UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) December 31, 2001
Commission File Number 001-10304
AMEXDRUG CORPORATION
--------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 95-2251025
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
8909 West Olympic Blvd., Suite 112
-----------------------------------
Beverly Hills, California 90211
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(Address of principal executive offices)
(Zip Code)
(310) 855-0475
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(Registrant's Executive Office Telephone Number)
ITEM 2. ACQUISITION AND DISPOSITION OF ASSETS
The Registrant hereby amends its Current Report on Form 8-K dated
January 15, 2002, to include Consolidated Financial Statements for the year
ended December 31, 2001.
ITEM 5. OTHER INFORMATION
Description of Business
General
Amexdrug Corporation, a Nevada corporation, (the "Company") is
primarily a full-line, wholesale distributor of pharmaceuticals,
over-the-counter products, health and beauty care products, and nutritional
supplements. The Company distributes its products primarily to independent
pharmacies in the western and southeastern regions of the United States, and
secondarily to small and medium-sized pharmacy chains, alternative care
facilities and other wholesalers and retailers. Over the next several months,
the Company anticipates increasing its sales to include the entire continental
United States.
The Company currently has 50,000,000 shares of authorized common stock
$.001 par value, of with 8,052,783 are issued and outstanding.
Significant Acquisitions
Allied Med, Inc.
----------------
On December 31, 2001, the Company acquired all of the issued and
outstanding common shares of Allied Med, Inc., an Oregon corporation ("Allied")
in a share exchange. The Company acquired the 50,000 issued and outstanding
shares of Allied from its sole shareholder, Jack Amin, in exchange for 7,000,000
restricted common shares of the Company. At all times during the negotiations of
the transaction, Mr. Amin was an officer, director and control shareholder of
both companies.
Consideration for the acquisition was determined through negotiations
between the boards of directors of both companies and was based on Allied's past
operating history and future potential growth.
Allied was formed as an Oregon corporation in October 1997, to operate
as a full line wholesaler of pharmaceuticals, over-the-counter and non-drug
products and health and beauty aids. In 1998, Allied's gross sales were
approximately $2.8 million. In 1999, gross sales exceeded $5 million. In 2000,
gross sales exceeded $9 million. Allied projects gross sales for 2001 to be
approximately $20 million.
As discussed herein, the Company has assumed the operations of Allied
as its primary
2
operations and intends to build on the wholesale pharmaceutical operations of
Allied. All future operations in the wholesale pharmaceutical industry will be
conducted through Allied.
Industry Trends
Pharmaceutical and Healthcare Markets.
According to IMS Health, a company specializing in information services
for the pharmaceutical and health care industries, the United States is the
world's largest pharmaceutical market, with 2000 sales of $150 billion,
including diagnostics and over-the-counter drugs. That figure is expected to
rise to $263 billion in 2005, a projected compound annual growth rate of 11.8%.
This continued growth rate of the sales of pharmaceutical products was
attributed to a number of factors including:
. the value added by the introduction of new drugs into the
marketplace, which more than offsets the value lost by
medications losing patent protection;
. new patterns of drug lifestyle management, resulting in higher
sales occurring earlier in the life cycle of a medication;
. increased money spent on direct-to-consumer marketing
initiatives; and
. an unprecedented period of investment by pharmaceutical companies
worldwide.
The Company believes that, currently, the pharmaceutical and health
care product markets are serviced primarily by traditional full-line
wholesalers.
Internet.
The Internet has emerged as the fastest growing communications medium
in history and is dramatically changing how businesses and individuals
communicate and share information. International Data Corporation estimates that
the number of Internet users will grow from 97 million at the end of 1998 to 320
million by 2002. The Internet has created new opportunities for conducting
commerce, such as business-to-consumer and person-to-person e-commerce.
Recently, the widespread adoption of intranets and the acceptance of the
Internet as a business communications platform has created a foundation for
business-to-business e-commerce that offers the potential for organizations to
streamline complex processes, lower costs and increase productivity. Internet-
based business-to-business e-commerce may be poised for rapid growth and could
represent a significantly larger opportunity than business-to-consumer or
person-to- person e-commerce. According to Gartner Group, worldwide business-to-
business Internet revenue was $433.3 billion in 2000, and in 2001 that total is
projected to reach $919 billion. North America accounted for 59% of the
worldwide total in 2000, with business-to-business Internet commerce totaling
$255 billion, and is anticipated to represent 52% of the projected $480 billion
in 2001. By 2005, worldwide business-to-business Internet commerce is expected
be more than $8.5 trillion, and the North American region will total $3.6
trillion, which will be 42% of the overall market. The Company hopes, although
it cannot guarantee, that it will benefit from this growth.
3
The dynamics of business-to-business e-commerce relationships differ
significantly from those of other e-commerce relationships. Business-to-business
e-commerce solutions frequently automate processes that are fundamental to a
business's operations by replacing various paper- based transactions with
electronic communications. In addition, business-to-business e- commerce
solutions must often be integrated with a customer's existing systems, a process
that can be complex, time-consuming and expensive. Consequently, selection and
implementation of a business-to-business e-commerce solution represents a
significant commitment by the customer, and the costs of switching solutions are
high. In addition, because business transactions are typically recurring and
non-discretionary, the average order size and lifetime value of a business-to-
business e-commerce customer is generally greater than that of a business-to-
consumer e-commerce customer. These solutions are likely to be most readily
accepted by industries characterized by a large number of buyers and sellers, a
high degree of fragmentation among buyers, sellers or both, significant
dependence on information exchange, large transaction volume and user acceptance
of the Internet.
Objectives and Strategy
The Company's key business objectives is to become a leading full-line
wholesale distributor of pharmaceuticals, over-the-counter products, health and
beauty care products and nutritional supplements, with an emphasis on online
sales.
To accomplish this objective, the Company plans to :
. market its name, products and services to create brand
recognition and generate and capture traffic on its web sites;
. provide quality products at competitive prices and efficient
service;
. develop strategic relationships that increase the Company's
product offerings; and
. attract and retain exceptional employees.
Sales and Marketing, Customer Service and Support
The Company's products are sold both through traditional wholesale
distribution lines and e-commerce venues, including the Company's web site,
www.amwdrug.com. The Company believes its e-commerce, business-to-business model
will allow the Company to leverage its existing wholesale distribution business,
thus increasing its ability to effectively market and distribute its products.
The Company uses a variety of programs to stimulate demand for its products and
increase traffic to its web sites, including a direct sales force,
telemarketing, blast faxing and advertising.
Direct Sales
The Company maintains employees to act as its direct sales force to
target organizations that buy and sell the products it carries.
4
Telemarketing
The Company maintains an in-house telemarketing group for use in
customer prospecting, lead generation and lead follow-up.
Blast Faxing
The Company has an automated system which it uses to fax weekly updates
to its customers informing them of special offers during the week.
Advertising
The Company advertises in trade journals, at trade shows and will seek
to engage in co- branding arrangements in the future. In addition to strategic
agreements and traditional advertising, the Company, will, as revenue allows,
implement online sales and marketing techniques to increase brand recognition
and to direct traffic to its website. Some of these techniques may include
banner ads on search engine web sites and Internet directories, direct links
from healthcare home pages, and mass e-mailings.
Customer Service and Support
The Company believes that it can establish and maintain long-term
relationships with its customers and encourage repeat visits if, among other
things, the Company has excellent customer support and service. The Company
currently offers information regarding its products and services and answers
customer questions about the ordering process, and investigates the status of
orders, shipments and payments. A customer can access the Company by fax or
e-mail by following prompts located on the Company's website or by calling the
Company's toll-free telephone line.
Promotion of Website
As revenue allows, the Company will promote, advertise and increase
recognition of its website through a variety of marketing and promotional
techniques, including:
. developing co-marketing agreements with major online sites and
services;
. enhancing online content and ease of use of its website;
. enhancing customer service and technical support;
. advertising in trade journals and at industry trade shows;
. conducting an ongoing public relations campaign; and
. developing other business alliances and partnerships.
5
Distribution
The Company distributes products from its facility in Portland, Oregon.
The Company fills orders with a combination of existing inventory and products
it orders from suppliers. Currently, customers are receiving their products
within 24 to 48 hours of order placement. As funds allow, the Company will
increase its in-house inventory of products to allow for shorter delivery times.
Purchasing
The Company purchases its products primarily from manufacturers and
secondarily from other wholesalers and distributors. The Company's purchasing
department constantly monitors the market to take advantage of periodic volume
discounts, market discounts and pricing changes.
Technology and Security
The Company website is hosted and maintained by a third party. This
provider delivers a secure platform for server hosting, including various safety
features to protect the information residing in its servers. Moreover, the
Company does not release information about its customers to third parties
without the prior written consent of its customers unless otherwise required by
law.
Notwithstanding these precautions, the Company cannot assure that the
security mechanisms will prevent security breaches or service breakdowns.
Despite the implemented security measures, servers can be vulnerable to computer
viruses, physical or electronic break- ins or other similar disruptions. Such a
disruption could lead to interruptions or delays in service, loss of data, or an
inability to accept and fulfill online customer orders. Any of these events
could materially affect the Company's business.
Management Information System
The Company's information system is maintained on an IBM AS 400
platform. The accounting information for sales, purchases, perpetual inventory
transactions, cash receipts and disbursements and sophisticated management
reports are provided timely for analytical and bookkeeping purposes. Also, the
order entry system was designed specifically for the Company and allows its
customers to order product 24 hours per day either via fax, internet or phone
modem. The system provides data to management enabling it to review sales trends
and customer base, monitor inventory levels, credit and collection issues, and
purchasing frequency and cost anticipation. Communication and availability of
data is possible through a local area network ring.
Competition
The Company faces strong competition both in price and service from
national, regional
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and local full-line, short-line and specialty wholesalers, service
merchandisers, self-warehousing chains and from manufacturers engaged in direct
distribution. Many of the Company's current and potential competitors have
longer operating histories and much larger customer bases than the Company. In
addition, many of the Company's competitors have greater brand recognition and
significantly greater financial, marketing and other resources. To compete
successfully, the Company has had to constantly monitor its competitive
situation and develop strategies to allow it to compete with other companies who
are able to:
. secure merchandise from vendors on more favorable terms;
. devote greater resources to marketing and promotional campaigns;
and
. adopt more aggressive pricing or inventory availability policies.
In addition, many of the Company's competitors have developed or may be
able to develop e-commerce operations that compete with the Company's e-commerce
operations, and may be able to devote substantially more resources to website
development and systems development than the Company. The online commerce market
is new, rapidly evolving and intensely competitive. The Company expects
competition to intensify in the future because barriers to entry are minimal,
and current and new competitors can launch new websites at relatively low cost.
The Company believes that the critical success factors for companies seeking to
create Internet business-to-business e-commerce solutions include the following:
. breadth and depth of product offerings;
. brand recognition;
. depth of existing customer base; and
. ease of use and convenience.
Unlike other well-publicized product categories such as online book or
compact disc retailing, there is no current market leader in its online
business-to-business market segment. The Company's immediate goal is to position
itself as a leading business-to-business e- commerce and online trade exchange
provider for, pharmaceuticals, over-the-counter products, health and beauty care
products and nutritional supplements. To that end, the Company believes that its
early entry into the online market may enable the Company to establish critical
competitive advantages over future competitors. The Company believes that such
competitive advantages include:
. the establishment of a recognizable brand;
. the development of online marketing and media relationships;
. the development of important relationships with manufacturers,
distributors, wholesalers and content providers; and
. exposure to an existing customer base.
However, competitive pressures created by any one of its current or
future competitors, or by its competitors collectively, could materially affect
the Company's business. The Company believes that the principal competitive
factors in its market are and will be:
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. brand recognition . selection
. speed and accessibility . customer service
. quality of site content . reliability and speed of fulfillment
. convenience . price
Government Regulations and Legal Uncertainties
Healthcare Regulation
---------------------
The manufacturing, packaging, labeling, advertising, promotion,
distribution and sale of most of the Company's products are subject to
regulation by numerous governmental agencies, particularly the United States
Food and Drug Administration, which regulates most of its products under the
Federal Food, Drug and Cosmetic Act, and the United States Federal Trade
Commission, which regulates the advertising of many of its products under the
Federal Trade Commission Act. The Company's products are also subject to
regulation by, among other regulatory agencies, the Consumer Product Safety
Commission, the United States Department of Agriculture, the United States
Department of Environmental Regulation and the Occupational Safety and Health
Administration. The manufacturing, labeling and advertising of its products is
also regulated by the Occupational Safety and Health Administration through
various state and local agencies.
Furthermore, the Company and/or its customers are subject to extensive
licensing requirements and comprehensive regulation governing various aspects of
the healthcare delivery system, including the so called "fraud and abuse" laws.
The fraud and abuse laws preclude:
. persons from soliciting, offering, receiving or paying any
remuneration in order to induce the referral of a patient for
treatment or for inducing the ordering or purchasing of items or
services that are in any way paid for by Medicare or Medicaid,
and
. physicians from making referrals to certain entities with which
they have a financial relationship.
The fraud and abuse laws and regulations are broad in scope and are
subject to frequent modification and varied interpretations. Significant
criminal, civil and administrative sanctions may be imposed for violation of
these laws and regulations.
The Company's advertising of dietary supplement products is also
subject to regulation by the Federal Trade Commission under the Federal Trade
Commission Act, in addition to state and local regulation. The Federal Trade
Commission Act prohibits unfair methods of competition and unfair or deceptive
acts or practices in or affecting commerce. The Federal Trade Commission Act
also provides that the dissemination or the causing to be disseminated of any
false advertisement pertaining to drugs or foods, which would include dietary
supplements, is an unfair or deceptive act or practice. Under the Federal Trade
Commission's Substantiation Doctrine, an advertiser is required to have a
"reasonable basis" for all objective product claims before the claims are made.
8
Failure to adequately substantiate claims may be considered either
deceptive or unfair practices. Pursuant to this Federal Trade Commission
requirement, the Company is required to have adequate substantiation for all
material advertising claims made for its products.
The Company may be subject to additional laws or regulations by the
Food and Drug Administration or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations which the Company considers
favorable, such as the Dietary Supplement Health and Education Act of 1994, or
more stringent interpretations of current laws or regulations, from time to time
in the future. The Company cannot predict the nature of such future laws,
regulations, interpretations or applications, nor can the Company predict what
effect additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. The Food and Drug
Administration or other governmental regulatory bodies could, however, require
the reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not able to be reformulated, imposition of
additional record keeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific
substantiation. Any or all of such requirements could have a material and
adverse effect on the Company's business.
The Company's products function within the structure of the healthcare
financing and reimbursement system of the United States. As a result of a wide
variety of political, economic and regulatory influences, this system is
currently under intense scrutiny and subject to fundamental changes. In recent
years, the system has changed significantly in an effort to reduce costs. These
changes include increased use of managed care, cuts in Medicare, consolidation
of pharmaceutical and medical-surgical supply distributors, and the development
of large, sophisticated purchasing groups. In addition, a variety of new
approaches have been proposed to continue to reduce cost, including mandated
basic healthcare benefits and controls on healthcare spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending. The Company anticipates that Congress and state legislatures
will continue to review and assess alternative healthcare delivery systems and
payment methods and that public debate with respect to these issues will likely
continue in the future. Because of uncertainty regarding the ultimate features
of reform initiatives and their enactment and implementation, the Company cannot
predict which, if any, of such reform proposals will be adopted, when they may
be adopted, or what impact they may have on the Company. The Company expects the
healthcare industry to continue to change significantly in the future. Some of
these changes, such as a reduction in governmental support of healthcare
services or adverse changes in legislation or regulations governing the privacy
of patient information, or the delivery of pricing of pharmaceuticals and
healthcare services or mandated benefits, may cause healthcare industry
participants to greatly reduce the amount of the Company's products and services
they purchase or the price they are willing to pay for the Company's products.
Changes in pharmaceutical manufacturers' pricing or distribution policies could
also significantly reduce its income.
While the Company uses its best efforts to adhere to the regulatory and
licensing requirements, as well as any other requirements affecting the
Company's products, compliance
9
with these often requires subjective legislative interpretation. Consequently,
the Company cannot assure that its compliance efforts will be deemed sufficient
by regulatory agencies and commissions enforcing these requirements. Violation
of these regulations may result in civil and criminal penalties, which could
materially and adversely affect its operations.
Internet Regulation
-------------------
Few laws currently regulate the Internet. Because of the Internet's
popularity and increasing use new laws and regulations may be adopted. Such laws
and regulations may cover issues such as:
. user privacy . distribution
. pricing . taxation
. content . characteristics and quality of products
. copyrights . services
Laws and regulations directly applicable to electronic commerce or
Internet communications are becoming more prevalent. The Company believes that
its use of third party material on its website is permitted under current
provisions of copyright law. Because legal rights to certain aspects of Internet
content and commerce are not clearly settled, the Company's ability to rely upon
exemptions or defenses under copyright law is uncertain. Also, although not yet
enacted, Congress is considering laws regarding Internet taxation. In addition,
various jurisdictions already have enacted laws that are not specifically
directed to electronic commerce but that could affect its business. The
applicability of many of these laws to the Internet is uncertain and could
expose the Company to substantial liability. Any new legislation or regulation
regarding the Internet, or the application of existing laws and regulations to
the Internet, could materially and adversely affect the Company. If the Company
were alleged to violate federal, state or foreign, civil or criminal law, even
if the Company could successfully defend such claims, it could materially and
adversely affect the Company.
Additionally, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission in the same manner as other telecommunications services. Furthermore,
local telephone carriers have petitioned the Federal Communications Commission
to regulate Internet service providers and online service providers in a manner
similar to long distance telephone carriers and to impose access fees on such
providers. If either of these petitions are granted, the costs of communicating
on the Internet could increase substantially. This, in turn, could slow the
growth of use of the Internet. Any such legislation or regulation could
materially and adversely affect its business, financial condition and operating
results.
Proprietary Rights
The Company believes that protecting its trademarks and registered
domain name is important to its business strategy of building strong brand name
recognition and that such
10
trademarks have significant value in the marketing of the Company's products. To
protect its proprietary rights, the Company will rely on copyright, trademark
and trade secret laws, confidentiality agreements with employees and third
parties, and license agreements with consultants, vendors and customers. Despite
such protections, however, the Company may be unable to fully protect its
intellectual property.
Employees
The Company currently employs 7 employees. Labor unions do not
represent any of these employees. The Company considers its employee relations
to be good. Competition for qualified personnel in its industry is intense,
particularly for technical staff responsible for marketing, advertising, web
development, and general and administrative activities.
Employees will be permitted to participate in employee benefit plans of
the Company that may be in effect from time to time, to the extent eligible.
Physical Facilities
The Company's principal business operations are housed in 800 square feet
of office space and 1,400 square feet of warehouse space in Portland, Oregon.
The Company leases this space under a two-year lease agreement. Rent for the
first year, which expires April 30, 2003, is $1,528 per month. Rent for the
second year is $1,563 per month. The lease expires in April 2004. The Company is
currently negotiating a one year extension of its lease. The Company believes
this space will be sufficient for the next twelve months.
The Company's principal executive offices are located in Beverly Hills,
California. The Company leases approximately 800 square feet of office space for
$800 per month. This space is leased on a month to month basis. The Company
believes this space will be sufficient for at least the next twelve months.
Company History Prior to the Acquisition of Allied Med, Inc.
The Company was incorporated under the laws of the state of California
on April 30, 1963 with authorized common stock of 10,000,000 shares at a par
value of $.10 and 1,000,000 preferred shares with a par value of $1.00 with the
name of Harlyn Products, Inc. Harlyn Products was engaged in the business of
selling jewelry to department stores and retail jewelry stores.
On March 21, 1997 the Company filed for bankruptcy in the United States
Bankruptcy Court, Central District of California in the Los Angeles Division
under Chapter 11, with Howard M. Ehrenberg as trustee, and emerged from
bankruptcy on April 24, 2000 under Chapter 7 with no remaining assets or
liabilities.
Pursuant to the bankruptcy settlement, the name of the Company was
changed to Amexdrug Corporation. The bankruptcy settlement also resulted in a
change in officers and
11
directors of the Company. The settlement also provided that the par value of the
common shares of the Company be reduced from $.10 to $.001, the authorized and
any outstanding preferred shares were canceled, the outstanding common stock was
reverse split on a one hundred shares for one share basis and 1,000,000 post
split common shares were issued to Jack Amin, currently and officer and director
of the Company, in exchange for $100,000 which was paid into the bankruptcy
court. The total of the post split outstanding shares, following completion of
the terms of the settlement, was 1,052,783.
Amended Articles of Incorporation completing the terms of the
bankruptcy were filed by the trustee in the state of California on June 22,
2000.
Solely for the purpose of changing domicile from California to Nevada,
on December 12, 2001, the Company, entered into a certain Merger Agreement with
a Nevada corporation named Amexdrug Corporation. The Nevada corporation was
incorporated on December 4, 2001. As a result of the merger, which became
effective on December 17, 2001, the Company became a Nevada corporation and the
separate existence of the California corporation ceased. At the time of the
merger, the Company changed its fiscal year end from June 30 to December 31.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The following financial statements of the Company are filed as a part
of this report:
Report of Hansen, Barnett & Maxwell, Certified Public Accountants;
Consolidated Balance Sheet as of December 31, 2001;
Combined Statements of Operations for the years ended
December 31, 2001 and 2000;
Combined Statements of Stockholders' Equity for the years ended
December 31, 2001 and 2000;
Combined Statements of Cash Flows for the years ended
December 31, 2001, and 2000;
Notes to Consolidated and Combined Financial Statements.
There are no financial statement schedules included as part of this
report. The financial statements of the Company are set forth immediately
following the signature page of this Form 8-K/A-1.
Exhibits. The following exhibits are included as part of this report:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Current Report on Form 8-K/A to be signed on
its behalf by the undersigned hereunto duly authorized.
AMEXDRUG CORPORATION
Date: March 18, 2002 By /s/ Jack Amin
---------------------------------------------
Jack Amin, President, Chief Financial Officer
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AMEXDRUG CORPORATION AND ALLIED MED, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.....................F-2
Consolidated Balance Sheet-- December 31, 2001.........................F-3
Combined Statements of Operations for the Years Ended December 31,
2001 and 2000.......................................................F-4
Combined Statements of Stockholders' Deficit for the Years Ended
December 31, 2000 and 2001..........................................F-5
Combined Statements of Cash Flows for the Years Ended December 31,
2001 and 2000.......................................................F-6
Notes to Consolidated and Combined Financial Statements................F-7
F-1
HANSEN, BARNETT & MAXWELL (801) 532-22
A Professional Corporation Fax (801) 532-7944
CERTIFIED PUBLIC ACCOUNTANTS 5 Triad Center, Suite 750
Salt Lake City, Utah 84180
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholders
Amexdrug Corporation
We have audited the accompanying consolidated balance sheet of Amexdrug
Corporation and subsidiary as of December 31, 2001, and the related combined
statements of operations, stockholders' deficit and cash flows of Amexdrug
Corporation and Allied Med, Inc. for each of the two years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred to
above present fairly, in all material respects, the financial position of
Amexdrug Corporation and subsidiary as of December 31, 2001, and the combined
results of operations and cash flows of Amexdrug Corporation and Allied Med.
Inc. for each of the two years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 16, 2002
[GRAPHIC OMITTED] Member of AICPA Division of Firms
Member of SECPS
F-2
AMEXDRUG CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Current Assets
Cash ................................................................................$ 562,004
Accounts receivable, net of allowance for doubtful accounts of $61,362 ............... 898,358
Inventory ............................................................................ 235,724
----------
Total Current Assets ............................................................. 1,696,086
----------
Property And Equipment
Office and computer equipment ........................................................ 119,828
Leasehold improvements ............................................................... 15,700
----------
135,528
Less accumulated depreciation ........................................................ (48,696)
----------
Net Property and Equipment ....................................................... 86,832
----------
Deposits .................................................................................. 2,842
----------
Total Assets ............................................................................$ 1,785,760
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable.....................................................................$ 1,815,128
Related party accounts payable ....................................................... 13,805
Accrued liabilities .................................................................. 1,720
Accrued settlement obligations ....................................................... 50,737
Current portion of capital lease obligations ......................................... 18,369
----------
Total Current Liabilities ........................................................ 1,899,759
----------
Long-Term Liabilities
Accrued settlement obligations, net of current portion ............................... 7,875
Capital lease obligations, net of current portion .................................... 76,285
----------
Total Long-Term Liabilities ...................................................... 84,160
----------
Commitments And Contingencies
Stockholders' Deficit
Common stock, $0.01 par value; 10,000,000 shares authorized
and 8,052,783 issued and outstanding ................................................. 8,053
Additional paid in capital (deficit) ................................................. (92,407)
Accumulated deficit .................................................................. (113,805)
----------
Total Stockholder's Deficit ...................................................... (198,159)
----------
Total Liabilities and Stockholders' Deficit...............................................$ 1,785,760
==========
See accompanying notes to consolidated and combined financial statements.
F-3
AMEXDRUG CORPORATION AND ALLIED MED, INC.
COMBINED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
---------------------------------
2001 2000
---------------- ---------------
Sales................................................................. $ 21,300,885 $ 8,247,870
Cost of Goods Sold.................................................... 20,961,743 7,880,480
---------------- ---------------
Gross Profit ........................................................ 339,142 367,390
Selling, General and Administrative Expense........................... (444,343) (322,693)
Interest Expense...................................................... (6,498) --
Interest and Other Income............................................. 2,212 2,626
---------------- ---------------
Net Income (Loss)..................................................... $ (109,487) $ 47,323
================ ===============
Basic and Diluted Income (Loss) Per Common Share...................... $ (0.01) $ 0.01
================ ===============
Basic and Diluted Weighted-Average Common Shares Outstanding.......... 8,052,783 8,052,783
================ ===============
See accompanying notes to consolidated and combined financial statements.
F-4
AMEXDRUG CORPORATION AND ALLIED MED, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Additional
Common Stock Paid-In Total
--------------------------- Capital Accumulated Stockholders'
Shares Amount (Deficit) Deficit Deficit
------------ ------------ ----------- ------------ ------------
Balance, December 31, 1999...................... 8,000,000 $ 8,000 $ (21,065) $ -- $ (13,065)
Issuance to acquire Harlyn Products, Inc........ 52,783 53 (53) -- --
Distributions to shareholder.................... -- -- (83,338) -- (83,338)
Net loss ...................................... -- -- 156,224 (108,901) 47,323
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000...................... 8,052,783 8,053 51,768 (108,901) (49,080)
Distributions to shareholder.................... -- -- (39,592) -- (39,592)
Net loss ...................................... -- -- (104,583) (4,904) (109,487)
------------ ------------ ------------- ------------ ------------
Balance, December 31, 2001...................... 8,052,783 $ 8,053 $ (92,407) $ (113,805) $ (198,159)
============ ============ ============ ============ ============
See accompanying notes to consolidated and combined financial statements.
F-5
AMEXDRUG CORPORATION AND ALLIED MED, INC.
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
-----------------------------------
2001 2000
---------------- ----------------
Cash Flows From Operating Activities
Net income (loss)................................................................ $ (109,487) $ 47,323
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................... 29,382 6,418
Bad debt expense............................................................... 20,030 41,332
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (587,935) (273,511)
Inventory.................................................................... 187,703 (127,376)
Accounts payable............................................................. 723,724 1,064,542
Related party accounts payable............................................... 4,904 8,901
Accrued liabilities.......................................................... (5,585) 7,305
Accrued settlement obligations............................................... (106,530) (422,998)
---------------- ----------------
Net Cash Provided By Operating Activities............................... 156,206 351,936
---------------- ---------------
Cash Flows From Investing Activities
Increase in deposits............................................................. (2,642) (200)
---------------- ----------------
Net Cash Used In Investing Activities................................... (2,642) (200)
---------------- ----------------
Cash Flows From Financing Activities
Principal payments on capital lease obligations.................................. (7,254) --
Distributions to shareholders.................................................... (39,592) (83,338)
---------------- ----------------
Net Cash Used In Financing Activities................................... (46,846) (83,338)
----------------- ----------------
Net Increase in Cash.................................................................. 106,718 268,398
Cash at Beginning of Year............................................................. 455,286 186,888
---------------- ---------------
Cash at End of Year................................................................... $ 562,004 $ 455,286
================ ===============
Supplemental Cash Flows Information
Cash paid for interest.............................................................$ 6,498 $ --
================ ===============
Non-Cash Investing And Financing Activities
Property and equipment acquired by capital lease...................................$ 101,908 --
See accompanying notes to consolidated and combined financial statements.
F-6
AMEXDRUG CORPORATION AND ALLIED MED, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1 -- Organization and Nature of Operations
Organization and Nature of Operations
Allied Med, Inc. was organized in October 1997 in the State of Oregon as a
wholly-owned corporation of Jack Amin. Allied Med, Inc. is a full-line,
wholesale distributor of pharmaceuticals, over-the-counter products, health and
beauty care products, and nutritional supplements. Allied Med, Inc. distributes
its products primarily in the United States of America, to small and
medium-sized pharmacy chains, alternative care facilities and other wholesalers
and retailers.
In February 2000, the Company loaned Jack Amin $100,000 to purchase 1,000,000
shares of common stock of Harlyn Products, Inc., a publicly-traded Company from
the United States Bankruptcy Court. On April 25, 2000, the Bankruptcy Court
approved the sale and the shares were issued. Additionally, there were 52,783
additional common shares that remained outstanding of Harlyn Products, Inc.
after a 1-for-100 reverse stock split. In June 2000, Harlyn Products, Inc.
changed its name to Amexdrug Corporation.
Harlyn Products, Inc. had no prior operations that continued after its
bankruptcy. As a result, the acquisition of the majority of its common stock by
Jack Amin was accounted for as the acquisition of its monetary assets, which
there were none, for $100,000 and the $100,000 payment was charged to operations
of Amexdrug Corporation on the date it was paid. The $100,000 note payable to
Allied Med, Inc. was due on demand and bore interest at 5%.
On December 31, 2001, Jack Amin exchanged all of the issued and outstanding
common stock of Allied Med, Inc. for 7,000,000 shares of Amexdrug Corporation.
In addition, Amexdrug Corporation assumed the note payable and accrued interest
payable to Allied Med, Inc. This exchange was between entities under common
control and has been accounted for at historical cost. The accompanying combined
statements of operations include the operations of Allied Med, Inc. for all
periods presented and the operations of Amexdrug Corporation from February 4,
2000. Stockholders' deficit and loss per share information have been restated
for all periods presented on a combined basis to give retroactive effect to the
shares issued on April 25, 2000 and in the reorganization on December 31, 2001.
The accompanying consolidated financial statements include the accounts of
Amexdrug Corporation and Allied Med, Inc. (referred to herein, on a combined
basis, as the Company). All significant intercompany accounts and transactions
have been eliminated in consolidation and combination.
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 disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
The Company's historical revenues and receivables have been derived solely from
the pharmaceutical industry. The Company offers credit terms on the sale of its
pharmaceutical products. The Company performs ongoing credit evaluations of its
customers' financial condition and usually requires a post-dated check from its
customers at the date products are shipped. The Company maintains an allowance
for uncollectible accounts receivable based upon the expected collectibility of
all accounts receivable.
During the years ended December 31, 2001 and 2000, purchases from one vendor
accounted for 84 and 63 percent of total purchases, respectively. As of December
31, 2001 and 2000, accounts payable due to this vendor accounted for 89% of the
total accounts payable.
Inventory-- Inventory includes purchased products for resale and is stated at
the lower of cost (using the first-in, first-out method) or market value.
Provisions, when required, are made to reduce excess and obsolete inventory to
its estimated net realizable value. Due to competitive pressures and technical
innovation, it is possible that estimates of the net realizable value could
change in the near term.
F-7
ALLIED MED, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Property and Equipment --Property and equipment are stated at cost, less
accumulated depreciation. Major additions and improvements are capitalized,
while minor repairs and maintenance costs are expensed when incurred.
Depreciation is computed using the double-declining method over the estimated
useful lives of the related assets, which are as follows:
Office and computer office equipment............. 3 -7 years
Leasehold improvements........................... 2 -5 years
Depreciation expense was $29,382 and $6,418 for the years ended December 31,
2001 and 2000, respectively. On retirement or disposition of property and
equipment, the cost and related accumulated depreciation and amortization are
removed from the accounts and any resulting gain or loss is recognized in the
statement of operations.
Concentration of Credit Risk and Fair Value of Financial Instruments --At
December 31, 2001, the Company had cash in excess of federally insured limits of
$471,853. The carrying amounts reported in the accompanying financial statements
for cash, accounts receivable and accounts payable approximate fair values
because of the immediate or short-term maturities of these financial
instruments. The carrying amounts of the Company's debt obligations approximate
fair value based on current interest rates available to the Company.
Impairment of Long-Lived Assets--The Company reviews its long-lived assets for
impairment when events or changes in circumstances indicate that their carrying
value may not be recoverable. The Company evaluates, at each balance sheet date,
whether events and circumstances have occurred which indicate possible
impairment. The Company uses an estimate of future undiscounted net cash flows
from the related asset or group of assets over their remaining life in measuring
whether the assets are recoverable. As of December 31, 2001, the Company does
not consider any of its long-lived assets to be impaired.
Revenue Recognition --The Company generates revenues from the resale of
pharmaceuticals, over-the-counter products, health and beauty care products and
nutritional supplements. The Company accounts for these revenues at the time of
shipment to and acceptance by the customer.
Income Taxes--Allied med, Inc. and its shareholder elected to be taxed under the
provisions of Subchapter S of the internal Revenue Code through December 31,
2001 when that election terminated. Under those provisions, Allied Med, Inc. did
not pay federal or state corporate income taxes or receive the benefits from its
operating loss carry forwards. Instead, its stockholder was liable for
individual federal and state income taxes and benefited from operating losses.
As a result, all income or loss from Allied Med, Inc. has been accounted for as
having been constructively distributed to the Allied Med Inc. shareholders and
contributed to the capital of Allied Med, Inc. in the accompanying financial
statements.
The Company recognizes an asset or liability for the deferred tax consequences
of all temporary differences between the tax bases of assets or liabilities and
their reported amounts in the financial statements that will result in taxable
or deductible amounts in future years when the reported amounts of the assets or
liabilities are recovered or settled. These deferred tax assets or liabilities
are measured using the enacted tax rates that will be in effect when the
differences are expected to reverse. Deferred tax assets are reviewed
periodically for recoverability and valuation allowances are provided, as
necessary.
For the year ended December 31, 2001 the Company had a net operating loss carry
forward of $13,805. The tax benefit of $4,694 from the loss carry forward has
been fully offset by a valuation reserve. The loss carryforward will expire in
2021.
Net Income (Loss) Per Common Share--Basic income (loss) per common share is
computed by dividing net income (loss) by the weighted-average number of common
shares outstanding. Diluted income (loss) per common share is computed by
dividing net income (loss) by the weighted average number of common shares and
the dilutive potential common share equivalents outstanding. As of December 31,
2001 the Company did not have any potential common share equivalents.
F-8
ALLIED MED, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 3 -- ACCRUED SETTLEMENT OBLIGATIONS
In 1999, the Company entered into settlement agreements with numerous
vendors due to cash flow problems the Company was facing. Under these
settlement agreements the Company agreed to pay these vendors a total of
$588,140. The Company was required to pay a large a portion at the
initial execution of the agreement and the remaining balance based on
various payment plans. The payment plans ranged from 24 to 36 months. The
agreements are to be satisfied during May 2002 and one in May 2003. The
Company has classified future payments of $7,875 due in the year ending
December 31, 2003 as a long-term liability in the accompanying financial
statements. As of December 31, 2001 the remaining balance on these
settlement agreements was $58,612. During the year ended December 31,
2001 and 2000 the Company made payments of $106,530 and $422,998 on the
agreements.
NOTE 4 -- Leases
Capitalized Lease Obligations --Certain equipment is leased under capital
lease agreements. The following is a summary of assets held under capital
lease agreements at December 31, 2001:
December 31,
-----------------
2001
-----------------
Property and equipment................. $ 101,908
Less: Accumulated amortization.......... (23,736)
-----------------
$ 78,172
=================
The following is a schedule of future minimum lease payments under capital lease
agreements together with the present value of the net minimum lease payments:
Year Ending December 31,
------------------------
2002........................................ $ 29,849
2003........................................ 27,792
2004........................................ 27,792
2005........................................ 26,461
2006........................................ 11,112
Less: Amount representing interest.......... (28,352)
------------------
Present value of net minimum lease payments.. 94,654
Less: Current portion....................... (18,369)
------------------
Long-term portion........................... $ 76,285
==================
Operating Leases --The Company leases its operating facilities under a
non-cancelable operating lease that expires during February 2002. Subsequent to
year end, the lease was renewed for an additional two years and expires in April
2004. Additionally, the Company leases its executive offices on a month-to-month
basis. The monthly rental payment is $800. Rent expense for the years ended
December 31, 2001 and 2000 was $18,473 and $17,821, respectively
Future minimum payments due under the operating leases were as follows as of
December 31, 2001:
Year Ending December 31,
- ------------------------
2002............................................... $ 14,968
2003............................................... 16,600
2004............................................... 5,580
--------------
Total.............................................. $ 37,148
==============
F-9