SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended November 30, 1997
Commission File Number 33-24483-NY
HEALTH-PAK, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 11-2914841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1208 Broad Street, Utica, NY 13501
(Address of principal executive offices) (Zip Code)
Same
(Former Address) (Zip Code)
(315) 724-8370
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number os Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 30, 1997
Common stock, $0.002 par value 15,490,009
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of November 30, 1997 and
May 31, 1997 F-2
Statement of income (loss) for the six and
three months ended November 30, 1997 and 1996 F-3
Statement of cash flows for the six months
ended November 30, 1997 and 1996 F-4
Notes to condensed consolidated financial
statements F-5-13
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET - NOVEMBER 30, 1997 AND MAY 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASSETS LIABILITIES
November 30, May 31, November 30, May 31,
1997 1997 1997 1997
Current assets: Current liabilities:
Cash $ 203,207 $ 233,330 Current portion of long-term debt $ 15,158 $ 16,896
Receivables, trade, net of Notes payable 599,742 552,952
allowance of $6,000 489,790 455,376 Accounts payable 1,199,274 1,038,686
Inventory 1,568,863 1,456,990 Payroll and sales tax payable and
Note receivable 89,039 89,039 accrued expenses 46,524 84,503
---------- ----------
Prepaid expenses 126,931 100,649
Prepaid consulting fees 2,222 5,556
---------- ----------
Total current assets 2,480,052 2,340,940 Total current liabilities 1,860,698 1,693,037
---------- ---------- ---------- ----------
Property and equipment:
Machinery and equipment 312,106 310,797 Long-term debt, net of current
Leasehold improvements 116,878 107,460 portion 17,791 24,885
---------- ----------
Office equipment 99,860 99,860
Automotive equipment 21,021 21,021
---------- ----------
549,865 539,138
Less accumulated depreciation 234,066 209,476 Commitments
---------- ----------
315,799 329,662
------- -------
Minority interest in consolidated subsidiary 27,517 62,030
---------- ----------
Other assets:
Investments in affiliated Company 135,027 130,637 Shareholders' equity:
Deposit on building 28,647 28,400 Common stock, .001 par value 2,000,000
Security deposits 6,371 5,241 shares authorized
Deferred loan acquisition fees Common stock, .002 par value 20,000,000
and costs 11,069 18,224 shares authorized 30,980 30,980
Deferred offering expenses 99,530 99,530 Common stock purchase warrants:
Deferred income taxes 83,115 83,115 Class A
Cash surrender value, officers' Class B
life insurance 26,760 26,760 Class C
Officer's loan 1,200 1,200 Additional paid in capital 2,304,334 2,304,334
---------- ----------
Deficit ( 1,053,750) ( 1,051,557)
---------- ----------
391,719 393,107 1,281,564 1,283,757
---------- ---------- ---------- ----------
$3,187,570 $3,063,709 $3,187,570 $3,063,709
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
SIX AND THREE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
Six months ended Three months ended
November 30, November 30,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $1,998,923 $1,133,283 $ 985,417 $ 512,997
Cost of sales 1,470,334 766,040 733,022 366,650
---------- ---------- ---------- ----------
Gross profit 528,589 367,243 252,395 146,347
Selling, general and
administrative expenses 504,582 438,005 254,219 228,487
---------- ---------- ---------- ----------
Income (loss) from
operations 24,007 ( 70,762) ( 1,824 ( 82,140)
---------- ---------- ---------- ----------
Other income (expense):
Loss on investments in
affiliated company 4,390 ( 5,763) 35,082
Interest expense ( 61,770) ( 18,260) ( 28,703) ( 11,309)
Amortization ( 3,333) ( 3,333) ( 1,666) ( 1,666)
---------- ---------- ---------- ----------
( 60,713) ( 27,356) ( 30,369) 22,107
---------- ---------- ---------- ----------
Loss before income taxes( 36,706) ( 54,207) ( 32,193) ( 60,033)
Income taxes (benefit):
Current ( 18,275) ( 15,009)
Minority interest in
income of subsidiary 34,513 ( 18,890) 40,143
---------- ---------- ---------- ----------
Net income ($ 2,193) ($ 54,822) $ 7,950 ($ 45,024)
========== ========== ========== =========
Earnings per common and dilutive common equivalent share:
Primary $ 0.00 $ 0.00 $ 0.00 $ 0.00
=========== ========== ========= ==========
Fully diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
=========== ========== ========= ==========
Weighted average number of common shares and dilutive outstanding:
Primary 17,090,159 15,759,283 17,090,159 15,249,721
========== ========== ========== ==========
Fully diluted 17,090,159 15,759,283 17,090,159 15,249,721
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Operating activities:
Net loss ($ 2,193) ($ 54,822)
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 24,590 18,934
Amortization 3,334 8,653
Gain on investments in subsidiaries ( 4,390) 24,653
Changes in other operating assets and liabilities:
Accounts receivable ( 34,414) ( 297,462)
Inventory ( 146,386) ( 472,640)
Prepaid expenses and interest receivables ( 26,281) ( 5,196)
Accounts payable 160,588 258,844
Accrued expenses ( 37,979) ( 7,694)
Deferred income taxes ( 19,071)
Deposits and loan fees 5,777 ( 31,118)
-------- --------
Net cash used in operating activities ( 57,354) ( 576,919)
-------- --------
Investing activities:
Purchase of property and equipment ( 10,727) ( 39,050)
-------- --------
Net cash used in investing activities ( 10,727) ( 39,050)
-------- --------
Financing activities:
Proceeds from issuance of common stock 384,960
Increase in long-term debt 31,083
Proceeds from notes payable, bank 46,790 269,078
Payment of notes payable, bank ( 6,736)
Payment of long-term debt ( 8,832) ( 11,625)
Payment of deferred offering expenses ( 291)
-------- --------
Net cash provided from financing activities 37,958 666,469
-------- --------
Net increase (decrease) in cash ( 30,123) 50,500
Cash, beginning of period 233,330 1,376
-------- --------
Cash, end of period $203,207 $ 51,876
======== ========
Supplemental disclosures and cash flow information: Cash paid during the year
for:
Interest $ 61,770 $ 18,259
======== ========
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. $ 0 $136,400
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED 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 six months ended November 30, 1997. The Company's sales
are spread throughout the United States.
F-5
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED 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-6
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED 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 could 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
November 30, 1997.
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 November 30, 1997 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. Inventories:
Inventories consist of:
November 30 May 31
1997 1997
---- ----
Raw materials $ 972,695 $ 432,771
Finished goods 596,168 1,024,219
---------- ----------
$1,568,863 $1,456,990
========== ==========
F-7
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. 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' CAPITAL
Current liabilities:
Accounts payable $318,943
--------
Total current liabilities 318,943
-------
Members' capital 254,397
-------
Total liabilities and members' equity $573,340
========
F-8
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. 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.
7. Notes payable:
The Company has at its disposal a line of credit at Marine Midland Bank.The
note is due on demand and carries interest at prime + 1.5%. Inventory
and accounts receivable are pledged as security. The note is also
secured by the personal guarantees of Anthony Liberatore and Alfred
Zennamo to the extent of $50,000 in total. As of November 30, 1997 the
balance due on the line of credit was $57,926.
The Company opened a line of credit with Foothill Capital Corporation in
September 1996. The loan ceiling amount is based on a percentage formula
of eligible accounts receivable and inventory. The balance due at
November 30, 1997 was $541,816.
8. Long-term debt:
Rate Amount Maturity
Note payable, Key Credit (a) 12% $ 624 May, 1998
Note payable, Manifest Group (b) 10% 15,744 July, 1999
Note payable, Waste Mgmt. of N.Y. (c) 10% 4,195 November, 1998
Note payable, Business Services, Co. (d) 10% 78 January, 1998
Note payable, Resource Capital Corp. (e) 10% 4,227 March, 2000
Note payable, Resource Capital Corp. (f) 10% 3,028 July, 1999
Note payable, Resource Capital Corp. (g) 10% 5,053 April, 1998
-------
32,949
Less current portion 15,158
------
$17,791
=======
(a) Note payable is collateralized by equipment with a cost of
$5,690. The note is payable in installments of $241 per month,
including interest.
(b) Note payable is collateralized by equipment with a cost of
$20,064. The note is payable in installments of $492 per month
including interest.
F-9
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. 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 $199 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 November 30, 1997 are as follows:
Year Amount
November 30, 1998 $15,158
November 30, 1999 13,124
November 30, 2000 4,667
-------
$32,949
=======
9. 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 $31,500 for
the six months ended November 30, 1997 and $54,150 for the six months
ended November 30, 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 $7,500 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-10
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. 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 November 30, 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.
10. 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-11
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. 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 November 30, 1997, the Company has available, for tax reporting
purposes, net operating loss carryovers of approximately $647,600 which
expire through 2011.
11. Employment contracts:
The Company has no employment contracts. Further, it has no retirement,
pension or profit sharing plan covering its officers or directors.
12. 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.
F-12
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13. 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.
14. Common stock purchase options:
As of November 30, 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.
15. Earnings per share:
November 30, 1997 November 30, 1996
----------------- -----------------
Primary Primary
Number of shares:
Weighted average shares outstanding 15,490,009 14,159,133
Incremental shares for outstanding
stock options 1,600,150 1,600,150
---------- ----------
17,090,159 15,759,283
========== ==========
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 November 30,
1997 and November 30, 1996.
F-13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
I. Financial Condition and Liquidity.
Introduction.
As previously stated in the Company's filed reports, 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 $123,861 at November 30, 1997, the end of the first
half of fiscal 1998, when compared to the year end at May 31, 1997, an increase
of slightly over 4%, which reflects a slower growth rate in terms of total
assets than has been reported for previous periods. This is an indication of the
fact that the Company's recent expansion period with the addition of the PDA
acquisition has now settled. For instance, the Company's growth in terms of
total assets at May 31, 1997 compared to the year ended May 31, 1996 was 190%.
There is also very little change in the composition of assets since May 31, 1997
with cash being $30,523 lower at the end of the first half compared to the year
end; receivables are only $34,414 higher than the year end and inventory being
$111,873 higher than the year end. These changes, expressed in terms of
percentages are (13.1%), 7.5% and 7.7%, respectively, and are not regarded as
significant by management. Other changes in the composition of assets at
November 30, 1997 included (i) prepaid expenses which increased to $126,931, as
compared to $100,649 at fiscal year end; (ii) machinery and equipment which
increased slightly to $312,106 from $310, 797 at fiscal year end: leasehold
improvements which also increased slightly to $116,878, as compared to $107,460
at fiscal year end; and (iii) investment in affiliated company which also
increased slightly to $135,027 as compared to $130,637 at fiscal year end.
Each of the other individual asset accounts when compared with the corresponding
account for the fiscal year ended May 31, 1997 are quite comparable and reflect
little if any change in the composition of assets for the six month period ended
November 30, 1997.
Liabilities:
Total current liabilities at November 30, 1997 increased to $1,860,700, up
$167,663 from May 31, 1997. This increase was due primarily to increases in
notes payable, bank ($599,742 as compared to $552,952 at fiscal year end) and
accounts payable ($1,199,274 as compared to $1,038,686 at fiscal year end. The
increase in bank notes payable for the period reflects the Company's continued
increase in the use of its credit facility during the period and the increase in
accounts payable is caused by the Company's continued policy of temporarily
conserving cash for a proposed plant acquisition and some inventory purchases.
This policy has been in effect since the start of fiscal 1998 and, in part,
accounts for the increased inventory, including increases in inventory of its
affiliated company, reflected in the figures at November 30, 1997.
None of these changes are regarded as significant by management and except for
the entries mentioned above, the liabilities are comparable to the year ended
May 31, 1997. This indicates that the Company
<PAGE>
devoted the first half of fiscal 1998 to consolidation of its acquisition of PDA
and positioning itself to make the building and plant acquisition previously
mentioned.
Liability for payroll taxes decreased in this period ($46,526 at November 30,
1997 compared to $84,503 at Fiscal year end) as this item was reduced by payment
during the period and was not significantly increased because of the addition of
new employees, as was the case at the fiscal year end.
The additions to liabilities in the first half of fiscal 1998 represented by the
increases in notes payable and accounts payable are responsible for the 9.9%
increase in Total Current Liabilities at November 30, 1997 of approximately
$167,663 compared to the year ended May 31, 1997 ($1,860,700 at November 30,
1997 compared to $1,693,037 at the year ended May 31, 1997). Current Liabilities
at the end of the first half were, nevertheless, more than offset by Current
Assets of $2,480,052.
The Company's retained earnings deficit of $1,053,750 for the six months ended
November 30, 1997 shows an increase in the total deficit of $ 2,193 over the
year ended May 31, 1997 due to a further net loss in the six months ended
November 30, 1997 of a comparable amount. This loss compares with a net loss of
$89,622 at the year end in 1997 and a net loss of $54,822 at the end of the
first half of fiscal 1997 at November 30, 1996. However, more significantly,
during the three months ended November 30, 1997, the Company's operations showed
a net profit for the period of $7,950, as compared to a loss of $45,024 for the
three months ended November 30, 1996. See "Results of Operations" for further
details.
Management believes that, overall, there was no significant change in the
financial condition of the Company in the first half of fiscal 1998 when
compared to the year end.
See "Results of Operations" for additional information. For information
regarding liquidity, see Subparagraph (b) "Liquidity" below. For additional
information relating to the financial condition of the Company, also see
"Inflation" and "Trends Affecting Liquidity, Capital Resources and Operations."
(b) Liquidity.
Although there was a decrease in working capital at the end of the first half of
fiscal 1998 compared to the year ended May 31, 1997, the Company had sufficient
liquid assets to meet its obligations at the end of this period. Working capital
at November 30, 1997 was $619,352 compared to $647,903 at May 31, 1997, the
fiscal year end. This represents a decrease of $28,551 or 4.4% when comparing
the first half of 1998 with the fiscal year end. Management does not view this
as a significant change, particularly when taking into account the expenses that
the Company has had in assimilating the business of PDA, providing inventory for
PDA accounts and the establishment of a clean room facility for the Company,
largely to accommodate PDA products.
Principal short-term liabilities at November 30, 1997 were $1,199,274 in
accounts payables, short term note obligations of $599,742, the current portion
of long term debt in the amount of $15,158 and taxes and accrued expenses due of
$46,524 for a total of $1,860,698. Against this total, at November 30, 1997, the
Company had liquid current assets of $203,207 in cash, inventory of $1,568,863
and trade receivables of $489,790 for a total of $2,261,860 in short term liquid
assets. In management's opinion, these assets were sufficient to cover the
Company's operating expenses and debt for the foreseeable future.
Management also had at its disposal a credit line of $650,000 (an increase from
the previous credit line of $600,000) of which approximately $58,000 was
available at November 30, 1997. This credit line was increased in February 1998
to $750,000.
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 current fiscal year, including support
for its planned expansion of sales.
<PAGE>
The principal source of funds for the Company's operations during the first
quarter of 1998 continued to be from operating revenues and proceeds from its
credit line, as reflected in the Company's financial statements.
II. Results of Operations.
In the first half of fiscal 1998 the Company had gross sales of $1,998,923
compared to gross sales of $1,133,283 for the same period in fiscal 1997. This
is an increase of $865,640 compared to the first half of fiscal 1997 or a
percentage increase of approximately 76.4%. Cost of sales for the first half of
fiscal 1998 were $1,470,334 resulting in a gross profit from operations of
$528,589; compared to $766,040 and $367,243, respectively for the same period in
fiscal 1997. This represents an increase in gross operating profits for this
period of $161, 346 or slightly less than 44% higher than in the first half of
fiscal 1997.
Expressed as a percentage of net sales, gross profits for the six months ended
November 30, 1997 were 26.4% of net sales and 32.4% of net sales for the six
months ended November 30, 1996. Gross profits at the year ended May 31, 1997
were 26.1%. The comparison between the period ended November 30, 1997 and the
year ended May 31, 1997 shows only a slight increase which, like the larger
increase experienced in the first half of fiscal 1998, is primarily due to the
integration of the PDA products, which were not a factor in the first half of
fiscal 1997. The price increases were not in effect for the entire first half of
fiscal 1997 and were in place only for a portion of the first half of fiscal
1998. Nevertheless, the obvious increase in net sales for the quarter ended
November 30, 1997 compared to the same period ended November 30, 1996 resulted
in a significant increase in gross profits for the most recent period.
More significantly, however, during the three months ended November 30, 1997,
the Company had gross sales of $985,417, as compared to $512,997 for the three
months ended November 30, 1996. After cost of sales of $733,022 (compared to
$366,650 for the second quarter of fiscal 1997), the Company had a gross profit
of $252,395 for the second quarter of fiscal 1998, compared to a gross profit of
$146,347 for the second quarter of fiscal 1997. This represents and increase of
$106,048 or over 72% higher than the same period last year.
As previously reported, the substantial increase in revenues when compared to
the prior period 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. A price increase of 14.7% on all of PDA's products in July, 1997 was also
in effect for part of most the period ended November 30, 1997 and increased
revenues for that period.
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 from the study 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.
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 the current fiscal year 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.
<PAGE>
The Company opened important new customers for its products during fiscal 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 during the current year.
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.
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.
As stated above, cost of sales for the six months ended November 30, 1997
increased when compared to the six months ended November 30, 1996, as would be
expected from the significant increase in revenues for the current period. Cost
of sales for the period expressed as a percentage of net sales increased to
73.6% compared to 67.6% for the six months ended November 30, 1996. This
increase, however, is only slightly higher than at the fiscal year ended May 31,
1997, when cost of sales expressed as a percentage of net sales was 73.4%.
As was previously stated, cost of sales have increased as a percentage of net
sales because PDA's products were assimilated into the Company's line of
products and these products were generally carried by PDA at a higher cost
basis. The Company corrected this problem by (i) assuming some of the
manufacturing responsibility for PDA's products, and thereby controlling costs
on a better basis; and (ii) increasing the prices for PDA's products to more
accurately reflect costs. Management now believes that the cost differential has
been corrected by the increase in prices made by the Company in July, 1997, as
stated above, and by manufacturing some of PDA's products in house. Now
approximately 50% of PDA's products are made by the Company.
Selling, general and administrative expenses were 25.2% of net sales for the
first half of fiscal 1998 compared to 38.6% of net sales for the same period in
fiscal 1997. When examining this comparison it should be noted that in the
period ended November 30, 1996, the cost of the Company's factoring charges was
still attributable to this account while in the period ended November 30, 1997,
the Company changed its method of financing operations and the interest costs
for this purpose is shown in the interest expense account. Since this cost has
been shifted out of selling, general and administrative expenses this year, the
effect has been to lower this cost in the six months ended November 30, 1997
compared to November 30, 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."
<PAGE>
While the Company eliminated its high cost of factoring receivables during the
last fiscal year, financing costs in terms of interest charges for its present
financial accommodation for the six months were $61,770 compared with only
$18,260 for the six months ended November 30, 1996.
Net income (loss) for the six months ended November 30, 1997 was ($2,193)
compared to ($54,822) for the six months ended November 30, 1996, and ($89,622)
for the year ended May 31, 1997. While continuing to reflect a very modest loss
for the six months ended November 30, 1997, it should be noted that gross
profits from operations for the same period were considerably higher than gross
profits from operations for the same period at August 31, 1996. Cost factors
which affected profitability in both periods, however, were the interest costs
at November 30, 1997 and factoring charges (accounted for in higher General and
Administrative costs) in the comparable period ended November 30, 1996.
However, during the three months ended November 30, 1997, the Company operations
resulted in a net operating profit of $7,950, compared to a net loss of
($45,024) during the first six months of fiscal 1996. Management believes that
this renewed profitability is the culmination of several years of effort to
streamline the Company's operations and bring costs and pricing in line with
current market conditions.
For information with respect to the possible effect of future trends on
operations, see the discussion under the caption "Trends Affecting Liquidity,
Capital Resources and Operations."
III. Capital Resources.
There was no significant increase in Property and equipment in the period ended
November 30, 1997 and there are at present no commitments for capital purchases
except for the Company's proposed purchase of the building which it presently
occupies. The determination to purchase this building was made for a number of
reasons including a favorable purchase price and 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.
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 foreseeable 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 the Company's
resources.
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, a third operating
shift, to support a
<PAGE>
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 af fecting the health care industry;
(iii) governmental regulation of the Company's products and (iv) the growing
concern in many industries about controlling the spread of infectious disease.
Some disposable products offered by the Company are made from plastic-based
materials which have raised concern among environmental groups over their proper
disposal. Although management believes that such concerns are, in many cases,
valid, it is also believed that these concerns must be balanced with safety
provided by these products against infectious diseases such as AIDS, hepatitis
and others. This belief has recently been reinforced by the new, comprehensive
safety regulations issued by the Occupation al 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 im portantly, 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, possibly, 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. Spear headed 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 intro duced 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," car covers and
sterilized products are introduced, management believes that sales revenues will
increase and, over the long term, will result in more stable sales and higher
profit margins for the Company. In addition, the existence of the Occupa tional
Safety and Health Administration (OSHA) regulations are expected to continue to
have a positive influence on the demand for the Company's products.
In short, the above factors may each have a significant impact upon the
Company's future operations. At present, management believes that safety
concerns over the spread of infectious diseases such as AIDS and
<PAGE>
hepatitis will, at least for the foreseeable future, outweigh economic and
environmental concerns. Consequently, management does not anticipate any adverse
impact upon its future operations for the foreseeable future. Apart from these
factors, management knows of no trends or demands that would adversely affect
the financial condition of the Company.
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11 - Calculation of primary and fully-diluted income (loss) per share. Reference
is made to Note 15 the financial statements, incorporated herein by reference.
(b) Reports on Form 8-KSB
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH-PAK, INC.
/s/ Anthony J. Liberatore
Anthony J. Liberatore,President
Chief Operating Officer
Dated: February 10, 1998
/s/ Michael A. Liberatore
Michael A. Liberatore,Vice President
Chief Financial Officer
Dated: February 10, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1
<CASH> 203,207
<SECURITIES> 0
<RECEIVABLES> 489,790
<ALLOWANCES> 6,000
<INVENTORY> 1,568,863
<CURRENT-ASSETS> 2,480,052
<PP&E> 549,865
<DEPRECIATION> 234,066
<TOTAL-ASSETS> 3,187,570
<CURRENT-LIABILITIES> 1,860,698
<BONDS> 0
0
0
<COMMON> 30,890
<OTHER-SE> 2,304,334
<TOTAL-LIABILITY-AND-EQUITY> 3,187,570
<SALES> 1,998,923
<TOTAL-REVENUES> 1,998,923
<CGS> 1,470,334
<TOTAL-COSTS> 504,582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,770
<INCOME-PRETAX> (36,706)
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,706)
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<CHANGES> 34,513
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