U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE
EXCHANGE ACT OF 1934
From the transition period from __________ to ___________
Commission file number 00030074
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APO HEALTH, INC.
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(Exact name of registrant as specified in its charter)
Nevada 86-0871787
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3590 Oceanside Road, Oceanside, New York 11575
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(Address of principal executive offices)
(800) 365-2839
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(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
Yes __X__ No _____
As of May 10, 2002, 23,754,081 shares of Common Stock of the issuer were
issued.
APO HEALTH, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
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Page
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PART I - Financial Information
Item 1 Financial Statement.
Consolidated Balance Sheet as of
March 31, 2002 and September 30, 2001. 3
Consolidated Statement of Income for the three and six
months ended March 31, 2002 and 2001. 4
Consolidated Statement of Cash Flows for the three and
six months ended March 31, 2002 and 2001. 5
Notes to Consolidated Financial Statements. 6 - 11
Item 2 Management's Discussion and Analysis
Or Plan of Operations. 12
PART II - Other Information
Item 1 Legal Proceedings. 13
Item 2 Changes in Securities and Use of Proceeds. 13
Item 3 Default upon Senior Securities. 13
Item 4 Submission of Matters to a Vote of Security Holders. 13
Item 5 Other Information. 13
Item 6 Exhibits and Reports on Form 8-K. 13
Signatures 14
- 2 -
PART I - FINANCIAL INFORMATION
APO HEALTH, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2002 September 30, 2001
-------------- ------------------
(Unaudited)
ASSETS
------
Current Assets:
Cash $ 108,333 $ 179,167
Accounts Receivable, net of allowance for
doubtful accounts of $29,363 and $29,000 1,819,966 1,768,501
Other Receivables 302,102 -
Inventory 2,084,691 1,692,209
Due from Officers 98,905 99,844
Deferred Tax Assets 23,383 36,020
Other Current Assets 40,401 165,935
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Total Current Assets 4,477,871 3,941,676
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Property and Equipment, net of accumulated
Depreciation of $119,823 and $76,606 116,692 40,389
Goodwill, less accumulated amortization
Of $ - and $53,802 64,100 125,537
Deposits 7,500 7,500
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Total Assets $ 4,666,073 $ 4,115,102
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank Notes Payable $ 1,720,003 $ 1,736,224
Accounts Payable 839,894 1,056,117
Accrued Expenses 70,033 50,776
Due to Officer - 45,509
Income Taxes Payable 126,211 -
Customer Deposits 238,700 -
Other Current Liabilities 47,346 -
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Total Current Liabilities 3,042,487 2,888,626
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Stockholders' Equity:
Common stock, $.0002 par value,
125,000,000 shares authorized, 23,754,081
and 23,132,089 shares issued and outstanding 4,744 4,626
Paid-in Capital 1,621,494 1,452,530
Retained Earnings (Deficit) 131,383 (230,680)
Less Treasury Stock (134,035) -
------------ ------------
Total Stockholders' Equity 1,623,586 1,226,476
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Total Liabilities and Stockholders' Equity $ 4,666,073 $ 4,115,102
============ ============
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APO HEALTH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 2002 AND 2000 (UNAUDITED)
Three Months Six Months
------------ ----------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenue $ 7,026,039 $ 6,248,267 $ 13,516,329 $ 12,272,889
Cost of Revenue 6,338,801 5,647,119 12,154,439 10,955,405
------------- ------------- ------------- -------------
Gross Margin 687,238 606,148 1,361,890 1,317,484
------------- ------------- ------------- -------------
Operating Expenses
Selling Expense 194,808 186,740 402,120 336,200
General and Administrative Expenses 469,742 456,415 847,877 884,457
------------- ------------- ------------- -------------
664,550 643,155 1,249,997 220,657
------------- ------------- ------------- -------------
Income from Operations 22,688 (37,007) 111,893 96,827
Interest Expense 31,988 47,745 62,193 93,047
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Income (loss) before Provision for
Income Taxes (9,300) (84,752) 49,700 3,780
Provision for Income Taxes - (121) 18,350 1,271
------------- ------------- ------------- -------------
Net Income Before Discontinued
Operations (9,300) (84,631) 31,350 2,509
Discontinued Operations
Gain on Sale of Discontinued
Operations Net of Taxes 314,875 - 314,875 -
Income (loss) from Discontinued
Operations Net of Taxes (4,234) 15,510 15,838 24,026
------------- ------------- ------------- -------------
Discontinued Operations 310,641 15,510 332,713 24,026
------------- ------------- ------------- -------------
Net Income $ 301,341 $ (69,121) $ 362,063 $ 26,535
============= ============= ============= =============
Basic and Diluted Earnings
Per Common Share:
From Continuing Operations $(.00) $(.00) $.00 $.00
From Discontinued Operations .01 .00 .01 .00
------------- ------------- ------------- -------------
Total $ .01 $(.00) $.01 $.00
============= ============= ============= =============
Weighted Average Common Shares
Outstanding 23,754,874 15,150,344 23,579,874 14,758,304
============= ============= ============= =============
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APO HEALTH, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE SIX MONTHS ENDED
MARCH 31, 2002 AND 2001 (UNAUDITED)
2002 2001
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Cash Flow From Operating Activities:
Net Income $ 362,063 $ 26,535
Adjustments to Reconcile Net Income to
Net Cash Flows from Operating Activities:
Depreciation and Amortization 11,733 13,394
Deferred Taxes 12,637 14,880
Write-off Goodwill Discontinued Operations 125,537 -
Stock Issued for Services - 89,400
Changes In:
Accounts Receivable (51,645) 144,690
Other Receivables (302,102) -
Inventory (394,482) 324,598
Other Current Assets 120,487 23,461
Accounts Payable (206,747) (525,257)
Accrued Expenses 19,257 (115,835)
Income Taxes Payable 126,211 -
Customer Deposits Payable 238,000 -
Other Current Liabilities 41,482 -
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Cash Flows from Operating Activities 102,431 (7,133)
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Cash Flows From Investing Activities:
Investment In Subsidiary (25,000) -
Assets Acquired Net of Cash Investment (9,100) -
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Net Cash From Investing Activities (34,100) -
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Cash Flows from Financing Activities:
Advances from Officers, Net (46,448) (4,232)
Proceeds (Payment) on Bank Notes Payable, Net (92,717) 56,930
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Cash Flows from Financing Activities (139,165) 52,698
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Net Increase (Decrease) in Cash (70,834) 45,565
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Cash Balances:
Beginning of Period 179,167 90,732
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End of Period $ 108,333 $ 136,297
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APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial information is submitted in response to the
requirements of Form 10-Q and does not purport to be financial statements
prepared in accordance with generally accepted accounting principles. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted, although the Company believes the disclosures that are
made are adequate to make the information presented not misleading. Further,
in the opinion of the management, the interim financial statements reflect
fairly the financial position and results of operations for the periods
indicated.
It is suggested that these interim consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's Form 10K containing the Company's audited financial statements as of
and for the year ended September 30, 2001 filed with the Securities and
Exchange Commission.
The results of operations for the six months ended March 31, 2002 are not
necessarily indicative of results to be expected for the entire fiscal year
ending September 30, 2002.
Note 1 - Summary of Accounting Policies
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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. The Company and its wholly-owned subsidiary, Universal
Medical Distributors, Inc. ("Universal") distribute disposable medical
products principally to dental, medical and veterinary professionals and
wholesalers in the United States, principally on the East Coast.
Effective June 13, 2001, Internet Financial Corp.com, Inc., ("IFAN"), a Nevada
corporation, which was an inactive public company, acquired APO,
(collectively, the "Company"), pursuant to a tax-free reorganization
agreement. The acquisition was accounted for by the purchase method under
business combinations in a reverse acquisition transaction. Concurrently, IFAN
changed its name to APO Health, Inc., a Nevada corporation.
On January 2, 2002, the Company acquired 100% of the outstanding stock of
Envirotech Air Quality Services, Inc. ("Envirotech") a Florida corporation
specializing in indoor air quality testing, sanitation, sterilization and
filtration. The purchase price was $25,000 plus the Company will issue 50,000
shares of its restricted common stock to the former shareholders of
Envirotech. In addition, the Company will issue 100,000 common stock purchase
warrants to the former shareholders of Envirotech exercisable for a period of
two years at a purchase price of $.75 per share.The excess of the cost of the
acquisition over the net assets acquired gives rise to goodwill of $64,100.
- 6 -
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include all
highly liquid investments with original maturities of three months or less.
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 expenses as incurred.
Intangibles
Goodwill represents the excess of the cost of companies acquired over the fair
value of their net assets at the dates of acquisition and was being amortized
using the straight-line method over 15 years. Effective to the issuance of
FASB No. 142, the Company discontinued amortizing goodwill.
Impairment
The Company follows Statement of Financial Accounting Standards No. 121,
Impairment of Long-lived Assets, by reviewing such assets for the impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
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. Effective to the June 13, 2001 acquisition, the weighted average
number of shares of common stock have been retroactively restated to give
effect for the 5.94 to 1 stock split.
Reclassification
Certain reclassifications of certain prior year amounts were made to conform
to the current year presentation.
- 7 -
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
- -----------------------------------------------------
2002 2001
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Cash Paid During the Year for:
Interest $ 62,193 $ 93,047
Income Taxes - 65,000
Common Stock Issued for Consulting
and Professional Fees 139,083
Common Stock Issued in Acquisition
of Envirotech 30,000
Common Shares returned to Treasury 134,050
Note 3 - Discontinued Operations
- --------------------------------
On February 1,2002, the Company sold the veterinary division of Universal for
$550,000 including the customer lists and catalogs. In addition the Company
sold its inventory related to the veterinary business. The Company wrote off
the remaining goodwill associated with the veterinary business. The financial
statements have been restated to reflect the results from the discontinued
operations in prior periods.
Note 4 - Bank Notes Payable
- ---------------------------
On April 2, 2001, the Company renewed its credit facility with HSBC Bank USA
that provides for total borrowings that may not exceed $2,000,000. Bankers
acceptances and letters of credit, which relate to specific importation
transaction, may not exceed $500,000 each and own-note borrowing, which does
not relate to specific transactions, may not exceed $1,500,000. The credit
facility is collateralized by substantially all of the Company's assets and is
personally guaranteed by the Company's two majority stockholders. Interest of
prime +1% on the own-note borrowings is payable monthly and the bankers
acceptance fees of 200 basis points above the discount rate are paid at the
inception of the bankers acceptance. Borrowings on the credit facility are
payable
- 8 -
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Bank Notes Payable (continued)
- ---------------------------------------
on demand, or upon maturity, which is up to 180 days after the initiation of a
bankers acceptance or March 31, 2001, for own-note borrowings, whichever is
earlier. On April 2, 2001, the date the credit facility was renewed,
outstanding own-note borrowings were $1,949,000, and the $449,600 excess over
the sub-limit was converted to a term loan payable over one year in monthly
installments of $37,467. Interest will be at the bank's prime rate plus 1%.
Own-note borrowings was $1,500,000 as of March 31, 2002; acceptances totaled
$111,316 and there were $72,217 letters of credit outstanding. As of March 31,
2002, the term loan amounted to $37,467. The credit facility matured March 31,
2002 and is in the process of being extended for an additional year with the
same terms .
The Company assumed approximately $75,000 in connection with the acquisition
of Envirotech
Note 5 - Related Parties
- ------------------------
Advances due to/from officers are non-interest bearing and due on demand.
Note 6 - Income Taxes
- ---------------------
Income taxes (benefit) consist of the following:
2002 2001
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Continuing Operations $ 18,350 $ 1,271
Discontinued Operations 185,345 12,172
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$ 203,695 $ 13,443
============ ============
A reconciliation of income tax at the federal statutory income tax rate to
total income taxes is as follows:
2002 2001
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Computed at the federal
statutory rate of 34% $ 203,712 $ 13,592
State income tax 25,399 2,175
Operating loss carryforward (25,416) -
Other adjustments - (2,324)
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$ 203,695 $ 13,443
============ ============
The components of deferred taxes are as follows:
2002 2001
------------ ------------
Deferred tax assets
Allowance for doubtful accounts $ 10,730 $ 11,000
Depreciation 8,520 8,500
Net operating loss carryover 4,133 16,395
Miscellaneous - 125
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$ 23,383 $ 36,020
============ ============
- 9 -
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Common Stock Issuances
- -------------------------------
On November 28, 2001, the Company issued 463,610 shares of common stock, par
value $.0002, registered on Form S-8, to three consultants and an attorney for
the Company. The shares were valued at $.30 per share based on services to be
provided by the consultants and attorney.
On January 1,2002 the Company issued 50,000 restricted shares of its common
stock in the acquisition of Envirotech.
In March 2002 several agreements with outside consultants were cancelled and
739,000 shares of common stock were returned ,which the Company is holding as
Treasury Stock. The Company recorded this transaction at the value of shares
originally issued.
Note 8 - Lease
- --------------
The Company leases approximately 11,800 square feet in New York on a
month-to-month basis with an affiliated company owned by two officers of the
Company. The affiliates lease underlying the New York lease expires on
December 31, 2004. Lease payments made by the Company approximate lease
payments by the affiliated company.
Future minimum lease payments are as follows:
Year ended September 31,
------------------------
2002 $ 35,000
2003 72,450
2004 74,900
2005 17,500
-----------
Total $ 199,850
===========
Note 9 - Commitments and Contingencies
- --------------------------------------
Litigation
There is an action pending in the Circuit/Superior Court of Marion County,
Indiana entitled Kenro, Inc., on behalf of itself and all other similarly
situated against APO Health, Inc. The lawsuit involves unsolicited broadcast
faxes sent in the state and has been certified as a class action suit. The
Company has petitioned the court to certify its class action certification
order for interlocutory appeal. If the Company can defeat the class
certification, then the plaintiff is limited to a single violation with a
maximum potential recovery of $1,500. If the class certification issue is lost
then the Company's exposure can range in the millions of dollars. The Company
has filed a suit seeking indemnification by or contribution from the vendors
who sent the faxes on behalf of the Company. It is the Company's belief and
contention that damages, if any, which may be awarded to the plaintiff are
covered by insurance up to policy limits.
- 10 -
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation (continued)
However, on October 24, 2001, the Company was named as a defendant in
Merchant's & Business Men's Mutual Insurance Company vs. APO Health, Inc.
Merchant's & Business Men's Mutual Insurance Company issued a Commercial
Blanket Excess Liability insurance policy to the Company for one year
commencing February 27, 2000 up through February 27, 2001. Merchant's &
Business Men's Mutual Insurance Company alleges in its complaint that policy
coverage with the Company does not extend to the allegations set forth in the
aforementioned Kenro suit. The Company, however, disagrees and contends that
the policy issued by Merchant's & Business Men's Mutual Insurance Company
obligates them to cover any damages that the Company may incur, as a result of
an unfavorable verdict in the Kenro suit
Employment Agreement
Effective October 1, 2001, the Company 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 expires September 30, 2004 and shall be automatically
renewed for successive periods of one year unless either party gives written
notice to terminate the agreement.
Note 9 - Concentration of Credit Risk
- -------------------------------------
The Company maintains bank accounts at several banks. As of March 31, 2002,
the Company had $172,400 on deposit, in excess of the $100,000 limitation per
account insured under federal law.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ---------------------------------------------------------------------------
Results of Operations
- ---------------------
The results of operations for the three and six months ended March 31, 2001
have been restated to reflect the sale of the veterinary division of
Universal.
Revenue for the six months ended March 31, 2002 increased by $1,243440 or
10.1% over the six months ended March 31, 2001. The increase was due to an
increase in the sales to wholesalers and distributors while retail sales were
flat. As a result, the gross profit margin declined from 10.7% to 10.0%. For
the three months ended March 31, 2002,revenue increased by $777,772 or 12.4%
over the three months ended March 31,2001.The gross profit margin for the
three months ended March 31, 2002 was 9.8% compared to 9.7% for the three
months ended March 31, 2001.
Operating expenses including selling and general and administrative expenses
for the six months ended March 31, 2002 were $1,249,997, an increase of
$29,340 or 2.4% over the six months ended March 31, 2001. Selling expenses
during the six month period increased by approximately $66,000 or 19.6%.
Shipping expense increased by $32,000 and advertising increased by $23,000
accounting for the majority of the increase in selling expenses. General and
Administrative expenses decreased by approximately $37,000 in the six months
ended March 31, 2002 from the corresponding period in 2001. In 2001,bonuses to
officers were $86,400 to the reflect the value of stock issued to them. In
2002 there was a bonus of $19,500, the net effect of these bonuses being a
decrease of approximately $67,000 in 2002. Included in general and
administrative expenses were consulting fees that were being written off over
the term of the contracts. For the six months ended the Company recorded an
expense of $36,000.The net effect of these two changes was a decrease in
general and administrative expenses of $31,000.
Interest expense for the six months ended March 31, 2002 was $62,193, a
decrease of $30,854 compared to the six months ended March 31, 2001. The
Company paid down a $500,000 term loan during the year ended March 31, 2002
and the interest rate on the line of credit decreased as the prime rate
decreased over the last twelve months.
On February 1, 2002, the Company sold the veterinary division of Universal
resulting in an after tax gain of $314,875 after giving effect to a write-off
of goodwill of $125,537.
Financial Condition
- -------------------
As of March 31, 2002, the Company had current working capital of $1,467,384.
In addition, the Company has available approximately $275,000 in unused credit
facilities, including bankers acceptances and letters of credit. The Company
has issued a total of 3,703,634 common stock purchase warrants exercisable at
prices ranging from $.25 to $2.00 per share and 250,000 common stock purchase
warrants to Dr. Jan Stahl exercisable at $.25 per share. If these warrants are
exercised, the net proceeds to the Company would be in excess of $4,500,000.
These proceeds could be used for acquisitions and or major capital expansion.
At the current time, the Company has no immediate plans for a material
acquisition or major capital expenditures and, therefore, has sufficient
working capital for its current operations.
- 12 -
PART II - OTHER INFORMATION
APO HEALTH, INC.
ITEM 1 - LEGAL PROCEEDINGS
- -----------------------------
There is an action pending in the Circuit/Superior Court of Marion County,
Indiana entitled "Kenro, Inc., on behalf of itself and all others similarly
situated against APO Health, Inc., Cause No. 490120101CP000016." The lawsuit
involves unsolicited broadcast faxes sent in the state and has been certified
as a class action suit. The Company has petitioned the court to certify its
class action for interlocutory appeal. The Company has filed a suit seeking
indemnification by or contribution from the vendors who sent the faxes on
behalf of the Company. It is the Company's belief and contention that damages,
if any, which may be awarded to the plaintiff are covered by insurance up to
policy limits.
However, on October 24, 2001, the Company was named as a defendant in
Merchant's & Business Men's Mutual Insurance Company vs. APO Health, Inc.,
Case No. 01-605-091, Supreme Court of the State of New York, County of New
York. Merchant's & Business Men's Mutual Insurance Company issued a Commercial
Blanket Excess Liability insurance policy to the Company for one year
commencing February 27, 2000 up and through February 27, 2001. Merchant's &
Business Men's Mutual Insurance Company alleges in its complaint that policy
coverage with the Company does not extend to the allegations set forth in the
aforementioned Kenro suit. The Company, however, disagrees and contends that
the policy issued by Merchant's & Business Men's Mutual Insurance Company
obligates them to cover any monetary damages that the Company may incur, as a
result of an unfavorable verdict in the Kenro suit.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
- -----------------------------------------------------------
None.
ITEM 3 - DEFAULT UPON SENIOR SECURITIES
- ---------------------------------------------
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------------------
None.
ITEM 5 - OTHER INFORMATION
- ------------------------------
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------------
None.
- 13 -
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: May 14, 2002 By: /s/ Dr. Jan Stahl
-----------------------
Dr. Jan Stahl, Chairman
Chief Executive Officer
and Secretary
(Principal Executive Officer)
Date: May 14, 2002 By: /s/ Peter Steil
-----------------------
Peter Steil, President
and Treasurer
(Principal Financial and
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.
Date: May 14, 2002 By: /s/ Dr. Jan Stahl
-----------------------
Dr. Jan Stahl, Director
Date: May 14, 2002 By: /s/ Peter Steil
-----------------------
Peter Steil, Director
Date: May 14, 2002 By: /s/ Kenneth Leventhal
-----------------------
Kenneth Leventhal, Director
- 14 -