SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended February 28, 1997
Commission File Number 33-24483-NY
HEALTH-PAK, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 11-2914841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1208 Broad Street, Utica, NY 13501
(Address of principal executive offices) (Zip Code)
Same
(Former Address) (Zip Code)
(315) 724-8370
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 28, 1997
Common stock, $0.002 par value 15,888,556
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheets as of February 28, 1997 and
May 31, 1996 F-2
Statement of income for nine and three months ended
February 28, 1997 and February 29, 1996 F-3
Statement of cash flows for nine months
ended February 28, 1997 and February 29, 1996 F-4
Notes to condensed consolidated financial
statements F-5-11
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE>
<TABLE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET - FEBRUARY 28, 1997 AND MAY 31, 1996
ASSETS LIABILITIES
February 28, May 31, February 28, May 31,
<CAPTION>
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current assets: Current liabilities:
Cash $149,231 $ 1,376 Current portion of long term debt $ 17,828 $ 17,105
Receivables, trade, net of Notes payable, bank 475,571 80,827
allowance of $2,000 552,375 286,926 Accounts payable 952,454 477,688
Inventory 1,260,738 571,619 Payroll and sales tax payable and
Income tax refund receivable, accrued expenses 23,180 39,155
----------- ---------
current 1,740 1,740
Prepaid expenses 88,268 92,381
Current portion of consulting
agreement 6,667 6,667
---------- ----------
Total current assets 2,059,019 960,709 Total current liabilities 1,469,033 614,775
---------- ---------- ---------- --------
Property and equipment:
Machinery and equipment 308,680 293,783 Long-term debt, net of current
Leasehold improvements 94,522 87,546 portion 28,606 16,662
---------- ---------
Office equipment 99,529 71,638
Automotive equipment 21,021 21,021
---------- ----------
523,752 473,988
Less accumulated depreciation 195,101 180,841 Commitments
---------- ----------
328,651 293,147
------- -------
Minority interest in consolidated
subsidiary 8,838
-----
Other assets:
Investments in affiliated Company 130,637 Shareholders' equity:
Deposit on building 21,600 23,400 Common stock, .001 par value 2,000,000
Deposits 8,041 241 shares authorized, none issued
Prepaid consulting agreements, net Common stock, .002 par value 20,000,000
of current portion 555 5,555 shares authorized, 15,888,556 shares 31,776 27,943
Deferred offering expenses 225,710 225,419 issued and outstanding
Deferred income taxes 109,210 83,115 Common stock purchase warrants:
Deferred loan fees and costs 28,618 Class A
Cash surrender value, officers' Class B
life insurance 16,139 16,139 Class C
Officer's loan 1,200 1,150 Additional paid in capital 2,303,53 1,786,011
---------- ----------
Retained earnings (deficit) ( 912,411)( 836,516)
---------- --------
541,710 355,019
1,422,903 977,438
--------- -------
$2,929,380 $1,608,875 $2,929,380 $1,608,875
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE AND THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
Nine months ended Three months ended
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $2,299,507 $1,539,693 $1,166,224 $ 544,201
Cost of sales 1,840,495 1,143,054 1,074,455 416,844
---------- ---------- ---------- ----------
Gross profit 459,012 396,639 91,769 127,357
Selling, general and
administrative expenses 501,815 369,856 107,721 124,173
---------- ---------- ---------- ----------
Income (loss) from
operations ( 42,803) 26,783 ( 15,952) 3,184
---------- ---------- ---------- ----------
Other income (expense):
Loss on investments in
affiliated company ( 5,763)
Interest expense ( 38,790) ( 6,102) ( 20,530) 182
Amortization ( 5,000) ( 17,000) ( 1,667) ( 5,667)
---------- ---------- ---------- ----------
( 49,553) ( 23,102) ( 22,197) ( 5,485)
---------- ---------- ---------- ----------
Income (loss) before
income taxes ( 92,356) 3,681 ( 38,149) ( 2,301)
Income taxes (benefit):
Current ( 25,299) 736 ( 13,566) ( 494)
Minority interest in
income of subsidiary( 8,838) 10,052
---------- ---------- ---------- -----------
Net income (loss) ($ 75,895) $ 2,945 ($ 14,531) ($ 1,807)
========== ========== ========== ==========
Earnings per common and
dilutive common
equivalent share:
Primary $ 0.00 $ 0.00 $ 0.00 $ 0.00
=========== ========= =========== =========
Fully diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
========== ========= =========== =========
Weighted average number
of common shares and
dilutive outstanding:
Primary 14,710,797 13,374,189 15,888,556 13,478,337
========== ========== ========== ==========
Fully diluted 14,760,947 13,664,948 15,938,706 13,711,095
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
February 28, February 29,
1997 1996
---- ----
Operating activities:
Net income (loss) ($ 75,895) $ 2,945
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 28,467 36,323
Amortization 5,000 17,000
Loss on investments in subsidiaries 5,763
Minority interest in subsidiary 8,838
Changes in operating assets and liabilities:
Accounts receivable ( 265,449) ( 93,522)
Inventory ( 689,119) ( 50,121)
Income tax refund receivable ( 631)
Prepaid expenses and interest receivables ( 10,094) 15,542
Accounts payable 474,766 38,107
Accrued expenses ( 15,975) ( 5,383)
Deferred income taxes ( 26,095) ( 3,057)
Deposits and loan fees ( 34,618) ( 1,800)
-------- --------
Net cash used in operating activities ( 594,411) ( 44,597)
-------- --------
Investing activities:
Purchase of property and equipment ( 49,764) ( 65,699)
Investment in subsidiaries
Loan receivable ( 50)
--------
Net cash used in investing activities ( 49,814) ( 65,699)
-------- --------
Financing activities:
Proceeds from issuance of common stock and paid in capital 384,960 70,100
Increase in long-term debt 30,326 58,054
Proceeds from notes payable, bank 405,521
Payment of notes payable, bank ( 10,777)
Payment of long-term debt ( 17,659)
Payment of deferred offering expenses ( 291) ( 18,612)
-------- --------
Net cash provided from financing activities 792,080 109,542
-------- --------
Net increase in cash 147,855 ( 754)
Cash, beginning of period 1,376 1,494
-------- --------
Cash, end of period $149,231 $ 740
======== ========
Supplemental disclosures and cash flow information: Cash paid during the year
for:
Interest $ 34,683 $ 6,102
======== ========
Income taxes $ 0 $ 0
======== ========
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for equity interest
in Silver Lake Holding, Ltd. $136,400 $ 0
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1997
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended
February 28, 1997 are not necessarily indicative of the results that may
be expected for the year ending May 31, 1997. For further information
refer to the consolidated financial statements and footnotes thereto
incorporated by reference in the Company's Annual Report on Form 10-K
for the year ended May 31, 1996.
1. Nature of business:
Health-Pak, Inc. is a manufacturer and distributor of disposable paper
products for use in serviced-related industries, primarily the medical
and hospital industry.
2. Summary of significant accounting policies:
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.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make 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 could differ from those
estimates.
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).
F-5
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1997
(Unaudited)
2. Summary of significant accounting policies (continued):
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.
Cash and cash equivalents:
Cash and cash equivalents include financial instruments with maturities
of three months or less.
3. Inventories:
Inventories consist of:
February 28, 1997 May 31, 1996
----------------- ------------
Raw materials $ 525,787 $372,753
Finished goods 734,951 198,866
---------- --------
$1,260,738 $571,619
========== ========
4. Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its 65% owned subsidiary, Protective Disposal Apparel,
LLC. Inter-company transactions and balances have been eliminated in
consolidation.
F-6
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1997
(Unaudited)
4. Investment:
The Company purchased a 10% equity interest in Silver Lake Corporation in
exchange for its own common stock valued at $.682 per share. This
investment is accounted for under the equity method of accounting.
In October 1996, the Company formed and purchased a 65% equity interest in
Protective Apparel, LLC, a company operating in the disposable apparel
business. The LLC in turn purchased a continuing business, Scherer
Healthcare, Ltd, d/b/a Protective Disposal Apparel. As of October 28,
1996 the balance sheet of the LLC was as follows:
ASSETS
Current assets:
Accounts receivable $263,371
Inventory 308,469
-------
Total current assets 571,840
-------
Security deposits 1,500
-----
Total assets $573,340
========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $318,943
--------
Total current liabilities 318,943
-------
Members' capital 254,397
-------
Total liabilities and members' equity $573,340
========
5. Notes payable, bank:
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 February 28, 1997 the balance due on the
line of credit was $70,050.
The Company opened a line of credit with Foothill Capital Corporation in
September 1996. The loan ceiling amount is based on a percentage formula
of eligible accounts receivable and inventory. The balance due at February
28, 1997 is $405,521.
F-7
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1997
(Unaudited)
6. Long-term debt:
Rate Amount Maturity
Note payable, Key Credit (a) 12% $ 2,470 May, 1998
Note payable, Manifest Group (b) 10% 19,680 July, 1999
Note payable, Waste Mgmt. of N.Y. (c) 10% 5,921 November, 1998
Note payable, Business Services, Co. (d) 10% 1,722 January, 1998
Note payable, Resource Capital Corp. (e) 10% 5,496 March, 2000
Note payable, Resource Capital Corp. (f) 10% 4,299 July, 1999
Note payable, Resource Capital Corp. (g) 10% 6,846 April, 1998
-------
46,434
Less current portion 17,828
------
$28,606
=======
(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 $11,923.
The note is payable in installments of $240 per month including
interest.
(d) Note payable is collateralized by equipment with a cost of $7,688.
The note is payable in installments of $184 per month including
interest.
(e) Note payable is collateralized by equipment with a cost of $6,796.
The note is payable in installments of $170 per month including
interest.
(f) Note payable is collateralized by equipment with a cost of $5,296.
The note is payable in installments of $155 per month including
interest.
(g) Note payable is collateralized by equipment with a cost of $9,053.
The note is payable in installments of $251 per month including
interest.
Maturities of the debt as of February 28, 1997 are as follows:
Year Amount
---- ------
February 28, 1998 $17,828
February 28, 1999 15,667
February 28, 2000 10,600
February 28, 2001 2,339
-------
$46,434
F-8
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1997
(Unaudited)
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 term of this lease
was from August 1, 1993 to April 30, 1994 at a monthly $7,500. The
Company had an option to purchase the facility for $600,000 which
expired on April 30, 1994. The lease was automatically extended for an
additional three year period for $9,500, with payments beginning in
August, 1995.
Rentcharged to expense in the nine months ended February 28, 1997 and
February 29, 1996 was $70,800 and $70,500 respectively.
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 February 28, 1997, 2,716,517 options have been
exercised as follows:
Number of options Exercise price
600,000 .10
200,000 .25
300,000 .35
1,616,517 .22
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-9
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1997
(Unaudited)
8. Income taxes:
The components of income tax expense (benefit) for February 28, 1997 and
February 29, 1996:
A reconciliation of income tax expense (benefit) at the statutory rate to
income tax expense (benefit) at the Company's effective rate is as
follows:
February 28 May 31
1997 1996
Computed (benefit) expense at expected
statutory rates ($34,406) ($20,012)
Surtax exemption 19,226 9,712
State tax expense (benefit) ( 10,119) ( 4,860)
------- -------
Income tax expense (benefit) ($25,299) ($15,160)
======= =======
The effective statutory rate for 1996 was 34% for federal tax purposes.
As of May 31, 1996, the Company has available, for tax reporting purposes,
net operating loss carryovers of approximately $394,000 which expire in
2009.
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 tax
purposes.
F-10
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1997
(Unaudited)
9. Earnings per share:
Nine months ended Three months ended
02/28/97 02/29/96 02/28/97 02/29/96
Number of shares:
Weighted average
shares outstanding 14,710,797 12,883,449 15,888,556 12,987,597
Incremental shares
for outstanding
stock warrants 490,740 490,740
---------- ---------- ---------- ----------
Primary 14,710,797 13,374,189 15,888,556 13,497,337
Common stock to be
issued under contractual
obligation 50,150 290,759 50,150 232,758
---------- ---------- ---------- ----------
Fully diluted 14,760,947 13,664,948 15,938,706 13,711,095
========== ========== ========== ==========
10. Related party transactions:
Officers loans are unsecured and non-interest bearing. Officers have
indicated that they will not be repaid in the current year.
F-11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Introduction.
As previously stated in the Company's report on Form 10-QSB for the six
months ended November 30, 1996, the financial statements and the discussion
which follows includes, on a consolidated basis, the assets, liabilities and
operating results for Protective Disposable Apparel Company, LLC ("PDA") which
was acquired by the Company in October, 1966 as a 65% owned subsidiary. Since
adjustments were not made for prior periods, comparisons may not completely
reflect the actual results. Inter company balances have also been eliminated in
the consolidation.
I. Financial Condition and Liquidity.
(a) Financial Condition.
Assets.
At February 28, 1997, the end of the third quarter of the fiscal year
ending May 31, 1997, total assets increased by $1,320,505 from May 31, 1996, the
end of fiscal 1996, to $2,929,380, an increase of approximately 82%, and
increased by $302,126 or approximately 11.5% in the quarter ended February 28,
1997 from the six month period ended November 30, 1996.
The three principal reasons for this substantial increase were: (i) the
acquisition of the assets and business of PDA, the partially-owned subsidiary
purchased in October, 1996; (ii) receipt of the proceeds from the exercise of
certain options for up to $384,960; and (iii) slight increases in property and
equipment to accommodate the increased business activity resulting from the
acquisition of PDA.
Closer scrutiny of these increases demonstrates the more specific
effect of each of the foregoing principal factors on various aspects of the
financial statements of the Company. For instance, cash increased substantially
from the year end by $147,855. While this was partially due to the fact that the
Company was conserving some cash to meet expenses of the construction of a
"clean room" (see below), the addition of machinery and equipment to accommodate
increased operations from the acquisition of PDA and to cover the increase in
payables from the PDA acquisition, it was also due to the fact that proceeds
from the sale of Common Stock by the exercise of outstanding Options was
received in the period following the year end. Also, the increase in receivables
from the year ended May 31, 1996 of approximately $265,449 primarily arises from
the acquisition of PDA's receivables (with the consequent obligation for certain
of its liabilities as well).
4
<PAGE>
Inventory has also substantially increased (by $689,119, an increase of
approximately 120%) in the period since the year ended at May 31, 1996,
primarily from the purchase of PDA's inventory and new inventory additions to
balance PDA's business.
In order to accommodate anticipated, increased operations by reason of
the acquisition of PDA, the Company also acquired additional machinery and
equipment in the period of approximately $14,897.
Assets also slightly increased by reason of the addition to leasehold
improvements relating to the construction of a "clean room" to permit the
Company to offer sterilized products to PDA'a customers and to certain of the
Company's customers and also by the acquisition of additional office equipment.
The increase in Investments in Affiliated Company since the year end
arises from the Company's acquisition of an interest of 10% in Silver Lake
Corporation in exchange for its own Common Stock (valued at $0.687 per share)
and the acquisition of PDA in October, 1966.
The overall increase in total assets for the nine-month period ended
February 28, 1997 was substantial in relation to the Company's prior growth
history and is primarily attributable to the factors described above. However,
management believes that this addition to the Company's business will advance
the Company's financial future and will provide a base from which the Company
can grow once the assimilation problems, discussed below, are corrected.
Liabilities.
The most significant increases in Liabilities for the nine month period
ended February 28, 1997 occurred in Notes Payable Bank and Accounts Payable.
These increases are primarily due to the new financing established by the
Company to replace the factoring arrangements it previously had and also the
obligations incurred with the acquisition of PDA, discussed above.
The substantial increase in Notes Payable - Bank (an increase of
$394,744 from the year ended May 30, 1996) is due to fact that the Company
opened a line of credit with Foothill Capital Corporation in September, 1996
which replaced the Company's former factoring agreement with another financial
institution. The loan ceiling amount on this financing is based on a percentage
formula of eligible accounts receivable and inventory. The balance due at
February 28, 1997 was $405,521. In addition, the Company carried a line of
credit at the Marine Midland Bank which was converted to a note. The balance due
on the note at the end of the third quarter was $70,050.
5
<PAGE>
The increase in Accounts Payable (about 99% when compared to May 31,
1996) primarily results from new obligations assumed by the Company after the
year end in connection with the purchase of PDA and because of substantial
increases in inventory purchases occurring during the first six months period
ended November 30, 1996 to balance and to accommodate PDA's business. Slower
payments by the Company during the same period to conserve cash for construction
costs and equipment acquisition also contributed to the increase in Accounts
Payable. Accounts Payable increased by about $215,922 or 29.3% during the
quarter ended February 28, 1997 when compared to the six-month period ended
November 30, 1996 which accounts for the fact that inventory purchases continued
during this quarter as well (Inventory increased in the third quarter by
$216,479 or by 20.7%).
Total Current Liabilities at the end of the third quarter were
$1,469,033 compared with $614,775 at the end of the fiscal year, an increase of
$813,765 or 132%. Current Liabilities at November 30, 1996 were $1,133,396,
which shows an increase for the quarter ended February 28, 1997 of approximately
$335,637 or approximately 29.6%. This is attributed to the factors discussed
above.
The Company believes that it is now in a more balanced position with
respect to inventory since making the acquisition and can use, for the most
part, existing inventory to support sales for the next few months without
substantial inventory acquisition.
The Retained Earnings deficit increased by $75,895 to $912,411 (or
9.1%) in the first nine months of the fiscal year when compared to the 1996 year
end period, reflecting the fact that the Company experienced a net loss for the
nine month period ended February 28, 1997 of $75,895 compared to a net profit of
$2,945 for the same period last year. Retained Earnings declined by $21,074 for
the three-month period ended February 28, 1997, also demonstrating the fact that
the Company experienced a substantial loss in the third quarter as well.
This loss is generally attributable to assimilation of PDA's business
into the Company's operations, particularly selling off undesirable inventories
of PDA at reduced prices, inventory replacement and purchases and the pricing
problems relating to PDA'a products. See "Results of Operations" below.
The Company's financial statements, particularly the balance sheet,
have changed rather substantially as a result of the acquisition of PDA made in
October, 1966 and the changes necessarily made to accommodate PDA's business.
This transaction influenced the increases in receivables and inventory,
additions to machinery and equipment and the substantial increases in current
liabilities. Another significant factor was the Company's change in credit
facilities by terminating the factoring of its accounts
6
<PAGE>
to the establishment of a credit line with Foothill Capital
Corporation.
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.
Working capital increased slightly at February 28, 1997 to
approximately $389,986 compared to $345,934 at May 31, 1996, the end of the
fiscal year, an increase of $44,052 or approximately 13%. This increase was
primarily due to a cash increase for the period and higher receivables and
inventory. However, working capital declined substantially in the third quarter
when compared to working capital of $633,247 for the previous six months ended
November 30, 1996. Management attributes the decline to the necessary expenses
for assimilating PDA's business, primarily inventory purchases, as previously
discussed.
The most significant Current Liabilities affecting liquidity at the end
of February 28, 1997 were $952,454 in Accounts Payable and Notes Payable - Bank
of $475,571, $17828 in the Current Portion of Long Term Debt and $23,180 in
Other Accrued Liabilities for a total of $1,469,033 (compared with Current
Liabilities of $1,133,396 at November 30, 1996 and $614,773 at May 31, 1996, the
end of the fiscal year). Against this total, the Company had Cash assets at
February 28, 1997 of $149,231, Inventory of $1,260,738 and Receivables of
$552,375, for a total of $1,962,344 in cash and cash equivalent assets (compared
with $859,921 at May 31, 1996 and $1,680,523 at November 30, 1996). Although
management believes there was adequate liquidity at the end of the first nine
months of fiscal 1997 in terms of working capital and cash and cash equivalent
assets to meet its current obligations, because of the heavy expenses associated
with the acquisition of PDA, its ability to pay Accounts Payable was diminished.
The Company also expects to draw on existing inventory, having now
balanced PDA's requirements, to improve liquidity over the next quarter.
The principal sources of funds for the Company's operations during the
nine months ended February 28, 1997 were the proceeds received from the sale of
stock and operating revenues, as reflected in the Company's financial
statements.
In combination, management believes that the Company will have adequate
working capital and sufficient credit alternatives to fund the Company's
operations during the balance of fiscal 1997 and well into 1998, including
support for its planned expansion of sales.
7
<PAGE>
II. Results of Operations.
Net Sales for the nine month period ended February 28, 1997 totalled
$2,299,507 and were higher by $759,814 than the comparative period in fiscal
1996 (an increase of approximately 49.3%). A substantial portion of this
increase results from the additional sales provided by the acquisition of PDA
and to a lesser extent from the Company's own growth in sales during the period.
The period also benefitted from seasonal sales of fleece sportswear, an item
which is principally manufactured in summer and early fall but not shipped until
late fall and early winter.
Net sales for the three months ended February 28, 1997 were $1,166,224
compared to only $544,201 for the three month-period ended February 29, 1996.
This represents an increase of $622,023 for the period or over 114%.
There were no significant price increases to account for higher net
sales during the period; however, as of April 1, 1997, the Company made a
general price increase of approximately 6% on most of its products and effective
May 1, 1997, increased prices by 10.9% on products offered by PDA. These
increases do not have any effect on the results reported for the period ended
February 28, 1997. Management believes these increases are within industry
guidelines and will not have a significant effect on future sales.
Management believes that the substantial increase in sales for the
period clearly demonstrates the advantages of making the PDA acquisition which;
although, not without cost and difficulties in assimilation, it is expected,
will make even further contributions to net sales as its inventory position is
corrected, products from the Company are offered to its customers and additional
sales efforts are in effect.
While the acquisition of PDA made record contributions to net sales as
previously stated, there has been a period of absorption and dislocation in the
Company's results of operations. Management believes these difficulties are now
under control and profitability should improve beginning by the next quarter.
During the first nine months of fiscal 1997, the Cost of Sales
expressed as a percentage of Net Sales was 80% compared to 74.2% for the same
period in fiscal 1996, and 76% for the year ended May 31, 1996. However, this
also compares with a percentage of 92.1% of sales for the three months ended
February 28, 1997 and indicates significantly higher operating and material
costs for that period, with a substantial effect on profitability. This quarter
was the primary period that PDA's inventory was sold at a discount and inventory
acquisitions were made for PDA. Previously, the Company's operating costs were
for the most part consistently in the range of 73% to 76% of sales.
8
<PAGE>
In addition to inventory liquidation during the period, management
attributes this decline in Costs of Sales to the fact that PDA's costs were not
in line with its pricing and, after a great deal of investigation and research,
management has a better working understanding of these costs and has made
adjustments, including certain pricing changes effective May 1, 1997 of an
average of approximately 10.9% across the range of PDA's products. This decline
was also exacerbated by the fact that the Company was required to make
substantial additions to inventory during the period for PDA to provide a
product balance after acquisition. It is management's expectation that with new
price increases in effect, balanced inventory and better knowledge of PDA's
product costing, Cost of Sales will be adjusted for improved profitability
results in the next quarter and after the year end period.
The Company is also in the process of assimilating a greater portion of
the manufacturing for products sold by PDA which was previously manufactured in
Haiti and Mexico. Management believes that by taking this action it will
actually reduce costs `and at the same time reduce its own overhead costs.
Previously, most of PDA's products were manufactured by others.
Based on the previous results of the Company's retail outlet store, the
Company continued to expand the product lines being offered in the store with
the expectation that the store will continue the trend experienced in fiscal
1995 and make an even greater contribution to net revenues in fiscal 1998.
During the first nine months of fiscal 1997, Selling, General and
Administrative Expenses were higher at $501,815 or 21.8% of Net Sales, compared
to $369,856 or 24% of Net Sales for the comparable period in 1996. However, as a
percentage of sales, this account actually declined in the period. This change
represents an increase of $131,959 in Selling, General and Administrative
Expenses on higher Net Sales of $759,814 for the nine months ended February 28,
1997 when compared to 1996. General and Administrative Expenses for the three
month period ended February 28, 1997 were actually lower on substantially
increased sales compared to the same period in 1996. These expenses were 9.2% of
net sales for the three months ended February 28, 1997 compared to 22.8% for the
comparative period in 1996.
This improvement is largely due to the following factors: (i)
previously, the Company factored its accounts receivable which was a cost
included in the General and Administrative account; while presently, the Company
has eliminated factoring receivables and has replaced this financing with a new
credit line, the expense of which is carried separately from the General and
Administrative account; (ii) the Company has instituted several measures to
contain costs in the General and Administrative area; and (iii) net sales have
been substantially increased over the period by the
9
<PAGE>
acquisition of PDA so that General and Administrative costs are now averaged
over a greater number.
There was a net loss of $42,803 from Operations for the first nine
months in 1997 compared with a net profit of $26,783 or 1.74% of Net Sales for
the comparative period in 1996. As is evident from the Income Statement, this
loss was obviously due to the higher Costs of Sales during the period, resulting
from the factors described above. A comparison of the three month period ended
February 28, 1997 with the same period in 1996 also shows a loss for the third
quarter of 1997 of $15,952 compared with a profit of $3,184 for the comparable
period in 1996. This loss is also a product of higher Cost of Sales in the most
recent period compared to 1996.
The decline in Income from Operations for this period is regarded by
management as a temporary situation resulting from the assimilation of PDA into
its business and one which will be cured by the factors already employed such as
price increases to be effective for April 1, 1997 and May 1, 1997 and the
orderly distribution of PDA's inventory at list price rather than discounted
liquidation prices. Management expects an improved picture by not later than the
first quarter of 1998.
As previously reported, among the Company's prospects for increased
performance in 1998, besides the addition of PDA's business, is the Company's
move to include a new line of garments in the disposable medical industrial area
for such products as laboratory coats and hats used primarily by laboratories
and pharmaceutical companies and the possibility of new government contracts
which would have a positive effect on net sales. Recently, the Company added an
orthopaedic operating room gown to its line and a new line of sterilized
products will also be shortly introduced. The Company is looking forward to the
possibility of additional sales derived from manufacturing a product called the
"Rigg" as mentioned in other reports; however the outlook for this item cannot
be anticipated as yet because marketing is only beginning. The Company has
already begun manufacturing this product.
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.
The Company embarked on a program to offer sterilized products as an
addition to its product line. In order to accomplish this addition, the Company
allocated approximately $6,976 in leasehold improvements for the construction of
a "clean room" and additional funds for the acquisition of certain equipment.
The Company expects to be in position to begin manufacturing sterile items
10
<PAGE>
within the near future and does not expect the expenditure of significant
amounts for this project.
Additional office equipment expenditures accounted for an increase of
approximately $27,891 in capital spending since the year end, mainly for
computer equipment and additional office equipment necessary to accommodate
PDA's business.
Except as stated above, there were no material changes in property and
equipment during the first nine months of fiscal 1997.
There also were no material commitments for capital expenditures at the
end of the period. However, under a lease agreement for the occupancy of its
manufacturing facility at Beechgrove Place, Utica, New York, the Company has the
right 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.
Except as noted above, 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, including its proposed warrant offering,
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
11
<PAGE>
outweigh any negative impact of price increases and would not adversely affect
the Company's projected sales. Additionally, the hospital and health care
markets have historically been best able to pass on increased costs 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.
Many 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
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
new requirements for protective apparel such as the items manufactured by the
Company. Management believes that these new regulations, which are now fully
implemented, will increase demand for the Company's products and significantly
expand the Company's markets. Management believes that most significant among
these new markets for its products will be hospitals looking to comply with the
new OSHA regulations and 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 un-
12
<PAGE>
necessary and wasteful costs. To meet the criticism in recent years 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 which are the
mainstay of its business will continue to have strong appeal and demand in the
marketplace.
In the interests of higher profitability, management continues to
de-emphasize the sale of third party products while concentrating upon the sale
of Company manufactured products. Also, as new Company manufactured products,
such as the line of limited reusable products, 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. In addition, the
existence of the Occupational Safety and Health Administration (OSHA)
regulations are expected to have a positive influence on the demand for the
Company's products.
Each of the above factors may have a significant impact upon the
Company's future operations. At present, however, 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.
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11 - Calculation of primary and fully-diluted income (loss) per
share. Reference is made to Note 9 of the financial
statements, incorporated herein by reference.
(b) Reports on Form 8-KSB
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
/s/ Anthony J. Liberatore
Anthony J. Liberatore
President
Chief Operating Officer
Dated: May 2, 1997
/s/ Michael A. Liberatore
Michael A. Liberatore
Vice President
Chief Financial Officer
Dated: May 2, 1997
14
<PAGE>
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<PERIOD-START> JUN-01-1996
<PERIOD-END> SEP-30-1997
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