10-Q 1 apo10q123101.txt FORM 10-Q FOR QUARTERLY PERIOD ENDED DECEMBER 31, 2001 U.S. 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 December 31, 2001 OR [ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934 From 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 Road, Oceanside, New York 11575 _____________________________________________________ (Address of principal executive offices) (800) 365-2839 _________________ (Issuer's Telephone Number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 As of February 4, 2002, 23,704,023 shares of Common Stock of the issuer were issued. APO HEALTH, INC. FORM 10-Q QUARTER ENDED DECEMBER 31, 2001 TABLE OF CONTENTS ___________________ Page ____ PART I - Financial Information Item 1 Financial Statements. Consolidated Balance Sheet as of December 31, 2001 and September 30, 2001. 3 Consolidated Statement of Income for the three months ended December 31, 2001 and 2000. 4 Consolidated Statement of Cash Flows for the Three months ended December 31, 2001 and 2000. 5 Notes to Consolidated Financial Statements. 6 - 11 Item 2 Management's Discussion and Analysis Or Plan of Operations. 12 PART II - Other Information Item 1 Legal Proceedings. 13 Item 2 Changes in Securities and Use of Proceeds. 13 Item 3 Default upon Senior Securities. 13 Item 4 Submission of Matters to a Vote of Security Holders. 13 Item 5 Other Information. 13 Item 6 Exhibits and Reports on Form 8-K. 13 Signatures 14 - 2 - PART I - FINANCIAL INFORMATION
APO HEALTH, INC. CONSOLIDATED BALANCE SHEET December 31, September 30, 2001 2001 ----------- ----------- (Unaudited) ASSETS -------- Current Assets: Cash $ 578,559 $ 179,167 Accounts Receivable, net of allowance For doubtful accounts of $29,000 and $29,000 1,704,305 1,768,501 Inventory 2,258,528 1,692,209 Due from Officers 113,904 99,844 Deferred Tax Assets 23,383 36,020 Other Current Assets 236,642 165,935 ----------- ----------- Total Current Assets 4,915,321 3,941,676 ----------- ----------- Property and Equipment, net of accumulated Depreciation of $79,578 and $76,606 37,417 40,389 Goodwill, less accumulated amortization Of $53,802 and $53,802 125,537 125,537 Deposits 32,500 7,500 ----------- ----------- Total Assets $ 5,110,775 $ 4,115,102 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ----------------------------------------- Current Liabilities: Bank Notes Payable $ 1,723,716 $ 1,736,224 Accounts Payable 1,829,755 1,056,117 Accrued Expenses 131,023 50,776 Due to Officer - 45,509 ----------- ----------- Total Current Liabilities 3,684,494 2,888,626 ----------- ----------- Stockholders' Equity: Common stock, $.0002 par value, 125,000,000 shares authorized, 23,704,081 and 23,132,089 shares issued and outstanding 4,734 4,626 Paid-in Capital 1,591,505 1,452,530 Retained Earnings (Deficit) (169,958) (230,680) ----------- ----------- Total Stockholders' Equity 1,426,281 1,226,476 ----------- ----------- Total Liabilities and Stockholders' Equity $ 5,110,775 $4,115,102 =========== ===========
- 3 -
APO HEALTH, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 (UNAUDITED) 2001 2000 ----------- ----------- Revenue $ 6,807,021 $ 6,368,388 Cost of Revenue 6,075,357 5,595,174 ----------- ----------- Gross Margin 731,664 773,214 ----------- ----------- Operating Expenses Selling Expense 224,121 161,579 General and Administrative Expenses 403,929 457,113 ----------- ----------- 628,050 618,692 ----------- ----------- Income from Operations 103,614 154,522 Interest Expense 30,255 45,302 ----------- ----------- Income before Provision for Income Taxes 73,359 109,220 Provision for Income Taxes 12,637 13,564 ----------- ----------- Net Income $ 60,722 $ 96,656 =========== =========== Basic and Diluted Earnings Per Common Share $ .00 $ .01 =========== =========== Weighted Average Common Shares Outstanding 23,394,874 14,216,422 =========== ===========
- 4 -
APO HEALTH, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 (UNAUDITED) 2001 2000 ----------- ----------- Cash Flow From Operating Activities: Net Income $ 60,722 $ 95,746 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation and Amortization 2,972 3,708 Deferred Taxes 12,637 1,563 Changes In: Accounts Receivable 64,196 (425,393) Inventory (566,319) (73,610) Other Current Assets 68,377 11,210 Deposits (25,000) Accounts Payable 773,638 206,594 Accrued Expenses 80,247 (12,805) Income Taxes Payable - 13,564 ----------- ----------- Cash Flows from Operating Activities 471,469 (179,423) ----------- ----------- Cash Flows from Financing Activities: Advances from Officers, Net (59,569) 80,664 Proceeds (Payment) on Bank Notes Payable, Net (12,508) 106,903 ----------- ----------- Cash Flows from Financing Activities (72,077) 187,594 Net Increase (Decrease) in Cash 399,392 8,171 ----------- ----------- Cash Balances: Beginning of Period 179,167 90,732 ----------- ----------- End of Period $ 578,559 $ 98,903 =========== ===========
- 5 - 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 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 10K containing the Company's audited financial statements as of and for the year ended September 30, 2001 filed with the Securities and Exchange Commission. The results of Operations for the three months ended December 31, 2001 are not necessarily indicative of results to be expected for the entire fiscal year ending September 30, 2002. 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, Internet Financial Corp.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 changes 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 months 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. - 6 - APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 expenses as incurred. Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the dates of acquisition and was being amortized using the straight-line method over 15 years. Effective to the issuance of FASB No. 142, the Company discontinued amortizing goodwill. The Company follows Statement of Financial Accounting Standards No. 121, Impairment of Long-lived Assets, by reviewing such assets for the impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 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. 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. Reclassification 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. - 7 - APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Supplemental Cash Flow Statement Disclosures -------------------------------------------------------- 2001 2000 ----------- ----------- Cash Paid During the Year for: Interest $ 19,455 $ 45,302 Income Taxes - 65,000 Common Stock Issued for Consulting And Professional Fees 139,083 Note 3 - Bank Notes Payable ------------------------------ On April 2, 2001, the Company renewed its credit facility with HSBC Bank USA that provides for total borrowings that may not exceed $2,000,000. Bankers acceptances and letters of credit, which relate to specific importation transaction, may not exceed $500,000 each and own-note borrowing, which does not relate to specific transactions, may not exceed $1,500,000. The credit facility is collateralized by substantially all of the Company's assets and is personally guaranteed by the two majority Company stockholders. Interest of prime +1% on the own-note borrowings is payable monthly and the bankers acceptance fees of 200 basis points above the discount rate are paid at the inception of the bankers acceptance. Borrowings on the credit facility are payable on demand, or upon maturity, which is up to 180 days after the initiation of a bankers acceptance or March 31, 2001, for own-note borrowings, whichever is earlier. On April 2, 2001, the date the credit facility was renewed, outstanding own-note borrowings were $1,949,000, and the $449,600 excess over the sub-limit was converted to a term loan payable over one year in monthly installments of $37,467. Interest will be at the bank's prime rate plus 1%. Own-note borrowings was $1,500,000 as of December 31, 2001; acceptances totaled $111,316 and there were $72,217 letters of credit outstanding. As of December 31, 2001, the term loan amounted to $112,400. The credit facility matures March 31, 2002. Note 4 - Related Parties --------------------------- Advances due to/from officers are non-interest bearing and due on demand. - 8 - APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Income Taxes ------------------------ Income taxes (benefit) consist of the following: 2001 2000 ----------- ----------- Current $ - $ 15,127 Deferred 12,637 (1,563) ----------- ----------- $ 12,637 $ 13,564 =========== =========== A reconciliation of income tax at the federal statutory income tax rate to total income taxes is as follows: 2001 2000 ----------- ----------- Computed at the federal statutory rate of 34% $ 24,941 $ 37,134 State income tax 3,668 5,461 Valuation allowance adjustment (7,363) - Other adjustments (8,609) (29,031) ----------- ----------- $ 12,637 $ 13,564 =========== =========== The components of deferred taxes are as follows: 2001 2000 ----------- ----------- Deferred tax assets Allowance for doubtful accounts $ 11,600 $ 39,003 Depreciation 8,520 4,563 Net operating loss carryover 7,363 - Miscellaneous (4,100) 125 ----------- ----------- 23,383 43,691 ----------- ----------- Deferred tax liabilities Deferred officer compensation - 4,299 State franchise taxes - 6,392 ----------- ----------- 10,691 ----------- Current net deferred tax assets $ 23,383 $ 33,000 =========== =========== The Company has a net operating loss carryover of approximately $30,000 to offset future taxable income. The carryover expires 2016. - 9 - APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 - Common Stock Issuances ---------------------------------- On November 28, 2001, the Company issued 463,610 shares of common stock, par value $.0002, registered on Form S-8, to three consultants and an attorney for the Company. The shares were valued at $.30 per share based on services to be provided by the consultants and attorney. Note 7 - Lease ----------------- The Company leases approximately 11,800 square feet in New York on a month-to-month basis with an affiliated company owned by two officers of the Company. The affiliates lease underlying the New York lease expires on December 31, 2004. Lease payments made by the Company approximate lease payments by the affiliated company. Future minimum lease payments are as follows: Year ended December 31, ----------------------- 2002 $ 70,000 2003 72,450 2004 74,900 Total $ 217,350 Note 8 - 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 other 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 collars. 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. - 10 - APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS However, on October 24, 2001, the Company was named as a defendant in Merchant's & Business Men's Mutual Insurance Company vs. APO Health, Inc. Merchant's & Business Men's Mutual Insurance Company issued a Commercial Blanket Excess Liability insurance policy to the Company for one year commencing February 27, 2000 up through February 27, 2001. Merchant's & Business Men's Mutual Insurance Company alleges in its complaint that policy coverage with the Company does not extend to the allegations set forth in the aforementioned Kenro suit. The Company, however, disagrees and contends that the policy issued by Merchant's & Business Men's Mutual Insurance Company obligates them to cover any damages that the Company may incur, as a result of an unfavorable verdict in the Kenro suit. Employment Agreement Effective October 1, 2001, the Company entered into a three-year employment agreement with its chief executive officer that provides for a minimum annual salary of $250,000 with incentives based on the Company's attainment of specified levels of sales and earnings as defined in the agreement. The employment agreement expires September 30, 2004 and shall be automatically renewed for successive periods of one year unless either party gives written notice to terminate the agreement. Note 9 - Concentration of Credit Risk ---------------------------------------- The Company maintains bank accounts at one bank. As of December 31, 2001, the Company had $578,559 on deposit, and only $100,000 in each bank is insured under federal law. Note 10 - Subsequent Events ------------------------------ On January 2, 2002, the Company acquired 100% of the outstanding stock of Envirotech Air Quality Services, Inc. ("Envirotech") a Florida corporation specializing in indoor air quality testing, sanitation, sterilization and filtration. The purchase price was $25,000 plus the Company will issue 50,000 shares of its restricted common stock to the former shareholders of Envirotech. In addition, the Company will issue 100,000 common stock purchase warrants to the former shareholders of Envirotech exercisable for a period of two years at a purchase price of $.75 per share. - 11 - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -------------------------------------------------------------------------- Results of Operations --------------------- Revenue for the three months ended December 31, 2001 increased by $438,633 or 6.9% over the three months ended December 31, 2000. The increase in revenue was due to increases in sales of product to wholesalers and other distributors during the period ended December 31, 2001. Gross margins for the three-month period ended December 31, 2001 was 10.7% a decrease of 1.4% from the period ended December 31, 2000. The decreased margin was due to the lower margins that are earned on sales to wholesalers and distributors as opposed to retail sales. The 1.4% reduction in gross profit margins decreased the gross margin by approximately $95,300 and the increase sales increased gross profit by approximately $47,200. Operating expenses for the three months ended December 31, 2001 were $628,050, an increase of $9,358 or 1.5% from the three months ended December 31, 2000. Selling expenses increased by $62,542 to $224,121, an increase of 38.7%. Shipping expenses increased by $31,911, advertising expense increased by $15,777 and credit card processing increased by $7,856, accounting for 90% of the increases. General and Administrative expenses for the three months ended December 31, 2001 decreased by $53,184 to $403,929 or 11.6%. Significant decreases in general and administrative expenses include bad debt of $72,282 and office expenses of $9,933. Significant increases in general and administrative expenses include consulting fees of $46,599. The increase in consulting fees includes consultants for corporate planning, financing and acquisitions. Interest expense decreased by $15,047 to $30,255 as borrowing was reduced and interest rates paid by the Company decreased substantially. Financial Condition ------------------- As of December 31, 2001, the Company had current working capital of $1,230,827. In addition, the Company has available approximately $275,000 in unused credit facilities, including bankers acceptances and letters of credit. The Company has issued a total of 3,603,634 common stock purchase warrants exercisable at prices ranging from $1.00 to $2.00 per share and 250,000 common stock purchase warrants to Dr. Jan Stahl exercisable at $.25 per share. If these warrants are exercised, the net proceeds to the Company would be in excess of $4,500,000. These proceeds could be used for acquisitions and or major capital expansion. At the current time, the Company has no immediate plans for a material acquisition or major capital expenditures and, therefore, has sufficient working capital for its current operations. - 12 - PART II - OTHER INFORMATION APO HEALTH, INC. ITEM 1 - 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. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS ----------------------------------------------------------- None. ITEM 3 - DEFAULT UPON SENIOR SECURITIES --------------------------------------------- None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------------------ None. ITEM 5 - OTHER INFORMATION ------------------------------ None. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ------------------------------------------------- None. - 13 - 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: February 14, 2002 By: /s/ Dr. Jan Stahl ----------------------- Dr. Jan Stahl, Chairman Chief Executive Officer and Secretary (Principal Executive Officer) Date: February 14, 2002 By: /s/ Peter Steil ----------------------- Peter Steil, President and Treasurer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: February 14, 2002 By: /s/ Dr. Jan Stahl ----------------------- Dr. Jan Stahl, Director Date: February 14, 2002 By: /s/ Peter Steil ----------------------- Peter Steil, Director Date: February 14, 2002 By: /s/ Kenneth Leventhal ----------------------- Kenneth Leventhal, Director - 14 -