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