SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): January 25, 2002
NANTUCKET INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 001-08509 58-0962699
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
45 Ludlow Street, Suite 602
Yonkers, NY 10705
(Address of principal executive offices) (Zip Code)
(914) 375-7591
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Page 1 of __ pages
ITEM 2. Acquisition of Disposition of Assets
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 said Plan of Reorganization,
which was accepted by the creditors of Nantucket and approved by the Bankruptcy
court, is discussed in more detail in Item 3 of this report, "Bankruptcy or
Receivership". The assets of Accutone, which were acquired by Nantucket through
its acquisition of the Accutone stock, include all of its facilities, contracts,
service agreements, accounts receivable, patent rights, customer lists, etc.
As a result of Nantucket's acquisition of Accutone, those persons who were
creditors or shareholders of Nantucket prior to the acquisition now own a total
of 714,285, comprising 12% of the shares of the common stock of Nantucket.
Persons who were shareholders of Accutone prior to the acquisition now own a
total of 5,285,715, comprising 88% of the issued and outstanding common stock of
Nantucket. While this represents a great diminution in the percentage of
Nantucket owned by its pre-acquisition shareholders. had the Plan of
Reorganization not been put into effect, the shares held by such persons would
have had no value at all because the only other alternatives for Nantucket would
have been:
(a) administration through the liquidation chapter of the Bankruptcy
Code, Chapter 7, with no meaningful distribution to the creditors
and the dissolution of the corporation, leaving the shareholders
with nothing left of their investment; or
(b) dismissal from bankruptcy jurisdiction and administration pursuant
to state law remedies, with no possible causes of action under any
state bankruptcy law for the recovery of any assets.
Nantucket's voluntary petition under Chapter 11 of the United States
Bankruptcy Code was filed on March 3, 2000 in the U.S. Bankruptcy Court for the
Southern District of New York. At the time such petition was filed until it
acquired Accutone, Nantucket was a dormant Delaware corporation. Prior to the
effectuation of Plan of Reorganization, the common stock of Nantucket was held
by approximately 1,100 shareholders. As a result of the reorganization, the
number of Nantucket shareholders will be increased to approximately 1,180 (see
Item 3 of this report, "Bankruptcy or Receivership").
AVAILABLE INFORMATION RESPECTING NANTUCKET INDUSTRIES INC.
Nantucket Industries, Inc. is subject to the informational requirements of
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and in accordance therewith is required to file reports, and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, and other information may be inspected and copied at the Commission's
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public reference room located in Room 1024 at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and at 7 World Trade Center, 13th Floor, New York, New York 10048. The
Commission also maintains a web site at "http:\\www.sec.gov" where such material
filed electronically can be examined. Copies of such materials may also be
obtained at prescribed rates from the Public Reference Section of the Commission
located in Room 1024 at 450 Fifth Street, N.W., Washington, D.C. 20549.
THE COMPANY
As a result of the above described acquisition, Accutone Inc. (together
with Accutone's wholly-owned subsidiary, Interstate Hearing Aid Service Inc.) is
now a wholly owned subsidiary of Nantucket Industries Inc. Nantucket, has no
business or assets other than those which it acquired through its acquisition of
Accutone. With respect therefore to the current business, history, and prospects
of Nantucket, Accutone is the predecessor of Nantucket. Therefore, in this
report, the business, history, and prospects of Accutone are treated as if they
were the business, history, and prospects of Nantucket. Unless context
necessarily requires otherwise, all references in this report to "Accutone", the
"Company", "we", "us", or "our" includes Nantucket Industries Inc., Accutone,
Inc. and Interstate Hearing Services, Inc.
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 Accutoner 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. Our
corporate headquarters are located at 45 Ludlow Street, Yonkers, NY 10705;
Telephone 914-375-7591.
RISK FACTORS
Our common stock is traded in the over-the-counter market under the Symbol
NTKI and is quoted on the OTC Electronic Bulletin Board. Since approximately
April 2000 there has been virtually no active market for our stock. Any person
considering purchasing shares of our common stock, on or off the public market,
should understand that such an investment would be speculative and would involve
a high degree of risk. Accordingly, you should carefully consider the following
factors before making a decision to invest.
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Risks Related To Potential Dilution
We Will Have To Obtain Financing From Sales of Our Equity Or Convertible Debt
Securities; This Could Result In The Dilution Of The Voting Power Of The Present
Shareholders And Could Decrease The Value Of Our Shares
We must expand our business to the point where it could be possible for us to
sustain a viable public market for our shares. In order to do this, we will
require outside funding, during the next twelve months, in the amount of
$500,000 to $1,500,000. While we believe that we will be able to raise these
funds from the sale of our equity or convertible debt securities, we have not
yet entered into any arrangements with any investment banker or broker with
respect to a private placement or public offering of our securities. Therefore,
we are unable to state the possible terms of any sales of our securities or the
ultimate dilution which such sales will cause to our shareholders. However, the
issuance of any additional common shares will reduce the percentage of
ownership, the voting power of each other share, and, possibly, the book value
or market price of our currently outstanding shares (See and "Risks Related To
Our Financial Condition").
Risks Related To Our Business
We Have A Limited Operating History For You To Use To Evaluate Our Business.
We have a very limited operating history for you to use to evaluate our
business, especially since the October 2000 change in our business plan. Since
we started operations in January 1997, we have devoted almost all of our efforts
to developing business contacts and marketing concepts and very little time and
expense to marketing and sales. Marketing activity, under our new business plan,
commenced in October 2000 and results, in terms of an increase in sales, only
began in the first quarter of 2001. Based upon this very limited history of
operations, we are unable to predict whether our products will sell in the
volumes or at the prices that we anticipate (See "BUSINESS").
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Our Success Will Be Entirely Dependent On Our Ability To Increase the Number and
Level of Operations of Our Sales and Dispensing Offices. Presently, We Do Not
Have Sufficient Financial Resources To Do So.
We have no potential sources of revenues other than from anticipated sales of
our services and hearing aids and certain proposed accessory products.
Consequently, we are entirely dependent on our success in opening and equipping
an increased number of sales and dispensing offices and operating them
profitably. Our ability to do so will depend in large part upon our ability to
raise financing for our projected expansion, our management skills (which, to
date, are based on limited experience), and the success of our marketing and
advertising plans. We cannot give any assurance that we will be successful in
expanding the volume and profitability of our business. If we fail to do so, or
if we are only able to do so more slowly than we expect, our business, results
of operations, and financial condition will be materially and adversely
affected. If that is the case, it is not likely that our business will sustain a
viable public market for our common stock (See "Risks Related to Our Financial
Condition" "Risks Related to the Market For Our Common Stock", and "BUSINESS").
Initiating And Expanding Our Marketing And Sales Operations Will Strain Our
Resources; Failure to Effectively Manage Our Growth Could Disrupt Our Operations
And Prevent Us From Generating The Revenues We Expect.
Because we have only recently implemented a business plan which shifted the
focus of our marketing efforts from the individual, self-pay patient to group
healthcare organizations and third party payers, our business is at an early
stage of development. As noted in the foregoing Risk Factor, we believe that in
order for our business to become profitable at a level that will sustain a
public market for our common stock, we will have to open, equip, and
successfully operate an increased number of sales and dispensing offices. This
will require the expansion of our administrative and audiological staff and the
implementation of successful marketing and advertising campaigns. If we are able
to raise enough financing to establish more sales and dispensing offices and put
efficient marketing infrastructures in place, we may then experience rapid
growth. But rapid growth would require us to manage multiple relationships with
various audiologists and/or licensed hearing aid dispensers as well as
administrative personnel, vendors of hearing aids, and other third parties.
Because of that, the expansion of our operations can be expected to strain our
management, operational, financial, and technological resources. If we fail to
manage our growth in a manner that minimizes these strains on our resources it
could disrupt our operations and ultimately prevent us from generating the
revenues we expect. If this should be the case, we might not be able to sustain
a viable public market for our common stock (see "Risks Related To Our Financial
Condition" and "Risks Related to the Market For Our Stock", below).
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We Do Not Have Sufficient Executive or Audiological Staff to Successfully Expand
Our Business. Neither do We Have the Financial Resources to Hire Sufficient
Staff.
Presently, we do not have any executive personnel other than Mr. Treglia and Mr.
Brand (whose activities are limited to our Pennsylvania operations). Neither do
we have sufficient audiologists to significantly increase the number of our
sales and dispensing offices. Therefore, we will not be able to expand the
volume and profitability of our business unless we are able to hire additional
managerial and audiological personnel. Presently, this is impossible because our
current cash flows and financial resources are inadequate. In fact, we may not
be able to hire sufficient additional personnel unless we are able to raise debt
or equity financing from sales of our securities or from other sources such as
institutional lenders. Moreover, competition for highly-qualified personnel is
intense, and we cannot assure that we will be able to hire qualified managerial
and audiological staff even if we are able raise the funds to do so. If we are
unable to raise outside funding to pay for hiring additional personnel and if we
are unable to attract and retain qualified staff, we will not be able to expand
the volume and profitability of our business. If that is the case, we might not
be able to sustain a viable public trading market for our common stock (see
"Risks Related To Our Financial Condition" and "Risks Related to the Market For
Our Stock", below).
We Must Compete With Larger, More Well Established, Well Known, and Better
Financed Hearing Aid Retailers.
Our ability to generate revenues and operate profitably will be directly related
to our ability to compete effectively with our competitors. Some of these have
large networks of retail hearing aid dispensing outlets, are well known to the
public, larger than we are, and have substantially more assets and resources
than we have. These competitors have the financial resources to mount larger
marketing and consumer-oriented advertising campaigns than we can, or will be
able to, conduct. We intend to meet competition through establishing provider
relationships with various types of health care organizations, by advertising to
the self-pay market and by conducting educational campaigns aimed at acquainting
the public with the potential benefits of hearing aids. We can give no assurance
that this strategy will succeed, or that we will be able to overcome the
competitive disadvantages we face as a small company with limited capital and
limited history of successfully marketing and dispensing hearing aids (See
"Business - Competition").
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Our Future Success Is Dependent, in Part, on the Performance And Continued
Service Of Our President and Vice President.
Our performance and future operating results are substantially dependent on the
continued service and performance of John H. Treglia, our president and chief
executive officer and Mr. Larry Brand, our vice president in charge of
Pennsylvania operations. To date, Mr. Treglia has not only contributed his
services but also a substantial portion of the financing required for the
implementation and operation of our business. If either Mr. Treglia's or Mr.
Brand's services become unavailable, our business and prospects would be
adversely affected. We do not currently maintain "key man" insurance for any of
our executive officers or other key employees and do not intend to obtain this
type of insurance until such time as the Company has positive cash flow and is
profitable. The loss of the services of Mr. Treglia or Mr. Brand could have a
material adverse effect on our financial condition, operating results, and, on
the public market for our common stock (See "MANAGEMENT").
Risks Related To Our Financial Condition
We Need Financing In Order to Implement Our Business Plan and We May Not Be Able
To Obtain It.
In order for us to expand our operations to the point where they are profitable
and large enough to sustain a viable public market for our securities, we must:
* expand the volume of operations and the profitability of our
existing sales and dispensing offices; and
* open and equip new sales and dispensing offices in the New York
Metropolitan Area and implement and develop operations at these new
offices;
* expand our administrative and audiological staff's;
* expand our marketing and advertising programs.
If we are to achieve these goals, we will incur a substantial increase in
expenses. We currently have virtually no cash available for these activities
other than our limited cash flow from operations. We believe that we will be
able to raise $500,000 to $1,500,000 from a private placement of convertible
debt or our equity securities. However, we have not entered into any agreement
with any investment banking firm or securities broker to act as selling agent
for us in a private placement of our securities. We intend to meet with one or
more lending institutions that lend money collateralized by accounts receivable
which are generated by Medicare and/or Medicaid. We expect to be able to
establish banking relationships with at least one of these institutions in the
near future. We anticipate that this will give us access to a credit line in the
amount of from $50,000 to $100,000. However, at present, no such line is in
place and we cannot give any assurance that it will, in
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fact, be granted. We cannot give any assurances that we will be successful in
raising sufficient funds to expand the volume and profitability of our business
to the point where it can sustain a public market for our common stock.
We Have Had Losses From Operations Since Inception, and We have (Very Limited
Working Capital) (a Working Capital Deficit)
We were organized in October 1996 and have generated only limited revenues from
operations. In order to implement and develop our business in the New York
metropolitan area, we have had to depend on cash infusions by way of: (i) an
aggregate of approximately $140,000 from investors in a private placement of our
convertible debentures; and (ii) approximately $250,000 in contributions to
capital provided via Mr. Treglia (as well as contributions of uncompensated
services from Mr. Treglia). We therefore incurred losses from inception through
the end of our last completed fiscal year (year ended December 31, 2000). As of
December 31, 2000, we had an accumulated deficit of $(275,872). While we
anticipate that we may continue to incur net losses for the foreseeable future,
for the first quarter of the current fiscal year (three months ended March 31,
2001), we showed a profit of $14,622, which reduced our accumulated deficit to
($261,250). As at March 31, 2001, we had total current assets of $119,724 and
total current liabilities of $90,618, giving us very limited working capital of
approximately $ 29,106. If we fail to establish profitable operations and
continue to incur losses, we might not be able to sustain a viable public market
for our common stock.
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Risks Related To The Public Market For Our Common Stock
Since April of 2000 There Has Been Virtually No Public Market For Our Common
Stock. Unless Such Market Develops, No Shareholder May Be Able To Sell Our
Shares
Since April of 2000, there has been virtually no public market for our common
stock. Until April 17, 1998, our (Nantucket's) common stock was traded on the
American Stock Exchange. Because it fell below American Stock Exchange
guidelines for continued listing, it was delisted effective April 17, 1998. From
that date it was traded in the over-the-counter market and quoted on the OTC
electronic bulletin board of the NASD Supplemental Market under the symbol
"NANK" ("NANKQ" during the time its Chapter 11 proceedings were pending). Our
common stock is currently traded in the over-the-counter market and quoted on
the OTC electronic bulletin board under the symbol NTKI. Moreover, even if a
market for our common stock does develop, it may be highly limited. Failure to
develop or maintain an active and reliable trading market for our stock could
negatively affect the price of our shares and make it impossible to sell such
shares.
We Are Not, And May Never Be, Eligible For NASDAQ Or Any National Stock
Exchange.
Our common stock is not presently, and it is likely that for the foreseeable
future it will not be, eligible for inclusion in NASDAQ or for listing on any
United States national stock exchange. To be eligible to be included in NASDAQ,
a company is required to have not less than $4,000,000 in net tangible assets, a
public float with a market value of not less than $5,000,000, and a minimum bid
of price of $4.00 per share. At present, we do not have, and we are unable to
state whether we will ever have, sufficient assets and market price to meet the
Nasdaq application standards.
Our Common Stock Will Be A "Penny Stock," And Compliance With Requirements For
Dealing In Penny Stocks May Make It Difficult For Our Shareholders To Resell
Their Shares.
As a consequence of our financial condition, the market for our common stock,
will, for the forseeable future, our stock will continue to be traded in what is
known as the over-the-counter market and reported on the OTC Bulletin Board. At
least for the foreseeable future, our common stock will continue to be deemed to
be a "penny stock" as that term is defined in Rule 3a51-1 under the Securities
Exchange Act of 1934. Rule 15g-2 under the Exchange Act requires broker/dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain from these inventors a
manually signed and dated written acknowledgement of receipt of the document
before effecting a transaction in a penny stock for the investor's account.
Compliance with these requirements may make it more difficult for holders of our
common stock to resell their shares to third parties or otherwise, which could
have a material adverse effect on the liquidity and market price of our common
stock. Penny stocks are stocks:
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(i) with a price of less than $5.00 per share; or
(ii) that are not traded on NASDAQ or a national securities exchange;
(iii) are issued by companies with net tangible assets of less than: (A)
$2.0 million (if the issuer has been in continuous operation for at
least three years); or (B) $5.0 million (if in continuous operation
for less than three years); or
(iv) which have average revenue of less than $6.0 million for the last
three years.
BUSINESS
General
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 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. Since implementing our new business plan in October 2000, we
have entered into contracts with fourteen managed health care provider
organizations in the New York metropolitan area, including Medicare and
Medicaid. We presently in negotiations with another twelve of these
organizations within six months (see "Sales and Marketing").
In addition to marketing our services, our current efforts and resources
are being devoted to expanding 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
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long term goal is to expand our operations into a wider geographic area.
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.
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 are presently endeavoring to put all of these elements into place.
Therefore our primary goals during the next eighteen months include:
* opening and establishing operations at an additional five 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 approximately twenty-five nursing homes in the New York
metropolitan area (We estimate that 25 nursing homes can be serviced
by one full-time audiologist based on an estimate of one to two
half-days per month).
* increasing the number of audiologists on our staff to at least nine;
* hiring a chief financial officer and a chief operations officer,
experienced in the health care industry;
We also intend to implement an aggressive advertising and marketing
campaign aimed at individuals and managed health care organizations and to
establish a professional advisory board consisting of from 4 to 6 individuals
with high levels of experience and expertise in hearing health care,
gerontology, and hearing aid product development and promotion.
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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 $1,000,000 to $1,500,000. Our present plan for financing
focuses on raising funds through a private placement of our securities (see
"Proposed Financing Plans").
Overview of the Industry
Hearing Loss
We believe 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, On February 8, 1999, 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 a great many people suffering from hearing loss can be
helped with the use of hearing aids, a 1999 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
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continuing growth during the coming decades. 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 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 an expansion of
hearing aid use include the following:
o A rapidly aging population (the "graying of America") accompanied by
a natural, progressive deterioration in hearing acuity;
o Wide exposure to excessive noise, pollution among younger segments
of the population resulting in ever increasing damage to hearing;
o A growing acceptance among all segments of the population of the use
of hearing aids;
o The availability of smaller and less visible hearing aids;
o Advances in hearing aid technology, including computerized digital
products;
o Decreasing prices of hearing aids;
o 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.
Our Sales and Dispensing Offices
We are currently operating five hearing sales and dispensing facilities.
Five of these are retail sales and dispensing offices, which are located in
medical arts buildings, shopping malls, independent store-fronts, and, in one
case, on-site at a medical outpatient center. Two of our five retail offices are
located in Yonkers, NY, one is in Mount Vernon, NY., and one is in Forty Fort,
PA. Our fifth facility is located on-site at The Wartburg Home of The
Evangelical Lutheran Church (the Wartburg nursing home facility.) We are
scheduled to open a seventh facility on Main Street in New Rochelle, New York
(see "Facilities and Services", below).
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One of our Yonkers offices and both of our Pennsylvania offices are open
and functioning on a full time basis. We expect that our recently opened Yonkers
Avenue office, which is presently open two days a week, will be open at least
three days a week by September 1, 2001. Our Wartburg Out-patient office is
currently open two days per week and our Wartburg Nursing Home office is
currently open an average of two days per month, on an as-needed basis.
Our Ludlow Street Yonkers offices is staffed and supervised by a
full-time, licensed and certified audiologist and one full-time patient care
coordinators. Our Yonkers Avenue office is staffed and supervised by a licensed
and certified audiologist. Our two Pennsylvania offices are each opened full
time and are staffed by a state licensed hearing aid dispenser, as required by
applicable Pennsylvania law and at least one clerical, reception person.
Our current New York sales and dispensing offices range from 600 to 1,100
square feet in size. These include our two Yonkers offices 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 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.
Our Pennsylvania sales and dispensing office is equipped with portable
audiological testing and fitting equipment and a sound-deadened room. This meets
all applicable requirements of the State of Pennsylvania Department of Health
Regulations regarding the sales and dispensing of hearing aids.
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On-Site Offices
The Wartburg Adult Care Community Outpatient Clinic
and The Wartburg Nursing Home
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:
* Establishing and 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 will have 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 non-resident outpatients
and Wartburg assisted living facility residents.
* Establishing and operating a separate on-site dispensing and testing
facility in Wartburg nursing home (The Wartburg Home of the
Evangelical Lutheran Church, Inc.). The Wartburg's provision of
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. This office was opened in April
2001.
Presently, the Wartburg outpatient facility handles six hundred patient
visits per month. We expect that during the next six months, we will devote a
total of approximately two to three days per week to patients at the Wartburg
facilities. The Wartburg Diagnostic and Treatment Center has advised us that it
intends to actively promote its outpatient services and its agreements with us
provide that it will include our audiological facility in its marketing efforts,
at its expense. In addition, we intend to implement our own marketing program
and to coordinate it with the Wartburg so as to maximize promotion of our
Wartburg outpatient facility, as well as our other facilities. Based on
projected responses to our coordinated marketing efforts and the physical
presence of our facility on-site, we expect that patient awareness of our
services will increase. As a result, after the initial six months of operation,
we may be required to increase our personnel and operating hours at the Wartburg
Out-Patient
15
Clinic in order to fully service non-resident outpatients.
Proposed Contracts With Additional Nursing Homes
We are presently in negotiations with six additional nursing homes for the
establishment of on-site offices and our appointment as sole provider of
audiological services and products during the duration of the term of the
contract. We have received provisional agreements, pending only the execution of
final contracts, for the following four of such nursing homes:
No. of
Nursing Home Location Residents
------------ -------- ---------
Laconia Nursing Home Bronx, NY 240
Schervier Nursing Home Bronx, NY 480
New San Souci Health Care Yonkers, NY 210
Fieldston Lodge Bronx, NY 185
Contract With Park Avenue Health Care Management Inc.
We are currently in the final stages of negotiations with Park Avenue
Health Care Management Inc. and its affiliate, Park Avenue Medical Associates,
P.C. (referred to herein, collectively, as "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. 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 currently have
sufficient staff and equipment to service thirty-four of the seventy-two nursing
homes which the Park Avenue contract will add to our clientele. We anticipate
that we will be able to service at least sixty of these nursing homes by the end
of the current calendar year.
In-Home Services
Because of the geographic dispersal of the population in much of the State
of Pennsylvania (other than in urban areas), our subsidiary, Interstate Hearing
Aid Service Inc. has, for the past thirty-five years, provided in-home visits by
Registered Hearing Aid Fitters licensed by the Pennsylvania Department of
Health. In-home services include testing, diagnosing, fitting, dispensing, and
follow-up visits, as required. Approximately fifty per cent of the sales made in
Pennsylvania are attributable to in-home visits.
16
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 of
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
17
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.
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:
* 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;
* results of all procedures are reported to the attending physician
and become a part of the patient's permanent medical records.
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.
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/Umitron,
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
18
decoders, pocket talkers, specially adapted telephones, alarm clocks, doorbells
and fire alarms.
Customers
As a major part of our new business plan, we have successfully expanded
our patient referral base by securing appointments as the sole provider of
hearing aids and audiological services to nursing homes, out-patient facilities,
and adult group homes. We have also established relationships 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 since
October 1, 2000, when we began marketing our services to them. Our customers
include:
* patients who learn about us through our newspaper advertisements
(see "Sales and Marketing", below);
* 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
(see "Existing Contracts With Health Care Providers and Third-Party
Payers", below);
* patients who are referred to us by out-patient health care clinics
and hospitals (see "Out-Patient Facilities" and "Area Hospitals",
below;
* patients who are referred to us, on an out-patient basis, by nursing
homes and senior care facilities at which they reside (see "Nursing
Homes", below);
* patients who are referred to us by area physicians with whom we have
established relationships (see "Physician Referrals", below; *
patients who are treated on an in-patient basis in nursing homes or
senior care facilities (see "Facilities - On-Site Offices", above);
and
* patients in Pennsylvania who are visited, tested, and fitted in
their homes (see "Services -In-Home Services", above).
Existing Contracts With Health Care Providers
and Third-Party Payers
Since the Autumn of 2000, we have entered into contracts for the provision
of audiological services with twenty-one health care provider organizations, as
well as third-party payers such as Medicare and New York State Medicaid. We also
have additional contracts with at least another twelve organizations pending
finalization and/or execution. We expect these additional contracts to be
19
completed by not later than the end of 2001. We believe that we currently have
sufficient staff and facilities which are geographically accessable for all
participants in organizations which we have contracted with or which we are in
the process of finalizing agreements with. These groups and organizations
include:
Existing Contracts With Health Care Organizations
We have entered into contracts with the following health care
organizations:
.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;
.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
Generally, our agreements with health insurance or managed care
organizations provide for services to be offered on three different bases,
including:
(a) fee for service basis based on a contractual rate which we offer to
provider's members (all paid for by the patient); and
(b) 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).
(c) a special Medicare/Medicaid encounter basis where we are paid a
fixed fee by
20
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).
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.
Nursing Homes
Approximately seven nursing homes 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:
No. of
Nursing Home Location Residents
------------ -------- ---------
Kings Terrace/Terrace Health Care Bronx, NY 320
Manhattanville Nursing Home Bronx, NY 280
Methodist Church Home Riverdale, NY 240
Riverdale Nursing Home Bronx, NY 300
Tarrytown Hall Care Center Tarrytown, NY 185
Classic Residence by Hyatt Yonkers, NY 277
St. Joseph's Nursing Home Yonkers, NY
Existing Referral Arrangements With Out-Patient Facilities
We have established relationships with four local out-patient facilities.
They began referring patients to us at the end of November 2000. Since that
time, referrals from these facilities have steadily increased from a total of
approximately 20 during November and December of 2000 to current levels of about
eight to ten per week. We believe that patient referrals from these sources will
continue to grow based upon the positive feedback we have received from them.
These out-patient facilities include:
21
No. of
Out-Patient Patients Seen
Facility Location Annually
-------- -------- -------------
Urgi Square Geriatric
Care Clinic Yonkers, NY 4,000
Urgicare Health Care
Clinic Yonkers, NY 7,200
Riverdale Nursing Home
Outpatient Clinic Bronx, NY 2,000
Methodist Nursing Home
Outpatient Clinic Bronx, NY 2,500
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
(see "Facilities - On-Site Offices"). Our audiologist visits the out-patient
clinic two half-days per week and the nursing home two half-days per month. To
date, our audiologist has seen an average of approximately six to eight
patients, per half-day, at each of these facilities. We expect that over the
next year, we will expand the amount of time our audiologists spend at the
out-patient clinic to at least two full days per week and the number of patients
will increase substantially as we become an integral part of the general
services referral base of the physicians practising at the out-patient center.
Area Hospitals
We have also established relationships with four area hospitals. They have
recently begun referring patients to us. The planned increase in the number of
our sales offices will put our services within the geographical reach of an
increased number of the patients of these hospitals. We, therefore, expect that
these relationships will begin to have an impact on the volume of our business
by the second quarter of 2001. The hospitals with which we have established
patient referral relationships are:
Hospital Location
----------------------- --------------------
* Saint Josephs Medical Center South Yonkers, NY
* Yonkers General Hospital South Yonkers, NY
* Montefiore Medical Center Northeast Bronx, NY
* Westchester Medical Center White Plains, NY
22
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 medical reporting system
which provides each referring physician with a full audiological report on each
of their patient visits to our offices.
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 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 150 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, 90-day payment terms from
our hearing aid suppliers instead of the normal 30-day terms common
industry-wide. We anticipate that, 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, collateralized by our medicare and medicaid receivables.
23
Sales and Marketing
Since the Autumn of 2000, when we implemented our new business plan, we
have expanded our marketing efforts to include, not only the self-pay patients
who had previously 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 have consisted solely of
personal contacts by our president, John H. Treglia, with all of the types of
entities and organizations listed above. We have also utilized print media
advertising on a limited basis to the self-pay patient market.
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 recently started a joint advertising
campaign with the Wartburg Out-Patient Clinic that will intend to increase over
the next twelve months. We also intend to increase our marketing efforts to the
self-pay, (uninsured patient) market.
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, marketing to health care
organizations is done by CEO, Mr. Treglia and by patient care coordinator
through personal contacts.
Our proposed marketing plan will also focus on educating both physicians
and patients on the need for regular hearing testing and the importance of
hearing aids and other assistive listening devices in improving the quality of
life for hearing impaired individuals. We have already completed our first two
hearing health seminars at the Classic Residence by Hyatt and The Wartburg, each
a residential
24
center including various levels of health care. We expect to be able to hold at
least two such seminars during the non-winter months (March through November) at
numerous institutions throughout the New York Metropolitan area.
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, which we have already begun to implement, 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.
Business Strategy
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. We believe that our success will
be largely dependent upon our ability to:
* Expand our existing operations, first in the New York metropolitan
area and then on a regional basis.
* distinguish our company from its competitors and
* effectively market our products and services;
* expand our marketing efforts to include the growing assisted living
community population.
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; and
* the availability, ease of use, and effectiveness of the newest
hearing aid technologies;
* the ability to arrange financing for hearing aids through an
arrangement with Lend-An-Ear, a lease financing organization which
arranges for lease-purchase financing of hearing aids on reasonable
terms, especially directed to the senior citizen marketplace.
Proposed Financing Plans
In order for us to implement our business plan, we will require financing
in a minimum amount
25
of $500,000 during the next twelve months. We intend to use our best efforts to
generate between $500,000 and $1,500,000 in equity or convertible debt financing
from a private placement of our securities within six to eighteen months. We
have not yet determined whether the private placement will be effected by our
officers or by a Securities Broker acting as our selling agent. At this time, we
are unable to state what the terms of the anticipated private placement will be
or the amount of dilution which will result from the intended financing.
If we are unable to raise these funds through a private placement of our,
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, we
will curtail our growth and 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.
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. The Company has 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 Offices 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 audiologists In our
Pennsylvania operations, we have four 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
26
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 referral are mandated in the future, they should not be
expected to have an adverse impact on the Company's 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 thirty 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. The Company
believes that none of its managed care or other provider contracts or its
relationships with referring physicians are violative of the anti-kickback
statute.
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.
27
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 the Company currently operates
and in New Jersey and Connecticut, which are part of the Company's 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 the Company. 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. The Company knows of no current or proposed state
regulations with which it, as currently operated, 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 with
copies of their insurance coverage certificates and we believe that they are all
in compliance with applicable federal and state requirements. 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.
Seasonality
The Company is not generally affected by seasonality.
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
28
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 focus our efforts primarily on urban,
high density population areas.
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 the Company. 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 the Company. 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, 2001, 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,
As of June 1, 2001, in our Pennsylvania operations, we had a total of two
full-time employees consisting of our vice president, Larry A. Brand and one
person who is an administrator and a Pennsylvania Registered Hearing Aid Fitter.
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
29
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 of from one to three million dollars, at such time as we
have the financial resources to do so.
PROPERTIES AND EQUIPMENT
Corporate Headquarters
The Company's corporate headquarters are located in Suite 602 The Ludlow
Street Medical Building located at 45 Ludlow Street. This office consists of 850
square feet. Approximately 800 square feet of these premises are used as two
administrative offices with the balance of the space comprising a reception
area.
We occupy these premises pursuant to five year lease with Diamond
Properties, Inc. The lease expires in February 2006. The lease calls for monthly
rental payments of $895 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, offstreet parking available. It is located off a main street and
around the corner from Saint Joseph's Medical Center, a major area health care
facility.
Ludlow Street Sales and Dispensing Office
We have a retail sales and dispensing office located 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 Josephs included, in addition to the equipment listed above, a second full
spectrum hearing suite, which we are presently keeping in storage. All of the
30
equipment which we purchased from Saint Josephs, 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.
Yonkers Avenue Sales and Dispensing Office
We currently sublease an approximately 600 square foot space in a retail
eyeglass outlet which also houses the offices of an opthalmolgist and an
optometrist. This facility is located on the first floor of a two year old
building located at 818 Yonkers Avenue, Yonkers, New York. This location is a
busy, heavily trafficked, commercial area, with adequate, free, offstreet
parking available. The upper stories of this building comprise a professional
building housing the private offices of eight physicians and a physical
rehabilitation facility. We occupy this space under a two-year sublease with
Park Hill Optical Corp. The lease, which expires on December 31, 2002, provides
for an option to renew for an additional three years. Monthly rental payments
for the first two years of the lease term are $800, with payments for the
three-year renewal period set at $900. All rental payments are fully inclusive
of utilities, taxes, and all other charges. A common reception area and waiting
room, as well as the services of a receptionist, are provided by the lessor at
no additional cost.
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.
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 $400, 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.
31
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. This 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).
32
MANAGEMENT'S DISCUSSION
The following is management's discussion and analysis of significant
factors which have affected our financial position and operations during the
fiscal years ended December 31, 2000, December 31, 1999 and the fiscal quarters
ended March 31, 2001, and march 31, 2000. This discussion also includes events
which occurred subsequent to the end of the fiscal quarter ended March 31, 2001
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, under the subcaption "Risk Factors". 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.
We are in the early stages of the business of the retail sales and
dispensing of hearing aids. We intend to open, equip, staff, and begin operating
at least five new retail sales and dispensing offices in the New York
Metropolitan area during the next twelve months. We also need to increase the
volume and profitability of operations at our three existing retail offices and
our two existing on-site nursing home and outpatient clinic offices. Unless we
do so, the volume and profitability levels of our business might not be able to
support a viable public market for the common stock of our company.
Liquidity and Capital Resources
The activities of the Company since its formation in 1996 have been
financed principally by contributions to capital provided via our President,
John H. Treglia in the approximate amount of $250,000 and by proceeds from
private placements, to a total of nine, private, unaffiliated individuals, of
our debt and equity securities, consisting of: (i) 45,000 shares of our common
stock and (ii) our 8% subordinated convertible debentures in the aggregate face
amount of $90,000. The total proceeds for all of the shares and debentures sold
were $94,500. All of the debentures have been converted into a total of 172,598
shares of common stock. All of the aforesaid proceeds and capital contributions
were used for working capital and capital investments in various types of office
and audiological equipment and furnishings. None of the proceeds or capital
contributions were used to pay compensation to Mr. Treglia, who has contributed
all of his services without compensation.
We estimate that in order for us to achieve our goals of opening,
equipping, staffing, and beginning operations at, five new retail sales and
dispensing offices and increasing the volume and profitability of our existing
sales and dispensing offices over the next twelve months, we will be required to
make capital investments and expenditures in the amount of $500,000 to
$1,500,000. All of these funds will have to be obtained from sources other than
cash flow. As noted above, under
33
"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 confident 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 funding, we may be able to open two additional retail sales and
dispensing offices using funds from cash flow and vendor financing for necessary
equipment. In the absence of substantial outside funding, we will redirect our
efforts toward an expansion of the on-site nursing home portion of our business.
We believe that we can establish this type of relatively small offices, equipped
only with portable audiological testing and fitting equipment, out of an
anticipated cash flow and vendor financing. This could delay the development of
our business to the point where it can sustain a viable public market for its
stock by approximately twelve to twenty-four months.
As at December 31, 2000, the Company had total assets of $199,008 as
compared to $164,559 at December 31, 1999 and $87,490 at December 31, 1998.
Total assets further increased $32,439 during the first quarter of 2001,
bringing them to $231,447 at March 31, 2001. This increase was attributable
principally to: (i) an increase of $24,614 in equipment (purchased to support
the expansion and addition of sales and dispensing offices); an increase of
$11,590 in accounts receivable; and (iii) $3,765 in offsetting decreases in cash
and inventories.
During the fiscal year ended December 31, 2000, total liabilities
increased by $51,425, from $42,951 at December 31 1999 to $94,376 at December
31, 2000. This increase was attributable principally to increases in accounts
payable of $29,360 and $25,000 for legal fees. During during the first quarter
of 2001, liabilities decreased to $92,236, due to a slight decrease in accounts
payable.
As at December 31, 2000, the Company had current assets of $111,899 and
current liabilities of $91,936 resulting in working capital of $19,936, as
compared to working capital in the amount of $19,044 at December 31, 1999 and
$2,959 at December 31, 1998. Current assets increased to $119,724 during the
first quarter of 2001 and current liabilities decreased during that quarter,
bringing working capital up to $29,106 at March 31, 2001.
Reflecting the foregoing, the financial statements indicate that as at
March 31, 2001, the Company has a working capital 29,106 (current assets minus
current liabilities) compared to working capital of 19,963, and 19,044, and at
December 31, 2000, and March 31, 2000, respectively.
Results of Operations
From inception, in October 1996 through March 31, 2001, the Company
incurred a cumulative net loss of $261,250. During the fiscal years ended
December 31, 2000, 1999, and 1998, we had
34
revenues of $314,028, $362,175, and $267,388, respectively. Management believes
that the discontinuance of manufacturing operations during fiscal 2000, while in
the company's best interests for the long run, was responsible for the failure
of revenues to continue to grow at a sustained pace during that year. In the
fall of 2000, we began to implement our new business plan, focusing our
marketing efforts at health care entities and organizations instead of limiting
them to the individual, self-pay patient. As a result, growth in revenues
increased during the first quarter of 2001 to $113,214 for the quarter. Because
of our new marketing plan, our cliental has changed and now encompasses a
greater proportion of Medicare and Medicaid patients than in previous years. As
a result, while total revenues have increased during the first quarter of 2001,
per patient revenues have decreased. Management believes that this decrease in
per patient revenue will be more than made up for by an increase in the total
number of patients seen.
During the fiscal years ended December 31, 2000, 1999, and 1998, costs of
sales, as a percentage of revenues decreased from 69.5% in 1998 to 64% in 1999,
and 71% in 2000. This yielded gross profits of $86,686 in 1998, $129,633 in 1999
and $90,000 in 2000. After selling, general, and administrative expenses, the
company incurred losses from operations for these years. Such losses decreased
from $57,327 for fiscal 1998 to $5,620 for fiscal 1999, and $12,254 for fiscal
2000. During the first quarter of 2001, costs of sales, as a percentage of
revenues, decrease to 57%, which after selling, general, and administrative
expenses yielded a profit from operations of $20,694.
The financial statements which are included in this Disclosure Document
reflect total general and administrative expenses of $152,254 for the year ended
December 31, 2000. This reflects an increase in such expenses over the year
ended December 31, 1999 when total expenses came to $135,253. Expenses for 1999
reflect a decrease, as compared to the year ended December 31, 1998, when
expenses totaled $144,013. During the first quarter of 2001, general and
administrative expenses totaled $27,232 reflecting a (substantial) increase in
the general level of activities of the company.
As a result of the foregoing, during the fiscal years ended December 31,
1998, 1999, and 2000 we had net losses of $71,619, $31,363, and $84,916,
respectively. During the first quarter of 2001, we had a net profit of $14,622.
From inception (January 1997) through March 31, 2001, we have incurred a
cumulative net loss of $261,250.
MANAGEMENT
Directors and Executive Officers
The following sets forth, as of January 25, 2002, the names and ages of
all directors, executive officers, and other significant employees of Accutone,
Inc.; the date when each director was appointed; and all positions and offices
in the Company held by each. Effective as of January 25, 2002, all officers and
directors of Nantucket Industries Inc., other than Mr. Treglia and Dr.
Castanaro, will resign. The officers and directors of Accutone will hold the
same positions with Nantucket Industries Inc. as they
35
do with Accutone, except for Mr. Brand who is initially anticipated to serve as
an officer, but not a director, of Nantucket. Each director will hold such
office until the next annual meeting of shareholders and until his or her
successor has been elected and qualified:
Date
Offices Appointed
Name Age Held Director
---- --- ---- --------
John H. Treglia 58 Director, President, October 1996
and Treasurer
Larry A. Brand 48 Director and October 1996
Vice President in charge
of Pennsylvania Operations
The board of directors has no standing committees.
Family Relationships
No family relationship has ever existed between any director, executive
officer of Company or any person contemplated to become such.
Business Experience
The following summarizes the occupation and business experience during the
past five years for each director, executive officer and significant employee of
the Company. A significant employee is a person who is not an executive officer
of the Company but who is expected to make a significant contribution to the
business of the Company.
JOHN H. TREGLIA. Mr. Treglia is a graduate of Iona College, from which he
received a BBA in Accounting in 1964. He formed Accutone Inc. in October 1996
and, since then, he has served as its president, and CEO, and one of its
directors. After acquiring Interstate Hearing Aids Service Inc. in 1998, Mr.
Treglia became president and CEO of that company as well. Since January 18, 2000
he has served as president, secretary, and a director of Nantucket Industries
Inc., devoting such time to the business and affairs of Nantucket as is required
for the performance of his duties. From 1964 until 1971, Mr. Treglia was
employed as an accountant by Ernst & Ernst and, thereafter, 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.
36
LARRY A. BRAND. Mr. Brand received a Bachelor of Arts degree from Syracuse
University in 1974. He received a Juris Doctor degree from New York Law School
in 1977. From 1978 through 1997, Mr. Brand practiced law in Wilkes Barre, PA.
Upon its inception in November 1996, Mr. Brand was appointed as vice president
and a director of Accutone. From that time until November 1997, Mr. Brand
devoted part of his time to the business and affairs of our Pennsylvania
operations and part of his time to his law practice. In November of 1997, Mr.
Brand ceased practicing law and began to devote all of his time to the business
and affairs of our Pennsylvania operations. Since joining us, Mr. Brand has not
only served in an administrative capacity, but has also functioned as a
Pennsylvania licensed Hearing Aid Fitter and Dispenser.
37
Compliance With Section 16(a) of the Exchange Act.
Accutone is a privately held corporation and are not subject to any
reporting requirements of the Securities and Exchange Commission.
EXECUTIVE COMPENSATION
Current Remuneration
We have no stock option or stock appreciation rights, long term or other
incentive compensation plans, deferred compensation plans, stock bonus plans,
pension plans, or any other type of compensation plan in place for its executive
officers, directors, or other employees. None of our executive officers or
directors have ever received compensation of any such types from the Company
pursuant to plans or otherwise. We have not entered into any employment
agreements with any of our executive officers or directors.
Our CEO, John H. Treglia, has served without compensation since he formed
the Company in October 1996. To date, Mr. Treglia has contributed all of his
services to the Company without compensation.
As reported on form 10-K for the fiscal year ended February 28, 2001, on April
3, 2000, Nantucket Industries, Inc. entered into an employment agreement with
John H. Treglia, its President and CEO. The agreement provides for an annual
salary in the amount of $150,000 and a term of three years. Mr. Treglia has
agreed to waive the right to be paid in cash until, in the opinion of the board
of directors, the Company has 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 agreements 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 hereafter adopted by the Company (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
non-competition with the Company for the two-year period following termination
of employment with the company and for various other terms and conditions of
employment.
Compensation of Directors
The directors of the Company are not compensated for their services as
such.
38
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners.
The following table sets forth information as of January 25, 2002, with
respect to the persons known to the Company to have been the beneficial owners
of more than 5% of the common stock, $.10 par value of Accutone, Inc.
PRINCIPAL SHAREHOLDERS TABLE
Title Name and
of Address of Amount and
Beneficial Beneficial Nature of Percent of
Owner Ownership Class Class
- ---------- ---------- --------- ----------
Common John H. Treglia 2,678,534 44.6%
13-44 Henrietta Court
Fair Lawn, NJ 07410
Common Larry A. Brand 500,000 8.3%
92 Second Avenue
Kingston, PA 18704
Common Dr. Frank J. Castanaro 733,000 12.2%
71 Bradford Boulevard
Yonkers, NY 10710
Common Frances Katz Levine 600,000 10%
621 Clove Road
Staten Island, NY 10310
Common Scott Rapfogel 600,000 10%
16 Regency Circle
Englewood, NJ
39
Security Ownership of Management
The following table sets forth information as of January 25, 2002, with
respect to the shareholdings of the Company's executive officers and directors.
MANAGEMENT SHAREHOLDINGS TABLE
Title Name and Amount and
of Address of Nature of
Class Beneficial Beneficial Percent of
Owner Owner Class(1) Class
- ----- ---------- ---------- ----------
Common John H. Treglia 2,678,534 44.6%
13-44 Henrietta Court
Fair Lawn, NJ 07410
Common Larry A. Brand 500,000 8.3%
92 Second Avenue
Kingston, PA 18704
Common Dr. Frank J. Castanaro 733,000 12.2%
71 Bradford Boulevard
Yonkers, NY 10710
Common All directors and 3,908,122 65.1%
officers as a group
(3 persons)
Proposed Medical and Professional Advisory Board
We are in the process of forming a Medical and Professional Advisory Board
which will consist 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 is to assist us with any complex questions or issues which may arise in
connection with their fields of expertise. Once we have established this board,
we will consult with its members with respect to current developments in their
fields of expertise and, where appropriate, for advice respecting our business
strategy.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of all transactions during the last two
completed fiscal years, the
40
current fiscal year, or any presently proposed transactions, to which we were or
are to be a party and which any of the following persons had or is to have a
direct or indirect interest: (i) any director or executive officer of the
Company; (ii) any person who owns or has the right to acquire 5% or more of the
issued and outstanding common stock of the Company; and (iii) any member of the
immediate family of any such persons. The Company does not have any requirement
respecting the necessity for independent directors to approve transactions with
related parties. All transactions are approved by the vote or unanimous written
consent of the full board of directors.
Retainer Agreement with Frances Katz Levine and
Scott Rapfogel, d/b/a "Levine & Rapfogel"
On January 1, 2000 we entered into a retainer agreement with Frances Katz
Levine and Scott Rapfogel, formerly d/b/a "Levine & Rapfogel". Pursuant to which
Ms. Levine, Mr. Rapfogel, or either one of them have provided legal services
respecting securities law aspects of our Nantucket's acquisition of Accutone.
This retainer agreement called for us to pay Levine and/or Rapfogel $250 per
hour for legal services rendered thereunder. As at the present date, Levine &
Rapfogel have billed us for a total of $50,000, none of which amount has been
paid to them. Each of Ms. Levine and Mr. Rapfogel owns 10% of our issued and
outstanding common stock.
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 of the Company, or any associate of any of them, is a party to or
has a material interest in any proceeding adverse to us.
RECENT SALES OF UNREGISTERED SECURITIES
During the three year period preceding January 25, 2002 (the date of the
consummation of its acquisition of Accutone), Nantucket Industries, Inc. made mp
we made the following sales of our common stock without registration under the
Securities Act of 1933, as amended (the "Securities Act"). The following sets
forth information respecting the dates, class of purchasers, and consideration
involved in such sales and the bases for Registrant's claim that all such sales
were exempt from the registration provisions of Section 5 of the Securities Act.
From April of 1999 through June of 2000, we sold a total of six units of
our securities, at a price of $10,500 per unit. All Each unit consisted of one
three-year, 8% subordinated convertible debenture in the principal amount of
$10,000 and 5000 shares of our common stock, $.01 par value, as follows:
April 1999 two units to two private, unaffiliated individuals;
January 2000 two units to two private, unaffiliated individuals;
June 2000 two units to two private, unaffiliated individuals;
June through
December 2001 A total of 260,000 shares to twelve private,
unaffiliated individuals, all of whom are "accredited
investors" for SEC purposes, consisting of common stock
at a purchase price of $.50 per share.
41
Each of the debentures which were included in the units were converted to
shares of our common stock, $.01 par value, per share, during the fiscal year in
which they were sold. The total number of shares into which these debentures
were converted was 97,400.
The sale of all of the six units described above are claimed to have been
exempt from the registration requirements of Section 5 of the Securities Act
because of the exemption contained in Section 4(2) of the Act for the following
reasons:
(i) We did not engage in any general advertising or general solicitation and
we paid no commission or similar remuneration, directly or indirectly,
with respect to such transactions;
(ii) The persons who acquired these securities were unrelated private
individuals, all of whom were sophisticated investors. Such persons had
continuing access to relevant information concerning us and/or had such
knowledge and experience in financial and business matters that they are
capable of evaluating the merits and risks of investing in our company and
were able to bear the economic risk thereof.
(iii) Each of the people who invested in our company, advised us that they were
purchasing the units for investment and without a view to their resale or
distribution unless the securities were subsequently registered. Each of
these people also acknowledged that they were aware that there was no
market for these securities and that even if a market developed there
would be restrictions on the resale of the securities unless they were
subsequently registered or they became eligible for an exemption from the
registration requirements of the Act. They also acknowledged that they
understood that an appropriate legend would be placed on the certificates
evidencing the shares reciting the absence of their registration under the
Securities Act and referring to the restrictions on their transferability
and resale.
(iv) For the reasons set forth above and because of the manner of offering the
securities and the limited number of persons whom we offered and sold our
securities to, we believe that these sales did not constitute a public
offering. Accordingly, we claim that these transactions were exempt from
the registration requirements of Section 5 of the Securities Act by reason
of Section 4(2) thereof, in that such transactions did not involve a
public offering of securities.
Financial Statements
The audited financial statements filed as a part of this report are as follows:
Consolidated Balance Sheet - December 31, 2000
Consolidated Statements of Operations for the years ended December 31,
1997, 1998, 1999, and 2000, and cumulative for the period from
inception to December 31, 2000
Consolidated Statements of Stockholders' Equity
as at December 31, 1997, 1998, 1999, and 2000
42
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998, 1999, and 2000, and cumulative for the period from
inception to December 31, 2000
The unaudited financial statements filed as a part of this report are as
follows:
Consolidated Balance Sheet - March 31, 2001
Consolidated Statements of Operations for the three months ended
March 31, 2000
Consolidated Statements of Stockholders' Equity as at March 31, 2000
Consolidated Statements of Cash Flows for the three months ended
March 31, 2000
ITEM 3. Bankruptcy or Receivership
3.1 Order Confirming Plan of Reorganization Signed on December 10, 2001.
On December 10, 2001, a hearing respecting a plan of reorganization for
Nantucket Industries Inc. (the "Plan of Reorganization") was held before United
States Bankruptcy Judge, Hon. Richard A. Bohanan, respecting (Case Name:
Nantucket Industries, Inc., Case Number: 00-B10867). The Plan of Reorganization
was submitted to the court in connection with Nantucket's voluntary petition
under Chapter 11 of the United States Bankruptcy Code which had been filed in
the U.S. Bankruptcy Court for the Southern District of New York, by Nantucket
Industries Inc. on March 3, 2000. An order confirming the Plan of Reorganization
was signed by Judge Bohanan on December 10, 2001 which, by its terms, became
effective December 20, 2001. This event was previously reported in our quarterly
report on Form 10-Q for the quarter ended November 30, 2001. The following
documents were filed as exhibits to said Form 10-Q.
Exhibits
--------
1. Notice of entry and Notice of Deadline for Filing Administrative
Claims
2. Order confirming Plan of Reorganization signed by Hon. Richard A.
Bohanan.
3. Order Approving Disclosure Statement to Debtor's Second Amended Plan
of Reorganization and Fixing Time for Filing Acceptances or
Rejections of Plan Combined with Notice.
4. Second Amended Joint Plan of Reorganization.
5. Disclosure Statement to the Second Amended plan of Reorganization.
43
The signed order called for the following means of execution of the Plan
of Reorganization:
1. All of the assets of Accutone, Inc. are to be acquired by Nantucket.
These assets consist all of Accutone's facilities, contracts,
service agreements, accounts receivable, patent rights, customer
lists, etc.
2. All shares, in all classes of Nantucket stock, issued and
outstanding prior to the Confirmation Date (the "Old Nantucket
Shares") as well as all warrants, options and subscriptions to
Nantucket Industries, Inc. equity interests existing prior to the
Confirmation Date, are to be deemed cancelled and rendered null and
void.
3. The reorganized Nantucket Industries, Inc. is to issue approximately
6 million Shares of common stock out of the total number of shares
authorized by the amended charter as follows:
A. Approximately 714,840 shares to be issued to the holders of
Allowed Claims and Equity Interests in (old) Nantucket
Industries, Inc, as follows:
44
1) Holders of Allowed General Unsecured claims shall
receive in full settlement and satisfaction of their
respective claims (1) one share per $5.00 of General
Unsecured Claim.
2) Holders of issued and outstanding shares of preferred
stock in (old) Nantucket Industries, Inc. are to
receive, in full settlement of their liquidation
preference and all other rights appurtenant to such
shares one (1) share per $20.00 of liquidation
preference currently held, and the currently outstanding
shares of preferred stock shall be cancelled of record.
3) Holders of all issued and outstanding shares of common
stock in (old) Nantucket Industries, Inc. are to receive
in full settlement and satisfaction of their respective
equity interests, one (1) share per ten (10) shares of
currently issued stock presently held, and the current
outstanding common shares in (old) Nantucket Industries,
Inc. shall be canceled of record.
B. The balance of approximately 5,285,160 are to be issued to the
equity interest holders of Accutone, Inc. in consideration of,
and exchange for, that entity.
C. All issued shares of stock in the various wholly owned
subsidiaries of Nantucket, are to be deemed cancelled, null
and void.
The record date for the cancellation of all old shares and the issuance
other transfer of Accutone's assets to Nantucket was effective as of January 25,
2002.
ITEM 5. OTHER EVENTS
On January 22, 2002 we released the following press release:
PRESS RELEASE:
Yonkers New York, January 22, 2002: Nantucket Reorganization To Be
Implemented January 25, 2002.
John H. Treglia, President and CEO of Nantucket Industries Inc. (NANKQ),
announced today that the Company has noted an increase in trading activity
of its common stock. Mr. Treglia stated that the Company knows of no
reason for such increase other than it emergence from Chapter 11
Reorganization Proceedings pursuant to the Order Confirming the Plan of
Reorganization of the United States Bankruptcy Court for the Southern
District of New York. This Order was signed on December 10, 2001 and was
effective on December 20, 2001, as reported in Nantucket's quarterly
report on Form 10-Q, for the fiscal quarter ended November 30, 2001, filed
with the Securities and Exchange Commission on January 7, 2002. All
transactions required under the Order will be implemented effective
January 25, 2002. As a result of such reorganization, all shares traded
prior to January 25, 2002 are subject to a one-for-ten reverse split as of
January 25, 2002.
45
Implementation of the Order of confirmation calls for the following:
o The holders of all publicly traded common stock of Nantucket will
receive one share for every ten common shares held by them prior to
the implementation of the reorganization;
o The unsecured creditors of Nantucket will receive approximately
340,000 free-trading common shares in settlement of approximately
$1.7 million dollar of debt;
o The former preferred shareholders of Nantucket will receive
approximately 50,000 free-trading common shares in settlement of
their $1 million dollars of liquidation preference;
o The current shareholders of Accutone Inc., will receive
approximately 5.2 million unregistered, restricted common shares in
exchange for the business and all of the assets of Accutone.
Accutone (The Company) directly and indirectly through its wholly owned
subsidiary, Interstate Hearing Aid Service, Inc., are engaged in the
business of distributing and dispensing custom hearing aids, their related
products, and professional audiological services. It conducts the major
part of its business through its contractual affiliations with nursing
homes, senior care, and assisted living facilities. Details of Accutone's
business, including its financial statements were included as an exhibit
to Nantucket's last 10-Q filing.
ITEM 7. EXHIBITS
No Exhibits are being filed with this Report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
NANTUCKET INDUSTRIES INC.
Dated: February 19, 2002 By /s/ John H. Treglia
------------------------------------
John H. Treglia, President
and Secretary
46
Accutone, Inc.
and Subsidiary
Audited Financial Statements
Years Ended December 31, 2000, 1999 and 1998
Accutone, Inc.
and Subsidiary
Contents
- --------------------------------------------------------------------------------
Independent auditors' report 2
Financial statements:
Consolidated balance sheets 3
Consolidated statements of operations 4
Consolidated statement of stockholders' deficit 5
Consolidated statements of cash flows 6
Notes to consolidated financial statements 7-8
Independent Auditors' Report
To the Board of Directors
Accutone, Inc. and Subsidiary
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Accutone, Inc.
and Subsidiary as of December 31, 2000, 1999 and 1998 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Accutone, Inc. and
Subsidiary as of December 31, 2000, 1999 and 1998, and the consolidated results
of its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
May 8, 2001
Accutone, Inc.
and Subsidiary
Consolidated Balance Sheets
=================================================================================================
December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Assets
Cash $ 10,860 $ 34,548 $ 11,372
Accounts receivable 19,680 8,500 4,850
Inventories 10,760 13,378 7,500
Deferred costs (Note 5) 70,599 -- --
- -------------------------------------------------------------------------------------------------
Total current assets 111,899 56,426 23,722
- -------------------------------------------------------------------------------------------------
Property, plant and equipment, net (Notes 2 and 3) 87,109 108,133 63,768
- -------------------------------------------------------------------------------------------------
$ 199,008 $ 164,559 $ 87,490
=================================================================================================
Liabilities and Stockholders' Deficit
Current portion of long-term debt (Note 3) $ 3,129 $ 2,935 $ 2,767
Accounts payable 63,807 34,447 18,046
Other liabilities (Note 5) 25,000 -- --
- -------------------------------------------------------------------------------------------------
Total current liabilities 91,936 37,382 20,813
Long term debt (Note 3) 2,440 5,569 8,504
- -------------------------------------------------------------------------------------------------
Total liabilities 94,376 42,951 29,317
- -------------------------------------------------------------------------------------------------
Stockholders' equity (Note 4)
Common stock, $.01 par value; authorized 100,000 shares;
issued and outstanding 1,000 1,000 1,000
Additional paid-in capital 379,504 311,564 216,766
Accumulated deficit (275,872) (190,956) (159,593)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 104,632 121,608 58,173
- -------------------------------------------------------------------------------------------------
$ 199,008 $ 164,559 $ 87,490
=================================================================================================
See accompanying notes to financial statements.
3
Accutone, Inc.
and Subsidiary
Consolidated Statements of Operations
================================================================================
Years ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Net sales $ 314,028 $ 362,175 $ 267,388
Cost of sales 224,028 232,542 180,702
- --------------------------------------------------------------------------------
Gross profit 90,000 129,633 86,686
Selling, general and administrative
expenses 152,254 135,253 144,013
- --------------------------------------------------------------------------------
Loss from operations (62,254) (5,620) (57,327)
Other expense:
Depreciation 21,024 20,107 11,010
Interest expense 1,638 5,636 3,282
- --------------------------------------------------------------------------------
Total other expense 22,662 25,743 14,292
- --------------------------------------------------------------------------------
Loss before income taxes (84,916) (31,363) (71,619)
Income taxes (Note 4) -- -- --
- --------------------------------------------------------------------------------
Net loss $ (84,916) $ (31,363) $ (71,619)
================================================================================
See accompanying notes to financial statements.
4
Accutone, Inc.
and Subsidiary
Consolidated Statement of Stockholders' Equity
================================================================================
Additional
Common paid-in Accumulated
stock capital deficit Total
- --------------------------------------------------------------------------------
Balance at January 1, 1998 $ 1,000 $ 139,369 $ (87,974) $ 52,395
Net loss (71,619) (71,619)
Capital contribution 77,397 77,397
- --------------------------------------------------------------------------------
Balance at December 31, 1998 1,000 216,766 (159,593) 58,173
Net loss (31,363) (31,363)
Capital contribution 94,798 94,798
- --------------------------------------------------------------------------------
Balance at December 31, 1999 1,000 311,564 (190,956) 121,608
Net loss (84,916) (84,916)
Capital contribution 67,940 67,940
- --------------------------------------------------------------------------------
Balance at December 31, 2000 $ 1,000 $ 379,504 $(275,872) $ 104,632
================================================================================
See accompanying notes to financial statements.
5
Accutone, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
=======================================================================================
Years ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(84,916) $(31,363) $(71,619)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 21,024 20,107 11,010
Changes in assets and liabilities
Accounts receivable (11,180) (3,650) 650
Inventories 2,618 (5,878) 4,569
Deferred costs (70,599) -- --
Accounts payable 29,360 16,401 (5,054)
Other liabilities 25,000 -- --
- ---------------------------------------------------------------------------------------
Net cash used by operating activities (88,693) (4,383) (60,444)
- ---------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment -- (64,472) (22,251)
- ---------------------------------------------------------------------------------------
Net cash used by investing activities -- (64,472) (22,251)
- ---------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contribution 67,940 94,798 77,397
Proceeds from equipment loan -- -- 12,377
Payments on long-term debt (2,935) (2,767) (1,106)
- ---------------------------------------------------------------------------------------
Net cash provided by
financing activities 65,005 92,031 88,668
- ---------------------------------------------------------------------------------------
Net increase (decrease) in cash (23,688) 23,176 5,973
Cash, beginning of year 34,548 11,372 5,399
- ---------------------------------------------------------------------------------------
Cash, end of year $ 10,860 $ 34,548 $ 11,372
=======================================================================================
See accompanying notes to financial statements.
6
Accutone, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
1. Summary of
Significant
Accounting Policies
a. The Company
Accutone, Inc. and its wholly-owned
subsidiary (the "Company") distribute
hearing aids.
b. Principles of Consolidation
The consolidated financial statements
include the accounts of Accutone, Inc. and
its wholly-owned subsidiary. All significant
intercompany balances and transactions have
been eliminated.
c. Revenue Recognition
Revenue is recognized when the merchandise
is shipped.
d. Inventories
Inventories are stated at the lower of cost
(first-in, first-out method) or market.
e. Property 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.
f. 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.
g. Estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make estimates and assumptions, that affect
the reported amounts of the assets and
liabilities at the date of the financial
statements, the revenues and expenses during
the period as well as the disclosure of
contingent assets and liabilities. Actual
results could differ from those estimates.
7
Accutone, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
h. Long-Lived Assets
The company reviews the carrying values of
its long-lived and identifiable intangible
assets for possible impairment whenever
events or changes in circumstances indicate
that the carrying amount of the assets may
not be recoverable. Any long-lived assets
held for disposal are reported at the lower
of their carrying amounts or fair value less
cost to sell.
2. Property, Plant and
Equipment
2000 1999 1998
---------------------------------------------------------------
Furniture and fixtures $ 13,801 $ 13,801 $ 13,801
Leasehold improvements 25,000 25,000 --
Machinery and equipment 61,269 61,269 21,797
Customer list 47,935 47,935 47,935
------------------------------------
148,005 148,005 83,533
Accumulated depreciation (60,896) (39,872) (19,765)
---------------------------------------------------------------
$ 87,109 $ 108,133 $ 63,768
===============================================================
3. Long-term debt
2000 1999 1998
---------------------------------------------------------------
Equipment loan payable to a finance
company, collateralized by equipment
with monthly installments of $280
including interest at 5.9%
maturing in 2002 $5,569 $8,504 $1,998
Less current maturities 3,129 2,935 2,767
---------------------------------------------------------------
$2,440 $5,569 $8,504
===============================================================
4. Income taxes
At December 31, 2000, the Company had net
operating loss carryforwards of
approximately $276,000 expiring from 2017 to
2020.
5. Commitment and The Company has incurred fees with certain
contingencies stockholders for legal services performed in
connection with a proposed reverse
acquisition with Nantucket Industries Inc.
(debtor in possession). It is anticipated
that the transaction will be completed
within the next six months.
================================================================================
See accompanying notes to financial statements.
8
Accutone, Inc.
and Subsidiary
Compiled Financial Statements
Three Months Ended March 31, 2001
Accutone, Inc.
Contents
- --------------------------------------------------------------------------------
Independent accountant's compilation report 2
Financial statements:
Consolidated balance sheets 3
Consolidated statement of operation 4
Consolidated statement of stockholders' equity 5
Consolidated statement of cash flows 6
Notes to consolidated financial statements 7-8
Independent Accountants' Compilation Report
To the Board of Directors
Accutone, Inc. and Subsidiary
Yonkers, New York
We have compiled the accompanying consolidated balance sheet of Accutone, Inc.
and Subsidiary as of March 31, 2001 and the related consolidated statements of
operations, stockholders' equity and cash flows for the three months then ended,
in accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
May 10, 2001
Accutone, Inc.
and Subsidiary
Consolidated Balance Sheet
================================================================================
March 31, 2001
- --------------------------------------------------------------------------------
Assets
Cash $ 7,315
Accounts receivable 31,270
Inventories 9,940
Deferred costs (Note 5) 71,199
- --------------------------------------------------------------------------------
Total current assets 119,724
- --------------------------------------------------------------------------------
Property, plant and equipment, net (Notes 2 and 3) 111,723
- --------------------------------------------------------------------------------
$ 231,447
================================================================================
Liabilities and Stockholders' Equity
Current portion of long-term debt (Note 3) $ 3,183
Accounts payable 62,435
Other liabilities (Note 5) 25,000
- --------------------------------------------------------------------------------
Total current liabilities 90,618
Long term debt (Note 3) 1,618
- --------------------------------------------------------------------------------
Total liabilities 92,236
- --------------------------------------------------------------------------------
Commitments and contingencies (Note 5)
Stockholders' equity
Common stock, $.01 par value; authorized 100,000
shares, issued and outstanding 1,000
Additional paid-in capital 399,461
Accumulated deficit (261,250)
- --------------------------------------------------------------------------------
Total stockholders' equity 139,211
- --------------------------------------------------------------------------------
$ 231,447
================================================================================
See accompanying notes to compiled financial statements
3
Accutone, Inc.
and Subsidiary
Consolidated Statement of Operations
================================================================================
Three months ended March 31, 2001
- --------------------------------------------------------------------------------
Net sales $113,219
Cost of sales 65,293
- --------------------------------------------------------------------------------
Gross profit 47,926
Selling, general and administrative expenses 27,232
- --------------------------------------------------------------------------------
Income from operations 20,694
Other expense:
Depreciation 5,286
Interest expense 786
- --------------------------------------------------------------------------------
Total other expense 6,072
- --------------------------------------------------------------------------------
Income before income taxes 14,622
Income taxes (Note 4) --
- --------------------------------------------------------------------------------
Net income $ 14,622
================================================================================
See accompanying notes to compiled financial statements.
4
Accutone, Inc.
and Subsidiary
Consolidated Statement of Stockholders' Equity
================================================================================
Additional
Common paid-in Accumulated
stock capital deficit Total
- --------------------------------------------------------------------------------
Balance at January 1, 2001 $1,000 $379,504 $(275,872) $104,632
Net income -- -- 14,622 14,622
Capital contribution -- 19,957 -- 19,957
- --------------------------------------------------------------------------------
Balance at March 31, 2001 $1,000 $399,461 $(261,250) $139,211
================================================================================
See accompanying notes to compiled financial statements.
5
Accutone, Inc.
and Subsidiary
Consolidated Statement of Cash Flows
================================================================================
Three months ended March 31, 2001
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 14,622
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,286
Changes in assets and liabilities:
Accounts receivable (11,590)
Inventories 820
Deferred costs (600)
Accounts payable (1,372)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 7,166
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to equipment (29,900)
- --------------------------------------------------------------------------------
Net cash used by investing activities (29,900)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contribution 19,957
Payments on long-term debt (768)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 19,189
- --------------------------------------------------------------------------------
Net decrease in cash (3,545)
Cash, beginning of period 10,860
- --------------------------------------------------------------------------------
Cash, end of period $ 7,315
================================================================================
See accompanying notes to compiled financial statements.
6
Accutone, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
1. Summary of
Significant
Accounting Policies
a. The Company
Accutone, Inc. and its wholly-owned
subsidiary (the "Company") distribute
hearing aids.
b. Principles of Consolidation
The consolidated financial statements
include the accounts of Accutone, Inc. and
its wholly-owned subsidiary. All significant
intercompany balances and transactions have
been eliminated.
c. Revenue Recognition
Revenue is recognized when the merchandise
is shipped.
d. Inventories
Inventories are stated at the lower of cost
(first-in, first-out method) or market.
e. Property 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.
f. 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.
g. Estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make estimates and assumptions, that affect
the reported amounts of the assets and
liabilities at the date of the financial
statements, the revenues and expenses during
the period as well as the disclosure of
contingent assets and liabilities. Actual
results could differ from those estimates.
7
Accutone, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
h. Long-Lived Assets
The company reviews the carrying values of
its long-lived and identifiable intangible
assets for possible impairment whenever
events or changes in circumstances indicate
that the carrying amount of the assets may
not be recoverable. Any long-lived assets
held for disposal are reported at the lower
of their carrying amounts or fair value less
cost to sell.
2. Property, Plant and
Equipment
2001
-----------------------------------------------------------------
Furniture and fixtures $ 13,801
Leasehold improvements 25,000
Machinery and equipment 91,169
Customer list 47,935
-----------------------------------------------------------------
177,905
Accumulated depreciation (66,182)
-----------------------------------------------------------------
$111,723
=================================================================
3. Long-term debt
2001
-----------------------------------------------------------------
Equipment loan payable to a finance
company, collateralized by equipment
with monthly installments of $280
including interest at 5.9% maturing
in 2002 $ 4,801
Less current maturities 3,183
-----------------------------------------------------------------
$ 1,618
=================================================================
4. Income taxes At March 31, 2001, the Company had net
operating loss carryforwards of
approximately $276,000 expiring from 2017 to
2020.
5. Commitment and The Company has incurred fees with certain
contingencies stockholders for legal services performed in
connection with a proposed reverse
acquisition with Nantucket Industries Inc.
(debtor in possession). It is anticipated
that the transaction will be completed
within the next six months.
================================================================================