SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23031
DYNAMIC HEALTH PRODUCTS, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
STATE OF FLORIDA 34-1711778
------------------------------ ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6950 BRYAN DAIRY ROAD, LARGO, FLORIDA 33777
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (727) 544-8866
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The number of shares outstanding of the Issuer's common stock at $.01 par value
as of August 13, 1999 was 3,535,224 (exclusive of Treasury Shares).
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
1999 1999
------------ ------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 219,973 $ 899,951
Accounts receivable, net 2,945,394 2,535,274
Inventories, net 2,889,480 2,580,753
Prepaid expenses and other current assets 354,179 221,726
------------ ------------
Total current assets 6,409,026 6,237,704
------------ ------------
Property, plant and equipment, at cost, net 2,647,432 2,476,357
Intangible assets, net 1,745,169 1,769,153
Other assets 65,657 57,619
------------ ------------
TOTAL ASSETS $ 10,867,284 $ 10,540,833
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,304,394 $ 2,495,648
Accrued expenses 387,586 371,556
Current portion of long-term obligations 515,642 643,243
Credit lines payable 2,213,643 2,388,729
Related party obligations 25,000 38,434
------------ ------------
Total current liabilities 6,446,265 5,937,610
------------ ------------
Long-term obligations, less current portion 1,393,265 1,392,793
------------ ------------
TOTAL LIABILITIES 7,839,530 7,330,403
------------ ------------
Commitments and contingencies -- --
Shareholders' equity:
Series A Convertible Preferred stock, $.01 par value;
400,000 shares authorized; 310,000 shares issued
and outstanding, at face value 775,000 775,000
Series B 6% Cumulative Convertible Preferred stock,
$.01 par value; 800,000 shares authorized;
30,000 shares issued and outstanding, at face value 75,000 75,000
Common stock, $.01 par value; 20,000,000 shares authorized;
3,535,224 shares issued and outstanding 35,352 35,352
Additional paid-in capital 3,400,615 3,400,615
Accumulated deficit (1,258,313) (1,076,537)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,027,654 3,210,430
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,867,184 $ 10,540,833
============ ============
</TABLE>
See notes to condensed consolidated financial statements
- 2 -
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Revenues:
Distribution $ 12,612,329 $ 5,830,575
Manufacturing 1,306,068 914,544
------------ ------------
TOTAL REVENUES 13,918,397 6,745,119
------------ ------------
Cost of goods sold:
Distribution 12,108,369 5,585,936
Manufacturing 1,019,286 596,724
------------ ------------
TOTAL OF COST OF GOODS SOLD 13,127,655 6,182,660
------------ ------------
GROSS PROFIT:
Distribution 503,960 244,639
Manufacturing 286,782 317,820
------------ ------------
TOTAL GROSS PROFIT 790,742 562,459
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 971,725 308,051
------------ ------------
OPERATING INCOME (LOSS) BEFORE OTHER INCOME AND EXPENSE (180,983) 254,408
Other income (expense):
Interest income 9,421 2,360
Other income and expenses, net 124,592 6,435
Interest expense (134,681) (29,719)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (668) (20,924)
------------ ------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST (181,651) 233,484
Income (loss) attributable to minority interest -- 14,950
------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAXES (181,651) 218,534
Income tax provision (benefit) -- --
------------ ------------
NET INCOME (LOSS) (181,651) 218,534
Preferred share dividends 1,125 --
------------ ------------
NET INCOME (LOSS) AVAILABLE
TO COMMON SHAREHOLDERS $ (182,776) $ 218,534
============ ============
Basic income (loss) per share (0.05) $ 0.12
============ ============
Basic weighted number of common shares outstanding 3,535,224 1,833,674
============ ============
Diluted income (loss) per share $ (0.04) $ 0.12
============ ============
Diluted weighted number of common shares outstanding 4,785,224 1,889,474
============ ============
</TABLE>
See notes to condensed consolidated financial statements
- 3 -
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $(182,776) $ 218,534
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 98,212 22,498
Minority interest -- 14,950
Changes in operating assets and liabilities:
Accounts receivable (410,022) (357,137)
Inventory (308,727) (87,843)
Prepaid expenses and other current assets (132,453) (8,094)
Accounts payable 808,746 (230,050)
Accrued expenses 16,030 71,934
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (110,990) (355,208)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other assets (8,038) 1,891
Purchases of property and equipment (244,801) (127,328)
Decrease (increase) in intangible assets (500) (1,225)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (253,339) (126,662)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving line of credit agreements (175,086) --
Proceeds from issuance of long-term debt 124,941 537,546
Payments of long-term debt (252,070) (128,752)
Payments of shareholder loans (13,434) (60,096)
Distributions to stockholders, net -- (48,407)
Proceeds from issuance of common stock -- 50,000
--------- ---------
Net cash provided by (used in) financing activities (315,649) 350,291
--------- ---------
NET INCREASE (DECREASE) IN CASH (679,978) (131,579)
CASH AT BEGINNING OF PERIOD 899,951 456,519
--------- ---------
CASH AT END OF PERIOD $ 219,973 $ 324,940
========= =========
</TABLE>
See notes to condensed consolidated financial statements
- 4 -
<PAGE>
<TABLE>
<CAPTION>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
CONTINUED (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
-------------- -------------
<S> <C> <C>
Supplemental cash flow information:
Cash paid during the period for interest $ 134,115 $ 17,386
Supplemental schedule of non-cash financing activities:
Capital lease obligations incurred for purchase of
property and equipment $ 124,941 $ 56,147
Conversion of related party notes payable and
accrued interest to common stock $ -- $ 81,331
Acquisition of Energy Factors, Inc. through
issuance of 310,000 shares of preferred stock $ -- $ 775,000
Acquisition of Becan Distributors, Inc. through
issuance of 1,500,000 shares of common stock $ -- $2,250,000
</TABLE>
See notes to condensed consolidated financial statements
- 5 -
<PAGE>
Dynamic Health Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1999
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instruction to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month periods
ended June 30, 1999 and 1998 are not necessarily indicative of the results that
may be expected for the year ending March 31, 2000. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's Form 10-KSB for the year ended March 31, 1999.
NOTE B-PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Dynamic Health Products, Inc. ("DHP") and its subsidiaries,
Innovative Health Products, Inc. ("IHP"), Becan Distributors, Inc. ("Becan") and
its subsidiary Discount Rx, Inc. ("Discount"), Incredible Products of Florida,
Inc. ("IP"), J.Labs, Inc. ("JL"), Herbal Health Products, Inc. ("HHP"),
(collectively the "Company"). All intercompany balances and transactions have
been eliminated.
NOTE C-STOCKHOLDERS' EQUITY
The Company has adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Basic
earnings per common share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share gives effect to convertible preferred
shares which are considered to be dilutive common stock equivalents.
Series B 6% Cumulative Convertible Preferred Stock shareholders are
entitled to cumulative annual dividends, from the date of issuance, payable
annually in arrears. The Company may make dividend payments on the Preferred
Stock in cash or by delivery of fully paid nonassessable shares of common stock
of the Company, or through a combination thereof.
- 6 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
The Company derives its revenues from developing, manufacturing and
wholesaling a wide variety of non-prescription nutritional supplements and
health and beauty care products, and distributing and wholesaling prescription
pharmaceuticals. Revenues are billed and recognized as product is produced and
shipped, net of discounts, allowances, returns and credits.
Cost of goods sold is comprised of direct personnel compensation,
statutory and other benefits associated with such personnel and other direct
manufacturing and material product costs. Cost of goods sold also includes
indirect costs relating to labor to support the warehousing of production and
manufacturing overhead. Research and development expenses are charged against
cost of goods sold and are not material to the Company's operations. Selling,
general and administrative costs include administrative, sales and marketing and
other indirect operating costs. Interest and other income (expense) consists
primarily of interest expense associated with borrowings to finance capital
equipment expenditures and other working capital needs.
The Company acquired Becan Distributors, Inc. on June 26, 1998. The merger
was accounted for as a combination of entities under common control and treated
as if a "pooling of interests". The financial statements have been retroactively
restated, for all periods presented, to include the results of operations for
Becan.
RESULTS OF OPERATIONS
Three Months ended June 30, 1999 and June 30, 1998
REVENUES. Total revenues increased $7,173,278, or 106.4%, to $13,918,397
for the three months ended June 30, 1999 as compared to $6,745,119 in the three
months ended June 30, 1998. Distribution revenues increased $6,781,754, or
116.3%, to $12,612,329 for the three months ended June 30, 1999, as compared to
$5,830,575 in the three months ended June 30, 1998. The increase was due to
increased sales to existing customers and expansion of the customer base
resulting from increased marketing efforts and acquisitions made during the
period. Manufacturing revenues increased $391,524, or 29.9%, to $1,306,068 for
the three months ended June 30, 1999, as compared to $914,544 in the
corresponding period. The increase was primarily attributable to increased
volume of private label sales resulting from continued expansion of marketing
efforts and the introduction of new products, and increased sales associated
with the June 1998 acquisition of IHP.
GROSS PROFIT. Total gross profit increased $228,283, or 40.6%, to $790,742
for the three months ended June 30, 1999, as compared to $562,459 in the three
months ended June 30, 1998. Gross margin decreased to 5.7% for the three months
ended June 30, 1999 from 8.3% in the corresponding period. Distribution gross
profit increased $259,321, or 106%, to $503,960 for the three months ended June
30, 1999, as compared to $244,639 in the three months ended June 30, 1998 and
the gross margin decreased to 4% for the three months ended June 30, 1999, from
4.2% in the corresponding period. The decrease was primarily attributable to an
increase in the mix of sales, which yields a lower gross margin. Manufacturing
gross profit decreased $31,038, or 9.8%, to $286,782 for the three months ended
June 30, 1999, as compared to $317,820 in the corresponding period and the gross
margin decreased to 21.9% for
- 7 -
<PAGE>
the three months ended June 30, 1999, from 34.7% in the corresponding period.
The decrease was primarily attributable to a change in the mix of sales, which
yields a lower gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of advertising and promotional
expenses; personnel costs related to general management functions, finance,
accounting and information systems, payroll expenses and sales commissions;
professional fees related to legal, audit and tax matters; and depreciation and
amortization expense. Selling, general and administrative expenses increased
$663,674, or 215.4%, to $971,725 for the three months ended June 30, 1999, as
compared to $308,051 in the corresponding period. The increase was primarily due
to additional advertising, promotional and payroll expenses to support increased
net sales and the Company's growth, as well as additional amortization of
goodwill and depreciation of fixed assets associated with acquisitions made
during fiscal 1999. As a percentage of net sales, selling, general and
administrative expenses increased to 6.9% for the three months ended June 30,
1999 from 4.6% in the corresponding period.
INTEREST INCOME (EXPENSE), NET. Interest expense, net of interest income,
increased $97,901 to $125,260 for the three months ended June 30, 1999, from
$27,359 for the three months ended June 30, 1998. The increase was a result of
greater borrowings to finance the purchase of additional machinery and
equipment, to make necessary plant modifications, and for financing of
additional working capital needs with the expansion of the Company's operations.
INCOME TAXES. The Company has no income tax provision for the period
presented due to the utilization of net operating losses not previously
recognized. These net operating losses may be carried forward for up to 15
years. As such, the Company does not anticipate any liability for income taxes
for the three months ended June 30, 1999 and 1998.
Management believes that there was no material effect on operations or the
financial condition of the Company as a result of inflation for the three months
ended June 30, 1999 and 1998. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through available borrowings under
its credit line facility, loans from within the Company, and the sale of equity
securities issued by the Company. The Company had a working capital deficit of
$37,239 at June 30, 1999, inclusive of current portion of long-term obligations
and credit facilities, as compared to a working capital deficit of $658,584 at
June 30, 1998.
Net cash used in operating activities was ($110,990) for the three months
ended June 30, 1999 as compared to net cash used in operating activities of
($355,208) for the three months ended June 30, 1998. The usage of cash is
primarily attributable to an increase in accounts receivable ($410,022), as a
result of increased sales by the Company during such period, and an increase in
inventory ($308,727), an increase in prepaid expenses and other current assets
($132,453), partially offset by an increase in accounts payable $808,746, and an
increase in accrued expenses $16,030. In conjunction with the installation of
new manufacturing software in March and April 1999, the Company implemented
additional procedural controls in accounts receivable and inventory procurement
including requiring deposits from customers on new orders and the implementation
of inventory cycle counts, which management expects will have positive cash
effects in its operating activities.
- 8 -
<PAGE>
Net cash used in investing activities was ($253,339), representing the
purchase of property and equipment, and plant modifications ($244,801), the
acquisition of other assets ($8,038), and an increase in intangible assets
($500).
Net cash used in financing activities was ($315,649), representing
repayments of long-term debt ($252,070), repayments on lines of credit
($175,086), repayments of shareholder loans ($13,434), partially offset by
proceeds from issuance of long-term debt $124,941.
Management believes that cash expected to be generated from operations,
current cash reserves, and existing financial arrangements will be sufficient
for the Company to meet its capital expenditures and working capital needs for
its operations as presently conducted. The Company's future liquidity and cash
requirements will depend on a wide range of factors, including the level of
business in existing operations, expansion of facilities, expected results from
recent procedural changes in accounts receivable and inventory procurement, and
possible acquisitions. In particular, if cash flows from operations and
available credit facilities are not sufficient, it will be necessary for the
Company to seek additional financing. While there can be no assurance that such
financing would be available in amounts and on terms acceptable to the Company,
management believes that such financing would likely be available on acceptable
terms.
The Company has obtained preliminary approval to refinance the land and
building owned by its wholly-owned subsidiary, and to finance the construction
of expansion to the existing plant, but provides no assurance as to the success
of establishing the refinance.
YEAR 2000 STATEMENT
The Year 2000 issue encompasses the required recognition of computer
hardware and software systems and computer controlled devices, including
equipment, used in the Company's distribution and manufacturing operations to
properly acknowledge the change from Year 1999 to Year 2000. The failure of any
hardware and software systems or equipment to timely and accurately recognize
such change could result in partial or complete systems failure. In the normal
course of business, the Company relies on products and services from critical
vendors, customers and other third parties whose computer systems must also be
Year 2000 compliant in order for the Company to realize the uninterrupted flow
of its business operations. The Company is actively taking steps to ensure that
its systems and equipment will be Year 2000 compliant, including assessing the
scope of work, prioritizing, certifying compliance, and testing compliance.
The Company has identified those systems and equipment in its operations
that are considered to be critical to the Company's day to day operations. All
of the Company's systems and equipment utilized in its operations was tested for
Year 2000 compliance during February and March 1999, with approximately 95% of
such systems and equipment being certified as Year 2000 compliant as of June 30,
1999. The Company is in the process of obtaining written assurances from its
third-party software providers that the software used by the Company is Year
2000 compliant. In addition, the Company is actively seeking assurances of Year
2000 compliance from each of its key suppliers, customers and other third
parties with whom the Company conducts business. A lack of response or
inadequate or inaccurate information from such third parties could materially
affect the Company's assessment for Year 2000 readiness. Until assessments are
completed, the Company cannot predict whether the failure of any such third
party to be Year 2000 compliant will have a material adverse effect on the
Company's business.
- 9 -
<PAGE>
To date, the costs incurred by the Company to address Year 2000 issues
have been immaterial, and the Company expects that the costs to complete Year
2000 compliance certification, testing and verifications will also be
immaterial. Where appropriate, the Company will develop contingency plans in
areas it determines that Year 2000 readiness is insufficient. However, no
assurances can be given that the Company's Year 2000 efforts are appropriate,
adequate, or complete. In addition, the Company is unable to fully determine the
effect of a failure of its own systems or those of any third party with whom it
conducts business, but any significant failures could have a material adverse
effect on the Company's financial condition, results of operations and cash
flows.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Company is subject to litigation incidental to its
business. Such claims, if successful, could exceed applicable insurance
coverage. The Company is not currently a party to any material legal
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. - NOT APPLICABLE.
ITEM 4. - NOT APPLICABLE.
ITEM 5. OTHER INFORMATION.
The Company has determined not to complete its Form 15C211 filing with
NASDAQ at this time. However, if the Company completes a public offering of its
common stock, it intends to list its common stock for trading over the Nasdaq
Stock Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
The following exhibits are filed with this report:
27.1 Financial Data Schedule (for SEC use only).
(b) REPORTS ON FORM 8-K.
During the three months ended June 30, 1999, the Company filed no reports
on Form 8-K.
- 10 -
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNAMIC HEALTH PRODUCTS, INC.
Date: August 13, 1999 By: /s/WILLIAM L. LAGAMBA
---------------------
William L. LaGamba
Chief Executive Officer,
Secretary, and Director
Date: August 13, 1999 By: /s/JUGAL K. TANEJA
---------------------
Jugal K. Taneja
Chairman of the Board,
Chief Accounting Officer, and Director
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the financial
statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 219,973
<SECURITIES> 0
<RECEIVABLES> 3,064,532
<ALLOWANCES> (119,138)
<INVENTORY> 2,889,480
<CURRENT-ASSETS> 6,409,026
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,867,284
<CURRENT-LIABILITIES> 6,446,265
<BONDS> 0
850,000
0
<COMMON> 35,352
<OTHER-SE> 2,142,302
<TOTAL-LIABILITY-AND-EQUITY> 10,867,284
<SALES> 13,918,397
<TOTAL-REVENUES> 13,918,397
<CGS> 13,127,655
<TOTAL-COSTS> 13,127,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,681
<INCOME-PRETAX> (182,776)
<INCOME-TAX> 0
<INCOME-CONTINUING> (182,776)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (182,776)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.04)
</TABLE>
