SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended November 30, 1998
Commission File Number 33-24483-NY
HEALTH-PAK, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 11-2914841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1208 Broad Street, Utica, NY 13501
(Address of principal executive offices) (Zip Code)
Same
(Former Address) (Zip Code
(315) 724-8370
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 30, 1998
Common stock, $0.002 par value 15,490,009
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of November 30, 1998 and
May 31, 1998 F-2
Statement of income for six and three months
ended November 30, 1998 and 1997 F-3
Statement of cash flows for six months
ended November 30, 1998 and 1997 F-4
Notes to condensed consolidated financial
statements F-5 - F-13
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET - NOVEMBER 30, 1998 AND MAY 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASSETS LIABILITIES
November 30, May 31, November 30, May 31,
1998 1998 1998 1998
Current assets: Current liabilities
Cash $ 52,982 $ 31,905 Current portion of long-term debt $ 96,907 $ 30,515
Receivables, trade, net of Notes payable, bank 734,620 718,291
allowance of $13,500 679,357 641,152 Accounts payable 649,892 811,730
Inventory 1,488,888 1,572,320 Payroll and sales tax payable and
Note receivable 89,039 89,039 accrued expenses 55,047 98,508
Prepaid expenses 53,002 83,870 Note payable, officer 55,000
---------- ---------- ---------- ----------
Total current assets 2,363,268 2,418,286 Total current liabilities 1,591,466 1,659,044
---------- ---------- ---------- ----------
Property and equipment:
Land120,000
Building 483,662
Machinery and equipment 401,351 315,978 Long-term debt, net of current
Leasehold improvements 133,593 133,598 portion 680,249 44,004
---------- ----------
Office equipment 110,130 110,130
Automotive equipment 21,021 21,021
---------- ----------
1,269,757 580,727
Less accumulated depreciation 277,822 248,417 Commitments
---------- ----------
991,935 332,310
------- -------
Minority interest in consolidated
subsidiary 11,279
------
Other assets: Shareholders' equity:
Investments in affiliated Company 135,027 135,027 Common stock subscriptions 56,781
Deposits 25,841 32,888 Common stock, .001 par value
Loan acquisition fees 2,000,000 share authorized
and costs, net 45,507 3,240
Deferred offering expenses 49,765 99,530 Common stock,.002 par value
Deferred income taxes 83,115 83,115 20,000,000 shares authorized 30,980 30,980
Cash surrender value, officers' Common stock purchase warrants:
life insurance 33,942 33,942 Class A
Officer's loan 1,200 1,200 Class B
---------- ---------- Class C
Additional paid in capital 2,304,334 2,304,334
374,397 388,942 Defcit (934,210) (910,103)
---------- ----------
---------- ----------
1,457,885 1,425,211
--------- ---------
$3,729,600 $3,139,538 $3,729,600 $3,139,538
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
SIX AND THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Six months ended Three months ended
November 30, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $1,511,569 $1,687,907 $ 706,716 $ 820,150
Cost of sales 1,007,102 1,159,318 510,979 567,755
---------- ---------- ---------- ----------
Gross profit 504,467 528,589 195,737 252,395
Selling, general and
administrative expenses 402,488 504,582 166,151 254,219
---------- ---------- ---------- ----------
Income from operations 101,979 24,007 29,586 ( 1,824)
---------- ---------- ---------- ----------
Other income (expense):
Gain on investments in
affiliated company 4,390
Interest expense ( 81,178) ( 61,770) ( 30,443) ( 28,703)
Amortization ( 56,184) ( 3,333) ( 28,092) ( 1,666)
---------- ---------- ---------- ----------
( 137,362) ( 60,713) ( 58,535) ( 30,369)
---------- ---------- ---------- ----------
Loss before minority
interest ( 35,383) ( 36,706) ( 28,949) ( 32,193)
Minority interest in
income (loss) of
consolidated subsidiary 11,278 34,513 2,595 40,143
---------- ---------- ---------- ----------
Net income (loss) ($ 24,105) ($ 2,193) ($ 26,354) $ 7,950
========== ========== ========== ==========
Earnings per common and dilutive common equivalent share:
Primary $ 0.00 $ 0.00 $ 0.00 $ 0.00
============= ========== =========== ======
Fully diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
============= ========== =========== ======
Weighted average number of
common shares and
dilutive outstanding:
Primary 17,490,009 17,090,159 17,490,009 17,090,159
========== ========== ========== ==========
Fully diluted 17,490,009 17,090,159 17,490,007 17,090,159
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Operating activities:
Net loss ($ 24,105) ($ 2,193)
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 29,405 24,590
Amortization 56,184 3,334
Gain on investments in subsidiaries ( 4,390)
Gain (loss) on minority interest in consolidated
subsidiary ( 11,278) ( 34,513)
Changes in other operating assets and liabilities:
Accounts receivable ( 38,205) ( 34,414)
Inventory 83,432 ( 111,873)
Prepaid expenses 29,914 ( 26,281)
Accounts payable ( 161,838) 160,588
Accrued expenses ( 43,463) ( 37,979)
Deposits 5,244
Loan fees ( 45,930) 5,777
-------- --------
Net cash used in operating activities ( 120,640) ( 57,354)
-------- --------
Investing activities:
Purchase of property and equipment ( 689,030) ( 10,727)
-------- --------
Net cash used in investing activities ( 689,030) ( 10,727)
-------- --------
Financing activities:
Proceeds from common stock subscriptions 56,781
Proceeds from long-term debt 731,351
Proceeds from notes payable, bank 16,329 46,790
Proceeds form officers' loan 55,000
Payment of long-term debt ( 28,714) ( 8,832)
-------- --------
Net cash provided from financing activities 830,747 37,958
-------- --------
Net increase (decrease) in cash 21,077 ( 30,123)
Cash, beginning of period 31,905 233,330
-------- --------
Cash, end of period $ 52,982 $203,207
======== ========
Supplemental disclosures and cash flow information:
Cash paid during the year for:
Interest $ 81,178 $ 61,770
======== ========
Income taxes $ 0 $ 0
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization of the company:
The Company originally "Morgan Windsor Ltd," was incorporated in the State
of Delaware on December 28, 1987 as a "blind pool". The only operations of the
Company at that time were to structure a public offering of its securities.
Thereafter the company began to search for a viable business opportunity.
On May 15, 1989, the Registration Statement containing the Company's
original prospectus was declared effective by the Securities Exchange
Commission. Pursuant to the original prospectus the Company was offering up to
4,000,000 units, at $.10 per unit, each consisting of one share of common stock,
one Class A warrant and one Class B warrant. No securities were sold pursuant to
original prospectus.
The Company subsequently amended its public offering to consist of a
minimum of 15,000 units to a maximum 50,000 units to be offered at $6.00 per
unit. Each unit consists of six shares of common stock (.002 par value) and
eighteen Class A redeemable common stock purchase warrants and twelve B
redeemable common stock purchase warrants. On September 7, 1990, the Company
sold 16,358 units receiving gross proceeds of 98,148. Between October and
November of 1989 the Company repurchased an aggregate of 178,583 shares of the
Company from nineteen stockholders for an aggregate price paid for these shares.
As a result of the above transactions as of April 30, 1991, the date of
acquisition of Health-Pak, Inc, the Company had outstanding shares of 387,648 to
the public.
On April 30, 1991, the Company acquired 100% of the issued and outstanding
capital stock of Health-Pak, Inc, a New York corporation, in exchange for
4,996,352 shares of which 4,756,077 shares were exchanged for 97.54% of the
outstanding shares of Health-Pak, Inc. and 240,275 shares were retained to
acquire the remaining outstanding shares of Health-Pak, Inc.
Thereafter, the Company, "Morgan Windsor, Inc." changed its name to
"Health-Pak, Inc" and increased its authorized capitalization to 20,000,000
shares.
2. Nature of business:
Health-Pak, Inc. is a manufacturer and distributor of disposable paper
products for use in serviced-related industries, primarily the medical and
hospital industry. The industry is highly competitive and is serviced by several
large national and multi-national companies with greater financial resources in
comparison to the financial resources available to the Company. There is no
guarantee that this market will continue to develop since the incorporation of
government intervention, economic conditions and other unforeseen situations may
occur.
The Company maintains manufacturing facilities in upstate New York, Mexico
and to a lesser extent Haiti. In addition to paper goods, the Company also
manufactures a sporting goods accessory item, sales of which were minimal for
the six months ended November 30, 1998. The Company's sales are spread
throughout the United States.
F-5
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies:
Principles of organization:
The acquisition of the Company's subsidiary on April 22, 1991 has been
accounted for as a reverse purchase of the assets and liabilities of the Company
by Morgan Windsor Ltd. Accordingly, the consolidated financial statements
represent assets, liabilities and operations of Health-Pak, Inc. prior to April
30, 1991 and the combined assets, liabilities, and operations for the ensuing
period. The financial statements reflect the purchase of the stock of Morgan
Windsor Ltd. by Health-Pak, Inc., the value being the historical cost of the
assets acquired. All significant intercompany profits and losses from
transactions have been eliminated. Pursuant to the purchase the Company's
387,648 shares were issued to the public for $60,000.
Revenue recognition:
The Company maintains its books and records on the accrual basis of
accounting, recognizing revenue when goods are shipped and expenses when they
are incurred.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method (FIFO).
Property and equipment:
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight line method over the following useful
lives:
Years
Machinery and equipment 10
Leasehold improvements 19, 31-1/2 and 39
Automotive equipment 5
Office equipment 10
Expenditures for major renewals and betterments that extend the useful
lives of the property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
Per share amounts:
Net earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the period.
Fully diluted and primary earnings per common share are the same amounts for the
period presented.
Cash and cash equivalents:
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of three months or less.
F-6
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued):
Principles of consolidation:
The accompanying consolidated financial statements also include the
accounts of the Company and its 65% owned subsidiary, Protective Disposal
Apparel, LLC. Inter-company transactions and balances have been eliminated in
consolidation (see Note 5).
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results differ from these estimates.
Effect of recently issued accounting standards:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impaired of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. "SFAS" No. 121
requires that Long-Lived Assets and certain identifiable intangibles to be held
and used by the Company be reviewed for impairment whenever events indicated
that the carrying amount of an asset may not be recoverable. The Company has no
impaired assets at November 30, 1998.
The Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation". The
effective date of SFAS No. 123 is for fiscal years beginning after December 15,
1995, and established a method of accounting for stock compensation plans based
on fair value. The Company does not believe that SFAS No. 123 will have an
impact on its financial statements. The Company has not adopted SFAS No. 123 at
November 30, 1998 and continues to use APB 25 which accounts for stock
compensation at the intrinsic value.
Investments:
Investments in certain less than 20% owned companies are carried at cost
and are accounted for on the equity method. The investment account is adjusted
for the Company's proportionate share of their undistributed earnings or losses.
Because the Company exercises significant influence over the investees'
operating and financial activities, management has considered the equity method
of accounting as proper.
4. Inventories:
Inventories consist of:
November 30 May 31
1998 1998
---- ----
Raw materials $ 446,666 $ 483,696
Finished goods 1,042,222 1,088,624
---------- ----------
$1,488,888 $1,572,320
========== ==========
F-7
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Investment:
A) The Company purchased a 10% equity interest in Silver Lake
Corporation in exchange for its own common stock valued at $.682
per share. This investment is accounted for under the equity
method of accounting with a fair value of the stock contributed of
$136,400. Health Pak, Inc., being a significant influence over the
operations and finance of the joint ventures activities with
Silver Lake Corporation, has elected to use the equity method of
accounting for the investment.
B) In October 1996, the Company formed and purchased a 65% equity
interest in Protective Disposable Apparel Co., LLC, a company
operating in the disposable apparel business. Protective Disposal
Apparel Co., LLC in turn purchased a continuing business, Scherer
Healthcare, Ltd, d/b/a Protective Disposal Apparel. As of October
28, 1996 the balance sheet of the entity to be acquired just prior
to the purchase was as follows:
ASSETS
Current assets:
Accounts receivable $263,371
Inventory 308,469
-------
Total current assets 571,840
-------
Security deposits 1,500
-----
Total assets $573,340
========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $318,943
--------
Total current liabilities 318,943
-------
Members' capital 254,397
-------
Total liabilities and members' equity $573,340
========
F-8
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Note receivable:
The Company is due $89,039 from the minority interest owner of its
subsidiary, Protective Disposable Apparel Co., LLC. This amount represents the
subsidiary portion of the purchase cost of the business which the Company paid
on behalf of the minority shareholder. The note receivable is non-interest
bearing, unsecured and indefinite in maturity.
8. Line of credit:
The Company opened a line of credit with Foothill Capital Corporation in
September 1996. The loan ceiling amount is based on a percentage formula of
eligible accounts receivable and inventory. The balance due at November 30, 1998
was $734,620.
9. Long-term debt:
Rate Amount Maturity
Note payable, Manifest Group (a) 10% $ 9,840 July, 1999
Note payable, Waste Mgmt. of N.Y. (b) 10% 1,445 June, 1999
Note payable, Resource Capital Corp. (c) 10% 2,528 March, 2000
Note payable, Resource Capital Corp. (d) 10% 1,408 September, 1999
Note payable, Resource Capital Corp. (e) 10% 2,440 July, 1999
Note payable, City of Utica (f) 3% 145,167 June, 2005
Note payable, bank (g)Prime +2% 247,222 November, 2013
Note payable, bank line of credit (h) 11.5% 41,760 May, 2001
Note payable, U.S. SBA (i) 5.85% 247,000 December, 2018
Note payable, Acclaim Leasing (j) 10% 78,346 November, 2001
--------
777,156
Less current portion 96,907
------
$680,249
========
(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.
F-9
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Long-term debt (continued):
(d) Note payable is collateralized by equipment with a cost of
$5,296. The note is payable in installments of $155 per month
including interest.
(e) Note payable is collateralized by equipment with a cost of
$9,053. The note is payable in installments of $251 per month
including interest.
(f) Note payable is collateralized by machinery, equipment, furniture
and fixtures, inventory and accounts receivable. The note is
payable in installments of $1,982 per month including interest.
(g) Note payable is collateralized by real estate. The note is
payable in principal installments of $1,389 per month plus
interest.
(h) Note payable is collateralized by accounts receivable, machinery,
equipment, inventory, intangibles and chattel paper. The note is
payable in principal installments of $1,347 per month plus
interest.
(i) Note payable is collateralized by real estate. The note is
payable in monthly installments of $2,078 including interest and
loan fees.
(j) Note payable is collateralized by equipment with a cost of
$84,351. The note is payable in installments of $2,599 including
interest.
Maturities of long-term debt as of November 30, 1998 are as follows:
Year Amount
November 30, 1999 $ 96,907
November 30, 2000 92,182
November 30, 2001 84,172
November 30, 2002 46,708
November 30, 2003 47,449
Thereafter 409,738
--------
$777,156
========
F-10
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments:
Consultant contracts:
The Company entered into a three year investment banking consulting
agreement on December 31, 1994. The Company issued 1,000,000 shares of $.002 par
common shares and used a discount valuation of $.002 per share. The consultant
is to act as a placement agent for Health-Pak, Inc. on all private placements or
secondary offerings. Services commenced as of April 1, 1995. The agreement is
being amortized over thirty six months.
In addition, the Company also issued 4,500,000 stock options at various
exercised prices. As of November 30, 1998, 2,748,047 options have been exercised
as follows:
Number of options Exercise price
600,000 .10
233,333 .15
1,914,714 .26
The Company entered into a public relations consulting agreement on March
10, 1995. The agreement has a thirty month term and services commenced on June
11, 1995. The Company issued 1,750,000 shares of $.002 par per common shares
plus an additional 17,242 shares of the original agreement that in addition to
the 1,750,000 shares, 250,000 shares are to be issued at a rate of 8,621 shares
per month over the next twenty nine months. A valuation of $.02 per share was
used. The Company withdrew from the consulting agreement in August and no other
shares were issued. In addition, advances made to the Company and on the books
as a notes payable, other, were reclassified as payment for common stock already
issued.
11. Income taxes:
Effective June 1, 1993, the Company has adopted the Statements of Financial
Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes,"
which applies a balance sheet approach to income tax accounting. The new
standard required the Company to reflect on its balance sheet the anticipated
tax impact of future taxable income or deductions implicit in the balance sheet
in the form of temporary differences. The Company has reflected certain future
tax benefits on its balance sheet from the realization of the carryover of the
current years net operating loss to anticipated future earnings. The cumulative
effect as of June 1, 1993, the date of the adoption of SFAS No. 109, was
immaterial. As permitted by SFAS No. 109, prior year's financial statements have
not been restated.
F-11
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Income taxes (continued):
The components of deferred tax assets and liabilities are as follows:
Deferred tax assets:
Bad debt allowances $ 500
Net operating loss carryfoward 114,115
-------
114,615
-------
Deferred tax liability:
Depreciation 900
---
Deferred tax asset 113,715
Valuation allowance 30,600
------
Net deferred tax asset $ 83,115
========
As of November 30, 1998, the Company has available, for tax reporting
purposes, net operating loss carryovers of approximately $640,000 which expire
through 2013.
12. Employment contracts:
The Company has no employment contracts. Further, it has no retirement,
pension or profit sharing plan covering its officers or directors.
13. Deferred offering expense:
The value stated is the amount that has been paid by the Company for
expenses incurred for the public offering of warrants. The deferred offering
expenses on the issued or expired warrants have been deducted from the proceeds
of the offering. The offering of the Class C warrants is expected to be
completed in 1998. Amortization of the deferred offering expense of $49,765 is
included at November 30, 1998.
All deferred offering expenses pertain to the Class C warrants which had
not been issued as of the statement date.
F-12
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. Related party transactions:
Officers loans are unsecured and non-interest bearing. Officers have
indicated that they will not be repaid in the current year. In addition, the
Company has advanced funds to its minority interest partner, Protective Disposal
Apparel, in the amount of $89,039.
15. Earnings per share:
November 30, 1998 November 30, 1997
----------------- -----------------
Primary Primary
Number of shares:
Weighted average shares outstanding 15,490,009 15,490,009
Incremental shares for outstanding
stock options 1,600,150
---------- ---------
15,490,009 17,090,159
========== ==========
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. Shares that would be outstanding
assuming exercise of dilutive stock options, all of which are considered to be
common stock equivalents. Fully diluted earnings per share are the same as
primary earnings per share for November 30, 1998 and November 30, 1997.
F-13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
I. Financial Condition and Liquidity
Introduction
As previously stated, the financial statements and the discussion which
follows includes, on a consolidated basis, the assets, liabilities and operating
results for Protective Disposable Apparel Company, LLC ("PDA") which was
acquired by the Company in October, 1996 as a 65% owned subsidiary.
Inter-company balances have also been eliminated in the consolidation.
(a) Financial Condition
Assets
Total assets increased by $590,062 at November 30, 1998 when compared to
the year ended May 31, 1998, an increase of approximately 18.8%. This increase
is largely due to the acquisition by the Company of its plant facility in Utica,
New York, which took place in July, 1998.
Total assets also increased by $42,951 during the quarter ended November
30, 1998 when compared to the three months period ended August 31, 1998, an
increase of approximately 1.2%.
The increase in assets at November 30, 1998 was also slightly enhanced
by additions to cash (increased by $21,077 compared to the year ended May 31,
1998), receivables (which increased by $38,205) and machinery and equipment
(which increased by $85,373, reflecting additional equipment purchases). These
increases were also offset by reductions in inventory (down by approximately
$83,432 from the year ended May 31, 1998) and prepaid expenses (down by
$30,868).
The increase in cash for the three months ended November 30, 1998 was due
to the fact that Anthony J. Liberatore, President of the Company, loaned $55,000
to the Company during the period to offset the dislocation of cash caused by the
purchase of the building occupied by the Company in July, 1998.
The increase in receivables at November 30, 1998 is caused by the fact that
the Company had slower collections during the six month period ended at November
30, 1998. Inventory decreased slightly as a normal part of experiencing lower
sales for the six month period and because of the Company's decision to remove
certain non-profitable items from its line. At November 30, 1998, inventory was
approximately 5.3% lower than at the year end.
There were no significant purchases of machinery and equipment during the
quarter. During the three months ended November 30, 1998, approximately $70,000
was spent on the acquisition of machinery to manufacture tissue paper which
will be added to the Company's line of products.
<PAGE>
In summary, total assets increased by 18.8% at November 30, 1998 when
compared to the year ended May 31, 1998 and increased by 1.2% since the quarter
ended August 31, 1998. The primary reason for the increase since the year end
has been previously identified as the result of purchasing the Company's plant
facility and the purchase of machinery and equipment. These purchases will, of
course, be offset by increases in liabilities to the extent that the properties
were financed.
Liabilities
Current liabilities have decreased by $67,578 during the six month period
ended November 30, 1998 compared to the year ended May 31, 1998. The principal
reason for this reduction arises from the fact that accounts payable were
reduced significantly by November 30, 1998 (by approximately $161,838 during the
six months ended November 30, 1998) and payroll and sales taxes were further
slightly reduced for the period. These reductions were offset by increases in
the current portion of long term debt, bank notes payable and officer's loans to
the Company.
The increase in the current portion of long term debt arises largely from
the liability incurred by acquiring the Company's plant facility in Utica, which
was purchased in July, 1998, and was financed during the quarter ended August
31, 1998. The current portion of long term debt was also slightly influenced by
the purchase of machinery and equipment during the quarter ended November 30,
1998. The increase in bank notes payable indicates additional borrowing by the
Company on its credit line and notes payable to officers reflects the loan made
by the Company's president in the amount of $55,000.
In the previous quarter (ended August 31, 1998) we reported that a
significant portion of the loan covering the building purchased during that
quarter in the amount of $240,000 was due in December, 1998 and was accounted
for as a short term debt in current liabilities. It was anticipated that this
loan would be replaced by a long term SBA loan, which would then permit the
reversal of this entry as a short term liability. The loan was subsequently
replaced by the anticipated long term SBA loan before maturity in December.
Therefore, in the quarter ended November 30, 1998, the long term portion of that
loan has been accounted for as a long term liability and is the reason for the
dramatic drop in the current portion of long term debt for this period compared
to the last quarter (i.e. $301,472 was reported as the current portion of
long-term debt in the quarter ended August 31, 1998 and only $96,907 at November
30, 1998). Total current liabilities were lower by $206,011 because of this
adjustment when compared to the end of the first quarter ended August 31, 1998;
however, except as noted above, total current liabilities at November 30, 1998
were otherwise quite comparable to the year ended May 31, 1998.
<PAGE>
Total current liabilities for the quarter ended August 31, 1998 are
approximately $140,000 higher when compared to the year end, but this is not
significant when you take into account the fact that the Company had a
substantial increase in short term liabilities associated with the acquisition
of its real property as stated above.
It should also be noted that accounts payable were further reduced in the
six months ended November 30, 1998 by $42,367 when compared to the quarter ended
August 31, 1998. This reflects the application of additional cash during the
period to the payment of payables.
Liability for payroll taxes varies with the number of employees at any
given time and the date upon which the period falls. There was a reduction in
this account of approximately $43,461 during the six months period ended
November 30, 1998 when compared to the year ended at May 31, 1998.
Long term debt at November 30, 1998 was increased by $636,245 when compared
to the year ended May 31, 1998. As stated previously, this increase was caused
by the addition of further debt to finance the purchase of the plant facility
and machinery and equipment purchases during the period. This account was also
increased from the previously reported $403,760 at the end of August 31, 1998
for the reasons stated above (i.e. because of the transfer of debt from short
term to long term as stated above).
While total liabilities increased by some $568,667 at November 30, 1998
compared to the year ended May 31, 1998 which was as expected from the debt
acquired in connection with the acquisition of the real property made in July,
1998, it has increased only slightly (by approximately $70,478) when compared to
August 31, 1998 as a result of the machinery and equipment purchases during that
period. The increase in liabilities since the year end is balanced by an
increase in total assets of $590,062 at November 30, 1998 and an increase in
assets of $42,951 at November 30, 1998 compared the first quarter ended August
31, 1998.
Also, while the Company experienced a higher operating profit at November
30, 1998 compared to the year end and the end of the first quarter, the net loss
for the six months ended November 30, 1998 was higher than for previous periods
because of increased amortization and interest expense and is reflected in the
fact that the Company's deficit was greater at November 30, 1998 by
approximately $24,107 compared to the year end and by $26,873 compared to the
quarter ended August 31, 1998. See "Results of Operations."
<PAGE>
Management believes that, except for taking into account the fact that the
Company purchased the real property and the machinery and equipment referred to
above, there has been no significant change in the financial condition of the
Company during the quarter.
See "Results of Operations" for additional information. For information
regarding liquidity, see Subparagraph (b) "Liquidity" below. For additional
information relating to the financial condition of the Company, also see
"Inflation" and "Trends Affecting Liquidity, Capital Resources and Operations."
(b) Liquidity
The Company had sufficient liquid assets to meet its obligations at the end
of November 30, 1998. Working capital at November 30, 1998 was $771,802 compared
to $759,242 at the year ended May 31, 1998, a slight increase in spite of the
added burdens of increased current debt resulting from acquisitions of property
and notes payable to banks. For comparison purposes, working capital at the end
of August 31, 1998 was $573,527.
As we have described above, working capital at August 31, 1998 was greatly
affected by accounting for the current portion of the debt incurred by the
Company to acquire its plant facility. A portion of the debt as originally
structured was due in December 1998; however, it was to be replaced by a long
term SBA loan which was not closed by the end of the first quarter. When this
loan was closed, the current portion of long term debt was adjusted to reflect
the disposition of the loan. This explains why working capital at August 31,
1998 was only $573,527 compared to $771,802 at November 30, 1998.
Principal short-term liabilities at November 30, 1998 were $96,907 in the
current portion of long term notes due, $734,620 in short term bank notes
payable, $649,892 in accounts payable, payroll taxes due of $55,047 and
short-term officer's loans due of $55,000, for a total of $1,591,466 in short
term liabilities. Against this total, at November 30, 1998, the Company had
liquid current assets consisting of cash in the amount of $52,982, receivables
of $679,357, inventory in the amount of $1,488,888 and notes receivable of
$89,039 for a total of $2,310,266.
At November 30, 1998, management also had at its disposal a credit line of
$850,000 of which approximately $80,000 was available at November 30, 1998. The
credit line was increased in 1998 to $850,000 from $750,000 last year. The
Company may find it necessary to replace its credit facility in the near future;
however it is waiting for a conclusion with respect to its private offering
before taking action in this area.
<PAGE>
In summary, management believes that the Company will have sufficient
liquidity and adequate working capital to fund the Company's operations during
the current fiscal year, including support for its planned expansion of sales.
Management is planning additional equity financing which, if completed,
could add substantially to the Company's liquidity in the near future and would
afford the Company the opportunity to make new acquisitions and to expand its
business. There is no assurance that the Company will be successful in its
attempts to raise additional capital at an affordable cost.
The principal source of funds for the Company's operations during quarter
ended November 30, 1998 has been from operating revenues and proceeds from its
credit line, as reflected in the Company's financial statements.
II. Results of Operations.
(a) Net Sales
Net sales at the six month period ended November 30, 1998 were $1,511,569.
This compares with net sales of $1,687,907 for the six month period ended
November 30, 1997. While the difference is $176,338, a decrease of approximately
10.4% from 1998 to 1997, it must be looked at from the point of view that the
Company took deliberate action to eliminate a certain percentage of sales in the
previous quarter (ended August 31, 1998) that were not profitable. This
elimination, combined with shipping differences (i.e. during the first quarter
ended August 31, 1998, orders which are usually shipped in this period were made
early enough during the last fiscal year to be shipped in the year ended May 31,
1998) and a general downturn in industry orders (which the Company also serves
in addition to the medical supply industry) resulted in lower sales for this
period.
Net sales at the end of the three month period ended November 30, 1998 were
also lower than for the same period last year (i.e. net sales for 1998 were
$704,716 for the quarter compared to sales of $820,150 in 1997, a difference of
$115,434 or approximately 14%). Lower sales during the quarter ended November
30, 1998 resulted from a continuation of the factors described above, except
that shipping differences were not involved, but the other factors mentioned
above had more of an impact in this period.
Net sales for the three months ended August 31, 1998 were $804,853 which is
quite comparable to the $867,757 net sales for the three months ended August 31,
1997, and were lower in that period more or less, because of shipping
differences as explained above combined with the beginning of elimination of
unprofitable sales and slightly slower industry sales at this time.
<PAGE>
Sales which were eliminated from the Company's line because of
unprofitability included nurses caps, shoe covers and surgical masks among
others and represented products which were primarily manufactured by others.
The Company is now seeing a turnaround in demand from industry as orders
are beginning to improve and sales are increasing now in that area.
Net sales in the six month period ended November 30, 1998 were not affected
by price changes or significant additions from new business during the period to
increase sales to former levels.
As for the future in terms of increasing sales, 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 and institutional industries which includes toilet tissue paper for
institutions and tissue gowns. Revenues are presently approximately $2 million
per annum; however, the Company believes that these revenues can be greatly
expanded with its own network of customers and new business which the Company
will seek to obtain after the closing.
The acquisition agreement for Jake calls for the payment of more than
$300,000 cash and the issuance of stock to the shareholders of Jake. The Company
has not yet closed this agreement as of the date of this report and is awaiting
currently planned additional financing to support the purchase of Jake.
The Company is also looking forward to entering into the tissue paper
supply business with the purchase of its machinery and equipment for the
production of tissue paper. Management believes that there is an excellent
market opportunity for this type of product. While the acquisition of Jake will
enhance the Company's entry into this market, the Company is prepared to move
ahead in this area with or without the acquisition.
The Company also recently introduced "sonic sealed" garments in former
periods which are produced by a sonic sealing or welding process, manufactured
by ultrasonic equipment which essentially changes the molecular structure of the
material being made to form a complete and impenetrable seal at the point of
closure. No heat is used or necessary for this process. These garments are fluid
and chemical resistant and are used primarily in chemical and nuclear work. It
is expected that these products will contribute to sales during the current
fiscal year.
<PAGE>
The shift, beginning in 1996, to private label work has also been
essentially discontinued as the Company assumed additional responsibility
for the manufacture of PDA's products and requiredadditional
manufacturing capacity for its own products
Under new agreements for manufacturing private label goods with two new
principal customers, the Company will sustain sufficient profits to warrant a
continuation of this work at a reduced rate.
The Company's production of operating gowns did not achieve the results
expected and were essentially discontinued; however, the Company is
manufacturing such gowns presently to the specifications of a new customer and
will continue to offer this product mainly through the orders received from its
customer.
There were again no significant contributions to revenues from the sale of
the "Rigg" (a sling designed to hold basketballs, soccer balls and baseballs,
among other things, allowing free use of the hands and arms) a non-medical
product offered for consumer use beginning in 1995 and the Company is still
awaiting marketing efforts of others to see important revenues from this
product.
However, based on the potential of the new products mentioned above, the
new markets opened by the Company and the addition of PDA's sales and customers,
management believes the Company will grow again in terms of overall net revenues
for 1999.
For additional information see Item 1. "Description of Business" in the
Company's 10-KSB report for the year ended May 31, 1998.
<PAGE>
(b) Cost of Sales
The elimination of unprofitable sales did result in a lower cost of sales
percentage for the six months ended November 30, 1998 compared to 1997 (i.e.
66.6% for 1998 compared to 68.6% for 1997) which, combined with lower costs for
selling, general and administrative expenses for the six months ended November
30, 1998, resulted in higher income from operations for 1998 compared to 1997.
However, the Company did experience a set back in cost of sales for the
three months ended November 30, 1998 compared to the three months ended November
30, 1997 (i.e. cost of sales at the end of the three months ended November 30,
1998 was at 72.5% compared to 69.2% for the same period in 1997). This result
occurred because the Company suffered a loss of approximately $34,000 in
inventory in its Mexican production facility. This facility was inherited from
the PDC acquisition and operated as a separate contractor with the Company. When
requested to deliver an inventory count, it was noticed that part of the
inventory, consisting mainly of raw materials, was missing. The Company
immediately took steps to terminate its relationship with this facility and will
perform the operations previously made in Mexico at itsplant in Utica,
New York. The Company does not anticipate any dislocationbecause of
this move and further, does not expect any substantial negativeimpact on
cost of sales or profitability because management believes the work
done in Mexico can be easily replaced in its own plant without significant
increases in costs
The effect of the Company's action to discontinue unprofitable sales was
clearly evident in the previous quarter (ended August 31, 1998) which showed
cost of sales of only 61.6%. It was because of this low percentage that the
impact of the higher cost of sales percentage for the quarter ended November 30,
1998 was less significant and the average cost of sales for the six months ended
November 30, 1998 was lower overall. See "Management's Discussion and Analysis
or Plan of Operation" in the 10-QSB report filed for the quarter ended August
31, 1998.
It should be remembered that the cost of sales increased in 1997 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 which resulted in a cost of sales for more
recent periods that is more in line with the Company's usual standards.
(c) Gross Profits
Gross profits for the six months ended November 30, 1998 were lower by
$24,122 than gross profits for the comparable period in 1997, primarily due to
the fact that net sales for the six months ended November 30, 1998 were also
lower by approximately 10.5% for that period compared to November 30, 1997.
Expressed as a percentage of net sales, gross profits were 33.4% of net sales
for the six months ended November 30, 1998 compared to 31.3% of net sales for
the same period in 1997. The improvement occurs because of the lower cost of
sales percentage for the six months ended November 30,1998 compared to the six
months ended November 30, 1997. The lower cost of sales percentage was achieved
in this period even though certain difficulties were experienced in the three
months ended November 30, 1998 (see below). This compares with a gross profit
percentage of 32.2% at the year ended May 31, 1998.
<PAGE>
For the three months ended November 30, 1998 gross profits expressed as a
percentage of net sales was 27.9% compared with 30.8% for the comparable period
in 1997. The lower gross profit percentage for the three months ended November
30, 1998 is caused by both lower sales and a high cost of sales percentage for
that period as explained above. As previously stated, this period was influenced
by a loss of inventory, lower sales because of the elimination of unprofitable
products and because of a downturn in industry orders.
(d) Selling, General and Administrative Costs
Selling, general and administrative costs for the six months ended November
30, 1998 were substantially lower when compared to the same period last year.
This was due to the fact that the two principal officers of the Company waived
their salaries during this period and one other officer (mainly concerned with
the operations of PDA) resigned and was not replaced during the period.
Selling, general and administrative costs were also lower in the three
months ended November 30, 1998 for the same reasons stated above.
As has been said, the elimination of unprofitable business in recent months
and the price increases effected for the PDA products during the 1997 fiscal
year, among other things, influenced the lower cost basis for products in the
six months period ended November 30, 1998 and, combined with lower selling,
general and administrative costs in that period resulted in a slight improvement
in income from operations for the first six months of the 1999 fiscal year
compared to the same period in 1997 which showed a profit of $24,007 compared to
the $101,979 Income from operations for the six months ended November 30, 1998.
Selling, general and administrative expenses were also lower for the three
months ended November 30, 1998 for the same reasons described above.
<PAGE>
(e) Interest and Amortization Expenses
Interest expenses increased by approximately $20,000 in the six months
period ended November 30, 1998 compared to the previous period in 1997. This
reflects additional borrowing by the Company during the period. Amortization
also increased during the period to account for the additional debt incurred by
the acquisition of the Company's plant facility in July, 1998.
These expenses combined to result in a net loss for the six months ended
November 30, 1998 as it did for November 30, 1997; however the loss for the six
months ended November 30, 1998 was more significant because of the increases in
interest costs and amortization. These same factors combined to produce a net
loss for the three months ended November 30, 1998 compared to the three months
period ended November 30, 1997 which showed a profit of $7,950, because the full
weight of the amortization costs were not in place as yet.
In order to offset the costs of borrowing and amortization, it will be
necessary for the Company to increase its net sales by either adding additional
products, services or customers or by making an acquisition. The Company is
undertaking to do this now by itsproposed plan to increase sales and by
arranging for additional financing toallow acquisitions which management has
had in mind as well as the acquisitionof Jake Industries Inc., discussed
above, which is scheduled shortly. Inaddition, the Company believes that
with its new tissue products, (i.e. toilettissue for industrial use and tissue
paper for examination tables in medical andveterinary offices) it will open new
markets and sales.
For information with respect to the possible effect of future trends on
operations, see the discussion under the caption "Trends Affecting Liquidity,
Capital Resources and Operations."
III. Capital Resources
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.
Also, during the six months ended November 30, 1998 the Company purchased
additional machinery and equipment to manufacture tissue paper for its planned
entry into the market for such products, including toilet tissue for
institutional customers and tissue paper for examination tables. There were no
other significant increases in the purchase of any other property or equipment.
The Company also does not presently anticipate the allocation of other
significant resources for machinery and equipment purchases in the near future,
unless its proposed private offering of securities is successful. Any such
commitments, however, 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 resources. Future conditions, however, may
change this position.
<PAGE>
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 tosupport not only its present
level of operations but, with the addition of asecond and, if needed,
a third operating shift, to support a substantialincrease in production of
its present product lines. Second, although productpricing would be affected
by inflation due to higher costs, management believesthat public health and
safety concerns would outweigh any negative impact ofprice increases and
would not adversely affect the Company's projected sales.Additionally,
the hospital and health care markets have historically been bestable 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.
<PAGE>
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 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.
<PAGE>
PART II OTHER INFORMATION
ITEM 5. Other Information
Effective January 8, 1999, the Company adopted a reverse split of its
Common Stock on the basis of one (1) new share for every fifteen (15) presently
issued shares of Common Stock.
Based on the 15,490,009 shares of Common Stock outstanding at January 8,
1998, the new total number of new outstanding shares are 1,032,667.
A new CUSIP number has been issued to identify post-split shares from
pre-split shares.
Shareholders are not required to surrender their presently issued
certificates; however they may do so voluntarily or the certificates will be
exchanged when presented for transfer.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11 - Calculation of primary and fully-diluted income (loss) per
share. Reference is made to Note 16 of the financial
statements,
incorporated herein by reference.
(b) Reports on Form 8-KSB
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH-PAK, INC.
/s/ Anthony J. Liberatore
Anthony J. Liberatore
President
Chief Operating Officer
Dated: March 25, 1998
/s/ Michael A. Liberatore
Michael A. Liberatore
Vice President
Chief Financial Officer
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
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