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, 1997
---------------------------------
[ ] 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, 1997 were
$14,325,963.
The aggregate market value of common stock held by non-affiliates amounted
to $ 61,197 as of June 30, 1997.
As of June 30, 1997 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. 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. The former President of
Simpson/Bayse remained in charge of the Company's distributor sales and had 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.
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<PAGE>
Effective June 9, 1995 the Company and the former President of
Simpson/Bayse terminated this agreement, and his role within the Company, to
pursue other business interests which do not appear to 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. The Company retains all
instrument rights, the Simpson/Bayse name and the exclusive instrument patterns
and processes.
(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.
(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. 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 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 experiencing a decline in gross margin percentage on overall Company
sales.
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
operating SMS company, its employees, liabilities accounts receivable nor the
entirety of its inventory. The Company has permitted, by contract, the former
owner and several former employees to operate a non-competing sales organization
in several mid-Atlantic states. See also Item 3. Litigation and Notes to
Financial Statements.
Surgical Instruments
Presently, the surgical instrument division consists of the combined
Herwig, Misdom-Frank, S/B, Sklar and SMS 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
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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.
Instruments are purchased from approximately 115 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. In fiscal 1997
approximately 41% of product purchases for resale were made in foreign currency
from German suppliers. The purchase of SMS increased the potential for the
Company to sell lower priced Pakistani products.
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 and are made to exacting Sklar specifications.
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.
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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.
The Company's product lines comprises more than 9,000 different products
for use in a wide range of surgical procedures, including dental, orthodontic
and veterinary procedures.
The Company markets its products through the medical distribution network.
The Company's products are advertised in trade periodicals and are also
exhibited at industry trade shows. The Company has approximatley 2,000 active
accounts. As a result of the continuing industry consolidation the Company's
sales are concentrated among its few largest customers which account for
approximately 50% of the Company's sales in 1997.
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, 1997, 1996 and 1995
the surgical and orthodontic product lines contributed the following percentages
of total net sales of the Company:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Surgical instruments and products 93.9% 90.5% 85.2%
Orthodontic instruments and products 6.1 9.5 14.8
------- ------- -------
100% 100% 100%
======= ======= =======
</TABLE>
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CURRENT
In June 1996 the company executed a Purchase Agreement with Surgical
Marketing Specialists, Inc. (SMS) of Columbia, Maryland. The 1997 business
efforts of the Company were hampered by the events arising out of the
acquisition of SMS. The Company's purchase agreement with the former owner's of
the business acquired from Surgical Marketing 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
and their attorneys of Surgical Marketing Specialists, Inc. The principles of
the SMS business who entered into employment agreements with Sklar have been
terminated and certain other changes 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 Marketing 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 which they continue to own and operate.
The events which arose from the acquisition of SMS have significantly
diverted managements time and attention from Company operations which have
negatively impacted profits and expense control. Management believes that while
its attention was focused on the disclosure problems of the old SMS Company that
it lost a significant amount of the business and opportunity that it purchased.
SOURCE OF SUPPLY
Surgical Instruments
As noted above, the majority of the surgical instrument products are
typically purchased from Germany and Pakistan. In fiscal 1997 and 1996 the value
of domestic purchases remained relatively high (approximately 48% and 34%,
respectively) reflecting the increasing diversification of the Company's
products. 1997's higher domestic purchase percent also was impacted by the SMS
acquisition. 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
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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, 1997 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 Company's 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 obsolescence in the industry. The catalogs published by
the Company for hospital and physician use include 9000 patterns.
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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 five 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
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.
EMPLOYEES
The Company currently has sixty-three full-time equivalent employees
(including principal executive officers). None of its employees are covered by
collective bargaining agreements. The Company believes its employee relations
are satisfactory.
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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 $232,800. Approximately half of 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. 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 Medical
Specialists, Inc. The principles of the SMS business who entered into employment
agreements with Sklar have been terminated and certain other changes 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 Marketing 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 which they continue to own and operate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The information called for by this item is not applicable to Sklar
Corporation.
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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, 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
June 30, 1996 1/8 1/8
September 30, 1996 1/8 1/8
December 31, 1996 1/8 1/8
March 31, 1997 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 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 794 accounts of record of its Common Stock as of March 31,
1997.
(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 subsequent years.
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, 1997 March 31, 1996 March 31, 1995 March 31, 1994 March 31, 1993
<S> <C> <C> <C> <C> <C>
Revenues $ 14,325,963 $ 9,400,019 $ 6,556,375 $ 5,746,289 $ 6,195,435
============ ============ ============ ============ ============
Earnings from Operations $ 180,039 $ 121,705 $ 85,709 $ 91,120 $ 89,543
============ ============ ============ ============ ============
Loss per share of
Common Stock (1) $ (.11) $ (.15) $ (.18) $ (.18) $ (.18)
============ ============ ============ ============ ============
Selected Balance Sheet
Data at End of Period:
Total Assets $ 9,585,845 $ 6,015,591 $ 6,259,600 $ 4,926,020 $ 5,206,392
Long-term Obligations 798,041 803,910 939,621 163,984 204,272
Working Capital 243,788 1,199,119 898,093 58,116 (117,221)
Current Ratio 1.04:1 1.37:1 1.26:1 1.02:1 .96:1
</TABLE>
(1) The Company has not declared or paid dividends in this 5 year period.
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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,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales 57.0 50.9 47.4 48.1 50.1
Gross Profit 43.0 49.1 52.6 51.9 49.9
Selling, General &
Admin. Expenses 38.7 44.3 47.0 46.4 43.3
Other Expense 0.0 0.0 0.0 0.0 0.9
Income before
Interest & Taxes 4.2 4.8 5.7 5.5 5.8
Interest Expense 2.8 3.2 4.1 3.7 4.1
Income Before
Income Taxes 1.5 1.6 1.6 1.9 1.7
Net Income 1.3 1.3 1.3 1.6 1.4
</TABLE>
Results of Operations
1997 Compared to 1996:
Sales in fiscal 1997 are $4,925,944 higher than 1996. This increase is a
result of continued growth of market share and the acquisition of SMS. 50% of
the sales growth came from Sklar's two largest customers.
Cost of Sales, as a percent of sales, increased from 50.9% in 1996 to 57%
in 1997. This increase reflects the increasingly competitive pricing in the
marketplace and changes in product mix. This change is also impacted by the
acquisition of SMS and its emphasis on lower margin products. In 1997 the
Company experienced a $135,062 benefit from currency fluctuation compared to a
$60,688 gain in 1996. Because of the increasingly competitive environment in the
medical supply marketplace and the possibility of less favorable foreign
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currency exchange rates with the Deutsche Mark, the Company expects cost of
sales as a percent of sales to increase in future years.
Selling, General and Administrative Expenses for fiscal 1997 increased
$1,381,795, but decreased from 44.3% to 38.7% as a percent of sales compared to
1996. This increased spending is primarily due to the Company's increasing its
emphasis on marketing efforts and the increased overhead costs resulting from
the SMS acquisition. 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 marketing, related costs have also increased. By hiring an
outside sales force the Company increased its staff to enable it to place
additional emphasis on attaining new business. Beginning in 1997, the Company
adopted the policy of recognizing publication costs of all catalogues as expense
when they are sent to customers. 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. The amortization rate for goodwill
recognized in the SMS acquisition is being amortized over fifteen years. Other
expenses in the administrative aspects of the business also increased as a
result of the increased business level. Any reduction in the purchase price of
SMS and the liability associated therewith will result in a corresponding
decrease in goodwill.
1996 Compared to 1995:
Sales in fiscal 1996 were $2,843,644 higher than 1995. This increase was
primarily due to the increased business generated from the Company's marketing
agreement entered into with General Medical Corporation (GMC) in November, 1994.
Cost of Sales, as a percent of sales, increased from 47.4% in 1995 to 50.9%
in 1996. This fluctuation resulted from increasingly competitive pricing in the
marketplace and changes in product mix. In 1996 the Company experienced a
$60,688 benefit from currency fluctuation compared to a $175,559 loss in 1995.
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 was primarily due to the Company's increasing its
emphasis on sales and marketing 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 sales and marketing, related costs also
increased. In addition the Company increased its staff to enable it to place
additional emphasis on attaining new business. Other expenses in the
administrative aspects of the business also increased as a result of the
increased business level.
-14-
<PAGE>
1995 Compared to 1994:
Sales in fiscal 1995 were $810,086 higher than 1994. This increase was
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 was
partially offset by the rise in value of the Deutsche mark.
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 was primarily due to the Company's increasing its emphasis on marketing
efforts. As a result of this increased manpower and focus on marketing, related
costs increased. Amortization costs for catalogs and goodwill increased as a
result of changes taking place in the health care market place. The Company
believed the increasing competition may cause the Company to publish new
catalogs faster than had historically been required and as a result decreased
the estimated useful lives of existing catalogs. The Company's amortization rate
for its goodwill was 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 increased as a result of the increased business level
primarily resulting from the Herwig transaction.
Effects of Dollar Weakness
In 1997 and 1996 the Company purchased 41% and 63%, 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 has not engaged in forward purchases of foreign currency, but has
chosen to buy according to its weekly needs as payable amounts become due.
During 1997 the Deutsche mark continued to weaken against the dollar resulting
in a $135,062 benefit to the Company. The effect of the dollar strengthening in
fiscal 1996 resulted in a gain for the year of $60,688. 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.
-15-
<PAGE>
Liquidity and Capital Resources
Working capital decreased in 1997 by $893,365 over 1996. This resulted
primarily from the increased debt level taken on to accomplish the SMS
acquisition. The increased sales level which resulted in increased accounts
receivable, an increase in inventory and a corresponding increase in trade
payables also had an impact on working capital. The acquisition was financed by
an increased bank line of credit with interest payable at the Bank's National
Commercial Rate (BNCR) plus 1.25%. The Company pays .25% per annum for its
unused line and has entered into a contract with the bank to provide for
interest rate protection on $2,000,000 through August of 1997. Total borrowings
under the line of credit initially could not exceed the lesser of $3,750,000 or
the Borrowing Base, which is the sum of 80% of qualified Accounts Receivable and
50% of qualifying inventory. Effective April 1, 1997 borrowing under the line of
credit is amended to be no greater than $3,000,000. The new agreement also
facilitates a $100,000 letter of credit, which is a sub-line of the line of
credit facility, and foreign currency contract purchases.
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. $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. As soon as management became aware of
disputes and alleged misrepresentation on the part of the Seller no further
amounts have been paid to the Seller or for the Seller in respect of the
liabilities recorded at the time of acquisition of SMS.
The Company's peak short-term borrowing pursuant to lines of credit were
$2,999,000 in 1997 and $1,625,000 in 1996. At March 31, 1997, the Company's
outstanding line of credit was $2,768,000, leaving $206,000 available, after
reduction for a $26,000 stand-by letter of credit and foreign exchange purchase,
assuming sales and operations remain at the current levels. Any decrease in
sales and, or increase in 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 1997, to finance the
Company's capital additions. Significant inventory purchases were made by the
Company during fiscal 1997 to maintain our customers' fill rates until the
Company became familiar with its new product lines. Some problems identified
with the inventory acquired from SMS impacted the Company's ability to decrease
inventory during 1997. The Company has identified slow moving inventory that it
acquired from SMS which has impacted the Company's ability to reduce inventory
during 1997. The contract provides the Company with indemnification against all
acquired inventory not sold within one year from the SMS acquisition of SMS. The
Company , in arbitration, will be seeking the return of money's already paid to
SMS due to this slow-moving inventory and other alleged misrepresentation ( See
Litigation, Item 3.)
On January 31, 1996 the Company entered into amended agreements with
Corestates Bank restructuring the then existing financing agreements. The
amendments provided for a 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.
During fiscal 1995 the Company upgraded its computer capability to meet the
needs of its expanded business requirements. The new computer was leased for 2
years commencing November, 1994. Further improvements to the computer system are
identified as necessary for fiscal 1998. The present bank financing facility
expires on August 29, 1997 and will be renegotiated before that time. Management
believes the bank facilities will continue to be sufficient to meet the
Company's liquidity needs in the foreseeable future.
-16-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
and Supplementary Financial Data Page
Independent Auditors' Report ...........................................17
Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 and 1996...............18
Consolidated Statements of Income
for the years ended March 31, 1997, 1996 and 1995 ...................19
Consolidated Statements of Stockholder's Equity ........................20
Consolidated Statements of Cash Flows
for the years ended March 31, 1997, 1996 and 1995 ...................21
Notes to Consolidated Financial Statements ..........................22-37
-17-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Sklar Corporation
West Chester, Pennsylvania
We have audited the accompanying consolidated balance sheet of Sklar
Corporation as of March 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
March 31,1997,1996 and 1995. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sklar
Corporation as of March 31,1997 and 1996, and the consolidated results of its
operations and its cash flows for the years ended March 31,1997, 1996 and 1995,
in conformity with generally accepted accounting principles.
STOCKTON BATES & COMPANY, P.C.
Lancaster, Pennsylvania
July 3, 1997
-18-
<PAGE>
SKLAR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash (Note C) $ 7,506 $ 128,869
Accounts Receivable (Note D) 2,467,535 1,410,019
Inventories (Note E) 4,128,912 2,839,988
Prepaid Expenses 238,311 22,635
----------- -----------
TOTAL CURRENT ASSETS 6,842,264 4,401,511
EQUIPMENT AND IMPROVEMENTS (Note F) 554,385 444,227
GOODWILL (Notes B, G and I) 2,012,213 842,931
OTHER ASSETS (Note G) 176,983 326,922
----------- -----------
TOTAL ASSETS $ 9,585,845 $ 6,015,591
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash Overdraft $ 198,243 $ --
Short-term Bank Borrowings (Note H) 2,768,088 895,000
Current Portion-Long-Term Debt (Note J) 178,094 489,534
Current Portion-Capital Lease Obligation (Note N) 0 14,689
Trade Accounts Payable (Note K) 3,217,304 1,687,602
Accrued Expenses 209,322 104,901
Accrued Income Taxes (Note I) 27,425 10,666
----------- -----------
TOTAL CURRENT LIABILITIES 6,598,476 3,202,392
Long-term Debt (Note H and J) 798,041 733,684
Other Liabilities (Note K) 0 70,226
----------- -----------
TOTAL LIABILITIES 7,396,517 4,006,302
----------- -----------
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 (41,173) (221,212)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 2,189,328 2,009,289
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 9,585,845 $ 6,015,591
=========== ===========
</TABLE>
See notes to financial statements
-19-
<PAGE>
SKLAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended March 31
1997 1996 1995
<S> <C> <C> <C>
Net Sales (Note P) $ 14,325,963 $ 9,400,019 $ 6,556,375
Cost of Goods Sold 8,162,770 4,784,355 3,105,027
------------ ------------ ------------
Gross Profit 6,163,193 4,615,664 3,451,348
Selling, General and Administrative Expense 5,549,876 4,168,081 3,080,755
------------ ------------ ------------
Income from Operations 613,317 447,583 370,593
Other Income (Expenses):
Other (5,748) 0 4,664
Interest (395,331) (302,698) (268,548)
------------ ------------ ------------
Other Expenses - Net (401,079) (302,698) (263,884)
------------ ------------ ------------
Income before Taxes 212,239 144,885 106,709
Provisions for Taxes Currently Payable
State (32,200) (23,180) (21,000)
------------ ------------ ------------
Net Income 180,039 121,705 85,709
Preferred Dividend Requirement (Note L) 310,312 310,312 310,312
------------ ------------ ------------
Loss Applicable to Common Shares $ (130,273) $ (188,607) $ (224,603)
============ ============ ============
Per Share Data:
Weighted Ave. Common Shares Outstanding 1,237,711 1,237,711 1,237,711
Loss Per Share $ (.11) $ (.15) $ (.18)
============ ============ ============
</TABLE>
See notes to financial statements
-20-
<PAGE>
SKLAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series A Additional
Convertible subordinated Common Paid-in Accumulated
Preferred Conv. Prfd Stock Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 $ 248 $ 0 $ 123,771 $ 2,106,482 $ (428,626) $ 1,801,875
Net Income for the fiscal 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 fiscal 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
Net Income for the fiscal year
ended March 31, 1997 180,039 180,039
------- ------- --------- ----------- ---------- -----------
Balance, March 31, 1997 $ 248 $ 0 $ 123,771 $ 2,106,482 $(41,173) $ 2,189,328
======= ======= ========= =========== ========== ===========
</TABLE>
See notes to financial statements
-21-
<PAGE>
SKLAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
For the Year Ended March 31
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 180,039 $ 121,705 $ 85,709
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 463,102 468,673 433,429
Provision for losses and returns
on accounts receivable 54,000 32,093 19,019
Loss on abandonment of assets 5,748
Change in operating assets and liabilities:
(Increase) in accounts receivable (1,111,516) (269,814) (137,998)
(Increase)Decrease in inventory 585,423 170,795 (1,114,237)
(Increase) Decrease in prepaid expenses (215,676) 5,655 26,389
Increase(Decrease) in accounts payable 559,090 (88,250) 732,896
Increase in accrued expenses 104,421 8,787 4,201
Increase (Decrease)in income taxes 16,759 3,025 (31,359)
----------- ----------- -----------
Total Adjustments 461,350 330,964 (67,660)
----------- ----------- -----------
Net cash provided by operations 641,389 452,669 18,049
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (236,823) (153,641) (165,905)
Acquisition of SMS (1,700,000) -- --
Intangible Assets (54,083) 0 (248,180)
----------- ----------- -----------
Net cash used in investing activities (1,990,906) (153,641) (414,085)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 198,243
Net borrowing (payments)
on line-of-credit agreement (410,734) 110,000 39,000
Borrowing on credit line for acquisition 1,700,000 -- --
Principle payments on long-term debt
and capital leases (259,355) (399,276) (207,803)
Proceeds from issuance of long-term debt 0 0 700,000
----------- ----------- -----------
Net cash provided by (used in)
financing activities 1,228,154 (289,276) 531,197
----------- ----------- -----------
NET INCREASE(DECREASE) IN CASH (121,363) 9,752 135,161
CASH BEGINNING OF YEAR 128,869 119,117 (16,044)
----------- ----------- -----------
CASH END OF THE YEAR $ 7,506 $ 128,869 $ 119,117
=========== =========== ===========
</TABLE>
See notes to financial statements
-22-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
A. Summary of Significant Accounting Policies,
Financial Statments:
The financial statements include those of Sklar Corporation and Sales and
Marketing, Specialists, Inc., a wholly owned subsisidiary which serves as a
service company housing the Company's outside sales force.
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's 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 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. In 1997 the
Company made an accounting change wherein elements of overhead were eliminated
from the total inventory valuation. Note E to the financial statements discloses
the dollar effect of this change in accounting.
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.
-23-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(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.
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, 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.
-24-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
B. Acquisitions and Corporation Changes, (continued):
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
-25-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(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.
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 was allocated $1,999,347 to inventory and
$1,307,444 to goodwill. The purchase was financed by $1,700,000 drawn against
the Company's amended credit line agreement with Corestates Bank, $900,386
assumption of SMS liabilities, subject to the agreement, and $706,405 of notes
payable to the Seller. Subsequent to the acquisition it was determined certain
inventory may be misrepresented or mislabeled and could not be sold in the
United States in accordance with regulations of the US Customs and Food and Drug
Administration. Said inventory is currently in the possession of the US
Government and accordingly is no longer reflected as an asset of the Company,
but was offset against amounts payable to SMS. The Company is taking action
against the former owners of SMS to recoup the amount it believes it lost as a
result of these circumstances which had not been disclosed prior to the
acquisition. The Company intends to pursue its claims in arbitration and the
court system against the former owners and management of SMS. In addition to
-26-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
B. Acquisitions and Corporation Changes, (continued):
cancellation of remaining obligations to SMS the liabilities assumed from SMS
in the acquisition are subject to the Purchase Agreement with the Company which
provides an indemnification to SMS for these liabilities which indemnification,
in the opinion of management, is void due to the alleged misrepresentation of
the Seller. Thus, $706,000 of the liabilities assumed in the SMS acquisition
subject to the agreement, to the extent not paid, will be deducted from goodwill
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, 1997 the Company had the following concentrations of cash
subject to credit risk:
Germany $7,506
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, 1997
Carrying Estimated
Amounts Fair Value
Cash $ 7,506 $ 7,506
Long-term debt $976,135 $991,619
Other liabilities $ 61,971 $ 58,819
D. Accounts Receivable:
<TABLE>
<CAPTION>
Accounts receivable consist of the following: March 31
1997 1996
<S> <C> <C>
Trade Receivables $ 2,337,642 $ 1,429,105
Other Receivables (including a related party receivable of
$238,556 in 1997 and $12,768 in 1996) 235,807 35,914
----------- -----------
2,573,449 1,465,019
Allowance for Doubtful Accounts and Sales Returns (105,914) (55,000)
----------- -----------
$ 2,467,535 $ 1,410,019
=========== ===========
</TABLE>
-27-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
D. Accounts Receivable, (continued):
The related party receivable at March 31, 1997 includes $199,562, net due
from the Company's President, Don Taylor. In conjunction with this amount
substantial personal assets of Mr. Taylor are pledged as collateral for Company
loans.
E. Inventories:
<TABLE>
<CAPTION>
Inventories consist of the following: March 31
1997 1996
<S> <C> <C>
Sklar, Herwig, SMS and MFI Surgical Instruments from Germany (including customs
and freight of $148,425
and $154,033 in 1997 and 1996, respectively) $ 2,194,353 $ 2,325,467
Sklar, Herwig, SMS and MFI Surgical Instruments not
from Germany (including freight of $124,211 and
$6,634 in 1997 and 1996, respectively) 2,210,273 397,075
DCA Products (including freight of $3,417
and $4,113 in 1997 and 1996, respectively) 174,286 209,749
Inventory Overhead 0 232,697
----------- -----------
4,578,912 3,164,988
Less Valuation Allowance (450,000) (325,000)
----------- -----------
$ 4,128,912 $ 2,839,988
=========== ===========
</TABLE>
During 1997 the Company made a change in accounting and eliminated certain
elements of overhead as part of the total inventory valuation. Operating costs
included in inventory amounted to $232,697 at March 31, 1996. Inventory overhead
of $298,929 is excluded from inventory in 1997. Total operating costs incurred
relating to inventory during 1997, 1996 and 1995 amounted to $564,977, $378,175
and $360,999, respectively. The dollar effect of the change in the statement of
income amounts to $298,929 in 1997 and $1,287 and $80,656 in 1996 and 1995,
respectively.
F. Equipment and Improvements:
<TABLE>
<CAPTION>
Equipment and improvements consist of the following: March 31
1997 1996
<S> <C> <C>
Furniture and Equipment (including assets acquired under
capital leases of $40,713) $ 846,866 $ 661,866
Leasehold Improvements 259,617 218,405
----------- -----------
1,106,483 880,271
Less Accumulated Depreciation and Amortization
(including amounts applicable to assets acquired
under capital leases of $20,357 in 1997 and $12,214 in 1996) (552,098) (436,044)
----------- -----------
$ 554,385 $ 444,227
=========== ===========
</TABLE>
-28-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
F. Equipment and Improvements, (continued):
Depreciation and amortization expense for equipment and improvements,
including assets acquired under capital leases, amounted to $120,917 in 1997,
$112,962 in 1996, and $94,233 in 1995.
G. Goodwill and Other Assets:
Other assets consist of the following:
March 31
1997 1996
Catalog Development Costs (Net) $130,142 $316,826
Acquisition Costs (Net) 45,068 7,414
Patents (Net) 1,773 2,682
-------- --------
$176,983 $326,922
======== ========
The following table summarizes the lives and amortization expense for
goodwill and other assets:
<TABLE>
<CAPTION>
Amortization Expense
Life in Years 1997 1996 1995
<S> <C> <C> <C> <C>
Goodwill 15-20 $ 138,163 $ 65,526 $ 62,000
Catalog Development Costs 11/2 - 5 186,685 237,145 232,018
Acquisition Costs 5 16,428 52,131 44,266
Patents 16 1/2 909 909 912
--------- --------- ---------
TOTAL $342,185 $355,711 $339,196
========= ========= =========
</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, except beginning in 1997 finished catalogs not distributed are treated
as a prepaid expense. The dollar effect of the change relating to finished
catalogs amounted to $201,260 in 1997. Goodwill may be 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 to the extent that the
benefit amount computed exceeds normal goodwill amortization. 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.
-29-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
H. Short-term Bank Borrowings:
The following table shows the Company's short term bank borrowings for the
past three fiscal years:
<TABLE>
<CAPTION>
Maximum Amount Average Amount
Interest Outstanding During Outstanding During Weighted Average
Balance Rate at End the the Period (B) Interest Rate During
at End of Period Period (A) the Period (C)
of Period
<S> <C> <C> <C> <C> <C>
March 31, 1997 $2,768,088 9.75% $2,999,000 $2,382,064 9.5%
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%
<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, 1997 the Company's revolving line of credit of $3,750,000 is
available to the extent of collateral by the sum of 80% of qualifying accounts
receivable plus 50% of inventories. Qualifying accounts receivable and inventory
used as a basis for the March 31, 1997 borrowing totaled $5,564,273. Unused
available credit at March 31, 1997 was $620,000 after considering an outstanding
$26,000 standby letter of credit and foreign currency purchase. The maximum
revolving line of credit is reduced to $3,000,000 on April 1, 1997 and, as a
result, the unused available credit is reduced to $200,000.
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,
1997.
At March 31, 1997 the Company had outstanding borrowings of $2,768,088 and
the Prime Rate was 8.50%. The interest expense on short-term bank borrowings for
1997, 1996, and 1995 amounted to $226,394, $152,117 and $152,178, 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.
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
-30-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
I. Income Taxes, (continued):
carry-forwards and additional post-merger operating losses totaling
approximately $1,946,000, which expire in tax years, 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. 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 1997, 1996, and 1995,
$308,000, $211,000, and $149,000 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 accounts for its income taxes under the asset/liability method
mandated by Financial Accounting Standards Board Statement No. 109 "Accounting
for Income Taxes." Under this method 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, 1997 March 31, 1996
Total deferred tax asset $615,574 $692,925
Less valuation allowance 607,408 688,287
-------- --------
Net deferred tax asset 8,166 4,638
Total deferred tax liability 8,166 4,638
-------- --------
Total deferred tax asset $ 0 $ 0
======== ========
The net change in the valuation allowance for the year ended March 31, 1997
and 1996 was a reduction of $80,879 and $465,440.
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.
J. Long-term Debt:
On May 20, 1994 the Company entered into agreements with Corestates 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. Simultaneously, the Company negotiated a three year term loan of
$400,000 to be repaid in 36 monthly installments of $11,111 plus interest
-31-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
J. Long-term Debt, (continued):
commencing June 1, 1994 and due in full May 1, 1997. These loans were 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.
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 Corestates Bank which, on December 28,
1994, was converted to a 60 month borrowing arrangement. The long-term agreement
with Corestates 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 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. 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%. 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.
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 not made payments on this obligation since
September 1996 and is pursuing legal remedies to the alleged infringement of the
purchase agreement. The Company had paid all previous payments due, under
protest, upon advice of counsel. In the opinion of management the outcome of
this action will not have a material impact on the Company.
-32-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
J. Long-term Debt, (continued):
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.
The amended line of credit agreement with Corestates Bank established a new
line of credit amount at $3,750,000, which reduces to $3,000,000 on April 1,
1997 and 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.
<TABLE>
<CAPTION>
Debt outstanding at March 31, 1997 1996
<S> <C> <C>
Corestates Bank, 36 month term loan, interest at
BNCR plus 2.5% $ 155,556
Corestates Bank, 30 month term loan, interest at
BNCR plus 2.25% 483,333
Seller Notes from SMS acquisition, net of reduction(1) $ 579,005
SBA Loan, 60 month term loan, interest at
Prime Rate plus 2.25% 280,000 450,000
DCA Note, interest at 20.1% 117,130 134,329
---------- ----------
$ 976,135 $1,223,218
Less Current Portion 178,094 489,534
---------- ----------
Total Long-term Debt $ 798,041 $ 733,684
========== ==========
</TABLE>
The aggregate maturities for the next five years of all long-term debt are
as follows at March 31, 1997:
For the Year ending March 31, 1998 $178,094
For the Year ending March 31, 1999 $160,010
For the Year ending March 31, 2000 $ 69,026
For the Year ending March 31, 2001 $ 0
Other (1) $579,005
$976,135
-33-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
J. Long-term Debt, (continued):
(1) The notes payable to the Seller of $706,405 bearing interest at 9% call
for payment 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. The amount and
timing of the Seller Notes from the SMS acquisition are the subject of pending
arbitration and accordingly there is no determination of the timing of any
amount due under theses notes. The balance of these notes has been reduced, for
financial statement presentation, by the estimated value of inventory now in the
possession of the Food and Drug Administration. Management believes these
liabilities will not be paid.
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 and 1997 purchases, the obligation is expected to be
repaid at $67,000 per year. The current portion of this obligation is reflected
in Accounts Payable.
L. Stockholders' Equity:
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 $4,023,249 at March 31, 1997. No dividends
may be 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, 1997, no options were granted and
none were exercised. As of March 31, 1997, 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, 1997.
-34-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
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. Effective October 1, 1996 the Company took over additional available
space at its present address and the monthly rental payment increased to $19,400
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, 1997, 1996, and 1995 was $206,642, $228,857, and
$181,882, respectively.
Minimum rental commitments under the non-cancelable operating leases are as
follows:
RELATED
TOTAL PARTY
For the Year ending March 31, 1998 $241,178 $232,800
For the Year ending March 31, 1999 $236,549 $232,800
For the Year ending March 31, 2000 $ 77,600 $ 77,600
For the Year ending March 31, 2001 $ 0 $ 0
For the Year ending March 31, 2002 $ 0 $ 0
Thereafter $ 0 $ 0
-------- --------
TOTAL $555,327 $543,200
======== ========
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
that has been paid for this building was $196,800 in 1997, $195,800 in 1996, and
$155,800 in 1995.
(2) The Company has outstanding notes receivable from current officers and
directors amounting to $199,952 at March 31, 1997 and $12,768 at March 31, 1996
as listed in Note C.
(3) The Company supplies instruments to two companies whose board of directors
include directors of Sklar. Sales to the customers amounted to $ 50,448 during
1997 and $38,078 and $35,012 during 1996 and 1995, respectively. The amounts due
from these companies at March 31, 1997 and 1996, included in trade receivables
is $11,923 and $7,544, respectively. Purchases from these companies amounted to
$238 during 1997 and $21,608 and $12,028, during 1996 and 1995, respectively.
The amount due to these vendors at March 31, 1997 and 1996, included in trade
accounts payable, is $0 and $245, respectively.
-35-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
O. Related Party Transactions, (continued):
(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 1997, 1996 and 1995 the
Company purchased $281,940, $228,694 and $5,472, respectively for repair and
other services, from a company in which the President has been a minority
shareholder. At March 31, 1997 the Company has advanced $ 82,187 to this
company.
(5) During 1997 the Company paid $61,500 to the former wife of the President.
P. Significant Customer Information:
Two customers of the Company provided significant sales volume in 1997,
1996 and 1995. During these fiscal years sales to one customer comprised 13.1%,
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 35.3%, 36.7% and 20.4% of the Company's 1997, 1996
and 1995 sales, respectively.
Q. Employee Benefit Plans:
The Company maintains a 401(k) savings-sharing plan for the benefit of its
employees. Payments under the contributory plan administered by an independent
trustee 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 $60,609 in 1997, $33,574 in 1996, and $18,882 in 1995. In addition
$45,000 was paid to the profit sharing aspect of the plan during 1997. Of this
amount $15,000 was recognized as an expense in 1996 and $30,000 in 1997.
R. Advertising Costs:
The Company policy is to expense advertising costs as incurred.
S. Foreign Currency Transaction and Translation Gains (Losses):
Gains and (losses) recognized from foreign currency activity amounted to
$135,062, $60,688, and $(175,588) in 1997, 1996 and 1995, respectively.
-36-
<PAGE>
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
(Continued)
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. The remaining balances of
these notes were absorbed into the credit line at June 4, 1996.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid amounted to $ 324,109 in 1997, $297,364 in 1996, and $217,215
in 1995.
Income taxes paid amounted to $11,236 in 1997, $18,329 in 1996, and $33,400
in 1995.
-37-
<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 57, has been the owner and President of
G.D.M. Industries for nineteen years. Mr. Kellam's company specializes in the
advertising and promotional business.
William R. Knepshield. Mr. Knepshield, age 62, has twenty 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 43, 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 51, 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 49, has been the owner and President of C & S
Medical Supply for fourteen 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.
-38-
<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, 1997, to each Executive
Officer of the Company whose aggregate cash and cash equivalent compensation
exceeded $100,000. During the years ended March 31, 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.
<TABLE>
<CAPTION>
Capacities in Other
Name of Individual or Which Served Cash Annual Fiscal
Number of Persons in Group Compensation Compensation Year
<S> <C> <C> <C> <C>
Don Taylor President $170,170 $26,173 1997
Michael Malinowski Vice President $125,364 $20,833 1997
Don Taylor President $194,465 $7,548 1996
Don Taylor President $163,340 $4,899 1995
</TABLE>
Other Annual Compensation is comprised of the Company's matching 401K
contribution and the Company's profit sharing contribution. Profit sharing
contributions are allocated among all participants in the 401K Plan. In addition
in 1997 the Company purchased insurance and paid for certain automobile costs.
-39-
<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,
1995 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.
<TABLE>
<CAPTION>
Name and Address Title of Class # of Shares % of Class
<S> <C> <C> <C>
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
241 Upland Road Common 707,876 57.2
West Grove, PA 19390
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 Officers Preferred 15,516 62.5
as a Group Common 748,132 60.4
* Less than 1%
</TABLE>
-40-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1(a) for information as to the Merger. See Item 8, Note N 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
18 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 43,
44 and 45 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 ******
-41-
<PAGE>
2(a)(5) Agreement to Purchase Assets of the Herwig Division of
General Medical Corporation and for a continuing
marketing relationship ********
2(a)(6) Agreement to Purchase Assets of Sales and Marketing
Specialists, Inc.
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 *******
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.
-42-
<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 14, 1997 By: s\DON TAYLOR
------------------------ -------------------------------
Don Taylor
President and Director
Dated: July 14, 1997 By: s\MICHAEL MALINOWSKI
------------------------ -------------------------------
Michael Malinowski
Chief Accounting 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 14, 1997 By: s\DON TAYLOR
------------------------ -------------------------------
Don Taylor
President and Director
Dated: July 14, 1997 By: s\MICHAEL MALINOWSKI
------------------------ ------------------------------
Michael Malinowski
Executive V. P. and Director
Dated: By:
------------------------------
Albert Wicks
Director
Dated: July 14, 1997 By: s\WILLIAM R. KNEPSHIELD
------------------------ ------------------------------
William R. Knepshield
Director
Dated: By:
------------------------------
George Kellam
Director
-43-
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is hereby executed as of this 31st day of
May, 1996 by and between Surgical Marketing Specialists, Inc. a/k/a SMS, Inc.
f/k/a Sales and Marketing Services, Inc. ("SMS" or the "Business"), a Maryland
Corporation with its principal place of business at 7136 Montevideo Road,
Jessup, Maryland 20794, W. Richard Smith ("W.R. Smith"), Marlyn Smith, adults
residing at 2833 Cox Neck Road, Chester, Maryland 21619, Laura Smith Johnson,
and SICLAR CORPORATION ("Sklar" or "Buyer'1), a Pennsylvania Corporation with
its principal place of business at 889 Matlack Street, West Chester,
Pennsylvania 19382.
WHEREAS, SMS is in the business of importing and marketing medical and
surgical instruments and products; and
WHEREAS, Sklar desires to acquire the assets of SMS; and
WHEREAS, Sklar and SMS have reached an agreement whereby SMS will sell to
Sklar all of its assets, as more fully identified herein, except such assets as
may be specifically excluded herein.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
and for other good and valuable consideration, the parties, intending to be
legally bound, agree as follows:
1. Sale and Purchase of Assets. At the closing hereinafter provided for,
SMS shall sell, transfer and assign to Sklar, and Sklar shall purchase from SMS
all of SMS's right, title and interest in and to the assets of the Business (all
but the Excluded Assets) ("Assets"), including, without limitation, all of the
assets set forth below, free and clear of all liens, claims and encumbrances,
all as adjusted for changes occurring in the ordinary course of business as
permitted hereunder between the date hereof and the date of Closing. The Assets
shall not include assets specifically excluded herein.
1.1 All Assets. All property and assets of SMS of every kind and
description wherever located, including, without limitation, claims, rights,
choses in action, whether choate or inchoate, licenses, trademarks, contracts of
employees and sales representatives as indicated on Exhibit E, technology,
tradenames, inventory, equipment and other assets described generally in the
attached Exhibits, except the Excluded Assets. The inventory shall include all
inventory listed in Exhibit A (hereinafter the "INVENTORY"). The Assets which
are not included in this sale are listed in Exhibits B- 1 and B-2 (the "Excluded
Assets"). In addition to the Assets, Sklar shall have purchased all W.R. Smith's
stock of Sales and Marketing Services, Inc. prior to closing.
1.2 SMS Customer Lists and Business Records. All customer files,
customer lists and customer records and other business records of SMS. SMS and
W.R. Smith agree not to use any copies of said Customer lists, files and
records, or to use said Customer
<PAGE>
'p either directly or indirectly, except as allowed in Exhibits B. B-1 and B-2
and W.R. Smith's disclosure document.
1.3 SMS Telenhone Numbers. SMS's business telephone numbers, to wit,
(410) 799-7044, (800) 825-6071, (410) 799-1070 (Fax) and 6849069 (Telex). SMS
will assist in the immediate transfer of said telephone numbers, and execute all
assignments of said telephone numbers reasonably requested by Sklar in order to
effectuate the transfer of said telephone numbers without delay. Sklar will
answer the above phone numbers as "SMS" for a period of six (6) months (and
SMS/Sklar thereafter), and shall refer customers to O.R. Marketing, Inc. for
service and sales of items detailed on Exhibit B-1 and otherwise to the Sklar
sales department.
1.4 Non-Competition Agreement. The agreements of SMS, W.R. Smith,
Laura Smith Johnson and Greg Johnson not to disclose confidential information
concerning SMS, Sklar or their respective businesses, and not to compete with
Sklar, as set forth in the Confidentiality and Non-Competition agreement
attached hereto as Exhibit F. SMS and W.R. Smith understand and agree that the
foregoing agreements are a material part of the consideration and inducement to
Sklar to execute this agreement.
1.5 Trademarks and Tradenames. All right title and interest of SMS,
W.R. Smith and any affiliate thereof in and to any and all trademarks,
tradenames, and copyrights, including, without limitation, licenses and
marketing rights of any nature whatsoever, as set forth in Exhibit D.
1.6 Contracts. All rights under SMS's written contracts which are
material to the business specifically identified in Exhibit E. and accepted by
Sklar herein, and such other assets, tangible or intangible, including but not
limited to contract rights, agreements, intellectual property, catalogues, art
work, literature, and licenses, oral or written, relating to the business of
SMS.
2. Purchase Price. As full consideration for the Assets sold and purchased
hereunder including, without limitation, the Inventory and Confidentiality and
Non-Competition Agreements, Sklar shall pay to SMS and/or for the account of SMS
the total sum set forth below, subject to the adjustments set forth in Paragraph
3. Sklar shall make payments to SMS or for the account of SMS as follows:
2.1 ONE MILLION SEVEN HUNDRED THOUSAND DOLLARS ($1,700,000.00) payable
at closing via wire transfer to Columbia Bank, Park View Building, 10480 Little
Patuxent Parkway, Columbia, Maryland 21044-3523, to be paid on account of
inventory.
2.2 ONE HUNDRED NINETY ONE THOUSAND TWO HUNDRED THIRTY ONE DOLLARS and
Sixty Cents ($191,231.60) plus interest at nine percent (9%) per annum totaling
Two Hundred Thousand Dollars ($200,000.00) principal and interest, payable
2
<PAGE>
to SMS in cash or certified bank check six (6) calendar months following
closing, to be paid on account of inventory.
2.2.1 The principal payable to SMS under this provision shall be
increased/decreased by the following:
2.2.1.1 The amount of credits from suppliers not
specifically accounted for in any exhibits to this Agreement, but which credit
is acknowledged to be due SMS after the close of business on May 31, 1996 and is
assigned to Sklar by Exhibit A.
2.2.1.2 The value of replacement inventory from vendors not
accounted for specifically in any exhibits, and which replacement inventory is
delivered to Sklar.
2.2.1.3 The value of all merchandise returned by customers
for which SMS issues a credit to that customer subsequent to May 31, 1996, and
which merchandise is delivered to Sklar.
2.2.1.4 Any and all draws and advances to SMS sales
representatives and any expense reimbursement incurred after May 31, 1996, which
cover the period after May 31, 1996 and which Sklar has acknowledged as ordinary
and necessary.
2.2.1.5 All SMS salaries and expenses which are related to
the management and relocation of records, equipment and inventory after May 31,
1996.
2.2.1.6 The cost of maintaining voice mail after May31,
1996.
2.2.1.7 The verified cost of all goods, including freight
and customs charges of goods consigned to SMS which are received, or released
from customs, after May 31, 1996 and which are thereafter delivered to Sklar,
which cost shall not exceed $10,000.00 more than the values shown in Exhibit U,
attached hereto
2.3 Sklar shall assume only such of SMS's trade accounts payable as
are specified in Exhibit C hereto, $900,386.06 relating to the business and
assets acquired hereunder. The assumption of said accounts payable is payment
paid on account of inventory, to extent inventory is not paid in lull by
payments under Paragraphs 2.1 and 2.2, the balance of such assumed payments is
allocated to goodwill. Providing Sklar complies with its duty to indemnify for
accounts payable assumed it provided under Paragraph 16, then Sklar shall be
deemed to have satisfied this obligation.
2.4 FIVE HUNDRED FIFTEEN THOUSAND ONE HUNDRED SEVENTY THREE DOLLARS
and Sixteen Cents ($515,173.16) plus interest at the rate of nine
3
<PAGE>
percent (9%) payable to SMS in eighteen (18) equal consecutive monthly
installments of THIRTY THREE THOUSAND THREE HUNDRED THIRTY THREE DOLLARS and
Thirty-Three Cents ($33,333.33) each commencing on the first of the thirteenth
calendar month after closing and on the first of each month thereafter,
allocated to goodwill. This Note shall be subject to adjustment under Paragraph
7.5 to the extent set forth therein.
2.5 The Purchase Price shall be secured by a Security Agreement in the
form of the Security Agreement attached hereto and incorporated herein as
Exhibit 0, and evidenced by Promissory Notes in the form of the Promissory Notes
attached hereto and incorporated herein as Exhibits P1 P2 and perfected by UCC 1
Financing Statements, in the form of the UCC 1 Financing Statements attached
hereto and incorporated herein as Exhibits 01. 02 and 03. The form of Exhibits,
0, Q1, Q2, and Q3 shall be satisfactory to Sklar's Bank secured creditor,
Meridian Bank, which shall be determined by Sklar prior to closing. Any
subordination agreement entered into between Meridian Bank and SMS shall contain
a provision that Meridian Bank may not unreasonably withhold its consent to
Sklar punctually making the payments required hereunder providing Sklar is not
then in default with its obligations to the Bank. Collection of the Purchase
Price shall further be guaranteed by Don Taylor ("Guarantor") as set forth in
Paragraph 2.6 below.
2.6 Guaranty of Collection. Subject to the prior and senior rights of
Meridian Bank, the Guarantor (Don Taylor) hereby irrevocably guarantees
collection by the SMS of all Sklar's obligations hereunder. If, after reasonable
collection efforts by SMS following the occurrence of an Event of Default under
the this Agreement, Sklar's obligations hereunder remain due and owing in whole
or in part, Guarantor agrees to pay such Sklar's obligations hereunder to the
SMS upon demand. Guarantor further agrees to render reasonable assistance to SMS
in its collection efforts under the this Agreement. During the course of such
collection efforts, Guarantor will not sell, transfer or otherwise dispose of
any material asset of Guarantor other than as required pursuant to any document,
agreement or instrument by and between Meridian Bank and Guarantor. As set forth
in the Subordination Agreement and the Intercreditor Agreement SMS acknowledges
its ability to be paid by Sklar and is junior and subordinate to Meridian Bank.
2.7 Financing Contingency. Notwithstanding anything contained herein
to the contrary, this entire Agreement, all other Agreements executed pursuant
hereto and parties' obligations and duties thereunder, are contingent upon
Sklar's obtaining one hundred percent (100%) financing from Meridian Hank on or
before Closing for the payment required under Paragraph 2.1 above
($1,700,000.00). Such funding from Meridian Bank shall not require any changes
to this Agreement or the Exhibits unless such change is consented to in writing
by SMS and be a condition precedent to the parties' obligations under this
Agreement and all agreements attached hereto. If Sklar does not obtain such
funding from Meridian despite its best efforts to acquire same on or before
Closing, this Agreement and all agreements executed pursuant hereto, but not the
Confidentiality Agreement entered into prior to this Agreement, shall be null
and void, and there shall be no further liabilities between the parties.
4
<PAGE>
3. Adjustments to Purchase Price. The purchase price shall be adjusted by
netting out the following:
3.1 The purchase price shall be reduced by the amount of the decrease
or discrepancy in the value of the INVENTORY at time of closing compared to the
value of said INVENTORY of Two Million Dollars ($2,000,000.00) reflected in
Exhibit A. The value of the inventory shall be determined in accordance with the
following formula: Average Cost per generally accepted accounting principles
(GAAP) plus freight and dutv of eight percent (8%). Inventory value shall exceed
One Million Seven Hundred Thousand Dollars ($1,700,000.00)
3.2 The purchase price shall be adjusted by the amount by which face
value of trade accounts payable on the date of closing, assumed by Sklar at
closing are in excess of $900,000.00.
3.3 SMS acknowledges that the INVENTORY sold hereunder may contain
slow moving, outdated, obsolete or excess items. The parties shall use their
best efforts to sell all of the INVENTORY in the ordinary course of business.
Any INVENTORY remaining unsold one (1) year after the Closing date ("Excess
Inventory") shall be computed on or about June 30, 1997. The purchase price
shall be reduced by the value in excess of $75,000.00 of any inventory remaining
unsold one (1) year after the closing date, except that the slow-moving
laparoscopic inventory may not exceed $25,000.00 of such slow-moving inventory.
The value of such excess inventory shall be the same formula as is found under
Paragraph 3.1.
3.4 Any said adjustments may, at Sklar's option, be deducted from any
payment due to SMS under Paragraph 2.4 above.
4. Liabilities. Other than the payables listed in Exhibit E attached
hereto, Sklar is assuming no liabilities hereunder. SMS shall, at closing, give
an affidavit of accounts payable to Sklar, representing and warranting the same
to be accurate as of closing. The parties agree to waive compliance with the
Bulk Sale law. SMS warrants that upon Closing, its payables will not exceed
$150,000.00. SMS indemnifies and holds Sklar harmless as to any claims made
arising out of any trade payables other than the accounts payable Sklar
expressly assumes per Exhibit C. SMar indemnifies SMS and holds it harmless as
to any claim arising out of Sklar's failure to satisfy the accounts payable it
expressly assumes per Exhibit C.
5. Closing. The date of Closing of this transaction ("Closing") shall he on
or before May 31, 1996, time being of the essence, or on such date mutually
agreed to by the parties in writing. At closing, title to and possession of the
assets shall be transferred, conveyed and delivered from SMS to SKLAR. The
closing shall be at the offices of Sklar or at such other location as the
parties may agree in writing.
5.1 Sklar shall remove all of the assets sold hereunder from the SMS
facility in Jessup, Maryland within a reasonable period of time following the
closing, but in any
5
<PAGE>
event not later than thirty (30) days after the Closing Date, unless otherwise
agreed in writing by the parties.
6. Sklar's Conditions of Closing. Sklar's obligations hereunder shall be
subject to the satisfaction of the conditions set forth below:
6.1 Sklar shall have received from counsel for SMS a favorable opinion
dated as of the Closing date, in form and substance satisfactory to Sklar and
its counsel, to the effect that to the best of their knowledge:
6.1.1 SMS is a duly organized and validly existing corporation in
good standing under the laws of the state of Maryland.
6.1.2 No provisions of SMS's Articles of Incorporation or
By-Laws, and to the best of SMS's knowledge, no provision of any contract,
agreement or other agreement to which it is a party prevent SMS from delivering
good and marketable title to the Assets in the manner contemplated by this
Agreement, or would otherwise be breached by the consummation of the
transactions contemplated hereunder.
6.1.3 SMS, W.R. Smith, Marlyn Smith and Laura Smith Johnson have
the full power, right and authority to execute this Agreement and consummate the
transactions contemplated herein.
6.1.4 This Agreement constitutes a valid and binding obligation
of the parties in accordance with its terms, subject to limitations with respect
to enforcement imposed by law in connection with bankruptcy or similar
proceedings.
6.1.5 The Assets sold, transferred and conveyed pursuant to the
terms of this Agreement, on delivery to Sklar, will be free and clear of any
liens, claims, charges or encumbrances.
6.2 No action or proceeding shall have been instituted before any
court, agency or other governmental body to restrain or prohibit the
transactions contemplated hereby.
6.3 The representations and warranties of SMS, W.R. Smith, Marlyn
Smith, and Laura Smith Johnson, contained in this Agreement shall be true and
correct in all respects as of the date of closing, and all covenants and
agreements of SMS to be performed on or before the Closing shall have been duly
performed.
6.4 There shall have been no material adverse change or damage to the
Assets or the business of SMS.
6
<PAGE>
6.5 SMS and W.R. Smith, Laura Smith Johnson and Greg Johnson shall
have delivered to Sklar the fully executed Confidentiality and Non-Competition
Agreement in the form attached hereto as Exhibit F.
6.6 W. Richard Smith, Laura Smith Johnson and Greg Johnson shall have
delivered to Sklar the folly executed Employment Agreements in the form attached
hereto as Exhibit G.
7 Sellers' Representations and Warranties. SMS and W.R. Smith hereby
represent and warrant the following to be true and correct to the best of their
knowledge, information and belief as of the time of closing (unless otherwise
specified herein):
7.1 SMS owns all Assets sold hereunder, including, without limitation,
the INVENTORY, free and clear of all liens, claims, demands, security interests
and encumbrances of any nature whatsoever.
7.2 SMS, Inc. is a corporation duly organized and existing under the
laws of the State of Maryland with its principal place of business at 7136
Montevideo Road, Jessup, Maryland 20794, and is and shall be duly authorized and
empowered to execute this Asset Purchase Agreement, and to do any and all things
required to consummate all of the transactions contemplated hereunder.
7.3 The execution and performance of this Asset Purchase Agreement and
all transactions contemplated hereunder, have been and will be duly authorized
by SMS's Board of Directors and stockholders, and shall be legally binding upon
SMS. SMS is not bound by or subject to any contractual or other obligation which
would be violated by SMS's execution or performance of this Asset Purchase
Agreement.
7.4 To the best of SMS's and W.R. Smith's knowledge, information and
belief, SMS's and W.R. Smith's execution and delivery of this Asset Purchase
Agreement and consummation of the transactions contemplated hereunder do not
conflict with or result in the breach of SMS's certificate of
incorporation/charter, by-laws, or any statute, regulation, or court or
administrative order or process, or any agreement to which SMS or W.R. Smith is
a party or by which they or either of them is bound. SMS must, however, receive
consent of PHARMA-PLAST International A/S, which is bound to not unreasonably
withhold its consent to the assignment of its Distribution Agreement with
Seller.
7.5 SMS represents and warrants that the INVENTORY sold hereunder
meets the requirements of all applicable laws and regulations of the United
States and all regulatory agencies thereof, including but not limited to the
U.S. Food and Drug Administration. Without limiting the generality of the
foregoing, SMS represents and warrants that the INVENTORY meets all applicable
metallurgical requirements and labeling requirements for surgical grade
stainless steel, if so described or designated in the catalogs, sales
literature, labels, packaging, or other literature. SMS further represents and
warrants that all
7
<PAGE>
representations relating to the inventory which are set forth in labels,
packaging, catalogs, and sales literature are true and correct. SMS agrees to
replace any INVENTORY item(s) found to be misbranded, adulterated, otherwise in
violation of any applicable laws or regulations, or otherwise subject to recall,
seizure or injunction by, inter alia, the U.S. Government or any regulatory
agency thereof including, but not limited to, the U.S. Food and Drug
Administration. SMS agrees to defend, indemnify, and hold Sklar harmless from
and against any claims, that the INVENTORY, or any item therefrom does not meet
the requirements of any applicable laws and regulations of the United States or
any regulatory agency thereof, including, but not limited to, the U.S. Food and
Drug Administration, provided that Sklar reasonably notifies SMS and W.R. Smith
of such claim in writing, and fully cooperates in SMS's and W.R. Smith's
investigation and defense of such claims, and further providing that Sklar shall
limit its total recourse against SMS to the extent of $600,000.00 including
replacement of inventory, fines, penalties, loss of business, consequential and
all other damages of any type or nature. SMS shall supply to Sklar all violation
notices received from FDA, U.S. Customs service or from any other U.S. or other
regulatory agency, for the past three (3) years relating to SMS, suppliers, or
products sold by SMS. This documentation attached hereto as Exhibit S. Any
adjustment made under this Paragraph shall be made as an adjustment to the
absolute dollars payable whether principal and/or interest, due under Exhibit
P2.
7.6 [Intentionally left blank]
7.7 The Exhibits to this Agreement set forth true, complete and
accurate information describing the matters set forth therein.
7.8 There has been no event prior to closing which has materially and
adversely affected any of the Assets sold or transferred hereunder.
7.9 There is no suit, claim, action or proceeding now pending, or
threatened, nor is SMS or W.R. Smith aware of any grounds therefor, to which SMS
is a party or which may result in any judgment, order, decree, liability or
other determination which will or could have any material adverse effect upon
any of the Assets sold or transferred hereunder, or upon SMS's ability to
perform this agreement. No such judgment, order or decree has been entered
against SMS, nor has SMS incurred any liability which could have such effect.
7.10 SMS has furnished to Sklar its financial statements for the years
ended 1994 and 1995, respectively, and its financial statement for the three (3)
month period ended March 31, 1996. There are no liabilities of SMS, contingent
or otherwise, including, without limitation, any tax liability of any nature
whatsoever, which are not disclosed by or reflected fully in such financial
statements or disclosed in a schedule provided by SMS to Sklar. SMS has duly
filed all federal, state, county and city income tax returns and other tax
returns of every kind and description, and there are presently no claims for tax
deficiencies pending against SMS by any taxing authority, nor does SMS know of
any basis for the making of any claim by any taxing authority for any tax
deficiency against SMS. SMS further warrants and
8
<PAGE>
represents that all of its tax returns have been filed when due and that it has
not concealed material facts regarding its business from Sklar.
7.11 Since the date of its most recent financial statement referred to
in Paragraph 7.10 hereof, except as disclosed in this Agreement, SMS has not had
any change in its financial condition, assets, business or its customer list,
other than changes in the ordinary course of business, none of which changes in
the ordinary course of business has been materially adverse.
7.12 Neither SMS nor W.R. Smith are aware of any condition or
circumstance within or without SMS which would have a material adverse effect
upon Sklar, SMS or the business and assets sold hereunder.
7.13 The inventories set forth on the financial Statements referred to
in Paragraph 7.10 and in Exhibit A hereto are properly valued. Except for
obsolete items which have been fully written off, inventories consist of items
of quality and quantity currently usable and salable in the ordinary course of
business without markdown or discount. Seller holds no materials on consignment
and has title to no materials in the possession of others except as on Exhibit
K.
7.14 No purchase commitment for materials, supplies, component parts
or other items of inventory to which Seller is a party, is in excess of normal,
ordinary, usual and current requirements of its business or at a price in excess
of the current reasonable market price. All such purchase commitments are listed
on Exhibit R.
7.15 The Assets sold hereunder include, without limitation, all assets
necessary to the operation of the current business of SMS, excluding the
Excluded Assets.
7.16 Except as set forth in Exhibit L, SMS is not in default under any
of the contracts sold hereunder and, to the best of SMS's knowledge. no event
has occurred which with the passage of time or the giving of notice, or both,
would constitute a default under any such contract which individually or in the
aggregate would have a material adverse effect upon the financial condition or
the Business. (None)
7.17 SMS and W.R. Smith represent and warrant that the rights or other
interests with respect to trademarks, tradenames and copyrights sold,
transferred and assigned hereunder are assignable. SMS and W.R. Smith shall not
market, promote or sell any products bearing or reflecting any such trademarks,
tradenames or copyrights without the express written approval of Sklar.
7.18 Intentionally left blank
7.19 Intentionally left blank
9
<PAGE>
7.20 SMS and W.R. Smith represent and warrant that the gross profit
achieved by SMS for the period January, 1995 through December, 1995 is as
reflected in the "Customer/item/class multi-period analysis delivered by SMS to
Sklar during the negotiation of this transaction as set forth in Exhibit M. SMS
and W.R. Smith further represent and warrant that there no material adverse
changes have occurred which would limit Sklar's ability to achieve the same
profit in its future operation of the business sold hereunder.
7.21 SMS, W.R. Smith, Laura Smith Johnson, and Greg Johnson will use
their best efforts to insure the continuity and seamless transition to Sklar of
SMS's relationships with all SMS customers, vendors, suppliers, and sales
representatives.
7.22 Intentionally left blank
7.23 For the period set forth in their respective Non-Competition
Agreements, Laura Smith Johnson and Gregory Johnson and W.R. Smith shall not:
7.23.1 Compete with Sklar, any affiliate of Sklar, or the SMS
business sold hereunder within the Continental U.S. (the 'Territory"), except as
specifically permitted under the respective Confidentiality and Non-Competition
Agreements.
7.23.2 Engage in any business substantially similar to the
businesses of Sklar within the territory except as specifically permitted under
the Confidentiality and Non-Competition Agreements.
7.23.3 Request any customers, vendors or suppliers of Sklar or
the business sold hereunder to curtail or cancel their business with Sklar.
Solicit or divert any customers or potential customers of Sklar or the business
sold hereunder to any other person, company, firm or business.
7.23.4 Disclose to any person, firm, corporation or any other
entity, any confidential information concerning Sklar or the business sold
hereunder.
7.23.5 Induce, or attempt to influence, any employee of Sklar to
terminate employment with Sklar or to enter into any employment or other
business relationship with any other person, firm, or corporation; or
7.24 Act or conduct themselves in any manner which is clearly inimical
or contrary to the best interests of Sklar.
7.25 Engage in any practice the purpose of which is to evade the above
provisions, or commit any act which detrimental to the successful continuation
of Sklar or the SMS business, sold under the Asset Purchase Agreement.
10
<PAGE>
8. Representations and Warranties of Buyer. Buyer hereby represents and
warrants the following to be true as of the date of closing:
8.1 Sklar Corporation is a corporation duly organized and existing
under the laws of the Commonwealth of Pennsylvania with its principal place of
business at 889 5. Matlack Street, West Chester, Pennsylvania 19382, and is and
shall be duly authorized and empowered to execute this Asset Purchase Agreement,
and to do any and all things required to consummate all of the transactions
contemplated hereunder.
8.2 The execution and performance of this Asset Purchase Agreement and
all transactions contemplated hereunder, have been and will be duly authorized,
and shall be legally binding upon Sklar. Sklar is not bound by or subject to any
contractual or other obligation which would be violated by its execution or
performance of this Asset Purchase Agreement.
8.3 To the best Sklar's knowledge, information and belief, Sklar's
execution and delivery of this Asset Purchase Agreement and consummation of the
transactions contemplated hereunder do not conflict with or result in the breach
of Sklar's certificate of incorporation/charter, by-laws, or any statute,
regulation, or court or administrative order of process, or any agreement to
which Sklar is a party or by which it is bound.
8.4 There is no suit, claim, action or proceeding now pending, or
threatened, nor is Sklar aware of any grounds therefor, to which Sklar is a
party, or which may result in any judgment, order, decree, liability or other
determination which will or could have any material adverse effect upon Skiar's
ability to perform this agreement. No such judgment, order or decree has been
entered against Sklar, nor has Sklar incurred any liability which could have
such effect.
9 Representations and Warranties to Survive Closing. All of the
representations and warranties contained herein (including all statements
contained in any exhibit or schedules hereto), are a material part of the
consideration for the sale of the assets, and shall survive closing.
10. Oneration Pending Closing. During the period from the date hereof to
the Date of Closing:
10.1 SMS shall:
10.1.1 Conduct the Business according to the ordinary and usual
curse and maintain and preserve the organization of the Business, its employees
and relationships with suppliers, customers and others; and
10.1.2 Inform Sklar in writing immediately of the development of
any material matters relating to the business, including, without limitation,
any adverse changes
11
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in the results of operations or financial position of the Business, or any
litigation, proceeding or government investigation instituted or threatened
against Seller relating to the Business or the occurrence of any factor which
might give rise to any litigation, proceeding or investigation as aforesaid.
10.2 SMS shall not, without the prior written consent of Sklar:
10.2.1 Mortgage, pledge or subject to lien, security interests or
other obligations or encumbrance any of the Assets;
10.2.2 Sell or otherwise transfer any of the assets; not in the
usual contracts; or
10.2.3 Enter into any contract or agreement relating to the
business ordinary course or terminate or make any material change in any of such
10.2.4 Increase or agree to increase in any manner the
compensation of any of the employees of the Business or commit the Business to
any pension, retirement or profit sharing plan or agreement or employment
agreement with or for the benefit of any employee or other person.
10.3 SMS shall keep the Assets adequately insured against fire and
casualty until the Date of Closing.
11. Liabilities. Sklar assumes no liabilities other than those expressly
assumed herein. SMS agrees to indemnify, defend and hold Sklar harmless from and
against any and all liabilities imposed upon Sklar as a result of this
Agreement, other than those expressly assumed herein. In addition to such
remedies as Sklar may have at law or in equity, Sklar shall be permitted to set
off any liability incurred as a result of SMS not satisfying the accounts
payable not assumed by Sklar as set forth in Exhibit C against the Promissory
Notes, Exhibits P1 and 1)2 attached hereto.
12. Third Party Consents and Governmental Approval. No consent or approval
of any third party or of any court or governmental agency or instrumentality is
required for the parties to execute and deliver this Agreement and any related
documents or to consummate the transactions contemplated herein or therein.
13. No Brokers or Finders. Neither party has retained a broker to assist in
consummating this transaction. No person has or will have, as a result of the
transactions contemplated by this Agreement and the related documents, any
right, interest, or valid claim against or upon either party for any commission,
fee, or other compensation as a finder or broker because of any act or omission
of either party.
12
<PAGE>
14. Disclosure No representation or warranty made by SMS in this agreement
contains any untrue statement or fails to state a material fact necessary to
make the statements contained herein not misleading. From the Effective Date
through the Closing Date, each party shall give promptly to the other notice in
writing of any event, condition, or circumstance which would cause any
representation or warranty of the party contained in this Agreement to become
misleading or inaccurate or which would constitute a breach of this Agreement.
15. Transfer. Simultaneously with the payment on the Date of Closing as
specified hereinabove, SMS shall convey by bill of sale absolute, all personal
property other than the Excluded assets in Exhibit B to Sklar or by assignment
or endorsement of certificates of title, as the case may be, free of all liens,
encumbrances, conditions and limitations. Items in Exhibit D shall be
transferred by assignment.
16. Indemnity. Sklar and SMS shall indemnify, defend, and hold each other
and their respective directors, officers, agents and affiliates harmless from
and against any claim, demand, cause of action, judgment, loss, liability, cost,
or other expenses whatsoever, including, without limitation, reasonable expenses
of litigation and investigation and reasonable fees and costs of attorneys,
accountants and other professionals incurred in the defense thereof or the
enforcement of rights hereunder incurred as a result of any breach of any
representation, warranty, covenant, or agreement contained in this Agreement. In
addition, SMS shall indemnify Sklar from and against any product liability claim
or judgment based on or arising out of the sale of any product sold prior to the
close of business on May 31, 1996, and Sklar shall hold SMS harmless and
indemnify SMS from any act, transaction, or sale occurring after Closing. SMS
and Sklar each shall add the other as an "additional insured" to all insurance
policies that each carry respecting liability, property, and casualty insurance.
Policies for liability shall be maintained at their current levels for
twenty-four (24) months after closing. The contents of this covenant of
Indemnity and Hold Harmless shall remain secret and kept in confidence.
17. Defense and Settlement of Claims. If any person entitled to
indemnification hereunder is threatened in writing with any claim or lawsuit by
any third party, the indemnified party shall give written notice thereof as
promptly as reasonably practicable to the party required to provide
indemnification. The Indemnifying party shall not make any settlement of such
claim or lawsuit without the written consent of the Indemnified Party, which
consent shall not be unreasonably withheld, however, such consent shall not be
required regarding the settlement or compromise of accounts payable assumed
hereunder.
18. Confidentiality and Non-Competition. SMS and W.R. Smith, Laura Smith
Johnson and Greg Johnson agree to execute confidentiality and non-competition
agreements in the form attached hereto as Exhibit F.
19. Employment of W.R. Smith. Laura Smith Johnson and Greg Johnson. Sklar
shall employ W.R. Smith, for an initial period of one (1) year and Laura Smith
Johnson and Greg Johnson for an initial period of eighteen (18) months pursuant
to the employment agreements attached hereto as Exhibit G subject to the terms
and conditions specified therein for
13
<PAGE>
the first year following closing. Laura Smith Johnson and Greg Johnson shall
work to successfully integrate the operations and business of SMS into Sklar.
20. Termination. This agreement may be terminated prior to the closing Date
i) by mutual agreement of the parties; ii) by SMS by notice to the Sklar if the
Closing shall not have taken place on or before May 31, 1996; iii) by either
party if there has been a breach by the other party of any representation,
warranty, covenant, or agreement contained herein; iv) if any condition
contained in this agreement which must be met prior to the closing becomes
impossible to fulfill; v) if either party is unable to obtain any consent,
authorization, or approval necessary to consummate this agreement. If this
Agreement is terminated, it shall become wholly void and of no further force and
effect, but such termination shall not constitute a waiver by either party of
any claim it may have for damages caused by reason of breach of representation,
warranty, covenant, or agreement made by the other party in this Agreement.
21. Exnenses. Each of the parties shall bear its own expenses incident to
this Agreement and the Transactions contemplated hereby, including without
limitation, all fees and disbursements of counsel, accountants, and financial
advisors retained by such party, whether or not the transactions contemplated in
this agreement are consummated.
22. O.R. Marketing. Inc. With the exception of Jarit Brand instruments, for
a period of thirty-six (36) months after Closing (the "Restricted Period"), no
instruments other than Sklar brand instrument (as defined in the current Sklar
catalog) may be sold by O.R. Marketing, Inc. Additionally, during such
Restricted Period, O.R. Marketing, Inc. shall purchase all its requirements for
all Sklar Products and all substantially similar products except for Jarit Brand
from Sklar, providing Sklar shall not unreasonably withhold the sale of its
products from O.R. Marketing, Inc. During the Restricted Period, the territorial
limitations set forth in Exhibit B-l shall apply [to] O.R. Marketing, Inc.
During the Restricted Period, Sklar and O.R. Marketing, Inc. will each receive
50% of the "Gross Profit" made on the sales of Sklar Products, "Gross Profit"
being defined in this Paragraph as 50% of the difference between O.R. Marketing,
Inc.'s selling price to its customers and Sklar's cost of goods sold.
Distribution of such profits and an accounting for same shall occur with such
frequency as is reasonable, but no less frequently than each calendar quarter.
23. Miscellaneous. The following miscellaneous provisions shall apply to
this Agreement.
23.1 Counterpart Execution. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute and be the same instrument.
23.2 Severability. Any provision of this Agreement which is held to be
invalid, illegal or unenforceable in any jurisdiction, shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, or illegality,
without effecting in any way the remaining provisions of this Agreement.
14
<PAGE>
4 23.3 Governing Law. This Agreement shall be deemed to be made in the
Commonwealth of Pennsylvania and shall in all respects be interpreted,
construed, and governed by and in accordance with the laws of the Commonwealth
of Pennsylvania without any presumption or construction against the party
causing the Agreement to be drafted.
23.4 Headings. The headings and subheadings are inserted convenience
of reference only and shall not affect the interpretation of this Agreement.
23.5 Amendment. This Agreement may be amended only in writing, signed
by all of the parties.
23.6 No Waiver. The Failure of either party to enforce at any time any
of the provisions of this Agreement shall not be construed to be a waiver of the
right of such party thereafter to enforce each and every provisions of this
Agreement.
23.7 Independent Contractors. The parties are independent contractors,
and neither party shall act or attempt to at, or represent itself as, an agent
of the other party.
23.8 Successors and Assigns. This Agreement shall be binding upon.
shall insure to the benefit of, and shall be enforceable by the respective
successors of the parties.
23.9 Notices. Any notice due under this Agreement, including any
notice of termination, shall be in writing and delivered by certified mail,
return receipt requested, and mailed to each party at its address above,
addressed to "Chief Executive Officer," with a copy to the General Counsel.
23.10 Assignment and Transfer. This contract may not be assigned or
transferred to any other party.
23.11 Authorization. This Agreement is executed by an officer of each
party duly authorized by its Board of Directors to enter into the obligations
and commitments set forth in this Agreement. This Agreement represents a valid
and binding agreement of each party.
23.12 Entire Agreement. This Agreement constitutes understanding
between the parties with respect to the subject matter hereof, all prior or
understandings being merged into this Agreement or canceled.
24. SMS's Closing Obligations. At Closing, SMS shall deliver to Sklar the
following documents:
24.1 Assignments, Consents, Bills of Sale, Certificates of Title and
other documents or instruments of transfer and which shall contain full
warranties of title as shall be
15
<PAGE>
effective to vest in Buyer all of Seller's right, title and interest in and to
all of the Assets being conveyed hereunder, free and clear of all liens,
charges, encumbrances and restrictions;
24.2 All contracts, files, commitments and rights pertaining to
Seller's Business and other data relating to is operations;
24.3 A release, in form satisfactory to counsel for Sklar, of any lien
or security interest in the Assets.
24.4 The Confidentiality and Non-Competition Agreements fully executed
by SMS, W.R. Smith, Laura Johnson and Gregory Johnson.
24.5 The fully executed Employment Agreements of W.R. Smith1 Laura
Smith Johnson and Greg Johnson.
24.6 Closing Statement; and
24.7 Opinion of Seller's counsel.
25. Sklar's Closing Obligations. At Closing, Buyer shall deliver to Seller:
25.1 Payment of the sums due pursuant to this Agreement;
25.2 Resolution of Board of Directors of assignee of Buyer, if
appropriate, authorizing the execution of this Agreement and all documents
required for Closing;
25.3 Execution of all agreements executed by Seller which require
Buyer's agreement and execution;
25.4 Closing Statement.
26. Arbitration. The parties hereto shall take any and all disputes under
this Agreement and any of the Exhibits attached hereto to arbitration, before
the American Arbitration Association, which shall hold a hearing concluding such
issues within forty-five (45) days of submission. Three (3) Arbitrators shall be
selected, who shall sit within the West Chester, Pennsylvania Metropolitan area.
The Arbitration result shall be binding.
16
<PAGE>
IN WITNESS WHEREOF, the parties have signed and dated this Agreement in the
spaces below.
SMS, INC. SKLAR CORPORATION
s\W Richard Smith, President s\ Don Taylor, President
Date: June 4, 1996 Date: June 4, 1996
s\ W. Richard Smith
s\ Laura Smith Johnson
s\ Marlyn Smith
Limited Joinder of O.R. Marketing Inc.
O.R. Marketing, Inc. joins in the above Asset Purchase Agreement for the
limited purpose of consenting to the provisions of Paragraph 22.
O.R. MARKETING, INC.
By: s\W. Richard Smith,
Sole Director and
Shareholder
17
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