability under the Revolving Credit Facility, minus all ----- Reserves of a minimum aggregate amount of not less than $2,500,000. In addition, Valley South shall have Excess Availability under the Revolving Credit Facility, minus the Valley South Reserve of a minimum amount of not less than $500,000. - ----- 1. Evidence of Payment. Bank shall have received evidence ------------------- that all outstanding obligations of P&W to Obligors or any of their Affiliates has been paid in full, except for certain pre-petition obligations of P&W to Obligors in an amount not to exceed $40,000. In addition, Bank shall have received evidence that any payments made to P&W by Obligors in connection with the Acquisition have been offset in full by amounts then owed to Obligors by P&W. 1. No Material Adverse Change. Bank shall have received -------------------------- evidence that no Material Adverse Change nor any material change in the value of the Collateral shall have occurred from the date of financial information and projections most recently provided to Bank. 1. Other Documents. All other documents and legal matters --------------- in connection with the transactions contemplated by this Amendment shall have been delivered, executed, or recorded. (a) Confirmation of Collateral. Nothing contained herein shall be -------------------------- deemed to be a compromise, satisfaction, accord and satisfaction, novation or release of any of the Loan Documents, or any rights or obligations thereunder, or a waiver by Bank of any of its rights under the Loan Documents or at law or in equity. All liens, security interest, rights and remedies granted to Bank in the Loan Documents are hereby ratified, confirmed and continued. Borrowers and Guarantors acknowledge and agree that the term "Loan Documents" as used in the Loan Agreement and any other documents executed in connection therewith shall include, without limitation, this Amendment and any and all other documents executed in connection herewith. (a) Challenge to Enforcement. Borrowers and Guarantors acknowledge ------------------------ agree that they do not have any defense, set-off, counterclaim or challenge against the payment of any sums owing under the Loan Documents, or the enforcement of any of the terms or conditions thereof. (a) Additional Representation and Warranties. Borrowers and ---------------------------------------- Guarantors hereby represent and warrant, which representations and warranties shall survive until all Obligations are paid and satisfied in full, as follows: a. All representations and warranties of Borrowers and Guarantors set forth in the Loan Documents are true and complete in all material respects as of the date hereof. a. Upon the effectiveness of this Amendment, no condition or event exists or has occurred which would constitute an event of default under the Loan Documents or under any other material agreement between Borrowers, any Guarantor and any other third party (or would, upon the giving of notice or the passage of time, or both constitute an event of default). a. Borrowers have not received any notice of default or event of default from any other lender, trustee or lessor with respect to any other loan, financing or lease agreement between such parties and any Borrower. a. The execution and delivery of this Amendment by Borrowers and Guarantors and all documents and agreements to be executed and delivered pursuant to the terms hereof: (1) have been duly authorized by all requisite corporate action by Borrowers and Guarantors; (1) will not conflict with or result on the breach of or constitute a default (upon the passage of time, delivery of notice or both) under any Borrower's or any Guarantor's Articles of Incorporation, By-Laws or any applicable statute, law, rule, regulation or ordinance or any indenture, mortgage, loan or other document or agreement to which any Borrower or any Guarantor is a party or by which any of them is bound or affected; and (1) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of any Borrower or any Guarantor, except liens in favor of Bank or as permitted hereunder or under the Loan Documents. a. All tax returns required to be filed by Borrowers have been timely filed and all taxes upon Borrowers or their properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency. (a) Additional Documents; Further Assurances. Borrowers covenant and ---------------------------------------- agree to execute and deliver to Bank, or to cause to be executed and delivered to Bank contemporaneously herewith, at the sole cost and expense of Borrowers, any and all other documents, agreements, statements, resolutions, certificates, consents and information as Bank may require in connection with the matters or actions described herein. Borrowers further covenant and agree to execute and deliver to Bank or to cause to be executed and delivered at the sole cost and expense of Borrowers, from time to time, any and all other documents, agreements, statements, certificates and information as Bank shall reasonably request to evidence or effect the terms hereof, the Loan Agreement, as amended, or any of the other Loan Documents, or to enforce or to protect Bank's interest in the Collateral. All such documents, agreements, statements, certificates and information shall be in form and content acceptable to Bank in its sole discretion. (a) Certain Fees, Costs, Expenses and Expenditures. Borrowers will ---------------------------------------------- pay all of Bank's expenses in connection with the review, preparation, negotiation, documentation and closing of this Amendment and the consummation of the transactions contemplated hereunder, including without limitation, costs and fees and expenses of counsel retained by Bank and all fees related to filings, recording of documents and searches, whether or not the transactions contemplated hereunder are consummated. Nothing contained herein shall limit in any manner whatsoever Bank's right to reimbursement under any of the Loan Documents. (a) Communications and Notices. All notices, requests and other -------------------------- communications made or given in connection with this Amendment shall be made in accordance with the provisions of the Loan Agreement. (a) Time of Essence. Time is of the essence of this Amendment. --------------- (a) No Waiver. Except as otherwise provided herein, nothing contained --------- and no actions taken by Bank in connection herewith shall constitute nor shall they be deemed to be a waiver, release or amendment of or to any rights, remedies, or privileges afforded to Bank under the Loan Documents or under the UCC. Nothing herein shall constitute a waiver by Bank of any Borrower's or any Guarantor's compliance with the terms of the Loan Documents, nor shall anything contained herein constitute an agreement by Bank to enter into any further amendments with Borrowers and Guarantors. (a) Inconsistencies. To the extent of any inconsistencies between the --------------- terms and conditions of this Amendment and the terms and conditions of the Loan Documents, the terms and conditions of this Amendment shall prevail. All terms and conditions of the Loan Documents not inconsistent herewith shall remain in full force and effect and are hereby ratified and confirmed by Borrowers and Guarantors. (a) Binding Effect. This Amendment and all rights and powers granted -------------- hereby will bind and inure to the benefit of the parties hereto and their respective permitted successors and assigns. (a) Severability. The provisions of this Amendment and all other Loan ------------ Documents are deemed to be severable, and the invalidity or unenforceability of any provision shall not affect or impair the remaining provisions which shall continue in full force and effect. (a) No Third Party Beneficiaries. The rights and benefits of this ---------------------------- Amendment and the Loan Documents shall not inure to the benefit of any third party. (a) Modifications. No modifications of this Amendment or any of the ------------- Loan Documents shall be binding or enforceable unless in writing and signed by or on behalf of the party against whom enforcement is sought. (a) Holidays. If the day provided herein for the payment of any -------- amount or the taking of any action falls on a Saturday, Sunday or public holiday at the place for payment or action, then the due date for such payment or action will be the next succeeding Business Day. (a) Law Governing. This Amendment has been made, executed and ------------- delivered in the Commonwealth of Pennsylvania and will be construed in accordance with and governed by the laws of such Commonwealth, without regard to any rules or principles regarding conflicts of law or any rule or canon of construction which interprets agreements against the draftsman. (a) Headings. The headings of the Articles, Sections, paragraphs and -------- clauses of this Amendment are inserted for convenience only and shall not be deemed to constitute a part of this Amendment. (a) Counterparts; Facsimile Signatures. This Amendment may be ---------------------------------- executed in any number of counterparts, all of which taken together constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. Any signature delivered via facsimile shall be deemed an original signature hereto. (a) Joint and Several. The obligations of Borrowers and Guarantors ----------------- under this Amendment shall be joint and several obligations. (a) Waiver of Right to Trial by Jury. BORROWERS, GUARANTORS AND BANK -------------------------------- WAIVE ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER THIS AMENDMENT, (b) ARISING UNDER ANY OF THE OTHER LOAN DOCUMENTS OR (c) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF BORROWERS, GUARANTORS OR BANK WITH RESPECT TO THIS AMENDMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWERS, GUARANTORS AND BANK AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AMENDMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF BORROWERS, GUARANTORS AND BANK TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. BORROWERS AND GUARANTORS ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT THEY FULLY UNDERSTAND ITS TERMS, CONTENT AND EFFECT, AND THAT THEY VOLUNTARILY AND KNOWINGLY AGREE TO THE TERMS OF THIS SECTION. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BORROWERS: --------- DRUGMAX, INC., formerly known as DrugMax.com, Inc. By: /s/ Ronald J. Patrick ------------------------------- Name/Title: VP of Finance ------------------------ VALLEY DRUG COMPANY By: /s/ Ronald J. Patrick ------------------------------- Name/Title: VP of Finance ------------------------ DISCOUNT RX, INC. By: /s/ Ronald J. Patrick ------------------------------- Name/Title: CFO ------------------------ VALLEY DRUG COMPANY SOUTH By: /s/ Ronald J. Patrick ------------------------------- Name/Title: CFO ------------------------ GUARANTORS: ---------- DESKTOP MEDIA GROUP, INC. By: /s/ Ronald J. Patrick ------------------------------- Name/Title: CFO ------------------------ VETHALL, INC By: /s/ Ronald J. Patrick ------------------------------- Name/Title: CFO ------------------------ BANK: ---- STANDARD FEDERAL BANK NATIONAL ASSOCIATION, formerly known as Michigan National Bank, as successor in interest to Mellon Bank, N.A. By: LaSalle Business Credit, Inc., as agent By: /s/ Stephen A. Caffrey -------------------------------- Name/Title: Vice President ------------------------ -----END PRIVACY-ENHANCED MESSAGE-----