SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITY EXCHANGE ACT OF 1934 [FEE REQUIRED]
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended May 31, 1998 Commission file No. 33-24483NY
DELAWARE 11-2914841
State or other jurisdiction (IRS Employer ID#)
of incorporation or organization
HEALTH-PAK, INC.
Exact name of Registrant as specified in its charter
1208 Broad Street, Utica, New York 13504 (Address
of principle executive offices) (Zip code)
Registrant's telephone number, including area code (315) 724-8370
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Act of 1934, during the
preceding 12 months (or for such period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained to the
best of the Registrant' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this form 10-KSB. [X]
Issuers revenue for its most recent fiscal year $3,715,487
The aggregate market value of the voting common stock held by non-
affiliates (1) of the Registrant based on the average of the high ($
) and low ($ ) bid prices ($ ) of the Company's Common Stock, for
the week ended is approximately based upon the
shares of Registrant's Common Stock held by non-affiliates.
The number of shares outstanding of each of the Registrant's classes of
Common Stock, as of May 31, 1998 is 15,490,009 shares all of one class
of $.002 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transition Small Business Disclosure Format Yes No X
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
YEAR ENDED MAY 31, 1998
CONTENTS
Page
Independent auditors' report F-2
Consolidated financial statements:
Balance sheet F-3
Statement of income (loss) F-4
Statement of shareholders' equity F-5
Statement of cash flows F-6
Notes to consolidated financial statements F-7 - F-17
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Health-Pak, Inc. and subsidiary
Utica, New York
We have audited the accompanying consolidated balance sheet of Health-Pak,
Inc. and Subsidiary as of May 31, 1998, and the related consolidated statements
of income (loss), shareholders' equity, and cash flows for the years ended May
31, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Health-Pak, Inc. and
Subsidiary as of May 31, 1998, and the results of its operations, shareholders'
equity and its cash flows for the years ended May 31, 1998 and 1997 in
conformity with generally accepted accounting principles.
Zeller Weiss & Kahn
July 16, 1998
Mountainside, New Jersey
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - MAY 31, 1998
ASSETS
Current assets:
Cash $ 31,905
Receivables, trade, net of allowance of $13,500 641,152
Inventory 1,572,320
Prepaid expenses 83,870
----------
Total current assets 2,329,247
---------
Property and equipment:
Machinery and equipment 315,978
Leasehold improvements 133,598
Office equipment 110,130
Automotive equipment 21,021
----------
580,727
Less accumulated depreciation 248,417
-------
332,310
-------
Other assets:
Investments in affiliated companies 135,027
Notes receivable 89,039
Deferred offering expenses 99,530
Deferred income taxes 83,115
Deposits 32,888
Loan acquisition fees and costs, net of amortization 3,240
Cash surrender value, officers' life insurance 33,942
Officers' loan 1,200
----------
477,981
-------
$3,139,538
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 14,351
Notes payable, bank 768,134
Accounts payable 811,730
Payroll and sales tax payable and accrued expenses 98,508
----------
Total current liabilities 1,692,723
---------
Long-term debt, net of current portion 10,325
----------
Minority interest in consolidated subsidiary 11,279
----------
Shareholders' equity:
Common stock, .001 par value 2,000,000 shares authorized,
none issued
Common stock, .002 par value 20,000,000 shares
authorized, 15,490,009 shares issued and outstanding 30,980
Common stock purchase warrants:
Class A
Class B
Class C
Additional paid in capital 2,304,334
Deficit ( 910,103)
----------
1,425,211
-----------
$3,139,538
==========
See notes to consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (LOSS)
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Net sales $3,715,487 $3,421,452
Cost of sales 2,518,909 2,526,468
---------- ----------
Gross profit 1,196,578 894,984
Selling, general and administrative expenses 1,113,248 948,980
---------- ----------
Income (loss) from operations 83,330 ( 53,996)
---------- ----------
Other income and expenses:
Gain (loss) on investment in unconsolidated
subsidiary 4,390 ( 5,763)
Interest expense ( 129,578) ( 54,810)
---------- ----------
( 125,188) ( 60,573)
---------- ----------
Loss before minority interest ( 41,858) ( 114,569)
Minority interest in loss of consolidated
subsidiary 50,751 27,009
---------- ----------
Income (loss) before taxes 8,893 ( 87,560)
Income taxes 2,939 2,062
---------- ----------
Net income (loss) $ 5,954 ($ 89,622)
========== ==========
Net income (loss) per common share:
Primary ($ 0.01) ($ 0.01)
========== ==========
Fully diluted ($ 0.01) ($ 0.01)
========== ==========
Weighted average number of common shares outstanding:
Primary 17,040,009 16,439,815
========== ==========
Fully diluted 17,040,009 16,439,815
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
MAY 31, 1996 TO MAY 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Unissued
Common stock Preferred stock common stock Capital Retained
number of $.002 par number of $10 par number of $.002 par in excess earnings
shares amount shares amount shares amount of par val.(deficit) Total
------ ------ ------ ------ ------ ------ ----------- ------- -----
Balance at May 31, 1996 13,641,962 $27,284 0 0 0 0 $1,923,070 ($ 836,516) $1,113,838
Prior period adjustment for write-off of
offering expenses ( 125,419) ( 125,419)
---------- ------- ----- ------- ------- ---- ---------- ---------- -------
Balance at May 31, 1996 as restated 13,641,962 27,284 0 0 0 0 1,923,070 ( 961,935) 988,419
Exercise of stock options 1,848,047 3,696 381,264 384,960
Net income for year ended May 31, 1997 ( 89,622) ( 89,622)
---------- ------- ----- ------- ------- ---- ---------- ---------- --------
Balance at May 31, 1997 15,490,009 30,980 0 0 0 0 2,304,334 ( 1,051,557) 1,283,757
Prior period adjustment for forgiveness
of rent 135,500 135,500
---------- ------- ----- ------- ------- ---- ---------- ---------- --------
Balance at May 31, 1997 as restated 15,490,009 30,980 0 0 0 0 2,304,334 ( 916,057) 1,419,257
Net income for year ended May 31, 1998 5,954 5,954
---------- ------- ----- ------ ------- ---- ---------- ---------- ----------
Balance at May 31, 1998 15,490,009 $30,980 0 0 0 0 $2,304,334 ($ 910,103) $1,425,211
========== ======= ===== ====== ======= ==== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Operating activities:
Net income (loss) $ 5,954 ($ 89,622)
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 38,941 28,635
Amortization 18,515 16,385
(Gain) loss on investment in unconsolidated
subsidiary ( 4,390) 5,763
Minority interest in loss of consolidated
subsidiary ( 50,751) ( 27,009)
Changes in operating assets and liabilities:
Accounts receivable ( 185,776) ( 168,450)
Inventory ( 115,330) ( 796,332)
Prepaid expenses 16,779 ( 6,528)
Accounts payable 32,663 436,879
Accrued expenses 14,005 45,348
Deposits and loan fees 2,778 ( 37,943)
Other assets ( 10,151)
-------- --------
Net cash used in operating activities ( 226,612) ( 603,025)
-------- --------
Investing activities:
Purchase of property and equipment ( 41,589) ( 65,150)
Officers loan ( 50)
Note receivable ( 89,039)
Officers' life insurance ( 7,182)
-------- --------
Net cash used in investing activities ( 48,771) ( 154,239)
-------- --------
Financing activities:
Proceeds from issuance of common stock 384,960
Proceeds from long-term debt 18,349
Proceeds from notes payable, bank 231,347 486,944
Payment of notes payable, bank ( 16,165) ( 14,819)
Payment of long-term debt ( 17,105) ( 10,335)
-------- --------
Net cash provided from financing activities 198,077 865,099
-------- --------
Net increase (decrease) in cash ( 77,306) 107,835
Cash, beginning of period 109,211 1,376
-------- --------
Cash, end of period $ 31,905 $109,211
======== ========
Supplemental disclosures and cash flow information: Cash paid during the year
for:
Interest $129,578 $ 54,810
======== ========
Income taxes $ 0 $ 0
======== ========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization of the company:
The Company originally "Morgan Windsor, Ltd." was incorporated in the
State of Delaware on December 28, 1987 as a "blind pool". The only
operations of the Company at that time were to structure a public
offering of its securities. Thereafter the company began to search for a
viable business opportunity.
On May 15, 1989, the Registration Statement containing the Company's
original prospectus was declared effective by the Securities Exchange
Commission. Pursuant to the original prospectus the Company was offering
up to 4,000,000 units, at $.10 per unit, each consisting of one share of
common stock, one Class A warrant and one Class B warrant. No securities
were sold pursuant to original prospectus.
The Company subsequently amended its public offering to consist of a minimum
of 15,000 units to a maximum 50,000 units to be offered at $6.00 per
unit. Each unit consists of six shares of common stock (.002 par value)
and eighteen Class A redeemable common stock purchase warrants and
twelve B redeemable common stock purchase warrants. On September 7,
1990, the Company sold 16,358 units receiving gross proceeds of 98,148.
Between October and November of 1989 the Company repurchased an
aggregate of 178,583 shares of the Company from nineteen stockholders
for an aggregate price paid for these shares. As a result of the above
transactions as of April 30, 1991, the date of acquisition of
Health-Pak, Inc., the Company had outstanding shares of 387,648 to the
public.
On April 30, 1991, the Company acquired 100% of the issued and outstanding
capital stock of Health-Pak, Inc., a New York corporation, in exchange
for 4,996,352 shares of which 4,756,077 shares were exchanged for 97.54%
of the outstanding shares of Health-Pak, Inc. and 240,275 shares were
retained to acquire the remaining outstanding shares of Health-Pak, Inc.
Thereafter, the Company, "Morgan Windsor, Ltd.", changed its name to
"Health-Pak, Inc." and increased its authorized capitalization to
20,000,000 shares.
2. Nature of business:
Health-Pak, Inc. is a manufacturer and distributor of disposable paper
products for use in serviced-related industries, primarily the medical
and hospital industry. The industry is highly competitive and is
serviced by several large national and multi-national companies with
greater financial resources in comparison to the financial resources
available to the Company. There is no guarantee that this market will
continue to develop since the incorporation of government intervention,
economic conditions and other unforeseen situations may occur.
The Company maintains manufacturing facilities in upstate New York, Mexico
and to a lesser extent, Haiti. In addition to paper goods, the Company
also manufactures a sporting goods accessory item, sales of which were
minimal for the year ended May 31, 1998. The Company's sales are spread
throughout the United States.
F-7
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies:
Principles of organization:
The acquisition of the Company's subsidiary on April 22, 1991 has been
accounted for as a reverse purchase of the assets and liabilities of
the Company by Morgan Windsor, Ltd. Accordingly, the consolidated
financial statements represent assets, liabilities and operations of
Health-Pak, Inc. prior to April 30, 1991 and the combined assets,
liabilities, and operations for the ensuing period. The financial
statements reflect the purchase of the stock of Morgan Windsor, Ltd. by
Health-Pak, Inc., the value being the historical cost of the assets
acquired. All significant intercompany profits and losses from
transactions have been eliminated. Pursuant to the purchase the Company
issued 387,648 shares to the public for $60,000.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its 65% owned subsidiary, Protective Disposal
Apparel, Co., LLC. All significant inter-company balances and
transactions have been eliminated (See Note 5). Investments in 20% to
50% owned affiliates are accounted for in the equity method.
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.
F-8
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued):
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.
Long-lived assets:
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for the Long-Lived Assets to be Disposed of", which requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and undiscounted cash flows
estimated to be generated by those assets are less than the assets
carrying amount. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated
useful life of long-lived assets may warrant revision or the remaining
balance may not be recoverable. As of May 31, 1998, management believes
that no revision to the remaining useful lives or write-down of
long-lived assets is required.
Intangible assets:
Intangible assets consist primarily of deferred financing costs.
Intangible assets are being amortized on a straight-line method based
on the estimated lives noted below. Deferred financing costs are being
amortized over the life of the respective contracts and agreements.
Intangible assets consist of the following:
Deferred financing costs 2 years $ 25,918
Deferred offering fees 1 year 99,530
--------
125,448
Less accumulated depreciation 22,678
------
$102,770
========
Amortization expense for intangible assets was $16,385 and $18,515 for
the years ended May 31, 1998 and 1997, respectively.
F-9
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued):
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:
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for the reporting and display of comprehensive
income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a
period from transactions generated from non-owner sources. It includes
all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Management believes
that the adoption of SFAS No. 130 will not have a material impact on
the financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131. "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 133 applies to all public companies and is
effective for fiscal years beginning after December 15, 1997. SFAS No.
131 requires that business segment financial information be reported in
the financial statements utilizing the management approach. The
management approach is defined as the manner in which management
organizes the segments within the enterprise for making operating
decisions and assessing performance. SFAS No. 131 also establishes
standards for related disclosures about products and services,
geographic areas and major customers. The Company is currently
evaluating the impact, if any, of the adoption of this pronouncement on
the Company's existing disclosures.
Fair value of financial instruments:
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses
and debt instruments. The book values of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses are
considered to be representative of their respective fair values. None
of the Company's debt instruments that are outstanding as of May 31,
1998 have readily ascertainable market values; however, the carrying
values are considered to approximate their respective fair values. See
Notes 7, 8, 9 and 10 for the terms and carrying values of the Company's
various debt instruments.
F-10
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued):
Net loss per common shares:
The Company adopted SFAS No. 128 "Earnings Per Share" as of May 31,
1998. In accordance with SFAS No. 128, prior period earnings per share
amounts have been restated to conform with SFAS No. 128. SFAS No. 128
requires basic earnings per share which is computed by dividing
reported earnings available to common stockholders by the weighted
average shares outstanding and diluted earnings per share which
reflects the dilutive effect of common stock equivalents such as stock
options and warrants, unless the inclusion would result in
antidilution. Inclusion of the common stock equivalents in the diluted
net loss per share calculation would be antidilutive and therefore such
shares are not included in the calculation.
Income taxes:
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes". SFAS No. 109 requires the liability method of
accounting for deferred income taxes. Deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities. Deferred
tax assets or liabilities at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually
paid or recovered. A valuation allowance is established against
deferred tax assets unless the Company believes it is more likely than
not that the benefit will be realized.
Concentration of credit risk::
Financial instruments that potentially subject the Company's customer
base principally comprises companies within the waste disposal industry
and municipal authorities. The Company does not require collateral from
its customers.
4. Restated information:
Certain accounts of the balance sheet of the prior year have been
reclassified for purposes of the statement of cash flows. Adjustments
have been made to reflect rent forgiveness from prior year accruals.
5. Inventories:
Inventories consist of:
May 31
1998
----
Raw materials $ 483,696
Finished goods 1,088,624
----------
$1,572,320
==========
F-11
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Investment:
A) The Company purchased a 10% equity interest in Silver Lake
Corporation in November, 1995 in exchange for its own common stock
valued at $.682 per share. The investment is accounted for 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 venture activities of Silver Lake Corporation, has
elected to use the equity method of accounting for the investment.
B) In October 1996, the Company, as a 65% owner, formed a limited
liability company (LLC) with a non-related party. The LLC then
acquired on October 18, 1996 substantially all of the assets and
liabilities of Scherer Healthcare, Ltd. d/b/a Protective Disposal
Apparel for cash in the amount of $254,397. The cash paid for the
purchase price was funded from the sale of 1,577,848 shares of the
Company's common stock valued at $341,960.
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. Notes payable, bank:
The Company has at its disposal a line of credit at Marine Midland Bank. The
note is due on demand and carries interest at prime + 1.5%. Inventory
and accounts receivable are pledged as security. The note is also
secured by the personal guarantees of Anthony Liberatore and Alfred
Zennamo to the extent of $50,000 in total. As of May 31, 1998 and 1997
the balance due on the line of credit was $49,843 and $66,008,
respectively.
The Company opened a line of credit with Foothill Capital Corporation in
September 1996. The loan ceiling amount is based on a percentage formula
of eligible accounts receivable and inventory. The balance due at May
31, 1998 was $718,291.
F-12
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-term debt:
Rate Amount Maturity
Note payable, Manifest Group (a) 10% $12,792 July, 1999
Note payable, Waste Mgmt. of N.Y. (b) 10% 2,706 November, 1998
Note payable, Resource Capital Corp. (c) 10% 3,382 March, 2000
Note payable, Resource Capital Corp. (d) 10% 2,220 September, 1999
Note payable, Resource Capital Corp. (e) 10% 3,576 July, 1999
-------
24,678
Less current portion 14,351
------
$10,325
=======
(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.
(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.
Maturities of long-term debt as of May 31, 1998 are as follows:
Year Amount
May 31, 1999 $14,351
May 31, 2000 9,343
May 31, 2001 984
-------
$24,678
=======
F-13
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments:
Commencing August 1, 1993, the Company entered into a lease agreement with
the Utica Industrial Development Corporation for manufacturing and
office space of approximately 43,500 square feet. The initial term of
the lease was from August 1, 1993 to April 30, 1994 at a monthly rental
of $7,500.
The Company had an option to purchase the facility for $600,000 which
expired on April 30, 1994. The purchase was not completed by April 30,
1994, and the lease was automatically extended for an additional three
year period at the same terms and rental. Rent expense was $86,550 for
the year ended May 31, 1997.
OnJune 21, 1998, the Company purchased the building for $600,000. All the
current rent was forgiven due to this transaction.
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 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
11. Income taxes:
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
========
F-14
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income taxes (continued):
Areconciliation of the Company's effective tax rate to the statutory
U.S. Federal tax rate is as follows:
Computed at the expected statutory rate $1,400
State income tax 2,939
Federal tax benefit ( 1,400)
------
Income tax expense $2,939
======
As of May 31, 1998, the Company has available, for tax reporting
purposes, net operating loss carryovers of approximately $640,000 which
expire through 2011.
12. Shareholders' equity:
In the year ended May 31, 1996, the Company recorded 1,100,000 shares as
exercise of stock options. The amount should have been 900,000 with
200,000 shares reflected as an exchange of shares in a non-cash
transaction for a 10% equity interest in the affiliate investment,
Silver Lake Corporation. The shareholder equity has been corrected to
present the cash transaction on exercise of the options and the stock
transfer for the investment. The capital account has been corrected as
follows:
As Reported
Paid in
Shares Capital Capital
Exercise of options 1,100,000 2,200 212,800
Common stock issued for
acquisition of Silver Lake
Corporation 0 0 0
Corrected
Paid in
Shares Capital Capital
Exercise of options 900,000 1,800 213,200
Common stock issued for
acquisition of Silver Lake
Corporation 200,000 400 136,000
F-15
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Shareholders' equity (continued):
The Company erroneously omitted the transactions regarding Silver Lake
Corporation and has retroactively adjusted the balances to reflect the
correction.
13. Employment contracts:
The Company has no employment contracts. Further, it has no retirement,
pension or profit sharing plan covering its officers or directors.
14. Deferred offering expense:
The value stated is the amount that has been paid by the Company for
expenses incurred for the public offering of warrants. The deferred
offering expenses on the issued or expired warrants have been deducted
from the proceeds of the offering. The offering of the Class C warrants
is expected to be completed in 1998. In the event the offering does not
take effect, the deferred offering expenses will be charged to
operating expenses.
All deferred offering expenses pertain to the Class C warrants which had
not been issued as of the statement date.
15. Prior period adjustment:
Aprior period adjustment in the amount of $135,500 has been made
against retained earnings for forgiveness of rent in conjunction with
the purchase of the building the Company occupies.
16. Related party transactions:
Officers loans are unsecured and non-interest bearing. Officers have
indicated that they will not be repaid in the current year. In
addition, the Company has advanced funds to its minority interest
partner, Protective Disposal Apparel, in the amount of $89,039.
F-16
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Common stock purchase options:
As of May 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.
18. Earnings per share:
May 31, 1998 May 31, 1997
------------ ------------
Primary Primary
Number of shares:
Weighted average shares outstanding 15,490,009 14,839,665
Incremental shares for outstanding
stock options 1,575,075 1,600,150
---------- ----------
17,065,084 16,439,815
========== ==========
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. Shares that would be
outstanding assuming exercise of dilutive stock options, all of which
are considered to be common stock equivalents. Fully diluted earnings
per share are the same as primary earnings per share for May 31, 1998
and May 31, 1997.
19. Subsequent events:
On June 21, 1998, the Company purchased the building that it occupies
for $600,000. As part of the agreement all back rent except for $50,000
would be forgiven. The current accrual at May 31, 1998 has been reduced
to reflect this transaction.
F-17
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
The Company's primary business in fiscal 1998 continued to be the
manufacture and/or distribution of reusable and nonwoven disposable textile
products, including apparel such as examination gowns, lab coats, surgical
gowns, coveralls and ancillary items such as aprons, masks, caps, covers,
surgical draperies, diapers and underpads, towels, wipes, cloths and
sterilization wraps and other related products, which were sold primarily to the
hospital and medical marketplace and non-medical fleece sportswear, winter wear
and golf wear sold primarily to customers in the regular clothing industry.
During the 1997 fiscal year, however, the Company also acquired the assets
and business of Protective Disposable Apparel Company L.L.C. ("PDA") which
basically added a new dimension to the products offered by the Company.
PDA's products, though somewhat similar to the Company's products, are
primarily sold to industry markets such as pharmaceutical companies, the nuclear
industry, laboratories and other similar types of operations where either a
"germ resistant," "contamination free" or "clean room" atmosphere is needed.
Because the items sold by PDA are so similar to the Company's products, the
Company is able to undertake the manufacture of most of PDA's inventory in many
instances.
PDA's products include industrial safety coveralls, lab coats and caps and
other industrial safety items used for protective purposes. A "paint spray"
jacket and coveralls have been added for use in the automotive industry.
The Company also offers a line of sterilized products such as sterile
laboratory coats, coveralls, hoods and boots, influenced by the PDA acquisition.
These are items which are principally used in environments where a germ-free
objective is required by the customer.
To accommodate the production of "clean room" products, primarily for PDA
customers, the Company built its own "clean room" facility which is necessary
for the production of sterile products. This facility was completed during the
1997 fiscal year and is now in full operation. Over 90% of sterile items are
manufactured for disposable use.
The area of sterilized surgical products is also considered by management
to be the most challenging sector within the medical nonwoven marketplace. Both
the production and the sterilization of surgical products require significant
resources and must meet exacting FDA standards. The Company's founder and
President, Anthony J. Liberatore, gained experience in the launching of a
sterilized product line during his ten-year tenure at Disposable
Profiles/Spartan Healthcare Inc. (see "MANAGEMENT"). However, the sterilized
products sector is highly competitive and is presently dominated by Baxter
International, Johnson & Johnson, Kimberly-Clark and two other large suppliers.
Last year the Company also introduced "sonic sealed" garments which are
items produced by a sonic welding process at the seams, and are manufactured by
ultrasonic equipment which essentially changes the molecular structure of the
material being made, to form a complete and impenetrable seal at the point of
closure. No heat is used or necessary for this process. These garments are fluid
and chemical resistant and are used primarily in chemical and nuclear work.
This year the Company also began to sell its outdoor sportswear, spun
polyester fleece items, winter wear and recreational wear and other non-medical
or industrial protective wear through another outlet store in the Utica area as
well as through its own factory outlet store. While these sales are not material
compared to the overall revenues for other products, this has been a slowly
growing business for the Company.
These products include winter wear scarves, hats, gloves, pants, socks,
jackets, shirts and related other wearables and accessories for both men and
women.
The Company has also marketed the non-medical and non-industrial items to
specialty catalog companies and retail stores principally in the Northeastern
United States. The modest success of the outlet store and non-medical products
in past years has prompted the Company to continue this operation during the
current fiscal year. During fiscal 1998 the outlet store accounted for
approximately 2% of net revenues compared to 3 % in 1997. The lower percentage
this year results from greater revenues from other products in fiscal 1998 and
the additional revenues from the acquisition of PDA rather than lower sales from
these sources.
The Company expanded the outlet store's product lines by adding golf and
other sports outer wear products for spring, summer and fall wear, and it now
plans to operate the store all year.
Management believes that the growing concern over disposal of medical
related waste products which are not degradable has re- sulted in a
re-evaluation of the use of disposable medical products by many healthcare
facilities. In many cases where adequate laundry facilities are available,
either within the healthcare facility itself or through the use of independent
specialized laundry services, management has perceived a growing trend for the
use of reusable products. The Company will be in a position to meet any changing
industry demand between usable and reusable products in the future without any
adverse impact upon its overall sales.
In addition to the products which it manufactures directly, to a lesser
extent, the Company also acts as a distributor of related products manufactured
by others. These products are sold as an ancillary part of the Company's product
line to provide its customers with a more complete selection of items. Although
the Company continues to distribute such products, it has been reducing its
dependence on the distribution of third party products and has emphasized sales
of its own expanded product lines.
The Nonwoven Medical Disposable Industry.
Until late in fiscal 1994, most of the products manufactured by the Company
utilized disposable "nonwoven" materials. These materials currently are still
used in the manufacture of disposable products offered by the Company. Although
the balance in demand for disposable and reusable products changes from time to
time, the Company continues to offer both types of products and it is in a
position to shift from one to the other as customer demand changes.
"Nonwoven" is an industry term used to distinguish nonwoven fabrics from
traditional woven fabrics. The fabric's fibers may be man made plastics or
natural substances such as cotton, rayon or pulp, which accounts for most of the
nonwoven materials today. Nonwoven fabrics may be porous or absorbent, made to
be easily torn or tear-resistant, permeable or impermeable, hydrophobic or
hydraulic, soft or abrasive. Producers of these fabrics include companies such
as DuPont, Kimberley-Clark and Dow Chemical.
Manufacturers, like the Company, which convert nonwoven fabric into
specific products are commonly referred to as "converters." The medical nonwoven
market is serviced by over 50 such companies, including multinational giants
such as Baxter International, Johnson & Johnson, Kimberley-Clark and Proctor &
Gamble, as well as a sizable number of smaller businesses. Baxter International
is estimated to produce approximately 33% of all medical nonwoven products,
Johnson & Johnson 16% and Kimberly- Clark 12%. In other words, three companies
alone are estimated to control over 60% of the total market for nonwoven
products. Proctor & Gamble's presence in the medical nonwoven market is also
significant in size (estimated at 9% of the market) but limited to its diaper
product line.
Until recently one of the principal factors which has accelerated the
acceptance of nonwoven items in the medical marketplace has been the generally
acknowledged superiority of nonwoven products in the prevention of infection.
Another effect of the AIDS crisis has been the increased interest outside the
hospital environment in protection from serious infection, which carries, in the
opinion of management, the promise of opening new markets for nonwoven apparel.
Two significant threats to the growth in annual sales of medical nonwoven
items are issues of cost and concerns over the environment. While proponents
argue that the true, overall cost of using disposable products is lower than the
cost of reusable materials (when all factors are taken into consideration),
nonwoven products can appear to be the more expensive of the two alternatives.
Furthermore, the cost of nonwoven products has been rising as a result of
increases in manufacturing costs of such fabrics. The medical sector, and in
particular the hospital industry, has been subjected to intense pressure from
the government, insurers and others to control seemingly runaway costs of health
care (which accounts for approximately 11% of the gross national product). These
factors have reduced gross profit margins of nonwoven suppliers and adversely
affected overall profitability. In the environmental area, concern has been
growing in recent years over the effect of the widespread use of disposable
products made from non-biodegradable plastics (a category which presently
includes most medical nonwoven products) on the environment, and particularly on
the dwindling capacity for solid waste disposal in the United States.
Proposed New Products.
The Company is working on and plans to market in the near future a line of
fire-retardant garments for fire safety industry use. The Company has produced a
prototype of these garments and has received trial, sample orders for this
product.
The Company continues to develop new products and to evaluate existing
related products which could compliment the Company's current product lines, but
which are not necessarily "medical" items, in order to offer potential buyers a
wider variety of products and to attract additional sales. Management believes
that by continuing the development of new products, it will be in a better
position to attract new customers and will more effectively utilize its existing
marketing organization.
Proposed new items representing an extension of present products include
the new industrial line of apparel which is manufactured for use in the
pharmaceutical and meat industries and consist of laboratory coats and coveralls
which are impervious to liquids. Products within this group are now being
manufactured by the Company as special orders for its customers. Due to the
increasing demand for these items beginning last year, management plans to
introduce them as part of its standard product lines in the future.
With the announcement of the new OSHA regulations in December 1991
management elected to modify the design and materials used for many of its
existing disposable products to comply with the stand- ards required by these
regulations. With the implementation of these regulations in July 1992, the
Company has been able to meet the increased demand from hospitals and health
care facilities which must comply with these new standards. Management expects
the demand for these products to continue for the foreseeable future.
Over the past few fiscal years the Company has been anticipating the
development of the "Rigg," a sling-like product that is designed to hold one or
more balls to free the use of arms in transporting sports equipment. The Company
has been dependent on the owners of this product to develop sales and marketing
while its own participation was limited to manufacturing this item. There has
been little or no activity in this development during the last fiscal year, so
that the Company is no longer taking an active role in the production of the
"Rigg."
Acquisition of Jake Industries, Inc.
In August, 1998 the Company entered into an agreement of purchase with Jake
Industries, Inc. ("Jake") for a consideration of $1,317,380, of which amount
$317,380 is payable in cash and the balance in stock of the Company.
Located in Brielle, New Jersey, Jake manufactures and sells paper products
and tissue primarily to health-care facilities and the medical industry.
Products include disposable wipes and toilet tissue. Jake's sales are
approximately $2 million per annum.
It is anticipated that the acquisition of Jake will give the Company a
broader product line and new customers as well as certain equipment to
manufacture paper products sold by Jake. The Company has already acquired
equipment for the purpose of producing rolled tissue paper for doctor's office
use and the Company is targeting this area for sales during the current fiscal
year.
The Company believes that with this diversification in its product line, it
will be in a position increase sales and revenues during the current fiscal
year.
Sales and Marketing.
The primary markets for the Company's medical products are in the
health-care sector, divided essentially into three broad categories: (i)
hospitals; (ii) "alternative site" facilities (including surgical centers,
nursing homes, and elderly care facilities and clinics); and (iii) home
(consumer) use. Primary customer categories would be the single end-user,
purchasing associations or consortiums of various kinds - a dominant feature in
the hospital sector - and various federal, state and local government bodies
(the majority of whose purchases are open to competitive bidding). The primary
channels of distribution include medical supply distributors, dealers who
specialize in the medical and hospital markets and firms purchasing the
Company's products for resale under "private label" arrangements for other
suppliers and retailers. Primary sales and marketing techniques or strategies
include direct mailings, trade publication advertising, attendance at various
industry trade shows, bidding for government contracts when appropriate and
direct solicitation of prospective customers.
To date the Company has relied primarily on sales though Northeast-based
dealers, manufacturer's representatives and on "private label" agreements for
the marketing of its products and sales by Company officers and employees. The
Company's customer base also consists of firms with which the Company has
"private label" arrangements and a number of direct end-users.
The Company markets PDA products through a network of five independent
manufacturers representative groups specializing is sales to the clean room
distribution market, or sales to industrial users of clean room supplies. In
addition, the Company maintains a small sales office facility in Arden, North
Carolina which is staffed by two full-time sales employees and one part-time
employee. The Arden sales group handles sales to national and international
accounts, house accounts and other similar customers of PDA.
The Company is also represented by two of the largest distributors of
industrial products and is featured in the national catalogue of one of the
distributors. In addition, the Company advertises its PDA products in four or
five industry magazines and sales representatives for PDA attend safety and
clean room shows to offer PDA products.
During fiscal 1998 the Company's three largest customers accounted for 14
%, 3% and 2%, respectively, of its total annual net sales.
Competition.
The medical marketplace is an intensely competitive atmosphere for
manufacturers of medical items made from fabrics, and is populated by over fifty
suppliers ranging in size from multinational concerns like Baxter International,
Johnson & Johnson and Kimberly-Clark to enterprises smaller in size than the
Company. Certain of these companies, such as Baxter International and
Kimberly-Clark, are also suppliers of the basic materials used by the Company in
the manufacture of its products as well as being manufacturers or suppliers of
finished products. At present, the Company purchases a portion of its raw
materials from Kimberly-Clark and others. However, management believes that
there are adequate alternative sources for the materials purchased from these
suppliers so that a loss of any one source of supplies would not have a
materially adverse impact upon the Company's operations. See "Suppliers."
In addition to the advantages offered by their larger size, greater
resources, greater visibility and established reputations in the market, certain
of the Company's larger competitors possess the added advantage of also
producing the fabrics from which their products are made. The control over the
cost of materials provided by this kind of "vertical integration" may be even
more advantageous to such companies in the future if costs continue to pose
increasing problems for the medical apparel business (as has recently been the
case).
Product competition in the medical apparel industry is primarily based on
price, fabric quality and design features. For many end-users, however, the size
of and resources controlled by the supplier, and thus its ability to satisfy a
broad range of customer requirements at the lowest possible cost, is a major
consideration. This is particularly true for hospital chains, associations and
buying consortiums and for other large institutional customers. This situation,
of course, places smaller firms such as the Company at a competitive
disadvantage. The Company is not a significant factor in the medical apparel
industry and competes primarily on price, service, quality and delivery.
Nevertheless, the Company believes that its smaller size enables the
Company to react more quickly to a customer's needs and to service its customers
on a more personal basis. The Company, therefore, also competes on its ability
to afford its customers a personal service.
The products manufactured for industrial use such as safety coveralls,
laboratory coats, caps and other similar products such as those distributed by
its PDA subsidiary is equally subject to extreme competition, primarily from the
same suppliers to the medical industry. Competition in this area must be
characterized as intense.
The Company will compete in this industry by offering quality products and
service, and primarily by being competitive in terms of its pricing.
Also, while presently not significant in its present product line,
sportswear items are equally subject to intense competition from very large and
well-known manufacturers, garment designers and smaller producers of similar
apparel. The Company competes aggressively in these markets as well on the basis
of price, service and quality.
Patents and Trademarks.
The Company has no patents and there is little likelihood that it will
develop patentable products or processes in the foreseeable future. Absent such
protection, the Company will primarily rely upon trade secrets and proprietary
techniques to attain any commercial advantage. There is no assurance that
competitors will not independently develop and market, or obtain patent
protection for, products similar to those designed or produced by the Company,
and thus negate any advantage of the Company with respect to any such products.
The Company may, however, distribute products manufactured by others which are
covered by one or more patents. The Company may also seek to patent products
manufactured by third parties which were not previously patented. Even if patent
protection becomes available, there can be no assurance that such protection
will be commercially beneficial to the Company.
In connection with its marketing efforts, and in order to fully benefit
from the Company's name recognition in the future, the Company has filed and as
of March 18, 1994, received trademark protection of the name "HEALTH-PAK" with
the United States Patent and Trademark Office.
Suppliers.
The Company at present purchases its raw materials and fabric from several
different suppliers. Management does not believe that there is or will be, in
the near future, a significant shortage or inability to obtain adequate supplies
of raw materials needed for its operations. Rather, the primary problem
encountered by the Company has been, and is expected to be, the continued
escalation in the costs of needed raw materials. High cost for fabric has
already seriously impacted upon the Company's profit margins and continued
increases in such costs could pose a serious threat to the competitiveness of
all of its products, which is one primary reason that the Company is expanding
into new areas such as reusable fabrics and other new products. See also
"Competition."
Employees
At present the Company employs a total of 68 persons, including two
executive officers, eight employees in managerial or supervisory capacities, two
hourly office workers and 66 hourly production employees. As the Company
implements the planned expansion of its operations it will require additional
personnel, both skilled and unskilled. Although the Company believes that the
personnel it will require are readily available at reasonable salary rates, no
assurance can be given that it will be able to attract the type and quantity of
employees its operations will require. Further, even if such personnel are
available, no assurance can be given that they can be hired on terms favorable
to the Company.
Production Facilities.
On July 21, 1998 the Company purchased for $600,000 its present office and
manufacturing facility located at 2005 Beechgrove Place, Utica, New York which
it now occupies. The property is a cinder-block building having approximately
43,500 square feet of office and manufacturing space situated on approximately
4.6 acres of land. The Company has now consolidated all of its executive offices
and manufacturing operations within this single facility.
The Company was previously paying $7,500 in rental for the facilities.
Mortgage amortization and taxes will be approximately $6,500 per month.
In the opinion of the Company, this facility is adequate both for the
Company's present operations and is also expected to provide sufficient
production capacity to accommodate its expansion plans for the foreseeable
future.
Government Regulation.
The products marketed by the Company are subject to regulation as medical
devices by the Food And Drug Administration (the "FDA"), which has comprehensive
authority to regulate the development, production, distribution and promotion of
medical devices. The states and foreign countries where Company products are
sold may also impose additional regulatory requirements.
Pursuant to the federal Food, Drug and Cosmetic Act and the regulation
promulgated thereunder, a medical device is ultimately classified by the FDA as
either a Class I, Class II or Class III device. Class I devices are subject to
general controls which are applicable to all devices. Such controls include
regulations regarding FDA inspection of facilities, "Good Manufacturing
Practices," labeling, maintenance of records and filings with the FDA. Class II
devices must meet general performance standards established by the FDA before
they can be marketed and must adhere to such standards once on the market. Class
III devices require individual pre-market approval by the FDA before they can be
marketed, which can involve extensive tests to prove safety and efficacy of the
device.
Each manufacturer of medical devices is required to register with the FDA
and also to file a "510(k) Notification" (the "Notification") before initially
marketing a new device intended for human use. The manufacturer may not market
such new device until 90 days following the filing of such Notification unless
the FDA permits an early marketing date. The FDA, prior to the expiration of the
90-day period, may notify the manufacturer that it objects to the marketing of
the proposed device and thereby may delay or preclude the manufacturer's ability
to market that device. The FDA may also require further data from, or testing
by, the manufacturer.
The FDA permits the marketing of some medical devices, subject to the
general controls under the Act, if the devices are "substantially equivalent" to
devices marketed in interstate commerce before May 28, 1976 (the effective date
of the Medical Device Amendment to the Act).
Of the Company's present products, its gowns and sterilization wrappers are
Class I devices for which the necessary approvals have been obtained. The
Company's proposed sterilized products, on the other hand, would fall within the
Class III category, in which case the Company would have to file a Pre-market
Approval Application. Such application must be accompanied by extensive
literature references and preclinical and clinical testing data. The FDA
normally has 180 days to review a Pre-market Approval Application, during which
time an independent advisory committee evaluates the Application and provide
recommendations to the FDA. While the FDA has often responded to such
Applications within the allotted time, there are many instance where the reviews
have been more protracted, and a number of devices have never been cleared for
marketing.
Any products distributed by the Company pursuant to the above
authorizations are subject to pervasive and continuing regulation by the FDA.
All phases of the manufacturing and distribution process are governed by FDA
regulation and each supplier of products to the Company must also have
FDA-approved products. Products must be produced in registered establishments
and be manufactured in accordance with "Good Manufacturing Practices." All such
devices must be listed periodically with the FDA as well. Labeling and
promotional activities are subject to scrutiny by the FDA and in certain
instances by the Federal Trade Commission. The export of devices is also
regulated in certain instances.
The Mandatory Device Reporting ("MDR") regulation obligates the Company to
provide information to the FDA on injuries alleged to have been associated with
the use of a product or certain product failures which could cause injury. If
due to FDA inspections, MDR reports or other information, the FDA believes that
the Company is not in compliance with the law, the FDA can institute proceedings
to detain or seize products, enjoin future violations, or asses civil and/or
criminal penalties against the Company, its officers or employees. Any such
action could disrupt the Company's operations for an undetermined time.
In addition, numerous other federal and state agencies, such as
environmental, hazard control, working conditions and other similar regulators
have jurisdiction to take actions which could have a material adverse effect
upon the Company's business.
As discussed above, In January, 1992, OSHA issued comprehensive new federal
regulations aimed at establishing new protective standards to minimize
occupational exposure to various blood borne pathogens such Hepatitis and the
HIV virus associated with AIDS. OSHA determined, after a four year study of the
need for such regulations, that employees face a significant health risk as the
result of occupational exposure to blood and other potentially infectious
materials and concluded that this exposure can be minimized or eliminated using
a combination of work practice controls, personal protective clothing and
equipment, training and medical surveillance. Furthermore, there are 23 states
with their own OSHA-approved occupational safety and health plans which must now
adopt a comparable standard within six months or amend their existing standard
if it not at least as effective as the federal standard. These new regulations
are primarily aimed at the healthcare industry where, based upon published OSHA
findings, between 2 and 2.5 Million workers are presently at risk of infection
From the Company's point of view, these new regulations, which make
mandatory in the healthcare industry the use of protective apparel, such as the
products manufactured by the Company, are ex- pected to have materially
favorable impact upon the Company's sales during the foreseeable future.
Although no assurances can be giv- en, based upon sales of the new OSHA-mandated
products, management believes that the Company will continue to be a beneficiary
of the increase in demand for products of this type for the foreseeable future.
Management has begun development of new barrier gowns and similar protective
apparel specifically designed to meet the requirements of the new OSHA
regulations and has restructured its marketing plans to bring these new products
to market.
Insurance
Due to the decrease in the number of insurance carriers willing to provide
product liability insurance in the health care industry, product liability
insurance availability has been significantly reduced and premiums have
increased dramatically over recent years. At present, the Company maintains
product liability insurance in the amount of $2,000,000. Although the Company
intends to maintain such insurance coverage, there can be no assurance that the
Company will be able to obtain insurance at reasonable premiums which it can
afford in the future. The inability to continue such insurance could have a
materially adverse effect upon the business, financial condition and future
prospects of the Company. To date there have no product liability claims against
the Company.
ITEM 2. DESCRIPTION OF PROPERTIES.
Facilities
The Company's principal executive offices, manufacturing and warehouse
facilities are located at 2005 Beechgrove Place, Utica, New York where it
occupies 43,500 square feet of space located in a single cinder-block building.
The property was recently purchased by the Company. Also see Item 1.
"Description of Business - Production Facilities" for additional information on
the Company's plant facility.
The Company also leases, with an option to purchase, the premises at 1208
Broad Street, Utica, New York pursuant to its lease with Anthony J. Liberatore,
its President; although this building is not presently occupied by the Company
and all operations have now been consolidated with its manufacturing plant at
2005 Beechgrove Place in Utica, New York. While the Company leases the premises
from Mr. Liberatore, it has not paid any rent since July, 1995 and Mr.
Liberatore has agreed that any payments made to him during fiscal 1995 will be
applied against the purchase price of the building if the option to purchase is
exercised. The Company's option price is $130,000, less the payments made in
fiscal 1995, and Mr. Liberatore has agreed to accept Common Stock for the
purchase price. See "Certain Relationships and Related Transactions" and
"Executive Compensation."
The Company also leases a small sales office facility in Arden, North
Carolina for two full time employees and one part time employee engaged in sales
activities for PDA.
ITEM 3. LEGAL PROCEEDINGS.
The Company knows of no substantial litigation pending, threatened or
contemplated, or unsatisfied judgments against it, or any substantial
proceedings in which the Company is a party, except as set forth below. The
Company also knows of no legal action pending or threatened or judgments entered
against any officers or directors of the Company in their capacity as such,
except for one pending suit brought in the Supreme Court of The State of New
York, County of Oneida, against the Company and Anthony J. Liberatore by Edward
Dyman, a former director of the Company. The suit was commenced on March 13,
1991 and alleges, in essence, that certain services were performed on behalf of
the Company which were not properly compensated and seek money damages in the
aggregate amount of approximately $1.1 Million. The plaintiff in this case has
taken no action for more than three years. The Company has vigorously defended
this suit, has interposed counterclaims against the plaintiff which seek money
damages against Mr. Dyman in the sum of $5 Million in the aggregate. Based upon
the opinion of Uscher, Quiat & Usher, special litigation counsel, this suit is
subject to good and non-frivolous defenses and management expects to prevail in
its defense of the suit and expect to prevail with respect to its counterclaim.
No adverse impact upon the Company or its operations is expected to result from
the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the Company's stockholders during the fourth
quarter ended May 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company sold an issue of Units consisting of Common Stock and Warrants
in 1990. Trading in the Units commenced in September, 1990; however, the
Company's Common Stock has traded separately from the Units since August 1991
and the last trading in the Units occurred on March 12, 1992. Trading in the
Common Stock has been on a limited basis. The principal market on which the
Company's securities are traded is the OTC Electronic Bulletin Board. The
following tables show for the periods indicated the range of high and low bid
quotes for the Common Stock of the Company which were obtained from the National
Quotation Bureau and are between dealers, do not include retail mark-ups,
mark-downs, or other fees or commissions, and may not necessarily represent
actual transactions. There is no present trading market for the Company's Units
or issued Warrants:
COMMON STOCK TRADING HISTORY
The Company's Common Stock is traded in the over-the-counter market on the
OTC Electronic Bulletin Board. A summary of the trading history for the
Company's Common Stock is as follows:
BID
High Low
Quarter ended February 28, 1995 $0.39 $0.35
Quarter ended May 31, 1995 $0.57 $0.32
Quarter ended August 30, 1995 $0.60 $0.58
Quarter ended November 30, 1995 $0.46 $0.44
Quarter ended February 28, 1996 $0.75 $0.60
Quarter ended May 31, 1996 $0.36 $0.32
Quarter ended August 30, 1996 $0.45 $0.32
Quarter ended November 30, 1996 $0.39 $0.39
Quarter ended February 28, 1997 $0.39 $0.25
Quarter ended May 31, 1997 $0.29 $0.10
Quarter ended August 30, 1997 $0.16 $0.15
Quarter ended November 31, 1997 $0.105 $0.09
Quarter ended February 28, 1998 $0.10 $0.115
Quarter ended May 31, 1998 $0.175 $0.165
On May 22, 1998 the reported high bid price for the Company's Common Stock
was $0.165. The number of record holders of the Company's Common Stock on May
31, 1998 was 268. There currently are 14 market makers for the Company's
securities.
The Company has not paid any dividends, except for the Class C Warrants
declared by the Board of Directors but not yet distributed. There are no plans
to pay any cash dividends in the foreseeable future. The declaration and payment
of dividends in the future, of which there can be no assurance, is determined by
the Board of Directors based upon conditions then existing, including earnings,
financial condition, capital requirements and other factors. There are no
restrictions on the Company's ability to pay dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
I. Financial Condition and Liquidity.
Introduction.
As previously stated, 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 $75,829 at May 31, 1998 when compared to May 31,
1997, an increase of only 2.5%. This increase is not significant when measured
against the Company's previous total assets. However, subsequent to the fiscal
year end, the Company acquired its plant facility in Utica, which was a
previously leased facility. This acquisition should contribute to an increase in
assets during the first quarter of 1999.
The slight increase in assets occurs from increases in receivables (which
increased by approximately 41% from the previous year), a slight increase in
inventory and other assets, which were sufficient to overcome a substantial
decline in cash, when compared to the year ended May 31, 1997 and the quarter
ended February 28, 1998.
Receivables increased by approximately 10% from the quarter ended February
26, 1998.
Some of the increase in total assets was also helped by non-operating
increases in offering expenses and an increase in the cash value of officer's
insurance.
The increases mentioned above were not offset by entries for lower amounts
in the current portion of consulting agreements and prepayment of consulting
agreements accounts which were reduced as the Company used such services during
1998.
A comparison of certain significant tangible assets of the Company for the
three fiscal years ended May 31, 1998 is as follows:
1998 1997 1996
---- ---- ----
Cash $ 31,905 $ 233,330 $ 1,376
Receivables 641,152 455,376 286,926
Inventory 1,572,320 1,456,990 571,619
Net Property
& Equipment 332,310 326,662 293,147
------- ------- -------
$ 2,577,687 $ 2,475,358 $ 1,153,068
============= ============ ===========
This comparison shows a substantial decline in cash for 1998 compared to
1997 because of paying down accounts payable and incurring costs associated with
the acquisition of the Company's plant facility in Utica, New York. The Company
was accumulating cash for the building acquisition in 1997 as part of the down
payment and to cover closing costs. The comparison also shows increases in
receivables in 1998 and inventory, and a very slight increase in net property
and equipment for 1998.
The increase in inventory coincides with the increase in business from the
year ended May 31, 1997, an increase in revenues of approximately 8.6% and the
purchase of additional inventory items to support the Company's sales efforts.
At the end of the third quarter (February 28, 1998) inventory was $580,319.
The Company is also holding approximately $100,000 in inventory of the
"Rigg," a product in the development stage which has not begun significant sales
as of this date. There were no significant purchases of machinery and equipment
during the year ended May 31, 1998.
Cash in 1997 increased because the Company made a decision in that year to
accumulate cash to use as a down payment for the purchase of the building
occupied by the Company and to cover closing costs. While this purchase was not
concluded during the 1998 fiscal year, closing expenses did occur in that
period. The building was purchased during the first quarter of 1999, in July of
1998. As previously stated, management believes that the building purchase will
result in significant savings in terms of rent for future operations. In
addition, the exercise of options in 1997, contributed to increases in cash
during that year. Similar purchases of securities did not occur during 1998.
Last year the Company replaced its high cost factoring arrangements and
replaced this financing with a more reasonable receivables financing agreement
which resulted in reduced interest expense for 1997 and 1998. However, as the
Company grows in terms of assets, it is expected that the Company will be in a
position to finance its own receivables and thereby replace all costly
financing. This will improve profits in future years.
Comparison of Quarter ended February 27, 1998 and the year ended May 31,
1998.
Except for the substantial decline in cash from February 28, 1998 to May
31, 1998, as described above, and the slight increase in inventory, there were
few dramatic changes in the assets from these dates.
Liabilities:
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 while the
reduction in accounts payable shows the Company's application of cash to these
accounts during the year.
These differences are not as remarkable when comparing the end of the third
quarter (February 28, 1998) with the year end except that the reduction in
payables occurred in the fourth quarter, after February 28,1998. This coincides
with the reduction of cash in the fourth quarter.
Total current liabilities for the year ended May 31, 1998 are approximately
the same when compared to the year ended in 1997; however, at the end of the
third quarter, total current liabilities increased to $2,079,559 which was
$386,837 higher than the year ended May 31, 1998 and $384,522 higher than the
year ended May 31, 1997. These increases at February 28, 1998 were due to higher
amounts in bank notes payable and additions to payables.
Liability for payroll taxes varies with the number of employees at any
given time and the date upon which the year end falls. There was not a
significant change in this account for the period from May 21, 1997 to May 31,
1998.
The Company's deficit of $(910,103) for 1998 shows slight improvement over
the deficit of $(1,051,557) for 1997. This compares with a deficit of $(836,516)
for 1996. See "Results of Operations."
Management believes that, overall, there has been slight improvement in the
financial condition of the Company in fiscal 1998 when compared to prior years.
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 fiscal 1998. Working capital at May 31, 1998 was $771,551 compared to
$689,501 in 1997 an increase of $82,050. Working capital at the end of the third
quarter, February 28, 1998, was $542,936 (an improvement at they year end of
$228,615). The increase in working capital in 1998 occurred even though the
Company had higher cash demands during the last quarter of 1998 in connection
with the pat down of accounts payable and demands from the closing of the
building purchase.
Principal short-term liabilities at May 31, 1998 were $811,730 in payables,
short term note obligations of $768,134 and payroll taxes due of $98,508 for a
total of $1,678,372. Against this total, in 1998 the Company had liquid current
assets of $31,908 in cash, inventory of $1,572,320 and receivables of $641,152
for a total of $2,245,372.
This year management also had at its disposal a credit line of $750,000 of
which approximately $31,709 was available at May 31, 1998. The credit line was
increased in 1998 to $750,000 from $600,000 and recently, the credit line was
increased again to $850,000.
In combination, management believes that the Company will have sufficient
liquidity and adequate working capital and sufficient credit alternatives to
fund the Company's operations during the next fiscal year, including support for
its planned expansion of sales.
The principal source of funds for the Company's operations during fiscal
1998 has been from operating revenues and proceeds from its credit line, as
reflected in the Company's financial statements.
II. Results of Operations.
In fiscal 1998 the Company had net sales of $3,715,487 compared to net
revenues of $3,421,452 in 1997 and $1,881,149 in 1996. This is an increase of
$294,035 compared to 1997 or approximately 8.6% and an increase of $1,834,338 or
approximately 97.5% over 1996.
The increase in revenues this year when compared to last year is much less
dramatic because the Company did not add substantial sales through an
acquisition as it did in 1997 when it acquired PDA. This year revenues were also
only slightly influenced by pricing changes made in PDA products sold by the
Company which were effected by July, 1997. These increases did not effect prices
on the core of the Company's products.
The Company also eliminated sales which were not profitable during the
fiscal year ended May 31, 1998. This accounted for a drop in sales overall which
was overcome by new business during the year.
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 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.
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. 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 no significant contributions to revenues from the sale of the
"Rigg" (a sling designed to hold basketballs, soccer balls and baseballs, among
other things, allowing free use of the hands and arms) a non-medical product
offered for consumer use beginning in 1995 and the Company is still awaiting
marketing efforts of others to see important revenues from this product.
However, based on the potential of the new products mentioned above, the
new markets opened by the Company and the addition of PDA's sales and customers,
management believes the Company will grow again in terms of net revenues for
1999.
For additional information see Item 1. "Description of Business."
Cost of sales expressed as a percentage of sales for 1998 was 67.8%
compared to 73.8% in 1997. This is an improvement of approximately 6% over last
year and reflects the Company's measures to properly cost the products of its
newly acquired subsidiary, PDA, during the last fiscal year. This improvement
plus the slight increase in revenues for 1998 resulted in a higher gross profit
for 1998 when compared to 1997.
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 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 and the result is a cost of sales this year
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 influenced the lower cost basis for
products in 1998 and resulted in the slight operating profit for the year.
Additional efficiency was gained from the fact that PDA's warehouse was
moved to the Company's plant in Utica, New York during the fiscal year and by
undertaking to manufacture more than half of PDA's products which were
previously purchased items.
Gross profits for 1998 were higher by $245,536 than gross profits for 1997
(i.e. $$1,196,578 in 1998 compared to $894,984 for 1997) on slightly increased
net sales of $3,715,487 compared to net sales of $3,421,452 for 1997. Expressed
as a percentage of net revenues, gross profits were 32.2% of net sales for 1998
compared to 26.1% of net revenues for 1997. The improvement occurs because of
the lower cost of sales percentage for 1998 compared to 1997.
Selling, general and administrative expenses were 31.3% of net sales for
1998 compared to 27.7% of net sales for 1997. The higher percentage for 1998
reflects the fact that PDA was not operated for a full year during 1997 and,
therefore, general and administrative costs for PDA were not fully included in
last years financial statement. This year the full cost of selling, general and
administrative expenses are included for PDA. Also, approximately $38,000 in
sales commissions from 1997 were amortized during the 1998 fiscal year. The
higher percentage, of course, reduced profitability for the year ended May 31,
1998, but still allowed for an operating profit of $80,391 for the year compared
to a loss from operations for 1997 of $56,058.
While the Company eliminated its high cost of factoring receivables during
the 1996 fiscal year, financing costs for 1998 in the form of interest expense
was increased to $129,578 compared to only $54,810 for 1997. This, of course,
reflects increased borrowing during 1998.
Net income for 1998 was $5,954 compared to a loss of $89,622 for 1997. This
is an improvement of $83,668 over 1997 and results from slightly higher sales,
more efficient cost of sales and higher gross profits. These improvements were
substantial enough so that they were not offset by increased selling, general
and administrative costs and much higher interest costs in 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."
Third Quarter ended February 28, 1998 Compared with Fourth Quarter Ended
May 31, 1998
Net sales for the three months ended February 28, 1998 were $1,020,193
which is more than 50% higher than net sales for the fourth quarter sales (i.e.
three months ended May 31, 1998) of $696,371. This is due primarily to the fact
that most of the orders taken for sales in the third quarter came early enough
for shipments to be made in that quarter, while normally many of the orders
taken in the third quarter are shipped in the fourth quarter. In addition, many
orders taken in the fourth quarter were not shipped, this year, until the first
quarter of 1999.
Net sales at February 28, 1998 were also slightly lower higher than the
$1,166,224 reported revenues for the third quarter ended February 28, 1997.
Cost of sales in the third quarter expressed as a percentage of net sales
was 75.6% which compares with 92.1% for the same period in 1997 and reflects the
correction of problems encountered with assimilating PDA's products into the
Company's line as previously discussed in the Company's 10-KSB report for May
31, 1997. This compares with a cost of sales percentage of 67.8% for the year
ended May 31, 1998, which shows further improvement by the year end.
The improvement in cost of sales allowed the Company to enjoy an operating
profit of $248,659 for the three months ended February 28, 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 fiscal year ended May 31, 1998, there was no significant
increase in the purchase of any property and equipment. 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.
Current conditions indicate, however, that some funds will be required for
additional capital expenditures in the near future which coincides with
management's sales expansion program; however, as explained above, financing for
purchasing these resources will be obtained from sources which will not require
a substantial outlay of cash and will be in proportion to its expansion program.
IV. Inflation.
Management anticipates that inflation will not have a material effect on
the Company's operations in the future. This is principally due to two factors.
First, if orders increase due to inflation the Company presently has adequate
manufacturing equipment and capacity to support not only its present level of
operations but, with the addition of a second and, if needed, third, operating
shift, to support a substantial increase in production of its present product
lines. Second, although product pricing would be affected by inflation due to
higher costs, management believes that public health and safety concerns would
outweigh any negative impact of price increases and would not adversely affect
the Company's projected sales. Additionally, the hospital and health care
markets have historically been best able to pass on increased costs which are
typically paid by insurance coverage.
V. Trends Affecting Liquidity, Capital Resources and Operations.
A number of factors are expected to impact upon the Company's liquidity,
capital resources and future operations. Included among these are (i)
environmental concerns; (ii) economic factors generally affecting the health
care industry; (iii) governmental regulation of the Company's products and (iv)
the growing concern in many industries about controlling the spread of
infectious disease.
Some disposable products offered by the Company are made from plastic-based
materials which have raised concern among environmental groups over their proper
disposal. Although management believes that such concerns are, in many cases,
valid, it is also believed that these concerns must be balanced with safety
provided by these products against infectious diseases such as AIDS, hepatitis
and others. This belief has recently been reinforced by the new, comprehensive
safety regulations issued by the Occupational Safety and Health Administration
(OSHA) which require extensive new measures to combat the spread of infection
and disease in many industries which had not previously required such measures.
Most importantly, from the point of view of the Company, are the requirements
for protective apparel such as that manufactured by the Company. Management
believes that the regulations, which are now fully implemented, will increase
demand for the Company's products and significantly expand the Company's
markets. Based upon recent increased orders, management believes that most
significant among these new markets for its products will be the hospital
looking to comply with the new OSHA regulations, emergency service industries,
including police, fire and ambulance services, which routinely are exposed to
unusually high risk of infectious diseases and physicians.
Nevertheless, the requirements relating to proper disposal of plastic-based
garments is still in question and the Company cannot predict the outcome of any
future regulations relating to these matters. Any changes in manufacturing or
disposal requirements could result in higher manufacturing costs and less
profitability for the Company or, perhaps, complete elimination, which could
have a substantially negative impact on liquidity and capital resources in the
future.
Management also believes that perhaps the most significant adverse impact
upon its liquidity, capital resources and future operations may result from
economic pressures to keep health care costs low. Spearheaded by health care
insurers and now the federal government, the entire health care industry in the
United States has come under increasing pressure and scrutiny to reduce
unnecessary and wasteful costs. To meet the criticism in recent years over the
higher cost of disposable products, the Company has introduced a line of limited
reusable products. These products are designed to be washed and reused from
between 25 and 100 times before being replaced. Management believes that such
products will not only address the economic concerns but also the environmental
issues by reducing the amount of products which are being discarded. However, as
already mentioned, in situations where there is a high risk of spreading
infection, management believes that the disposable products will continue to
have strong appeal and demand in the marketplace.
As new Company manufactured products, such as the "Rigg" and 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.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is submitted as a separate section to this report
(see Pages F-1 to F-17).
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT- ING AND
FINANCIAL DISCLOSURE.
There have been no changes in and no disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The executive officers and directors of the Company and its wholly-owned
subsidiary are as follows:
NAME AGE POSITION(S) HELD
ANTHONY J. LIBERATORE 55 President, Chief
Executive Officer,
Chairman of the Board
MICHAEL A. LIBERATORE 32 Vice President-Market-
ing, Secretary-
Treasurer and Director
WILLIAM F. MEOLA 52 Director
Profiles of the directors and officers of the Company are set forth below.
All directors hold office until the next annual shareholders meeting or until
their death, resignation, retirement, removal, disqualification or until their
successors have been elected and qualified. Vacancies in the Board may be filled
by majority vote of the remaining directors. Officers of the Company serve at
the will of the Board of Directors, subject to the terms of employment
agreements as discussed below. There is no Executive Committee or other
committee of the Board of Directors. Election to the Board of Directors is for a
period of one year and elections are ordinarily held at the Company's Annual
Meeting of Shareholders. The Board of Directors has regular meetings once a
year, after the Annual Meeting of Shareholders, for the purpose of electing the
officers of the Company.
There are at present three vacancies on the Board of Directors which the
Company will fill at its proposed next shareholder's meeting.
Messrs. Anthony Liberatore and Alfredo A. Zennamo, a former officer and
director, may be deemed "parents" and "organizers" of the Company as those terms
are defined in the Rules and Regulations promulgated under the Securities Act of
1933, as amended. Anthony Liberatore and Michael A. Liberatore are father and
son. Additionally, Alfredo Zennamo is the nephew of Anthony Liberatore. There
are no other family relationships between officers and directors.
Profiles of Officers and Directors
ANTHONY J. LIBERATORE, a co-founder of Health-Pak, Inc., a New York
corporation, ("Health") the Company's wholly owned subsidiary, has served as
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company since April 30, 1991. He has held the same positions with Health since
its formation in April 1985. From May 1980 until formation of Health in 1985,
Mr. Liberatore was employed as a senior procurement specialist by the Utica New
York based North American Division of International Computers Ltd., a British
corporation. From 1970 until 1980, Mr. Liberatore was general manager of
Disposable Profiles/Spartan Healthcare Inc. ("Disposable"), also based in Utica
New York, a wholly-owned subsidiary of the Palm Beach Company of Cincinnati,
Ohio, which manufactured and marketed nonwoven disposable products for the
medical market. In his capacity as general manager of Disposable, Mr. Liberatore
was, among other responsibilities, charged with the development of that
company's sterilized product line.
MICHAEL A. LIBERATORE has been Vice President-Marketing, Assistant
Secretary, Treasurer and a Director of the Company and Health, the Company's
wholly owned subsidiary, since April 30, 1991. Prior thereto he served as
Secretary and Assistant Treasurer of Health from January 1990, having originally
joined Health in May 1987 as its Director of Sales and Marketing. From 1986
until joining Health, Mr. Liberatore was employed as an assistant store manager
by the Chicago Market, a department store chain. Mr. Liberatore is a graduate of
Mohawk Valley Community College having received his Associates degree in
Individual Studies in 1986
WILLIAM F. MEOLA has been a Director of the Company since April 30, 1991
and has served as a Director of Health, the Company's wholly owned subsidiary,
since May 1987. Since March, 1993, Mr. Meola has been employed as a registered
representative with the Albany Savings Bank, Utica, New York. From September
1988 until March 1993 Mr. Meola was a self-employed financial consultant and
also sales manager and a registered representative with the Prudential Insurance
Company. From January to September 1988 Mr. Meola was employed as an Assistant
Vice President and District Manager of the Dime Savings Bank of New York. From
August 1982 until shortly before joining the Dime Savings Bank of New York, Mr.
Meola was employed as Vice President of the SBU Insurance Agency of Utica New
York. Prior thereto, from 1973 until 1982, Mr. Meola held various positions
within the insurance and financial planning industry, owning and operating his
own insurance agency from 1980 until its sale in 1982. Mr. Meola is a graduate
of Utica College of Syracuse University, having received his Bachelor of Science
Degree in Biology.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information relating to the remuneration
received by officers and directors of the Company. At present, directors are not
compensated for their services as directors, except for the reimbursement of any
out-of-pocket expenses incurred in the performance of their duties. All
information set forth herein relates to Health, the Company's wholly owned
subsidiary.
During the periods ended May 31, 1998, May 31, 1997 and May 31, 1996 the
following remuneration was paid to the officers and directors of the Company:
Annual Compensation:
Annual Long Term All Other
Name and Position YEAR Compensa- Compensa- Compensa-
tion; tion tion (1)
Salary Bonus
Anthony Liberatore 1998 $85,000 None None $14,250
President 1997 $73,417 None None $14,250
1996 $51,900 None None $10,460
(2)
Michael Liberatore 1998 $55,000 None None $1,261
Vice President 1997 $47,728 None None $1,261
1996 $33,673 None None $1,261
(1) Includes the value of health and life insurance paid for the benefit of
the persons named herein.
(2) Includes amount paid to Anthony Liberatore for rent of building at 1208
Broad Street, Utica, New York in 1995.
For additional information see "Certain Relationships and Related
Transactions."
The Company previously had employment agreements with Messrs. Anthony J.
Liberatore and Michael A. Liberatore which expired on June 1, 1994. None of the
agreements were renewed and each of the foregoing officers continues to be
employed at the will of the Board of Directors. The Company has no other
employment contracts. There are also no retirement, pension or profit sharing
plan in effect for any officers or directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth at December 1, 1998 the stock ownership of
each person known by the Company to be a beneficial owner of five per cent (5%)
or more of the Company's Common Stock and by all officers and directors,
individually and as a group:
Number Percentage
of Shares of
Owned(1) Class(1)
Name ______________ ___________
Anthony J. Liberatore(2) 3,324,427 22.75%
Elizabeth Liberatore(3) 747,153 4.8%
Officers & Directors as
a group (3 persons)(2) 4,627,146 29.87%
____________________________
(1) Assumes a total number of shares outstanding of 15,490,009; however,
the Company's Board of Directors has approved a reverse stock split of one share
for each 15 shares held which has not been effected as of the date of this
Report. If the reverse split is finally adopted, Principal Shareholder's
holdings will be as follows:
Anthony J. Liberatore 221,628
Elizabeth Liberatore 49,810
Officers and Directors
as a Group 308,476
(2) This number includes 1,840,667 shares of Common Stock held beneficially
by Anthony J. Liberatore; 747,153 shares owned beneficially by Elizabeth
Liberatore, wife of Anthony J. Liberatore; and a total of 736,607 shares of
Common Stock owned beneficially by two shareholders who have granted to Anthony
J. Liberatore a voting trust agreement, permitting Mr. Liberatore to exercise
voting rights over the shares. Anthony J. Liberatore disclaims any beneficial
interest in any of the foregoing shares of Common Stock except those shares
registered in his name. All of the shares of Common Stock reported herein under
Mr. Liberatore's name have been integrated with his shares for computation of
the share ownership of Officers and Directors as a group.
(3) Elizabeth Liberatore is the wife of Anthony Liberatore, President of
the Company. Mrs. Liberatore's shares are integrated with shares reported as
owned by Anthony J. Liberatore.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Anthony J. Liberatore has granted an option to the Company to purchase the
Company's former office building from him located at 1208 Broad Street, Utica,
New York, at a purchase price of $130,000 less certain payments already made by
the Company. The building is presently owned by Mr. Liberatore. The Company does
not pay any rent for the use of the property; however, the building is presently
not occupied.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed pursuant to Item 601 of Regulation S-K:
3. Certificate of Incorporation and By-Laws, with all Amendments thereto,
filed previously as Exhibit 3 to Registrants S-1 registration statement under
SEC file No. 33-43230 and incorporated herein by reference.
4. Warrant Agreement, filed previously as Exhibit 10 to the Registrants
initial registration statement on Form S-18 under SEC file No. 33-24483-NY and
incorporated herein by reference.
10(a). Lease Agreement between the Company and Anthony Liberatore for
premises at 1208 Broad Street, Utica, New York, filed previously as Exhibit
10(c) to the Registrants S-1 registration statement under SEC file No. 33-43230
and incorporated herein by reference.
10(b). Employment Agreement dated as of June 1, 1991 between the Company
and Anthony Liberatore filed previously as Exhibit 10(d) to the Registrants S-1
registration statement under SEC file No. 33-43230 and incorporated herein by
reference.
10(c). Employment Agreement dated as of June 1, 1991 between the Company
and Michael Liberatore filed previously as Exhibit 10(e) to the Registrants S-1
registration statement under SEC file No. 33-43230 and incorporated herein by
reference.
10(e). Letter of Intent between the Registrant and Consoli- dated
Healthcare Corp., dated March 11, 1993, filed previously under Current Report on
Form 8-K, dated March 17, 1993 under SEC file No. 33-24483-NY and incorporated
herein by reference.
10(f). Letter of Intent between the Registrant and Covers North America,
Inc., dated July 20, 1993, filed previ- ously under Current Report on Form 8-K,
dated July 26, 1993 under SEC file No. 33-24483-NY and incorporated herein by
reference.
10(g). Contract for Purchase and Interim Lease between Regis- trant and the
Utica Industrial Development Corporation for the lease and ultimate purchase of
an office and manufacturing facility located at 2005 Beechgrove Place, Utica,
New York, dated July 23, 1993, filed previously under Current Report on Form
8-K, dated July 27, 1993 under SEC file No. 33-24483-NY and incorporated herein
by reference.
10(h). Amendment to Lease Agreement between the Company and Anthony J.
Liberatore dated March 1, 1995 relating to changes in the lease and option to
purchase the premises located at 12008 Broad Street, Utica, New York. Filed as
an Exhibit to Form 10-KSB for the Year ended May 31, 1995 and incorporated
herein by reference.
10(i). Agreement between the Company and Silver Lake Holdings Ltd. Inc.
dated July 1, 1995 for the manufacture of the "Rigg." Filed as an Exhibit to
Form 10-KSB for the year ended May 31, 1995 and incorporated herein by
reference.
10(j). Agreement between the Company and Russo Securities, Inc. dated
December 28, 1994 for consulting services. Filed as an Exhibit to Form 10-KSB
for the year ended May 31, 1995.
10(k). Agreement between the Company and Creative Media International, Inc.
to provide consulting services dated March 10, 1995. Filed as an Exhibit to Form
10- KSB for the year ended May 31, 1995.
10(l). Agreement between the Company and Jake Industries, Inc. ("Jake")
provideing for the acquisition of Jake by the Company. Filed with this Report on
Form 10- KSB.
11. Statement re computation of per share earnings, See "Financial
Statements - Statement of Operations and Note 18."
21. Subsidiaries of the Registrant. Filed as an Exhibit to Form 10-KSB for
the year ended May 31, 1995 and incorporated herein by reference.
23(a). Consents of B. Bruce Freitag, Esq., and Zeller Weiss & Kahn,
Certified Public Accountants, filed previously as Exhibit 24(a) to the
Registrants S-1 registration statement under SEC file No. 33-43230 and
incorporated herein by reference.
23(b). Consent of Usher Quiat & Usher, litigation counsel for the
Registrant, filed previously as Exhibit 24(b) to the Registrants S-1
registration statement under SEC file No. 33-43230 and incorporated herein by
reference.
(b) Form 8-K filings: None filed during last quarter of the fiscal year.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HEALTH-PAK, INC.
Dated: December 4, 1998 By: /s/Anthony J. Liberatore
Anthony J. Liberatore
President and Principal
Executive Officer
Dated: December 4, 1998 By: /s/Michael A. Liberatore
Michael A. Liberatore,
Vice President, Treasurer,
Secretary, Principal
Financial and Accounting
Officer
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: December 4, 1998 /s/Anthony J. Liberatore
Anthony J. Liberatore
President and Principal
Executive Officer and
Director
Dated: December 4, 1998 /s/Michael A. Liberatore
Michael A. Liberatore,
Vice President, Treasurer,
Secretary, Principal
Financial and Accounting
Officer, Director
Dated: December 4, 1998 /s/William F. Meola
William F. Meola
Director
EXHIBITS
Filed With
Form 10-KSB
HEALTH-PAK, INC.
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