UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-23031
DYNAMIC HEALTH PRODUCTS, INC.
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(Name of small business issuer in its charter)
STATE OF FLORIDA 34-1711778
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(State of or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
6950 BRYAN DAIRY ROAD, LARGO, FLORIDA 33777
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(Address of Principal Executive Officers) (Zip Code)
Issuer's telephone number: (727) 544-8866
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE.
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON CAPITAL STOCK
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(Title of Class)
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers
in response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $40,936,240.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, cannot be determined. There is currently no established
trading market for the common stock of the Company, and the shares are not
presently listed, therefore aggregate market value cannot be determined.
Number of shares outstanding of the Issuer's common stock at $.01 par
value as of July 10, 2000 was 2,917,224 (exclusive of Treasury Shares).
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Dynamic Health Products, Inc. (the "Company"), was incorporated on
January 27, 1998, as a Florida corporation under the name Direct Rx Healthcare,
Inc. In April 1998, its name was changed to Nu-Wave Health Products, Inc. and in
August 1998, its name was changed to Dynamic Health Products, Inc.
The Company's predecessor, Direct Rx, Inc., an Ohio corporation
("Direct Rx"), was formed in 1992. In September 1995, Direct Rx acquired an 80%
interest in Nu-Wave Health Products, Inc., a Florida corporation ("Nu-Wave"),
which manufactured non-prescription medications, nutritional supplements, and
health and beauty care products. On July 1, 1997, Direct Rx acquired the
remaining shares of Nu-Wave. In January 1998, Direct Rx changed it domicile from
Ohio to Florida. After the domicile change, the Company changed its name to
Direct Rx Healthcare, Inc., and later to Dynamic Health Products, Inc., its
current name. After the domicile change, Nu-Wave was merged into the Company.
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 through its wholly-owned subsidiary, Go2Pharmacy.com, Inc.,
a Florida corporation incorporated in September 1985, and acquired by the
Company in June 1998, creates, manufacturers, and packages a wide variety of
proprietary and non-proprietary dietary supplements, over-the-counter drugs, and
health and beauty care products. References in this Annual Report on Form 10-KSB
refer to the Company and its subsidiaries as "Company," unless otherwise
indicated. Although the Company manufactures its own "branded" products that it
markets and distributes through its system, the Company's primary business is
the contract manufacture of products for others. Some of the Company's branded
products which it is currently manufacturing and marketing are "Nutrisure" meal
replacement powder, "Physician's Pharmaceuticals" dietary supplements and
"Arth-Aid" roll-on and cream for arthritis. The channels of distribution for its
proprietary products and the channels of distribution for the products it
manufactures for others include health food, drug store, convenience and mass
market stores, and direct marketing through distributors and catalog sales. The
Company has two manufacturing facilities in the greater Tampa Bay area.
The Company has grown primarily through acquisitions. The Company had
developed sales orders in excess of its manufacturing capacity and, in June
1998, acquired through a merger with a wholly-owned subsidiary of the Company,
Energy Factors, Inc. ("Energy Factors"), a Florida corporation, which had a
33,222 square foot office, laboratory, manufacturing and warehouse facility
located in Largo, Florida, with substantial excess manufacturing capacity. After
the acquisition, the Company changed the name of Energy Factors to Innovative
Health Products, Inc. and in February 2000, its name was changed to
Go2Pharmacy.com, Inc. ("Go2Pharmacy").
The Company's second manufacturing facility, also located in the
greater Tampa Bay area, includes 9,694 square feet of leased space, and is used
primarily to manufacture over-the-counter products, creams and lotions. This
facility is registered with the FDA to manufacture and package over-the-counter
drugs.
Currently, the Company has the manufacturing capability to produce
approximately 270 million tablets and capsules and four million bottles
annually. The Company, on average, operates its manufacturing facilities one
shift per day, five days per week. At times, certain of the Company's packaging
lines or capsule and tablet production lines operate during a second shift, as
demand warrants. The Company believes it can double sales volumes without the
necessity of expanding its current facilities; an increase of production would
require additional space for warehousing and shipping operations but would not
require substantial capital investment.
The Company operates flexible manufacturing lines which enable it to
shift output efficiently among various pieces of equipment depending upon such
factors as batch size, tablets or capsule count, and labeling requirements. The
Company strives to fulfill and ship all orders within 30-45 days.
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In June 1998, the Company acquired all of the issued and outstanding
capital stock of Becan Distributors, Inc. ("Becan"), incorporated in November
1996, in Ohio. Becan is a wholesale distributor of pharmaceuticals,
over-the-counter drugs, and health and beauty care products. In August 1998, the
Company, through Becan, formed Discount Rx, Inc. ("Discount"), a Louisiana
corporation. Discount is a wholesale distributor of pharmaceuticals,
over-the-counter drugs, and health and beauty care products. Becan and Discount
also provide distribution channels for the Company's branded products. The
Company operated two distribution centers, one of which was a 2,600 square foot
leased facility located in Pittsburgh, Pennsylvania, used by Becan, and the
other was a 1,250 square foot leased facility located in Mandeville, Louisiana,
used by Discount. Both of these facilities were used for the wholesale
distribution of pharmaceuticals and health and beauty care products by Becan and
Discount. The Company subsequently sold Becan and its subsidiary, Discount, to
DrugMax.com, Inc. ("DrugMax"), formerly Nutriceuticals.com, Inc., on November
26, 1999.
In September 1998, the Company acquired J.Labs, Inc. ("J.Labs"),
incorporated in April 1997 as a Florida corporation. The operations of J.Labs
consist of the procurement of trademarks and product rights for the Company's
branded products.
In September 1998, the Company formed Incredible Products of Florida,
Inc. ("Incredible"), a Florida corporation, to market dietary supplements
through distributors and radio infomercials. In May 1999, the Company formed
Dynamic Life, Inc. ("Dynamic Life"), as a Florida corporation. In March 2000,
Incredible was merged into Dynamic Life. Dynamic Life markets dietary
supplements primarily through distributors and through direct marketing to
consumers.
In December 1998, the Company formed Herbal Health Products, Inc.
("Herbal"), as a Florida corporation. Herbal acquired the Florida operations of
a Colorado company which markets dietary pet supplements primarily to
Veterinarians.
In February 2000, through Dynamic Life, the Company formed Dynamic Life
Asia, LLC ("Dynamic Asia"), a Florida limited liability company. Also in
February 2000, through Dynamic Asia, the Company formed Dynamic Life Korea Ltd.
("Dynamic Korea"), a Korean corporation, to market dietary supplements primarily
through distributors and through direct marketing to consumers.
The Company manufactures most of the products sold and distributed by
Dynamic Life, Dynamic Korea and Herbal.
In June 2000, through Go2Pharmacy, the Company formed Breakthrough
Engineered Nutrition, Inc. ("Breakthrough"), as a Florida corporation, to
market, through distributors, a new branded product line "Lean Protein". Under
this new line, Breakthrough has introduced zero carbohydrate, high protein snack
chips.
MARKETING AND SALES
The Company's branded products and the products it manufactures for
others are marketed directly to its wholesale customers by the Company's
in-house salespeople. The Company wholesales dietary supplements,
over-the-counter drugs, and health and beauty care products manufactured by the
Company and others, to independent pharmacies, regional and national chain
drugstores, alternate care facilities, mail order facilities, mass
merchandisers, deep discounters and brokers. The products the Company
manufactures for others are distributed by them to health food and drug stores,
mass merchandisers, and by direct marketing including Internet sales. The
Company's dietary supplements, over-the-counter drugs, and health and beauty
care products are also marketed directly to consumers by the Company's in-house
salespeople primarily through direct mail.
The Company's branded non-veterinary products are marketed and
distributed to health food, drug and convenience stores and directly to
consumers through distributors. Its branded pet dietary supplement products are
marketed and distributed through veterinary clinics, feed stores, boarding
facilities, animal trainers, and mail order. The Company's veterinary products
are marketed directly to consumers by direct mail and to wholesale purchasers by
the Company's salespeople.
<PAGE>
COMPETITION
The manufacturing, wholesale, retail and distribution industries in
which the Company operates are highly competitive. Numerous companies, many of
which have greater size and greater financial, personnel, distribution and other
resources than the Company, compete with the Company in its development,
manufacture, distribution, wholesaling and retailing businesses. THE NUTRITION
BUSINESS JOURNAL estimates that there are 1,050 manufacturers and branded
marketers of dietary supplements in the United States with at least $500,000 in
annual sales. The Nutrition Business Journal's 1997 database includes 16
companies with over $100 million in revenues, representing 55% of the dietary
supplement market, up from 12 companies and 44% of the market in the 1996
analysis.
The Company's branded products face substantial competition from broad
line manufacturers, major private label manufacturers and, more recently, large
pharmaceutical companies. Increased competition from such companies could have a
material adverse affect on the Company because such companies have greater
financial and other resources available to them and possess manufacturing,
distribution and marketing capabilities far greater than those of the Company.
The Company competes on the basis of product quality, competitive
pricing, its ability to develop new products, and customer service. The
Company's ability to compete favorably with its competitors with respect to its
branded products will depend primarily upon its development of brand recognition
across multiple distribution channels, its ability to quickly develop new
products with market potential, to successfully advertise, market and promote
its products, as well as its product quality and the development of a strong and
effective distribution network.
BACKLOG
The Company's revenues are processed through its system from sales
orders generated and issued by the Company's customers. The Company fulfills the
sales orders on a turn-around time of between 30-45 days. As such, at any given
point in time, the Company experiences a backlog of unfilled sales orders. At
March 31, 2000, the Company had approximately $534,000 in backlog sales orders.
PRODUCT DEVELOPMENT
Generally, the more novel and unique the Company's products are, the
greater the profit margins. The Company's product development team works closely
with its customers to understand their needs, their strengths and their
objectives to be met, thus involving the team to create products with more
unique sales points. Products are developed by applying the latest technology to
meet end user's product desires. The Company's response time in developing both
its own proprietary products and products for others is critical and enables the
Company to take advantage of consumer trends and preferences. For example, the
Company developed a touch-free roll-on for arthritis so users need not touch the
irritating active ingredient with their fingers.
RESEARCH AND DEVELOPMENT
Dr. Sekharam, the Company's President, provides guidance and direction
for the research and development team. The Company's research and development
department, located in its Largo, Florida facility, is staffed by three
full-time chemists. The department is responsible for the development of new
concepts and formulations, both for the Company's branded products and for
products manufactured for others. The technical staff prepares cost estimates
and samples based on these formulations, refining them as necessary. They also
develop operational procedures and conduct pilot operations prior to the final
manufacture of the product. Nutritional information, as well as label
requirements, are prepared by the department's regulatory staff personnel.
The laboratory is equipped with modern up-to-date laboratory test
equipment, including high pressure liquid chromatography, atomic absorption
spectroscopy, as well as instruments to test pH, viscosity, moisture, gradient
sizing, ash, melting point, refractive index, tablet hardeners and
disintegration.
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The laboratory includes stability chambers to test both long-term and
accelerated shelf life of each product. Microbiological tests for total plate
count and coliforms are also conducted.
Research and development expenses incurred for the Company's branded
products and for products which the Company manufactures for others are either
absorbed by the Company and charged directly to expense, passed on to the
customer in the customer's product cost or charged to the customer.
TRADEMARKS
The Company utilizes various federally registered trademarks including
"Nutrisure," "Physician's Pharmaceuticals" and "Arth-Aid." The Company believes
that protecting some of its trademarks is crucial to its business strategy of
building strong brand name recognition and that such trademarks have significant
value in the marketing of its products.
The Company's policy is to pursue registrations of all the trademarks
associated with its key products. The Company relies on common law trademark
rights to protect its unregistered trademarks. They include Vitality Systems,
Vitality Pets, and Liva Life. Common law trademark rights generally are limited
to the geographic area in which the trademark is actually used, while a United
States federal registration of a trademark enables the registrant to stop the
unauthorized use of the trademark by any third party anywhere in the United
States. Furthermore, the protection available, if any, in foreign jurisdictions
may not be as extensive as the protection available to the Company in the United
States.
Although the Company seeks to ensure that it does not infringe on the
intellectual property rights of others, there can be no assurance that third
parties will not assert intellectual property infringement claims against the
Company. Any infringement claims by third parties against the Company may have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
PRINCIPAL SUPPLIERS AND SOURCES OF SUPPLY
The Company obtains all of its raw materials for the manufacture of its
products from third party suppliers. Many of the raw materials used in the
Company's products are harvested internationally. The Company does not have
contracts with any suppliers committing such suppliers to provide materials
required for the production of its products. There can be no assurance that
suppliers will provide raw materials needed by the Company in the quantities
requested or at a price the Company is willing to pay. Because the Company does
not control the actual production of these raw materials, it is also subject to
delays caused by interruption in production of materials based on conditions not
within its control. Such conditions include job actions or strikes by employees
of suppliers, weather, crop conditions, transportation interruptions and natural
disasters or other catastrophic events. The inability of the Company to obtain
adequate supplies of raw materials for its products at favorable prices, or at
all, could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
During the Yuletide season, many of the Company's suppliers are closed.
As such, the Company makes adjustments in raw material inventory levels to
minimize shortages during that time.
QUALITY CONTROL
The manufacture of the Company's products is in accordance with the
Good Manufacturing Practices ("GMP's") 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 "Business - Government Regulation" below.
The Company maintains a modern well-equipped manufacturing facility,
which has the capability of adhering to 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 and required
<PAGE>
samples are retained. The material then is processed by formulating, blending,
encapsulating, and/or tableting when required by the formula.
GOVERNMENT REGULATION
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of the Company's products are subject to regulation by
numerous government agencies, the most active of which are the U.S. Food and
Drug Administration (the "FDA"), which regulates the Company's products under
the Federal Food, Drug and Cosmetic Act (the "FFDCA") and regulations
promulgated thereunder and the U.S. Federal trade Commission ("FTC") which
regulates the advertising of the Company's products under the Federal Trade
Commission Act ("FTCA"). The Company's products are also subject to regulation
by, among other regulatory agencies, the Consumer Product Safety Commission, the
U.S. Department of Agriculture (the "USDA") and the Environmental Protection
Agency (the "EPA") and Occupational Safety and Health Act ("OSHA"). The
manufacture, labeling and advertising of the Company's products are also
regulated under the Federal Occupational Safety and Health Act and by various
state and local agencies as well as each foreign country to which the Company
distributes its products.
The regulation of dietary supplement labeling claims by the FDA is
governed by the FFDCA and the recent Dietary Supplement Health and Education Act
of 1994 ("DSHEA"). Under Section 6 of the DSHEA, structure/function claims are
permitted in dietary supplement labeling without prior authorization by the FDA,
provided that the manufacturer has substantiation for the claims and complies
with certain notification and disclaimer requirements. The DSHEA amended the
FTCA and set up a new framework for FDA regulation of dietary supplements. It
also created an office in the National Institutes of Health to coordinate
research on dietary supplements, and it called on President Clinton to set up an
independent dietary supplement commission to report on the use of claims in
dietary supplement labeling. In passing the DSHEA, Congress recognized first,
that many people believe that dietary supplements offer health benefits and
second, that consumers want a greater opportunity to determine whether
supplements may help them. The law essentially gives dietary supplement
manufacturers freedom to market more products as dietary supplements and provide
information about their products' benefits.
Traditionally, the term "dietary supplements" referred to products made
of one or more essential nutrients, such as vitamins, minerals, and protein. But
DSHEA broadened the definition to include, with some exceptions, any product
intended for ingestion as a supplement to the diet. This includes vitamins,
minerals, herbs, botanicals, and other plant-derived substances, amino acids and
concentrates, metabolites, constituents and extracts of these substances. DSHEA
requires manufacturers to include the words "dietary supplement" on product
labels. Also, commencing in March 1999, a "Supplement Facts" panel is required
on the labels of most dietary supplements. The substantial majority of the
products marketed or manufactured by the Company are regulated as dietary
supplements under the FDCA.
The FDA oversees product safety, manufacturing and product information,
such as claims in a product's labeling, package inserts, and accompanying
literature. One of the most important functions of the FDA relates to drugs. A
drug, which sometimes can be derived from plants used as traditional medicine,
is an article that, among other things, is intended to diagnose, cure, mitigate,
treat, or prevent diseases. Before marketing, drugs must undergo clinical
studies to determine their effectiveness, safety, possible interactions with
other substances, and appropriate dosages; the FDA must review this data and
authorize the drugs' use before they are marketed. Although the Company does not
develop drugs, it manufactures over-the-counter drugs for others. The Company's
manufacture of over-the-counter drugs must be in compliance with all FDA
guidelines and FDA enforced GMP's for those products as set forth in official
monographs of the U.S. Pharmacopeia and other applicable laws enforced by the
FDA.
The FDA does not authorize, endorse, or test dietary supplements;
however, a product sold as a dietary supplement and touted in its labeling as a
new treatment or cure for a specific disease or condition would be considered an
unauthorized - and thus illegal - drug. Labeling changes consistent with the
provisions in DSHEA would be required to maintain the product's status as a
dietary supplement.
As with food, federal law requires manufacturers of dietary supplements
to insure that the products they put on the market are safe. Dietary supplement
manufacturers wanting to market a new ingredient (that is, an ingredient not
marketed in the United States before 1994) have two options. They can first
submit to
<PAGE>
the FDA, at least 75 days before the product is expected to go to market,
information that supports their conclusion that the new ingredient can
reasonably be expected to be safe, meaning that the new ingredient does not
present a significant or unreasonable risk of illness or injury under conditions
of use recommended in the product's labeling. The information the manufacturer
submits becomes publicly available 90 days after the FDA receives it. The second
option for manufacturers is that they petition the FDA to establish the
condition under which the new dietary ingredient would reasonably be expected to
be safe.
Under DSHEA and previous food labeling laws, supplement manufacturers
are permitted to use, when approved by the FDA, three types of claims:
nutrient-content claims, disease claims, and nutrition-support claims, which
include "structure-function claims." Nutrient-content claims describe the level
of a nutrient in a food or dietary supplement. For example, a supplement
containing at least 200 mg of calcium per serving could carry the claim "high in
calcium." A supplement with at least 12 mg per serving of Vitamin C could state
on its label, "excellent source of Vitamin C."
Disease claims show a link between a substance and a disease or
health-related condition. The FDA authorizes disease claims based on a review of
the scientific evidence. Alternatively, after the FDA is notified, the claims
may be based on an authoritative statement from certain scientific bodies, such
as the National Academy of Sciences, that shows or describes a well-established
diet-to-health link. For instance, it is permissible to advertise a link between
calcium and a lower risk of osteoporosis, if the supplement contains sufficient
amounts of calcium.
Nutrition-support claims can describe a link between a nutrient and the
deficiency disease that can result if the nutrient is lacking in the diet. For
example, the label of a Vitamin C supplement could state that Vitamin C prevents
scurvy. When these types of claims are used, the label must mention the
prevalence of the nutrient-deficiency disease in the United States and must also
conform to applicable FDA labeling guidelines.
Claims can also refer to the supplement's effect on the body's
structure or function, including its overall effect on a person's well being.
These are known as structure-function claims. Examples of structure-function
claims are: "calcium builds strong bones," "antioxidants maintain cell
integrity," "fiber maintains bowel regularity."
Under DSHEA, manufacturers are also permitted to use structure-function
claims without FDA authorization. These claims are based on the manufacturer's
review and interpretation of scientific literature. Like all label claims,
structure-function claims must be true and not misleading. Structure-function
claims must be accompanied by the disclaimer "This statement has not been
evaluated by the Food and Drug Administration. This product is not intended to
diagnose, treat, cure, or prevent any disease." Manufacturers who plan to use a
structure-function claim on a particular product must inform the FDA of the use
of the claim no later than 30 days after the product is first marketed. The
manufacturer must be able to substantiate its claim. If the submitted claims
promote the product as drugs instead of supplements, the FDA can advise the
manufacturer to change or delete the claim.
Recently, the FDA has identified several problems where manufacturers
were buying herbs, plants and other ingredients without first adequately testing
them to determine whether the product they ordered was actually what they
received or whether the ingredients were free from contaminants. The FDA has
advised consumers to look for ingredients in products with the U.S.P. notation,
which indicates the manufacturer followed standards established by the U.S.
Pharmacopoeia, and to consider the name of the manufacturer or distributor,
stating that supplements made by a nationally known food and drug manufacturer
have likely been made under tight controls because these companies already have
in place manufacturing standards for their other products.
Claims made for the Company's dietary supplement products may include
statements of nutritional support and health and nutrient content claims when
authorized by the FDA or otherwise allowed by law. The FDA's interpretation of
what constitutes an acceptable statement of nutritional support may change in
the future thereby requiring that the Company revise its labeling. The FDA
recently issued a proposed rule on what constitutes permitted structure/function
claims as distinguished from prohibited disease claims. Although the Company
believes its product claims comply with the law, depending on the content of the
final regulation, it may need to revise its labeling.
<PAGE>
The FDA issued final dietary supplement labeling regulations in 1997
that required a new format for product labels and necessitated revising dietary
supplement product labels. All companies in the dietary supplement industry were
required to comply with these labeling regulations in March 1999. The FDA has
also announced that it is considering promulgating new GMP's, specific to
dietary supplements. Such GMP's, if promulgated, may be significantly more
rigorous than currently applicable GMP requirements and contain quality
assurance requirements similar to GMP requirements for drug products. Therefore,
the Company may be required to expend additional capital resources on
manufacturing in the future in order to comply with the law. The failure of the
Company to comply with applicable FDA regulatory requirements could result in,
among other things, injunctions, product withdrawals, recalls, product seizures,
fines, and criminal prosecutions.
The Company cannot predict the nature of any future laws, regulations,
interpretations or applications, nor can it determine what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not capable of reformulation, additional
record keeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
The Company's advertising of its dietary supplement products is subject
to regulation by the FTC under the FTCA. The FTCA prohibits unfair methods of
competition and unfair or deceptive acts or practices in or affecting commerce.
The FTCA provides that the dissemination or the causing to be disseminated of
any false advertisement pertaining to drugs or foods, which would include
dietary supplements, is an unfair or deceptive act or practice. Under the FTC's
Substantiation Doctrine, an advertiser is required to have a "reasonable basis"
for all objective product claims before the claims are made. Failure to
adequately substantiate claims may be considered either deceptive or unfair
practices. Pursuant to this FTC requirement the Company is required to have
adequate substantiation for all material advertising claims made for its
products.
In recent years the FTC has initiated numerous investigations of
dietary supplement and weight loss products. The FTC is reexamining its
regulation of advertising for dietary supplements and has announced that it may
issue a guidance document to assist supplement marketers in understanding and
complying with the substantiation requirement. Upon release of this guidance
document the Company will be required to evaluate its compliance with the
guideline and may be required to change its advertising and promotional
practices. The Company may be the subject of investigation in the future. The
FTC may impose limitations on the Company's advertising of its products. Any
such limitations could materially adversely affect the Company's ability to
successfully market its products.
The FTC has a variety of processes and remedies available to it for
enforcement, both administratively and judicially, including compulsory
processes, cease and desist orders, and injunctions. FTC enforcement can result
in orders requiring, among other things, limits on advertising, corrective
advertising, consumer redress, divestiture of assets, rescission of contracts
and such other relief as may be deemed necessary. A violation of such orders
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
Advertising, labeling, sales and manufacturing of dietary supplements
and conventional foods are also regulated by state and local authorities. There
can be no assurance that state and local authorities will not commence
regulatory action which could restrict the permissible scope of the Company's
product claims or its ability to sell in that state.
Governmental regulations in foreign countries where the Company may
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors for those countries.
These distributors are independent contractors over whom the Company has limited
control.
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The Company manufactures certain products pursuant to contracts with
customers who distribute the products under their own or other trademarks. Such
private label customers are subject to government regulations in connection with
their purchase, marketing, distribution and sale of such products. The Company
is subject to government regulations in connection with its manufacture,
packaging and labeling of such products. However, the Company's private label
customers are independent companies, and their labeling, marketing and
distribution of such products is beyond the Company's control. The failure of
these customers to comply with applicable laws or regulations could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
The Company may be subject to additional laws or regulations by the FDA
or other federal, state or foreign regulatory authorities, the repeal of laws or
regulations which the Company considers favorable, such as the Dietary
Supplement Health and Education Act of 1994, or more stringent interpretations
of current laws or regulations, from time to time in the future. The Company is
unable to predict the nature of such future laws, regulations, interpretations
or applications, nor can it predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on its
business in the future. They could, however, require the reformulation of
certain products to meet new standards, the recall or discontinuance of certain
products not able to be reformulated, imposition of additional record keeping
requirements, expanded documentation of the properties of certain products,
expanded or different labeling and scientific substantiation. Any or all of such
requirements could have a material adverse affect on the Company's business,
financial condition, results of operations and cash flows.
In house training is provided to all applicable employees and safety
meetings are frequently held to ensure compliance with regulations. Thus far,
the Company has not incurred additional expenses in order to comply with FDA
requirements. The Company believes that it is substantially in compliance with
all FDA record keeping and reporting requirements and all environmental
regulations affecting the Company.
INDUSTRY SEGMENTS
For the year ended March 31, 2000, the Company had the following
revenues and gross profits from its distribution and manufacturing segments:
REVENUE AS GROSS PROFIT AS
A PERCENTAGE A PERCENTAGE
OF TOTAL GROSS OF SEGMENT
REVENUES REVENUES PROFIT REVENUES
----------- ------------ ----------- ---------------
Distribution $35,489,000 86.7% $ 1,832,000 5.2%
Manufacturing 5,447,000 13.3% 1,641,000 30.1%
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Total $40,936,000 $ 3,473,000
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EMPLOYEES
As of March 31, 2000, the Company had 65 employees. Of such employees,
12 were engaged in marketing and sales, 36 were devoted to production and
distribution and 17 were responsible for management and administration. None of
the Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
In each case, the employees are permitted to participate in employee
benefit plans of the Company that may be in effect from time to time, to the
extent eligible, and each employee may be entitled to receive an annual bonus as
determined at the sole discretion of the Company's Board of Directors based on
the Board's evaluation of the employee's performance and the financial
performance of the Company. Each of the employees are eligible for grant of
stock options in accordance with the provisions of the Company's 1999 Stock
Option Plan, as determined by the Administrator of the Plan.
In March 1999, the Company's Board of Directors adopted the Company's
1999 Stock Option Plan, which has been approved by the Company's shareholders.
The purpose of the 1999 Plan is to enable the Company to attract and retain
top-quality executive employees, officers, directors and consultants and to
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provide such executive employees, officers, directors and consultants with an
incentive to enhance stockholder return. The 1999 Plan provides for the grant to
officers, directors, or other key employees and consultants of the Company, of
options to purchase up to an aggregate of 1,500,000 shares of common stock.
DISPOSITION
On November 26, 1999, the Company sold a significant subsidiary, Becan,
to DrugMax, an affiliate of Jugal K. Taneja, a principal shareholder, Chairman
of the Board, and Chief Executive Officer of the Company. Jugal K. Taneja is a
principal shareholder and a director of DrugMax. In connection with the sale, in
exchange for all of the outstanding shares of Becan common stock, the Company
received the sum of $2,000,000 in cash, and 2,000,000 (post October 1999
one-for-two reverse stock split) shares of DrugMax common stock. In addition,
1,000,000 shares of common stock of DrugMax were deposited into escrow for
future issuance to the Company upon the attainment by Becan of certain financial
targets for the fiscal years ending March 31, 2000 and 2001. Becan did not
attain its financial target for the fiscal year ending March 31, 2000 and as a
result 500,000 shares were returned from escrow to DrugMax. For the year ended
March 31, 1999 and the period from April 1, 1999 through November 26, 1999,
Becan had net revenues of approximately $31.1 million and $33.7 million,
respectively and net income of approximately $94,000 and $23,000, for such
periods.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for "forward-looking statements" to encourage companies
to provide prospective information, so long as such information is identified as
forward-looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statement(s). The Company
desires to take advantage of the safe harbor provisions of the Act.
Except for historical information, the Company's Annual Report on Form
10-KSB for the year ended March 31, 2000, the Company's quarterly reports on
Form 10-QSB, the Company's current reports on Form 8-K, periodic press releases,
as well as other public documents and statements, may contain forward-looking
statements within the meaning of the Act.
In addition, representatives of the Company may, from time to time,
participate in speeches and calls with market analysts, conferences with
investors and potential investors in the Company's securities, and other
meetings and conferences. Some of the information presented in such speeches,
calls, meetings and conferences may be forward-looking within the meaning of the
Act.
It is not reasonably possible to itemize all of the many factors and
specific events that could affect the Company and/or the Company's industry as a
whole. In some cases, information regarding certain important factors that could
cause actual results to differ materially from those projected, forecasted,
estimated, budgeted or otherwise expressed in forward-looking statements made by
or on behalf of the Company may appear or be otherwise conveyed together with
such statements. The following additional factors (in addition to other possible
factors not listed) could affect the Company's actual results and cause such
results to differ materially from those projected, forecasted, estimated,
budgeted or otherwise expressed in forward-looking statements made by or on
behalf of the Company.
GOVERNMENT REGULATION. The manufacture, packaging, labeling,
advertising, promotion, distribution and sale of the Company's products are all
subject to extensive regulation by numerous state and government agencies.
Because of the broad language of the laws applicable to the Company's business,
it is difficult for the Company to remain in strict compliance, although the
Company employs a full-time compliance person for that purpose. If the Company
fails to or is unable to comply with applicable laws and governmental
regulations, the Company's business could be adversely affected. See "Business -
Government Regulation."
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POSSIBLE ADVERSE PUBLICITY. The Company's is dependent on consumers'
perceptions and may be adversely affected by publicity associated with illness
or other adverse effects from the consumption of its products (or similar
products distributed by other companies) and future reports of research that are
perceived as less favorable or that question earlier research. Future scientific
research or publicity may not be favorable to the dietary supplement industry or
to any particular product, and may not be consistent with earlier favorable
research or publicity. The Company is highly dependent upon consumers'
perceptions of the safety and quality of its products as well as dietary
supplements distributed by other companies. Thus, the mere publication of
reports asserting that those products may be harmful or questioning their
efficacy could adversely effect the Company regardless of whether such reports
are scientifically supported or whether the claimed harmful effects would be
present at the dosages recommended for such products.
EXPOSURE TO PRODUCT LIABILITY. The Company faces an inherent risk of
exposure to product liability claims in the event that the use of its products
results in injury. Management believes that the Company has adequate insurance,
but if it does not, product liabilities relating to its products could adversely
effect the Company. Although many of the ingredients in the Company's products
are vitamins, minerals, herbs and other substances for which there is a long
history of human consumption, some of its products contain ingredients for which
no such history exists. In addition, although management believes all of the
Company's products are safe when taken as directed, there is little long-term
experience with human consumption of certain of these product ingredients in
concentrated form. Accordingly, the Company cannot assure that its products,
even when used as directed, will have the effects intended or will not have
harmful side effects. Any such unintended effects may result in adverse
publicity or product liability claims that could adversely effect the Company.
IMPORTANCE OF DEVELOPMENT OF NEW PRODUCTS. Products currently
experiencing strong popularity and rapid growth may not maintain their sales
over time. As a result, it will be important for the Company to be able to
develop new products. The Company cannot assure that its efforts to develop new
produces will be successful.
COMPETITION. The dietary supplement industry is highly competitive.
Numerous companies, many of which have greater size and greater financial,
personnel, manufacturing, distribution, marketing and other resources than the
Company, compete with us in the development, manufacture and marketing of
dietary supplements. Competition from such companies could have a material
adverse effect on the Company. The Company also faces competition in both the
health food store and mass market distribution channels from private label
dietary supplements offered by health and natural food store chains, drugstore
chains, mass merchandisers and supermarket chains. See "Business - Competition."
RAW MATERIALS AVAILABILITY. The Company obtains all of the raw
materials for the manufacture of its products from third-party suppliers. Many
of the raw materials used in its products are harvested internationally. The
Company cannot assure that suppliers will provide the raw materials needed in
the quantities requested or at a price the Company is willing to pay. Because
the Company does not control the actual production of these raw materials,
delivery to the Company is also subject to delays caused by interruption in
production of materials based on conditions not within the control of the
Company. The Company's inability to obtain adequate supplies of raw materials
for its products at favorable prices, or at all, could adversely effect the
Company's business.
MANUFACTURING RISKS. The Company's manufacturing operations are
dependent upon the continued operation of the Company's manufacturing facilities
in the Tampa Bay area of Florida. The operation of dietary supplement
manufacturing plants involves many risks, including the breakdown, failure or
substandard performance of equipment, natural and other disasters, and the need
to comply with the requirements of directives of government agencies, including
the FDA. In particular, our manufacturing facilities are located in central
Florida, a geographic area that has historically been prone to hurricanes, which
in some cases have been catastrophic. Any such damage or destruction could
aversely affect the Company.
LIMITED TRADEMARK PROTECTION: NO PATENTS. The Company's policy is to
pursue registrations for all of the trademarks associated with its key
proprietary products. The Company relies on common law trademark rights to
protect its unregistered trademarks as well as its trade dress rights. Common
law trademark rights generally are limited to the geographic area in which the
trademark is actually used, while
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a United States federal registration of a trademark enables the registrant to
stop the unauthorized use of the trademark by any third party anywhere in the
United States. The Company intends to register its trademarks in certain foreign
jurisdictions where its products are sold. However, the protection available, if
any, in such jurisdictions may not be as extensive as the protection available
to the Company in the United States. Also, because the Company has no patents on
its proprietary products, another company may replicate them.
INFRINGEMENT ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS. Although the
Company seeks to ensure that it does not infringe on the intellectual property
rights of others, the Company cannot assure that third parties will not assert
intellectual property claims against the Company. Infringement claims by third
parties against the Company may have a material adverse affect on the Company.
CONCENTRATION OF CUSTOMERS. For the year ended March 31, 2000, three
customers represented approximately 28% of revenues derived from manufacturing
operations. 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. Two customers represented approximately 32% of
revenues derived from distribution operations.
GENERAL RISKS
KEY PERSONNEL. As a small company with only 65 employees, the Company's
success depends on the services of its senior management team. If the Company
loses the services of one or more of these employees, the Company could be
materially adversely affected.
GROWTH MANAGEMENT. The Company believes that continued growth may
strain its management, operations, sales and administrative personnel and other
resources. In order to serve the needs of its existing and future customers the
Company intends to increase its workforce. The Company's ability to manage
further growth depends in part upon its ability to expand its operating,
management, information and financial systems, and production capacity, which
may significantly increase its future operating expenses. The Company cannot
assure that its business will grow in the future or that it will be able to
effectively manage its growth.
POSSIBLE FUTURE ACQUISITIONS. The Company expects to pursue additional
acquisitions in the future as a part of its business strategy. The Company
cannot assure that attractive acquisition opportunities will be available to it
or that it will be able to obtain financing for future acquisitions. If the
Company is unable to consummate future acquisitions, its business, financial
condition and operating results could be adversely affected.
Acquisitions involve numerous risks, including the risk that the risk
that the acquired business will not perform in accordance with expectations,
difficulties in the integration of the operations and products of the acquired
businesses with the Company's business, the diversion of management's attention
from other aspects of the Company's business, the risks associated with entering
geographic and product markets in which the Company has limited or no direct
prior experience, and the potential loss of key employees of the acquired
business arising out of such acquired business. Future acquisitions would likely
require additional financing, which would likely result in an increase in the
Company's indebtedness or the issuance of additional capital stock, which may be
dilutive to the Company's shareholders. In addition, to the extent the Company
has outstanding indebtedness under credit facilities, the Company is required to
incur indebtedness to consummate an acquisition, the Company must obtain the
consent of the lender prior to such acquisition.
The Company's acquisitions in June 1998 resulted in a significant
increase in the Company's intangible assets (goodwill) included on the Company's
balance sheet. Any future acquisitions may result in additional intangible
assets and related amortization expense. At March 31, 2000, the intangible
assets on the Company's balance sheet were approximately $1 million,
representing 5.8% of the Company's total assets at that date. If the Company
sells or liquidates the Company or part of its assets, the Company cannot assure
that the value of its intangible assets will be realized. In addition, the
Company continually evaluates whether events and circumstances have occurred
indicating that any portion of the remaining balance of the amount allocable to
the Company's intangible assets may not be recoverable. When factors indicate
that the
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amount allocable to the Company's intangible assets should be evaluated for
possible impairment, the Company may be required to reduce the carrying value of
such assets. Any future determination requiring the write-off of a significant
portion of unamortized intangible assets could have a material adverse effect on
the Company's operating results.
PROVISIONS ON THE PAYMENT OF DIVIDENDS. The Company has not declared
cash dividends on its common stock and the Company does not anticipate paying
cash dividends in the foreseeable future. Under the terms of the Company's
credit facilities, the Company is precluded from paying dividends.
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Articles
of Incorporation (the "Articles") and Bylaws (the "Bylaws"), certain sections of
the Florida Business Corporation Act, and the ability of the Board of Directors
to issue shares of preferred stock and to establish the voting rights,
preferences and other terms may be deemed to have an anti-takeover effect and
may discourage takeover attempts not first approved the Company's Board of
Directors, including takeovers which shareholders may deem to be in their best
interests.
CONTROL BY CERTAIN STOCKHOLDERS. Directors, executive officers and
related family members beneficially own approximately 70% of the outstanding
shares of the Company's common stock. Therefore, these stockholders will have
significant control over the election of the Company's directors and most of the
Company's corporate actions.
EXPOSURE TO NATURAL DISASTERS. The Company's Florida facilities are
located in the greater Tampa Bay area, which is prone to hurricanes. The
Company's business could be adversely affected should its ability to manufacture
products be impacted by such event.
GO2PHARMACY.COM, INC.
On December 15, 1999, Innovative Health Products, Inc. filed a
registration statement on Form SB-2 with the Securities and Exchange Commission
("SEC") for an initial public offering of 1,000,000 shares of its common stock.
On February 29, 2000, Innovative Health Products, Inc. changed its name to
Go2Pharmacy.com, Inc., by filing Articles of Amendment to Articles of
Incorporation. On May 12, 2000 and on June 28, 2000, Go2Pharmacy filed Amendment
No. 1 and Amendment No. 2, respectively, to its registration statement on Form
SB-2 with the SEC. The registration statement is subject to completion and there
can be no assurance as to the successful completion of the initial public
offering. Simultaneous and conditioned upon the offering, Go2Pharmacy.com, Inc.
will be acquiring the Delaware corporation Go2Pharmacy.com, Inc. in exchange for
3,000,000 shares of its common stock. In the event the offering is successful,
the Company will own 3,000,000 shares, or 42.8% of the common stock of
Go2Pharmacy.com, Inc. Reference is made to Go2Pharmacy.com, Inc.'s Registration
Statement No. 333-92849 on Form SB-2, as filed with the SEC on June 28, 2000.
FUTURE PLANS
Additional manufacturing and packaging equipment has been purchased
during the fiscal year ended March 31, 2000, to help meet the expanded capacity
requirements of its current and future business.
Management of the Company is considering acquiring manufacturing
companies, distribution companies, and marketing companies. In order to
accomplish its future plans, the Company is considering raising capital either
through private placement or an initial public offering.
ITEM 2. PROPERTIES.
The Company owns a 33,222 square foot office, manufacturing, research
and development, laboratory, packaging and warehouse facility located in Largo,
Florida. This facility serves as the Company's corporate headquarters, and is
utilized for the manufacture of tablets, capsules, liquids and powders. The
facility utilizes high speed encapsulating, tableting and production line
equipment and also houses the Company's graphic arts department which designs
and produces labels for products produced at this and the Company's
manufacturing facility in Tampa, Florida. The Largo, Florida facility is large
enough to handle large orders, but is still able to provide quick response to
customer needs. The
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Company's research and development department, also housed in this facility,
develops and improves both the Company's proprietary products and customer's
products.
The Company's facility 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. Additional manufacturing, warehousing, and shipping is performed at
this facility, consisting of approximately 9,694 square feet. This facility was
also being used by Dynamic Life and Herbal for offices, warehousing, and
shipping for their distribution operations. In June 1999, the operations of
Incredible and Herbal were relocated to the Company's facility in Largo,
Florida.
The Company leases a second property in Tampa, Florida that is being
utilized for additional storage and warehousing for its manufacturing
operations, consisting of approximately 3,600 square feet. This lease is for a
term of two years that expires on December 30, 2000, with an annual rental of
$15,300.
The Company also leases a property in Largo, Florida that is being
utilized for additional storage and warehousing for its manufacturing
operations, consisting of approximately 1,500 square feet. This lease was for a
term of one year that expired on May 14, 1999. The Company has an automatic
option to renew the lease from year to year for one year terms, with an annual
rental of $6,000. Since May 1999, the Company has been leasing the property on a
month to month basis.
In the judgment of management, the leases described above reflect rent
at current fair market value.
As of March 31, 2000, the Company had real property, equipment,
furniture, and leasehold improvements, net of accumulated depreciation, in the
approximate amount of $2,690,000.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the company is subject to litigation incidental to
its business including possible product liability claims. Such claims, if
successful, could exceed applicable insurance coverage. The Company is not
currently a party to any legal proceedings which it believes will have a
material adverse affect on its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is not listed for trading on The NASDAQ
Stock Market or any exchange and there is currently no established trading
market for its common stock.
As of June 29, 2000, there were approximately 390 stockholders of the
Company's common stock.
Historically, the Company has not declared or paid any cash dividends
on the common stock. It currently intends to retain any future earnings to fund
the development and growth of its business. Any future determination to pay
dividends on the common stock will depend upon the Company's results of
operations, financial condition and capital requirements, applicable
restrictions under any credit facilities or other contractual arrangements and
such other factors deemed relevant by the Company's Board of Directors. The
Company's existing bank credit facilities prohibit the payment of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 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 a if a "pooling of interests." The consolidated financial statements
have been retroactively restated, for all periods presented, to include the
results of operations for Becan. The Company subsequently sold Becan on November
26, 1999. The consolidated financial statements include the results of
operations for Becan through November 26, 1999.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999
REVENUES. Total revenues increased $4.5 million, or 12.5%, to $40.9
million for the year ended March 31, 2000, as compared to $36.4 million for the
year ended March 31, 1999. Distribution revenues increased $3.5 million, or
11.0%, to $35.5 million for the year ended March 31, 2000, as compared to $32.0
million for the year ended March 31, 1999. The increase was primarily due to
increased sales to existing customers and expansion of the customer base
resulting from increased marketing efforts. Manufacturing revenues increased
$1.0 million, or 23.3%, to $5.4 million for the year ended March 31, 2000, as
compared to $4.4 million for the year ended March 31, 1999. The increase is
primarily attributable to increased volume of private label sales resulting from
continued expansion of marketing efforts and the introduction of new products.
GROSS PROFIT. Total gross profit increased $738,000, or 27.0%, to $3.5
million for the year ended March 31, 2000, as compared to $2.7 million for the
year ended March 31, 1999. Gross margin increased
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from 7.5% for the year ended March 31, 1999 to 8.5% for the year ended March 31,
2000. Distribution gross profit increased $95,000, or 5.5%, to $1.8 million for
the year ended March 31, 2000, as compared to $1.7 million for the year ended
March 31, 1999. For the year ended March 31, 2000, distribution gross margin
decreased to 5.2%, from 5.4% for the year ended March 31, 1999. Manufacturing
gross profit increased $643,000, or 64.5%, to $1.6 million for the year ended
March 31, 2000, as compared to $997,000 for the year ended March 31, 1999. The
gross margin from manufacturing increased to 30.1% for the year ended March 31,
2000, from 22.6% for the year ended March 31, 1999. 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.
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
$1.3 million, or 44.7%, to $4.1 million for the year ended March 31, 2000 as
compared to $2.9 million for the year ended March 31, 1999. The increase was
primarily due to additional advertising and promotional expenses, as well as
payroll expenses and costs associated with fringe benefits 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 June 1998. As a percentage of sales, selling, general and administrative
expenses increased to 10.1% for the year ended March 31, 2000 from 7.9% for the
year ended March 31, 1999.
INTEREST INCOME (EXPENSE), NET. Interest expense, net of interest
income, increased $112,000 to $469,000 for the year ended March 31, 2000, from
$358,000 for the year ended March 31, 1999. The increase in interest expense in
fiscal 2000 is 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 had income tax expense of $3.8 million for
the year ended March 31, 2000, primarily associated with the gain on the sale of
Becan, and no income tax provision for the year ended March 31, 1999 due to the
utilization of net operating losses not previously recognized. These net
operating losses may be carried forward for up to 20 years. See Note 8 to
consolidated financial statements.
Management believes that there was no material effect on operations or
the financial condition of the Company as a result of inflation in fiscal 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through available borrowings
under its credit line facilities, loans from within the Company, the sale of
equity securities issued by the Company and the sale of its subsidiary, Becan.
The Company had working capital of $543,500 at March 31, 2000, inclusive of
current portion of long-term obligations and credit facilities.
Net cash used in operating activities was $516,000 for the year ended
March 31, 2000, as compared to net cash used in operating activities of $2.8
million for the year ended March 31, 1999. The usage of cash was primarily
attributable to net income of $6.5 million, a decrease in amounts due from
affiliates and related parties, net of $9,000, an increase in accrued expenses
of $1.4 million, an increase in accrued income taxes of $400,000, and an
increase in deferred income taxes of $3.4 million, partially offset by an
increase in accounts receivable of $502,000, an increase in inventories of
$308,000, an increase in prepaid expenses and other current assets of $175,000,
an increase in other assets of $194,000, and a decrease in accounts payable of
$199,000, primarily as a result of the November 1999 sale of Becan.
Net cash provided by investing activities was $1.4 million,
representing proceeds from the sale of equipment of $16,000, proceeds from the
sale of Becan of $2,000,000, partially offset by purchases of property and
equipment of and plant modifications of $575,600, and an increase in intangible
assets of $39,000.
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Net cash provided by financing activities was $173,000, representing
proceeds on lines of credit of $652,000, proceeds of long-term obligations of
$1.1 million, proceeds of shareholder loans of $167,000, partially offset by
repayments of long-term obligations of $1.6 million, and repayments of
shareholder loans of $180,000.
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.
On September 13, 1999, the Company established a loan with GE Capital
Small Business Finance Corporation. The principal amount of the note is
$880,000. The note bears interest at the lowest Prime Rate as published in the
Wall Street Journal (based on the prime rate in effect on the first business day
of the month in which a change occurs) plus 2.25% per annum. The term of the
note is 25 years and one month from the date of the note, payable in equal
monthly installments of principal and interest. The note is secured by a
mortgage on the Company's land and building in Largo, Florida. The note is also
secured by personal guarantee from the Company's Chairman of the Board. Proceeds
from the note were used to satisfy all outstanding mortgages on the property and
for payment of loan costs associated with the note.
On September 3, 1999, the Board of Directors of the Company unanimously
agreed that it would be in the best interest of the Company and its shareholders
to enter into an Agreement And Plan of Reorganization with DrugMax.com, Inc.
("DrugMax"), formerly Nutriceuticals.com Corporation, to sell all of the shares
of capital stock of Becan Distributors, Inc., a wholly-owned subsidiary of the
Company, to DrugMax, to further certain of its business objectives, including
without limitation, providing additional working capital to the Company.
On September 8, 1999, the Company entered into such agreement, whereby
the Company agreed to exchange all of the issued and outstanding shares of stock
of Becan to DrugMax for $2,000,000 in cash and 2,000,000 (post October 1999
one-for-two reverse stock split) restricted shares of voting common stock, $.001
par value, of DrugMax. Additional consideration of 1,000,000 (post October 1999
one-for-two reverse stock split) restricted shares of common stock, $.001 par
value, of DrugMax, which shares shall be placed in escrow pursuant to an escrow
agreement, and which shares would be issuable at a future date to the Company
upon the attainment by Becan of certain projected revenues and gross margins for
the fiscal years ending March 31, 2000 and 2001. The closing was subject to the
success of a public offering of DrugMax common stock. The number of shares of
DrugMax common stock to be issued by DrugMax in consideration of the shares of
Becan common stock was determined based upon the relative estimated value of
each of the companies.
On October 4, 1999, the Company entered into a Third Party Pledge
Agreement in favor of First Community Bank of America from the Company, which
provided collateral in the form of the Company's certificate of deposit with
First Community Bank of America, in the amount of $500,000, for a loan
established by DrugMax with First Community Bank of America. In December 1999,
any unpaid balance of principal and interest on this loan were paid in full by
DrugMax, and the Third Party Pledge Agreement was terminated.
On November 26, 1999, following the successful completion of a public
offering by DrugMax, the Company sold Becan to DrugMax. Becan did not attain its
financial target for the fiscal year ending March 31, 2000 and as a result,
500,000 of the 1,000,000 shares placed in escrow were returned to DrugMax. For
the year ended March 31, 1999 and the period from April 1, 1999 through November
26, 1999, Becan had net revenues of approximately $31.1 million and $33.7
million, respectively and net income of approximately $94,000 and $23,000, for
such periods.
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In December 1999, Go2Pharmacy 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 Dynamic Health
Products, Inc. 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 March
31, 2000, the outstanding principal balance on this note was $492,733.
In December 1999, Go2Pharmacy established a loan with First Community
Bank of America, for the purchase of equipment. The principal amount of the note
is $89,531. The note bears interest at 9.5% per annum. Principal and interest on
the note are payable in 36 equal monthly payments, in the amount of $2,873,
commencing February 5, 2000. The final payment of any unpaid balance of
principal and interest on the note will be due on January 5, 2003.
In February 2000, the Company issued $1,545,000 aggregate principal
amount of its Series A 8% Convertible Promissory Notes ("Notes") and Warrants to
purchase common stock of the Company. The Notes and Warrants were issued in
exchange for 618,000 shares of the Company's common stock, which shares were
issued in conjunction with a private placement undertaken in 1998. The Notes are
convertible, and the Warrants exercisable, for shares of the Company's common
stock at a price equal to the lesser of (i) 50% of the price at which the
Company sells its shares of common stock in an initial public offering, or (ii)
50% of the average closing price of the common stock during the five trading
days prior to receipt by the Company of written notice of conversion. The
Warrants expire if the Company does not complete an initial public offering by
December 31, 2002. Principal of and interest on the Notes is payable on each
February 1, May 1, August 1 and November 1, with the entire unpaid balance, plus
accrued interest thereon, payable in full on February 1, 2002. The 618,000
shares of the Company's common stock were subsequently cancelled by the Company.
Go2Pharmacy has filed a registration statement on Form SB-2 with the
Securities and Exchange Commission. The registration statement is subject to
completion and there can be no assurance as to the completion of the initial
public offering. Simultaneous and conditioned upon the offering, Go2Pharmacy
will be acquiring the Delaware corporation Go2Pharmacy.com, Inc. in exchange for
3,000,000 shares of its common stock. In the event the offering is successful,
the Company will own 3,000,000 shares, or 42.8% of the common stock of
Go2Pharmacy. Reference is made to Go2Pharmacy.com, Inc.'s Registration Statement
No. 333-92849 on Form SB-2, as filed with the SEC on June 28, 2000.
YEAR 2000 STATEMENT
The Company did not experience any failure of its own systems or those
of any third party with whom it conducts business, as a result of the Year 2000.
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See consolidated financial statements following Item 13 of this Annual
Report on Form 10-KSB.
ADDITIONAL INFORMATION ABOUT FINANCIAL PRESENTATION
The Company effected a one-for-three reverse stock split in August
1998. Unless otherwise stated, all share information in this Annual Report on
Form 10-KSB gives retroactive effect to this reverse stock split.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not have any material market risk sensitive financial
instruments.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
On April 29, 1999, the Company engaged Grant Thornton LLP as the
Company's independent auditors for the fiscal year ended March 31, 1999,
replacing the firm of Kirkland, Russ, Murphy & Tapp, CPAs, which served as the
Company's independent auditors for the fiscal year ended March 31, 1998. The
change was approved by the Company's audit committee. The reason for the change
to a national firm was to better position the Company for access to the public
capital markets.
The reports of Kirkland, Russ, Murphy & Tapp, CPAs for each of the two
fiscal years ended March 31, 1997 and March 31, 1998 did not contain any adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
The Company believes there were no disagreements with Kirkland, Russ,
Murphy & Tapp, CPAs within the meaning of Instruction 4 to Item 304 of
Regulation S-B on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure in connection with the
audits of the Company's financial statements for the fiscal years ended March
31, 1998 and 1997 or for any subsequent interim period, which disagreements if
not resolved to their satisfaction would have caused Kirkland, Russ, Murphy &
Tapp, CPAs to make reference to the subject matter of the disagreements in
connection with its reports.
During the fiscal years ended 1998 and 1997, and through April 29,
1999, there have been no reportable events (as defined in Item 304(a)(1)(iv)(B)
of Regulation S-B) of the type required to be disclosed by that section. The
Company has not consulted with Grant Thornton LLP regarding either (i) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements; or (ii) any matter that was either the
subject matter of a disagreement or an event in response to (as defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions).
A letter of Kirkland, Russ, Murphy & Tapp, CPAs addressed to the
Securities and Exchange Commission is included as Exhibit 16.1 to this Annual
Report on Form 10-KSB. Such letter states that such firm agrees with the
statements made by the Company in Form 8-K filed April 30, 1999.
On May 9, 2000, Grant Thornton LLP notified the Company that it was
terminating its client-accountant relationship with the Company. This letter was
received by the Company after the Company had expressed its dissatisfaction to
Grant Thornton regarding the amount of its fees, which in the opinion of
management of the Company were excessive.
Also on May 9, 2000, the Company's audit committee approved the
appointment of Brimmer, Burek & Keelan LLP as its independent auditors for the
fiscal year ended March 31, 2000. On June 13, 2000, the Company engaged Brimmer,
Burek & Keelan LLP as its independent auditors for the fiscal year ended March
31, 2000.
The report of Grant Thornton for the fiscal year ended March 31, 1999
did not contain any adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope, or accounting principles.
The Company believes there were no disagreements with Grant Thornton
within the meaning of Instruction 4 to Item 304 of Regulation S-K on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure in connection with the audit of the Company's
financial statements for the fiscal year ended March 31, 1999 or for any
subsequent interim period through May 9, 2000 (the date Grant Thornton notified
the Company that it was terminating its client-accountant relationship), with
the exception of the disagreements noted below, which disagreements if not
resolved to their satisfaction would have caused Grant Thornton to make
reference to the subject matter of the disagreements in connection with its
report.
Effective November 26, 1999, the Company transferred all of the shares
of Becan Distributors, Inc., a wholly-owned subsidiary, to DrugMax.com, Inc. in
exchange for $2,000,000 in cash and 2,000,000 shares of common stock of DrugMax.
Additional consideration consisted of 1,000,000 shares of common stock of
DrugMax, which shares were placed in escrow pursuant to an escrow agreement, and
which shares
<PAGE>
would be issuable at a future date to the Company upon the attainment by Becan
of certain projected revenues and gross margins for the fiscal years ending
March 31, 2000 and 2001.
In connection with its review of the Company's financial statements for
the fiscal quarter ended December 31, 1999, Grant Thornton disagreed with the
Company's financial reporting of the Becan/DrugMax transaction in two respects.
Because of these disagreements the Company did not file its Form 10-QSB for the
fiscal quarter ended December 31, 1999 until May 23, 2000.
First, Grant Thornton disagreed with the Company's proposed valuation
of the common stock of DrugMax received by the Company in connection with the
Becan transaction. In response to this matter, the Company sought an
interpretation from the Securities and Exchange Commission regarding the proper
valuation of the DrugMax common stock for financial reporting purposes. On May
15, 2000, the Company received a response from the Securities and Exchange
Commission that was consistent with the position taken by Grant Thornton. The
Company subsequently filed its Form 10-QSB for the fiscal quarter ended December
31, 1999 on May 23, 2000.
Second, Grant Thornton, based upon the Agreement and Plan of
Reorganization as filed, disagreed with the Company's characterization of the
Becan/DrugMax transaction as a tax-free reorganization under the Internal
Revenue Code of 1986, as amended, despite the intent of both the seller and the
buyer that the transaction be a tax-free reorganization. As a further step in
this reorganization, Becan subsequently merged into DrugMax, with DrugMax
continuing as the surviving entity. The Company believes that the Becan/DrugMax
transaction constituted a tax-free reorganization following the merger of Becan
into DrugMax.
The Company has authorized Grant Thornton to respond fully and without
limitation to inquiries of Brimmer, Burek & Keelan LLP concerning each of the
matters discussed above as to which Grant Thornton disagreed with the position
of the Company.
During the two most recent fiscal years and through the date of this
filing, there have been no reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K) of the type required to be disclosed by that section. The
Company has not consulted with Brimmer, Burek & Keelan LLP regarding either (i)
the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements; or (ii) any matter that was either the
subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation
S-K and the related instructions) or a reportable event (as defined in Item
304(a)(1)(v) of Regulation S-K).
A letter of Grant Thornton LLP addressed to the Securities and Exchange
Commission is included as Exhibit 16.2 to this Annual Report on Form 10-KSB.
Such letter states that such firm agrees with the statements made by the Company
in Form 8-K filed May 9, 2000 and Form 8-K/A filed June 5, 2000.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following are the names and certain information regarding the
current Directors and Executive Officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
<S> <C> <C> <C>
Jugal K. Taneja 56 Chairman of the Board, Chief Executive
Officer and Director 1992
Paul A. Santostasi 65 Vice Chairman of the Board and Director 1999
Kotha S. Sekharam, Ph.D. 49 President and Director 1995
Carol Dore-Falcone 35 Chief Financial Officer N/A
Cani I. Shuman 43 Secretary and Treasurer N/A
Martin A. Traber 54 Director 1992
Rakesh K. Sharma, M.D. 43 Director 1999
</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. Some of the directors and
executive officers of the Company also serve in various capacities with
subsidiaries of the Company.
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
Jugal K. Taneja has served as the Company's Chairman of the Board since
its inception. Until June 1998 and since November 1999, he also served as the
Company's Chief Executive Officer. From November 1991 until December 1998, he
also served as the Chairman of the Board and Chief Executive Officer of NuMed
Home Health Care, Inc., a provider of home health care services and contract
staffing of health care employees. From June 1993 until March 1998, he was also
the Chief Executive Officer of National Diagnostics, Inc., a provider of medical
diagnostic services. NuMed Home Health Care, Inc and National Diagnostics, Inc.,
are publicly traded companies. Mr. Taneja is also a Director of DrugMax.com,
inc., a public company operating as an online business to business wholesaler
and retailer of pharmaceuticals, over-the-counter drugs, health and beauty care
products and private label dietary supplements. Although he devotes substantial
time to the operations and business of the Company, Mr. Taneja does not devote
his full time to Company business.
Paul A. Santostasi has been the Vice Chairman of the Board of the
Company since the Company acquired Energy Factors in June 1998 and was the
Chairman and Chief Executive Officer of Energy Factors from 1989 until its
acquisition by the Company in June 1998. As Vice Chairman of the Company, Mr.
Santostasi is responsible for acquisitions and new business ventures. Prior to
his affiliation with Energy Factors, he was the founder, Chairman and Chief
Executive Officer of Suncoast Plastics, a public company, from 1980 until 1989.
Mr. Santostasi holds a B.S. degree in mechanical engineering.
Dr. Kotha S. Sekharam has served as President and a director of the
Company since June 1996. Dr. Sekharam was a founder and director of Nu-Wave
Health Products, Inc. ("Nu-Wave") and served as its President from June 1996
through March 1998 and served as Nu-Wave's Vice President from September 1995
until June 1996. The Company acquired 80% of Nu-Wave in September 1995 and the
additional 20% of Nu-Wave in July 1997. From 1992 until September 1995, he
served as Director of Research and Development of Energy Factors, Inc., acquired
by the Company in June 1998. Dr. Sekharam holds a Ph.D.
<PAGE>
in food sciences from Central Food Technological Research Institute, Mysore,
India, a United Nations university center and has over 15 years of experience in
the food and health industry.
Carol Dore-Falcone has served as the Company's Chief Financial Officer
since August 1999. Prior to that she was employed as an audit manager with
Deloitte & Touche LLP, Certified Public Accountants, where she had served in
various capacities since January 1990. Ms. Dore-Falcone is a certified public
accountant and holds an M.B.A. from the University of Tampa.
Cani I. Shuman has served as the Company's Secretary and Treasurer
since April 2000, and has been Corporate Controller of the Company since
February 1999. Prior to that she served as Chief Financial Officer of the
Company since January 1998. Prior to her employment with the Company in January
1998, she was employed in public accounting with Hacker, Johnson, Cohen & Grieb,
PA, and Copeland and Company, CPAs since January 1994. Prior to that, she held
accounting positions in private industry. Ms. Shuman is a certified public
accountant and holds a B.S. degree in Accounting from the University of South
Florida.
Martin A. Traber has served as a director of the Company since its
inception. He has been a partner in the law firm of Foley & Lardner since August
1994. Prior to joining Foley & Lardner, Mr. Traber was a partner in the law firm
of Ardor & Hadden were he served for 10 years on the firm's management committee
and was national chairman of the business and corporate departments and of the
marketing and business development committee. Mr. Traber has over 27 years of
experience in corporate finance and securities law.
Rakesh K. Sharma, M.D., became a director of the Company in March 1999.
Dr. Sharma is a cardiologist and is a member of the medical staff of several
hospitals in the Tampa Bay, Florida area.
KEY EMPLOYEES
Mihir K. Taneja had served as Chief Executive Officer, Secretary and a
director of Go2Pharmacy.com, Inc. since November 1999. Prior to that, he served
as Go2Pharmacy's Vice President of Marketing from June 1998 to November 1999. He
also served as the Company's Vice president of Marketing from July 1996 to
November 1999. Prior to joining the Company, Mr. Taneja served as a market and
financial analyst for Bancapital Corporation from 1994 to 1996. Mr. Taneja holds
Bachelor of Arts degrees in finance and marketing from the University of Miami.
Mr. Taneja is the son of Jugal K. Taneja.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's common stock is not traded in the "pink sheets" or on the
OTC Bulletin Board or listed for trading on any stock exchange. None of the
Company's directors or officers and no person who was the beneficial owner of
more than ten percent of the Company's common stock has filed a Form 3 as
required by Section 16(a) of the Securities And Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1)
----------------------
NAME AND
PRINCIPAL POSITION YEAR SALARY($) BONUS($)
------------------ ---- --------- --------
Jugal K. Taneja, Chairman and CEO(2) 2000 $ 240,000 $ -0-
1999 $ 75,000 $ -0-
1998 $ 75,000 $ 5,414
William L. LaGamba, CEO(3) 2000 $ 86,526 $ -0-
1999 $106,735 $ -0-
<PAGE>
Paul A. Santostasi, Vice Chairman 2000 $125,000 $ 240
1999 $121,711 $ -0-
Kotha S. Sekharam, Ph.D., President 2000 $ 90,000 $ -0-
1999 $ 75,000 $ -0-
1998 $ 75,000 $ 5,414
------------
(1) All employees of the Company during fiscal 2000 were paid by the Company.
For fiscal 1998 and from April 1, 1998 through August 31, 1998, employees
of the Company were deemed leased employees, pursuant to a Service
Agreement by and between the Company and Nations Staffing, Inc., a
non-affiliated company. The agreement was terminated on August 31, 1998.
(2) Mr. Taneja served as the Company's Chief Executive Officer until June 1998
and since November 1999.
(3) From June 1998 through November 1999, Mr. LaGamba served as the Company's
Chief Executive Officer.
Historically, no director of the Company received any compensation or other
remuneration for serving on the Board of Directors, except for the reimbursement
for reasonable expenses incurred in attending meetings of the Company's Board of
Directors. Commencing March 1999, the Company pays each non-employee director a
fee of $500 for each meeting attended by such director, but not less than $2,000
per year if they attend at least three meetings during the year. Outside
directors who serve on board committees will be paid a fee of $100 for each
committee meeting attended by such director.
EMPLOYMENT AGREEMENTS
On March 15, 1999, the Company entered into Employment Agreements with
Messrs. Jugal Taneja, William LaGamba and Kotha Sekharam. Each of the March 15,
1999 Employment Agreements are for a term of three years and renew automatically
for successive periods of one year after their expiration unless, not less than
30 days prior to the end of the initial term or any one-year renewal period, one
of the parties sends written notice to the other party of its intent to
terminate the agreement. Mr. LaGamba's employment agreement terminated in
November 1999 simultaneously with his resignation as Chief Executive Officer of
the Company. Mr. Taneja's employment agreement was amended in January 2000,
subsequent to his appointment as Chief Executive Officer of the Company. On May
1, 1998, the Company entered into an Employment Agreement with Mr. Santostasi,
which ends on June 13, 2001. Salaries payable under the agreements are: Taneja -
$240,000, Santostasi - $125,000 and Sekharam - $90,000.
Certain significant employees of the Company have entered into
employment agreements with Go2Pharmacy, which will become effective upon the
successful completion of the initial public offering of Go2Pharmacy's common
stock. At such time, employment agreements between the Company and such
employees will be terminated.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of June 29, 2000
with respect to the beneficial ownership of the outstanding Common Stock by (i)
any holder of more than five (5%) percent; (ii) each of the Company's executive
officers and directors; and (iii) the directors and executive 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.
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF APPROXIMATE
TITLE OF NAME AND ADDRESS BENEFICIAL PERCENT
CLASS OF BENEFICIAL OWNER(1) OWNERSHIP(2) OF CLASS
----- ---------------------- ------------ ---------
<S> <C> <C> <C>
Common Jugal K. Taneja(3) 1,172,927 40.2%
Common Manju Taneja(4) 432,851 14.8%
Common William L. LaGamba(5) 435,000 14.9%
Common Michele LaGamba(6) 435,000 14.9%
Common Mihir K. Taneja 369,999 12.7%
Common Mandeep K. Taneja 369,999 12.7%
Common Kotha S. Sekharam, Ph.D.(7) 115,616 4.0%
Common Paul A. Santostasi(8) -0- -0-
Common Carol Dore-Falcone -0- -0-
Common Cani I. Shuman -0- -0-
Common Martin A. Traber 10,000 *
Foley & Lardner
100 North Tampa Street, 27th Floor
Tampa, FL 33602
Common Rakesh K. Sharma, M.D. -0- -0-
1107 S. Myrtle Avenue
Clearwater, FL 33756
Common All officers and directors as
a group (7 persons) 1,298,543(8) 44.5%
</TABLE>
-----------------------------
*Less than one percent.
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
Dynamic Health Products, Inc. at 6950 Bryan Dairy Road, Largo, FL 33777.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to the shares shown. Except where indicated by footnote and subject to
community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of voting
securities shown as beneficially owned by them.
(3) Includes 413,185 shares beneficially owned by Manju Taneja, Jugal K.
Taneja's wife, as to which Mr. Taneja exercises no investment or voting
power and disclaims beneficial ownership. Also includes (i) 670,076 shares
owned by Carnegie Capital, Ltd. and (ii) 70,000 shares owned by First Delhi
Family Partnership, Ltd. Mr. Taneja is the general partner of Carnegie
Capital, Ltd. and First Delhi Family Partnership, Ltd. As such, Mr. Taneja
holds sole voting and investment power with respect to the shares held of
record by Carnegie Capital, Ltd. and First Delhi Family Partnership, Ltd.
(4) Includes 19,666 shares beneficially owned by Jugal K. Taneja, as to which
Manju Taneja exercises no investment or voting power and disclaims
beneficial ownership. Excludes (i) 670,076 shares owned by Carnegie
Capital, Ltd., and (ii) 70,000 shares owned by First Delhi Family
Partnership, Ltd., as to which Mrs. Taneja exercises no investment or
voting power and disclaims beneficial ownership.
<PAGE>
(5) Includes 196,000 shares owned by Michele LaGamba, Mr. LaGamba's wife, as to
which Mr. LaGamba exercises no investment or voting power and disclaims
beneficial ownership. Also includes and 126,000 shares held by Mr. LaGamba
as custodian for their minor children.
(6) Includes 113,000 shares owned by William L. LaGamba, and 126,000 shares
held by Mr. LaGamba as custodian for their minor children, as to which Mrs.
LaGamba exercises no investment or voting power and disclaims beneficial
ownership.
(7) Includes 10,000 shares owned by Madhavi Sekharam, Dr. Sekharam's wife, as
to which Dr. Sekharam exercises no investment or voting power and disclaims
beneficial ownership.
(8) Paul A. Santostasi, a director and the Vice Chairman of the Company, does
not beneficially own any common stock. Mr. Santostasi holds options to
purchase 200,000 shares of common stock, none of which may be exercised
within 60 days. Mr. Santostasi is a director, the president and the owner
of 30% of the outstanding voting securities of U.S. Diversified
Technologies, Inc. U.S. Diversified Technologies, Inc. owns 310,000 shares
of Company Series A Convertible Preferred Stock, each of which is entitled
to one vote. As such, Mr. Santostasi shares investment and voting power
with respect to the shares of Series A Convertible Preferred Stock held of
record by U.S. Diversified Technologies, Inc., as to which he disclaims
beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From September 1998 to November 1999, the Company provided to DrugMax,
without charge, office and warehouse space, and the use of the Company's general
office equipment in Largo, Florida.
As a condition of making the Company's credit facility with The CIT
Group/Credit Finance available, the lender required Jugal K. Taneja to
personally guarantee the Company's credit facility in the aggregate maximum
amount of $2,000,000. In March 1999, the Company granted to Mr. Taneja, in
return for such guarantee, an option to purchase 500,000 shares of common stock
of the Company at an exercise price of $2.50 per share. The option vests over
three years. As of March 31, 2000, the outstanding balance on the credit
facility was approximately $857,000.
Paul A. Santostasi, the Company's Vice Chairman, is the president and
the owner of approximately 30% of the issued and outstanding equity securities
of U.S. Diversified Technologies, Inc. ("USDTI"). USDTI owns 310,000 shares of
Series A Preferred Stock of the Company. In June 1998, the Company granted to
Mr. Santostasi an option to purchase 200,000 shares of Company common stock at a
purchase price of the greater of $9 per share or the price at which the common
stock would be offered at the completion of a successful Initial Public Offering
of the Company. The options vest over a period of three years, commencing on
June 12, 1999.
In March 1999, the Company granted options to purchase a total of
210,000 shares of common stock to eight of its employees under its 1999 Stock
Option Plan. As of March 31, 2000, 50,000 of such options expired. In August
1999, the Company granted an option to purchase a total of 30,000 shares of
common stock to one of its employees under its 1999 Stock Option Plan. All of
the foregoing options vest equally over three years.
In August and September 1999, Jugal K. Taneja, the Company's Chairman,
loaned the Company $156,500, which the Company repaid with interest at 10% per
annum in December 1999.
In August 1999, William L. LaGamba, the Company's former Chief
Executive Officer, loaned the Company $10,000, which the Company repaid with
interest at 10% per annum in December 1999.
On November 26, 1999, the Company sold a significant subsidiary, Becan,
together with its wholly-owned subsidiary, Discount, to DrugMax, an affiliate of
Jugal K. Taneja, a principal shareholder, Chairman of the Board, and Chief
Executive Officer of the Company. Mr. Taneja is a principal shareholder and a
director of DrugMax. William L. LaGamba, the Chief Executive Officer of DrugMax
is also a principal shareholder in the Company. In connection with the sale, in
exchange for all of the outstanding shares of Becan common stock, the Company
received the sum of $2,000,000 in cash, and 2,000,000 (post
<PAGE>
October 1999 one-for-two reverse stock split) shares of DrugMax common stock. In
addition, 1,000,000 shares of common stock of DrugMax were deposited into escrow
for future issuance to the Company upon the attainment by Becan of certain
financial targets for the fiscal years ending March 31, 2000 and 2001. Becan did
not attain its financial target for the fiscal year ending March 31, 2000 and as
a result 500,000 shares were returned from escrow to DrugMax. The 500,000 shares
remaining in escrow will be released to the Company in the year 2001, provided
that DrugMax's operations attributable to Becan attain certain financial target
levels in the fiscal year ending March 31, 2001.
Until December 1999, substantially all of the products sold by DrugMax
were manufactured by the Company. The Company has an agreement with DrugMax
whereby DrugMax is committed to purchase products from the Company, provided
such products are on terms which are no less favorable than the terms that could
be obtained by DrugMax, for similar products, from a disinterested third party
supplier.
In December 1999, the Company loaned $2,250 to Kotha S. Sekharam, the
Company's President. The loan is to payable on demand with interest at 10% per
annum.
For the period from November 26, 1999 through March 31, 2000, revenues
of approximately $210,000 were recorded from sales by the Company to DrugMax.
The Company believes that material affiliated transactions and loans,
and business relationships entered into by the Company or its subsidiaries with
certain of its officers, directors and principal stockholders or their
affiliates were on terms no less favorable than the Company could have obtained
from independent third parties. Any future transactions between the Company and
its officers, directors or affiliates will be subject to approval by a majority
of disinterested directors or stockholders in accordance with Florida law.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS.
See pages F-1 through F-26.
(a)(2) EXHIBITS.
The following exhibits are filed with this report:
2.1 Agreement And Plan Of Reorganization by and between Nutriceuticals.com
Corporation and Dynamic Health Products, Inc. dated September 8, 1999.
(1)
2.2 Merger Agreement By And Among Go2Pharmacy.com, Inc. (Florida) And
Go2Pharmacy.com, Inc. (Delaware), dated June 26, 2000.
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)
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. (5)
10.5 Note and Mortgage in favor of GE Capital Small Business Finance
Corporation from the Company, dated September 13, 1999. (6)
10.6 Third Party Pledge Agreement in favor of First Community Bank of
America from the Company, dated October 4, 1999. (6)
10.7 Line of Credit Agreement in favor of First Community Bank of America
from the Company, dated October 4, 1999. (7)
10.8 Loan and Security Agreement in favor of First Community Bank of
America, from Innovative Health Products, Inc., dated December 29,
1999. (7)
16.1 Letter of Kirkland, Russ, Murphy & Tapp, CPAs to the Securities and
Exchange Commission pursuant to the requirements of Item 304(a)(3) of
Regulation S-K. (8)
16.2 Letter of Grant Thornton LLP to the Securities and Exchange Commission
pursuant to the requirements of Item 304(a)(3) of Regulation S-K. (9)
21.1 Dynamic Health Products, Inc. - List of Subsidiaries.
<PAGE>
27.1 Financial Data Schedule (for SEC use only).
------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 14, 1999, file number 0-23031, filed in Washington,
D.C.
(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, 1998, file number 0-23031,
filed in Washington, D.C.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999, file number 0-23031,
filed in Washington, D.C.
(7) 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.
(8) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 29, 1999, file number 0-23031, filed in Washington, D.C.
(9) Incorporated by reference to the Company's Current Report on Form
8-K/A, dated June 5, 2000, file number 0-23031, filed in Washington,
D.C.
(b) REPORTS ON FORM 8-K.
During the year ended March 31, 2000, the Company filed five reports on
Form 8-K.
Form 8-K dated April 29, 1999, with respect to a change in the
Company's certifying accountants to Grant Thornton LLP, for the fiscal year
ended March 31, 1999.
Form 8-K dated September 14, 1999, with respect to the Company entering
into an Agreement and Plan of Reorganization on September 8, 1999, to sell all
of the shares of capital stock of Becan Distributors, Inc., a wholly-owned
subsidiary of the Company, to Nutriceuticals.com Corporation.
Form 8-K dated December 8, 1999, with respect to the Company's November
26, 1999 sale of Becan Distributors, Inc.
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DYNAMIC HEALTH PRODUCTS, INC.
DATED: July 14, 2000 By: /s/ JUGAL K. TANEJA
----------------------------------------
Jugal K. Taneja, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JUGAL K. TANEJA Chairman of the Board, July 14, 2000
----------------------------- Chief Executive Officer and Director
Jugal K. Taneja
/s/ PAUL A. SANTOSTASI Vice Chairman of the Board, July 14, 2000
----------------------------- and Director
Paul A. Santostasi
/s/ KOTHA S. SEKHARAM President and Director July 14, 2000
-----------------------------
Kotha S. Sekharam
/s/ CAROL DORE-FALCONE Chief Financial Officer July 14, 2000
-----------------------------
Carol Dore-Falcone
/s/ MARTIN A. TRABER Director July 14, 2000
-----------------------------
Martin A. Traber
</TABLE>
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report F-2
Consolidated Balance Sheets as of March 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended
March 31, 2000 and 1999 F-4
Consolidated Statements of Shareholders' Equity for
the years ended March 31, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 2000 and 1999 F-6 - F-7
Notes to Consolidated Financial Statements F-9 - F-26
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Dynamic Health Products, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Dynamic Health
Products, Inc. and Subsidiaries as of March 31, 2000 and the related
consolidated statement of operations, shareholders' equity, and cash flows for
the year ended March 31, 2000. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dynamic
Health Products, Inc. and Subsidiaries as of March 31, 2000 and the consolidated
results of operations and cash flows for the year ended March 31, 2000, in
conformity with generally accepted accounting principles.
/S/ BRIMMER, BUREK & KEELAN LLP
-------------------------------
Brimmer, Burek & Keelan LLP
Tampa, Florida
July 8, 2000
F-2
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,959,452 $ 899,951
Accounts receivable, net 770,161 2,535,274
Inventories, net 1,677,344 2,580,753
Prepaid expenses and other current assets 340,649 221,726
Due from affiliates 10,155 --
Due from related parties 2,250 --
------------ ------------
Total current assets 4,760,011 6,237,704
Property, plant and equipment, net 2,689,780 2,476,357
Investment in unconsolidated affiliate 9,203,062 --
Intangible assets (primarily goodwill), net 1,043,669 1,769,153
Other assets, net 194,571 57,619
------------ ------------
Total assets $ 17,891,093 $ 10,540,833
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,120,045 $ 2,495,648
Accrued expenses 385,418 371,556
Accrued income taxes 400,000 --
Current portion of long-term obligations 915,806 643,243
Credit lines payable 1,349,284 2,388,729
Obligations to related parties 25,000 38,434
Obligations to affiliates 20,927 --
------------ ------------
Total current liabilities 4,216,480 5,937,610
Deferred income taxes 3,363,000 --
Long-term obligations, less current portion 2,199,509 1,392,793
------------ ------------
Total liabilities 9,778,989 7,330,403
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
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;
2,917,224 and 3,535,224 shares issued and outstanding 29,172 35,352
Additional paid in capital 1,861,788 3,400,615
Retained earnings (accumulated deficit) 5,371,144 (1,075,537)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 7,112,104 3,210,430
------------ ------------
Total liabilities and shareholders' equity $ 17,891,093 $ 10,540,833
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Distribution $ 35,489,125 $ 31,981,531
Manufacturing 5,447,115 4,416,251
------------ ------------
TOTAL REVENUES 40,936,240 36,397,782
------------ ------------
Cost of goods sold:
Distribution 33,657,177 30,244,272
Manufacturing 3,806,569 3,419,046
------------ ------------
TOTAL COST OF GOODS SOLD 37,463,746 33,663,318
------------ ------------
GROSS PROFIT 3,472,494 2,734,464
Selling, general and administrative expenses 4,136,612 2,858,389
------------ ------------
OPERATING INCOME (LOSS) BEFORE OTHER
INCOME (EXPENSES) (664,118) (123,925)
Other income (expenses):
Interest income 58,168 15,673
Gain on sale of subsidiary 11,535,495 --
Gain on transfer of equity securities 107,544 --
Equity in loss of affiliated companies (498,309) --
Other income and expenses, net 203,018 118,932
Interest expense (527,617) (373,489)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) 10,878,299 (238,884)
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES 10,214,181 (362,809)
(Income) loss attributable to minority interest -- 63,450
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 10,214,181 (299,359)
Income taxes 3,763,000 --
------------ ------------
NET INCOME (LOSS) 6,451,181 (299,359)
Preferred stock dividends 4,500 2,535
------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 6,446,681 $ (301,894)
============ ============
Basic income (loss) per share $ 1.87 $ (0.11)
============ ============
Basic weighted average number of common shares outstanding 3,452,260 2,865,190
============ ============
Diluted income (loss) per share $ 1.38 $ (0.11)
============ ============
Diluted weighted average number of common shares outstanding 4,671,328 2,865,190
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------- -------------------------- ---------------------------
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1998 (Restated) -- $ -- -- $ -- 1,984,926 $ 19,849
Issuance of common stock at $1.50
per share for cash -- -- -- -- 33,333 333
Conversion of note payable to
common stock at $.30 per share -- -- -- -- 271,106 2,711
Distributions to Becan shareholders -- -- -- -- -- --
Issuance of preferred stock for
acquisition of Energy Factors, Inc. 310,000 775,000 -- -- -- --
Issuance of common stock for minority
interest acquisition of Becan
Distributors, Inc. -- -- -- -- 485,000 4,850
Issuance of common stock
at $2.50 per share for cash -- -- -- -- 200,000 2,000
Issuance of preferred stock at $2.50
per share for cash, net of offering
costs -- -- 30,000 75,000 -- --
Issuance of common stock for
acquisition of J.Labs, Inc. -- -- -- -- 100,000 1,000
Issuance of common stock for asset
purchase -- -- -- -- 32,243 323
Issuance of common stock at $2.50
per share for cash -- -- -- -- 418,000 4,180
Conversion of note payable to
common stock at $2.50 per share -- -- -- -- 10,616 106
Dividends on preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 1999 310,000 775,000 30,000 75,000 3,535,224 35,352
Redemption of 618,000 shares of
common stock at $2.50 per share
in exchange for notes payable -- -- -- -- (618,000) (6,180)
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 1999 310,000 $ 775,000 30,000 $ 75,000 2,917,224 $ 29,172
=========== =========== =========== =========== =========== ===========
RETAINED
ADDITIONAL EARNINGS TOTAL
PAID-IN (ACCUMULATED SHAREHOLDERS'
CAPITAL DEFICIT) EQUITY
----------- ------------- ------------
<S> <C> <C> <C>
Balances at March 31, 1998 (Restated) $ 972,807 $ (776,178) $ 216,478
Issuance of common stock at $1.50
per share for cash 49,667 -- 50,000
Conversion of note payable to
common stock at $.30 per share 78,620 -- 81,331
Distributions to Becan shareholders (48,407) -- (48,407)
Issuance of preferred stock for
acquisition of Energy Factors, Inc. -- -- --
Issuance of common stock for minority
interest acquisition of Becan
Distributors, Inc. 722,650 -- 727,500
Issuance of common stock
at $2.50 per share for cash 498,000 -- 500,000
Issuance of preferred stock at $2.50
per share for cash, net of offering
costs (17,226) -- (17,226)
Issuance of common stock for
acquisition of J.Labs, Inc. (500) -- 500
Issuance of common stock for asset
purchase 80,285 -- 80,608
Issuance of common stock at $2.50
per share for cash 1,040,820 -- 1,045,000
Conversion of note payable to
common stock at $2.50 per share 26,434 -- 26,540
Dividends on preferred stock (2,535) -- (2,535)
Net loss -- (299,359) (299,359)
----------- ----------- -----------
Balances at March 31, 1999 3,400,615 (1,075,537) 2,360,430
Redemption of 618,000 shares of
common stock at $2.50 per share
in exchange for notes payable (1,538,827) -- (1,545,007)
Net loss -- 6,446,681 6,446,681
----------- ----------- -----------
Balances at March 31, 1999 $ 1,861,788 $ 5,371,144 $ 7,262,104
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,451,181 $ (299,359)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization 395,868 271,458
Gain on involuntary conversion of property -- (81,192)
Loss on disposition of equipment 22,348 --
Minority interest -- (63,450)
Gain on sale of subsidiary (11,535,495) --
Gain on transfer of equity securities (107,544) --
Equity in loss of affiliated companies 498,309 --
Changes in operating assets and liabilities (exclusive of effect of
business acquisitions and disposition):
Accounts receivable (501,593) (1,470,593)
Inventories (307,969) (1,171,789)
Prepaid expenses and other current assets (174,816) (135,205)
Other assets (193,612) --
Due from affiliates and related parties, net 8,522 --
Accounts payable (198,897) 182,742
Accrued expenses 1,364,960 (34,483)
Accrued income taxes 400,000 --
Deferred income taxes 3,363,000 --
------------ ------------
Net cash used in operating activities (515,738) (2,801,871)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (574,540) (301,041)
Proceeds from involuntary conversion of property -- 99,100
Proceeds from sale of equipment 16,000 --
Increase in intangible assets (39,136) (51,263)
Cash paid for acquisitions, net -- (18,309)
Proceeds from sale of subsidiary 2,000,000 --
Decrease (increase) in other assets -- 7,940
------------ ------------
Net cash provided by (used in) investing activities 1,402,324 (263,573)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving line of credit agreements 652,071 2,203,728
Proceeds from issuance of long-term obligations 1,137,573 760,991
Payments of long-term obligations (1,603,295) (763,527)
Proceeds from issuance of shareholder loans 166,500 295,500
Payments of shareholder loans (179,934) (589,989)
Distributions to shareholders, net -- (48,407)
Proceeds from issuance of common stock -- 1,595,000
Proceeds from issuance of preferred stock -- 57,774
------------ ------------
Net cash provided by financing activities 172,915 3,511,070
------------ ------------
Net increase in cash 1,059,501 445,626
Cash at beginning of period 899,951 454,325
------------ ------------
Cash at end of period $ 1,959,452 899,951
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31,
2000 1999
--------- ----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $538,588 $382,869
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 $127,568
Conversion of related party notes payable and accrued interest to
common stock $ -- $107,871
Transfer of equity securities in settlerment of liabilities $807,000 $ --
</TABLE>
During fiscal 1999, the Company completed several acquisitions in exchange for
approximately $1,600,000 of the Company's stock. The Company assumed
approximately $3,200,000 of liabilities and allocated approximately $3,000,000
to tangible assets (see Note 2). $3,000,000 to tangible assets (see Note 2).
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dynamic Health Products, Inc. ("Company") creates, manufactures, and packages a
wide variety of proprietary and non-proprietary dietary supplements,
over-the-counter drugs, and health and beauty care products. the Company's
primary business segments are the contract manufacture of products for others
throughout the United States and a wholesale distributor of pharmaceuticals,
over-the-counter drugs, and health and beauty care products throughout the
United States. The channels of distribution for its proprietary products and the
channels of distribution for the products it manufactures for others in the
distribution business segment include health food, drug, convenience and mass
market stores, and direct marketing through radio, catalog sales and
infomercials.
RESTATEMENTS
On June 26, 1998, the Company acquired Becan Distributors, Inc. ("Becan") in a
transaction accounted as if a combination of entities under common control and
treated as if a "pooling of interests" (see Note 2). Accordingly, the
accompanying consolidated financial statements for the year ended March 31, 1999
have been restated to reflect this 1999 acquisition of Becan.
Unless otherwise noted, all information has been adjusted to retroactively
reflect the one-for-three reverse common stock split on August 11, 1998.
On November 26, 1999, Becan Distributors, Inc. and its subsidiary Discount Rx,
Inc. was sold to Drugmax.com, Inc. ("DrugMax"), an affiliate of the Company. See
Note 7. Accordingly, the consolidated financial statements for the year ended
March 31, 2000 include the results of operations of Becan from April 1, 1999
through November 26, 1999.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Dynamic Health
Products, Inc. and its principally wholly-owned subsidiaries, Go2Pharmacy.com,
Inc. ("Go2"), Becan Distributors, Inc. and its subsidiary Discount Rx, Inc.
("Discount"), Incredible Products of Florida, Inc. ("Incredible"), J. Labs, Inc.
("J.Labs"), Herbal Health Products, Inc. ("Herbal"), Dynamic Life, Inc. and its
subsidiaries Dynamic Life Asia, LLC and Dynamic Life Korea Ltd., 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.
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 has a 50% ownership and shares
profits and losses equally. The Company is required to contribute half of the
costs incurred in the initial marketing of the product. The Company accounts for
the investment under the equity method of accounting. At March 31, 2000 and
1999, the investment on the records of the Company and the operations of the
joint venture were not material.
F-8
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
INVENTORIES
Inventories, net are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method (see Note 4).
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided for using the straight-line method, in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives (buildings 20 years, all other asset categories range
from three to seven years). Leasehold improvements are amortized using the
straight-line method over the lives of the respective leases or the service
lives of the improvements, whichever is shorter. Leased equipment under capital
leases is amortized using the straight-line method over the lives of the
respective leases or over the service lives of the assets for those leases that
substantially transfer ownership. Accelerated methods are used for tax
depreciation.
INTANGIBLE ASSETS
Intangible assets consist primarily of the excess of cost over the net assets
acquired relating to the acquisitions (see Note 2). The excess of cost over net
assets acquired (goodwill) is amortized over a 20-year period using the
straight-line method. Lease costs and Non-compete agreements are amortized over
a 5-year period, and loan costs are amortized over the life of the loan, and the
straight-line method is used in computing the amortization. Accumulated
amortization totaled approximately $126,033 and $87,000 at March 31, 2000 and
1999, respectively.
IMPAIRMENT OF ASSETS
The Company's policy is to evaluate whether there has been a permanent
impairment in the value of long-lived assets, certain identifiable intangibles
and goodwill when certain events have taken place that indicate that the
remaining balance may not be recoverable. When factors indicate that the
intangible assets should be evaluated for possible impairment, the Company uses
an estimate of related undiscounted cash flows. Factors considered in the
valuation include current operating results, trends and anticipated undiscounted
future cash flows. There have been no impairment losses in 2000 or 1999.
INCOME TAXES
The Company utilizes the guidance provided by Statement of Financial Accounting
Standards No. 109, "Accounting For Income Taxes" (SFAS 109). Under the liability
method specified by SFAS 109, deferred tax assets and liabilities are determined
based on the difference between the financial
F-9
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES - (CONTINUED)
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax
expense is the result of changes in deferred tax assets and liabilities.
EARNINGS PER COMMON SHARE
Earnings (loss) per share are computed using the basic and diluted calculations
on the face of the statement of operations. Basic earnings (loss) per share is
calculated by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings (loss) per
share is calculated by dividing net income by the weighted average number of
shares of common stock outstanding for the period, adjusted for the dilutive
effect of common stock equivalents, using the treasury stock method (See Note
13).
USE OF ESTIMATES
The preparation of 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 and disclosures of
contingent assets and liabilities at March 31, 2000 and 1999, as well as the
reported amounts of 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 financial statements.
REVENUE RECOGNITION
Revenues are recognized for the distribution and manufacturing segments when the
merchandise is shipped to the customer.
STOCK BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation", but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for options
issued to employees, which uses the intrinsic method to determine compensation
expense when the fair market value of the stock exceeds the exercise price on
the date of grant. No compensation expense has been recognized for stock options
granted in 2000 and 1999. If the Company had elected to recognize compensation
expense for stock options based on the fair value at grant date consistent with
the method prescribed by SFAS No. 123, net income and earnings per share would
have been reduced (see Note 12).
ADVERTISING COSTS
The Company charges advertising costs to expense as incurred. Advertising
expense was $124,697 and $170,000 for the years ended March 31, 2000 and 1999,
respectively.
F-10
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company, in estimating its fair value disclosures for financial instruments,
uses the following methods and assumptions:
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES: The
carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses approximate their
fair value due to their relatively short maturity.
LONG-TERM OBLIGATIONS: The fair value of the Company's fixed-rate
long-term obligations is estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. At March 31, 2000, the fair value of
the Company's long-term obligations approximated its carrying value.
CREDIT LINES PAYABLE: The carrying amount of the Company's credit lines
payable approximates fair market value since the interest rate on these
instruments changes with market interest rates.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements for the
year ended March 31, 1999 to conform to the presentation at March 31, 2000.
NOTE 2 - ACQUISITIONS, MERGERS AND DISPOSITION
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 $.30 per 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. Effective April 1, 1998, the Company
merged with its subsidiary.
On June 12, 1998, the Company acquired Innovative Health Products, Inc.,
formerly Energy Factors, Inc., a wholly-owned subsidiary of U.S. Diversified
Technologies, Inc. U.S. Diversified Technologies, Inc. received in exchange for
its capital stock in Energy Factors, 310,000 shares of Series A Convertible
Preferred Stock of the Company representing a fair market value of approximately
$775,000. The Preferred Stock valuation of $2.50 per share is based on several
factors, including prices of recent common stock issuances. In addition, 200,000
options to purchase common stock of the Company at $9 per share, vesting over
three years, were issued to an employee. The acquisition was accounted for under
the purchase method of accounting. Management has determined that the goodwill
of approximately $880,000 associated with this transaction will be amortized
over a 20-year life. The results of operations of Innovative have been reflected
in the Company's results of operations beginning immediately subsequent to the
acquisition date of June 12, 1998.
F-11
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 2 - ACQUISITIONS, MERGERS AND DISPOSITION - (CONTINUED)
The Company previously reported that 400,000 shares of Series A Convertible
Preferred Stock were exchanged. The reduction of shares was a result of a "right
of set-off" provision in the acquisition agreement based on the final evaluation
of the net assets acquired.
The aggregate purchase price of $775,000 was allocated as follows:
Inventory $ 575,000
Property, plant and equipment 2,167,000
Other assets 82,000
Goodwill 881,000
-------------
3,705,000
Less: Liabilities assumed (2,930,000)
-------------
$ 775,000
On June 26, 1998, the Company acquired all of the issued and outstanding capital
stock of Becan Distributors, Inc. in exchange for 1,500,000 shares of common
stock of the Company. The majority owners of Becan were also the majority
shareholders of the Company and, as a result, the majority interest was
accounted for as a combination of entities under common control and treated as
if a "pooling of interests". 485,000 shares of common stock with a fair value of
$727,500 (as estimated by the Board of Directors based on common stock sales to
third parties) were exchanged for the minority interest and resulted in goodwill
of approximately $700,000. Management has determined that the goodwill
associated with this transaction will be amortized over a 20-year life. The
results of operations of Becan for the twelve months ended March 31, 1999 have
been reflected in the Company's results of operations for the fiscal year ended
March 31, 1999. The Company subsequently sold Becan to DrugMax on November 26,
1999. See "Sale of Subsidiary" below.
On August 20, 1998, the Company formed Incredible Products of Florida, Inc. and
contributed $160,000 capital to Incredible. Incredible acquired approximately
$80,000 of assets and assumed approximately $100,000 of liabilities of
Incredible Products, Inc. in exchange for 49% of Incredible Products of Florida.
The acquisition was accounted for under the purchase method of accounting and
resulted in goodwill of approximately $100,000. The results of operations of
Incredible have been reflected in the Company's results of operations beginning
immediately subsequent to the acquisition date of September 1, 1998. Subsequent
to year end, the 49% minority interest was returned to the Company for a nominal
amount. Pro forma information for Incredible is not provided due to its
immateriality.
On September 30, 1998, the Company acquired all of the issued and outstanding
capital stock of J.Labs, Inc. in exchange for 100,000 shares of common stock of
the Company. The merger was accounted for as a combination of entities under
common control and treated as if a "pooling of interests", as the ownership of
J.Labs was also the majority ownership of the Company. The results of operations
of J.Labs, which are immaterial for the twelve months ended March 31, 1999, have
been reflected in the Company's results of operations for the fiscal year ended
March 31, 1999.
F-12
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 2 - ACQUISITIONS, MERGERS AND DISPOSITIONS - (CONTINUED)
On December 29, 1998, the Company formed Herbal Health Products, Inc. Herbal
acquired approximately $160,000 of the assets of Dr. Gerald Schmoling and
Nutrapro, Inc. and assumed approximately $120,000 of the liabilities of Dr.
Gerald Schmoling in return for approximately $18,000 and 32,243 shares of common
stock of the Company valued at $80,608 (the fair value as determined by the
board of Directors based on sales to third parties). Dr. Schmoling also agreed
to receive options to purchase 32,243 additional shares of common stock of the
Company, at $5 per share, which grant and immediately vest upon the attainment
of certain sales and profit goals. The acquisition was accounted for under the
purchase method of accounting and resulted in goodwill of approximately $60,000.
The results of operations of Herbal have been reflected in the Company's results
of operations beginning immediately subsequent to the acquisition date of
December 29, 1998. Pro forma information for Herbal is not provided due to its
immateriality.
In February 2000, Dynamic Life Korea Ltd. ("Dynamic Korea") was incorporated
under the laws of Korea as a wholly owned subsidiary of Dynamic Life Asia, LLC
("Dynamic Asia") which was formed on February 9, 2000 as a limited liability
corporation under the laws of the state of Florida. Asia is a wholly owned
subsidiary of Dynamic Life, Inc., formerly Incredible Products of Florida, Inc.,
which is a wholly-owned subsidiary of the Company.
Dynamic Korea was formed to market the Company's products to distributors in
Korea, and commenced operation in April 2000. The laws of Korea require that a
foreign owned company have minimum capitalization generally equivalent to 10% of
annualized sales. The Company initially deposited $60,000 as an advance to
incorporate Dynamic Korea and subsequently advanced approximately $290,000 as a
contribution to capital in May 2000. As of March 31, 2000 there was no operating
activity by Dynamic Asia or Dynamic Korea.
SALE OF SUBSIDIARY
On November 26, 1999, pursuant to an Agreement and Plan of Reorganization
entered into on September 8, 1999 with DrugMax.com, Inc., formerly
Nutriceuticals.com Corporation, the Company sold all of the shares of capital
stock of Becan Distributors, Inc. and its subsidiary Discount Rx, Inc. to
DrugMax, to further certain of its business objectives, including without
limitation, providing additional working capital to the Company. The Company
received 2,000,000 shares of restricted common stock of Drugmax (with an
estimated fair value of $10.00 per share) and $2,000,000 cash in exchange for
all of the issued and outstanding shares of stock of Becan. Additional
consideration of 1,000,000 restricted shares of common stock, $.001 par value,
of DrugMax were placed in escrow pursuant to an escrow agreement, to be issuable
at a future date to the Company upon the attainment by Becan of certain
projected revenues and gross margins for the fiscal years ending March 31, 2000
and 2001. Becan did not attain its financial target for the fiscal year ending
March 31, 2000 and as a result 500,000 shares were returned from escrow to
DrugMax. The 500,000 shares remaining in escrow will be released to the Company
in the year 2001, provided that DrugMax's operations attributable to Becan
attain certain financial target levels in the fiscal year ending March 31, 2001.
Jugal K. Taneja, a principal shareholder, Chairman of the Board, and Chief
Executive Officer of the Company is also a principal shareholder and a director
of DrugMax. William L. LaGamba, the Chief Executive Officer of DrugMax is also a
principal shareholder of the Company.
F-13
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 3 - ACCOUNTS RECEIVABLE, NET
At March 31, 2000 and 1999, accounts receivable, net consist of the following:
<TABLE>
<CAPTION>
2000 1999
--------------- ---------
<S> <C> <C>
Distribution $ 49,330 $ 1,782,404
Manufacturing 843,020 872,541
------------- ------------
892,350 2,654,945
Less allowance for doubtful accounts (122,189) (119,671)
------------ ------------
Total $ 770,161 $ 2,535,274
============ ===========
</TABLE>
NOTE 4 - INVENTORIES
At March 31, 2000 and 1999, inventories, net consist of the following:
<TABLE>
<CAPTION>
2000 1999
--------------- ---------
<S> <C> <C>
Distribution:
Raw materials $ 37,141 $ -
Finished goods 153,148 1,300,182
Less reserve for obsolescence (1,048) -
Manufacturing:
Raw materials 1,397,780 1,100,823
Work in process 67,102 150,721
Finished goods 23,221 29,027
--------------- --------------
$ 1,677,344 $ 2,580,753
=========== ===========
</TABLE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
At March 31, 2000 and 1999, property, plant and equipment consist of the
following:
<TABLE>
<CAPTION>
2000 1999
--------------- ---------
<S> <C> <C>
Land and building $ 1,513,525 $ 1,421,460
Machinery and equipment 1,176,928 1,035,042
Furniture, fixtures and equipment 405,423 214,597
Vehicles 14,293 27,215
Leasehold improvements 31,390 21,854
-------------- -------------
3,141,559 2,720,168
Less accumulated depreciation and amortization (451,779) (243,811)
------------- ------------
Total $ 2,689,780 $ 2,476,357
=========== ===========
</TABLE>
F-14
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 6 - INVESTMENT IN UNCONSOLIDATED AFFILIATE
Investments in net assets of affiliated companies accounted for under the equity
method amounted to $9,203,062 at March 31, 2000.
The combined results of operations and financial position of the Company's
equity-basis affiliates are summarized below:
<TABLE>
<CAPTION>
Year Ended
MARCH 31, 2000
<S> <C>
Condensed Income Statement Information
Net sales $ 21,050,547
Gross profit 143,776
Net loss (1,988,944)
Condensed Balance Sheet Information:
Current assets 12,106,932
Non-current assets 26,982,358
Current liabilities 6,914,593
Non-current liabilities -
Net worth 32,171,070
</TABLE>
On December 3, 1999, the Company transferred 134,500 shares of its investment in
DrugMax.com, Inc. to certain creditors in satisfaction of $807,000 of its
obligations and recorded a gain of $107,544 related to the transfer.
NOTE 7 - RELATED PARTY TRANSACTIONS
On May 29, 1998, approximately $81,000 of demand notes payable and unpaid
interest payable to the spouse of the Chairman of the Company, was converted
into 271,106 shares of the common stock of the Company. The notes and unpaid
accrued interest at 8.5% were to be repaid in cash or, at the holder's option,
converted into common stock at $.30 per share (which was the fair value of the
common stock at the time of the note, as determined by the Board of Directors).
Interest expense on these notes totaled $1,000 for the year ended March 31,
1999.
Throughout 1999, the Company's Chairman and an affiliate of the Chairman, loaned
the Company an aggregate of approximately $228,000, which loans were repaid in
February and March 1999. Interest on these loans accrued at a rate of 10% per
annum and totaled $11,000 for the year ended March 31, 1999.
Also during 1999, the Company repaid $200,000 in loans made to one of its
subsidiaries by an affiliate of the Chairman during fiscal 1998. Interest on
these loans accrued at the rate of 10% per annum and totaled approximately
$20,000 for the year ended March 31, 1999.
In 1999, the Company's President loaned $25,000 to the Company. In March 1999,
the Company issued 10,616 shares of common stock to its President, valued at
$2.50 per share, as payment in full of principal and accrued interest in the
amount of approximately $27,000 due under the promissory note dated July 21,
1998. Interest on the notes accrued at the rate of 10% per annum, and totaled
$1,500 for the year ended March 31, 1999.
F-15
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
In June 1998, the Company assumed a $25,000 note payable to the Company's Vice
Chairman, associated with the June 12, 1998 Energy Factors acquisition. The note
bears interest at 10.8% per annum and interest totaled $2,000 for the year ended
March 31, 1999.
See the acquisitions of related parties at Note 2.
In August and September 1999, the Company issued promissory notes payable to the
Chairman of the Board of the Company totaling $156,500, which notes were repaid
in December 1999. Interest on these notes accrued at a rate of 10% per annum and
totaled $4,299.
The Company charges a management fee of $20,000 per month to DrugMax for
accounting and administrative services. The fee has been charged since the sale
of Becan in November 1999 and is to continue at that rate through June 2000.
From July 1, 2000 the charge will be on an hourly basis for services rendered.
See the acquisitions of related parties at Note 2.
NOTE 8 - INCOME TAXES
Income tax expense for the years ended March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current income tax $ 400,000 $ -
Deferred income tax 3,363,000 -
------------ ---------
Income tax expense $ 3,763,000 $ -
=========== =====
</TABLE>
Income Taxes for the years ended March 31, 2000 and 1999 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:
F-16
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 8 - INCOME TAXES - (CONTINUED)
<TABLE>
<CAPTION>
2000 1999
---- ----
Computed tax expense at the
<S> <C> <C>
statutory rate $ 3,843,000 $ (112,000)
Increase (decrease) in taxes resulting
from :
State income taxes, net of federal tax
benefit - (11,000)
Effect of permanent differences,
principally non-deductible goodwill - 47,000
Deferred assets not recognized - 76,000
Receivable and inventory allowances 17,000 -
Gains on sales of subsidiary and on
securities (3,310,000) -
Equity in loss of affiliate company 187,000 -
Depreciation (40,000) -
Net operating loss utilization (297,000) -
---------------------- ----------
Current income tax expense $ 400,000 $ -
================-- ============
</TABLE>
Temporary differences that give rise to deferred tax assets and liabilities:
<TABLE>
<CAPTION>
2000 1999
Deferred tax assets:
<S> <C> <C>
Bad debts $ 57,000 $ 45,000
Inventories 64,000 54,000
Deposits 37,000 32,000
Net operating loss carryforwards - 294,000
------------------ ---------
Gross deferred tax assets 158,000 425,000
Less: Valuation allowance - 371,000
------------------ ---------
158,000 54,000
================================== ======
Deferred tax liabilities:
Depreciation $ 58,000 $ 54,000
Gain on sale of subsidiary
and securities 3,463,000 -
------------------ --------
$3,521,000 $ 54,000
================== ========
</TABLE>
F-17
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has operating leases for facilities and certain machinery and
equipment that expire at various dates through 2004. Certain leases provide an
option to extend the lease term. Certain leases provide for payment by the
Company of any increases in property taxes, insurance, and common area
maintenance over a base amount and others provide for payment of all property
taxes and insurance by the Company.
Future minimum lease payments, by year and in aggregate under non-cancelable
operating leases, consist of the following at March 31, 2000:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31
<S> <C> <C>
2001 $ 103,575
2002 31,080
2003 31,080
2004 25,900
2005 -
Thereafter -
-----
$ 191,635
</TABLE>
Total rent expense for the years ended March 31, 2000 and 1999 was approximately
$125,700 and $119,000, respectively.
EMPLOYMENT AGREEMENTS
In March 1999, the Company entered into Employment Agreements with certain
members of management. Each employment agreement has a term of three years and
are renewed automatically for successive periods of one year after their
expiration unless, not less than 30 days prior to the end of the initial term or
any one-year renewal period, one of the parties sends written notice to the
other party of its intent to terminate the agreement. In conjunction with the
acquisition of Energy Factors in June 1998, the company entered into a
three-year Employment Agreement with Energy Factors' former President, who is
currently Vice Chairman of the Company. Annual salaries payable under these
contracts amount to $550,000 plus an annual bonus at the discretion of the Board
of Directors.
F-18
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 9 - COMMITMENTS AND CONTINGENCIES - (CONTINUED)
COMMITMENTS AND CONTINGENCIES
The Company established a subsidiary in Korea to market its products to
distributors in Korea. In May 2000, Dynamic Korea entered into an agreement to
lease certain office and residential space for a one year period at a monthly
rental amount of $16,500.
LITIGATION
The Company is, from time to time, involved in litigation relating to claims
arising out of its operations in the ordinary course of business. The Company
believes that none of the claims that were outstanding as of March 31, 2000
should have a material adverse impact on its financial condition or results of
operations.
YEAR 2000 ISSUE
The Company did not experience any failure of its own systems or those of any
third party with whom it conducts business, as a result of the Year 2000. 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.
NOTE 10 - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at March 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------ ---- ----------
Notes payable collateralized by real property, due in monthly
principal payments of $12,256 plus interest at a rate of 12% through
October 2002, requiring a balloon payment due October 2002. This note
was retired in September 1999 and replaced with the note described
below.
<S> <C> <C>
$ - $839,276
Note payable collateralized by real property, due in monthly payments
of $8,153, including interest at prime (9.00% at March 31,
2000) plus 2.25% through October 2024. -
876,764
Note payable collateralized by certain equipment, due in monthly
principal payments of $8,192 plus interest through February 2004,
interest rate at prime (6.75% at March 31, 2000) plus 2.25%.
363,164 483,328
</TABLE>
F-19
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
<TABLE>
Note payable collateralized by certain equipment, due in monthly
payments of $2,874, including interest at 9.50% through January,
<S> <C> <C>
2003. 85,350 -
Capitalized lease obligations for equipment, due in monthly principal
and interest payments of approximately $8,659 through 2004.
290,820 264,551
Convertible notes payable (Series A), convertible anytime after the
expiration of six months after the consummation by the Company of an
IPO at a conversion price of an amount equal to the lesser of 50% of
the price at which the Company sold its common stock in the IPO or
50% of the average closing price of the common stock during the five
trading days prior to the receipt by the Company of written notice of
conversion, principal payments of $154,500 are payable quarterly on
February 1, May 1, August 1, and November 1 until February 1, 2002 or
until converted into common stock, interest at 8% per annum is also
payable quarterly with the principal payments.
1,390,500 -
Unsecured 10% notes payable due at April 30, 1999 - 125,000
Unsecured 10% notes payable due at the closing of an IPO with
interest. - 125,000
Other 108,717 198,881
-- ------- -------
3,115,315 2,036,036
Less current maturities 915,806 643,243
--- ------- -------
Total $2,199,509 $1,392,793
========== ==========
</TABLE>
At March 31, 2000, aggregate maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C> <C>
2001 $ 915,806
2002 1,019,767
2003 199,498
2004 139,771
2005 15,466
Thereafter 825,007
------------
Total $ 3,115,315
===========
</TABLE>
F-20
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 10 - LONG-TERM OBLIGATIONS - (CONTINUED)
In February 2000 the holders of the Series A 8% convertible notes payable were
issued common stock purchase warrants. No value was assigned to the warrants as
the value was insignificant. Each stock warrant entitles the holder to purchase
one (1) share of common stock for each $2.50 of principal amount loaned at an
exercise price equal to the lesser of 50% of the price at which the Company
common stock is sold in a IPO or 50% of the average closing price of the common
stock during the five trading days prior to the receipt by Company of a Notice
of Exercise from the warrant holder. The warrants expire December 31, 2004.
NOTE 11 - CREDIT LINES PAYABLE
In February 1999, the Company established a $2 million revolving credit facility
scheduled to mature in February 2002. The credit available to the Company is
based on a percentage of eligible accounts receivable and inventory. A portion
of the proceeds from the line of credit was funded in the form of a 60-month
term loan for approximately $491,000 (see Note 9). The credit available to the
Company under this line was approximately $780,285 at March 31, 2000. The
facility imposes no financial covenants. Minimum borrowing under the agreement
is $1,000,000. The agreement places limitations on disposition of assets and
debt funding to transactions within the normal course of business and restricts
the payment of dividends to any shareholder of record of any class of Company
stock during the term of the agreement. All borrowings accrue interest at prime
(8.75% at March 31, 2000) plus 2.25% and are secured by all assets of the
company except those of Becan and Discount. At March 31, 2000, the Company had
borrowed $856,551 under this facility.
In December 1999, the Company established a $500,000 revolving credit facility
scheduled to mature in November 2000. The collateral for this loan is a
certificate of deposit owned by the Company and held by the lending institution.
The credit available to the company under this line was approximately $7,300 at
March 31, 2000. The facility imposes no financial covenants. All borrowings
accrue interest at 2.10% over the rate paid on the certificate of deposit
serving as collateral for this loan. At March 31, 2000, the Company had borrowed
$492,733 under this facility.
The credit lines payable are included with current liabilities instead of
long-term liabilities as management believes that this presentation better
reflects the utility of the current assets as the source of repayment for the
credit lines payable.
NOTE 12 - SHAREHOLDERS' EQUITY
In August 1998, upon the filing by the Company of Articles of Amendment to its
Articles of Incorporation, a one-for-three reverse stock split of the common
stock of the Company was effected.
In August 1998, upon the filing by the Company of Articles of Amendment to its
Articles of Incorporation, the Company established Series A Convertible
Preferred Stock. The Series A Preferred was issued in conjunction with the
Company's acquisition of Energy Factors. Terms associated with the issuance of
the Series A Preferred are: (1) Shareholders are not entitled to receive
dividends, (2) Liquidation preference of $5 per share over any junior stock,
including common stock, (3) Automatic conversion to one share of common stock if
the average closing price of the common stock for any five
F-21
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 12 - SHAREHOLDERS' EQUITY (CONTINUED)
consecutive trading day period is $5 per share or more, and (4) Holders of
Series A Preferred are entitled to the same voting rights as shareholders of
common stock as a single class.
In September 1998, upon the filing by the Company of Articles of Amendment to
its Articles of Incorporation, the Company established Series B 6% Cumulative
Convertible Preferred Stock. The Series B Cumulative Convertible Preferred Stock
was issued for cash used in the operations of the Company. Terms associated with
the issuance of Series B Preferred are: (1) Shareholders are entitled to receive
dividends on each outstanding share at an annual rate of 6%, (2) Liquidation
preference of $2.50 per share over any junior stock, including common stock, (3)
Automatic conversion to one share of common stock if the average closing price
of the common stock for any five consecutive trading day period is $5 per share
or more, and (4) Holders of Series B Preferred have no voting rights.
In February 2000, the Company issued $1,545,000 aggregate principal amount of
its Series A 8% Convertible Promissory Notes (Notes) and Warrants to purchase
common stock of the Company. The Notes and Warrants were issued in exchange for
618,000 shares of the Company's common stock, which shares were issued in
conjunction with a private placement undertaken in 1998. The Notes are
convertible, and the Warrants exercisable, for shares of the Company's common
stock at a price equal to the lesser of (i) 50% of the price at which the
Company sells its shares of common stock in an initial public offering, or (ii)
50% of the average closing price of the common stock during the five trading
days prior to receipt by the Company of written notice of conversion. The
Warrants expire if the Company does not complete an initial public offering by
December 31, 2002. Principal of and interest on the Notes is payable on each
February 1, May 1, August 1 and November 1, with the entire unpaid balance, plus
accrued interest thereon, payable in full on February 1, 2002. The 618,000
shares of the Company's common stock were subsequently canceled by the Company.
NOTE 13 - STOCK OPTIONS
EMPLOYEE STOCK OPTION PLAN
The Company's Stock Option Plan ("SOP") was adopted in March 1999 to provide for
the grant to employees up to 1,500,000 incentive stock options within the
meaning of Section 422 of the Internal Revenue Code. The SOP is intended to
provide incentives to directors, officers, and other key employees and to
enhance the Company's ability to attract and retain qualified employees. Stock
options are granted for the purchase of Common Stock at a price not less than
the fair market on the date of grant. In March 1999, options were granted, under
the SOP, to purchase 210,000 shares of common stock of the Company at $2.50 per
share, vesting equally over a three-year period from the date of grant.
F-22
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 13 - STOCK OPTIONS - (CONTINUED)
OTHER TRANSACTIONS
In March 1999, the Company granted the Chairman options to purchase 500,000
shares of common stock at $2.50 per share, which is the fair value as determined
by the Board of Directors. The options were granted in return for the guarantee
of the credit lines payable by the Chairman, and vest equally over a three-year
period from the date of grant.
In conjunction with an acquisition, the Company issued options to purchase
200,000 shares at $9.00 per share (See Note 2).
The following table summarizes information about the aggregate stock option
activity for the years ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
OF SHARES PRICE OF SHARES PRICE
<S> <C> <C> <C>
Outstanding, beginning of year 910,000 $ 3.93 - $ -
Granted 30,000 2.50 910,000 3.93
Exercised - - - -
Expired (50,000) 2.50 - -
---------- ------------------------------------------
Outstanding vested, end of year 890,000 $ 3.96 910,000 $ 3.93
========= ============= ======== ===========
Options vested, end of year 286,667 $4.01 $ -
======= ===== ============================
</TABLE>
The weighted average fair value of options granted during 1999 on granted
options whose exercise price exceeds the market price of the stock on the grant
date is $0.07. The weighted average fair value of options granted during 1999 on
granted options whose exercise price is the market price of the stock on the
grant date is $1.22.
The weighted average fair value of options granted during 1998 on granted
options whose exercise price equals the market price of the stock on the grant
date was immaterial. There were no granted options whose exercise price is less
than the market price of the stock on the grant date in 1998.
F-23
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 13 - STOCK OPTIONS - (CONTINUED)
The following table summarizes information concerning currently outstanding and
exercisable stock options:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted
Contractual Average
Range of Number Life Exercise
EXERCISE PRICES OUTSTANDING (YEARS) PRICE
Outstanding Shares
<S> <C> <C> <C> <C>
$2.50 690,000 4.02 $2.50
$9.00 200,000 3.25 $9.00
</TABLE>
The Company has adopted only the disclosure provision of SFAS No. 123, as it
related to employee awards. APB No. 25 is applied in accounting for the plan.
Accordingly, no compensation expense is recognized related to the stock based
compensation plans. The pro forma net earnings per common share, if the Company
had elected to account for its plan consistent with the methodology prescribed
by SFAS No. 123, are shown in the following table:
<TABLE>
<CAPTION>
1999
Net earnings (loss):
As reported $ (301,894)
<S> <C>
Pro forma $ (330,000)
Net earnings (loss) per common share - basic and diluted:
As reported $ (0.11)
Pro forma $ (0.12)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Binomial options pricing model with the following weighted average assumptions
used for grants in 1999: no dividend yields; expected volatility of 50%; risk
free interest rates of 5.6%; and expected lives of 4.5 years. The weighted
average fair value of options granted in 1999 is $.97.
F-24
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 14 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings
per common share:
<TABLE>
<CAPTION>
2000 1999
--------------- ----------
Numerator:
<S> <C>
Net earnings (loss) $ (299,359)
Less: preferred stock dividends (2,535)
------------
$ (301,894)
Denominator:
For basic earnings per share - weighted and dilutive
average shares 2,865,190
Effect of dilutive securities:
Employee stock options -
Series A Convertible Preferred Stock -
Series B Cumulative Convertible Preferred Stock -
----------------
For diluted earnings per share 2,865,190
=========
Net earnings (loss) per common share - Basic $ (0.11)
Net earnings (loss) per common share - Diluted $ (0.11)
</TABLE>
The effect of all dilutive securities for 2000 (see Notes 9, 11 and 12) were not
included in the calculation of diluted net loss per share, as the effect would
have been anti-dilutive.
NOTE 15 - CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are limited due
to the distribution of sales over a large customer base as of March 31, 2000.
For the year ended March 31, 2000, one customer represented approximately % of
revenues derived from distribution while three customers represented
approximately % of revenues derived from manufacturing operations. No customers
represented 10% or more of consolidated revenues as of March 31, 1999. For the
year ended March 31, 1999, one customer represented 10.8% of revenues derived
from distribution while three customers represented approximately 32% of
revenues derived from manufacturing operations.
The Company has no concentration of customers within specific geographic areas
outside the United States that would give rise to significant geographic credit
risk.
F-25
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 16 - FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
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 radio,
catalog sales and infomercials throughout the United States. The Company has two
manufacturing facilities located in the greater Tampa Bay, Florida area and
distribution centers located in Pittsburgh, Pennsylvania and Mandeville,
Louisiana. Intersegment sales include a margin, based on market pricing, which
is eliminated in consolidation. The Company sold its distribution subsidiary on
November 26, 1999 and thereafter was only a manufacturing segment.
The following table shows net sales, gross profit, operating income and assets,
which are the areas management uses in its business segment analysis. Amounts
shown below are as of and for the years ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
-------------- ---------
(in thousands)
Revenues
<S> <C>
Distribution $ 31,982
Manufacturing 4,416
-------------
36,398
Intersegment sales 2,750
------------
Total $ 39,148
==========
Gross profit
Distribution $ 1,737
Manufacturing 997
-------------
Total $ 2,734
===========
2000 1999
-------------- ---------
(in thousands)
Operating income (loss)
Distribution $ (5)
Manufacturing (119)
-------------
Total $ (124)
============
Assets
Distribution $ 4,736
Manufacturing 4,618
Corporate 1,187
-------------
Total $ 10,541
===========
</TABLE>
F-26
<PAGE>
DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 17 - SUBSEQUENT EVENTS
PUBLIC OFFERING
The Company's wholly owned subsidiary Go2Pharmacy.com, Inc. (Go2) filed a
registration statement with the Securities and Exchange Commission to offer up
to 1,150,000 shares of common stock to the public. The gross proceeds are
projected to be approximately $10,000,000 and the proceeds of the offering are
to be generally used to fund expansion of the business, retirement of debt and
working capital.
PENDING PURCHASE OF COMPANY
Simultaneously with the public offering, Go2 has an agreement to acquire the
Delaware corporation Go2Pharmacy.com, Inc. (Go2Delaware) for 3,000,000 shares of
common stock of Go2.
In April 2000, the Company formed a new wholly owned subsidiary to market and
distribute the Company's own branded product, Lean Protein.
F-27
