FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the six month period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 1-6107
SKLAR CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 44-0625447
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
889 S. Matlack Street, West Chester, Pennsylvania 19382
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (610) 430-3200
Check whether the issuer (l) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ________ No ________
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding October 1, 1998
- ------------------------------------ -----------------------------
(Common stock, $0.10 par value) 794,423
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
<PAGE>
SKLAR CORPORATION
INDEX
Page No.
Part I Financial Information
Balance Sheet -
September 30, 1998 and March 31, 1998 .................. 3
Statement of Income (Loss) -
three and six months ended September 30, 1998 and 1997 . 4
Statement of Cash Flows -
six months ended September 30, 1998 and 1997 .......... 5
Notes to condensed financial statements ........................ 6 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................10 - 11
Part II Other Information
Item 1 Legal Proceedings .................................. 11 - 12
Item 3 Defaults Upon Senior Securities .................... 12
Item 5 Other Information .................................. 12
Item 6 Exhibits and Reports on form 8-K ................... 12
2
<PAGE>
SKLAR CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS 9/30/98 3/31/98
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 71,910 $ 12,885
Accounts Receivable 2,240,804 2,547,506
Inventories (Note 5) 3,167,605 3,142,043
Prepaid Expenses 218,799 199,262
---------- ----------
TOTAL CURRENT ASSETS 5,699,118 5,901,696
EQUIPMENT AND IMPROVEMENTS (Note 6) 632,284 630,264
GOODWILL (Note 7) 558,468 879,830
OTHER ASSETS 54,714 106,636
---------- ----------
TOTAL ASSETS $6,944,584 $7,518,426
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash Overdraft $ 74,028 $ 294,816
Short-term Bank Borrowings (Note 2) 1,144,000 2,085,000
Current Portion-Long-Term Debt and
Capital Lease Obligations 131,250 232,214
Trade Accounts Payable 2,617,187 2,100,424
Accrued Expenses 265,820 270,794
Accrued Income Taxes 46,405 2,509
---------- ----------
TOTAL CURRENT LIABILITIES 4,278,690 4,985,757
Long-term Debt and Capital Lease Payable 23,172 90,337
---------- ----------
TOTAL LIABILITIES 4,301,862 5,076,094
---------- ----------
CONTINGENCIES 0 0
STOCKHOLDERS' EQUITY (Note 9):
Series A convertible preferred stock, par value
$.01 per share, authorized, 35,000 shares;
24,825 issued and 21,954 shares outstanding 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; 1,237,711 issued
and 794,423 outstanding 123,771 123,771
Additional Paid-in Capital 2,106,482 2,106,482
Retained earnings 563,259 362,869
---------- ----------
2,793,760 2,593,370
---------- ----------
Less treasury stock 151,038 151,038
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 2,642,722 2,442,332
---------- ----------
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $6,944,584 $7,518,426
========== ==========
</TABLE>
See notes to financial statements
3
<PAGE>
SKLAR CORPORATION
STATEMENTS OF INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Month Ended
9/30/98 9/30/97 9/30/98 9/30/97
<S> <C> <C> <C> <C>
Revenues:
Net Sales (Note 10) $ 3,418,405 $ 3,428,446 $ 6,651,867 $ 6,903,869
Cost and Expenses:
Cost of Goods Sold 1,713,183 1,963,135 3,553,023 3,932,599
Selling, General & Admin 1,465,203 1,275,390 2,763,814 2,728,508
Interest 49,692 111,171 105,744 210,148
----------- ----------- ----------- -----------
3,228,078 3,349,696 6,422,581 6,871,255
----------- ----------- ----------- -----------
Income (Loss) before taxes 190,327 78,750 229,286 32,614
Provision for Income Taxes
Currently Payable (Note 8) 25,000 3,261 28,896 3,261
----------- ----------- ----------- -----------
Net Income (Loss) 165,327 75,489 200,390 29,353
----------- ----------- ----------- -----------
Preferred Dividend
Requirement (Note 9) 68,607 68,607 137,213 137,213
----------- ----------- ----------- -----------
Gain (Loss) Applicable to
Common Shares 96,720 6,882 63,177 (107,860)
----------- ----------- ----------- -----------
Per Share Data:
Weighted Average Common Shares
Outstanding 794,423 744,423 773,112 744,423
----------- ----------- ----------- -----------
Gain (Loss) Per Share $ 0.12 $ 0.01 $ 0.08 $ (0.14)
=========== =========== =========== ===========
(Note 11)
</TABLE>
See notes to financial statements
4
<PAGE>
SKLAR CORPORATION
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
9/30/98 9/30/97
<S> <C> <C>
Net Cash Provided (used) by Operating Activities 1,470,770 163,225
Net Cash Provided (Used) by Investing Activities (81,693) (77,856)
Net Cash Provided (Used) by Financing Activities (1,330,052) (59,862)
----------- -----------
Net Increase/(Decrease) in Cash 59,025 25,507
Cash at Beginning of Period 12,885 7,506
----------- -----------
Cash at End of Period $ 71,910 $ 33,013
=========== ===========
</TABLE>
See notes to financial statements
5
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 MANAGEMENT'S REPRESENTATION
In the opinion of Management, the unaudited financial statements contain all
adjustments necessary to present fairly the financial position as of September
30, 1998 and the results of operations and cash flows for the period then ended.
NOTE 2 SHORT-TERM BANK BORROWINGS
On June 4, 1996 the Company entered into an amended and restated loan and
security agreement for $3,750,000, which reduced to $3,000,000 on March 31,
1997, and is collateralized by the sum of 80% of qualifying accounts receivable
plus 50% of inventories. Borrowings based on eligible inventories may comprise
up to 50% of the outstanding credit line amount. Qualifying accounts receivable
and inventory used as a basis for the September 30, 1998 borrowing totaled
$5,060,949. Unused available credit at September 30, 1998 was $1,178,950 after
considering outstanding letters of credit totaling $34,640 and a $20% market
risk reserve on forward currency contracts totaling $83,610.
Borrowings from this line bear interest at the Bank's National Commercial Rate
(BNCR) plus 1.25% (one and one-quarter percent). At September 30, 1998 the BNCR
was 8.5%. The interest expense on short-term bank borrowings for the six months
ended September 30, 1998 and 1997 amounted to $75,243 and $137,963,
respectively.
The short-term borrowing facility requires the Company to comply with certain
restrictive covenants, including maintenance of various financial ratios. The
note is guaranteed by the Company's president including an assignment of his
company common and preferred stock.
NOTE 3 LONG-TERM DEBT
The contract under which Dental Corporation of America (DCA) was acquired was
renegotiated in April 1992. The renegotiated contract, among other things,
changed the payment terms from three fixed $100,000 annual payments plus
interest and royalties based upon future sales to a fixed monthly payment of
$12,000 for one year commencing April 1, 1992 followed by a monthly payment of
$5,000 for six years commencing April 1, 1993. The gross payments and associated
liability under the new agreement are substantially the same as to those which
were recorded, including interest, upon the acquisition of DCA. Accordingly,
there has been no change to the financial statements in connection with this
renegotiation. The new agreement did however change the aggregate prospective
maturities. The Company has not made payments against this obligation since
September 1996, but continues to reflect the liability (See Item 1 (A), Legal
Matters under Part II, Other Information).
NOTE 4 BUSINESS OPERATIONS
The Company imports and distributes under the Sklar, Misdom-Frank and other
trademarks hand-held, non-electronic instruments for the surgical, dental and
veterinary fields.
6
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 BUSINESS OPERATIONS, continued
Effective May 31, 1996, the Company acquired certain assets and assumed certain
liabilities of Surgical Medical Specialists, Inc. (SMS) in a transaction 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 vendor liabilities, subject to the agreement, and $706,405 of
notes payable to the seller. Subsequent to the acquisition it was determined
certain inventory may have been misrepresented or mislabeled and could not be
sold in the United States in accordance with regulations of the U.S. Customs and
Food and Drug Administration.
During the fiscal year ended March 31, 1998, settlements were reached with the
seller and one of the vendors included in the original assumed liabilities. The
settlement transactions included a cash payment from the seller, cash payments
to a vendor by the seller and the company and a reduction of liabilities to the
seller and vendors. These transactions were accounted for by an offsetting
reduction of goodwill.
During the six months ended September 30, 1998, an agreement was reached with
another vendor included in the original assumed liabilities which encompasses a
cash payment of $120,000, in complete satisfaction of liabilities approximating
$470,000 to be made prior to December 31, 1998. This agreement has been recorded
at September 30, 1998 as a reduction of goodwill.
NOTE 5 INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
NOTE 6 EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided generally on the
straight-line method over the useful lives of the assets which are estimated to
be three to ten years for equipment and the shorter of the life of the lease or
the life of the asset for leasehold improvements.
NOTE 7 GOODWILL AND CATALOG DEVELOPMENT COSTS
Goodwill is amortized over fifteen or twenty years. For the six months ended
September 30, 1998, the goodwill originally booked upon the acquisition of DCA
was reduced by $50,000 to reflect the decrease in value consistent with the
declining volume in that business.
Prior to fiscal year 1996 costs incurred in creating, producing and distributing
new and existing catalogs were added to other assets and amortized at various
schedules ranging from 1-5 years. Subsequent to fiscal year 1995 catalog
development costs are expensed as incurred.
7
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 INCOME TAXES
Income taxes represent the State tax due. Federal income taxes payable are
offset by net operating loss carry-forwards and goodwill is reduced accordingly
to reflect the utilization of the loss carry-forwards. No tax loss
carry-forwards exist to offset state income tax payable.
As a result of the merger of Medco Jewelry Corporation and Misdom-Frank
Corporation, management believes there may be federal net operating loss
carry-forwards available to Medco Jewelry Corporation at the date of merger that
have transferred to Sklar Corporation. Such loss carry-forwards and additional
post-merger operating losses totaling approximately $1,036,000, which expire in
1999 ($50,000), 2000 ($14,000), 2001 ($461,000), and 2002 ($511,000), are
available as deductions from federal taxable income of future years.
NOTE 9 STOCKHOLDERS' EQUITY
As of September 30, 1998, of the 1,500,000 shares of Common Stock authorized,
794,423 are outstanding. Of the Series A Convertible Preferred Stock, 21,954
shares are authorized and outstanding.
The Series A Convertible Preferred Stock may be redeemed by the Company after
March 1, 1986 at a price of $100 per share and is entitled to a liquidation
preference of $100 per share plus cumulative dividends. Annual dividends of
$12.50 per share accrue cumulatively on the Series A Convertible Preferred Stock
commencing on July 1, 1984, payable on June 30 of each year commencing June 30,
1985. No dividends have been declared in the years 1988 through 1998.
NOTE 10 SALES
A sale is recorded when title to the product passes to the customer.
NOTE 11 NET LOSS PER SHARE
Net loss per share is computed by dividing the net loss applicable to common
shares by the weighted average number of shares of Common Stock outstanding
after giving effect to the ratably accrued preferred dividend. No effect has
been given to Common Stock equivalent shares as such would be anti-dilutive.
NOTE 12 CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers cash in bank
and on hand as cash equivalents.
8
<PAGE>
SKLAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid amounted to $102,997 in the six months ended September 30, 1998,
and $151,273 in the six months ended September 30, 1997.
Income taxes paid amounted to $22,051 in the six months ended September 30,
1998, and $8,500 in the six months ended September 30, 1997.
9
<PAGE>
SKLAR CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
herein.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
sales for certain items in the Company's Statements of Income for each period:
Income and Expense Items as Percentage of
Net Sales for the six months ended September 30
1998 1997
Net Sales 100.0% 100.0%
Cost of Sales 53.4 57.0
Gross Profit 46.6 43.0
Selling, General and
Admin. Expenses 41.6 39.5
Income Before
Interest & Taxes 5.0 3.5
Interest Expense 1.6 3.0
Income Before
Income Taxes 3.4 0.5
Net Income (Loss) 3.0 0.4
SALES
For the six month period ended September 30, 1998 compared to the six month
period ended September 30, 1997, sales were down $252,002 or 3.7%. This decrease
reflects the competitive market pressures.
COST OF SALES
Cost of sales as a percentage of sales decreased 3.6% for the six month period
ended September 30, 1998 compared to the six month period ended September 30,
1997. This decrease results primarily from the mix of products sold and
favorable currency fluctuations.
10
<PAGE>
SKLAR CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative expenses for the six month period ended
September 30, 1998 have increased $35,306 or 1.3% from the six month period
ended June 30, 1997. The increase in these expenditures is a result of the
Company's commitment to an increased marketing and advertising effort and the
resulting increased personnel and advertising costs. Management expects to
continue this level of expenditure in future periods.
INTEREST
Interest costs decreased $104,404 or 49.7% for the six month period ended
September 30, 1998 compared to the six month period ended September 30, 1997 due
to a reduction in the outstanding line of credit and term debt funded by
operations and inventory and accounts receivable reductions.
INCOME TAXES
Federal income tax expense is reduced in both periods by the available net
operating loss carry-forwards. Income tax expense represents the state income
tax payable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revolving line of credit with CoreStates Bank is considered
adequate to meet the financing requirements of the Company in the foreseeable
future.
PART II - OTHER INFORMATION
ITEM 1 LEGAL MATTERS
The Company filed suit in 1992 against the former principal of DCA for violating
the terms of a non-compete agreement signed as part of a re-negotiated
settlement for the purchase of DCA. The suit seeks the return of all monies paid
to the former principal. The case is currently under appeal to the Superior
Court of Pennsylvania and no assessment of the outcome of the case has been made
by counsel. Payments for DCA have been suspended since September 1996.
Settlement was reached prior to arbitration in the matter of the asset purchase
agreement with SMS. The settlement was to the satisfaction of the Company
although certain inventory has been written off as a result of its non-saleable
properties. Certain other inventory may be written off as well.
The Company filed suit in the Court of Common Pleas for Chester County,
Pennsylvania against an entity knows as "Endo-Surgical Systems, Inc." ("ENDO")
in February of 1998. Endo is controlled by the Company's former Controller. The
suit alleges misappropriation of trade secrets and conversion, tortious
interference with existing contractual relations, and tortious interference with
prospective economic advantage. Injunctive relief is sought in addition to
damages, costs, and fees. In December of 1997, the company also filed in the
court of Common Pleas for Chester County, a Writ of
11
<PAGE>
Summons against the former controller, personally. The Company has since
conducted a fact-finding effort. A complaint was filed in May of 1998. The
complaint alleges at this juncture, among other things, that the former
Controller has violated the standards of conduct in the practice of public
accounting and engaged in misappropriation of trade secrets and conversion,
breach of fiduciary duties and confidential relationship, tortious interference
with existing contractual relationships, tortious interference with prospective
economic advantage, defamation and trade libel, breach of contract, and fraud
and misrepresentation. Injunctive relief, damages, costs and fees are sought.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
As reported in registrant's form 10-Q for the quarter ended December 31, 1985
and as further discussed in Note 9 to the financial statements, the registrant
did not declare a dividend on its cumulative Series A Convertible Preferred
Stock on June 30, 1988 through 1998.
ITEM 5 OTHER INFORMATION
The registrant filed Form 15 on June 30, 1998 to deregister its Common Shares
and Series A Convertible Preferred Stock.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
SKLAR CORPORATION
/S/Michael Malinowski
MICHAEL MALINOWSKI
CHIEF FINANCIAL OFFICER
November 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000064500
<NAME> SKLAR CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 71,910
<SECURITIES> 0
<RECEIVABLES> 2,240,804
<ALLOWANCES> 107,122
<INVENTORY> 3,167,605
<CURRENT-ASSETS> 5,699,118
<PP&E> 1,410,113
<DEPRECIATION> 777,830
<TOTAL-ASSETS> 6,944,584
<CURRENT-LIABILITIES> 4,278,690
<BONDS> 0
0
248
<COMMON> 123,771
<OTHER-SE> 2,508,640
<TOTAL-LIABILITY-AND-EQUITY> 6,944,584
<SALES> 6,651,867
<TOTAL-REVENUES> 6,651,867
<CGS> 3,553,023
<TOTAL-COSTS> 6,316,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,744
<INCOME-PRETAX> 229,286
<INCOME-TAX> 28,896
<INCOME-CONTINUING> 200,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200,390
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
