UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2004
|_| 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:
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 of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark, if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the average bid and asked price of
such common equity, as of the last business day of the registrant's most
recently completed second fiscal quarter was $3,683,502.61.
The number of shares outstanding of each of the registrant's classes of
common stock as of December 15, 2004 was 35,921,045 shares.
APO HEALTH, INC.
FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
Part I
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 4
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 10
Item 9A. Controls and Procedures 10
Item 9B. Other Information 10
Part III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 13
Item 12. Security Ownership of Certain Beneficial
Owners and Management 14
Item 13. Certain Relationships and Related Transactions 14
Item 14. Principal Accounting Fees and Services 14
Part IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 15
Signatures 16
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 represented approximately 91% of the then outstanding share of
common stock. IFAN, an inactive company, subsequently 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.,
("Universal") a distributor and 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 school, retail medical and dental
areas. To attain that goal, the Company has introduced its first institutional
retail catalogue and in January 2005, the Company plans to introduce its first
physician medical catalogue. The current distribution of revenue is 91% from
wholesale accounts and 9% 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 total revenue.
Products and Services
Currently, the Company distributes approximately 5,000 different products.
New products are constantly added as the needs of the Company's customers
increase. The Company obtains its products from vendors throughout the world and
does not manufacture any products except for its emergency dental kits. Although
the Company does not have any contractual arrangements with suppliers, the
Company believes that there are adequate alternative suppliers for any product
it sells.
Sales and Marketing
The Company's products are sold directly by Company employees, through mail
order, and by one outside, independent sales representative. The Company's sales
organization presently consists of five persons, including Dr. Stahl, the
Company's Chief Executive Officer, who oversees a combination of direct
salespersons and the one independent sales representatives.
The Company's marketing approach attempts to capitalize on its ability
to procure products throughout the world at favorable prices and to resell them
to its customers.
Potential Impact of Changing Economic Factors in the Health Care Markets
The health care industry has been typified in recent years by strict cost
containment measures imposed by federal and state governments, private insurers
and other "third party" payers of medical costs. In response to these pressures,
virtually all segments of the health care market have become extremely cost
sensitive and in many cases hospitals and other health care providers have
become affiliated with purchasing consortiums, which obtain large quantities of
products at the lowest possible cost. These factors in combination have had an
adverse impact upon smaller suppliers and manufacturers, such as the Company,
which are either unable to supply the large quantities sought by the purchasing
consortiums or which are unable to respond to the need for lower product
pricing. Although management believes that its planned expansion program will
enable it to meet the demand for large quantity orders, and despite management's
belief that the dramatic increased demand for safety oriented
1
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 distributors such as the Company, to provide
information to the FDA on injuries alleged to have been associated with the use
of a product or certain product failures which could cause injury. The FDA is
empowered to take action against manufacturers of regulated products including
both civil and criminal remedies, and may also prohibit or suspend the marketing
of products if circumstances so warrant. Any such action by the FDA could result
in a disruption of the Company's operations for an undetermined time.
Product Liability: Cost and Availability of Insurance
Providers of medical products to hospitals and other health care
institutions may encounter liability for damages to patients in the event that
their products prove to be defective. Certain of the Company's products and
proposed products will be utilized in medical procedures where the Company could
be subject to claims for injuries alleged to have resulted from the use of its
products. Recent developments in the insurance industry have reduced the
availability and increased the cost of liability insurance coverage. At present,
the Company has no product liability insurance.
Lack of Patent Protection
At present, the Company does not rely upon patent protection for any of its
products and such protection is not believed to be essential by management
because of the character of its products. Furthermore, there is little
likelihood that 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 that are
smaller in size and financial ability than the Company. The Company's present
and prospective competitors also include the numerous manufacturers and
suppliers of reusable medical products and manufacturers of raw materials used
by the Company. Many of the Company's competitors have far greater financial
resources, larger staffs, and more established market recognition in both the
domestic and international markets than the Company.
Dependence Upon Third Party Manufacturers/Suppliers
The Company does not directly manufacture any of the products it presently
sells. The products distributed by the Company are, for the most part,
manufactured by third parties in the United States, the Far East, Mexico and
Canada. In general, the Company does not have long-term contracts with its
manufacturers. Although the Company believes alternative sources for virtually
all of its products are readily available, there can be no assurance that the
available supply from such alternative sources would be adequate to meet the
demand for production that could result from any significant disruption in the
current manufacturers and suppliers of the Company's products.
2
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,
employs a total of 11 persons; two executive personnel; four sales persons;
three clerical and administrative personnel; and two warehouse employees. The
Company's employees are not represented by any collective bargaining
organization. The Company believes its relationship with its employees is good.
ITEM 2. PROPERTIES
The Company's offices are located at 3590 Oceanside Road, Oceanside, New
York. The premises contain approximately 9,800 square feet under a five-year
lease (the "Lease") which expired on November 30, 2004 (the "Lease Term"). The
Lease Term has been extended for an additional five years through November 30,
2009. These premises are occupied under a Lease between the landlord, who is an
unaffiliated third party, and an affiliated company PJS Trading, Corp., a New
York corporation ("PJS") owned by Dr. Stahl formed for the express purpose of
entering into the Lease. The Company occupies these premises under an oral
agreement with PJS and Dr. Stahl whereby the Company has agreed to discharge all
of the Lease obligations with the landlord. The annual lease payment under the
new lease starts at approximately $77,300 per year and increases to $80,000 in
the fifth year with additional increases for real estate taxes over the Lease
Term. Neither PJS nor Dr. Stahl derives any profit from the Lease nor will they
during the balance of the Lease Term. Management of the Company believes the
current facility is adequate for its current operations. Effective December 1,
2004, the Company has subleased for a one year period approximately 2,000 square
feet of the warehouse space at approximately $30,000 per year.
ITEM 3. LEGAL PROCEEDINGS
The Proctor & Gamble Company v. Xetal, et al, CaseNo. 04 Civ. 28250 (DRH),
which matter is pending in the United States District Court for the Eastern
District of New York. This lawsuit is captioned "Xetal, Inc., d/b/a APO Health,
Inc and Universal Medical Distributors, Inc." Xetal Inc. was the former parent
of both APO Health Inc. and Universal Medical Distributors, Inc. Xetal Inc.,
(now known as Sickbay Media Services, Inc.) has had no involvement or interest
in either the Company or Universal for four years.
On or about July 7, 2004, APO Health, Inc. was served with process in a
suit commenced by The Proctor & Gamble Company ("P&G") in the US District Court
for the Eastern District of New York, against it and a number of other parties.
P&G claimed that the Company, as well as others were involved in the sale of
Pantene and Head and Shoulders products which were not manufactured by P&G. The
Company purchased several shipments of these products abroad and unbeknownst to
the Company, some non P&G products were included in these shipments. The Company
has cooperated with P&G as well as the federal regulatory agencies and has
supplied P&G with all of its documentation in order to assist P&G in its efforts
to remove these products from the marketplace and to allow it to trace back the
source of these improper products.
In the lawsuit, P&G is seeking, among other relief, a request for a
temporary and permanent injunction from selling such products. The Company
continues to cooperate with and assist the Food and Drug Administration in its
inquiry and has undertaken a voluntary recall of these products. As a result of
the Company's continuing cooperation with P&G and the FDA and its lack of
knowing culpability, its counsel believes that this proceeding will conclude
without any adverse consequence to the Company.
3
On or about December 3, 2004, APO Health, Inc. and Dr. Jan Stahl were
served with process in a suit commenced by Alcoa, Inc. ("Alcoa") in the U.S.
District Court for the Eastern District of New York, against them and a number
of other parties. Alcoa claimed that the Company, as well as others, was
involved in the sale of products which were not manufactured by Alcoa. The
Company purchased several shipments of these products abroad and unbeknownst to
the Company, some non-Alcoa products were included in these shipments. The
Company has cooperated with Alcoa as well as the federal regulatory agencies and
has supplied Alcoa with all of its documentation in order to assist Alcoa in its
efforts to remove these products from the marketplace and to allow it to trace
back the source of these improper products.
In the lawsuit Alcoa is seeking, among other relief, a request for a
temporary and permanent injunction from selling such products. The Company
continues to cooperate with and assist the Food and Drug Administration in its
inquiry and has undertaken a voluntary recall of these products. As a result of
the Company's continuing cooperation with Alcoa and the FDA and its lack of
knowing culpability, its counsel believes that this proceeding will terminate
without any adverse consequence to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is currently quoted on NASDAQ's OTC Bulletin
Board under the symbol "APOA." The high and low prices of the common stock for
the quarterly periods of the two years ended September 30, 2004 are as follows:
Common
------
Quarter Ended High Low
------------- ----- -----
December 31, 2002 $0.650 $0.015
March 31, 2003 0.080 0.031
June 30, 2003 0.060 0.260
September 30, 2003 0.090 0.053
December 31, 2003 0.050 0.040
March 31, 2004 0.180 0.050
June 30, 2004 0.150 0.090
September 30, 2004 0.090 0.050
As of December 15, 2004, there were approximately 351 holders of record
of the Company's common stock.
Dividend Policy
The Company has not adopted any policy regarding the payment of dividends
on its common stock. The Company does not intend to pay any cash dividends on
its common stock in the foreseeable future. All cash resources are expected to
be invested in developing the Company's business. There are no restrictions that
materially limit the Company's ability to pay cash dividends.
Recent Sales of Unregistered Securities
During the fiscal year ended September 30, 2004, the Company issued a total
of 2,567,000 shares of common stock for consulting, compensation and
professional services valued at $148,350. These issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
5
On April 1, 2004, the Company issued a total of 1,000,000 restricted shares
of common stock with the Company receiving net proceeds of $90,000. Those
issuances were considered exempt from registration by reason of Section 4(2) of
the Securities Act of 1933, as amended.
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, 2004. Periods prior to
2002 have been restated to give effect for discontinued operations.
Statement of Operations Data:
Fiscal Years Ended September 30,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ----- ---- ----
Revenue $35,918,887 $47,448,232 $31,998,836 $ 24,143,949 $ 28,882,347
Gross Profit 1,163,017 1,978,024 2,198,162 2,524,717 2,763,830
Selling, General and
Administrative Expenses 2,658,149 2,323,949 2,515,907 2,303,284 2,648,967
Net Income (loss)
From continuing
operations (1,045,132) (517,256) (247,521) (157,899) (199,257)
Discontinued operations 291,498 35,839 16,932
Net Income (Loss) (1,048,828) (517,256) 43,977 (122,060) (240,900)
Earnings per common
From continuing operations $(.03) $(.02) $(.01) $(.01) $(.02)
Discontinued operations - - $ .01 $ .00 $ .00
Earnings per
Common Share $(.03) $(.02) $.00 $(.01) $(.02)
Weighted Average
Shares Outstanding 34,338,680 27,003,847 23,864,383 21,532,814 13,217,660
Balance Sheet Data:
As of September 30,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ----- ---- ----
Total Assets $2,538,748 $3,698,086 $4,774,786 $ 4,115,102 $ 4,423,752
Total Liabilities 2,126,362 2,475,222 3,334,602 2,888,626 3,546,184
Stockholders' Equity 412,386 1,222,864 1,440,184 1,226,476 877,568
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this annual report are forward looking. In particular, the statements herein
regarding industry prospects and future results of operations or financial
position are forward-looking statements. Forward-looking statements reflect
management's current expectations and are inherently uncertain. The Company's
actual results may differ significantly from management's expectations.
6
Results of Operations
Comparison of Fiscal 2004 and 2003
Revenues for the year ended September 30, 2004 was $35,918,887 compared to
$47,448,232 for the year ended September 30, 2003. This was a decrease of
$11,529,345 or 24.3%. The decrease was entirely due to the decrease in sales of
products sold through the Company's wholesale division. The cost of products
that the Company had previously imported from both Canada and Europe increased
substantially as the United States dollar declined against the Canadian dollar,
British pound and the Euro. Because of the price increases in United States
dollar terms, the Company was not able to pass along its increased costs to the
wholesalers, and therefore, the Company reduced or eliminated its purchases on
those products. As a result, overall revenues for the Company declined. Retail
sales by the Company were stable from 2003 to 2004.
The Company is in the process of preparing a new catalogue of medical
supplies which will be distributed to schools, doctors and medical clinics. The
Company anticipates that the catalogue will be completed prior to December 2004,
and that it will be distributed in January 2005. The gross profit on products
included in the catalogue are expected to be from approximately 20% to 40% and
management expects the average margin to be approximately 25% on new sales from
the catalogue.
The cost of revenues for the year ended September 30, 2004, was $34,305,870
compared to $45,470,208 for the year ended September 30, 2003. This was a
decrease of $11,164,338 or 24.5%. Included in the cost of revenues was
approximately $475,000 for products the Company purchased and had to be recalled
and destroyed after it was determined that the products were counterfeit. The
gross profit margin for the year ended September 30, 2004, was 4.5% compared to
4.2% for the year ended September 30, 2003. The increase in profit margin is
directly related to the Company's decision to reduce purchases from Canada and
Europe where the Company would be unable to sell those products at a profit.
Selling expenses for the year ended September 30, 2004 were $551,230
compared to $576,250 for the year ended September 30, 2004, a decrease of
$25,020 or 4.3%. Commission expense increased from $72,390 to $133,128, an
increase of $63,738 representing sales generated by outside sources to augment
the internal sales force. Freight costs increased from $242,730 to $296,637, an
increase of $53,907 due to increases based on fuel surcharges. Advertising and
related costs were $79,575 for the year ended September 30, 2004, a decrease of
$103,126 from $182,701 for the year ended September 30, 2003. The Company
reduced spending in anticipation of the new catalogue it expects to be completed
in January 2005. Advertising and related costs are expected to increase by
approximately $75,000 in fiscal 2005. Travel and entertainment expense for the
year ended September 30, 2004, declined by $35,200 from the year ended September
30, 2003.
General and administrative expenses for the year ended September 30, 2004
were $2,106,919, an increase of $359,220 over the year ended September 30, 2003.
In the fourth quarter of the fiscal year ended September 30, 2004, the Company
recorded bad debt expense of $681,901 which included writing off advances and
increasing the allowance for doubtful accounts directly related to the
counterfeit products that the Company purchased and resold.. Compensation
decreased by $185,165 in 2004 which was entirely attributable to the fact that
in 2003 there was a bonus of $156,732 to one of the officers of the Company. For
the year ended September 30, 2004 no bonuses were declared. In 2003, consulting
fees related to possible merger and acquisition activities were $250,200. In
2004, total consulting fees decreased to $102,100, a decrease of $148,000. These
two items accounted for the entire decrease in general and administrative
expenses excluding bad debt expense. All other items of general and
administrative expense exhibited minor increases or decreases.
There was a final settlement of litigation against the Company in January
2004, and as a result, the Company was reimbursed $92,755 by its insurance
carrier for all legal expenses it had previously expended.
Interest expense for the year ended September 30, 2004 was $96,451, an
increase of $3,985 from the year ended September 30, 2003 .The Company has a
financing agreement (see note 4 to the financial statements) which provides for
a maximum line of credit of $1,000,000 where collections are applied against the
line of credit on a daily basis and proceeds from the line of credit are only
taken when needed to pay down liabilities. As a result the average daily balance
outstanding on the line of credit increased slightly from the prior year. The
financing agreement allows the Company greater flexibility in its ability to
finance increased sales and additional inventory.
7
Comparison of Fiscal 2003 and 2002
Revenues for the year ended September 30, 2003 were $47,448,232 compared to
$31,998,836 for the year ended September 30, 2002, an increase of $15,449,396
(48.3%). The increase in revenues is attributable to the Company's wholesale
business as several products that the Company distributed were in highdemand.
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% decline
in the value of the United States dollar against 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 include 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 that sent
verified numbers to which it could fax advertising materials, saving
approximately $8,000 per month or $96,000 annually. 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 financial consultants was paid in common stock of the
Company which did not affect the Company's cash flow. 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 a class action lawsuit in
the State of Illinois; therefore, legal fees incurred by the Company have
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.
Liquidity and Capital Resources
As of September 30, 2004, the Company had working capital of $396,262, a
decrease of $828,099 from the Company's working capital at September 30, 2003.
The Company's loss from continuing operations of $1,048,828 for the year ended
September 30, 2004 was funded by the decrease in working capital and increase in
cash flows from operations for the year ended September 30, 2004 which was
$473,951. At September 30, 2004 the Company has a $1,000,000 credit facility of
which approximately $400,000 is unused. The entire loss for the year ended
September 30, 2004 was caused by counterfeit goods the Company unintentionally
acquired which are included in cost of sales ($475,000) and provision for
doubtful accounts and the write-off of bad debts ($680,000) from the sale of
those products.. Based upon the above factors, the Company believes that it has
sufficient funds for operations for the next fiscal year.
Off-Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements that are
reasonably likely to have a current or future effect on its financial condition,
revenues, results of operations, liquidity or capital expenditures.
8
Contractual Obligations
As of September 30, 2004, the Company had the following contractual
obligations:
Payments due by period
--------------------------------------------------
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
----- --------- --------- --------- ------
Operating Lease Obligations $387,175 $76,812 $141,796 $155,230 $13,337
Critical Accounting Policies
Cash and cash equivalents. For purposes of the statements of cash flows,
cash equivalents include all highly liquid investments with original maturities
of three month or less.
Revenue recognition occurs when products are shipped.
Advertising is expensed as incurred. For the years ended September 30,
2004, 2003 and 2002 advertising expense was $25,730, $72,029, $303,849,
respectively.
Merchandise inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property and equipment is stated at cost. Depreciation is provided for on
the straight-line method over the useful estimated life. The cost of maintenance
and repairs is expensed as incurred.
The Company follows Statement of Financial Accounting Standards No. 144,
Impairment of Long-lived Assets, by reviewing such assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
Shipping and handling is expensed as incurred. Shipping and handling is
included in selling expense was $296,637, $242,730, and$272,036 for the years
ended September 30, 2004, 2003 and 2002, 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.
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.
9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in United States interest rates would affect the interest earned on
our cash and cash equivalents. Based on our overall interest rate exposure at
September 30, 2004, a near-term change in interest rates, based on historical
movements, would not materially affect the fair value of interest rate sensitive
instruments. Our debt instruments have fixed interest rates and terms and,
therefore, a significant change in interest rates would not have a material
adverse effect on our financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by this Item is attached hereto at the
end of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining adequate
internal control over our financial reporting. As of the end of the period
covered by this report, our management conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms. There was no significant
change our internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation.
ITEM 9B. OTHER INFORMATION
None.
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, 2004.
Name Age Position
Dr. Jan Stahl 56 Chairman, Chief Executive Officer, Acting Chief
Financial Officer, Secretary, Director
Kenneth Levanthal 49 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.
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.
11
Family Relationships
There are no family relationships between or among the Company's directors,
executive officers or persons nominated or charged by the Company to become
directors or executive officers.
Involvement in Legal Proceedings
During the past five years, none of the following occurred with respect to
the Company's directors or executive officers: (1) no petition under the federal
bankruptcy laws or any state insolvency law was filed by or against, or a
receiver, fiscal agent or similar officer was appointed by a court for the
business or property of such persons; (2) there has been no petition under the
federal bankruptcy laws or any state insolvency law filed by or against, or a
receiver, fiscal agent or similar officer appointed by a court for the business
or property of any partnership in which such persons were a general partner at
or within two years before the time of such filing, or any corporation or
business association of which such persons were executive officers at or within
two years before the time of such filing; (3) no such persons were convicted in
a criminal proceeding or are a named subject of a pending criminal proceeding
(excluding traffic violations and other minor offenses); (4) no such persons
were the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting their
involvement in any type of business practice, or in securities or banking or
other financial institution activities; and (5) no such persons were found by a
court of competent jurisdiction in a civil action by the Securities and Exchange
Commission or by the Commodity Futures Trading Commission to have violated any
federal or state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
Audit Committee Financial Expert
The Company does not have an audit committee financial expert (as defined
in Item 401 of Regulation S-K) serving on its Board of Directors. The Company
has not yet employed an audit committee financial expert on its Board due to the
inability to attract such a person.
Code of Ethics
The Company has adopted a Code of Ethics and Business Conduct that applies
to all of its officers, directors and employees. The Code of Ethics has been
filed with this annual report as Exhibit 14.1. Upon request, the Company will
provide to any person without charge a copy of its Code of Ethics. Any such
request should be made to Attn: Dr. Jan Stahl, APO Health, Inc., 3590 Oceanside
Rd., Oceanside, New York 11575. The Company's telephone number is (800)
365-2839. The Company is in the process of building a section of its website at
www.apohealth.com where its Code of Ethics will be available to investors.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities to file with
the SEC initial reports of ownership and reports of change in ownership of
common stock and other equity securities of the Company. Officers, directors and
greater than ten percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Based solely on
the review of copies of such reports furnished to the Company and written
representations that no other reports were required, the Company believes that
during the fiscal year ended September 30, 2004, its executive officers,
directors and all persons who own more than ten percent of a registered class of
the Company's equity securities complied with all Section 16(a) filing
requirements.
12
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation the Company has paid or that has accrued on behalf of the Company's
chief executive officer and other executive officers with annual compensation
exceeding $100,000 during the fiscal years ending September 30, 2004, 2003 and
2002.
Summary Compensation Table
-------------------------- Long-Term
Compensation
---------------------------- ------------
Annual Compensation Awards Payouts
--------------------------- ---------------------------- ------------
Securities
Other Under All
Annual Restricted -lying Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary ($) Bonus ($) sation ($) Award(s) ($) SARs (#) Payouts ($) sation ($)
- ----------------------------------- ----- ----------- ------------- ----------- --------------- ------------ ------------ ----------
Jan Stahl, Chief Executive 2004 $250,000 $ 0 -0- -0- -0- -0- -0-
Officer (1) 2003 $222,150 $156,723 -0- 34,666 -0- -0- -0-
(2)
2002 $246,446 $77,000 -0- -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.
Executive Employment Agreements
Dr. Jan Stahl had an employment agreement that expired on September 30,
2004. The agreement has been automatically extended for a period of one year.
Benefit Plans
On July 22, 2002, the Company adopted a Bonus Compensation Warrant
Agreement, whereby, the Company would issue Bonus Compensation Warrants
equivalent to 10% of the price of any merger or acquisition brought to the
Company. All of the warrants being exercisable into shares of common stock at
80% of the 20 day average bid and ask price of the Company's common stock. The
Company is authorized up to a maximum aggregate of 3,000,000 shares of common
stock available for any Bonus Compensation Warrants.
On July 22, 2002, the Company issued a common stock purchase warrant for
260,000 shares of common stock exercisable at $.10 per share and on September
27, 2002, a common stock purchase warrant for 1,875,000 shares exercisable at
$.04 per share, both expiring on August 31, 2007. That issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
Board Compensation
The Company does not have any formal or informal arrangements or agreements
to compensate its directors for services they provide as members of the
Company's Board of Directors.
13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 2004, certain
information regarding the beneficial ownership of the Company's common stock.
Number of Shares Owned Percentage
Name of Record and Beneficially Common Stock Outstanding (1)
---- -------------------------- ----------------------------
Dr. Jan Stahl
3141 Ann Street
Baldwin, NY 11510 11,112,512 30.94%
Kenneth Levanthal
24 Meadowbrook Road
Huntington Station, NY 11746 796,000 2.21%
All Directors and Officers
As a Group 11,908,512 33.15%
(1) Based upon a total of 35,921,045 shares as of December 15, 2004
Securities Authorized for Issuance Under Equity Compensation Plans
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's offices are occupied by the Company under a lease between the
landlord who is an unaffiliated third party and an affiliated company PJS
Trading,Corp., a New York corporation ("PJS") owned by Dr. Jan Stahl. The
Company occupies the premises under an oral agreement with PJS and Dr Stahl
whereby the Company discharges all the obligations of the lease with the
landlord.
Except as set forth above, the Company has not entered into any transaction
during the last two years and it has not proposed any transaction to which the
Company was or is to be a party, in which any of the following persons had or is
to have a direct or indirect material interest:
- Any director or executive officer of the Company;
- Any nominee for election as a director;
- Any security holder named in the "Security Ownership of
Certain Beneficial Owners and Management" section above; and
- Any member of the immediate family (including spouse, parents,
children, siblings, and in-laws) of any such person.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit fees
The aggregate fees billed for professional services rendered by the
Company's principal accountants for the audit of the Company's financial
statements, for the reviews of the financial statements included in the
Company's annual report on Form 10-K, and for other services normally provided
in connection with statutory filings were $27,500 and $22,500 for the years
ended September 30, 2004 and 2003, respectively.
All Other Fees
The Company did not incur any fees for other professional services rendered
by its principal accountants during the years ended June 30, 2004 and 2003.
14
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial statements and financial statement schedules that have been omitted
are not required.
(a) The following documents are filed as part of this report.
1. Financial Statements Page
Report of Independent Registered Public Accounting Firm. F-1
Balance Sheets as of September 30, 2004 and 2003. F-2
Statements of Operations for the years ended
September 30, 2004, 2003, and 2002. F-3
Statements of Changes in Stockholders' Equity
For the years ended September 30, 2004, 2003 and 2002. F-4
Statements of Cash Flows for the years ended
September 30, 2004, 2003 and 2002. F-5
Notes to Consolidated Financial Statements. F-6-F-11
2. Financial Schedule
Valuation and Qualifying Accounts
For the years ended September 30, 2004, 2003 and 2002 F-12
(b) Exhibits.
Exhibit
Number Description
- ------------------ -- ----------------------------------------------------------
2.1 Tax-Free Reorganization Agreement between the Company and
InternetFinancialCorp.com, Inc., effective June 13, 2001, incorporated
by reference to Form 8-K/A filed with the Securities and Exchange
Commission on July 23, 2001.
3.1 Restated Articles of Incorporation, incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on October 12,
2001.
3.2 Certificate of Amendment to Articles of Incorporation, changing name
to Interfinancialcorp.com, Inc., incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on October 12, 2001.
3.3 Certificate of Amendment to Articles of Incorporation, changing name
to APO Health, Inc., incorporated by reference to Form 8-K filed with
the Securities and Exchange Commission on October 12, 2001.
3.4 By-laws of the Company, incorporated by reference to registration
statement on Form 10 (File No. 000-30074) filed with the Securities
and Exchange Commission on February 19, 1999.
14.1 Code of Ethics and Business Conduct
21.1 List of Subsidiaries
31.1 Certification by Dr. Jan Stahl, Chief Executive Officer and Chief
Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification by Dr. Jan Stahl, Chief Executive Officer and Chief
Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(c) Reports on Form 8-K.
None.
15
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 28, 2004 By:/S/ Dr. Jan Stahl
---------------------------
Dr. Jan Stahl
Chairman, Chief Executive Officer, Acting
Chief Financial Officer, Principal
Accounting
Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ Dr. Jan Stahl Director December 28, 2004
-------------------
Dr. Jan Stahl
/S/ Kenneth Levanthal Director December 28, 2004
------------------
Kenneth Levanthal
16
REPRORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders APO Health, Inc.
Oceanside, New York
We have audited the accompanying consolidated balance sheets of APO Health,
Inc., and subsidiaries as of September 30, 2004 and 2003 the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years ended September 30, 2004. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years ended September 30,
2004, 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 each of
the three years ended September 30, 2004, 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.
/s/ Linder & Linder
Linder & Linder
Certified Public Accountants
Dix Hills, New York
November 29, 2004, except Note 10, as to
F-1
APO HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and 2003
ASSETS
-------- 2004 2003
------------ ------------
Current Assets
Cash $ 574,732 $ 405,153
Accounts receivable, net of allowance for
doubtful accounts of $380,000 and $50,000 1,179,078 1,702,741
Inventory 583,040 1,396,205
Notes receivables - 4,566
Due from officers - 108,905
Other current assets 186,274 55,013
------------ ------------
Total Current Assets 2,523,124 3,672,583
Property and Equipment, net of accumulated
Depreciation of $88,430 and $88,496 8,124 18,003
Deposits 7,500 7,500
------------ ------------
Total Assets $2,538,748 $3,698,086
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank notes payable $ 609,185 $1,008,123
Accounts payable 1,168,278 924,029
Accrued compensation 89,224 248,483
Customer deposits 259,675 294,587
------------ ------------
Total Current Liabilities 2,126,362 2,475,222
------------ ------------
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, 35,673,045 and 32,106,045
Shares issued and outstanding 7,135 6,422
Paid in capital 2,158,308 1,920,671
Retained earnings (deficit) (1,753,057) (704,229)
------------ ------------
Total Stockholders' Equity 412,386 1,222,864
------------ ------------
Total Liabilities and Stockholders' Equity $2,538,748 $3,698,086
============ ============
See Accompanying Auditor' Report and Notes to Financial Statements.
F-2
APO HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
2004 2003 2002
-------------- -------------- --------------
Revenues $ 35,918,887 $ 47,448,232 $ 31,998,836
Cost of revenues 34,305,870 45,470,208 29,800,674
-------------- -------------- --------------
Gross Margin 1,613,017 1,978,024 2,198,162
Operating Expenses
Selling 551,230 576,250 842,212
General and administrative 2,106,919 1,747,699 1,673,695
-------------- -------------- --------------
2,658,149 2,323,949 2,515,907
-------------- -------------- --------------
(Loss) from operations (1,045,132) (345,925) (317,745)
-------------- -------------- --------------
Other Income (Expenses)
Recovery of Litigation Costs 92,755 - -
Interest expense (96,451) (92,466) (94,790)
-------------- -------------- --------------
Total other expenses (3,696) (92,466) (94,790)
-------------- -------------- --------------
(Loss) before provision for
income taxes (1,048,828) (438,371) (412,535)
Provision for (recovery) of income tax - 79,155 (165,014)
-------------- -------------- --------------
(Loss) from
continuing operations (1,048,828) (517,526) (247,521)
Discontinued operations net of taxes of
$ 0 , $ 0 , and $195,059 - - 291,498
-------------- -------------- --------------
Net Income (Loss) $ (1,048,828) $ (517,526) $ 43,977
============== ============== ==============
Earnings per common share and earnings
Per common share assuming dilution
From continuing operations $ (.03) $ (.02) $ (.01)
Discontinued operations .00 .00 .01
-------------- -------------- --------------
Net income (loss)per common shares $ (.03) $ (.02) $ .00
============== ============== ==============
Weighted average common
Outstanding 34,338,680 27,003,847 23,864,383
============== ============== ==============
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, 2004, 2003, AND 2002
Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Totals
------ ------ ------- ------------ ------------
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 1,518 298,688 300,206
Net (loss) (517,526) (517,526)
------------ ------------ ------------ ------------ ------------
Balance
September 30, 2003 32,106,045 6,422 1,920,671 (704,229) 1,222,864
Issuance of stock
For services 2,567,000 513 147,837 148,350
Private placement 1,000,000 200 89,800 90,000
Net (loss) (1,048,828) (1,048,828)
------------ ------------ ------------ ------------ ------------
Balance
September 30,2004 35,673,045 $ 7,135 $2,158,308 $(1,753,057) $ 412,386
============= ============ ============ ============ ============
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, 2004, 2003, AND 2002
2004 2003 2002
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(1,048,828) $ (517,526) $ 43,977
Adjustments to reconcile net income (loss)to
net cash flows from operating activities
Depreciation and amortization 9,879 10,496 11,890
Bad debts 330,000 20,000 2,515
Deferred taxes 73,563 37,543
Stock issued for services 148,350 300,206 89,731
Write off goodwill 125,537
Changes in:
Accounts receivable 193,663 (211,446) 256,569
Inventory 813,165 846,404 (550,400)
Other current assets (131,261) (36,716) 147,638
Accounts payable 244,249 (194,259) 62,171
Deferred compensation (50,354) 67,765 149,942
Customers deposits payable (34,912) (371,009) 665,596
------------ ------------ ------------
Cash Flows provided by (used in
Operating Activities 473,951 (12,522) 967,623
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Notes receivables 4,566 253,934 (258,500)
Advances from officer, net - (15,000) (31,448)
------------ ------------ ------------
Cash Flows provided by
(used in) Investing Activities 4,566 238,934 (289,948)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank notes payable, net (398,938) (341,877) (336,224)
Proceeds from sale of stock 90,000
------------ ------------ ------------
Cash Flows (used in) (308,938) (341,877) (336,224)
------------ ------------ ------------
Financing Activities
Net increase (decrease) in cash 165,579 (115,645) 341,541
Cash Balances
Beginning of Year 405,153 520,618 179,167
------------ ------------ ------------
End of Year $ 574,732 $ 405,153 $ 520,618
============ ============ ============
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 APO and
its wholly-owned subsidiary, Universal Medical Distributors, Inc. ("Universal")
distribute disposable medical products principally to dental, medical and
veterinary professionals and wholesalers in the United States, principally on
the East Coast. Effective June 13, 2001, InternetFinancialCorp.com, Inc.,
("IFAN"), a Nevada corporation, which is an inactive public company acquired
APO, (collectively, the "Company"), pursuant to a tax-free reorganization
agreement. The acquisition was accounted for by the purchase method under
business combinations in a reverse acquisition transaction. Concurrently, IFAN
changed its name to APO Health, Inc., a Nevada corporation.
All significant intercompany balances and transactions have been eliminated in
consolidation.
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, 2004,
2003 and 2002 advertising expense was $25,730, $72,029, $303,849, respectively.
Merchandise inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property and equipment is stated at cost. Depreciation is provided for on the
straight-line method over the useful estimated life. The cost of maintenance and
repairs is expensed as incurred.
The Company follows Statement of Financial Accounting Standards No. 144,
Impairment of Long-lived Assets, by reviewing such assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
Shipping and handling is expensed as incurred. Shipping and handling is included
in selling expense was $296,637, $242,730, and$272,036 for the years ended
September 30, 2004, 2003 and 2002, 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.
Fair value financial statements .The Company's carrying amount of financial
statements which include cash, accounts receivable, bank notes payable, and
accounts payable approximate fair value.
Reclassifications. Certain reclassifications of certain prior year amounts were
made to conform to the current year presentation.
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.
F-6
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES
2004 2003 2002
Cash paid during the year for:
Interest $96,451 $92,477 $91,790
Non cash transactions:
Note payable paid for by
the issuance of stock $50,000
Reduction of Officers loan
With offset to deferred
Compensation $109,905
Note 3- OTHER CURRENT ASSETS
Other current assets consist of the following:
2004 2003
---- ----
Prepaid Expenses $ 96,274 $55,013
Consulting fees 40,000
Advance to stockholder 50,000
-------- -------
Total current assets $186,274 $55,013
The Company advanced to one of the stockholders of the Company which is payable
on demand and non interest bearing. Subsequent to the year end, the stockholder
repaid the advance in full
Note 4 - BANK NOTES PAYABLE
On October 29, 2002, the Company entered into a financing agreement with
Rosenthal & Rosenthal, Inc. The financing agreement provides the Company with a
maximum credit facility not to exceed $3,000,000. On September 1, 2004 the
credit facility was amended by mutual consent and reduced the maximum amount of
credit under the facility to $1,000,000. 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% (7.50% as of September 30, 2004).
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. At September 30, 2004, the Company was in violation of
certain covenants including its net worth and working capital which were
subsequently waived by the lending institution.
Bank Notes Payable at September 30, 2004 and 2003 consist of the following:
2004 2003
---- ----
Own Note Borrowing $ 609,185 $1,008,123
Note 5 - INCOME TAXES
Income taxes (benefit) consist of the following:
2004 2003 2002
---- ---- ----
Current $ - $ 5,592 $ (7,498)
Deferred - 73,563 37,543
Total $ - $79,155 $ 30,045
F-7
APO HEALTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of income tax at the federal statutory income tax rate to
total income taxes is as follows:
2004 2003 2002
Computed at the federal statutory
Rate of 34% $ - $ - $ 25,168
State income tax (benefit) - - 4,441
Valuation allowance adjustment - 73,563 (22,300)
Other adjustments - 5,592 22,736
-------- -------- ---------
Total $ - $79,155 $ 30,045
======== ======== =========
The components of deferred taxes are as follows:
2004 2003
Deferred tax assets
Allowance for doubtful accounts $152,000 $ 20,000
Depreciation 21,250 12,000
Deferred compensation 50,400 102,400
Net operating loss carryover 404,025 62,280
Valuation allowance (627,675) (196,680)
--------- ---------
Total deferred tax assets $ - $ -
--------- ---------
The Company has a net operating loss carryover of approximately $854,100 to
offset future taxable income. The carryover losses expires through 2024. The
Company has offset the deferred tax asset by a valuation of $627,675, since it
cannot be determined more likely than not whether the Company will be able to
utilize such net operating loss carryover. During the year ended September 30,
2004, the valuation allowance increased by $430,995.
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 was 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.
Note 7 - COMMON STOCK ISSUANCES
During the fiscal year ended September 30, 2004, the Company issued a total of
2,567,000 shares of common stock for consulting, compensation and professional
services valued at $148,350.
On April 1, 2004, the Company issued a total of 1,000,000 restricted share of
common stock with the Company receiving net proceeds of $90,000.
During the fiscal year ended September 30, 2003, the Company issued a total of
7,551,818 shares of common stock for consulting, compensation and other
professional services valued at $300,206 which includes compensation to officers
in the approximate amount of $46,700.
F-8
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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:
2002
-------
Net income (loss) as reported $43,977
Pro forma compensation (52,253)
Net Income (loss) pro forma $(8,276)
Diluted earnings (loss) per share $(.00)
The estimated per share fair value of the warrants granted in July and September
2002 were $.032 and $.025, respectively using the Black-Scholes option pricing
model with the following assumptions:
2002
------
Dividend yield -
Volatility 76.44
Interest rate 3.25%
Option life in months 59
Note 8 - LEASES
The Company's offices are located at 3590 Oceanside Road, Oceanside, New York.
The premises contain approximately 9,800 square feet under a five-year lease
(the "Lease") which expired on November 30, 2004 (the "Lease Term"). The Lease
Term has been extended for an additional five years through November 30, 2009.
These premises are occupied under a Lease between the landlord, who is an
unaffiliated third party, and an affiliated company PJS Trading, Corp., a New
York corporation ("PJS") owned by Dr. Stahl formed for the express purpose of
entering into the Lease. The Company occupies these premises under an oral
agreement with PJS and Dr. Stahl whereby the Company has agreed to discharge all
of the Lease obligations with the landlord. The annual lease payment under the
new lease starts at approximately $77,300 per year and increases to $80,000 in
the fifth year with additional increases for real estate taxes over the Lease
Term. Neither PJS nor Dr. Stahl derives any profit from the Lease nor will they
during the balance of the Lease Term. Management of the Company believes the
current facility is adequate for its current operations. Effective December 1,
2004, the Company has subleased for a one year period approximately 2,000 square
feet of the warehouse space at approximately $30,000 per year. Rental expense
net of subleases was $50,261, $59,429 and $73,881 for each of the three years
ended September 30, 2004.
F-9
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments are as follows:
For the years ended September 30,
2005 $ 76,812
2006 70,571
2007 71,225
2008 75,825
2009 79,405
After 2009 13,337
--------
Total $387,175
========
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, 2004, 2003, and 2002, were $0, $0, and $0, respectively.
Note 10 - COMMITMENTS AND CONTINGENCIES
Employment Agreement
Effective October 1, 2001, the Company has entered into a three-year employment
agreement with its chief executive officer that provides for a minimum annual
salary of $250,000 with incentives based on the Company's attainment of
specified levels of sales and earnings as defined in the agreement. The
employment agreement 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.
Legal Proceedings
On or about July 7, 2004, APO Health, Inc. was served with process in a suit
commenced by The Proctor & Gamble Company ("P&G") in the US District Court for
the Eastern District of New York, against it and a number of other parties. P&G
claimed that APO, as well as others were involved in the sale of Pantene and
Head and Shoulders products which were not manufactured by P&G. APO purchased
several shipments of these products abroad and unbeknownst to APO, some non P&G
products were included in these shipments. APO has cooperated with P&G as well
as the Federal regulatory agencies and has supplied P&G with all of its
documentation in order to assist P&G in its efforts to remove these products
from the marketplace and to allow it to trace back the source of these improper
products. The law suit is seeking, among other relief, a request for a temporary
and permanent injunction from selling such products. The Company continues to
cooperate with and assist the Federal Drug Administration ("FDA") in its inquiry
and has undertaken a voluntary recall of these products. As a result of APO's
continuing cooperation with P&G and the FDA and its lack of knowing culpability,
its counsel believes that this proceeding will terminate without any adverse
consequence to the Company.
On or about December 3, 2004, APO Health, Inc. and Dr. Jan Stahl were served
with process in a suit commenced by Alcoa, Inc. (Alcoa) in the US District Court
for the Eastern District of New York, against it and a number of other parties.
Alcoa claimed that APO, as well as others were involved in the sale of products
which were not manufactured by Alcoa. APO purchased several shipments of these
products abroad and unbeknownst to APO, some non Alcoa products were included in
these shipments. APO is cooperating with Alcoa as well as the Federal regulatory
agencies and is suppying Alcoa with all of its documentation in order to assist
Alcoa in its efforts to remove these products from the marketplace and to allow
it to trace back the source of these improper products.
The law suit is seeking, among other relief, a request for a temporary and
permanent injunction from selling such products. The Company continues to
cooperate with and assist the Federal Drug Administration in its inquiry and has
undertaken a voluntary recall of these products. As a result of APO's continuing
cooperation with Alcoa and the FDA and its lack of knowing culpability, its
counsel believes that this proceeding will terminate without any adverse
consequence to the Company.
F-10
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product Liability
Certain of the Company's products and proposed products will be utilized in
medical procedures where the Company could be subject to claims from injuries
resulting from use of the Company's products. Recent developments in the
insurance industry have reduced the availability and increased the cost of
liability insurance coverage. At present, the Company is self-insured for
product liability claims.
Note 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,
2004, the Company had approximately $411,200 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, 2004, 2003 and 2002 the following
customers had in excess of 10% of the total sales. No single vendor accounts for
greater than 10% of purchases.
2004 2003 2002
---- ---- ----
Customer A 40% 38% 25%
Customer B 12% 11%
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,
------------------------
2004 2003 2002
---- ---- ----
Net income (loss) available for common
Shareholders, basic and diluted $(1,048,828) $(517,526) $ 43,977
Weighted average common shares
Outstanding-basic 34,338,680 27,003,847 23,864,383
Net effect of dilutive stock options * * *
Basic earnings (loss) per share $(.03) $ (.02) $ .00
* antidilutive
F-11
APO HEALTH, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002
Balance
Year Ended Beginning of Balance
September 30, Account Period Additions Reduction End of Period
- ------------- ------- ------ --------- --------- -------------
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 $(24,200) $ 197,000
2004 Allowance for
Doubtful accounts $50,000 $330,000 $ 380,000
Allowance for
Deferred taxes $197,000 $431,000 $ 628,000
F-12