UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2004
Commission File Number: 003-08955
NANTUCKET INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-0962699
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
45 Ludlow Street, Suite 602, Yonkers, New York 10705
(Address of principal executive offices) (Zip Code)
(914) 375-7591 (Registrant's telephone number,
including area code)
(Former Address, since last report)
Securities registered pursuant to Section 12(g) of the Act. Common Stock,
$.10 par value
Name of each exchange on which registered. NASD OTC Bulletin Board
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 twelve 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. |X| YES |_| NO
The aggregate market value of the outstanding Common Stock of the registrant
held by non-affiliates of the registrant as of June11, 2004, based on the
average bid and asked price of the Common Stock on the NASD OTC Bulletin Board
on said date was $ 7,633,172.
As of June 14, 2004, the Registrant had outstanding 12,151,328 shares of common
stock.
NANTUCKET INDUSTRIES, INC.
TABLE OF CONTENTS
Page #
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PART I
Business ................................................................... 1
Properties ................................................................. 18
Legal Proceedings .......................................................... 19
Submission of Matters to a Vote of Security Holders ........................ 19
PART II
Market for registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........................... 20
Selected Financial Data .................................................... 20
Management's Discussion and Analysis of financial Condition and
Results of Operations ...................................................... 21
Quantitative and Qualitative Disclosures about Market Risk ................. 25
Financial Statements and Supplementary Data ................................ F-1
F-19
Changes in Disagreements with Accountants on Accounting and
Financial Disclosure ....................................................... 26
Controls and Procedures .................................................... 26
PART III
Directors and Executive Officers of the Registrant ......................... 27
Executive Compensation ..................................................... 27
Security Ownership of Certain Beneficial Owners and Management ............. 29
Certain Relationships and Related Transaction .............................. 29
Principal Accounting Fees and Services ..................................... 30
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-K ............ 30
SIGNATURES ................................................................. 31
ITEM 1. BUSINESS
We are directly, and indirectly through our subsidiaries, Accutone Inc. and
Interstate Hearing Aid Service Inc., in the business of distributing and
dispensing custom hearing aids. Accutone Inc. was formed under the laws of the
State of Pennsylvania in October 1996 for the purpose of engaging in the
manufacture, dispensing, and distribution of hearing aids. In 1998, Accutone
acquired 100% ownership of Interstate, a Pennsylvania corporation and an FDA
licensed hearing aid manufacturer which had been in the hearing aid business for
approximately 35 years. In the Fall of 2000, Accutone discontinued all
manufacturing operations and changed the focus of its marketing to be
concentrated through Interstate Hearing Aid Service, Inc. to include, not only
the individual, self-pay patients, but health care entities and organizations
which could serve as patient referral sources for us.
History
Until the end of October 1999, when we discontinued all prior business
activities, we produced and distributed popular priced branded fashion
undergarments for sale, throughout the United States, to mass merchandisers and
national chains. We produced and sold our men's underwear products primarily
under licensed labels including "Brittania" and "Arrow" and, until March 31,
1998, we also produced women's innerwear under the GUESS? label, for sale to
department and specialty stores. From October 31, 1999 up to and including the
period that we effectuated the reverse acquisition of Accutone and Interstate
Hearing Aid we were a dormant corporation.
Subsequent to the reverse acquisition our only assets and business were those
attributable to the acquired group of corporations. Until the summer of 2000, a
small portion of our business consisted of manufacturing operations. However,
because of changes in the competitive climate of the hearing aid manufacturing
industry and the comparatively small level of our operations, all manufacturing
was discontinued on July 30, 2000. This marked the beginning of an ongoing
change in our revised business plan, which now encompasses concentrating our
marketing to nursing homes, hospitals, out-patient clinics, members of managed
health care providers, such as health maintenance organizations ("HMO's"),
Physician Provider Organizations (physician group practices known as "PPO's"),
union health plans, medicare, and medicaid while considering the expansion of an
advertising campaign aimed at individuals in the non-insured self- pay market.
Since implementing our revised business plan in October 2000, we have entered
into contracts through Interstate Hearing Aid with approximately 65 managed
health care provider organizations, unions, local municipalities and secondary
health care insurance providers and pediatric care organizations in the New York
metropolitan area, including Medicare and Medicaid. We are continually in
negotiations with other such organizations and we anticipate that the number of
such organizations will continue to grow. As a result of our additional
marketing plan, changes and efforts, we have contracted with seven early
intervention agencies. We are currently negotiating to sublease space in the
offices of Early Achievers, Inc., An early intervention agency with whom we have
signed an exclusive contract for audiological early intervention services.
In addition to marketing our services, we anticipate that when and if our
capitalization improves, we will expand our audiological staff and the level of
our operations and the related potential profitability. Our long term goal is to
expand all segments of our operations, both in scope of services and in a wider
geographic area, as well as to change emphasis of services to include a much
larger proportion of private pay patients in an attempt to increase gross
profits. Currently, approximately 80% of our audiology revenues are generated
from third party payors. The reduction in payment levels from Medicaid has
negatively impacted our profit margins.
We are also currently providing in-home fitting and dispensing services in the
State of Pennsylvania, where our customer base is located in a somewhat rural
area, making home visits convenient for our customers. We have four Pennsylvania
Registered Hearing Aid Fitters who are available to us for in-home, as well as
office visits in Pennsylvania. To date because of our financial constraints, we
have been unable to utilize these Hearing Aid Fitters to their fullest capacity.
Through our offices and our in-home services, we offer a full range of
audiological products and services for the hearing impaired. (see subsequent
events)
1
In order to make our services via Interstate Hearing Aid acceptable to managed
care and health insurance companies, we must address their particular concerns.
This will require that we have:
* service locations which are conveniently accessible to their members;
* an adequate staff of highly qualified audiologists;
* a full range of high quality hearing aid products;
* competitive pricing; and
* adequate product liability and professional malpractice insurance
coverage.
We are continually endeavoring to put all of these elements into place.
Therefore, our primary goals in the audiological services segment of our
business during the next eighteen months include:
* Significant marketing efforts to increase exposure and sales to
private pay patients to increase much higher profit margins.
* A concentration of marketing efforts to nursing home facilities and
early intervention agencies to provide audiological services;
* opening and establishing operations at sales and dispensing offices
on-site at additional nursing home facilities in the New York
metropolitan area;
* increasing the number of audiologists on our staff to service these
additional facilities;
* hiring a chief financial officer, a chief operations officer and a
director of marketing.
Upon receipt of the necessary capital as set forth herein, we also intend to
implement an aggressive advertising and marketing campaign aimed at individuals
and managed health care organizations and to utilize the knowledge and
experience of the professional advisory board which consists of 6 individuals
with high levels of experience in hearing health care, gerontology, and early
intervention, accounting, marketing and practice development concepts. We have
also made positive strides and have been successful in identifying potential
acquisition targets in medically related industries (see subsequent events)
which we believe will add a material increase in gross revenues and
profitability.
We estimate that in order to achieve these goals, many of which will involve the
increase and expansion of marketing the "Discount Medical Service Cards" of our
recently acquired, Comprehensive Network Solutions, Inc. as outlined in our
subsequent events discussion. Although there can be no guarantees of
successfully attaining these goals, management will be actively pursuing same.
We will require financing from sources other than cash flow, within the next six
to eighteen months, in an amount ranging from $1,000,000 to $1,500,000. Our
present plan for financing focuses on raising funds through a private placement
of our securities. Although we have had limited success in raising private
placement funds, our efforts have fallen short of our previous expectations.
Although the capital markets have a perceived improvement, we are cautiously
optimistic of our abilities to achieve these goals. Along these lines, we are
continually and actively pursuing potential businesses alliances with privately
held businesses in like and or compatible medically related industries. We
believe that the addition of both sales volume growth and profitability will
greatly assist us in successfully raising additional capital. (see subsequent
events)
2
Overview of the Industry
Hearing Loss
We continue to believe and are reinforced by nationwide statistics that hearing
loss is one of the most prevalent chronic health conditions in the United
States, and that its incidence is on the rise. Hearing loss occurs when there is
damage to the auditory system, possibly caused by heredity, aging, noise
exposure, illness, trauma, and/or some medications. Some hearing loss is
temporary and/or can be corrected with medical or surgical treatment. Other
types of hearing loss can be effectively managed with hearing devices. Although
hearing loss traditionally has been considered an "old person's" condition, in
several reports, the Better Hearing Institute reported that hearing loss is
becoming increasingly common among the "Baby Boomer" 40 to 65 year old segment
of the population. This is widely believed to be the result of extreme noise
exposure, possibly because of a history of excessive exposure to extremely high
decibel rock-and-roll concerts and the widespread use of "walkman" type radios
(which produce a concentrated level of noise in extremely close proximity to the
ear). The degree of hearing loss is often directly related to the amount of
exposure and the intensity of loud noise. However, damaging noise does not
necessarily have to result from extreme situations. Even cumulative exposure to
everyday noises, such as the sounds of daily traffic, construction work, or a
noisy office can contribute to hearing loss.
Hearing loss can have serious implications, leading to communication disorders,
isolation, depression, cognitive dysfunction, and overall decline in quality of
life. While hearing loss has historically been considered an effect of aging,
recently some government agencies, health care organizations and insurance
companies have begun increasing their scope of services and coverage's to
include early interventions for children up to the age of 12. While a great many
people suffering from hearing loss can be helped with the use of hearing aids, a
survey by the National Council on the Aging (NCOA) indicated that older adults
with hearing impairments, who do not wear hearing aids, are more likely to
report sadness and depression, worry and anxiety, paranoia, diminished social
activity, and greater insecurity than those who wear aids. We believe that the
products and technologies currently available are broad and varied and in most
instances can afford to the hearing impaired individual the amplification
necessary to afford them the ability to have improved hearing and enjoy a full
and normal lifestyle. In addition, we believe that these people could also
benefit from the use of other assisted listening devices, such as telephone or
television amplifiers (see "Products", below).
The Future of the Industry
While we recognize that in the past and still today, many members of the public
have been reluctant to use hearing aids, we believe that this industry can be
expected to experience substantial and continuing growth during the coming
decades. Management recognizes our ability to take advantage of these increases
and that we must have required additional capital and infrastructure to be
successful. Although the statistics of the last three years have shown minor
growth, Sergei Kochkin, PhD, an officer and board member of the Better Hearing
Institute and a director of market development at Knowles Electronics, has
written a market research article in which he concluded that, "With modern
estimates of hearing loss ranging from 24 million to 28 million and hearing
instrument penetration at only 21% to 22% historically, it is of interest to
determine the extent to which the more than 20 million hearing- impaired
individuals who do not use hearing instruments are, in fact, current or future
candidates for hearing aids. In the past we have conservatively estimated that
if even 25% of the non-owner market were convinced to purchase hearing aids over
the next five years that the market would double and retailers would realize an
incremental $1 billion a year."
Some of the factors which we believe will contribute to a measured expansion of
hearing aid use and audiological services include the following:
- A rapidly aging population (the "graying of America") accompanied by a
natural, progressive deterioration in hearing acuity;
- Wide exposure to excessive noise, pollution among younger segments of
the population resulting in ever increasing damage to hearing;
3
- A growing acceptance among all segments of the population of the use
of hearing aids;
- The availability of smaller and less visible hearing aids;
- Advances in hearing aid technology, including computerized digital
products;
- Decreasing prices of hearing aids;
- Increasing coverage of hearing aid products by HMO's, PPO's, unions,
employer-sponsored groups, and Medicare and Medicaid to offset the
costs to the end user; and
- Substantial increase in testing of pediatric patients since the
medical profession has become aware of hearing losses in infants and
toddlers.
As a result of the increase in the early intervention area of audiology, many
health care organizations, managed care organizations and health care insurance
companies (including medicaid) have begun to reimburse the costs of implementing
early intervention testing procedures in their reimbursement schedules. We are
currently expanding our marketing efforts in the early intervention segment of
our business, mainly through the efforts of John H. Treglia our president and
CEO.
Our Sales and Dispensing Offices
We are currently operating three hearing aid sales and audiological testing
facilities. These are retail sales and dispensing offices, which are located in
medical arts buildings, independent store-fronts, and, in one case, on-site at a
medical outpatient center. One of our retail offices is located in Yonkers, New
York, one is in Mount Vernon, New York, and one is in Forty Fort, Pennsylvania.
Our Mount Vernon facility is located on-site at The Wartburg Home of The
Evangelical Lutheran Church in its 16,000 square foot outpatient facility.
Our Yonkers office and our Pennsylvania office are open and functioning on a
full time basis. We had expected that another office in Yonkers, which was
recently closed, would provide full time services on an as needed basis.
However, such offices were recently closed since it failed to meet our projected
profitability. Our Wartburg out-patient office is currently open two days per
week and our Wartburg Nursing Home office is currently open an average of four
days per month, on an as-needed basis. Our Ludlow Street Yonkers office is
staffed and supervised by a full-time, licensed and certified audiologist and
one full-time patient care coordinator. Our Pennsylvania office operates on a
full time basis and is staffed by a state licensed hearing aid dispenser, as
required by applicable Pennsylvania law and at least one clerical employee.
Our current New York sales and dispensing offices range from 600 to 1,100 square
feet in size. These include our Yonkers office and our on-site Wartburg
Outpatient Facility office, all of which are fully equipped with:
* soundproof testing booths and state-of-the-art testing equipment that
meets or exceeds all state standards; and
* a full range of diagnostic and auditory-vestibular tests that assist
referring physicians in the treatment of patients with hearing and
balance disorders.
Our on-site nursing home offices, which do not have their own existing on-site
testing booths and audiological equipment, are equipped with our portable
electronic audiological equipment brought in by the audiologist at each visit.
This equipment meets or exceeds the requirements of all federal and state
agencies as well as all third-party payers. We have found this equipment to be
adequate to serve the needs of almost all patients at these facilities and
continually upgrade all equipment to the latest industry standards.
On-Site Offices
The Wartburg Adult Care Community Outpatient Clinic and The Wartburg Nursing
Home
4
We have entered into lease and service agreements with The Wartburg Adult Care
Community Outpatient Clinic and the Wartburg Nursing Home. These facilities are
part of the Wartburg Adult Care Community which is located in a 36-acre campus
in the town of Mount Vernon in Westchester County, New York. The Wartburg is a
comprehensive senior health care complex which includes residential assisted
living, nursing home, and critical care facilities as well as a 16,000 square
foot Outpatient Health Services complex serving area residents as well as
persons residing within the Wartburg facilities. Our contracts with the
outpatient clinic and the nursing home provide for our:
* Operating an on-site dispensing and testing office in the Wartburg
Diagnostic and Treatment Center (outpatient center). Under the terms
of the contract, our office has use, at no cost, of a common reception
and waiting room and reception personnel in the Wartburg, who will
schedule and coordinate patient appointments. This facility is fully
equipped, including a sound- proof booth, and all required electronic
testing equipment as well as all other peripheral equipment necessary
for appropriate audiological testing and the fitting and dispensing of
hearing aids. This office is used for the treatment of both
non-resident outpatients and Wartburg assisted living facility
residents. We are currently in the process of expanding the patient
base to include early intervention (pediatric testing and evaluation)
as well as dispensing of hearing aids when deemed appropriate and
necessary.
* Operating a separate on-site dispensing and testing facility in
Wartburg nursing home (The Wartburg Home of the Evangelical Lutheran
Church, Inc.). Wartburg provides treatment and waiting room areas
within the nursing home to be used as an audiological testing,
fitting, and dispensing facility for its nursing home patients,
utilizing portable and mobile, state of the art, testing and fitting
equipment.
Presently, the Wartburg outpatient facility handles six hundred patient visits
per month. We had anticipated that during the past six months, we would devote a
total of approximately two to three days per week to patients at the Wartburg
facilities, but we fell short of our expectations. The Wartburg Diagnostic and
Treatment Center had advised us that it intended to actively promote its
outpatient services but financial constraints have prohibited them from doing
so. We will continue to expand our own marketing program as soon as the
financial resources are available to us. We intend to coordinate such a
marketing program with the Wartburg so as to maximize promotion of our Wartburg
outpatient facility, as well as our other facilities. Because of financial
constraints, the Wartburg was unable to fully implement its projected marketing
program. This has continued to negatively impact our projected growth of our
audiological services and hearing aid sales. It is our belief that our continued
coordinated marketing efforts and the physical presence of our facility on-site,
will increase patient awareness of our services. To date, we have not been as
successful in our business operations as our original projections had lead us to
believe. With anticipated increases in capital and fording, we continue to
believe these goals of additional revenues and/profitability can be attained. In
response to the expected growth in pediatric and early intervention services
which are to be added to those services we already provide, the Wartburg is in
the process of constructing 2 separate waiting rooms for its patients. It is
intended that one room will be for seniors and one will be for pediatric
patients. This construction is not being undertaken solely to accommodate our
patients but also for the Wartburg's expected entrance into pediatric medical,
psychiatric and physical rehabilitation services. As a result, we intend to
increase our personnel and operating hours at the Wartburg Out-Patient Clinic in
order to adequately service the non-resident outpatients that will be added, as
well as the full time residents/patients of the facility.
Existing Contracts with Nursing Home Facilities
We have presently entered into contracts with approximately fifty eight nursing
homes for the establishment of on-site offices and our appointment as sole
provider of audiological services and products during the terms of the
contracts. The following sets forth the nursing home facilities that we have
entered into such contracts:
5
Daughters of Jacob Nursing & Rehabilitation Center Bronx
Daughters of Jacob Adult Care Bronx
Schervier Nursing Care Center Bronx
Judith Lynn Adult Home Bronx
Hebrew Hospital Home Bronx
Laconia Nursing Home Bronx
Hebrew Hospital Home Greenburgh
Saint Joseph's Hospital Nursing Home Yonkers
New Sans Souci Nursing Home Yonkers
The Wartburg Mount Vernon
Outpatient Health Services @ The Wartburg Mount Vernon
Shalom Nursing Home Mount Vernon
ICF Mount Vernon
Dumont Masonic Home New Rochelle
Bethel Nursing & Rehabilitation Center
Croton-on-Hudson
Bethel Nursing Home, Inc. Ossining
Cortlandt Manor Nursing Care Center Cortlandt Manor
Northern Manor Geriatric Care Center Nanuet
Northern Metropolitan RHCF Monsey
Northern Riverview Nursing & Rehabilitation Center Haverstraw
Wingate at Duchess Fishkill
Wingate at St. Francis Beacon
Wingate at Ulster Highland
The Fountains at RiverVue Tuckahoe
Eden Park Nursing Home Poughkeepsie
Eden Park Health Care Center E. Greenbush
(Rensselaer Co.)
Oakwood Care Center Oakdale
(Suffolk Co.)
Florence Nightingale Rehabilitation & Nursing Center Manhattan
Somers Manor Nursing Home, Inc. Somers
Laconia Nursing Home Bronx
Schervier Nursing Home Bronx
New San Souci Health Care Yonkers
Fieldston Lodge Bronx
Throgs Neck Extended Care* Bronx
Pelham Parkway Nursing Home* Bronx
Concourse Rehabilitation & Nursing Center Bronx
Waterview Hills Nursing Home Purdys
Northwoods Facilities (3 facilities) Albany
Victory Lake Nursing Home Hyde Park
In the past we have aggressively pursued contracts with new nursing home
facilities (especially those that have been made available to us pursuant to the
needs of our association with Park Avenue Medical Associates, PC as set forth
herein). However, we have currently curtailed these efforts due to capital
constraints which prevent us from adding to our professional staff of
audiologists and therefore adding to the number of nursing home and senior care
facilities we are currently unable to service.
We are also in process of renegotiating existing contracts with these facilities
to add additional revenues to make up for the cuts in Medicaid and Medicare
reimbursement rate.
Contract With Park Avenue Health Care Management Inc.
On February 15, 2002, we executed an Agreement with Park Avenue Health Care
Management Inc. and its affiliate, Park Avenue Medical Associates, P.C.
(referred to herein, collectively, as "Park Avenue") which closed on February
28, 2002. Pursuant to this Agreement, Park Avenue contributed its entire
Audiology business in consideration for the issuance of 1,200,000 of our shares
to Park Avenue. Park Avenue is a health care management organization which
services nursing homes, hospitals, assisted living facilities, adult day care
centers, adult homes, and senior outpatient clinics. Park Avenue directly
employs medical professional personnel, including physicians in both general and
specialty practices and other health care professionals such as podiatrists,
audiologists, and optometrists.
6
Nursing homes contract with Park Avenue for the services of its medical
professionals, on a pre-determined schedule or on an as-needed basis. Park
Avenue presently provides staff to approximately seventy-two nursing homes. We
anticipate that with additional operating capital we will be able to service a
majority of these nursing homes and senior care facilities.
Our Services
We provide all of our patients at our retail, nursing home, and out-patient
clinic sales and dispensing offices with comprehensive hearing care services
consisting of the following:
- an interview with one of our audiologists or patient care coordinators
respecting the hearing problems and all factors which may contribute
to or cause such problems;
- an internal and external examination of the patient's ear performed by
one of our audiologists;
- an initial hearing screening to establish a permanent base-line
hearing acuity and to determine whether the patient has a hearing
problem;
- if the initial screening indicates that there is a hearing problem,
the audiologist will then perform additional testing and do a complete
audiological evaluation, including:
* air conduction;
* bone conduction;
* speech recognition thresholds;
* most comfortable hearing level;
* uncomfortable hearing level;
* site of lesion tests, if required;
* tymponometry;
* acoustic reflex testing; and
* acoustic reflex decay.
The patient is then counseled with respect to the results of the audiological
testing and evaluation, the nature and extent of any hearing defects found, the
possible effects of such hearing aids on the patient's lifestyle, and the
options for treatment with a hearing aid; and if it is determined that a hearing
aid would be of benefit to the patient, an appropriate aid will be prescribed
and fitted; the fitting process will include taking impressions of the affected
ear or ears.
All hearing aids that we prescribe are custom made for the individual patient.
Delivery is usually made within one week to ten days. When the patient receives
the hearing aid, the audiologist explains the properties and capabilities of the
hearing aid, and demonstrates proper insertion, removal, maintenance techniques,
and the operation of all the features of the hearing aid. The patient is then
re-tested wearing the hearing aid to enable the audiologist to determine whether
the hearing aid is performing to prescribed standards and to evaluate the
benefit to the patient. After one week, the patient care coordinator will
contact the patient by telephone to discuss any problems or questions and to
schedule a follow-up appointment if the patient or the patient care coordinator
feels it is needed.
We provide follow-up services including, where necessary, additional personal
contacts with the patient and/or the patient's family, for the purpose of
monitoring and guiding the patient's progress in successfully utilizing the
hearing aid and making all adjustments required to insure a successful outcome.
We also have a family hearing counseling program to help the patient and his or
her family understand the proper use of their hearing products and the nature of
their disability. These services are provided on an as needed basis as
determined by the licensed audiologists.
7
In addition to all of the foregoing services, at the Wartburg Nursing Home, and
at all on-site offices which we may establish at other nursing homes in the
future:
* We continually coordinate with these facilities for the payments which
have not been reimbursed by the various third party payors and are to
be paid to us by the facilities or the patients (this does not include
Medicaid beneficiaries).
* we work directly with the director of the facility and nursing staff
to insure that all residents and patients are provided any required
audiological assistance on a timely basis.
* patient's appointments are scheduled by the nursing home personnel at
intervals of approximately one-half hour to forty-five minutes;
* all patients are seen at the direction and referral of his or her ear
nose and throat specialist or primary care physician;
* we provide base-line hearing screening for all new admissions
including residents and short-term rehab patients; and
* results of all procedures are reported to the attending physician and
become a part of the patient's permanent medical records.
Early Intervention Services
While hearing loss has historically been considered an effect of aging,
recently health care professionals as well as some government agencies, health
care organizations and insurance companies have begun to increase their scope of
services and coverage's to include early interventions for infants and children
up to the age of 16. The reason for the rise in early intervention is due to
the fact that many organizations now believe that pediatric hearing impairment
may be the cause, or part of the reason, for such disorders as Attention Deficit
Disorder, Dyslexia, disciplinary problems, educational underachievement and
disfunctional behavior with a family setting, especially with siblings.
Unfortunately, many of these problems have been deemed to be caused by alcohol
and drug abuse by the child's mother or other prenatal problems which were not
previously brought to light. We currently have referral contracts with and
provide audiological services to the following agencies:
-First Step Services, Inc.
-Los Ninos Community Services
-Speech and Communications Professionals
-Project Rainbow
-Secundino Services, Inc
-Early Achievers Services, Inc.
-Paxxon Healthcare Services, LLC
As a result of our providing such services for these companies, we are
continually approached by similar organizations and we believe that we can
attain substantial growth in this new source of revenues to our company if our
operating capital improves.
We were in negotiations to enter into a business combination with Paxxon
Healthcare Services, Inc. However, we have ceased negotiations with Paxxon and
we do not currently anticipate that we will enter into any form of business
combination with Paxxon.
Our Products
A hearing aid is an electronic, battery-operated device that amplifies and
transforms sound to allow for improved communications. All hearing aids consist
of three components: the microphone, the amplifier, and the loudspeaker. Sound
is received through the microphone, which vibrates in response to sound waves
and converts the sound waves to electrical signals. The amplifier enhances the
intensity of these signals before transmitting them to the loudspeaker where
they are converted back to sound waves for broadcast in the ear.
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All hearing aids that we prescribe are custom made for the individual patient.
We have selected a variety of major worldwide manufacturers' products, to make
available through our offices, in order to provide the best possible hearing aid
products for our patients. These include the latest digital technology available
from Magnatone, Siemens, Phonak, Sonotome, Lori/Unitron, United Hearing Systems,
and others. We are also able to make available, by special order, a large
selection of other hearing enhancement devices including telephone and
television amplifiers, telecaptioners and decoders, pocket talkers, specially
adapted telephones, alarm clocks, doorbells and fire alarms.
Customers
To date, we have continued to expand our patient referral base by securing our
appointment as the potential sole providers of hearing aids and audiological
services to nursing homes, out-patient facilities, and adult group homes with
whom we have contractual arrangements. We have also established relationships
and have signed contacts with other types of health care organizations, such as
HMO's and PPO's. Our affiliations with these types of health care organizations
and facilities have grown rapidly to the extent that our current capital
structure has allowed. Our customers include:
* word of mouth generated by our existing patient base;
* patients who are participating members of health care organizations,
who come to us as a result of contractual (or in some cases,
non-contractual) arrangements with such organizations, appointing us
as an approved, preferred, or sole, provider of audiological care to
their members. As a provider, we are listed in the organization's
provider manual as a source for audiological services and products;
* patients who are referred to us by out-patient health care clinics and
hospitals;
* patients who are referred to us, on an out-patient basis, by nursing
homes and senior care facilities at which they reside;
* patients who are referred to us by area physicians with whom we have
established relationships;
* patients who are treated on an in-patient basis in nursing homes or
senior care facilities; and
* pediatric patients referred to us by local school districts, pediatric
managed care organizations and local pediatric physicians.
Existing Contracts With Health Care Providers and Third-Party Payers
To date we have entered into contracts for the provision of audiological
services with an excess of sixty health care provider organizations, as well as
third-party payers such as Medicare and New York State Medicaid. We expect these
additional contracts to continue to grow as we progress. We believe that we
currently have sufficient staff and facilities which are geographically
accessible for all participants in organizations which we have contracted with.
Some of these groups and organizations include:
Medicare Federal Health Care Program, Parts A and B;
New York State Medical Assistance (Title XIX) Program/Medicaid;
Independent Health Association;
Magnacare Health Care;
Empire Blue Cross Blue Shield Health P.P.O.;
Corvel Corporation;
Oxford Health Plans (New York, Inc.);
Health Insurance Plan of Greater New York and Group;
Community Choice Health Plan, Inc.;
Better Health Advantage, Inc.;
Fidelis Health Care, Inc.
Health Source Westchester Pre-Paid Health Services Plan, Inc.;
Workers Compensation Agreement;
Preferred Choice Management Systems;
Speech and Communications Professionals;
9
Los Ninos Services, Inc.
Genesis Health Care, Inc.
Pomco
National Ear Care Plan, Inc.
Paxxon Health Care Services
Visiting Nurse Services of Bronx/Westchester Counties
United Health Care
Local 1199
Blue Cross Senior Plans
Aetna US Health Care
Blue Cross Senior Plan
GHI (General Health Insurance)
AARP (Secondary Pay)
American Postal
Workers Union
United America Insurance
Mutual of Omaha
Cigna
City of Yonkers
First United (Secondary Payer)
Westchester Community Health Plan
Local 32 E
Health Source
Fidellis
Oxford
Genesis Health Care
Generally, our agreements with health insurance or managed care organizations
provide for services to be offered on four different bases, including:
(1) fee for service basis based on a contractual rate which we offer to
provider's members (all paid for by the patient); and
(2) an encounter basis where we are paid a fixed fee by the insurance or
managed care organization for each hearing aid sold (with the balance
paid to us by the individual member).
(3) a special Medicare/Medicaid encounter basis where we are paid a fixed
fee by Medicare and/or Medicaid for particular audiological services,
at a price preestablished by Medicare or Medicaid (other than the
"deductible" amount, which is paid either by the patient or other
third-party payers).
(4) For those services not covered by a third party payor to be paid
either by the facility or the patients family members.
Requirement for Renewal of Agreements with Health Insurance and Managed Care
Organizations
The terms of most agreements with health insurance and managed care
organizations are subject to renegotiation annually. Moreover, most of these
agreements may be terminated, at any time, by either party on 90-days notice.
Even if we are successful in expanding our base of contracts with such
organizations and institutions, the early termination or failure to renew such
agreements could adversely affect our results of operations. To date, we have
not been terminated and, in some instances, new and updated contracts have been
signed.
Nursing Homes
Approximately fourteen nursing homes, assisted living facilities and adult day
care centers currently provide out-patient referrals and transportation of
their residents to our Ludlow Street office. We also provide limited on-site
testing and evaluations within these nursing homes for residents who are
disabled or infirm. These nursing homes include:
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Kings Terrace/Terrace Health Care Bronx
Manhattanville Nursing Home Bronx
Methodist Church Home Riverdale
Riverdale Nursing Home Bronx
Tarrytown Hall Care Center Tarrytown
Classic Residence by Hyatt Yonkers
St. Joseph's Nursing Home Yonkers
Saint Joseph Geriday Care Yonkers
Sutton Park Adult Care Yonkers
Varian Woods Assisted Living Riverdale
Sprain Brook Manor Yonkers
Saint Michaels/Nursing Home Westchester
Mary The Queen/Retired Nuns Bronx
Saint Joseph's Long Term Care Yonkers
Existing Referral Arrangements With Out-Patient Facilities
We have established relationships with four local out-patient facilities and
these referrals continue to steadily increase. We believe that patient referrals
from these sources will continue to grow based upon the positive feedback we
receive from these out-patient facilities.
On-Site Offices
We have established an on-site office at The Wartburg Adult Care Community
Outpatient Clinic, where our location makes us the sole on-site audiological
services provider to patients being treated at the clinic. We have also
established an on-site office at The Wartburg Nursing Home where we are the
exclusive provider of audiological services to all residents at the Nursing
Home. Our audiologist visits the out-patient clinic two half-days per week and
the nursing home four half-days per month. On average, our audiologist sees
approximately six to eight patients, per half-day, at each of these facilities.
We had expected that the amount of time our audiologists would spend at the
out-patient clinic would increase to at least two full days per week. The
current financials constraints taking place at this facility have negatively
impacted this anticipated growth.
Area Hospitals
We have established relationships with five area hospitals who have been
referring patients to our Ludlow Street office. We believe that if we receive
the necessary infusion of additional capital, the growth in the number of our
sales offices will put our services within the geographical reach of an
increased number of the patients of these and other hospitals. We therefore,
expect that these relationships will have a continuing impact on the volume of
our out-patient referrals. The hospitals with which we have established patient
referral relationships are:
1. Saint Josephs Medical Center South Yonkers, NY
2. Yonkers General Hospital South Yonkers, NY
3. Montefiore Medical Center Northeast Bronx, NY
4. Westchester Medical Center White Plains, NY
5. Saint Johns Medical Center
Physician Referrals
Referrals from physicians are generally based upon personal contacts and
established patient and physician satisfaction. We endeavor to maintain our
relationships with referring physicians by using a timely comprehensive medical
reporting system which provides each referring physician with a full
audiological report on each of their patients that visit our offices.
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Payments for Services
Our customer base includes self-pay patients, patients whose costs are covered
by medicare or medicaid, patients whose costs are covered by private health care
organizations; and patients whose costs are covered as union benefits). Treating
Medicare and Medicaid patients involves payment lag issues which are currently
problematic for us because of our current capital constraints. Current Medicare
and Medicaid payments for audiological services and hearing aids can take as
long as 120 to 180 days after approved services are provided and hearing aids
are dispensed. In order to assist us with the cash flow lag, we have been
successful in obtaining from some of our suppliers an extension of their normal
payment term. We are hopeful that if the current domestic economic conditions
improve in the near future, we will be able to put bank financing arrangements
into place which will provide us with a credit line for working capital.
Beginning in February 2002, we began billing Medicare directly on-line. We
anticipate that this will continue to accelerate our collection time. Medicaid
does not currently have an on-line billing system for audiological services or
the billing for hearing aids dispersed, and we therefore continue to encounter
the long payment lag from time of service to actual payments.
Sales and Marketing
Recognizing the vast untapped market of hearing impaired individuals we intend
to continue to expand our marketing efforts to include, on a more highly
concentrated basis self-pay patients who had previously not been our principal
customer base, to include:
- physicians in private or group practices;
- providers of group health care;
- unions;
- nursing homes;
- senior care facilities;
- out-patient health care clinics;
- hospitals;
- speech pathology groups;
- nursing home managed
- health care organizations; and
- third party payers, including Medicare and New York State
Medicaid.
Marketing to these organizations and entities has consisted and for the near
forseable future solely of personal contacts by our president, John H. Treglia,
with all of the types of entities and organizations listed above.
Proposed and Existing Advertising and Marketing Program
We intend to continue to try to bring our company and our services and products
to the attention of managed care providers, which can promote our products and
services to the hearing impaired, and to their participating members. In
connection with this, we began a proposed, but somewhat limited, joint
advertising campaign with the Wartburg Out-Patient Clinic. The combined capital
constraints of the Wartburg and our company have continued to cause all current
advertising to be discontinued. We also intend to increase our marketing efforts
to the self-pay, (uninsured patient) market when sufficient operating capital is
made available. Our marketing plan contemplates implementing an aggressive
advertising and marketing program focused on both of these markets, highlighting
the quality of our services and products, as well as competitive pricing. In
addition, to address the substantial growth in the number of assisted living
facilities and nursing homes, we intend, when financial resources are available,
to retain a director of senior care and nursing home marketing to promote and
develop relationships with such establishments. At present, all marketing to
health care organizations is done by our CEO, Mr. Treglia. Our marketing and
advertising efforts have been continually hindered by our capital constraints
which have adversely effected our originally projected higher gross profit
percentages.
It is our goal to establish ourselves as a provider of highly professional
services, quality products, and comprehensive post-sale consumer education. Our
marketing campaign, although currently limited, will emphasize company-operated,
free seminars on hearing and hearing loss, as well as direct consumer
advertising in local radio, newspaper, and, eventually, television media.
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In April of 2002 we entered into a binding letter of intent with United Hearing
Systems, Inc. to purchase all of their assets. Although our management devoted a
substantial amount of time and resources into this potential acquisition during
the 2002 year we ultimately determined that the purchase of these assets would
not have the original perceived positive impact on our potential profitability.
Business Strategy - Audiological Services
Our business plan recognizes that increasing the number of our sales offices
will make our services conveniently accessible to a greater number of
participating members of health care organizations and other entities with which
we have relationships or may establish relationships. Our plan is therefore to
couple such an increase in offices with an expansion of our patient referral
base. We expect this two-pronged approach to enable us to substantially increase
the volume and profitability of our business by further concentrations on the
private pay population. We believe that our success will be largely dependent
upon our ability to raise capital and then use such funds to:
* expand and emphasize our marketing efforts to include the growing
adult assisted living community nursing home and adult day care
population;
* expand our existing operations, first in the New York metropolitan
area and then on a regional basis;
* distinguish our company from its competitors as a provider of hearing
healthcare services to not only the affluent private pay population;
* effectively market our products and services to service the growing
pediatric patient base.
We believe that, in addition, the hearing aid industry, as a whole, must use
customer satisfaction, advertising, and educational programs to strengthen
consumer confidence in the industry and to educate the hearing impaired
population with respect to:
* the importance of professional hearing testing;
* the availability, ease of use, and effectiveness of the newest hearing
aid technologies; and
* the ability to arrange financing for hearing aids through an
arrangement with several emerging lease financing organizations which
arrange for lease-purchase financing of hearing aids on reasonable
terms, especially directed to the senior citizen marketplace and other
hearing impaired persons on fixed incomes.
Proposed Financing Plans
In order for us to implement our business plan, we will require financing in a
minimum amount of $500,000 during the next twelve months. We intend to use our
best efforts to generate between $500,000 and $1,000,000 in equity or
convertible debt financing from a private placement of our securities within six
to eighteen months. To date, we have received limited financing which we believe
is in part attributable because of the current years market conditions. At this
time, we are unable to state what the terms of the anticipated private placement
will be or the amount of shareholder dilution which will result from the
intended financing.
If we are unable to raise these funds through a private placement, we
will endeavor to raise the required financing from other sources such as lease
financing for major equipment purchases and loans from banks or institutional
lenders. We cannot be certain that we will be able to raise the required
financing from any of the foregoing sources.
If we fail to do so, our growth will continue to be curtailed and we will
concentrate on increasing the volume and profitability of our existing outlets,
using any surplus cash flow from operations to expand our business as quickly as
such resources will support.
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Dependence on Outside Manufacturers of Hearing Aids
We currently make available to our customers hearing aids supplied by
approximately five major manufacturers, as well as hearing enhancement devices
manufactured by other companies. There are currently approximately 40
manufacturers of these products world wide and few manufacturers offer dramatic
product differentiation. We are therefore confident that, in the event of any
disruption of supply from any of our current sources, we could obtain comparable
products from other manufacturers on comparable terms. We have not experienced
any significant disruptions in supply in the past.
Dependence on Qualified and Licensed Audiological Personnel
We employ New York State licensed, ASHA certified audiologists in our New York
offices. In our Pennsylvania office and in-home services, Registered Hearing Aid
Fitters provide primary services, with licensed audiologists available on a
consulting basis. In our New York area operations, we currently have two
full-time, and one part-time, New York State audiologist. In our Pennsylvania
operation, we have four available Registered Hearing Aid Fitters in
Pennsylvania, who are employed by us, on a part-time basis, as independent
contractors, and two Pennsylvania licensed audiologists available on a
consulting basis for special needs.
Should we be unable to attract and retain qualified audiologists or Registered
Hearing Aid Fitters, either as employees or independent contractors, it could
limit our ability to compete effectively against competing hearing aid retailers
and thus adversely affect our business. There are currently 6,000 audiologists
in the United States and approximately 200 educational institutions in the
United States which offer audiology degree/certification programs. There is
therefore no current or potential shortage of qualified personnel. However,
while we have not encountered any problems attracting and retaining sufficient
audiological staff, it is possible that we could find ourselves at a competitive
disadvantage against larger, better financed, and more well established hearing
aid providers for the services of qualified personnel.
Government Regulation
Federal
The practice of audiology and the dispensing of hearing aids are not presently
regulated on the Federal level. The United States Food and Drug Administration
("FDA") is responsible for monitoring the hearing care industry. Currently there
are only two regulations affecting the sale of hearing aids:
(i) A physician's review. While the FDA requires first time hearing aid
purchasers to receive medical clearance from a physician prior to purchase,
patients may sign a waiver in lieu of a physician's examination. A majority
of our patients and targeted market are members of the managed care or
institutional providers with whom we have contracts, or whom we expect to
enter into contracts with, to provide hearing care. Some of these
organizations require a physician referral. Consequently, even if any new
federal or state physician referrals are mandated in the future, they
should not be expected to have an adverse impact on our operations.
(ii) A return policy. The FDA requires states to adopt a return policy for
consumers offering them the right to return their products, generally
within three to forty five-days. In Pennsylvania, where the state mandated
return period is three days, we offer our customers a full thirty-day
return policy. In New York, the state requires a forty-five day return
period, which we comply with. Moreover, if our audiologist determines that
an individual patient requires additional time to become acclimated to
using a hearing aid, we will extend the return period to accommodate such
special needs.
In addition, because we accept Medicare and Medicaid patients, each of our sales
and dispensing offices must maintain their eligibility as Medicare/Medicaid
providers and must comply with related federal anti-fraud, anti-kickback and
other applicable regulations. Federal laws prohibit the payment of remuneration
("kickbacks") in return for a physician referring a Medicare or Medicaid
patient, and those laws limit physicians from referring patients to providers in
which they have a financial interest. We believe that none of our managed care
or other provider contracts or our relationships with referring physicians are
violative of the anti-kickback statute.
14
We are unable to predict the effect of future changes in federal laws, or the
impact that changes in existing laws or in the interpretation of those laws
might have on our business. We believe we are in material compliance with all
existing federal regulatory requirements.
State
Generally, state regulations, where they exist, are concerned primarily with the
formal licensure of audiologists and of those who dispense hearing aids and with
practices and procedures involving the fitting and dispensing of hearing aids.
In Pennsylvania and New York, where we currently operate, and in New Jersey and
Connecticut, which are part of our currently targeted markets, such regulations
do exist. We believe we are in compliance with all applicable regulations in
Pennsylvania and New York and we intend to format all of our programs in
Connecticut and New Jersey so that they are in full compliance with the
regulations of those states. While we believe it is unlikely, there can be no
assurance that regulations will not be promulgated in states in which we
operate, or plan to operate, which could have a material adverse effect upon us.
Such regulations could include stricter licensure requirements for dispensers of
hearing aids, inspections of centers for the dispensing of hearing aids and the
regulation of advertising by dispensers of hearing aids. We know of no current
or proposed state regulations with which we, as we currently operate, could not
comply.
Product and Professional Liability
In the ordinary course of our business, we may be subject to product and
professional liability claims alleging the failure of, or adverse effects
claimed to have been caused by, products sold or services which we have
provided. We maintain insurance at a level which we believe to be adequate. Each
of our licensed audiologists is also required by state law to carry appropriate
malpractice liability insurance. All of our audiologists have furnished us, as
well as all nursing homes, assisted living, adult day care, senior care, HMO's,
PPO's and other managed care organizations with whom we have contractual or
other relationships with copies of their insurance coverage certificates. As a
part of this process we also keep records of all license and insurance
anniversary and/or effective dates to attempt to insure compliance. We believe
that they are all in compliance with applicable federal and state requirements.
Also included as a part of compliance with the credentialing requirements,
copies of all educational degrees, certificates and licensing are appropriately
maintained. While we believe that it would be highly unlikely that a successful
claim would be in excess of the limits of our insurance policies, if such an
event should occur, it could conceivably adversely affect our business.
Moreover, because we distribute products manufactured by others, we believe we
will have recourse against the manufacturer in the event of a product liability
claim. It should be noted however that we could be unsuccessful in a recourse
claim against a manufacturer or, that even if we were successful, such
manufacturer might not have adequate insurance or other resources to make good
on our claim.
Competition
The hearing care industry is highly fragmented with approximately 11,000
practitioners providing testing and dispensing products and services.
Approximately 2,500 of these practitioners are audiologists working for
hospitals or physicians, 2,500 of the practitioners are licensed audiologists in
private practice, and the remaining 6,000 are hearing aid specialists. Industry
surveys estimate that approximately 5% of all hearing aids are sold in
physicians' offices, 60% are dispensed by qualified audiologists in private
practice, and the remaining 35% are sold by hearing aid specialists.
Because there are no federal, state or local regulatory or oversight agencies in
the hearing care industry, it is not possible to determine the precise number of
competitors in every market which we are operating in or which we intend to
enter. Our present plan is to continue to focus our efforts primarily on urban,
high density population areas, since we believe these areas will best implement
our current business plan and potential growth with a minimal amount of impact
on our current capital structure.
15
Most competitors are small retailers generally focusing on the sale of hearing
aids without providing comprehensive audiometric testing and other professional
services. However, some of our chief competitors offer comprehensive services
and have large distribution networks and brand recognition. Principal among
these are: (1) Bausch & Lomb, a hearing aid manufacturer whose distribution
system is through a national network of over 1,000 franchised "Miracle Ear"
stores including 400 located in Sears Roebuck & Co. stores; (2) Beltone
Electronics Corp., a hearing aid manufacturer that distributes its products
primarily through its network of approximately 1,000 "authorized" distributors;
and (3) HEARx LTD., a hearing aid distributor whose dispensing and distribution
system is through a network of approximately 79 company owned centers located in
Florida, New York, New Jersey, and California.
To the best of our knowledge, except for HearX, most national networks primarily
offer hearing aids only and do not provide the comprehensive diagnostic
services, use of audiologist services or other ancillary products offered by us.
More importantly, they do not use the services of audiologists in the majority
of their centers. However, these networks are owned by companies having greater
resources than are available to us, and there can be no assurance that one or
more of these competitors will not expand and/or change their operations to
capture the market targeted by us. Nor can there be any assurance that the
largely fragmented hearing care market cannot be successfully consolidated by
the establishment of co-operatives, alliances, confederations or the like which
would then compete more effectively with us in our intended market areas.
Employees
As of June 1, 2004, in our New York area operations, we had a total of four
full-time, and two part-time employees. Full-time employees include, our
president and CEO, John H. Treglia, two New York State licensed audiologists,
and one receptionist - patient care coordinator. In our Pennsylvania operations,
we employ two full-time employees. Our part-time employees consist of three
Pennsylvania Registered Hearing Aid Fitters, who work for us, on an as needed
basis (part- time), and two Pennsylvania licensed audiologists who consult with
us on an as needed basis.
The loss of the services of Mr. Treglia would adversely affect the conduct and
operation of our business. To date we have not purchased a "key man" insurance
policy on Mr. Treglia's life. However, we intend to purchase such a policy in
the amount from $1M to $3M, at such time as we have the financial resources
to do so.
COMPREHENSIVE NETWORK SOLUTIONS, INC.
Section A Mission & Purpose
The hearing aid industry was changing at a rapid pace and management decided to
identify additional opportunities to position Nantucket as a major provider of
health care delivery systems.
The first successful result of this search was the acquisition of 100% of the
stock of Comprehensive Network Solutions, Inc. (CNS) an Austin, Texas based
company in the business of disease management through the development of
healthcare networks with common purposes. Nantucket management believes this is
the foundation for a premier medical savings card in the rapidly expanding
market place. CNS's discount medical savings card can be customized to serve
both retail and commercial markets with a broad menu of health care service
options. CNS's early entry into the market should enable CNS to capture a large
market share in a short period of time.
Background:
Significant market changes have occurred over the past two years that creates an
advantageous environment for new health care financing initiatives in all three
major commercial markets - Employee Benefits, Individual Health Benefits and
Workers' Compensation. These changes present the opportunity for traditional and
complimentary medicine to increase their collaboration coupled with innovative
consumer choice and defined contribution products which are the foundation of
Comprehensive Network Solutions business strategy and plans.
16
Change 1: As the cost of health care has begun to increase in double digits
again, employers, health insurers and the uninsured are all searching for
alternatives to traditional health insurance, health plans and HMO's. Initial
efforts in the market have focused on medical savings plans and defined
contribution alternatives. This is leading to the logical consumer focused
alternative of limited indemnity reimbursement plans coupled with discounted
networks of preferred providers. Historically consumers, employers and health
issuers focused on choosing the insurance plan that met their anticipated
financial needs and then concerned themselves with what health care providers
they could access. The move toward consumer choice requires the benefit
purchaser, now the individual with either their own or their employers fixed
dollar amount to spend, to choose the health care providers they want to access
and then choose the financing arrangement that best meets their individual
needs. For all segments of the benefit market, this shift of purchase priority
means that consumers are demanding a broad array of health care providers
including complimentary and alternative care.
CNS, Inc. Business planning includes products, administration and product
distribution to exploit this market change in a defined geographic market
initially, and then broadening to more markets with improved products. The
initial packaged products include six levels of providers networks and one
limited indemnity medical insurance plan. These products have been trademarked
as CNS Select, CNS Advantage, CNS Optima and CNS 500 Plan which will be marketed
to individuals utilizing the chiropractic networks either owned or under the
control of CNS, Inc. Summaries of these products are attached to this business
plan of reference. These products will be marketed to employers, unions, trade
associations and municipalities.
Change 2: Traditional employee benefit plans and workers' compensation plans
have begun incorporating disease management processes and services into their
operations. Disease management programs are based on the principle that there
are a few diagnosis that generate most of the cost of a health plan and that
these diagnosis can be managed cost effectively through the introduction of a
closed network of health care providers who agree to follow evidence based, best
practice diagnostic and treatment guidelines for patients with these specific
diagnoses. Seminal work on this cost management and patient outcomes strategy
began over 15 years ago and has progressed for diseases such as diabetes, heart
disease, stroke, arthritis and others. Diseases and conditions of the back, neck
and upper extremities were primarily ignored until recently. These conditions
are now a focus of disease management as their costs increase compared to the
costs of other diseases which have been reduced comparatively. Until the early
1990s, back conditions were not in the top 15 diagnoses by costs. Today, these
conditions rank in the top 10 for cost with the least positive patient outcomes.
CNS, Inc. Began in 2002 with a mission to develop disease management treatment
guidelines that would address back, neck and upper extremity musculoskeletal
conditions specifically for workers' compensation. During the past year, these
have been codified and copyrighted. Through an affiliation with the Health
Partners, the strategy is to develop Exclusive Provider Organizations (EPO) in
markets where state regulation enables workers' compensation plans to direct
injured workers to specific health care providers. The CNS' EPO's will be
marketed to workers' compensation and employee benefit plans on the basis access
fees, case management fees and shared savings of future medical costs versus
historic medical costs and patient outcomes. The longer term strategy will be
implemented based on actual performance of CNS disease management outcomes over
a period of one or more years' data.
Mission: Provide high quality consumer choice and defined contribution health
care benefits for employees and uninsured and underinsured individuals while
continuing development of evidence based disease management program for
musculoskeletal conditions of the back, neck and upper extremity.
Purpose: Focus on those marketing health care benefits that will meet the real
perceived health care needs of consumers, enabling these prospective clients to
choose appropriate providers and financial arrangements that best meet their
individuals needs. Complete development and market implementation of a high
quality musculoskeletal disease management program for target markets with
directed care of workers' compensation cases.
17
ITEM 2. PROPERTIES
Corporate Headquarters
Our corporate headquarters is located in Suite 602, The Ludlow Street Medical
Building, located at 45 Ludlow Street, Yonkers, New York. This office consisted
of 850 square feet. We recently leased an additional 800 square feet to
accommodate additional sales and administrative personnel hired by us pursuant
to the acquisition of Comprehensive Network Solutions, Inc. (see subsequent
event).
We occupy these premises pursuant to a five year lease with Diamond Properties,
Inc. which expires in February 2006. With the additional space, our lease calls
for monthly rental payments of $2,100 fully inclusive of all utilities, taxes,
and other charges. The building in which these offices are located is of a newly
renovated, seven story building which houses the private offices of
approximately twenty physicians, dentists, and other medical professionals, with
adequate, free, or off street parking available. It is located off of a main
street and is around the corner from Saint Joseph's Medical Center, a major area
health care facility.
Ludlow Street Sales and hearing Aid Dispensing Office
We have a retail sales and dispensing office located on the first floor lobby of
the Ludlow Street Medical Building in a retail space adjacent to the elevators.
We occupy this space pursuant to a five-year lease with Diamond Properties Inc,
which will expire in February 2006. The lease calls for monthly rental payments
of $1,087, fully inclusive of all utilities, taxes and other charges.
This facility comprises approximately 800 square feet and has a glass enclosed,
visible waiting and reception area and a private fully equipped testing and
dispensing office. This office is fully equipped as an audiological and hearing
aid dispensing facility; equipment includes: (i) a full spectrum hearing suite,
consisting of a wheel chair accessible sound-proof testing booth, of
approximately 10 feet x 12 feet, designed to accommodate the needs of pediatric
patients as well as handicapped adults; (ii) an electronic audiometer; (iii) an
electronic tympanometer; (iv) a computerized hearing aid programmer; and (iv)
other required peripheral testing, fitting and repair equipment. This equipment
was purchased, used, from Saint Joseph's Hospital, which has discontinued its
audiological services department. The equipment purchased from Saint Joseph's
included, in addition to the equipment listed above, a second full spectrum
hearing suite, which we are presently keeping in storage. All of the equipment
which we purchased from Saint Joseph's, and which we are currently using, is
modern and has been totally refurbished and recalibrated. Saint Joseph's
original cost for this equipment was approximately $54,000 and its replacement
cost would be approximately $78,000. We were able to purchase, relocate,
refurbish and recalibrate the equipment for a total cost of $19,000. This
equipment enables us to fully service all patients whom we see at this facility,
including the nursing home patients who are brought to us on an out-patient
basis as well as pediatric patients.
The Wartburg Diagnostic and Treatment Center On-Site Facility
On April 1, 2001, we began operations at our dispensing and testing office
located on-site at the Wartburg Adult Care Community, Outpatient Clinic. This
office is approximately 500 square feet and is located in the Outpatient Health
Services Building on the Wartburg Mount Vernon Campus. We are permitted the use
of common reception and waiting room facilities. The Wartburg also makes
available to us, without additional charge, a large meeting room in which can
run our hearing health care fairs in conjunction with the Wartburg. We occupy
this office pursuant to a lease between our subsidiary, Interstate Hearing Aid
Service and The Wartburg Diagnostic and Treatment Center. This lease is for an
unspecified term beginning on March 12, 2001. The lease calls for monthly rental
payments of $375, fully inclusive of all utilities, taxes, and other charges.
The lease amount is subject to review upon written request by either party on
the March 12th anniversary date of the lease. This dispensing office is
outfitted and equipped with: (i) a standard size wheel-chair accessible
sound-proof booth, (ii) an electronic audiometer; (iii) an electronic
tympanometer; (iv) a computerized hearing aid programmer; and (iv) other
required peripheral testing, fitting and repair equipment.
18
Under the terms of the lease, we are required to maintain certain medical and
administrative practice policies and procedures of the Outpatient Facility. We
are also obligated to provide specified levels of audiological services at
specified times, to maintain professional liability insurance, and to indemnify
the Outpatient Clinic.
The Wartburg Home of the Evangelical Lutheran Church On-Site Facility
We operate a dispensing and testing facility at The Wartburg Home of the
Evangelical Lutheran Church, a nursing home. This facility is approximately 150
square feet and is located on the third floor of the building housing, The
Wartburg Skilled Nursing Facility on the Wartburg Mount Vernon Campus. We occupy
this facility pursuant to a lease between our subsidiary, Interstate Hearing Aid
Service and The Wartburg Home of the Evangelical
Lutheran Church. This lease is for an unspecified term beginning on March 15,
2001. The lease calls for monthly rental payments of $200, fully inclusive of
housekeeping, security services, all utilities (excluding telephone charges),
taxes, and other charges. The lease amount is subject to review upon written
request by either party on the March 15th anniversary date of the lease. The
equipment used in this office consists of portable audiological equipment,
specifically designed to be in compliance with all federal and state
requirements as well as those with all third-party payers, and brought in by the
audiologist at each visit. This equipment is also used for bed-side testing
when required for the treatment of infirm patients. Under the terms of the
lease, we are required to maintain certain medical and administrative practice
policies and procedures of the Outpatient Facility. We are also obligated to
provide specified levels of audiological services at specified times, to
maintain professional liability insurance, and to indemnify the nursing home.
Pennsylvania Forty-Fort Office
We currently lease an 800 square foot, street level office at 142 Wells Street,
Forty-Fort, Pennsylvania. This facility is located in the main business district
of Forty-Fort and the space is utilized for administrative, sales, dispensing,
and telemarketing activities. The facility is divided among offices, waiting
rooms, a sound deadened testing area, a dispensing area, and small telemarketing
area. This facility is also used as a coordination center for our
Pennsylvania licensed hearing aid fitters, who test and dispense hearing aids on
an in-home basis, the most common method of dispensing hearing aid products in
rural areas.
ITEM 3. LEGAL PROCEEDINGS
We are unaware of any pending or threatened legal proceedings to which we are a
party or of which any of our assets is the subject. No director, officer, or
affiliate, or any associate of any of them, is a party to or has a material
interest in any proceeding adverse to us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the year ended February 28, 2004, we did not submit any matters to a vote
of our shareholders.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Our common stock, $.10 par value, was traded on the American Stock Exchange
under the symbol "NAN" until April 17, 1998. Because we had fallen below
American Stock Exchange guidelines for continued listing, effective April 17,
1998, our common stock was delisted. It is currently traded in the
over-the-counter market and quoted on the OTC Electronic Bulletin Board
maintained by the National Association of Securities Dealers, Inc. (the "OTC
Bulletin Board"). The stock was quoted on the OTC Bulletin Board under the
symbol NANK until March 3, 2000, when we filed a Voluntary Petition under
Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern
District of New York. After that date, our OTC Bulletin Board Symbol was changed
to, NANKQ. On January 25, 2002, when the "Reverse Acquisition" was made on a
stock-for-stock-basis pursuant to the terms of our Chapter 11 reorganization,
the symbol was changed to NTKI. The following table sets forth representative
high and low bid prices by calendar quarters during the period from (March 1,
2000 through February 28, 2004) and the subsequent periods. The level of trading
in our common stock has been sporadic and limited and the bid prices reported
may not be indicative of the value of our common stock or the existence of an
active market. The OTC market quotations reflect inter-dealer prices without
retail markup, markdown, or other fees or commissions, and may not necessarily
represent actual transactions.
Bid Prices
Period Common Stock
Low High
--- ----
Fiscal Year Ended February 28, 2002
May 31, 2001 $0.01 $0.05
August 31, 2001 0.01 0.07
November 30, 2001 0.01 0.50
February 28, 2002 0.15 0.80
Fiscal Year Ended February 28, 2003
May 31, 2002 $0.75 $1.75
August 31, 2002 0.40 0.95
November 30, 2002 0.08 0.65
February 28, 2003 0.10 0.23
Fiscal Year Ended February 28, 2004
May 31, 2003 $0.75 $1.75
August 31, 2003 0.60 0.17
November 30, 2003 0.62 0.81
February 28, 2004 0.55 1.37
We have never paid any cash dividends on our common stock, and have no present
intention of doing so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial information
for the three fiscal years ended February 28, 2003.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and in
conjunction with our Consolidated Financial Statements and notes appearing
elsewhere in this report.
20
For Fiscal Year Ended
---------------------
(In thousands, except per share amounts)
Feb. 28 Feb. 28 Feb. 28
2004 2003 2002
Summary Statements of Operations
--------------------------------
Net sales $ 409 $ 406 $ 38
Gross profit 88 83 9
Net (loss) gain sale of asset -- --
Net gain sale of asset -- --
Net income (loss) 307 (169) 1,370
Net earnings (loss)
per share-basic
and diluted (.03) (.02) (.38)
Average shares
outstanding 8,440 3,620
Summary Balance Sheet Data
Total assets 1,408 828 254
Working capital 437 40 147
Long-term debt (exclusive
of current maturities) 30 -- --
Convertible subordinated
debt -- --
Stockholders' equity 1,232 642 931
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of significant factors
which have affected our financial position and operations during the fiscal
years ended February 28, 2004 and February 28, 2003. This discussion also
includes events which occurred subsequent to the end of the fiscal year ended
February 28, 2004, and contains both historical and forward- looking statements.
When used in this discussion, the words "expect(s)", "feel(s)", "believe(s)",
"will", "may", "anticipate(s)" "intend(s)" and similar expressions are intended
to identify forward-looking statements. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from those projected. Factors that might cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Readers are also urged to carefully review and
consider the various disclosures elsewhere in this Report which discuss factors
which affect the Company's business, including the discussion at the end of this
Management's Discussion and Analysis. This discussion should be read in
conjunction with the Company's Consolidated Financial Statements, respective
notes and Selected Consolidated Financial Data included elsewhere in this
Report.
The Reorganized Company
Pursuant to the terms of our Chapter 11 Plan of Reorganization, we effected a
"Reverse Acquisition" by which we acquired all the issued and outstanding
capital stock of Accuntone, Inc., a Pennsylvania corporation.
As a result of the above-described acquisition, Accutone Inc. (together with
Accutone's wholly-owned subsidiary, Interstate Hearing Aid Service, Inc.) is now
our wholly owned subsidiary. Through February 28, 2004, we had no business or
assets other than those which we acquired through our acquisition of Accutone.
(see subsequent event for disclosure of business acquired after February 28,
2004). With respect to our current business, history, and prospects, Accutone is
the predecessor of Nantucket.
21
We are directly, and indirectly through our subsidiaries, Accutone Inc. and
Interstate Hearing Aid Service Inc., in the business of distributing and
dispensing custom hearing aids. Our predecessor, Accutone Inc. was formed under
the laws of the State of Pennsylvania in October 1996 for the purpose of
engaging in the manufacture, dispensing, and distribution of hearing aids. In
1998, Accutone acquired 100% ownership of Interstate, a Pennsylvania corporation
and an FDA licensed hearing aid manufacturer which has been in the hearing aid
business for approximately 35 years. In the Fall of 2000, Accutone discontinued
all manufacturing operations and changed the focus of its marketing to include,
not only the individual, self-pay patient, but health care entities and
organizations which could serve as patient referral sources for us.
Until the summer of 2000, a small portion of our business consisted of
manufacturing operations. However, because of changes in the competitive climate
of the hearing aid manufacturing industry and the comparatively small level of
our operations, we discontinued all manufacturing on July 30, 2000. This marked
the beginning of a significant change in our then effective business plan, which
now encompasses concentrating our marketing to nursing homes, hospitals,
out-patient clinics, members of managed health care providers, such as health
maintenance organizations ("HMO's"), Physician Provider Organizations (physician
group practices known as "PPO's"), union health plans, medicare, and medicaid
while expanding an advertising campaign aimed at individuals in the non-insured
self- pay market. The geographic emphasis on this business has been and will
continue to be focused in the New York metropolitan area. Since implementing
this business plan, we have entered into contracts with approximately 63 managed
health care provider organizations, unions, local municipalities and secondary
health care insurance providers and pediatric care organizations in the New York
metropolitan area, including Medicare and Medicaid. We are continually in
negotiations with other such organizations.
In addition to marketing our services, we are continuing to attempt to expand
our audiological staff and the level of operations and profitability at our
existing offices as well as operations at new retail sales and dispensing
offices in the New York Metropolitan area. Our long term goal in the
audiological field is to expand our operations in this concentrated geographic
area.. To date such expansion has been curtailed by our failure to obtain
significant financing.
We also provide in-home fitting and dispensing services in the State of
Pennsylvania, where our customer base is located in a somewhat rural area,
making home visits convenient for our customers. We have four Pennsylvania
Registered Hearing Aid Fitters who are available to us for in-home, as well as
office visits in Pennsylvania. Through our offices and our in-home services, we
offer a full range of audiological products and services for the hearing
impaired. We have been unable to provide these services to our expectation level
based on our need for capital infusion.
In order to make our services acceptable to managed care and health insurance
companies, we must address their particular concerns. This will require that we
have:
* service locations which are conveniently accessible to their members;
* an adequate staff of highly qualified audiologists;
* a full range of high quality hearing aid products;
* competitive pricing; and
* adequate product liability and professional malpractice insurance
coverage.
We have been endeavoring to put all of these elements into place but have been
unable to do so due to budgetary constraints. Therefore our primary goals during
the next eighteen months, if we receive adequate financing, will include:
* opening and establishing operations at additional fully equipped
offices accessible to residents of all five boroughs of New York City.
* opening and establishing operations at sales and dispensing offices
on-site at additional nursing homes in the New York metropolitan area.
* increasing the number of audiologists on our staff to service these
additional facilities; and
* hiring a chief financial officer and a chief operations officer.
22
We intended to implement an aggressive advertising and marketing campaign aimed
at individuals and managed health care organizations. In order to undertake
these initiatives we have established a professional advisory board of 6
individuals with high levels of experience and expertise in hearing health care,
gerontology, accounting, marketing and various other medical practices.
We were in negotiations to enter into a business combination with Paxxon
Healthcare Services, Inc. However, we have ceased negotiations with Paxxon and
we do not currently anticipate that we will enter into any form of business
combination with Paxxon.
Subsequent Events
On March 1, 2004 pursuant to a Stock Purchase Agreement, we acquired one hundred
percent (100%) of the issued and outstanding shares of common stock of
Comprehensive Network Solutions, Inc. based in Austin, Texas, from the
Comprehensive Shareholders in consideration for the issuance of a total of
250,000 restricted shares of our common stock to the Comprehensive shareholders.
Pursuant to the Agreement, Comprehensive became our wholly owned subsidiary.
Additional consideration of $60,000 was also paid to Comprehensive to be used as
working capital and we assumed a liability of $25,000 for marketing services
performed by an individual. Such liability was satisfied through the issuance of
25,000 shares of our restricted common stock to such individual. All shares
issued in this transaction have a holding period of two years.
The acquisition will allow us to utilize the resources of both companies to
enter the health benefit market with consumer choice products for individuals,
employers, associations, unions and political subdivisions. Comprehensive's
business plan focuses on marketing health care benefits that enable the
prospective clients to choose appropriate providers and financial arrangements
that best meet their individual needs. The business plan also includes the
complete development and market implementation of a high quality musculoskeletal
disease management program for target markets with directed care of workers'
compensation cases.
Comprehensive was organized in June 2002 with headquarters in Austin, Texas. The
company has been focused on specialty health benefits products, including three
levels of provider networks and one limited indemnity medical insurance plan.
These products have been trademarked as ChiroCare Select, ChiroCare Advantage,
ChiroCare Optima and CNS 500 Plan. The company is currently working on expanding
its product with additional benefits and alternative benefit funding options.
These new expanded products will be offered through a captive retail sales
operation to individuals and small employers; and customized private label
versions of the products through its broker and consultant relationships to
associations, unions political subdivisions and large employers. The offerings
are alternative cost and quality benefit solutions to prospects and clients who
are uninsured or underinsured through existing traditional defined benefit
health plans.
Comprehensive's goals include a plan to develop disease management treatment
guidelines that would address back, neck and upper extremity musculoskeletal
conditions specifically for workers' compensation. During the past year, these
guidelines have been codified and copyrighted. Through an affiliation with
Health Partners, the strategy is to develop exclusive provider organizations
(EPO) in markets where state regulation enables workers' compensation plans to
direct injured workers to specific health care providers. Comprehensive's EPOs
will be marketed to workers' compensation and employee benefit plans on the
basis access fees, case management fees and shared savings of future medical
costs versus historic medical costs and patient outcomes.
The Company will continue to refine and improve its predictive model of evidence
based on treatment guidelines and disease management for musculoskeletal
injuries and illnesses. The quality and cost effective management of these
conditions will continue to be a primary focus for the company's medical and
network development staff in preparation for additional market introductions.
23
Our goal is to implement the Comprehensive business model initially in the
NorthEast and then expand nationwide. In order to implement these goals, we are
interviewing potential qualified candidates to fill various positions of sales,
marketing and administration. To date, we have already met with and presented
our various discount health care products and services. We estimate that in
order to achieve these goals, we will require financing from sources other than
cash flow, within the next eighteen months, in an amount ranging from $750,000
to $1,000,000. Since the acquisition, we have been successful in raising
approximately $200,000 through private equity offerings. Although we have
previously been unsuccessful in raising significant capital, our management
believes that the current financial market upturn as well as the benefits of the
acquisition of Comprehensive will assist us in potentially raising additional
capital. Management believes that the acquisition of Comprehensive will add
significant revenues and profitably during the upcoming year to the consolidated
Nantucket family of businesses.
Results of Operations
Sales
Sales for the year ended February 28, 2004 were $409,040 compared to $406,134
for the year ended February 27, 2003. Our failure to materially increase sales
was due in combination of failure to raise additional working capital on a
timely basis and the decrease in Medicaid reimbursement rates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $337,881 in 2004 as compared
to $194,887 in fiscal 2003. This increase was due for the most part to increased
consulting fees which were substantially paid for by the issuance of our
restricted common stock.
Liquidity and Capital Resources
We incurred significant operating losses in recent years which resulted in
severe cash flow problems that negatively impacted our ability to conduct our
business as structured and ultimately caused us to become and remain insolvent.
The reorganized Nantucket, utilizing the increasing sales and projected
potential profitability of Accutone and its subsidiary Interstate Hearing Aid,
should generate working capital to finance its current operations, but not
enough to expand its scope of business activities.
We estimate that in order for us to achieve our goals to open equipment and
staff additional offices, add another 40 nursing homes to those we currently
service, increase our volume of sales and profitability, we will require capital
investments and expenditures in the amount of $500,000 to $1,000,000. All of
these funds will have to be obtained from sources other than cash flow. As noted
above, under "Proposed Financing Plans", it is our intention to make a private
placement of our equity or convertible debt securities in an amount of at least
$500,000. We do not have any established bank credit lines or relationships in
place at this time. However, we are optimistic that if we are able to raise a
minimum of $500,000 through the sales of our securities, we will be able to
establish credit lines that will further enhance our ability to finance the
expansion of our business. There can be no assurance that we will be able to
obtain outside financing on a debt or equity basis on favorable terms, if at
all. In the event that there is a failure in any of the finance-related
contingencies described above, the funds available to us may not be sufficient
to cover the costs of our operations, capital expenditures and anticipated
growth during the next twelve months. However, we believe that, even if we are
unable to raise the required outside financing we can curtail our growth to such
a degree so as to maintain increased operations.
24
Although the capital markets have a perceived improvement, we are cautiously
optimistic of our abilities to achieve these goals. Along these lines we are
actively pursuing potential businesses alliances with privately held businesses
in like and or compatible industries. We believe that the addition of both sales
volume growth and profitability will greatly assist us in successfully raising
additional capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse changes in market prices and
rates. We are exposed to market risk because of changes in foreign currency
exchange rates as measured against the U.S. dollar. We do not anticipate that
near-term changes in exchange rates will have a material impact on our future
earnings, fair values or cash flows. However, there can be no assurance that a
sudden and significant decline in the value of European currencies would not
have a material adverse effect on our financial conditions and results of
operations.
Our short-term bank debt bears interest at variable rates; therefore our results
of operations would only be affected by interest rate changes to the short-term
bank debt outstanding. An immediate 10 percent change in interest rates would
not have a material effect on our results of operations over the next fiscal
year.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Nantucket Industries, Inc.
and Subsidiaries
Audited Financial Statements
Years Ended February 29, 2004,
February 28, 2003 and
February 28, 2002
Nantucket Industries, Inc.
Contents
================================================================================
Independent auditors' report 2
Financial statements:
Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statement of stockholders' equity 5
Consolidated statements of cash flows 6
Notes to consolidated financial statements 7-19
F-1
Independent Auditors' Report
To the Board of Directors
Nantucket Industries, Inc. and Subsidiaries
Yonkers, New York
We have audited the accompanying consolidated balance sheet of Nantucket
Industries, Inc. and Subsidiaries for the years ended February 29, 2004 and
February 28, 2003 and 2002 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. 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 audit in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial position of Nantucket
Industries, Inc. and Subsidiaries as of February 29, 2004 and February 28, 2003
and 2002, and the consolidated results of its operations and its cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
F-2
June 10, 2004
Nantucket Industries, Inc.
and Subsidiaries
Consolidated Balance Sheets
=================================================================================================================================
February 29
February 28, 2004 2003 2002
------------------------------------------------------------------------- ------------------- ----------------- -----------------
Assets
Cash and cash equivalents $ 172,429 $ 550 $ 6,266
Accounts receivable (Note 2) 147,954 132,324 120,214
Inventories (Notes 2) 3,870 5,365 5,125
Prepaid expenses (Note 10) 73,067 8,067 120,000
Stock subscription receivable 160,800 25,000 -
Other current assets 5,000 5,000 2,225
------------------------------------------------------------------------- ------------------- ----------------- -----------------
Total current assets 563,120 176,306 253,830
------------------------------------------------------------------------- ------------------- ----------------- -----------------
Property, plant and equipment, net (Notes 2 and 5) 61,027 66,340 81,458
Other assets, net
Covenant not to compete (Notes 2 and 4) 300,000 300,000 300,000
Customer list (Notes 2 and 4) 260,000 285,706 311,984
Prepaid expenses (Note 10) 223,750 - 110,000
------------------------------------------------------------------------- ------------------- ----------------- -----------------
$ 1,407,897 $ 828,352 $ 1,057,272
========================================================================= =================== ================= =================
Liabilities and Stockholders' Equity
Accounts payable $ 106,768 $ 77,766 102,635
Loans payable 15,000 55,000 -
Pre-petition taxes (Note 1) 3,964 3,964 3,964
------------------------------------------------------------------------- ------------------- ----------------- -----------------
Total current liabilities 125,732 136,730 106,599
Line of credit (Note 6) 30,000 30,000 -
Pre-petition taxes, net of current portion (Note 1) 19,821 19,821 19,821
------------------------------------------------------------------------- ------------------- ----------------- -----------------
Total liabilities 175,553 186,551 126,420
------------------------------------------------------------------------- ------------------- ----------------- -----------------
Stockholders' equity (Notes 1,9 and 10)
Common stock, $.10 par value; authorized 20,000,000 shares; 1,166,730 859,052 903,600
issued 11,667,309
Additional paid-in capital 13,534,031 13,079,309 13,180,261
Common stock subscribed 160,800 25,000 -
Accumulated equity (deficit) (13,629,217) (13,321,560) (13,153,009)
------------------------------------------------------------------------- ------------------- ----------------- -----------------
Total stockholders' equity 1,232,344 641,801 930,852
------------------------------------------------------------------------- ------------------- ----------------- -----------------
$ 1,407,897 $ 828,352 $ 1,057,272
========================================================================= =================== ================= =================
See accompanying notes to financial statements.
F-3
Nantucket Industries, Inc.
and Subsidiaries
Consolidated Statements of Operations
=================================================================================================================================
February 29,
Years ended February 28, 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------------------
Net sales $ 409,040 $ 406,134 $ 38,443
Cost of sales 321,462 324,569 29,731
---------------------------------------------------------------------------------------------------------------------------------
Gross profit 87,578 81,565 8,712
Selling, general and administrative expenses 337,881 194,887 257,276
---------------------------------------------------------------------------------------------------------------------------------
(Loss) from operations (250,303) (113,322) (248,564)
Other expense:
Interest expense 10,305 9,437 21
Depreciation and amortization 47,049 45,792 1,762
---------------------------------------------------------------------------------------------------------------------------------
Total other expense 57,354 55,229 1,783
---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and (307,657) (168,551) (250,347)
extraordinary item
Income taxes (Note 8) - - -
---------------------------------------------------------------------------------------------------------------------------------
Loss before extraordinary item (307,657) (168,551) (250,347)
Extraordinary item-gain on debt discharge - - 1,621,162
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (307,657) (168,551) 1,370,815
Net earnings (loss) per share - basic and diluted $ (.03) $ (.02) $ .38
---------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 9,834,258 8,440,251 3,620,168
=================================================================================================================================
See accompanying notes to financial statements.
F-4
Nantucket Industries, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
=================================================================================================================================
Preferred stock
designated as
non-voting convertible Common stock
------------------------ ------------------------------
Additional
paid-in
Shares Amount Shares Amount capital
-------------------------------------- ------------ ----------- ------------ ------------ ------------
Balance at March 1, 2001 5,000 500 3,241,848 324,185 12,539,503
Cancellation of stock (5,000) (500) (3,241,848) (324,185) 299,748
Plan of reorganization 720,443 72,044 (32,418)
Reverse merger-Accutone 5,285,160 528,516 (301,032)
Consultant agreement 1,200,000 120,000 120,000
Executive compensation 630,397 63,040 74,460
Acquisition of audiology practice 1,200,000 120,000 480,000
Net earnings
------------ ------------ ------------ ------------ ------------
Balance at February 28, 2002 9,036,000 903,600 13,180,261
Cancellation of consultant (1,200,000) (120,000) (120,000)
Private placement sales 337,857 33,785 35,715
Executive compensation 416,667 41,667 (16,667)
Net (loss)
------------ ------------ ------------ ------------ ------------
Balance at February 28, 2003 8,590,524 859,052 13,079,309
Consultant agreement 1,250,000 125,000 200,000
Private placement sales 899,642 89,964 132,436
Executive compensation 357,143 35,714 (10,714)
Convertible debt 570,000 57,000 133,000
Net (loss)
-------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at February 29, 2004 11,667,309 $ 1,166,730 $ 13,534,031
====================================== ============ ============ ============ ============ ============
Treasury stock
-----------------------------
Common Stock Accumulated
Subscribed deficit Shares Amount Total
-------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at March 1, 2001 -- (14,523,824) 3,052 (19,937) (1,644,217)
Cancellation of stock (3,052) 19,937 --
Plan of reorganization
Reverse merger-Accutone
Consultant agreement
Executive compensation
Acquisition of audiology practice
Net earnings 1,370,815
-------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at February 28, 2002 -- (13,153,009) 930,852
Cancellation of consultant
Private placement sales
Executive compensation
Net (loss) (168,551)
-------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at February 28, 2003 25,000 $(13,321,560) 641,801
Consultant agreement
Private placement sales
Executive compensation
Convertible debt
Net (loss) (307,657)
-------------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at February 29, 2004 $ 160,800 $(13,629,217) $ 1,232,344
====================================== ============ ============ ============ ============ ============
See accompanying notes to financial statements
F-5
Nantucket Industries, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
=================================================================================================================================
February 29,
Years ended February 28, 2004 2003 2002
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ (307,657) $ (168,551) $ 1,370,815
Adjustments to reconcile net earnings (loss) to
net cash used by operating activities:
Depreciation and amortization 47,049 45,792 1,762
Decrease (increase) in assets:
Accounts receivable (15,630) (12,110) (120,214)
Inventories 1,495 ( 240) (5,125)
Prepaid expenses (65,000) 111,933 (120,000)
Other current assets - (2,775) 18,106
(Decrease) increase in liabilities:
Accounts payable 29,002 (24,869) (142,129)
Accrued expenses and other liabilities - - (1,432,807)
-------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (310,741) (50,820) (429,592)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (16,030) (4,396) (83,220)
(Increase) decrease in other assets (223,750) 110,000 (721,984)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (239,780) 105,604 (805,204)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issue of stock for reorganization, acquisitions and operations, net 762,400 (145,500) 1,239,610
Repayment of loans (40,000) - -
Proceeds from loans and line of credit - 85,000 -
-------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities 722,400 (60,500) 1,239,610
-------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 171,879 (5,716) 4,814
Cash and cash equivalents, beginning of year 550 6,266 1,452
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 172,429 $ 550 $ 6,266
=================================================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 10,305 $ 9,437 $ 21
Income taxes $ - $ - $ -
See accompanying notes to financial statements.
F-6
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Reorganization The Company filed for Chapter 11 bankruptcy protection in
March 2000. Management began its search for a viable merger
candidate since if it were not successful the Company would
cease to exist. The Company had been totally inactive since
November of 1999.
On January 25, 2002, Nantucket Industries Inc., effected a
"reverse acquisition" pursuant to which Nantucket acquired
all of the issued and outstanding capital stock of Accutone,
Inc., a Pennsylvania corporation. The acquisition was made
on a stock-for-stock basis pursuant to the terms of
Nantucket's Chapter 11 Plan of Reorganization. The Plan of
Reorganization, which was accepted by the creditors of
Nantucket and approved by the Bankruptcy Court on December
10, 2001 and became effective on January 25, 2002.
DESCRIPTION OF THE PLAN
-----------------------
The Plan provided for the cancellation of all outstanding
shares of stock in the Company and the re-issuance of new
shares of stock by the reorganized Company. All stock of
existing Subsidiaries was cancelled.
All holders of allowed claims and stock interests in the
Debtor would receive ratable distribution of the new shares
of stock in accordance with the formulas set forth below.
The Plan of Reorganization, was predicated upon the
acquisition of the Accutone business and its business
prospects in exchange for a distribution of 5,285,160 common
shares in the reorganized Company to the current equity
holders of Accutone. The resulting combined entity issued
new shares of its stock to all parties in interest in a
manner that reflected the respective liquidation preferences
of the classes of claims and interests.
ADMINISTRATIVE DEBT
-------------------
The costs and expenses of the administrative claim of
Nantucket in course of the reorganization had priority of
distribution pursuant to 11 U.S.C. ss.503 and would either
be paid in full upon confirmation, or other terms agreed
upon by the holders of such claims.
The expenses of administration consisted primarily of the
fees of professional persons retained by Nantucket in the
course of this reorganization and their fees were ultimately
subject to allowance and approval by the Bankruptcy Court.
F-7
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
PRIORITY TAX DEBT
-----------------
Priority tax debt consisted of governmental taxing
authorities whose claims would be entitled to priority of
payment pursuant to Section 507 (a)(8) of the Bankruptcy
Code. There are no taxes due to government agencies other
than personal property tax due to Bartow County, Georgia,
for which a claim has been settled in the amount of $23,130.
In addition, the Internal Revenue Service filed a priority
claim in the approximate amount of $745 and the claim was
settled for such amount. The allowed amount of these
priority claims, will be paid in full by the reorganized
Company in the manner permitted by Section 1129(a)(9)(C) by
payment, on account of such claims, of deferred cash
payments over a period of six years after the earlier of the
date of assessment of such claim or the Effective Date of
the Plan, together with interest at the rate provided for in
the United States Tax Code as of the date of such payments.
The Effective Date is defined in the Plan as the date upon
which the order confirming the Plan is final and no longer
subject to an appeal.
SECURED DEBT
------------
Secured debt consisted of the secured claim of NAN
Investors, LP, the entity that loaned the Pre-Chapter 11
Company through a private placement the original amount of
$3,500,000, of which, $2,760,000 was memorialized in two
12.5% convertible debentures. NAN was still owed, as of the
filing date, the approximate sum of $800,000.00. The claim
was secured by the assets of the Pre-Chapter 11 Company,
pursuant to the blanket security interest granted NAN in
1998 to assure payment of the debt. In October, 1999 all of
the assets of the Pre-Chapter 11 Company were surrendered to
NAN in lieu of foreclosure and according to the Pre-Chapter
11 Company's management there were no assets remaining in
the Company. The unsecured portion of the NAN debt, was
determined to be $830,337.00 and was treated as general
unsecured claim.
GENERAL UNSECURED DEBT
----------------------
Unsecured Debt consisted of the holders of general unsecured
claims against Nantucket arising from the operations of its
business. There were general unsecured claims totaling
$1,731,321 including the NAN investors unsecured debt
(above). Holders of allowed general unsecured claims
received in full settlement and satisfaction of their
respective claims, receive 346,263 shares of common stock in
the reorganized Company, one (1) share of stock in the
reorganized Company per $5.00 of claim.
F-8
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
PREFERRED STOCK
---------------
The Samberg Group were holders of 5,000 shares of preferred
stock issued by the Company in 1995. The preferred stock had
a liquidation preference of $200 pre share, for a total of
$1,000,000 based upon the election of redemption rights
approved in 1997. The preferred stock was issued in exchange
for the investment of additional capital of $1,000,000 by
the Samberg Group in 1994. The Samberg Group is comprised of
Stephen M. Samberg, the former President and Chairman of the
Board (1994 through 1998), Steven Sussman, Raymond Wathen,
Robert R. Polen and the wife of Ronald Hoffman, all of whom
are former officers of the Pre-Chapter 11 Company and/or
members of its board.
The Plan provided that the holder of the stock issued and
outstanding shares of preferred stock in the Pre-Chapter 11
Company would receive, in full settlement and satisfaction
their liquidation preference and all other rights
appurtenant to such shares, one (1) share of stock in the
reorganized Company per $20.00 of liquidation preference
they held. As a result, the Samberg Group received a total
of 50,000 shares of common stock in the reorganized Company
in full settlement and satisfaction of the redemption claims
and all other claims based upon the preferred shares. The
outstanding shares of preferred stock would be deemed null
and void and shall be canceled of record.
COMMON STOCKHOLDERS
-------------------
Consists of the holders of shares of common stock in the
Company which were issued and outstanding. There were
3,241,848 shares of stock issued and outstanding and held by
approximately 1,100 holders. The Plan provided for the
preservation of their participation in the reorganized
Company by issuing them new shares of stock in the
reorganized Company at the rate of one (1) new share of
stock in the reorganized Company per ten (10) shares of the
currently issued stock held a total of 324,184. The current
shares of stock would be deemed null and void and the
shareholders are to turn in their present shares for
cancellation.
In addition, all outstanding warrants and options to
purchase stock and to convert debt to stock would be deemed
null and void and canceled of record. These rights canceled
included those rights granted to NAN Investors in
conjunction with the private placement of 1996 of $3,500,000
by which NAN had the right to purchase Nantucket common
stock at fixed prices.
F-9
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
EXTRAORDINARY GAIN ON DISCHARGE OF DEBT
---------------------------------------
The value of securities to be distributed under the Plan was
less than the value of the allowed claims on and interests
in the Company: Accordingly, the Company recorded an
extraordinary gain of $1,621,162related to the discharge of
pre-petition liabilities. Distributions associated with
pre-petition claims and obligations and provisions for
settlements are reflected in the February 28, 2002 balance
sheet. The consolidated financial statements at February 28,
2002 give effect to the issuance of all common stock and any
surviving liabilities in accordance with the Plan.
The extraordinary gain recorded by the Company was
determined as follows:
Liabilities subject to compromise at the effective $ 1,731,321
date
Less:
Assumption of pre-petition liabilities 23,175
Liabilities in excess of recorded amounts 30,575
Assets offset against pre-petition liabilities 21,783
Value of common stock issued 34,626
------------------------------------------------------------ ---------------
Extraordinary Gain on Debt Discharge $ 1,621,162
============================================================ ===============
2. Summary of
Significant
Accounting Policies
a. The Company
Nantucket Industries, Inc. and its wholly owned subsidiaries
(the "Company") were inactive from October 1999 until
January 26, 1992. At that date a reverse merger with
Accutone Inc. and Subsidiary occurred. (See note 1) Accutone
Inc. is engaged in the business of selling and distributing
hearing aids and providing the related audiological
services.
F-10
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
b. Principles of Consolidation
The consolidated financial statements include the accounts
of Nantucket Industries, Inc. and its wholly owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated. As a result of the above
described acquisition, Nantucket Industries, Inc. (together
with Accutone's wholly-owned subsidiary) has no business or
assets other than those which it acquired through its
acquisition of Accutone.
c. Accounts Receivable
An allowance for doubtful accounts is provided based upon
historical bad debt experience and periodic evaluations of
the aging of the accounts. No allowance was considered
necessary since to date there has been no bad debt
expense.
d. Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation is
computed for financial statement purposes, using the
straight-line method over the estimated useful life. For
income tax purposes, depreciation is computed using
statutory rates.
e. Inventories
Inventories are stated at the lower of costs (first-in,
first-out method) or market.
f. Intangible Assets
Intangible assets include customer lists, which are stated
at cost. Amortization is computed for financial statement
and tax purposes using the straight-line method over 15
years.
g. Income Taxes
The Company and its wholly owned subsidiaries file a
consolidated federal income tax return. Deferred income
taxes arise as a result of differences between financial
statement and income tax reporting
F-11
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
h. Earnings (Loss) Per Common Share
In fiscal year 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS No. 128),
Earnings Per Share, which requires public companies to
present earnings per share and, if applicable, diluted
earnings per share. All comparative periods must be restated
as of February 28, 1998 in accordance with SFAS No. 128.
Basic earnings per share are based on the weighted average
number of common shares outstanding without consideration of
potential common share equivalents. Diluted earnings per
share are based on the weighted average number of common and
potential common shares outstanding. The calculation takes
into account the shares that may be issued upon exercise of
stock options, if any, reduced by the shares that may be
repurchased with the funds received from the exercise, based
on the average price during the year.
i. Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 130 (SFAS No. 130), Reporting Comprehensive Income,
which is effective for the Company's year ending February
27, 1999. SFAS No. 130 addresses the reporting and
displaying of comprehensive income and its components.
Earnings (loss) per share will only be reported for net
earnings (loss), and not for comprehensive income. Adoption
of SFAS No. 130 relates to disclosure within the financial
statements and is not expected to have a material effect on
the Company's financial statements.
j. Segment Information
In June 1997, the FASB also issued Statement of Financial
Accounting Standards No. 131 (SFAS No. 131), Disclosure
About Segments of an Enterprise and Related Information,
which is effective for the Company's year ending February
27, 1999. SFAS No. 131 changes the way public companies
report information about segments of their business in their
financial statements and requires them to report selected
segment information in their quarterly reports. Adoption of
SFAS No. 131 relates to disclosure within the financial
statements and is not expected to have a material effect on
the Company's financial statements.
k. Fiscal Year
The Company's fiscal year ends February 28.
F-12
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
l. Reclassification
Certain prior year amounts have been reclassified in order
to conform to the current year's presentation.
m. Use of Estimates
In preparing the Company's financial statements, management
is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
n. Impairment of Long-Lived Assets
The Company applies Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of. Accordingly, when indicators of impairment are present,
the Company periodically evaluates the carrying value of
property, plant and equipment and intangibles in relation to
the operating performance and future undiscounted cash flows
of the underlying business. The Company adjusts carrying
amount of the respective assets if the expected future
undiscounted cash flows are less than their book values. No
impairment loss was required in fiscal year 2003.
o. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company
for debt with similar terms and maturities, the fair value
of the company's long-term debt approximate the carrying
value. The carrying value of all other financial instruments
potentially subject to valuation risk, principally cash,
accounts receivable and accounts payable, also approximate
fair value.
p. Advertising Costs
Costs for newspaper and other media advertising are expensed
as incurred and were $20,255, $18,147 and $1,686 in 2004,
2003 and 2002, respectively.
q. Sales return policy
The Company provides to all patients purchasing hearing aids
a specific return period, a minimum of 45 days, if the
patient is dissatisfied with the product. The Company does
not provide an allowance in accrued expenses for returns
since actual returns for this fiscal year were less than 2%.
The return period can be extended an additional 15 days at
the discretion of the dispensing audiologist. All the
manufacturers that supply the Company accept all returns
back for full credit within these return periods.
F-13
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Concentration Currently approximately 70% of the reorganized
of Risk Company's business is based on contracts with The New York
State Medical Assistance Program (Medicaid) and Empire
Medicare Service (Medicare).
4. Acquisition of On February 28, 2002 the Company executed a
Audiology contract with Park Avenue Medical Practice Associates, P.C.
and Park Avenue Health Care Management, Inc. The Park Avenue
Group directly employs medical professional personnel,
including physicians in both general and specialty practices
and other health care professionals such as podiatrists,
audiologists, psychologists and psychotherapists.
Nursing homes and long term care facilities contract with
Park Avenue for the services of Park Avenue's medical
professionals, on a pre-determined schedule or on an
as-needed basis. Pursuant to the terms of the agreement Park
Avenue contributed its entire audiology practice to the
Company. The contract also calls for Brad I. Markowitz, the
president of Park Avenue Management to join the Company's
Board of Directors. Mr. Markowitz is a banker by trade and
has been with Park Avenue since 1995. At that time Park
Avenue was servicing approximately seven nursing homes.
Under his tutelage Park Avenue has grown to service over
seventy long term care facilities. In addition, Mr.
Markowitz serves on the Board of Trustees of several private
companies.
The Company issued 1,200,000 shares of restricted common
stock to acquire the audiology practice of Park Avenue
Medical Associates P.C. Under the agreement the Company
gains access to approximately 70 nursing homes to provide
complete audiology services. As of February 29, 2004 the
Company has entered into contracts with approximately 59 of
these nursing homes. In addition, Park Avenue will continue
to provide additional access to any new nursing homes they
have contact with.
5. Property, Property, plant and equipment are summarized as follows:
Plant and
Equipment
February 29, February 28, February 28,
2004 2003 2002
--------------------------------------------------------------------------------
Leasehold improvements $ 25,000 $ 25,000 $ 25,000
Machinery and equipment 120,296 104,266 99,870
Furniture and fixtures 6,200 6,200 6,200
--------------------------------------------------------------------------------
151,496 135,466 131,070
Less accumulated depreciation 90,469 69,126 49,612
--------------------------------------------------------------------------------
$ 61,027 $ 66,340 $ 81,458
================================================================================
F-14
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
6. Line of The Company has a revolving line of credit with Park Avenue
Credit for up to $30,000. The interest rate on any amount of the
line utilized is at prime plus 2%. The agreement expires and
on August 1, 2005 with a provisions for a renewal of this
agreement.
7. Net Earnings The following table sets forth the computation of basic and
(Loss) Per diluted loss per share:
Common Share
February 29, February 28, February 28,
2004 2003 2002
---------------------------------------------------------------------------------------------
Net earnings (loss) attributable to common $ (307,657) $ (168,815) $1,370,815
stockholders
Accrued dividends on preference shares - - -
---------------------------------------------------------------------------------------------
Denominator for basic and diluted net
earnings (loss) per common share -
weighted average shares outstanding 9,834,528 8,440,251 3,620,168
---------------------------------------------------------------------------------------------
Basic and diluted net earnings (loss) per $ (.03) $ (.02) $ .38
share
---------------------------------------------------------------------------------------------
8. Income Taxes Deferred income taxes reflect the net effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amount
used for income tax purposes. Deferred tax assets and
liabilities are measured using enacted tax rates.
Significant components of the Company's deferred taxes at
February 29, 2004, February 28, 2003 and February 28, 2002
are as follows:
February 29, February 28, 2003 February 28,
2004 2002
---------------------------------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforward $ 291,900 $ 96,950 $ 96,950
Deferred tax liabilities
Difference between the book and tax
basis of property, plant and
equipment - - -
---------------------------------------------------------------------------------------------
Net deferred tax asset 291,900 96,950 96,950
Valuation allowance 291,900 96,950 96,950
---------------------------------------------------------------------------------------------
Net deferred taxes $ - $ - $ -
---------------------------------------------------------------------------------------------
F-15
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company anticipates utilizing its deferred tax assets
only to the extent of its deferred tax liabilities.
Accordingly, the Company has fully reserved all remaining
deferred tax assets, which it cannot presently utilize.
For tax purposes at February 28, 2004, the Company's net
operating loss carryforward was $834,000, which, if unused,
will expire from 2017 to 2021. Certain tax regulations
relating to the change in ownership may limit the Company's
ability to utilize its net operating loss carryforward if
the ownership change, as computed under each regulation,
exceeds 50%.
There was no income tax provision (benefit) for the fiscal
years 2004, 2003 and 2002.
The following is a reconciliation of the normal expected
statutory federal income tax rate to the effective rate
reported in the financial statements.
February 29, February 28, February 28,
2004 2003 2002
------------------------------------------------------------------------------------------
Computed "expected" provision for:
Federal income taxes (35.0)% (35.0)% (35.0)%
Valuation allowance 35.0 35.0 35.0
------------------------------------------------------------------------------------------
Actual provision for income taxes - % - % 0%
------------------------------------------------------------------------------------------
9. Stockholders' a. Issuance of Preferred Stock
Equity
On March 22, 1994, the Company sold to its management group
5,000 shares of non-voting convertible preferred stock for
$1,000,000. These shares were convertible into 200,000
shares of common stock at the rate of $5.00 per share. These
shares provided for cumulative dividends at a floating rate
equal to the prime rate. Such dividends were convertible
into common stock at the rate of $5.00 per share. The
conversion rights were waived in May 1998. These shares were
redeemable, at the option of the Company, on or after
February 27, 1999 and had a liquidation preference of $200
per share. As of February 28, 2001, February 27, 2000
dividends in arrears were $570,134, and $489,484,
respectively. The liquidation preference of $200 per share
as well as any dividends in areas at that time were settled
in full, pursuant to the approved plan of reorganization.
(See Note 1).
F-16
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In connection with the Company's refinancing on March 22,
1994, the Company entered into a $2,000,000 term loan
agreement with a financial institution. Pursuant to the
agreement, the Company issued to the bank 10,000 treasury
common shares related to mandatory prepayments, which were
not made. The treasury stock was retired in conjunction with
the plan of reorganization.
c. Grant of Warrants
Warrants have been granted to NAN Investors LP to purchase
16,500,000 shares of the Company's Common Stock for $.10 per
share, with a five-year term effective May 21, 1998. All
warrants were canceled in conjunction with the plan of
reorganization.
d. Private Placements
At various dates during the current fiscal year the Company
closed on private placements for 899,642 shares of common
stock for an aggregate sales price of $222,400. The offers
and sales were made only to "accredited investors" as
defined in Rule 501(a) of Regulation D and the Company
relied on Regulation D and Section 4(2) of the Securities
act of 1933 to issue the securities without registration.
e. Stock plans
The Company currently has no stock plans in effect.
10. Commitments,
Contingencies
and Related
Party
Transactions
a. Agreement with Principal Stockholders
On March 1, 1994, in connection with the restructuring
described in Note 4, the Company entered into agreements
with its two principal stockholders and a group of employees
(the "Management Group"). The agreements provide, among
other things, for:
The reimbursement of the principal stockholders, limited to
$1.50 per share to the extent that the gross proceeds per
share from the sale of common stock by the stockholders
during the two-year period beginning September 1, 1994 were
less than $5.00 per share. Such guaranty was applicable to a
maximum of 150,000 shares sold by such stockholders, subject
to reductions under certain circumstances. The principal
stockholders sold 157,875 shares including 88,400 at prices
below $5.00 per share; 37,125 shares in the fiscal year
ended March 1, 1997 and 51,275 shares in the year ended
March 2, 1996 which resulted in a charge to operating
results of $12,000 and $35,000, respectively.
F-17
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Warrants to purchase up to 157,875 shares of common stock
equal to the number of shares sold by the principal
stockholders. The exercise price per share of such warrants
would equal the gross proceeds per share from the
corresponding sale by the principal stockholders. Such
warrants expired on February 28, 2000. All agreement with
the principal stockholder was canceled in conjunction with
the plan of reorganization.
b. Executive compensation
In accordance with employment agreement between the Company
and John H. Treglia The Company's President dated, April 3,
2000, Mr. Treglia was entitled to cash compensation of
$150,000 per year, all such cash compensation was waived by
Mr. Treglia. In accordance with Paragraph 6 of this
employment agreement, Mr. Treglia may receive common stock
of the Company valued at the average market price on a
monthly basis. In accordance with the agreement on November
15, 2002, Mr. Treglia was issued 416,667 shares of
restricted common stock of the Company. Compensation for the
period March 1, 2002 and ending on February 28, 2003 such
shares equating to approximately $25,000 in salary.
Compensation for the period March 1, 2003 and ending on
February 29, 2004 was $62,060 of which $25,000 was paid in
common stock.
c. Consulting agreement
The Company terminated its consulting agreement with
Westminster Holdings Ltd. and rescinded the 1,200,000 shares
of common stock of Nantucket Industries, Inc. as of June 21,
2002.
During this fiscal year the Company entered into two
consulting agreements and issued 1,250,000 shares of
restricted common stock of Nantucket Industries, Inc.
d. Major Suppliers
During this fiscal year United Hearing Systems ("UHS")
became a major supplier of the Company. This occurred in the
course of negotiating to purchase UHS. These negotiations
were terminated in December 2002. Although there are a
limited number of manufactures of hearing aids, management
shifted its purchasing to include three other manufacturers
who provide similar hearing aids on comparable terms. In the
event of a disruption of supply from any one manufacture the
Company could obtain comparable products from other
manufacturers. Few manufacturers offer dramatic product
differentiation. The Company has not experienced any
significant disruptions in supply in the past.
F-18
Nantucket Industries, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
e. Lease obligation
The Company leases office under any agreement that expires
on February 2006. As of February 29, 2004 the future minimum
lease payments are as follows:
February 28
------------------------------------------------------------
2005 27,627
2006 28,456
------------------------------------------------------------
$ 56,083
============================================================
11. Subsequent a. Acquisition
Events
Effective March 1, 2004 the Company will issued 453,200
shares of common stock and $60,000 for working capital to
acquire all the common stock of Comprehensive Network
Solutions, Inc. a company providing non-insurance membership
cards, which allow the members to receive a discount for
certain medical services. As part of the acquisition the
line of credit of Comprehensive Network Solutions Inc. was
repaid by the certain stockholder.
F-19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None in the last two years.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our principal executive officer and principal financial officer evaluated our
disclosure controls and procedures (as defined in rule 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended) as of a date within 90
days before the filing of this annual report (the Evaluation Date). Based on
that evaluation, our principal executive officer and principal financial officer
concluded that, as of the Evaluation Date, the disclosure controls and
procedures in place were adequate to ensure that information required to be
disclosed by us, including our consolidated subsidiaries, in reports that we
file or submit under the Exchange Act, is recorded, processed, summarized and
reported on a timely basis in accordance with applicable rules and regulations.
Although our principal executive officer and principal financial officer
believes our existing disclosure controls and procedures are adequate to enable
us to comply with our disclosure obligations, we intend to formalize and
document the procedures already in place and establish a disclosure committee.
Changes in internal controls
We have not made any significant changes to our internal controls subsequent to
the Evaluation Date. We have not identified any significant deficiencies or
material weaknesses or other factors that could significantly affect these
controls, and therefore, no corrective action was taken.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors, Executive Officers and Significant Employees
The following sets forth, as of June 10, 2004, the names and ages of our
directors, executive officers, and other significant employees; the date when
each director was appointed; and all positions and offices held by each. Each
director will hold office until the next annual meeting of shareholders and
until his or her successor has been elected and qualified:
Date
Positions Appointed
Name Age Held Director
---------------------- --- --------------- -------------
John H. Treglia 61 Director, President, January 18, 2000
and, CEO and CFO
Dr. Frank Castanaro 53 Secretary and Director February 17, 2000
Set forth below is information regarding the principal occupations of each
current director during the past five years or more. None of the directors or
principal executive officers holds the position of director in any other public
company.
John H. Treglia is a graduate of Iona College, from which he received a BBA in
Accounting in 1964. Since January 18, 2000, he has served as our president,
secretary, and a director, devoting such time to our business and affairs as is
required for the performance of his duties. From 1964 until 1971, Mr. Treglia
was employed as an accountant by Ernst & Ernst. Thereafter, he founded and
operated several businesses in various areas. From 1994 through 1998, Mr.
Treglia served as a consultant to several companies which were in Chapter 11.
These included J.R.B. Contracting, Inc., Laguardia Contracting, and
Melli-Borrelli Associates. In 1996, Mr. Treglia founded Accutone Inc., a company
engaged in the business of manufacturing and distributing hearing aids. He has
served as its president and CEO since such time.
Dr. Frank Castanaro received a Bachelor of Science degree from the University of
Scranton in 1974. In 1978, he graduated from Georgetown University School of
Dentistry and has been in private practice as a dentist since such time. Dr.
Castanaro was appointed as our director on February 17, 2000. Dr. Castanaro has
assisted two large ophthalmology practices to introduce and expand their
activities in Laser therapy, including, but not limited to, Lasik procedures.
Dr. Castanaro presently practices dentistry in partnership with Dr.'s Joseph C.
Fontana and John B. Fontana in Peekskill, New York, and has a solo practice in
Yonkers, New York. Dr. Castanaro is a member of the American Dental Association,
the Dental Society of the State of New York, the Ninth District Dental Society,
and the Peekskill-Yorktown Dental Society.
Code of Ethics. The company has adopted a Code of Ethics applicable to its Chief
Executive Officer and Chief Financial Officer. This Code of Ethics is filed
herewith as an exhibit.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Until June of 2000, when our board of directors eliminated compensation for
directors other than those employed by us, such persons were paid $5,000
annually and an additional $500 for each Board or committee meeting attended in
person. No payments have been made during the fiscal year ended February 28,
2004.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee was disbanded in May 1998. As of the date hereof, the
Board of Directors has not established a new Compensation Committee and it has
no plans to do so until such time as our financial position and prospects
improve significantly.
27
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows compensation information for each of the
fiscal years ended February 28, 2004 February 28, 2003 and February 28, 2002 for
all persons who served as our chief executive officer. No other executive
officers received compensation in excess of $100,000 during the fiscal year
ended February 28, 2004.
ANNUAL COMPENSATION
Name and Principal
and Position Year Salary Other Compensation
------------ ---- ------ ------------------
John H. Treglia 2004 $37,060 357,142 shares
President, Chief Executive 2003 -0- 357,142 shares
Officer, Secretary and Director 2002 -0- 630,397 shares
Dr. Frank Castanaro 2004 $ -0- 0
Secretary and Director 2003 -0- 0
2002 -0- 0
Pursuant to his employment agreement, John H. Treglia is to receive a total of
$150,000 per year. For the fiscal year end February 28, 2004, Mr. Treglia
received $37,060 in salary and $25,000 worth of our restricted common stock. Mr.
Treglia agreed to waive his rights to the balance of $87,940 owed to him under
his employment agreement.
ITEM NO. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information as of June 10, 2004, with respect to
the persons known to us to be the beneficial owners of more than 5% of our
common stock, $.10 par value.
PRINCIPAL SHAREHOLDERS
We know of no person, other than those listed in the Management's Shareholdings
Table, below, who owns more than 5% of our common stock. The following table
sets forth information as of June 10, 2004, with respect to the beneficial
ownership of our common stock, $.10 par value, of each of our executive officers
and directors and all executive officers and directors as a group:
PRINCIPAL SHAREHOLDERS TABLE
Title Name and
of Address of Amount and
Beneficial Beneficial Nature of Percent of
Owner Ownership Class Class
--------- ---------- -------- ---------
Common Carlyn A. Barr (1) 2,837,026 23.35%
13-44 Henrietta Court
Fair Lawn, NJ 07410
Common Park Avenue Health Care 1,200,000 9.88%
Management
One North Lexington Avenue
White Plains, New York 10601
Common Dr. Frank J. Castanaro 733,000 6.03%
71 Bradford Boulevard
Yonkers, NY 10710
(1) Carlyn A. Barr is the wife of John H. Treglia. John Treglia has disavowed
any interest in the shares of common stock owned by Ms. Barr.
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Security Ownership of Management
The following table sets forth information as of June 10, 2004, with respect to
the shareholdings of the Company's executive officers and directors.
Title Name and Amount and
of Address of Nature of
Class Beneficial Beneficial Percent of
Owner Owner Class(1) Class
----- ---------- ---------- ----------
Common John H. Treglia 0 0
13-44 Henrietta Court
Fair Lawn, NJ 07410
Common Dr. Frank J. Castanaro 733,000 6.03%
71 Bradford Boulevard
Yonkers, NY 10710
Common All directors and 733,000 6.03%
officers as a group
(2 persons)
Pursuant to the rules of the Securities and Exchange Commission, shares of our
common stock, which an individual or member of a group has a right to acquire
within 60 days pursuant to the exercise of options or warrants, are deemed to be
outstanding for the purpose of computing the ownership of such individual or
group, but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table. Accordingly, where
applicable, each individual or group member's rights to acquire shares pursuant
to the exercise of options or warrants are noted below.
Medical and Professional Advisory Board
We have formed a Medical and Professional Advisory Board which consists of
individuals with experience and expertise in otolaryngology, audiology,
geriatric care (both medical and psychological), and new hearing aid product
developments. The purpose of establishing this advisory board was to assist us
with any complex questions or issues which may arise in connection with their
fields of expertise. W we consult with the members with respect to current
developments in their fields of expertise and, where appropriate, for advice
respecting our business strategy.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of any transactions during the fiscal year ended
February 28, 2004 or any presently proposed transactions, to which we were, or
are, to be a party, in which the amount involved in such transaction (or series
of transactions) was $60,000 or more and which any of the following persons had
or is to have a direct or indirect material interest: (ii) any of our directors
or executive officers; (ii) any person who owns or has the right to acquire 5%
or more of our issued and outstanding common stock; and (iii) any member of the
immediate family of any such persons. Current management is not aware of any
requirements, which may have been in effect prior to January 2000, with respect
to the approval of related transactions by independent directors. Because of its
current limited management resources, the company does not presently have any
requirement respecting the necessity for independent directors to approve
transactions with related parties. All transactions are approved by the vote of
the majority, or the unanimous written consent, of the full board of directors.
All member so the board of directors all members of the board of directors,
individually and/or collectively, could have possible conflicts of interest with
respect to transactions with related parties.
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Employment Agreement with John H. Treglia
On April 3, 2000, we entered into an employment agreement with John H. Treglia,
our President and CEO. The agreement provides for an annual salary in the amount
of $150,000 and a term of three years. On April 3, 2003 we entered into an
amendment to such employment agreement extending the terms of the agreement for
an additional five years based on the same terms and conditions. Mr. Treglia has
agreed to waive the right to be paid in cash until, in the opinion of the board
of directors, we have sufficient financial resources to make such payments. In
lieu of cash salary payments, Mr. Treglia may accept shares of common stock at,
or at a discount from the market price. His agreement provides for the
possibility of both increases in salary and the payment of bonuses at the sole
discretion of the board of directors, participation in any pension plan,
profit-sharing plan, life insurance, hospitalization of surgical program or
insurance program adopted by us (to the extent that the employee is eligible to
do so under the provisions of such plan or program), reimbursement of business
related expenses, for the non-disclosure of information which we deem to be
confidential to it, for non-competition with us for the two-year period
following termination of employment with us and for various other terms and
conditions of employment. We do not intend to provide any of our employees with
medical, hospital or life insurance benefits until our board of directors
determines that we have sufficient financial resources to do so.
ITEM 14. PRINCIPAL ACCOUNTANTING FEES AND SERVICES
Audit Fees
For the Company's fiscal year ended February 28, 2004, we were billed
approximately $12,000 for professional services rendered for the audit of our
financial statements. We also were billed approximately $3,000 for the review of
financial statements included in our periodic and other reports filed with the
Securities and Exchange Commission for our year ended February 28, 2004.
Tax Fees
For the Company's fiscal year ended February 28, 2004, we were billed $2,000 for
professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
The Company did not incur any other fees related to services rendered by our
principal accountant for the fiscal year ended February 28, 2004.
ITEM 15. - EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits:
None
(b) Reports of Form 8-K filed in fourth quarter of the fiscal year:
None
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Yonkers, State of New York.
NANTUCKET INDUSTRIES, INC.
June 14, 2004 By /s/ John H. Treglia
----------------------------------
John H. Treglia, President and CEO
By: /s/ Frank Castanaro
----------------------------------
Dr. Frank Castanaro, Secretary
Pursuant to 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 on the dates indicated.
June 14, 2004 /s/ John H. Treglia
----------------------------------
John H. Treglia, Director
/s/ Frank Castanaro
----------------------------------
Dr. Frank Castanaro, Director
31