SECURITIES & EXCHANGE COMMISSION
Washington, D.C., 20549
--------------------------
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee required). For the
fiscal year ended May 31, 1996.
[ ] TRANSITION REPORT UUNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required).
For the transition period from_______________ to____________.
Commission File Number: 33-24483-NY
HEALTH-PAK, INC.
(Name of small business issuer in its charter)
Delaware 11-2914841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Ident. Number)
2005 Beechgrove Place, Utica, New York 13501
(Address of principal executive offices) (zip code)
Issuer's telephone number: (315) 724-8370
Securities registered under Section 12(b) of the Exchange Act: ction
None
Securities registered under Section 12(g) of the Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes __ No _X_
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Sec. 229.405 of this chapter) 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 [ X ]
State issuer's revenues for its most recent fiscal year $1,881,149.
The aggregate market value of the voting stock held by non-affiliates
of registrant on October 13, 1996 was $5,113,934 based upon an average bid price
of $0.36 per share on that date.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of October 9, 1996: 14,205,372 shares of common stock.
Transition Small Business Disclosure Format Yes____ No__X__
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DOCUMENTS INCORPORASTED BY REFERENCE
Certain of the information required by Part IV "Exhibits and Reports on
Form 8-K" is incorporated by reference from portions of the Registrants
registration statement on Form S-1 as filed on November 13, 1993 under File
Number 33-24483 NY
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FORM 10-KSB
HEALTH-PAK, INC.
May 31, 1996
TABLE OF CONTENTS
Item
No. Description Page
PART I
1. Description of Business 4
2. Description of Properties 15
3. Legal Proceedings 15
4. Submission of Matters to a Vote
of Security Holders 16
PART II
5. Market for Common Equity
and Related Stockholder Matters 17
6. Management's Discussion and Analysis
or Plan of Operation 18
7. Financial Statements 26
8. Changes In and Disagreements With
on Accounting and Financial Disclosure 26
PART III
9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With Section
16(a) of the Exchange Act 27
10. Executive Compensation 29
11. Security Ownership of Certain
Beneficial Owners and Management 30
12. Certain Relationships and
Related Transactions 31
PART IV
13. Exhibits and Reports on Form 8-K 32
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Introduction.
The Company's primary business in fiscal 1996 continued to be the
manufacture and/or distribution of reusable and nonwoven disposable textile
products, mostly medical apparel and ancillary items such as gowns, aprons,
masks, caps, covers, surgical draperies, diapers and underpads, towels, wipes,
cloths and sterilization wraps and other related products, which were sold
primarily to the hospital and medical marketplace and non-medical fleece
sportswear, which was sold to customers in the regular clothing industry. Prior
to the use of nonwoven disposable items, the needs of hospitals, nursing homes,
clinics and other medical facilities were met almost exclusively by reusable
textile products. In addition, beginning in fiscal 1995, the Company offered a
new line of disposable coveralls and laboratory coats for industrial and
pharmaceutical users.
Beginning in late fiscal 1994, management determined that many medical
facilities were reversing the previous trend toward the use of fully disposable
medical products which then was the Company's primary business and, due to
environmental and cost concerns, were returning to the utilization of reusable
and limited reusable products. Therefore, in response to this change, the
Company, throughout fiscal 1995 and again in 1996, emphasized the manufacture of
reusable products in its line. At the present time, approximately 50% of the
Company's sales are in reusable products and about 50% in disposable products.
Management expects that this balance will continue in fiscal 1997.
In the fall of 1993, the Company opened a retail outlet store, located
at its plant facility on Beechgrove Place, Utica, New York for the sale of a new
line of outdoor sportswear (sold as non-medical products) which the Company was
also marketing to specialty catalog companies and retail stores principally in
the Northeastern United States. The sportswear products offered are made of a
spun polyester fleece material and are primarily used for winter recreational
wear. The modest success of the outlet store in past years has prompted the
Company to continue this operation during the current fiscal year. During fiscal
1995 and 1996 the outlet store accounted for approximately 5% of net revenues.
During fiscal 1996 the Company expanded the outlet store's product lines by
adding golf and other sports outer wear products for spring, summer and fall
wear, and it now plans to operate the store all year. See "Present Operations"
below for additional information.
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Present Operations.
The Company's principal products at the present time include a line of
reusable and disposable staff examination gowns, patient isolation gowns,
bouffant caps, sterilization wraps, tissue products, wash cloths and other
similar items used by hospitals and related health care facilities. Reusable
products were again emphasized in the Company's product line during fiscal 1996
and will continue to be featured during the current fiscal year.
The reusable products which the Company offers utilize a specialized
three-layer system of construction which incorporates a facing fabric, an
impervious inner membrane and a back fabric which combine to provide maximum
comfort for the wearer and a level of protection which complies with the OSHA
regulations implemented in 1992 (see discussion below). During fiscal 1994, the
Company received its first orders for reusable operating room gowns, back table
cloths and Mayo stand covers from a nationally recognized laundry service
specializing in the rental and laundering of such products for hospital and
other health care facilities. Virtually all of the Company's manufactured
products can be customized to fit the particular needs of individual customers.
Management believes that the growing concern over disposal of medical
related waste products which are not degradable has resulted in a re-evaluation
of the use of disposable medical products by many healthcare facilities. In many
cases where adequate laundry facilities are available, either within the
healthcare facility itself or through the use of independent specialized laundry
services, management has perceived a growing trend for the use of reusable
products. The Company will be in a position to meet any changing industry demand
between usable and reusable products in the future without any adverse impact
upon its overall sales.
During fiscal 1993, the Company began production of a new line of
specialty sportswear products made from a spun polyester fleece fabric. This
product line, now in its fourth year of production, includes gloves, hats,
scarves, socks and related accessories, jackets, shirts, pants and other wearing
apparel for both men and women. Presently, these products are sold to specialty
catalog sales companies and retail stores throughout the Northeastern United
States, as well as being sold directly to the public at the Company's own
factory outlet store in Utica, New York. These products have become an
increasing source of revenues for the Company and management believes that such
products will continue as a significant source of revenues during fiscal 1997
and for years beyond.
In addition to the products which it manufactures directly, to a lesser
extent, the Company also acts as a distributor of related products manufactured
by others. These products are sold as an ancillary part of the Company's product
line to provide its
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customers with a more complete selection of items. Although the Company
continues to distribute such products, since fiscal 1991 the Company has been
reducing its dependence on the distribution of third party products and has
emphasized sales of its own expanded product lines.
During the fiscal year ended May 31, 1996, the Company also partially
returned to manufacturing goods for third parties under a private label basis
where the Company supplied labor only. The decision to return to private label
work was made because the Company was able to realize a profit on this work on
newly negotiated terms. In prior years the Company engaged in this type of
manufacturing but subsequently it abandoned this work because it was not
profitable. During 1996 approximately 25% of production was devoted to this type
of operation.
By supplying labor only services, the costs of material were not
included in the sale price and this contributed to lower revenues during the
period. If costs of financing receivables in 1996 could have been eliminated,
the Company would have shown greater profits in the fiscal year ended May 31,
1996 on lower sales.
The Nonwoven Medical Disposable Industry.
Until late in fiscal 1994, most of the products manufactured by the
Company utilized disposable "nonwoven" materials. These materials currently are
still used in the manufacture of disposable products offered by the Company.
Although management has begun to de-emphasize its disposable product lines in
favor of newly introduced reusable products, it plans to continue to offer
disposable nonwoven products for the foreseeable future.
"Nonwoven" is an industry term used to distinguish nonwoven fabrics
from traditional woven fabrics. The fabric's fibers may be man made plastics or
natural substances such as cotton, rayon or pulp, which accounts for most of the
nonwoven materials today. Nonwoven fabrics may be porous or absorbent, made to
be easily torn or tear-resistant, permeable or impermeable, hydrophobic or
hydraulic, soft or abrasive. Producers of these fabrics include companies such
as DuPont, Kimberley-Clark and Dow Chemical.
Manufacturers, like the Company, which convert nonwoven fabric into
specific products are commonly referred to as "converters." The medical nonwoven
market is serviced by over 50 such companies, including multinational giants
such as Baxter International, Johnson & Johnson, Kimberley-Clark and Proctor &
Gamble, as well as a sizable number of smaller businesses. Baxter International
is estimated to produce approximately 33% of all medical nonwoven products,
Johnson & Johnson 16% and Kimberly-Clark 12%. In other words, three companies
alone are estimated to control over 60% of the total market for nonwoven
products. Proctor & Gamble's
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presence in the medical nonwoven market is also significant in size (estimated
at 9% of the market) but limited to its diaper product line.
Until recently one of the principal factors which has accelerated the
acceptance of nonwoven items in the medical marketplace has been the generally
acknowledged superiority of nonwoven products in the prevention of infection.
Another effect of the AIDS crisis has been the increased interest outside the
hospital environment in protection from serious infection, which carries, in the
opinion of management, the promise of opening new markets for nonwoven apparel.
Two significant threats to the growth in annual sales of medical
nonwoven items are issues of cost and concerns over the environment. While
proponents argue that the true, overall cost of using disposable products is
lower than the cost of reusable materials (when all factors are taken into
consideration), nonwoven products can appear to be the more expensive of the two
alternatives. Furthermore, the cost of nonwoven products has been rising as a
result of increases in manufacturing costs of such fabrics. The medical sector,
and in particular the hospital industry, has been subjected to intense pressure
from the government, insurers and others to control seemingly runaway costs of
health care (which accounts for approximately 11% of the gross national
product). These factors have reduced gross profit margins of nonwoven suppliers
and adversely affected overall profitability. In the environmental area, concern
has been growing in recent years over the effect of the widespread use of
disposable products made from non-biodegradable plastics (a category which
presently includes most medical nonwoven products) on the environment, and
particularly on the dwindling capacity for solid waste disposal in the United
States.
Proposed New Products.
The Company continues to develop new products and to evaluate existing
related products which could compliment the Company's current product lines, but
which are not necessarily "medical" items, in order to offer potential buyers a
wider variety of products and to attract additional sales. Management believes
that by continuing the development of new products, it will be in a better
position to attract new customers and will more effectively utilize its existing
marketing organization.
Proposed new items representing an extension of present products
include the new industrial line of apparel which is manufactured for use in the
pharmaceutical and meat industries and consist of laboratory coats and coveralls
which are impervious to liquids. Products within this group are now being
manufactured by
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the Company as special orders for its customers. Due to the increasing demand
for these items this year, management plans to introduce them as part of its
standard product lines in the future.
The area of sterilized surgical products is also considered by
management to be the most challenging sector within the medical nonwoven
marketplace. Both the production and the sterilization of sterilized surgical
products require significant resources and must meet exacting FDA standards. The
Company's founder and President, Anthony J. Liberatore, gained experience in the
launching of a sterilized product line during his ten-year tenure at Disposable
Profiles/Spartan Healthcare Inc. (see "MANAGEMENT"). However, the sterilized
products sector is highly competitive and is presently dominated by Baxter
International, Johnson & Johnson, Kimberly- Clark and two other large suppliers.
At the present time, no sterilized products are manufactured or sold by the
Company. Additional financing, will be required for the Company to acquire
specialized equipment for the production of these products.
With the announcement of the new OSHA regulations in December 1991
management elected to modify the design and materials used for many of its
existing disposable products to comply with the standards required by these
regulations. With the implementation of these regulations in July 1992, the
Company has been able to meet the increased demand from hospitals and health
care facilities which must comply with these new standards. Management expects
the demand for these products to continue for the foreseeable future.
In late fiscal 1995 the Company entered into an exclusive manufacturing
agreement with Silver Lake Holdings, Ltd. ("Silver Lake"), a privately held
corporation which owns the exclusive worldwide manufacturing and distribution
rights for a new sports- related product called "The Rigg." Under terms of the
agreement the Company will manufacture the product for Silver Lake on the basis
of cost plus 30%. In essence, The Rigg is new product, constructed of a neoprene
holder and strapping, intended to facilitate the easy and safe carrying of
sports balls of virtually any size or shape. It will have particular application
for persons using motorcycles or bicycles who will be able, with the use of the
Rigg, to sling the ball over their shoulder, thereby freeing both hands to
control a motorcycle or bicycle.
The Rigg has other applications as well and has generated some interest
from a television broadcast on which it was shown some months ago. Following the
end of fiscal 1995, the Company received its first shipment from Silver Lake of
neoprene and other required raw materials as well as the required sewing
machinery to begin manufacture of the Rigg, as required under its manufacturing
agreement. Management expects that full production will begin in the second
quarter of the current fiscal year. However, although the pricing structure
agreed to between the Company and Silver Lake
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provides for manufacture to be on a "cost plus 30%" basis, management cannot at
this point make any estimation of the expected revenues from this product.
Recent Developments.
The Company is presently negotiating with the holders of the
outstanding common stock of Protective Disposable Apparell, Inc. ("Protective"),
a manufacturer of products somewhat similar to the products of the Company, for
a partial acquisition of Protective. If terms are successfully negotiated, the
Company will acquire approximately % of this corporation. Current sales for
Protective are in the area of $2,000,000 per annum. The Company believes that a
combination with Protective will be beneficial to both companies because of the
economies of operation that the joining of these companies would achieve. In
addition, the Company would access additional customers to make sales of its own
products and, Protective would be in a position to offer its products to the
Company's customers.
None of the terms have been agreed upon as yet and there is no
assurance that this transaction will eventually take place.
Sales and Marketing.
The primary markets for the Company's medical products are in the
health-care sector, divided essentially into three broad categories: (i)
hospitals; (ii) "alternative site" facilities (including surgical centers,
nursing homes, and elderly care facilities and clinics); and (iii) home
(consumer) use. Primary customer categories would be the single end-user,
purchasing associations or consortiums of various kinds - a dominant feature in
the hospital sector - and various federal, state and local government bodies
(the majority of whose purchases are open to competitive bidding). The primary
channels of distribution include medical supply distributors, dealers who
specialize in the medical and hospital markets and firms purchasing the
Company's products for resale under "private label" arrangements for other
suppliers and retailers. Primary sales and marketing techniques or strategies
include direct mailings, trade publication advertising, attendance at various
industry trade shows, bidding for government contracts when appropriate and
direct solicitation of prospective customers.
To date the Company has relied primarily on sales though
Northeast-based dealers, manufacturer's representatives and on "private label"
agreements for the marketing of its products and sales by Company officers and
employees. The Company's customer base presently consists of firms with which
the Company has "private label" arrangements and a number of direct end-users.
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During fiscal 1996 the Company's three largest customers accounted for
8%, 7% and 6%, respectively, of its total annual net sales.
Competition.
The Company is now primarily engaged in producing and distributing
apparel products and related accessories made from various fabrics for the
medical marketplace. The medical market-place is an intensely competitive
atmosphere for manufacturers of medical items made from fabrics, and is
populated by over fifty suppliers ranging in size from multinational concerns
like Baxter International, Johnson & Johnson and Kimberly-Clark to enterprises
smaller in size than the Company. Certain of these companies, such as Baxter
International and Kimberly-Clark, are also suppliers of the basic materials used
by the Company in the manufacture of its products as well as being manufacturers
or suppliers of finished products. At present, the Company purchases a portion
of its raw materials from Kimberly-Clark and others. However, management
believes that there are adequate alternative sources for the materials purchased
from these suppliers so that a loss of any one source of supplies would not have
a materially adverse impact upon the Company's operations. See "Suppliers."
In addition to the advantages offered by their larger size, greater
resources, greater visibility and established reputations in the market, certain
of the Company's larger competitors possess the added advantage of also
producing the fabrics from which their products are made. The control over the
cost of materials provided by this kind of "vertical integration" may be even
more advantageous to such companies in the future if costs continue to pose
increasing problems for the medical apparel business (as has recently been the
case).
Product competition in the medical apparel industry is primarily based
on price, fabric quality and design features. For many end-users, however, the
size of and resources controlled by the supplier, and thus its ability to
satisfy a broad range of customer requirements at the lowest possible cost, is a
major consideration. This is particularly true for hospital chains, associations
and buying consortiums and for other large institutional customers. This
situation, of course, places smaller firms such as the Company at a competitive
disadvantage. The Company is not a significant factor in the medical apparel
industry and competes primarily on price, service, quality and delivery.
Nevertheless, the Company believes that its smaller size enables the
Company to react more quickly to a customer's needs and to service its customers
on a more personal basis. The Company, therefore, also competes on its ability
to afford its customers a personal service.
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Also, while presently not significant in its present product line,
sportswear items and industrial type garments are equally subject to intense
competition from very large and well-known manufacturers, garment designers and
smaller producers of similar apparel. The Company competes aggressively in these
markets as well on the basis of price, service and quality.
Patents and Trademarks.
The Company has no patents and there is little likelihood that it will
develop patentable products or processes in the foreseeable future. Absent such
protection, the Company will primarily rely upon trade secrets and proprietary
techniques to attain any commercial advantage. There is no assurance that
competitors will not independently develop and market, or obtain patent
protection for, products similar to those designed or produced by the Company,
and thus negate any advantage of the Company with respect to any such products.
The Company may, however, distribute products manufactured by others which are
covered by one or more patents. The Company may also seek to patent products
manufactured by third parties which were not previously patented. Even if patent
protection becomes available, there can be no assurance that such protection
will be commercially beneficial to the Company.
In connection with its marketing efforts, and in order to fully benefit
from the Company's name recognition in the future, the Company has filed and as
of March 18, 1994, received trademark protection of the name "HEALTH-PAK" with
the United States Patent and Trademark Office.
Suppliers.
The Company at present purchases its raw materials and fabric from
several different suppliers. Management does not believe that there is or will
be, in the near future, a significant shortage or inability to obtain adequate
supplies of raw materials needed for its operations. Rather, the primary problem
encountered by the Company has been, and is expected to be, the continued
escalation in the costs of needed raw materials. High cost for fabric has
already seriously impacted upon the Company's profit margins and continued
increases in such costs could pose a serious threat to the competitiveness of
all of its products, which is one primary reason that the Company is expanding
into new areas such as reusable fabrics and other new products. See also
"Competition."
Employees
At present the Company employs a total of 61 persons, including 2
executive officers, 6 employees in managerial or supervisory capacities, two
hourly office workers and 53 hourly production employees. As the Company
implements the planned expansion of its operations it will require additional
personnel,
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both skilled and unskilled. Although the Company believes that the personnel it
will require are readily available at reasonable salary rates, no assurance can
be given that it will be able to attract the type and quantity of employees its
operations will require. Further, even if such personnel are available, no
assurance can be given that they can be hired on terms favorable to the Company.
Production Facilities.
On July 23, 1993 the Company entered into a Contract for Purchase with
the Utica Industrial Development Corporation ("UIDC") for the lease or ultimate
purchase of its present office and manufacturing facility located at 2005
Beechgrove Place, Utica, New York (the "Premises") which it now occupies. The
property is a cinder-block building having approximately 43,500 square feet of
office and manufacturing space situated on approximately 4.6 acres of land.
Registrant has now consolidated all of its executive offices and manufacturing
operations within this single facility.
In conjunction with the proposed purchase of the premises, the Company
has entered into a Lease Agreement with the UIDC having an initial term
commencing August 1, 1993 and continuing through April 30, 1994 at a monthly
rental of $7,500. The Lease of the premises by the Company has been extended
through April 30, 1997 at a monthly rental of approximately $9,000 per month,
including allocation for real property taxes. The Company's option to purchase
the building was also extended through July 31, 1997.
The Company's new facility is expected to be adequate both for the
Company's present operations and is expected to provide sufficient production
capacity to accommodate its expansion plans for the foreseeable future,
including adequate space for installation of specialized facilities which will
be needed when the Company elects to enter the sterilized products markets.
Government Regulation.
The products marketed by the Company are subject to regulation as
medical devices by the Food And Drug Administration (the "FDA"), which has
comprehensive authority to regulate the development, production, distribution
and promotion of medical devices. The states and foreign countries where Company
products are sold may also impose additional regulatory requirements.
Pursuant to the federal Food, Drug and Cosmetic Act and the regulation
promulgated thereunder, a medical device is ultimately classified by the FDA as
either a Class I, Class II or Class III device. Class I devices are subject to
general controls which are applicable to all devices. Such controls include
regulations regarding FDA inspection of facilities, "Good Manufacturing
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Practices," labeling, maintenance of records and filings with the FDA. Class II
devices must meet general performance standards established by the FDA before
they can be marketed and must adhere to such standards once on the market. Class
III devices require individual pre-market approval by the FDA before they can be
marketed, which can involve extensive tests to prove safety and efficacy of the
device.
Each manufacturer of medical devices is required to register with the
FDA and also to file a "510(k) Notification" (the "Notification") before
initially marketing a new device intended for human use. The manufacturer may
not market such new device until 90 days following the filing of such
Notification unless the FDA permits an early marketing date. The FDA, prior to
the expiration of the 90- day period, may notify the manufacturer that it
objects to the marketing of the proposed device and thereby may delay or
preclude the manufacturer's ability to market that device. The FDA may also
require further data from, or testing by, the manufacturer.
The FDA permits the marketing of some medical devices, subject to the
general controls under the Act, if the devices are "substantially equivalent" to
devices marketed in interstate commerce before May 28, 1976 (the effective date
of the Medical Device Amendment to the Act).
Of the Company's present products, its gowns and sterilization wrappers
are Class I devices for which the necessary filings have been made. The
Company's proposed sterilized products, on the other hand, would fall within the
Class III category, in which case the Company would have to file a Pre-market
Approval Application. Such application must be accompanied by extensive
literature references and preclinical and clinical testing data. The FDA
normally has 180 days to review a Pre-market Approval Application, during which
time an independent advisory committee evaluates the Application and provide
recommendations to the FDA. While the FDA has often responded to such
Applications within the allotted time, there are many instance where the reviews
have been more protracted, and a number of devices have never been cleared for
marketing.
Any products distributed by the Company pursuant to the above
authorizations are subject to pervasive and continuing regulation by the FDA.
All phases of the manufacturing and distribution process are governed by FDA
regulation and each supplier of products to the Company must also have
FDA-approved products. Products must be produced in registered establishments
and be manufactured in accordance with "Good Manufacturing Practices." All such
devices must be listed periodically with the FDA as well. Labeling and
promotional activities are subject to scrutiny by the FDA and in certain
instances by the Federal Trade Commission. The export of devices is also
regulated in certain instances.
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The Mandatory Device Reporting ("MDR") regulation obligates the Company
to provide information to the FDA on injuries alleged to have been associated
with the use of a product or certain product failures which could cause injury.
If due to FDA inspections, MDR reports or other information, the FDA believes
that the Company is not in compliance with the law, the FDA can institute
proceedings to detain or seize products, enjoin future violations, or asses
civil and/or criminal penalties against the Company, its officers or employees.
Any such action could disrupt the Company's operations for an undetermined time.
In addition, numerous other federal and state agencies, such as
environmental, hazard control, working conditions and other similar regulators
have jurisdiction to take actions which could have a material adverse effect
upon the Company's business.
As discussed above, In January, 1992, OSHA issued comprehensive new
federal regulations aimed at establishing new protective standards to minimize
occupational exposure to various blood borne pathogens such Hepatitis and the
HIV virus associated with AIDS. OSHA determined, after a four year study of the
need for such regulations, that employees face a significant health risk as the
result of occupational exposure to blood and other potentially infectious
materials and concluded that this exposure can be minimized or eliminated using
a combination of work practice controls, personal protective clothing and
equipment, training and medical surveillance. Furthermore, there are 23 states
with their own OSHA-approved occupational safety and health plans which must now
adopt a comparable standard within six months or amend their existing standard
if it not at least as effective as the federal standard. These new regulations
are primarily aimed at the healthcare industry where, based upon published OSHA
findings, between 2 and 2.5 Million workers are presently at risk of infection.
From the Company's point of view, these new regulations, which make
mandatory in the healthcare industry the use of protective apparel, such as the
products manufactured by the Company, are expected to have materially favorable
impact upon the Company's sales during the foreseeable future. Although no
assurances can be given, based upon sales of the new OSHA-mandated products,
management believes that the Company will continue to be a beneficiary of the
increase in demand for products of this type for the foreseeable future.
Management has begun development of new barrier gowns and similar protective
apparel specifically designed to meet the requirements of the new OSHA
regulations and has restructured its marketing plans to bring these new products
to market.
Insurance
Due to the decrease in the number of insurance carriers willing to
provide product liability insurance in the health care
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industry, product liability insurance availability has been significantly
reduced and premiums have increased dramatically over recent years. At present,
the Company maintains product liability insurance in the amount of $2,000,000.
Although the Company intends to maintain such insurance coverage, there can be
no assurance that the Company will be able to obtain insurance at reasonable
premiums which it can afford in the future. The inability to continue such
insurance could have a materially adverse effect upon the business, financial
condition and future prospects of the Company. To date there have no product
liability claims against the Company.
ITEM 2. DESCRIPTION OF PROPERTIES.
Facilities
The Company's principal executive offices, manufacturing and warehouse
facilities are located at 2005 Beechgrove Place, Utica, New York where it
occupies 43,500 square feet of space located in a single cinder-block building.
The property is leased from an unrelated party pursuant to an interim lease
while the Company completes its financing efforts in contemplation of the
purchase of the plant for a purchase price of $600,000. Also see Item 1.
"Description of Business - Production Facilities" for additional information on
the Company's plant facility.
The Company also leases, with an option to purchase, the premises at
1208 Broad Street, Utica, New York pursuant to its lease with Anthony J.
Liberatore, its President; although this building is not presently occupied by
the Company and all operations have now been consolidated with its manufacturing
plant at 2005 Beechgrove Place in Utica, New York. While the Company leases the
premises from Mr. Liberatore, it has not paid any rent since July, 1995 and Mr.
Liberatore has agreed that any payments made to him during fiscal 1995 will be
applied against the purchase price of the building if the option to purchase is
exercised. The Company's option price is $130,000, less the payments made in
fiscal 1995, and Mr. Liberatore has agreed to accept Common Stock for the
purchase price. See "Certain Relationships and Related Transactions" and
"Executive Compensation."
ITEM 3. LEGAL PROCEEDINGS.
The Company knows of no litigation pending, threatened or contemplated,
or unsatisfied judgments against it, or any proceedings in which the Company is
a party, except as set forth below. The Company also knows of no legal action
pending or threatened or judgments entered against any officers or directors of
the Company in their capacity as such, except for one pending suit brought in
the Supreme Court of The State of New York, County of Oneida,
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against the Company and Anthony J. Liberatore by Edward Dyman, a former director
of the Company. The suit was commenced on March 13, 1991 and alleges, in
essence, that certain services were performed on behalf of the Company which
were not properly compensated and seek money damages in the aggregate amount of
approximately $1.1 Million. The plaintiff in this case has taken no action for
more than two years. The Company has vigorously defended this suit, has
interposed counterclaims against the plaintiff which seek money damages against
Mr. Dyman in the sum of $5 Million in the aggregate. Based upon the opinion of
Uscher, Quiat & Usher, special litigation counsel, this suit is subject to good
and non-frivolous defenses and management expects to prevail in its defense of
the suit and expect to prevail with respect to its counterclaim. No adverse
impact upon the Company or its operations is expected to result from the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the Company's stockholders during the
fourth quarter ended May 31, 1996.
16
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company sold an issue of Units consisting of Common Stock and
Warrants in 1990. Trading in the Units commenced in September, 1990; however,
the Company's Common Stock has traded separately from the Units since August
1991 and the last trading in the Units occurred on March 12, 1992. Trading in
the Common Stock has been on a limited basis. The principal market on which the
Company's securities are traded is the over-the-counter market in the "pink
sheets." The following tables show for the periods indicated the range of high
and low bid quotes for the Common Stock of the Company which were obtained from
the National Quotation Bureau and are between dealers, do not include retail
mark-ups, mark-downs, or other fees or commissions, and may not necessarily
represent actual transactions. There is no present trading market for the
Company's Units or issued Warrants:
COMMON STOCK TRADING HISTORY
BID
High Low
Quarter ended February 28, 1993 $2.375 $0.43
Quarter ended May 31, 1993 $2.125 $0.68
Quarter ended August 31, 1993 $1.25 $0.875
Quarter ended November 30, 1993 $0.625 $0.50
Quarter ended February 28, 1994 $0.4375 $0.25
Quarter ended May 31, 1994 $0.25 $0.1875
Quarter ended August 31, 1994 $0.3125 $0.0625
Quarter ended November 30, 1994 $0.16 $0.0625
Quarter ended February 28, 1995 $0.39 $0.35
Quarter ended May 31, 1995 $0.57 $0.32
Quarter ended August 31, 1995 $0.60 $0.58
Quarter ended November 30, 1995 $0.46 $0.44
Quarter ended February 28, 1996 $0.75 $0.60
Quarter ended May 31, 1996 $0.36 $0.32
Quarter ended August 31, 1996 $0.35 $0.34
On October 9, 1996 the reported bid price for the Company's Common Stock
was $0.36. The number of record holders of the Company's Common Stock on May 31,
1996 was 274. There currently are 12 market makers for the Company's securities
.
The Company has not paid any dividends, except for the Class C Warrants
to be distributed to Shareholders upon completion of the pending S-1
Registration Statement. There are no plans to pay any cash dividends in the
foreseeable future. The declaration and payment of dividends in the future, of
which there can be no assur-
17
<PAGE>
ance, is determined by the Board of Directors based upon conditions then
existing, including earnings, financial condition, capital requirements and
other factors. There are no restrictions on the Company's ability to pay
dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
I. Financial Condition and Liquidity.
(a) Financial Condition.
Assets:
In spite of declining revenues and profits in 1996, the Company's total
assets at May 31, 1996 increased by approximately $296,091 compared to May 31,
1995.
This increase is primarily attributable to capital received upon the
exercise of certain options (i.e. approximately $215,000) and additions in 1996
to inventory and receivables, slight increases in prepaid expenses and more
substantial increases in machinery and equipment, leasehold improvements, office
equipment and vehicle acquisitions during the year.
The increase in equipment result primarily from acquisitions by the
Company of additional sewing equipment, office computer equipment and new
automotive equipment. In anticipation of higher sales for the year, the Company
also acquired additional inventory.
Receivables were also higher during the 1996 fiscal year due to the
fact that the Company eliminated the factoring of receivables during the last
three months of the 1996 fiscal year. Ordinarily, during the operation of its
factoring agreement, receivables would be sold to the factor and would not
appear on the Company's books. As the amount factored decreased, the amount of
receivables would proportionately increase.
The Company also spent additional funds during 1996 on heating and air
conditioning repairs to its plant in Utica, New York. Some of the increase in
total assets was also helped by non-operating increases in offering expenses and
an increase in the cash value of officer's insurance.
The increases mentioned above were not offset by entries for lower
amounts in the current portion of consulting agreements and prepayment of
consulting agreements accounts which were reduced as the Company used such
services during 1996.
18
<PAGE>
A comparison of certain significant tangible assets of the Company for
the three fiscal years ended May 31, 1996 is as follows:
1996 1995 1994
---------- ---------- ---------
Cash $ 1,376 $ 1,494 $ 98,116
Receivables 286,926 198,419 285,716
Inventory 571,619 464,283 366,778
Net Property
& Equipment 293,147 224,885 214,779
----------- ---------- ----------
Total $ 1,153,068 $ 889,081 $ 965,389
This comparison shows an increase in basic net tangible assets for the year
ended May 31, 1996. The table also indicates the effect of increased receivables
at May 31, 1996 and shows the increases in Inventory and Net Property and
Equipment for 1996. As stated above, the increase in receivables was primarily
due to reducing the Company's dependence on factoring its receivables during
1996 while increases in inventory reflects additions to inventory in 1996 in
anticipation of higher sales. Increases in Net Property and Equipment for 1996
arises from additional machinery and equipment purchases during 1996 made in
anticipation of additional future sales of various new products. Cash is lower
in 1996 and 1995 compared to 1994 because 1994 was a year when cash was reserved
by the Company to finance a transitional period from the Company's dependence on
bank financing until it entered into the previously mentioned factoring
agreement; however, while assets were inflated by the amount of excess cash in
1994, liabilities in 1994 in the form of payables were comparatively greater in
that year because of reserving cash, so the difference between 1994 and 1995 was
not as great as may be assumed from the table. Management believes that the
current trend toward increased assets reflects a healthier financial atmosphere
and will enable the Company to now avoid the exceptionally high costs of its
factoring agreement which affected profits significantly in 1996. The Company
was greatly helped by the infusion of cash from the exercise of options,
mentioned above, in eliminating its dependence on the factoring of its accounts.
The Company has replaced this financing with a more reasonable receivables
financing agreement which will substantially lower interest rates in 1997.
Liabilities:
Both Long Term Debt and the Current Portion of Long Term Debt increased
during 1996, reflecting the Company's purchases of machinery and equipment,
office computer equipment and a truck.
19
<PAGE>
The Company's bank debt remained essentially the same in 1996 as
compared to 1995; however, recently the Company negotiated a monthly payment
arrangement with its bank and this indebtedness is
being amortized at the rate of $2,107 per month and currently the balance is
$78,132. In 1994, the Company's obligation to its bank was approximately
$205,000.
The Company eliminated its outstanding Other Notes in 1996 by issuing
common stock, amounting to a difference of $47,450 when compared to 1995.
Accounts Payable increased by approximately $87,821 in 1996 compared to
1995. As discussed above, this increase reflects the Company's reduction in 1996
in the factoring of its account receivable as funds were not as readily
available to meet payables as they were when factoring was used. The Company
also purchased raw materials in 1996 in anticipation of greater sales for the
"Rigg" a new Company item and other new products.
Liability for payroll taxes also increased in 1996 due to the fact that
there were more employees in 1996 than in 1995.
These additions to liabilities in 1996 account for the increase in
Total Current Liabilities at May 31, 1996 of approximately $82,132 compared to
1995 ($614,775 in 1996 compared to $532,652 in 1995). Total Current Liabilities
in 1994 were only $20,709 lower than Total Current Liabilities for 1996 (i.e.
Total Current Liabilities in 1994 were $594,066). Current Liabilities were more
than offset by Current Assets of $960,709.
The Company's retained earnings deficit of $836,516 for fiscal 1996
(compared with $785,615 for 1995 and $789,695 for 1994) shows an increase of
$50,901 over 1995 due to a net loss from operations in 1996. This loss compares
with a profit of $4,080 in 1995. Management believes that the loss from
operations was significantly influenced by its high costs of factoring its
receivables. With the elimination of these costs in the current fiscal year and
replacement with new, more conventional financing costs, profits from operations
should improve during the current fiscal year. See "Results of Operations."
Management believes that, overall, there has been improvement in the
financial condition of the Company in fiscal 1996 when compared to 1995 and
1994. This improvement is evident from the increases in total assets, working
capital and tangible assets in 1996. This growth would have been more impressive
if the Company were not subject to the high cost of factoring its accounts
during most of 1996, a problem that the Company has eliminated for the current
fiscal year by replacing such financing with a new financing agreement at more
reasonable rates.
20
<PAGE>
See "Results of Operations" for additional information. For information
regarding liquidity, see Subparagraph (b) "Liquidity" below. For additional
information relating to the financial condition of the Company, also see
"Inflation" and "Trends Affecting Liquidity, Capital Resources and Operations."
(b) Liquidity.
The Company had sufficient liquid assets to meet its obligations at the
end of fiscal 1996. Working capital at May 31, 1996 was $345,934 compared to
$310,960 in 1995 and $342,653 in 1994. The increase in working capital in 1996
when compared to 1995 occurred even though the Company had higher inventory
purchases during 1996 and additional demands on cash during the period as the
Company exited from its factoring arrangements.
Principal short-term liabilities at May 31, 1996 were $477,688 in
payables, short term note obligations of $97,932 and taxes due of $39,155 or a
total of $614,775. Against this total, the Company had liquid current assets of
$1,375 in cash, inventory of $571,619, receivables of $286,926 and an income tax
refund of $1,740 for a total of $861,660.
Although cash items were not large enough to defray all of the
Company's payables on a timely basis, management believes that this condition
was predictable because of its efforts to emerge from factoring receivables.
Therefore, management believes that there have been no adverse changes
in liquidity in 1996 when compared to 1995 and 1994.
In combination, management believes that the Company will have adequate
working capital and sufficient credit alternatives to fund the Company's
operations during the next fiscal year, including support for its planned
expansion of sales.
The principal source of funds for the Company's operations during
fiscal 1996 has been from operating revenues, capital from the exercise of
options and proceeds from financing receivables, as reflected in the Company's
financial statements.
II. Results of Operations.
In fiscal 1996 the Company had net sales of $1,881,149 compared to
$2,059,630 in 1995 and $1,827,534 for fiscal 1994. During 1996 the Company
shifted part of its production to the manufacture of goods for private label
(accounting for approximately 25% of total revenues for 1996) involving sales
which did not require the Company to supply materials; therefore, accounting for
somewhat lower revenues. Since contracts for private label involved labor only
they were also more profitable for the Company during this year.
21
<PAGE>
The Company previously worked on labor only contracts for private label
medical and other apparel but the terms of such contracts did not allow for
sufficient profits and the Company converted back into primarily manufacturing
its own products.
Under new agreements for manufacturing private label goods with two new
principal customers, the Company will sustain sufficient profits to warrant a
continuation of this work.
In addition, certain of the Company's new products, introduced last
year, such as operating gowns which decreased approximately $200,000 in sales in
1996, did not achieve the results expected during last year. However, orders for
this product have increased during the current fiscal year and a substantial
order has recently been placed with the Company for future delivery and the
Company will continue sales of this item in its line.
Also sales of the Company's "Rigg" (a sling designed to hold
basketballs, soccer balls and baseballs, among other things, allowing free use
of the hands and arms) a non-medical product offered for consumer use in 1995 is
only beginning to be advertised and revenues from this item are also expected to
contribute to overall sales during the current fiscal year.
On July 1, 1996 (after the close of the fiscal year ended May 31, 1996)
the Company raised its prices an average of 11% to 13% on all of its products.
This increase has not affected the Company's customer relations and is expected
to have a positive influence on revenues for the current fiscal year.
The Company has also opened the United States Government as a customer
in recent months for certain of its medical products. Since sales in the volume
expected to the government will be new in fiscal 1997, anticipated increases in
revenues should result from this source during the current fiscal year.
The most significant source for increased revenues in 1997
will result from the Company's proposed acquisition of Protective
Disposable Apparel, Inc. during the current fiscal year, a company
whose sales are in the area of $2,000,000 a year in somewhat
similar products now sold by the Company. See Item 1. "Descrip-
tion of Business - Recent Developments."
The Company is also renegotiating with an Australian company for
manufacturing and distribution rights to a new type of car cover. This item was
a principal target a few years ago, but negotiations were dropped when a claim
for exclusive distribution rights for this item was made by a third party. This
impediment has been cured and the Company believes that terms will be reached
during the current fiscal year for the manufacture and sale of this item.
22
<PAGE>
The Company also has new orders for disposable wash cloths for the
current fiscal year, all of which will, in the Company's opinion improve
revenues for 1997.
Therefore, while revenues declined in 1996 by approximately 8.67% when
compared with 1995, it is management's opinion that improvement will result in
revenues for 1997 from the foregoing items as well as through normal expansion
of the Companies business in that year.
Cost of Sales for 1996 decreased by $221,706 when compared to 1995, a
change of approximately 14%, which is consistent with greater efficiency on some
of the Company's labor only contracts. Cost of sales expressed as a percentage
of net sales was 71.4% in 1996, 76% in 1995 and 91% in 1994. Gross Profits for
1996 were actually higher by $43,225 than gross profits for 1995 (i.e. $536,940
for 1996 and $493,715 for 1995) on declining revenues for 1996.
This shows an increasing trend to more efficient operation by the
Company from the Company's financial position in 1994.
The increase of $127,039 in selling, general and administrative expense
for 1996 when compared to 1995, an increase of approximately 28% over the
previous year, clearly illustrates how the factoring of receivables was hurting
profits in the last two years. This was the principal reason for the loss of
$52,619 in income from operations in 1996. With this problem corrected in 1997
by replacing such financing, the Company should return to profitability during
the current fiscal year. Selling, general and administrative expenses for 1996
were $589,559 compared to $462,520 in 1995 and $459,987 in 1994.
The difference in net income (loss) for 1996 compared with 1995 has
been discussed above and the causes of the loss in 1996 has been identified as
primarily the result of higher factoring costs and to a lesser extent, reduction
in anticipated sales of operating gowns and other products in 1996. As stated
above, factoring receivables has been eliminated during 1996 and more normal
costs of financing have replaced the factoring of accounts receivable at
previous high rates.
The Company's retail outlet store, previously opened to sell seasonal
winter garments made of fleece as an ancillary operation again showed
improvement for the year. The Company intends to continue expansion of this
facility and to operate the store on a year round basis with products other than
just winter wear, although significant annual revenues have not been made as
yet.
23
<PAGE>
For information with respect to the possible effect of future trends on
operations, see the discussion under the caption "Trends Affecting Liquidity,
Capital Resources and Operations."
III. Capital Resources.
Property and equipment increased in 1996 by approximately $68,262 in
1996 compared to 1995 as mentioned above. The increase results from additional
acquisitions of machinery and equipment, vehicular purchases and office computer
additions.
There were no material commitments for capital expenditures at the end
of fiscal 1996. However, under an agreement for the lease of its new
manufacturing facility, the Company has an option to purchase the property for
an option price of $600,000. The Company has not yet made any determination
whether or not it will exercise its option, which if exercised, will require
separate financing. Because of the value of the building, management does not
anticipate that a substantially large down payment would be required and monthly
amortization charges should not substantially exceed rentals now being paid.
The Company also does not presently anticipate the allocation of
significant resources for machinery and equipment purchases. Any such
commitments will be dependent on demand for the delivery of products under new
or increased orders and will primarily be purchased in cooperation with New York
State financing programs, leasing programs or bank financing without committing
substantial cash assets. Future conditions, such as successful equity financing
efforts, may change this position.
Current conditions indicate, however, that some funds will be required
for additional capital expenditures in the near future which coincides with
management's sales expansion program; however, as explained above, financing for
purchasing these resources will be obtained from sources which will not require
a substantial outlay of cash and will be in proportion to its expansion program.
IV. Inflation.
Management anticipates that inflation will not have a material effect
on the Company's operations in the future. This is principally due to two
factors. First, if orders increase due to inflation the Company presently has
adequate manufacturing equipment and capacity to support not only its present
level of operations but, with the addition of a second and, if needed, third,
operating shift, to support a substantial increase in production of its present
product lines. Second, although product pricing would be affected by inflation
due to higher costs, management believes that public health and safety concerns
would outweigh any negative impact of price increases and would not adversely
affect the Com-
24
<PAGE>
pany's projected sales. Additionally, the hospital and health care markets have
historically been best able to pass on increased costs which are typically paid
by insurance coverage.
V. Trends Affecting Liquidity, Capital Resources and Operations.
A number of factors are expected to impact upon the Company's
liquidity, capital resources and future operations. Included among these are (i)
environmental concerns; (ii) economic factors generally affecting the health
care industry; (iii) governmental regulation of the Company's products and (iv)
the growing concern in many industries about controlling the spread of
infectious disease.
Some disposable products offered by the Company are made from
plastic-based materials which have raised concern among environmental groups
over their proper disposal. Although management believes that such concerns are,
in many cases, valid, it is also believed that these concerns must be balanced
with safety provided by these products against infectious diseases such as AIDS,
hepatitis and others. This belief has recently been reinforced by the new,
comprehensive safety regulations issued by the Occupational Safety and Health
Administration (OSHA) which require extensive new measures to combat the spread
of infection and disease in many industries which had not previously required
such measures. Most importantly, from the point of view of the Company, are the
requirements for protective apparel such as that manufactured by the Company.
Management believes that the regulations, which are now fully implemented, will
increase demand for the Company's products and significantly expand the
Company's markets. Based upon recent increased orders, management believes that
most significant among these new markets for its products will be the hospital
looking to comply with the new OSHA regulations, emergency service industries,
including police, fire and ambulance services, which routinely are exposed to
unusually high risk of infectious diseases and physicians.
Nevertheless, the requirements relating to proper disposal of
plastic-based garments is still in question and the Company cannot predict the
outcome of any future regulations relating to these matters. Any changes in
manufacturing or disposal requirements could result in higher manufacturing
costs and less profitability for the Company or, perhaps, complete elimination,
which could have a substantially negative impact on liquidity and capital
resources in the future.
Management also believes that perhaps the most significant adverse
impact upon its liquidity, capital resources and future operations may result
from economic pressures to keep health care costs low. Spearheaded by health
care insurers and now the federal government, the entire health care industry in
the United States has come under increasing pressure and scrutiny to reduce
unnecessary and wasteful costs. To meet the criticism in recent years
25
<PAGE>
over the higher cost of disposable products, the Company has introduced a line
of limited reusable products. These products are designed to be washed and
reused from between 25 and 100 times before being replaced. Management believes
that such products will not only address the economic concerns but also the
environmental issues by reducing the amount of products which are being
discarded. However, as already mentioned, in situations where there is a high
risk of spreading infection, management believes that the disposable products
will continue to have strong appeal and demand in the marketplace.
As new Company manufactured products, such as the "Rigg" and car covers
are introduced, management believes that sales revenues will increase and, over
the long term, will result in more stable sales and higher profit margins for
the Company. A substantial increase in sales will also occur if the Company
completes its proposed acquisition of Protective Disposable Apparell, Inc. See
Item 1. "Description of Business - Recent Developments." In addition, the
existence of the Occupational Safety and Health Administration (OSHA)
regulations are expected to continue to have a positive influence on the demand
for the Company's products.
In short, the above factors may each have a significant impact upon the
Company's future operations. At present, management believes that safety
concerns over the spread of infectious diseases such as AIDS and hepatitis will,
at least for the foreseeable future, outweigh economic and environmental
concerns. Consequently, management does not anticipate any adverse impact upon
its future operations for the foreseeable future. Apart from these factors,
management knows of no trends or demands that would adversely affect the
financial condition of the Company.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is submitted as a separate section to this
report (see Pages F-1 to F-17).
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT-
ING AND FINANCIAL DISCLOSURE.
There have been no changes in and no disagreements with accountants on
accounting and financial disclosure.
26
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The executive officers and directors of the Company and its wholly-owned
subsidiary are as follows:
NAME AGE POSITION(S) HELD
ANTHONY J. LIBERATORE 52 President, Chief
Executive Officer,
Chairman of the Board
MICHAEL A. LIBERATORE 29 Vice President-Market-
ing, Assistant Secretary,
Treasurer and Director
GUSTAVE J. DeTRAGLIA 47 Secretary
WILLIAM F. MEOLA 49 Director
Profiles of the directors and officers of the Company are set forth
below. All directors hold office until the next annual shareholders meeting or
until their death, resignation, retirement, removal, disqualification or until
their successors have been elected and qualified. Vacancies in the Board may be
filled by majority vote of the remaining directors. Officers of the Company
serve at the will of the Board of Directors, subject to the terms of employment
agreements as discussed below. There is no Executive Committee or other
committee of the Board of Directors. Election to the Board of Directors is for a
period of one year and elections are ordinarily held at the Company's Annual
Meeting of Shareholders. The Board of Directors has regular meetings once a
year, after the Annual Meeting of Shareholders, for the purpose of electing the
officers of the Company.
There are at present three vacancies on the Board of Directors occasioned
by the resignations of Messrs. R. Peter Sirbu, Benedict A. Girardi and Alfredo
A. Zennamo who were elected at the last Board of Director's meeting. Mr. Sirbu
resigned to take a new executive position in Omaha, Nebraska and Mr. Girardi has
perma- nently moved to Florida. Mr. Zennamo was on medical leave without pay for
most of fiscal 1995. Following the fiscal year end, on September 12, 1995, Mr.
Zennamo resigned as an officer and director of the Company. There were no
disagreements with either Messrs. Sirbu, Girardi and Zennamo. The Board of
Directors plans to fill at least one of the vacancies within the near future but
has not yet determined the replacement candidate. The other vacancies will not
be filled until the next annual Board of Director's meeting.
27
<PAGE>
Messrs. Anthony Liberatore and Alfredo A. Zennamo, a former officer and
director, may be deemed "parents" and "organizers" of the Company as those terms
are defined in the Rules and Regulations promulgated under the Securities Act of
1933, as amended. Anthony Liberatore and Michael A. Liberatore are father and
son. Addition- ally, Alfredo Zennamo is the nephew of Anthony Liberatore. There
are no other family relationships between officers and directors.
Profiles of Officers and Directors
ANTHONY J. LIBERATORE, a co-founder of Health-Pak, Inc., a New York
corporation, ("Health") the Company's wholly owned subsidiary, has served as
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company since April 30, 1991. He has held the same positions with Health since
its formation in April 1985. From May 1980 until formation of Health in 1985,
Mr. Liberatore was employed as a senior procurement specialist by the Utica New
York based North American Division of International Computers Ltd., a British
corporation. From 1970 until 1980, Mr. Liberatore was general manager of
Disposable Profiles/Spartan Healthcare Inc. ("Disposable"), also based in Utica
New York, a wholly-owned subsidiary of the Palm Beach Company of Cincinnati,
Ohio, which manufactured and marketed nonwoven disposable products for the
medical market. In his capacity as general manager of Disposable, Mr. Liberatore
was, among other responsibilities, charged with the development of that
company's sterilized product line.
MICHAEL A. LIBERATORE has been Vice President-Marketing, Assistant
Secretary, Treasurer and a Director of the Company and Health, the Company's
wholly owned subsidiary, since April 30, 1991. Prior thereto he served as
Secretary and Assistant Treasurer of Health from January 1990, having originally
joined Health in May 1987 as its Director of Sales and Marketing. From 1986
until joining Health, Mr. Liberatore was employed as an assistant store manager
by the Chicago Market, a department store chain. Mr. Liberatore is a graduate of
Mohawk Valley Community College having received his Associates degree in
Individual Studies in 1986.
GUSTAVE J. DeTRAGLIA has been Secretary of the Company since April 30, 1991
and has served as Secretary of Health, the Company's wholly owned subsidiary,
since 1987. Since 1974 Mr. Detraglia has been self-employed as an attorney at
law in Utica, New York. Mr. Detraglia is duly licensed to practice law and has
been a member of the bar of the state of New York since 1974. He received his
Bachelor of Science Degree from Wagner College in 1970 and his Juris Doctor
Degree from Syracuse University, College of Law in 1973.
WILLIAM F. MEOLA has been a Director of the Company since April 30, 1991
and has served as a Director of Health, the Company's wholly owned subsidiary,
since May 1987. Since March,
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<PAGE>
1993, Mr. Meola has been employed as a registered representative with the Albany
Savings Bank, Utica, New York. From September 1988 until March 1993 Mr. Meola
was a self-employed financial consultant and also sales manager and a registered
representative with the Prudential Insurance Company. From January to September
1988 Mr. Meola was employed as an Assistant Vice President and District Manager
of the Dime Savings Bank of New York. From August 1982 until shortly before
joining the Dime Savings Bank of New York, Mr. Meola was employed as Vice
President of the SBU Insurance Agency of Utica New York. Prior thereto, from
1973 until 1982, Mr. Meola held various positions within the insurance and
financial planning industry, owning and operating his own insurance agency from
1980 until its sale in 1982. Mr. Meola is a graduate of Utica College of
Syracuse University, having received his Bachelor of Science Degree in Biology.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information relating to the remuneration
received by officers and directors of the Company. At present, directors are not
compensated for their services as directors, except for the reimbursement of any
out-of-pocket expenses incurred in the performance of their duties. All
information set forth herein relates to Health, the Company's wholly owned
subsidiary.
During the periods ended May 31, 1995 and May 31, 1996, the following
remuneration was paid to the officers and directors of the Company:
Annual
Compensa- Long Term All Other
Name and tion; Compensa- Compensa-
Position Year Salary Bonus tion tion(1)
Anthony 1996 $ 51,900 None None $10,460
Libera- 1995 $ 47,431 None None $24,061
tore; (2)
0Presi-
dent
Michael 1996 $ 33,673 None None $1,261
Libera- 1995 $ 29,446 None None $1,261
tore;
Vice Pre-
sident
==============================================================================
(1) Includes the value of health and life insurance paid for the benefit of the
persons named herein.
(2) Includes amount paid to Anthony Liberatore for rent of building at 1208
Broad Street, Utica, New York in 1995.
29
<PAGE>
For additional information see "Certain Relationships and
Related Transactions."
The Company previously had employment agreements with Messrs. Anthony J.
Liberatore, Michael A. Liberatore and Alfredo Zennamo which expired on June 1,
1994. None of the agreements were renewed and each of the foregoing officers
continues to be employed at the will of the Board of Directors. Mr. Zennamo has
since been on medical leave from the Company.
The Company has no other employment contracts. There are also no
retirement, pension or profit sharing plan in effect for any officers or
directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth at October __, 1996 the stock ownership
of each person known by the Company to be a beneficial owner of five per cent
(5%) or more of the Company's Common Stock and by all officers and directors,
individually and as a group:
Number Percentage
of Shares of
Owned(1) Class(1)
Name ______________ ___________
Anthony J. Liberatore(2) 3,524,427 27.6%
Elizabeth Liberatore(3) 747,153 5.9%
Officers & Directors as
a group (4 persons)(2) 4,627,146 36.2%
- ----------------------------
(1) Assumes a total number of shares outstanding of 12,774,539
(2) This number includes 1,840,667 shares of Common Stock held beneficially by
Anthony J. Liberatore; 747,153 shares owned beneficially by Elizabeth
Liberatore, wife of Anthony J. Liberatore; 200,000 shares owned beneficially by
Mark Liberatore, son of Anthony J. Liberatore, who resides with Mr. and Mrs.
Liberatore; and a total of 736,607 shares of Common Stock owned beneficially by
two shareholders who have granted to Anthony J. Liberatore a voting trust
agreement, permitting Mr. Liberatore to exercise voting rights over the shares.
Anthony J. Liberatore disclaims any beneficial interest in any of the foregoing
shares of Common Stock except those shares registered in his name. All of the
shares of Common Stock reported herein under Mr. Liberatore's name have been
integrated with his shares for computation of the share ownership of Officers
and Directors as a group.
(3) Elizabeth Liberatore is the wife of Anthony Liberatore,
President of the Company. Mrs. Liberatore's shares are integrated
with shares reported as owned by Anthony J. Liberatore.
30
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1. During fiscal 1995, payments of $21,600 were made by the Company to
Anthony J. Liberatore for rent due on the Company's former offices located at
1208 Broad Street, Utica, New York, which is presently owned by Mr. Liberatore.
During the same period, Mr. Liberatore paid approximately $20,100 in taxes,
insurance and interest with respect to the property leased to the Company.
Approximately $10,000 has been amortized on the mortgage covering the property
since the beginning of the mortgage. This rental compares with rentals for
similar space in the area from non-affiliated persons.
Since the Company moved all of its operations to a new plant facility
at 2005 Beechgrove Place, Utica, New York, these premises have not been occupied
by the Company but were held pursuant to a lease which expired in January, 1995.
The Company and Mr. Liberatore later agreed that no further payments on the
lease would be made after July, 1995, and that all payments made to him during
fiscal 1995 and thereafter would be applied against the purchase price.
In fiscal 1995, Mr. Liberatore granted the Company an option to
purchase the building for a total price of $130,000, less all payments made in
fiscal 1995 (i.e. $21,600) and any payments made thereafter, at such time as he
is able to delivery title free and clear of existing mortgages. Mr. Liberatore
also agreed to accept the Company's Common Stock in payment for the purchase
price of the premises.
31
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed pursuant to Item 601 of
Regulation S-K:
3. Certificate of Incorporation and By-Laws, with all Amendments thereto,
filed previously as Exhibit 3 to Registrants S-1 registration statement under
SEC file No. 33-43230 and incorporated herein by reference.
4. Warrant Agreement, filed previously as Exhibit 10 to the Registrants
initial registration statement on Form S-18 under SEC file No. 33-24483-NY and
incorporated herein by reference.
10(a). Lease Agreement between the Company and Anthony Liberatore for
premises at 1208 Broad Street, Utica, New York, filed previously as
Exhibit 10(c) to the Registrants S-1 registration statement under
SEC file No. 33-43230 and incorporated herein by reference.
10(b). Employment Agreement dated as of June 1, 1991 between the
Company and Anthony Liberatore filed previously as Exhibit
10(d) to the Registrants S-1 registration statement under SEC
file No. 33-43230 and incorporated herein by reference.
10(c). Employment Agreement dated as of June 1, 1991 between the
Company and Michael Liberatore filed previously as Exhibit
10(e) to the Registrants S-1 registration statement under SEC
file No. 33-43230 and incorporated herein by reference.
10(e). Letter of Intent between the Registrant and Consolidated
Healthcare Corp., dated March 11, 1993, filed previously under
Current Report on Form 8-K, dated March 17, 1993 under SEC file
No. 33-24483-NY and incorporated herein by reference.
10(f). Letter of Intent between the Registrant and Covers North
America, Inc., dated July 20, 1993, filed previously under
Current Report on Form 8-K, dated July 26, 1993 under SEC file
No. 33-24483-NY and incorporated herein by reference.
10(g). Contract for Purchase and Interim Lease between Registrant and
the Utica Industrial Development Corporation for the lease and
ultimate purchase of an office and manufacturing facility
located at 2005 Beechgrove Place, Utica, New York, dated July
23, 1993, filed
32
<PAGE>
previously under Current Report on Form 8-K, dated
July 27, 1993 under SEC file No. 33-24483-NY and
incorporated herein by reference.
10(h). Amendment to Lease Agreement between the Company and
Anthony J. Liberatore dated March 1, 1995 relating to
changes in the lease and option to purchase the premises
located at 12008 Broad Street, Utica, New York. Filed as an
Exhibit to Form 10-KSB for the Year ended May 31, 1995 and
incorporated herein by refer ence.
10(i). Agreement between the Company and Silver Lake Holdings
Ltd. Inc. dated July 1, 1995 for the manufacture of
the "Rigg." Filed as an Exhibit to Form 10-KSB for
the year ended May 31, 1995 and incorporated herein by
reference.
10(j). Agreement between the Company and Russo Securities,
Inc. dated December 28, 1994 for consulting services.
Filed as an Exhibit to Form 10-KSB for the year ended
May 31, 1995.
10(k). Agreement between the Company and Creative Media
International, Inc. to provide consulting services
dated March 10, 1995. Filed as an Exhibit to Form 10-
KSB for the year ended May 31, 1995.
11. Statement re computation of per share earnings, See
"Financial Statements - Statement of Operations and
Note 18."
21. Subsidiaries of the Registrant. Filed as an Exhibit
to Form 10-KSB for the year ended May 31, 1995 and
incorporated herein by reference.
23(a) Consents of B. Bruce Freitag, Esq., and Zeller Weiss & Kahn,
Certified Public Accountants, filed previously as Exhibit 24(a) to
the Registrants S-1 registration statement under SEC file No.
33-43230 and incorporated herein by reference.
23(b). Consent of Usher Quiat & Usher, litigation counsel for the
Registrant, filed previously as Exhibit 24(b) to the
Registrants S-1 registration statement under SEC file No.
33-43230 and incorporated herein by refer ence.
(b) Form 8-K filings:
None filed during last quarter of the fiscal year.
33
<PAGE>
SIGNATURES
In accordance with 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.
HEALTH-PAK, INC.
Dated: October 23, 1996 By: /s/Anthony J. Liberatore
-------------------------
Anthony J. Liberatore
President & Principal Executive
Officer
Dated: October 23, 1996 By: /s/Michael A. Liberatore
-------------------------
Michael A. Liberatore,
Vice President, Treasurer
Principal Financial & Accounting
Officer
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Dated: October 23, 1996 /s/Anthony J. Liberatore
--------------------------
Anthony J. Liberatore
President & Principal Executive
Officer
Dated: October 23, 1996 /s/Michael A. Liberatore
--------------------------
Michael A. Liberatore,
Vice President, Treasurer
Ast. Secretary, Principal
Financial & Accounting
Officer
Dated: October 23, 1996 /s/William F. Meola
---------------------
William F. Meola
Director
Dated: October 23, 1996 /s/Gustave J. DeTraglia
-------------------------
Gustave J. DeTraglia
Secretary
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
YEAR ENDED MAY 31, 1996
CONTENTS
Page
Independent auditors' report F-2
Consolidated financial statements:
Balance sheet F-3
Statement of income (loss) F-4
Statement of shareholders' equity F-5
Statement of cash flows F-6
Notes to consolidated financial statements F-7 - F-17
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Health-Pak, Inc. and subsidiary
Utica, New York
We have audited the accompanying consolidated balance sheet of Health-Pak,
Inc. and Subsidiary as of May 31, 1996, and the related consolidated statements
of income (loss), shareholders' equity, and cash flows for the years ended May
31, 1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Health-Pak, Inc. and
Subsidiary as of May 31, 1996, and the results of its operations and its cash
flows for the years ended May 31, 1996 and 1995 in conformity with generally
accepted accounting principles.
September 4, 1996
Mountainside, New Jersey
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization of the Company:
The Company originally "Morgan Windsor Ltd," was incorporated in the state
of Delaware on December 28, 1987 as a "blind pool". The only operations of the
Company at that time were to structure a public offering of its securities.
Thereafter the company began to search for a viable business opportunity.
On May 15, 1989, the Registration Statement containing the Company's
original prospectus was declared effective by the Securities and
Exchange Commission. Pursuant to the original prospectus the Company was
offering up to 4,000,000 units, at $.10 per unit, each consisting of one
share of common stock, one Class A warrant and one Class B warrant. No
securities were sold pursuant to original prospectus.
The Company subsequently amended its public offering to consist of a minimum
of 15,000 units to a maximum 50,000 units to be offered at $6.00 per
unit. Each unit consists of six shares of common stock (.002 par value)
and eighteen Class A redeemable common stock purchase warrants and
twelve Class B redeemable common stock purchase warrants. On September
7, 1990, the Company sold 16,358 units receiving gross proceeds of
98,148. Between October and November of 1989 the Company repurchased an
aggregate of 178,583 shares of the Company from nineteen stockholders
for an aggregate price paid for these shares. As a result of the above
transactions as of April 30, 1991, the date of acquisition of
Health-Pak, Inc, the Company had outstanding shares of 387,648 to the
public.
On April 30, 1991, the Company acquired 100% of the issued and outstanding
capital stock of Health-Pak, Inc. A New York corporation in exchange for
4,996,352 shares of which 4,756,077 shares were exchanged for 97.54% of
the outstanding shares of Health-Pak, Inc. and 240,275 shares were
retained to acquire the remaining outstanding shares of Health-Pak, Inc.
Thereafter, the Company, "Morgan Windsor Ltd" changed its name to
"Health-Pak, Inc" and increased its authorized capitalization to
20,000,000 shares.
2. Nature of business:
Health-Pak, Inc. is a manufacturer and distributor of dispos able paper
products for use in serviced-related industries, primarily the medical
and hospital industry. The Company sells to the east coast of the United
States. There is no guarantee that this market will continue to develop
since the incorporation of government intervention, economic conditions
and other unforeseen situations may occur. This market is competitive
with other companies with the major concentration of customers being in
the New York State region.
F-7
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies:
Principles of consolidation:
The acquisition of the Company's subsidiary on April 22, 1991 has been
accounted for as a reverse purchase of the assets and liabilities of the
Company by Morgan Windsor Ltd. Accordingly, the consolidated financial
statements represent assets, liabilities and operations of Health-Pak,
Inc. prior to April 30, 1991 and the combined assets, liabilities, and
operations for the ensuing period. The financial statements reflect the
purchase of the stock of Morgan Windsor Ltd. by Health-Pak, Inc., the
value being the historical cost of the assets acquired. All significant
intercompany profits and losses from transactions have been eliminated.
Pursuant to the purchase the Company's 387,648 shares were issued to the
public for $60,000.
Revenue recognition:
The Company maintains its books and records on the accrual basis of
accounting, recognizing revenue when goods are shipped and expenses when
they are incurred.
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method (FIFO).
Property and equipment:
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight line method over the following
useful lives:
Years
Machinery and equipment 10
Leasehold improvements 19 and 31-1/2
Automotive equipment 5
Office equipment 10
Expenditures for major renewals and betterments that extend the useful lives
of the property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
Per share amounts:
Net earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the
period. Fully diluted and primary earnings per common share are the same
amounts for the period presented.
Cash and cash equivalents:
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments
with original maturities of three months or less.
F-8
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued):
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results differ from these estimates.
Effect of recently issued accounting standards: The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impaired of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. "SFAS" No. 121 requires that
Long- Lived Assets and certain identifiable intangibles to be held and
used by the Company be reviewed for impairment whenever events indicated
that the carrying amount of an asset may not be recoverable. The Company
has no impaired assets at May 31, 1996.
The Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock
Based Compensation". The effective date of SFAS No. 123 is
for fiscal years beginning after December 15, 1995, and
established a method of accounting for stock compensation
plans based on fair value. The Company does not believe that
SFAS No. 123 will have an impact on its financial statements.
The Company has not adopted SFAS No. 123 at May 31, 1996 and
continues to use APB 25 which accounts for stock compensation
at the intrinsic value.
4. Inventories:
Inventories consist of:
May 31 May 31
1996 1995
Raw materials $372,753 $227,582
Finished goods 198,866 236,701
-------- --------
$571,619 $464,283
======== ========
5. Line of credit:
The Company has at its disposal a line of credit at Marine Midland Bank. The
note is due on demand and carries interest at prime + 1.5%. Inventory
and accounts receivable are pledged as security. The note is also
secured by the personal guarantees of Anthony Liberatore and Alfred
Zennamo to the extent of $50,000 in total. As of May 31, 1996 and 1995
the balance due on the line of credit was $80,827.
F-9
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-term debt:
Rate Amount Maturity
Note payable, Key Credit (a) 12% $ 3,793 May, 1998
Note payable, Manifest Group (b) 10% 14,372 July, 1999
Note payable, H.E.P Leasing Co. (c 10% 4,263 February, 1997
Note payable, Waste Mgmt. of N.Y. (d) 10% 7,763 November, 1998
Note payable, Business Services, Co (e) 10% 3,576 January, 1998
-------
33,737
Less current portion 17,105
-------
$16,662
(a) Note payable is collateralized by equipment with a cost of
$5,690. The note is payable in installments of $223 per
month, including interest.
(b) Note payable is collateralized by equipment with a cost of
$20,064. The note is payable in installments of $410 per
month including interest.
(c) Note payable is collateralized by equipment with a cost of
$11,279. The note is payable in installments of $580 per
month including interest.
(d) Note payable is collateralized by equipment with a cost of
$11,923. The note is payable in installments of $240 per
month including interest.
(e) Note payable is collateralized by equipment with a cost of
$7,688. The note is payable in installments of $184 per
month including interest.
Maturities of long-term debt as of May 31, 1996 are as follows:
Year Amount
May 31, 1997 $17,105
May 31, 1998 11,290
May 31, 1999 4,553
May 31, 2000 819
---------
$33,767
=======
F-10
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Commitments:
Commencing August 1, 1993, the Company entered into a lease agreement with
the Utica Industrial Development Corporation for manufacturing and office
space of approximately 43,500 square feet. The initial term of the lease
was from August 1, 1993 to April 30, 1994 at a monthly rental of $7,500.
The Company had an option to purchase the facility for $600,000 which
expired on April 30, 1994. The purchase was not completed by April 30,
1994, and the lease was automatically extended for an additional three
year period at the same terms and rental. Rent expense was $90,000 for the
year ended May 31, 1996 and $75,000 for the year ended May 31, 1995.
The following is a schedule of future minimum rental payments required
under the above operating lease as of May 31, 1996:
Year Amount
May 31, 1997 $82,500
-------
$82,500
=======
Consultant contracts:
The Company entered into a three year investment banking consulting
agreement on December 31, 1994. The Company issued 1,000,000 shares of
$.002 par common shares and used a discount valuation of $.002 per share.
The consultant is to act as a placement agent for Health-Pak, Inc. on all
private placements or secondary offerings. Services commenced as of April
1, 1995. The agreement is being amortized over thirty six months.
In addition, the Company also issued 4,500,000 stock options at various
exercised prices. As of May 31, 1996, 1,100,000 options have been
exercised as follows:
Number of options Exercise price
600,000 .10
200,000 .25
300,000 .35
The Company entered into a public relations consulting agreement on March
10, 1995. The agreement has a thirty month term and services commenced on June
11, 1995. The Company issued 1,750,000 shares of $.002 par common shares plus
17,242 shares per the original agreement that an additional 250,000 shares to be
issued at a rate of 8,621 shares per month over the next twenty nine months. A
valuation of $.02 per share was used. The Company withdrew from the consulting
agreement in August and no other shares were issued. In addition, advances made
to the Company and on the books as a notes payable, other, were reclassified as
payment for common stock already issued.
F-11
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Income taxes:
Effective June 1, 1993, the Company has adopted the Statements of
Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting for
Income Taxes," which applies a balance sheet approach to income tax
accounting. The new standard required the Company to reflect on its
balance sheet the anticipated tax impact of future taxable income or
deductions implicit in the balance sheet in the form of temporary
differences. The Company has reflected certain future tax benefits on its
balance sheet from the realization of the carryover of the current years
net operating loss to anticipated future earnings. The cumulative effect
as of June 1, 1993, the date of the adoption of SFAS No. 109, was
immaterial. As permitted by SFAS No. 109, prior year's financial
statements have not been restated.
Deferred income taxes are a result of timing differences arising from
depreciation reported for tax purposes in periods different than for book
purposes.
The components of income tax expense (benefit) at May 31, 1996 are:
Provision for income taxes:
Federal tax $ 0
State tax 0
Deferred tax benefit ( 15,160)
-------
Total income tax benefit ($15,160)
========
Deferred tax benefit arising from:
Net operating loss carryfoward ($15,160)
========
Reconciliation of income tax benefit at statutory rate to income tax
expenses at the Company's effective rate is as follows:
Tax benefit at statutory rate ($20,012)
Surtax exemption 9,712
State income tax benefit, net
of federal tax benefit ( 4,860)
- -----
Income tax benefit ($15,160)
========
F-12
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Income taxes (continued):
The components of deferred tax assets and liabilities are as follows:
Assets Liabilities
Bad debt allowances $ 500
Depreciation $900
Net operating loss carryfoward 83,515
------- ---------
Total 84,015 $900
====
Deferred tax liability 900
-------
Net deferred tax asset $83,115
========
The components of income tax expense (benefit) for May 31, 1995 are:
A reconciliation of income tax expense at the statutory rate to income tax
expense at the Company's effective rate is as follows:
Computed expense at expected statutory rates $1,734
Surtax exemption ( 969)
State tax 255
------
Income tax expense $1,020
======
The effective statutory rate for 1995 was 34% for federal tax purposes.
As of May 31, 1995, the Company has available, for tax reporting purposes,
net operating loss carryovers of approximately $394,000 which expire in
2009.
9. Common stock purchase warrants:
On May 26, 1989, Health-Pak, Inc. prior to the merger with
Morgan Windsor Ltd on April 30, 1991, issued Health-Pak, Inc.
warrants of which 120,795 of such warrants were exercised at a
price of one warrant plus $.40 per common share. The Company
received $48,318 and exchanged Health-Pak, Inc. shares for
344,991 shares of the Company. These shares were issued for
warrants of Health-Pak, Inc. (New York) and not from warrants
issued by Health-Pak, Inc. (formerly Morgan-Windsor Ltd).
F-13
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Common stock purchase warrants (continued):
On May 15, 1989, the Company completed its public offering in which 50,000
units were offered at $6.00 per unit. Each unit would consist of six
shares of common stock ($.002 par value) and eighteen Class A redeemable
common stock purchase warrants and twelve Class B redeemable common stock
purchase warrants. Each Class A warrant entitles the holder to purchase
one additional share of common stock at $.75 per share until June 30,
1992. Each Class B warrant entitles the holder to purchase one additional
share of common stock at $2.00 per share until March 5, 1992. Outstanding
were 294,444 Class A and 196,296 Class B redeemable common stock purchase
warrants of the Company. As of the balance sheet date of May 31, 1996 both
Class A and Class B warrants have expired as of December 31, 1994.
10. Employment contracts:
The Company has no employment contracts. Further, it has no retirement,
pension or profit sharing plan covering its officers or directors.
11. Deferred offering expense:
Thevalue stated is the amount that has been paid by the Company for expenses
incurred for the public offering of warrants. The deferred offering
expenses on the issued or expired warrants have been deducted from the
proceeds of the offering. The offering of the Class C warrants is expected
to be completed in 1997. In the event the offering does not take effect,
the deferred offering expenses will be charged to operating expenses.
Alldeferred offering expense pertain to the Class C warrants which had not
been issued as of the statement date.
12. Common stock shares outstanding:
The following shares were issued and outstanding at these respective dates:
May 31, 1996 13,972,039
----------
May 31, 1995 12,774,539
----------
F-14
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Proceeds from private placement:
In June 1991, the Board of Directors of the Company duly authorized the
Company to undertake a private placement of up to 500,000 of the Company's
shares at a price of $0.50 per share to accredited investors only,
pursuant to the exemption provided in Regulation D of the Securities Act
of 1933.
As of June 15, 1992, the Board of Directors of the Company duly authorized
the Company to undertake a private placement of up to 500,000 shares of
preferred stock as of May 31, 1993. The Company sold 6,500 shares at $10
per share on a subscription basis. The preferred stock was never issued
and was never authorized by the certificate of incorporation. The Company
adopted a resolution to the effect that 500,000 shares of preferred stock
be authorized convertible into fifteen shares of the common stock of the
Company during the first year of its issue. No action was taken to issue
the preferred stock since all the stockholders converted. The preferred
stock was at $10 par value and 9% cumulative. As of May 31, 1995 all
shareholders consented to convert their shares into common stock. The
Company issued 97,500 shares of its common stock for 6,500 shares of
subscribed for preferred stock during 1996. The proceeds to the Company
amounted to $65,000.
14. Subsequent events:
On May 22, 1991, the Company resolved to authorize the issue of 1,984,680
as a new class of warrants, to be designated Class C redeemable common
stock purchase warrants which shall be registered with the Securities and
Exchange Commission and that, following completion of such registration
process, said Class C warrants shall be distributed to all shareholders of
the Company as of June 14, 1991 on the basis of one Class C warrant for
every four shares of common stocks owned at such date.
Each Class C warrant shall entitle the warrant holders to purchase one
share of the Company's common stock at $.25 per share for a period of 90
days following the distribution date of said warrants, $.50 per share for
the next 60 days and $1.25 per share for the final 30 days of the exercise
period of Class C warrants. The Class C warrants shall be distributed
within ten days following the effective date of the Company's registration
statement. As of May 31, 1996 no new registration statement had been filed
with the Security and Exchange Commission.
On August 26, 1995, the Company's Board of Directors adopted a letter of
intent to purchase a building from Mr. Anthony Liberatore in the amount of
$130,000. All rental payments for the period June 1, 1994 to May 31, 1995, which
totaled $21,600, are to be applied as a down payment, with the remaining balance
to be paid by the issurance of the Company's common shares. The number of shares
to be issued to Mr. Liberatore shall be determined by dividing the balance of
the cash purchase price remaining after the credit due to the Company for rental
payments by a par share price equal to 60% of the average "bid" price as quoted
on the NASDAQ system for such shares during the period March 1 through March 15,
1995. As of May 31, 1996 no sale has taken place.
F-15
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Subsequent events (continued):
On August 5, 1996, the Company signed a letter of intent to purchase the
inventory, accounts receivable and equipment, less the accounts payable of
the protective disposal apparel division of Scherer Healthcare Ltd. at
September 30, 1996. Based on book value of acquiring assets of the
financial statements, the consolidated assets do not exceed 10% of the
combined assets acquired by the significant subsidiary test of Regulation
S-X Rule 210.1-02 (w).
15. Related party transactions:
Officers loans are unsecured and non-interest bearing. Officers have
indicated that they will not be repaid in the current year.
16. Subscription deposits payable:
On April 5, 1993 the Company entered into an agreement with Investor
Resources Services, Inc. for the purpose of concluding a private placement
of up to 600,000 shares of the Company's common stock to a limited number
of private investors. The agreement with Investor Resources Services, Inc.
provides that those private investors have the right to subscribe for up
to 600,000 shares of the Company's common stock at a purchase price of
$.60 per share. The Company has agreed to include such shares of stock in
its pending registration statement as filed with the Securities and
Exchange Commission. As a condition to the performance or registration of
the stock, if by June 24, 1993 the registration statement is not effective
and the shares subscribed for by Investor Resources Services, Inc. are not
eligible for sale to the public, the Company must provide the pledge of
166,666 shares of its common stock by such or its shareholders as may be
necessary to guarantee to each subscriber of Investor Resources Services,
Inc.
Inconsideration of the shareholders lending their shares of common stock to
the Company pursuant to the pledge agreement with Investor Resources
Services, Inc. and their having lost their shares of common stock, the
Company shall issue additional shares of common stock to the shareholders
to replace the lost shares by foreclosure of Investor Resources Services,
Inc. and in addition a 50% bonus as compensation for loosing their
privilege of selling the shares now and as compensation for the loan.
On July 7, 1993 the shares of the pledged stock were taken by Investor
Resources Services, Inc. pursuant to the terms of the pledge agreement. On April
5, 1993 Investor Resources Services, Inc. subscribed for 166,666 shares of
common stock for a total of $100,000. As of May 31, 1993 those shares had not
been replaced to the guarantors who pledged those shares. The Company had
recorded this $100,000 as a subscription deposit payable. The Company, on May
26, 1994, issued 249,999 shares of the Company's common stock to the guarantors
F-16
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Common stock purchase options:
As of May 31, 1996 the unexercised options held by Silver Lake,
Inc. are as follows:
Amount of options Exercise price Expiration
400,000 .35 September 30,1996
1,000,000 .75 October 31, 1998
1,000,000 1.25 October 31, 1998
1,000,000 2.00 October 31, 1998
18. Earnings per share:
May 31, 1996 May 31, 1995
Primary Primary
Number of shares:
Weighted average shares outstanding 13,085,785 10,812,712
Incremental shares for outstanding
stock options 3,352,083
----------
16,437,868 10,812,712
========== ==========
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. Shares that would be
outstanding assuming exercise of dilutive stock options , all of which are
considered to be common stock equivalents. Fully diluted earnings per
share are the same as primary earnings per share for May 31, 1996 and May
31, 1995.
F-17
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - MAY 31, 1996
ASSETS LIABILITIES
Current assets: Current liabilities
Cash $ 1,376 Current portion of long term debt 17,105
Receivables, trade, net of Notes payable, bank (Note 5) 80,827
allowance of $2,000 286,926 Accounts payable 477,688
Inventory (Notes 3 & 4) 571,619 Payroll and sales tax payable and
Income tax refund receivable, accrued expenses 39,155
------
current 1,740
Prepaid expenses 92,381
Current portion of consulting
agreement 6,667
-----
Total current assets 960,709 Total current liabilities 614,775
------- -------
Property and equipment (Notes 3 & 6):
Machinery and equipment 293,783 Long-term debt, net of current
Leasehold improvements 87,546 portion (Note 6) 16,662
------ - ------
Office equipment 71,638
Automotive equipment 21,021
------
473,988
Less accumulated Commitments (Note 7)
depreciation 180,841
-------
293,147
-------
Other assets: Shareholders' equity:
Deposit on building (Note 14) 23,400 Preferred stock A, 9% cumulative
Security deposits 241 convertible $10 par, 5,000,000 shares
Prepaid consulting agreements, net unauthorized and unissued (Note 13)
of current portion (Note 7) 5,555 Common stock,.001 par value 2,000,000
Deferred offering expenses
(Note 11 225,419 shares authorized
Deferred income taxes 83,115 Common stock, .002 par value 20,000,000
Cash surrender value, officers' shares authorized (Note 12) 27,943
life insurance 16,139 Common stock purchase warrants:
Officer's loan (Note 15) 1,150 Class A (Note 9)
---------- Class B(Note 9)
355,019
----------
Additional paid in capital ( 836,516)
Retained earnings (deficit) 977,438
-------
$1,608,875 $1,608,875
=========== ============
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (LOSS)
YEARS ENDED MAY 31, 1996 AND 1995
1996 1995
---- ----
Net sales $1,881,149 $2,059,630
Cost of sales 1,344,209 1,565,915
---------- ----------
Gross profit 536,940 493,715
Selling, general and administrative
expenses (Note 14) 589,559 462,520
---------- ----------
Income (loss) from operations ( 52,619) 31,195
---------- ----------
Other charges:
Amortization 8,765
Interest expense 13,442 17,330
---------- ----------
13,442 26,095
---------- ----------
Income before income taxes ( 66,061) 5,100
---------- ----------
Income taxes expense (benefit) (Note 8)
Current
Deferred ( 15,160) 1,020
---------- ----------
Net income (loss) ($ 50,901) $ 4,080
========== ==========
Net income (loss) per common share:
Primary ($ 0.01) $ 0.00
========== ==========
Fully diluted N/A N/A
Weighted average number of common shares outstanding (Note 18):
Primary 16,437,868 10,812,712
========== ==========
Fully diluted N/A N/A
=========== ===========
See notes to consolidated financial statements.
F-4
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1996 AND 1995
1996 1995
---- ----
Operating activities:
Net income (loss) ($ 50,901) $ 4,080
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 51,233 24,872
Amortization 3,443
Changes in operating assets and liabilities:
Decrease (increase) in interest receivable 9,599
Decrease (increase) in accounts receivable ( 88,057) 87,297
Decrease (increase) in inventory ( 107,336) ( 97,505)
Decrease (increase) in income tax refund receivable 2,733 1,020
Increase in prepaid expenses ( 6,520) ( 58,792)
Increase in accounts payable 87,821 62,697
Increase (decrease) in accrued expenses 26,544 ( 30,553)
Decrease in other assets 12,514
-------- ---------
Net cash provided from operating activities ( 71,969) 6,158
-------- --------
Investing activities:
Source of cash:
Decrease in note receivable 68,000
Use of cash:
Purchase of property and equipment ( 119,497) ( 34,978)
Increase in other assets ( 17,100)
Increase in deferred offering expenses ( 43,065) ( 28,936)
-------- --------
Net cash used in investing activities ( 162,562) ( 13,014)
-------- --------
Financing activities:
Sources of cash:
Increase in long-term debt 29,863 5,690
Increase in notes payable, other 47,450
Proceeds from issuance of common stock 252,000
Use of cash:
Decrease in notes payable, bank ( 124,173)
Payment of long-term debt ( 18,733)
Decrease in notes payable, other ( 47,450)
-------- ---------
Net cash provided from (used in) financing activities 234,413 ( 89,766)
-------- --------
Net increase (decrease) in cash ( 118) ( 96,622)
Cash, beginning of period 1,494 98,116
-------- --------
Cash, end of period $ 1,376 $ 1,494
======== ========
Supplemental disclosures and cash flow information:
Cash paid during the year for:
Interest $ 13,442 $ 18,012
======== ========
Income taxes $ 0 $ 0
======== ========
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for director fees, past
services and consulting contracts $ 0 $ 60,000
======== ========
See notes to consolidated financial statements.
F-6
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> Jun-01-1995
<PERIOD-END> May-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,376
<SECURITIES> 0
<RECEIVABLES> 288,926
<ALLOWANCES> 2,000
<INVENTORY> 571,619
<CURRENT-ASSETS> 960,709
<PP&E> 473,988
<DEPRECIATION> 180,841
<TOTAL-ASSETS> 1,608,875
<CURRENT-LIABILITIES> 614,775
<BONDS> 0
0
0
<COMMON> 27,943
<OTHER-SE> 1,786,011
<TOTAL-LIABILITY-AND-EQUITY> 1,608,875
<SALES> 1,881,149
<TOTAL-REVENUES> 1,881,149
<CGS> 1,344,209
<TOTAL-COSTS> 589,559
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,442
<INCOME-PRETAX> (66,061)
<INCOME-TAX> (15,160)
<INCOME-CONTINUING> (50,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,901)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
