---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-QSB





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




| |  |  | For the quarterly period ended September 30, 2002
| |  |  | -------------------------------------------------




| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | -----------------------------------------------------------------------------------------




| |  |  | For the transition period from
 to
| |  |  | ----------------------------------




Commission file number 0-23031





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DYNAMIC HEALTH PRODUCTS, INC.


(Exact name of small business issuer as specified in its charter)





Florida

34-1711778(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)12399 Belcher Road South, Suite 160, Largo, Florida

33773(Address of principal executive offices)

(Zip Code)





Issuers telephone number (727) 324-6667





---




Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.  x  Yes  ̈ No





The number of shares outstanding of the Issuers common stock at $.01 par value as of November 14, 2002 was 3,082,875.





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---




PART IFINANCIAL INFORMATION





Item 1. CONSOLIDATED FINANCIAL STATEMENTS.





DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS





September 30, 2002


March 31, 2002(Unaudited)


(Audited)ASSETSCurrent assets:Cash and cash equivalents

$
276,932


$
666,213Certificate of deposit


45,368



51,461Marketable equity securities, net


4,196



8,341Accounts receivable, net


119,335



14,146Inventories


103,174



96,903Prepaid expenses


58,309



41,434Other current assets


114,406



28,543Due from affiliates


2,683



471Due from related parties






1,145Notes receivable, net






Notes receivable from affiliates


35,907



80,303Total current assets


760,310



988,960Property, plant and equipment, net


1,399,323



1,423,019Intangible assets, net


25,205



25,827Investments in unconsolidated affiliates


4,375,818



7,484,703Notes receivable


1,071,027



1,028,411Note receivable from affiliate






393,228Other assets, net


15,489



11,746Total assets

$
7,647,172


$
11,355,894LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
238,812


$
218,735Other payables


163,918



97,523Current portion of long-term obligations


41,057



44,758Accrued expenses


45,153



59,101Obligations to affiliates


34,863



138,769Total current liabilities


523,803



558,886Deferred income taxes


1,096,782



2,440,241Long-term obligations, less current portion


879,430



862,812Total liabilities


2,500,015



3,861,939Commitments and contingenciesShareholders equity:Series A Convertible Preferred stock, $.01 par value; 400,000 shares authorized; no shares issued or
outstanding






Series B 6% Cumulative Convertible Preferred stock, $.01 par value; 800,000 shares authorized; no shares and 20,000
shares issued and outstanding, at face value






50,000Common stock, $.01 par value; 20,000,000 shares authorized; 3,082,875 and 3,052,141 shares issued and
outstanding


30,828



30,521Additional paid-in capital


2,538,144



2,472,727Retained earnings


2,644,117



5,017,791Accumulated other comprehensive income:Unrealized losses on marketable equity securities


(65,932
)


(77,084
)Total shareholders equity


5,147,157



7,493,955Total liabilities and shareholders equity

$
7,647,172


$
11,355,894





See accompanying notes to condensed consolidated financial statements.







-2-




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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)





Three Months Ended September
30,


Six Months Ended September
30,2002


2001


2002


2001Revenues

$
244,581


$
332,640


$
420,402


$
631,101Cost of goods sold


95,796



180,531



166,481



338,970Gross profit


148,785



152,109



253,921



292,131Operating expenses:Selling, general and administrative expenses


225,267



444,912



471,364



904,296Amortization expense


311



1,676



622



3,352Depreciation expense


23,657



26,354



46,689



52,663Total operating expenses


249,235



472,942



518,675



960,311Operating income (loss) before other income and expense


(100,450
)


(320,833
)


(264,754
)


(668,180
)Other income (expense):Interest income


23,520



18,873



57,680



39,984Other income and expenses, net


52,218



108,386



99,343



272,933Equity in income (loss) of affiliated companies


(3,374,547
)


248,228



(3,538,730
)


548,139Losses on marketable equity securities, net


(21,570
)


(17,503
)


(21,570
)


(17,540
)Interest expense


(16,035
)


(43,920
)


(34,043
)


(91,370
)Total other income (expense)


(3,336,414
)


314,064



(3,437,320
)


752,146Income (loss) before income taxes


(3,436,864
)


(6,769
)


(3,702,074
)


83,966Income tax expense (benefit)


(1,328,400
)


300



(1,328,400
)


300Net income (loss)


(2,108,464
)


(7,069
)


(2,373,674
)


83,666Preferred stock dividends






1,125







2,250Net income (loss) available to common shareholders

$
(2,108,464
)

$
(8,194
)

$
(2,373,674
)

$
81,416Basic income (loss) per share

$
(0.69
)

$



$
(0.77
)

$
0.03Basic weighted average number of common shares outstanding


3,072,258



2,917,141



3,067,282



2,917,141Diluted income (loss) per share

$
(0.69
)

$



$
(0.77
)

$
0.02Diluted weighted average number of common shares outstanding


3,072,258



2,917,141



3,072,200



3,457,141





See accompanying notes to condensed consolidated financial statements.







-3-




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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY


Six Months Ended September 30, 2002





Accumulated OtherComprehensive IncomeSeries APreferred Stock

Series BPreferred Stock


Common Stock

Additional Paid-in Capital

Retained Earnings


Unrealized Losses
on Securities


Total Shareholders EquityShares

Dollars

Shares


Dollars


Shares

DollarsBalances at March 31, 2002 (Audited)



$


20,000


$
50,000


3,052,141

$
30,521

$
2,472,727

$
5,017,791


$
(77,084
)

$
7,493,955COMPREHENSIVE INCOME (LOSS)Net income (loss)






















(2,373,674
)






(2,373,674
)Unrealized gains (losses) on marketable equity securities (net of tax of $ 6,273)


























11,152



11,152Comprehensive income (loss)






























(2,362,522
)Conversion of 20,000 shares of Series B preferred stock to 20,000 shares of common stock






(20,000
)


(50,000
)

20,000


200


49,800










Issuance of 10,734 shares of common stock in payment of accrued preferred share dividends













10,734


107


15,617










15,724Balances at September 30, 2002 (Unaudited)



$





$



3,082,875

$
30,828

$
2,538,144

$
2,644,117


$
(65,932
)

$
5,147,157





See accompanying notes to condensed consolidated
financial statements.




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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)





Six Months EndedSeptember 30,2002


2001Cash flows from operating activities:Net income (loss)

$
(2,373,674
)

$
83,666Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization


47,311



56,014Equity in (income) loss of affiliated companies


3,538,730



(548,138
)Losses on sale of marketable equity securities, net


21,570



17,503Changes in operating assets and liabilities:Accounts receivable


(105,189
)


Inventories


(6,271
)


18,172Due to/from affiliates, net


(117,653
)


27,972Prepaid expenses


(16,875
)


(47,464
)Other current assets


(85,863
)


(24,767
)Other assets


(46,359
)


19,108Accounts payable


20,077



23,530Other payables


66,395



(13,221
)Accrued expenses


1,775



54,622Deferred income taxes


(1,349,732
)


Net cash used in operating activities


(405,758
)


(333,003
)Cash flows from investing activities:Purchases of property and equipment


(22,993
)


(1,261
)Purchase of certificate of deposit


(45,906
)


(50,483
)Redemption of certificate of deposit


51,999



Purchase of investment in common stock






(50,349
)Proceeds from sale of marketable equity securities






2,351Proceeds from related party receivables


20,460



23,406Net cash provided by (used in) investing activities


3,560



(76,336
)Cash flows from financing activities:Proceeds from issuance of long-term obligations


34,651



15,832Payments of long-term obligations


(21,734
)


(17,952
)Proceeds from issuance of related party obligations






11,620Net cash provided by financing activities


12,917



9,500Net increase (decrease) in cash


(389,281
)


(399,839
)Cash and cash equivalents at beginning of period


666,213



1,131,156Cash and cash equivalents at end of period

$
276,932


$
731,317





See accompanying notes to condensed consolidated
financial statements.







-5-




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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(Continued)





Six Months Ended September 30,2002

2001Supplemental disclosure of cash flow information:Cash paid during the period for interest

$
33,697

$
69,114Cash paid during the period for income taxes

$
21,332

$
300Supplemental schedule of non-cash investing activities:Exchange of notes receivable from affiliate to investment in preferred stock of affiliate

$
429,846

$
Obligation to affiliate incurred for purchase of investment in common stock

$


$
149,651Supplemental schedule of non-cash financing activities:Conversion of Series B 6% Cumulative Convertible Preferred stock into common stock

$
50,000

$
Accrual of preferred stock dividends

$
377

$
2,250Issuance of common stock in payment of accrued preferred share dividends

$
16,101

$






See accompanying notes to condensed consolidated financial statements.




-6-




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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


FOR THE THREE AND SIX MONTHS ENDED


SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001





NOTE ABASIS OF PRESENTATION





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles for interim financial information and with the
instruction to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles for complete consolidated financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2002 and 2001 are not necessarily
indicative of the results that may be expected for the year ending March 31, 2003. For further information, refer to the consolidated financial statements and footnotes included in the Companys Form 10-KSB for the year ended March 31, 2002.





Certain reclassifications have been made to the financial statements as of and for the three and six months ended
September 30, 2001, and as of March 31, 2002, to conform to the presentation as of and for the three and six months ended September 30, 2002.





NOTE BPRINCIPLES OF CONSOLIDATION





The condensed consolidated financial
statements as of and for the three and six months ended September 30, 2002 include the accounts of Dynamic Health Products, Inc. and its principally wholly-owned subsidiaries (collectively the Company), J. Labs, Inc., Dynamic Life
Products, Inc., Herbal Health Products, Inc. (Herbal), Dynamic Life, Inc. and its subsidiary Dynamic Life Asia, LLC, Dynamic Financials Corporation and its subsidiary Bryan Capital Limited Partnership, and Todays Drug, Inc.
Significant intercompany balances and transactions have been eliminated in consolidation.





The condensed
consolidated financial statements as of and for the three and six months ended September 30, 2001 include the accounts of Dynamic Health Products, Inc. and its principally wholly-owned subsidiaries, J. Labs, Inc., Dynamic Life Products, Inc., Herbal
Health Products, Inc., 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. Effective November
30, 2001, the Company sold Dynamic Life Korea Ltd. (Dynamic Korea). Dynamic Korea has a year end of December 31. Accordingly, the condensed consolidated financial statements as of and for the three and six months ended September 30, 2001
include the results of operations of Dynamic Korea from April 1, 2001 through June 30, 2001 and January 1, 2001 through June 30, 2001. Significant intercompany balances and transactions have been eliminated in consolidation.







-7-




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NOTE CINVESTMENTS IN UNCONSOLIDATED AFFILIATES





Investments in companies in which the Company has a 20% to 50% interest are accounted for using the equity method. Accordingly, the investments are carried at cost,
adjusted for the Companys proportionate share of their undistributed earnings and losses.





Investment in net
assets of an affiliated company, DrugMax, Inc. (DrugMax), accounted for under the equity method amounted to $3,800,074 as of September 30, 2002, with ($3,339,051) and ($3,494,265), and $249,617 and $549,528 being recorded as the
Companys share of DrugMaxs income (loss) for the three and six months ended September 30, 2002 and 2001, respectively. At September 30, 2002 and 2001, the Company owned approximately 27% and 34% of DrugMax, respectively. Based on market
prices, this investment had a market value of approximately $2,783,520 at September 30, 2002.





The consolidated
results of operations for the three and six months ended September 30, 2002 and 2001, and the financial position of the Companys equity-basis affiliate, DrugMax, as of September 30, 2002 are summarized below:





Three MonthsEndedSeptember 30,

Six MonthsEndedSeptember 30,2002


2001

2002


2001(Unaudited)


(Unaudited)

(Unaudited)


(Unaudited)Condensed Income Statement Information:Net sales

$
73,736,121


$
66,187,701

$
136,839,940


$
137,064,013Gross profit


2,279,786



1,676,828


4,260,612



3,478,116Net income (loss)


(12,298,531
)


735,466


(12,870,220
)


1,619,114





As of September 30, 2002(Unaudited)Condensed Balance Sheet Information:Current assets

$
38,369,983Non-current assets


15,892,923Current liabilities


35,021,970Non-current liabilities


664,560Total shareholders equity


18,576,376





Investment in net assets of an affiliated company, Vertical Health
Solutions, Inc. (Vertical), amounted to $405,108 as of September 30, 2002, with $30,178 and $34,238 being recorded as the Companys share of Verticals loss for the three and six months ended September 30, 2002, respectively.
At September 30, 2002 and 2001, the Company owned approximately 21% and 4% of Vertical, respectively. The investment in net assets of Vertical amounted to $9,500 as of September 30, 2001. Upon the Company entering into a Conversion Agreement with
Vertical, effective June 30, 2002, whereby the Company received 429,846 shares of Series A Preferred stock of Vertical, the Company began accounting for the investment under the equity method (see Note D). As the investment was not accounted for
under the equity method during the comparable September 30, 2001 periods presented, no financial information is provided for the three and six months ended September 30, 2001.




-8-




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The consolidated results of operations for the three and six months ended September 30, 2002, and the financial position
of the Companys equity-basis affiliate, Vertical, as of September 30, 2002 are summarized below:





Three MonthsEndedSeptember 30, 2002


Six MonthsEndedSeptember 30, 2002(Unaudited)


(Unaudited)Condensed Income Statement Information:Net sales

$
488,005


$
811,976Gross profit


182,548



353,413Net loss


(144,072
)


(270,318
)





As OfSeptember 30, 2002(Unaudited)Condensed Balance Sheet Information:Current assets

$
411,899Non-current assets


285,969Current liabilities


976,161Non-current liabilities


31,124Shareholders deficit


(309,417
)





Investment in net assets of an affiliated company, Tribeca Beverage
Company (Tribeca), accounted for under the equity method amounted to $170,636 as of September 30, 2002, with $5,318 and $10,227 being recorded as the Companys share of Tribecas loss for the three and six months ended
September 30, 2002, respectively. At September 30, 2002 and 2001, the Company owned 20% of Tribeca.





The results
of operations for the three and six months ended September 30, 2002 and 2001, and the financial position of the Companys equity-basis affiliate, Tribeca, as of September 30, 2002 are summarized below:





Three MonthsEndedSeptember 30,


Six MonthsEndedSeptember 30,2002


2001


2002


2001(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Condensed Income Statement Information:Net sales

$
15,908


$



$
53,862


$
Gross profit


7,208







24,353



Net income (loss)


(26,589
)


(6,944
)


(51,133
)


(6,944
)







-9-




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As ofSeptember 30, 2002(Unaudited)Condensed Balance Sheet Information:Current assets

$
79,407Non-current assets


5,129Current liabilities


23,355Non-current liabilities


Total shareholders equity


61,181





NOTE DCONVERSION OF NOTES RECEIVABLE FROM AFFILIATE





In July 2000, certain notes receivable totaling $425,000 arose pursuant to Herbals sale of substantially all of its assets relating
to the distribution of veterinary products to Vertical Health Solutions, Inc., an affiliate of the Company. Effective June 30, 2002, the Company entered into a Conversion Agreement with Vertical whereby the parties agreed to convert the
Companys notes receivable from Vertical, with a balance of unpaid principal and interest due of $429,846, into 429,846 shares of Series A preferred stock of Vertical. As of September 30, 2002, the investment in Vertical amounted to $405,108
and is included in investments in unconsolidated affiliates.





NOTE ECOMPREHENSIVE INCOME





The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting
Comprehensive Income, which became effective for the Company for the fiscal year ended March 31, 1999. SFAS 130 establishes standards for reporting and display of comprehensive income within the general purpose financial statements and requires
reclassification of applicable financial statement components for any prior period comparative financial statement components. The Company has implemented SFAS 130 as of and for the three and six months ended September 30, 2002 based on
comprehensive income transactions being present. The Company has elected to present the comprehensive income items within the shareholders equity section of the balance sheet in addition to presenting a consolidated statement of changes in
shareholders equity statement. The following presents comprehensive income as of September 30, 2002:





Before-Tax Amount


Tax (Expense)Benefit

Net-of-TaxAmountUnrealized losses (gains) on marketable equity securities held for sale

$
(17,425
)

$
6,273

$
(11,152
)Other comprehensive income

$
(17,245
)

$
6,273

$
(11,152
)





NOTE FINCOME TAXES





The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. Under SFAS 109, the
Company uses the asset and liability method which recognizes the amount of current and deferred taxes payable or refundable based on transactions recorded as of and for the periods presented in the consolidated financial statements as determined by
the enacted tax laws and tax rates. The company has a current and a deferred tax liability recorded as of September 30, 2002




-10-




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of zero and $1,096,782, respectively, primarily as a result of the differences arising between book and tax basis of the gain resulting from the Companys sale of its subsidiary, Becan
Distributors, Inc. (Becan), in November 1999.





NOTE GRELATED PARTY TRANSACTIONS





On October 1, 1999, the Company entered into a triple-net lease agreement with Innovative Companies, Inc., formerly Go2Pharmacy, Inc.
(Innovative), an affiliate of the Company, whereby Innovative agreed to lease the Companys land and 33,222 square foot building in Largo, Florida for a term of ten years at approximately $192,000 annually. The lease provides for an
annual cost-of-living increase. This facility serves as Innovatives corporate headquarters and also serves as part of Innovatives offices, manufacturing, warehousing and shipping operations. Jugal K. Taneja, a principal shareholder and
Chairman of the Board of the Company is also a principal shareholder, and Chairman of the Board of Innovative.





On
March 22, 2002, the Company entered into a Sublease and Consent agreement with Innovative Health Products, Inc., a wholly-owned subsidiary of Innovative, whereby the Company agreed to sublease approximately 5,200 square feet of office and warehouse
space for its executive offices and its operations in Largo, Florida. This facility serves as the Companys corporate headquarters and is also used for offices, warehousing and shipping operations. The facility is sublet for a term of
approximately one year, ending on March 31, 2003. The sublease contains an option to continue the sublease subsequent to March 31, 2003, on a month-to-month basis through January 10, 2004, unless terminated earlier. The rental under the sublease is
$33,384 annually.





For the three and six months ended September 30, 2002 and 2001, purchases of products from
subsidiaries of Innovative were approximately $46,371 and $94,122, and $43,258 and $99,574, respectively. For the three and six months ended September 30, 2002, sales of products to a subsidiary of Innovative were approximately $3,394 and zero,
respectively. There were no sales of products to subsidiaries of Innovative for the three and six months ended September 30, 2001. As of March 31, 2002 and September 30, 2002, approximately $74,701 and $14,140, respectively, were due to subsidiaries
of Innovative, and are included in obligations to affiliates.





For the three and six months ended September 30,
2002 and 2001, sales of products to a subsidiary of DrugMax, an affiliate of the Company, were approximately $5,760 and zero, respectively. As of March 31, 2002 and September 30, 2002, $113 and $606, respectively, were due from DrugMax, and are
included in due from affiliates. Jugal K. Taneja, a principal shareholder and Chairman of the Board of the Company is also a principal shareholder, Chairman of the Board and Chief Executive Officer of DrugMax. William L. LaGamba, the Chief Operating
Officer and President of DrugMax is also a principal shareholder of the Company.





Amounts due from affiliates and
amounts due to affiliates represent amounts owed to or amounts owed by the Company for sales or purchases occurring in the normal course of business. Amounts due from and to these affiliates are in the nature of trade payables or receivables and
fluctuate based on sales and purchasing volume and payments received.





In May 2002, the Company issued 20,000
shares of common stock of the Company. The 20,000 shares of common stock were issued in exchange for 20,000 shares of Series B 6%







-11-




---

Cumulative Convertible Preferred stock of the Company, which shares were issued in conjunction with a private placement undertaken in 1998.





In July 2002, the Company declared a dividend distribution of 23,709 shares of its investment in Innovatives common stock to the holders of record of Series B 6%
Cumulative Convertible Preferred stock of the Company, as of December 31, 2001.





NOTE HSHAREHOLDERS EQUITY





In May 2002, the Company issued 20,000 shares of its common stock. The 20,000 shares of common stock were
issued in exchange for 20,000 shares of Series B 6% Cumulative Convertible Preferred stock of the Company, which shares were issued in conjunction with a private placement undertaken in 1998.





In July 2002, the Company obtained clearance of its Form 211 with NASD Regulation for listing of the Companys common stock on the OTC Bulletin Board.





In September 2002, the Company issued 10,734 shares of its common stock in payment of $16,101 of accrued
preferred share dividends.





NOTE ISUBSEQUENT EVENT





On October 10, 2002, the Board of Directors of the Company approved the declaration of a dividend distribution to holders of record of its issued and outstanding common
shares as of October 10, 2002, in the form of approximately 1,933,000 shares of DrugMax, Inc., a Nevada Corporation, which the Company owns. The payment rate will be .626882 shares of DrugMax common stock for each share of the Companys common
stock held on October 10, 2002.




-12-




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Item 2.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





The following management discussion and analysis should be read in conjunction with the Condensed Consolidated Financial
Statements and Notes thereto presented elsewhere in this Form 10-QSB. The discussion is based upon such condensed consolidated financial statements that have been prepared in accordance with U.S. Generally Accepted Accounting Principles.





The statements contained in this Report that are not historical are forward-looking statements, including
statements regarding the Companys expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include the Companys statements regarding liquidity, anticipated cash needs and availability and
anticipated expense levels. All forward-looking statements included in this Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is
important to note that the Companys actual results could differ materially from those in such forward-looking statements. Additionally, the following discussion and analysis should be read in conjunction with the Condensed Consolidated
Financial Statements and notes thereto appearing elsewhere in this Report. The discussion is based upon such condensed consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles.





Overview





The Company derives its revenues from developing, 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 shipped, net
of discounts, allowances, returns and credits.





Cost of goods sold is comprised of direct product costs, direct
personnel compensation and other statutory benefits and indirect costs relating to labor to support the warehousing of product and other warehousing overhead. Research and development expenses are charged against cost of goods sold as incurred and
are not material to the Companys operations. Selling, general and administrative costs include management and general office salaries, advertising and promotional expenses, sales and marketing and other indirect operating costs. Interest and
other income (expense) consist primarily of interest income associated with notes receivable, and interest expense associated with borrowings to finance capital and other working capital needs.





In February 2000, the Company formed Dynamic Life Korea Ltd., as a Korean corporation, to market the Companys products to distributors in Korea. On November 30,
2001, the Company subsequently sold Dynamic Korea. Dynamic Korea has a year end of December 31. Accordingly, the condensed consolidated financial statements as of and for the three and six months ended September 30, 2001 include the results of
operations of Dynamic Korea from April 1, 2001 through June 30, 2001 and January 1, 2001 through June 30, 2001.





Results of Operations





Three and Six Months Ended September 30, 2002 Compared To Three and Six Months Ended September 30, 2001





Revenues. The Company generated revenues of $244,581 and $420,402, respectively, for the three and six months ended
September 30, 2002, a decrease of $88,059 or 26.5% and




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$210,699 or 33.4%, compared to $332,640 and $631,101, respectively, for the three and six months ended September 30, 2001. The decrease in revenues was primarily attributable to the absence of
revenues associated with Dynamic Korea, the Companys foreign subsidiary, due to the sale of Dynamic Korea in November 2001, and was partially offset by an increase in revenues associated with Herbal, due to increased sales to existing
customers with the introduction of new products, and the expansion of Herbals customer base.





Gross
profit. The Company achieved a gross profit of $148,785 and $253,921, respectively, for the three and six months ended September 30, 2002, a decrease of $3,324 or 2.2% and $38,210 or 13.1%, compared to $152,109 and $292,131, respectively, for
the three and six months ended September 30, 2001. Gross margin, as a percentage of revenues, increased from 45.7% and 46.3%, respectively, for the three and six months ended September 30, 2001, to 60.8% and 60.4%, respectively, for the three and
six months ended September 30, 2002. The increase was primarily attributable to increased revenues and related cost of goods sold associated with Herbal, which yield higher gross margins than that of Dynamic Korea, whose revenues and related cost of
goods sold were reflected in the three and six months ended September 30, 2001.





Operating expenses. The
Company incurred operating expenses of $249,235 and $518,675, respectively, for the three and six months ended September 30, 2002, compared to $472,942 and $960,311, respectively, for the three and six months ended September 30, 2001. These costs
include various selling, general and administrative expenses that consist primarily of advertising and promotional expenses; personnel costs related to general management functions, sales and general office, finance, accounting and information
systems, payroll expenses and sales commissions; professional fees related to legal, audit and tax matters, and other indirect operating expenses of $225,267 and $471,364, respectively, for the three and six months ended September 30, 2002.
Additionally, operating expenses include costs for amortization of $311 and $622, respectively, and depreciation of $23,657 and $46,689, respectively, for the three and six months ended September 30, 2002. The 47.3% and 46.0% decrease in operating
expenses, respectively, for the three and six months ended September 30, 2002, from those of the three and six months ended September 30, 2001, was primarily due to the absence of operating expenses associated with Dynamic Korea, and was partially
offset by an increase in rents, as well as increased payroll expenses and costs associated with fringe benefits to support our increased net sales associated with Herbal, and the Companys growth. As a percentage of sales, operating expenses
decreased to 101.9% and 123.4%, respectively, for the three and six months ended September 30, 2002, from 142.2% and 152.2%, respectively, for the three and six months ended September 30, 2001.





Interest income. Interest income was $23,520 and $57,680, respectively, for the three and six months ended September 30, 2002, compared to $18,873 and $39,984,
respectively, for the three and six months ended September 30, 2001. The increase in interest income was primarily a result of an increase in notes receivable, associated with the sale of Dynamic Korea in November 2001.





Interest expense. Interest expense was $16,035 and $34,043, respectively, for the three and six months ended September 30, 2002,
compared to $43,920 and $91,370, respectively, for the three and six months ended September 30, 2001. The decrease in interest expense was primarily a result of a decrease in the Companys outstanding obligations, as well as favorable interest
rate changes.




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Income taxes. At September 30, 2002 the Company had a deferred income tax
liability of approximately $1.1 million, primarily associated with the gain resulting from the Companys sale of its subsidiary, Becan, in November 1999.





Net income (loss) per share.Net loss per share for the three months ended September 30, 2002 was $0.69, compared to net income per share of zero for the three months ended September 30, 2001.
Net loss per share for the six months ended September 30, 2002 was $0.77, compared to net income per share of $0.03 for the six months ended September 30, 2001. The decrease in net income per share was primarily a result of the equity in loss of
affiliated companies of $3,374,547 and $3,538,730, respectively, for the three and six months ended September 30, 2002, compared to equity in income of affiliated companies of $248,228 and $548,139, respectively, for the three and six months ended
September 30, 2001.





Inflation; Seasonality.Management believes that there was no material effect on
operations or the financial condition of the Company as a result of inflation for the three and six months ended September 30, 2002 and 2001. 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 the usage of available cash reserves. The Company had working capital of $236,507 at
September 30, 2002, compared to working capital of $430,074 at March 31, 2002.





Net cash used in operating
activities was $405,758 for the six months ended September 30, 2002, as compared to net cash used in operating activities of $333,003 for the six months ended September 30, 2001. The usage of cash was primarily attributable to an increase in
accounts receivable of $105,189, an increase in inventories of $6,271, an increase in amounts due to/from affiliates, net of $117,653, an increase in prepaid expenses of $16,875, an increase in other current assets of $85,863, an increase in other
assets of $46,359 and a decrease in deferred income taxes of $1,349,732, partially offset by an increase in accounts payable of $20,077, an increase in other payables of $66,395 and an increase in accrued expenses of $1,775.





Net cash provided by investing activities was $3,560, representing the redemption of a certificate of deposit of $51,999 and proceeds from
related party receivables of $20,460, partially offset by purchases of property and equipment of $22,993 and the purchase of a certificate of deposit of $45,906.





Net cash provided by financing activities was $12,917, representing proceeds from the issuance of long-term obligations of $34,651 and was partially offset by the payments of long-term obligations of
$21,734.





At September 30, 2002, the Company had $276,932 in cash and cash equivalents, as compared to $666,213 at
September 30, 2001.





Management believes that cash expected to be generated from operations and current cash
reserves 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




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requirements will depend on a wide range of factors, including the level of business in existing
operations, expansion of facilities and possible acquisitions. In particular, if cash flows from operations are not sufficient, it will be necessary for the Company to seek additional financing. While there can be no assurance that such financing
would be available in amounts and on terms acceptable to the Company, management believes that such financing would likely be available on acceptable terms.





In July 2000, certain notes receivable totaling $425,000 arose pursuant to Herbals sale of substantially all of its assets relating to the distribution of veterinary products to Vertical Health
Solutions, Inc., an affiliate of the Company. Effective June 30, 2002, the Company entered into a Conversion Agreement with Vertical whereby the parties agreed to convert the Companys notes receivable from Vertical with a balance of unpaid
principal and interest due of $429,846, into 429,846 shares of Series A preferred stock of Vertical.





In September
2002, the Company issued 10,734 shares of common stock of the Company in payment of $16,101 of accrued preferred share dividends.





Item 3. CONTROLS AND PROCEDURES.





Within the 90 days prior to the date of filing of this
quarterly report on Form 10-QSB, the Companys management carried out an evaluation, under the supervision and with the participation of the Companys Disclosure Committee, including the Companys President (Principal Executive
Officer) and its Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14). Based upon that evaluation, the Companys
President (Principal Executive Officer) and Chief Financial Officer have concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. There were no significant changes in the
Companys internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.




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PART IIOTHER INFORMATION





Item 1. LEGAL PROCEEDINGS.





From time to time the company is subject to litigation incidental to its business including possible product liability claims. Such claims, if successful, could exceed applicable insurance coverage. The Company is not currently a
party to any material legal proceedings.





Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.





In May 2002, the Company issued 20,000 shares of common stock of the Company. The 20,000 shares of common stock were issued in exchange
for 20,000 shares of Series B 6% Cumulative Convertible Preferred stock of the Company, which shares were issued in conjunction with a private placement undertaken in 1998.





In September 2002, the Company issued 10,734 shares of common stock of the Company in payment of $16,101 of accrued preferred share dividends.





Item 3. DEFAULTS UPON SENIOR SECURITIES.





Not applicable.





Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.





There were no matters submitted to a vote of security holders during the three and six months ended September 30, 2002.





Item 5. OTHER INFORMATION.





In July 2002, the Company obtained clearance of its Form 211 with NASD Regulation for listing of the Companys common stock on the OTC Bulletin Board.





In July 2002, the Company declared a dividend distribution of 23,709 shares of its investment in Innovatives common stock to the holders of record of Series B 6%
Cumulative Convertible Preferred stock of the Company, as of December 31, 2001.





On October 10, 2002, the Board of
Directors of the Company approved the declaration of a dividend distribution to holders of record of its issued and outstanding common shares as of October 10, 2002, in the form of approximately 1,933,000 shares of DrugMax, Inc., a Nevada
Corporation, which the Company owns. The payment rate will be .626882 shares of DrugMax common stock for each share of the Companys common stock held on October 10, 2002.





Item 6. EXHIBITS AND REPORTS ON FORM 8-K.





(a)Exhibits.





The following exhibits are filed with this report:







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10.1

Conversion Agreement, effective June 30, 2002, between Dynamic Health Products, Inc. and Vertical Health Solutions, Inc., dated July 29, 2002.
(1)99.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.99.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.


---

| | (1) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2002, file number 0-23031, filed in
Washington, D.C.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




(b)Reports on Form 8-K.





During the three months ended September 30, 2002, the Company filed no reports on Form 8-K.




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SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Dynamic Health Products, Inc.Date: November 19, 2002



By:

/s/Mandeep K. TanejaMandeep K. Taneja, President (Principal Executive Officer)Date: November 19, 2002



By:

/s/Cani I. ShumanCani I. Shuman, Chief Financial Officer




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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER


PURSUANT TO SECTION 302 OF THE


SARBANES-OXLEY ACT OF 2002





I, Mandeep K. Taneja, President (Principal Executive Officer) of Dynamic Health Products, Inc., certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-QSB of Dynamic Health Products, Inc.;
| | -- |  | --------------------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Dated: November 19, 2002





/s/ Mandeep K. TanejaMandeep K. TanejaPresident (Principal Executive Officer)




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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER


PURSUANT TO SECTION 302 OF THE


SARBANES-OXLEY ACT OF 2002





I, Cani I. Shuman, Chief Financial Officer of Dynamic Health Products, Inc., certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-QSB of Dynamic Health Products, Inc.;
| | -- |  | --------------------------------------------------------------------------------------

| | 
| | 

| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 

| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 

| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Dated: November 19, 2002





/s/ Cani I. ShumanCani  I. Shuman Chief  Financial Officer




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