SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITY EXCHANGE ACT OF 1934 [FEE REQUIRED]
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended May 31, 1997 Commission file No. 33-24483NY
DELAWARE 11-2914841
State or other jurisdiction (IRS Employer ID#)
of incorporation or organization
HEALTH-PAK, INC.
Exact name of Registrant as specified in its charter
1208 Broad Street, Utica, New York 13504 (Address
of principle executive offices) (Zip code)
Registrant's telephone number, including area code (315) 724-8370
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
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 Act of 1934, during the
preceding 12 months (or for such 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained to the
best of the Registrant' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this form 10-KSB. [X]
Issuers revenue for its most recent fiscal year $3,421,452
The aggregate market value of the voting common stock held by non-
affiliates (1) of the Registrant based on the average of the high ($
) and low ($ ) bid prices ($ ) of the Company's Common Stock, for
the week ended is approximately based upon the
shares of Registrant's Common Stock held by non-affiliates.
The number of shares outstanding of each of the Registrant's classes of
Common Stock, as of May 31, 1997 is 15,490,009 shares all of one class of
$.002 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transition Small Business Disclosure Format Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Certain of the information required by Part IV "Exhibits and Reports on
Form 8-K" is incorporated by reference from portions of the Registrants
registration statement on Form S-1 as filed on November 13, 1993 under File
Number 33-24483 NY
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FORM 10-KSB
HEALTH-PAK, INC.
May 31, 1997
TABLE OF CONTENTS
Item
No. Description Page
PART I
1. Description of Business 4
2. Description of Properties 15
3. Legal Proceedings 15
4. Submission of Matters to a Vote
of Security Holders 16
PART II
5. Market for Common Equity
and Related Stockholder Matters 17
6. Management's Discussion and Analysis
or Plan of Operation 18
7. Financial Statements 29
8. Changes In and Disagreements With
on Accounting and Financial Disclosure 29
PART III
9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With Section
16(a) of the Exchange Act 30
10. Executive Compensation 32
11. Security Ownership of Certain
Beneficial Owners and Management 33
12. Certain Relationships and
Related Transactions 33
PART IV
13. Exhibits and Reports on Form 8-K 35
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
The Company's primary business in fiscal 1997 continued to be the
manufacture and/or distribution of reusable and nonwoven disposable textile
products, including apparel such as examination gowns, lab coats, surgical
gowns, coveralls and ancillary items such as aprons, masks, caps, covers,
surgical draperies, diapers and underpads, towels, wipes, cloths and
sterilization wraps and other related products, which were sold primarily to the
hospital and medical marketplace and non-medical fleece sportswear, winter wear
and golf wear sold primarily to customers in the regular clothing industry.
During the 1997 fiscal year, however, the Company also acquired the
assets and business of Protective Disposable Apparel Company L.L.C. ("PDA")
which basically added a new dimension to the products offered by the Company.
PDA's products, though somewhat similar to the Company's products, are
primarily sold to industry markets such as pharmaceutical companies, the nuclear
industry, laboratories and other similar types of operations where either a
"germ resistant," "contamination free" or "clean room" atmosphere is needed.
Because the items sold by PDA are so similar to the Company's products, the
Company is able to undertake the manufacture of most of PDA's inventory in many
instances.
PDA's products include industrial safety coveralls, lab coats and caps
and other industrial safety items used for protective purposes. A "paint spray"
jacket and coveralls have been added for use in the automotive industry.
New for this year are sterilized products such as sterile laboratory
coats, coveralls, hoods and boots, influenced by the PDA acquisition. These are
items which are principally used in environments where a germ-free objective is
required by the customer.
To accommodate the production of "clean room" products, primarily for
PDA customers, the Company built its own "clean room" facility which is
necessary for the production of sterile products. This facility was completed
during the 1997 fiscal year and is now in full operation. Over 90% of sterile
items are manufactured for disposable use.
The area of sterilized surgical products is also considered by
management to be the most challenging sector within the medical nonwoven
marketplace. Both the production and the sterilization of
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surgical products require significant resources and must meet exacting FDA
standards. The Company's founder and President, Anthony J. Liberatore, gained
experience in the launching of a sterilized product line during his ten-year
tenure at Disposable Profiles/Spartan Healthcare Inc. (see "MANAGEMENT").
However, the sterilized products sector is highly competitive and is presently
dominated by Baxter International, Johnson & Johnson, Kimberly-Clark and two
other large suppliers.
Also during the 1997 fiscal year, the Company introduced "sonic sealed"
garments which are items produced by a sonic welding process at the seams, and
are manufactured by ultrasonic equipment which essentially changes the molecular
structure of the material being made, to form a complete and impenetrable seal
at the point of closure. No heat is used or necessary for this process. These
garments are fluid and chemical resistant and are used primarily in chemical and
nuclear work.
This year the Company also began to sell its outdoor sportswear, spun
polyester fleece items, winter wear and recreational wear and other non-medical
or industrial protective wear through another outlet store in the Utica area as
well as through its own factory outlet store. While these sales are not material
compared to the overall revenues for other products, this has been a slowly
growing business for the Company.
These products include winter wear scarves, hats, gloves, pants, socks,
jackets, shirts and related other wearables and accessories for both men and
women.
The Company has also marketed the non-medical and nonindustrial items
to specialty catalog companies and retail stores principally in the Northeastern
United States. The modest success of the outlet store and non-medical products
in past years has prompted the Company to continue this operation during the
current fiscal year. During fiscal 1997 the outlet store accounted for
approximately 3% of net revenues compared to 5% in 1996. The lower percentage
this year results from greater revenues from other products in fiscal 1997 and
the additional revenues from the acquisition of PDA rather than lower sales from
these sources.
The Company expanded the outlet store's product lines by adding golf
and other sports outer wear products for spring, summer and fall wear, and it
now plans to operate the store all year.
Management believes that the growing concern over disposal of medical
related waste products which are not degradable has resulted in a re-evaluation
of the use of disposable medical products by many healthcare facilities. In many
cases where adequate laundry facilities are available, either within the
healthcare facility itself or through the use of independent specialized laundry
services, management has perceived a growing trend for the
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use of reusable products. The Company will be in a position to meet any changing
industry demand between usable and reusable products in the future without any
adverse impact upon its overall sales.
In addition to the products which it manufactures directly, to a lesser
extent, the Company also acts as a distributor of related products manufactured
by others. These products are sold as an ancillary part of the Company's product
line to provide its customers with a more complete selection of items. Although
the Company continues to distribute such products, it has been reducing its
dependence on the distribution of third party products and has emphasized sales
of its own expanded product lines.
During the fiscal year ended May 31, 1997, with the acquisition of PDA
and its own expanded product line, the Company de-emphasized manufacturing for
private label, labor only contracts. Last year approximately 25% of total
production was engaged in this business.
The Nonwoven Medical Disposable Industry.
Until late in fiscal 1994, most of the products manufactured by the
Company utilized disposable "nonwoven" materials. These materials currently are
still used in the manufacture of disposable products offered by the Company.
Although the balance in demand for disposable and reusable products changes from
time to time, the Company continues to offer both types of products and it is in
a position to shift from one to the other as customer demand changes.
"Nonwoven" is an industry term used to distinguish nonwoven fabrics
from traditional woven fabrics. The fabric's fibers may be man made plastics or
natural substances such as cotton, rayon or pulp, which accounts for most of the
nonwoven materials today. Nonwoven fabrics may be porous or absorbent, made to
be easily torn or tear-resistant, permeable or impermeable, hydrophobic or
hydraulic, soft or abrasive. Producers of these fabrics include companies such
as DuPont, Kimberley-Clark and Dow Chemical.
Manufacturers, like the Company, which convert nonwoven fabric into
specific products are commonly referred to as "converters." The medical nonwoven
market is serviced by over 50 such companies, including multinational giants
such as Baxter International, Johnson & Johnson, Kimberley-Clark and Proctor &
Gamble, as well as a sizable number of smaller businesses. Baxter International
is estimated to produce approximately 33% of all medical nonwoven products,
Johnson & Johnson 16% and Kimberly-Clark 12%. In other words, three companies
alone are estimated to control over 60% of the total market for nonwoven
products. Proctor & Gamble's presence in the medical nonwoven market is also
significant in size (estimated at 9% of the market) but limited to its diaper
product line.
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Until recently one of the principal factors which has accelerated the
acceptance of nonwoven items in the medical marketplace has been the generally
acknowledged superiority of nonwoven products in the prevention of infection.
Another effect of the AIDS crisis has been the increased interest outside the
hospital environment in protection from serious infection, which carries, in the
opinion of management, the promise of opening new markets for nonwoven apparel.
Two significant threats to the growth in annual sales of medical
nonwoven items are issues of cost and concerns over the environment. While
proponents argue that the true, overall cost of using disposable products is
lower than the cost of reusable materials (when all factors are taken into
consideration), nonwoven products can appear to be the more expensive of the two
alternatives. Furthermore, the cost of nonwoven products has been rising as a
result of increases in manufacturing costs of such fabrics. The medical sector,
and in particular the hospital industry, has been subjected to intense pressure
from the government, insurers and others to control seemingly runaway costs of
health care (which accounts for approximately 11% of the gross national
product). These factors have reduced gross profit margins of nonwoven suppliers
and adversely affected overall profitability. In the environmental area, concern
has been growing in recent years over the effect of the widespread use of
disposable products made from non-biodegradable plastics (a category which
presently includes most medical nonwoven products) on the environment, and
particularly on the dwindling capacity for solid waste disposal in the United
States.
Proposed New Products.
The Company is working on and plans to market in the near future a line
of fire-retardant garments for fire safety industry use. The Company has
produced a prototype of these garments and has received trial, sample orders for
this product.
The Company continues to develop new products and to evaluate existing
related products which could compliment the Company's current product lines, but
which are not necessarily "medical" items, in order to offer potential buyers a
wider variety of products and to attract additional sales. Management believes
that by continuing the development of new products, it will be in a better
position to attract new customers and will more effectively utilize its existing
marketing organization.
Proposed new items representing an extension of present products
include the new industrial line of apparel which is manufactured for use in the
pharmaceutical and meat industries and consist of laboratory coats and coveralls
which are impervious to liquids. Products within this group are now being
manufactured by the Company as special orders for its customers. Due to the
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increasing demand for these items this year, management plans to introduce them
as part of its standard product lines in the future.
With the announcement of the new OSHA regulations in December 1991
management elected to modify the design and materials used for many of its
existing disposable products to comply with the standards required by these
regulations. With the implementation of these regulations in July 1992, the
Company has been able to meet the increased demand from hospitals and health
care facilities which must comply with these new standards. Management expects
the demand for these products to continue for the foreseeable future.
The Company has been anticipating the development of the "Rigg." The
Rigg is a sling-like belt or holder constructed of a neoprene strapping,
intended to facilitate the easy and safe carrying of sports balls of virtually
any size or shape. It allows the user to sling a ball over the shoulder and
leave hands free for either riding a bicycle, motorcycle or moped or otherwise
for carrying packages or equipment.
The Company entered into an exclusive manufacturing agreement in 1995
with Silver Lake Holdings, Ltd. ("Silver Lake"), a privately held corporation
which owns the exclusive worldwide manufacturing and distribution rights for
this sports-related product. Under terms of the agreement the Company will
manufacture the product for Silver Lake on the basis of cost plus 30%.
The Rigg has other applications as well and has generated some interest
from a television broadcast last year. Following the end of fiscal 1995, the
Company received its first shipment from Silver Lake of neoprene and other
required raw materials as well as the required sewing machinery to begin
manufacture of the Rigg, as required under its manufacturing agreement. Although
recent interest has been received from a major retailer of sports equipment,
this product has been slow to develop from a marketing point of view. Since the
Company has only manufacturing responsibilities under the terms of its agreement
with Silver Lake, it has no control over the marketing efforts for this product
and is dependent on Silver Lake to achieve market interest. This current year,
the Company may take a more active role in marketing the product. While the
Company believes this product can generate substantial revenues, at this time,
the Company does not know when Silver Lake will accomplish the necessary
development for this product to become a significant factor in its product line.
The Company is, however, encouraged by the new interest of the major sports
retailer mentioned above.
Sales and Marketing.
The primary markets for the Company's medical products are in the
health-care sector, divided essentially into three broad categories: (i)
hospitals; (ii) "alternative site" facilities
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(including surgical centers, nursing homes, and elderly care facilities and
clinics); and (iii) home (consumer) use. Primary customer categories would be
the single end-user, purchasing associations or consortiums of various kinds - a
dominant feature in the hospital sector - and various federal, state and local
government bodies (the majority of whose purchases are open to competitive
bidding). The primary channels of distribution include medical supply
distributors, dealers who specialize in the medical and hospital markets and
firms purchasing the Company's products for resale under "private label"
arrangements for other suppliers and retailers. Primary sales and marketing
techniques or strategies include direct mailings, trade publication advertising,
attendance at various industry trade shows, bidding for government contracts
when appropriate and direct solicitation of prospective customers.
To date the Company has relied primarily on sales though
Northeast-based dealers, manufacturer's representatives and on "private label"
agreements for the marketing of its products and sales by Company officers and
employees. The Company's customer base also consists of firms with which the
Company has "private label" arrangements and a number of direct end-users.
The Company markets PDA products through a network of five independent
manufaturers representative groups specializing is sales to the clean room
distribution market, or sales to industrial users of clean room supplies. In
addition, the Company maintains a small sales office facility in Arden, North
Carolina which is staffed by two full-time sales employees and one part-time
employee. The Arden sales group handles sales to national and international
accounts, house accounts and other similar customers of PDA.
Richard Welch, sales manager for PDA products also travels for certain
sales and visits customers on a regular basis.
The Company is also represented by two of the largest distributors of
industrial products and is featured in the national catalogue of one of the
distributors. In addition, the Company advertises its PDA products in four or
five industry magazines and sales representatives for PDA attend safety and
clean room shows to offer PDA products.
During fiscal 1997 the Company's three largest customers accounted for
8%, 7% and 6%, respectively, of its total annual net sales.
Competition.
The medical marketplace is an intensely competitive atmosphere for
manufacturers of medical items made from fabrics, and is populated by over fifty
suppliers ranging in size from
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multinational concerns like Baxter International, Johnson & Johnson and
Kimberly-Clark to enterprises smaller in size than the Company. Certain of these
companies, such as Baxter International and Kimberly-Clark, are also suppliers
of the basic materials used by the Company in the manufacture of its products as
well as being manufacturers or suppliers of finished products. At present, the
Company purchases a portion of its raw materials from Kimberly-Clark and others.
However, management believes that there are adequate alternative sources for the
materials purchased from these suppliers so that a loss of any one source of
supplies would not have a materially adverse impact upon the Company's
operations. See "Suppliers."
In addition to the advantages offered by their larger size, greater
resources, greater visibility and established reputations in the market, certain
of the Company's larger competitors possess the added advantage of also
producing the fabrics from which their products are made. The control over the
cost of materials provided by this kind of "vertical integration" may be even
more advantageous to such companies in the future if costs continue to pose
increasing problems for the medical apparel business (as has recently been the
case).
Product competition in the medical apparel industry is primarily based
on price, fabric quality and design features. For many end-users, however, the
size of and resources controlled by the supplier, and thus its ability to
satisfy a broad range of customer requirements at the lowest possible cost, is a
major consideration. This is particularly true for hospital chains, associations
and buying consortiums and for other large institutional customers. This
situation, of course, places smaller firms such as the Company at a competitive
disadvantage. The Company is not a significant factor in the medical apparel
industry and competes primarily on price, service, quality and delivery.
Nevertheless, the Company believes that its smaller size enables the
Company to react more quickly to a customer's needs and to service its customers
on a more personal basis. The Company, therefore, also competes on its ability
to afford its customers a personal service.
The products manufactured for industrial use such as safety coveralls,
laboratory coats, caps and other similar products such as those distributed by
its PDA subsidiary is equally subject to extreme competition, primarily from the
same suppliers to the medical industry. Competition in this area must be
characterized as intense.
The Company will compete in this industry by offering quality products
and service, and primarily by being competitive in terms of its pricing.
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Also, while presently not significant in its present product line,
sportswear items are equally subject to intense competition from very large and
well-known manufacturers, garment designers and smaller producers of similar
apparel. The Company competes aggressively in these markets as well on the basis
of price, service and quality.
Patents and Trademarks.
The Company has no patents and there is little likelihood that it will
develop patentable products or processes in the foreseeable future. Absent such
protection, the Company will primarily rely upon trade secrets and proprietary
techniques to attain any commercial advantage. There is no assurance that
competitors will not independently develop and market, or obtain patent
protection for, products similar to those designed or produced by the Company,
and thus negate any advantage of the Company with respect to any such products.
The Company may, however, distribute products manufactured by others which are
covered by one or more patents. The Company may also seek to patent products
manufactured by third parties which were not previously patented. Even if patent
protection becomes available, there can be no assurance that such protection
will be commercially beneficial to the Company.
In connection with its marketing efforts, and in order to fully benefit
from the Company's name recognition in the future, the Company has filed and as
of March 18, 1994, received trademark protection of the name "HEALTH-PAK" with
the United States Patent and Trademark Office.
Suppliers.
The Company at present purchases its raw materials and fabric from
several different suppliers. Management does not believe that there is or will
be, in the near future, a significant shortage or inability to obtain adequate
supplies of raw materials needed for its operations. Rather, the primary problem
encountered by the Company has been, and is expected to be, the continued
escalation in the costs of needed raw materials. High cost for fabric has
already seriously impacted upon the Company's profit margins and continued
increases in such costs could pose a serious threat to the competitiveness of
all of its products, which is one primary reason that the Company is expanding
into new areas such as reusable fabrics and other new products. See also
"Competition."
Employees
At present the Company employs a total of 72 persons, including two
executive officers, eight employees in managerial or supervisory capacities, two
hourly office workers and 62 hourly production employees. As the Company
implements the planned expansion of its operations it will require additional
personnel,
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both skilled and unskilled. Although the Company believes that the personnel it
will require are readily available at reasonable salary rates, no assurance can
be given that it will be able to attract the type and quantity of employees its
operations will require. Further, even if such personnel are available, no
assurance can be given that they can be hired on terms favorable to the Company.
Production Facilities.
On July 23, 1993 the Company entered into a Contract for Purchase with
the Utica Industrial Development Corporation ("UIDC") for the lease or ultimate
purchase of its present office and manufacturing facility located at 2005
Beechgrove Place, Utica, New York (the "Premises") which it now occupies. The
property is a cinder-block building having approximately 43,500 square feet of
office and manufacturing space situated on approximately 4.6 acres of land. The
Company has now consolidated all of its executive offices and manufacturing
operations within this single facility.
In conjunction with the proposed purchase of the premises, the Company
has entered into a Lease Agreement with the UIDC having an initial term
commencing August 1, 1993 and continuing through April 30, 1994 at a monthly
rental of $7,500. The Lease of the premises by the Company has been extended at
a monthly rental of approximately $9,000 per month, including allocation for
real property taxes. The Company's option to purchase the building was also
extended.
The Company has served notice that it intends to purchase the building
and at present, the Company believes it has secured the necessary financing and
will shortly proceed with the purchase of the building.
In the opinion of the Company, this facility is adequate both for the
Company's present operations and is also expected to provide sufficient
production capacity to accommodate its expansion plans for the foreseeable
future.
Government Regulation.
The products marketed by the Company are subject to regulation as
medical devices by the Food And Drug Administration (the "FDA"), which has
comprehensive authority to regulate the development, production, distribution
and promotion of medical devices. The states and foreign countries where Company
products are sold may also impose additional regulatory requirements.
Pursuant to the federal Food, Drug and Cosmetic Act and the regulation
promulgated thereunder, a medical device is ultimately classified by the FDA as
either a Class I, Class II or Class III
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device. Class I devices are subject to general controls which are applicable to
all devices. Such controls include regulations regarding FDA inspection of
facilities, "Good Manufacturing Practices," labeling, maintenance of records and
filings with the FDA. Class II devices must meet general performance standards
established by the FDA before they can be marketed and must adhere to such
standards once on the market. Class III devices require individual pre-market
approval by the FDA before they can be marketed, which can involve extensive
tests to prove safety and efficacy of the device.
Each manufacturer of medical devices is required to register with the
FDA and also to file a "510(k) Notification" (the "Notification") before
initially marketing a new device intended for human use. The manufacturer may
not market such new device until 90 days following the filing of such
Notification unless the FDA permits an early marketing date. The FDA, prior to
the expiration of the 90- day period, may notify the manufacturer that it
objects to the marketing of the proposed device and thereby may delay or
preclude the manufacturer's ability to market that device. The FDA may also
require further data from, or testing by, the manufacturer.
The FDA permits the marketing of some medical devices, subject to the
general controls under the Act, if the devices are "substantially equivalent" to
devices marketed in interstate commerce before May 28, 1976 (the effective date
of the Medical Device Amendment to the Act).
Of the Company's present products, its gowns and sterilization wrappers
are Class I devices for which the necessary approvals have been obtained. The
Company's proposed sterilized products, on the other hand, would fall within the
Class III category, in which case the Company would have to file a Pre-market
Approval Application. Such application must be accompanied by extensive
literature references and preclinical and clinical testing data. The FDA
normally has 180 days to review a Pre-market Approval Application, during which
time an independent advisory committee evaluates the Application and provide
recommendations to the FDA. While the FDA has often responded to such
Applications within the allotted time, there are many instance where the reviews
have been more protracted, and a number of devices have never been cleared for
marketing.
Any products distributed by the Company pursuant to the above
authorizations are subject to pervasive and continuing regulation by the FDA.
All phases of the manufacturing and distribution process are governed by FDA
regulation and each supplier of products to the Company must also have
FDA-approved products. Products must be produced in registered establishments
and be manufactured in accordance with "Good Manufacturing Practices." All such
devices must be listed periodically with the FDA as well. Labeling and
promotional activities are subject to scrutiny by the FDA and in certain
instances by the Federal Trade Commission. The export of
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devices is also regulated in certain instances.
The Mandatory Device Reporting ("MDR") regulation obligates the Company
to provide information to the FDA on injuries alleged to have been associated
with the use of a product or certain product failures which could cause injury.
If due to FDA inspections, MDR reports or other information, the FDA believes
that the Company is not in compliance with the law, the FDA can institute
proceedings to detain or seize products, enjoin future violations, or asses
civil and/or criminal penalties against the Company, its officers or employees.
Any such action could disrupt the Company's operations for an undetermined time.
In addition, numerous other federal and state agencies, such as
environmental, hazard control, working conditions and other similar regulators
have jurisdiction to take actions which could have a material adverse effect
upon the Company's business.
As discussed above, In January, 1992, OSHA issued comprehensive new
federal regulations aimed at establishing new protective standards to minimize
occupational exposure to various blood borne pathogens such Hepatitis and the
HIV virus associated with AIDS. OSHA determined, after a four year study of the
need for such regulations, that employees face a significant health risk as the
result of occupational exposure to blood and other potentially infectious
materials and concluded that this exposure can be minimized or eliminated using
a combination of work practice controls, personal protective clothing and
equipment, training and medical surveillance. Furthermore, there are 23 states
with their own OSHA-approved occupational safety and health plans which must now
adopt a comparable standard within six months or amend their existing standard
if it not at least as effective as the federal standard. These new regulations
are primarily aimed at the healthcare industry where, based upon published OSHA
findings, between 2 and 2.5 Million workers are presently at risk of infection.
From the Company's point of view, these new regulations, which make
mandatory in the healthcare industry the use of protective apparel, such as the
products manufactured by the Company, are expected to have materially favorable
impact upon the Company's sales during the foreseeable future. Although no
assurances can be given, based upon sales of the new OSHA-mandated products,
management believes that the Company will continue to be a beneficiary of the
increase in demand for products of this type for the foreseeable future.
Management has begun development of new barrier gowns and similar protective
apparel specifically designed to meet the requirements of the new OSHA
regulations and has restructured its marketing plans to bring these new products
to market.
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Insurance
Due to the decrease in the number of insurance carriers willing to
provide product liability insurance in the health care industry, product
liability insurance availability has been significantly reduced and premiums
have increased dramatically over recent years. At present, the Company maintains
product liability insurance in the amount of $2,000,000. Although the Company
intends to maintain such insurance coverage, there can be no assurance that the
Company will be able to obtain insurance at reasonable premiums which it can
afford in the future. The inability to continue such insurance could have a
materially adverse effect upon the business, financial condition and future
prospects of the Company. To date there have no product liability claims against
the Company.
ITEM 2. DESCRIPTION OF PROPERTIES.
Facilities
The Company's principal executive offices, manufacturing and warehouse
facilities are located at 2005 Beechgrove Place, Utica, New York where it
occupies 43,500 square feet of space located in a single cinder-block building.
The property is leased from an unrelated party pursuant to an interim lease. The
Company has received financing necessary to proceed with the purchase of this
building and is presently in the process of purchasing the building. Also see
Item 1. "Description of Business - Production Facilities" for additional
information on the Company's plant facility.
The Company also leases, with an option to purchase, the premises at
1208 Broad Street, Utica, New York pursuant to its lease with Anthony J.
Liberatore, its President; although this building is not presently occupied by
the Company and all operations have now been consolidated with its manufacturing
plant at 2005 Beechgrove Place in Utica, New York. While the Company leases the
premises from Mr. Liberatore, it has not paid any rent since July, 1995 and Mr.
Liberatore has agreed that any payments made to him during fiscal 1995 will be
applied against the purchase price of the building if the option to purchase is
exercised. The Company's option price is $130,000, less the payments made in
fiscal 1995, and Mr. Liberatore has agreed to accept Common Stock for the
purchase price. See "Certain Relationships and Related Transactions" and
"Executive Compensation."
The Company also leases a small sales office facility in Arden, North
Carolina for two full time employees and one part time employee engaged in sales
activities for PDA.
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ITEM 3. LEGAL PROCEEDINGS.
The Company knows of no litigation pending, threatened or contemplated,
or unsatisfied judgments against it, or any proceedings in which the Company is
a party, except as set forth below. The Company also knows of no legal action
pending or threatened or judgments entered against any officers or directors of
the Company in their capacity as such, except for one pending suit brought in
the Supreme Court of The State of New York, County of Oneida, against the
Company and Anthony J. Liberatore by Edward Dyman, a former director of the
Company. The suit was commenced on March 13, 1991 and alleges, in essence, that
certain services were performed on behalf of the Company which were not properly
compensated and seek money damages in the aggregate amount of approximately $1.1
Million. The plaintiff in this case has taken no action for more than two years.
The Company has vigorously defended this suit, has interposed counterclaims
against the plaintiff which seek money damages against Mr. Dyman in the sum of
$5 Million in the aggregate. Based upon the opinion of Uscher, Quiat & Usher,
special litigation counsel, this suit is subject to good and non-frivolous
defenses and management expects to prevail in its defense of the suit and expect
to prevail with respect to its counterclaim. No adverse impact upon the Company
or its operations is expected to result from the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the Company's stockholders during the
fourth quarter ended May 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company sold an issue of Units consisting of Common Stock and
Warrants in 1990. Trading in the Units commenced in September, 1990; however,
the Company's Common Stock has traded separately from the Units since August
1991 and the last trading in the Units occurred on March 12, 1992. Trading in
the Common Stock has been on a limited basis. The principal market on which the
Company's securities are traded is the over-the-counter market in the "pink
sheets." The following tables show for the periods indicated the range of high
and low bid quotes for the Common Stock of the Company which were obtained from
the National Quotation Bureau and are between dealers, do not include retail
mark-ups, mark-downs, or other fees or commissions, and may not necessarily
represent actual transactions. There is no present trading market for the
Company's Units or issued Warrants:
COMMON STOCK TRADING HISTORY
BID
High Low
Quarter ended February 28, 1994 $0.4375 $0.25
Quarter ended May 31, 1994 $0.25 $0.1875
Quarter ended August 30, 1994 $0.3125 $0.0625
Quarter ended November 30, 1994 $0.16 $0.0625
Quarter ended February 28, 1995 $0.39 $0.35
Quarter ended May 31, 1995 $0.57 $0.32
Quarter ended August 30, 1995 $0.60 $0.58
Quarter ended November 30, 1995 $0.46 $0.44
Quarter ended February 28, 1996 $0.75 $0.60
Quarter ended May 31, 1996 $0.36 $0.32
Quarter ended August 30, 1996 $0.45 $0.32
Quarter ended November 30, 1996 $0.39 $0.39
Quarter ended February 28, 1997 $0.39 $0.25
Quarter ended May 31, 1997 $0.29 $0.10
On September 26, 1997 the reported high bid price for the Company's
Common Stock was $0.145. The number of record holders of the Company's Common
Stock on May 31, 1997 was 267. There currently are 12 market makers for the
Company's securities.
The Company has not paid any dividends, except for the Class C Warrants
declared by the Board of Directors but not yet distributed. There are no plans
to pay any cash dividends in the foreseeable future. The declaration and payment
of dividends in the future, of which there can be no assurance, is determined by
the Board of Directors based upon conditions then existing, including
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earnings, financial condition, capital requirements and other
factors. There are no restrictions on the Company's ability to pay
dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
I. Financial Condition and Liquidity.
Introduction.
As previously stated in the Company's report on Form 10-QSB for the six
months ended November 30, 1996 and the nine months ended February 27, 1997, 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, 1996 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.
(a) Financial Condition.
Assets:
Total assets increased by $1,454,834 at May 31, 1997 when compared to
May 31, 1996, an increase of approximately 190%. This increase is significant
when measured against the Company's previous total assets. The most significant
part of the increase occurred earlier in the 1997 fiscal year with the
acquisition of PDA in October, 1996. For instance, at February 28, 1997, total
assets were $2,929,360 which is only $134,345 less than total assets of
$3,063,709 at May 31, 1997. Therefore, the Company's growth can be largely
attributed to its acquisition of PDA.
The three principal reasons for this increase during the fiscal year
ended May 31, 1997 were: (i) the acquisition of the assets and business of PDA
as a partially-owned subsidiary (which greatly contributed to inventory and
receivables additions); (ii) receipt of the proceeds from the exercise of
certain options for up to $384,960 (primarily used to facilitate the acquisition
of PDA); and (iii) slight increases in property and equipment to accommodate the
increased business activity resulting from the acquisition of PDA.
The increase in equipment results from acquisitions during fiscal 1997
by the Company of additional sewing equipment and office computer equipment. In
anticipation of higher sales for the year, the Company also acquired additional
inventory.
Receivables increased dramatically during 1997 to coincide with higher
revenues for that year.
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Receivables were also higher at May 31, 1997 partially due to the fact
that the Company eliminated the factoring of receivables during the last three
months of the 1996 fiscal year. Ordinarily, during the operation of its previous
factoring agreement, receivables would be sold to the factor and would not
appear on the Company's books. As the amount factored decreased, the amount of
receivables would proportionately increase. In 1966 the Company did not have a
full year of operating without factoring its receivables; however, in 1997,
receivables factoring was eliminated for the full year.
Some of the increase in total assets was also helped by non-operating
increases in offering expenses and an increase in the cash value of officer's
insurance.
The increases mentioned above were not offset by entries for lower
amounts in the current portion of consulting agreements and prepayment of
consulting agreements accounts which were reduced as the Company used such
services during 1997.
A comparison of certain significant tangible assets of the Company for
the three fiscal years ended May 31, 1997 is as follows:
1997 1996 1995
---------- ---------- ---------
Cash $ 233,330 $ 1,376 $ 1,494
Receivables 455,376 286,926 198,419
Inventory 1,456,990 571,619 464,283
Net Property
& Equipment 329,662 293,147 224,885
----------- ---------- ----------
Total $2,475,358 $1,153,068 $ 889,081
This comparison shows the significant increases in cash, receivables
and inventory for 1997 and the substantial increase in total tangible assets for
1997 when compared to the other years. The table also indicates the effect of
eliminating factoring as a method of financing the Company's receivables in
1996, by reflecting higher receivables for 1996 when compared to 1995.
The substantial increase in inventory in 1997 reflects additions to
inventory in 1997 and 1996 due to the acquisition of PDA and in anticipation of
higher sales. The Company is also holding approximately $100,000 in inventory of
the "Rigg," a new product which has not begun significant sales as of this date.
Increases in Net Property and Equipment for 1997 and 1996 arise from additional
machinery and equipment purchases during those years made to accommodate some of
the manufacturing for PDA products and looking forward to the accommodation of
additional business. Cash in 1997 increased because the Company made a
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decision to accumulate cash to use as a down payment for the purchase of the
building occupied by the Company. While this purchase has not been completed as
yet, the Company believes this will shortly occur. If the Company does acquire
the building as planned, management believes significant savings in terms of
rent will occur. In addition the exercise of options, previously mentioned,
contributed to increases in cash. Management believes that the current trend
toward increased assets reflects a healthier financial atmosphere and will
enable the Company to avoid the exceptionally high costs of factoring which
affected profits significantly in 1996. The Company has replaced this financing
with a more reasonable receivables financing agreement which has substantially
reduced overall interest expense for 1997.
Comparison of Quarter ended February 27, 1997 and the year ended May 31, 1997.
The changes mentioned above are much less dramatic when compared to the
third quarter. The acquisition of PDA and the exercise of options had already
taken place by February 27, 1997, so that the increases in various accounts
mentioned above had already contributed to the Company's growth by the third
quarter of 1997.
Inventory is slightly higher at May 31, 1997 than it was at the end of
February, 1997.
There were no significant changes in machinery and equipment from the
end of the third quarter compared to the year end.
Liabilities:
Bank notes payable and accounts payable represent the most significant
increases to liabilities in 1997 when compared to prior years.
In 1996, the Company's obligation to banks was only $80,827 while at
May 31, 1997 this amount increased to $552,952, an increase of $472,125. This
increase is largely due to a change in the Company's primary method of
financing. It should be remembered that previously the Company was factoring its
receivables to finance its operations. This involved the actual sale of
receivables to the factor with the result that receivables sold to the factor
did not appear on the Company's books. This method was changed during 1996 by a
financing plan which provided the Company with a credit line of $600,000 (of
which $481,000 has been used) involving a note to a financial institution
collateralized by assets of the Company, which explains the increase in bank
obligations.
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Accounts Payable increased by approximately $561,018 in 1997 compared
to 1996. Part of the increase is due to the assumption of liabilities in the
acquisition of PDA; however, more significantly, the Company has also been
accumulating cash to use as a down payment for the intended purchase of the
building which the Company now occupies under the terms of a lease and such
accumulation has slowed payment of obligations. Increases in payables is also
accounted for by the cost of the Company's construction of a "clean room"
operation for the production of sterile products which the Company intends to
offer shortly. Management believes that these increases, though significant in
some cases when compared with the previous size of the Company's business, are
not out of line with present operations and the Company's ability to pay and are
seen by management as the cost of future anticipated new business.
Liability for payroll taxes also increased in 1997 due to the fact that
there were more employees in 1997 than in 1996 and because of the operation of
the Company's factory store.
These additions to liabilities in 1997 account for the increase in
Total Current Liabilities at May 31, 1997 of approximately $1,078,262 compared
to 1996 ($1,693,037 in 1997 compared to $614,775 in 1996). Total Current
Liabilities in 1996 were more comparable to the previous year. In 1996, Total
Current Liabilities were only $20,709 higher than Total Current Liabilities for
1995 (i.e. Total Current Liabilities in 1995 were $594,066). Current Liabilities
for 1997 were, nevertheless, more than offset by Current Assets of $2,382,538.
The growth in liabilities parallels the Company's increased business.
The Company's retained earnings deficit of $1,051,557 for fiscal 1997
(compared with $836,516 for 1996 and $785,615 for 1995) shows an increase in the
deficit of $215,041 over 1996 and $865,942 over 1995 due to a further net loss
from operations in 1997 of $89,622. This loss compares with a net loss of
176,320 in 1996.
See "Results of Operations."
Management believes that, overall, there has been improvement in the
financial condition of the Company in fiscal 1997 when compared to prior years.
This improvement is evident from the increases in total assets, working capital,
cash and other tangible assets in 1996 and 1997.
See "Results of Operations" for additional information. For information
regarding liquidity, see Subparagraph (b) "Liquidity" below. For additional
information relating to the financial condition of the Company, also see
"Inflation" and "Trends Affecting Liquidity, Capital Resources and Operations."
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(b) Liquidity.
The Company had sufficient liquid assets to meet its obligations at the
end of fiscal 1997. Working capital at May 31, 1997 was $689,501 compared to
$345,934 in 1996, an increase of $343,567 (or approximately 99%). The increase
in working capital in 1997 occurred even though the Company had higher inventory
purchases during 1997, costs involving the construction of a "clean room,"
additions to inventory and additional demands on cash during the period as the
Company exited from its factoring arrangements.
Working capital at the end of the third quarter, February 27, 1997, was
$589,964, an increase of $99,537 or approximately 17% when compared with the
year ended May 31, 1997.
Principal short-term liabilities at May 31, 1997 were $1,038,686 in
payables, short term note obligations of $552,952 and taxes due of $84,503 for a
total of $1,676,141. Against this total, in 1997 the Company had liquid current
assets of $233,330 in cash, inventory of $1,456,990 and receivables of $455,376
for a total of $2,145,666.
This year management also had at its disposal a credit line of $600,000
of which approximately $68,698 was available at May 31, 1997.
In combination, management believes that the Company will have
sufficient liquidity and adequate working capital and sufficient credit
alternatives to fund the Company's operations during the next fiscal year,
including support for its planned expansion of sales.
The principal source of funds for the Company's operations during
fiscal 1997 has been from operating revenues, capital from the exercise of
options and proceeds from its credit line, as reflected in the Company's
financial statements.
II. Results of Operations.
In fiscal 1997 the Company had net sales of $3,421,452 compared to net
revenues of $1,881,149 in 1996 and $2,059,630 in 1995. This is an increase of
$1,540,303 compared to 1996 or approximately 81.9% and an increase of $1,361,822
or approximately 66.1% over 1995.
The substantial increase in revenues when compared to 1996 results
primarily from the acquisition of PDA which added its revenues to those of the
Company. Revenues were also very slightly influenced by a price increase of 3.5%
on all of the Company's products applied on March 1, 1997. The Company also
increased prices on all of PDA's products in July, 1997 by 14.7%; however, these
increases did not have an affect on revenues for 1997.
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The price increases on PDA products were made as the result of a cost
study conducted by the Company to insure that PDA's pervious costing was in line
with pricing. Management discovered that many of PDA's products were not
correctly priced, which resulted in the price increase as of July 1, 1997. This
study took longer than anticipated or the price adjustments would have been
implemented sooner.
Having now "costed" all of PDA's products and having adjusted the
prices accordingly, management believes that improvement will occur in the Cost
of Goods account for the current fiscal year.
During the fiscal year ended May 31, 1997, the Company introduced new
products which are expected by management to make more significant contributions
to revenues in 1998 than in 1997. These new products include sterile garments
used in "clean room" operations in industry, where a germ free objective is
maintained. These products include sterile lab coats, coveralls, hoods and boots
and are a product of the Company's new "clean room" facilities.
The Company also introduced "sonic sealed" garments which are garments
produced by a sonic sealing or welding process, manufactured by ultrasonic
equipment which essentially changes the molecular structure of the material
being made to form a complete and impenetrable seal at the point of closure. No
heat is used or necessary for this process. These garments are fluid and
chemical resistant and are used primarily in chemical and nuclear work.
The Company opened important new customers for its products during
1997, including Boeing, Grumman Aircraft, Bristol Meyers, Johnson and Johnson
and Mitsubishi. It is anticipated that serving these customers will influence
revenues in a positive way for 1998.
The shift, beginning in 1996, to private label work has been
essentially discontinued as the Company assumed additional responsibility for
the manufacture of PDA's products and required additional manufacturing capacity
for its own products.
Under new agreements for manufacturing private label goods with two new
principal customers, the Company will sustain sufficient profits to warrant a
continuation of this work at a reduced rate.
The Company's production of operating gowns did not achieve the results
expected and were essentially discontinued; however, the Company is
manufacturing such gowns presently to the specifications of a new customer and
will continue to offer this product mainly through the orders received from its
customer.
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There were no significant contributions to revenues from the sale of
the "Rigg" (a sling designed to hold basketballs, soccer balls and baseballs,
among other things, allowing free use of the hands and arms) a non-medical
product offered for consumer use beginning in 1995 and the Company is still
awaiting marketing efforts of others to see important revenues from this
product.
However, based on the potential of the new products mentioned above,
the new markets opened by the Company and the addition of PDA's sales and
customers, management believes the Company will grow significantly in terms of
net revenues for 1998.
For additional information see Item 1. "Description of
Business."
Cost of sales for 1997 increased when compared to 1996 as would be
expected from the significant increase in revenues for the current year. Cost of
sales for 1997 expressed as a percentage of net sales was 73.8% compared to
71.4% in 1996, a difference of 2.4%. This difference is largely due to the fact
that PDA's products were introduced during 1997 with a higher cost basis than
the products manufactured or sold by the Company and which influenced the
outcome of profitability. Management believes that the cost differential has
been corrected by the increase in prices made by the Company in July, 1997, as
stated above, which would not have an affect on cost of sales for the 1997 year
end.
The cost of sales was also affected by the fact that the Company
changed PDA'a warehouse by moving product to Utica. Additionally, the Company
re-examined PDA's manufacturing arrangements and determined that certain
manufacturing being done for PDA was inefficient and, therefore, the Company
assumed responsibility for manufacturing many of PDA's products. Currently,
approximately fifty percent (50%) of PDA's products are now made by the Company.
The Company believes that this will give it more control over costs.
The Company was also hampered in 1997 by sales commitments of PDA to
deliver products at fixed prices.
Cost of sales expressed as a percentage of net sales was 76% in 1995.
The Company was obviously operating more efficiently in 1996 than in
1997 in terms of costing its products. The manufacturing costs of the Company's
own products was much better known than the newly introduced products of PDA.
Since there was a substantial increase in products and customers added by the
PDA acquisition, this had an effect on the overall costs of sale for 1997.
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Gross profits for 1997 were higher by $358,044 than gross profits for
1996 (i.e. $894,984 for 1997 compared to $536,940 for 1996) on increased net
sales of $3,421,452 compared to net sales of $1,881,149 for 1996. Expressed as a
percentage of net sales, gross profits were 26.1% of net sales for 1997 and
28.5% of net sales for 1996. The difference occurs because of the higher cost of
sales percentage for 1997 compared to 1996.
While gross profits for 1997 are higher than in 1996, as expected on
higher net sales in that period, the percentage ratio to net sales is actually
lower in 1997 compared to 1996. Therefore the true potential for gross profits
in 1997 on higher revenues was not achieved because, as explained above, a great
deal of PDA's sales were underpriced until correction could be made.
Selling, general and administrative expenses were 27.7% of net sales
for 1997 and 31.3% of net sales for 1996. When examining this comparison it
should be noted that in 1996 the cost of the Company's factoring charges was
attributable to this account. In the year ended 1997, this cost was carried in
the interest charges account. Since this cost has been shifted out of selling,
general and administrative expenses this year, the effect has been to lower this
cost compared to 1996.
Other charges are up for the same reason, i.e. because interest charges
for the Company's credit line are included in the interest account, which is
part of other charges.
While the Company eliminated its high cost of factoring receivables
during the last fiscal year, financing costs for 1997 were still $54,810.
Net income (loss) for 1997 was ($89,622) compared to ($176,320) for
1996. This difference was not an improvement over 1996 when the non-recurring
items charged against income in 1996 are considered. For instance, a charge of
$125,419 was made in 1996 for deferred offering expenses. This was slightly
offset by an income tax benefit of $15,160; however, overall, the gross profit
for 1996 would have been only ($50,901) without the charge for deferred offering
expenses.
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."
Third Quarter ended February 28, 1997 Compared with Year Ended May
31, 1997
Net sales for the three months ended February 28, 1997 were $1,166,224
which is quite comparable to fourth quarter sales (i.e. three months ended May
31, 1997) of $1,121,945 (calculated by taking the difference between year end
net sales and subtracting
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sales for the nine months ended February 28, 1997). Net sales at February 28,
1997 were considerably higher than the $544,201 reported revenues for the third
quarter ended February 29, 1996.
The dramatic increase in revenues for the third quarter of 1997 when
compared to the same period for 1996 obviously occurred because of the
acquisition of PDA.
Cost of sales in the third quarter expressed as a percentage of net
sales was 92.1% and reflects the problems encountered with costing PDA's
products and the other significant costs involved in the assimilation of PDA
into the Company. This compares with a cost of sales percentage of 73.8% for the
year ended May 31, 1997.
The high cost of sales had an impact on the gross profit for the third
quarter (which was only $91,769 for the three months ended February 28, 1997 on
higher net sales than the previous period for 1996) and resulted in an operating
loss of ($15,952) for the third quarter which, when added to the loss incurred
during the fourth quarter ended May 31, 1997 of ($40,106) resulted in a loss for
the year of ($56,058).
The same problems discussed above affected cost sales during this
period i.e. the fact that PDA's products were out of line with costs, the
warehousing movements, changing direction in the manufacture of PDA's warehouse
and other aspects of accomplishing the final synergy between the two Companies.
The acquisition of PDA has been and will be good for the Company in the
future; however this has not been accomplished without cost to the Company.
III. Capital Resources.
There was no significant increase in Property and equipment in 1997,
although some sewing equipment was purchased to accommodate increased production
requirements for handling PDA products. During 1996 the Company acquired
machinery and equipment, purchased a new truck and obtained office and computer
equipment.
The Company has determined to purchase the building which it occupies
for a number of reasons, most importantly because it will be saving money on the
difference between rental payments and mortgage amortization. For this purpose,
the Company has been accumulating cash as was stated above for the down payment.
The Company does not anticipate that this purchase will involve
significant cash demands in excess of the funds already conserved.
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The Company also does not presently anticipate the allocation of
significant resources for machinery and equipment purchases. Any such
commitments will be dependent on demand for the delivery of products under new
or increased orders and will primarily be purchased in cooperation with New York
State financing programs, leasing programs or bank financing without committing
substantial cash assets. Future conditions, such as successful equity financing
efforts, may change this position.
The Company constructed a "clean room" to provide the basis
for the sale of sterilized products which is now complete. This
was not a significant cost to the Company.
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 which are
typically paid by insurance coverage.
V. Trends Affecting Liquidity, Capital Resources and Operations.
A number of factors are expected to impact upon the Company's
liquidity, capital resources and future operations. Included among these are (i)
environmental concerns; (ii) economic factors generally affecting the health
care industry; (iii) governmental regulation of the Company's products and (iv)
the growing concern in many industries about controlling the spread of
infectious disease.
Some disposable products offered by the Company are made from
plastic-based materials which have raised concern among environmental groups
over their proper disposal. Although management believes that such concerns are,
in many cases, valid, it is also believed that these concerns must be balanced
with safety provided by these products against infectious diseases such as AIDS,
hepatitis and
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others. This belief has recently been reinforced by the new, comprehensive
safety regulations issued by the Occupational Safety and Health Administration
(OSHA) which require extensive new measures to combat the spread of infection
and disease in many industries which had not previously required such measures.
Most importantly, from the point of view of the Company, are the requirements
for protective apparel such as that manufactured by the Company. Management
believes that the regulations, which are now fully implemented, will increase
demand for the Company's products and significantly expand the Company's
markets. Based upon recent increased orders, management believes that most
significant among these new markets for its products will be the hospital
looking to comply with the new OSHA regulations, emergency service industries,
including police, fire and ambulance services, which routinely are exposed to
unusually high risk of infectious diseases and physicians.
Nevertheless, the requirements relating to proper disposal of
plastic-based garments is still in question and the Company cannot predict the
outcome of any future regulations relating to these matters. Any changes in
manufacturing or disposal requirements could result in higher manufacturing
costs and less profitability for the Company or, perhaps, complete elimination,
which could have a substantially negative impact on liquidity and capital
resources in the future.
Management also believes that perhaps the most significant adverse
impact upon its liquidity, capital resources and future operations may result
from economic pressures to keep health care costs low. Spearheaded by health
care insurers and now the federal government, the entire health care industry in
the United States has come under increasing pressure and scrutiny to reduce
unnecessary and wasteful costs. To meet the criticism in recent years over the
higher cost of disposable products, the Company has introduced a line of limited
reusable products. These products are designed to be washed and reused from
between 25 and 100 times before being replaced. Management believes that such
products will not only address the economic concerns but also the environmental
issues by reducing the amount of products which are being discarded. However, as
already mentioned, in situations where there is a high risk of spreading
infection, management believes that the disposable products will continue to
have strong appeal and demand in the marketplace.
As new Company manufactured products, such as the "Rigg" and car covers
are introduced, management believes that sales revenues will increase and, over
the long term, will result in more stable sales and higher profit margins for
the Company. In addition, the existence of the Occupational Safety and Health
Administration (OSHA) regulations are expected to continue to have a positive
influence on the demand for the Company's products.
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In short, the above factors may each have a significant impact upon the
Company's future operations. At present, management believes that safety
concerns over the spread of infectious diseases such as AIDS and hepatitis will,
at least for the foreseeable future, outweigh economic and environmental
concerns. Consequently, management does not anticipate any adverse impact upon
its future operations for the foreseeable future. Apart from these factors,
management knows of no trends or demands that would adversely affect the
financial condition of the Company.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is submitted as a separate section to this
report (see Pages F-1 to F-17).
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT-
ING AND FINANCIAL DISCLOSURE.
There have been no changes in and no disagreements with accountants on
accounting and financial disclosure.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The executive officers and directors of the Company and its wholly-owned
subsidiary are as follows:
NAME AGE POSITION(S) HELD
ANTHONY J. LIBERATORE 53 President, Chief
Executive Officer,
Chairman of the Board
MICHAEL A. LIBERATORE 30 Vice President-Market-
ing, Secretary-
Treasurer and Director
WILLIAM F. MEOLA 50 Director
Profiles of the directors and officers of the Company are set forth
below. All directors hold office until the next annual shareholders meeting or
until their death, resignation, retirement, removal, disqualification or until
their successors have been elected and qualified. Vacancies in the Board may be
filled by majority vote of the remaining directors. Officers of the Company
serve at the will of the Board of Directors, subject to the terms of employment
agreements as discussed below. There is no Executive Committee or other
committee of the Board of Directors. Election to the Board of Directors is for a
period of one year and elections are ordinarily held at the Company's Annual
Meeting of Shareholders. The Board of Directors has regular meetings once a
year, after the Annual Meeting of Shareholders, for the purpose of electing the
officers of the Company.
There are at present three vacancies on the Board of Directors occasioned
by the resignations of Messrs. R. Peter Sirbu, Benedict A. Girardi and Alfredo
A. Zennamo who were elected at the last Board of Director's meeting. Mr. Sirbu
resigned to take a new executive position in Omaha, Nebraska and Mr. Girardi has
perma- nently moved to Florida. Mr. Zennamo was on medical leave without pay for
most of fiscal 1995. Following the fiscal year end, on September 12, 1995, Mr.
Zennamo resigned as an officer and director of the Company. To the best
knowledge of the remaining members of the Board of Directors, there were no
disagreements with either Messrs. Sirbu, Girardi and Zennamo. The Board of
Directors plans to fill at least one of the vacancies within the near future but
has not yet determined the replacement candidate. The other vacancies will not
be filled until the next annual Board of Director's meeting.
30
<PAGE>
Messrs. Anthony Liberatore and Alfredo A. Zennamo, a former officer and
director, may be deemed "parents" and "organizers" of the Company as those terms
are defined in the Rules and Regulations promulgated under the Securities Act of
1933, as amended. Anthony Liberatore and Michael A. Liberatore are father and
son. Addition- ally, Alfredo Zennamo is the nephew of Anthony Liberatore. There
are no other family relationships between officers and directors.
Profiles of Officers and Directors
ANTHONY J. LIBERATORE, a co-founder of Health-Pak, Inc., a New York
corporation, ("Health") the Company's wholly owned subsidiary, has served as
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company since April 30, 1991. He has held the same positions with Health since
its formation in April 1985. From May 1980 until formation of Health in 1985,
Mr. Liberatore was employed as a senior procurement specialist by the Utica New
York based North American Division of International Computers Ltd., a British
corporation. From 1970 until 1980, Mr. Liberatore was general manager of
Disposable Profiles/Spartan Healthcare Inc. ("Disposable"), also based in Utica
New York, a wholly-owned subsidiary of the Palm Beach Company of Cincinnati,
Ohio, which manufactured and marketed nonwoven disposable products for the
medical market. In his capacity as general manager of Disposable, Mr. Liberatore
was, among other responsibilities, charged with the development of that
company's sterilized product line.
MICHAEL A. LIBERATORE has been Vice President-Marketing, Assistant
Secretary, Treasurer and a Director of the Company and Health, the Company's
wholly owned subsidiary, since April 30, 1991. Prior thereto he served as
Secretary and Assistant Treasurer of Health from January 1990, having originally
joined Health in May 1987 as its Director of Sales and Marketing. From 1986
until joining Health, Mr. Liberatore was employed as an assistant store manager
by the Chicago Market, a department store chain. Mr. Liberatore is a graduate of
Mohawk Valley Community College having received his Associates degree in
Individual Studies in 1986.
WILLIAM F. MEOLA has been a Director of the Company since April 30, 1991
and has served as a Director of Health, the Company's wholly owned subsidiary,
since May 1987. Since March, 1993, Mr. Meola has been employed as a registered
representative with the Albany Savings Bank, Utica, New York. From September
1988 until March 1993 Mr. Meola was a self-employed financial consultant and
also sales manager and a registered representative with the Prudential Insurance
Company. From January to September 1988 Mr. Meola was employed as an Assistant
Vice President and District Manager of the Dime Savings Bank of New York. From
August 1982 until shortly before joining the Dime Savings Bank of New York, Mr.
Meola was employed as Vice President of the SBU Insurance Agency of Utica New
York. Prior thereto, from 1973 until 1982, Mr. Meola held various positions
within the insurance and financial planning industry, owning and operating his
own insurance agency from 1980 until its sale in 1982. Mr. Meola is a graduate
of Utica College of Syracuse University, having received his Bachelor of Science
Degree in Biology.
31
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information relating to the remuneration
received by officers and directors of the Company. At present, directors are not
compensated for their services as directors, except for the reimbursement of any
out-of-pocket expenses incurred in the performance of their duties. All
information set forth herein relates to Health, the Company's wholly owned
subsidiary.
During the periods ended May 31, 1997, May 31, 1996 and May 31, 1995
the following remuneration was paid to the officers and directors of the
Company:
Annual Long Term All Other
Compensation Compensation Compensation
(1)
Position Year Salary
Anthony Liberatore 1997 $ 73,417 None None $14,250
President 1996 $ 51,900 None None $10,460
1995 $ 47,431 None None $24,061
(2)
Michael Liberatore 1997 $ 47,728 None None $1,261
Vice President 1996 $ 33,673 None None $1,261
1995 $ 29,446 None None $1,261
===============================================================================
(1) Includes the value of health and life insurance paid for the benefit of the
persons named herein.
(2) Includes amount paid to Anthony Liberatore for rent of building at 1208
Broad Street, Utica, New York in 1995.
For additional information see "Certain Relationships and
Related Transactions."
The Company previously had employment agreements with Messrs. Anthony J.
Liberatore, Michael A. Liberatore and Alfredo Zennamo which expired on June 1,
1994. None of the agreements were renewed and each of the foregoing officers
continues to be employed at the will of the Board of Directors. Mr. Zennamo
has since been on medical leave from the Company.
32
<PAGE>
The Company has no other employment contracts. There are also no
retirement, pension or profit sharing plan in effect for any officers or
directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth at November 1, 1997 the stock ownership
of each person known by the Company to be a beneficial owner of five per cent
(5%) or more of the Company's Common Stock and by all officers and directors,
individually and as a group:
Number Percentage
of Shares of
Owned(1) Class(1)
Name ______________ ___________
Anthony J. Liberatore(2) 3,324,427 22.75%
Elizabeth Liberatore(3) 747,153 4.8%
Officers & Directors as
a group (3 persons)(2) 4,627,146 29.87%
- ----------------------------
(1) Assumes a total number of shares outstanding of 15,490,000
(2) This number includes 1,840,667 shares of Common Stock held beneficially by
Anthony J. Liberatore; 747,153 shares owned beneficially by Elizabeth
Liberatore, wife of Anthony J. Liberatore; and a total of 736,607 shares of
Common Stock owned beneficially by two shareholders who have granted to Anthony
J. Liberatore a voting trust agreement, permitting Mr. Liberatore to exercise
voting rights over the shares. Anthony J. Liberatore disclaims any beneficial
interest in any of the foregoing shares of Common Stock except those shares
registered in his name. All of the shares of Common Stock reported herein under
Mr. Liberatore's name have been integrated with his shares for computation of
the share ownership of Officers and Directors as a group.
(3) Elizabeth Liberatore is the wife of Anthony Liberatore, President of the
Company. Mrs. Liberatore's shares are integrated with shares reported as owned
by Anthony J. Liberatore.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Anthony J. Liberatore has granted an option to the Company to purchase the
Company's former office building from him located at 1208 Broad Street, Utica,
New York, at a purchase price of $130,000 less certain payments already made by
the Company. The building is presently owned by Mr. Liberatore. The Company does
not pay any rent for the use of the property; however, the building is presently
not occupied.
33
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed pursuant to Item 601 of Regulation S-K:
3. Certificate of Incorporation and By-Laws, with all Amendments
thereto, filed previously as Exhibit 3 to Registrants S-1
registration statement under SEC file No. 33-43230 and incorporated
herein by reference.
4. Warrant Agreement, filed previously as Exhibit 10 to the
Registrants initial registration statement on Form S-18
under SEC file No. 33-24483-NY and incorporated herein by
reference.
10(a). Lease Agreement between the Company and Anthony Liberatore for
premises at 1208 Broad Street, Utica, New York, filed previously as
Exhibit 10(c) to the Registrants S-1 registration statement under
SEC file No. 33-43230 and incorporated herein by reference.
10(b). Employment Agreement dated as of June 1, 1991 between the
Company and Anthony Liberatore filed previously as Exhibit
10(d) to the Registrants S-1 registration statement under SEC
file No. 33-43230 and incorporated herein by reference.
10(c). Employment Agreement dated as of June 1, 1991 between the
Company and Michael Liberatore filed previously as Exhibit
10(e) to the Registrants S-1 registration statement under SEC
file No. 33-43230 and incorporated herein by reference.
10(e). Letter of Intent between the Registrant and Consolidated
Healthcare Corp., dated March 11, 1993, filed previously under
Current Report on Form 8-K, dated March 17, 1993 under SEC file
No. 33-24483-NY and incorporated herein by reference.
10(f). Letter of Intent between the Registrant and Covers North
America, Inc., dated July 20, 1993, filed previously under
Current Report on Form 8-K, dated July 26, 1993 under SEC file
No. 33-24483-NY and incorporated herein by reference.
10(g). Contract for Purchase and Interim Lease between Registrant and
the Utica Industrial Development Corporation for the lease and
ultimate purchase of an office and manufacturing facility
located at 2005 Beechgrove Place, Utica, New York, dated July
23, 1993, filed
34
<PAGE>
previously under Current Report on Form 8-K, dated
July 27, 1993 under SEC file No. 33-24483-NY and
incorporated herein by reference.
10(h). Amendment to Lease Agreement between the Company and
Anthony J. Liberatore dated March 1, 1995 relating to
changes in the lease and option to purchase the premises
located at 12008 Broad Street, Utica, New York. Filed as an
Exhibit to Form 10-KSB for the Year ended May 31, 1995 and
incorporated herein by reference.
10(i). Agreement between the Company and Silver Lake Holdings
Ltd. Inc. dated July 1, 1995 for the manufacture of
the "Rigg." Filed as an Exhibit to Form 10-KSB for
the year ended May 31, 1995 and incorporated herein by
reference.
10(j). Agreement between the Company and Russo Securities, Inc. dated
December 28, 1994 for consulting services. Filed as an Exhibit to
Form 10-KSB for the year ended May 31, 1995.
10(k). Agreement between the Company and Creative Media International,
Inc. to provide consulting services dated March 10, 1995. Filed as
an Exhibit to Form 10- KSB for the year ended May 31, 1995.
11. Statement re computation of per share earnings, See
"Financial Statements - Statement of Operations and
Note 18."
21. Subsidiaries of the Registrant. Filed as an Exhibit to Form 10-KSB
for the year ended May 31, 1995 and incorporated herein by
reference.
23(a). Consents of B. Bruce Freitag, Esq., and Zeller Weiss & Kahn,
Certified Public Accountants, filed previously as Exhibit 24(a) to
the Registrants S-1 registration statement under SEC file No.
33-43230 and incorporated herein by reference.
23(b). Consent of Usher Quiat & Usher, litigation counsel for the
Registrant, filed previously as Exhibit 24(b) to the
Registrants S-1 registration statement under SEC file No.
33-43230 and incorporated herein by reference.
(b) Form 8-K filings:
None filed during last quarter of the fiscal year.
35
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HEALTH-PAK, INC.
Dated: November 7, 1997 By: /s/Anthony J. Liberatore
-------------------------
Anthony J. Liberatore
President & Principal Executive Officer
Dated: November 7, 1997 By: /s/Michael A. Liberatore
-------------------------
Michael A. Liberatore,
Vice President, Treasurer,
Secretary, Principal Financial
& Accounting Officer
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Dated: November 7, 1997 /s/Anthony J. Liberatore
--------------------------
Anthony J. Liberatore
President & Principal Executive Officer
Dated: November 7, 1997 /s/Michael A. Liberatore
--------------------------
Michael A. Liberatore,
Vice President, Treasurer,
Secretary, Principal Finanical & Accounting Officer
Dated: November 7, 1997 /s/William F. Meola
---------------------
William F. Meola
Director
36
<PAGE>
During fiscal 1996 the Company's three largest custom-
ers accounted for 8%, 7% and 6%, respectively, of its total
annual net sales. The Company's three largest customers
were Physician's Sales Service, Inc., Caligone, Inc. and
Emjay, Inc.
Competition.
The Company is now primarily engaged in producing and distributing
apparel products and related accessories made from various fabrics for the
medical marketplace. The medical marketplace is an intensely competitive
atmosphere for manufacturers of medical items made from fabrics, and is
populated by over fifty suppliers ranging in size from multinational concerns
like Baxter International, Johnson & Johnson and Kimberly-Clark to enterprises
smaller in size than the Company. Certain of these companies, such as Baxter
International and Kimberly-Clark, are also suppliers of the basic materials used
by the Company in the manufacture of its products as well as being manufacturers
or suppliers of finished products. At present, the Company purchases a portion
of its raw materials from Kimberly-Clark and others. However, management
believes that there are adequate alternative sources for the materials purchased
from these suppliers so that a loss of any one source of supplies would not have
a materially adverse impact upon the Company's operations. See "Suppliers."
In addition to the advantages offered by their larger size, greater
resources, greater visibility and established reputations in the market, certain
of the Company's larger competitors possess the added advantage of also
producing the fabrics from which their products are made. The control over the
cost of materials provided by this kind of "vertical integration" may be even
more advantageous to such companies in the future if costs continue to pose
increasing problems for the medical apparel business (as has recently been the
case).
Product competition in the medical apparel industry is primarily based
on price, fabric quality and design features. For many end-users, however, the
size of and resources controlled by the supplier, and thus its ability to
satisfy a broad range of customer requirements at the lowest possible cost, is a
major consideration. This is particularly true for hospital chains, associations
and buying consortiums and for other large institutional customers. This
situation, of course, places smaller firms such as the Company at a competitive
disadvantage. The Company is not a significant factor in the medical apparel
industry and competes primarily on price, service, quality and delivery.
<PAGE>
Nevertheless, the Company believes that its smaller size enables the
Company to react more quickly to a custom-er's needs and to service its
customers on a more personal basis. The Company, therefore, also competes on its
ability to afford its customers a personal service.
<PAGE>
Sales and Marketing.
The primary markets for the Company's medical products are in the
health-care sector, divided essentially into three broad categories: (i)
hospitals; (ii) "alternative site" facilities (including surgical centers,
nursing homes, and elderly care facilities and clinics); and (iii) home
(consumer) use. Primary customer categories would be the single end-user,
purchasing associations or consortiums of various kinds - a dominant feature in
the hospital sector - and various federal, state and local government bodies
(the majority of whose purchases are open to competitive bidding). The primary
channels of distribution include medical supply distributors, dealers who
specialize in the medical and hospital markets and firms purchasing the
Company's products for resale under "private label" arrangements for other
suppliers and retailers. Primary sales and marketing techniques or strategies
include direct mailings, trade publication advertising, attendance at various
industry trade shows, bidding for government contracts when appropriate and
direct solicitation of prospective customers.
To date the Company has relied primarily on sales though
Northeast-based dealers, manufacturer's representatives and on "private label"
agreements for the marketing of its products and sales by Company officers and
employees. The Company's customer base presently consists of firms with which
the Company has "private label" arrangements and a number of direct end-users.
During fiscal 1996 the Company's three largest custom-
ers accounted for 8%, 7% and 6%, respectively, of its total
annual net sales. The Company's three largest customers
were Physicians' Sales Service, Inc., Caligone, Inc. and
Emjay, Inc.
HEALTH-PAK, INC. AND SUBSIDIARY
YEAR ENDED MAY 31, 1997
CONTENTS
Page
Independent auditors' report F-2
Consolidated financial statements:
Balance sheet F-3
Statement of income (loss) F-4
Statement of shareholders' equity F-5
Statement of cash flows F-6
Notes to consolidated financial statements F-7 - F-16
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Health-Pak, Inc. and subsidiary
Utica, New York
We have audited the accompanying consolidated balance sheet of Health-Pak,
Inc. and Subsidiary as of May 31, 1997, and the related consolidated statements
of income (loss), shareholders' equity, and cash flows for the years ended May
31, 1997 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Health-Pak, Inc. and
Subsidiary as of May 31, 1997, and the results of its operations, shareholders'
equity and its cash flows for the years ended May 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
August 11, 1997
Mountainside, New Jersey
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - MAY 31, 1997
ASSETS
Current assets:
Cash $ 233,330
Receivables, trade, net of allowance of $9,000 455,376
Inventory 1,456,990
Investments in affiliated company 130,637
Prepaid expenses 100,649
Prepaid consulting fees 5,556
----------
Total current assets 2,382,538
Property and equipment:
Machinery and equipment 310,797
Leasehold improvements 107,460
Office equipment 99,860
Automotive equipment 21,021
----------
539,138
Less accumulated depreciation 209,476
-------
329,662
Other assets:
Notes receivable 89,039
Deferred offering expenses 99,530
Deferred income taxes 83,115
Deposit on building 28,400
Deposits 5,241
Loan acquisition fees and costs 18,224
Cash surrender value, officers' life insurance 26,760
Officers' loan 1,200
----------
351,509
----------
$3,063,709
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 16,896
Notes payable, bank 552,952
Accounts payable 1,038,686
Payroll and sales tax payable and accrued expenses 84,503
----------
Total current liabilities 1,693,037
Long-term debt, net of current portion 24,885
----------
Minority interest in consolidated subsidiary 62,030
Shareholders' equity:
Common stock, .001 par value 2,000,000 shares authorized,
none issued
Common stock, .002 par value 20,000,000 shares
authorized, 15,490,009 shares issued and outstanding 30,980
Common stock purchase warrants:
Class A
Class B
Class C
Additional paid in capital 2,304,334
Deficit ( 1,051,557)
----------
1,283,757
---------
$3,063,709
==========
See notes to consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (LOSS)
YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
---- ----
Net sales $3,421,452 $1,881,149
Cost of sales 2,526,468 1,344,209
---------- ----------
Gross profit 894,984 536,940
Selling, general and administrative expenses 951,042 589,559
---------- ----------
Income (loss) from operations ( 56,058) ( 52,619)
---------- ----------
Other charges:
Loss in investment of unconsolidated affiliate 5,763
Interest expense 54,810 13,442
---------- ----------
60,573 13,442
---------- ----------
Loss before income taxes and prior period
adjustment ( 116,631) ( 66,061)
Prior period adjustment to write down deferred
offering expenses ( 125,419)
---------- ----------
Loss before income taxes ( 116,631) ( 191,480)
---------- ----------
Income tax expense (benefit):
Deferred ( 15,160)
---------- ----------
Minority interest in loss of consolidated
subsidiary ( 27,009)
----------
Net income (loss) ($ 89,622) ($ 176,320)
========== ==========
Net income (loss) per common share:
Primary ($ 0.01) ($ 0.01)
========== ==========
Fully diluted N/A N/A
Weighted average number of common shares outstanding:
Primary 16,439,815 16,348,852
========== ==========
Fully diluted N/A N/A
See notes to consolidated financial statements.
F-4
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Operating activities:
Net income (loss) ($ 89,622) ($176,320)
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 28,635 51,232
Amortization 6,666 6,667
Loss on investments in unconsolidated subsidiary 5,763
Loss on minority interest in consolidated subsidiary ( 27,009)
Changes in operating assets and liabilities:
Accounts receivable ( 168,450) ( 88,507)
Inventory ( 796,332) ( 107,336)
Income tax refund receivable 2,733
Prepaid expenses ( 6,528) ( 6,520)
Accounts payable 560,998 87,821
Accrued expenses 45,348 26,544
Deposits and loan fees ( 28,224)
Other assets ( 10,151) ( 31,919)
-------- --------
Net cash used in operating activities ( 478,906) ( 235,605)
-------- --------
Investing activities:
Purchase of property and equipment ( 65,150) ( 119,494)
Officers loan ( 50)
Note receivable ( 89,039)
--------
Net cash used in investing activities ( 154,239) ( 119,494)
-------- --------
Financing activities:
Proceeds from issuance of common stock and paid in capital 384,960 292,000
Proceeds from long-term debt 18,349 29,863
Proceeds from notes payable, bank 486,944
Payment of notes payable, bank ( 14,819)
Payment of long-term debt ( 10,335) ( 49,236)
Payment of deferred offering expenses ( 43,065)
Write-off of deferred offering expenses 125,419
-------- --------
Net cash provided from financing activities 865,099 354,981
-------- --------
Net increase in cash 231,954 ( 118)
Cash, beginning of period 1,376 1,494
-------- --------
Cash, end of period $233,330 $ 1,376
======== ========
Supplemental disclosures and cash flow information: Cash paid during the year
for:
Interest $ 54,810 $ 18,012
======== ========
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. $136,400
Reversal of common stock, unpaid and unissued,
for consulting contracts ($ 40,000)
========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization of the company:
The Company originally "Morgan Windsor Ltd," was incorporated in the State
of Delaware on December 28, 1987 as a "blind pool". The only operations
of the Company at that time were to structure a public offering of its
securities. Thereafter the company began to search for a viable business
opportunity.
On May 15, 1989, the Registration Statement containing the Company's
original prospectus was declared effective by the Securities Exchange
Commission. Pursuant to the original prospectus the Company was offering
up to 4,000,000 units, at $.10 per unit, each consisting of one share of
common stock, one Class A warrant and one Class B warrant. No securities
were sold pursuant to original prospectus.
The Company subsequently amended its public offering to consist of a minimum
of 15,000 units to a maximum 50,000 units to be offered at $6.00 per
unit. Each unit consists of six shares of common stock (.002 par value)
and eighteen Class A redeemable common stock purchase warrants and
twelve B redeemable common stock purchase warrants. On September 7,
1990, the Company sold 16,358 units receiving gross proceeds of 98,148.
Between October and November of 1989 the Company repurchased an
aggregate of 178,583 shares of the Company from nineteen stockholders
for an aggregate price paid for these shares. As a result of the above
transactions as of April 30, 1991, the date of acquisition of
Health-Pak, Inc, the Company had outstanding shares of 387,648 to the
public.
On April 30, 1991, the Company acquired 100% of the issued and outstanding
capital stock of Health-Pak, Inc, a New York corporation, in exchange
for 4,996,352 shares of which 4,756,077 shares were exchanged for 97.54%
of the outstanding shares of Health-Pak, Inc. and 240,275 shares were
retained to acquire the remaining outstanding shares of Health-Pak, Inc.
Thereafter, the Company, "Morgan Windsor, Inc." changed its name to
"Health-Pak, Inc" and increased its authorized capitalization to
20,000,000 shares.
2. Nature of business:
Health-Pak, Inc. is a manufacturer and distributor of disposable paper
products for use in serviced-related industries, primarily the medical
and hospital industry. The industry is highly competitive and is
serviced by several large national and multi-national companies with
greater financial resources in comparison to the financial resources
available to the Company. There is no guarantee that this market will
continue to develop since the incorporation of government intervention,
economic conditions and other unforeseen situations may occur.
The Company maintains manufacturing facilities in upstate New York, Mexico
and to a lesser extent Haiti. In addition to paper goods, the Company
also manufactures a sporting goods accessory item, sales of which were
minimal for the year ended May 31, 1997. The Company's sales are spread
throughout the United States.
F-7
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies:
Principles of organization:
The acquisition of the Company's subsidiary on April 22, 1991 has been
accounted for as a reverse purchase of the assets and liabilities of
the Company by Morgan Windsor Ltd. Accordingly, the consolidated
financial statements represent assets, liabilities and operations of
Health-Pak, Inc. prior to April 30, 1991 and the combined assets,
liabilities, and operations for the ensuing period. The financial
statements reflect the purchase of the stock of Morgan Windsor Ltd. by
Health-Pak, Inc., the value being the historical cost of the assets
acquired. All significant intercompany profits and losses from
transactions have been eliminated. Pursuant to the purchase the
Company's 387,648 shares were issued to the public for $60,000.
Revenue recognition:
The Company maintains its books and records on the accrual basis of
accounting, recognizing revenue when goods are shipped and expenses
when they are incurred.
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method (FIFO).
Property and equipment:
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight line method over the following
useful lives:
Years
Machinery and equipment 10
Leasehold improvements 19, 31-1/2 and 39
Automotive equipment 5
Office equipment 10
Expenditures for major renewals and betterments that extend the useful
lives of the property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
Per share amounts:
Net earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during
the period. Fully diluted and primary earnings per common share are the
same amounts for the period presented.
Cash and cash equivalents:
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt
instruments with original maturities of three months or less.
F-8
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued):
Principles of consolidation:
The accompanying consolidated financial statements also 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 (see Note 5).
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results differ from
these estimates.
Effect of recently issued accounting standards:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impaired of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. "SFAS"
No. 121 requires that Long-Lived Assets and certain identifiable
intangibles to be held and used by the Company be reviewed for
impairment whenever events indicated that the carrying amount of an
asset may not be recoverable. The Company has no impaired assets at May
31, 1996.
The Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation".
The effective date of SFAS No. 123 is for fiscal years beginning after
December 15, 1995, and established a method of accounting for stock
compensation plans based on fair value. The Company does not believe
that SFAS No. 123 will have an impact on its financial statements. The
Company has not adopted SFAS No. 123 at May 31, 1996 and continues to
use APB 25 which accounts for stock compensation at the intrinsic value.
Investments:
Investments in certain less than 20% owned companies are carried at cost
and are accounted for on the equity method. The investment account is
adjusted for the Company's proportionate share of their undistributed
earnings or losses. Because the Company exercises significant influence
over the investees' operating and financial activities, management has
considered the equity method of accounting as proper.
4. Concentrations of credit risk:
The Company had deposited at a single banking institution as of May 31,
1997, cash over the amount insured by the Federal Deposit Insurance
Company. Should the bank experience difficulty the Company would be at
risk for $133,330.
F-9
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Inventories:
Inventories consist of:
May 31 May 31
1997 1996
---- ----
Raw materials $ 432,771 $372,753
Finished goods 1,024,219 198,866
---------- --------
$1,456,990 $571,619
========== ========
6. Investment:
A) 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 with a fair value of the stock contributed of
$136,400. Health Pak, Inc., being a significant influence over the
operations and finance of the joint ventures activities with
Silver Lake Corporation, has elected to use the equity method of
accounting for the investment.
B) In October 1996, the Company formed and purchased a 65% equity
interest in Protective Disposable Apparel Co., LLC, a company
operating in the disposable apparel business. Protective Disposal
Apparel Co., 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 entity to be acquired just prior
to the purchase 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
========
F-10
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Note receivable:
The Company is due $89,039 from the minority interest owner of its
subsidiary, Protective Disposable Apparel Co., LLC. This amount
represents the subsidiary portion of the purchase cost of the business
which the Company paid on behalf of the minority shareholder. The note
receivable is non-interest bearing, unsecured and indefinite in
maturity.
8. Line of credit:
The Company has at its disposal a line of credit at Marine Midland Bank.The
note is due on demand and carries interest at prime + 1.5%. Inventory
and accounts receivable are pledged as security. The note is also
secured by the personal guarantees of Anthony Liberatore and Alfred
Zennamo to the extent of $50,000 in total. As of May 31, 1997 and 1996
the balance due on the line of credit was $66,008 and $80,827,
respectively.
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 May
31, 1997 was $486,944.
9. Long-term debt:
Rate Amount Maturity
Note payable, Key Credit (a) 12% $ 1,517 May, 1998
Note payable, Manifest Group (b) 10% 18,696 July, 1999
Note payable, Waste Mgmt. of N.Y. (c) 10% 5,244 November,1998
Note payable, Business Services, Co. (d) 10% 1,174 January, 1998
Note payable, Resource Capital Corp. (e) 10% 5,073 March, 2000
Note payable, Resource Capital Corp. (f) 10% 3,820 July, 1999
Note payable, Resource Capital Corp. (g) 10% 6,257 April, 1998
-------
41,781
Less current portion 16,896
------
$24,885
=======
(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.
F-11
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-term debt (continued):
(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 long-term debt as of May 31, 1997 are as follows:
Year Amount
May 31, 1998 $16,896
May 31, 1999 14,809
May 31, 2000 9,092
May 31, 2001 984
-------
$41,781
=======
10. Commitments:
Commencing August 1, 1993, the Company entered into a lease agreement with
the Utica Industrial Development Corporation for manufacturing and
office space of approximately 43,500 square feet. The initial term of
the lease was from August 1, 1993 to April 30, 1994 at a monthly rental
of $7,500.
The Company had an option to purchase the facility for $600,000 which
expired on April 30, 1994. The purchase was not completed by April 30,
1994, and the lease was automatically extended for an additional three
year period at the same terms and rental. Rent expense was $86,550 for
the year ended May 31, 1997 and $90,000 for the year ended May 31, 1996.
The Company is currently renegotiating to purchase the facility for the
original asking price of $600,000. Rental of the building is currently
on a month to month basis at the rate of $9,500 per month. Should the
purchase of the building be consummated, approximately $50,000 of the
past rent will go toward the purchase price if the down payment on the
revised purchase agreement is paid within a specified time frame.
F-12
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments (continued):
Consultant contracts:
The Company entered into a three year investment banking consulting
agreement on December 31, 1994. The Company issued 1,000,000 shares of
$.002 par common shares and used a discount valuation of $.002 per
share. The consultant is to act as a placement agent for Health-Pak,
Inc. on all private placements or secondary offerings. Services
commenced as of April 1, 1995. The agreement is being amortized over
thirty six months.
In addition, the Company also issued 4,500,000 stock options at various
exercised prices. As of May 31, 1997, 2,748,047 options have been
exercised as follows:
Number of options Exercise price
600,000 .10
233,333 .15
1,914,714 .26
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 per
common shares plus an additional 17,242 shares of the original agreement
that in addition to the 1,750,000 shares, 250,000 shares are 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.
11. Income taxes:
Effective June 1, 1993, the Company has adopted the Statements of
Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting for
Income Taxes," which applies a balance sheet approach to income tax
accounting. The new standard required the Company to reflect on its
balance sheet the anticipated tax impact of future taxable income or
deductions implicit in the balance sheet in the form of temporary
differences. The Company has reflected certain future tax benefits on
its balance sheet from the realization of the carryover of the current
years net operating loss to anticipated future earnings. The cumulative
effect as of June 1, 1993, the date of the adoption of SFAS No. 109, was
immaterial. As permitted by SFAS No. 109, prior year's financial
statements have not been restated.
F-13
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income taxes (continued):
The components of deferred tax assets and liabilities are as follows:
Deferred tax assets:
Bad debt allowances $ 500
Net operating loss carryfoward 114,115
-------
114,615
-------
Deferred tax liability:
Depreciation 900
---
Deferred tax asset 113,715
Valuation allowance 30,600
------
Net deferred tax asset $ 83,115
========
As of May 31, 1997, the Company has available, for tax reporting
purposes, net operating loss carryovers of approximately $647,600 which
expire through 2011.
12. Shareholders' equity:
In the year ended May 31, 1996, the Company recorded 1,100,000 shares as
exercise of stock option. The amount should have been 900,000 with
200,000 shares reflected as an exchange of shares in a non-cash
transaction for a 10% equity interest in the affiliate investment,
Silver Lake Corporation. The shareholder equity has been corrected to
present the cash transaction on exercise of the options and the stock
transfer for the investment. The capital account has been corrected as
follows:
As Reported
Paid in
Shares Capital Capital
Exercise of options 1,100,000 2,200 212,800
Common stock issued for
acquisition of Silver Lake
Corporation 0 0 0
Corrected
Paid in
Shares Capital Capital
Exercise of options 900,000 1,800 213,200
Common stock issued for
acquisition of Silver Lake
Corporation 200,000 400 136,000
F-14
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Shareholders' equity (continued):
The Company erroneously omitted the transactions regarding Silver Lake
Corporation and has retroactively adjusted the balances to reflect the
correction.
13. Employment contracts:
The Company has no employment contracts. Further, it has no retirement,
pension or profit sharing plan covering its officers or directors.
14. Deferred offering expense:
The value stated is the amount that has been paid by the Company for
expenses incurred for the public offering of warrants. The deferred
offering expenses on the issued or expired warrants have been deducted
from the proceeds of the offering. The offering of the Class C warrants
is expected to be completed in 1997. In the event the offering does not
take effect, the deferred offering expenses will be charged to
operating expenses.
All deferred offering expense pertain to the Class C warrants which had
not been issued as of the statement date.
15. Prior period adjustment:
A prior period adjustment in the amount of $125,419 has been made
against retained earnings for amortization of offering expenses related
to the class C stock warrants.
16. Related party transactions:
Officers loans are unsecured and non-interest bearing. Officers have
indicated that they will not be repaid in the current year. In
addition, the Company has advanced funds to its minority interest
partner, Protective Disposal Apparel, in the amount of $89,039.
F-15
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Common stock purchase options:
As of May 31, 1997 the unexercised options held by Silver Lake, Inc. are
as follows:
Amount of options Exercise price Expiration
500,000 .75 October 31, 1998
600,150 1.25 October 31, 1998
500,000 2.00 October 31, 1998
The Company has elected to continue use of the methods of accounting
described by APB-25 "Accounting for Stock Issued to Employees" which is
based on the intrinsic value of equity instruments and has not adopted
the principles of SFAS-123 "Accounting for Stock Based Compensation"
effective for fiscal years beginning after December 15, 1995, which is
based on fair value. There is no significant difference between
compensation cost recognized by APB-25 and the fair value method of
SFAS-123. The Company has not recognized compensation on the granting
of the options and warrants to employees and consultants since the fair
value of the warrants or options is the same as or less than the
exercise price
18. Earnings per share:
May 31, 1997 May 31, 1996
------------ ------------
Primary Primary
Number of shares:
Weighted average shares outstanding 14,839,665 12,748,852
Incremental shares for outstanding
stock options 1,600,150 3,600,000
---------- ----------
16,439,815 16,348,852
========== ==========
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. Shares that would be
outstanding assuming exercise of dilutive stock options , all of which
are considered to be common stock equivalents. Fully diluted earnings
per share are the same as primary earnings per share for May 31, 1997
and May 31, 1996.
F-16
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
JUNE 1, 1995 TO MAY 31, 1997
<TABLE>
<CAPTION>
Unissued
Common stock Preferred stock common stock Capital Retained
number of $.002 par number of $10 par number of $.002 par in excess earnings
shares amount shares amount shares amount of par val. (deficit) Total
------ ------ ------ ------ ------ ------ ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1995 12,444,462 $24,889 0 0 330,258 $661 $1,536,404 ($785,615) $ 776,339
Exercise of stock options 900,000 1,800 213,200 215,000
Common stock issued in exchange
for stock of Silver Lake Corporation 200,000 400 136,000 136,400
Withdrawal from contract and reversal of
common stock August 1, 1995 ( 232,758) ( 466) ( 39,534) ( 40,000)
Reclassification of notes payable 77,000 77,000
Issuance of common stock 97,500 195 ( 97,500) ( 195) 0
Net income for year ended May 31, 1996 ( 50,901) ( 50,901)
---------- ------- ----- ------- ------- ---- ---------- ---------- ---------
Balance at May 31, 1996 13,641,962 27,284 0 0 0 0 1,923,070 ( 836,516)1,113,838
Prior period adjustment for write-off of
offering expenses ( 125,419) (125,419)
---------- ------- ----- ------- ------- ---- ---------- ---------- ----------
Balance at May 31, 1996 as restated 13,641,962 27,284 0 0 0 0 1,923,070 ( 961,935) 988,419
Exercise of stock options 1,848,047 3,696 381,264 384,960
Net income for year ended May 31, 1997 ( 89,622) (89,622)
---------- ------- ----- ------- ------- ---- ---------- ---------- ---------
Balance at May 31, 1997 15,490,009 $30,980 0 0 0 0 $2,304,334 ($1,051,557)$1,283,757
========== ======= ===== ======= ======= ==== ========== ========== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAY-31-1997
<EXCHANGE-RATE> 1
<CASH> 233,330
<SECURITIES> 0
<RECEIVABLES> 455,376
<ALLOWANCES> 9,000
<INVENTORY> 1,456,990
<CURRENT-ASSETS> 2,382,538
<PP&E> 539,138
<DEPRECIATION> 209,476
<TOTAL-ASSETS> 3,063,709
<CURRENT-LIABILITIES> 1,693,037
<BONDS> 0
0
0
<COMMON> 30,980
<OTHER-SE> 2,304,334
<TOTAL-LIABILITY-AND-EQUITY> 3,063,709
<SALES> 3,421,452
<TOTAL-REVENUES> 3,421,452
<CGS> 2,526,468
<TOTAL-COSTS> 951,042
<OTHER-EXPENSES> 5,763
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,810
<INCOME-PRETAX> (116,631)
<INCOME-TAX> 0
<INCOME-CONTINUING> (116,631)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 27,009
<NET-INCOME> (89,622)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> 0.00
</TABLE>
