UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended September 30, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number ______________________
APO HEALTH, INC.
(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 Rd. Oceanside, New York 11575
(Address of principal executive offices) (Zip Code)
(800) 365-2839
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.0002 Per Share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. |_|
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, if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2) of the Act. Yes |_| No |X|
[COVER CONTINUES ON FOLLOWING PAGE]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity, as of the last business day of the registrant's most recently
completed second fiscal quarter was $789,376.
The number of shares outstanding of each of the registrant's classes of common
stock as of December 23, 2005 was 42,387,712 shares.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
APO HEALTH, INC.
FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
Page
PART I
Item 1. Business..................................................................................... 1
Item 1A. Risk Factors................................................................................. 3
Item 1B. Unresolved Staff Comments.................................................................... 6
Item 2. Properties................................................................................... 6
Item 3. Legal Proceedings............................................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 7
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.................................................... 7
Item 6. Selected Financial Data...................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 12
Item 8. Financial Statements and Supplementary Data.................................................. 12
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure......... 12
Item 9A. Controls and Procedures...................................................................... 12
Item 9B. Other Information............................................................................ 12
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 12
Item 11. Executive Compensation....................................................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters................................................................. 15
Item 13. Certain Relationship and Related Transactions................................................ 15
Item 14. Principal Accounting Fees and Services....................................................... 15
PART IV
Item 15. Exhibits, Financial Statement Schedules...................................................... 16
SIGNATURES................................................................................................. 17
PART I
ITEM 1 -BUSINESS
History
APO Health, Inc., a Nevada corporation (the "Company") was formed in 1997
as Dom Caribe, Ltd. On July 1, 1998, the Company changed its name to Caribbean
Ventures, Inc., and then to Internetfinancialcorp.com, Inc. on February 11,
2000.
Pursuant to a Tax-Free Reorganization Agreement effective June 13, 2001,
the Company acquired 3,046,300 of the 3,209,563 outstanding shares of common
stock of APO Health, Inc., a New York corporation ("APO New York"), which
represented approximately 91% of the then outstanding share of common stock of
APO New York. The Company subsequently became the sole owner and operator of the
business and properties of APO New York and in connection therewith the Company
changed its name to APO Health, Inc.
Business of the Company
The present operations of the Company through its subsidiaries, APO New
York and Universal Medical Distributors, Inc., a New York corporation
("Universal"), consist of distributing and supplying disposable medical, dental,
veterinary supplies, health and beauty aids, and pharmaceuticals. These products
include medical and dental disposable items such as syringes, gauze, gowns,
facemasks and instruments. Throughout the remainder of this report, references
to the "Company" refer to APO Health, Inc., a Nevada corporation, together with
its subsidiaries APO New York and Universal.
Management has elected to maintain its low margin wholesale business and at
the same time increase its market share in school, retail medical and dental
areas. The current distribution of revenue is 87% from wholesale accounts and
13% from retail accounts.
Products and Services
Currently, the Company distributes approximately 2,000 different products.
New products are constantly added as the needs of the Company's customers
change. The Company obtains its products from vendors throughout the world and
does not manufacture any products except for its emergency dental kits. Although
the Company does not have any contractual arrangements with suppliers, the
Company believes that there are adequate alternative suppliers for any product
it sells.
Sales and Marketing
The Company's products are sold directly by Company employees, through mail
order, and by one outside, independent sales representative. The Company's sales
organization presently consists of five persons, including Dr. Stahl, the
Company's Chief Executive Officer, who oversees a combination of direct
salespersons and the one independent sales representative.
The Company's marketing approach attempts to capitalize on its ability to
procure products throughout the world at favorable prices and to resell them to
its customers.
Potential Impact of Changing Economic Factors in the Health Care Markets
The health care industry has been typified in recent years by strict cost
containment measures imposed by federal and state governments, private insurers
and other "third party" payers of medical costs. In response to these pressures,
virtually all segments of the health care market have become extremely cost
sensitive and in many cases hospitals and other health care providers have
become affiliated with purchasing consortiums, which obtain large quantities of
products at the lowest possible cost. These factors in combination have had an
adverse impact upon smaller suppliers and manufacturers, such as the Company,
which are either unable to supply the large quantities sought by the purchasing
consortiums or which are unable to respond to the need for lower product
pricing. Although management believes that its planned expansion program will
enable it to meet the demand for large quantity orders, and despite management's
belief that the dramatic increased demand for safety oriented products, such as
the disposable products offered by the Company, will offset these factors, there
can be no assurance that the Company will be able to overcome the negative
impact of these conditions in the health care marketplace.
1
Potential Impact of FDA and Government Regulation
Some of the Company's products may be regulated as medical devices by the
U.S. Food and Drug Administration (the "FDA") pursuant to the Federal Food and
Drug Cosmetics Act and are, or may be, subject to regulation by other federal
and state governmental agencies. The FDA has comprehensive authority to regulate
the development, production, distribution and promotion of medical devices.
Furthermore, certain states impose additional requirements on the distribution
of medical devices. The FDA may require pre-market approval of some of the
Company's proposed products, requiring extensive testing and a lengthy review
process. The cost of complying with present and future regulations may be
significant. Furthermore, the regulatory approval process and attendant costs
may delay or prevent the marketing of products developed by the Company in the
future. The Mandatory Device Reporting regulation obligates manufacturers,
including distributors such as the Company, to provide information to the FDA on
injuries alleged to have been associated with the use of a product or certain
product failures which could cause injury. The FDA is empowered to take action
against manufacturers of regulated products including both civil and criminal
remedies, and may also prohibit or suspend the marketing of products if
circumstances so warrant. Any such action by the FDA could result in a
disruption of the Company's operations for an undetermined time.
Product Liability: Cost and Availability of Insurance
Providers of medical products to hospitals and other health care
institutions may encounter liability for damages to patients in the event that
their products prove to be defective. Certain of the Company's products and
proposed products will be utilized in medical procedures where the Company could
be subject to claims for injuries alleged to have resulted from the use of its
products. Recent developments in the insurance industry have reduced the
availability and increased the cost of liability insurance coverage. At present,
the Company has no product liability insurance.
Lack of Patent Protection
At present, the Company does not rely upon patent protection for any of its
products and such protection is not believed to be essential by management
because of the character of its products. Furthermore, there is little
likelihood that the Company will develop patentable products or processes in the
foreseeable future. In the absence of such protection, the Company will
primarily rely upon trade secrets and proprietary techniques, where applicable,
to attain or maintain any commercial advantage. There is no assurance that
competitors will not independently develop and market, or obtain patent
protection for products similar to those designed or produced by the Company,
and thus negate any advantage of the Company with respect to any such products.
Even if patent protection becomes available to the Company, there can be no
assurance that such protection will be commercially beneficial.
Competition
The medical, dental and veterinary products supply business is intensely
competitive. At present, the Company estimates that there are over 40 companies
whose products compete with many of the Company's present and proposed products.
These companies range from major multinational companies to enterprises that are
smaller in size than the Company. The Company's present and prospective
competitors also include the numerous manufacturers and suppliers of reusable
medical products and manufacturers of raw materials used by the Company. Many of
the Company's competitors have far greater financial resources, larger staffs,
and more established market recognition in both the domestic and international
markets than the Company.
Dependence Upon Third Party Manufacturers/Suppliers
The Company does not directly manufacture any of the products it presently
sells. 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. In general, the Company does not have long-term contracts with its
manufacturers. Although the Company believes alternative sources for virtually
all of its products are readily available, there can be no assurance that the
available supply from such alternative sources would be adequate to meet the
demand for production that could result from any significant disruption in the
current manufacturers and suppliers of the Company's products.
Foreign Manufacturing
Foreign manufacturing is subject to a number of risks, including
transportation delays and interruptions, political and economic disruptions, the
imposition of tariffs and similar import/export controls and changes in
governmental policies. Although, to date, the Company has not experienced any
material adverse effects due to such risks, there can be no assurance that such
events will not occur in the future with the result of possible increases in
product costs and/or delays in product delivery which would, in all likelihood,
result in the loss of revenues and goodwill by the Company.
2
Employees
The Company, including its two subsidiaries, APO New York and Universal,
employs a total of nine persons: two executive personnel; three sales persons;
three clerical and administrative persons; and one warehouse employee. The
Company's employees are not represented by any collective bargaining
organization. The Company believes its relationship with its employees is good.
ITEM 1A- RISK FACTORS
The Company's business involves a high degree of risk. Potential investors
should carefully consider the risks and uncertainties described below and the
other information in this report before deciding whether to invest in the
Company's securities. Each of the following risks could materially and adversely
affect the Company's business, financial condition, and results of operations.
This could cause the trading price of the Company's common stock to decline,
with the loss of part or all of your investment.
THE COMPANY'S FINANCIAL STATUS CREATES SUBSTANTIAL DOUBT WHETHER THE COMPANY
WILL CONTINUE AS A GOING CONCERN FOR MORE THAN 12 MONTHS FROM THE DATE OF THIS
REPORT. IF THE COMPANY DOES NOT CONTINUE AS A GOING CONCERN, INVESTORS WILL LOSE
THEIR ENTIRE INVESTMENT.
The Company reported net losses totaling $663,837, $1,048,828 and $517,526
for the fiscal years ended September 30, 2005, 2004 and 2003, respectively. As
of September 30, 2005 the Company had a stockholders deficit of $136,571 and a
working capital deficit of $146,062. Adverse economic conditions have limited
the ability of the Company to market its products at amounts sufficient to
recover its operating and administrative costs. The Company is in violation of
the tangible net worth covenant of its credit facility with Rosenthal &
Rosenthal, Inc. (See Note 4 to the accompanying financial statements). As
further described under Item 3 of this report, the Company is a defendant in two
lawsuits commenced by The Proctor & Gamble Company and Alcoa, Inc., based on the
sale of products of those two companies, which unbeknownst to the Company were
counterfeit products. In view of these matters, realization of a major portion
of the assets in the accompanying balance sheet is dependent upon the Company's
ability to meet its financing requirements, and the success of its operations.
Management believes that actions presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern. While the Company believes it has sufficient
capital resources to fund operations for the next 12 months, the Company may
require additional capital to continue operations beyond such period. The
Company may raise additional working capital either through private placements,
public offerings and/or bank financing. There are no assurances that the Company
will be able to achieve a level of revenues adequate to generate sufficient cash
flow from operations or obtain additional financing through private placements,
public offerings and/or bank financing necessary to support its working capital
requirements. To the extent that funds generated from any private placements,
public offerings and/or bank financing are insufficient, the Company will have
to raise additional working capital. No assurance can be given that additional
financing will be available, or if available, will be on acceptable terms. If
adequate working capital is not available the Company will be forced to
discontinue operations, which would cause investors to lose the entire amount of
their investment. In the event the Company is forced to discontinue operations,
it may divest itself of its subsidiaries APO New York and Universal and attempt
to locate and negotiate with another company for the purpose of a business
combination of the two companies in order to obtain another business opportunity
for the Company's shareholders.
THE COMPANY IS A DEFENDANT IN TWO LITIGATION PROCEEDINGS, WHICH HAS CAUSED THE
COMPANY TO LOSE CUSTOMERS RESULTING IN A SIGNIFICANT LOSS OF REVENUE. THESE
PROCEEDINGS MAY CAUSE THE COMPANY TO LOSE OTHER CUSTOMERS WHICH WOULD FURTHER
WORSEN THE COMPANY'S FINANCIAL CONDITION AND COULD FORCE THE COMPANY TO
DISCONTINUE OPERATIONS.
As further described under Item 3 of this report, the Company is a
defendant in two lawsuits commenced by The Proctor & Gamble Company ("P&G") and
Alcoa, Inc. ("Alcoa"), based on the sale of products of those two companies,
which unbeknownst to the Company were counterfeit products. The Company
purchased several shipments of products abroad and unbeknownst to the Company,
some non-P&G and non-Alcoa products were included in these shipments. The
Company is cooperating with P&G and Alcoa as well as the federal regulatory
agencies and is supplying P&G and Alcoa with all of its documentation in order
to assist P&G and Alcoa in their efforts to remove these products from the
marketplace and to allow them to trace back the source of these improper
products. The Company lost three wholesale customers due to these litigation
proceedings resulting in reduced revenue of approximately $4,250,000 during the
fiscal year ended September 30, 2005. Although the Company believes it has
meritorious defenses and is vigorously defending its position in these
proceedings, the litigation proceedings may cause the Company to lose other
customers which would further worsen the Company's financial condition and could
force the Company to discontinue operations.
3
THE COMPANY MAY INCUR MATERIAL PRODUCT LIABILITY COSTS.
Providers of medical products to hospitals and other health care
institutions may encounter liability for damages to patients in the event that
their products prove to be defective. Certain of the Company's products and
proposed products will be utilized in medical procedures where the Company could
be subject to claims for such injuries resulting from the use of its products.
All of the products the Company sells are produced by third-party manufacturers.
As a distributor of products manufactured by third parties, the Company may be
liable for various product liability claims for products the Company does not
manufacture even though the Company has no control over the manufacturing
procedures used in connection with the production of these third-party products.
At present, the Company has no product liability insurance.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS MAY IMPOSE ADDITIONAL COSTS, WHICH MAY
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Some of the Company's products may be regulated as medical devices by the
U.S. Food and Drug Administration (the "FDA") pursuant to the federal Food and
Drug Cosmetic Act and are, or may be, subject to regulation by other federal and
state governmental agencies. The FDA has comprehensive authority to regulate the
development, production, distribution and promotion of medical devices.
Furthermore, certain states impose additional requirements on the distribution
of medical devices. The FDA may require pre-market approval of some of the
Company's proposed products, requiring extensive testing and a lengthy review
process. The cost of complying with present and future regulations may be
significant. Furthermore, the regulatory approval process and attendant costs
may delay or prevent the marketing of products developed by the Company in the
future. The Mandatory Device Reporting regulation obligates manufactures
including, in some cases, distributors such as the Company, to provide
information to the FDA on injuries alleged to have been associated with the use
of a product or certain products failures which could cause injury. The FDA is
empowered to take action against manufacturers of regulated products including
both civil and criminal remedies, and may also prohibit or suspend the marketing
of products if circumstances so warrant. Any such action by the FDA could result
in a disruption of the Company's operations for an undetermined time. Compliance
with any of these laws and regulations may impose additional costs on the
Company, which may negatively affect the Company's financial condition.
THE DENTAL, MEDICAL AND VETERINARY PRODUCTS SUPPLY BUSINESSES ARE INTENSELY
COMPETITIVE. THE COMPANY HAS MANY WELL-ESTABLISHED COMPETITORS WITH
SUBSTANTIALLY GREATER FINANCIAL AND OTHER RESOURCES THAN THE COMPANY. THESE
FACTORS MAKE IT DIFFICULT FOR THE COMPANY TO COMPETE IN ITS INDUSTRY AND MAY
ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS.
The medical, dental and veterinary products supply business is intensely
competitive. At present, the Company estimates that there are over 40 companies
whose products compete with many of the Company's present and proposed products.
These companies range from major multinational companies to enterprises that are
smaller in size and financial ability than the Company. The Company's present
and prospective competitors also include the numerous manufacturers and
suppliers of reusable medical products and manufacturers of raw materials used
by the Company. Many of the Company's competitors have far greater financial
resources, larger staffs, and more established market recognition in both the
domestic and international markets than the Company. These factors make it
difficult for the Company to compete in its industry and may adversely affect
the Company's results of operations.
IF THE COMPANY'S SUPPLIERS ARE UNABLE TO DELIVER PRODUCT, THE COMPANY'S REVENUES
AND ULTIMATELY PROFITS WILL BE REDUCED.
The Company is highly dependent on third party vendors to manufacture and
distribute its products. The Company does not directly manufacture any of the
products it presently sells. 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. In general, the Company does not have long-term contracts
with its manufacturers. Although the Company believes alternative sources for
virtually all of its products are readily available, there can be no assurance
that the available supply from such alternative sources would be adequate to
meet the increased demand for production that would most likely result from any
significant disruption in the Company's traditional manufacturers and suppliers.
If the Company's suppliers are unable to deliver product, the Company's revenues
and ultimately profits will be reduced.
4
THE COMPANY IS SUBJECT TO RISKS SPECIFIC TO FOREIGN MANUFACTURING WHICH COULD
CAUSE INCREASES IN PRODUCT COSTS AND DELAYS IN PRODUCT DELIVERY WHICH WOULD
RESULT IN LOSS OF REVENUES AND GOODWILL.
Foreign manufacturing is subject to a number of risks, including
transportation delays and interruptions, political and economic disruptions, the
imposition of tariffs and similar import/export controls and changes in
governmental policies. Although, to date, the Company has not experienced any
material adverse effects due to such risks, there can be no assurance that such
events will not occur in the future with the result of possible increases in
product costs and/or delays in product delivery which would, in all likelihood,
result in the loss of revenues and goodwill by the Company.
THE LOSS OF THE SERVICES OF THE COMPANY'S CHIEF EXECUTIVE OFFICER, DR. JAN
STAHL, COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
The Company's success depends to a large degree on the skills of Dr. Jan
Stahl, who is presently one of two executive officers. The other executive
officer is Kenneth Levanthal who serves as the Company's Corporate Secretary.
The loss of Dr. Stahl's services could have a materially adverse effect upon the
Company's ability to successfully carry on its business. Furthermore, the
Company's operations require the services of additional skilled personnel. There
can be no assurance that the Company will be able to attract persons with the
requisite skills and training to meet the Company's needs or, even if suitable
persons are found that they will be available on terms acceptable to the
Company.
THE COMPANY'S HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE
FOR THE COMPANY'S COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER,
THE LIMITED MARKET FOR THE COMPANY'S COMMON STOCK MAKES THE STOCK PRICE MORE
VOLATILE. THIS MAY MAKE IT DIFFICULT FOR YOU TO SELL THE COMPANY'S COMMON STOCK
FOR A POSITIVE RETURN ON YOUR INVESTMENT.
The public market for the Company's common stock has historically been very
volatile. During the past two fiscal years ended September 30, 2005 and the
quarter ended December 31, 2005, the market price for the Company's common stock
has ranged from $0.01 to $0.18 (See Item 5 of this report). Any future market
price for the Company's common stock is likely to continue to be very volatile.
This price volatility may make it more difficult for you to sell shares when you
want at prices you find attractive. The Company's litigation proceedings with
The Proctor & Gamble Company and Alcoa, Inc. may have contributed to the
volatility in the Company's stock price. In addition, the stock market in
general has experienced extreme price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of companies.
Broad market factors and the investing public's negative perception of the
Company's business may reduce the Company's stock price, regardless of the
Company's operating performance. Further, the market for the Company's common
stock is limited and the Company cannot assure you that a larger market will
ever be developed or maintained. As of December 13, 2005, the average daily
trading volume of the Company's common stock over the past three months was
approximately 25,689 shares. The last reported sales price for the Company's
common stock as of December 13, 2005, was $0.015 per share. Market fluctuations
and volatility, as well as general economic, market and political conditions,
could reduce the market price of the Company's common stock. As a result, this
may make it difficult or impossible for you to sell the Company's common stock
for a positive return on your investment.
THE COMPANY'S COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC,
WHICH MAKES TRANSACTIONS IN THE COMPANY'S COMMON STOCK CUMBERSOME AND MAY REDUCE
THE VALUE OF AN INVESTMENT IN THE COMPANY.
The Securities and Exchange Commission has adopted Rule 3a51-1 which
establishes the definition of a "penny stock," for the purposes relevant to the
Company, as any equity security that has a market price of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, Rule
15g-9 requires:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of the
person; and
o make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
5
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the SEC relating to the penny stock
market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability
determination; and
o that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of the Company's common stock and cause a decline in
the market value of the stock.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
ITEM 1B- UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
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 initially 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 the Company's Chief
Executive Officer, 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.
ITEM 3. LEGAL PROCEEDINGS
On or about July 7, 2004, the Company 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 and a number of other parties. P&G
claimed that the Company, as well as others were involved in the sale of Pantene
and Head and Shoulders products which were not manufactured by P&G. The Company
purchased several shipments of these products abroad and unbeknownst to the
Company, some non P&G products were included in these shipments. The Company 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.
Recently, the complaint was amended to include a number of additional parties,
including Dr. Jan Stahl, chief executive officer of the Company. The
co-defendants in the suit have asserted cross-complaints against the Company for
an unspecified amount to be determined at trial based upon their receipt and
subsequent resale of these products.
6
On or about December 3, 2004, the Company 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 the Company, as well as others were involved in the sale of
products which were not manufactured by Alcoa. The Company purchased several
shipments of these products abroad and unbeknownst to the Company, some non
Alcoa products were included in these shipments. The Company 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. . Recently, the
complaint was amended to include a number of additional parties, including Dr.
Jan Stahl, chief executive officer of the Company. The co-defendants in the suit
have asserted cross-complaints against the Company for an unspecified amount to
be determined at trial based upon their receipt and subsequent resale of these
products.
In both the P&G and Alcoa law suits, the plaintiffs have sought
compensatory damages in an amount to be proven at the time of trial. Each
plaintiff has also requested an award of punitive damages in the sum of
$10,000,000. At this time, outside counsel believes that the plaintiffs at trial
will be unable to sustain the burden of proof necessary for an award of punitive
damages. Outside counsel indicates that the litigation is in the early stages of
discovery and is unable to render their expert opinion. The Company believes it
has meritorious defenses and is vigorously defending its positions.
One of the Company's former customers, Allou Distributors Inc. has recently
filed for bankruptcy protection. The bankruptcy trustee is seeking the return of
$70,000 which he deems is a preferential distribution for payment of merchandise
sold to Allou Distributors Inc. The Company believes the claim is without merit
and will vigorously defend its position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no matter submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's common stock is currently quoted on the OTC Bulletin Board
under the symbol "APOA." The high and low prices of the common stock for the
quarterly periods of the two years ended September 30, 2005 are as follows:
Common Stock Prices
---------------------
Quarter Ended High Low
------------- ---- ---
December 31, 2003 $0.05 $0.04
March 31, 2004 $0.18 $0.05
June 30, 2004 $0.15 $0.09
September 30, 2004 $0.09 $0.05
December 31, 2004 $0.09 $0.04
March 31, 2005 $0.07 $0.03
June 30, 2005 $0.04 $0.02
September 30, 2005 $0.06 $0.02
December 31, 2005 $0.03 $0.01
As of December 23, 2005, there were approximately 1000 holders of record of
the Company's common stock.
Dividend Policy
The Company has not adopted any policy regarding the payment of dividends
on its common stock. The Company does not intend to pay any cash dividends on
its common stock in the foreseeable future. All cash resources are expected to
be invested in developing the Company's business. There are no restrictions that
materially limit the Company's ability to pay cash dividends.
Recent Sales of Unregistered Securities
On October 9, 2004 and November 10, 2004, the Company issued a total of
348,000 shares of common stock to professionals and consultants for services
rendered valued at $14,880. These issuances were exempt from registration
requirements under Section 4(2) of the Securities Act of 1933, as amended.
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. These issuances were exempt from registration
requirements under Section 4(2) of the Securities Act of 1933, as amended.
On April 1, 2005, the Company issued a total of 4,166,667 shares of
restricted common stock to Dr. Jan Stahl, CEO of the Company, as consideration
for $50,000 of deferred executive compensation. This issuance was exempt from
registration requirements under Section 4(2) of the Securities Act of 1933, as
amended.
During the fiscal year ended September 30, 2005, the Company issued a total
of 2,548,000 shares of common stock for consulting and professional services
valued at $64,880. These issuances were exempt from registration requirements
under Section 4(2) of the Securities Act of 1933, as amended.
7
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of and for each
of the years in the five year period ended September 30, 2005. Periods prior to
2002 have been restated to give effect for discontinued operations.
Statement of Operations Data:
Fiscal Years Ended September 30,
--------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ----- ----
Revenue $15,014,295 $35,918,887 $47,448,232 $ 31,998,836 $ 24,143,949
Gross Profit 1,243,500 1,163,017 1,978,024 2,198,162 2,524,717
Selling, General and
Administrative Expenses 1,858,361 2,658,149 2,323,949 2,515,907 2,303,284
Net Income (loss)
From continuing
operations (663,837) (1,048.828) (517,256) (247,521) (157,899)
Discontinued operations 291,498 35,839
Net Income (Loss) (663,837) (1,048,828) (517,256) 43,977 (122,060)
Earnings per common
From continuing operations $ (.02) $ (.03) $ (.02) $ (.01) $ (.01)
Discontinued operations - - $ .01 $ .00
Earnings per
Common Share $ (.02) $ (.03) $ (.02) $ .00 $ (.01)
Weighted Average
Shares Outstanding 39,166,845 34,338,680 27,003,847 23,864,383 21,532,814
Balance Sheet Data:
As of September 30,
----------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
----- ---- ----- ----- ----
Total Assets $1,360,620 $ 2,538,748 $ 3,698,086 $ 4,774,786 $ 4,115,102
Total Liabilities 1,497,191 2,126,362 2,475,222 3,334,602 2,888,626
Stockholders' Equity (136,571) 412,386 1,222,864 1,440,184 1,226,476
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements. All
statements other than statements of historical fact made in this annual 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
Comparison of Fiscal 2005 and 2004
Revenue for the year ended September 30, 2005 was $15,014,295 compared to
$35,918,887 for the year ended September 30, 2004. This was a decrease of
$20,904,592 or 58.2%. The decrease in revenue has been quantified into three
8
distinct categories described below. Sales in 2004 to customers that were either
no longer in business in 2005 or who were no longer buying from alternative
sources resulted in a decrease in revenue of $1,969,421. Revenue from customers
who are involved in the lawsuits with Proctor & Gamble Company and Alcoa were
$4,238,273 in 2004. These companies no longer purchase products from the
Company. In prior years, the Company purchased many different products which
were imported from both Canada and Europe. In 2004, the Company reduced the
amount of imports from those areas as the United States dollar decreased in
value against the Canadian dollar, British pound and the Euro. The value of the
Canadian dollar, British pound and the Euro continue to be strong compared to
the value of the United States dollar. Therefore, the Company has eliminated the
importation of many of those foreign products. The decrease in revenue from
those customers which had previously purchased these products from the Company
was $14,955,667 for the year ended September 30, 2005.
The cost of revenue for the year ended September 30, 2005 was $13,770,795
compared to $34,305,870 for the year ended September 30, 2004. This was a
decrease of $20,535,075 or 59.9%. The gross profit margin for the year ended
September 30, 2005 was 8.3% compared to 4.5% for the year ended September 30,
2004, which included a write-off equal to 1.3% for products which had to be
recalled and destroyed after it was determined that those products were
counterfeit. The increase in the gross profit margin is directly related in
percentage of sales coming from retail clients that have higher profit margins
than wholesale customers and the increase in profit margin of products sold to
wholesale customers.
Selling expense for the year ended September 30, 2005 was $410,526, a
decrease of $140,704 from the year ended September 30, 2004. The major decreases
in selling expenses were shipping costs which decreased by $100,168 and
commission expense which decreased by $76,687, both due to the decrease in sales
volume. Advertising and related expenses increased by $18,447 which included the
write-off of $59,061 of costs related to a sales catalogue which has been
abandoned. Travel and entertainment expense increased by approximately $16,000
during the year ended September 30, 2005 as the Company searched for new
customers to make up for the lost revenue created by the lawsuits, customers
that are no longer in business, and elimination of sales of products from Canada
and Europe.
General and administrative expense for the year ended September 30, 2005
were $1,447,835, a decrease of $659,084 from the year ended September 30, 2004.
The largest decrease was a reduction in bad debt expense of $555,291. In 2004,
the Company wrote-off advance for prepaid merchandise and increased the
allowance for bad debt expense for a total bad debt expense of $701,901. In
2005, the Company increased the allowance for doubtful accounts by $25,397 and
wrote off an additional $121,213 primarily related to the counterfeit products
sold in 2004. Compensation and related employment expenses decreased by
approximately $97,000 due to the reduction in the number of employees and
reduction in compensation of the two officers of the Company. Consulting expense
decreased by approximately $40,000 as a prior consulting contract expired and
was not renewed. Professional fees increased during the year ended September 30,
2005 by approximately $94,200. Legal expenses to defend the lawsuits by Proctor
& Gamble Company and Alcoa were approximately $85,000.
Interest expense for the year ended September 30, 2005 was $48,976, a
decrease of $47,475 from the year ended September 30, 2004 .The Company has a
financing agreement (see note 4 to the financial statements) which provides for
a maximum line of credit of $500,000 where collections are applied against the
line of credit on a daily basis and proceeds from the line of credit are only
taken when needed to pay down liabilities. In addition, due to the decline in
revenue and related accounts receivable, the Company's average borrowing under
the line of credit decreased by approximately 50%.
Comparison of Fiscal 2004 and 2003
Revenues for the year ended September 30, 2004 was $35,918,887 compared to
$47,448,232 for the year ended September 30, 2003. This was a decrease of
$11,529,345 or 24.3%. The decrease was entirely due to the decrease in sales of
products sold through the Company's wholesale division. The cost of products
that the Company had previously imported from both Canada and Europe increased
substantially as the United States dollar declined against the Canadian dollar,
British pound and the Euro. Because of the price increases in United States
dollar terms, the Company was not able to pass along its increased costs to the
wholesalers, and therefore, the Company reduced or eliminated its purchases on
those products. As a result, overall revenues for the Company declined. Retail
sales by the Company were stable from 2003 to 2004.
The Company is in the process of preparing a new catalogue of medical
supplies which will be distributed to schools, doctors and medical clinics. The
Company anticipates that the catalogue will be completed prior to December 2004,
and that it will be distributed in January 2005. The gross profit on products
included in the catalogue are expected to be from approximately 20% to 40% and
management expects the average margin to be approximately 25% on new sales from
the catalogue.
9
The cost of revenues for the year ended September 30, 2004, was $34,305,870
compared to $45,470,208 for the year ended September 30, 2003. This was a
decrease of $11,164,338 or 24.5%. Included in the cost of revenues was
approximately $475,000 for products the Company purchased and had to be recalled
and destroyed after it was determined that the products were counterfeit. The
gross profit margin for the year ended September 30, 2004, was 4.5% compared to
4.2% for the year ended September 30, 2003. The increase in profit margin is
directly related to the Company's decision to reduce purchases from Canada and
Europe where the Company would be unable to sell those products at a profit.
Selling expenses for the year ended September 30, 2004 were $551,230
compared to $576,250 for the year ended September 30, 2004, a decrease of
$25,020 or 4.3%. Commission expense increased from $72,390 to $133,128, an
increase of $63,738 representing sales generated by outside sources to augment
the internal sales force. Freight costs increased from $242,730 to $296,637, an
increase of $53,907 due to increases based on fuel surcharges. Advertising and
related costs were $79,575 for the year ended September 30, 2004, a decrease of
$103,126 from $182,701 for the year ended September 30, 2003. The Company
reduced spending in anticipation of the new catalogue it expects to be completed
in January 2005. Advertising and related costs are expected to increase by
approximately $75,000 in fiscal 2005. Travel and entertainment expense for the
year ended September 30, 2004, declined by $35,200 from the year ended September
30, 2003.
General and administrative expenses for the year ended September 30, 2004
were $2,106,919, an increase of $359,220 over the year ended September 30, 2003.
In the fourth quarter of the fiscal year ended September 30, 2004, the Company
recorded bad debt expense of $681,901 which included writing off advances and
increasing the allowance for doubtful accounts directly related to the
counterfeit products that the Company purchased and resold. Compensation
decreased by $185,165 in 2004 which was entirely attributable to the fact that
in 2003 there was a bonus of $156,732 to one of the officers of the Company. For
the year ended September 30, 2004 no bonuses were declared. In 2003, consulting
fees related to possible merger and acquisition activities were $250,200. In
2004, total consulting fees decreased to $102,100, a decrease of $148,000. These
two items accounted for the entire decrease in general and administrative
expenses excluding bad debt expense. All other items of general and
administrative expense exhibited minor increases or decreases.
There was a final settlement of litigation against the Company in January
2004, and as a result, the Company was reimbursed $92,755 by its insurance
carrier for all legal expenses it had previously expended.
Interest expense for the year ended September 30, 2004 was $96,451, an
increase of $3,985 from the year ended September 30, 2003 .The Company has a
financing agreement (see note 4 to the financial statements) which provides for
a maximum line of credit of $1,000,000 where collections are applied against the
line of credit on a daily basis and proceeds from the line of credit are only
taken when needed to pay down liabilities. As a result the average daily balance
outstanding on the line of credit increased slightly from the prior year. The
financing agreement allows the Company greater flexibility in its ability to
finance increased sales and additional inventory.
Financial Condition, Liquidity and Capital Resources
As of September 30, 2005, the Company had working capital deficit of
$146,062, a decrease of $542,824 from the Company's working capital at September
30, 2004. The Company's loss from continuing operations of $663,837 for the year
ended September 30, 2005 was funded by the decrease in working capital and
increase in cash flows from operations for the year ended September 30, 2005
which was $211,245. At September 30, 2005 the Company had available a $500,000
credit facility with Rosenthal & Rosenthal, Inc., of which $457,369 was
outstanding at September 30, 2005 (see Note 4 to the accompanying financial
statements). The credit facility is collateralized by substantially all of the
Company's assets and $500,000 of the facility is personally guaranteed by Dr.
Jan Stahl, Chief Executive Officer of the Company. Under terms of the credit
facility, the lender may call the loan if the Company is in violation of certain
restrictive covenants. At September 30, 2005, the Company is in violation of its
net worth and working capital covenants. Rosenthal & Rosenthal has not waived
the violations, and accordingly, the entire amount of the obligation is
callable. The credit facility matured on October 31, 2005 and has been extended
through December 31, 2005 under substantially the same terms as the original
agreement. The Company and the lender have agreed to continue the credit
facility on a month to month basis. The Company has requested an extension of
the credit facility through March 31, 2006.
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 $350,000 during the year ended
September 30, 2005. The Company has also increased its gross profit margin from
4.6% to 8.3%.
10
Adverse economic conditions have limited the ability of the Company to
market its products at amounts sufficient to recover its operating and
administrative costs. As a result, the Company incurred losses of $663,837,
$1,048,828 and 517,256 for the three years ended September 30, 2005, 2004 and
2003, respectively. The Company is in violation of the working capital and
tangible net worth covenants of its lending agreement which makes the obligation
callable (see Note 4 to the accompanying financial statements). As more fully
described in Item 3 of this report and Note 9 of the accompanying financial
statements, the Company is a co-defendant in two lawsuits with Proctor & Gamble
and Alcoa, involved in the sale of products of those two companies, which
unbeknownst to the Company, were counterfeit products. It is not possible to
predict at this time the ultimate outcome of the litigation or the extent, if
any, of the effect on the Company.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon the Company's ability to meet
its financing requirements, and the success of its operations. Management
believes that actions presently being taken to revise the Company's operating
and financial requirements provide the opportunity for the Company to continue
as a going concern. The financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going concern.
While the Company believes it has sufficient capital resources to fund
operations for the next 12 months, the Company may require additional capital to
continue operations beyond such period.
Off-Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements that are
reasonably likely to have a current or future effect on its financial condition,
revenues, and results of operations, liquidity or capital expenditures.
Contractual Obligations
As of September 30, 2005, the Company had the following contractual
obligations:
Payments due by period
-------------------------------------------
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
----- --------- --------- ------------------
Operating Lease Obligations $310,363 $70,571 $147,050 $92,742
Critical Accounting Policies
Cash and cash equivalents. For purposes of the statements of cash flows,
cash equivalents include all highly liquid investments with original maturities
of three month or less.
Revenue recognition occurs when products are shipped.
Advertising is expensed as incurred. For the years ended September 30,
2005, 2004 and 2003 advertising expense was $78,847, $25,730, $72,029,
respectively.
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 useful estimated life. The cost of maintenance
and repairs is expensed as incurred.
The Company follows Statement of Financial Accounting Standards No. 144,
Impairment of Long-lived Assets, by reviewing such assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
Shipping and handling is expensed as incurred. Shipping and handling is
included in selling expense was $196,469, $296,637, and $242,730 for the years
ended September 30, 2005, 2004 and 2003, respectively.
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.
Earnings Per Share- Basic net income per share has been calculated based on
the weighted average number of shares of common stock outstanding during the
period. Diluted net income per share is computed by dividing the net income by
the weighted average number of common shares outstanding plus potential dilutive
securities.
Reclassifications - Certain reclassifications of certain prior year amounts
were made to conform to the current year presentation.
11
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.
ITEM 7A - 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 September 30, 2005, the Company had $489,600 on deposit, in
excess of the $100,000 in each bank, which is insured under federal law.
Foreign Manufacturing - Foreign manufacturing is subject to a number of
risks, including transportation delays and interruptions, political and economic
disruptions, the imposition of tariffs and similar import/export controls and
changes in governmental policies. Although, to date, the Company has not
experienced any material adverse effects due to such risks, there can be no
assurance that such events will not occur in the future with the result of
possible increases in product costs and/or delays in product delivery which
would, in all likelihood, result in the loss of revenues and goodwill by the
Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by this Item is attached hereto at the
end of this report beginning on page F-1 and is hereby incorporated by
reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A - 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: (1) accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure; and (2)
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.
ITEM 9B - OTHER INFORMATION
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and business experience of the
executive officers and directors of the Company. All information is as of
December 23, 2005.
Name Age Position
- ------------------- --------- ---------------------------------------------
Dr. Jan Stahl 57 Chairman, Chief Executive Officer, Acting Chief
Financial Officer, Principal Accounting Officer,
Secretary, Director
Kenneth Leventhal 50 Secretary and Director
12
Dr. Jan Stahl is a New York State licensed dentist. Dr. Stahl founded APO
Health, the Company's wholly owned subsidiary, in 1987, and has been its
Chairman, Chief Executive Officer, Secretary and a Director since such time. Dr.
Stahl's primary responsibilities for the Company are in the area of sales and
marketing. Prior to founding the Company, Dr. Stahl was a practicing dentist in
the state of New York.
Kenneth Levanthal founded Universal Medical Distributors, Inc.
("Universal"), a subsidiary of the Company, in 1985 and has served as its
president since such time. Prior to founding Universal, Mr. Levanthal had been
employed as Executive Vice President of Medardo Corp., a division of Omnicare,
Inc., having been employed by Medardo Corp. since 1997, prior to its acquisition
by W.R. Grace & Co. (the parent company of Omnicare, Inc.).
Family Relationships
There are no family relationships between or among the Company's directors,
executive officers or persons nominated or charged by the Company to become
directors or executive officers.
Involvement in Legal Proceedings
During the past five years, none of the following occurred with respect to
the Company's directors or executive officers: (1) no petition under the federal
bankruptcy laws or any state insolvency law was filed by or against, or a
receiver, fiscal agent or similar officer was appointed by a court for the
business or property of such persons; (2) there has been no petition under the
federal bankruptcy laws or any state insolvency law filed by or against, or a
receiver, fiscal agent or similar officer appointed by a court for the business
or property of any partnership in which such persons were a general partner at
or within two years before the time of such filing, or any corporation or
business association of which such persons were executive officers at or within
two years before the time of such filing; (3) no such persons were convicted in
a criminal proceeding or are a named subject of a pending criminal proceeding
(excluding traffic violations and other minor offenses); (4) no such persons
were the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting their
involvement in any type of business practice, or in securities or banking or
other financial institution activities; and (5) no such persons were found by a
court of competent jurisdiction in a civil action by the Securities and Exchange
Commission or by the Commodity Futures Trading Commission to have violated any
federal or state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
Audit Committee Financial Expert
The Company does not have an audit committee financial expert (as defined
in Item 401 of Regulation S-K) serving on its Board of Directors. The Company
has not yet employed an audit committee financial expert on its Board due to the
inability to attract such a person.
Code of Ethics
The Company has adopted a Code of Ethics and Business Conduct that applies
to all of its officers, directors and employees. The Code of Ethics was filed as
Exhibit 14.1 to the Company's annual report on Form 10-K for the fiscal year
ended September 30, 2004. Upon request, the Company will provide to any person
without charge a copy of its Code of Ethics. Any such request should be made to
Attn: Dr. Jan Stahl, APO Health, Inc., at 3590 Oceanside Rd., Oceanside, New
York 11575. The Company's telephone number is (800) 365-2839. The Company is in
the process of building a section of its website at www.apohealth.com where its
Code of Ethics will be available to investors.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities to file with
the SEC initial reports of ownership and reports of change in ownership of
common stock and other equity securities of the Company. Officers, directors and
greater than ten percent stockholders are required by SEC regulations to furnish
13
the Company with copies of all Section 16(a) forms they file. Based solely on
the review of copies of such reports furnished to the Company and written
representations that no other reports were required, the Company believes that
during the fiscal year ended September 30, 2005, its executive officers,
directors and all persons who own more than ten percent of a registered class of
the Company's equity securities complied with all Section 16(a) filing
requirements.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation the Company has paid or that has accrued on behalf of the Company's
chief executive officer and other executive officers with annual compensation
exceeding $100,000 during the fiscal years ending September 30, 2005, 2004 and
2003.
Summary Compensation Table
Long-Term
Compensation
---------------------------- ----------
Annual Compensation Awards Payouts
------------------------- ----------------------------- -----------------------
Restricted Securities All
Other
Annual Under-lying LTIP Other
Name and Compen- Stock Options/ Payouts Compen-
Principal Position Year Salary ($) Bonus ($) sation ($) Award(s) ($) SARs (#) ($) sation ($)
- ------------------------------- -------- ----------- ------------- ----------- --------------- ------------ ---------- -------------
Jan Stahl, Chief Executive 2005 $231,128 $ 0 -0- -0- -0- -0- -0-
Officer (1) 2004 $250,000 $ 0 -0- -0- -0- -0- -0-
2003 $222,150 $156,723 (2) -0- 34,666 -0- -0- -0-
(1) It is noted that the figures listed as "salary" include both base salary and
earned commissions, but do not include annual bonus amounts, if any, which are
listed separately under the "bonus" column. (2) Dr. Stahl has waived his rights
to $180,000 of his bonus for the benefit of the Company.
Options Grants
The Company made no grants of stock options during fiscal year ended
September 30, 2005 to the named executive officer.
Option Exercises in Last Fiscal Year
The named executive officer did not exercise any stock options during the
fiscal year ended September 30, 2005.
Executive Employment Agreements
Dr. Jan Stahl had an employment agreement that expired on September 30,
2004. The agreement has been automatically extended for a period of one year.
Benefit Plans for Executive Officers and Directors
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 is authorized up to a maximum aggregate of 3,000,000 shares of common
stock available for any Bonus Compensation Warrants.
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. That issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
14
Board Compensation
The Company does not have any formal or informal arrangements or agreements
to compensate its directors for services they provide as members of the
Company's Board of Directors.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 23, 2005, certain
information regarding the beneficial ownership of the Company's common stock.
Number of Shares Owned Percentage
Name of Record and Beneficially Common Stock Outstanding (1)
---- -------------------------- ----------------------------
Dr. Jan Stahl
3141 Ann Street
Baldwin, NY 11510 15,279,179 36.05%
Kenneth Leventhal
24 Meadowbrook Road
Huntington Station, NY 11746 796,000 1.88%
All Directors and Officers
As a Group 16,075,179 37.93%
(1) Based upon a total of 42,387,712 shares outstanding as of December 23, 2005.
Securities Authorized for Issuance Under Equity Compensation Plans
As of September 30, 2005, there were no compensation plans of the Company
pursuant to which any of the Company's securities are issuable upon exercise of
outstanding options, warrants or other rights and the Company did not have any
compensation plan with securities remaining available for future issuance upon
exercise of options, warrants or other rights.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's offices are occupied by the Company 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. Jan Stahl. The
Company occupies the premises under an oral agreement with PJS and Dr Stahl
whereby the Company discharges all the obligations of the lease with the
landlord. Neither PJS nor Dr. Stahl derives any profit from the Lease nor will
they during the balance of the Lease Term. Management believes the terms of the
lease are at least as favorable as the Company could obtain from unrelated third
parties.
Except as set forth above, the Company has not entered into any transaction
during the last two years and it has not proposed any transaction to which the
Company was or is to be a party, in which any of the following persons had or is
to have a direct or indirect material interest:
- - Any director or executive officer of the Company;
- - Any nominee for election as a director;
- - Any security holder named in the "Security Ownership of Certain Beneficial
Owners and Management" section above; and
- - Any member of the immediate family (including spouse, parents, children,
siblings, and in-laws) of any such person.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit fees
The aggregate fees billed for professional services rendered by the
Company's principal accountants for the audit of the Company's financial
statements, for the reviews of the financial statements included in the
Company's annual report on Form 10-K, and for other services normally provided
in connection with statutory filings were $29,250 and $27,500 for the years
ended September 30, 2005 and 2004, respectively.
15
All Other Fees
The Company did not incur any fees for other professional services rendered
by its principal accountants during the years ended September 30, 2005 and 2004.
Audit Committee Pre-Approval Policies and Procedures
The Board of Directors acts as the audit committee, and consults with
respect to audit policy, choice of auditors, and approval of out of the ordinary
financial transactions.
PART IV
ITEM 15- EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial statements and financial statement schedules that have been omitted
are not required.
(a) The following documents are filed as part of this report.
Financial Statements Page
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets as of September 30, 2005 and 2004 F-2
Statements of Operations for the years ended
September 30, 2005, 2004, and 2003 F-3
Statements of Changes in Stockholders' Equity
For the years ended September 30, 2005, 2004 and 2003. F-4
Statements of Cash Flows for the years ended
September 30, 2005, 2004 and 2003 F-5
Notes to Consolidated Financial Statements F-6 - F-11
Schedule to Consolidated Financial Statements F-12
(b) Exhibits.
Exhibit Number
Description
- --------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation (incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission on
October 12, 2001)
3.2 Certificate of Amendment to Articles of Incorporation, changing name to
Interfinancialcorp.com, Inc. (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission on October 12,
2001)
3.3 Certificate of Amendment to Articles of Incorporation, changing name to APO
Health, Inc. (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on October 12, 2001)
3.4 By-laws of the Company (Incorporated by reference to the Company's
registration statement on Form 10 (File No. 000-30074) filed with the
Securities and Exchange Commission on February 19, 1999)
10.1 APO Health, Inc. 2005 Professional/Consultant Compensation Plan dated
February 23, 2005 (Incorporated by reference to the Company's registration
statement on Form S-8 (File No. 333-123141) filed with the Securities and
Exchange Commission on March 4, 2005)
10.2 APO Health, Inc. 2005(B) Professional/Consultant Compensation Plan dated
October 15, 2005 (Incorporated by reference to the Company's registration
statement on Form S-8 (File No. 333-129249) filed with the Securities and
Exchange Commission on October 26, 2005)
14.1 Code of Ethics and Business Conduct (Incorporated by reference to the
Company's annual report on Form 10-K for the fiscal year ended September
30, 2004, filed with the Securities and Exchange Commission on December 28,
2004)
21.1 List of Subsidiaries
31.1 Certification by Chief Executive Officer and Acting Chief Financial
Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1 Certification by Chief Executive Officer and Acting 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
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: January 13, 2006 By: /s/ Dr. Jan Stahl
----------------------------------------
Dr. Jan Stahl
Chairman, Chief Executive Officer, Acting
Chief Financial Officer and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Dr. Jan Stahl Chairman, Chief Executive Officer, January 13, 2006
- -------------------
Dr. Jan Stahl Acting Chief Financial Officer and
Principal Accounting Officer
/s/ Kenneth Levanthal Director and Secretary January 13, 2006
- -----------------------
Kenneth Leventhal
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders APO Health, Inc
Oceanside, New York
We have audited the accompanying consolidated balance sheets of APO Health,
Inc., and subsidiaries as of September 30, 2005 and 2004 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years ended September 30, 2005. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, the following conditions
raise substantial doubt about the Company's ability to continue as a going
concern. As discussed in Notes 1, 4 and 9, adverse economic conditions have
limited the ability of the Company to market its products at amounts sufficient
to recover its operation and administrative costs. As a result, the Company has
incurred substantial losses for the past three years. In addition, the Company
is in violation of its working capital and tangible net worth covenants in its
lending agreement and therefore, its obligation to the factor is callable. The
Company has pledged all of its assets as collateral for the obligations and if
called by factor, it would seriously impair the Company's ability to continue as
a going concern and to realize its investments in assets through future
successful operations. The Company is also the defendant in several lawsuits
alleging the sale of counterfeit products and the receipt of a deemed
preferential distribution in a bankruptcy proceeding. At present time, it is not
possible to predict the outcome, but any negative outcome would have a severe
affect on the Company.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of APO Health, Inc. and
subsidiaries as of September 30, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years ended September 30,
2005, in conformity with accounting principles generally accepted in the United
States.
Our audits were made to form an opinion on the basic financial statements taken
as a whole. The supplemental schedule listed in the index to the financial
statements and schedules are presented to comply with the rules and regulations
under the Securities and Exchange Act of 1934 and are not otherwise a required
part of the basic financial statements. The supplemental schedule for each of
the three years ended September 30, 2005, have been subjected to the auditing
procedures applied in the audits of the basic financial statements. In our
opinion, the supplemental schedule referred to above fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Linder & Linder
- -----------------------------
Linder & Linder
Certified Public Accountants
Dix Hills, New York
December 2, 2005
F-1
APO HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2005 and 2004
ASSETS
2005 2004
------------ ------------
Current Assets
Cash $ 634,161 $ 574,732
Accounts receivable, net of allowance for
doubtful accounts of $405,397 and $380,000 452,878 1,179,078
Inventory 228,008 583,040
Other current assets 36,082 186,274
------------ ------------
Total Current Assets 1,351,129 2,523,124
Property and Equipment, net of accumulated
Depreciation of $89,639 and $88,430 1,991 8,124
Deposits 7,500 7,500
------------- ------------
Total Assets $ 1,360,620 $ 2,538,748
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank notes payable $ 457,369 $ 609,185
Accounts payable 783,069 1,168,278
Accrued compensation 42,473 89,224
Customer deposits 214,280 259,675
------------ ------------
Total Current Liabilities 1,497,191 2,126,362
----------- ------------
Stockholders' Equity
Preferred stock, $.01 par value, 2,000,000
Shares authorized, 0 shares issued
Common stock, $.0002 par value, 125,000,000
Shares authorized, 42,387,712 and 35,673,045
Shares issued and outstanding 8,478 7,135
Paid in capital 2,271,845 2,158,308
Retained earnings (deficit) (2,416,894) (1,753,057)
------------- ------------
Total Stockholders' Equity (136,571) 412,386
------------- ------------
Total Liabilities and Stockholders' Equity $ 1,360,620 $ 2,538,748
============= ============
See Accompanying Auditor' Report and Notes to Financial Statements.
F-2
APO HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
2005 2004 2003
------------- -------------- --------------
Revenues $ 15,014,295 $ 35,918,887 $ 47,448,232
Cost of revenues 13,770,795 34,305,870 45,470,208
------------- ------------- --------------
Gross Margin 1,243,500 1,613,017 1,978,024
Operating Expenses
Selling 410,526 551,230 576,250
General and administrative 1,447,835 2,106,919 1,747,699
-------------- -------------- --------------
1,858,361 2,658,149 2,323,949
-------------- -------------- --------------
(Loss) from operations (614,861) (1,045,132) (345,925)
-------------- -------------- --------------
Other Income (Expenses)
Recovery of Litigation Costs - 92,755 -
Interest expense (48,976) (96,451) (92,466)
-------------- -------------- --------------
Total other expenses (48,976) (3,696) (92,466)
-------------- -------------- --------------
(Loss) before provision for
income taxes (663,837) (1,048,828) (438,371)
Provision for (recovery) of income tax - - 79,155
-------------- -------------- --------------
Net Income (Loss) $ (663,837) $ (1,048,828) $ (517,526)
============== ============= ==============
Earnings per common share and earnings
Per common share assuming dilution
Net income (loss)per common shares $ (.02) $ (.03) $ (.02)
============== ============== ==============
Weighted average common
Outstanding 39,166,845 34,338,680 27,003,847
============== ============== ==============
See Accompanying Auditors' Report and Notes to Financial Statements.
F-3
APO HEALTH, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Totals
------------ ----------- ------------ ----------- -----------
Balances
September 30, 2002 24,554,227 $4,904 $1,621,983 $ (186,703) $1,440,184
Issuance of stock
For services 7,551,818 1,518 298,688 300,206
Net (loss) (517,526) (517,526)
------------ ----------- ------------ ----------- -----------
Balance
September 30, 2003 32,106,045 6,422 1,920,671 (704,229) 1,222,864
Issuance of stock
For services 2,567,000 513 147,837 148,350
Private placement 1,000,000 200 89,800 90,000
Net (loss) (1,048,828) (1,048,828)
------------ ----------- ------------ ----------- -----------
Balance
September 30, 2004 35,673,045 7,135 2,158,308 (1,753,057) 412,386
Issuance of stock
For services 2,548,000 510 64,370 64,880
Conversion of
Accrued compensation 4,166,667 833 49,167 50,000
Net (loss) (663,837) (663,837)
------------ ----------- ------------ ----------- -----------
Balance
September 30, 2005 42,387,712 $8,478 $2,271,845 $(2,416,894) $(136,571)
============ =========== ============ =========== ===========
See Accompanying Auditors' Report and Notes to Financial Statements.
F-4
APO HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004, AND 2003
2005 2004 2003
----------- ------------ -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ (663,837) $(1,048,828) $ (517,526)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities
Depreciation and amortization 6,133 9,879 10,496
Bad debts 25,397 330,000 20,000
Deferred taxes - 73,563
Stock issued for services 64,880 148,350 300,206
Changes in:
Accounts receivable 700,803 193,663 (211,446)
Inventory 355,032 813,165 846,404
Other current assets 150,192 (131,261) (36,716)
Accounts payable (385,209) 244,249 (194,259)
Deferred compensation 3,249 (50,354) 67,765
Customers deposits payable (45,395) (34,912) (371,009)
----------- ------------ -----------
Cash Flows provided by (used in)
Operating Activities 211,245 473,951 (12,522)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Notes receivables - 4,566 253,934
Advances from officer, net - - (15,000)
----------- ------------ -----------
Cash Flows provided by
Investing Activities - 4,566 238,934
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayment) from bank notes payable, net (151,816) (398,938) (341,877)
Proceeds from sale of stock - 90,000 -
----------- ------------ -----------
Cash Flows (used in) (151,816) (308,938) (341,877)
----------- ------------ -----------
Financing Activities
Net increase (decrease) in cash 59,429 165,579 (115,645)
Cash Balances
Beginning of Year 574,732 405,153 520,618
----------- ------------ -----------
End of Year $ 634,161 $ 574,732 $ 405,153
=========== ============ ============
See Accompanying Auditors' Report and Notes to Financial Statements.
F-5
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF 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 and medical and
professionals and wholesalers in the United States, principally on the East
Coast. Effective June 13, 2001, InternetFinancialCorp.com, Inc., ("IFAN"), a
Nevada corporation, which is 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.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Operating deficit and economic conditions
Adverse economic conditions have limited the ability of the Company to market
its products at amounts sufficient to recover its operating and administrative
costs. As a result, the Company incurred losses of $663,837, $1,048,828, and
$517,526 for the three years ended September 30, 2005. The Company is in
violation of the working capital and tangible net worth covenants of its lending
agreement (see note 4).As more fully described in note 9, the Company is a
co-defendant in two lawsuits with Proctor & Gamble and Alcoa, involved in the
sale of products of those two companies, which unbeknownst to the Company, were
counterfeit products. It is not possible to predict at this time the ultimate
outcome of the litigation or the extent, if any of the effect on the Company. In
addition, the trustee of a former customer in bankruptcy is seeking return of a
payment which it deems to be a preferential distribution. The above factors
cause substantial doubt of the Company's ability to continue as a going concern.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon the Company's ability to meet its
financing requirements, and the success of its operations. Management believes
that actions presently being taken to revise the Company's operating and
financial requirements provide the opportunity for the Company to continue as a
going concern. The financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going concern.
Cash and cash equivalents- For purposes of the statements of cash flows, cash
equivalents include all highly liquid investments with original maturities of
three month or less.
Revenue recognition- Revenue recognition occurs when products are shipped.
Advertising- Advertising is expensed as incurred. Advertising expense for the
years ended September 30, 2005, 2004 and 2003 was $78,847, $25,730, and $72,029
respectively.
Merchandise inventory -Merchandise inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
Property and equipment- Property and equipment is stated at cost. Depreciation
is provided for on the straight-line method over the useful estimated life. The
cost of maintenance and repairs is expensed as incurred.
Long-lived Assets -The Company follows Statement of Financial Accounting
Standards No. 144, Impairment of Long-lived Assets, by reviewing such assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
Shipping and handling- Shipping and handling costs are expensed as incurred.
Shipping and handling expense included in selling expense was $196,469,
$296,637, and $242,730 for the years ended September 30, 2005, 2004 and 2003,
respectively.
Income taxes - 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.
Earnings Per Share- Basic net income per share has been calculated based on the
weighted average number of shares of common stock outstanding during the period.
Diluted net income per share is computed by dividing the net income by the
weighted average number of common shares outstanding plus potential dilutive
securities.
F-6
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF ACCOUNTING POLICIES(continued)
Fair value financial instruments -.The Company's carrying amount of financial
instruments which include cash, accounts receivable, bank notes payable, and
accounts payable approximate fair value.
Reclassifications- Certain reclassifications of certain prior year amounts were
made to conform to the current year presentation. Such reclassifications had no
effect on prior years reported loss.
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 2003
---- ---- ----
Cash paid during the year for:
Interest $48,976 $92,477 $92,477
Non cash transactions:
Conversion of deferred compensation
Into common stock $50,000
Note 3- OTHER CURRENT ASSETS
Other current assets consist of the following:
2005 2004
---- ----
Prepaid Expenses $ 36,082 $ 96,274
Consulting fees - 40,000
Advance to stockholder - 50,000
--------- ----------
Total current assets $ 36,082 $ 186,274
--------- ----------
In 2004, the Company advanced to one of the stockholders of the Company $50,000
which was payable on demand and non interest bearing. During fiscal 2005, the
stockholder repaid the advance in full
Note 4 - BANK NOTES PAYABLE
On October 29, 2002, the Company entered into a financing agreement with
Rosenthal & Rosenthal, Inc. The financing agreement provides the Company with a
maximum credit facility not to exceed $3,000,000. On September 1, 2004 the
credit facility was amended by mutual consent and reduced the maximum amount of
credit under the facility to $1,000,000. On March 2, 2005 the financing
agreement was amended reducing the maximum credit 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% (9.25% as
of September 30, 2005). Under terms of the agreement, the lender may call the
loan if the Company is in violation of any restrictive covenant. At September
30, 2005, the Company is in violation of its net worth and working capital
covenants. Rosenthal & Rosenthal has not waived the violations, and accordingly,
the entire amount of the obligation is callable. The credit facility matured on
October 31, 2005 and has been extended through December 31, 2005 under
substantially the same terms as the original agreement. The Company and the
lender have agreed to continue the credit facility on a month to month basis.
The Company has requested an extension of the credit facility through March 31,
2006.
Note 5 - INCOME TAXES
Income taxes (benefit) consist of the following:
2005 2004 2003
----- ---- ----
Current $ - $ - $ 5,592
Deferred - - 73,563
---------- ----------- ----------
Total $ - $ - $ 79,155
---------- ----------- ----------
F-7
APO HEALTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - INCOME TAXES (continued)
A reconciliation of income tax at the federal statutory income tax rate to total
income taxes is as follows:
2005 2004 2003
------ ---- ----
Computed at the federal statutory
Rate of 34% $ - $ - $ -
State income tax (benefit) - - -
Valuation allowance adjustment - - 73,563
Other adjustments - - 5,592
--------- --------- ----------
Total $ - $ - $ 79,155
========= ========= ==========
The components of deferred taxes are as follows:
2005 2004
------- -------
Deferred tax assets
Allowance for doubtful accounts $162,150 $ 152,000
Depreciation 21,150 12,000
Deferred compensation 17,000 50,400
Net operating loss carryover 624,000 404,025
Valuation allowance (824,300) (627,675)
--------- ---------
Total deferred tax assets $ - $ -
--------- ---------
The Company has a net operating loss carryover of approximately $1,560,000 to
offset future taxable income. The carryover losses expires through 2025. The
Company has offset the deferred tax asset by a valuation of $824,300, since it
cannot be determined more likely than not whether the Company will be able to
utilize such net operating loss carryover. During the year ended September 30,
2005, the valuation allowance increased by $196,625.
Note 6 - COMMON STOCK ISSUANCES
During the fiscal year ended September 30, 2005, the Company issued a total of
2,548,000 shares of common stock for consulting and professional services valued
at $64,880.
On April 1, 2005, the Company issued 4,166,667 shares of restricted common stock
to Dr. Jan Stahl, chief executive and financial officer of the Company on the
conversion of $50,000 of accrued compensation.
During the fiscal year ended September 30, 2004, the Company issued a total of
2,567,000 shares of common stock for consulting, compensation and professional
services valued at $148,350.
On April 1, 2004, the Company issued a total of 1,000,000 restricted share of
common stock with the Company receiving net proceeds of $90,000.
During the fiscal year ended September 30, 2003, the Company issued a total of
7,551,818 shares of common stock for consulting, compensation and other
professional services valued at $300,206 which includes compensation to officers
in the approximate amount of $46,700.
Stock Option Plan
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 exercised.
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. To date none of these warrants have
been exercised.
F-8
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - 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,
2005, 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 $46,112, $50,206 and $59,429 for each of the three years
ended September 30, 2005.
Future minimum lease payments are as follows:
For the years ended September 30,
2006 70,571
2007 71,225
2008 75,825
2009 79,405
2010 13,337
Note 8 - PROFIT SHARING PLAN
The Company established a profit sharing plan in 1992. All full-time employees
as defined within the plan are eligible to participate. Contributions to the
plan are discretionary and are determined at the Company's year end. The amount
contributed or accrued to the profit sharing plan for the years ended September
30, 2005, 2004, and 2003, were $0, $0, and $0, respectively.
Note 9 - COMMITMENTS AND CONTINGENCIES
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 September 30, 2004 and shall be automatically
renewed for successive periods of one year unless either party gives written
notice to terminate the agreement.
Legal Proceedings
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 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. Recently, the complaint was
amended to include a number of additional parties, including Dr. Jan Stahl,
chief executive officer of the Company. The co-defendants in the suit have
asserted cross-complaints against the Company for an unspecified amount to be
determined at trial based upon their receipt and subsequent resale of these
products.
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
F-9
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings (continued)
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. . Recently, the complaint was amended to include a number
of additional parties, including Dr. Jan Stahl, chief executive officer of the
Company. The co-defendants in the suit have asserted cross-complaints against
the Company for an unspecified amount to be determined at trial based upon their
receipt and subsequent resale of these products.
In both the P&G and Alcoa law suits, the plaintiffs have sought
compensatory damages in an amount to be proven at the time of trial. Each
plaintiff has also requested an award of punitive damages in the sum of
$10,000,000. At this time, outside counsel believes that the plaintiffs at trial
will be unable to sustain the burden of proof necessary for an award of punitive
damages. Outside counsel indicates that the litigation is in the early stages of
discovery and is unable to render their expert opinion. The Company believes it
has meritorious defenses and is vigorously defending its positions.
One of the Company's former customers, Allou Distributors Inc. has recently
filed for bankruptcy protection. The bankruptcy trustee is seeking the return of
$70,000 which he deems is a preferential distribution for payment of merchandise
sold to Allou Distributors Inc. The Company believes the claim is without merit
and will vigorously defend its position.
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 present, the Company is self-insured for
product liability claims.
Note 10 - 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 September 30,
2005, the Company had approximately $489,600 on deposit, in excess of the
$100,000 in each bank, which is insured under federal law.
The concentration of credit risk due to receivables is minimal due to the
Company's diverse customer base throughout the United States. For the years
ended September 30, 2005, 2004 and 2003 the following customers had in excess of
10% of the total sales. No single vendor accounts for greater than 10% of
purchases.
2005 2004 2003
---- ---- ----
Customer A 35% 40% 38%
Customer B 10% 12%
Foreign manufacturing is subject to a number of risks, including transportation
delays and interruptions, political and economic disruptions, the imposition of
tariffs and similar import/export controls and changes in governmental policies.
Although, to date, the Company has not experienced any material adverse effects
due to such risks, there can be no assurance that such events will not occur in
the future with the result of possible increases in product costs and/or delays
in product delivery which would, in all likelihood, result in the loss of
revenues and goodwill by the Company.
Note 11 - Computation of Earnings Per Share
Basic earnings per share is calculated using the average number of common shares
outstanding. Diluted earnings per share is computed on the basis of average
number of common shares outstanding plus the effect of outstanding stock options
using the "treasury stock method".
F-10
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Computation of Earnings Per Share (continued)
Year Ended September 30,
-------------------------
2005 2004 2003
---- ---- ----
Net income (loss) available for common
Shareholders, basic and diluted $ (663,837) $(1,048,828) $ (517,526)
Weighted average common shares
Outstanding-basic 39,199,845 34,338,680 27,003,847
Net effect of dilutive stock options * * *
Basic earnings (loss) per share $ (.02) $ (.03) $ (.02)
* antidilutive
F-11
APO HEALTH, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002
Balance
Year Ended Beginning of Balance
September 30, Account Period Additions Reduction End of Period
------- ------------- --------- --------- -------------
2003 Allowance for
Doubtful accounts $30,000 $ 20,000 $ 50,000
Allowance for
Deferred taxes $ -0- $ 221,200 $(24,200) $ 197,000
2004 Allowance for
Doubtful accounts $50,000 $ 330,000 $ 380,000
Allowance for
Deferred taxes $197,000 $ 431,000 $ 628,000
2005 Allowance for
Doubtful accounts $380,000 $ 25,397 $ 405,297
Allowance for
Deferred taxes $628,000 $ 196,300 $ 824,300
F-12