8-K/A

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 12, 2004

DrugMax, Inc.

(Exact name of registrant as specified in its charter)

STATE OF NEVADA	1-15445	34-1755390
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

312 Farmington Avenue

Farmington, CT 06032-1968

(Address of principal executive offices)

Registrant’s telephone number, including area code: (860) 676-1222

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c)) under the Exchange Act (17 CFR 240.13e-4(c))

Explanatory Note:

On November 18, 2004, DrugMax, Inc. (“DrugMax”) filed a Current Report on Form 8-K to report the completion of its merger with Familymeds Group, Inc. (“FMG”). The purpose of this Amendment No. 1 to the Current Report on Form 8-K is to include the unaudited condensed consolidated financial statements of FMG and the unaudited pro forma financial information required by Article 11 of Regulation S-X that were not previously filed with the Securities and Exchange Commission. The unaudited condensed consolidated financial statements and unaudited pro forma information are attached hereto as Exhibits 99.1 and 99.2, respectively.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The unaudited condensed consolidated balance sheets as of September 25, 2004 and December 27, 2003 and the unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of cash flows for the nine months ended September 25, 2004 and September 27, 2003 of FMG, and the notes thereto, are attached as Exhibit 99.1 hereto. All other financial statements of FMG required to be filed pursuant to Item 9.01 of Form S-K were previously filed by DrugMax in its definitive proxy statement on Schedule 14A, filed with the Securities and Exchange Commission on October 12, 2004.

(b) Pro Forma Financial Information.

The unaudited pro forma condensed consolidated balance sheet at September 25, 2004 for FMG and September 30, 2004 for DrugMax and the unaudited pro forma condensed consolidated statement of operations for the six months ended September 25, 2004 for FMG and the six months ended September 30, 2004 for DrugMax are attached as Exhibit 99.2 hereto. All other unaudited pro forma financial information required to be filed pursuant to Article 11 of Regulation S-X was previously filed by DrugMax in its definitive proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on October 12, 2004.

(c) Exhibits.

The exhibits to this report are listed in the Exhibit Index set forth elsewhere herein.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

DRUGMAX, INC.
By:	/s/ Edgardo Mercadante
	Edgardo Mercadante, Chief Executive Officer

Dated: January 3, 2005

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EXHIBIT INDEX

Exhibit Number	Exhibit Description
99.1	Unaudited Condensed Consolidated Financial Statements of Familymeds Group, Inc.
99.2	Unaudited Pro Forma Financial Information

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EX-99.1

EXHIBIT 99.1

FAMILYMEDS GROUP, INC. AND SUBSIDIARIES

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Page
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of September 25, 2004 (unaudited) and December 27, 2003 (unaudited)	I-2
Condensed Consolidated Statements of Operations for the nine months ended September 25, 2004 (unaudited) and September 27, 2003 (unaudited)	I-3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 25, 2004 (unaudited) and September 27, 2003 (unaudited)	I-4
Notes to Condensed Consolidated Financial Statements (unaudited)	I-5

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FAMILYMEDS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 25, 2004			December 27, 2003
	(Unaudited)			(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	976,304		$	1,307,094
Trade receivables, net of contractual and doubtful accounts allowance of approximately $1,550,000 and $1,718,000, respectively.		10,202,634			9,864,996
Inventories		18,761,524			18,874,602
Prepaid expenses and other current assets		1,660,612			876,631
Total current assets		31,601,074			30,923,323
PROPERTY AND EQUIPMENT—Net of accumulated depreciation and amortization of approximately $11,168,000 and $9,071,000, respectively		3,559,458			4,788,732
DEFERRED FINANCING COSTS—Net of accumulated amortization of approximately $1,573,000 and $1,521,000, respectively		3,875			152,175
OTHER INTANGIBLE ASSETS—Net of accumulated amortization of approximately $14,836,000 and $12,763,000, respectively		5,365,925			7,385,222
OTHER NONCURRENT ASSETS		564,697			903,325
TOTAL	$	41,095,029		$	44,152,777
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt	$	34,675,788		$	37,696,328
Current portion of obligations under capital leases		44,260			40,456
Accounts payable		25,111,286			21,336,404
Accrued expenses		9,259,900			9,453,780
Total current liabilities		69,091,234			68,526,968
OBLIGATIONS UNDER CAPITAL LEASES—Less current portion		—			33,687
OTHER LONG-TERM LIABILITIES		118,954			155,310
PREFERRED STOCK:
Series A Redeemable Convertible Preferred Stock, $0.01 par value, 1,317,391 shares authorized; 1,317,391 shares issued and outstanding (involuntary liquidation value $8,106,965 and $7,709,227, respectively)		8,100,630			7,800,660
Series B Redeemable Convertible Preferred Stock, $0.01 par value, 2,042,105 shares authorized; 1,858,239 shares issued and outstanding (involuntary liquidation value $14,586,656 and $13,814,966, respectively)		14,560,870			13,954,108
Series C Convertible Preferred Stock, $0.01 par value, 2,564,102 shares authorized; 2,564,102 shares issued and outstanding (involuntary liquidation value $24,999,995)		24,655,525			24,655,525
Series D Redeemable Convertible Preferred Stock, $0.01 par value, 4,000,000 shares authorized; 2,217,769 shares issued and outstanding (involuntary liquidation value $54,193,253 and $50,952,160, respectively)		53,995,469			51,277,856
Series E Redeemable Convertible Preferred Stock, $0.01 par value, 1,519,757 shares authorized; 988,441 shares issued and outstanding (involuntary liquidation value $22,054,867 and $21,278,730, respectively)		12,255,503			11,636,924
Total preferred stock		113,567,997			109,325,073
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Common stock, no par value, 14,484,123 shares authorized; 3,729,412 shares issued		14,650,925			14,650,925
Nonvoting common stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding		2,734,343			2,734,343
Accumulated deficit		(156,968,424	)		(149,173,529	)
		(139,583,156	)		(131,788,261	)
Less treasury stock, at cost (1,795,556 shares)		(2,100,000	)		(2,100,000	)
Total stockholders’ deficit		(141,683,156	)		(133,888,261	)
TOTAL	$	41,095,029		$	44,152,777

See notes to condensed consolidated financial statements.

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FAMILYMEDS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	NINE MONTHS ENDED
	SEPTEMBER 25, 2004			SEPTEMBER 27, 2003
	(Unaudited)
NET REVENUES	$	165,475,849		$	162,550,251
COST OF SALES		131,195,033			127,538,102
Gross margin		34,280,816			35,012,149
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		33,009,565			35,500,933
DEPRECIATION AND AMORTIZATION EXPENSE		3,590,018			3,953,182
IMPAIRMENTS OF LONG-LIVED ASSETS		—			913,328
GAIN ON DISPOSAL OF FIXED ASSETS AND INTANGIBLE ASSETS		(1,028,204	)		(377,966	)
OPERATING LOSS		(1,290,563	)		(4,977,328	)
OTHER INCOME (EXPENSE):
Interest expense		(2,668,324	)		(6,036,736	)
Interest income		34,079			54,633
Other income		372,838			436,569
Total other expense, net		(2,261,407	)		(5,545,534	)
NET LOSS		(3,551,970	)		(10,522,862	)
Preferred Stock Dividends		(3,882,749	)		(3,897,237	)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(7,434,719	)	$	(14,420,099	)
BASIC AND DILUTED LOSS PER SHARE:
Net loss attributable to common stockholders	$	(3.84	)	$	(7.46	)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted Shares		1,933,856			1,933,856

See notes to condensed consolidated financial statements.

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FAMILYMEDS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	NINE MONTHS ENDED
	SEPTEMBER 25, 2004			SEPTEMBER 27, 2003
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,551,970	)	$	(10,522,862	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		3,590,018			3,953,182
Stock compensation expense		—			144,750
Noncash interest expense		352,686			4,205,897
Impairments of long-lived assets		—			913,328
Amortization of deferred financing costs		265,935			358,163
Benefit from contractual allowances and doubtful accounts		(336,948	)		(613,119	)
Gain on disposal of fixed assets and intangible assets		(1,028,204	)		(377,966	)
Effect of changes in operating assets and liabilities:
Trade receivables		(690	)		3,353,044
Inventories		113,078			(166,568	)
Prepaid expenses and other current assets		(783,981	)		(204,266	)
Accounts payable		3,774,881			(2,546,143	)
Accrued expenses		(546,566	)		(627,407	)
Other		302,272			(360,740	)
Net cash provided by (used in) operating activities		2,150,511			(2,490,707	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net		(416,730	)		(624,569	)
Proceeds from sale of prescription files, net		1,103,487			130,000
Payments for intangible assets		—			(142,848	)
Net cash provided by (used in) investing activities		686,757			(637,417	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible subordinated notes		—			4,000,000
Repayment of amounts outstanding on revolving credit facility, net		(3,020,540	)		(149,830	)
Repayment of obligations under capital leases		(29,883	)		(174,772	)
Payment of deferred financing costs		(117,635	)		(133,900	)
Net cash (used in) provided by financing activities		(3,168,058	)		3,541,498
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(330,790	)		413,374
CASH AND CASH EQUIVALENTS—Beginning of period		1,307,094			632,529
CASH AND CASH EQUIVALENTS—End of period	$	976,304		$	1,045,903
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION—Cash paid for:
Interest	$	2,315,638		$	1,830,839

See notes to condensed consolidated financial statements.

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FAMILYMEDS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – SEPTEMBER 25, 2004 (UNAUDITED) AND SEPTEMBER 27, 2003 (UNAUDITED)

1. MERGER, PREFERRED STOCK FINANCING, CREDIT FACILITY AND GOING CONCERN

Merger—On March 19, 2004, Familymeds Group, Inc. (“FMG”) entered into an Agreement and Plan of Merger which was amended on July 1, 2004 and also on October 11, 2004 (as amended, the “Merger Agreement”) with DrugMax, Inc. (“DrugMax”). Under the terms of the Merger Agreement, on November 12, 2004, FMG merged into DrugMax, which became the surviving corporation in the merger (the “Merger”). The separate existence of FMG ceased and the name of the surviving corporation is DrugMax. Prior to the Merger, warrants to purchase 438,249 shares of FMG Series E Redeemable Convertible Preferred Stock (“Series E”) were exercised by FMG note holders. DrugMax issued 10,470,507 shares of DrugMax common stock to certain FMG preferred shareholders and FMG note holders in connection with the Merger. The FMG note holders received 2,106,982 DrugMax shares valued at $8 million in exchange for their notes and the remaining 8,363,525 DrugMax shares were allocated to FMG’s preferred shareholders based on liquidation preferences. Based on the ten-day-weighted stock price of $3.7969 as of November 12, 2004, the Series E shareholders received DrugMax stock equal to their full liquidation preference, the FMG Series C preferred shareholders and FMG Series D preferred shareholders received DrugMax stock equal to approximately 7% of their liquidation preferences and the FMG Series A preferred shareholders and FMG Series B preferred shareholders receive no consideration for their shares. In addition, DrugMax issued 663,675 shares of DrugMax restricted common stock and options to purchase 1,646,842 shares of DrugMax common stock at $0.57 per share to certain employees and directors of FMG that remained employees and directors of DrugMax after the Merger. The restricted stock vests on March 25, 2005. The options vested immediately, but the options are not exercisable until January 4, 2006. DrugMax will record compensation expense of approximately $8.3 million related to the 663,675 restricted shares and the 1,646,842 options issued to certain employees and directors. The compensation expense of approximately $2.7 million for the restricted shares will be accrued over the vesting period from November 12, 2004 to March 25, 2005, while the $5.6 million of compensation expense relating to the options will be accrued from November 12, 2004 to January 4, 2006, as these options are not exercisable until January 4, 2006. The Merger was treated as a purchase of DrugMax by FMG for accounting purposes.

The purchase price of approximately $47.6 million represents the sum of (i) the estimated fair value ($37.8 million) of the 8,196,652 shares of DrugMax common stock, $.001 par value, retained by the existing common stockholders of DrugMax, Inc. (the estimated fair value of the shares of DrugMax common stock is based on the average closing price of DrugMax common stock of $4.61 per share for the five-day period from March 18, 2004 to March 24, 2004, which includes two business days before and after the announcement of the merger) (ii) $8.2 million based on a Black Scholes valuation for 2.2 million outstanding DrugMax options, all of which vested in connection with the merger, and (iii) estimated FMG merger costs of $1.6 million including estimated registration costs of $250,000 related to the requirement to subsequently register the shares issued to FMG. The excess of purchase price over the fair value of the net assets acquired will be allocated to (i) a manufacturing patent valued at $1.9 million with an estimated life of 15 years, (ii) the value related to DrugMax’s MorepenMax joint venture estimated at $1.7 million, (iii) DrugMax’s authorized distributor contracts and outlet to distribute products valued at $9.0 million with an estimated life of 15 years, (iv) a trademark valued at $0.6 million with an estimated life of 15 years and (v) goodwill

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of $36.0 million. DrugMax is in the process of obtaining an independent valuation of the intangible assets acquired and the preliminary purchase price allocation is subject to change as a result. Immediately prior to the merger, FMG vested all stock options that had not terminated by their own terms prior to the merger and issued one share of FMG non-voting common stock for each such outstanding FMG option on a one-for-one basis. Accordingly, at the time of the merger, no options to purchase FMG non-voting common stock remained outstanding.

Following is a summary of the preliminary purchase price allocation (in thousands):

Cash and cash equivalents	$	346
Accounts receivable		12,909
Inventories		13,658
Prepaid expenses and other current assets		2,162
Property and equipment		1,542
Manufacturing patent		1,900
MorepenMax joint venture		1,700
Distributor contracts		9,000
Trademark and other		600
Goodwill		36,001
Other assets		589
Debt		(12,069	)
Accounts payable and accrued expenses		(20,718	)
Purchase price	$	47,620

The “Company” herein refers to the combined company after the merger.

Preferred Stock Financing—On December 2, 2004, DrugMax sold 17,000 shares of Series A Convertible Preferred Stock (the “DrugMax Preferred Stock”) to certain qualified institutional buyers and accredited investors for net proceeds of $15,980,000, after consideration of placement expenses of approximately $1,020,000. Holders of the DrugMax Preferred Stock are entitled to receive cumulative dividends, before any dividends are paid to the common stockholders, at the rate per share of 7% per annum until the fourth anniversary of the closing, 9% per annum from the fourth anniversary of the closing until the fifth anniversary, 11% per annum from the fifth anniversary of the closing until the sixth anniversary and 14% per annum thereafter. Except as provided in the certificate of designation, the shares of DrugMax Preferred Stock do not have any voting rights. The holders may at their option, from time to time, convert their shares into shares of DrugMax common stock. The DrugMax Preferred Stock is convertible into an aggregate of 4,594,591 shares of DrugMax common stock, based upon an initial conversion price of $3.70 per share. The conversion price is subject to anti-dilution adjustment pursuant to the certificate of designation. Further, if the Company meets certain equity conditions set forth in the certificate of designation, the Company may at its option force the holders to convert their DrugMax Preferred Stock, subject to the terms of the certificate of designation, at the then applicable conversion price. Furthermore, after the fourth anniversary of the closing, provided the Company has satisfied the equity conditions set forth in the certificate of designation, the Company may at its option redeem the DrugMax Preferred Stock. If the redemption date occurs following the fourth anniversary of the closing but prior to the fifth anniversary, the redemption price shall be $1,200 per share, if the redemption date occurs on or following the fifth anniversary of the closing but prior to the sixth anniversary, the redemption price shall be $1,100 per share, if the redemption date occurs on or following the sixth anniversary of the closing, the redemption price shall be $1,050, plus all accrued but unpaid dividends and all liquidated damages and

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other amounts due in respect of the DrugMax Preferred Stock. Pursuant to the certificate of designation, upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the DrugMax Preferred stockholders shall be entitled to receive out of the assets of the Company, $1,000 for each share plus any accrued and unpaid dividends thereon and any other fees or liquidated damages owing thereon before any distribution or payment shall be made to the holders of any junior securities, including the common stock.

In addition, the investors received warrants to purchase 1,378,374 shares of DrugMax common stock at an exercise price of $4.25 per share. The warrants expire on the fifth anniversary of the closing.

Credit Facility—On July 2, 1999, FMG entered into a $25,000,000 senior collateralized revolving credit facility (the “GECC Agreement”) with General Electric Capital Corporation (“GECC”). In November 2000, the facility was increased to $31,000,000. On December 9, 2004, the Company entered into the Second Amended and Restated Credit Agreement (the “Senior Credit Facility”) with GECC, which increased the facility from $31 million to $65 million. In conjunction with entering into the Senior Credit Facility, the $4 million term loan and related paid-in-kind interest of $0.8 million were repaid to GECC. In addition, the credit facility in place with DrugMax at the time of its merger with FMG was terminated and the $11.9 million balance then outstanding was repaid to Congress Financial Corporation. The Senior Credit Facility matures on December 9, 2007. The Senior Credit Facility is secured by all assets of the Company. As of December 9, 2004, $25.0 million was outstanding under the Senior Credit Facility and $9.2 million was available for additional borrowings based on eligible receivables and inventory. The Senior Credit Facility requires compliance with certain restrictive covenants including, but not limited to, minimum EBITDA, maximum capital expenditures, maximum fixed charge coverage ratio, minimum net worth, minimum inventory turnover, maximum trade receivable days sales outstanding, maximum accounts payable days outstanding and maximum ratio of non-pharmaceutical inventory to total inventory. The cumulative monthly minimum EBITDA covenants, as defined, for 2005 are detailed below:

Period	Cumulative EBITDA
As of January 31, 2005	$	500,000
As of February 28, 2005	$	1,000,000
As of March 31, 2005	$	2,000,000
As of April 30, 2005	$	2,700,000
As of May 31, 2005	$	3,500,000
As of June 30, 2005	$	4,200,000
As of July 31, 2005	$	4,800,000
As of August 31, 2005	$	5,600,000
As of September 30, 2005	$	6,700,000
As of October 31, 2005	$	8,000,000
As of November 30, 2005	$	8,600,000
As of December 31, 2005	$	9,000,000

Interest on borrowings on the Senior Credit Facility is calculated at either the index rate (as defined) plus an applicable index margin (as defined) or, at the option of the Company, at an adjusted monthly LIBOR index rate plus an applicable LIBOR margin (as defined). As of December 9, 2004, the interest rates in effect under the GECC Agreement were 6.09% and 7.25% for LIBOR and the index rate, respectively.

Going Concern—FMG incurred net losses of $3.6 million, $12.2 million and $10.1 million for the first nine months of 2004 and for fiscal 2003 and 2002, respectively. As of September 25, 2004 and December 27, 2003, FMG had a stockholders’ deficit of $141.7 million and $133.9 million, respectively. These factors raise substantial doubt surrounding FMG’s ability to continue as a going concern. Management believes that the proceeds from the preferred stock sale discussed above and the new Senior Credit Facility, which matures on December 9, 2007, provide the Company with the liquidity to meet its needs for the next twelve months.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and

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expenses during the reporting periods. Actual results could differ from those estimates. Management’s estimates relate primarily to determining the allowance for doubtful accounts and impairments of long-lived assets.

Unaudited interim financial statements—The consolidated financial statements and related notes as of September 25, 2004 and for the nine months ended September 25, 2004 and September 27, 2003 are unaudited. All adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of financial condition, results of operations and cash flows have been made. The results of operations for the nine months ended September 25, 2004 are not necessarily indicative of the results that may be expected for a full year.

Loss per Share—Basic loss per share represents loss available to common stockholders divided by the weighted average number of common shares outstanding during the period. Common shares outstanding excludes shares in escrow. Diluted loss per share reflects additional common shares that would have been outstanding if potentially dilutive shares had been issued or earned, determined under the treasury stock method. During the nine months ended September 25, 2004 and September 27, 2003, options to purchase 882,508 and 1,032,675 shares of common stock, respectively, and all convertible preferred stock were excluded from the computation of loss per share since inclusion would be antidilutive.

Stock-Based Compensation—FMG uses the intrinsic value method of accounting for stock options. Forfeitures are accounted for in the period the options are actually forfeited. Had compensation cost for the FMG’s stock-based compensation plans been determined based on the fair value at the grant dates for awards consistent with the method of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), FMG’s net loss would have changed to the pro forma amounts indicated below:

	Nine Months Ended
	September 25, 2004			September 27, 2003
Net loss, as reported	$	(7,434,719	)	$	(14,420,099	)
Effect of stock-based employee compensation expense determined under fair method valuation for all awards		(20,960	)		67,014
Pro forma net loss	$	(7,455,679	)	$	(14,353,085	)
Basic and diluted net loss per share:
As reported	$	(3.84	)	$	(7.46	)
Pro forma	$	(3.86	)	$	(7.42	)

Reclassifications—Certain reclassifications have been made to prior year financial statements to conform with the current year presentation.

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New Accounting Pronouncements—In November 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 03-13 “Applying the Conditions on Issue Number 42 of FASB Statement No. 144, ‘Accounting for the Impairment or Disposal of Long-Lived Assets in Determining whether to Report Discontinued Operations.’” EITF No. 03-13 is effective for disposals of retail stores or other components after January 5, 2005.

In November 2004 the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe SFAS No. 151 will have a material impact on its consolidated financial condition or results of operations.

In December 2004 the FASB issued SFAS No. 152, “Accounting for Real Estate Timesharing Transactions, an amendment of FASB Statements No. 66 and 67” and SFAS No. 153, ”Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29”. The Company does not believe these statements will have a material impact on its consolidated financial condition or results of operations.

In December 2004 the FASB also issued SFAS No. 123R, “Share-Based Payment” which requires that the cost resulting for all share-based payment transactions be recognized in the financial statements. This statement is effective for the Company as of the beginning of the first interim reporting period that begins after June 15, 2005. The Company is currently evaluating the impact SFAS No. 123R will have on its consolidated financial statements.

******

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EX-99.2

EXHIBIT 99.2

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following Pro Forma Unaudited Condensed Consolidated Balance Sheet at September 25, 2004 for FMG and September 30, 2004 for DrugMax, and the Pro Forma Unaudited Condensed Consolidated Statement of Operations for the six months ended September 25, 2004 for FMG and the six months ended September 30, 2004 for DrugMax give effect to the November 12, 2004 merger of FMG and DrugMax based on the assumptions set forth below. The pro forma unaudited condensed consolidated financial statements give effect to the merger using purchase accounting as required by accounting principles generally accepted in the United States. For accounting purposes FMG is deemed to be the acquiror. The pro forma unaudited condensed consolidated statement of operations assumes the merger was consummated as of April 1, 2004. The pro forma unaudited condensed consolidated balance sheet assumes the merger was consummated on September 25, 2004 for FMG and September 30, 2004 for DrugMax.

Merger adjustments reflect the application of the purchase method of accounting by FMG, including adjustments to reflect the difference between historical carrying values and estimated fair values for tangible assets and liabilities acquired and the estimated value of identifiable and other intangible assets. DrugMax has hired an independent appraisal firm to determine the value of the intangible assets acquired. Accordingly, the estimated fair values herein are subject to further refinement. FMG and DrugMax do not expect that the final allocation of the aggregate purchase price for the merger will differ materially from the preliminary allocation reflected herein. The pro forma shareholders’ equity represents the combined book value of FMG and DrugMax, as adjusted for the merger, computed in accordance with generally accepted accounting principles used in the United States. This amount is not intended to represent fair market value nor does it represent amounts, if any, that would be available for distribution to shareholders in the event of liquidation.

Estimated merger adjustments also reflect (i) the conversion of $4.0 million of convertible notes and $4.0 million of accrued interest into shares of DrugMax common stock, and (ii) the exercise of Series E warrants, issued in connection with issuance of the convertible notes, into Series E Redeemable Convertible Preferred Stock in connection with the merger in accordance with the terms of the original warrant agreement.

The following transactions have not been included as expenses in the pro forma unaudited condensed consolidated statement of operations for the six months ended September 25, 2004 for FMG and the six months ended September 30, 2004 for DrugMax, since the expenses will not have a continuing impact on the combined company’s operating results; however, these amounts will be charged to operations:

• Estimated DrugMax merger expenses of $0.8 million for professional fees incurred and expensed by DrugMax prior to the merger.

• Estimated charge of $5.6 million related to stock options issued to certain employees and directors for 1,646,842 DrugMax common shares exercisable at $0.57 per share. The $5.6 million charge related to the in-the money stock options will be recognized as compensation expense from November 12, 2004 (grant date) to January 4, 2006 (the date the options are exercisable).

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• Estimated interest charge of $2.7 million related to the issuance of warrants to purchase 704,324 shares of DrugMax common stock at $2.61 per share to certain FMG note holders based on a Black Scholes valuation.

• Estimated preferred stock dividends of $9.0 million related to the issuance of warrants to purchase 2,795,766 shares of DrugMax common stock at $2.61 per share to certain FMG stockholders based on a Black Scholes valuation.

Immediately prior to the merger, FMG vested all stock options that had not terminated by their own terms prior to the merger and issued one share of FMG non-voting common stock for each such outstanding FMG option on a one-for-one basis. Accordingly, at the time of the merger, no options to purchase FMG non-voting common stock remained outstanding. FMG common stockholders did not receive any shares of DrugMax stock in the merger. However, DrugMax issued to certain employees and directors of FMG who continue to provide services to DrugMax following the merger 663,675 restricted shares of common stock (the “Management Shares”). Further, certain FMG employees and directors whose options were settled prior to the merger also received DrugMax options in connection with the merger. Because FMG issued non-voting common stock for each outstanding option on a one for one basis and because DrugMax issued Management Shares on a one-for-one basis to each FMG option holder who continues to provide services to DrugMax following the merger, in settlement of all outstanding options, prior to granting any DrugMax stock options, under the guidance of APB 25 and FIN 44, the subsequent grant of DrugMax options did not trigger variable accounting. As such, the DrugMax options are being accounted for as fixed stock option awards.

On December 9, 2004, the Company entered into the Second Amended and Restated Credit Agreement with GECC (the “Senior Credit Facility”), which increased the facility from $31 million to $65 million. In conjunction with entering into the Senior Credit Facility, the $4 million term loan and related paid-in-kind interest of $0.8 million were repaid to GECC. In addition, the credit facility in place with DrugMax, Inc. at the time of its merger with FMG was terminated and $11.9 million was repaid to Congress Financial Corporation. The Senior Credit Facility matures on December 9, 2007. The Senior Credit Facility is secured by all assets of the Company. The Senior Credit Facility requires compliance with certain restrictive covenants including, but not limited to, minimum EBITDA, maximum capital expenditures, maximum fixed charge coverage ratio, minimum net worth, minimum inventory turnover, maximum trade receivable days sales outstanding, maximum accounts payable days outstanding and maximum ratio of non-pharmaceutical inventory to total inventory.

The pro forma financial information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the impact of possible revenue enhancements, expense efficiencies and asset dispositions among other factors that may result as a consequence of the merger and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined as of April 1, 2004.

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PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET (in thousands)

	Familymeds September 25, 2004			Drug Max September 30, 2004			Pro Forma Adjustments			Pro Forma Adjusted
ASSETS
Current assets:
Cash and cash equivalents	$	976		$	346		$	—		$	1,322
Accounts receivable, net		10,203			12,909			—			23,112
Inventories		18,761			13,658			—			32,419
Prepaid expenses and other current assets		1,661			2,162			(686	)6		3,137
Total current assets		31,601			29,075			(686	)		59,990
Property and equipment, net		3,559			1,542			—			5,101
Goodwill		—			13,105			22,896	4		36,001
Patents and trademarks		—			274			2,226	4		2,500
Deferred financing costs, net		4			397			—			401
Other identifiable intangible assets, net		5,366			—			10,700	4		16,066
Other noncurrent assets		565			589			—			1,154
Total assets	$	41,095		$	44,982		$	35,136		$	121,213
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	34,676		$	11,980		$	(4,000	)1	$	42,656
Accounts payable		25,111			20,178						45,289
Accrued expenses and other		9,304			540			(4,000	)1		6,722
								878	6
Total current liabilities		69,091			32,698			(7,122	)		94,667
Long-term liabilities and capital leases		119			89			—			208
Total liabilities		69,210			32,787			(7,122	)		94,875
Redeemable preferred stock		113,568			—			(113,568	)9		—
Commitments and contingencies
Stockholders’ equity (deficit):
Common stock		17,385			8			(17,374	)1,3		19
Additional paid-in capital		—			43,782			142,146	1,3		185,928
Accumulated deficit		(156,968	)		(31,595	)		31,595	2		(156,968	)
Unearned compensation restricted stock		—			—			(2,641	)10		(2,641	)
Treasury stock, at cost		(2,100	)		—			2,100	9		—
Total stockholders’ equity (deficit)		(141,683	)		12,195			155,826			26,338
Total liabilities and stockholders’ equity (deficit)	$	41,095		$	44,982		$	35,136		$	121,213

See accompanying notes to pro forma unaudited condensed consolidated financial statements.

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PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data)

	Familymeds			DrugMax
	Six Months Ended September 25, 2004			Six Months Ended September 30, 2004			Pro Forma Adjustments			Pro Forma Adjusted
Net revenues	$	109,257		$	82,848		$	—		$	192,105
Cost of sales		86,693			80,263			—			166,956
Gross margin		22,564			2,585			—			25,149
Operating expenses:
Selling, general and administrative expenses		21,514			3,816			—			25,330
Depreciation and amortization		2,305			132			4405			2,877
Gain on disposal of fixed assets and intangible assets		(254	)		—			—			(254	)
Total operating expenses		23,565			3,948			440			27,953
Operating loss		(1,001	)		(1,363	)		(440	)		(2,804	)
Other income		209			7			—			216
Interest expense, net		(1,876	)		(509	)		—			(2,385	)
Net loss		(2,668	)		(1,865	)		(440	)		(4,973	)
Preferred stock dividends		(2,579	)		—			2,5798			—
Net loss attributable to common stockholders	$	(5,247	)	$	(1,865	)	$	2,139		$	(4,973	)
Net loss per common share - basic	$	(2.71	)	$	(0.23	)				$	(0.26	)
Net loss per common share - diluted	$	(2.71	)	$	(0.23	)				$	(0.26	)
Weighed average shares outstanding - basic		1,934			8,193						19,3277
Weighed average shares outstanding - diluted		1,934			8,193						19,3277

See accompanying notes to pro forma unaudited condensed consolidated financial statements.

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NOTES TO PRO FORMA UNAUDITED

CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Overview

Merger

FMG was the acquiror for accounting purposes. The purchase price of approximately $47.6 million represents the sum of (i) the estimated fair value ($37.8 million) of the 8,196,652 shares of DrugMax common stock, $.001 par value, retained by the existing common stockholders of DrugMax, Inc. (the estimated fair value of the shares of DrugMax common stock is based on the average closing price of DrugMax common stock of $4.61 per share for the five-day period from March 18, 2004 to March 24, 2004, which includes two business days before and after the announcement of the merger) (ii) $8.2 million based on a Black Scholes valuation for 2.2 million outstanding DrugMax options, all of which vested in connection with the merger, and (iii) estimated FMG merger costs of $1.6 million including estimated registration costs of $250,000 related to the requirement to subsequently register the shares issued to FMG. The excess of purchase price over the fair value of the net assets acquired will be allocated to (i) a manufacturing patent valued at $1.9 million with an estimated life of 15 years, (ii) the value related to DrugMax’s MorepenMax joint venture estimated at $1.7 million, (iii) DrugMax’s authorized distributor contracts and outlet to distribute products valued at $9.0 million with an estimated life of 15 years, (iv) a trademark valued at $0.6 million with an estimated life of 15 years and (v) goodwill of $36.0 million. DrugMax is in the process of obtaining an independent valuation of the intangible assets acquired. Accordingly, the preliminary purchase price allocation herein is subject to change.

The pro forma condensed consolidated financial statements reflect the issuance of 10,470,507 shares of DrugMax, Inc. common stock, $.001 par value, to certain preferred shareholders, warrant holders and note holders of FMG. The 10,470,507 shares of DrugMax common stock were issued to FMG shareholders and warrant holders, based on liquidation preferences after $8.0 million of shares were issued to certain note holders for principal and accrued interest.

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Following is a summary of the preliminary purchase price allocation (in thousands):

Cash and cash equivalents	$	346
Accounts receivable		12,909
Inventories		13,658
Prepaid expenses and other current assets		2,162
Property and equipment		1,542
Manufacturing patent		1,900
MorepenMax joint venture		1,700
Distributor contracts		9,000
Trademark and other		600
Goodwill		36,001
Other assets		589
Debt		(12,069	)
Accounts payable and accrued expenses		(20,718	)
Purchase price	$	47,620

Following is a summary of the shares of DrugMax common stock outstanding after the Merger:

	Shares
Existing DrugMax shareholders	8,196,652
Shares issued to preferred shareholders and note holders of FMG	10,470,507
Restricted stock issued to certain directors and employees of FMG	663,675
Total shares outstanding	19,330,834

Following is a summary of the pro forma adjustments:

(1) To reflect the conversion of $4.0 million of convertible notes and $4.0 million of accrued interest payable as of September 25, 2004 into 2,106,982 shares of DrugMax common stock.

(2) To eliminate DrugMax’s accumulated deficit.

(3) To reflect the issuance of 10,470,507 shares of DrugMax common stock to FMG’s preferred shareholders and note holders, the issuance of 663,675 shares of restricted stock to certain directors and employees of FMG, including the unearned compensation for the 663,675 shares of restricted stock based on a stock price of $3.98 (DrugMax’s closing stock price on November 12, 2004).

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The following is a summary of the adjustments affecting additional paid-in-capital (in thousands):

To reflect the elimination of FMG’s redeemable preferred stock	$	113,568
To reclass DrugMax’s accumulated deficit		(31,595	)
To reflect the elimination of FMG’s treasury stock		(2,100	)
To eliminate DrugMax’s net equity		(12,195	)
To record the allocation of the DrugMax common stock less the par value and the fair value of the vested options		46,563
To record the issuance of restricted shares as deferred compensation		2,520
To reflect the conversion of the convertible notes and accrued interest		8,000
To eliminate FMG’s common stock		17,385
	$	142,146

(4) To record the identifiable intangible assets and goodwill resulting from the Merger.

(5) To record the amortization of the finite-lived intangible assets resulting from the Merger, assuming a 15-year life as follows (in thousands):

	Six Months Ended September 25, 2004
Manufacturing patent	$	64
MorepenMax joint venture		56
Distributor contracts		300
Trademark		20
Total amortization	$	440

(6) To eliminate deferred FMG merger costs of $686,000 as of September 25, 2004 and to accrue additional merger costs of $878,000 incurred after September 25, 2004, including $250,000 related to the requirement to subsequently register the shares issued in connection with the Merger.

(7) A reconciliation of the basic and diluted weighted average shares outstanding is as follows:

	Six Months Ended September 25, 2004
DrugMax actual weighted average shares outstanding	8,193,277
Shares issued to common and preferred shareholders and noteholders of FMG	10,470,507
Restricted stock	663,675
Total pro forma basic and diluted weighted average shares outstanding	19,327,459

(8) To eliminate the preferred stock dividends for the redeemable preferred stock converted to common stock at the time of the Merger.

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(9) To eliminate FMG’s redeemable preferred stock and treasury stock.

(10) To record unearned expense compensation relating to the 663,675 shares of restricted stock issued to certain directors and employees of FMG based on a stock price of $3.98 (DrugMax’s closing stock price on November 12, 2004).

(11) The following transactions have not been included as expenses in the pro forma unaudited condensed consolidated statement of operations for the six months ended September 25, 2004 for FMG and the six months ended September 30, 2004 for DrugMax, since the expenses will not have a continuing impact on the combined company’s operating results; however, these amounts will be charged to operations:

• Estimated DrugMax merger expenses of $0.8 million for professional fees incurred and expensed by DrugMax prior to the merger.

• Estimated charge of $5.6 million related to stock options issued to certain employees and directors for 1,646,842 DrugMax common shares exercisable at $0.57 per share. The $5.6 million charge related to the in-the money stock options will be recognized as compensation expense from November 12, 2004 (grant date) to January 4, 2006 (the date the options are exercisable).

• Estimated interest charge of $2.7 million related to the issuance of warrants to purchase 704,324 shares of DrugMax common stock at $2.61 per share to certain FMG note holders based on a Black Scholes valuation.

• Estimated preferred stock dividends of $9.0 million related to the issuance of 2,795,766 warrants to purchase 2,795,766 shares of DrugMax common stock at $2.61 per share to certain FMG stockholders based on a Black Scholes valuation.

Furthermore, it is expected that compensation expense will increase due to changes in employment agreements for certain DrugMax officers; however, the changes are subject to compensation committee approval and are not reflected in these pro forma statements.

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