10-Q 1 jun30200510q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 OR [ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934 From the transition period from __________ to ___________ Commission File Number: ___________ 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 No.) 3590 Oceanside Road, Oceanside, New York 11575 ---------------------------------------------- (Address of principal executive offices) (Zip Code) (800) 365-2839 (Registrant's telephone number, including area code) 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 preceding 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 __ No __X__ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Ac)t. Yes _____ No __X__ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of August 10, 2005, 41,639,712 shares of Common Stock of the issuer were issued and outstanding. APO HEALTH, INC. FORM 10-Q QUARTER ENDED JUNE 30, 2005 TABLE OF CONTENTS
Page PART I - Financial Information Item 1 Financial Statements. Consolidated Balance Sheets as of June 30, 2005 and September 30, 2004. 2 Consolidated Statements of Operations for the three and nine months ended June 30, 2005 and 2004. 3 Consolidated Statements of Cash Flows for the nine months ended June 30, 2005 and 2004. 4 Notes to Consolidated Financial Statements. 5 - 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 11 Item 3 Quantitative and Qualitative Disclosures About Market Risk 12 Item 4 Controls and Procedures 12 PART II - Other Information Item 1 Legal Proceedings. 12 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds. 13 Item 3 Defaults upon Senior Securities. 13 Item 4 Submission of Matters to a Vote of Security Holders. 13 Item 5 Other Information. 13 Item 6 Exhibits 13 Signatures 14 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. APO HEALTH, INC. CONSOLIDATED BALANCE SHEETS June 30, September 30, 2005 2004 ------------------ ------------------ (Unaudited) ASSETS Current Assets: Cash $ 278,745 $ 574,732 Accounts Receivable, net of allowance for doubtful accounts of $360,000 and $380,000 834,812 1,179,078 Inventory 455,908 583,040 Other Current Assets 100,155 186,274 ------------------ ------------------ Total Current Assets 1,669,620 2,523,124 ------------------ ------------------ Property and Equipment, net of accumulated depreciation of $88,105 and $88,430 3,524 8,124 Deposits 7,500 7,500 ------------------ ------------------ Total Assets $ 1,680,644 $ 2,538,748 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Bank Notes Payable $ 206,784 $ 609,185 Accounts Payable 942,702 1,168,278 Accrued Compensation 50,818 89,224 Customer Deposits 255,020 259,675 ------------------ ------------------ Total Current Liabilities 1,455,324 2,126,362 ------------------ ------------------ Stockholders' Equity: Common stock, $.0002 par value, 125,000,000 shares authorized, 41,639,712 and 35,673,045 shares issued and outstanding 8,328 7,135 Paid-in Capital 2,247,115 2,158,308 Retained Earnings (Deficit) (2,030,123) (1,753,057) ------------------ ------------------ Total Stockholders' Equity 225,320 412,386 ------------------ ------------------ Total Liabilities and Stockholders' Equity $ 1,680,644 $ 2,538,478 ================== ==================
2 APO HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
Three Months Nine Months ----------------------------------------- ----------------------------------------- 2005 2004 2005 2004 ------------------ ------------------ ------------------ ------------------ Revenue $ 3,879,566 $ 8,204,667 $ 12,486,146 $ 29,448,197 Cost of Revenue 3,582,834 8,071,884 11,352,224 28,073,093 ------------------ ------------------ ------------------ ------------------ Gross Margin 296,732 132,783 1,133,922 1,374,294 ------------------ ------------------ ------------------ ------------------ Operating Expenses Selling Expense 81,141 107,107 294,070 481,718 General and Administrative Expenses 280,420 267,658 1,076,820 1,027,657 ------------------ ------------------ ------------------ ------------------ 361,561 374,765 1,370,890 1,509,375 ------------------ ------------------ ------------------ ------------------ (Loss) from Operations (64,829) (241,982) (236,968) (135,081) ------------------ ------------------ ------------------ ------------------ Other Income (Expense) Recovery of Litigation Expense - - - 92,755 Interest Expense (12,544) (27,230) (40,098) (77,292) ------------------ ------------------ ------------------ ------------------ (12,544) (27,230) (40,098) 15,463 ------------------ ------------------ ------------------ ------------------ Income (loss) before Provision for Income Taxes (77,373) (269,212) (277,066) (119,618) Provision for Income Taxes - - - - ------------------ ------------------ ------------------ ------------------ Net Income $ (77,373) $ (269,212) $ (277,066) $ (119,618) ================== ================== ================== ================== Basic and Diluted Earnings Per Common Share: Total $ (.00) $ (.01) $ (.01) $ .00 ================== ================== ================== ================== Weighted Average Common Shares Outstanding 41,639,712 35,106,145 37,833,941 33,570,589 ================== ================== ================== ==================
3 APO HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
2005 2004 ------------------ ------------------ Cash Flow From Operating Activities: Net Income $ (277,066) $ (119,618) Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation and Amortization 4,600 7,410 Allowance For Doubtful Accounts (20,000) 20,000 Stock Issued for Services 40,000 - Changes In: Accounts Receivable 364,266 237,647 Inventory 127,132 64,234 Other Current Assets 86,119 (132) Accounts Payable (225,576) (30,731) Accrued Compensation 11,594 (18,581) Customer Deposits Payable (4,655) (61,264) ------------------ ------------------ Cash Flows Provided by Operating Activities 106,414 98,965 ------------------ ------------------ Cash Flows From Investing Activities: Notes Receivable - 4,566 ------------------ ------------------ Cash Flows Provided by Investing Activities - 4,566 ------------------ ------------------ Cash Flows from Financing Activities: Cash Overdraft - 71,558 Advances from officers, net - 20,000 Net proceeds issuance of common stock - 90,000 Proceeds (Payment) on Bank Notes Payable, Net (402,401) (181,212) ------------------ ------------------ Cash Flows (used for) Financing Activities (402,401) 4,912 ------------------ ------------------ Net (Decrease) in Cash (295,987) 103,877 Cash Balances: Beginning of Period 574,732 405,153 ------------------ ------------------ End of Period $ 278,745 $ 509,030 ================== ==================
4 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following financial information is submitted in response to the requirements of Form 10-Q and does not purport to be financial statements prepared in accordance with generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, in the opinion of the Company's management, the interim financial statements reflect fairly the financial position and results of operations for the periods indicated. It is suggested that these interim consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K containing the Company's audited financial statements as of and for the year ended September 30, 2004 filed with the Securities and Exchange Commission. The results of operations for the nine months ended June 30, 2005 are not necessarily indicative of results expected for the entire fiscal year ending September 30, 2005. Note 1 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. 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 was an inactive public company acquired APO, (collectively, the "Company"), pursuant to a tax-free reorganization agreement. The acquisition was accounted for by the purchase method under business combinations in a reverse acquisition transaction. Concurrently, IFAN changed its name to APO Health, Inc., a Nevada corporation. Operating deficit and economic conditions. Adverse economic conditions have limited the ability of the Company to market its products at amounts sufficient to recover its operating and administrative costs. As a result, the Company incurred a loss of $1,048,828 for the year ended September 30, 2004 and an additional loss of $277,066 for the nine months ended June 30, 2005. The Company is in violation of the tangible net worth covenant of its lending agreement (see note 3).As more fully described in note 7, the Company is a defendant in two lawsuits with Proctor & Gamble and Alcoa, involved in the sale of products of those two companies, which unbeknownst to the Company were counterfeit products. It is not possible to predict at this time the ultimate outcome of the litigation or the extent, if any of the effect on the Company. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon the Company's ability to meet its financing requirements, and the success of its operations. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Cash and cash equivalents. For purposes of the statements of cash flows, cash equivalents include all highly liquid investments purchased with original maturities of three month or less. Revenue recognition occurs when products are shipped. 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 estimated useful life. The cost of maintenance and repairs is expensed as incurred. 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. 5 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings Per Share, Basic. Earnings per share have been calculated based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the net income by the weighted average number of common shares outstanding plus potential dilutive securities. 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
2005 2004 -------------- ------------- Cash paid during the year for Interest $ 40,098 $ 77,292 Non-cash transaction: Common Stock Issued for Professional Fees $ 40,000 Common Stock issued upon conversion of deferred compensation 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 provided the Company with a maximum credit facility not to exceed $3,000,000. The credit facility has been amended by mutual consent and reduced the maximum amount of credit under the facility to $500,000. The credit facility is collateralized by substantially all the Company's assets and 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% (8.25% as of March 31, 2005). 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. The Company is currently not in compliance with the tangible net worth covenant of the financing agreement. Under terms of the agreement, the lender may call the loan if the Company is in violation of any restrictive covenant.
Bank Notes Payable are as follows June 30 September 30 2005 2004 ------------------ ------------------ Own note borrowing $ 206,784 $ 609,185 ================== ================== Note 4 - INCOME TAXES Income taxes (benefit) consist of the following: 2005 2004 ------------------ ------------------ Current $ - $ - Utilization of net operating loss - - Deferred - - ------------------ ------------------ Total $ - $ - ================== ================== A reconciliation of income taxes at the federal statutory income tax rate to total income taxes is as follows: 2005 2004 ------------------ ------------------ Computed at federal statutory rate of 34% $ - $ - State income tax - - Utilization of net operating loss - - ------------------ ------------------ Total $ - $ - ------------------ ------------------
6 APO HEALTH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - INCOME TAXES (continued) The components of deferred taxes are as follows:
June 30, September 30, 2005 2004 ------------------ ------------------ Deferred tax assets Allowance for doubtful accounts $ 144,000 $ 152,000 Depreciation 21,000 21,250 Deferred Compensation 20,000 50,400 Net operating loss carryover 574,000 404,025 Valuation allowance (759,000) (627,675) ------------------ ------------------ Total Deferred tax asset $ - $ - ================== ==================
The Company has a net operating loss carryover of approximately $1,139,000 to offset future taxable income. The carryover expires at various times through 2024. The Company has offset the deferred tax asset by a valuation allowance of $759,000, since it cannot be determined more likely than not whether the Company will be able to utilize such net operating loss carryover. Note 5 - COMMON STOCK On April 1, 2005, the Company issued a total of 4,166,667 shares of restricted common stock to Dr. Jan Stahl, CEO of the Company in exchange for the conversion of $50,000 of deferred compensation. On March 8, 2005 and March 29, 2005, the Company issued a total of 1,700,000 shares of common stock to professionals and consultants for services rendered valued at $34,000. In October, 2004, the Company issued 100,000 shares of common stock to a professional for services rendered valued at $6,000. On January 29, 2004, the Company entered into an Investment Banking agreement with Sloan Securities Corp. ("SSC") to provide financing and advisory and investment banking services for a period of one year from the date of the agreement. In consideration for these services, the Company issued to an affiliate of SSC 2,000,000 share of restricted common stock in the Company valued at $120,000. In January of 2004, the Company authorized the creation of 3,500,000 bonus compensation warrants exercisable at $0.025 per share, for an exercise period of three years, to be issued to designated recipients approved by the Board. On January 9, 2004, the Board authorized the issuance of 2,300,000 of compensation warrants to various officers and professionals for services rendered. 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 issued. 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. Note 6 - 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 7 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $34,351 and $39,581 for the six month periods ended June 30, 2005 and 2004, respectively. Future minimum lease payments are as follows: For the years ended September 30, 2005 $ 19,325 2006 70,571 2007 71,225 2008 75,825 2009 79,405 After 2009 13,337 ------------- Total $ 329,688 ------------- Note 7 - COMMITMENTS AND CONTINGENCIES 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 the present time, the Company is self-insured for product liability claims. Litigation ---------- 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 lawsuit is seeking, among other relief, a request for a temporary and permanent injunction from selling such products. Recently, the complaint was amended to include a number of additional parties, including Dr. Jan Stahl, chief executive officer of the Company. In addition, P &G is seeking damages of $10,000,000. Outside counsel is unable to predict at this time the ultimate outcome of the litigation or the extent, if any of the effect on the Company. The Company believes it has meritorious defenses and is vigorously defending its position. 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 supplying 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 lawsuit is seeking, among other relief, a request for a temporary and permanent injunction from selling such products. . Recently, the complaint was amended to include a number of additional parties, including Dr. Jan Stahl, chief executive officer of the Company. In addition, P &G is seeking damages of $10,000,000. Outside counsel is unable to predict at this time the ultimate outcome of the litigation or the extent, if any of the effect on the Company. The Company believes it has meritorious defenses and is vigorously defending its position. 8 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS One of the Company's former customers, Allou Distributors Inc. has recently filed for bankruptcy protection. The bankruptcy trustee is seeking the return of $70,000 which he deems is a preferential distribution for payment of merchandise sold to Allou Distributors Inc. The Company believes the claim is without merit and will vigorously defend its position. 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 expired on September 30, 2004, and shall be automatically renewed for successive periods of one year unless either party gives written notice to terminate the agreement. Note 8 - 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 June 30, 2005, the Company had $310,987 on deposit, in excess of the $100,000 in each bank, which is insured under federal law. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements -------------------------- This quarterly report on Form 10-Q 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 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. Results of Operations --------------------- Revenue for the three months ended June 30, 2005 was $3,879,566, a decrease of $4,325,101 or 52.7%, compared to the three months ended June 30, 2004. Revenue for the nine months ended June 30, 2005 was $12,486,146, a decrease of $16,962,051, or 57.5%, compared to the nine months ended June 30, 2004. The Company lost three wholesale customers with total sales of approximately $3,850,000 during the nine month period ended June 30, 2004 and approximately $1,250,000 during the three month period ended June 30, 2004 due to the Alcoa and Proctor & Gamble litigation. In addition, revenue was reduced by approximately $13,500,000 for the nine months ended June 30, 2005 and $4,500,000 for the three months ended June 30, 2005 which is attributable to a reduction in the sale of health, beauty aids and other pharmaceutical products acquired from European vendors as margins on these products decreased due to the decline in the value of the U.S. Dollar against both the Euro and the British Pound. Where product was available for sale but the margins were such that the Company would not be able to generate a profit, the Company declined to sell those products. As a result of the decrease in wholesale revenue, cost of goods sold associated with those sales also declined proportionately. Cost of sales for the three months ended June 30, 2005 was $3,582,834, a decrease of $4,489,050, or 55.6% compared to the three months ended June 30, 2004. The cost of sales for the nine months ended June 30, 2005 was $11,352,224, a decrease of $16,720,869, or 59.6%, compared to the nine months ended June 30, 2004. Gross profit for the three months ended June 30, 2005 was $269,732 compared to $132,783 for the three months ended June 30, 2004. The gross profit for the nine months ended June 30, 2005 was $1,133,922 compared to $1,374,294 for the nine months ended June 30, 2004. Gross profit as a percentage of sales was 7.6% for the three months ended June 30, 2005 compared to 1.6% for the three months ended June 30, 2004. Gross profit as a percentage of sales was 9.1% for the nine months ended June 30, 2005 compared to 4.6% for the nine months ended June 30, 2004. The increase in gross profit as a percentage of sales is a result of the Company's change in strategy away from selling very low gross profit items. The Company is in the process of preparing a new medical catalogue for medical supplies. It anticipates that this new catalogue will aid in the increase of the sale of medical supplies which have higher gross profit margins than many of the other products and increase the overall gross profit margin of the Company. Selling expenses for the three months ended June 30, 2005 were $81,141, a decrease of $25,966, or 24.2%, compared to selling expenses of $107,107 for the three months ended June 30, 2004. Selling expenses for the nine months ended June 30, 2005 were $294,070, a decrease of $187,648, or 39.0%, compared to $481,718 for the nine months ended June 30, 2004. As a direct relationship with the decrease in wholesale revenue, the Company reduced costs associated with that revenue for the nine months ended June 30, 2005 as follows: freight costs decreased by $78,101, commissions decreased by $68,839, and advertising and related costs decreased by approximately $39,246. Changes in other selling costs were immaterial. Advertising costs will increase when the Company completes and distributes its new medical supply catalogue. General and administrative expenses for the three months ended June 30, 2005 were $280,420 compared to general and administrative expenses of $267,658 for the three months ended June 30, 2004. General and administrative expenses for the nine months ended June 30, 2005 were $1,076,820 an increase of $49,163 or 4.8% compared to the nine months ended June 30, 2004. There were three categories where general and administrative expenses increased from the nine months ended June 30, 2004. Bad debt expenses increased by $101,214 as additional reserves were taken due to write off of receivables against the 10 allowance of approximately $121,000 with an increase in the reserve of $125,000, consulting increased by $8,000 (one consulting agreement ended in January 2005) and legal expenses related to the Alcoa and Proctor & Gamble litigation was approximately $85,000. These three categories accounted for increases of approximately $194,000. Compensation and related employee expenses decreased by approximately $75,500 as the Company reduced the number of full time personnel by two persons. Other professional fees decreased by approximately $15,000 and bank fees decreased by approximately $15,000 as the Company reduced the availability on the line of credit. All other general and administrative expenses decreased by approximately $38,000. Interest expense for the three months ended June 30, 2005 was $12,544 compared to interest expense of $27,230 for the three months ended June 30, 2004. Interest expense for the nine months ended June 30, 2005 was $40,098, a decrease of $37,194 from the nine month period ended June 30, 2004. The Company has reduced the average amount of borrowing on its line of credit with Rosenthal & Rosenthal, Inc. by approximately 50% and the monthly minimum interest expenses charges have been reduced by $4,000. Financial Condition, Liquidity and Capital Resources ---------------------------------------------------- As of June 30, 2005, the Company had net working capital of $214,296, a decrease of $182,466 from net working capital of $396,762 from September 30, 2004 as a result of the net loss during the period. At June 30, 2005, the Company has a $500,000 credit facility of which approximately $285,000 is not being used. At June 30, 2005, the Company is not in compliance with the tangible net worth covenant of the financing agreement. Under terms of the agreement, the lender may call the loan if the Company is in violation of any restrictive covenant. Exclusive of the increase in bad debt expense, legal expenses related to the Alcoa and Proctor & Gamble litigations and the expiration of a one year consulting agreement in January 2004, the Company reduced selling, general and administrative expenses by approximately $350,000 during the nine months ended June 30, 2005. The Company has also increased the gross profit margin from 4.6% to 9.1%. Adverse economic conditions have limited the ability of the Company to market its products at amounts sufficient to recover its operating and administrative costs. As a result, the Company incurred a loss of $1,048,828 for the year ended September 30, 2004 and an additional loss of $277,066 for the nine months ended June 30, 2005. The Company is in violation of the tangible net worth covenant of its lending agreement ( see note 3 ).As more fully described in note 7, the Company is a defendant in two lawsuits with Proctor & Gamble and Alcoa, involved in the sale of products of those two companies, which unbeknownst to the Company were counterfeit products. It is not possible to predict at this time the outcome of the litigation or the extent of the effect on the Company. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon the Company's ability to meet its financing requirements, and the success of its operations. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Off-Balance Sheet Arrangements ------------------------------ The Company does not have any off-balance sheet arrangements that are likely to have a current or future effect on the Company's financial condition, revenues or expenses, results of operations or capital resources. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Exchange Rate Risk. 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. As a result, the Company's financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. The Company has virtually eliminated its purchases from Europe as the cost of products have increased substantially as the value of the U.S. Dollar has declined substantially against both the Euro and the British Pound. Credit Risk. The Company maintains cash balances at various financial institutions. At times, such balances exceed the insured limits of the financial institution. To date, the Company has not experienced any losses in such accounts. As of March 31, 2005, the Company had $310,987 on deposit, in excess of the $100,000 in each bank, which is insured under federal law. ITEM 4. CONTROLS AND PROCEDURES. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is: (1) accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. There was no change in the Company's internal controls or in other factors that could affect these controls during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. 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 lawsuit is seeking, among other relief, a request for a temporary and permanent injunction from selling such products. Recently, the complaint was amended to include a number of additional parties, including Dr. Jan Stahl, chief executive officer of the Company. In addition, P &G is seeking damages of $10,000,000. The Company believes it has meritorious defenses and is vigorously defending its position. 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 supplying 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 lawsuit is seeking, among other relief, a request for a temporary and permanent injunction from selling such products. . Recently, the complaint was amended to include a number of additional parties, including Dr. Jan Stahl, chief executive officer of the Company. In addition, P &G is seeking damages of $10,000,000. The Company believes it has meritorious defenses and is vigorously defending its position. One of the Company's former customers, Allou Distributors Inc. has recently filed for bankruptcy protection. The bankruptcy trustee is seeking the return of $70,000 which he deems is a preferential distribution for payment of merchandise 12 sold to Allou Distributors Inc. The Company believes the claim is without merit and will vigorously defend its position. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. On April 1, 2005, the Company issued a total of 4,166,667 shares of restricted common stock to Dr. Jan Stahl, CEO of the Company, as consideration for $50,000 of deferred executive compensation. This issuance was exempt from registration requirements under Section 4(2) of the Securities Act of 1933, as amended. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. On April 1, 2005, the Company issued a total of 4,166,667 shares of restricted common stock to Dr. Jan Stahl, CEO of the Company, as consideration for $50,000 of deferred executive compensation. This issuance was exempt from registration requirements under Section 4(2) of the Securities Act of 1933, as amended. ITEM 6. EXHIBITS. Exhibit Number Description ------- ------------------------------------------------------------------------ 31.1 Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 13 SIGNATURES Pursuant to the requirements 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: August 19, 2005 By:/s/ Jan Stahl -------------------- Dr. Jan Stahl, Chairman Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer and Secretary 14