FORM 10-SB/A-2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-23031
DYNAMIC HEALTH PRODUCTS, INC.,
formerly Nu-Wave Health products, Inc.,
successor to and formerly Direct Rx, Inc.
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(Name of Small Business Issuer in its charter)
Florida 34-1711778
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6950 Bryan Dairy Road
Largo, Florida 33777
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(Address of principal executive offices) (Zip Code)
Issuers's telephone number (727) 544-8866
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered Each class is to be registered
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Capital Stock
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(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
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TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS................................................4
A. Company...........................................................4
B. History of Company and Business...................................4
1. Direct Rx................................................4
2. Old Nu-Wave..............................................4
3. Mergers and Restructure..................................5
C. Present Company and Business......................................7
1. Business.................................................7
2. Quality Control..........................................8
3. Government Regulation....................................8
D. Industry Segments.................................................9
E. Employees........................................................10
F. Risk Factors.....................................................10
G. Recent Acquisitions..............................................10
1. Dynamic.................................................10
2. Becan...................................................11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS...........12
A. Results of Operations and Fiscal Year 1998
Compared to Fiscal Year 1997 ....................................12
B. Liquidity and Capital Resources..................................13
ITEM 3. DESCRIPTION OF PROPERTY..............................................14
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................................14
A. Security Ownership of Certain beneficial Owners
and Management...................................................14
B. Outstanding Options and Conversion Rights........................15
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS..................................................16
A. Directors and Executive Officers.................................16
B. Summary of Background and Experience
of Executive Officers and Key Personnel..........................17
ITEM 6. EXECUTIVE COMPENSATION...............................................18
A. Directors........................................................18
B. Executive Officers...............................................18
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................18
ITEM 8. DESCRIPTION OF SECURITIES............................................19
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS........................20
ITEM 2. LEGAL PROCEEDINGS....................................................20
ITEM 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
AND FINANCIAL DISCLOSURE.............................................20
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES..............................20
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS............................23
PART F/S
Financial Statements..........................................................23
PART III
Item 1. Index to Exhibits....................................................23
Item 2. Description of Exhibits..............................................24
Signatures....................................................................25
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
A. COMPANY
Dynamic Health Products, Inc. ("Company"), a Florida corporation, formerly
Nu-Wave Health Products, Inc., a Florida corporation, successor to and formerly
Direct Rx, Inc., was incorporated January 29, 1998. Currently, the Company is
engaged in the mail order business of diabetic equipment and supplies and in the
business of creating, manufacturing and packaging of non-prescription
medications and health products on an international basis. The Company is a
"small business issuer" for purposes of disclosure and filings under the
Securities Act of 1933 and the Securities Exchange Act of 1934. The Company 's
fiscal year begins on April 1 and ends on March 31 of each year.
The principal office of the Company is currently located at 6950 Bryan Dairy
Road, Largo, Florida.
Direct Rx filed its initial Form 10-SB with the United States Securities and
Exchange Commission ("SEC") on August 25, 1997 and received comments from the
SEC staff. The Company filed an amended Form 10-SB, dated July 1, 1998, filed on
July 22, 1998, and has received comments from the SEC staff. However, no market
developed for the common capital stock of Direct Rx, and there is currently no
market for the common capital stock of the Company.
B. HISTORY OF COMPANY AND BUSINESS
1. DIRECT RX
Direct Rx, Inc. ("Direct Rx"), an Ohio corporation, was incorporated on June 30,
1992. It was originally formed to pursue business opportunities in the sale of
pharmaceuticals, drug items and medications both from a retail pharmacy and from
orders obtained by mail or phone and delivered directly to consumers.
In August, 1992, the Company purchased the assets of Vern's Pharmacy, Inc.
("Pharmacy") and was engaged in the retail pharmacy business. Due to negative
competitive conditions, the retail pharmacy business was discontinued on April
30, 1995, and sold on August 15, 1995. In December, 1992, the Company acquired
Diabetes Supplies of Texas, Inc., a Houston, Texas based provider of diabetic
products through mail order sales. Direct Rx continued to and the Company is
currently providing a broad range of equipment and supplies to diabetics on a
mail order basis.
The principal office of Direct Rx. and its wholly-owned subsidiary were located
at 5905-A Hampton Oaks Parkway, Tampa, Florida. See "A.2. Old Nu-Wave" below.
The mail order Diabetic Supplies business of Direct Rx was operated and still is
operated out of its offices located at 275 Curry Hollow Road, Pittsburgh,
Pennsylvania.
Since April, 1995, when Direct Rx discontinued the retail pharmacy business, the
principal business of Direct Rx, other than the business of its wholly-owned
subsidiary, was the mail-order sale of diabetic supplies and equipment for use
in measuring and controlling blood sugar levels. The primary products were
testing meters and strips. Direct Rx also sold a variety of associated products,
such as transfer pipets, glucose tablets and specially prepared food items for
diabetics.
2. OLD NU-WAVE
The original Nu-Wave Health Products, Inc. ("Old Nu-Wave") was a wholly-owned
subsidiary corporation of the Direct Rx. Old Nu-Wave was incorporated on May 1,
1995, as a Florida corporation under the name of Solstice, Inc. Pursuant to
amended Articles of Incorporation, its name was changed to the original Nu-Wave
Health Products, Inc. on September 25, 1995. Old Nu-wave had no significant
business operations until September, 1995.
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In September, 1995, the Direct Rx acquired 80% of the issued and outstanding
common capital stock of Old Nu-Wave in consideration of the payment of $.10 per
share, the same consideration contributed by the other 20% shareholders, and on
September 15, 1995, Old Nu-Wave purchased the assets of Ayur, Inc., a non-
prescription health product manufacturer, for $32,700, $16,700 in cash, provided
by Direct Rx in the form of a loan, and $16,000 pursuant to an unsecured
promissory note. This promissory note has been paid in full.
As of July 15, 1997, Direct Rx issued 100,000 shares of its common capital
stock, valued at $.10 per share, to the other four (4) shareholders of Old
Nu-Wave in exchange for the 20 shares of common capital stock of Old Nu-Wave,
which constituted the remaining 20% of the issued and outstanding common capital
stock of Old Nu-Wave, resulting in Direct Rx then owning 100% of Nu-Wave. Of
this 100,000 shares, 55,000 were issued to Kotha S. Sekharam, then the President
of Direct Rx and Old Nu-Wave and now the President of the Company.
Old Nu-Wave was and the Company still is in the business of creating,
manufacturing and packaging of non-prescription medications and health products
on an international basis.
The principal office of Old Nu-Wave was located at 5905-A Hampton Oaks Parkway,
Tampa, Florida.
3. MERGERS AND RESTRUCTURE
It was determined by Management that it would be in the best interest of Direct
Rx to change the domicile of or reincorporate Direct Rx to the State of Florida,
where its executive offices were located and a substantial portion of its
business was located, through its wholly-owned subsidiary, Old Nu-Wave. It was
further determined to consolidate the operations of the Direct Rx and Old
Nu-Wave and to change the name of Direct Rx to Nu-Wave Health Products, Inc.,
which has significant name recognition with the Company's market. The above was
accomplished through two merger transactions approved by the various Boards of
Directors and Management as controlling shareholders of Direct Rx and Old
Nu-Wave.
First, a new wholly owned subsidiary of Direct Rx was formed as a Florida
corporation on January 27, 1998, under the name of Direct Rx Healthcare, Inc.
("Direct Healthcare"). Direct Rx was then merged into Direct Healthcare on March
19, 1998, with Direct Healthcare as the surviving corporation. The outstanding
common capital stock and all outstanding options or rights of conversion were
exchanged for the common capital stock and option and conversion rights of
Direct Healthcare on a one to one basis. See "Part II, Item 4. Recent Sales of
Unregistered Securities."
Subsequently, Old Nu-Wave, the already existing subsidiary of Direct Rx, was
merged into Direct Healthcare, with Direct Healthcare as the surviving
corporation, and its Articles of Incorporation were amended to change the name
of the corporation to Nu-Wave Health Products, Inc. ("Company"), effective April
1, 1998.
As a result of the foregoing, the Company and its operations as of April 1,
1998, were operating as one Florida corporation under the new name of Nu-Wave
Health Products, Inc. and its executive offices were located at 5905-A Hampton
Oaks Parkway, Tampa, Florida 33610, telephone number (813) 628-0804.
It was determined by Management that it would be in the best interest of the
Company to change the name of the corporation to Dynamic Health Products, Inc.,
which management believes has a positive connotation in the Company's market.
The above was accomplished through a series of transactions as follows.
First, Articles of Amendment to the Articles of Incorporation of Dynamic Health
Products, Inc. ("Dynamic") were filed to change the name of the Company's wholly
owned subsidiary from Dynamic Health Products, Inc., a Florida corporation,
formerly Energy Factors, Inc., to Innovative Health Products, Inc., effective
July 23, 1998.
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Subsequently, the Articles of Amendment to the Articles of Incorporation of
Nu-Wave Health Products, Inc., a Florida corporation, were filed to change the
name of the corporation to Dynamic Health Products, Inc. ("Company"), effective
August 11, 1998.
As a result of the foregoing, the Company as of August 11, 1998 is operating as
one Florida corporation under the new name of Dynamic Health Products, Inc. and
its executive offices are located at 6950 Bryan Dairy Road, Largo, Florida
33777, telephone number (727) 544-8866.
The Directors of the Company are the same as the former Directors of Direct Rx,
Inc. and the officers of the Company are the same as the former Officers of
Direct Rx, Inc. See "Part I, Item 5. Directors, Officers, Promoters and Control
Persons."
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C. PRESENT COMPANY AND BUSINESS
1. BUSINESS
The Company continues the same business of Direct Rx and Old Nu-Wave and is
engaged in the business of creating, manufacturing and packaging of a wide
variety of non-prescription medications and health products for companies that
sell through numerous channels of distribution, on an international basis. These
products include nutritional supplements, over-the-counter pharmaceuticals,
cosmetics, extracts, lotions, creams, gets, liquids, powders, capsules and
tablets. Depending upon the specific needs of the customer, the products are
manufactured in bulk or packaged under private label. Although the Company has
customers on an international basis, the highest concentration of its customer
base is currently located in the in the United States. The international
business constitutes less than 10% of the total sales and revenues of the
Company.
The Company manufactures and packages approximately 99% of its non-prescription
medications and health products. The Company's manufacturing processes are
specifically designed to insure the highest quality control. Substantially all
of the Company's products are manufactured from readily available raw material.
Significant difficulties have not been encountered in purchasing supplies of
principal raw material or finished goods.
The Company markets its manufactured products to companies, which sell through
numerous different channels of distribution, including health food, drug,
convenience and mass market stores, through direct salespersons, brokers,
manufacturer representatives, distributors, and through marketing companies. The
industry in which the Company is engaged is characterized by intense
competition. The Company competes against established pharmaceutical and
consumer product companies that currently market products which have identical
active ingredients or are equivalent or functionally similar to or in
competition with those which the Company manufactures. In addition, numerous
companies are developing or may, in the future, engage in the development of
products competitive with those manufactured by the Company. The Company
believes it competes effectively against its competitors on the basis of its
ability to develop new products, the quality of products, competitive pricing,
and service.
Additional manufacturing and/or packaging equipment has been purchased during
fiscal year 1998 and subsequently to fiscal year end, to help meet the expanded
capacity requirements of its current and future business.
The Diabetes Supplies division, formerly the business of Direct Rx, has been
engaged in the mail-order sale of diabetic supplies and equipment for use in
measuring and controlling blood sugar levels. The primary products are testing
meters and strips. The Company also sells a variety of associated products, such
as transfer pipets and glucose tablets for diabetics. The Diabetes Supplies
division of the Company markets its products of diabetic supplies and equipment
to customers through print media and manufacturer referral.
The industry in which the Diabetes Supplies division of the Company is engaged
is characterized by intense competition. The Company competes against
established pharmaceutical and consumer product companies that currently market
products which have identical active ingredients or are equivalent or
functionally similar to or in competition with those which the Diabetes Supplies
division markets. The Company believes it competes effectively against its
competitors on the basis of price and service.
The mail-order Diabetes Supplies division is a small portion of the business of
the Company. The Company is currently considering various options of divesting
the Diabetes Supplies division in order that it may concentrate its efforts on
its manufacturing operations.
During fiscal 1998, the Company entered into a joint venture agreement to form
21st Century Health Care Products, LLC ("21st Century"), an Ohio limited
liability company. Under the terms of the agreement, the Company will have a 50%
ownership and will share profits and losses equally. 21st Century was
specifically formed to develop and distribute a children's multivitamin and
vegetable supplement product, "Jungle Jerry's Gummy Pals". The written agreement
between the parties has not been finalized. The other 50% interest is owned by
an independent party
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who is not affiliated with the Company or with any person
or entity with which the Company is affiliated. During fiscal 1998, the Company
had invested $5,000 in this joint venture.
During fiscal 1998, the Company began manufacturing products for J.Labs, Inc.
("J.Labs"). J.Labs is a company which holds trademarks for various products
which the Company manufactures. The Company pays royalty/brokerage fees for each
unit of product sold for which J.Labs holds a trademark. J.Labs is a corporation
owned by Manju Taneja (the spouse of Jugal Taneja), Mandeep Taneja (the son of
Jugal Taneja), Mihir Taneja (the son of Jugal Taneja), Kotha Sekharam, and
Madhavi Sekharam (the wife of Kotha Sekharam). The Company is presently
considering acquiring J.Labs.
As of June 15, 1998, the Company is also in the business of manufacturing and
distributing food supplements and health/diet products in the form of capsules,
tablets, powders, liquids and creams. See "G. Recent Acquisitions, 1.
Dynamic" below.
As of June 26, 1998, the Company is also in the wholesale business of
distributing pharmaceuticals and health and beauty products to independent
pharmacies, regional and national chain drug stores, alternate care facilities,
mail order facilities, mass merchandisers, deep discounters and brokers. See "G.
Recent Acquisitions, 2. Becan" below.
The principal office of the Company and its manufacturing facility is currently
located at 6950 Bryan Dairy Road, Largo, Florida. Additional manufacturing
operations are currently located at 5905-A Hampton Oaks Parkway, Tampa, Florida.
The Diabetes Supplies division of the Company is operated out of its offices
located at 275 Curry Hollow Road, Pittsburgh, Pennsylvania.
The business or any of the segments of the business of the Company is not
seasonal and the business or any of the segments of the business of the Company
are not in any material way dependent upon any patents, trademarks, licenses,
franchises or concessions.
2. QUALITY CONTROL
The manufacture of the Company's products is in accordance with the Good
Manufacturing Practices prescribed by the FDA, all other applicable regulatory
standards, and the Company's own rigorous quality control procedures. The
Company places special emphasis on quality control. The Company has formal
written quality control procedures that outline specific procedures to be
followed from the acceptance of raw materials, production processes, inspections
during the manufacturing, labeling, and packaging process, through the testing
of finished products. See "Present Company and Business - Government Regulation"
below.
The Company maintains a modern well-equipped manufacturing facility, that has
the capability of adhering to any current and anticipated regulatory
requirements. Raw materials when received, are initially held in quarantine
during which time the Company's quality assurance department confirms the
product against the manufacturer's certificate of analysis. Once cleared, a lot
number is assigned, required samples are retained, and the material is processed
by formulating, blending, and encapsulating when required.
3. GOVERNMENT REGULATION
The Company is subject to regulation by one or more federal agencies in
processing, formulation, packaging, labeling and advertising of the Company's
products including the United States Food and Drug Administration ("FDA"), the
Federal Trade Commission, the Consumer Product Safety Commission, the United
States Postal Service, the United States Department of Agriculture and the
Environmental Protection Agency. Activities of the Company are also regulated by
various agencies of the states and localities in which the Company's products
are sold.
The Company manufactures vitamins, minerals, herbs, and other similar
nutritional substances ("dietary supplements") and over-the-counter drug
products. The FDA is primarily responsible for regulation of the
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manufacture, labeling, and sale of vitamins and mineral supplements. The Dietary
Supplement Health and Education Act of 1994 ("DSHEA") was signed into law in
October 1994. This law, which amends the Federal Food, Drug and Cosmetic Act,
defines dietary supplements as a separate and distinct entity, and not as food
additives. Vitamins, minerals, herbs and other nutritional substances are
included in this definition. It provides for the use of third party scientific
literature which shall not be regulated as labeling by the FDA, so long as it is
not false or misleading. The DSHEA also delayed the FDA's requirements for
extensive product label changes which were to be applied to products
manufactured after July 1, 1995. It directs the FDA to publish new label
regulations for supplements with a mandatory effective date of December 31,
1996, and provides a set of different label requirements for ingredient content
information. No modifications were made on the requirements and proscriptions
regarding health claims for dietary supplements. The DSHEA also introduced the
concept of Good Manufacturing Practices to the industry of dietary supplement
manufacturers. Thus far, the Company has not incurred additional expenses in
order to comply with FDA requirements.
The Company provides in-house training to all applicable employees and safety
meetings are frequently held to insure compliance with regulations. The record
keeping and reporting requirements of the FDA have been complied with by the
Company. The Company believes that it is in compliance with all environmental
regulations affecting the Company.
D. INDUSTRY SEGMENTS
As of March 31, 1998, and for the twelve months then ended, the Company had the
following revenues from the mail- order diabetic supply business and from the
health products manufacturing business:
<TABLE>
<CAPTION>
Revenues as Gross Profit As
Revenues A Percentage A Percentage
March 31, 1998 Of Total Gross Of Total
(12 months) Revenues Profit Revenues
----------- -------- ------ ---------------
<S> <C> <C> <C> <C>
Mail-order diabetic
supply business $ 461,349 19% $ 23,500 1%
Health products
manufacturing business 1,906,936 81% 518,120 22%
</TABLE>
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E. EMPLOYEES
As of March 31, 1998, the Company had twenty (20) employees (deemed leased
employees) and a consultant in connection with its health products manufacturing
operation, all of which are located in the Tampa, Florida office. The employees
at the Tampa location are deemed leased employees pursuant to a Service
Agreement by and between the Company and Nations Staffing, Inc. ("NSI"), with
offices at II 701 Belcher Road, Suite 116, Largo, Florida. Pursuant to the
agreement, NSI pays all payroll and salaries of the employees and provides
workers' compensation insurance and hospital and medical benefits. The Company
had one (1) full-time and one (1) part-time employee in connection with the
mail-order Diabetes Supplies division, all of which are located in the
Pittsburgh, Pennsylvania office.
Employee leasing was initially instituted as the most economical method to
manage start-up operations and to eliminate the potential liability involved in
timely and proper accounting for and reporting of employee payroll withholdings.
To the best knowledge of the Company's management, there have been and are no
consequences of this arrangement that were or are negative or adverse to the
Company. The Company, however, is presently considering eliminating this leased
employee concept and the Service Agreement in the near future.
NSI is not affiliated with the Company or with any officer or director of the
Company or any other person or entity with which the Company is affiliated.
At the present time, the Company has no profit sharing or pension plan or any
other form of retirement plan for its employees, including executive officers.
The Company considers its employee relations to be satisfactory and has
experienced no work stoppages. Employees of the Company are not represented by a
labor union.
F. RISK FACTORS
If any source of a product's ingredients becomes unavailable, the Company
believes that alternative sources of supply are available at comparable prices.
In the event the Company was unable to find alternate sources at competitive
prices on a timely basis for its principal products, the Company could be
materially adversely affected.
As of March 31, 1998, four (4) customers represented approximately 67% of
consolidated revenues in fiscal 1997. The loss of one or more of these customers
in all likelihood would have a material adverse effect on the financial
condition of the Company, at least on a short term basis.
Any modifications to the FDA's regulatory authority could subject the Company to
additional expenses in order to comply with more stringent requirements or could
have a materially adverse impact on the Company if products were to become
limited.
G. RECENT ACQUISITIONS
1. DYNAMIC
In May, 1998, the Company entered into a non-binding letter of intent to provide
certain working capital financing to Energy Factors, Inc. ("EFI"), a
wholly-owned subsidiary of U.S. Diversified Technologies, Inc. , a Florida
corporation. Effective June 15, 1998, the Company acquired EFI. At the closing,
the Company acquired legal title to the net assets of the EFI. The Company will
account for the acquisition as a purchase.
The above acquisition has been accomplished through a series of transactions
approved by the various Boards of Directors and Management as controlling
shareholders of the Company and EFI. First, a new wholly-owned subsidiary of the
Company was formed as a Florida corporation under the name of Nu-Wave
Acquisition, Inc. (Nu-
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Wave Acquisition"). Next, Nu-Wave Acquisition was then merged with and into EFI,
with EFI as the surviving corporation, in order to avoid the necessity of
transfers of EFI's business. As a result of the merger, EFI became a
wholly-owned subsidiary of the Company. On the effective date of the merger, the
EFI changed its name to Dynamic Health Products, Inc. ("Dynamic"), which was
subsequently changed to Innovative Health Products, Inc.
It was determined by Management that it would be in the best interest of the
Company to acquire EFI to further certain of its business objectives, including
without limitation, providing expanded manufacturing facilities for the Company
and additional sales for Dynamic.
U.S. Diversified Technologies, Inc., the former parent of Dynamic, will receive
in exchange for its capital stock in the Dynamic, 400,000 share of Series A
Convertible Preferred Stock to be issued by the Company. Dynamic was valued by
the Board of Directors of the Company at $2,000,000 and The Series A Convertible
Preferred Stock will have a liquidation preference in that amount.
Dynamic is a manufacturer and distributor of food supplements and health/diet
products in the form of capsules, tablets, powders, liquids and creams, with a
well organized 40,000 square foot manufacturing facility, high speed processing
and packaging lines, and fully equipped laboratory. The Company intends to
continue such business.
2. BECAN
Effective June 26, 1998, the Company acquired Becan Distributors, Inc., an Ohio
corporation ("Becan"). At the closing, The Company acquired all of the issued
and outstanding capital stock of Becan in exchange for common stock in the
Company.
The Becan shareholders will receive a total of 1,500,000 shares of common stock
of the Company upon the filing by the Company's Articles of Amendment to its
Articles of Incorporation which will effect a one for three reverse stock split.
The reverse stock split is expected to be effective in August, 1998, but no
record date has yet been established. The acquisition was accomplished in
accordance with the terms of an Agreement and Plan of Reorganization dated June
26, 1998, by and among the Company and the shareholders of Becan. The number of
shares of the common stock of the Company to be issued in consideration of the
shares of Becan common stock was determined based upon the relative estimated
value of each of the companies and was approved by unanimous vote of the Board
of Directors of the Company, including the members of the Board of Directors of
the Company who were not affiliated with Becan. Manju Taneja, the wife of Jugal
K. Taneja (the Chairman and Chief Executive Officer of the Company), and their
two sons, Mihir and Mandeep, collectively owned approximately 68% of the issued
and outstanding Becan common stock. See "Part I, Item 4. Security Ownership of
Certain Beneficial Owners" for information concerning the ownership interests of
these same persons in the Company. Jugal K. Taneja was and continues to be the
Chairman of the Board of both the Company and Becan. The Company will account
for the acquisition as a combination of entities under common control, with the
acquisition of the minority interest accounted for under the purchase method of
accounting.
Becan is engaged in the wholesale business of distributing pharmaceuticals and
health and beauty products to independent pharmacies, regional and national
chain drug stores, alternate care facilities, mail order facilities, mass
merchandisers, deep discounters and brokers. In addition, Becan has several
"branded" items as to which it has sole distribution and marketing rights. These
products are sold through the above mentioned trade channels.
It was determined by Management that it would be in the best interest of the
Company to acquire Becan to further certain of its business objectives,
including without limitation, providing additional sales and expanded marketing
and distribution channels for the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto which are attached
hereto ("Financial Statements").
The Company currently is engaged in two lines of business, the mail order
business of diabetic equipment and supplies and, through its wholly-owned
subsidiary, the business of creating, manufacturing and packaging of
non-prescription medications and health products. One of the original lines of
business, the Pharmacy was sold in August, 1995, and Nu-Wave, the wholly-owned
subsidiary of the Company, was acquired in September, 1995. See "Part I, Item 1.
Business".
A. RESULTS OF OPERATIONS AND FISCAL YEAR 1998
COMPARED TO FISCAL YEAR 1997
Net sales from the health products manufacturing business for fiscal year ended
1998 were $1,906,396 as compared to net sales in 1997 of $789,323. This
represents a 142% increase over sales in 1997. The increase is primarily
attributable to increased volume in private label sales resulting from continued
expansion of marketing efforts and the introduction of new products. Net sales
from the mail-order diabetic supply business for fiscal year ended 1998 were
$461,349 as compared to net sales in 1997 of $171,017. This represents a 170%
increase over sales in 1997. The increase is primarily attributable to increased
sales with existing customers.
Gross profit from the health products manufacturing business increased 54%, or
$185,771, to $518,120 in 1998 as compared to $347,958 in 1997. Gross profit from
the mail-order diabetic supply business increased 50%, or $7,891, to $23,500 in
1998 as compared to $15,609 in 1997. For the fiscal year ended 1998, gross
margin from the health products manufacturing business decreased to 27.17% from
42.11% in the corresponding period. The decrease in the gross margin from the
health products manufacturing business is principally attributable to the
offering of competitive pricing to attract new customer, and an increase in raw
material and other production expenses due to certain inefficiencies resulting
from growth, which such inefficiencies have now been corrected. It is the
opinion of management that this gross margin is now increasing. For the fiscal
year ended 1998, gross margin from the mail-order diabetic supply business
decreased to 5.09% from 9.13% in the corresponding period. The decrease in gross
margin from the diabetic supply business is principally attributable to an
increase in the mix of sales, which yields a lower gross margin.
Selling, general and administrative expenses were $527,609 in 1998 and $485,710
in 1997. As a percentage of sales, selling, general and administrative expenses
were 22% in 1998 and 51% in 1997. The overall decrease in the percentage of
selling, general and administrative expenses is primarily attributable to
increased management efficiency and maximum performance of existing personnel.
Interest expense, net of interest income, was $18,272 in 1998, as compared to
$13,859 in 1997. The increase in interest expense in 1998 is a result of greater
borrowings to finance the purchase of additional machinery and equipment, and to
make additional necessary plant modifications.
The Company had no income tax expense for the fiscal years 1998 and 1997.
Management believes that there was no material effect on operations or the
financial condition of the Company as a result of inflation in 1998 and 1997.
Management also believes that its business is not seasonal; however, significant
promotional activities can have a direct impact on sales volume in any given
quarter.
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B. LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $173,804 and ($172,473) at the end of 1998
and 1997, respectively.
The Company's statement of cash flows for 1998 reflects cash provided by
operating activities of $21,085. The provision of cash is primarily attributable
to an increase in accounts payable and accrued expenses of $213,695, and an
increase in unearned revenues of $15,341, offset by an increase in accounts
receivable ($90,561), an increase in prepaid expenses ($5,064), and an increase
in inventory ($171,964). The change in accounts payable, accounts receivable,
and inventory is a result of increased sales and operations as well as
anticipated future growth.
Net cash used in investing activities was $50,346 representing the purchase of
property and equipment ($37,147) and the acquisition of other assets ($13,199).
Net cash was also provided by financing activities of $238,633, representing
proceeds from related party borrowing of $20.000, and proceeds from long-term
debt of $240,200, offset by repayment of capital lease obligations ($9,321), and
repayment of principal borrowing ($12,246).
During fiscal year 1998, $156,146.40 of notes payable to related parties were
converted to 1,561,464 shares of common stock of the Company. Subsequent to
fiscal year end, on May 29, 1998, the remaining notes payable to related parties
of $81,331.80, including principal and unpaid accrued interest, were converted
to 813,318 shares of common stock of the Company.
The Company expects to meet its cash requirements from operations, current cash
reserves, and existing financial arrangements. In addition, the Company is
considering raising additional capital for acquisitions and working capital
either through private placement or a secondary public offering.
During March and April 1998, the Company received $250,000 from investors and
issued nonnegotiable promissory notes with stock warrants attached. The notes
bear interest at ten percent (10%) per annum, compounded annually. The due date
shall be the earlier of (i) April 30, 1999, or (ii) the closing of a minimum of
an additional $1,000,000 of equity financing, by private placement or other
non-public offering. The note may be prepaid at any time by the Company to the
payees without any penalty or premium. The attached stock warrant entitles the
payee to purchase common stock of the Company (based on one share for each one
dollar amount of the principal amount reflected in the note) at a purchase price
of $.50 per share. The stock warrant shall expire the earlier of, one year from
the closing of an additional $1,000,000 of equity financing, or December 31,
1999.
In May 1998, 100,000 shares of common stock of the Company were sold to a
non-affiliated third party investor at $.50 per share, for gross proceeds of
$50,000.
On May 13, 1998, the Company loaned $100,000 to Energy Factors, Inc. (EFI), a
subsidiary of U.S. Diversified Technologies, Inc., for the purpose of assisting
EFI with its working capital needs. The note bears interest at 2% per annum
above the Prime Rate as periodically announced by THE WALL STREET JOURNAL, and
is secured by a third mortgage on all real and personal property of EFI.
In June 1998, the Company established a bank line of credit. The principal
amount of the note is $200,000. The note bears interest at 4.08% per annum on
the unpaid outstanding principal of each advance, payable monthly. The due date
is June 3, 1999. The note or any portion thereof may be prepaid without penalty.
This line of credit is secured by $200,000 cash maintained in a Money Market
account with the bank.
Although, in the opinion of the management of the Company, the above data
reflects positive information concerning the present operations of the Company,
there can be no assurance that the Company's results of operations will continue
to the same extent or in the same manner as reflected above.
13
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
The Company does not own or hold any legal or equitable interest in any real
estate. The offices in Tampa, Florida are leased pursuant to a five year lease
that expires on November 30, 2000. The Company has an option to renew the lease
at the end of the five year term.. The rental under the lease is $7,032.50 per
month subject to yearly adjustment for shared property operating expenses. This
facility serves as the Company's corporate headquarters, manufacturing,
warehousing, and shipping facility. Management is currently seeking an
additional manufacturing facility to meet the increased capacity requirements of
growing customer demand. The Company uses offices in Pittsburgh, Pennsylvania of
one of its principal customers at no cost to the Company.
In January 1998, the Company leased a second property in Tampa, Florida which is
being utilized for additional storage and warehouse for its manufacturing
operations. This lease is for a term of two years that expires on December 30,
2000, a with an annual rental of $15,300.
In the opinion of the management of the Company, the leases described above
reflect rent at current fair market value.
As of March 31, 1998, the Company had furniture, equipment, and leasehold
improvements, net of accumulated depreciation, in the amount of $176,462.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 1, 1998, with
respect to the beneficial ownership of the outstanding common stock of the
Company by (i) any holder of more than five (5%) percent; (ii) each of the
Company's officers and directors; and (iii) the directors and officers of the
Company as a group. An asterisk indicates beneficial ownership of less than 1%
of the outstanding common stock. Except as otherwise indicated, each of the
shareholders listed below has sole voting and investment power over the shares
beneficially owned.
<TABLE>
<CAPTION>
Amount and
Nature of Approximate
Title of Name and Address Beneficial Percent
Class of Beneficial Owner Ownership of Class
- -------- ------------------- --------- --------
<S> <C> <C> <C>
Common Manju Taneja 1,964,553 (1) 51%
c/o Dynamic Health Products, Inc.
6950 Bryan Dairy Road
Largo, FL 33777
Common Jugal K. Taneja 484,229 (2) 13%
c/o Dynamic Health Products, Inc.
6950 Bryan Dairy Road
Largo, FL 33777
Common Kotha S. Sekharam 255,000 7%
c/o Dynamic Health Products, Inc.
6950 Bryan Dairy Road
Largo, FL 33777
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Common Cani I. Shuman -0- -0-
c/o Dynamic Health Products, Inc.
6950 Bryan Dairy Road
Largo, FL 33777
Common Mihir K. Taneja 5,000 *
c/o Dynamic Health Products, Inc.
6950 Bryan Dairy Road
Largo, FL 33777
Common Martin A. Traber 30,000 *
Foley & Lardner
100 North Tampa Street
Tampa, FL 33602
Common All officers and directors as
a group (5 persons) 774,229 (3) 20%
</TABLE>
* Less than one percent (1%).
(1) Excludes beneficial ownership of (i) 59,000 shares of common stock owned by
Jugal Taneja, (ii) 210,229 shares of common stock owned by Carnegie Capital,
(iii) 210,000 shares of common stock owned by First Delhi Trust, (iv) 5,000
shares of common stock owned by Mandeep Taneja, and (vi) 5,000 shares of common
stock owned by Mihir Taneja, as to which Mrs. Taneja exercises no voting or
disposition rights.
(2) Includes beneficial ownership of (i) 210,229 shares of common stock owned by
Carnegie Capital, (ii) 210,000 shares of common stock owned by First Delhi
Trust, (iii) 5,000 shares of common stock owned by Mandeep Taneja. Excludes
1,964,553 shares beneficially owned by his wife, Manju Taneja, as to which Mr.
Taneja exercises no voting or disposition rights.
(3) Includes shares beneficially owned by Jugal Taneja, Kotha Sekharam, Cani
Shuman, Mihir Taneja and Martin Traber.
Certain executive officers, directors and beneficial owners of the Company were
granted options to purchase common capital stock of the Company, but these
rights have expired. See "B. Outstanding Options and Conversion Rights" below.
B. OUTSTANDING OPTIONS, WARRANTS AND CONVERSION RIGHTS
During the fiscal year 1998, there were outstanding the following options to
purchase, warrants and conversion rights with respect to the common capital
stock of the Company:
1. Remaining stock conversion rights granted to Manju Taneja pursuant to the
terms of the promissory notes representing the indebtedness of the Company to
her. As of June 1, 1998, these conversion rights no longer exist. See "Part II,
Item 4. Recent Sales of Unregistered Securities".
2. Stock option rights granted to Dr. Kotha S. Sekharam, in connection with his
employment, whereby he was entitled to purchase 200,000 shares of common capital
stock of the Company at an option price of $.20 per share to be exercised on or
before December 31, 1997. These stock option rights have not been exercised and
have now expired.
15
<PAGE>
3. Stock option rights granted to Stephen D. Kovalik, in connection with his
employment, whereby he was entitled to purchase 50,000 shares of common capital
stock of the Company at an option price of $.40 per share to be exercised on or
before March 31, 1998. These stock option rights have not been exercised and
have now expired.
4. Stock option rights granted to Mihir Taneja, in connection with his
employment, whereby he was entitled to purchase 50,000 shares of common capital
stock of the Company at an option price of $.40 per share to be exercised on or
before March 31, 1998. These stock option rights have not been exercised and
have now expired.
5. Stock option rights granted to Phillip J. Laird, in connection with his
employment, whereby he was entitled to purchase 300,000 shares of common capital
stock of the Company at an option price of $.20 per share if exercised with his
first year of employment. To the extent not exercised during that period, Mr.
Laird could purchase the remainder of such option shares for $.50 per share
during his second year of employment. Mr. Laird terminated his employment with
the Company on September 15, 1997. These stock option rights have not been
exercised and have now expired.
6. Stock warrants issued in connection with the financing of $250,000 in debt,
pursuant to non-negotiable promissory notes. The warrants entitle the holders
thereof to purchase in aggregate 250,000 shares of common capital stock of the
Company at a purchase price of $.50 per share. See "Part II, Item 4. Recent
Sales of Unregistered Securities.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
A. DIRECTORS AND EXECUTIVE OFFICERS
The following are the names and certain information regarding the current
Directors and Executive Officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Jugal K. Taneja 53 Chairman of the Board, Chief
Executive Officer,
Secretary, and Director
Kotha S. Sekharam 47 President, Treasurer, and
Director
Cani I. Shuman 41 Chief Financial Officer
Mihir K. Taneja 23 Vice President of Marketing,
Assistant Secretary
Martin A. Traber 51 Director
</TABLE>
All directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. Officers are elected annually by
the Board of Directors and, subject to existing employment agreements, serve at
the discretion of the Board.
No director of the Company or Nu-Wave receives any compensation or other
remuneration for serving on the Board of Directors, except for the reimbursement
of any out-of-pocket expenses, if any, incurred by ANY director in connection
with attendance at a meeting of the Board of Directors.
16
<PAGE>
B. SUMMARY OF BACKGROUND AND EXPERIENCE
OF EXECUTIVE OFFICERS AND KEY PERSONNEL
The following is a summary of the background and experience of the directors,
executive officers and key personnel of the Company :
JUGAL K. TANEJA, was the Chairman of the Board, Chief Executive Officer and a
Director of the Direct Rx and since its inception of the Company since October,
1991 and was the Chairman of the Board, Secretary and a Director of Old Nu-Wave
since September, 1995. Mr. Taneja also serves as Director, Chief Executive
Officer, and Secretary of NuMED Home Health Care Inc. Prior to his association
with the Company, Mr. Taneja served as Senior Vice President of Union Commerce
Bank and Huntington National Bank from 1979 to 1983 and as Executive Vice
President of Bancapital Corp. from 1983 to 1991. Although he devotes substantial
time to the operations and business of the Company, Mr. Taneja does not devote
his full time to the Company.
KOTHA S. SEKHARAM, was the Co-Founder, Director, President, and Treasurer of Old
Nu-Wave. He has a Ph.D in Food Sciences from Central Food Technological Research
Institute, Mysore, India (a United Nations University center) and over 17 years
experience in the manufacturing industry, covering foods, supplements,
pharmaceuticals, and cosmetics. Prior to Old Nu-Wave, he was the Director of
Research and Development at Energy Factors, Inc. a manufacturer of health
products.
CANI I. SHUMAN, holds B.S. degree in Accounting from the University of South
Florida and is a Certified Public Accountant. She is presently Chief Financial
Officer of the Company. Prior to her employment with the Company in January
1998, she was employed in public accounting for Hacker, Johnson, Cohen & Grieb,
PA, and Copeland and Company, CPAs. Prior to that, she held accounting positions
in private industry.
MIHIR K. TANEJA, holds B.A. degrees in Finance and Marketing from the
University of Miami. He is presently Vice President of Marketing for the
Company. Prior to his employment with Old Nu-Wave in June 1997, he was employed
in various accounting and financial functions for NuMED Home Health Care, Inc.,
AT Broad & Co., and Bancapital Corp.
MARTIN A. TRABER, is a partner in the Tampa, Florida office of Foley & Lardner,
a national law firm. He has practiced in the areas of corporate finance and
securities law for 25 years and is a director of numerous companies (including
several in the medical technology field). Mr. Traber graduated MAGNA CUM LAUDE
in 1970 from Indiana University School of Law, where he was Associate Editor of
the LAW REVIEW.
17
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
A. DIRECTORS
No director of the Company or Nu-Wave receives any compensation or other
remuneration for serving as such director, except for the reimbursement of any
out-of-pocket expenses, if any, incurred by any director in connection with
attendance at a meeting of directors.
B. EXECUTIVE OFFICERS
There are no executive officers of the Company who received total compensation
and other remuneration in excess of $100,000. The following table sets forth the
names of the compensated executive officers who are either the president or
chief executive officer and a description and amount of any and all annual
compensation and remuneration received by them:
<TABLE>
<CAPTION>
Other Annual
Name and Principal Position Year Salary($) Bonus($) Compensation($)
- --------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Jugal K. Taneja, CEO (1) 1998 $75,000 $5,414 $ -0-
1997 $ -0- $ -0- $ -0-
Dr. Kotha S. Sekharam, President (2) 1998 $75,000 $5,414 $ -0-
1997 $52,500 $ -0- $ -0-
</TABLE>
(1) Pursuant to an employment agreement dated July 15, 1997, Mr. Taneja is
entitled to a performance bonus based upon a percentage of net income, before
taxes, and a percentage of annual revenues. See "Exhibit 11".
(2) Pursuant to an employment agreement dated July 15, 1997, Dr. Sekharam is
entitled to a performance bonus based upon a percentage of net income, before
taxes, and a percentage of annual revenues. In addition, Dr. Sekharam was
granted a stock option for a total of 200,00 shares of common capital stock of
the Company. This stock option was not timely exercised and has now expired.
Also, Dr. Sekharam is eligible for stock options at such times and on such terms
as determined by the Company's Board of Directors. See "Exhibit 10" and "Part I,
Item 4. Security Ownership of Certain Beneficial Owners and Management"
All employees, including executive officers, except for employees of the
Diabetic Supplies division of the Company, are paid by the Company, but are
deemed leased employees, pursuant to a Service Agreement by and between Nu-Wave
and Nations Staffing, Inc. See "Part I, Item 1. Description of Business, E.
Employees". Employees of the Diabetic Supplies division of the Company are paid
directly by the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Direct Rx previously had an agreement with Bancapital Management Corporation,
which is owned and controlled by Jugal Taneja, a director, officer and
stockholder of the Company, to pay for accounting and management services. This
agreement was terminated effective May 13, 1996. Direct Rx paid approximately
$6,000 for such services during the year ended March 31, 1997.
Direct Rx had a Consulting Agreement with the former president of Direct Rx,
Judy Pickle, for a term of one year ending on March 31, 1995. Pursuant to this
agreement, Ms. Pickle was paid $18,000 during 1994 and 1995 for these services.
Also during 1994 and 1995, 18,000 shares of common stock of the Company held by
Ms. Pickle were redeemed at $1.00 per share in connection with the Consulting
Agreement.
18
<PAGE>
The Company had demand notes payable to Manju Taneja, the wife of Jugal Taneja,
in the principal amount of $210,000, and interest at the prime rate (8.5% at
March 31, 1998) payable quarterly. This indebtedness and unpaid accrued interest
was to be repaid in cash or, at the option of the holder, converted into common
capital stock of the Company at a conversion price of $.10 per share. During the
fiscal year 1998, the Company issued 1,561,464 shares of the common capital
stock of the Company to Manju Taneja (out of which 200,000 were sold to Dr.
Sekharam- see below) in exchange for and as a conversion of $156,146, principal
and accrued interest, of the indebtedness of the Company to Manju Taneja. The
remainder of the indebtedness, including unpaid accrued interest, in the amount
of $81,313.80 was converted into 813,318 common capital stock of the Company on
May 29, 1998. Therefore, as of June 1, 1998, this indebtedness has been paid in
full.
As of July 15, 1997, out of the converted shares referred to above, 200,000
shares were sold by Manju Taneja to Dr. Kotha S. Sekharam, the President and a
director of the Company, and previously of Direct Rx and Old Nu-Wave, for $.10
per share.
As of July 15, 1997, the Company issued 100,000 shares of its common capital
stock, valued at $.10 per share, to the other four (4) shareholders of Nu-Wave
in exchange for the 20 shares of common capital stock of Nu-Wave, which
constituted the remaining 20% of the issued and outstanding common capital stock
of Nu-Wave, resulting in the Company then owning 100% of Nu-Wave.
During fiscal 1998, the Company began manufacturing products for J. Labs, Inc.
("J. Labs"). J. Labs is a company which holds patents for various products which
the Company manufactures. The Company pays royalty/brokerage fees for each unit
of product sold for which J. Labs holds a patent. J. Labs is a corporation owned
by Manju Taneja (the spouse of Jugal Taneja), Mandeep Taneja (the son of Jugal
Taneja), Mihir Taneja (the son of Jugal Taneja), Kotha Sekharam, and Madhavi
Sekharam (the wife of Kotha Sekharam). The Company is presently considering
acquiring J.Labs.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares of
capital stock, $.01 par value, 9,000,000 of common stock and 1,000,000 of
preferred stock. As of June 1, 1998, there were 3,823,547 shares of common stock
issued and outstanding. There were no shares of preferred stock issued and
outstanding at June 1, 1998.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Cumulative voting in
the election of directors is not permitted. Holders of common stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available therefor and not otherwise restricted. In the
event of liquidation, dissolution or winding up of the Company, holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities. A holder of common stock has no conversion, preemptive or other
rights per se to subscribe for additional shares or other securities, unless
otherwise granted, and there are no redemption or sinking fund provisions with
respect to such shares. All issued and outstanding common stock are fully paid
and non-assessable.
As of the date hereof, there are no outstanding warrants, options or other
rights of purchase or conversion with respect to any of the common capital stock
of the Company, except as set forth above under "Part I, Item 4. Security
Ownership of Certain Beneficial Owners and Management".
There is currently no public trading market for the common stock of the Company.
19
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
There is currently no established trading market for the common stock of the
Company, and the shares are not presently listed. The Company has filed Form 15
(c) 2-11 with NASDAQ to list the common stock of the company on the OTC Bulletin
Board in order to create marketability for the stock.
As of June 1, 1998, there were approximately 400 stockholders, each holding
shares of the Company's common stock.
Historically, the Company has not paid dividends on its common stock and has no
present intention of paying dividends.
The Company has agreed to register pursuant to the filing of this Form 10-SB
total issued and outstanding shares of common capital stock of the Company in
the amount of 3,823,547 shares. See "Part II, Item 4. Recent Sales of
Unregistered Securities" and "Part I, Item 4. Security Ownership of Certain
Beneficial Owners and Management".
ITEM 2. LEGAL PROCEEDINGS
Neither the Company nor its predecessor companies, Direct Rx or Old Nu-Wave, are
parties to any legal proceedings or any claims or investigations involving any
governmental entities or agencies. Further, no director, executive officer,
affiliate, or any beneficial owner of more than 5% of the common capital stock
of the Company or its predecessor companies, Direct Rx or Old Nu-Wave, or any
associate of any such person, is a party to any proceeding adverse to the
Company.
ITEM 3. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
During the last two most recent fiscal years, the Company has not changed or had
any disagreements with its independent accountants engaged to audit the
Company's financial statements.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
In 1992 and 1993, the Company instituted an offering of 200,000 Units at $1.00
per Unit, each Unit consisting of one (1) share of common capital stock of the
Company, together with common stock purchase warrants to purchase five (5)
shares at an exercise price of $1.00 per share, increasing up to $2.50 per share
over a specified period of time. This offering and the securities offered
thereby were not registered under the Securities Act of 1933 ("Act"), as
amended, and were offered and sold as an intra-state offering only to residents
of the State of Ohio in reliance upon the exemption provided in Section 3(a)(11)
of the Act and Rule 147 promulgated thereunder, and in compliance with
applicable Ohio securities laws.
In July, 1995, the Company executed an exchange offering which entitled each
shareholder to exchange all shares of common stock currently owned for an equal
number of newly issued shares of common stock. The purpose of the exchange
offering was to ensure that the outstanding shares of the Company's common stock
were freely transferable without restriction. This exchange offer was not
registered under the Securities Act of 1933 ("Act"), as amended, and was offered
and sold pursuant to an exemption provided in Section 3 (a)(9) of the Act and
/or to Rule 504 of Regulation D under the Act. In addition, the Company
initiated a warrant call which required warrant holders to convert their
outstanding warrants to common capital stock before October 16, 1995, at a ratio
of one share for each five warrants,. without any further payment or
consideration. As a result, 1,463,650 warrants were converted to 286,730 shares
of common capital stock. This exchange offer was not registered under the
Securities Act of 1933 ("Act"), as amended, and was offered and sold pursuant to
Rule 504 of Regulation D under the Act, and in compliance with applicable Ohio
securities laws.
20
<PAGE>
In August, 1995, the Company approved an agreement which allowed the President
of the Company (then Direct Rx) the option to purchase 10% of stock of the
Company at book value. Such an option was never exercised and this agreement is
no longer in effect.
As of July 15, 1997, the Company issued 100,000 shares of its common capital
stock, based on a value of $.10 per share, to the other four (4) shareholders of
Nu-Wave in exchange for the 20 shares of common capital stock of Nu-Wave, which
constituted the remaining 20% of the issued and outstanding common capital stock
of Nu-Wave, resulting in the Company then owning 100% of Nu-Wave. Of these
100,000 exchange shares, 55,000 were issued to Dr. Kotha S. Sekharam, the
President and a director of both the Company and Nu-Wave. The remaining 45,000
share were issued to Sandhya Kalindindi, Shanti Kalindindi and Dr. Umamaheswar
S. Prasad. This exchange was not registered under the Securities Act of 1933
("Act"), as amended, and was sold in reliance on an exemption provided in
Section 4(2) of the Act. All of the remaining shareholders were sophisticated
investors and, as either officers or persons involved with the Company, had
access to all information about the Company to make an informed investment
decision.
During the fiscal year 1998, the Company issued 1,561,464 shares of the common
capital stock of the Company to Manju Taneja in exchange for and as a conversion
of $156,146, principal and accrued interest, of the indebtedness of the Company
to Manju Taneja. Pursuant to the terms of the promissory notes, the principal
amount of $210,000 and any unpaid accrued interest, at the option of the holder,
may be converted into common capital stock of Company based on a price of $.10
per share. The remaining principal and accrued interest on this indebtedness of
$81,313.80 was converted into 813,318 share of common stock on May 29, 1998.
Therefore, this indebtedness has been paid in full. These conversions were not
registered under the Securities Act of 1933 ("Act"), as amended, and were
completed in reliance on an exemption provided in Section 4(2) of the Act. In
addition to being an accredited investor, Mrs. Taneja was a sophisticated
investor and had access to all information about the Company to make an informed
investment decision.
As of July 15, 1997, out of the converted shares referred to above, 200,000
shares were sold by Manju Taneja to Dr. Kotha S. Sekharam for $.10 per share.
This sale was not registered under the Securities Act of 1933 ("Act"), as
amended, and was sold in reliance on an exemption provided in Section 4(2) of
the Act. Dr. Kotha was a sophisticated investor and, as President of the
Company, had access to all information about the Company to make an informed
investment decision.
In connection with the merger of Direct Rx into the newly formed Direct
Healthcare, there was a stock exchange or conversion whereby the outstanding
common capital stock and all outstanding options or rights of conversion were
exchanged for the common capital stock and option and conversion rights of
Direct Healthcare on a one to one basis, i.e. each one (1) share of common
capital stock of Direct Rx was converted into and exchanged for one (1) share of
common capital stock of Direct Healthcare. As a result of this merger, each then
present shareholder of Direct Rx had the same number of shares of common capital
stock and the same percentage of equity in Direct Healthcare as such shareholder
had in Direct Rx prior to the merger, and each holder of any option or other
right to purchase or otherwise acquire common capital stock of Direct Rx had the
same rights to purchase or otherwise acquire the same number of shares of common
capital stock of Direct Healthcare, subject to the same terms and conditions as
previously existed. There was no monetary payment required to or from the
shareholders in connection with this merger. The sole purpose of the merger was
to redomicile Direct Rx to the State of Florida. This stock exchange or
conversion and the stock exchange or converted was not registered under the
Securities Act of 1933, as amended, in reliance on Rule 145, in that such an
exchange was not an "offer to sell", "offer for sale" or "sale".
During March and April, 1998, the Company received $250,000 from investors and
issued nonnegotiable promissory notes with stock warrants attached. The notes
bear interest at ten percent (10%) per annum, compounded annually. The due date
shall be the earlier of (i) April 30, 1999, or (ii) the closing of a minimum of
an additional $1,000,000 of equity financing, by private placement or other
non-public offering. The note may be prepaid at any time by the Company to the
payees without any penalty or premium. The attached stock warrant entitles the
payee to purchase common stock of the Company (based on one share for each one
dollar amount of the principal amount reflected in
21
<PAGE>
the note) at a purchase price of $.50 per share. The stock warrant shall expire
the earlier of, one year from the closing of an additional $1,000,000 of equity
financing, or December 31, 1999. In addition, in May, 1998, 100,000 shares of
common stock of the Company were sold to a non-affiliated third party investor
at $.50 per share, for gross proceeds of $50,000. These sales were not
registered under the Securities Act of 1933 ("Act"), as amended, and were
completed in reliance on an exemption provided in Section 4(2) of the Act. In
addition to being accredited investors, all investors were sophisticated
investors and had access to all information about the Company to make an
informed investment decision.
Since the initial offerings, the above transactions reflect a then existing
effort to consistently set the value of the common stock of the Company at $.10
per share. The recent warrant price and sale price of $.50 per share in
connection with the March and April, 1998 transactions reflects an increased
value based on the performance of the Company.
Effective June 15, 1998, the Company acquired Energy Factors, Inc ("EFI"). The
above acquisition has been accomplished through a series of transactions
approved by the various Boards of Directors and Management as controlling
shareholders of the Company and EFI. First, a new wholly-owned subsidiary of the
Company was formed as a Florida corporation under the name of Nu-Wave
Acquisition, Inc. (Nu-Wave Acquisition"). Next, Nu-Wave Acquisition was then
merged with and into EFI, with EFI as the surviving corporation, in order to
avoid the necessity of transfers of EFI's business. As a result of the merger,
EFI became a wholly-owned subsidiary of the Company. On the effective date of
the merger, the EFI changed its name to Dynamic Health Products, Inc.
("Dynamic"). U.S. Diversified Technologies, Inc., the former parent of Dynamic,
will receive in exchange for its capital stock in the Dynamic, 400,000 share of
Series A Convertible Preferred Stock to be issued by the Company. Dynamic was
valued by the Board of Directors of the Company at $2,000,000 and The Series A
Convertible Preferred Stock will have a liquidation preference in that amount.
This exchange was not registered under the Securities Act of 1933 ("Act"), as
amended, and was sold in reliance on an exemption provided in Section 4(2) of
the Act. In addition, this transaction was a part of a total sale of a business.
Effective June 26, 1998, the Company acquired Becan Distributors, Inc., an Ohio
corporation ("Becan"). At the closing, The Company acquired all of the issued
and outstanding capital stock of Becan in exchange for common stock in The
Company. The Becan shareholders will receive a total of 1,500,000 shares of
common stock of the Company upon the filing by the Company's Articles of
Amendment to its Articles of Incorporation which will effect a one for three
reverse stock split. The reverse stock split is expected to be effective in
August, 1998, but no record date has yet been established. The acquisition was
accomplished in accordance with the terms of an Agreement and Plan of
Reorganization dated June 26, 1998, by and among the Company and the
shareholders of Becan. The number of shares of the common stock of the Company
to be issued in consideration of the shares of Becan common stock was determined
based upon the relative estimated value of each of the companies and was
approved by unanimous vote of the Board of Directors of the Company, including
the members of the Board of Directors of the Company who were not affiliated
with Becan. Manju Taneja, the wife of Jugal K. Taneja (the Chairman and Chief
Executive Officer of the Company), and their two sons, Mihir and Mandeep,
collectively owned approximately 68% of the issued and outstanding Becan common
stock. See "Part I, Item 4. Security Ownership of Certain Beneficial Owners" for
information concerning the ownership interests of these same persons in the
Company. Jugal K. Taneja was and continues to be the Chairman of the Board of
both the Company and Becan. This exchange was not registered under the
Securities Act of 1933 ("Act"), as amended, and was sold in reliance on an
exemption provided in Section 4(2) of the Act. All investors were sophisticated
investors and had access to all information about the Company to make an
informed investment decision. In addition, this transaction was a part of a
total sale of a business.
The Company has granted certain stock options for the purchase of common capital
stock of the Company in various amounts and for various option prices to certain
officers of the Company. These stock option rights have not been exercised and
have now expired. See "Part I, Item 4. Security Ownership of Certain Beneficial
Owners and Management".
22
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation and By-Laws provide and grant to any
person who is or was a director or officer of the Company ("Qualified
Indemnified Person"), and to their respective heirs, executors and
administrators, rights of indemnification as provided for in the provisions of
the Florida General Corporation Law.
Therefore, and pursuant to the provisions of the Florida General Corporation
Law, a Qualified Indemnified Person generally is indemnified as to any action,
suit, or proceeding, against expenses, including attorney fees, judgments, fines
and amounts paid in settlement, if such Qualified Indemnified Person acted in
good faith and in a manner reasonably believed by him or her to be in or not
opposed to the best interests of the Company.
The Company has been informed, however, that insofar as the above
indemnification may be deemed to cover any liabilities under the Securities Act
of 1933, in the opinion of the SEC, such indemnification is against public
policy and is therefore unenforceable.
PART F/S
Attached hereto and incorporated herein by reference are the following financial
statements:
Consolidated Balance Sheets for the two fiscal years ended March 31, 1998, the
related Consolidated Statements of Operations for the two fiscal years in the
period ended March 31, 1998, the related Consolidated Statements of
Shareholders' Equity (Deficit) for the two fiscal years in the period ended
March 31, 1998, and the related Consolidated Statements of Cash Flows for the
two fiscal years in the period ended March 31, 1998, audited by Kirkland, Russ,
Murphy & Tapp, independent auditors, as stated in their report appearing
therein.
PART III
ITEM 1. INDEX TO EXHIBITS.
Attached is the Index to the following exhibits:
<TABLE>
<CAPTION>
Exhibit Page
------- ----
<S> <C>
Exhibit 1- Audited financial statements for the two years
ended March 31, 1998(a)...................................................
Exhibit 2- Articles of Incorporation and Amendments of Direct Rx.....................
Exhibit 3- By-Laws of Direct Rx(b)...................................................
Exhibit 4- Articles of Incorporation and Amendments of Old Nu-Wave(b)................
Exhibit 5- By-Laws of Old Nu-Wave(b).................................................
Exhibit 6- Articles of Amendment to the Articles of Incorporation
of Solstice, Inc(b).......................................................
Exhibit 7- Company Articles of Incorporation(a)......................................
Exhibit 8- Agreement of Merger-Direct Rx and Direct Rx Healthcare, Inc.(a)...........
Exhibit 9- Agreement of Merger-Direct Rx healthcare, Inc. and Old Nu-Wave(a).........
Exhibit 10- Dr. Sekharam Employment Agreement(a)......................................
Exhibit 11- Jugal Taneja Employment Agreement(a)......................................
Exhibit 12- Service Agreement between Company and Nations Staffing, Inc.(a)...........
Exhibit 13- Revolving Line of Credit Agreement between Company and Republic Bank(a)...
Exhibit 14- Promissory Note in favor of Company from Energy Factors, Inc(a)...........
Exhibit 15- Articles of Amendment to the Articles of Incorporation of Dynamic
Health Products, Inc.(c)..................................................
Exhibit 16- Articles of Amendment to the Articles of Incorporation of Nu-Wave
Health Products, Inc.(c)..................................................
</TABLE>
23
<PAGE>
(a) Incorporated by Reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1998, File number 0-23031, filed in
Washington, D.C.
(b) Incorporated by Reference to the Company's amended Form 10-SB, dated July
1, 1998, File number 0-23031, filed in Washington, D.C.
(c) Incorporated by Reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1998, File number 0-23031, filed in
Washington, D.C.
ITEM 2. DESCRIPTION OF EXHIBITS.
The following is a brief description of each of the Exhibits:
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
Exhibit 1- Audited financial statements for the two years
ended March 31, 1998(a)
Exhibit 2- Articles of Incorporation and Amendments of Direct Rx
Exhibit 3- By-Laws of Direct Rx(b)
Exhibit 4- Articles of Incorporation and Amendments of Old Nu-Wave(b)
Exhibit 5- By-Laws of Old Nu-Wave(b)
Exhibit 6- Articles of Amendment to the Articles of Incorporation
of Solstice, Inc(b)
Exhibit 7- Company Articles of Incorporation(a)
Exhibit 8- Agreement of Merger-Direct Rx and Direct Rx Healthcare, Inc.(a)
Exhibit 9- Agreement of Merger-Direct Rx healthcare, Inc. and Old Nu-Wave(a)
Exhibit 10- Dr. Sekharam Employment Agreement(a)
Exhibit 11- Jugal Taneja Employment Agreement(a)
Exhibit 12- Service Agreement between Company and Nations Staffing, Inc.(a)
Exhibit 13- Revolving Line of Credit Agreement between Company and Republic Bank(a)
Exhibit 14- Promissory Note in favor of Company from Energy Factors, Inc(a)
Exhibit 15- Articles of Amendment to the Articles of Incorporation of Dynamic
Health Products, Inc.(c)
Exhibit 16- Articles of Amendment to the Articles of Incorporation of Nu-Wave
Health Products, Inc.(c)
</TABLE>
(a) Incorporated by Reference to the Company's Annual Report Form 10-KSB for
the fiscal year ended March 31, 1998, File number 0-23031, filed in
Washington D.C.
(b) Incorporated by Reference to the Company's amended Form 10-SB, dated July
1, 1998, File number 0-23031, filed in Washington, D.C.
(c) Incorporated by Reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1998, File number 0-23031, filed in
Washington, D.C.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
behalf of the undersigned, thereto duly authorized.
DYNAMIC HEALTH PRODUCTS, INC.
-----------------------------
(Registrant)
Date March 1, 1999
By Kotha S. Sekharam /s/
-----------------------------------------
President
By Cani I. Shuman /s/
-----------------------------------------
Chief Financial Officer
25
<PAGE>
[KIRKLAND, RUSS, MURPHY & TAPP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors
Direct Rx Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Direct Rx
Healthcare, Inc. and Subsidiary as of March 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years ended March 31, 1998 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated 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 consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for out opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Direct
Rx Healthcare, Inc. and Subsidiary as of March 31, 1998 and 1997 and the results
of its consolidated operations and its consolidated cash flows for the years
ended March 31, 1998 and 1997, in conformity with generally accepted accounting
principles.
Kirkland, Russ, Murphy & Tapp
May 7, 1998
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
ASSETS
1998 1997
--------- ---------
Current assets:
Cash $ 245,953 36,581
Accounts receivable, net of allowance for
uncollectible accounts of $33,500 in 1998
and $19,000 in 1997 193,829 117,768
Inventory, net of reserve for obsolescence
of $4,000 in 1998 and $3,000 in 1997 296,642 124,678
Prepaid expenses 20,492 15,428
--------- ---------
Total current assets 756,916 294,455
Furniture, equipment and leasehold improvements,
improvements, net 176,462 104,948
Intangible assets, net 17,869 12,021
Investments in joint venture 5,000 -
Other assets 20,486 12,287
--------- ---------
$ 976,733 423,711
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 8,587 5,633
Current portion of capital lease obligation 20,340 -
Accounts payable and accrued expenses 427,510 239,106
Related party notes payable 79,145 190,000
Unearned revenue 47,530 32,189
--------- ---------
Total current liabilities 583,112 466,928
--------- ---------
Long-term debt 225,000 -
Capital lease obligations 33,974 -
--------- ---------
Total liabilities 842,086 466,928
--------- ---------
Shareholders' equity (deficit):
Common stock, no par value, 3,000,000 shares
authorized, 2,910,229 and 1,248,765 shares
issued and outstanding 500 500
Additional paid-in capital 958,323 792,177
Accumulated deficit (824,176) (835,894)
--------- ---------
Net shareholders' equity (deficit) 134,647 (43,217)
--------- ---------
$ 976,733 423,711
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997
---------- ---------
Revenues:
Diabetic supplies $ 461,349 171,017
Manufacturing 1,906,936 789,323
---------- ---------
Total revenues 2,368,285 960,340
Cost of goods sold:
Diabetic supplies 437,849 155,408
Manufacturing 1,388,816 456,974
---------- ---------
Total of cost of goods sold 1,826,665 612,382
---------- ---------
Gross profit 541,620 347,958
General and administrative expenses 527,609 485,710
---------- ---------
Operating income (loss) 14,011 (137,752)
Other income (expense):
Management fees - (5,700)
Interest (18,272) (13,859)
Other income and expenses, net 15,976 (35,134)
---------- ---------
(2,296) (54,693)
Income (loss) before
income taxes 11,718 (192,445)
Income taxes - -
---------- ---------
Net income (loss) $ 11,718 (192,445)
========== =========
Basic and diluted income (loss) per share $ .01 (15)
========== =========
Basic and diluted weighted number of common
shares outstanding 2,058,446 1,248,765
========== =========
See accompanying notes to consolidated financial statements.
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional Net
-------------------- Paid-in Accumulated Shareholders'
Shares Dollars Capital Deficit Equity (Deficit)
--------- ------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1996 1,248,765 $ 500 792,177 (643,449) 149,228
Net loss - - - (192,445) (192,445)
--------- ------- ----------- ----------- ---------------
Balances at March 31, 1997 1,248,765 500 792,177 (835,894) (43,217)
Acquisition of minority interest
at $.10 per share 100,000 - 10,000 - 10,000
Conversion of note payable to
stock at $.10 per share 1,561,464 - 156,146 - 156,146
Net income - - - 11,718 11,718
--------- ------- ----------- ----------- ----------------
Balances at March 31, 1998 2,910,229 $ 500 958,323 (824,176) 187,647
========= ======= =========== =========== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997
--------- --------
Cash flows from operating activities:
Net income (loss) $ 11,718 (192,445)
Adjustment to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 33,420 28,128
Allowance for uncollectible accounts 14,500 19,000
Gain on disposal of assets - (6,245)
Changes in operating assets and liabilities:
Accounts receivable (90,561) (101,270)
Inventory (171,964) 16,192
Prepaid expenses (5,064) (15,428)
Accounts payable and accrued expenses 213,695 140,274
Unearned revenue 15,341 32,188
--------- --------
Net cash provided by (used in)
operating activities 21,085 (79,606)
--------- --------
Cash flows from investing activities:
Decrease (increase) in other assets (13,199) 11,427
Proceeds from sale of equipment - 2,000
Purchases of property and equipment (37,147) (27,530)
Decreases in related party advances - 33,100
--------- --------
Net cash provided by (used in)
investing activities (50,346) 18,997
--------- --------
Cash flows from financing activities:
Proceeds from related party notes payable 20,000 99,022
Principal payments on capital lease obligations (9,321) (7,267)
Proceeds from long-term debt 240,200 -
Repayments of long-term debt (12,246) -
--------- --------
Net cash provided by financing activities: 238,633 91,755
--------- --------
Net increase in cash 209,372 31,146
Cash at beginning of year 36,581 5,435
--------- --------
Cash at end of year $ 245,953 36,581
========= ========
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
1998 1998
--------- --------
Supplemental cash flow information:
Cash paid during the year for interest $ 31,097 3,921
========= ========
Supplemental schedule of non-cash financing activities:
Capital lease obligations incurred for purchase of
property and equipment $ 63,635 -
========= ========
Acquisition of minority interest through issuance of
common stock $ 10,000 -
Conversion of related party notes payable and
accrued interest to common stock $ 156,146 -
========= ========
See accompanying notes to consolidated financial statements.
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS ACTIVITY
Direct Rx Healthcare, Inc. and its wholly-owned subsidiary,
Nu-Wave Health Products, Inc. (Company) sell diabetic supplies
through the mail to customers located throughout the United
States and manufacturer and package non-prescription
medications on a contractual basis for customers located
primarily in Florida.
(B) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Direct Rx Healthcare, Inc. and its wholly-owned subsidiary,
Nu-Wave health products, Inc. Significant intercompany
balances and transactions have been eliminated in
consolidation.
On July 15, 1997, the Company acquired the remaining 20%
interest in its' subsidiary through a stock exchange. The
Company exchanged 100,000 shares of its common stock (valued
at $.10 share, its fair market value) for the outstanding
stock held by the minority interest. The transaction was
accounted for by the purchase method of accounting.
(C) MANAGEMENT ESTIMATES
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at
March 31, 1998 and 1997 and revenues and expenses for the
years then ended. The actual outcome of the estimates could
differ from the estimates made in the preparation of the
consolidated financial statements.
(D) REVENUE RECOGNITION
Revenue is recognized for the health products manufacturing
operations when the production process is complete and the
merchandise is shipped to the customer. Revenue is recognized
for the mail-order diabetes supplies operations when the
merchandise is shipped to customer.
(E) INVENTORY
Inventory is stated at the lower cost or market. Cost is
determined by the first-in, first-out method.
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL, STATEMENTS
(F) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation
expenses is computed using the straight-line basis over the
estimated useful lives of the furniture and equipment, which
range from five to seven years. Leasehold improvements are
depreciated over the life of the lease.
(G) INTANGIBLE ASSETS
Covenants not to compete are amortized using the straight-line
basis over the five year term of the agreements. Organization
costs represent legal and other costs incurred when organizing
the Company. The costs are being amortized using the
straight-line basis over five years. Goodwill is being
amortized over twenty years using the straight-line method.
(H) INCOME TAXES
The Company utilizes the guidance of Financial Accounting
Standards No. 109 to account for income taxes. Under the asset
and liability method of Statement No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement No. 109,
the effect on deferred tax asset and liabilities of a change
in tax rates is recognized in income in the period that
includes the enactment date.
(I) CONCENTRATION OF CREDIT RISK
Four customers represented approximately 67% of consolidated
revenues in 1998.
Cash balances are maintained in a financial institution.
Occasionally, deposits exceed amounts insured by the Federal
Deposit Insurance Corporation.
(J) EARNINGS PER SHARE
In the fourth quarter of fiscal 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, EARNINGS
PER SHARE (SFAS 128). Under SFAS 128, basic net income (loss)
per share of common stock is computed by dividing income
available to common stockholders by the weighted average
number of common shares actually outstanding during the
period. Diluted net income (loss) per share of common stock
presents income attributable to common shares actually
outstanding plus dilutive potential common shares outstanding
during the period. The Company's options and warrants were not
included in computing dilutive net income (loss) per common
stock because their effects were anti-dilutive.
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) PROPERTY AND EQUIPMENT
At March 31, 1998 and 1997, property and equipment consists of
the following:
1998 1997
--------- -------
Machinery and equipment $ 196,784 107,814
Furniture and fixtures 2,708 2,798
Office equipment 12,199 9,849
Leasehold improvements 13,766 4,304
--------- -------
225,547 124,765
Less accumulated depreciation and
amortization (19,085) (19,817)
--------- -------
$ 176,462 104,948
========= =======
(3) INTANGIBLE ASSETS
At March 31, 1998 and 1997, intangible assets consists of the
following:
1998 1997
--------- -------
Covenants not to compete $ 16,726 16,726
Organization costs - 5,391
Goodwill 10,000 -
--------- -------
26,726 22,117
Less accumulated amortization (8,857) (10,096)
--------- -------
$ 17,869 12,021
========= =======
(4) RELATED PARTY TRANSACTIONS
At March 31, 1998, the Company has demand notes payable to the
spouse of the Chairman of the Company totaling $79,145, which
may be increased as determined by the Board of Directors. The
notes bear interest at the prime rate (8.5% at March 31, 1998)
which is payable quarterly. The notes and unpaid accrued
interest may be repaid in cash or at the holder's option,
converted into common stock at $.10 per share. During fiscal
year 1998, $156,146 of notes payable and accrued interest were
converted into 1,561,464 shares of common stock.
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) INCOME TAXES
The Company had no income tax expense for the years ended 1998
and 1997.
Income taxes for the years ended March 31, 1998 and 1997
differ from the amounts computed by applying the effective
U.S. federal income tax rate of 34% to income before income
taxes as a result of the following:
1998 1997
--------- ---------
Computed "expected" tax expense $ 4,000 (65,000)
Increase (decrease) in taxes resulting
from:
State income taxes, net of federal
tax benefit 1,000 (8,000)
Change in valuation allowance (5,000) 73,000
--------- ---------
Income tax expense $ - -
========= ========
Temporary differences which give rise to deterred tax assets
and liabilities are as follows:
1998 1997
--------- ---------
Deferred tax assets:
Bad debts $ 13,000 8,000
Inventories 2,000 1,000
Net operating loss carryforwards 294,000 294,000
--------- ---------
Gross deferred tax assets 309,000 303,000
Less: valuation allowance (295,000) (300,000)
--------- ---------
$ 14,000 3,000
========= =========
Deferred tax liabilities:
Fixed asset $ 14,000 3,000
========= =========
(6) COMMITMENTS
The Company has operating leases for office and warehouse
space that expire in 2000. The lease for the office space has
an option to extend the lease for five years. Future minimum
lease payments as of March 31, 1998 are as follows:
YEAR ENDING MARCH 31:
1999 $ 72,888
2000 53,692
---------
Total minimum lease payments $ 126,580
=========
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) COMMITMENTS - CONTINUED
The monthly rent payments on the office space also include
payments for common area maintenance and real estate taxes.
Rent expense for the operating lease was $93,386 and 477,695
for the years ended March 31, 1998 and 1997, respectively.
The Company is obligated under various capital leases for
certain machinery and equipment. The gross amount of related
property and equipment at March 31, 1998 subject to lease is
as follows:
Machinery and equipment $ 63,635
Less accumulated depreciation and
amortization (3,781)
---------
$ 59,854
=========
The present value of future minimum capital lease payments as
of March 31, 1998 are as follows:
YEAR ENDING MARCH 31:
1999 $ 27,672
2000 23,677
2001 15,194
---------
Total minimum lease payments 66,543
Less amount representing interest (12,228)
---------
Obligations under capital leases 54,314
Current installment of capital lease
obligations (20,340)
---------
Capital lease obligations, less current
installments $ 33,974
=========
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) LONG-TERM DEBT
Long-term debt consists of the following at March 31, 1998:
Unsecured 9% note payable, due in installments of
$1,759, including interest, through August 1998 $ 8,587
Unsecured 10% note payable due on April 30, 1999
with interest. 35,000
Unsecured 10% note payable due on April 30, 1999
with interest $ 25,000
Unsecured 10% note payable due on April 30, 1999
with interest 40,000
Unsecured 105 note payable due on April 30, 1999
with interest 25,000
Unsecured 10% note payable due on April 30, 1999
with interest 100,000
--------
233,587
Less current installments (8,587)
--------
$225,000
========
Scheduled maturities of long-term debt at March 31, 1998 as
follows:
1999 $ 8,587
2000 $ 225,000
=========
Unsecured 10% notes payable may be due earlier than April 30,
1999, should the Company complete an equity offering, as
defined, prior to April 30, 1999.
Subsequent to March 31, 1998, the holders of unsecured 10%
notes payable were issued common stock purchase warrants. Each
stock warrant entitles the holder to purchase one (1) share of
common stock for each $1 of principal amount lent at $.50 per
share and expire the earlier of, one year from the closing of
an equity financing, as defined, or December 31, 1999.
The fair market value of the common stock purchase warrants
are immaterial to the financial statements at date of
issuance.
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) STOCK OPTIONS
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123).
Accordingly, no compensation cost has been recognized for the
Company's granted stock options. Had compensation and other
costs for the Company's granted stock options been determined
based on the fair value at the grant date or issuance for
awards in 1998 consistent with the provisions of SFAS 123, the
impact of net income would have been immaterial.
AGGREGATE STOCK OPTION ACTIVITY
The following table summarizes information about the aggregate
stock option activity for the years ended March 31, 1998 and
1997:
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
--------------------- ----------------------
Weighted Weighted
average average
Number exercise Number exercise
of shares price of shares price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year - - - -
Granted 600,000 $.23 - -
Exercised - - - -
Expired 600,000 .23 - -
--------- --------- --------- ---------
Outstanding, end of year - - - -
--------- --------- --------- ---------
Options vested, end of year - - - -
--------- --------- --------- ---------
</TABLE>
(9) JOINT VENTURE AGREEMENT
On August 12, 1997, the Company entered into a joint venture
agreement with a group to form an Ohio limited liability
company to market one of its products. Under the terms of the
agreement, the Company will have a 50% ownership and will
share profits and losses equally. The Company is required to
contribute half of the costs incurred in the initial
marketing of the product.
The Company will account for the investment under the equity
method of accounting.
<PAGE>
DIRECT Rx HEALTHCARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) SUBSEQUENT EVENT
Effective April, 1, 1998, the Company merged with its
subsidiary and became Nu-Wave Health Products, Inc.
In May 1998, the Company entered into a non-binding letter of
intent to provide certain working capital financing to U.S.
Diversified Technologies, Inc. Additionally, the Companies
have agreed to combine upon completion of certain items,
including a public stock offering.
