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 three month period ended June 30, 1997
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 March 31, 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 -
June 30, 1997 ....................................... 3
Statement of Income (Loss) -
three months ended June 30, 1997 and 1996 ........... 4
Statement of Cash Flows -
three months ended June 30, 1997 and 1996 ........... 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
<PAGE>
SKLAR CORPORATION
BALANCE SHEET
(Unaudited)
ASSETS 6/30/97
CURRENT ASSETS:
Cash $5,208
Accounts Receivable 2,855,247
Inventories (Note 5) 3,974,358
Prepaid Expenses 398,048
-----------
TOTAL CURRENT ASSETS 7,232,861
EQUIPMENT AND IMPROVEMENTS (Note 6) 594,269
GOODWILL (Note 7) 1,972,839
OTHER ASSETS 147,631
-----------
TOTAL ASSETS $9,947,600
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash Overdraft $306,223
Short-term Bank Borrowings (Note 2) 2,942,089
Current Portion-Long-Term Debt 199,036
Trade Accounts Payable 3,540,054
Accrued Expenses
39,983
Accrued Income Taxes 27,425
TOTAL CURRENT LIABILITIES 7,054,810
Long-Term Debt (Note 3) 749,599
-----------
TOTAL LIABILITIES 7,804,409
-----------
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 (87,310)
-----------
2,143,191
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $9,947,600
===========
See notes to financial statements
3
<PAGE>
SKLAR CORPORATION
STATEMENTS OF INCOME (LOSS)
(Unaudited)
For the Three months Ended
6/30/97 6/30/96
Revenues:
Net Sales (Note 10) $3,475,423 $3,066,529
Cost and Expenses:
Cost of Goods Sold 1,969,464 1,719,038
Selling, General and Administrative 1,453,118 1,208,525
Interest 98,977 78,884
----------- -----------
3,521,559 3,006,447
----------- -----------
Income (Loss) before taxes (46,136) 60,083
Provisions for Income Taxes
Currently Payable (Note 8) 0 9,000
----------- -----------
Net Income (Loss) (46,136) 51,083
----------- -----------
Preferred Dividend Requirement (Note 9) 77,578 77,578
----------- -----------
Loss Applicable to Common Shares $(123,714) $(26,495)
----------- -----------
Per Share Data:
Weighted Average Common Shares
Outstanding 1,237,711 1,237,711
----------- -----------
Loss Per Share (Note 11) $(0.10) $(0.02)
=========== ===========
See notes to financial statements
4
<PAGE>
SKLAR CORPORATION
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(Unaudited)
<TABLE>
<CAPTION>
For the Three months Ended
6/30/97 6/30/96
<S> <C> <C>
Net Cash Provided (used) by Operating Activities (127,206) 427,336
Net Cash Provided (Used) by Investing Activities (129,573) (3,375,711)
Net Cash Provided (Used) by Financing Activities 254,481 2,747,985
----------- -----------
Net Decrease in Cash (2,298) (200,390)
Cash at Beginning of Period 7,506 128,869
----------- -----------
Cash at End of Period $5,208 $(71,521)
=========== ===========
</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 June 30,
1997 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 reduced 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 June 30, 1997 borrowing totaled
$3,156,370. Unused available credit at June 30, 1997 was $57,911. 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 June 30, 1997 the BNCR was
8.50%. The interest expense on short-term bank borrowings for 1997 and 1996
amounted to $69,136 and $55,645, 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 June
30, 1997 the bank has waived 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 a 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 8.50% at June 30,
1997. 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 a 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 $3,000,000 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 August 31, 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.
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 fifteen or twenty years, and catalog development
costs are being amortized at various schedules ranging from 1 - 5 years for the
three month period ended June 30, 1997 and 1996.
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 $1,946,000, which expire in
1998 ($910,000), 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 June 30, 1997, 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 1997.
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 $76,897 in the three months ended June 30, 1997, and
$59,298 in the three months ended June 30, 1996.
Income taxes paid amounted to $0 in the three months ended June 30, 1997, and
$11,006 in the three months ended June 30, 1996.
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 three months ended June 30
1997 1996
Net Sales 100.0% 100.0%
Cost of Sales 56.7 56.1
Gross Profit 43.3 43.9
Selling, General and
Admin. Expenses 41.8 39.4
Income Before
Interest & Taxes 1.5 4.5
Interest Expense 2.8 2.6
Income Before
Income Taxes 0.0 1.9
Net Income (Loss) (1.3) 1.7
SALES
For the three month period ended June 30, 1997 compared to the three month
period ended June 30, 1996, sales were up $408,894 or 13.3%. 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 0.6% for the three month period
ended June 30, 1997 compared to the three month period ended June 30, 1996. 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 three month period ended
June 30, 1997 have increased $244,593 or 20.2% from the three month period ended
June 30, 1996. 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 $ 20,093 or 25.5% for the three month period ended June
30, 1997 compared to the three month period ended June 30, 1996 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
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. Payments for DCA have been suspended since September
1996 pending the outcome of this case.
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 due to a government investigation
and information supplied to us by the former principals of Surgical
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL MATTERS, (continued)
Medical Specialists, Inc. The principals and a relative of the SMS business who
entered into employment agreements with Sklar have been terminated and certain
other charges are being implemented within the Company as a result of this
situation which may result in Sklar posting significant inventory write-offs as
well as rendering the value of goodwill as zero.
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 to continue in business, but it does believe it will have
a significant impact on the benefit derived by the Company from the acquisition
of the Surgical Medical Specialists, Inc. As a result of developments and
information learned since acquisition Sklar's management is of the opinion that
the principals and a relative defrauded Sklar, and accordingly, Sklar is seeking
punitive damages from those individuals as well as asking the panel of
arbitrators to cancel all moneys that Sklar owes to those principals, their
creditors and a firm they continue to own and operate.
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 1997.
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
August 19, 1997
12
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<ARTICLE> 5
<CIK> 0000064500
<NAME> SKLAR CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 5,208
<SECURITIES> 0
<RECEIVABLES> 2,959,579
<ALLOWANCES> 104,332
<INVENTORY> 3,974,358
<CURRENT-ASSETS> 7,232,861
<PP&E> 1,179,575
<DEPRECIATION> 585,306
<TOTAL-ASSETS> 9,947,600
<CURRENT-LIABILITIES> 7,054,810
<BONDS> 0
0
248
<COMMON> 123,771
<OTHER-SE> 2,019,172
<TOTAL-LIABILITY-AND-EQUITY> 9,947,600
<SALES> 3,475,423
<TOTAL-REVENUES> 3,475,423
<CGS> 1,969,464
<TOTAL-COSTS> 3,422,582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,977
<INCOME-PRETAX> 46,136
<INCOME-TAX> 0
<INCOME-CONTINUING> 46,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,714
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
