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 November 30, 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 of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 30, 1996
Common stock, $0.002 par value 15,888,556
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheets as of November 30, 1996 and
May 31, 1996 F-2
Statement of income for six and three months ended
November 30, 1996 and 1995 F-3
Statement of cash flows for six months
ended November 30, 1996 and 1995 F-4
Notes to condensed consolidated financial
statements F-5-10
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET - NOVEMBER 30, 1996 AND AUGUST 31, 1996
<TABLE>
ASSETS LIABILITIES
<CAPTION>
<S> <C> <C> <C> <C>
November 30, May 31, November 30, May 31,
1996 1996 1996 1996
---- ---- ---- ----
Current assets: Current liabilities:
Cash$ 51,876 $ 1,376 Current portion of long term debt $ 22,236 17,105
Receivables, trade, net of Notes payable, bank (Note 5) 343,169 80,827
allowance of $2,000 584,388 286,926 Accounts payable 736,532 477,688
Inventory (Note 3) 1,044,259 571,619 Payroll and sales tax payable and
Income tax refund receivable, accrued expenses 31,461 39,155
---------- ------
current 1,740 1,740
Prepaid expenses 77,713 92,381
Current portion of consulting
agreement 6,667 6,667
---------- ----------
Total current assets 1,766,643 960,709 Total current liabilities 1,133,398 614,775
---------- ---------- ---------- ----------
Property and equipment (Note 2):
Machinery and equipment 313,197 293,783 Long-term debt, net of current
Leasehold improvements 89,335 87,546 portion (Note 6) 30,989 16,662
---------- ---------
Office equipment 89,485 71,638
Automotive equipment 21,021 21,021
---------- ----------
513,038 473,988
Less accumulated depreciation 185,231 180,841 Commitments (Note 7)
---------- ----------
327,807 293,147
------- -------
Minority interest in consolidated 18,890
subsidary
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 4,541 241 Common stock, .002 par value 20,000,000
of current portion (Note 7) 2,222 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 (Note 8) 102,187 83,115 Common stock purchase warrants:
Deferred loan fees and costs 28,618 Class A (Note 7)
Cash surrender value, officers' Class B (Note 7)
life insurance 16,139 16,139 Class C (Note 7)
Officer's loan (Note 9) 1,150 1,150 Additional paid in capita 2,303,538 1,786,011
---------- ----------
Retained earnings (deficit)( 891,337) ( 836,516)
---------- ----------
532,804 355,019
------- -------
1,443,977 977,438
$2,627,254 $1,608,875 $2,627,254 $1,608,875
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX AND THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995
Six months ended Three months ended
November 30, November 30,
1996 1995 1996 1995
---- ---- ---- ----
Net sales $1,133,283 $ 995,492 $ 512,997 $ 559,927
Cost of sales 766,040 726,210 366,650 421,106
---------- ---------- ---------- ----------
Gross profit 367,243 269,282 146,347 138,821
Selling, general and
administrative expenses 438,005 245,683 228,487 134,880
---------- ---------- ---------- ----------
Income (loss) from
operations ( 70,762) 23,599 ( 82,140) 3,941
---------- ---------- ---------- ----------
Other income (expense):
Loss on investments in
affiliated company ( 5,763) 35,082
Interest expense ( 18,260) ( 6,284) ( 11,309) ( 4,962)
Amortization ( 3,333) ( 11,333) ( 1,666) ( 5,666)
---------- ---------- ---------- ----------
( 27,356) ( 17,617) ( 22,107) ( 10,628)
---------- ---------- ---------- ----------
Income (loss) before
income taxes ( 54,207) 5,982 ( 60,033) ( 6,687)
Income taxes (benefit):
Current ( 18,275) 1,230 ( 15,009) ( 1,305)
Minority interest in
income of subsidiary ( 18,890)
----------
Net income (loss) ($ 54,822) $ 4,752 ($ 45,024) ($ 5,382)
========== ========== ========== ==========
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 14,930,298 13,104,797 15,013,011 13,104,797
========== ========== ========== ==========
Fully diluted 14,930,298 13,104,797 15,013,011 13,104,797
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
1996 1995
---- ----
Operating activities:
Net income (loss) ($ 54,822) $ 4,752
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 18,934 20,120
Amortization 8,653 11,333
Gain on investments in subsidiaries 24,653
Changes in operating assets and liabilities:
Increase in accounts receivable ( 297,462) ( 12,547)
Increase in inventory ( 472,640) ( 93,624)
Increase in income tax refund receivable ( 631)
Increase in prepaid expenses and interest receivables( 5,196) ( 3,238)
Increase in accounts payable 258,844 93,915
Increase (decrease) in accrued expenses ( 7,694) 6,131
Increase in deferred income taxes ( 19,071)
Increase in deposits and loan fees ( 31,118)
--------
Net cash provided from (used in) operating
activities ( 576,919) 26,211
-------- --------
Investing activities:
Use of cash:
Purchase of property and equipment ( 39,050) ( 40,721)
Investment in subsidiaries ( 18,262)
-------- --------
Net cash used in investing activities ( 39,050) ( 58,983)
-------- --------
Financing activities:
Sources of cash:
Proceeds from issuance of common stock 384,960
Increase in long-term debt 31,083 20,000
Proceeds from notes payable, bank 269,078 20,064
Use of cash:
Payment of notes payable, bank ( 6,736) ( 1,750)
Payment of current portion of long-term debt ( 967)
Payment of long-term debt ( 10,658) ( 3,286)
Payment of deferred offering expenses ( 291) ( 1,800)
-------- --------
Net cash provided from financing activities 666,469 33,228
-------- --------
Net increase in cash 50,500 456
Cash, beginning of period 1,376 1,494
-------- --------
Cash, end of period $ 51,876 $ 1,950
======== ========
Supplemental disclosures and cash flow information: Cash paid during the year
for:
Interest $ 18,259 $ 6,284
======== ========
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-4
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 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 six month period ended November
30, 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:
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
SIX MONTHS ENDED NOVEMBER 30, 1996
(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:
November 30, 1996 May 31, 1996
----------------- ------------
Raw materials $ 824,296 $372,753
Finished goods 219,963 198,866
---------- --------
$1,044,259 $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
SIX MONTHS ENDED NOVEMBER 30, 1996
(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 November 30, 1996 the
balance due on the line of credit was $74,091.
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
November 30, 1996 is $269,078.
F-7
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 1996
(Unaudited)
6. Long-term debt:
Rate Amount Maturity
Note payable, Key Credit (a) 12% $ 2,748 May, 1998
Note payable, Manifest Group (b) 10% 21,648 July, 1999
Note payable, H.E.P Leasing Co. (c) 10% 832 February, 1997
Note payable, Waste Mgmt. of N.Y. (d) 10% 6,571 November, 1998
Note payable, Business Services, Co.(e) 10% 2,270 January, 1998
Note payable, Resource Capital Corp. (f) 10% 5,988 March, 2000
Note payable, Resource Capital Corp. (g) 10% 4,617 July, 1999
Note payable, Resource Capital Corp. (h) 10% 8,551 April, 1998
-------
53,225
Less current portion 22,236
------
$30,989
=======
(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.
(g) Note payable is collateralized by equipment with a cost of $5,296.
The note is payable in installments of $167 per month including
interest.
(h) Note payable is collateralized by equipment with a cost of $9,053.
The note is payable in installments of $503 per month including
interest.
Maturities of the debt as of November 30, 1996 are as follows:
Year Amount
---- ------
November 30, 1997 $22,236
November 30, 1998 16,161
November 30, 1999 9,972
November 30, 2000 4,856
-------
$53,225
=======
F-8
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 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 expense in the six months ended November 30, 1996 and 1995
was $54,150 and $42,000 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 November 30, 1996, 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
SIX MONTHS ENDED NOVEMBER 30, 1996
(Unaudited)
8. Income taxes:
The components of income tax expense (benefit) for November 30, 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:
November 30 May 31
1996 1996
Computed (benefit) expense at expected
statutory rates ($24,853) ($20,012)
Surtax exemption 13,888 9,712
State tax expense (benefit) ( 7,310) ( 4,860)
------- -------
Income tax expense (benefit) ($18,275) ($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.
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.
Preliminary Note: In reading the following discussion it must be
remembered that the statement presented for the period ended November 30, 1996
includes, on a consolidated basis, the assets, liabilities and operating
statements for Protective Disposable Apparel Company LLC ("PDA"), which was
acquired by the Company in October 1996 as a 65% owned subsidiary corporation.
Since adjustments for the acquisition were not made for prior periods,
comparisons may not completely reflect the actual results. Also, the Company's
operating statements for the period ended November 30, 1996, includes only
approximately five weeks of activity by PDA.
I. Financial Condition and Liquidity.
(a) Financial Condition.
At November 30, 1996, the end of the first half of fiscal 1997, total
assets increased by $1,018,379 from May 31, 1996, the end of fiscal 1996, to
$2,627,254, of which approximately $710,292 is attributable to the PDA
acquisition. The principal reasons for this increase were (i) the acquisition by
the Company in October 1996 of a 65% interest in PDA, a company based in North
Carolina operating in the disposable apparel business primarily for the clean
room market; (ii) the Company's investment of $130,637 in Silver Lake Holdings,
Ltd.; (iii) an increase of $297,462 in trade receivables, of which approximately
$247,600 is attributable to the PDA acquisition; (iv) an increase of $472,640 in
inventory at November 30, 1996, of which approximately $393,600 is attributable
to the PDA acquisition; (v); an increase of $34,660 in machinery and equipment,
after accumulated depreciation, of which approxi mately $9,053 is attributable
to the PDA acquisition; (vi) an increase of $19,072 in deferred income taxes;
(vii) $28,618 in deferred loan fees, of which approximately $2,700 is
attributable to the PDA acquisition; (viii) an increase of $50,491 in cash, of
which approximately $45,839 is attributable to the PDA acquisition; and (ix) an
increase in deposits of $4,300, of which approximately $1,500 is attributable to
the PDA acquisition. These increases in the aggregate were offset in part by (i)
a decrease of $14,668 in prepaid expenses; (ii) a reduction of $1,800 in
deposits on building; and (iii) a reduction in prepaid consulting agreements of
$3,333, none of these decreases were attributable to the PDA acquisition. Other
changes to the composition of total assets were insignificant during the first
six months of fiscal 1997.
Of the foregoing changes in the composition of the Company's assets,
the investment in PDA represents the only new factor of significance during the
second quarter of fiscal 1997. As previously reported by the Company, effective
October 28, 1996, the Company entered into an Asset Purchase Agreement (the
"Agreement") with Scherer Healthcare, Ltd. ("Scherer") and PDA, a newly formed
New York limited liability company and a 65% owned subsidiary of the Company.
Pursuant to this Agreement, PDA acquired certain of the assets of the protective
apparel division of Scherer including inventory on hand (consisting of raw
materials, goods in progress and finished goods), certain equipment, product
designs and specifications, customer lists and pre-paid security deposits,
including the use of the name
<PAGE>
"Protective Disposable Apparel," and including also certain specified accounts
receivable subject to certain specified liabilities, all as reconciled by the
parties as of the close of business on October 18, 1996. PDA was formed,
together with a former part-owner of the protective apparel division of Scherer,
as a 65% owned subsidiary of the Company expressly for the purpose of acquiring
these assets and conducting the business of this former division of Scherer. The
remaining 35% continues to be owned by the same, unaffiliated party as was a
part-owner with Scherer.
Operational management of the former Scherer division has elected to
remain with the Company and are now employees of PDA.
During the first quarter of fiscal 1997, the Company also acquired an
interest in Silver Lakes Holding Ltd. ("Silver"). 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. The acquisition of Silver has not had a significant effect
on the Company's financial statements as of this date.
The increase in inventory during the first half of fiscal 1997, apart
from that portion which can attributed to the PDA acquisition, was reflective of
the Company's seasonal production and shipment of its line of fleece sportswear
products which usually occurs during the first half. In addition, the Company
had relatively stable receivables in this period if the effect of the
acquisition is not considered. However, the increase in trade receivables shown
in the balance sheet reflects the purchase of accounts from PDA and the fact
that significantly fewer receivables were financed during the current periods.
Apart from the effects of the PDA acquisition, property and equipment
for the first six months increased slightly due to the purchase of new office
equipment, consisting primarily of new computer equipment, and did not have a
significant effect on the Company's financial condition in the first half of
fiscal 1997.
The overall increase in total assets experienced by the Company during
the first half of fiscal 1997 amounted to approximately 29.5% (or approximately
51% including the effects of the PDA acquisition) 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 the protective disposable apparel
division of Scherer Healthcare, Ltd. following the end of the first quarter of
fiscal 1997. However, the full impact of this acquisition is not expected to be
realized until the third quarter of fiscal 1997. As stated above, the operating
results for the Company include only approximately five weeks of PDA operations.
With respect to the Company's total liabilities, due to the PDA
acquisition, increases occurred in all components except for payroll and sales
taxes and accrued expenses and in notes
<PAGE>
payable, bank which increased due to other factors as discussed below. There was
a $258,844 increase in accounts payable which is consistent with the increase in
trade receivables and inventory during the first half of fiscal 1997, as stated
above. However, it is important to note that without the PDA acquisition, the
Company had experienced a reduction in accounts payable of $56,256. The Company
also experienced a slight increase in the current portion of long term debt at
November 30, 1996 when compared to the end of fiscal 1996. Long-term debt, net
of current portion, increased to $30,989, $14,327 above the fiscal year end.
As mentioned above, "notes payable, bank" increased by $262,342. This
substantial increase was not due to the PDA acquisition but, rather, to the
opening of a new credit facility. The new credit facility has been utilized by
the Company principally for the purpose of eliminating the Company's receivables
factoring program. At November 30, 1997 there remained due and owing under this
the sum of $262,078.
It should be noted that the retained earnings deficit increased during
the first half of fiscal 1997 when compared to the 1996 year end period,
reflecting lower than expected revenues by the Company during this period. A
part of this 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.
Except for differences discussed above, the composition of assets
remained substantially the same during the first half of fiscal 1997. While
there were changes in the components of assets and liabilities for the first
half of fiscal 1997 when compared with the year ended May 31, 1996, as indicated
above, management believes that all of these changes, except for the a
cquisition of PDA and 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."
(b) Liquidity.
Principal current debt at November 30, 1996 was $736,532 in trade
payables, short term bank obligations of $343,169, $22,236 in the current
portion of long term debt and $31,461 in other accrued liabilities or a total of
$1,133,461 (compared with $614,775 at May 31, 1996). Against this total, the
Company had cash assets of $51,876, inventory of $1,044,259, receivables of
$584,388, an income tax refund receivable of $1,740 and various prepaid items
aggregating $84,380 for a total of $1,766,643 (compared with $960,709 at May 31,
1996). Although there was adequate liquidity at the end of the first half of
fiscal 1997 in terms of total current assets, because of the continued reduced
cash position, the Company's ability to pay its short term accounts payable was
diminished.
<PAGE>
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 by PDA 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.
At November 30, 1996, working capital was $633,247, an increase of
approximately $309,313 from the year end. This increase largely resulted from
the sale of common stock through the exercise of outstanding stock purchase
options during the six months ended November 30, 1996 and the purchase of PDA,
with substantial increases in receivables and inventory. At November 30, 1996
the Company also had adequate resources to pay its current liabilities.
II. Results of Operations.
Net sales for the first half of fiscal 1997, ended November 30, 1996,
totalled $1,133,283 and, if we do not consider the contribution to revenues by
PDA of $222,218, revenues during this period were somewhat lower (by $84,417 or
8.5%) 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 the factors contributing to this downturn are temporary
factors and do not represent any downward trend affecting the Company's
operations. During the first six months of fiscal 1997, the cost of sales
expressed as a percentage of net sales decreased to 72.0%, as compared to 72.9%
for the same period in fiscal 1996, representing the first reversal of this
ratio since fiscal 1995. Although cost of sales continued above the 71.5%
experienced for all of fiscal 1996, it represents a substantial decrease from
76% experienced for all of fiscal 1995.
Based on the previous results of the Company's retail outlet store, the
Company continues 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 1996 and make an even greater contribution to net sales in fiscal 1997.
Presently, however, the retail store makes only an insignificant contribution to
revenues.
During the first six months of fiscal 1997, Selling, General and
Administrative expenses showed an increase to $335,137 (excluding $102,868
attributable to PDA), compared to $ 245,683 for the same period last year. This
represents 36.8% of gross revenues, as compared to 24.7% for the same period in
fiscal 1996. Management attributes this shift primarily to extraordinary
production costs which did not generate the expected revenues. Management
expects that this ratio will correct during the balance of fiscal 1997 and
remain at approximately
<PAGE>
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 six months of fiscal 1997, ended November 30, 1996, except for the
addition of some new office equipment which was not significant.
There were no material commitments for capital expenditures at the end
of the first half 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 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.
<PAGE>
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
unnecessary 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
<PAGE>
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.
<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: March 10, 1997
HEALTH-PAK, INC.
By: /s/Anthony Liberatore
Anthony Liberatore,
President
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