WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL SECURITIES AND EXCHANGE COMMISSION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
[ ] 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 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 RD. OCEANSIDE, NEW YORK 11575
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(Address of principal executive offices) Zip Code
(800) 365-2839
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(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 (1):
Common Stock, Par Value $ .0002 Per Share
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(Title of Class)
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
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.
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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 .
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(1) Registration is being filed herewith.
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing bid price of such stock as of December 3, 2002,
amounted to $ 601,020.
The number of shares outstanding of each of the registrant's classes of common
stock as of December 3,2002 was 24,554,227 shares.
-1-
DOCUMENTS INCLUDED BY REFERENCE:
Registration on Form S-2 filed on January 15, 2002
Report on 10Q filed on February 14, 2002
Report on Form 8-K/A filed February 14, 2002
Report on Form 8-K/A filed February 27, 2002
Report on 10Q filed on May 16, 2002
Report on 10Q filed on August 14, 2002
(The Remainder of This Page Has Been Left Intentionally Blank.)
-2-
APO HEALTH, INC.
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FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
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PAGE
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PART I Item 1 Business 4 - 6
Item 2 Properties 6
Item 3 Legal Proceedings 6 -7
Item 4 Submission of Matters to a Vote
of Security Holders 7
PART II Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Item 8 Financial Statements and Supplementary Data 11
Item 9 Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 11
PART III Item 10 Directors and Executive Officers of the Registrant 12
Item 11 Executive Compensation 13
Item 12 Security Ownership of Certain Beneficial
Owners and Management 13
Item 13 Certain Relationships and Related Transactions 13
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 14
SIGNATURES 15
3
PART I
ITEM 1 BUSINESS
HISTORY
Pursuant to a Tax-Free Reorganization Agreement effective June 13, 2001,
InternetFinancialCorp.com, Inc. ("IFAN"), a Nevada corporation, acquired
3,046,300 of the 3,209,563 outstanding shares of common stock of APO Health,
Inc., which represent approximately 91%. Whereupon, IFAN an inactive company
became the sole owner and operator of the business and properties of APO Health,
Inc., (collectively the "Company")
BUSINESS OF THE COMPANY
The present operations of the Company through its subsidiaries, APO Health Inc.,
a New York corporation and Universal Medical Distributors Inc. is a distributor,
supplier of 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.
Management has elected to maintain its low margin wholesale business and at the
same time increase its market share in the school and retail medical and dental
areas in .To attain that goal, APO has introduced its first institutional retail
catalogue and in January ,2003 the Company will introduce its first physician
Medical catalogue. The current distribution of revenue is 80% from wholesale
accounts and 20% from retail accounts. The goal of the Company with the
introduction of the two new catalogues is to increase the higher gross profit
retail division to 40% of revenue.
PRODUCTS AND SERVICES
Currently, APO distributes approximately 10,000 different products New products
are constantly being added as the customers needs increase. APO 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, which it sells.
SALES AND MARKETING
The Company's products are sold directly by Company employees, through mail
order and by outside, independent sales representatives. The Company's sales
organization presently consists of four persons, including Dr. Stahl, the
Company's Chief Executive Officer, who oversees a combination of direct
salespersons and independent sales representatives. Typically, independent sales
representatives who have undertaken to sell the Company's products will agree
not to sell similar or competitive products during the time when they represent
the Company.
The Company's marketing approach attempts to capitalize on its wide array of
product lines in order to offer mass merchandisers, buying consortiums, and drug
store and supermarket chains a "package" approach to its private label program.
This not only provides customers with attractive and competitive pricing but, in
management's opinion, provides the Company with a competitive advantage by
offering its customers the ease of administration and cost savings which come
with using a single supplier for many of their product needs.
4
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 are charged with obtaining
large quantities of needed 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.
POTENTIAL IMPACT OF FDA AND GOVERNMENT REGULATION
Some of the Company's products may be regulated as medical devices by the
federal Food and Drug Administration (the "FDA") pursuant to the federal Food
and Drug Cosmetics Act (the "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 ("MDR") regulation
obligates manufacturers including, as 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.
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 such injuries resulting 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
maintains product liability insurance coverage in the amount of $1,000.000 with
an umbrella to $4,000,000. However, as a result of the continuing changes in
insurance coverage and premiums, no assurance can be given that such insurance
will be adequate to fully protect the Company in the future or that product
liability insurance can be maintained at a reasonable cost.
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 it 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.
5
COMPETITION
The dental and veterinary products supply businesses are intensely competitive.
At present, the Company estimates that there are over 20 companies whose
products compete with many of the Company's present and proposed products. These
companies range from major multinational companies to enterprises which 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 material 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
increased demand for production that would most likely result from any
significant disruption in the Company's traditional manufacturers and suppliers
of its 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.
EMPLOYEES
The Company, including its two subsidiaries, APO Health and Universal, employ a
total of 13 persons; 3 executive personnel; 4 sales persons; 4 clerical and
administrative personnel; and 2warehouse employees.
ITEM 2 PROPERTIES
As of September 30, 1999, the Company's offices were located at 3390 Oceanside
Road, Oceanside, New York. The premises contain approximately 12,000 square feet
under a five-year lease (the "Lease") which expires in December 31, 2004 (the
"Lease Term"). These premises are occupied under a Lease between the landlord,
who is an unaffiliated third party, and an affiliated company PJS Trading, Inc.,
a New York corporation ("PJS") owned by Dr. Stahl and Mr. Steil, which was
originally formed by them for the express purpose of entering into this Lease
agreement. The Company occupies these premises under an oral agreement with PJS
and Dr. Stahl and Mr. Steil whereby the Company has agreed to discharge all of
the Lease obligations with the landlord. The annual lease payment under the new
lease is approximately $72,400 per year with increases for real estate taxes
over the base period. Neither PJS nor Dr. Stahl nor Mr. Steil 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 1,2002 the Company has subleased approximately
2000 square feet of the warehouse space at approximately $18,000 per year.
ITEM 3 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.
6
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.
On July1, 2002,the Court granted the intervention motion of the Kenro
plaintiffs, and, as a matter of law, denied Merchants' motion for summary
judgement and granted the Company's cross-motion for summary judgement, and
finding that the claims asserted against the Company in the Kenro lawsuit fell
within the terms of the Merchants' policies. As a result, the Court ordered that
Merchants has a duty to defend and indemnify the Company in the Kenro lawsuit.
Additionally, the Court found alternatively, that the disclaimer of coverage by
Merchants was untimely, so that Merchants would not be allowed to rely upon or
raise any coverage defenses. The Court also found that the Company is entitled
to be reimbursed for the legal fees that it incurred, and ordered that a hearing
be conducted to determine the amount that Merchant owed.
Merchants subsequently filed a motion for reargument of its unsuccessful summary
judgement motion, and papers in opposition have been submitted by the Company
and the Kenro plaintiffs to the Court. The Company and the Kenro plaintiffs have
argued that the Court should adhere to its original decision for a variety of
reasons. Merchants has also filed an appeal to the Appellate Division from the
Court's July 1,2002 Order, and in the event the Court adheres to its decision,
it is expected that Merchants will again notice an appeal, and move to have the
two appeals consolidated.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
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ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
APO common stock currently trades on NASDAQ's OTC Electronic "Bulletin Board"
and is currently traded under the symbol "APOA" .The high and low prices of the
common stock for the quarterly periods for the two years ending September
30,2001 are as follows.(Prior to the reorganization on June 13,2001 the prices
reflect those of Internet Financial Corp. Com, Inc. trading under the symbol
"IFAN".)
Common
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Quarter Ended High Low
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December 31, 2000 6.25 1.90
March 31, 2001 3.00 1.80
June 30, 2001 3.50 2.62
September 30, 2001 3.00 0.72
December 31, 2001 1.01 0.45
March 31, 2002 0.70 0.09
June 30, 2002 0.50 0.09
September 30, 2002 0.15 0.05
(a) Holders The number of holders of record of the Company's common
stock as of September 30, 2002 was approximately 383.
(b) Dividends
The Company has not paid or declared any cash dividends on its
common stock since its inception, and by reason of its
contemplated financial requirements, does not anticipate paying
any cash dividends on its common stock in the near future.
8
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, 2002.Periods prior to 2002
have been restated to give effect for discontinued operations.
Statement of Operations Data:
Fiscal Year Ended September 30,
------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ----------- -----------
Revenue $31,998,836 $24,143,949 $28,882,347 $30,747,128 $31,720,600
Gross Profit 2,198,162 2,524,717 2,763,830 2,579,870 2,922,257
Selling, General and
Administrative Expenses 2,515,907 2,303,284 2,648,967 2,432,167 2,534,022
Net Income (loss)
From continuing
operations (247,521) (157,899) ( 199,257) 5,104 255,152
Discontinued operations 291,498 35,839 16,932 266,120 92,071
Extraordinary item - - - - -
Net Income (Loss) 43,977 (122,060) (240,900) 271,224 347,223
Earnings per common
From continuing operations $ (.01) $ (.01) $ (.02) $ .00 $ .05
Discontinued operations $ .01 $ .00 $ .00 $ .05 $ .01
Extraordinary item $ .00 $ .00 $ (.00) $ .00 $ .00
Earnings per
Common Share $ .00 $ (.01) $ (.02) $ .05 $ .06
Weighted Average
Shares Outstanding 23,864,383 21,532,814 13,217,660 5,261,432 5,513,882
Balance Sheet Data:
As of September 30,
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2002 2001 2000 1999 1998
------------ ------------ ------------ ----------- -----------
Total Assets $4,774,786 $4,115,102 $4,423,752 $4,259,980 $4,203,089
Total Liabilities 3,334,602 2,888,626 3,546,184 3,609,204 3,823,357
Stockholders' Equity 1,440,184 1,226,476 877,568 650,776 379,732
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The results of operations for the fiscal years ended September 30, 2002, 2001
and 2000 have been adjusted to reflect the disposition of the veterinary
division in February 2002 which are reported as discontinued operations.
RESULTS OF OPERATIONS
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COMPARISON OF FISCAL 2002 AND 2001
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Net sales for fiscal 2002 were $31,998,836 compared to $24,143,949 in fiscal
2001, an increase of $7,854,887 or 32.5%. The increase was entirely attributable
to the Company's wholesale business. Retail dental sales declined by
approximately 25% while the retail medical sales had minimal growth.
9
Gross margins for fiscal 2002 were $2,198,162 compared to $2,524,717 in fiscal
2001, a decrease of $326,555 or 12.9%.Gross margins were 6.87 % of net sales in
2002 compared to 10.46% in 2001. The decline in gross margins can be
attributable to two factors. The first factor is that the margin in the
wholesale division is substantially lower than that of the retail division and
even though sales increased by 32.5% the margin on those increased sale was
between 4% and 5% including one product with sales of approximately $4,000,000
that generated a gross profit of 1.5%. Retail dental sales decreased during 2002
due to more competition in the field and this competition forced the Company to
lower prices, which reduced the gross profit margin on those sales by
approximately 3%.
Operating expenses which includes both selling expenses and general and
administrative expenses for fiscal 2002 were $2,515,907 compared to $2,303,284
in fiscal 2001,an increase of $212,623 or 9.23%. Selling expenses for fiscal
2002 were $842,212 compared to $744,652 in fiscal 2001,an increase of $97,560 or
13.10%. Advertising costs including the cost of catalogues and mailing accounted
for approximately $73,000 of the increases while shipping cost increased by an
additional $32,000. Other selling expenses including commissions and travel
showed small decreases .
General and administrative costs in fiscal 2002 were $1,673,695 compared to
$1,558,632 in fiscal 2001, an increase of $115,063 or 7.38%. Officers
compensation in fiscal 2002 increased to $489,446 from $425,600 in fiscal 2001,
an increase of $63,846 which includes an incentive based bonus of $110,000
compared to a stock bonus of $86,100 in fiscal 2001.In fiscal 2001, the Company
recorded a reversal of a fiscal 2000 profit sharing contribution which reduced
fiscal 2001 general and administrative expenses by $50,000. There was no entry
for profit sharing in fiscal 2002. In fiscal 2002, the Company incurred
consulting expenses of $81,642 compared to $9,236 for fiscal 2001, an increase
of $72,406. The majority of the consulting expenses incurred by the Company in
2002 was for reviewing possible acquisition and financing the proposed
acquisitions, none of which were consummated. For fiscal 2003, the Company has
determined that it will not actively seek acquisitions and that expenses
incurred in 2002 for consulting will be non-recurring. Professional fees,
primarily legal expenses in fiscal 2002 were $142,405 compared to $46,777 in
fiscal 2001, an increase of $95,628. The increase was attributed to the
Company's defense of a class action lawsuit instituted in the State of Indiana.
The Company's insurance carrier is now defending the Company against the lawsuit
, therefore the Company does not expect incur fees it incurred in fiscal 2002.
Interest expense for the fiscal year was $94,780 compared to $153,698 for fiscal
2001. The decrease in interest expense of $58,908 resulted from a $386,224
decrease in principal outstanding during the year and declines in the prime
rate.
In February 2002, the Company sold the veterinary division of Universal Medical
Distributors for $750,000. Cost and expenses related to the sale including
inventory and goodwill previously acquired. The Company recorded a gain on the
disposal of this division of $281,201 net of related income taxes.
COMPARISON OF FISCAL 2001 AND 2000
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Net sales for fiscal 2001 were $24.14 million compared with $28.88 million in
fiscal 2000, a decrease of 16.4%. The decrease in sales was primarily a result
of decreases in the wholesale business. Retail dental, medical and veterinary
sales increased by approximately 15%, while sales to wholesalers decreased by
approximately 21%.
Gross margin for fiscal 2001 was $2.52 million compared with $2.76 million in
fiscal 2000, but as a percentage of sales the gross margin increased to 10.47%
in fiscal 2001 compared to 9.56% in fiscal 2000. The increase in gross margin
reflects a greater percentage of retail sales, which has a higher gross profit
margin then wholesale.
Operating expenses include selling expenses and general and administrative
expenses. Selling expenses for fiscal 2001 were $744,652 compared to $757,710 in
fiscal 2000, a decrease of 1.7%. The Company reduced advertising costs by
$42,594 in fiscal 2001 from fiscal 2000, a decrease of 17.8%, but this was
offset by an increase of $25,200 in shipping expense in fiscal 2001 from fiscal
2000, an increase of 11.6%. The increase in shipping expense was due to
surcharges by carriers for increased fuel costs.
10
General and administrative cost in fiscal 2001 were $1,558,632 compared with
$1,891,257 in fiscal 2000, a decrease of 17.6%. Officers compensation in fiscal
2001 was $425,600 compared to $592,900 in fiscal 2000, a decrease of 28.2%. In
fiscal 2000 officers' compensation included stock bonus of approximately
$305,000 compared to stock bonuses in fiscal 2001 of $86,100. In fiscal 2000,
the Company recorded a contribution to the profit sharing plan of $50,000. In
fiscal 2001, the company determined that the 2000 contribution would not be made
and recognized a $50,000 reduction in general and administrative expenses. As a
result of the reduction in revenue, other office expenses including mailing,
printing and stationary, and telephone decreased by approximately $66,500 in
fiscal 2001 from fiscal 2000.
Other expenses in fiscal 2001 include $340,225 of business acquisition costs
including professional and consulting fees to acquire an inactive public
company. In fiscal 2000, the company spun off its holding company incurring
professional and consulting fees of $137,135.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
As of September 30, 2002 the Company has net current working capital of
$1,342,622 an increase of $313,992 from September 30, 2001. The Company
generated cash flows from operations of $450,623,primarily by having wholesale
customer provide advances on purchase orders which was used to acquire the
specific inventory for these orders. At September 30,2002 the Company had a
$2,000,000 credit facility of which $650,000 was unused . Subsequent to the year
end, the Company entered into a new financing agreement with Rosenthal &
Rosenthal, Inc, increasing the credit facility by $1,000,000 to $3,000,000.
For fiscal 2003, the Company has reduced its budget for both selling and general
and administrative expenses by approximately $255,000 eliminating unnecessary
expenses and revising some of the operations. In addition the Company expects
that consulting and other professional fees will be reduced by approximately
$150,000 which it estimated were non-recurring items. The above reductions would
provide the Company with income from operations based on the current sales
volume.
Based upon the above factors, the Company believes that it has sufficient funds
for operations for the next fiscal year.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Appears after Item 14.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
11
PART III
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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 September 30,
2001.
Name Age Position
---- --- --------
Dr. Jan Stahl 54 Chairman, Chief Executive Officer
Secretary, Director
Peter Steil 54 President, Chief Financial Officer,
Director
Kenneth Levanthal 47 Director
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. Dr. Stahl received his DDS Degree from New York
University in 1974.
Peter Steil co-founded the Company along with Dr. Stahl in 1987 and has been its
President and Chief Financial Officer since such time. From 1981 to 1987, Mr.
Steil was President of LBS Interdent, Inc., a company engaged in dental product
sales. From 1974 to 1981, Mr. Steil was employed as Director of International
Technical Support and Sales by Degussa, a European based manufacturer and
distributor of dental and medical supplies. Subsequently (from 1984 to 1986) he
was employed by Orbident International, the international sales division of
Darby Drugs. Mr. Steil's training is in mechanical engineering having received
his Technical Degree from Tuebingen University, Germany, in 1974.
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.) Omnicare consists of various health
care companies, with Medarco specializing in the sale of veterinary products.
Mr. Levanthal graduated from Boston University in 1977, receiving his Bachelors
Degree.
12
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth information relating to remuneration received by
executive officers and directors for the Company's most recent fiscal year
compared with the previous two fiscal years.
OWNERS AND MANAGEMENT
Long Term Compensation
Securities All
Annual Compensation (1) Restricted Underlying Other
-----------------------
Name & Principal Stock Options of Compen-
Position Year Salary Bonus Awards SARS sation
- ---------------- ---- -------- ------- ------- ---- ------
Jan Stahl, 2002 $246,446 $77,000 -0- -0- -0-
CEO (1) 2001 222,000 -0- 43,200 -0- -0-
2000 155,000 -0- 182,671 -0- -0-
Peter Steil, 2002 $ 64,000 $16,500 -0- -0- -0-
President (1) 2001 124,800 -0- 43,200 -0- -0-
2000 124,800 -0- 108,454 -0- -0-
Kenneth 2001 $ 69,000 $16,500 -0- -0- -0-
Levanthal 2001 80,400 -0- -0- -0- -0-
2000 88,400 -0- 14,257 -0- -0-
(1) It should be 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.
The following table sets forth, as of September 30, 2002, 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
- ----------------------------- -------------------------- -------------------------
Dr. Jan Stahl
3141 Ann Street
Baldwin, NY 11510 9,092,694 36.08%
Peter Steil
57 Hewlett Avenue
P.O. Box 750
Point Lookout, NY 11569 3,837,128 15.22%
Kenneth Levanthal
24 Meadowbrook Road
Huntington Station, NY 11746 354,000 1.40%
All Directors and Officers
As a Group 12,533,822 52.70%
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended September 30, 2002, the Company issued a total of
1,247,138 shares of common stock for consulting and other professional services
valued at $89,731. These issuances were considered exempt by reason of Section
4(2) of the Securities Act of 1933.
13
PART IV
--------
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
PAGE
----
1. Financial Statements:
Report of Independent Certified Public Accountants. F-1-F-2
Balance Sheets as of September 30, 2002 and 2001. F-3
Statements of Operations for the years ended
September 30, 2002, 2001 , and 2000. F-4
Statements of Changes in Stockholders' Equity
For the years ended September 30, 2002, 2001 and 2000. F-5
Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000. F-6
Notes to Consolidated Financial Statement. F-7-F-13
2. Schedule II - Valuation and Qualifying Accounts. F-14
(b) Exhibits.
21 List of subsidiaries.
(c) Reports on Form 8-K.
14
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: December 30, 2002 By: /s/ Dr. Jan Stahl
--------------------
Dr. Jan Stahl, Chairman,
Chief Executive Officer
and Secretary
(Principal Executive Officer)
Date: December 30, 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: December 30, 2002 By: /s/ Dr. Jan Stahl
-------------------
Dr. Jan Stahl, Director
Date: December 30, 2002 By: /s/ Peter Steil
-----------------
Peter Steil, Director
Date: December 30, 2002 By: /s/ Kenneth Leventhal
----------------------
Kenneth Leventhal, Director
15
EXHIBIT 21
LIST OF SUBSIDIARIES
APO Health, Inc., a New York Corporation.
Universal Medial Distributors, Inc., a New York Corporation.
- 16 -
CERTIFICATE PURSUANT TO
-----------------------
18 U.S.C. SECTION 1350,
-----------------------
AS ADOPTED PURSUANT TO
----------------------
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------
In connection with the Annual Report of APO Health ,Inc.(the "Company") on Form
10K for the fiscal year ended September 30,2002 as filed with the Securities &
Exchange Commission (the "Report"),each of the undersigned, in the capacities
and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report Fairly presents, in all
material respects , the financial condition and results of operations
of the Company.
Dated: December 30, 2002 By: /s/ Dr. Jan Stahl
Dr. Jan Stahl
Chief Executive Officer and Director
Dated: December 30, 2002 By: /s/ Peter Steil
Peter Steil
Chief Financial Officer and Director
- 17 -
CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14
-----------------------------------------------------
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
-------------------------------------------------------------
I, Dr. Jan Stahl, Chief Executive Officer of APO Health, Inc., certify
that:
1. I have reviewed this annual report on Form 10 KSB of APO Health, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures of a date within 90 days of the filing
date of this annual report (the "Evaluation ate"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
- 18 -
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated December 30, 2002 By: /s/ Dr. Jan Stahl
--------------------
Dr. Jan Stahl
Chief Executive Officer and Director
- 19 -
CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14
-----------------------------------------------------
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
-------------------------------------------------------------
I, Dr. Peter Steil, Chief Financial Officer of APO Health, Inc., certify
that:
1. I have reviewed this annual report on Form 10 KSB of APO Health,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures of a date within 90 days of the filing
date of this annual report (the "Evaluation ate"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(e) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
- 20 -
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated December 30, 2002 By: /s/ Peter Steil
----------------------------
Peter Steil
Chief Financial Officer and Director
- 21 -
INDEPENDENT AUDITORS' REPORT
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., as of September 30, 2002 and 2001 the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of APO Health, Inc. as
of September 30, 2002 and 2001, and the results of their operations and their
cash flows for the years then ended, 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 schedule 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 the years
ended September 30, 2002 and 2001 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.
Linder & Linder
Certified Public Accountants
Dix Hills, New York
December 3, 2002
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
APO Health, Inc.
Oceanside, New York
We have audited the accompanying consolidated statement of operations,
stockholders' equity and cash flows of APO Health Inc. for the year ended
September 30,2000. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of APO Health, Inc. as
of September 30, 2000 and the results of its operations and its cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States.
Our audit was 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 schedule 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 the year
ended September 30, 2000 has been subjected to the auditing procedures applied
in the audit 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.
MALONE & BAILEY, PLLC
April 5, 2001
Houston, Texas
F-2
APO HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001
ASSETS
------
2002 2001
----------- -----------
CURRENT ASSETS
Cash $ 520,618 $ 179,167
Accounts receivable, net of allowance for
doubtful accounts of $30,000 and $29,000 1,511,295 1,768,501
Inventory 2,242,609 1,692,209
Notes receivables 258,500 -
Due from officers 113,905 99,844
Deferred tax asset 12,000 11,600
Other current assets 18,297 165,935
----------- -----------
Total Current Assets 4,677,224 3,917,256
Property and Equipment, net of accumulated
Depreciation of $88,496 and $76,606 28,499 40,389
Goodwill, less accumulated amortization
Of $-0- and $53,802 - 125,537
Deferred tax asset 61,563 24,420
Deposits 7,500 7,500
----------- -----------
Total Assets $4,774,786 $4,115,102
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
CURRENT LIABILITIES
Bank notes payable $1,350,000 $1,736,224
Accounts payable 1,118,288 1,056,117
Accrued expenses 200,718 50,776
Due to officer - 45,509
Customer deposits 665,596 -
----------- -----------
Total Current Liabilities 3,334,602 2,888,626
----------- -----------
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, 24,554,227 and 23,132,089
Shares issued and outstanding 4,904 4,626
Paid in capital 1,621,983 1,452,530
Retained earnings (deficit) (186,703) (230,680)
----------- -----------
Total Stockholders' Equity 1,440,184 1,226,476
----------- -----------
Total Liabilities and Stockholders' Equity $4,774,786 $4,115,102
=========== ===========
See Accompanying Auditor' Report and Notes to Financial Statements.
F-3
APO HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
Revenues $31,998,836 $24,143,949 $28,882,347
Cost of revenues 29,800,674 21,619,232 26,118,517
------------ ------------ ------------
Gross Margin 2,198,162 2,524,717 2,763,830
Operating Expenses
Selling 842,212 744,652 757,710
General and administrative 1,673,695 1,558,632 1,891,257
------------ ------------ ------------
2,515,907 2,303,284 2,648,967
------------ ------------ ------------
Income (loss) from operations (317,745) 221,433 114,863
------------ ------------ ------------
Other Expenses
Interest expense 94,790 153,698 141,704
Holding company spin-off costs - - 137,135
Business acquisition costs - 340,225 -
------------ ------------ ------------
Total other expenses 94,790 493,923 278,839
------------ ------------ ------------
(Loss) before provision for
income taxes (412,535) (272,490) (163,976)
Provision for (recovery) of income tax (165,014) (115,591) 35,281
------------ ------------ ------------
Income (loss) from continuing operations (247,521) (157,899) (199,257)
Discontinued operations net of taxes of
195,059, $23,892, and $11,288 291,498 35,289 16,932
Extraordinary item, net of taxes
of $30,175 - - (58,575)
------------ ------------ ------------
Net Income (Loss) $ 43,977 $ (122,060) $ (240,900)
============ ============ ============
Basic and diluted
Earnings per common share
From continuing operations $ (.01) $ (.01) $ (.02)
Discontinued operations .01 .00 .00
Extraordinary item .01 .00 (.00)
------------ ------------ ------------
Net income (loss)per common shares $ .00 $ (.01) $ (.02)
============ ============ ============
Weighted average common
Outstanding 23,864,383 21,532,814 13,217,660
============ ============ ============
See Accompanying Auditors' Report and Notes to Financial Statements.
F-4
APO HEALTH, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002 2001, AND 2000
Retained
Common Stock Paid-In Earnings Treasury
Shares Amount Capital (Deficit) Stock Totals
----------- ---------- ---------- ----------- ---------- ----------
Balances,
September 30, 1999 5,513,882 $ 1,103 $ 613,837 $ 36,016 (180) $ 650,776
Retroactive stock split 7,221,240 259 259 - -
Cancellation of
Treasury stock (180,000) (180) 180
Spin-off of Xetal,Inc. (96,264) 96,264 - -
Issuance of stock
For debt 600,000 600 161,438 - - 162,038
Issuance of stock
For services 1,061300 1,061 304,593 - 305,654
Net (loss) - - (240,900) - (240,900)
----------- ---------- ---------- ----------- ---------- ----------
Balances,
September 30, 2000 14,216,422 2,843 983,345 (108,620) - 877,568
Retroactive stock split 1,470,000 54 (54)
Issuance of stock for
Officers' bonus 300,000 300 86,100 86,400
Sale of stock 600,000 100 279,900 280,000
Recapitalization
Reverse acquisition 2,500,000 500 (500)
Issuance of stock
For services 4,145,667 829 103,739 104,568
Net loss - - - (122,060) - (122,060)
----------- ---------- ---------- ----------- ---------- ----------
Balances,
September 30, 2001 23,132,089 4,626 1,452,530 (230,680) 1,226,476
Conversion of loan payable 125,000 25 49,975 50,000
Acquisition of subsidiary 50,000 10 29,990 30,000
Issuance of stock
For services 1,247,138 243 89,488 89,731
Net Income - - 43,977 43,977
----------- ---------- ---------- ----------- ----------
Balances
September 30,2002 24,554,227 $ 4,904 $1,621,983 $(186,703) $1,440,184
=========== ========== ========== =========== ==========
See Accompanying Auditors' Report and Notes to Financial Statements.
F-5
APO HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
2002 2001 2000
---------- ---------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ 43,977 $(122,060) $ (240,900)
Adjustments to reconcile net income to net cash
Net cash flows from operating activities
Depreciation and amortization 11,890 16,900 30,370
Bad debts 2,515 (30,800) (29,400)
Deferred taxes 37,543 (1,457) 6,937
Stock issued for services 89,731 190,969 305,654
Write-off of a deposit 20,000
Gain on asset retirement 3,105
Write off goodwill 125,537
Changes in:
Accounts receivable 256,569 429,560 344,857
Inventory (550,400) 203,124 (619,757)
Other current assets 147,638 (135,693) 22,694
Accounts payable 62,171 (393,433) (449,002)
Accrued expenses 149,942 (153,188) (330,309)
Income taxes payable (107,491)
Customers deposits payable 665,596 - -
---------- ---------- ------------
Cash Flows provided by (used in
Operating Activities 450,623 3,922 (1,043,242)
---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Notes receivables 258,500
Purchase of property and equipment (7,187)
Increase in deposits - (2,543)
---------- -----------
Cash Flows (used in) Investing Activities 258,500 (9,730)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from officer, net (31,448) (39,041) 116,645
Proceeds from bank notes payable, net (336,224) (156,446) 985,820
Proceeds from sale of stock - 280,000 -
---------- ---------- ------------
Cash Flows provided by (used in) (367,672) 84,513 1,102,465
---------- ---------- ------------
Financing Activities
Net increase (decrease) in cash 341,451 88,435 49,493
Cash Balances
Beginning of Period 179,167 90,732 41,239
---------- ---------- ------------
End of Period $ 520,618 $ 179,167 $ 90,732
========== ========== ============
See Accompanying Auditors' Report and Notes to Financial Statements.
F-6
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. 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,
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.
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, 2002,
2001 and 2000 advertising expense amounted to $303,849, $196,173, and $238,767,
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.
Goodwill represents the excess of the cost of two companies acquired over the
fair value of their net assets at the dates of acquisition in 1996 and is being
amortized using the straight line method over 15 years. Effective to the
issuance of FASB No. 142 the Company discontinued amortizing goodwill.
The Company follows Statement of Financial Accounting Standards No. 121,
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 and amounted to $272,036 ,$240,709, and $215,510 for the
years ended September 30, 2002, 2001 and 2000, 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. 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.
F-7
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications. Certain reclassifications of certain prior year amounts were
made to conform to the current year presentation.
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 2000
------- -------- --------
Cash paid during the year for:
Interest $91,790 $143,901 $144,381
Income taxes $65,000
Non-cash transaction:
Spin-off Xetal Inc. $96,624
Note payable paid by issuance of stock $50,000 $162,038
NOTE 3 - 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 the Company's assets and is personally
guaranteed by the two majority Company 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 on demand, or
upon maturity, which is up to 180 days after the initiation of a bankers
acceptance or March 31, 2002, 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%.
The credit facility was extended through March 31,2003 with substantially the
same terms.
Bank Notes Payable at September 30,2002 and 2001consist of the following:
2002 2001
---------- ----------
Own Note Borrowing $1,350,000 $1,370,000
Bankers Acceptances - 103,958
Term Loan - 262,266
---------- ----------
$1,350,000 $1,736,224
========== ==========
F-8
APO HEALTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - DEBT FORGIVENESS
During 1996 and 1997, the Company raised $500,000 in notes payable from several
individuals. During 1998 and 1999, the Company settled the above debts by
recording an extraordinary gain.
During 2000, several former note-holders demanded a renegotiation of the
settlement and the Company paid an additional $88,750, which is shown as an
extraordinary expense net of taxes.
NOTE 5 - INCOME TAXES
Income taxes (benefit) consist of the following:
2002 2001 2000
---------- --------- ---------
Current ( 7,498) $(89,242) $ 76,273
Deferred 37,543 (1,457) (29,704)
---------- --------- ---------
Total $ 30,045 $(90,699) $ 46,469
---------- --------- ---------
A reconciliation of income tax at the federal statutory income tax rate to total
income taxes is as follows:
2002 2001 2000
---------- --------- ---------
Computed at the federal statutory
Rate of 34% $ 25,168 $(72,338) $ 7,641
State income tax (benefit) 4,441 (12,560) 8,146
Valuation allowance adjustment (22,300) 22,300 30,872
Other adjustment 22,736 (28,101) - .
---------- --------- ---------
Total $ 30,045 $(90,699) $ 46,569
---------- --------- ---------
The components of deferred taxes are as follows:
2002 2001
--------- ---------
Deferred tax assets
Allowance for doubtful accounts $ 12,000 $ 11,600
Depreciation 11,693 8,520
Net operating loss carryover, less
Valuation allowance of $0 and$22,300 27,300 20,000
Reversal of valuation allowance 22,300
Miscellaneous - (4,100)
--------- ---------
Total deferred tax assets 73,563 36,020
Less Current Portion 12,000 11,600
--------- ---------
Non current deferred tax asset $ 61,563 $ 24,420
--------- ---------
The Company has a net operating loss carryover of approximately $124,000 to
offset future taxable income. The carryover expires 2017.
F-9
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -DISCONTINUED OPERATIONS
In February 2002,the Company sold the veterinary division of Universal Medical
Distributors, Inc.,including customer lists and catalogues for $550,000.In
addition the Company sold its inventory related to the veterinary division. The
Company wrote off the remaining goodwill associated with the veterinary
division, which resulted in a pretax gain on the sale of $436,205. The financial
statements for 2001 and 2000 have been restated to reflect the discontinued
operations of this division. In connection with the sale of the veterinary
division, the Company received a total of $500,000 in cash (which includes the
sale of inventory) and received a note in the amount of $250,000 for the balance
which is due on January 31,2003.
In Janaury,2002 , the Company acquired Envirotech Air Quality Services, Inc.
("Envirotech") for $25,000 in cash and 50,000 restricted shares of common stock.
The Company sold "Envirotech" in August 2002 for $52,900, and recorded a pretax
loss from discontinued operations of $22,930. In connection with the sale the
Company received $44,400 in cash and a note in the amount of $8,500 receivable
over a period of 19 months with interest at the rate of 18% per annum.
NOTE 7 - COMMON STOCK ISSUANCES
During the fiscal year ended September 30,2002,the Company issued a total of
1,247,138 shares of common stock for consulting and other professional services
valued at $89,731.In addition, the company issued 125,000 shares of common stock
for the conversion of a $50,000 note payable and $50,000 shares of common stock
as part of the acquisition of "Envirotech" valued at $30,000.
During the fiscal year ended September 30, 2001, 300,000 shares of stock valued
at $86,400 were issued to two officers as a bonus and the Company sold 500,000
shares in a private placement which provided net proceeds to the Company of
$280,000. The inventors of the private placements received warrants to acquire
1,500,000 shares of Company stock at $1.00 per share. Such warrants expire April
24, 2004.
On June 13, 2001, the Company acquired IFAN in a transaction accounted for as a
reverse acquisition, whereby the Company is treated as the acquirer for
accounting purposes. Accordingly, the Company's stockholders' equity has been
retroactively restated to give effect to the acquisition. In conjunction with
the reverse acquisition, the Company's shareholders other than the shareholders
that purchased the 500,000 shares in the private placement received 5.9 IFAN
shares for each APO share held, and 2,500,000 shares were issued to the existing
IFAN shareholders.
In conjunction with the acquisition 3,145,667 shares were issued to consultants
associated with the acquisition. The consultants also received warrants to
purchase 1,350,000 shares of the Company's stock at prices ranging from $1 to $2
that expire September 13, 2004.
In addition, a consultant was issued 1,000,000 shares pursuant to a contract to
provide investor relations services over the next twelve months. The investment
relations consultant received warrants to purchase 1,000,000 share of Company
stock at prices ranging from $1 to $2 per share. Such warrants expire June 5,
2006.
F-10
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 are 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.
On July 22, 2002, the Company issued common stock purchase warrants for 260,000
shares of common stock exercisable at $0.10 per share, and on September 27,
2002, issued common stock purchase warrants for 1,875,000 shares exercisable at
$.04 per share, both expiring on August 31, 2007
Pro Forma Disclosure
- ----------------------
The Company has adopted the disclosure only provision of SFAS 123 "Accounting
for Stock Based Compensation." Under SFAS, employee warrants are valued at the
grant date using the Balk-Scholes valuation method model. Had compensation cost
for the Company's warrants been determined as prescribed by SFAS 123, pro forma
net income (loss) wand earnings per share for 2002 would have been changed as
follows:
2002
----
As Reported Proforma
------------ --------
Net Income (loss) $43,977 $(8,276)
Diluted earnings (loss) $.00 $(.00)
The estimated per share fair value of the warrants granted in July and September
2002 were $.078 and $.0254 respectively using the Black Scholes option pricing
model with the follo9wing assumptions: dividend yield 0%: expected volatility
rate of 76.44%: risk free interest rate of 3.25%: and expected option life of 5
years and 58 months respectively.
NOTE 8 - HOLDING COMPANY SPINOFF COSTS AND BUSINESS ACQUISITION COSTS
During fiscal 2002, the Company incurred $340,225 of non-recurring costs
associated with the acquisition of APO.
During fiscal 2000, the Company incurred $137,135 in legal and accounting fees
was incurred in connection with the spin-off of Xetal in December 1999.
NOTE 9 - LEASES
The Company leases 11,800 square feet in New York and a small sales office in
Florida. Both leases are month-to-month with affiliated companies owned by the
Company's officers and shareholders. The affiliate's underlying New York lease
expires in 2004 and the affiliate's underlying Florida lease expires in
September 2001. Lease payments made by the Company approximate the payments due
by the affiliated companies. Rental expense was $73,881, $73,183, and $76,665
for the years-ended September 30, 2002, 2001, and 2000, respectively.
Future minimum lease payments are, $71,916 in 2003, $74,364 in 2004, and $18,744
in 2005.
NOTE 10 - 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, 2002, 2001, and 2000, were $0, $0, and $50,000, respectively. During 2001,
the Company determined it will not make its 2000 pension contribution and
recognized such contribution as income.
NOTE 11 - 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 OTHERS 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.
F-11
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
On July1, 2002,the Court granted the intervention motion of the Kenro
plaintiffs, and, as a matter of law, denied Merchants' motion for summary
judgement and granted the Company's cross-motion for summary judgement, and
finding that the claims asserted against the Company in the Kenro lawsuit fell
within the terms of the Merchants' policies. As a result, the Court ordered that
Merchants has a duty to defend and indemnify the Company in the Kenro lawsuit.
Additionally, the Court found alternatively, that the disclaimer of coverage by
Merchants was untimely, so that Merchants would not be allowed to rely upon or
raise any coverage defenses. The Court also found that the Company is entitled
to be reimbursed for the legal fees that it incurred, and ordered that a hearing
be conducted to determine the amount that Merchant owed.
Merchants subsequently filed a motion for reargument of its unsuccessful summary
judgement motion, and papers in opposition have been submitted by the Company
and the Kenro plaintiffs to the Court. The Company and the Kenro plaintiffs have
argued that the Court should adhere to its original decision for a variety of
reasons. Merchants has also filed an appeal to the Appellate Division from the
Court's July 1,2002 Order, and in the event the Court adheres to its decision,
it is expected that Merchants will again notice an appeal, and move to have the
two appeals consolidated.
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 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 12 - 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,
2002, the Company had $495042 on deposit, in excess of the $100,000 in each
bank, which is insured under federal law.
F-12
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The concentration of credit risk due to receivables is minimal due to the
Company's diverse customer base. Two customers account for approximately 36%
,27% and 34% of sales for the years ended September 30, 2002 ,2001and 2000,
respectively. No single vendor accounts for greater than 10% of purchases.
NOTE 13-SUBSEQUENT EVENTS
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.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%. This agreement is for a
period of three years through October 31,2005 and may be extended on a year to
year basis thereafter unless terminated as provided in the agreement.
On December 1,2002, the Company entered into a sublease agreement to lease out
2000 square feet of its warehouse through November 30,2005 at an annual rate of
$18,000 per annum with annual increases of 4% on the anniversary date.
F-13
APO HEALTH, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
Balance, Balance,
Year Ended Beginning of End of
September 30, Account Period Additions Reduction Period
- ----------------- ----------------- ------------- ----------- ---------- --------
2000 Allowance for
Doubtful accounts $ 89,200 $ - $ (29,400) $59,800
2001 Allowance for
Doubtful accounts $ 59,800 $ - $ (30,800) $29,000
Allowance for
Deferred Taxes $ - $ 22,300 $ - $22,300
2002 Allowance for
Doubtful accounts $ 29,000 $ 1,000 - $30,000
Allowance for
Deferred Taxes $ 22,300 $ - $ (22,300) $ -
F-14