SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended February 28, 1998
Commission File Number 33-24483-NY
HEALTH-PAK, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 11-2914841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1208 Broad Street, Utica, NY 13501
(Address of principal executive offices) (Zip Code)
Same
(Former Address) (Zip Code)
(315) 724-8370
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 28, 1998
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 February 28, 1998 and
May 31, 1997 F-2
Statement of income (loss) for the nine and
three months ended February 28, 1998 and 1997 F-3
Statement of cash flows for the nine months
ended February 28, 1998 and 1997 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 - FEBRUARY 28, 1998 AND MAY 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASSETS LIABILITIES
February 28, May 31, February 28, May 31,
1998 1997 1998 1997
---- ---- ---- ----
Current assets: Current liabilities:
Cash $ 323,488 $ 233,330 Current portion of long-term debt $ 14,503 $ 16,896
Receivables, trade, net of Notes payable 760,840 552,952
allowance of $6,000 580,319 455,376 Accounts payable 1,252,435 1,038,686
Inventory 1,522,286 1,456,990 Payroll and sales tax payable and
Note receivable 89,039 89,039 accrued expenses 51,781 84,503
---------- ----------
Prepaid expenses 106,807 100,649
Prepaid consulting fees 556 5,556
---------- ----------
Total current assets 2,622,495 2,340,940 Total current liabilities 2,079,559 1,693,037
---------- ---------- ---------- ----------
Property and equipment:
Machinery and equipment 314,698 310,797 Long-term debt, net of current
Leasehold improvements 119,634 107,460 portion 14,332 24,885
---------- ----------
Office equipment 110,130 99,860
Automotive equipment 21,021 21,021
---------- ----------
565,483 539,138
Less accumulated depreciation 246,602 209,476 Commitments
---------- ----------
318,881 329,662
------- -------
Minority interest in consolidated subsidiary 18,897 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 6,372 5,241 shares authorized
Deferred loan acquisition fees Common stock, .002 par value 20,000,000
and costs 6,480 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 ( 1,119,5950)(1,051,557)
---------- ----------
387,131 393,107 1,215,719 1,283,757
---------- ---------- --------- ----------
$3,328,507 $3,063,709 $3,328,507 $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)
NINE AND THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine months ended Three months ended
February 28, February 28,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $2,682,952 $2,299,507 $ 925,456 $1,166,224
Cost of sales 1,905,704 1,840,495 676,797 1,074,455
---------- ---------- ---------- ----------
Gross profit 777,248 459,012 248,659 91,769
Selling, general and
administrative expenses 790,923 501,815 286,341 107,721
---------- ---------- ---------- ----------
Loss from operations ( 13,675) ( 42,803) ( 37,682) ( 15,952)
---------- ---------- ---------- ----------
Other income (expense):
Gain (loss) on investments
in affiliated company 4,390 ( 5,763)
Interest expense ( 95,872) ( 38,790) ( 34,102) ( 20,530)
Amortization ( 6,012) ( 5,000) ( 2,679) ( 1,667)
---------- ---------- ---------- ----------
( 97,494) ( 49,553) ( 36,781) ( 22,197)
---------- ---------- ---------- ----------
Loss before income taxes ( 111,169) ( 92,356) ( 74,463) ( 38,149)
Income taxes (benefit):
Current ( 25,299) ( 13,566)
Minority interest in income
(loss) of subsidiary 43,131 ( 8,838) 8,618 10,052
---------- ---------- ---------- ----------
Net loss ($ 68,038) ($ 75,895) ($ 65,845) ($ 14,531)
========== ========== ========== ==========
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 16,198,003 17,090,159 17,090,159
========== ========== ========== ==========
Fully diluted 17,090,159 16,198,003 17,090,159 17,090,159
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Operating activities:
Net loss ($ 68,038) ($ 75,895)
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 37,126 28,467
Amortization 5,000 5,000
Gain on investments in subsidiaries ( 4,390) 5,763
Minority interest in income of subsidiary ( 43,133) 8,838
Changes in other operating assets and liabilities:
Accounts receivable ( 124,943) ( 265,449)
Inventory ( 65,296) ( 689,119)
Prepaid expenses ( 6,156) ( 10,094)
Accounts payable 213,749 474,766
Accrued expenses ( 32,724) ( 15,975)
Deferred income taxes ( 26,095)
Deposits and loan fees 10,366 ( 34,618)
-------- --------
Net cash used in operating activities ( 78,439) ( 594,411)
-------- --------
Investing activities:
Purchase of property and equipment ( 26,345) ( 49,764)
Loan receivable ( 50)
-------- --------
Net cash used in investing activities ( 26,345) ( 49,814)
-------- --------
Financing activities:
Proceeds from issuance of common stock and paid in
capital 384,960
Increase in long-term debt 30,326
Proceeds from notes payable, bank 220,012 405,521
Payment of notes payable, bank ( 12,124) ( 10,777)
Payment of long-term debt ( 12,946) ( 17,659)
Payment of deferred offering expenses ( 291)
-------- --------
Net cash provided from financing activities 194,942 792,080
-------- --------
Net increase in cash 90,158 147,855
Cash, beginning of period 233,330 1,376
-------- --------
Cash, end of period $323,488 $149,231
======== ========
Supplemental disclosures and cash flow information: Cash paid during the year
for:
Interest $ 95,872 $ 38,790
======== ========
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 nine months ended February 28, 1998. 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
February 28, 1998.
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 February 28, 1998 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:
February 28 May 31
1998 1997
---- ----
Raw materials $ 456,686 $ 432,771
Finished goods 1,065,600 1,024,219
---------- ----------
$1,522,286 $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' capital $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 February 28, 1998 the
balance due on the line of credit was $53,884.
The Company opened a line of credit with Foothill Capital Corporation in
September 1996. The loan ceiling amount is based on a percentage formula
of eligible accounts receivable and inventory. The balance due at
February 28, 1998 was $706,956.
8. Long-term debt:
Rate Amount Maturity
Note payable, Key Credit (a) 12% $ 137 May, 1998
Note payable, Manifest Group (b) 10% 14,268 July, 1999
Note payable, Waste Mgmt. of N.Y. (c) 10% 3,331 November, 1998
Note payable, Resource Capital Corp. (d) 10% 3,805 March, 2000
Note payable, Resource Capital Corp. (e) 10% 2,624 July, 1999
Note payable, Resource Capital Corp. (f) 10% 4,670 April, 1998
-------
28,835
Less current portion 14,503
------
$14,332
=======
(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
$6,796. The note is payable in installments of $170 per month
including interest.
(e) Note payable is collateralized by equipment with a cost of
$5,296. The note is payable in installments of $155 per month
including interest.
(f) 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 February 28, 1998 are as follows:
Year Amount
February 28, 1999 $14,503
February 28, 2000 11,449
February 28, 2001 2,883
-------
$28,835
=======
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 $47,250 for
the nine months ended February 28, 1998 and $70,800 for the nine months
ended February 28, 1997.
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.
Inaddition, the Company also issued 4,500,000 stock options at various
exercised prices. As of February 28, 1998, 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 February 28, 1998, 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 February 28, 1998 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:
February 28, 1998 February 28, 1997
----------------- -----------------
Primary Primary
Number of shares:
Weighted average shares outstanding 15,490,009 14,597,883
Incremental shares for outstanding
stock options 1,600,150 1,600,150
---------- ----------
17,090,159 16,198,033
========== ==========
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 February 28,
1998 and February 28, 1997.
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 $264,798 at February 28, 1998, the end of the first
nine months of fiscal 1998, when compared to the year end at May 31, 1997, an
increase of slightly over 9%, 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, as previously reported, the
Company's growth in terms of total assets at May 31, 1997 compared to the year
ended May 31, 1996 was 190%.
At February 28, 1998 there were modest increases in a number of the components
of the Company's current assets since May 31, 1997. Most significant among these
were cash, being $90,158 higher at the end of the nine month period compared to
the year end; receivables, being $124,943 higher than the year end; inventory,
being $65,296 higher than at year end; and prepaid expenses, being $6,158 higher
than at year end. These changes, expressed in terms of percentages are 38.6%,
25.2%, 4.5% and 6.1%, respectively. At February 28, 1998 the only component of
current receivables which declined was prepaid consulting fees, which dropped
from $5,556 at year end to $536. Overall, the changes to current assets are not
regarded as significant by management. Other changes in the composition of total
assets at February 28, 1998 included (i) machinery and equipment which increased
slightly to $314,698 from $310,797 at fiscal year end: (ii) leasehold
improvements which also increased slightly to $119,634, as compared to $107,460
at fiscal year end; (iii) office equipment which increased slightly to 110,130
from 99,860 at year end; and (iv) 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 nine month period
ended February 28, 1998.
Liabilities:
Total current liabilities at February 28, 1998 increased to $2,079,559, up
$386,522 from May 31, 1997. This increase was due primarily to increases in
notes payable, bank ($760,840 as compared to $552,952 at fiscal year end) and
accounts payable ($1,252,435 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 its pending 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 February 28, 1998. Further, the
increase in accounts payable also corresponds to the Company's increased
receivables and increased sales revenues during this period.
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 has devoted the first nine
months of fiscal 1998 to consolidation of its acquisition of PDA and positioning
itself to make the building and plant acquisition previously mentioned, which is
currently anticipated to be completed during the first quarter of fiscal 1999.
Liability for payroll taxes decreased in this period ($51,781 at February
28, 1998 compared to $84,503 at Fiscal year end). This component of the
Company's liabilities was reduced by payments 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 addition to liabilities in this period represented by the increases in notes
payable and accounts payable are responsible for 55.3% of the increase in Total
Current Liabilities at February 28, 1998 of approximately $386,522 compared to
the year ended May 31, 1997. Current Liabilities at February 28, 1998 were,
nevertheless, more than offset by Current Assets of $2,622,495.
The Company's retained earnings deficit of $1,119,595 for the nine months ended
February 28, 1998 shows an increase in the total deficit of $68,038 over the
year ended May 31, 1997 due to a further net loss in the six months ended
February 28, 1998 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 $75,895 at the end of the
first nine months of fiscal 1997 at February 28, 1997. See "Results of
Operations" for further details.
Management believes that, overall, there was no significant change in the
financial condition of the Company during the first nine months 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
nine months 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 February 28, 1998 was $542,936 compared to $647,903 at May
31, 1997, the fiscal year end. This represents a decrease of $104,967 or 16.2%
when comparing the end of fiscal 1997 . 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 February 28, 1998 were $1,252,435 in
accounts payable, short term note obligations of $760,840, the current portion
of long term debt in the amount of $14,503 and taxes and accrued expenses due of
$51,781 for a total of $2,079,559. Against this total, at February 28, 1998, the
Company had liquid current assets of $323,488 in cash, inventory of $1,522,286
and trade receivables of $580,319 for a total of $2,426,093 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 $750,000 (an increase from
the previous credit line of $600,000) of which approximately $43,000 was
available at February 28, 1998.
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.
The principal source of funds for the Company's operations during the first nine
months 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 nine months of fiscal 1998 the Company had gross sales of
$2,682,952 compared to gross sales of $2,299,507 for the same period in fiscal
1997. This is an increase of $383,445 compared to the first nine months of
fiscal 1997, or a percentage increase of approximately 16.7%. Cost of sales for
the first nine months of fiscal 1998 were $1,905,704 resulting in a gross profit
from operations of $777,248; compared to $1,840,495 and $459,012, respectively
for the same period in fiscal 1997. This represents an increase in gross
operating profits for this period of $318,236 or slightly more than 69% higher
than in the first nine months of fiscal 1997.
Expressed as a percentage of net sales, gross profits for the nine months
ended February 28, 1998 were 29.0% of net sales, as compared to 24.9% of net
sales for the nine months ended February 28, 1996. Gross profits at the year
ended May 31, 1997 were 26.1% of net sales. The comparison between the period
ended February 28, 1998 and the year ended May 31, 1997 shows a slight increase
which is primarily due to certain price increases implemented by the Company
were not in effect during the comparable period of fiscal 1997 and were in place
only for a portion of the first nine months of fiscal 1998. Nevertheless, the
obvious increase in net sales for the period ended February 28, 1998 compared to
the same period ended February 28, 1997 resulted in a significant increase in
gross profits for the most recent period.
During the three months ended February 28, 1998, the Company had gross
sales of $925,456, which was less than the $1,166,224 reported for the three
months ended February 28, 1997. After cost of sales of $676,797 (compared to
$1,074,455 for the third quarter of fiscal 1997), the Company had a gross profit
of $248,659 for the third quarter of fiscal 1998, compared to a gross profit of
only $91,769 for the third quarter of fiscal 1997. This represents an increase
of $156,890 or over almost 171% higher than the same period last year.
As previously reported, the Company experienced a substantial increase in
revenues due to the acquisition of PDA which added its revenues to those of the
Company. Revenues were also 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 all of the
third quarter of fiscal 1998 and for most of the nine months ended February 28,
1998. The re-alignment of prices by the Company contributed to the 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, and are manufactured in 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 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 significant 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 the balance of fiscal 1998 and in fiscal 1999.
Cost of sales for the nine month period expressed as a percentage of net sales
decreased to 71.1% compared to 80.0% for the nine months ended February 28,
1997, reversing a trend which had been continued through the first half of
fiscal 1998. This percentage, decrease from the same period in the prior year,as
well as for 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. Management believes
that these measures were responsible for the lower percentage experienced during
the first nine months of fiscal 1998.
Selling, general and administrative expenses were 29.5% of net sales for the
first nine months of fiscal 1998 compared to 21.8% of net sales for the same
period in fiscal 1997
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 nine months were $95,872 compared with only
$38,790 for the nine months ended February 28, 1997.
Net income (loss) for the nine months ended February 28, 1998 was ($68,038)
compared to ($75,895) for the nine months ended February 28, 1997, and ($89,622)
for the year ended May 31, 1997. While continuing to reflect a modest loss for
the nine months ended February 28, 1998, 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 in the prior year. Cost factors which
affected profitability in both periods, however, were the interest costs at
February 28, 1998 and factoring charges (accounted for in higher General and
Administrative costs) in the comparable period ended February 28, 1997.
Most of the loss experienced in the current fiscal year occurred during the
third quarter with the Company reflecting a net operating loss during the three
months ended February 28, 1998 of ($65,845) as compared to a loss of only
($14,531) during the third quarter of fiscal 1997.
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 February 28, 1998 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 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 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, 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. 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 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 Occupational 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 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: July 10, 1998
/s/ Michael A. Liberatore
Vice President
Chief Financial Officer
Dated: July 10, 1998
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<PERIOD-TYPE> 9-MOS
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<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
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<CASH> 323,488
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