FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the six month period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-6107
SKLAR CORPORATION
(Exact name of registrant as specified 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
Check whether the issuer (l) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding November 13, 1996
(Common stock, $0.10 par value) 1,237,711
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
SKLAR CORPORATION
INDEX
Page No.
Part I Financial Information
Balance Sheet -
September 30, 1996 ......................................3
Statement of Income -
six months ended September 30, 1996 and 1995 ............4
Statement of Cash Flows -
six months ended September 30, 1996 and 1995 ............5
Notes to condensed financial statements ........................6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................10-11
Part II Other Information
Item 1 Legal Proceedings ....................................11
Item 3 Defaults Upon Senior Securities ......................11
2
<PAGE>
SKLAR CORPORATION
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS 9/30/96
CURRENT ASSETS:
Cash $ 0
Accounts Receivable 2,724,729
Inventories (Note 5) 3,554,745
Prepaid Expenses 28,801
-----------
TOTAL CURRENT ASSETS 6,308,276
EQUIPMENT AND IMPROVEMENTS (Note 6) 463,343
GOODWILL (Note 7) 2,086,155
OTHER ASSETS 230,898
-----------
TOTAL ASSETS $ 9,088,672
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term Bank Borrowings (Note 2) $ 2,735,044
Current Portion-Long-Term Debt 292,236
Current Portion-Capital Lease Obligation 3,802
Trade Accounts Payable 1,906,788
Accrued Expenses 1,138,335
Accrued Income Taxes 7,691
-----------
TOTAL CURRENT LIABILITIES 6,083,897
Long-term Debt (Note 3) 795,811
Other Liabilities 138,080
-----------
TOTAL LIABILITIES 7,017,788
-----------
CONTINGENCIES
STOCKHOLDERS' EQUITY (Note 9):
Series A convertible preferred stock, par value
$.01 per share, authorized, 10,000,000 shares;
issued and outstanding 24,825 shares 248
Series A subordinate convertible preferred stock,
no par value, authorized 4,000 shares; issued
and outstanding -0- 0
Common stock, par value $.10 per share,
authorized, 1,500,000 shares; issued and
outstanding, 1,237,711 shares 123,771
Additional Paid-in Capital 2,106,482
Deficit (159,617)
-----------
2,070,884
-----------
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $ 9,088,672
===========
</TABLE>
See notes to financial statements
3
<PAGE>
SKLAR CORPORATION
STATEMENTS OF INCOME
AND DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
For the Six months Ended
9/30/96 9/30/95
<S> <C> <C>
Revenues:
Net Sales (Note 10) $ 6,962,099 $ 4,553,406
Cost and Expenses:
Cost of Goods Sold 3,885,183 2,553,087
Selling, General and Administrative 2,814,350 1,798,685
Interest 190,206 161,595
----------- -----------
6,889,739 4,513,367
----------- -----------
Income before taxes 72,360 40,039
Provisions for Income Taxes
Currently Payable (Note 8) 10,765 6,500
----------- -----------
Net Income 61,595 33,539
----------- -----------
Preferred Dividend Requirement (Note 9) 155,156 155,156
----------- -----------
Loss Applicable to Common Shares $ (93,561) $ (121,617)
----------- -----------
Per Share Data:
Weighted Average Common Shares
Outstanding 1,237,711 1,237,711
----------- -----------
Loss Per Share (Note 11) $ (0.08) $ (0.10)
=========== ===========
</TABLE>
See notes to financial statements
4
<PAGE>
SKLAR CORPORATION
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
9/30/96 9/30/95
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 61,595 $ 33,539
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 292,492 228,158
Provision for losses on
accounts receivable 11,036 11,573
Change in operating assets and liabilities:
Increase in accounts receivable (1,325,746) (279,761)
Decrease in inventory 1,284,590 375,185
Increase in prepaid expense (6,167) (4,917)
Increase (decrease) in accounts payable 211,505 (136,357)
Increase in accrued expenses 133,048 6,040
Increase (decrease) in income taxes payable 4,706 (4,656)
----------- -----------
Total Adjustments 605,464 (195,265)
----------- -----------
Net cash provided by operating activities 667,059 228,804
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (73,354) (37,505)
Acquisition of inventory (1,999,347)
Intangible and Other Assets (1,385,452) (121,509)
----------- -----------
Net cash used in investing activities (3,458,153) (159,014)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line-of-credit 140,044 110,000
Borrowing on credit line for acquisition 1,700,000
Seller notes for acquisition 706,405
Liabilities assumed in acquisition 900,386
Net payments on capital lease (Note 12) (10,088) (9,697)
Net payments on long term debt (773,722) (260,062)
----------- -----------
Net cash provided by
financing activities 2,662,225 (159,759)
----------- -----------
NET DECREASE IN CASH (128,869) 89,969
CASH BEGINNING OF PERIOD 128,869 119,117
----------- -----------
CASH, END OF THE PERIOD $ 0 $ 29,148
=========== ===========
</TABLE>
See notes to financial statements
5
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 MANAGEMENT'S REPRESENTATION
In the opinion of Management, the unaudited financial statements
contain all adjustments necessary to present fairly the financial position as of
September 30, 1996 and the results of operations and cash flows for the period
then ended.
NOTE 2 SHORT-TERM BANK BORROWINGS
On June 4, 1996 the Company entered into an amended and restated loan
and security agreement for $3,750,000 collateralized by the sum of 80% of
qualifying accounts receivable plus 50% of inventories. Borrowings based on
eligible inventories may comprise up to 50% of the outstanding credit line
amount. Qualifying accounts receivable and inventory used as a basis for the
September 30, 1996 borrowing totaled $3,580,000. Unused available credit at
September 30, 1996 was $750,000. The amount of available credit line is
dependent upon the balance of qualifying accounts receivable and inventory and
is therefore subject to change.
Borrowings from this line bear interest at the Bank's National
Commercial Rate (BNCR) plus 1.25% (one and one-quarter percent). At September
30, 1996 the BNCR was 8.25%. The interest expense on short-term bank borrowings
for 1996 and 1995 amounted to $135,798 and $83,961, 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.
The loan agreement requires certain covenants to be met by the
Company. At September 30, 1996 the Company was in compliance with these
covenants.
NOTE 3 LONG-TERM DEBT
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 agreement 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 prime rate was
8.25% at September 30, 1996. The principal is repayable in monthly amounts
beginning in March 1995. The first three monthly principal payments were $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.
6
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 LONG-TERM DEBT, (continued)
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 fixed $100,000 annual payments 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 gross payments and associated
liability under the new agreement are substantially the same as to 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.
NOTE 4 BUSINESS OPERATIONS
The Company imports and distributes under the Sklar, Misdom-Frank and
other trademarks hand-held, non-electronic instruments for the surgical, dental
and veterinary fields.
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 $1,999,347 to inventory and
$1,307,444 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.
7
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 BUSINESS OPERATIONS, (continued)
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.
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 if items are purchased by GMC the Company is obligated to make certain
marketing incentive payments.
NOTE 5 INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
NOTE 6 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 method 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.
NOTE 7 GOODWILL AND CATALOG DEVELOPMENT COSTS
Goodwill is amortized over twenty years, and catalog development costs
are being amortized at various schedules ranging from 1 1/2 - 5 years for the
six month period ended September 30, 1996 and 1995, except that catalog
development costs incurred after March 31, 1995 are expensed in the year
incurred.
NOTE 8 INCOME TAXES
Income taxes represent the State tax due. Federal income taxes payable
are offset by net operating loss carryforwards and goodwill is reduced
accordingly to reflect the utilization of the loss carryforwards. No tax loss
carryforwards exist to offset state income tax payable.
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 $2,254,000, which
expire in 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.
8
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 STOCKHOLDERS' EQUITY
As of September 30, 1996, of the 1,500,000 shares of Common Stock
authorized, 1,237,711 are outstanding. Of the Series A Convertible Preferred
Stock, 24,825 shares are authorized and outstanding.
The Series A Convertible Preferred Stock may be redeemed by the
Company after March 1, 1986 at a price of $100 per share and is entitled to a
liquidation preference of $100 per share plus cumulative dividends. Annual
dividends of $12.50 per share accrue cumulatively on the Series A Convertible
Preferred Stock commencing on July 1, 1984, payable on June 30 of each year
commencing June 30, 1985. No dividends have been declared in the years 1988
through 1996.
NOTE 10 SALES
A sale is recorded when title to the product passes to the customer.
NOTE 11 NET LOSS PER SHARE
Net loss per share is computed by dividing the net loss applicable to
common shares by the weighted average number of shares of Common Stock
outstanding after giving effect to the ratably accrued preferred dividend. No
effect has been given to Common Stock equivalent shares as such would be
anti-dilutive.
NOTE 12 CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers
cash in bank and on hand as cash equivalents.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid amounted to $162,808 in the six months ended September
30, 1996, and $166,510 in the six months ended September 30, 1995.
Income taxes paid amounted to $8,500 in the six months ended September
30, 1996, and $10,629 in the six months ended September 30, 1995.
9
<PAGE>
SKLAR CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
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. The discussion should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
herein.
RESULTS OF OPERATIONS
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 Percentage of
Net Sales for the six months ended September 30
1996 1995
---- ----
Net Sales 100.0% 100.0%
Cost of Sales 55.8 56.1
Gross Profit 44.2 43.9
Selling, General and
Admin. Expenses 40.4 39.5
Income Before
Interest & Taxes 3.8 4.4
Interest Expense 2.7 3.5
Income Before
Income Taxes 1.0 0.9
Net Income 0.9 0.7
SALES
For the six month period ended September 30, 1996 compared to the six month
period ended September 30, 1995, sales were up $2,408,693 or 52.9%. This
increase reflects the additional business attained as a result of the purchase
agreement with SMS, the impact of the 1994 marketing agreement entered into with
the Company's major customer and the success of the Company's approach to build
sales through an emphasis on marketing and advertising.
COST OF SALES
Cost of sales as a percentage of sales decreased 0.3% for the six month period
September 30, 1996 compared to the six month period ended September 30, 1995.
This decrease results primarily from the mix of products sold. As a result of
increasing competitiveness in the health care industry, management expects the
business to show in future periods lower than historical profit margin as a
percent of sales.
10
<PAGE>
SKLAR CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative expenses for the six month period ended
September 30, 1996 have increased $1,015,665 or 56.5% from the six month period
ended September 30, 1995. The increase in these expenditures is a result of the
general increase in the Company required by the additional sales volume and the
Company's commitment to an increased marketing and advertising effort and the
resulting increased personnel and advertising costs. Management expects to
continue this level of expenditure in future periods.
INTEREST
Interest costs increased $ 28,611 or 17.7% for the six month period ended
September 30, 1996 compared to the six month period ended September 30, 1995 due
to increased average borrowing levels resulting from the acquisiton on May 31,
1996 and the resulting increased accounts receivable. This impact was partly
offset by a decline in the interest rate charged to the Company.
INCOME TAXES
Federal income tax expense is reduced in both periods by the available net
operating loss carryforwards. Income tax expense represents the state income tax
payable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's $3,750,000 revolving line of credit with Meridian Bank is
considered adequate to meet the financing requirements of the Company in the
foreseeable future.
PART II - OTHER INFORMATION
ITEM 1 LEGAL MATTERS
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 in the pleading and
discovery stage, therefore, no assessment of the outcome of the case has been
made by legal counsel.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
As reported in registrant's form 10-Q for the quarter ended December 31, 1985
and as further discussed in Note 9 to the financial statements, the registrant
did not declare a dividend on its cumulative Series A Convertible Preferred
Stock on June 30, 1988 through 1996.
11
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THE REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SKLAR CORPORATION
/s/ DON TAYLOR
DON TAYLOR
PRESIDENT
November 14, 1996
12
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,788,643
<ALLOWANCES> 63,914
<INVENTORY> 3,554,745
<CURRENT-ASSETS> 6,308,276
<PP&E> 953,625
<DEPRECIATION> 490,282
<TOTAL-ASSETS> 9,088,672
<CURRENT-LIABILITIES> 6,083,897
<BONDS> 0
0
248
<COMMON> 123,771
<OTHER-SE> 1,946,865
<TOTAL-LIABILITY-AND-EQUITY> 9,088,672
<SALES> 6,962,099
<TOTAL-REVENUES> 6,962,099
<CGS> 3,885,183
<TOTAL-COSTS> 6,699,533
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,206
<INCOME-PRETAX> 72,360
<INCOME-TAX> 10,765
<INCOME-CONTINUING> 61,595
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,595
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
