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 August 31, 1996
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 os Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 31, 1996
Common stock, $0.002 par value 14,205,372
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheets as of August 31, 1996 and
May 31, 1996 F-2 - F-3
Statement of income for three months ended
August 31, 1996 and 1995 F-4
Statement of cash flows for three months
ended August 31, 1996 and 1995 F-5
Notes to condensed consolidated financial
statements F-6-10
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET - AUGUST 31, 1996 AND MAY 31, 1996
ASSETS
August 31, May 31,
1996 1996
---- ----
Current assets:
Cash $ 618 $ 1,376
Receivables, trade, net of
allowance of $2,000 270,864 286,926
Inventory (Notes 2 & 3) 596,121 571,619
Income tax refund receivable, current 1,740 1,740
Prepaid expenses 94,747 92,381
Current portion of consulting agreement 6,667 6,667
---------- ----------
Total current assets 970,757 960,709
---------- ----------
Property and equipment (Note 2):
Machinery and equipment 299,178 293,783
Leasehold improvements 89,335 87,546
Office equipment 88,874 71,638
Automotive equipment 21,021 21,021
---------- ----------
498,408 473,988
Less accumulated depreciation 175,737 180,841
---------- ----------
322,671 293,147
---------- ----------
Other assets:
Investment in Silver Lake Holdings,
Ltd. (Note 4) 130,637
Deposit on building (Note 14) 58,400 23,400
Security deposits 241 241
Prepaid consulting agreements, net
of current portion (Note 7) 3,889 5,555
Deferred offering expenses 225,710 225,419
Deferred income taxes (Note 8) 89,437 83,115
Cash surrender value, officers'
life insurance 16,139 16,139
Officer's loan (Note 15) 1,150 1,150
---------- ----------
525,603 355,019
---------- ----------
$1,819,031 $1,608,875
========== ==========
See notes to condensed consolidated financial statements.
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET - AUGUST 31, 1996 AND MAY 31, 1996
LIABILITIES
August 31, May 31,
1996 1996
---- ----
Current liabilities:
Current portion of long term debt (Note 6) $ 16,227 $ 17,105
Notes payable, bank (Note 5) 78,132 80,827
Accounts payable 510,336 477,688
Payroll and sales tax payable and
accrued expenses 46,182 39,155
---------- -----------
Total current liabilities 650,877 614,775
---------- ----------
Long-term debt, net of current
portion (Note 5) 29,114 16,662
---------- ----------
Commitments (Note 7)
Shareholders' equity:
Preferred stock A, 9% cumulative convertible
Common stock, .001 par value 2,000,000
shares authorized
Common stock, .002 par value 20,000,000
shares authorized 28,543 27,943
Common stock purchase warrants:
Class A (Note 9) Class B (Note 9) Class C (Note 9)
Additional paid in capital 1,956,811 1,786,011
Retained earnings ( 846,314) ( 836,516)
---------- ----------
1,139,040 977,438
---------- ----------
$1,819,031 $1,608,875
========== ==========
See notes to condensed consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
1996 1995
---- ----
Net sales $ 398,078 $ 435,565
Cost of sales 290,112 305,104
---------- ----------
Gross profit 107,966 130,461
Selling, general and administrative
expenses 106,650 110,803
---------- ----------
Income from operations 1,316 19,658
---------- ----------
Other charges:
Loss on investments 5,763
Interest expense 6,950 1,322
Amortization 1,667 5,667
---------- ----------
14,380 6,989
---------- ----------
Income (loss) before income taxes ( 13,064) 12,669
---------- ----------
Income taxes:
Current ( 3,266) 2,535
---------- ----------
Net income (loss) ($ 9,798) $ 10,134
========== ==========
Earnings per common and dilutive common equivalent share:
Primary $ 0.00 $ 0.00
========== ==========
Fully diluted $ 0.00 $ 0.00
========== ==========
Weighted average number of common shares and dilutive outstanding:
Primary 14,088,706 13,104,797
========== ==========
Fully diluted 14,088,706 13,104,797
========== ==========
See notes to condensed consolidated financial statements.
F-4
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
1996 1995
---- ----
Operating activities:
Net income (loss) ($ 9,798) $ 10,134
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 9,440 8,334
Amortization 10,246 5,667
Loss on investment 5,763
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 16,061 ( 47,648)
Increase in inventory ( 24,502) ( 43,017)
Decrease in income tax refund receivable 1,805
Increase in prepaid expenses and interest receivables ( 2,366) ( 2,293)
Increase in accounts payable 9,525 44,811
Increase in accrued expenses 7,027 7,788
(Increase) decrease in deferred income taxes ( 6,322) 2,535
-------- --------
Net cash provided from (used in) operating activities 15,074 ( 11,884)
-------- --------
Investing activities:
Use of cash:
Purchase of property and equipment ( 24,420) ( 25,703)
Increase in other assets ( 291) ( 430)
-------- --------
Net cash used in investing activities ( 24,711) ( 26,133)
-------- --------
Financing activities:
Sources of cash:
Proceeds from issuance of common stock 35,000
Increase in notes payable, other 20,000
Proceeds from loan 17,236 20,064
Use of cash:
Payment of notes payable ( 2,695) ( 700)
Payment of current portion of long-term debt ( 878)
Payment of long-term debt ( 4,784) ( 885)
Payment of deferred offering expenses ( 35,000) ( 1,800)
-------- --------
Net cash provided from financing activities 8,879 36,679
-------- --------
Net decrease in cash ( 758) ( 1,338)
Cash, beginning of period 1,376 1,494
-------- --------
Cash, end of period $ 618 $ 156
======== ========
Supplemental disclosures and cash flow information:
Cash paid during the year for:
Interest $ 6,950 $ 1,322
======== ========
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
======== ========
See notes to condensed consolidated financial statements.
F-5
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 1996
(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 three month period ended August
31, 1996 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:
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
F-6
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 1996
(Unaudited)
2. Summary of significant accounting policies (continued):
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.
Investment in Silver Lake:
The Company owns 10% of the stock of Silver Lake and carries its
investment in the equity method of accounting.
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.
3. Inventories:
Inventories consist of:
August 31, 1996 May 31, 1996
--------------- ------------
Raw materials $375,556 $372,753
Finished goods 220,565 198,866
-------- --------
$596,121 $571,619
======== ========
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.
5. Notes payable, bank:
The Company has 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 August 31, 1996 the
balance due on the line of credit was $78,132.
F-7
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 1996
(Unaudited)
6. Long-term debt:
Rate Amount Maturity
Note payable, Key Credit (a) 12% $ 3,266 May, 1998
Note payable, Manifest Group (b) 10% 23,124 July, 1999
Note payable, H.E.P Leasing Co. (c) 10% 2,571 February, 1997
Note payable, Waste Mgmt. of N.Y. (d) 10% 7,220 November, 1998
Note payable, Business Services, Co. (e) 10% 2,819 January, 1998
Note payable, Resource Capital Corp. (f) 10% 6,341 March, 2000
-------
45,341
Less current portion 16,227
------
$29,114
=======
(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.
(f) Note payable is collateralized by equipment with a cost of $6,796.
The note is payable in installments of $170 per month including
interest.
Maturities of long-term debt as of August 31, 1996 are as follows:
Year Amount
August 31, 1997 $16,227
August 31, 1998 12,952
August 31, 1999 9,286
August 31, 2000 6,876
-------
$45,341
F-8
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 1996
(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 August 31, 1996 and May 31, 1996 was $28,500 and $99,000
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 August 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-9
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 1996
(Unaudited)
8. Income taxes:
The components of income tax expense (benefit) for August 31, 1996 and 1995:
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:
August 31 August 31
1996 1995
Computed (benefit) expense at expected
statutory rates ($4,536) $3,775
Surtax exemption 2,000 ( 1,900)
State tax expense (benefit) ( 730) 660
------ ------
Income tax expense (benefit) ($3,266) $2,535
====== ======
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.
9. 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-10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
I. Financial Condition and Liquidity.
(a) Financial Condition.
At August 31, 1996, the end of the first quarter of fiscal 1997, total assets
increased by $210,156 from May 31, 1996, the end of fiscal 1996, to $1,819,031,
as compared with $1,413,996 at the end of the first quarter of fiscal 1995. The
principal reasons for this improvement were (i) an increase of $24,502 in
inventory during the period; (ii); an increase of $29,524 in machinery and
equipment; (iii) an increase of $35,000 in building deposits; (iv) an increase
of $6,322 in deferred income taxes and (v) the Company's investment in Silver
Lake Holdings, Ltd. These increases in the aggregate were offset in part by (i)
a decrease of $16,062 in trade accounts receivable; (ii) a reduction in prepaid
consulting agreements of $1,666; and (iii) a decrease of $698 in cash. Other
changes to the composition of total assets were insignificant during the first
three months of fiscal 1997. None of these results reflect the recently
concluded acquisition made by the Company of the assets and business of the
Protective Disposable Apparel Division of Scherer Healthcare, Ltd. ("PDA").
Of the foregoing changes in the composition of the Company's assets, the
investment in Silver Lake Holdings, Ltd. ("Silver") represents the only new item
of significance. As previously reported in the Company's Annual Report on Form
10-KSB, Silver holds an exclusive worldwide license for the manufacture and
distribution of a new sports-related product known as "The Rigg." The Company
has been granted an exclusive manufacturing license from Silver for the
production of The Rigg. As part of the granting of this license, the Company
purchased a 10% equity interest in Silver in exchange for shares of the
Company's common stock valued by the parties in the exchange at $0.682 per share
or a total of $136,400.
The increase in inventory during the first quarter of fiscal 1997 was reflective
of the Company's seasonal production and shipment of its line of fleece
sportswear products. In addition, the relatively stable level of trade
receivables at approximately the same level as experienced at the end of fiscal
1996 also reflects the fact that the Company is not financing as many
receivables in this quarter and coincides with the Company's recent reductions
in its financing of receivables in order to reduce its financing costs which
have been a major cost factor since fiscal 1995.
Property and equipment for the first three months increased slightly due to
additional purchases of new office equipment, including purchases to further
enhance the Company's new computer system installed in fiscal 1996, and did not
have a significant effect on the Company's financial condition in the first
three months of fiscal 1997.
The overall increase in total assets experienced by the Company during the first
quarter of fiscal 1997 amounted to approximately 11% and is primarily
attributable to the factors described above. Management believes that this
process will continue to improve during the balance of fiscal 1997 primarily
because of the corrective measures previously taken to improve sales and reduce
cost factors and also due to the completion of the Company's acquisition of
certain assets, including inventory and customer lists of PDA following the end
of the first quarter of fiscal 1997.
4
<PAGE>
However, the full impact of this acquisition, which resulted in the
establishment of a 65% owned subsidiary limited liability corporation,
Protective Disposable Apparel Company, LLC., which, in essence, plans to
continue the former operations of the Scherer Division, are not expected to be
realized until the third quarter of fiscal 1997.
With respect to the Company's total liabilities, increases occurred in accounts
payable and in other accrued liabilities, when compared to the year end. The
$32,648 increase in accounts payable for the current quarter (or about 6.8% when
compared to May 31, 1996) is consistent with an increase in inventory
acquisition during the first three months ended August 31, 1996, as stated
above. The Company also generated a slight decrease in both current portion of
long term debt and notes payable to banks at August 31, 1996 when compared to
the end of fiscal 1996. Long-term debt, net of current portion, increased to
$29,114, $12,452 above fiscal year end.
The Company recently replaced its receivables financing program, which had been
in place since fiscal 1994, with a new, long term asset financing program and
other credit facilities which management expects will substantially reduce the
costs which had been incurred with its previous receivables financing program.
It should be noted that the retained earnings deficit increased slightly during
the first quarter of fiscal 1997 when compared to the 1995 year end period,
reflecting slightly lower than expected revenues during this period. This is
also a reversal of the slight improvement of $10,134 in retained earnings
deficit experienced during the first quarter of fiscal 1996. A part of this
slight decrease is attributable to marketing delays experienced by Silver in
connection with the new sports-related item, The Rigg, which resulted in lower
than expected production of this product by the Company. This situation has
served to highlight the fact that, despite management's belief in the long term
potential for this new product, it is still too early to project the level of
revenues or profits, if any, which can be expected as the marketing efforts for
this product are only in their early stages. in addition, it must be remembered
that the first quarter figures do not reflect the Company's recent acquisition
of PDA which management expects will be profitable by the end of the second
quarter, although the full impact of this acquisition is not expected to be
reflected until at least the third quarter of fiscal 1997.
Except for differences discussed above, the composition of assets remained
substantially the same during the first three months of fiscal 1997. While there
were changes in the components of assets and liabilities for the first three
months of fiscal 1997 when compared with the year ended May 31, 1996 and the
first quarter of fiscal 1996, as indicated above, management believes that all
of these changes, except for the investment in Silver, were reflective of its
previous corrective action and of its replacement of its receivables financing
program with a coordinated financing and credit program.
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."
5
<PAGE>
(b) Liquidity.
Working capital decreased slightly at August 31, 1996 to approximately $319,880
compared to $345,934 at the end of fiscal 1996 but remained well above the
$246,223 which existed at August 31, 1995. This slight decrease in working
capital during this quarter resulted from increased expenses which occurred
during the period, the high cost of financing receivables and accelerated
inventory purchases.
Principal current debt at August 31, 1996 was $510,336 in trade payables, short
term bank obligations of $78,132, $16,227 in the current portion of long term
debt and $46,182 in other accrued liabilities or a total of $650,877 (compared
with $614,775 at May 31, 1996 and $609,471 at August 31, 1995). Against this
total, the Company had cash assets of only $618, inventory of $596,121,
receivables of $270,864, an income tax refund receivable of $1,740 and various
prepaid items aggregating $101,414 for a total of $970,757 (compared with
$960,709 at May 31, 1996). Although there was adequate liquidity at the end of
the first three months of fiscal 1997 in terms of total assets, because of the
continued reduced cash position, the Company's ability to pay its short term
accounts payable was diminished.
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, including support for its planned expansion
of sales and including the needs of its Protective Disposable Apparel Division
which was established at the end of October, 1996 following the Company's
acquisition of certain assets from Scherer Healthcare Ltd., as discussed above.
As previously reported in the Company's annual report on Form 10-KSB, the
principal source of funds for the Company's operations to date have been
invested capital and operating revenues, as reflected in the Company's financial
statements. This continues to be true as of the date of this report.
II. Results of Operations.
Net sales for the first three months of fiscal 1997, ended August 31, 1996,
totalled $398,078 and were only slightly lower (by $37,487 or 8.6%) than the
comparative period in fiscal 1996. Despite this decrease, which management
attributes to the Company's seasonal gearing up for its fleece sportswear sales,
which is principally manufactured in summer and early fall but not shipped until
late fall and early winter, and the disappointing sales during this period for
the new sports related item, The Rigg, discussed above, management believes that
operating results demonstrates that the corrective measures taken since the last
quarter of fiscal 1994 continue to show improvement. However, during the first
three months of fiscal 1997, the cost of sales expressed as a percentage of net
sales increased to 72.9%, as compared to 70% for the same period in fiscal 1996,
although this continued well below the 71.5% for all of fiscal 1996 and 76% for
all of fiscal 1995 (and down dramatically from 91% for all of fiscal 1994).
Based on the previous results of the Company's retail outlet store, the Company
continues to ex pand the product lines being offered in the store with the
expectation that the store will continue the trend experienced in fiscal 1995
and 1996 and make an even greater contribution to net sales in fiscal 1997.
6
<PAGE>
During the first three months of fiscal 1997, Selling, General and
Administrative expenses showed a slight decrease to $106,650, compared to
$110,803 for the same period last year. This represents 26.8% of gross revenues,
as compared to 25.4% for the same period in fiscal 1996 and 21.9% during the
same period in fiscal 1995. Management expects that this ratio will correct
during the balance of fiscal 1997 and remain at approximately the levels
experienced during fiscal 1996. At present, management is not able to predict
the impact upon this ration of the Company's new financing and credit facility
program which has substantially reduced its dependence upon its previous
receivables financing program.
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.
There were no material changes in property and equipment during the first three
months of fiscal 1997, ended August 31, 1996, except for the addition of some
new office equipment.
There were no material commitments for capital expenditures at the end of the
first three months of fiscal 1997. However, under an agreement for the lease of
its 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,
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
7
<PAGE>
believes that public health and safety concerns would 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 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 new
requirements for protective apparel such as that 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 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 un 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.
8
<PAGE>
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.
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.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
None.
9
<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.
Dated: December 29, 1996
HEALTH-PAK, INC.
By: /s/ Anthony Liberatore
Anthony Liberatore,
President
F-10
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