SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended August 31, 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 os Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 31, 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 August 31, 1998 and
May 31, 1998 F-2
Statement of income for three months ended
August 31, 1998 and 1997 F-3
Statement of cash flows for three months
ended August 31, 1998 and 1997 F-4
Notes to condensed consolidated financial
statements F-5 - F-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 - AUGUST 31, 1998 AND MAY 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASSETS LIABILITIES
August 31, May 31, August 31, May 31,
1998 1998 1998 1998
Current assets: Current liabilities:
Cash $ 31,905 Current portion of long-term debt $ 301,472 $ 30,515
Receivables, trade, net of Notes payable, bank 725,966 718,291
allowance of $13,500 $ 671,317 641,152 Accounts payable 692,259 811,730
Inventory 1,545,643 1,572,320 Payroll and sales tax payable and
Note receivable 89,039 89,039 accrued expenses 47,780 98,508
Prepaid expenses 65,005 83,870 Note payable, officer 30,000
---------- ---------- ---------- ----------
Total current assets 2,371,004 2,418,286 Total current liabilities 1,797,477 1,659,044
---------- ---------- ---------- ----------
Property and equipment:
Land 120,000
Building 483,662
Machinery and equipment 317,000 315,978 Long-term debt, net of current
Leasehold improvements 133,593 133,593 portion 403,760 44,004
Office equipment 110,130 110,130 -------- --------
Automotive equipment 21,021 21,021
---------- ----------
1,185,401 580,727
Less accumulated depreciation 262,252 248,417 Commitments
---------- ----------
923,154 332,310
------- ------- Minority interest
in consolidated subsidary 2,596 11,279
----- ------
Other assets: Shareholders' equity:
Investments in affiliated Company 135,027 135,027 Common stock subscriptions 55,359
Deposit on building 21,600 28,647 Common stock, .001 par value
Security deposits 4,241 4,241 2,000,000 shares authorized
Loan acquisition fees Common stock, .002 par value
and costs, net 38,719 3,240 20,000,000 shares authorized 30,980 30,980
Deferred offering expenses 74,647 99,530 Common stock purchase warrants:
Deferred income taxes 83,115 83,115 Class A
Cash surrender value, officers' Class B
life insurance 33,942 33,942 Class C
Officer's loan 1,200 1,200 Additional paid in capital 2,304,334 2,304,334
---------- ----------
Deficit ( 907,857) ( 910,103)
---------- ----------
392,491 388,942 1,482,816 1,425,211
---------- ---------- ---------- ----------
$3,686,649 $3,139,538 $3,686,649 $3,139,538
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Net sales $ 804,853 $ 867,757
Cost of sales 496,123 591,563
---------- ----------
Gross profit 308,730 276,194
Selling, general and administrative
expenses 239,546 250,363
---------- ----------
Income from operations 69,184 25,831
---------- ----------
Other charges:
Loss on investments ( 4,390)
Interest expense 50,735 33,067
Amortization 24,883 1,667
---------- ----------
75,618 30,344
---------- ----------
Loss before minority interest ( 6,434) ( 4,513)
Minority interest in (income) loss of consolidated
subsidiary 8,683 ( 5,630)
---------- ----------
Net income (loss) $ 2,249 ($ 10,143)
========== ==========
Earnings per common and dilutive common equivalent share:
Primary $ 0.00 $ 0.00
========== ==========
Fully diluted $ 0.00 $ 0.00
========== ==========
Weighted average number of common shares and dilutive outstanding:
Primary 17,090,159 14,016,238
========== ==========
Fully diluted 17,090,159 14,016,238
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Operating activities:
Net income (loss) $ 2,249 ($ 10,143)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation 13,835 12,453
Amortization 28,334 1,667
Gain on investment in consolidated subsidiary ( 4,390)
Gain on (loss) on minority interest in consolidated
subsidiary ( 8,683) 5,630
Changes in operating assets and liabilities:
Accounts receivable ( 30,165) ( 13,034)
Inventory 26,677 ( 60,821)
Deposits and loan fees 7,047 2,197
Prepaid expenses 18,865 2,240
Accounts payable ( 119,471) 74,830
Accrued expenses ( 50,731) ( 28,480)
-------- --------
Net cash used in operating activities ( 112,043) ( 17,851)
-------- --------
Investing activities:
Purchase of property and equipment ( 604,679) ( 9,095)
-------- --------
Net cash used in investing activities ( 604,679) ( 9,095)
-------- --------
Financing activities:
Proceeds from deposits on common stock 55,359
Proceeds from notes payable, bank 497,675 65,051
Proceeds from long-term debt 150,000
Proceeds from officers' loan 30,000
Payment of long-term debt ( 9,287) ( 8,387)
Payment of financing costs ( 38,930)
-------- --------
Net cash provided from financing activities 684,817 56,664
-------- --------
Net increase (decrease) in cash ( 31,905) 29,718
Cash, beginning of period 31,905 233,330
-------- --------
Cash, end of period $ 0 $263,048
======== ========
Supplemental disclosures and cash flow information:
Cash paid during the year for:
Interest $ 50,735 $ 32,422
======== ========
Income taxes $ 0 $ 0
======== ========
</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 three months ended August 31, 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 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 August 31, 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
August 31, 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:
August 31 May 31
1998 1998
---- ----
Raw materials $ 463,693 $ 483,696
Finished goods 1,081,950 1,088,624
---------- ----------
$1,545,643 $1,572,320
========== ==========
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' EQUITY
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
7. Note receivable:
The Company is due $89,039 from the minority interest owner of its
subsidiary, Protective Disposable Apparel Co., LLC. This amount represents the
subsidiary portion of the purchase cost of the business which the Company paid
on behalf of the minority shareholder. The note receivable is non-interest
bearing, unsecured and indefinite in maturity.
8. Line of credit:
The Company 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 August 31, 1998
was $725,966.
9. Long-term debt:
Rate Amount Maturity
Note payable, Manifest Group (a) 10% $ 11,316 July, 1999
Note payable, Waste Mgmt. of N.Y. (b) 10% 2,064 November,1998
Note payable, Resource Capital Corp. (c) 10% 2,950 March, 2000
Note payable, Resource Capital Corp. (d) 10% 1,806 September,1999
Note payable, Resource Capital Corp. (e) 10% 2,901 July, 1999
Note payable, City of Utica (f) 3% 148,393 June, 2005
Note payable, bank (g) Prime +2% 490,000 November,2013
Note payable, bank line of credit (h) 11.5% 45,802 May, 2001
--------
705,232
Less current portion 301,472
-------
$403,760
========
(a) Note payable is collateralized by equipment with a cost of
$20,064. The note is payable in installments of $492 per month
including interest.
(b) Note payable is collateralized by equipment with a cost of
$11,923. The note is payable in installments of $240 per month
including interest.
F-9
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Long-term debt (continued):
(c) Note payable is collateralized by equipment with a cost of
$6,796. The note is payable in installments of $170 per month
including interest.
(d) Note payable is collateralized by equipment with a cost of
$5,296. The note is payable in installments of $155 per month
including interest.
(e) Note payable is collateralized by equipment with a cost of
$9,053. The note is payable in installments of $251 per month
including interest.
(f) Note payable is collateralized by machinery, equipment, furniture
and fixtures, inventory and accounts receivable. The note is
payable in installments of $1,982 per month including interest.
(g) Note payable is collateralized by real estate. The note is
payable in principal installments of $1,389 per month plus
interest. A portion of the note in the amount of $240,000 is due
December 1998. This amount is to be replaced with an SBA
guaranteed loan from the same bank under long-term debt and is
expected to be in place before the December due date.
(h) Note payable is collateralized by accounts receivable, machinery,
equipment, inventory, intangibles and chattel paper. The note is
payable in principal installments of $1,347 per month plus
interest.
Maturities of long-term debt as of August 31, 1998 are as follows:
Year Amount
August 31, 1999 $301,472
August 31, 2000 60,862
August 31, 2001 50,950
August 31, 2002 38,112
August 31, 2003 38,764
Thereafter 215,072
--------
$705,232
========
F-10
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments:
Consultant contracts:
The Company entered into a three year investment banking consulting
agreement on December 31, 1994. The Company issued 1,000,000 shares of $.002 par
common shares and used a discount valuation of $.002 per share. The consultant
is to act as a placement agent for Health-Pak, Inc. on all private placements or
secondary offerings. Services commenced as of April 1, 1995. The agreement is
being amortized over thirty six months.
In addition, the Company also issued 4,500,000 stock options at various
exercised prices. As of May 31, 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.
11. Income taxes:
Effective June 1, 1993, the Company has adopted the Statements of Financial
Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes,"
which applies a balance sheet approach to income tax accounting. The new
standard required the Company to reflect on its balance sheet the anticipated
tax impact of future taxable income or deductions implicit in the balance sheet
in the form of temporary differences. The Company has reflected certain future
tax benefits on its balance sheet from the realization of the carryover of the
current years net operating loss to anticipated future earnings. The cumulative
effect as of June 1, 1993, the date of the adoption of SFAS No. 109, was
immaterial. As permitted by SFAS No. 109, prior year's financial statements have
not been restated.
F-11
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Income taxes (continued):
The components of deferred tax assets and liabilities are as follows:
Deferred tax assets:
Bad debt allowances $ 500
Net operating loss carryfoward 114,115
-------
114,615
-------
Deferred tax liability:
Depreciation 900
---
Deferred tax asset 113,715
Valuation allowance 30,600
------
Net deferred tax asset $ 83,115
========
As of August 31, 1998, the Company has available, for tax reporting
purposes, net operating loss carryovers of approximately $640,000 which expire
through 2013.
12. Employment contracts:
The Company has no employment contracts. Further, it has no retirement,
pension or profit sharing plan covering its officers or directors.
13. 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 1998. Amortization of the deferred offering expense of $24,883 is
included at August 31, 1998.
All deferred offering expenses pertain to the Class C warrants which had
not been issued as of the statement date.
14. Related party transactions:
Officers loans are unsecured and non-interest bearing. Officers have
indicated that they will not be repaid in the current year. In addition, the
Company has advanced funds to its minority interest partner, Protective Disposal
Apparel, in the amount of $89,039.
F-12
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15. Common stock purchase options:
As of August 31, 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.
16. Earnings per share:
August 31, 1998 August 31, 1997
--------------- ---------------
Primary Primary
Number of shares:
Weighted average shares outstanding 15,490,009 15,490,009
Incremental shares for outstanding
stock options 1,575,075 1,600,150
---------- ----------
17,065,084 17,090,159
========== ==========
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 August 31, 1998 and August 31, 1997.
F-13
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
The following condensed consolidated financial statements have been
prepared by Health-Pak, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission promulgated under the
Securities Exchange Act of 1934 as amended. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company's
management, the condensed consolidated financial statements include all
adjustments (consisting only of adjustments of a normal, recurring nature)
necessary to present fairly the financial information set forth therein.
Operating results for the three month period ended August 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
May 31, 1999.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and accompanying notes included in
Form 10-KSB for the year ended May 31, 1998.
Condensed Consolidated Financial Statements:
Balance Sheet as of August 31, 1998 and May 31, 1998.........F-2
Statement of Income For
Three Months Ended August 31, 1998 and 1997..................F-3
Statement of Cash Flows
For three Months Ended August 31, 1998 and 1997,,,,...........F-4
Notes to Condensed Consolidated Financial Statements..F-5 to F-13
3
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
I. Financial Condition and Liquidity.
Introduction.
As previously stated, 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.
Inter-company balances have also been eliminated in the consolidation.
(a) Financial Condition.
Assets:
Total assets increased by $547,111 at August 31, 1998 when compared to the
year ended May 31, 1998, an increase of approximately 17.4%. This increase is
largely due to the acquisition by the Company of its plant facility in Utica,
New York, which took place in July, 1998.
The asset addition for the plant acquisition is reflected in "Property and
Equipment." Except for this addition, there is no substantial difference in
"property and equipment" from the year end.
Management believes that purchasing the building will result in positive
savings in terms of monthly expenses for rent for future years.
The increase in assets at August 31, 1998 was also slightly enhanced by
additions to receivables (which increased by $30,165 from the year ended May 31,
1998). The increase was also slightly offset by reductions in cash ($0 at the
end of the period or a $31,905 difference from the year end) and inventory (down
slightly by $26,683).
The increase in assets was also somewhat offset by reductions in certain of
the non-operating accounts such as deposits on buildings, deferred offering
expenses and other minor changes.
The increase in receivables is caused by the fact that the Company had
slower collections during the period. Inventory decreased slightly as a normal
part of experiencing lower sales for the period and because of the Company's
decision to remove certain non-profitable items from its line. At the end of the
first quarter, inventory was approximately 1.7% lower than at the year end.
4
<PAGE>
There were no significant purchases of machinery and equipment during the
quarter.
As previously stated, cash at the end of the quarter was $0. This was
because the Company applied most of its available cash during the quarter ended
August 31, 1998 (i) to the acquisition of the building facility on Beechgrove
Avenue in Utica, including closing costs; and (ii) to the reduction of accounts
payable. It should be noted in that respect that the Company was accumulating
cash since 1997 in contemplation of acquiring the plant facility. The building
was purchased in July of 1998, during the quarter ended August 31, 1998.
In summary, the acquisition of the Company's plant facility is the primary
reason for the increase in assets at this time. The increase in assets will be
offset by liabilities to the extent that the property was financed. Except for
the acquisition, total assets would be quite comparable to total assets for the
year ended May 31, 1998.
Liabilities:
The significant increase in the current portion of long term debt and long
term debt itself substantially account for the increase in liabilities at the
end of the quarter ended August 31, 1998. The increase in long term debt results
from the acquisition of the plant facility in July, 1998. A portion of the
mortgage loan for the purchase of the facility in the amount of $240,000 was due
in December, 1998 and had to be accounted for as a short term debt; however,
this portion of the debt was replaced by a long term SBA guaranteed loan in the
quarter ended November 30, 1998; and, therefore, the long term portion of this
loan will be transferred to the long term account in the next report. This
greatly inflated the current portion of long term debt for the three month
period ended August 31, 1998 and, as noted above, will be adjusted in the next
quarter after taking the replacement loan into effect.
An increase in bank notes payable and a reduction in accounts payable
represent the most significant changes in liabilities of the Company when
compared to the year ended May 31, 1997. The increase in bank notes payable
reflects additional borrowing by the Company on its credit line during the
quarter ended August 31, 1998, while the reduction in accounts payable shows the
Company's application of cash to these accounts during the quarter.
Total current liabilities for the quarter ended August 31, 1998 are
approximately $140,000 higher when compared to the year end, but this is not
significant when you take into account the fact that the Company had a
substantial increase in short term liabilities associated with the acquisition
of its real property.
5
<PAGE>
It should also be noted that accounts payable were reduced in the period by
$119,471 when compared to the year end. This reflects the application of
additional cash during the period to the payment of payables.
Liability for payroll taxes varies with the number of employees at any
given time and the date upon which the period falls. There was a reduction in
this account of approximately $51,000 during the period when compared to the
year end at May 31, 1998.
Overall, total liabilities increased by some $498,189 during the three
month period ended August 31, 1998 compared to the year end at May 31, 1998
which is as expected from the debt acquired in connection with the acquisition
of the real property made in July, 1998. This is balanced by an increase in
assets for the period of $547,111 compared to the year end, which also reflects
the value of the property acquired.
The Company's deficit of $(907,357) shows only slight improvement over the
year end deficit of $(910,103). This compares with a deficit of $(1,041,702) for
the comparable quarter ended August 31, 1997. See "Results of Operations."
Management believes that, except for taking into account the fact that the
Company purchased the real property referred to above, there has been no
significant change in the financial condition of the Company during the quarter.
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.
The Company had sufficient liquid assets to meet its obligations at the end
of the first quarter ended August 31, 1998. Working capital at August 31, 1998
was $573,527 compared to $759,242 at the year ended May 31, 1998, a reduction of
$185,715. This is to be expected in the light of the cash and mortgage note
requirements for the acquisition of the building and the reduction of accounts
payable mentioned above, among other things. For comparison purposes, working
capital at the end of August 31, 1997 was $640,853.
Principal short-term liabilities at August 31, 1998 were $301,472 in the
current portion of long term notes due, $725,966 in short term notes payable,
$692,259 in accounts payable, and payroll taxes due of $47,700 for a total of
$1,719,697. Against this
6
<PAGE>
total, at the end of the quarter, the Company had liquid current assets
consisting of receivables of $671,317, inventory in the amount of $1,545,643 and
notes receivable of $89,039 for a total of $2,305,999.
During the quarter management also had at its disposal a credit line of
$850,000 of which approximately $80,000 was available at August 31, 1998. The
credit line was increased in 1998 to $850,000 from $750,000 last year.
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.
Management is planning additional equity financing which, if completed,
could add substantially to the Company's liquidity in the near future and would
afford the Company the opportunity to make new acquisitions and to expand its
business. There is no assurance that the Company will be successful in its
attempts to raise additional capital at an affordable cost.
The principal source of funds for the Company's operations during quarter
ended August 31, 1998 has been from operating revenues and proceeds from its
credit line, as reflected in the Company's financial statements.
II. Results of Operations.
Net sales at the end of the first quarter ended August 31, 1998 were
$804,359. This compares with net sales of $867,757 at the end of the first
quarter of 1997. The slight decrease of approximately 7.3% results from the fact
that the Company made a determination during the quarter to eliminate from its
product line certain items which it felt were not profitable to sell. These
items included nurses caps, shoe covers and surgical masks among others and
represented products which were primarily manufactured by others. Management
believes this elimination will also have an effect on sales in the next quarter
as well.
The reduction in sales was not accompanied by additions from new business
or price increases during the period to boost sales to former levels; however,
management believes that with new measures being taken to increase sales,
including making certain acquisitions and entering into the market for tissue
paper will eventually make up for the downturn in net sales (see below).
In that regard it is interesting to note that cost of sales expressed as a
percentage of net sales for the quarter ended August 31, 1998 was 61.6% compared
with 68% for the quarter ended August 31, 1997.
7
<PAGE>
None of the sales were influenced by price changes during the quarter.
As for the future, the Company has entered into an agreement with Jake
Industries, Inc. ("Jake") and its principal shareholders to acquire the
substantial part of the assets of Jake as a going concern. Located in New
Jersey, Jake is a manufacturer of paper products to the medical industry
including toilet tissue paper for institutions and tissue gowns. Revenues are
presently approximately $2 million per annum; however, the Company believes that
these revenues can be greatly expanded with its own network of customers and new
business which the Company will seek to obtain after the closing.
The acquisition agreement for Jake calls for the payment of more than
$300,000 cash and the issuance of stock to the shareholders of Jake. The Company
has not yet closed this agreement as of the date of this report and is awaiting
currently planned additional financing to support the purchase of Jake.
The Company also introduced "sonic sealed" garments in former periods which
are 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. It is
expected that these products will contribute to sales during the current fiscal
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 again 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.
8
<PAGE>
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 again in terms of overall net revenues
for 1999.
For additional information see Item 1. "Description of
Business."
As previously indicated, cost of sales expressed as a percentage of net
sales for the three months ended August 31, 1998 was 61.6% compared to 68% for
the three months period ended August 31, 1997. Cost of sales for the year ended
May 31, 1998 was 67.8%. This is an efficiency improvement of approximately 6.4%
over the comparable three months period last year and an improvement of 6.2%
since the year ended May 31, 1998 and reflects the Company's measures to improve
profitability by eliminating unprofitable items from its line and properly
costing its other products. This improvement was primarily responsible for the
increase in gross profits for the three months ended August 31, 1998 compared to
the similar period in 1997, even though sales were lower for the current period
by approximately 7.3%.
It should be remembered that the cost of sales increased last year to 73.8%
with the introduction of PDA products as part of the Company line. Management
pointed out at that time that the PDA products were initially introduced at a
higher cost basis than the Company's products. Costing analysis and immediate
action was taken to correct these differences which resulted in a cost of sales
this period that is more in line with the Company's usual standards.
As stated above, the elimination of unprofitable business and the price
increases effected for the PDA products during the previous year, influenced the
lower cost basis for products in the three months ended August 31, 1998.
Gross profits for the three months ended August 31, 1998 were higher by
$32,536 than gross profits for the comparable period in 1997 on lower net sales
for the period, all due to the improvement in cost of sales. Expressed as a
percentage of net revenues, gross profits were 38.4% of net sales for the three
months ended August 31, 1998 compared to 31.8% of net sales for the comparable
quarter in 1997. The improvement occurs because of the lower cost of sales
percentage for the quarter ended August 31, 1998 compared to the quarter ended
August 31, 1997. This compares with a gross profit percentage of 32.2% at the
year ended May 31, 1998.
There was no significant difference in selling, general and administrative
expenses for the quarter ended August 31, 1998 compared to the quarter ended
August 31, 1997; although, it is slightly lower for the three month period ended
August 31, 1998 and is expected to be even lower during the next reporting
period.
9
<PAGE>
Financing costs for the three months ended August 31, 1998 in the form of
interest expense increased to $50,735 compared to $33,067 for the comparable
period in 1997. This, of course, reflects increased borrowing during quarter
ended August 31, 1998.
Net income for the quarter ended August 31, 1998 was $2,249 compared to a
net loss of $10,143 for the comparable period in 1997. This is a slight
improvement of $12,392 over the quarter ended August 31, 1997 which occurred
even though sales were lower for the period ended August 31, 1998 and results
from more efficient cost of sales and higher gross profits as indicated above.
Although only slight, these improvements were substantial enough to show a
profit for the quarter even though profits for the period were offset by
increases in interest and amortization expenses during the quarter ended August
31, 1998.
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."
First Quarter ended August 31, 1998 Compared with Fourth Quarter
Ended May 31, 1998
Net sales for the three months ended May 31, 1998 were $696,371 which
compares to sales in the quarter ended August 31, 1998 of $804,853. Net sales
for the three months ended August 31, 1998 are higher by approximately 13.5%
than the quarter ended May 31, 1998. While sales in both the fourth quarter of
last year and the first quarter of the current fiscal year (ended August 31,
1998) are rather significantly lower than previous periods, the lower sales for
the fourth quarter of 1998 result primarily from shipping products during
different periods (i.e. during the fourth quarter of last year many orders came
early enough during the third quarter to allow for shipment in that quarter,
while normally many orders received in the third quarter are not shipped until
the fourth quarter) while the reduction in sales for the first quarter of fiscal
1999 was caused by the deliberate elimination of unprofitable sales.
Cost of sales in the fourth quarter of 1998 expressed as a percentage of
net sales was 67.8% which compares with the 61.3% for the first quarter of 1999
previously mentioned and reflects the measures taken by the Company in the three
months ended August 31, 1998 to improve profitability by eliminating
unprofitable products from its product line. This action, coupled with previous
efforts taken too improve profitability for PDA's products has improved the
Company's profit status for the three months period ended August 31, 1998. By
increasing sales in the near future, the efficiencies adopted by the Company in
the last two periods should have a positive impact on net revenues beginning in
the next period.
10
<PAGE>
The improvement in cost of sales allowed the Company to enjoy an operating
profit of $69,184 for the three months ended August 31, 1998.
III. Capital Resources.
On July 21, 1998 the Company acquired its plant facility in Utica, New York
for a purchase price of $600,000. As part of the agreement to purchase the
building, all back rent (the Company was withholding rent for repairs) except
for $50,000 was forgiven. The Company was paying $7,500 per month for rental of
this facility.
During the three months ended August 31, 1998, there was no other
significant increase in the purchase of any property or equipment. The Company
does expect to spend additional funds in the near future for the acquisition of
tissue production machinery to enter into the tissue supply business (i.e.
toilet tissue for institutions and tissue paper for examination tables),
particularly if the acquisition with Jake Industries, Inc., mentioned above is
consummated.
The Company also does not presently anticipate the allocation of other
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.
Current conditions indicate, however, that some funds will be required for
additional capital expenditures in the near future which coincides with
management's sales expansion program; however, as explained above, financing for
purchasing these resources will be obtained from sources which will not require
a substantial outlay of cash and will be in proportion to its expansion program.
IV. Inflation.
Management anticipates that inflation will not have a material effect on
the Company's operations in the future. This is principally due to two factors.
First, if orders increase due to inflation the Company presently has adequate
manufacturing equipment and capacity to support not only its present level of
operations but, with the addition of a second and, if needed, third, operating
shift, to support a substantial increase in production of its present product
lines. Second, although product pricing would be affected by inflation due to
higher costs, management believes that public health and safety concerns would
outweigh any negative impact of price increases and would not adversely affect
the Company's projected sales. Additionally, the hospital 11
<PAGE>
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, perhaps, complete elimination, which could
have a substantially negative impact on liquidity and capital resources in the
future.
Management also believes that perhaps the most significant adverse impact
upon its liquidity, capital resources and future operations may result from
economic pressures to keep health care costs low. Spearheaded by health care
insurers and now the federal government, the entire health care industry in the
United States has come under increasing pressure and scrutiny to reduce
unnecessary and wasteful costs. To meet the criticism in recent years over the
higher cost of disposable products, the Company has intro-
12
<PAGE>
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" and other items
under development 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 16 of the financial
statements,
incorporated herein by reference.
(b) Reports on Form 8-KSB
None.
13
<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: March 18, 1998
/s/ Michael A. Liberatore
Michael A. Liberatore
Vice President
Chief Financial Officer
Dated: March 18, 1998
14
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