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 December 31, 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 February 14, 1997
(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 - December 31, 1996 ...............................3
Statement of Income - nine months ended December 31, 1996
and 1995 ...................................................4
Statement of Cash Flows - nine months ended December 31,
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 - 12
Item 3 Defaults Upon Senior Securities ......................12
2
<PAGE>
SKLAR CORPORATION
BALANCE SHEET
(Unaudited)
ASSETS 12/31/96
CURRENT ASSETS:
Cash $ 26,063
Accounts Receivable 2,581,319
Inventories (Note 5) 3,983,604
Prepaid Expenses 28,801
-----------
TOTAL CURRENT ASSETS 6,619,789
EQUIPMENT AND IMPROVEMENTS (Note 6) 461,932
GOODWILL (Note 7) 2,046,782
OTHER ASSETS 163,747
-----------
TOTAL ASSETS $ 9,292,250
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term Bank Borrowings (Note 2) $ 2,457,088
Current Portion-Long-Term Debt 334,833
Trade Accounts Payable 2,342,150
Accrued Expenses 1,191,518
Accrued Income Taxes 7,691
-----------
TOTAL CURRENT LIABILITIES 6,194,689
Long-term Debt (Note 3) 727,213
Other Liabilities 134,195
-----------
TOTAL LIABILITIES 7,194,689
-----------
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 (132,940)
-----------
2,097,561
-----------
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $ 9,292,250
===========
See notes to financial statements
3
<PAGE>
SKLAR CORPORATION
STATEMENTS OF INCOME
AND DEFICIT
(Unaudited)
For the Nine months Ended
12/31/96 12/31/95
Revenues:
Net Sales (Note 10) $ 10,667,769 $ 7,074,783
Cost and Expenses:
Cost of Goods Sold 5,887,746 3,779,634
Selling, General and Administrative 4,390,852 3,008,564
Interest 282,763 233,680
------------ ------------
10,561,361 7,021,878
------------ ------------
Income before taxes 106,408 52,905
Provisions for Income Taxes
Currently Payable (Note 8) 18,136 10,000
------------ ------------
Net Income 88,272 42,905
------------ ------------
Preferred Dividend Requirement (Note 9) 232,734 232,734
------------ ------------
Loss Applicable to Common Shares $ (144,462) $ (189,829)
------------ ------------
Per Share Data:
Weighted Average Common Shares
Outstanding 1,237,711 1,237,711
------------ ------------
Loss Per Share (Note 11) $ (0.12) $ (0.15)
============ ============
See notes to financial statements
4
<PAGE>
SKLAR CORPORATION
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(Unaudited)
<TABLE>
<CAPTION>
For the Nine months Ended
12/31/96 12/31/95
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 88,272 $ 42,905
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 446,307 521,766
Provision for losses on
accounts receivable 17,036 18,000
Change in operating assets and liabilities:
Increase in accounts receivable (1,188,337) (305,795)
Decrease in inventory 855,731 190,858
Increase in prepaid expense (6,167) (5,386)
Increase (decrease) in accounts payable 646,867 (173,163)
Increase in accrued expenses 186,231 35,482
Increase (decrease) in income taxes payable 4,706 (4,656)
----------- -----------
Total Adjustments 962,374 (277,106)
----------- -----------
Net cash provided by operating activities 1,050,646 228,804
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (142,306) (116,534)
Acquisition of inventory (1,999,347)
Intangible and Other Assets (1,364,192) (135,974)
----------- -----------
Net cash used in investing activities (3,505,845) (252,508)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net(payments) borrowings on line-of-credit (137,912) 134,000
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) (14,689) (14,456)
Net payments on long term debt (801,796) (291,678)
----------- -----------
Net cash provided by
financing activities 2,352,393 (172,134)
----------- -----------
NET DECREASE IN CASH (102,806) (104,631)
CASH BEGINNING OF PERIOD 128,869 119,117
----------- -----------
CASH, END OF THE PERIOD $ 26,063 $ 14,486
=========== ===========
</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 December
31, 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 which amount will reduce to $3,000,000 on
March 31, 1997 and is 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 December 31, 1996 borrowing
totaled $3,750,000. Unused available credit at December 31, 1996 was $1,250,000.
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 December 31, 1996 the BNCR
was 8.25%. The interest expense on short-term bank borrowings for 1996 and 1995
amounted to $200,827 and $123.770, 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 meet by the Company. At
December 31, 1996 the Company was in compliance with these covenants, except
for the net worth covenant which was waived by the bank for December 31, 1996.
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
December 31, 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. The Company has not made payments against this obligation since
September 1996, but continues to reflect the liability (See Item 1 (A), Legal
Matters under Part II, Other Information).
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 Company is
pursuing its legal rights regarding its acquisition of the business as result of
developments about which the company has become aware (See Item 1 (B)., Legal
Matters under Part II, Other Information).
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. No payments have
been made on these notes.
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 to
supply GMC with its medical instrument needs for its customers.
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 December 31, 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 carry-forwards and goodwill is reduced accordingly
to reflect the utilization of the loss carry-forwards. No tax loss
carry-forwards 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 December 31, 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 $265,076 in the nine months ended December 31, 1996,
and $234,540 in the nine months ended December 31, 1995.
Income taxes paid amounted to $36,517 in the nine months ended December 31,
1996, and $14,479 in the nine months ended December 31, 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 nine months ended December 31
1996 1995
Net Sales 100.0% 100.0%
Cost of Sales 55.2 53.4
Gross Profit 44.8 46.6
Selling, General and
Admin. Expenses 41.2 42.5
Income Before
Interest & Taxes 3.6 4.1
Interest Expense 2.7 3.3
Income Before
Income Taxes 1.0 0.7
Net Income 0.8 0.6
SALES
For the nine month period ended December 31, 1996 compared to the nine month
period ended December 31, 1995, sales were up $3,592,986 or 50.8%. 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 increased 1.8% for the nine month period
December 31, 1996 compared to the nine month period ended December 31, 1995.
This increase 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 nine month period ended
December 31, 1996 have increased $1,382,288 or 45.9% from the nine month period
ended December 31, 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 $ 49,083 or 21.0% for the nine month period ended
December 31, 1996 compared to the nine month period ended December 31, 1995 due
to increased average borrowing levels resulting from the acquisition on May 31,
1996 and the resulting increased accounts receivable and inventory. This impact
was partly offset by a decline in the interest rate charged to the Company
during the current fiscal year.
INCOME TAXES
Federal income tax expense is reduced in both periods by the available net
operating loss carry-forwards. Income tax expense represents the state income
tax payable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 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
(A) 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.
(B) The Company's purchase agreement with the former owner's of the business
acquired from Surgical Medical Specialists, Inc. (SMS) provided for disputes to
be handled through arbitration. Certain products and inventory acquired from SMS
are no longer being offered for sale by Sklar. The principles of the SMS
business who entered into employment agreements with Sklar have been terminate
and certain other changes have been implemented within the Company as a result
of this situation. Notes from the purchase assumed by the Sellers continue to be
reflected as a liability, but the $200,000 payment scheduled for December 1,
1996 has not been paid. The management of the Company does not believe this will
pose a threat to the Company's ability
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL MATTERS, (continued)
to continue in business, but it does believe it will have an impact on the
benefit derived by the Company from the acquisition of the SMS business. As a
result of developments and information learned since acquisition the Company is
pursuing its rights under this agreement against the sellers of SMS.
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.
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
DON TAYLOR
PRESIDENT
February 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,651,233
<ALLOWANCES> 69,914
<INVENTORY> 3,983,604
<CURRENT-ASSETS> 6,619,789
<PP&E> 1,022,577
<DEPRECIATION> 560,645
<TOTAL-ASSETS> 9,292,250
<CURRENT-LIABILITIES> 6,194,689
<BONDS> 0
0
248
<COMMON> 123,771
<OTHER-SE> 1,973,542
<TOTAL-LIABILITY-AND-EQUITY> 9,292,250
<SALES> 10,667,769
<TOTAL-REVENUES> 10,667,769
<CGS> 5,887,746
<TOTAL-COSTS> 10,278,598
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282,763
<INCOME-PRETAX> 106,408
<INCOME-TAX> 18,136
<INCOME-CONTINUING> 88,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,272
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
