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, 2003 |_| 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 APO HEALTH, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Nevada 86-0871787 - ------------------------------ ---------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 3590 Oceanside Rd. Oceanside, New York 11575 - ---------------------------------------- -------- (Address of principal executive offices) Zip Code (800) 365-2839 --------------------------------------------------- (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act (1): Common Stock, Par Value $ .0002 Per Share ----------------------------------------- (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 |_|. 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 |_|. (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 15, 2003, amounted to $806,301.32. The number of shares outstanding of each of the registrant's classes of common stock as of December 15, 2003 was 32,106,045 shares. 1 DOCUMENTS INCLUDED BY REFERENCE: Report on Form 8-K filed with the SEC on June 28, 2001; Registration on Form S-8 with the SEC on July 30, 2001; Report on Form 8-K filed with the SEC on October 12, 2001; Registration on Form S-8 filed with the SEC on November 29, 2001. Registration on Form S-8 filed with the SEC on October 1,2002 Registration on Form S-8 filed with the SEC on March 14,2003 Registration on Form S-8 filed with the SEC on June 10,2003 Registration on Form S-8 filed with the SEC on September 16,2003 (The Remainder of This Page Has Been Left Intentionally Blank.) 2 APO HEALTH, INC. FORM 10-K FISCAL YEAR ENDED SEPTEMBER 30, 2003 TABLE OF CONTENTS PAGE 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 9 Item 9 Changes in and Disagreements with Accountants On Accounting and Financial Disclosure 9 Item 9(a) Controls and Procedures 10 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 14 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 2004 the Company will introduce its first physician Medical catalogue. The current distribution of revenue is 92% from wholesale accounts and 8% 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 25% of revenue. Products and Services Currently, APO distributes approximately 5,000 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 one outside, independent sales representative. 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 the one independent sales representatives. The Company's marketing approach attempts to capitalize on its ability to procure products throughout the world at favorable pricing prices and to resell them to their customers at discounted prices. 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 4 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 has no product liability insurance. Lack of Patent Protection At present, the Company does not rely upon patent protection for any of its products and such protection is not believed to be essential by management because of the character of its products. Furthermore, there is little likelihood that 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. Competition The medical, dental and veterinary products supply business is intensely competitive. At present, the Company estimates that there are over 40 companies whose products compete with many of the Company's present and proposed products. These companies range from major multinational companies to enterprises 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 2 warehouse employees. 5 ITEM 2 PROPERTIES As of September 30, 1999, the Company's offices were located at 3590 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. 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 July 1, 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. 6 PART II 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: Common -------------------- Quarter Ended High Low ------------- ---- --- 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 December 31,2002 $0.065 $0.015 March 31,2003 $ 0.08 $0.031 June 30,2003 $ 0.06 $0.026 September 30, 2003 $ 0.09 $0.053 - ---------- (a) Holders The number of holders of record of the Company's common stock as of September 30, 2003 was approximately 366. (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. 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, 2003.Periods prior to 2002 have been restated to give effect for discontinued operations. Statement of Operations Data: Fiscal Year Ended September 30, -------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Revenue $47,448,232 $31,998,836 $24,143,949 $28,882,347 $30,747,128 Gross Profit 1,978,024 2,198,162 2,524,717 2,763,830 2,579,870 Selling, General and Administrative Expenses 2,323,949 2,515,907 2,303,284 2,648,967 2,432,167 Net Income (loss) From continuing operations (517,256) (247,521) (157,899) (199,257) 5,104 Discontinued operations 291,498 35,839 16,932 266,120 Extraordinary item -- -- -- -- -- Net Income (Loss) (517,256) 43,977 (122,060) (240,900) 271,224 Earnings per common From continuing operations $(.02) $(.01) $(.01) $(.02) $.00 Discontinued operations $.01 $.00 $.00 $.05 Extraordinary item $.00 $.00 $(.00) $.00 Earnings per Common Share $(.02) $.00 $(.01) $(.02) $.05 Weighted Average Shares Outstanding 27,003,847 23,864,383 21,532,814 13,217,660 5,261,432 7 Balance Sheet Data: As of September 30, -------------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Total Assets $3,698,086 $4,774,786 $4,115,102 $4,423,752 $4,259,980 Total Liabilities 2,475,222 3,334,602 2,888,626 3,546,184 3,609,204 Stockholders' Equity 1,222,864 1,440,184 1,226,476 877,568 650,776 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, 2003 and 2002 have been adjusted to reflect the disposition of the veterinary division in February 2002 which are reported as discontinued operations. Results of Operations Comparison of Fiscal 2003 and 2002 Net sales for the year ended September 30, 2003 were $47,448,232 compared to $31,998,836 for the year ended September 30,2002, and increase of $15,449,396 (48.3%). The increase in sales is wholly attributable to the wholesale business as several products that the company distributed were in highly sought after. Gross margins for the year ended were $1,978,024 compared to $2,198,162 for the year ended September 30, 2002, a decrease of $220,138 (10.0%). The gross margin for the year ended September 30, 2003 was 4.2% compared to 6.9% for the year ended September 30, 2002. The margins declined as some of the wholesale products were generating a gross profit of only 1 % to 1.5% because of rising costs for those products without the ability to raise prices. In addition, the 24% declines in the value of the US Dollar versus the Canadian Dollar and the Euro has affected profit substantially. The margins on retail sales also declined due to increases in product costs and increased competition which did not allow the Company to raise prices. Operating expenses which includes both selling and general and administrative expenses for the year ended September 30, 2003 were $2,323,949, compared to $2,515,907 for the year ended September 30, 2002. This was a decrease of $191,950 (7.6%).Selling expenses for the year ended September 30, 2003 were $576,250, compared to $842,212 for the year ended September 30, 2002. This was a decrease of $265,962 (31.5%). Advertising costs including catalogues and other printed materials decreased by approximately $260,000 in the year ended September 30, 2003. The Company eliminated its outside service which sent verified numbers to which it could fax advertising materials saving approximately $8,000 per month or $96,000 on an annual basis. All other selling expenses had minor changes from year to year decreasing by approximately $6,000. General and administrative expenses for the year ended September 30,2003 were $1,742,699, compared to $1,673,695 for the year ended September 30,2002. This was an increase of $74,004 (4.4%). Consulting expenses increased from $81,642 to $250,200, an increase of $168,558. The Company was actively searching for possible combinations or acquisitions during the year ended September 30, 2003. The compensation for the consultants was done for stock in the Company issued after the Company filed several forms S-8 which did not affect the cash flow of the Company. Professional expenses including legal expenses were $46,220 in the year ended September 30, 2003 compared to $142,405 for the year ended September 30,2002, a decrease of $96,185. The Company's insurance carrier is defending the class action lawsuit in the State of Illinois, therefore the fees incurred by the Company has declined substantially. Officer's compensation for fiscal 2003 increased to $533,956 from $489,446 in fiscal 2002, an increase of $44,510, which includes bonuses of $156,732 in fiscal 2003 compared to $110,000 in fiscal 2002. All other expenses decreased by approximately $18,369 with no significant change in any one expense. Comparison of Fiscal 2002 and 2001 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. 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 8 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. Liquidity and Capital Resources As of September 30, 2003 the Company has net current working capital of $1,197,361 a decrease of $145,261 from September 30, 2002. The Company's cash flows from operations was $(12,522). At September 30,2003 the Company had a $3,000,000 credit facility of which approximately $2,000,000 was unused, For fiscal 2003, the Company has reduced both selling and general and administrative expenses by approximately $152,000 eliminating unnecessary expenses and revising some of the operations. The Company expects that consulting and other professional fees will be reduced by approximately $350,000 in fiscal 2004 which it estimated were non-recurring items with the above reductions the Company anticipates operations will provide positive cash flows 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 9 ITEM 9(a) CONTROLS AND PROCEDURES The Company has established and maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed by APO Health, Inc. in the reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Within the 90 days prior to the date of this annual report, under the supervision and with the participation of APO Health, Inc.'s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the date of such evaluation in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in APO Health, Inc.'s periodic SEC filings. There have been no significant changes to the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation. 10 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages and business experience of the executive officers and directors of the Company. All information is as of September 30, 2003. In August of 2003, Peter Steil resigned as President, CFO and Director. Dr. Jan Stahl is presently acting President and CFO in addition to his other duties. Name Age Position ---- --- -------- Dr. Jan Stahl 55 Chairman, Chief Executive Officer, Chief Financial Officer Secretary, Director Peter Steil 55 President, Chief Financial Officer, Director Kenneth Levanthal 48 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. Lack of Independent Audit Committee Despite the new Sarbanes-Oxley requirement to maintain an independent audit committee, the Company has not yet adopted a charter and has not yet formed an audit committee. The Company hopes to appoint an independent director to serve as chairman of the new audit committee, which it expects to adopt within the next six months. Code of Ethics Despite the Sarbanes-Oxley requirement to have a Board approved Code of Ethics adopted by the Company, we presently have not created or adopted such a Code. The Board of Directors intends to prepare and adopt a Code of Ethics within the next 90 days. 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. (Jan may very well 11 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 (3) SARS sation - ---------------- ---- ------ ----- ------ ---- ------ Jan Stahl, 2003 $222,150 $156,723 (2) $34,666 -0- -0- CEO(1) 2002 246,446 77,000 -0- -0- -0- 2001 222,000 -0- 43,200 -0- -0- Peter Steil, 2003 $ 42,050 $ -0- $ -0- -0- -0- President(1) 2002 64,000 16,500 -0- -0- -0- 2001 124,800 -0- 43,200 -0- -0- Kenneth 2003 66,300 $ -0- $12,067 -0- -0- Levanthal 2002 69,000 $ 16,500 -0- -0- -0- 2001 80,400 -0- -0- -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. (2) Dr. Stahl has waived his rights to $180,000 of his bonus for the benefit of the Company. (3) Restricted Stock awards in lieu of cash compensation. The following table sets forth, as of September 30, 2003, certain information regarding the beneficial ownership of the Company's common stock. Percentage Number of Shares Owned Common Stock Name of Record and Beneficially Outstanding(1) ---- -------------------------- -------------- Dr. Jan Stahl 3141 Ann Street Baldwin, NY 11510 11,112,512 34.61% Peter Steil 57 Hewlett Avenue P.O. Box 750 Point Lookout, NY 11569 40,000 .125% Kenneth Levanthal 24 Meadowbrook Road Huntington Station, NY 11746 796,000 2.48% All Directors and Officers As a Group 11,948,512 39.70% - ---------- (1) Based upon a total of 32,106,045 shares as of December 15, 2003 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. SALES OF UNREGISTERED SECURITIES DURING FISCAL YEAR ENDED SEPTEMBER 30, 2003 The issuances of unregistered securities which occurred during the fiscal year were as follows: Unless otherwise noted, each of the issuances described below is considered by the Company to be exempt from registration by reason of Section 4(2) of the Securities Act of 1933. 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. These issuances were considered exempt from registration by reason of 12 Section 4(2) of the Securities Act of 1933. Also during that year, the Company sold 500,000 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. Those issuances were considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933, and Regulation D of the Act, and Rule 506 promulgated thereunder 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. These issuances were considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933 During the fiscal year ended September 30, 2003, the Company issued a total of 7,551,818 shares of common stock for consulting, compensation and other professional services valued at $300,206. These issuances were considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933. 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. These issuances were considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933. 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. That issuance was considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933. Stock Option Plan On July 22, 2002, the Company adopted a Bonus Compensation Warrant Agreement, whereby, the Company would issue Bonus Compensation Warrants equivalent to 10% of the price of any merger or acquisition brought to the Company. All of the warrants being exercisable into shares of common stock at 80% of the 20 day average bid and ask price of the Company's common stock. The Company authorized up to a maximum aggregate of 3,000,000 shares of common stock available for any Bonus Compensation Warrants. On July 22, 2002,The Company issued a common stock purchase warrant for 260,000 shares of common stock exercisable at $.10 per share and on September 27,2002,a common stock purchase warrant for 1,875,000 shares exercisable at $.04 per share, both expiring on August 31,2007. That issuance was considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933 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. 13 PAGE ---- 1. Financial Statements: Report of Independent Certified Public Accountants. F-1 Balance Sheets as of September 30, 2003 and 2002. F-2 Statements of Operations for the years ended September 30, 2003, 2002 and 2001. F-3 Statements of Changes in Stockholders' Equity For the years ended September 30, 2003, 2002 and 2001. F-4 Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001. F-5 Notes to Consolidated Financial Statement. F-6 - F-12 2. Schedule II - Valuation and Qualifying Accounts. F-13 Financial statements and financial statement schedules that have been omitted are not required. (b) Exhibits. 21 List of subsidiaries. 31.1 Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Chief Executive Officer and Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herein. (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: January 2, 2004 By: /s/ Dr. Jan Stahl ------------------------------------- Dr. Jan Stahl, Chairman, Chief Executive Officer, acting CFO (Principal Executive 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: January 2, 2004 By: /s/ Dr. Jan Stahl ------------------------------------- Dr. Jan Stahl, Director Date: January 2, 2004 By: /s/ Kenneth Leventhal ------------------------------------- Kenneth Leventhal, Director 15 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., and subsidiaries as of September 30, 2003 and 2002 the related consolidated statements of operations, stockholders' equity and cash flows for the years ended September 30, 2003, 2002 and 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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. and subsidiaries as of September 30, 2003 and 2002, and the results of their operations and their cash flows for the years ended September 30, 2003, 2002 and 2001 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 schedules listed in the index to the financial statements and schedules are presented to comply with the rules and regulations under the Securities and Exchange Act of 1934 and are not otherwise a required part of the basic financial statements. The supplemental schedules for the years ended September 30, 2003,2002 and 2001 have been subjected to the auditing procedures applied in the audits of the basic financial statements. In our opinion, the supplemental schedules 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 9, 2003 F-1 APO HEALTH, INC. CONSOLIDATED BALANCE SHEETS September 30, 2003 and 2002 ASSETS 2003 2002 ---- ---- Current Assets Cash $ 405,153 $ 520,618 Accounts receivable, net of allowance for doubtful accounts of $50,000 and $30,000 1,702,741 1,511,295 Inventory 1,396,205 2,242,609 Notes receivables 4,566 258,500 Due from officers 108,905 113,905 Deferred tax asset -- 12,000 Other current assets 55,013 18,297 ----------- ----------- Total Current Assets 3,672,583 4,677,224 Property and Equipment, net of accumulated Depreciation of $98,992 and $88,496 18,003 28,499 Deferred tax asset -- 61,563 Deposits 7,500 7,500 ----------- ----------- Total Assets $ 3,698,086 $ 4,774,786 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Bank notes payable $ 1,008,123 $ 1,350,000 Accounts payable 924,029 1,118,288 Accrued compensation 248,483 200,718 Customer deposits 294,587 665,596 ----------- ----------- Total Current Liabilities 2,475,222 3,334,602 ----------- ----------- 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, 32,106,045 and 24,554,227 Shares issued and outstanding 6,325 4,904 Paid in capital 1,920,768 1,621,983 Retained earnings (deficit) (704,229) (186,703) ----------- ----------- Total Stockholders' Equity 1,222,864 1,440,184 ----------- ----------- Total Liabilities and Stockholders' Equity $ 3,698,086 $ 4,774,786 =========== =========== See Accompanying Auditor' Report and Notes to Financial Statements. F-2 APO HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000 2003 2002 2001 ---- ---- ---- Revenues $ 47,448,232 $ 31,998,836 $ 24,143,949 Cost of revenues 45,470,208 29,800,674 21,619,232 ------------ ------------ ------------ Gross Margin 1,978,024 2,198,162 2,524,717 Operating Expenses Selling 576,250 842,212 744,652 General and administrative 1,747,699 1,673,695 1,558,632 ------------ ------------ ------------ 2,323,949 2,515,907 2,303,284 Income (loss) from operations (345,925) (317,745) 221,433 ------------ ------------ ------------ Other Expenses Interest expense 92,446 94,790 153,698 Business acquisition costs -- -- 340,225 ------------ ------------ ------------ Total other expenses 92,446 94,790 493,923 ------------ ------------ ------------ (Loss) before provision for income taxes (438,371) (412,535) (272,490) Provision for (recovery) of income tax 79,155 (165,014) (114,591) Income (loss) from continuing operations (517,526) (247,521) (157,349) Discontinued operations net of taxes of $0, $195,059, and $23,892 -- 291,498 35,839 ------------ ------------ ------------ Net Income (Loss) $ (517,526) $ 43,977 $ (122,060) ============ ============ ============ Earnings per common share and earnings per common share assuming dilution From continuing operations $ (.02) $ (.01) $ (.01) Discontinued operations .00 .01 .00 Extraordinary item .00 .01 .00 ------------ ------------ ------------ Net income (loss) per common shares $ (.02) $ .00 $ (.01) ============ ============ ============ Weighted average common Outstanding 27,003,847 23,864,383 21,532,814 ============ ============ ============ See Accompanying Auditors' Report and Notes to Financial Statements. F-3 APO HEALTH, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2003 2002, AND 2001 Retained Common Stock Paid-In Earnings Shares Amount Capital (Deficit) Totals ------ ------ ------- --------- ------ 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 500,000 100 279,900 280,000 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 Issuance of stock For services 7,551,818 1,421 298,785 300,206 Net (Loss) (517,526) (517,526) ---------- ------ ---------- --------- ---------- Balance September 30, 2003 32,106,045 $6,325 $1,920,768 $(704,229) $1,222,864 ========== ====== ========== ========= ========== See Accompanying Auditors' Report and Notes to Financial Statements. F-4 APO HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001 2003 2002 2001 ---- ---- ---- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $(517,526) $ 43,977 $(122,060) Adjustments to reconcile net income to net cash Net cash flows from operating activities Depreciation and amortization 10,496 11,890 16,900 Bad debts 20,000 2,515 (30,800) Deferred taxes 73,563 37,543 (1,457) Stock issued for services 300,206 89,731 190,969 Write off goodwill 125,537 Changes in: Accounts receivable (211,446) 256,569 429,560 Inventory 846,404 (550,400) 203,124 Other current assets (36,716) 147,638 (135,693) Accounts payable (194,259) 62,171 (393,433) Accrued expenses 67,765 149,942 (153,188) Customers deposits payable (371,009) 665,596 --------- --------- --------- Cash Flows provided by (used in) Operating Activities (12,522) 967,623 3,922 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Notes receivables 253,934 (258,500) --------- --------- --------- Cash Flows provided by (used in) Investing Activities 253,934 (258,500) CASH FLOWS FROM FINANCING ACTIVITIES Advances from officer, net (15,000) (31,448) (39,041) Proceeds from bank notes payable, net (341,877) (336,224) (156,446) Proceeds from sale of stock -- 280,000 --------- --------- --------- Cash Flows provided by (used in) Financing Activities (356,877) (367,672) 84,513 --------- --------- --------- Net increase (decrease) in cash (115,645) 341,451 88,435 Cash Balances Beginning of Period 520,618 179,167 90,732 --------- --------- --------- End of Period $ 405,153 $ 520,618 $ 179,167 ========= ========= ========= See Accompanying Auditors' Report and Notes to Financial Statements. F-5 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - SUMMARY OF ACCOUNTING POLICIES Nature of business and basis of consolidation. APO Health, Inc. ("APO") was incorporated under the laws of the state of New York in August 1978. 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, 2003, 2002 and 2001 advertising expense amounted to $72,029, $303,849 and $196,173, respectively. Merchandise inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and equipment is stated at cost. Depreciation is provided for on the straight-line method over the useful estimated life. The cost of maintenance and repairs is expensed as incurred. The Company follows Statement of Financial Accounting Standards No. 144, Impairment of Long-lived Assets, by reviewing such assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Shipping and handling is expensed as incurred. Shipping and handling is included in selling expense and amounted to $242,730, $272,036 and $240,709 for the years ended September 30, 2003, 2002 and 2001, 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-6 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 2003 2002 2001 ---- ---- ---- Cash paid during the year for: Interest $ 92,477 $91,790 $143,901 Non-cash transaction: Note payable paid by issuance of stock $50,000 Note 3 - BANK NOTES PAYABLE On October 29, 2002, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. The financing agreement provides the Company with a maximum credit facility not to exceed $3,000,000. 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% (7.25% as of September 30, 2003). This agreement is for a period of three years through October 31,2005 and may be extended on a year to year basis thereafter unless terminated as provided in the agreement. The credit facility provides that the Company maintain certain financial covenants. Bank Notes Payable at September 30, 2002 and 2002 consist of the following: 2003 2002 ---- ---- Own Note Borrowing $1,008,123 $1,350,000 Note 4 - INCOME TAXES Income taxes (benefit) consist of the following: 2003 2002 2001 ---- ---- ---- Current $ 5,592 (7,498) $(89,242) Deferred 73,563 37,543 (1,457) ------- -------- -------- Total $79,155 $ 30,045 $(90,699) ======= ======== ======== F-7 APO HEALTH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - INCOME TAXES (continued) A reconciliation of income tax at the federal statutory income tax rate to total income taxes is as follows: 2003 2002 2001 ---- ---- ---- Computed at the federal statutory Rate of 34% $ -- $ 25,168 $(72,338) State income tax (benefit) -- 4,441 (12,560) Valuation allowance adjustment 73,563 (22,300) 22,300 Other adjustment 5,592 22,736 (28,101) ------- -------- -------- Total $79,155 $ 30,045 $(90,699) ======= ======== ======== The components of deferred taxes are as follows: 2003 2002 ---- ---- Deferred tax assets Allowance for doubtful accounts $20,000 $12,000 Depreciation 12,000 11,693 Net operating loss carryover, less Valuation allowance of $221,200 -- 27,300 Change in valuation allowance (32,000) 22,300 ------- ------- Total deferred tax assets 73,563 Less Current Portion -- 12,000 ------- ------- Non current deferred tax asset $ -- $61,563 ======= ======= The Company has a net operating loss carryover of approximately $376,000 to offset future taxable income. The carryover expires 2018. The Company has offset the deferred tax asset by a valuation of $221,200, since it cannot be determined more likely than not whether the Company will be able to utilize such net operating loss carryover. During the year ended December 31, 2003, the valuation allowance increased by $221,200. Note 5 - 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 January, 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. F-8 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 - COMMON STOCK ISSUANCES During the fiscal year ended September 30, 2003, the Company issued a total of 7,551,818 shares of common stock for consulting, compensation and other professional services valued at $300,206 which includes compensation to officers in the approximate amount of $46,700. 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 investors in 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. As of September 30, 2003, none of the warrants have been exercised. 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. As of September 30, 2003, none of the warrants have been exercised. 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 were cancelled in fiscal 2002. Stock Option Plan On July 22,2002, the Company adopted a Bonus Compensation Warrant Agreement, whereby, the Company would issue Bonus Compensation Warrants equivalent to 10% of the price of any merger or acquisition brought to the Company. All of the warrants being exercisable into shares of common stock at 80% of the 20 day average bid and ask price of the Company's common stock. The Company authorized up to a maximum aggregate of 3,000,000 shares of common stock available for any Bonus Compensation Warrants. To date none of these shares have been exercised. On July 22, 2002, The Company issued a common stock purchase warrant for 260,000 shares of common stock exercisable at $.10 per share and on September 27, 2002, a common stock purchase warrant for 1,875,000 shares exercisable at $.04 per share, both expiring on August 31, 2007. To date none of these warrants have been exercised. F-9 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pro Forma Disclosure The Company has adopted the disclosure only provision of SFAS 123, "Accounting for Stock Based Compensation". Under SFAS 123 employee warrants are valued at the grant date using the Black-Scholes valuation model. Had compensation cost for the Company's warrants been determined as prescribed by SFAS 123, pro forma net income (loss) and earnings per share for 2002 would have been changed as follows: 2003 2002 --------- -------- Net Income (loss) as reported $(517,526) $ 43,977 Pro forma compensation (65,028) (52,253) --------- -------- Net Income (loss) pro forma $(587,554) $ (8,276) ========= ======== Diluted Earnings (loss) per share $ (.02) $ (.00) ========= ======== The estimated per share fair value of the warrants granted in July and September 2003 and 2002 were $.022 and $.079, and $.032 and $.025, respectively using the Black-Scholes option pricing model with the following assumptions: 2003 2002 --------- -------- Dividend yield 0 0 Volatility 78.10 76.44 Interest rate 2.82% 3.25% Option life in months 47 59 Note 7 - HOLDING COMPANY SPINOFF COSTS AND BUSINESS ACQUISITION COSTS During fiscal 2001, the Company incurred $340,225 of non-recurring costs associated with the acquisition of APO. Note 8 - LEASES The Company leases 12,000 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. On December 1, 2002 the Company entered into a sublease agreement to lease approximately 2000 square feet of its warehouse through November 30, 2005. The annual rental is $18,000 with annual increases of 4% on the anniversary date. Future minimum lease payments are $74,364 in 2004 and $18,744 in 2005. Note 9 - 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, 2003, 2002, and 2001, were $0, $0, and $0, respectively. During 2001, the Company determined it will not make its 2000 pension contribution and recognized such contribution as income. F-10 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 - 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. 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 July 1, 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. Product Liability Certain of the Company's products and proposed products will be utilized in medical procedures where the Company could be subject to claims from injuries resulting from use of the Company's products. Recent developments in the insurance industry have reduced the availability and increased the cost of liability insurance coverage. At present, the Company is self-insured for product liability claims. F-11 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 - 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, 2003, the Company had approximately $240,000 on deposit, in excess of the $100,000 in each bank, which is insured under federal law. The concentration of credit risk due to receivables is minimal due to the Company's diverse customer base. For the years ended September 30, 2003, 2002 and 2001 the following customers had in excess of 10% of the total sales. No single vendor accounts for greater than 10% of purchases. 2003 2002 2001 ---- ---- ---- Customer A 38% 25% 16% Customer B 12% 11% 11% --- --- --- 50% 36% 27% === === === Note 12 - Computation of Earnings Per Share Basic earnings per share is calculated using the average number of common shares outstanding. Diluted earnings per share is computed on the basis of average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock method". Year ended September 30, ------------------------------- 2003 2002 2001 ---- ---- ---- Net income (loss) available for common shareholders, basic and diluted $ (517,526) $ 43,977 $ (122,060) Weighted average common stock Outstanding-Basic 27,003,847 23,864,383 21,532,814 Net effect of dilutive stock options * * * Weighted average common stock and Common stock equivalents-diluted 27,003,847 23,864,383 21,532,814 Basic earnings per share $(.02) $.00 $(.01) ========== ========== ========== *Antidilutive $(.02) $.00 $(.01) ========== ========== ========== F-12 APO HEALTH, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001 Balance, Balance, Year Ended Beginning of End of September 30, Account Period Additions Reduction Period - ------------- ------- ------ --------- --------- ------ 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) $ -- 2003 Allowance for Doubtful accounts $30,000 $ 20,000 -- $ 50,000 Allowance for Deferred Taxes $ -0- $221,200 -- $221,200 F-13