-----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, SIZzQ3+QpruUgnqKI9hjVF22JmDGB+0XJiqC9sHMBLGpHX7jIhtfSPh6oVvXwveP 4yRoema3WUYMbwcaWtJmxw== 0001021408-02-002426.txt : 20020414 0001021408-02-002426.hdr.sgml : 20020414 ACCESSION NUMBER: 0001021408-02-002426 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRUGMAX 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: 02549884 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: DRUGMAX COM INC DATE OF NAME CHANGE: 20000208 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 DECEMBER 31, 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 December 31, 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 January 28, 2002, there were 7,121,833 shares of common stock, par value $0.001 per share, outstanding. The aggregate market value of such shares held by non-affiliates of the registrant (based upon the closing bid price of such shares on January 25, 2002) was approximately $18,353,085. Transitional Small Business Disclosure Formats (check one): Yes [_] No [X] DRUGMAX, INC. AND SUBSIDIARIES FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 2001 TABLE OF CONTENTS PART I Item 1. Financial Statements............................................................. 3 Condensed Consolidated Balance Sheets December 31, 2001 and March 31, 2001........................................ 3 Condensed Consolidated Statements of Operations Three and Nine Months Ended December 31, 2001 and 2000...................... 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 2001 and 2000................................ 5 Notes to Condensed Consolidated Financial Statements..................................... 6 Item 2. Management's Discussion and Analysis or Plan of Operations...................... 12 Overview............................................................................ 13 Results of Operations............................................................... 13 Financial Condition, Liquidity and Capital Resources................................ 15 PART II Item 1. Legal Proceedings................................................................ 16 Item 2. Changes in Securities and Use of Proceeds........................................ 16 Item 3. Submission of Matters To a Vote of Security Holders.............................. 16 Item 4. Exhibits and Reports on Form 8-K................................................. 17 Signatures............................................................................... 20
2 PART I - FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DRUGMAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS December 31, 2001 March 31, 2001 ---------------------- ------------------ Current assets: Cash and cash equivalents $ 207,453 $ 384,307 Restricted cash 2,000,000 2,052,080 Accounts receivable, net of allowance for doubtful accounts of $303,199 and $381,944 15,869,306 14,864,396 Inventory 16,248,649 10,694,155 Due from affiliates 10,934 25,861 Net deferred income tax asset - current 397,780 - Prepaid expenses and other current assets 446,834 373,928 ------------------ ----------------- Total current assets 35,180,956 28,394,727 Property and equipment, net 1,060,953 504,906 Goodwill, net 25,479,525 25,179,255 Intangible assets, net 285,914 44 Stockholder notes receivable 100,000 100,000 Net deferred income tax asset - long-term 712,500 - Deferred financing costs, net 247,848 284,950 Other assets 144,888 159,888 Deposits 41,457 7,520 ------------------ ----------------- Total assets $ 63,254,041 $ 54,631,290 ================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,089,710 $ 11,448,473 Accrued expenses and other current liabilities 487,175 360,911 Credit lines payable 19,411,546 11,944,497 Notes payable - current portion 675,980 666,660 Due to affiliates 506,246 552,658 ------------------ ----------------- Total current liabilities 31,170,657 24,973,199 Notes payable - long-term portion 647,784 1,111,118 Other long-term liabilities - 1,968,750 ------------------ ----------------- Total liabilities 31,818,441 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; 7,119,172 and 6,468,754 shares issued and outstanding 7,120 6,470 Additional paid-in capital 39,342,355 36,481,755 Accumulated deficit (7,913,875) (9,910,002) ------------------ ----------------- Total stockholders' equity 31,435,600 26,578,223 ------------------ ----------------- Total liabilities and stockholders' equity $ 63,254,041 $ 54,631,290 ================== =================
See accompanying notes to condensed consolidated financial statements. 3 DRUGMAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended December 31, 2001 December 31, 2000 December 31, 2001 December 31, 2000 ------------------ ------------------ ------------------ ------------------ Revenues $ 63,735,331 $ 54,697,214 $ 200,799,344 $ 122,473,558 Cost of goods sold 61,613,598 53,065,833 195,199,495 118,549,908 ------------------ ------------------ ------------------ ------------------ Gross profit 2,121,733 1,631,381 5,599,849 3,923,650 ------------------ ------------------ ------------------ ------------------ Selling, general and administrative expenses 1,443,509 1,201,801 3,756,295 3,871,038 Amortization expense 36,939 682,657 93,644 2,010,981 Depreciation expense 75,822 80,539 175,875 190,143 ------------------ ------------------ ------------------ ------------------ Total operating expenses 1,556,270 1,964,997 4,025,814 6,072,162 ------------------ ------------------ ------------------ ------------------ Operating income (loss) 565,463 (333,616) 1,574,035 (2,148,512) ------------------ ------------------ ------------------ ------------------ Other income (expense) Interest income 24,228 70,773 54,278 209,462 Other 5,207 - 12,060 375 Interest expense (217,888) (343,361) (754,527) (814,973) ------------------ ------------------ ------------------ ------------------ Total other income (expense) - net (188,453) (272,588) (688,189) (605,136) ------------------ ------------------ ------------------ ------------------ Income (loss) before income tax benefit 377,010 (606,204) 885,846 (2,753,648) Income tax benefit - - 1,110,280 - ------------------ ------------------ ------------------ ------------------ Net income (loss) $ 377,010 $ (606,204) $ 1,996,126 $ (2,753,648) ================== ================== ================== ================== Net income (loss) per common share - basic $ 0.05 $ (0.09) $ 0.28 $ (0.43) ================== ================== ================== ================== Net income (loss) per common share - diluted $ 0.05 $ (0.09) $ 0.28 $ (0.43) ================== ================== ================== ================== Weighted average shares outstanding - basic 7,089,742 6,419,384 7,007,412 6,404,079 ================== ================== ================== ================== Weighted average shares outstanding - diluted 7,325,095 6,419,384 7,220,725 6,404,079 ================== ================== ================== ==================
See accompanying notes to condensed consolidated financial statements. 4 DRUGMAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine For the Nine Months Ended Months Ended December 31, December 31, 2001 2000 ---------------- --------------- Cash flows from operating activities: Net income (loss) $ 1,996,126 $ (2,753,648) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 269,519 2,201,117 Loss on disposal of assets 5,298 - 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 (1,598,462) (7,881,146) Increase in inventory (4,910,618) (4,283,443) Decrease/(increase) in due from affiliates 14,927 (36,785) Decrease/(increase) in prepaid expenses and other current assets 102,616 (528,905) Decrease in shareholder notes receivable - 70,000 Decrease in notes receivable - 37,614 (Increase)/decrease in deposits (27,786) 1,500 (Decrease)/increase in accounts payable (1,358,763) 5,962,349 Increase/(decrease) in accrued expenses and other liabilities 62,783 (155,165) ---------------- --------------- Net cash used in operating activities (6,554,640) (7,366,512) ---------------- --------------- Cash flows from investing activities: Purchases of property and equipment (69,871) (77,883) Proceeds from sale of property and equipment 2,655 - Cash paid for acquisitions, net (482,536) (1,757,481) ---------------- --------------- Net cash used in investing activities (549,752) (1,835,364) ---------------- --------------- Cash flows from financing activities: Decrease in restricted cash 52,080 - Net change under revolving line of credit agreements 7,467,049 6,814,457 Payments of long-term obligations - (296,575) Proceeds from issuance of note payable - 2,000,000 Repayment of principal on notes payable (494,680) (1,511,040) Increase in deferred financing costs (50,499) (276,466) (Decrease)/increase in due to affiliates (46,412) 38,348 ---------------- --------------- Net cash provided by financing activities 6,927,538 6,768,724 ---------------- --------------- Net decrease in cash and cash equivalents (176,854) (2,433,152) Cash and cash equivalents at beginning of period 384,307 6,020,129 ---------------- --------------- Cash and cash equivalents at end of period $ 207,453 $ 3,586,977 ================ =============== Supplemental disclosures of cash flows information: Cash paid for interest $ 754,527 $ 814,973 ================ =============== Cash paid for income taxes $ - $ - ================ =============== Supplemental schedule of non-cash investing and financing activities: In April 2000, the Company 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 =============== In July 2001, the Company released from escrow 500,000 shares of common stock (fair value of $1,968,750) due to Dynamic Health Products, Inc. earned through the contingent consideration clauses in conjunction with the acquisition of Becan Distributors, Inc. In October 2001, the Company purchased substantially all the net assets of Penner & Welsch, Inc. for $482,536 cash, 125,418 shares of the Company's common stock (fair value of $750,000), and $1,604,793 in forgiveness of debt owed to the Company. The Company also issued 25,000 shares of stock (fair value of $142,500) in conjunction with a non-compete agreement. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 3,083,975 Cash and stock issued for acquisition 1,375,036 Forgiveness of debt owed to the Company 1,604,793 ---------------- Liabilities assumed $ 104,146 ================
See accompanying notes to condensed consolidated financial statements. 5 Notes to Condensed Consolidated Financial Statements (Unaudited) For the Three- and Nine-Month Periods Ended December 31, 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. 6 In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective April 1, 2001. A reconciliation of previously reported net income (loss) and earnings (loss) per share to the amounts adjusted for the exclusion of goodwill amortization net of the related income (loss) tax effect follows:
For the Three For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 ---------------- -------------- --------------- ---------------- Reported net income (loss) $ 377,010 $ (606,204) $ 1,996,126 $ (2,753,648) Add: Goodwill amortization net of income tax - 661,763 - 1,975,647 ---------------- -------------- --------------- ---------------- Adjusted net income (loss) $ 377,010 $ 55,559 $ 1,996,126 $ (778,001) ================ ============== =============== ================ Basic earnings (loss) per common share Reported net income (loss) $ .05 $ (.09) $ .28 $ (.43) Goodwill amortization, net of income tax - .10 - .31 ---------------- -------------- --------------- ---------------- Adjusted net income (loss) $ .05 $ .01 $ .28 $ (.12) ================ ============== =============== ================ Diluted earnings (loss) per common share Reported net income (loss) $ .05 $ (.09) $ .28 $ (.43) Goodwill amortization, net of income tax - .10 - .31 ---------------- -------------- --------------- ---------------- Adjusted net income (loss) $ .05 $ .01 $ .28 $ (.12) ================ ============== =============== ================
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, a wholly owned subsidiary of the Company, Valley, Ronald J. Patrick ("Patrick") and Ralph A. Blundo ("Blundo") signed a Merger Purchase Agreement. In connection with the merger, Patrick and Blundo received 217,255 shares of the Company's common stock at $10.125 per share and cash in the amount of $1.7 million. The acquisition was accounted for using the purchase method of accounting and accordingly $3.6 million of goodwill was recorded. The results of operations of Valley are included in the condensed consolidated financial statements from its purchase date. On October 25, 2001, Discount (the "Buyer"), a wholly-owned subsidiary of the Company, purchased (the "Purchase") substantially all of the net assets of Penner & Welsch, Inc. ("Penner" or the "Seller"), a wholesale distributor of pharmaceuticals based in Louisiana, 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 $482,536, and forgiveness of $1,604,793 in trade accounts payable and management fees owed to the Buyer. The source of the funds used to acquire the Seller's net 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. On October 19, 2001, the Company entered into an Employment Agreement with Gregory M. Johns ("Johns"), former owner of Penner, for an annual salary of $125,000, payable bi-weekly for a term of three years, terminating October 18, 2004. In accordance with the Employment Agreement, the Company agreed to issue a total 7 of 100,000 employee non-qualified stock options (the "Options") to Johns at a price of $8.00 per share contingent upon the attainment of gross profit goals by Discount over the three year term of the Employment Agreement. The Options, provided the goals are attained, would be issued one third of the total 100,000 each year for three years, and would be issued within sixty days of each anniversary date of the Employment Agreement. In conjunction with the Employment Agreement, on October 19, 2001, Johns executed a Restrictive Covenants Agreement and Agreement Not to Compete ("Non Compete Agreement") with the Company. In consideration for Johns' execution of the Non Compete Agreement, the Company issued to Johns 25,000 shares of common stock of the Company, with a fair market value at the date of issuance equal to $142,500. The cost of the Non Compete Agreement is an intangible asset and will be amortized over a four year period. In October 2001, the Company executed a Commercial Lease Agreement (the "Lease") with River Road Real Estate, LLC ("River Road"), a Florida limited liability company, to house the operations of Discount in St. Rose, Louisiana. The officers of River Road are Jugal K. Taneja, a Director, Chief Executive Officer, Chairman of the Board and a majority shareholder of the Company, William L. LaGamba, a Director and the President of the Company, Stephen M. Watters, a Director of the Company, and Gregory M. Johns. The Lease is for an initial period of five years with a base monthly lease payment of $15,000, and an initial deposit of $15,000 made to River Road by the Company. The acquisition of Penner's net assets was accounted for by the purchase method of accounting in accordance with SFAS No. 141. The Company is operating the business under Discount and the results of the operations are included in the condensed consolidated financial statements from the purchase date. The allocation of the purchase price of the net assets acquired in the Penner transaction is as follows: Accounts Receivable $ 1,091,884 Inventory 693,877 Property and Equipment 670,000 Other Current Assets 36,030 Intangible Assets 291,914 Goodwill 300,270 Assumption of liabilities (104,146) --------------------- Net value of purchased assets 2,979,829 Forgiveness of Trade Payables and Management fees (1,604,793) Value of common stock issued (892,500) --------------------- Cash paid for acquisition $ 482,536 ===================== The unaudited pro forma effect of the acquisitions of Valley and Penner on the Company's revenues, net income (loss) and net income (loss) per share, before the effects of the change in accounting for amortization of goodwill, had the acquisitions occurred on April 1, 2000 are as follows:
For the Nine Months For the Nine Months ended December 31, 2001 ended December 31, 2000 --------------------------------------------------------------- Revenues $ 203,455,915 $ 158,152,690 Net income (loss) 481,520 (5,379,454) Basic net income (loss) per share 0.07 (0.84) Diluted net income (loss) per share 0.07 (0.84)
8 The proforma information for the nine months ended December 31, 2001 and 2000, has been presented after the elimination of revenues and net income derived from the sales to Penner by Discount prior to the acquisition. In addition, the proforma information for the nine months ended December 31, 2001 and 2000, has been presented after the elimination of non-recurring charges from the Penner operations as follows:
For the Nine Months ended For the Nine Months ended December 31, 2001 December 31, 2000 --------------------------------- ---------------------------------- Management fees $ 547,220 $ 435,742 Trustee fees 25,000 15,000 Legal fees 160,577 106,599
NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the nine-month period ended December 31, 2001, by operating segment, are as follows:
Distribution Software Total ------------------ --------------- ----------------- Balance as of March 31, 2001 $ 25,179,255 $ - $ 25,179,255 Goodwill acquired during the period 300,270 - 300,270 ------------------ --------------- ----------------- Balance as of December 31, 2001 $ 25,479,525 $ - $ 25,479,525 ================== =============== =================
The Company has determined that it 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. The following table reflects the components of other intangible assets:
December 31, 2001 March 31, 2001 ------------------------------- ------------------------------ Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ---------------- -------------- ---------------- ------------- Amortized intangible assets: Noncompete agreement $ 142,500 $ 6,000 $ - $ - Domain name 200 200 200 156 --------- -------- -------- -------- Total $ 142,700 $ 6,200 $ 200 $ 156 ========= ======== ======== ======== Non-amortized intangible assets: Domain name $ 149,414 $ - $ - $ - ========= ======== ======== ========
Amortization expense for the three and nine-months ended December 31, 2001 was $36,939 and $93,644 respectively, and $682,657 and $ 2,010,981 for the three and nine-months ended December 31,2000, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows: Fiscal year ended March 31 Amount -------------------------- ------ 2002 $144,507 2003 167,568 2004 156,604 2005 30,000 2006 - 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 nine months ended December 31, 2001. During the three- and nine-month periods ended December 31, 2001, the Company recorded income tax expense of approximately $146,000, which was fully offset by recording the tax benefit associated with additional net operating loss carry forwards not previously recognized by the Company, and $202,220, respectively, which was offset by the change in the valuation allowance of $1,458,500 for a net income tax benefit of $1,110,280. A revision to the estimate of available net operating losses was made by the Company as a result of finalizing prior year tax returns during the quarter ended December 31, 2001. During the three- and nine-month periods ended December 31, 2000, the 9 Company recorded no income tax expense. 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 December 31, 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 assets. NOTE F - COMMITMENTS AND CONTINGENCIES On October 24, 2000, the Company obtained from Mellon Bank, N.A. ("Mellon") a $15 million 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. On October 29, 2001, the Company executed a loan modification agreement modifying the original Mellon line of credit with Standard Federal Bank National Association ("Standard"), formerly Michigan National Bank, as successor in interest to Mellon, increasing the line to $23 million. 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 not in compliance with the net worth, working capital, and quarterly net income ratios as of December 31, 2001. Standard has provided a letter to waive the net worth, working capital and quarterly net income (loss) covenants for the three-months ended December 31, 2001. 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 fess previously paid to GAF. At December 31, 2001, no warrants had been issued to GAF. As of February 14, 2002, GAF had 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. 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. 10 NOTE G - SEGMENT INFORMATION During the three- and nine-month periods ended December 31, 2000, the Company operated two business segments: wholesale distribution and computer software development. During the three- and nine-month periods ended December 31, 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 Three For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 ----------------------------------------------------------------------------- Revenues from external customers Distribution $ 63,735,331 $ 54,697,214 $ 200,799,344 $ 122,336,075 Software Development - - - 137,483 ----------------------------------------------------------------------------- Total $ 63,735,331 $ 54,697,214 $ 200,799,344 $ 122,473,558 ============================================================================= Income (loss) from operations by segment Distribution $ 565,463 $ (176,904) $ 1,574,035 $ (2,177,611) Software Development - (156,712) - 29,099 ----------------------------------------------------------------------------- Total $ 565,463 $ (333,616) $ 1,574,035 $ (2,148,512) =============================================================================
December 31, March 31, 2001 2001 ----------------------------------- Assets Distribution $ 63,231,145 $ 54,568,796 Software Development 22,896 62,494 ----------------------------------- Total $ 63,254,041 $ 54,631,290 ===================================
There were no inter-segment sales or transfers during either the three- and nine-month periods ended December 31, 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 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. The Company expects to own 40% of MorepenMax. MorepenMax is still in its initial development stage and, to date, the Company has not funded its obligation to the joint venture. MorepenMax plans to utilize the Morepen facilities to develop low-cost generic pharmaceuticals in the United States. The Company will be the exclusive distributor throughout the United States of the products developed by MorepenMax. 11 NOTE I - 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 Three For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 --------------------- -------------------- ----------------- ------------------ Basic shares 7,089,742 6,419,384 7,007,412 6,404,079 Additional shares assuming effect of dilutive stock options 235,353 - 213,313 - --------------------- -------------------- ----------------- ------------------ Diluted shares 7,325,095 6,419,384 7,220,725 6,404,079 ===================== ==================== ================= ==================
Note J - SUBSEQUENT EVENTS. On or about January 22, 2002, K. Sterling Miller ("Miller") and Jimmy L. Fagala ("Fagala" together with Miller the "Plaintiffs") filed a complaint naming the Company as a defendant in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida. In the complaint, the Plaintiffs seek damages from the Company alleging, among other things, that the Company inappropriately failed to release a total of approximately 39,000 shares of the Company's stock to the Plaintiffs in connection with the Company's acquisition of Desktop Corporation. The Plaintiffs also allege that the Company breached its employment agreements with Miller and Fagala. The Company intends to vigorously defend these allegations. 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 12 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 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. The Company maintains an inventory of over 20,000 stock-keeping units, to serve its 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 (the "Buyer"), purchased (the "Purchase") substantially all of the net assets Penner & Welsch, Inc. ("Penner" or the "Seller"), a wholesale distributor of pharmaceuticals based in Louisiana, 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 $482,536, and forgiveness of $1,604,793 in trade accounts payable and management fees owed to the Buyer. In addition, the Company issued 25,000 shares of restricted common stock of the Company valued at $142,500 to obtain a non- compete agreement with the former owner of Penner. The source of the funds used to acquire the Seller's net 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 is operating the business of the Seller under its subsidiary Discount. In October 2001, the Company executed a Commercial Lease Agreement (the "Lease") with River Road Real Estate, LLC ("River Road"), a Florida limited liability company, to house the operations of Discount in St. Rose, Louisiana. The officers of River Road are Jugal K. Taneja, a Director, Chief Executive Officer, Chairman of the Board and a majority shareholder of the Company, William L. LaGamba, a Director, Chief Operating Officer, and the President of the Company, Stephen M. Walters, a Director of the Company, and Gregory M. Johns. The Lease is for an initial period of five years with a base monthly lease payment of $15,000, and an initial deposit of $15,000 made to River Road by the Company. Results of Operations For the Three- and Nine-Month Periods Ended December 31, 2001 and 2000. Revenues. The Company generated revenues of $63.7 million and $200.8 million for the three- and nine-month periods ended December 31, 2001, respectively, compared to $54.7 million and $122.5 million, respectively, for the three- and nine-month periods ended December 31, 2000. The increase is attributable to the operations of the Pittsburgh division of the Company and Discount, acquired in November 1999, and Valley acquired in April 2000. The Company's Pittsburgh distribution facility generated revenues of $31.7 million and $102.3 million for the three- and nine-month periods ended December 31, 2001, respectively, compared to $28.4 million and $69.6 million, respectively, for the three- and nine-month periods ended December 31, 2000. Discount generated revenues of $7.4 million and $22.4 million for the three- and nine- month periods ended December 31, 2001, respectively, compared to $8.1 million and $10.5 million, respectively, for the three- and nine-month periods ended December 31, 2000. The increase in the nine-month revenue for Discount is attributable to its management of Penner beginning in the third fiscal quarter ended December 31, 2000, and through its acquisition of Penner in October 2001. Valley generated revenues of $24.7 million and $75.8 million for the three- and nine-month periods ended December 31, 13 2001, compared $17.9 million and $41.9 million, respectively, from its acquisition through the three-and nine-month periods ended December 31, 2000. In addition, approximately $.02 million and $.36 million and $.25 million and $.46 million of gross revenues were generated for the three- and nine-months periods ended December 31, 2001 and 2000, respectively, from the Company's remaining operations. The Company's warehouse locations through acquisitions generated double digit growth and achieved record sales in the nine months ended December 31, 2001, by expanding sales territories through acquisitions, cross selling to common customers, and aggressive marketing. Gross Profit. The Company achieved gross profits of $2.1 million and $5.6 million for the three- and nine-month periods ended December 31, 2001, respectively, compared to $1.6 million and $3.9 million, respectively, for the three- and nine-month periods ended December 31, 2000. The increase is attributable to $.6 million and $1.5 million, respectively, in gross profit generated by the Company's Pittsburgh distribution facility for the three- and nine-month periods ended December 31, 2001 compared to $.4 million and $1.0 million, respectively, for the three- and nine-month periods ended December 31, 2000. Discount generated $.5 million and $.6 million, respectively, in gross profit for the three- and nine-month periods ended December 31, 2001, compared to $.1 million for each the three- and nine-month periods ended December 31, 2000. Gross profit generated by Valley for the three- and nine-month periods ended December 31, 2001, respectively, were $1.0 million and $3.1 million, compared to $.9 million and $2.5 million, respectively, from its acquisition through the three- and nine-month periods ended December 31, 2000. Approximately $.02 million, $.36 million, $.2 million and $.3 million in gross profit for the three- and nine-month periods ended December 31, 2001 and 2000, respectively, were generated from the Company's remaining operations. Operating Expense. The Company incurred operating expenses of $1.6 million and $4.0 million for the three- and nine-month periods ended December 31, 2001, respectively, compared to $1.3 million and $4.1 million, respectively, for the three- and nine-month periods ended December 31, 2000. These expenses include various administrative, sales, marketing and other direct operating expenses of $1,556,270 and $4,025,814 for the three- and nine-month periods ended December 31, 2001, respectively, compared to $1,303,234 and $4,096,515 for the three- and nine-month periods ended December 31, 2000, respectively, net of $661,763 and $1,975,647 associated with goodwill amortization in the three- and nine-month periods ended December 31, 2000. The percentage of operating expenses remained constant at 2.4% of gross revenues, for the three months ended December 31, 2001 and 2000, respectively, and decreased from 3.3% to 2.0% for the nine months ended December 31, 2001 and 2000, respectively. The operating expenses for the three- and nine-months ended December 31, 2001, include $332,853 in expenses of Discount, or .5% of gross revenues, in operating expenses from the date of acquisition of Penner through December 31, 2001. The improvement in the operating expense ratio for the nine months ended December 31, 2001, reflects increased warehouse efficiencies, economies of scale associated with the Company's growth, and cost control efforts, such as elimination of duplicate services resulting from mergers, and reduction in web site monitoring and setup costs. Interest expense. Interest expense was approximately $217,900 and $754,500 for the three- and nine-month periods ended December 31, 2001, respectively, compared to approximately $343,400 and $815,000, respectively, for the three- and nine-month periods ended December 31, 2000. The decrease was due to more favorable interest terms under 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 nine-month periods ended December 31, 2001 was $.05 and $.28 per share, respectively, for both the basic and diluted shares, compared to a net loss per share of $(.09) and $(.43), respectively, for both the basic and diluted shares for the three- and nine-month periods ended December 31, 2000. At March 31, 2001, the Company had a deferred income tax asset valuation of $1,458,500. During the nine-month period ended December 31, 2001, the Company reduced the entire valuation allowance, and booked $1,110,280 deferred income tax asset, net of income tax expense of $348,220 for the nine-month period ended December 31, 2001, which provided the Company with net income of $.21 for the basic and $.20 per diluted share. The Company's adoption of SFAS No. 142 increased the net income per share by approximately $.06 and $.18 for both the basic and diluted net income per share for the three- and nine-month periods ended December 31, 2001, and would have had the effect of decreasing the basic and diluted net loss by $.10 and $.30 respectively, for both the basic and diluted purposes for the three- and nine-month periods ended December 31, 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 14 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 for the nine-month period ended December 31, 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 nine months ended December 31, 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 by the Company as net income plus non-cash expenses) for the quarter ended December 31, 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 $4.0 million and $.2 million, respectively, and restricted cash of $2 million at December 31, 2001. Net cash used in operating activities was $6,554,640 for the nine months ended December 31, 2001. The usage of cash is primarily attributable to increases in accounts receivable, inventory, deposits and accrued expenses and decreases in accounts payable, prepaid expenses, and due from affiliates. Net cash used in investing activities was $549,752 for the nine months ended December 31, 2001. Cash was invested in property and equipment in the amount of $69,871, less cash received for the sale of miscellaneous property and equipment no longer used by the Company, in intangible assets consisting of fees associated with the amended line of credit agreement, and the cash paid for the Penner acquisition. Net cash provided by financing activities was $6,927,538 for the nine months ended December 31, 2001, representing a net increase in the Company's revolving line of credit of $7,467,049, and a decrease in the restricted cash account with Standard, offset by the repayment of principal on the notes payable, and a decrease in due to affiliates. On October 29, 2001, the Company executed a loan modification agreement modifying its original line of credit with Standard Federal Bank National Association ("Standard"), formerly Michigan National Bank, as successor in interest to Mellon Bank, N.A., increasing the line to $23 million. 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 not in compliance with the net worth, working capital, and quarterly net income ratios as of December 31, 2001. Standard has provided a letter to waive the net worth, working capital and quarterly net income (loss) covenants for the quarter ended December 31, 2001. Management anticipates meeting the financial covenants of the credit facility for the quarter ended March 31, 2002, based upon its current projections for the quarter then ended. 15 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. On or about January 22, 2002, K. Sterling Miller ("Miller") and Jimmy L. Fagala ("Fagala" together with Miller the "Plaintiffs") filed a complaint naming the Company as a defendant in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida. In the complaint, the Plaintiffs seek damages from the Company alleging, among other things, that the Company inappropriately failed to release a total of approximately 39,000 shares of the Company's stock to the Plaintiffs in connection with the Company's acquisition of Desktop Corporation. The Plaintiffs also allege that the Company breached its employment agreements with Miller and Fagala. The Company intends to vigorously defend these allegations. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. In July 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. In October 2001, the Company issued 125,418 shares of restricted common stock to McKesson Corporation as part of the purchase price of Penner & Welsch, Inc. In October 2001, simultaneous with the acquisition of Penner, the Company issued 25,000 shares of common stock to Gregory M. Johns ("Johns") in conjunction with Johns' execution of a Restrictive Covenants Agreement and Agreement Not to Compete dated October 19, 2001. The foregoing transactions did not involve any underwriter, underwriting discounts or commissions or any public offering, and the Company believes that the transactions were exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof. The recipients in the transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in the transactions. The recipients had adequate access to information about the Company. Item 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 16 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. (12) 17 10.6 Consulting Agreement by and between DrugMax.com, Inc. and Stephen M. Watters dated August 10, 2000. (9) 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. (12) 10.9 Employment Agreement by and between DrugMax, Inc. and Gregory M. Johns dated October 19, 2001. * 10.10 Restrictive Covenants Agreement and Agreement Not to Compete by and between DrugMax, Inc. and Gregory M. Johns dated October 19, 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. (12) Incorporated by reference to the Company's Form 10-QSB, filed November 14, 2001. 18 (b) Reports on Form 8-K. During the three months ended December 31, 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. 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. Subsequent to December 31, 2001, the Company filed the following one (1) report on Form 8-K/A Form 8-K/A, dated January 7, 2002, with respect to financial data for the Company's asset purchase of Penner & Welsch, Inc. 19 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: February 14, 2002 By: /s/ Jugal K. Taneja -------------------------- -------------------------------- Jugal K. Taneja Chief Executive Officer Date: February 14, 2002 By: /s/ Ronald J. Patrick -------------------------- -------------------------------- Ronald J. Patrick Chief Financial Officer, Vice President of Finance, Secretary and Treasurer Date: February 14, 2002 By: /s/ William L. LaGamba -------------------------- -------------------------------- William L. LaGamba President and Chief Operations Officer 20 EX-10.9 3 dex109.txt EMPLOYMENT AGREEMENT BETWEEN DRUGMAX & G. JOHNS Exhibit 10.9 EMPLOYMENT AGREEMENT This AGREEMENT is made this 19th day of October, 2001 and effective as of the date set forth below between Discount Rx, Inc., a Louisiana corporation (the "Company"), and Gregory Michael Johns (the "Employee"). WHEREAS, the Employee and the Company entered into an Employment Agreement dated August 31, 2000 (the "Prior Agreement") and wish to amend, modify and replace the Prior Agreement with this Agreement' WHEREAS, the Employee possesses skills and expertise which make him valuable to the Company and which will contribute to the Company's future success; and WHEREAS, the Company desires to employ the Employee and the Employee desires to serve in the employ of the Company upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, the parties hereby agree as follows: 1. Employment, Acceptance and Term ------------------------------- 1.1 Subject to the terms and conditions of this Agreement, the Company hereby agrees to employ the Employee, and the Employee hereby agrees to serve the Company, commencing on the Effective Date (as defined below), as its Vice President of Sales and Purchasing for the term set forth in Section 1.2 below. The Effective Date shall be the Effective Date of the First Amended Plan of Reorganization filed by Penner & Welsch, Inc. Until the Effective Date, the Company shall owe no obligations to the Employee. 1.2 The term of this Agreement shall be for a three (3) year period commencing as of the Effective Date and ending on the third anniversary hereof. This Agreement may be renewable by mutual agreement of the Company and the Employee for subsequent terms of one (1) year by giving the Employee notice of such renewal at least sixty (60) days prior to the end of any term hereof. 2. Duties and Authority -------------------- During the term of this Agreement, the Employee shall devote his full time and energies to the business and affairs of the Company. The Employee shall not accept any other employment during the term of this Agreement, nor shall he permit such personal business interests as he may have to interfere with the performance of his duties hereunder. The Employee agrees to use his best efforts, skill and abilities to promote the Company's interests and to faithfully and diligently perform, to the best of his abilities, such duties as may from time to time be assigned to him by the Employee's immediate supervisor. It is understood that Employee's base of operation will be the New Orleans area, and he will not be required to move during the term of the contract. All such services shall be rendered for and in consideration of the compensation payable to the Employee under Section 3 hereof. 3. Compensation ------------ 3.1 Salary. The Employee shall receive an annual base salary during ------ the term of this Agreement of $125,000 payable in installments consistent with the Company's normal payroll schedule. The Company shall review this base salary at annual intervals, and may increase the Employee's annual base salary from time to time as the Company deems to be appropriate. 3.2 Additional Compensation for Execution of Non-Competition -------------------------------------------------------- Agreement. As a condition of this Agreement, Employee has agreed to execute that - --------- certain Restrictive Covenants Agreement and Agreement Not to Compete (the "Non- Competition Agreement"). As consideration for Employee executing the Non- Competition Agreement, the Employee shall also be entitled to receive such additional compensation as set forth in Exhibit "A" attached hereto and made a part hereof. 4. Expenses. -------- The Company shall pay or reimburse the Employee for all reasonable and necessary expenses incurred by the Employee, and authorized by the Company, during the term of this Agreement in connection with the business of the Company; provided, however, the Employee shall render to the Company a complete and accurate accounting of all such expenses in accordance with the substantiation requirements of Section 274 of the Internal Revenue Code of 1986, as amended. 5. Additional Benefits ------------------- During the term of this Agreement the Employee shall be allowed to participate (subject to uniformly applicable requirements for participation) at the Company's expense in any health, medical, dental, disability, insurance or pension plan made available by the Company for the benefit of its employees generally, and shall be entitled to an annual vacation of two (2) weeks for the first year hereof with full pay and allowances and two (2) weeks in subsequent years to be taken at such time or times as shall be mutually agreed between the Company and the Employee. The Company shall provide Employee with dental and health benefits reasonably comparable to that of Employee's previous employment. 6. Discharge for Cause ------------------- The Company shall have the right to terminate this Agreement and to discharge the Employee at any time for "cause". As used herein, termination for "cause" shall mean termination by action of the Company's Board of Directors based upon the occurrence of any of the following: 2 (i) Employee commits, is arrested, or otherwise officially charged with a felony or any crime involving moral turpitude, or any other criminal activity or unethical conduct which, in the good faith opinion of the Company, would impair Employee's ability to perform his duties hereunder or would impair the business reputation of the Company. (ii) Employee commits an act, or omits to take action in bad faith. (iii) Employee commits a proven intentional act which destroys property belonging to the Company, or it is proven that employee has stolen funds or property of the Company or any affiliate of the Company. (iv) Employee fails or refuses to comply with the policies or regulations of the Company as set forth in the DrugMax and Affiliates, (including Employer) Employee Handbook, a copy of which, Employee hereby acknowledges that he has received. (v) Employee uses illegal drugs or alcohol to an extent which materially impairs the Employee's performance of his duties hereunder. (vi) Employee knowingly and continually violates a material term of this Agreement. 7. Termination of Agreement ------------------------ Notwithstanding the provisions of Section 1 hereof, this Agreement shall terminate upon the happening of any one of the following events and the Company shall have no obligations to the Employee hereunder for any period after the effective date of such termination: (i) automatically and without notice, if the Employee shall die during the term hereof; (ii) by resolution of the Company's Board of Directors and upon not less than sixty (60) days' prior written notice to the Employee if the Employee shall become "disabled" as defined in any group disability policy maintained by the Company for the benefit of its employees; provided that in the event of such termination, the Employee shall be entitled to receive all compensation and benefits payable to him pursuant to this Agreement until the date set forth in such notice; (iii) automatically and without notice if the Employee voluntarily terminates his employment with the Company without the Company's consent; (iv) upon termination of the Employee's employment with the Company by mutual agreement between the Company and the Employee; 3 (v) upon written notice to the Employee of action taken by the Board of Directors of the Company to discharge the Employee for "cause" pursuant to Section 6 of this Agreement, which notice shall specify the reason for such discharge; provided, however, that if the Board notifies the Employee of action taken to discharge the Employee for any of the reasons set forth in either subsection (iv), (v) or (vii) of Section 6, the Employee shall have 30 days from receipt of such written notice to cure the specified deficiencies. If the Board, in its sole discretion, is not satisfied that such deficiencies have been cured, it shall so notify the Employee and the Employee shall be terminated effective on the date of such notification. 8. Non-Competition --------------- Employee agrees that he and the Company shall execute and be bound by the terms of the Restrictive Covenants Agreement and Agreement Not to Compete executed contemporaneously herewith and incorporated herein by reference. 9. Employment Policies ------------------- Employee hereby acknowledges the receipt of the DrugMax Employee Handbook. 10. Notices ------- All notices hereunder and other communications required or permitted to be given to either party hereto shall be in writing and delivered by hand or sent by overnight or by certified mail, return receipt requested, postage prepaid, addressed to such party at its address referred to above, or at such other address as such party may from time to time designate by written notice to the other party hereto, given in accordance with the provisions of this Section 9. Any such notice or other communication shall be deemed to have been given on the date delivered by hand or the date actually received. 11. Waivers ------- No waiver by either party hereto of any breach of any provision of this Agreement shall be deemed to constitute a waiver of any other breach of such provision or a waiver of any breach of any other provision of this Agreement. 12. Agreement Complete; Amendments ------------------------------ This Agreement embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter, including without limitation the Prior Agreement. This Agreement may not be amended, supplemented, cancelled or discharged except by a written instrument executed by the party to be charged. 4 13. Non-Assignability ----------------- The respective rights and obligations hereunder of the parties hereto are personal to such parties and shall not be transferred or assigned by them, in whole or in part, to any other person, firm or corporation; provided that the Company may assign this Agreement and the benefits hereunder without the consent of the Employee, without being relieved from any liability hereunder, to any of its direct or indirect "affiliates" or "associates" (as such terms are defined in Rule 405 of the Rules and Regulations promulgated under the Securities Act of 1933). Furthermore, it is understood that the rights and obligations of the Company will inure to the benefit of and will be binding upon the successors and assigns of Company. 14. Governing Law ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of Louisiana applicable to agreements made and to be performed entirely within such State. 15. Waiver of Jury Trial; Binding Arbitration. ----------------------------------------- Employer and Employee, on behalf of themselves and their respective officers, directors, employees, agents, successors and assigns, agree that if they cannot resolve any dispute or claim between themselves, including but not limited to any dispute as to whether a particular matter must be arbitrated or any claim that a party was fraudulently induced into entering this Agreement or any part of this Agreement, the dispute or claim shall be decided solely and exclusively by final and binding arbitration. The location of the arbitration shall be in New Orleans, Louisiana. The arbitration shall be in lieu of litigation in State or Federal Court and in lieu of trial by judge or by jury, and shall instead be conducted American Arbitration Association ("AAA") in accordance with its applicable arbitration rules and procedures then in effect, except as modified by this paragraph. The parties agree that there shall only be one arbitrator and that such arbitrator shall be a former or retired judge. The parties agree that such arbitrator shall be selected by the parties in accordance with the then existing arbitration rules and procedures of AAA. The parties hereby agree to commence any arbitration within ninety (90) days following a demand therefor made by either of the parties and to conclude such arbitration proceeding within thirty (30) days following its inception. The arbitration may award any extensions of time deadlines to the prevailing party as may be appropriate. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction, and the parties shall be entitled to utilize the courts to enforce the award. The parties hereby knowingly, voluntarily, and irrevocably waive their right to a trial by jury and agree that if the foregoing binding arbitration provision is determined for any reason to be unenforceable or inapplicable to a particular dispute, then such dispute shall be decided solely by a judge (without the use of a jury) sitting in a court of competent jurisdiction. This binding arbitration and jury trial waiver provision shall survive termination of this Agreement. 5 16. Captions -------- All captions and headings herein contained are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. Discount Rx, Inc., Employer By: /s/ Jugal K. Taneja ------------------------------------ Name: Jugal K. Taneja Title: Chief Executive Officer EMPLOYEE: /s/ Gregory Michael Johns ---------------------------------------- Gregory Michael Johns 6 JOINDER ------- DrugMax.com, Inc., a Nevada corporation, hereby joins in the Employment Agreement for purpose of guaranteeing the obligations of the Company set forth in Sections 3 of the Agreement and agreeing to the issuance of its shares as contemplated in Exhibit A; provided, however, that Parent shall be entitled to all of the defenses and rights of the Company as set forth in this Agreement. DRUGMAX.COM, INC. Guarantor By: /s/ Jugal K. Taneja --------------------------------- Jugal K. Taneja Chief Executive Officer 7 EXHIBIT A --------- Whereas, Discount Rx, Inc., a Louisiana corporation (the "Company"), desires to encourage Gregory Michael Johns' (the "Employee") sense of proprietorship in the Company and its affiliates and to provide an incentive to the Employee for remaining with and enhancing the value of the Company and its affiliates, the Company hereby agrees to cause its parent company, DrugMax, Inc., a Nevada corporation ("Parent") to pay to Employee the following additional compensation: 1. Company hereby grants to Employee non-qualified stock options (the "Options") to purchase up to a total of 100,000 shares of Common Stock of the Company at a price per share of $8.00 (the "Option Price") pursuant to the following provisions: Employee shall receive an option to purchase up to 33,333 shares of Common Stock within 60 days of the first anniversary of this Agreement if the Company attains at least $100,000.00 in gross profits during such year; Employee shall receive an option to purchase up to 33,333 shares of Common Stock within 60 days of the second anniversary of this Agreement if the Company attains at least $100,000.00 in gross profits during such year; and Employee shall receive an option to purchase up to 33,333 shares of Common Stock within 60 days of the third anniversary of this Agreement if the Company attains at least $100,000.00 in gross profits during such year. If gross profits do not exceed $100,000.00 for any given year during the term of the Employment Agreement, Employee shall not be entitled to any options during such year; provided that such event shall not prohibit Employee from being eligible to receive options upon the attainment of the above referenced performance goals in the remaining years of this Employment Agreement. Notwithstanding the foregoing, if Employee is terminated by the Company for any reason without Cause, as defined in the Employment Agreement, then Employee shall immediately be granted options to purchase the entire 100,000 shares of stock contemplated above. In the event the Employee is terminated for Cause or terminates the Employment Agreement, all options which have not been exercised shall automatically and immediately be canceled. 2. During the term of this Employment Agreement, the Company will pay Employee a $500.00 per month allowance for car and car related expenses payable on the 15/th/ day of each month in accordance with the payroll practices of Employer in effect from time to time. 3. Employee is hereby granted an option (the "Option") to purchase up to a total of 40,000 shares of the common stock, $.001 par value per share, of the DrugMax, Inc. (the "Common Stock"). The exercise price of the Option is $5.75, the closing price of the stock on October 18, 2001. This option shall terminate on the fifth anniversary of this Agreement; provided, however, that if Employee shall terminate the Agreement for any reason or the Company should terminate this Agreement for cause (as defined in this Agreement), the Employee shall have 30 days from the date of termination to exercise this Option, after which period this Option shall immediately terminate. The Option is not intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. When Employee elects to exercise the Option, he shall give written notice of such exercise to the Corporate Secretary of the Company. The notice of exercise shall state the number of shares of Common Stock as to which the Option is being exercised and shall be accompanied by the exercise price in cash. Employee may exercise the Option to purchase all or any whole number portion of the number of shares of Common Stock which Employee is then permitted to purchase hereunder (but not for any fractional shares). Employee's rights under the Options may not be assigned or transferred. Upon the death of Employee, this Option shall immediately terminate. The Company may from time to time impose any conditions on the exercise of the Option as it deems necessary or advisable to ensure that the Option granted hereunder, and each exercise thereof, satisfies the applicable requirements of federal and state securities laws. Such conditions to satisfy applicable federal and state securities laws may include, without limitation, the partial or complete suspension of the right to exercise the Option until the offering of the shares covered by the Option have been registered under the Securities Act of 1933, or the printing of legends on all stock certificates issued to Employee referring to the restrictions on the transferability of such shares. 4. In consideration of the non-competition covenant made by Employee pursuant to this Agreement, DrugMax, Inc. shall promptly issue to Employee 25,000 shares of Common Stock (the "Shares"). In connection with such issuance, Employee hereby represents and warrants to the Company as follows: a. Employee understands that the Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws on the grounds that the issuance of the Shares is exempt from registration pursuant to Section 4(2) of the Securities Act under the Securities Act and applicable state securities laws, and that the reliance of the Company on such exemptions is predicated in part on Employee's representations, warranties, covenants and acknowledgments set forth herein. b. Employee represents and warrants that Employee has not taken the Shares with a view to resale or other distribution within the meaning of the Securities Act and the rules and regulations thereunder and Employee agrees that Employee shall not distribute any of the Shares in violation of the Securities Act and the rules and regulations thereunder and any applicable Blue Sky regulations. c. Employee acknowledges that the Common Stock shall bear a restrictive legend in substantially the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. In addition, the Shares may bear any legend required by applicable securities or Blue Sky laws. d. The principal residence of Employee is in the State of Louisiana. e. Employee (i) acknowledges that the Shares must be held indefinitely unless subsequently registered under the Securities Act or an exemption from registration is available, (ii) is aware that any routine sales of Shares made pursuant to Rule 144 under the Securities Act may be made only in limited amounts and in accordance with the terms and conditions of that rule and that in such cases where Rule 144 is not applicable, compliance with some other registration exemption will be required, and (iii) is aware that Rule 144 is not currently available for use for resale of any of the Shares. f. Employee represents and warrants to the Company that Employee, either alone or together with the assistance of professional advisors, has such knowledge and experience in financial and business matters such that Employee is capable of evaluating the merits and risks an investment in the Shares. g. Employee confirms that he has had the opportunity to ask questions of and receive answers from the Company concerning the terms and conditions of its investment in the Shares, and has received to his satisfaction, such additional information, in addition to that set forth herein, about the Company's operations and the terms and conditions of the offering as they have requested. h. Employee agrees that he will not sell or otherwise transfer or dispose of the Shares or any interest therein without first complying with Section 3 of this Agreement and either of the --------- following conditions, the expenses and costs of satisfaction of which shall be fully borne and paid for by Employee: (i) the Company shall have received a written legal opinion from Employee's legal counsel, which opinion and counsel shall be satisfactory to the Company in the exercise of its reasonable judgment, or a copy of a "no- action" or interpretive letter of the SEC, specifying the nature and circumstances of the proposed transfer and indicating that the proposed transfer will not be in violation of any applicable bankruptcy laws or the registration provisions of the Securities Act and the rules and regulations promulgated thereunder; or (ii) the Company shall have received an opinion from its own counsel to the effect that the proposed transfer will not be in violation of any applicable bankruptcy laws or the registration provisions of the Securities Act and the rules and regulations promulgated thereunder. EX-10.10 4 dex1010.txt RESTRICTIVE COVENANTS AGREEMENT Exhibit 10.10 RESTRICTIVE COVENANTS AGREEMENT AND AGREEMENT NOT TO COMPETE This AGREEMENT (the "Agreement") is made this 19/th/ day of October, 2001, and is effective as of the date indicated on the signature page hereof, by and between Discount Rx, Inc., ("Employer") and Gregory Michael Johns, ("Employee"), the employee of Employer identified on the signature page hereof, and the entity formerly known as Penner & Welsch, Inc., by and through its President, Gregory Michael Johns ("P&W"). RECITALS Employer is engaged in the business of wholesale distribution of pharmaceuticals including sales and distribution in the territory described elsewhere in this Agreement. Employee is employed by Employer, pursuant to an Employment Agreement executed by Employer and Employee contemporaneously herewith. Employer has entered into that certain Agreement for Purchase and Sale of Assets of Penner & Welsch, Inc., and had closed the transactions contemplated therein contemporaneously herewith. As such, Employer has acquired the Operating Assets of P&W, including, but not limited to the name "Penner & Welsch, Inc.," business records, the goodwill associated with P&W's business, and all proprietary information or property relating to P&W's business or business prospects. Employer has developed, and continues to develop, certain proprietary information regarding its business operations and customers (the "Proprietary Company Information") that is very valuable to Employer and the continued confidentiality of which is essential to Employer's continued success. In the course of his employment, Employee will or has gained knowledge of the Employer's Proprietary Company Information including but not limited to the business, affairs, clients and methods of Employer. In the course of his employment, Employee will have or has access to lists of Employer's clients, and their needs and will or has become personally known to and acquainted with clients serviced by Employer, establishing a personal relationship with such clients for the benefit of Employer. In the course of his employment, Employee will have or has access to lists of Employer's employees and employee candidates recruited, hired and placed through Employer and will or has become personally known to and acquainted with such employees thereby establishing a personal relationship with such employees for the benefit of Employer. Employee will be or has been trained at the expense of Employer in the sale of Employer's services through the use of techniques, systems, forms and methods used and devised by Employer. Employee and P&W acknowledge that Employer would suffer irreparable harm if Employee were to use such knowledge, relationships and information (including Proprietary Company Information) for any purpose other than the benefit of Employer. Employer and Employee acknowledge that Employee has executed contemporaneously herewith an Employment Agreement and that Employee has been granted certain rights to an Option, as defined therein, as well as 25,000 shares of Common Stock of DrugMax, Inc. ("Common Stock"), all of which is more completely set forth therein. Employee acknowledges that the covenants, agreements, and obligations he makes herein are made in partial consideration of the grant by Discount Rx, Inc. of the Option and the Common Stock. EMPLOYER, EMPLOYEE, AND P&W AGREE AS FOLLOWS: 1. Proprietary Company Information. Employee and P&W acknowledge and agree that Proprietary Company Information means the information described above and any and all data and information relating to the business of Employer (i) of which the Employee becomes aware as a consequence of his employment by Employer, (ii) which has actual or potential economic value to Employer from not being generally known to other persons who could obtain economic value from its disclosure or use, and (iii) which is the subject of reasonable efforts by Employer to maintain its secrecy or confidentiality. Proprietary information may include, but is not limited to, client lists, sales and marketing information, identity and location of Employer's clients and suppliers, fee schedules, pricing information, client account records, training and operations material and memoranda, personnel records, employee lists, code books, pricing information, details of client or supplier contracts, operational methods, product or service development techniques or plans, new personnel acquisition plans, financial information concerning or relating to the business, accounts, clients, employees and affairs of Employer, and all physical embodiments of the foregoing, if such information is given to, developed by or acquired by Employee during Employee's employment with Employer. Employee acknowledges that the relationships Employee establishes with Employer's clients are a result of the employment relationship and any beneficial interest derived from such relationship is proprietary to Employer. Employee and P&W acknowledge and agree that all Proprietary Company Information, and all physical embodiments thereof, are confidential to, and shall be and remain the sole and exclusive property of, Employer. Upon request by Employer, and in any event upon termination of his employment with Employer for any reason, as a prior condition to receiving any final wage or salary check, Employee shall promptly deliver to Employer all property belonging to Employer including, without limitation, all Proprietary Company Information (and embodiments thereof) then in Employee's custody, control or possession. 2. Restrictions on Disclosure of Proprietary Company Information. In consideration of Employee's employment and/or continued employment, Employee covenants and agrees that Employee shall not at any time, whether or not employed by the Employer (i) divulge to any person (other than Employer) any Proprietary Company Information but shall keep secret and retain in strictest confidence any and all such Proprietary Company Information, (ii) use any such Proprietary Company Information for his own benefit or for the benefit of any other person (other than Employer) or (iii) permit any person (other than Employer) to examine any documents or records which contain or are derived from or in any way disclose any such information or data; provided, however, that Employee 2 shall be free to disclose any such information or data to the extent, but only to the extent, such information or data has intentionally and explicitly been made public by Employer or is or becomes otherwise generally available to the public other than as a result of an unauthorized disclosure by anyone, or Employee is required by applicable law or the order of any court to disclose such information or data. Further P&W covenants and agrees that P&W shall not at any time (i) divulge to any person (other than Employer) any Proprietary Company Information but shall keep secret and retain in strictest confidence any and all such Proprietary Company Information, (ii) use any such Proprietary Company Information for its own benefit or for the benefit of any other person (other than Employer) or (iii) permit any person (other than Employer) to examine any documents or records which contain or are derived from or in any way disclose any such information or data; provided, however, that P&W shall be free to disclose any such information or data to the extent, but only to the extent, such information or data has intentionally and explicitly been made public by Employer or is or becomes otherwise generally available to the public other than as a result of an unauthorized disclosure by anyone, or Employee is required by applicable law or the order of any court to disclose such information or data. 3. Territory. Employer, Employee, and P&W agree that the Territory subject to the covenants of this Agreement shall extend to each and every parish or county specified on the attached Schedule A because Employer, Employee and P&W agree and acknowledge that Employer currently conducts its business of wholesale distribution of pharmaceuticals in each and every parish or county listed on Schedule A. Employer and Employee agree that upon termination of the employment relationship, Schedule A shall be considered and treated as expanded to include any additional counties or parishes where Employee may after execution of this Agreement provide or have provided services for Employer, even if Employer and Employee do not actually update Schedule A to reflect such expansion. 4. Non-Solicitation of Employer's Clients. In consideration of Employee's employment and/or continued employment, and Employer's providing Employee with Proprietary Company Information and training, Employee covenants and agrees that for a period of one (1) year following termination of employment for any reason, Employee will not solicit, contact, or communicate with, directly or by assisting others, for his own competing business or the competing business of another, for the wholesale distribution of pharmaceuticals to clients of Employer's business. The restrictions in this Paragraph are valid only in the Territory specifically described in Paragraph 3. 5. Non-Recruitment of Employer's Employees. In consideration of Employee's employment and/or continued employment and training, and Employer's providing Employee with Proprietary Company Information, Employee covenants and agrees that for a period of one (1) year following termination of employment for any reason, Employee will not recruit or hire, or attempt to recruit or hire, directly or by assisting others, any other employee of Employer who works or worked within such Territory specifically described in Paragraph 3 prior to Employee's termination from employment. 3 6. Non-Compete Covenant. Employee covenants and agrees that for a period of one (1) year following Employee's termination, for any reason, from Employer, Employee shall not carry on or engage in the business of wholesale distribution of pharmaceuticals to its clients, either as a partner, principal, stockholder, or otherwise, in the area or Territory described in Paragraph 3. Employee further agrees that for a period of one (1) year following termination for any reason from Employer, Employee will refrain from employment involving work, duties, or responsibilities that would violate the covenants set out in Paragraphs 2, 4, and 5. Further, P&W covenants and agrees that for a period of one (1) year from the Effective Date of this Agreement, it shall not carry on or engage in the business of wholesale distribution of pharmaceuticals to Employer's clients, in the area or Territory described in Paragraph 3. 7. Covenant Not to Accept Employment with Customers or Suppliers. In further consideration of Employee's continued employment and in recognition of the substantial cost of training Employee, Employee will refrain from seeking or accepting employment with any current or former customer or supplier of the Employer without written consent by the Employer so long Employee is employed by the Employer and for a period of six months following termination of employment from the Employer. 8. Remedies. Employer, Employee, and P&W agree that because the rights of Employer hereunder are unique, any failure of Employee or P&W to perform and comply with Employee's or P&W's respective obligations under this Agreement may cause irreparable harm and injury to Employer for which any remedies at law may be inadequate. Accordingly, Employee, Employer and P&W agree that Employee's or P&W's actual, threatened or attempted breach of Employee's or P&W's respective obligations or covenants set forth in this Agreement, shall entitle Employer to recover damages for any loss sustained and the profit of which Employer has been deprived. Additionally, upon such breach, Employer is entitled, without bond, to temporary and permanent injunctions enjoining and restraining such breach, without Employer being required to show actual damages or irreparable injury. 9. Severability. Employer, Employee, and P&W desire that this Agreement be enforced to the fullest extent permissible under the laws and public policies of each state to which this Agreement is applicable. Accordingly, if any provision of this Agreement or the application thereof to any person or circumstance is invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 10. Waiver of Breach. The waiver by a party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. Further, Employer will not be deemed as a consequence of any act, delay, failure, omission, forbearance or other indulgence granted by it from time to time or for any other reason: (i) to have waived, or to be estopped from exercising, any of its rights or remedies under this Agreement or (ii) to have modified, changed, amended, terminated, 4 rescinded, or superseded any of the terms of this Agreement unless such waiver, modification, amendment, change, termination, rescission, or supercession is express, in writing and signed by Employer's authorized officer. A waiver expressly made in writing on one occasion will be effective only in that specific instance and only for the precise purpose for which given, and will not be construed as a consent to or a waiver of any right or remedy on any future occasion. No notice to or demand on Employee will entitle Employee to any other or future notice or demand in similar or other circumstances. 11. Trade Secrets. This Agreement does not limit rights which Employer has or may have under any applicable law with respect to information which constitutes a trade secret. 12. Entire Agreement. This Agreement constitutes the entire understanding between Employer and Employee with respect to the matters provided for herein, and supersedes all prior discussions, negotiations, commitments, writings and undertakings related hereto. 13. Amendment. The parties may amend, modify, supplement or terminate this Agreement in any manner as may be agreed upon in writing by the parties. 14. Counterparts. This Agreement may be executed by the parties in one (1) or more counterparts, each of which shall be deemed an original and shall constitute one and the same instrument. 15. Choice of Law. This Agreement shall be governed by and construed in accordance with the internal substantive laws and not the choice of law rules of the State of Louisiana. 16. Waiver of Jury Trial. Employer, Employee, and P&W, hereby knowingly, voluntarily, and irrevocably waive their right to a trial by jury and agree that in any legal proceeding arising out of or relating to this agreement or the transactions contemplated hereby such dispute shall be decided solely by a judge (without the use of a jury) sitting in a court of competent jurisdiction. This jury trial waiver provision shall survive termination of this Agreement. 17. Attorney Fees. If Employer brings a claim or action alleging a breach of this Agreement, Employer shall be entitled to recover its reasonable attorney fees in addition to any other damages or costs which are recoverable. 18. Notices. Any notice or other communication required or permitted to be given or made by any party to another in connection with this Agreement shall be given in writing and served by depositing same in the United States mail, postage prepaid and registered or certified with return receipt requested, as follows: if to the Company, then to the following address: Discount Rx, Inc., 12505 Starkey Road, Suite A, Largo, Florida 33773; if to the Employee, then to his or her address on record with the Company. 19. Survival. The obligations of the parties shall survive termination of this Agreement to the full extent necessary to protect the interests of the party in whose favor they run. 5 20. Headings. The headings used in this Agreement are used merely for the convenience of the parties, and in no way are meant to limit the meaning or intent of the language contained therein. 21. Assignment. The rights and obligations set forth in this Agreement shall bind and inure to the benefit of any and all parents, subsidiaries, divisions, affiliates of Employer, and/or to any successors or Employer, and/or to any assignee of all or substantially all of Employer's business or properties with respect to which Employee shall be employed. Employer may assign this Agreement, in whole or in part, to any other party. Employee may not assign this Agreement. 22. Acknowledgment. Employee hereby acknowledges that he has read, understands and expressly agrees to the terms of this Agreement, including without limitation the provisions governing the length of the agreements not to solicit or recruit or compete in violation of this Agreement, the waiver of the right to a trial by jury, and the choice of forum and governing law. Further, P&W, by and through its President, Gregory M. Johns, acknowledges that it has read, understands and expressly agrees to the terms of this Agreement, including without limitation the provisions governing the length of the agreements not to solicit or recruit or compete in violation of this Agreement, the waiver of the right to a trial by jury, and the choice of forum and governing law. 6 IN WITNESS WHEREOF, the parties have executed this Agreement on the 19th day of October, 2001. Discount Rx, Inc., Employer By: /s/ Jugal K. Taneja ---------------------------- Name: Jugal K. Taneja Title: Chief Financial Officer /s/ Gregory M. Johns ---------------------------- Gregory M. Johns, Employee Penner & Welsch, Inc. By: /s/ Gregory M. Johns ---------------------------- Name: Gregory M. Johns Title: President 7 Schedule A RESTRICTIVE COVENANTS TERRITORY Louisiana Parishes Jefferson St. Charles Orleans -----END PRIVACY-ENHANCED MESSAGE-----