UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE
EXCHANGE ACT OF 1934
From the transition period from __________ to ___________
Commissions file number
APO HEALTH, INC.
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(Exact name of registrant as specified in its charter)
Nevada 86-0871787
----------------------------- --------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3590 Oceanside Road, Oceanside, New York 11575
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(Address of principal executive offices)
(800) 365-2839
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(Issuer's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes __X__ No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes _____ No __X__
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 10, 2005,
37,473,045 shares of Common Stock of the issuer were issued and outstanding.
APO HEALTH, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
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Page
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PART I - Financial Information
Item 1 Financial Statements.
Consolidated Balance Sheets as of
March 31, 2005 and September 30, 2004. 2
Consolidated Statements of Operations for the three and six
Months ended March 31, 2005 and 2004. 3
Consolidated Statements of Cash Flows for the
Six months ended March 31, 2005 and 2004. 4
Notes to Consolidated Financial Statements. 5 - 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 11
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 12
Item 4 Controls and Procedures 12
PART II - Other Information
Item 1 Legal Proceedings. 12
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds. 13
Item 3 Defaults upon Senior Securities. 13
Item 4 Submission of Matters to a Vote of Security Holders. 13
Item 5 Other Information. 13
Item 6 Exhibits 13
Signatures 14
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
APO HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2005 2004
--------------- ---------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 271,480 $ 574,732
Accounts Receivable, net of allowance
for doubtful accounts of $360,000 and
$380,000 831,737 1,179,078
Inventory 652,572 583,040
Other Current Assets 98,626 186,274
--------------- ---------------
Total Current Assets 1,854,415 2,523,124
--------------- ---------------
Property and Equipment, net of accumulated
depreciation of $86,572 and $88,430 5,056 8,124
Deposits 7,500 7,500
--------------- ---------------
Total Assets $ 1,866,971 $ 2,538,748
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Notes Payable $ 297,654 $ 609,185
Accounts Payable 927,177 1,168,278
Accrued Compensation 100,818 89,224
Customer Deposits 288,629 259,675
--------------- ---------------
Total Current Liabilities 1,614,278 2,126,362
--------------- ---------------
Stockholders' Equity:
Common stock, $.0002 par value,
125,000,000 shares authorized, 37,473,045
and 35,673,045 shares issued and outstanding 7,495 7,135
Paid-in Capital 2,197,948 2,158,308
Retained Earnings (Deficit) (1,952,750) (1,753,057)
--------------- ---------------
Total Stockholders' Equity 252,693 412,386
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 1,866,971 $ 2,538,478
=============== ===============
2
APO HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 2005 AND 2004 (UNAUDITED)
Three Months Six Months
------------- ----------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Revenue $ 3,893,623 $ 13,859,543 $ 8,606,580 $ 21,243,530
Cost of Revenue 3,443,829 13,255,203 7,769,390 20,002,019
--------------- --------------- --------------- ---------------
Gross Margin 449,794 604,340 837,190 1,241,511
--------------- --------------- --------------- ---------------
Operating Expenses
Selling Expense 89,718 210,766 212,929 374,611
General and Administrative Expenses 419,443 420,168 796,400 759,999
--------------- --------------- --------------- ---------------
509,161 630,934 1,009,329 1,134,610
Income (Loss) from Operations (59,637) (26,594) (172,139) 106,901
--------------- --------------- --------------- ---------------
Other Income (Expense)
Recovery of Litigation Expense - 92,755 - 92,755
Interest Expense (13,648) (27,332) (27,554) (50,062)
--------------- --------------- --------------- ---------------
(13,648) 64,423 (27,554) 42,693
--------------- --------------- --------------- ---------------
Income (loss) before Provision for
Income Taxes (73,015) 37,829 (199,693) 149,594
Provision for Income Taxes - - - -
--------------- --------------- --------------- ---------------
Net Income $ (73,015) $ 37,289 $ (199,693) $ 149,594
=============== =============== =============== ===============
Basic and Diluted Earnings
Per Common Share:
Total $ (.00) $ .00 $ (.01) $ .00
=============== =============== =============== ===============
Weighted Average Common Shares
Outstanding 36,090,822 33,439,378 35,931,055 32,772,712
=============== =============== =============== ===============
3
APO HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
MARCH 31, 2005 AND 2004 (UNAUDITED)
2005 2004
--------------- ---------------
Cash Flow From Operating Activities:
Net Income $ (199,693) $ 149,594
Adjustments to Reconcile Net Income to
Net Cash Flows from Operating Activities:
Depreciation and Amortization 3,068 4,940
Allowance For Doubtful Accounts (20,000) -
Stock Issued for Services 40,000 -
Changes In:
Accounts Receivable 367,341 232,701
Inventory (69,532) (1,272,239)
Other Current Assets 87,648 13,301
Accounts Payable (241,101) 389,513
Accrued Compensation 11,594 (788)
Customer Deposits Payable 28,954 152,306
--------------- ---------------
Cash Flows Provided by (used for)
Operating Activities 8,279 (330,672)
--------------- ---------------
Cash Flows From Investing Activities:
Notes Receivable - 4,566
--------------- ---------------
Cash Flows Provided by Investing Activities - 4,566
--------------- ---------------
Cash Flows from Financing Activities:
Cash Overdraft - 186,651
--------------- ---------------
Proceeds (Payment) on Bank Notes Payable, Net (311,531) 3,089
--------------- ---------------
Cash Flows Provided by (used for)
Financing Activities (311,531) 189,740
--------------- ---------------
Net (Decrease) in Cash (303,252) (136,366)
Cash Balances:
Beginning of Period 574,732 405,153
--------------- ---------------
End of Period $ 271,480 $ 268,787
=============== ===============
4
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial information is submitted in response to the requirements
of Form 10-Q and does not purport to be financial statements prepared in
accordance with generally accepted accounting principles. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted, although the Company believes the disclosures that are made are
adequate to make the information presented not misleading. Further, in the
opinion of the Company's management, the interim financial statements reflect
fairly the financial position and results of operations for the periods
indicated.
It is suggested that these interim consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K containing the Company's audited financial statements as of
and for the year ended September 30, 2004 filed with the Securities and Exchange
Commission.
The results of operations for the six months ended March 31, 2005 are not
necessarily indicative of results expected for the entire fiscal year ending
September 30, 2005.
Note 1 ACCOUNTING POLICIES
Nature of Business and Basis of Consolidation. APO Health, Inc. ("APO") was
incorporated under the laws of the state of New York in August 1978. APO and its
wholly-owned subsidiary, Universal Medical Distributors, Inc. ("Universal")
distribute disposable medical products principally to dental, medical and
veterinary professionals and wholesalers in the United States, principally on
the East Coast. Effective June 13, 2001, InternetFinancialCorp.com, Inc.,
("IFAN"), a Nevada corporation, which was an inactive public company acquired
APO, (collectively, the "Company"), pursuant to a tax-free reorganization
agreement. The acquisition was accounted for by the purchase method under
business combinations in a reverse acquisition transaction. Concurrently, IFAN
changed its name to APO Health, Inc., a Nevada corporation.
Cash and cash equivalents. For purposes of the statements of cash flows, cash
equivalents include all highly liquid investments purchased with original
maturities of three month or less.
Revenue recognition occurs when products are shipped.
Merchandise inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property and equipment is stated at cost. Depreciation is provided for on the
straight-line method over the estimated useful life. The cost of maintenance and
repairs is expensed as incurred.
Income taxes are computed using the tax liability method of accounting, whereby
deferred income taxes are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates that will be in effect when the differences reverse.
5
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share, Basic. Earnings per share has been calculated based on the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing the net income by the
weighted average number of common shares outstanding plus potential dilutive
securities.
Estimates and assumptions. Preparing financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses at the balance sheet date and for the period then ended. Actual
results could differ from these estimates.
Note 2 - SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES
2005 2004
--------------- ---------------
Cash paid during the year for:
Interest $ 27,554 $ 50,062
Non-cash transaction:
Common Stock Issued for Professional Fees $ 40,000
Note 3 - BANK NOTES PAYABLE
On October 29, 2002, the Company entered into a financing agreement with
Rosenthal & Rosenthal, Inc. The financing agreement provided the Company with a
maximum credit facility not to exceed $3,000,000. The credit facility has been
amended by mutual consent and reduced the maximum amount of credit under the
facility to $500,000. The credit facility is collateralized by substantially all
the Company's assets and $500,000 of the facility is personally guaranteed by
Dr. Jan Stahl, Chairman and CEO of the Company. Interest is payable monthly on
the average daily loan balance at the announced prime rate of JP Morgan Chase
bank plus 2.5% (8.25% as of March 31, 2005). This agreement is for a period of
three years through October 31, 2005 and may be extended on a year to year basis
thereafter unless terminated as provided in the agreement. The credit facility
provides that the Company maintain certain financial covenants.
Bank Notes Payable are as follows March 31 September 30
2005 2004
--------------- ---------------
Own note borrowing $ 238,675 $ 609,185
=============== ===============
Note 4 - INCOME TAXES
Income taxes (benefit) consist of the following:
2004 2003
--------------- ---------------
Current $ - $ -
Utilization of net operating loss - -
Deferred - -
Total $ - $ -
6
APO HEALTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of income taxes at the federal statutory income tax rate
to total income taxes is as follows:
2004 2003
--------------- ---------------
Computed at federal statutory rate of 34% $ - $ -
State income tax - -
Utilization of net operating loss - -
--------------- ---------------
Total $ - $ -
--------------- ---------------
The components of deferred taxes are as follows:
March 31, September 30,
2005 2004
--------------- ---------------
Deferred tax assets
Allowance for doubtful accounts $ 156,000 $ 152,000
Depreciation 19,200 21,250
Deferred Compensation 40,000 50,400
Net operating loss carryover 534,000 404,025
Valuation allowance (749,200) (627,675)
--------------- ---------------
Total Deferred tax asset $ - $ -
=============== ===============
The Company has a net operating loss carryover of approximately $1,139,000 to
offset future taxable income. The carryover expires at various times through
2024. The Company has offset the deferred tax asset by a valuation allowance of
$749,200, since it cannot be determined more likely than not whether the Company
will be able to utilize such net operating loss carryover.
Note 5 - COMMON STOCK
On March 8, 2005 and March 29, 2005, the Company issued a total of 1,700,000
shares of common stock to professionals and consultants for services rendered
valued at $34,000.
In October, 2004, the Company issued 100,000 shares of common stock to a
professional for services rendered valued at $6,000.
On January 29, 2004, the Company entered into an Investment Banking agreement
with Sloan Securities Corp. ("SSC") to provide financing and advisory and
investment banking services for a period of one year from the date of the
agreement. In consideration for these services, the Company issued to an
affiliate of SSC 2,000,000 share of restricted common stock in the Company
valued at $120,000. In January of 2004, the Company authorized the creation of
3,500,000 bonus compensation warrants exercisable at $0.025 per share, for an
exercise period of three years, to be issued to designated recipients approved
by the Board. On January 9, 2004, the Board authorized the issuance of 2,300,000
of compensation warrants to various officers and professionals for services
rendered.
On July 22, 2002, the Company adopted a Bonus Compensation Warrant Agreement,
whereby, the Company would issue Bonus Compensation Warrants equivalent to 10%
of the price of any merger or acquisition brought to the Company. All of the
warrants being exercisable into shares of common stock at 80% of the 20 day
average bid and ask price of the Company's common stock. The Company authorized
up to a maximum aggregate of 3,000,000 shares of common stock available for any
Bonus Compensation Warrants. To date none of these shares have been issued.
On July 22, 2002 the Company issued a common stock purchase warrant for 260,000
shares of common stock exercisable at $.10 per share and on September 27, 2002,
a common stock purchase warrant for 1,875,000 shares exercisable at $.04 per
share, both expiring on August 31, 2007.
7
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - LEASES
The Company's offices are located at 3590 Oceanside Road, Oceanside, New York.
The premises contain approximately 9,800 square feet under a five-year lease
(the "Lease") which expired on November 30, 2004 (the "Lease Term"). The Lease
Term has been extended for an additional five years through November 30, 2009.
These premises are occupied under a Lease between the landlord, who is an
unaffiliated third party, and an affiliated company PJS Trading, Corp., a New
York corporation ("PJS") owned by Dr. Stahl formed for the express purpose of
entering into the Lease. The Company occupies these premises under an oral
agreement with PJS and Dr. Stahl whereby the Company has agreed to discharge all
of the Lease obligations with the landlord. The annual lease payment under the
new lease starts at approximately $77,300 per year and increases to $80,000 in
the fifth year with additional increases for real estate taxes over the Lease
Term. Neither PJS nor Dr. Stahl derives any profit from the Lease nor will they
during the balance of the Lease Term. Management of the Company believes the
current facility is adequate for its current operations. Effective December 1,
2004, the Company has subleased for a one year period approximately 2,000 square
feet of the warehouse space at approximately $30,000 per year. Rental expense
net of subleases was $22,290 and $26,156 for the six month periods ended March
31, 2005 and 2004, respectively.
Future minimum lease payments are as follows:
For the years ended September 30,
2005 $ 38,650
2006 70,571
2007 71,225
2008 75,825
2009 79,405
After 2009 13,337
---------------
Total $ 349,013
---------------
Note 7 - COMMITMENTS AND CONTINGENCIES
Litigation
On or about July 7, 2004, APO Health, Inc. was served with process in a suit
commenced by The Proctor & Gamble Company ("P&G") in the US District Court for
the Eastern District of New York, against it
8
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and a number of other parties. P&G claimed that APO, as well as others were
involved in the sale of Pantene and Head and Shoulders products which were not
manufactured by P&G. APO purchased several shipments of these products abroad
and unbeknownst to APO, some non P&G products were included in these shipments.
APO has cooperated with P&G as well as the Federal regulatory agencies and has
supplied P&G with all of its documentation in order to assist P&G in its efforts
to remove these products from the marketplace and to allow it to trace back the
source of these improper products. The lawsuit is seeking, among other relief, a
request for a temporary and permanent injunction from selling such products. The
Company continues to cooperate with and assist the Federal Drug Administration
("FDA") in its inquiry and has undertaken a voluntary recall of these products.
As a result of APO's continuing cooperation with P&G and the FDA and its lack of
knowing culpability, its counsel believes that this proceeding will terminate
without any adverse consequence to the Company.
On or about December 3, 2004, APO Health, Inc. and Dr. Jan Stahl were served
with process in a suit commenced by Alcoa, Inc. (Alcoa) in the US District Court
for the Eastern District of New York, against it and a number of other parties.
Alcoa claimed that APO, as well as others were involved in the sale of products
which were not manufactured by Alcoa. APO purchased several shipments of these
products abroad and unbeknownst to APO, some non Alcoa products were included in
these shipments. APO is cooperating with Alcoa as well as the Federal regulatory
agencies and is supplying Alcoa with all of its documentation in order to assist
Alcoa in its efforts to remove these products from the marketplace and to allow
it to trace back the source of these improper products. The lawsuit is seeking,
among other relief, a request for a temporary and permanent injunction from
selling such products. The Company continues to cooperate with and assist the
FDA in its inquiry and has undertaken a voluntary recall of these products. As a
result of APO's continuing cooperation with Alcoa and the FDA and its lack of
knowing culpability, its counsel believes that this proceeding will terminate
without any adverse consequence to the Company.
Employment Agreement
Effective October 1, 2001, the Company has entered into a three-year employment
agreement with its chief executive officer that provides for a minimum annual
salary of $250,000 with incentives based on the Company's attainment of
specified levels of sales and earnings as defined in the agreement. The
employment agreement expired on September 30, 2004, and shall be automatically
renewed for successive periods of one year unless either party gives written
notice to terminate the agreement.
Product Liability
Certain of the Company's products and proposed products will be utilized in
medical procedures where the Company could be subject to claims from injuries
resulting from use of the Company's products. Recent developments in the
insurance industry have reduced the availability and increased the cost of
liability insurance coverage. At the present time, the Company is self-insured
for product liability claims.
Note 8 - CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at various financial institutions. At times,
such balances exceed the insured limits of the financial institution. The
Company has not experienced any losses in such accounts and does not believe it
is exposed to any significant credit risk on cash balances. As of March 31,
2005, the Company had $310,987 on deposit, in excess of the $100,000 in each
bank, which is insured under federal law.
Note 9 - SUBSEQUENT EVENT
Subsequent to March 31, 2005, the Chief Executive Officer of the Company
converted $50,000 of deferred compensation into common stock.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. This
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact made in this report are forward looking. In particular, the
statements herein regarding industry prospects and future results of operations
or financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. The
Company's actual results may differ significantly from management's
expectations.
Results of Operations
Revenue for the three months ended March 31, 2005 was $3,893,623, a
decrease of $9,965,920 or 71.9%, compared to the three months ended March 31,
2004. Revenue for the six months ended March 31, 2005 was $8,606,580, a decrease
of $12,636,950, or 59.5%, compared to the six months ended March 31, 2004. The
Company lost two of its largest wholesale customers which totaled approximately
$2,500,000 during the six month period ended March 31, 2005 due to the Alcoa and
Proctor & Gamble litigation. In addition, revenue was reduced by approximately
$7,800,000 which is attributable to a reduction in the sale of health, beauty
aids and other pharmaceutical products acquired from European vendors as margins
on these products decreased due to the decline in the value of the U.S. Dollar
against both the Euro and the British Pound. Where product was available for
sale but the margins were such that the Company would not be able to generate a
profit, the Company declined to sell those products.
As a result of the decrease in wholesale revenue, cost of goods sold
associated with those sales also declined proportionately. Cost of sales for the
three months ended March 31, 2005 was $3,443,829, a decrease of $9,811,374, or
74.0% compared to the three months ended March 31, 2004. The cost of sales for
the six months ended March 31, 2005 was $7,769,390, a decrease of $12,232,629,
or 61.2%, compared to the six months ended March 31, 2004.
Gross profit for the three months ended March 31, 2005 was $449,794
compared to $609,340 for the three months ended March 31, 2004. The gross profit
for the six months ended March 31, 2005 was $837,190 compared to $1,241,511 for
the six months ended March 31, 2004. Gross profit as a percentage of sales was
11.6% for the three months ended March 31, 2005 compared to 4.4% for the three
months ended March 31, 2004. Gross profit as a percentage of sales was 9.7% for
the six months ended March 31, 2005 compared to 5.8% for the six months ended
March 31, 2004. The increased in gross profit as a percentage of sales is a
result of the Company's change in strategy away from selling very low gross
profit items. The Company is in the process of preparing a new medical catalogue
for medical supplies. It anticipates that this new catalogue will aid in the
increase of the sale of medical supplies which have higher gross profit margins
than many of the other products and increase the overall gross profit margin of
the Company.
10
Selling expenses for the three months ended March 31, 2005 were $89,718, a
decrease of $121,048, or 57.4%, compared to selling expenses of $210,766 for the
three months ended March 31, 2004. Selling expenses for the six months ended
March 31, 2005 were $212,929, a decrease of $161,682, or 43.2%, compared to
$374,611 for the six months ended March 31, 2004. As a direct relationship with
the decrease in wholesale revenue, the Company reduced costs associated with
that revenue as follows: freight costs decreased by $45,986, commissions
decreased by $58,206, and advertising and related costs decreased by
approximately $29,687. Other selling costs decreased by approximately $27,803
Advertising costs will increase when the Company completes and distributes its
new medical supply catalogue.
General and administrative expenses for the three months ended March 31,
2005 were $419,443 compared to general and administrative expenses of $420,168
for the three months ended March 31, 2004. General and administrative expenses
for the six months ended March 31, 2005 were $796,400 an increase of $36,401 or
4.2% compared to the six months ended March 31, 2004. There were three
categories where general and administrative expenses increased from the six
months ended March 31, 2004. Bad debt expenses increased by $4,004 as additional
reserves were taken due to write off of receivables against the allowance of
approximately $121,000 with an increase in the reserve of $125,000, consulting
increased by $58,000 (the consulting agreement ended in January 2004) and legal
expenses related to the Alcoa and Proctor & Gamble litigation was approximately
$68,000. These three categories accounted for increases of $160,004.
Compensation and related employee expenses decreased by $59,244 as the Company
reduced the number of full time personnel by two persons. Other professional
fees decreased by approximately $22,000 and bank fees decreased by approximately
$15,000 as the Company reduced the availability on the line of credit. All other
general and administrative expenses decreased by approximately $30,000.
Interest expense for the three months ended March 31, 2005 was $13,648
compared to interest expense of $27,332 for the three months ended March 31,
2004. Interest expense for the six months ended March 31, 2005 was $27,554, a
decrease of $22,508 from the six month period ended March 31, 2004. The Company
has reduced the average amount of borrowing on its line of credit with Rosenthal
& Rosenthal, Inc. by approximately 50%.
Financial Condition, Liquidity and Capital Resources
As of March 31, 2005, The Company had net working capital of $280,137, a
decrease of $116,625 from September 30, 2004 as a result of the net loss during
the period. At March 31, 2005, the Company had a $500,000 credit facility of
which approximately $205,000 not being used.
Exclusive of the increase in bad debt expense, legal expenses related to
the Alcoa and Proctor & Gamble litigations and the expiration of a one year
consulting agreement in January 2004, the Company reduced selling, general and
administrative expenses by approximately $290,000 during the six months ended
March 31, 2005. +The Company has also increased the gross profit margin from
5.8% to 9.7%.
Based upon the above factors, the Company believes that it has sufficient
funds for operations for the next fiscal year.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are
likely to have a current or future effect on the Company's financial condition,
revenues or expenses, results of operations or capital resources.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Exchange Rate Risk. The products distributed by the Company are, for the
most part, manufactured by third parties in the United States, the Far East,
Mexico and Canada. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. The Company has virtually eliminated its
purchases from Europe as the cost of products have increased substantially as
the value of the U.S. Dollar has declined substantially against both the Euro
and the British Pound.
Credit Risk. The Company maintains cash balances at various financial
institutions. At times, such balances exceed the insured limits of the financial
institution. To date, the Company has not experienced any losses in such
accounts. As of March 31,2005, the Company had $310,987 on deposit, in excess of
the $100,000 in each bank, which is insured under federal law.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company conducted
an evaluation, under the supervision and with the participation of its principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Exchange Act). Based upon this evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms. There was no change in
the Company's internal controls or in other factors that could affect these
controls during the Company's last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On or about July 7, 2004, a suit was commenced by the Proctor & Gamble
Company ("P&G") in the United States District Court for the Eastern District of
New York, naming APO Health, Inc. [(New York) "APO-NY"], the Company's
subsidiary, together with others as parties defendant. P&G claims that APO-NY as
well as others were involved in the sale of counterfeit Head and Shoulders and
Pantene products. APO-NY denies any improper conduct nor involvement in
importing of counterfeit products; no documentation has been produced to date,
indicating that any of the Pantene or Head and Shoulders products which APO-NY
imported were other than genuine. The Company has been actively defending
against this claim while cooperating with both P&G as well as the federal
regulatory agencies and has supplied P&G with all of its documentation in order
to assist P&G in its efforts to remove any counterfeit products from the
marketplace. This lawsuit is seeking, among other relief, a request for a
permanent injunction from selling counterfeit Pantene and Head and Shoulders
products. The suit also seeks damages.
On or about December 3, 2004, APO-NY as well as Dr. Jan Stahl, the
Company's President, were served with process in a suit by Alcoa, Inc.,
("Alcoa"), also in the United States District Court for the Eastern District of
New York. In that suit, Alcoa alleges that APO-NY as well as others imported and
sold counterfeit Reynolds Wrap Aluminum foil. The Company and Dr. Stahl have
denied these claims and are actively defending against these charges. This suit
seeks, among other relief, a request for a permanent injunction as well as
damages. APO has not received any documentation which would show that the
Reynolds Wrap which it purchased was not genuine. APO and Dr. Stahl are actively
defending this action.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibit
Number Description
- --------- ----------------------------------------------------------------------
31.1 Certification by Chief Executive Officer and Chief Financial Officer,
required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act,
promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer and Chief Financial Officer,
required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and
Section 1350 of Chapter 63 of Title 18 of the United States Code,
promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APO HEALTH, INC.
Date: May 23, 2005 By: /s/ Jan Stahl
--------------
Dr. Jan Stahl, Chairman
Chief Executive Officer, Principal
Financial Officer, Principal Accounting
Officer and Secretary
14