<PAGE>
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 September 30, 2000
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 December 20, 2000 was 2,917,141 (exclusive of Treasury Shares).
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS.
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
---------------------- ---------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 307,430 $ 693,595
Marketable equity securities, net 611,346 754,996
Certificate of deposit, restricted 521,958 510,861
Accounts receivable, net 410,560 770,161
Inventories 2,058,836 1,677,344
Prepaid registration expenses 332,022 252,356
Prepaid expenses and other current assets 632,224 88,293
Due from affiliates 41,343 10,155
Due from related parties 1,776 2,250
Note receivable from affiliate 75,000 -
--------------------- ---------------------
Total current assets 4,992,495 4,760,011
Property, plant and equipment, net 2,623,497 2,689,780
Intangible assets, net 945,398 1,043,669
Investments in unconsolidated affiliates 8,588,335 9,212,562
Note receivable from affiliate 350,000 -
Other assets, net 587,236 185,071
--------------------- ---------------------
Total assets $ 18,086,961 $ 17,891,093
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,179,217 $ 1,120,045
Other payables 997,737 273,980
Current portion of long-term obligations 888,130 915,806
Credit lines payable 1,141,111 1,349,284
Accrued expenses 130,469 111,438
Accrued income taxes 400,000 400,000
Obligations to affiliates 209,161 20,927
Obligations to related parties 112,951 25,000
--------------------- ---------------------
Total current liabilities 5,058,776 4,216,480
Deferred income taxes 3,294,308 3,363,000
Long-term obligations, less current portion 1,794,888 2,199,509
--------------------- ---------------------
Total liabilities 10,147,972 9,778,989
--------------------- ---------------------
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;
2,917,141 and 2,917,224 shares issued and outstanding 29,171 29,172
Additional paid-in capital 1,859,330 1,861,788
Retained earnings 5,322,606 5,371,144
Accumulated other comprehensive income:
Unrealized losses on marketable equity securities (122,118) -
--------------------- ---------------------
Total shareholders' equity 7,938,989 8,112,104
--------------------- ---------------------
Total liabilities and shareholders' equity $ 18,086,961 $ 17,891,093
===================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 2 -
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
================================ ================================
2000 1999 2000 1999
============== ============== ============== ==============
<S> <C> <C> <C> <C>
Revenues:
Distribution $ 1,776,375 $ 14,785,531 $ 3,892,458 $ 27,391,242
Manufacturing 783,321 1,160,484 1,715,216 2,466,533
-------------- -------------- -------------- --------------
Total revenues 2,559,696 15,946,015 5,607,674 29,857,775
-------------- -------------- -------------- --------------
Cost of goods sold:
Distribution 978,913 14,102,688 1,478,589 26,211,054
Manufacturing 661,092 891,885 1,555,351 1,911,171
-------------- -------------- -------------- --------------
Total cost of goods sold 1,640,005 14,994,573 3,033,940 28,122,225
-------------- -------------- -------------- --------------
Gross profit:
Distribution 797,462 682,843 2,413,869 1,180,188
Manufacturing 122,229 268,599 159,865 555,362
-------------- -------------- -------------- --------------
Total gross profit 919,691 951,442 2,573,734 1,735,550
-------------- -------------- -------------- --------------
Selling, general and
administrative expenses 1,204,943 1,128,989 2,468,891 2,100,016
-------------- -------------- -------------- --------------
Operating income (loss) before
other income and expense (285,252) (177,547) 104,843 (364,466)
Other income (expense):
Interest income 23,449 8,114 34,943 19,544
Gain on sale of assets 424,791 - 424,791 -
Other income and expenses, net 220,879 13,518 252,822 144,046
Equity in loss of affiliated companies (182,446) - (624,227) -
Interest expense (123,642) (145,741) (241,710) (282,432)
-------------- -------------- -------------- --------------
Total other income (expense) 363,031 (124,109) (153,381) (118,842)
-------------- -------------- -------------- --------------
Income (loss) before income taxes 77,779 (301,656) (48,538) (483,308)
Income taxes - - - -
-------------- -------------- -------------- --------------
Net income (loss) 77,779 (301,656) (48,538) (483,308)
Preferred stock dividends 1,125 1,125 2,250 2,250
-------------- -------------- -------------- --------------
Net income (loss) available
to common shareholders $ 76,654 $ (302,781) $ (50,788) $ (485,558)
============== ============== ============== ==============
Basic income (loss) per share $ 0.03 $ (0.09) $ (0.02) $ (0.14)
============== ============== ============== ==============
Basic weighted average number of
common shares outstanding 2,917,156 3,535,224 2,917,190 3,535,224
============== ============== ============== ==============
Diluted income (loss) per share $ 0.02 $ (0.09) $ (0.02) $ (0.14)
============== ============== ============== ==============
Diluted weighted average number of
common shares outstanding 4,127,156 3,535,224 2,917,190 3,535,224
============== ============== ============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Six Months Ended September 30, 2000
<TABLE>
<CAPTION>
Series A Series B Additional
Preferred Stock Preferred Stock Common Stock Paid-in
--------------- --------------- ------------
Shares Dollars Shares Dollars Shares Dollars Capital
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
March 31, 2000 (Audited) 310,000 $775,000 30,000 $75,000 2,917,224 $29,172 $1,861,788
Repurchase of 83 shares of
common stock at $2.50 per share - - - - (83) (1) (208)
Accrual of preferred dividends - - - - - - (2,250)
Net loss - - - - - - -
Other comprehensive income - - - - - - -
----------------------------------------------------------------------------------------
Balances at
September 30, 2000 (Unaudited) 310,000 $775,000 30,000 $75,000 2,917,141 $29,171 $1,859,330
========================================================================================
<CAPTION>
Accumulated Other
Comprehensive Income
--------------------
Unrealized Total
Retained Losses on Shareholders'
Earnings Securities Equity
-------------------------------------------------
<S> <C> <C> <C>
Balances at
March 31, 2000 (Audited) $5,371,144 $ - $8,112,104
Repurchase of 83 shares of
common stock at $2.50 per share - - (209)
Accrual of preferred dividends - - (2,250)
Net loss (48,538) - (48,538)
Other comprehensive income (loss) - (122,118) (122,118)
-------------------------------------------------------
Balances at
September 30, 2000 (Unaudited) $5,322,606 $(122,118) $7,938,989
=======================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 4 -
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
September 30, September 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (48,538) $ (483,308)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization 208,690 197,953
Equity in loss of affiliated company 624,227 -
Gain on sale of assets (424,791) -
Changes in operating assets and liabilities:
Accounts receivable 359,601 (639,939)
Inventory (381,492) (716,925)
Due to/from affiliates, net 157,046 -
Prepaid registration expenses (79,666) (35,747)
Prepaid expenses and other current assets (554,554) (186,102)
Other assets (402,165) -
Accounts payable 59,172 1,493,156
Other payables 723,757 416,845
Accrued expenses 19,031 (14,628)
--------------- --------------
Net cash provided by operating activities 260,318 31,305
--------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (127,345) (298,007)
Sale of assets 80,747 -
Purchases of marketable equity securities (47,160) -
Common stock repurchase (208) -
Decrease (increase) in intangible assets - (28,758)
--------------- --------------
Net cash used in investing activities (93,966) (326,765)
--------------- --------------
Cash flows from financing activities:
Net change in revolving line of credit agreements (208,173) (116,409)
Proceeds from issuance of long-term obligations 27,008 1,048,043
Payments of long-term obligations (459,303) (1,130,546)
Proceeds from issuance of related party obligations 94,951 166,500
Payments of related party obligations (7,000) (13,434)
--------------- --------------
Net cash used in financing activities (552,517) (45,846)
--------------- --------------
Net increase (decrease) in cash (386,165) (341,306)
Cash and cash equivalents at beginning of period 693,595 899,951
--------------- --------------
Cash and cash equivalents at end of period $ 307,430 $ 558,645
=============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
September 30, September 30,
2000 1999
--------------------------- --------------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 112,227 $ 276,379
=========================== ==========================
Cash paid during the period for income taxes $ - $ -
=========================== ==========================
Supplemental schedule of non-cash financing activities:
Capital lease obligations incurred for purchase of
property and equipment $ - $ 124,941
=========================== ==========================
Supplemental schedule of non-cash investing activities:
Notes received from affiliate for sale of assets $ 425,000 $ -
=========================== ==========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-6-
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 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 consolidated 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 and six month periods ended September 30, 2000 and 1999 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2001. 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, 2000.
NOTE B-PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements as of and for the three
months and six months ended September 30, 2000 include the accounts of Dynamic
Health Products, Inc. and its wholly-owned subsidiaries (collectively the
"Company"), Go2Pharmacy, Inc. ("Go2") and its subsidiary Breakthrough Engineered
Nutrition, Inc. ("Breakthrough"), J. Labs, Inc. ("JLabs"), Herbal Health
Products, Inc. ("Herbal"), Dynamic Life, Inc. and its subsidiaries Dynamic Life
Asia, LLC and Dynamic Life Korea Ltd. (collectively "Dynamic Life"), Dynamic
Financials Corporation and its subsidiary Bryan Capital Limited Partnership, and
Today's Drug, Inc. Significant intercompany balances and transactions have been
eliminated in consolidation.
The condensed consolidated financial statements as of and for the three
months and six months ended September 30, 1999 include the accounts of Dynamic
Health Products, Inc. and its wholly-owned subsidiaries, Go2, JLabs, Herbal,
Dynamic Life, and Becan Distributors, Inc. and its subsidiary Discount Rx, Inc.
(collectively "Becan"). Significant intercompany balances and transactions have
been eliminated in consolidation.
NOTE C-RECENTLY ISSUED AUTHORITATIVE GUIDANCE
In December 1999, Staff Accounting Bulletin 101 ("SAB 101"), "Revenue
Recognition in Financial Statements," was issued by the Securities and Exchange
Commission ("SEC"). SAB 101 provides guidance related to revenue recognition
issues based on interpretations and practices followed by the SEC. Management
has determined that the adoption of SAB 101 did not have a material impact on
its September 30, 2000 condensed consolidated financial statements.
-7-
<PAGE>
NOTE D-INVESTMENT IN UNCONSOLIDATED AFFILIATE
Investment in net assets of an affiliated company accounted for under the
equity method amounted to $8,578,835 as of September 30, 2000 with $182,446 and
$624,227 being recorded as the Company's share of their loss for the three
months and six months ended September 30, 2000, respectively. As the investment
did not exist during the comparable September 30, 1999 periods presented, no
financial information for the Company's equity-basis affiliate is provided as of
and for the three months and six months ended September 30, 1999.
The combined results of operations and financial position of the Company's
equity-basis affiliate is summarized below as of and for the three months and
six months ended September 30, 2000:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, 2000 September 30, 2000
------------------- ------------------
<S> <C> <C>
Condensed Income Statement Information:
Net sales $38,827,714 $67,862,991
Gross profit 1,364,592 2,367,554
Net loss (627,610) (2,147,439)
September 30, 2000
------------------
Condensed Balance Sheet Information:
Current assets 25,596,557
Non-current assets 29,260,624
Current liabilities 21,417,815
Non-current liabilities 1,394,358
Total shareholders' equity 32,045,008
</TABLE>
NOTE E-COMPREHENSIVE INCOME
The Company utilizes the guidance provided by Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income, which
became effective for the Company for the fiscal year ended March 31, 1999. SFAS
130 establishes standards for reporting and display of comprehensive income
within the general purpose financial statements and requires reclassification of
applicable financial statement components for any prior period comparative
financial statement components. The Company has implemented SFAS 130 as of and
for the three months and six months ended September 30, 2000 based on
comprehensive income transactions being present. The Company has elected to
present the comprehensive income items within the shareholders' equity section
of the balance sheet in addition to presenting a consolidated statement of
changes in equity statement. The following presents comprehensive income as of
September 30, 2000:
-8-
<PAGE>
Before-Tax Tax (Expense) Net-of-tax
Amount Benefit Amount
----------- ------------- -----------
Unrealized losses on marketable
equity securities held for sale $(190,810) $68,692 $(122,118)
--------- ------- ---------
Other comprehensive income $(190,810) $68,692 $(112,118)
========= ======= =========
NOTE F-SEGMENT INFORMATION
The Company has two industry segments: Distribution and Manufacturing. The
channels of distribution for its proprietary products and the channels of
distribution of the products it manufactures for others include health food,
drug, convenience and mass market stores, and direct marketing through
distributors and catalog sales throughout the United States. The Company has
two manufacturing facilities located in the greater Tampa Bay, Florida area. In
addition to being presented separately, intersegment financial data is included
in the gross segment amounts disclosed below in order to present accurate
segment information, where as on the condensed consolidated balance sheets and
statements of operations, all intercompany transactions have been eliminated in
consolidation.
The Company sold Becan, one of its distribution subsidiaries, in November
1999. Becan had distribution centers located in Pittsburgh, Pennsylvania and
Mandeville, Louisiana. Based on the sale of this subsidiary, Becan's financial
segment data related to its revenues, gross profits, operating income (loss) and
its assets are only included as of and for the three months and six months ended
September 30, 1999.
The Company commenced operations for one of its distribution subsidiaries,
Dynamic Korea, during April 2000. Based on the date of commencing initial
operations, Dynamic Korea's financial segment data related to its revenues,
gross profits, operating income (loss) and its assets are only included as of
and for the three months and six months ended September 30, 2000.
Presented below is condensed segment information as of and for the three
months and six months ended September 30, 2000 and 1999, as required by SFAS
131, Disclosures about Segments of an Enterprise and Related Information:
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Distribution $ 498,341 $14,785,351 $ 758,443 $27,682,465
Distribution - Korea 1,278,034 - 3,134,015 -
Manufacturing 783,321 1,340,228 2,550,150 2,703,992
Intersegment 355,891 390,271 1,143,757 529,930
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross profit:
Distribution 207,328 502,919 326,293 944,083
Distribution - Korea 239,528 - 1,020,332 -
Manufacturing 353,220 448,343 994,799 790,750
Operating income (loss):
Distribution 12,553 97,214 (88,206) 179,405
Distribution - Korea (118,353) - 164,686 -
Manufacturing (176,110) 76,753 (15,187) 40,143
<CAPTION>
September 30, September 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Assets:
Distribution $1,152,433 $5,738,847
Distribution - Korea 1,331,314 -
Manufacturing 5,149,513 4,052,613
Intersegment 786,682 293,874
</TABLE>
NOTE G-INCOME TAXES
The Company utilizes the guidance provided by Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. Under
SFAS 109, the Company uses the asset and liability method which recognizes the
amount of current and deferred taxes payable or refundable based on transactions
recorded as of and for the period presented in the consolidated financial
statements as determined by the enacted tax laws and tax rates. The company has
a current and a deferred tax liability recorded as of September 30, 2000 of
$400,000 and $3,294,308, respectively, primarily due to the gain on the November
1999 sale of Becan.
NOTE H-RELATED PARTY TRANSACTIONS
In June 2000, Go2 established a $100,000 revolving line of credit with
Carnegie Capital, LTD, an affiliate of Jugal K. Taneja, Chief Executive Officer
and Chairman of the Board of the Company, to provide a source of funding for
cash requirements directly related to Go2's Registration Statement. The note
bears interest at 10% per annum. Principal and interest on the note is due and
payable in full upon the successful completion of a public offering of Go2's
common stock. Go2's public offering was completed in November 2000 and in
accordance with the revolving line of credit agreement, the outstanding balance
was paid in full. As of September 30, 2000, the outstanding principal balance on
this note was $45,000 and is included in obligations to related parties.
- 10 -
<PAGE>
In June 2000, Go2 established a $100,000 revolving line of credit with
Joseph Zappala, a Director of DrugMax.com, Inc., an affiliate of the Company and
the President of Go2Pharmacy.com, Inc., a Delaware corporation, to provide a
source of funding for cash requirements directly related to Go2's registration
statement. The note bears interest at 10% per annum. Principal and interest on
the note is due and payable in full upon the successful completion of a public
offering of Go2's common stock. Go2's public offering was completed in November
2000 and in accordance with the revolving line of credit agreement, the
outstanding balance was paid in full. As of September 30, 2000, the outstanding
principal balance on this note was $45,000 and is included in obligations to
related parties.
In July 2000, Herbal sold substantially all of its assets relating to the
distribution of veterinary products, which primarily consisted of its inventory
and its customer base to Labelclick.com, Inc., an affiliate of the Company, for
a total sales price of $500,000. The Company owns approximately 11.9% of the
issued and outstanding common stock of Labelclick.com, Inc. Payment was in the
form of $75,000 in cash and two promissory notes totaling $425,000. The first
promissory note is in the principal amount of $75,000 and bears interest at 10%
per annum. Principal and interest are payable monthly commencing November 27,
2000, in the amount of $7,500 per month until the note is paid in full. The
second promissory note is in the principal amount of $350,000 and bears interest
at 10% per annum. Principal and interest are payable (i) upon the completion of
an initial public offering of common stock of Labelclick.com, Inc. which shall
be made within twelve months from July 31, 2000, or (ii) if the note is not paid
in full within twelve months from July 31, 2000, then payments are to be made
monthly in the amount of $12,372.99 per month until the note is paid in full.
The notes are secured by the business assets of Labelclick.com, Inc.
Amounts due to and from affiliates represent balances owed by or amounts
owed to the Company for sales occurring in the normal course of business.
Amounts due to and amounts due from these affiliates are in the nature of trade
payables or receivables and fluctuate based on sales volume and payments
received.
NOTE I-SUBSEQUENT EVENTS
On November 7, 2000, the Securities and Exchange Commission declared Go2's
registration of 1,000,000 shares of its common stock to be effective. The
registration was affected through the filing of Registration Statement No. 333-
92849 on Form SB-2 with the Securities and Exchange Commission. Go2's initial
public offering, pursuant to its registration, was successfully completed on
November 14, 2000. In conjunction with the offering, 1,000,000 share of common
stock, $.01 par value, of Go2 were sold to the public for net proceeds of
$6,655,705 to Go2. Simultaneously with and conditioned upon the offering, Go2
acquired the Delaware corporation, Go2Pharmacy.com, Inc., in exchange for
3,000,000 shares of its common stock. Subsequent to the offering, the Company
continues to own 3,000,000 shares, or 42.8% of the common stock of Go2.
- 11 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following management discussion and analysis should be read in
conjunction with the Condensed Consolidated Financial Statements and Notes
thereto presented elsewhere in this Form 10-QSB. The discussion is based upon
such condensed consolidated financial statements that have been prepared in
accordance with U.S. Generally Accepted Accounting Principles.
The statements contained herein that are not historical facts are "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Because such statements involve risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Forward-looking statements, including those in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are statements regarding the intent, belief or current expectations,
estimates or projections of the Company, its Directors or its Officers about the
Company and the industries in which it operates, and assumptions made by
management, and include among other items statements regarding the Company's
expectations, intentions, beliefs or strategies regarding the future. Forward-
looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward-looking statements included in this Form 10-QSB are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements.
Overview
The Company derives its revenues from developing, manufacturing,
wholesaling and distributing a wide variety of non-prescription dietary
supplements, and health and beauty care products. 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 manufacturing and material
product costs, direct personnel compensation and other statutory benefits and
indirect costs relating to labor to support product manufacture and the
warehousing of production and other manufacturing overhead. Research and
development expenses are charged against cost of goods sold as incurred.
Selling, general and administrative costs include management and general office
salaries, advertising and promotional expenses, 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.
In November 1999, the Company sold Becan, a significant subsidiary of the
Company, a distributor and wholesaler of prescription pharmaceuticals. The
condensed consolidated financial statements for the three months and six months
ended September 30, 1999 include the results of operations for Becan.
In February 2000, the Company formed Dynamic Life Korea Ltd. ("Dynamic
Korea"), as a Korean corporation, to market the Company's products to
distributors in Korea. Dynamic Korea commenced its operations in April 2000.
- 12 -
<PAGE>
Results of Operations
Three And Six Months Ended September 30, 2000 Compared To Three And Six Months
Ended September 30, 1999
Revenues. Total revenues decreased $13.4 million, or 83.9%, to $2.6 million
and $24.3 million, or 81.2%, to $5.6 million, respectively, for the three months
and six months ended September 30, 2000, as compared to $15.9 million and $29.9
million, respectively, for the three months and six months ended September 30,
1999. Distribution revenues decreased $13.0 million, or 88.0%, to $1.8 million
and $23.5 million, or 85.8%, to $3.9 million, respectively, for the three months
and six months ended September 30, 2000, as compared to $14.8 million and $27.4
million, respectively, for the three months and six months ended September 30,
1999. The decrease primarily resulted from the absence of revenues associated
with Becan and is partially offset by an increase in revenues associated with
Dynamic Life and Breakthrough. Manufacturing revenues decreased $377,000, or
32.5%, to $783,000 and $751,000, or 30.5%, to $1.7 million, respectively, for
the three months and six months ended September 30, 2000, as compared to $1.2
million and $2.5 million, respectively, for the three months and six months
ended September 30, 1999. The decrease was primarily attributable to decreased
volume of certain less profitable private label sales resulting from the
Company's implementation of more stringent gross profit benchmarks for the
acceptance of product manufacturing sales orders.
Gross profit. Total gross profit decreased $32,000, or 3.3%, to $920,000
for the three months ended September 30, 2000, as compared to $951,000 for the
three months ended September 30, 1999. Total gross profit increased $838,000, or
48.3%, to $2.6 million for the six months ended September 30, 2000, as compared
to $1.7 million for the six months ended September 30, 1999. Gross margin
increased from 6.0% and 5.8%, respectively, for the three months and six months
ended September 30, 1999 to 35.9% and 45.9%, respectively, for the three months
and six months ended September 30, 2000. Distribution gross profit increased
$115,000, or 16.8%, to $797,000 and $1.2 million, or 104.5%, to $2.4 million,
respectively, for the three months and six months ended September 30, 2000, as
compared to $683,000 and $1.2 million for the three months and six months ended
September 30, 1999. For the three months and six months ended September 30,
2000, distribution gross margin increased to 44.9% and 62.0%, respectively, from
4.6% and 4.3%, respectively, in the corresponding periods. The increase was
primarily attributable to revenues and related cost of goods sold associated
with Dynamic Life and Breakthrough during the three months and six months ended
September 30, 2000, which yield higher gross margins than that of Becan, whose
revenues and related cost of goods sold were reflected in the corresponding
periods. Manufacturing gross profit decreased $146,000, or 54.5%, to $122,000
and $395,000, or 71.2%, to $160,000, respectively, for the three months and six
months ended September 30, 2000, as compared to $269,000 and $555,000,
respectively, in the corresponding periods. For the three months and six months
ended September 30, 2000, manufacturing gross margin decreased to 15.6% and
9.3%, respectively, from 23.1% and 22.5%, respectively, in the corresponding
periods. The decrease was primarily attributable to a decrease in sales volume
and 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
$76,000, or 6.7%, to $1.2 million and
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$369,000, or 17.6%, to $2.5 million, respectively, for the three months and six
months ended September 30, 2000, as compared to $1.1 million and $2.1 million,
respectively, in the corresponding periods. The increase was primarily
attributable to additional advertising and promotional expenses, rents, as well
as payroll expenses and costs associated with fringe benefits to support our
increased sales and the Company's overall growth. As a percentage of sales,
selling, general and administrative expenses increased to 47.1% and 44.0%,
respectively, for the three months and six months ended September 30, 2000, from
7.1% and 7.0%, respectively, in the corresponding periods.
Interest income (expense), net. Interest expense, net of interest income
decreased $37,000 to $100,000 and $56,000 to $207,000, respectively, for the
three months and six months ended September 30, 2000, from $138,000 and
$263,000, respectively, for the three months and six months ended September 30,
1999. The decrease in interest expense was a result of increases in principal
payments on outstanding obligations.
Income taxes. At September 30, 2000, the Company had accrued income taxes
of $400,000 and a deferred income tax liability of $3.3 million, primarily
associated with the gain on the November 1999 sale of Becan. The Company had no
income tax expense for the three months and six months ended September 30, 2000
due to the loss incurred in that six month period, as adjusted for nondeductible
loss in equity of affiliated company and nontaxable foreign source income.
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
and six months ended September 30, 2000 and 1999. 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.
Financial Condition, Liquidity and Capital Resources
The Company has financed its operations through available borrowings under
its credit line facilities, loans from within the Company and from cash provided
by operations. The Company had a working capital deficit of $66,000 at September
30, 2000, inclusive of current portion of long-term obligations and credit
facilities, as compared to working capital of $544,000 at March 31, 2000.
Net cash provided by operating activities was $260,000 for the six months
ended September 30, 2000, as compared to net provided by operating activities of
$31,000 for the six months ended September 30, 1999. Cash provided was
primarily attributable to a decrease in accounts receivable of $360,000, an
increase in due to/from affiliates, net of $157,000, an increase in accounts
payable of $59,000, an increase in other payables of $724,000 and an increase in
accrued expenses of $19,000, partially offset by an increase in inventory of
$381,000, an increase in prepaid registration expenses of $80,000, an increase
in prepaid expenses and other current assets of $555,000 and an increase in
other assets of $402,000.
Net cash used in investing activities was $94,000, representing the
purchase of property and equipment of $127,000, the purchase of marketable
equity securities of $47,000, and payment for common stock repurchased of $200,
partially offset by the sale of assets of $81,000.
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Net cash used in financing activities was $553,000, representing repayments
on revolving lines of credit of $208,000, repayments of long-term obligations of
$459,000, repayments of related party obligations of $7,000, partially offset by
proceeds from issuance of long-term obligations of $27,000 and proceeds from
issuance of related party obligations of $95,000.
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.
In February 1999, the Company established a $2,000,000 credit facility to
provide additional working capital in support of accounts receivable and
inventory and to support its continued growth. A portion of the proceeds from
the line of credit were funded in the form of a 60-month term loan for
approximately $491,000, for repayment of certain capital lease obligations. The
remainder of this credit facility is in the form of a revolving line of credit.
The note bears interest at the Prime Rate of The Chase Manhattan Bank in New
York, New York, plus 2.25% per annum on the unpaid outstanding principal of each
advance, payable monthly. The note is to be secured by a blanket lien on all
assets of the Company, exclusive of certain leased assets. The note is also
secured by a personal guarantee from the Company's Chairman of the Board. The
credit facility provides substantial penalties for early termination. At
September 30, 2000, the outstanding principal balance on the line of credit was
approximately $641,000.
In December 1999, Go2 established a $500,000 revolving line of credit with
First Community Bank of America, to provide additional working capital for the
Company. The note bears interest at variable rates, commencing at 6.5% per
annum, on the unpaid outstanding principal of each advance, payable monthly.
The note is secured by a guarantee in the form of a Third Party Pledge Agreement
in favor of First Community Bank of America, from the Company. The principal on
the note is due and payable on November 10, 2000. The note or any portion
thereof may be prepaid without penalty. At September 30, 2000, the outstanding
principal balance on this note was approximately $500,000.
In June 2000, Go2 established a $100,000 revolving line of credit with
Carnegie Capital, LTD, an affiliate of Jugal K. Taneja, Chief Executive Officer
and Chairman of the Board of the Company, to provide a source of funding for
cash requirements directly related to Go2's Registration Statement. The note
bears interest at 10% per annum. Principal and interest on the note is due and
payable in full upon the successful completion of a public offering of Go2's
common stock. Go2's public offering was completed in November 2000 and in
accordance with the revolving line of credit agreement, the outstanding balance
was paid in full. As of September 30, 2000, the outstanding principal balance on
this note was $45,000.
In June 2000, Go2 established a $100,000 revolving line of credit with
Joseph Zappala, a Director of DrugMax.com, Inc., an affiliate of the Company and
the President of Go2Pharmacy.com,
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Inc., a Delaware corporation, to provide a source of funding for cash
requirements directly related to Go2's registration statement. The note bears
interest at 10% per annum. Principal and interest on the note is due and payable
in full upon the successful completion of a public offering of Go2's common
stock. Go2's public offering was completed in November 2000 and in accordance
with the revolving line of credit agreement, the outstanding balance was paid in
full. As of September 30, 2000, the outstanding principal balance on this note
was $45,000.
In July 2000, Herbal sold substantially all of its assets relating to the
distribution of veterinary products, which primarily consisted of its inventory
and its customer base to Labelclick.com, Inc., an affiliate of the Company, for
a total sales price of $500,000. The Company owns approximately 11.9% of the
issued and outstanding common stock of Labelclick.com, Inc. Payment was in the
form of $75,000 in cash and two promissory notes totaling $425,000. The first
promissory note is in the principal amount of $75,000 and bears interest at 10%
per annum. Principal and interest are payable monthly commencing November 27,
2000, in the amount of $7,500 per month until the note is paid in full. The
second promissory note is in the principal amount of $350,000 and bears interest
at 10% per annum. Principal and interest are payable (i) upon the completion of
an initial public offering of common stock of Labelclick.com, Inc. which shall
be made within twelve months from July 31, 2000, or (ii) if the note is not paid
in full within twelve months from July 31, 2000, then payments are to be made
monthly in the amount of $12,372.99 per month until the note is paid in full.
The notes are secured by the business assets of Labelclick.com, Inc.
On November 7, 2000, the Securities and Exchange Commission declared Go2's
registration of 1,000,000 shares of its common stock to be effective. The
registration was affected through the filing of Registration Statement No. 333-
92849 on Form SB-2 with the Securities and Exchange Commission. Go2's initial
public offering, pursuant to its registration, was successfully completed on
November 14, 2000. In conjunction with the offering, 1,000,000 share of common
stock, $.01 par value, of Go2 were sold to the public for net proceeds of
$6,655,705 to Go2. Simultaneously with and conditioned upon the offering, Go2
acquired the Delaware corporation, Go2Pharmacy.com, Inc., in exchange for
3,000,000 shares of its common stock. Subsequent to the offering, the Company
continues to own 3,000,000 shares, or 42.8% of the common stock of Go2.
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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. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed with this report:
2.1 Merger Agreement By And Among Go2Pharmacy.com, Inc. (Florida) And
Go2Pharmacy.com, Inc. (Delaware), dated June 26, 2000. (1)
3.1 Articles of Incorporation of Direct Rx Healthcare, Inc., filed January 27,
1998. (2)
3.2 Articles of Amendment to Articles of Incorporation of Nu-Wave Health
Products, Inc., dated August 11, 1998. (3)
3.3 Articles of Amendment to Articles of Incorporation of Dynamic Health
Products, Inc., filed September 1, 1998. (4)
3.4 Articles of Restatement of the Articles of Incorporation of Dynamic Health
Products, Inc., filed April 16, 1999. (4)
10.1 Employment Agreement between the Company and Paul Santostasi dated June
12, 1998. (4)
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10.2 Employment Agreement between the Company and Jugal K. Taneja dated March
15, 1999. (4)
10.3 Employment Agreement between the Company and Dr. Kotha S. Sekharam dated
March 15, 1999. (4)
10.4 Loan And Security Agreement between Dynamic Health Products, Inc. and
Innovative Health Products, Inc. and The CIT Group/Credit Finance, Inc.
dated February 2, 1999. (4)
10.5 Line of Credit Agreement in favor of First Community Bank of America from
the Company, dated October 4, 1999. (5)
27.1 Financial Data Schedule (for SEC use only).
____________
(1) Incorporated by reference to Go2Pharmacy, Inc.'s Registration
Statement No. 333-92849 on Form SB-2, as filed with the SEC on July
25, 2000.
(2) 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.
(3) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1998, file number 0-23031,
filed in Washington, D.C.
(4) Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1999, file number
0-23031, filed in Washington, D.C.
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1999, file number
0-23031, filed in Washington, D.C.
(b) Reports on Form 8-K.
During the six months ended September 30, 2000, the Company filed two
reports on Form 8-K.
Form 8-K dated May 9, 2000, with respect to a change in the Company's
certifying accountants to Brimmer, Burek & Keelan LLP, for the fiscal year ended
March 31, 2000.
Form 8-K/A dated June 5, 2000, with respect to a change in the Company's
certifying accountants to Brimmer, Burek & Keelan LLP, for the fiscal year ended
March 31, 2000.
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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: December 27, 2000 By: /s/ Jugal K. Taneja
-------------------
Jugal K. Taneja
Chairman of the Board, Chief
Executive Officer, and Director
Date: December 27, 2000 By: /s/ Cani I. Shuman
-------------------
Cani I. Shuman
Chief Financial Officer
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