FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission file number 1-6107
SKLAR CORPORATION
(Name of small business issuer in its charter)
Pennsylvania 44-0625447
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
889 S. Matlack Street, West Chester, Pennsylvania 19382
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (610) 430-3200
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock (par value $.10)
(Title of class)
Series A Convertible Preferred Stock ($12.50 Cumulative
Dividend; Preference Value $100.00; Par Value $.01)
(Title of class)
Check whether the issuer (l) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB. [X]
<PAGE>
Issuer's revenues for the fiscal year ended March 31, 1996 were $
9,400,019.
The aggregate market value of common stock held by non-affiliates amounted
to $ 48,958 as of June 30, 1996.
As of June 30, 1996 there were 1,237,711 shares of the registrant's Common
Stock outstanding.
Documents incorporated by reference:
The following documents relate to the Exhibits set forth in the Index to
Exhibits appearing on page 42 as part of Item 14(c), Part IV hereof.
Registrant's Current Report on Form 8-K dated November 11, 1982.
Registrant's Current Report on Form 8-K dated November 29, 1984.
Registrant's Current Report on Form 8-K dated December 19, 1985.
Registrant's Registration Statement on Form S-1, No. 2-90189.
Registrant's Annual Report on Form 10-K for the year ended March 26,
1983.
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1990.
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
Registrant's Current Report on Form 8-K dated December 13, 1993.
Registrant's Quarterly Report on Form 10-QA-1 for the quarter ended
December 31, 1994.
Registrant's Current Report on Form 8-K dated June 17, 1996
Transitional Small Business Disclosure Format:
Yes _______ No X
PART I
ITEM 1. BUSINESS
(a) On May 16, 1983, Misdom-Frank Corporation ("MFI"), an importer of
surgical, dental and veterinary instruments, merged (the "Merger") with Medco
Jewelry Corporation, a jewelry retailer, pursuant to which Misdom-Frank
stockholders received 77% of the shares of the combined companies outstanding
after the Merger. At the same time, Medco Jewelry Corporation changed its name
to Medco Group Incorporated. For further information on MFI and the Merger,
reference is made to the Company's Report on Form 8-K dated November 11, 1982.
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New management determined in 1986 after costs and corporate losses
exceeding one million dollars that the jewelry operation should be closed.
Accordingly, on March 1, 1986 and June 30, 1986, it closed its last two outlets.
That retail division was treated for financial statement purposes as a
discontinued operation at March 31, 1986, and a write-down of its assets to
estimated realizable value was recorded. For further information, reference
Registrant's Form 10-Q for the quarter ended December 31, 1990.
(b) On December 19, 1985, the Company purchased substantially all of the
assets (other than real estate) and assumed disclosed liabilities of J. Sklar
Mfg. Co., Inc. ("Sklar"), a manufacturer and distributor of surgical
instruments. The assets consisted primarily of accounts receivable, inventories,
trademarks and trade names and machinery and equipment. The Company has
continued the Sklar line, maintaining its image as a premium grade line of
instruments. The purchase price for the assets, calculated as of the December
19, 1985 closing date, equaled one-half of Sklar's adjusted book value. A
settlement in November 1989 allowed for a reduction of approximately $420,000
off the purchase price and concluded the Sklar acquisition. The final accounting
of the transaction resulted in the Company paying for the approximate value of
acquired inventory, less $400,000, and collectible receivables, which resulted
in a purchase price of approximately $1,500,000.
In December, 1986, the Company moved to West Chester, Pennsylvania. For
further information reference Registrant's Form 8-K dated December 19, 1985.
(c) On December 30, 1990 the Company purchased all of the assets of Dental
Corporation of America (DCA), a distributor of orthodontic medical supplies. The
acquisition was completed with the use of internal funds, bank line borrowings,
the personal guarantee of Mr. and Mrs. Taylor, and term notes payable to the
principal of Dental Corporation of America. It is management's opinion that the
acquisition of Dental Corporation of America will strengthen the Company's
strategic position in the medical/dental distribution industry. In addition,
because a larger proportion of DCA's merchandise is purchased in $US, foreign
currency fluctuations will have less of an impact on the Company's operating
results, to the extent that sales of these items constitute a larger proportion
of the total sales of the Company. For further information reference
Registrant's Form 10-Q dated December 31, 1990 and the notes to financial
statements annexed.
(d) On July 29, 1993, and amended in February, 1994, the Company entered
into a marketing agreement with the gynecological instrument firm Simpson/Bayse
(S/B), whereby the Company is the exclusive representative of Simpson/Bayse in
certain markets. As part of the agreement, the Company took possession of
certain inventory for which the Company paid $60,000 (minimum purchase). The
former President of Simpson/Bayse has been in charge of the Company's
distributor sales and has a commission arrangement with the Company for sales to
certain customers. In addition, the former President of Simpson-Bayse agreed not
to compete with the Company in the sale of medical instruments. For further
information reference Registrant's Form 10-Q dated September 30, 1993 and the
notes to financial statements annexed.
Effective June 9, 1995 the former President of S/B terminated this
agreement, and his role, to pursue other business interests which may be in
competition with the Company. Management does not believe this event will have a
significant impact on the Simpson/Bayse business or the Company.
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(e) On November 18,1994 the Company agreed to purchase the inventory and
$26,457 of fixed assets of the Herwig Division of General Medical Corporation
(GMC) for $898,379. The agreement also includes a marketing agreement whereby
the Company commits to supplying GMC with the medical instrument needs for its
customers for a fifty month term. GMC is under no obligation to buy any items
from the Company during the term of the agreement, but the Company is obligated
to make certain marketing incentive payments if items are purchased by GMC. For
further information reference Registrant's Form 10-Q dated December 31, 1994 and
the notes to financial statements annexed.
(f) In December 1994 and March 1995 the Company made two purchases of
medical instrument inventory, for $60,000 and $227,000, respectively, which had
been sold by a former customer of the Company (Stuart). The December purchase
was made directly from the President who acquired the inventory as an
accommodation to the Company. The March purchase was made from a company in
which the President is a minority shareholder. The inventory purchases were made
to enable the Company to enhance the product lines presented in its new hospital
catalog.
(g) Effective May 31, 1996, the Company purchased certain inventory,
customer lists and the rights to sell those customers from Surgical Medical
Specialists, Inc. (SMS) for a consideration of $3,306.791. The purchase price
includes non-compete agreements entered into by the officers and key employees
of SMS. This business is also an importer of hand-held surgical instruments from
Germany and Pakistan. Because 75% of SMS sales were in Pakistan sourced products
which have a lower sales price and related gross margin in the marketplace, the
Company is anticipating a decline in gross margin percentage on overall Company
sales. The Company expects to increase its prospective revenues by five million
dollars ($5,000,000) annually as a result of the purchase. Selling, general and
administrative expenses are expected to increase as additional staffing and
related expenses will be required to operate in this expanded arena of sales for
the Company.
The Company believes that the additional business may be profitable, but
the primary focus of the acquisition was to meet the needs of our customers in a
consolidating medical supply environment. The Company did not purchase the
entirety of the SMS organization nor inventory and has permitted by contract the
former owner and several former employees to operate a non-competing sales
organization in several mid-Atlantic states.
Surgical Instruments
The surgical instrument division consists of the combined Herwig, MFI, S/B
and Sklar product lines. MFI was founded in 1938 to import and distribute high
quality German surgical instruments in the United States. Sklar was founded in
1892 as primarily a manufacturer of surgical instruments and, through an
acquisition in the 1930's, expanded into suction and pressure apparatuses. The
right to the Herwig name was acquired with the acquisition of its inventory from
GMC in November, 1994. Over the years the product lines have been broadened so
that the Company now serves the dental and veterinary fields, and the sources of
supply have been geographically diversified. Following the Company's purchase of
Sklar in December 1985, the remainder of the manufacturing operations of Sklar
were discontinued. Virtually all the items still manufactured by Sklar as of the
acquisition date were replaced by goods from outside vendors with the exception
of the suction and pressure apparatuses, which the Company has discontinued.
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Instruments are purchased from approximately 50 suppliers. In fiscal 1995,
50% of the purchases were made from German suppliers in foreign currency, 3%
from Pakistani suppliers and the remainder were purchased domestically. The
increased domestic purchases were primarily due to a single large purchase of
inventory from the Herwig Division of General Medical Corporation and two
smaller purchases, made through affiliates, of the inventory of a customer of
the Company. The purchase of the customer's inventory reflects the changing
business relationship with this customer which now purchases more of its product
needs from the Company rather than dealing directly with other suppliers. In
fiscal 1996, approximately 63% of purchases were made in foreign currency from
suppliers in Germany. The remaining purchases were made in US Dollars including
3% of purchases made from Pakistani suppliers.
The Company markets instruments that are produced to its specifications by
a number of manufacturers, generally under non-exclusive arrangements. Although
the Company and its competitors primarily sell instruments utilizing standard
patterns which are not patented, the Sklar product lines include a number of
items of unique design. Essentially all the instruments sold by the Company
could be provided by more than one supplier.
The Company has no material patents. The Company has registered the
following trademarks: "MISDOM-FRANK", "MERIT", "MIFCO", "ECONO", "RALKS",
"SKLAR", "SKLARCUT", "SKLAR HONE", "SKLAR-KLEEN", "SKLAR POLISH", "SKLAR LITE",
"SKLAR LUBE", "SKLAR SOAK" and "SKLAR DISINFECTANT". The recognition factor of
these trademarks is considered to have commercial value.
The market for surgical instruments consists primarily of hospitals,
individual physicians, and small clinics.
Hospitals and other users of the Company's products can purchase directly
from manufacturers or from hospital supply dealers (see "Competition" below).
Although "direct marketing" companies (i.e., those manufacturers which have
their own sales force calling on the ultimate purchaser and also referred to
herein as "direct sales" or "direct selling" companies) account for over 50% of
sales to ultimate users of these products, management believes that the market
share held by "dealer-oriented" companies such as itself has been stable in
recent years.
For a typical independent dealer, instrument sales may represent less than
5% of his total sales; as a result, the practice has developed of depending on
full-line suppliers of general instruments like Sklar to supply such dealers on
a rapid delivery basis. The Company believes that "dealer-oriented" companies
control approximately 30% of the instrument market.
One direct sales company is believed to control approximately one-third of
the market. There are 4 significant dealer-oriented companies and eight direct
sales companies.
The Company has chosen to concentrate on promoting instruments of general
use for which demand is recurring, such as scissors, hemostats and needle
holders, rather than to emphasize instruments of specialized use for which
significant research and development expenditures are required to compete with
companies with greater financial resources than the Company.
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The Sklar and Herwig surgical product lines comprises more than 9,000
different products for use in a wide range of surgical procedures, including
dental and veterinary procedures. The Misdom Frank instrument line numbers
approximately 500 items and is comprised of general surgical instruments as well
as items utilized solely in dental practices. The veterinary line is composed of
approximately 200 items and carries products specific to veterinary practice or
the needs of stockmen, as well as instruments for which surgeons and hospital
operating rooms are the primary markets.
Misdom Frank and Sklar market their products through their own
telemarketing sales force and sales representatives of hospital and physician
supply companies. The Company's primary reference source for all customers
regarding the Company's products is its catalogs. The Company's products are
advertised in trade periodicals and are also displayed and exhibited at industry
trade shows. The Company has approximately 1,250 active accounts located
primarily in the United States. Export sales are not material to the company's
operations. Sales to two hospital supply customers and their related entities
total 49.1% of total sales and are significant to the Company for 1996 and are
expected to be so in future years. Sales to General Medical Corporation and the
second major customer were 36.7% and 12.4%, respectively, for 1996.
Orthodontic Instruments and Products
DCA markets to very small customers with a small average order size. DCA
advertises in trade periodicals and sells approximately 60% non-proprietary
products and 40% private label products. The primary method for marketing and
distribution of DCA products is catalog sales. DCA has registered the following
trademarks: "DCA Athletic Mouth Protector", "DCA CERAMICS", "DCA DISPOSABLE
TOOTHBRUSH", "DCA KLEEN", "DCA LUBE", "DCA SOAK", "TRAGINATE" and "KNO-KURL
TRACING ACETATE".
Product Line Sales Contribution Summary
The company has two product lines, surgical and orthodontic. Surgical
instruments and products are marketed through the Herwig, Sklar, MFI and
Simpson/Bayse names. Orthodontic instruments and products are marketed through
the DCA name. For each of the three years ended March 31, 1996, 1995 and 1994
the surgical and orthodontic product lines contributed the following percentages
of total net sales of the Company:
1996 1995 1994
Surgical instruments and products 90.5% 85.2% 82.1%
Orthodontic instruments and products 9.5 14.8 17.9
---- ---- ----
100% 100% 100%
==== ==== ====
CURRENT
The 1996 business effort concentrated on the further development and
distribution of a hospital catalog and new physician and specialty catalogs for
Sklar. These catalogs were produced internally utilizing the Company's
computerized graphic arts capabilities. In November 1994 the Company purchased
the inventory of The Herwig Division of General Medical Corporation (GMC) and
entered into a marketing agreement for the sale of products through GMC's sales
and
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distribution network. The agreement provides for the Company's payment of
various marketing incentives to GMC for their marketing efforts. This agreement,
although providing no guarantees to the Company for sales and no direct
relationship to customers other than GMC, has had a significant impact on the
operating levels and costs of the Company. As a result of the marketing
agreement GMC has become a significant customer. During fiscal 1996 sales to GMC
accounted for 36.7% of total sales.
SOURCE OF SUPPLY
Surgical Instruments
As noted above, the majority of the surgical instrument products are
typically purchased from Germany and Pakistan. The increase in domestic
purchases in fiscal 1995 was due to the purchase of the Herwig and Stuart
inventory. In fiscal 1996 the value of domestic purchases remained relatively
high (approximately 34%) reflecting the increasing diversification of the
Company's products. The Company expects the predominant amount of its purchases
to be made from Germany and Pakistan in future years. The substantial lead times
between the order date and delivery date (ranging from two weeks to six months)
require that the Company maintain substantial inventory levels to serve its
customers' needs. As noted under "Competition" below, one of the factors
involved in this competitive industry is the rapidity with which customers'
needs are satisfied. The Company finances its inventory through its bank credit
line, which, as of March 31, 1996 has an interest cost of 1.25% over prime rate
(see footnotes to financial statements - Section H). The company believes its
operations do not differ materially from other companies in the industry with
respect to inventory carrying costs.
The Company's backlog of orders is not substantial due to the distribution
nature of the business.
Orthodontic Products
Historically, virtually all of the Orthodontic products have been purchased
from domestic vendors. Lead times approximate two to eight weeks, depending on
the type of item and the manufacturer's production cycle. An effort is underway
to use imports purchased in $US, and therefore not impacted by currency
fluctuations, to source new products.
PRODUCT DEVELOPMENT
General
The Company is a distribution business and accordingly does not perform
research for new products.
Surgical Instruments
The Misdom Frank, Simpson Bayse, Herwig and Sklar product lines consist of
precision implements which generally have a per unit cost to the end-user of
less than $100.00. High volume products (scissors, hemostats, etc.) average less
than $50 per unit. As such, they are considered supplies, though manufacturing
quality is considered highly important by the user. The line has changed very
little in the past three decades due to the low rate of product
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obsolescence in the industry. The new catalogs published by the Company for
hospital and physician use include the non-conductive and non-reflective polymer
coated Simpson Bayse products for use in electro-surgery and laser surgery,
respectively. In addition, the new catalog includes expanded products offerings
for arthroscopy, endoscopy, eye, cardio-vascular and orthopedic surgery needs.
Orthodontic Products
Substantial changes have taken place in the orthodontic products field over
the last twenty years. However the development of new products has slowed in the
last four years. DCA is currently positioned as a supply, instrument and
infection control product source. The Company is known nation-wide for its
unique mouth guard products and educational orthodontic literature. The Company
is expanding its line of orthodontic instruments, intending to offer a
competitive product line, and using the value of its name to develop the market
for these products.
COMPETITION
The Company continues to emphasize its use of catalogs as a major marketing
tool. These are distributed for use by the sales representatives of the
Company's major customers to support their efforts to market surgical
instruments and to end users as a resource for identifying and ordering the
Company's products.
Surgical Instruments
The industry in which Sklar competes has two generally distinct segments:
the "direct selling" companies which emphasize specialty products and the
"dealer-oriented" companies which primarily market instruments of general use.
The former are typically divisions of large public corporations, while the
latter are smaller and, with the exception of the Company, privately-owned
companies.
The direct selling companies tend to emphasize selling to hospitals, which
are the primary market for the products of their research and development
activity. While these companies also offer a line of general purpose instruments
similar to the Company's, they are usually more expensive because of greater
overhead and selling expenses. On lower-priced items, this price differential
can be as great as 50%.
Dealer-oriented companies such as Sklar sell their products exclusively to,
or through, dealers. Many dealers concentrate on selling to individual
physicians and small clinics for which competition is less and margins are
correspondingly higher. The larger dealers and dealer chains concentrate on
hospitals. Regardless of the mode of distribution, the Company believes the
marketplace for medical instruments will become increasingly competitive and
that will result in lower profit margins.
Orthodontic Products
The orthodontic industry is a niche market which DCA sells to by way of
catalogs and promotional mailings. Competition generally uses the same marketing
techniques. DCA believes that it is one of the smaller companies which supplies
orthodontists.
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EMPLOYEES
The Company currently has 53 full-time and nine part time employees
(including principal executive officers). None of its employees is covered by
collective bargaining agreements. The Company believes its employee relations
are satisfactory.
ITEM 2. PROPERTIES
The Company's principal executive offices, warehouse and all operations are
presently located at 889 South Matlack Street, West Chester, Pennsylvania 19382.
The lease for these premises provides for an annual rental of approximately
$195,800. Approximately 27% of the Company's facilities are used for office
space and the remainder serves as the warehouse.
ITEM 3. LITIGATION
The Company has filed suit against the former principal of DCA for
violating terms of a non-compete agreement signed as part of a re-negotiated
settlement for the purchase of DCA. This suit will seek the return of all moneys
paid to the former principal to date. This case is currently under appeal to the
Superior Court of Pennsylvania and no assessment of the outcome of the case has
been made by legal counsel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The information called for by this item is not applicable to Sklar
Corporation.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(a) Principal Market and Stock Price
Quarter Ended High Bid Low Bid
------------- -------- -------
June 30, 1994 1/8 1/8
September 30, 1994 1/8 1/8
December 31, 1994 1/8 1/8
March 31, 1995 1/8 1/8
June 30, 1995 1/8 1/8
September 30, 1995 1/8 1/8
December 31, 1995 1/8 1/8
March 31, 1996 1/8 1/8
Prior to being listed in the NASDAQ System, the Common Stock of the Company
was traded in the over-the-counter market, but there was not an active trading
market and
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accordingly quotations for, and transactions in, the Common Stock did not
qualify as an "established trading market" as such term is defined in Securities
and Exchange Commission regulations. Trading in the Common Stock is extremely
light. The high and low bid reflect the most recent prices paid for the stock by
Don Taylor, the Company's principal shareholder.
The stock today is not listed on the NASDAQ System and current information,
if any, to the extent available must be obtained from "pink sheets".
(b) Approximate Number of Common Stock Security Holders
The Company had 799 accounts of record of its Common Stock as of March 31,
1996.
(c) Dividends
The Company has paid no dividends since 1975. Under the terms of the
Company's bank agreements, the Company may not pay any dividends without the
consent of the bank. Additionally, under the terms of the Company's Series A
Convertible Preferred Stock issue, no dividends may be paid on the Common Stock
until full cumulative dividends have been paid upon the Preferred Stock. Under
the terms of the company's Series A Convertible Preferred Stock, an annual
dividend of $12.50 per share accrues cumulatively on June 30. No dividends are
payable unless declared by the Board of Directors. On June 17, 1985 the Board of
Directors voted not to declare the first such dividend (which would have been
paid June 30, 1985). Due to operating cash requirements and bank restrictions,
the Board of Directors has declined to declare dividends in 1986 through 1996.
Under the terms of the Preferred Stock, commencing March 1, 1986, if less
than $12.50 per share in dividends has been paid on the Series A Convertible
Preferred Stock over any preceding 18 month period, the holders of the Series A
Convertible Preferred Stock, voting separately as a class, are entitled to elect
a number of additional directors to the Board of Directors of the Company
sufficient to cause such directors to be a majority of the Board. Currently of
the five board members four are holders of preferred stock. These Board members
and preferred shareholders own or control approximately 62% of the outstanding
preferred stock. See Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, 1996 March 31, 1995 March 31, 1994 March 31, 1993 March 31, 1992
<S> <C> <C> <C> <C> <C>
Revenues $ 9,400,019 $ 6,556,375 $ 5,746,289 $ 6,195,435 $ 5,398,057
=========== =========== =========== =========== ===========
Earnings (Loss) From
Continuing Operations $ 121,705 $ 85,709 $ 91,120 $ 89,543 $ (25,444)
=========== =========== =========== =========== ===========
Loss per share of
Common Stock (1) $ (.15) $ (.18) $ (.18) $ (.18) $ (.27)
=========== =========== =========== =========== ===========
Selected Balance Sheet
Data at End of Period:
Total Assets $ 6,015,591 $ 6,259,600 $ 4,926,020 $ 5,206,392 $ 5,506,681
Long-term Obligations 803,910 939,621 163,984 204,272 241,404
Working Capital 1,199,119 898,093 58,116 (117,221) (200,109)
Current Ratio 1.37:1 1.26:1 1.02:1 .96:1 .95:1
<FN>
(1) The Company has not declared or paid dividends in this 5 year period.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. This discussion should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
herein.
The following table sets forth, for the periods indicated, the percentage
of net sales for certain items in the Company's Statements of Income for each
period:
Income and Expense Items as a Percentage of Net Sales
Years Ended March 31,
1996 1995 1994 1993 1992(1)
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales 50.9 47.4 48.1 50.1 57.2
Gross Profit 49.1 52.6 51.9 49.9 42.8
Selling, General &
Admin. Expenses 44.3 47.0 46.4 43.3 39.3
Other Expense 0.0 0.0 0.0 0.9 0.0
Income before
Interest & Taxes 4.8 5.7 5.5 5.8 3.5
Interest Expense 3.2 4.1 3.7 4.1 4.0
Income (Loss) Before
Income Taxes 1.6 1.6 1.9 1.7 (0.5)
Net Income (Loss) 1.3 1.3 1.6 1.4 (0.5)
(1) 1996, 1995, 1994 and 1993 reflects the reclassification of certain expenses
from cost of sales to selling, general and administrative expenses. Similar
information is not available for fiscal 1992, accordingly the reclassifications
is not made for that year.
Results of Operations
1996 Compared to 1995:
Sales in fiscal 1996 are $2,843,644 higher than 1995. This increase is
primarily due to the increased business generated from the Company's marketing
agreement entered into with General Medical Corporation (GMC) in November, 1994.
Sales to GMC grew to 36.7% of total sales in fiscal 1996.
Cost of Sales, as a percent of sales, increased from 47.4% in 1995 to 50.9% in
1996. This fluctuation results from increasingly competitive pricing in the
marketplace and product mix. In 1996 the Company experienced a $60,688 benefit
from currency fluctuation compared to a $175,559 loss in 1995. Because of the
increasingly competitive environment in the medical
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supply marketplace the Company expects cost of sales as a percent of sales to
increase in future years.
Selling, General and Administrative Expenses for fiscal 1996 increased
$1,087,326, but decreased from 47.0% to 44.3% as a percent of sales compared to
1995. This increased spending is primarily due to the Company's increasing its
emphasis on telemarketing efforts and the increased overhead costs due to the
marketing agreement with GMC. The increased business volume also increased all
variable costs of operations. Additional employees in all facets of the business
were necessary to manage the increased business volume. As a result of this
increased manpower and focus on telemarketing, related costs, such as telephone,
have also increased. In addition the Company increased its staff to enable it to
place additional emphasis on attaining new business. Amortization costs for
catalogs and goodwill were increased in 1995 as a result of changes taking place
in the health care market place. The Company belief is that increasing
competition may cause the Company to publish new catalogs faster than had
historically been required and in 1995 decreased the estimated useful lives of
existing catalogs. All expenditures for catalogs in 1996 were charged to expense
as incurred. The Company's amortization rate for its goodwill was increased in
1995 to lives equal to the lower of twenty years or the remaining estimated
useful life. Other expenses in the administrative aspects of the business also
increased as a result of the increased business level.
1995 Compared to 1994:
Sales in fiscal 1995 are $810,086 higher than 1994. This increase is
directly attributable to a general price increase and the increased sales
resulting from the marketing agreement entered into during this fiscal year. As
a result of this agreement sales to GMC grew to 20.4% of total sales.
Cost of Sales, as a percent of sales, decreased from 48.1% in 1994 to 47.4%
in 1995. This decrease resulted from the general price increase and is partially
offset by the rise in value of the Deutsche mark. Because of the increasingly
competitive nature of the marketplace for the Company's products, and the
expected stability of the Deutsche mark, the Company expects higher cost of
sales as a percent of sales in future years.
Selling, General and Administrative Expenses for fiscal 1995 increased
$413,513 and from 46.4% to 47.0% as a percent of sales compared to 1994. This
increase is primarily due to the Company's increasing its emphasis on
telemarketing efforts and the increased overhead costs due to the marketing
agreement with GMC. As a result of this increased manpower and focus on
telemarketing, related costs, such as telephone, have also increased.
Amortization costs for catalogs and goodwill have also increased as a result of
changes taking place in the health care market place. The Company believes the
increasing competition may cause the Company to publish new catalogs faster than
has historically been required and as a result has decreased the estimated
useful lives of existing catalogs. The Company's amortization rate for its
goodwill has also been increased to lives equal to the lower of twenty years or
the remaining estimated useful life. Other expenses in the administrative
aspects of the business also increased as a result of the increased business
level primarily resulting from the Herwig transaction.
-13-
<PAGE>
Effects of Dollar Weakness
In 1996 and 1995 the Company purchased 63% and 50%, respectively, of its
medical instrument products in Deutsche marks. Orders are placed in Deutsche
marks and payment is made within three to six months after the order is placed.
The Company engages in no currency advance purchases and has chosen, rather than
to be a currency speculator, to buy according to its weekly needs as payable
amounts become due. During 1996 the Deutsche mark continued to weaken against
the dollar resulting in a $60,688 benefit to the Company. The effect of the
dollar falling in the later months of fiscal 1995 resulted in a total charge to
cost of sales for the year of $175,559. This impact of the increased cost of the
Deutsche mark was reduced in 1995 by a one time credit of $67,620 received from
a major supplier. The impact of this cost was further lessened by favorable
purchasing arrangements and pricing of the products being sold. Should the
Deutsche mark increase in cost relative to the dollar the Company would expect a
significant decrease in earnings and a higher cost of goods until the effect
could, if possible, be passed on to the customer as a price increase. In today's
highly competitive medical industry, there is no guarantee that the Company
would be able to pass on a price increase; therefore, the Company's annual
earnings can be affected by the volatility in the value of the dollar to the
Deutsche mark.
Liquidity and Capital Resources
On May 20, 1994 the Company entered into agreements with Meridian Bank to
restructure the existing financing agreements. The amended line of credit
provided a maximum principal amount of $1,600,000, replacing the former
$2,000,000. The rate of interest on the new line is calculated at the Bank's
National Commercial Rate plus 2.5%. Simultaneously, the Company negotiated a
three year term loan of $400,000 at the same interest rate, on which principal
of $11,111 and accrued interest will be paid in 36 monthly installments
commencing June 1, 1994 and due in full May 1, 1997.
Working capital increased in 1996 by $301,026 over 1995. This resulted
primarily from the increased sales level which resulted in increased accounts
receivable from customers, a reduction in inventory and a net reduction in the
current portion of bank debt. In 1995 working capital increased over 1994 as a
result of the purchase, in November, of the Herwig inventory from GMC which was
financed by a new five year term loan. This loan is guaranteed by the United
States Small Business Administration and is secured by the Herwig inventory.
Interest on this loan is calculated at the Bank's National Commercial Rate
(BNCR) plus 2.25%. As a result of the inventory purchase and the marketing
agreement with GMC in November 1994, the Company also entered into an amendment
of its May 1994 line-of-credit agreement with its bank. Total borrowings under
the line of credit could not exceed the lesser of $2,200,000 or the Borrowing
Base, which is the sum of 80% of qualified Accounts Receivable plus 45% of
qualified non-Herwig Inventory, not to exceed $800,000. Additionally, the
Inventory Component may not exceed 60% of the Borrowing Base. The new agreement
also facilitates a $100,000 letter of credit which is a sub-line of the line of
credit facility. The rate of interest on the new line is calculated at the BNCR
plus 2.25%. The three and five year term loans and the line-of-credit are all
secured by the accounts receivable, inventory, equipment and intangibles of the
Company.
On January 31, 1996 the Company entered into amended agreements with
Meridian Bank restructuring the then existing financing agreements. The
amendments provided for a
-14-
<PAGE>
reduction in the line of credit to $1,600,000 and a reduction in the interest
rate on the line of credit to BNCR plus 1.25%. In addition a $500,000 term loan
was established with interest at the BNCR plus 2.25%, on which principal of
$16,667 and accrued interest was scheduled to be paid in 30 monthly installments
commencing March 1, 1996 and due in full August 1, 1998.
The Company's peak short-term borrowing pursuant to lines of credit were
$1,625,000 in 1996 and $1,646,000 in 1995. At March 31, 1996, the Company's
outstanding line of credit was $895,000, leaving $317,000 available assuming
sales and operations remain at the current levels. Any decrease in sales and, or
inventory would have a dramatic impact on the availability of the credit line
and resulting impact on the Company's cash needs. Cash flows from operations
were adequate, in 1996, to finance the Company's capital additions. As a result
there was a reduction in borrowing against the credit-line. In 1995 cash flow
from operations was not sufficient to finance the Company's capital additions
and, then capitalized, new catalog development. As a result there was additional
borrowing against the credit line. In prior years short-term borrowing was
decreased primarily by increasing inventory turnover and reducing purchasing
lead time through vendor cooperation. The significant inventory purchases made
during fiscal 1995 impacted the Company's ability to decrease its inventory
during 1995. The Company's fiscal 1996 efforts were successful in renewing its
effort to reduce its inventory and increase its turnover rate.
During fiscal 1995 the Company upgraded its computer capability to meet the
needs of its expanded business requirements. The new computer has been leased
for 2 years commencing November, 1994. The capital asset value of the lease is
$40,713.
For fiscal 1997 the Company anticipates spending levels for fixed assets to
continue at the 1996 level. As a result of an additional acquisition made
subsequent to March 31, 1996 and a further revised financing arrangement
management believes the new bank facilities will be sufficient to meet the
Company's liquidity needs in the foreseeable future (See Subsequent Events
footnote in the Note to Financial Statements).
Effective May 31, 1996, the Company purchased for $3,306,791 certain
inventory and assumed the rights to sell certain products from Surgical Medical
Specialists, Inc. In conjunction with the purchase the Company further amended
their financing agreement with Meridian Bank to provide for a $3,750,000 line of
credit with interest payable at BNCR plus 1.25%. The Bank also transferred the
remaining liability for the Company's $400,000 and $500,000 term loans into the
line of credit. $1,700,000 of the purchase was financed by the Company's line of
credit, $900,386 by an assumption of liabilities subject to the Agreement and
$706,405 by Seller financed notes payable over a thirty month term in varying
amounts commencing on December 1, 1996.
-15-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Page
Financial Data
Independent Auditors' Report ....................................17
Financial Statements:
Balance Sheets as of March 31, 1996 and 1995 ....................18
Statements of Income
for the years ended March 31, 1996, 1995 and 1994 ............19
Statements of Stockholder's Equity ..............................20
Statements of Cash Flows
for the years ended March 31, 1996, 1995 and 1994 ............21
Notes to Financial Statements ................................22-37
Supplementary Financial Data:
Schedule II - Valuation and Qualifying Accounts .................38
-16-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Sklar Corporation
West Chester, Pennsylvania
We have audited the accompanying balance sheet of Sklar Corporation as of
March 31, 1996 and 1995 and the related statements of income, stockholders'
equity and cash flows for the years ended March 31, 1996, 1995 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sklar Corporation as of
March 31, 1996 and 1995, and the results of its operations and its cash flows
for the years ended March 31, 1996, 1995 and 1994, in conformity with generally
accepted accounting principles.
In connection with our audit of the financial statements referred to above,
we audited the supplementary financial schedule on page 37. In our opinion, this
financial schedule, when considered in relation to the financial statements
taken as a whole, presents fairly, in all material respects, the information
stated therein.
/s/ Stockton Bates & Company, P.C.
Certified Public Accountants
Lancaster, Pennsylvania
July 3, 1996
-17-
<PAGE>
SKLAR CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash (Note C) $ 128,869 $ 119,117
Accounts Receivable (Note D) 1,410,019 1,172,298
Inventories (Note E) 2,839,988 3,010,783
Prepaid Expenses 22,635 28,290
--------- ---------
TOTAL CURRENT ASSETS 4,401,511 4,330,488
EQUIPMENT AND IMPROVEMENTS (Note F) 444,227 403,547
GOODWILL (Notes B, G and I) 842,931 908,457
OTHER ASSETS (Note G) 326,922 617,108
--------- ---------
TOTAL ASSETS $ 6,015,591 $ 6,259,600
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term Bank Borrowings (Note H) $ 895,000 $ 1,285,000
Current Portion-Long-Term Debt (Note J) 489,534 362,988
Current Portion-Capital Lease Obligation (Note N) 14,689 19,621
Trade Accounts Payable (Note K) 1,687,602 1,661,031
Accrued Expenses 104,901 96,114
Accrued Income Taxes (Note I) 10,666 7,641
--------- ---------
TOTAL CURRENT LIABILITIES 3,202,392 3,432,395
Long-term Debt (Note H and J) 733,684 739,885
Long-term Capital Lease Obligation (Note N) 0 14,689
Other Liabilities (Note K) 70,226 185,047
--------- ---------
TOTAL LIABILITIES 4,006,302 4,372,016
--------- ---------
COMMITMENTS AND
CONTINGENT LIABILITIES (Notes B, N and L) 0 0
STOCKHOLDERS' EQUITY (Notes B, L and M):
Series A convertible preferred stock, par value
$.01 per share, authorized, 35,000 shares;
issued and outstanding 24,825 shares 248 248
Series A subordinate convertible preferred stock,
no par value, authorized 4,000 shares; issued
and outstanding -0- 0 0
Common stock, par value $.10 per share,
authorized, 1,500,000 shares; issued and
outstanding, 1,237,711 shares 123,771 123,771
Additional Paid-in Capital 2,106,482 2,106,482
Accumulated Deficit (221,212) (342,917)
--------- ---------
TOTAL STOCKHOLDER'S EQUITY 2,009,289 1,887,584
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,015,591 $ 6,259,600
=========== ===========
</TABLE>
See notes to financial statements
18
<PAGE>
SKLAR CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended March 31
1996 1995 1994
<S> <C> <C> <C>
Net Sales (Note P) $ 9,400,019 $ 6,556,375 $ 5,746,289
Cost of Goods Sold 4,784,355 3,105,027 2,761,248
--------- --------- ---------
Gross Profit 4,615,664 3,451,348 2,985,041
Selling, General and Administrative Expense 4,168,081 3,080,755 2,667,242
--------- --------- ---------
Income from Operations 447,583 370,593 317,799
Other Income (Expenses):
Other Income 0 4,664 0
Interest (302,698) (268,548) (210,679)
------- ------- -------
Other Expenses - Net (302,698) (263,884) (210,679)
------- ------- -------
Income before Taxes 144,885 106,709 107,120
Provisions for Taxes Currently Payable
State (23,180) (21,000) (16,000)
------- ------- -------
Net Income 121,705 85,709 91,120
Preferred Dividend Requirement (Note L) 310,312 310,312 310,312
------- ------- -------
Loss Applicable to Common Shares (188,607) (224,603) (219,192)
======== ======== ========
Per Share Data:
Weighted Ave. Common Shares Outstanding 1,237,711 1,237,711 1,237,711
Loss Per Share (.15) (.18) (.18)
==== ==== ====
</TABLE>
See notes to financial statements
19
<PAGE>
SKLAR CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series A Common Additional Accumulated
Convertible Subordinated Stock Paid-in Deficit Total
Preferred Conv. Prfd Capital
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1993 $248 $0 $123,771 $2,106,482 $(519,746) $1,710,755
Net Income for the year
ended March 31, 1994
91,120 91,120
--- --- ------- --------- -------- ---------
Balance, March 31, 1994 248 0 123,771 2,106,482 (428,626) 1,801,875
Net Income for the year
ended March 31, 1995
85,709 85,709
--- --- ------- --------- -------- ---------
Balance, March 31, 1995 248 0 123,771 2,106,482 (342,917) 1,887,584
Net Income for the year
ended March 31, 1996
121,705 121,705
--- --- ------- --------- -------- ---------
Balance, March 31, 1996 $248 $0 $123,771 $2,106,482 $(221,212) $2,009,289
==== === ======== ========== ========= ==========
</TABLE>
See notes to financial statements
20
<PAGE>
SKLAR CORPORATION
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
For the Year Ended March 31
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income $ 121,705 $ 85,709 $ 91,120
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 468,673 433,429 303,660
Provision for losses and returns
on accounts receivable 32,093 19,019 54,403
Change in operating assets and liabilities:
(Increase) in accounts receivable (269,814) (137,998) (45,554)
(Increase)Decrease in inventory 170,795 (1,114,237) 150,752
(Increase) Decrease in prepaid expenses 5,655 26,389 (4,746)
Increase(Decrease) in accounts payable (88,250) 732,896 (160,075)
Increase(Decrease) in accrued expenses 8,787 4,201 (43,011)
Increase (Decrease)in income taxes 3,025 (31,359) 21,391
----------- ----------- -----------
Total Adjustments 330,964 (67,660) 276,820
----------- ----------- -----------
Net cash provided by operations 452,669 18,049 367,940
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (153,641) (165,905) (63,255)
Principal payments received on
note receivable 0 0 35,647
Intangible and Other Assets 0 (248,180) (156,937)
----------- ----------- -----------
Net cash used in investing activities (153,641) (414,085) (184,545)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (payments)
on line-of-credit agreement 110,000 39,000 (170,000)
Principle payments on long-term debt
and capital leases (399,276) (207,803) (49,574)
Proceeds from issuance of long-term debt 0 700,000 0
----------- ----------- -----------
Net cash provided by (used in)
financing activities (289,276) 531,197 (219,574)
----------- ----------- -----------
NET INCREASE(DECREASE) IN CASH 9,752 135,161 (36,179)
CASH BEGINNING OF YEAR 119,117 (16,044) 20,135
----------- ----------- -----------
CASH END OF THE YEAR $ 128,869 $ 119,117 $ (16,044)
=========== =========== ===========
</TABLE>
See notes to financial statements
21
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
A. Summary of Significant Accounting Policies,
Business operations:
The Company is a distributor and contract manufacturer of hand-held
surgical instruments, chemicals for the care and cleaning of surgical
instruments, and other items for surgical, dental and veterinary use. The
Company primary market is for hand-held, non-electronic instruments to the
surgical, dental, orthodontic and veterinary fields. Most of the instruments are
imported from German sources and some from Pakistani sources. Other items are
mostly purchased from domestic sources. Customers are primarily hospital supply
distributors, but the Company also targets end users for its orthodontic
products.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Costs are computed based upon weighted average purchase prices, and are
used as the basis for charging cost of goods sold for the items sold from
inventory.
Equipment and Improvements:
Equipment and improvements are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided generally on the
straight-line and accelerated methods over the useful lives of the assets which
are estimated to be three to ten years for equipment and the shorter of the life
of the lease or the life of the asset for leasehold improvements.
Goodwill and Other Assets:
Goodwill and other assets are stated at cost less accumulated amortization.
Amortization is provided on a straight-line basis.
Loss per share:
Loss per common share is computed by dividing the net income, decreased by
the amount required for payment of preferred dividends, by the weighted average
number of shares of common stock outstanding. No effect has been given to common
stock equivalent shares as such would be anti-dilutive.
22
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
A. Summary of Significant Accounting Policies, (continued):
Revenue Recognition:
Revenue is recognized upon the shipment of goods to customers. Returns of
goods are recorded as an adjustment to sales upon receipt.
Foreign Currency Translation Gains and Losses:
The Company recognizes transaction gains and losses at the time of
settlement of the foreign currency transaction. The Company records translation
adjustments of the expected foreign currency cash flows based upon the
respective period end exchange rate. Gains and losses on realized activity and
the translation adjustment for the expected cash flows are adjusted to income.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Reclassifications:
Certain items from the 1994 financial statements have been reclassified to
make them comparable to 1995 and 1996. These reclassifications affected cost of
sales and selling, general and administrative expenses and reflect a change in
the association of certain costs previously attributed to cost of sales, now
being attributed to selling expense.
B. Acquisitions and Corporation Changes:
On July 30, 1982, R-P Instruments, a corporation organized by Argosy
Capital Incorporated as a vehicle for acquisition, acquired all of the
outstanding common stock of Misdom-Frank Corporation. Subsequently, Misdom-Frank
Corporation was merged with R-P Instruments in a tax-free liquidation with the
surviving corporation known as Misdom-Frank Corporation. The purchase price of
$4,050,000 consisted of $3,500,000 cash and $550,000 long-term subordinated
notes.
Because the transaction was treated as a purchase, the assets of
Misdom-Frank Corporation were adjusted to fair value at acquisition which
resulted in goodwill of approximately $78,000.
On November 3, 1982, Medco Jewelry Corporation entered into a merger
agreement with Misdom-Frank Corporation and its parent, Argosy Capital
Incorporated. The proposed merger was approved by the shareholders of the
respective companies and became effective May 16, 1983,
23
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
B. Acquisitions and Corporation Changes, (continued):
after approval by the appropriate state authorities. The merger provided for the
issuance of 660,000 shares of Medco Jewelry Corporation common stock for all of
the outstanding shares of Misdom-Frank Corporation.
The transaction was accounted for as a purchase and resulted in Medco
Jewelry Corporation becoming a majority-owned subsidiary of Argosy Capital
Incorporated. As a result, the transaction was considered to be a reverse
acquisition with Misdom-Frank Corporation as the acquiring company. The
allocation of the acquisition cost to the net assets of Medco Jewelry
Corporation was based on estimated fair value of its assets at that date and
resulted in additional goodwill of approximately $466,000.
The net funds used in the acquisition are summarized as follows:
Assets acquired:
Net current assets $ 77,752
Equipment and advances 80,583
Other assets 597,091
-------
755,426
Less:
Net current assets acquired 77,752
Long-term obligations 392,400
-------
470,152
-------
Net funds used in acquisition $285,274
========
In December, 1985, the company acquired certain assets and certain
liabilities of J. Sklar Manufacturing Company. At the time of the purchase, net
assets acquired exceeded assumed liabilities and costs resulting in negative
goodwill.
During the fiscal year ended March 31, 1987, it became apparent that the
assets acquired in the Sklar acquisition were overstated; and the Company filed
a RICO action against the former principal and their counsel. In July, 1987, the
Defendant offered to reduce the remaining obligations from the purchase to
$100,000 from $450,740. This proposed settlement was reflected in the financial
statements at March 31, 1988. As a result, long-term obligations were reduced by
$350,740; and negative goodwill of $363,810 was reduced to zero. These items
offset the write-down in current assets of $297,731 and in non-current assets of
$25,827. Additionally, $390,992 of expenses incurred during fiscal year ended
March 31, 1987 in connection with the litigation
24
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
B. Acquisitions and Corporation Changes, (continued):
have been reclassified against the liabilities to reflect the true cost of the
acquisition. In November 1989 a settlement was reached whereby the remaining
obligation would be settled for $80,000. The change from the prior year was
booked as a reduction of other current liabilities and goodwill in the amount of
$20,000.
On December 31, 1990 the Company purchased all the assets of Dental
Corporation of America, a distributor of orthodontic medical supplies. The
acquisition was completed with the use of internal funds, bank line borrowings,
and term notes payable to the principal of Dental Corporation of America. The
acquisition cost is calculated as follows:
Purchase price $946,613
Net book value of DCA (328,332)
--------
Goodwill $618,281
========
The Company records as additional revenues credits which cannot be applied
to customer balances. $283,963 of these credits existed as part of the purchase
of Dental Corporation of America and were recorded as revenue in the year ended
March 31, 1991.
On November 18, 1994 the Company purchased the inventory of the Herwig
Division of the General Medical Corporation (GMC) for $871,922. In addition, and
as part of the purchase agreement, the Company entered into a marketing
agreement whereby the Company committed to supplying GMC with its medical
instrument needs for its customers for a fifty month term. GMC is under no
obligation to buy any items from the Company during the term of the agreement,
but the Company is obligated to meet certain delivery requirements and make
certain marketing incentive payments if items are purchased by GMC.
See Subsequent Events footnote U.
C. Financial Instruments:
The Company's financial instruments subject to credit risk are primarily
trade accounts receivable and cash. Credit is granted to customers, located
primarily in the continental United States, in the ordinary course of business.
The Company does not require collateral or other security to support customer
receivables.
At March 31, 1996 the Company had the following concentrations of cash
subject to credit risk:
United States $75,928
Germany $52,941
25
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
C. Financial Instruments, (continued):
The Company maintains cash balances at two financial institutions. One is
located in the United States and the other in Germany. The account in the USA is
insured by the Federal Deposit Insurance Corporation up to $100,000. The account
in Germany is uninsured. While the Company usually maintains its balances at
levels below the insured amounts, there may be times, in the normal course of
business, when the Company's deposits at an Institution exceed the insured
amount.
The estimated fair value of the Company's financial instruments, both on
and off balance sheet, are summarized as follows:
March 31, 1996
Carrying Estimated
Amounts Fair Value
Cash $128,869 $128,869
Long-term debt $1,223,218 $1,236,651
Other liabilities $70,226 $66,715
D. Accounts Receivable:
Accounts receivable consist of the following:
March 31
1996 1995
Trade Receivables $1,429,105 $1,032,267
Other Receivables (including a related
party receivable of $12,768 in 1996
and $127,363 in 1995) 35,914 179,531
---------- ----------
1,465,019 1,211,798
Allowance for Doubtful Accounts
and Sales Returns (55,000) (39,500)
---------- ----------
$1,410,019 $1,172,298
========== ==========
26
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
E. Inventories:
<TABLE>
<CAPTION>
Inventories consist of the following: March 31
1996 1995
<S> <C> <C>
Sklar, Herwig and MFI Surgical Instruments from Germany
(including customs and freight of $154,033
and $141,438 in 1996 and 1995, respectively) $2,000,467 $2,026,548
Sklar, Herwig and MFI Surgical Instruments not from Germany
(including freight of $6,634 and
$9,258 in 1996 and 1995, respectively) 397,075 560,237
DCA Products (including freight of $4,113
and $3,776 in 1996 and 1995, respectively) 209,749 192,588
Inventory Overhead 232,697 231,410
---------- ----------
$2,839,988 $3,010,783
========== ==========
</TABLE>
Operating costs included in inventory amounted to $232,697, $231,410 and
$150,754 at March 31, 1996, 1995 and 1994 , respectively. Total operating costs
incurred relating to inventory during 1996, 1995 and 1994 amounted to $378,175,
$360,999 and $269,849, respectively.
F. Equipment and Improvements:
Equipment and improvements consist of the following:
<TABLE>
<CAPTION>
March 31
1996 1995
<S> <C> <C>
Furniture and Equipment (including assets acquired under
capital leases of $40,713) $661,866 $531,624
Leasehold Improvements 218,405 195,005
--------- ---------
880,271 726,629
Less Accumulated Depreciation and Amortization
(including amounts applicable to
assets acquiredunder capital leases of
$12,214 in 1996 and $8,143 in 1995) (436,044) (323,082)
--------- ---------
$444,227 $403,547
========= =========
</TABLE>
Depreciation and amortization expense for equipment and improvements,
including assets acquired under capital leases, amounted to $112,962 in 1996,
$94,233 in 1995 and $77,880 in 1994.
27
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
G. Goodwill and Other Assets:
Other assets consist of the following:
March 31
1996 1995
Catalog Development Costs (Net) $316,826 $553,971
Acquisition Costs (Net) 7,414 59,546
Patents (Net) 2,682 3,591
-------- --------
$326,922 $617,108
======== ========
The following table summarizes the lives and amortization expense for
goodwill and other assets:
<TABLE>
<CAPTION>
Amortization Expense
Life in Years 1996 1995 1994
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Goodwill 20 $ 65,526 $ 62,000 $ 30,142
Catalog Development Costs 1 1/2 - 5 237,145 232,018 156,075
Acquisition Costs 5 52,131 44,266 38,657
Patents 16 1/2 909 912 906
------ ------ ------
TOTAL $355,711 $339,196 $225,780
======== ======== ========
</TABLE>
Additions to Other Assets arise from the acquisition of companies or loans,
in the case of goodwill and acquisition costs, and from the costs incurred in
creating, producing and distributing new and existing catalogs in the case of
catalog development costs. Reductions in intangible assets result from
amortization of the assets over their useful or prescribed lives. For fiscal
years subsequent to March 31, 1995, Catalog Development Costs are expensed as
incurred. Goodwill is also reduced by an amount equal to the amount of Federal
tax net operating loss carry-forwards (NOLs) used to reduce the Company's
federal income tax liability. Regardless of the impact of the accounting policy
for the use of NOLs, the amortization period for goodwill has been reduced
prospectively in light of the changes in the health care industry to the lower
of the remaining life or twenty years. The dollar effect of the change in
estimate relating to catalog development and goodwill amortization was $76,988
for 1995.
28
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
H. Short-term Bank Borrowings:
<TABLE>
<CAPTION>
The following table shows the Company's short term bank borrowings for the past three fiscal years:
Balance Interest Maximum Amount Average Amount Weighted Average
at End Rate at End Outstanding During Outstanding During Interest Rate During
of Period of Period the Period (A) the Period (B) the Period (C)
<S> <C> <C> <C> <C> <C>
March 31, 1996 $895,000 9.50% $1,625,000 $1,376,250 11.1%
March 31, 1995 $1,285,000 11.25% $1,646,000 $1,390,250 10.8%
March 31, 1994 $1,646,000 9.25% $1,816,000 $1,678,000 8.9%
<FN>
(A) Based on the maximum amount outstanding at any month end.
(B) Average amount outstanding during the period is computed by dividing the
total of month-end outstanding principal balances by 12.
(C) Average interest rate for the year is computed by dividing short-term
interest expense by average aggregate short-term borrowings.
</FN>
</TABLE>
At March 31, 1996 the Company's revolving line of credit of $1,600,000 was
collateralized by the sum of 80% of qualifying accounts receivable plus 45% of
inventories. Borrowings based on eligible inventories have a fluctuating maximum
allowable balance to $150,000. Qualifying accounts receivable and inventory used
as a basis for the March 31, 1996 borrowing totaled $1,511,000. Unused available
credit at March 31, 1996 was $317,000 after considering an outstanding standby
letter of credit of $26,000.
Borrowings from this line bear interest at the Bank's National Commercial
Rate (its prime rate) plus 1.25% (one and one-quarter percent) at March 31,
1996.
At March 31, 1996 the Company had outstanding borrowings of $895,000 and
the Prime Rate was 8.25%. The interest expense on short-term bank borrowings for
1996, 1995, and 1994 amounted to $152,117, $152,178, and $148,589 respectively.
The terms of the borrowing agreement state that the Company may not,
without prior consent of the lender, declare or pay any dividends or incur
additional debt or obligations. The Company's President, Mr. Don Taylor,
personally guaranteed all obligations under this agreement secured by a lien on
his personal assets and his common and preferred shares of the Company's stock.
See Subsequent Event footnote U.
29
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
I. Income Taxes:
As a result of the merger of Medco Jewelry Corporation and Misdom-Frank
Corporation, management believes there may be federal net operating loss
carry-forwards available to Medco Jewelry Corporation at the date of merger that
have transferred to Sklar Corporation. Such loss carry-forwards and additional
post-merger operating losses totaling approximately $3,639,000, which expire in
1995 ($1,385,000), 1997 ($244,000), 1998 ($974,000), 1999 ($50,000), 2000
($14,000), 2001 ($461,000), and 2002 ($511,000), are available as deductions
from federal taxable income of future years. For financial statement purposes,
the net operating loss carry-forwards will be used to reduce goodwill as the
benefit is realized. There are no net operating loss carry-forwards available
for state tax purposes. In fiscal 1996,1995, and 1994 $210,960, $148,550, and
$123,740 of the available federal net operating loss carry-forward was applied
to reduce the federal taxable income. As a result, no federal income tax was
paid by the Company in these years. The Company's federal tax filings for all
years through March 31, 1993 have been audited by the Internal Revenue Service.
The Company adopted Financial Accounting Standards Board Statement No. 109
"Accounting for Income Taxes" effective April 1, 1993. Under the asset/liability
method mandated by FASB 109, a deferred tax asset or liability is recorded on
the tax effects of temporary differences between the tax bases and financial
reporting amounts of assets and liabilities. Measurement of the deferred tax
assets and liabilities is based on the effective tax rates when the underlying
temporary differences occur. These temporary differences are primarily due to
the net operating loss carryforwards, different depreciation methods and the use
of allowance accounts for financial statement purposes.
Deferred tax assets and liabilities are as follows:
March 31, 1996 March 31, 1995
Total deferred tax asset $692,925 $1,159,659
Less valuation allowance 688,287 1,153,727
------- ---------
Net deferred tax asset 4,638 5,932
Total deferred tax liability 4,638 5,932
------- ---------
Total deferred tax asset $0 $0
======= =========
The net change in the valuation allowance for the year ended March 31, 1996
and 1995 was a reduction of $465,440 and $865,507, respectively.
Permanent differences arise due to the amortization of goodwill, which
accounts for approximately 98% of the difference between pre-tax financial
statement income and income for tax purposes.
30
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
J. Long-term Debt:
On May 20, 1994 the Company entered into agreements with Meridian Bank to
restructure its financing agreements. The line of credit established at that
date had a maximum principal amount of $1,600,000, replacing the former
$2,000,000. The rate of interest on the line was calculated at the Bank's
National Commercial Rate (BNCR) plus 2.5%. Simultaneously, the Company
negotiated a three year term loan of $400,000 at the same interest rate, which
will be repaid in 36 monthly installments of $11,111 plus interest commencing
June 1, 1994 and due in full May 1, 1997. These loans are secured by the
accounts receivable, inventory, and all tangible and intangible assets of the
Company, and personally guaranteed by Mr. Don Taylor, President of the Company.
Total borrowings under the line of credit were limited to the lesser of
$1,600,000 or the Borrowing Base, which is the sum of 80% of qualified Accounts
Receivable plus 45% of qualified Inventory not to exceed $800,000. Additionally,
the Inventory Component may not exceed 60% of the Borrowing Base. The new
agreement also facilitates a $100,000 letter of credit which is a sub-line of
the line of credit facility. On November 18, 1994 the Company further amended
its line-of-credit to provide for a maximum availability of $2,200,000 and
interest at BNCR plus 2.25%. The security and the Borrowing Base calculation
remained unchanged.
On November 18, 1994, coincident with the purchase of inventory from the
Herwig Division of the General Medical Corporation, the Company entered into an
additional short term borrowing with Meridian Bank which, on December 28, 1994,
was converted to a 60 month borrowing arrangement. The long-term agreement with
Meridian Bank, guaranteed by the United States Small Business Administration
(SBA), provided for the Company to borrow $700,000 with interest at New York's
Prime Rate plus 2.25% payable monthly. The principal is repayable in monthly
amounts beginning in March 1995. The first three monthly principal payments are
$50,000 and the remainder are $10,000 through December, 1999. This loan is
secured by the Herwig inventory and all of the Company's other tangible and
intangible assets. Additional monthly principal payments are required if the
outstanding principal on the loan exceeds 50% of the Herwig inventory value,
including replacement inventory purchased in the ordinary course of business.
Effective January 31, 1996 the Company amended its line of credit with the
bank and entered into a $500,000 term loan to be repaid in 30 equal principal
installments of $16,668 plus interest at the BNCR plus 2.25%. The available line
of credit was reduced to $1,600,000 and the interest rate on the line was
reduced to the BNCR plus 1.25%. These loans are secured by the accounts
receivable, inventory, and all tangible and intangible assets of the Company,
and personally guaranteed by Mr. Don Taylor, President of the Company. Total
borrowings under the line of credit were limited to the lesser of $1,600,000 or
the Borrowing Base, which is the sum of 80% of qualified Accounts Receivable
plus 45% of qualified Inventory not to exceed $150,000. Additionally, the
Inventory Component may not exceed 20% of the Borrowing Base. The new agreement
also provides a $100,000 letter of credit facility and a $300,000 foreign
exchange contract facility, both of which are sub-lines of the line of credit
facility.
31
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
J. Long-term Debt, (continued):
The line-of-credit and other Meridian Bank borrowing agreements require the
Company to meet certain covenants including a working capital ratio, a ratio of
total liabilities to tangible net worth, a debt coverage ratio and a limitation
on the Company's investment in tangible and intangible assets. The Company is
also restricted from paying dividends without the Bank's authorization. The
company met all the financial covenant requirements for the fiscal year ended
March 31, 1996.
The contract under which Dental Corporation of America (DCA) was acquired
was renegotiated in April 1992. The renegotiated contract, among other things,
changed the payment terms from three annual payments of $100,000 plus interest
and royalties based upon future sales, to a fixed monthly payment of $12,000 for
one year commencing April 1, 1992 followed by a monthly payment of $5,000 for
six years commencing April 1, 1993. The effective interest rate of this new
agreement is 20.1% The gross payments and associated liability under the new
agreement are substantially the same as those which were recorded, including
interest, upon the acquisition of DCA. Accordingly, there has been no change to
the financial statements in connection with this renegotiation. The new
agreement did, however, change the aggregate prospective maturities.
Presently, the Company believes that the former owner of DCA has assisted
and is assisting another company to compete in a business substantially similar
to the business of Sklar. Accordingly, Sklar has filed legal action against the
former owner. The Company has continued to pay all payments due to date, under
protest, upon advice of counsel.
Legal counsel has indicated that if it is determined that the former owner
has committed the acts as stated by the Company (violation of the non-compete
clause of the renegotiated agreement), the Company may be entitled to relief
from all payments, past, present and remaining, otherwise due under the
agreement.
This debt is uncollateralized, and is subordinate to the Company's
short-term bank borrowings.
32
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
J. Long-term Debt, (continued):
Debt outstanding at March 31, 1996 1995
Meridian Bank, 36 month term loan,
interest at BNCR plus 2.5% $155,556 $288,889
Meridian Bank, 30 month term loan,
interest at BNCR plus 2.25% 483,333
SBA Loan, 60 month term loan, interest
at Prime Rate plus 2.25% 450,000 650,000
DCA Note, interest at 20.1% 134,329 163,984
---------- ---------
$1,223,218 1,102,873
Less Current Portion 489,534 362,988
---------- ---------
Total Long-term Debt $733,684 $739,885
---------- ---------
The aggregate maturities for the next five years of all long-term debt are
as follows at March 31, 1996:
For the Year ending March 31, 1997 $ 489,534
For the Year ending March 31, 1998 $ 386,414
For the Year ending March 31, 1999 $ 257,270
For the Year ending March 31, 2000 $ 90,000
-----------
$ 1,223,218
K. Other Non-current Liabilities:
This amount represents an amount due to a supplier. It will be repaid at a
rate equal to 5% of each current year's purchases until the amount is fully
paid. Based on fiscal 1996 purchases, the obligation will be repaid at $67,000
per year. The current portion of this obligation is reflected in Accounts
Payable.
L. Stockholders' Equity:
On November 4, 1983, the shareholders of the Company approved a reverse
stock split wherein shareholders received 1 share of common stock for every 5
shares previously held. All references herein regarding the number of shares of
common stock, related per share amounts, option and warrant amounts have been
adjusted to give retroactive effect to the reverse split.
On March 17, 1984, the Board of Directors of the Company resolved that
Series A Convertible Preferred Stock, $.01 par value, be authorized. During the
year ended March 31,1985, 25,000 units consisting of 1 share of Series A
Convertible Preferred Stock plus 8 shares of common stock were sold. Each share
of preferred stock accrues cumulative dividends at $12.50 per year. Dividends
are payable each June 30 only if declared by the Board of Directors. Dividends
in arrears on preferred stock were $3,712,936 at March 31, 1996. No dividends
may be
33
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
L. Stockholders' Equity, (continued):
paid on the common stock until cumulative dividends have been paid on the
preferred stock. The preferred stock may be redeemed at the Company's option for
$100 per share, and is entitled to a liquidation preference at $100 per share,
$2,482,500 aggregate, plus cumulative dividends.
M. Stock Options
In February 1983, the Corporation's Stockholders approved an Incentive
Stock Option Plan which provided for the granting of options to Officers and key
employees. The Plan covers 100,000 shares of Common Stock and is intended to
attract and retain qualified personnel and to provide incentive to individuals
who are deemed to be in a position to make a significant contribution to the
Corporation's operations. The exercise price of options granted under the Plan
is required to be market value on the date the option is granted. During the
fiscal year of the Corporation ended March 31, 1996, no options were granted and
none were exercised. As of March 31, 1996, no options under the Plan were
outstanding, and options covering all of such 100,000 shares were available for
future grant. In 1988 the Board granted Don Taylor 4,000 options on a new class
of subordinated preferred stock. Mr. Taylor has not exercised these options as
of March 31, 1996.
N. Lease Commitments:
In April 1992 the Company moved to a new location at 889 South Matlack
Street under a renewable four-year lease for office and warehouse space with J.
B. Associates, a related party described in Note O below. During fiscal 1996 the
lease with J.B. Associates was renegotiated and extended at a rate of $16,317
per month. The Company also leases certain equipment under various agreements.
The Company pays no contingent rentals under these leases, nor do they contain
any purchase options or significant escalation clauses. Total rent expense for
the years ending March 31, 1996, 1995, and 1994 was $228,857, $181,882, and
$174,405, respectively.
Minimum rental commitments under the non-cancelable operating leases are as
follows:
RELATED
TOTAL PARTY
For the Year ending March 31, 1997 $222,451 $195,800
For the Year ending March 31, 1998 $204,178 $195,800
For the Year ending March 31, 1999 $199,549 $195,800
For the Year ending March 31, 2000 $ 65,268 $ 68,868
For the Year ending March 31, 2001 $ 0 $ 0
Thereafter $ 0 $ 0
-------- --------
TOTAL $691,446 $656,268
======== ========
34
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
N. Lease Commitments, (continued):
The Company also leases certain computer equipment under capital leases
expiring in fiscal year 1997. The assets and corresponding liabilities are
recorded at the present value of the minimum lease payments based on interest
rates of 14.1% implicit in the leases.
Minimum annual lease payments are as follows:
For the Year ending March 31, 1997 $15,296
Less amount representing interest 607
-------
Present Value of minimum lease payments 14,689
Less current portion 14,689
-------
LONG-TERM OBLIGATION $ 0
=======
O. Related Party Transactions:
The Company has the following transactions with related parties:
(1) The partners in J.B. Associates are directors of Sklar Corporation.
Rent expense for this building was $195,800 in 1996, $155,800 in 1995,
and $131,600 in 1994.
(2) The Company has outstanding notes receivable from current officers and
directors amounting to $12,768 at March 31, 1996 and $127,363 at March
31, 1995 as listed in Note D.
(3) The Company supplies instruments to two companies whose board of
directors include directors of Sklar. Sales to the customers amounted
to $38,078 during 1996 and $35,012 and $17,789 during 1995 and 1994,
respectively. The amounts due from these companies at March 31, 1996
and 1995, included in trade receivables is $7,544 and $7,879,
respectively. Purchases from these companies amounted to $21,608
during 1996 and $12,028 and $4,571, during 1995 and 1994,
respectively. The amount due to these vendors at March 31, 1996 and
1995, included in trade accounts payable, is $245 and $0,
respectively.
(4) During 1995 the Company purchased for $287,000 the medical instrument
inventory of a former customer, for resale in the ordinary course of
business. $60,000 of this inventory was acquired from the President
and $227,000 was acquired from a company in which the President is a
minority shareholder. The inventory had been acquired on the Company's
behalf and was acquired to enable the Company to expand its product
line into new surgical areas which are included in the Company's new
Hospital catalog. In 1994, the Company began doing repair business
with a company whose sole shareholder is the son of the principal
shareholder's wife. Purchases from this company amounted to $68,105 in
1995 and $5,423 in 1994. This business relationship ended during 1995
.In addition, in 1996 and 1995 the Company purchased $228,694 and
$5,472, respectively for repair and other services, from a company in
which the President is a minority shareholder.
35
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
P. Significant Customer Information:
Two customers of the Company provided significant sales volume in 1996 and
1995. During fiscal 1996 and 1995 sales to one customer comprised 12.4% and
14.2%, respectively, of the Company's total sales. As a result of the November
1994 marketing agreement with General Medical Corporation (see Note B.), sales
to them comprised 36.7% and 20.4% of the Company's 1996 and 1995 sales,
respectively.
Q. Employee Benefit Plans:
The Company implemented a 401(k) savings-sharing plan in May 1992. Payments
under the contributory plan administered by an independent trustee for the
benefit of participating employees are made on a basis of percentage of the
employees' contributions. Eligible employees are those with more than one year
of service to the Company who work more than 1000 hours per year. Company
contributions to the plan amounted to $33,574 in 1996, $18,882 in 1995 and
$12,444 in 1994.
R. Advertising Costs:
The Company policy is to expense advertising costs as incurred. Advertising
costs for 1996, which include currently expensed catalog development costs, are
$446,686. Advertising costs for 1995 and 1994 are $165,189 and $130,653,
respectively.
S. Foreign Currency Transaction and Translation Gains (Losses):
Gains and (losses) recognized from foreign currency activity amounted to
$60,688, $(175,588), and $3,066 in 1996, 1995 and 1994, respectively.
T. Cash Flow Information:
For purposes of the statement of cash flows, the Company considers cash in
bank and on hand as cash equivalents.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
A capital lease obligation of $40,713 was incurred in 1995, when the
Company entered into a lease for new equipment.
The Company refinanced $500,000 and $400,000 in 1996 and 1995 respectively
of its short term bank borrowings to long-term debt.
36
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1996
(Continued)
T. Cash Flow Information, (continued):
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid amounted to $297,364 in 1996, $217,215 in 1995 and $198,072
in 1994.
Income taxes paid amounted to $18,329 in 1996, $33,400 in 1995, and $9,488
in 1994.
U. Subsequent Event:
Effective May 31, 1996 the Company acquired certain assets and assumed
certain liabilities of Surgical Medical specialists, Inc. (SMS) valued at
$3,306,791. The purchase price is allocated $1,993,347 to inventory and
$1,313,444 to goodwill. The purchase is financed by $1,700,000 drawn against the
Company's amended credit line agreement with Meridian Bank, $900,386 assumption
of SMS liabilities and $706,405 of notes payable to the Seller.
The amended line of credit agreement with Meridian Bank establishes a new
line of credit amount at $3,750,000 which is available to the Company to the
extent collateral is available to support a borrowing amount. Collateral is
comprised of 80% of qualifying accounts receivable and 50% of inventory.
Accounts receivable must support at least 50% of the outstanding line of credit
after December 1, 1996. In addition the Company must meet certain working
capital, net worth and tangible net worth requirements at various times during
the term of the line of credit agreement which expires at June 30, 1997. The
$400,000 and $500,000 term loans payable to the Bank have been paid off by the
line of credit. The interest rate on the line of credit is BNCR plus 1.25%. The
Company is also required to provide for interest rate protection and will
consider entering into forward purchase contracts for some of its Deutsche mark
obligations.
The liabilities assumed in this transaction are payable to vendors with
whom there either is an already existing relationship or where there is expected
to be a continuing relationship of that already established by SMS. These
liabilities are payable under various trade term arrangements which do not bear
interest.
The notes payable to the seller of $706,405 bearing interest at 9% are
payable in a lump sum amount of $200,000 on December 1, 1996 and then in
eighteen equal installments of $33,333 commencing June 1, 1997.
37
<PAGE>
SKLAR CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Charged Charged Other Balance at
Balance at to costs to Charges end
beginning of and other Additions of year
Year Description year expenses accounts (Deductions)
1996 Allowance for Doubtful
<S> <C> <C> <C> <C> <C>
Accounts/Sales Returns $39,500 $39,500 $(24,000) $55,000
Goodwill net of
Accumulated Amortization $908,457 $(65,526) (3) $842,931
Catalog Development net of
Accumulated Amortization $553,971 $(237,145) (3) $316,826
Acquisition Costs net of
Accumulated Amortization $59,546 $(52,132) (3) $7,414
Patents net of
Accumulated Amortization $3,591 $(909) (3) $2,682
1995 Allowance for Doubtful
Accounts/Sales Returns $ 66,600 $24,765 $(51,865) $39,500
Goodwill net of
Accumulated Amortization $970,457 $(62,000) (3) $908,457
Catalog Development net of
Accumulated Amortization $560,265 225,724 (1) $(232,018) (3) $553,971
Acquisition Costs net of
Accumulated Amortization $81,356 22,456 (2) $(44,266) (3) $59,546
Patents net of
Accumulated Amortization $4,503 $(912) (3) $3,591
1994 Allowance for Doubtful
Accounts/Sales Returns $99,453 $73,025 $(105,878) $66,600
Goodwill net of
Accumulated Amortization $1,000,598 $(30,141) (3) $970,457
Catalog Development net of
Accumulated Amortization $559,403 $156,937 (1) $(156,075) (3) $560,265
Acquisition Costs net of
Accumulated Amortization $120,013 $(38,657) (3) $81,356
Patents net of
Accumulated Amortization $5,409 $(906) (3) $4,503
<FN>
(1) Amount represents additional catalog development costs capitalized directly
to the asset account during the year.
(2) Amount represents costs capitalized directly to the asset account in
connection with the financing of the Herwig inventory.
(3) Amount represents amortization of the intangible asset over its useful or
prescribed life charged to the asset account.
</FN>
</TABLE>
38
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The information called for by this item is not applicable to the Company.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors and officers of the Company are as follows:
George Kellam. Mr. Kellam, age 56, has been the owner and President of
G.D.M. Industries for eighteen years. Mr. Kellam's company specializes in the
advertising and promotional business.
William R. Knepshield. Mr. Knepshield, age 61, has nineteen years
experience as the Chief Executive of several publicly held companies involved
with the medical technology field and the inventions of innovative medical
devices.
Michael Malinowski. Mr. Malinowski, age 42, was appointed to the Board in
April 1991. Mr. Malinowski joined the Company in 1986 with a background in
computer systems management and advertising. Mr. Malinowski's responsibilities
as Executive Vice President include the oversight of computer systems and the
development of catalogs for each of the Company's product lines.
Don Taylor. Mr. Taylor, age 50, was appointed to the Board in November 1988
and was elected President in January 1989. From 1986 to 1989 he was retained as
a "turn around" consultant to the Company. From 1969 to 1982 he owned and
operated a chain of drug stores. Additionally, from 1981 until 1986 he owned a
consulting firm specializing in the turn around of financially troubled
companies. His experience includes operations, sales and marketing.
Albert Wicks. Mr. Wicks, age 48, has been the owner and President of C & S
Medical Supply for thirteen years. Mr. Wicks' company specializes in the
distribution of medical supplies to the physician market. Prior to founding his
own company, he spent thirteen years in sales and management of Foster Medical,
a company that specializes in sales of supplies to physicians.
TERMS OF OFFICE
Directors are elected at each Annual Meeting of Shareholders and serve for
a term of two years. Officers serve at the pleasure of the Board of Directors.
39
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid by the company for the fiscal year ended March 31, 1996, to each Executive
Officer of the Company whose aggregate cash and cash equivalent compensation
exceeded $100,000. During the years ended March 31, 1993, 1994 and 1995, no
director received any fee for serving as director or for committee
participation. Commencing in 1996 non-employee directors receive $500 per
meeting attended.
Name of Individual Other
or Number of Capacities in Cash Annual Fiscal
Persons in Group Which Served Compensation Compensation Year
Don Taylor President $194,465 $7,548 1996
Don Taylor President $163,340 $4,899 1995
Don Taylor President $136,622 $2,647 1994
Other Annual Compensation is comprised of the Company's matching 401K
contribution and Mr. Taylor's portion of the Company's profit sharing
contribution to the 401K Plan. Profit sharing contributions are allocated among
all participants in the 401K Plan.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares owned by persons or
entities who are known by management to have beneficially owned on March 31,
1996 more than 5% of the voting stock of the company, the number of shares
beneficially owned on such date by each Director, and the number of shares owned
by all Directors and officers of the company as a group. Messrs. Knepshield,
Malinowski, Taylor and Wicks are presently Directors of the Company.
Name and Address Title of Class # of Shares % of Class
Michael Malinowski Preferred 2,995 12.1
613 Aberdeen Drive Common 40,256 3.3
Kennett Square, PA 19348
Don Taylor Preferred 12,446 50.1
1740 Lenape Road Common 707,876 57.2
West Chester, PA 19382
George Kellam Preferred 25 *
1060 North State Street Common 0 *
Dover, DE 19901
William R. Knepshield Preferred 50 *
11 Roselawn Lane Common 0 *
Malvern, PA 19355
Albert Wicks Preferred 0 *
1604 Dogwood Drive Common 0 *
West Lawn, PA 19607
All Directors and Preferred 15,516 62.5
Officers as a Group Common 748,132 60.4
* Less than 1%
41
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1(a) for information as to the Merger. See Item 8, Note L as to
rent paid by the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Schedules
The financial statements and schedules listed in the accompanying
Index to Financial Statements and Supplementary Financial Data on page
15 are filed as part of this Annual Report. All other schedules are
omitted because they are not applicable or the required information is
shown in the financial statements or the notes thereto.
2. Exhibits
The exhibits listed on the accompanying Index to Exhibits on pages 40
and 41 are filed as part of this Annual Report.
(b) No reports on Form 8-K have been filed by the Registrant during the last
quarter of the period covered by this report.
INDEX TO EXHIBITS
ITEM 14(c).
Filed Herewith
Exhibits Page Number
2(a)(1) Merger Agreement dated November 3, 1982 by and
between the Registrant, Misdom-Frank Corporation
and Argosy Capital Incorporated **
2(a)(2) Agreement of Purchase and Sale of Assets dated
October 31, 1985 between Sklar Purchasing Corporation,
J. Sklar Mfg. Co., Inc., John Sklar, Alan Sklar,
Burton J. Sklar, the Estate of Max H. Sklar,
and the Residuary Trust u/w/o Max H. Sklar *****
2(a)(3) Agreement dated December 4, 1985 between
Medco Group Incorporated, Sklar Purchasing
Corporation and J. Sklar Mfg. Co., Inc. *****
2(a)(4) Agreement to Purchase Assets of Dental
Corporation of America ******
2(a)(5) Agreement to Purchase Assets of the Herwig Division
of General Medical Corporation and for
a continuing marketing relationship ********
42
<PAGE>
3(a)(1) Restated Certificate of Incorporation of Registrant *
3(a)(2) Certificate of Amendment of Certificate of
Incorporation of Registrant ***
3(b)(1) By-Laws of Registrant ****
3(b)(2) Change name from Medco Group Incorporated
to Sklar Corporation *******
22 Subsidiaries of the Registrant Percentage of
STATUS Company Name and Address Ownership
INACTIVE Sklar Purchasing Corporation 100%
889 S. Matlack Street
West Chester, PA 19382
INACTIVE Sklar Surgical Instrument Corp. 100%
889 S. Matlack Street
West Chester, PA 19382
INACTIVE Ralks Ltd. 100%
889 S. Matlack Street
West Chester, PA 19382
- ------------------------------------------
* Incorporated by reference from Registrant's Annual Report on Form
10-K for the year ended March 26, 1983.
** Incorporated by reference from Registrant's Current Report on
Form 8-K dated November 11, 1982.
*** Incorporated by reference from Registrant's Registration Statement
on Form S-1, No. 2-90189.
**** Incorporated by reference from Registrant's Current Report on
Form 8-K dated November 29, 1984.
***** Incorporated by reference from Registrant's Current Report on
Form 8-K dated December 19, 1985.
****** Incorporated by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1990.
******* Incorporated by reference from Registrant's Current Report on Form
8-K dated December 12, 1993.
******** Incorporated by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1994.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SKLAR CORPORATION
(Registrant)
Dated: July 15, 1996 By: /s/ DON TAYLOR
Don Taylor
President and Director
Dated: July 15, 1996 By: /s/ CHARLES A.W. WILSON
Charles A.W. Wilson
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: July 15, 1996 By: /s/ DON TAYLOR
Don Taylor
President and Director
Dated: July 15, 1996 By: /s/ MICHAEL MALINOWSKI
Michael Malinowski
Executive V. P. and Director
Dated: July 15, 1996 By: /s/ ALBERT WICKS
Albert Wicks
Director
Dated: July 15, 1996 By: /s/ WILLIAM R. KNEPSHIELD
William R. Knepshield
Director
Dated: July 15, 1996 By: /s/ GEORGE KELLAM
George Kellam
Director
44
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<NAME> SKLAR CORPORATION
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
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0
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<OTHER-SE> 1,885,270
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