UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File No. 1-6107
SKLAR CORPORATION
(Name of Small Business Issuer as specified in its charter)
Pennsylvania 44-0625447
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) Number)
889 South Matlack Street
West Chester, PA 19382
(Address of principal executive offices) (Zip code)
(610) 430-3200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
(Title of class)
Series A Convertible Preferred Stock, $.01 par value
(Title of class)
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Check whether the issuer has (1) 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 ]
Issuer's revenues for the fiscal year ended March 31, 1998 were
$13,766,868.
The aggregate market value of common stock held by non-affiliates was
$60,810 as of June 1, 1998.
As of June 1, 1998 there were 754,940 shares of the
issuer's Common Stock outstanding.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
PART I
<S> <C> <C>
1. Business.................................................................................. 4
2. Properties................................................................................ 13
3. Legal Proceedings......................................................................... 13
4. Submission of Matters to a Vote of
Security Holders.......................................................................... 14
PART II
5. Market for the Registrant's Common
Equity and Related Stockholder
Matters................................................................................... 15
6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................................. 16
7. Financial Statements...................................................................... 19
8. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................................................................ 20
PART III
9. Directors and Executive Officers
of the Registrant......................................................................... 20
10. Executive Compensation.................................................................... 21
11. Security Ownership of Certain Beneficial
Owners and Management..................................................................... 24
12. Certain Relationships and Related
Transactions.............................................................................. 25
13. Exhibits and Reports on Form 8-K.......................................................... 27
Signatures................................................................................ 28
</TABLE>
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PART I
Item 1. Business
The Misdom-Frank Corporation ("MFI") was incorporated in 1938 in the
State of Delaware to import and distribute high quality German surgical
instruments in the United States. The product line was subsequently broadened to
include dental and veterinary instruments. In 1983 MFI merged with Medco Jewelry
Corporation and the name of the company was changed to Medco Group Incorporated
("Medco"). In 1984 the jewelry operation was closed. In 1985 Medco purchased
substantially all of the assets (other than real estate) and certain liabilities
of the J. Sklar Manufacturing Co., Inc. ("Sklar"), a well-respected manufacturer
and distributor of surgical instruments that had been in continuous operation
since 1892. In 1986 the entire operation was moved to West Chester,
Pennsylvania. Medco was subsequently reincorporated in Pennsylvania in 1990 and
in 1993 changed its name to Sklar Corporation.
The Company made the following acquisitions between 1986 and 1996.
1. Dental Corporation of America ("DCA") Acquired in 1990 to
strengthen the Company's strategic position in the dental sales
segment.
2. Simpson/Bayse ("S/B") in 1993. The Company purchased certain
assets of S/B to expand its obstetrical and gynecological line
and strengthen the Company's strategic position.
3. Herwig Division-General Medical Corporation ("GMC") in 1994. This
purchase included a marketing agreement whereby the Company
supplied GMC with the surgical instrument needs of its customers
for a fifty-month term. This agreement has since been extended
for an additional fifty months. The purchase and marketing
agreement opened GMC's supply chain to the Company, strengthening
its position in primary and acute care markets and serves as a
model for other large vendor relationships.
4. Surgical Marketing Specialists, Inc. ("SMS") in 1996. The
purchase was an asset purchase of certain inventory, customer
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lists, and rights. The focus of the purchase was to (i) meet the
needs of the Company's customers in a consolidating medical
supply environment and (ii) acquire product lines whose values
could be leveraged with the Sklar brand name. A majority of the
lines acquired in the purchase carry a lower gross margin than
the Company's other lines. Consequently the Company has
experienced a decline in total gross margin percentage.
The company currently markets products through two divisions. The
surgical instrument division is made up of lines that are primarily hand held
surgical instruments, products that are complementary such as the instrument
care and cleaning line, line extensions such as sterile procedure kits, and new
low cost/low margin disposables such as scalpels and blades. The surgical
instrument division accounts for 95% of the Company's revenue. Due to the
combination of the Sklar brand name and the Company's relationships with the
largest full line medical products distributors, the company believes itself to
be a "supply chain manager" rather than a traditional distributor. The
orthodontics division accounts for 5% of the Company's revenue as a "direct
seller" to a niche market of orthodontists.
Products
The surgical instrument division is made up of the combined Sklar,
Misdom-Frank, S/B, and SMS product lines. The lines have been broadened so that
the Company also serves the dental and veterinary markets. The Company strategy
is 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 special use for which significant research and
development expenditures are required to compete with companies with greater
financial resources. The major medical areas of specialization utilizing the
Company's instruments are dermatology, cardiology, obstetrics and gynecology,
plastic surgery, neurology, orthopedics, ENT, microsurgery, laparoscopic,
central supply, and general surgery.
Surgical instruments stocked by the Company are primarily manufactured
in Germany and Pakistan. German instruments are typically considered by
consumers to be of a higher quality and are primarily used in operating rooms.
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Pakistani products are lower priced and used in those areas of the hospital
where disappearance rates are high and the requirement for precision is lower;
and in sterile procedure kits.
During the last year the company has added over 10 new product groups
to the line. These new groups include disposable products (curettes, punches,
Laryngoscope blades and other products), patient care products, disposable
surgical products, Put-up kits, Electrosurgery instruments and Gynecological
sampling instruments. These new products were chosen to take advantage of, (i)
the consolidating medical supply environment, (ii) the shifting age demographics
of the general population and, (iii) the desirability of disposable products
that are safer for the healthcare worker, and save labor energy for the end
user. The Company believes these new products, if they gain market acceptance,
will increase the Company's net sales. As the sales from these new products
increase the Company expects a decline in gross margin as disposable products
generally carry a lower percentage profit that non-disposable instruments. While
the company has successfully test marketed several new disposable products,
there are no assurances that all of these new products will find customer
acceptance due to potential conflicts with existing distributor product lines
and existing group purchasing organization ("GPO") vendor contracts.
The Company is also exploring the acquisition of companies, and the
acquisition or development of additional products in order to augment its lines.
Sklar will attempt to leverage the value and marketability of acquired products
using the Sklar brand name, marketed through current distribution channels.
Markets
The overriding trend in the healthcare industry is the move to managed
care and its resulting emphasis on cost reduction. This places significant
pressure on pricing as well as product utilization and has caused the
consolidation of distributors GPO's, hospitals and other end users. Healthcare
is more often being provided in a variety of alternative care centers ranging
from sub-acute care to freestanding surgery centers to doctors' offices.
Management believes the Company is positioned to reach all of these markets. The
Company either has or is pursuing contracts and/or agreements with the major,
full line, distributors to these markets. Although the contracts and agreements
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do not guarantee exclusivity, it has been the Company's experience that once its
products are accepted by the distributor, the products are sold ahead of the
competition. The Company's strategy is to leverage this effort through its own
inside and outside sales force that markets directly to the end user to cause
pull through demand. The Company has recently begun to pursue and secure
contracts with GPO's. However the Company's late entry to this market may place
it at a disadvantage when competing against instrument companies with existing
contracts. Although the company has signed local contracts, it has not yet
secured and successfully executed regional and national GPO contracts. Generally
hospitals belong to local, regional and national buying groups. Sklar's risk is
that although it has local contracts, the regional and national purchasing
contracts often override these local agreements.
The market for the Company's products is also affected by the aging
population. The increasing average age of the population increases the use of
cardiology, orthopedic, laparoscopic and neurology products. The Company is
attempting to strengthen these product lines by the addition of new items while
maintaining a strong presence in areas such as obstetrics and gynecology, as
well as the introduction of disposable products. The Company maintains and will
expand its products utilized in minimally invasive surgery which is both a
characteristic of preventive care and one of the key elements in reducing
hospital length of stay (LOS).
The Company markets its products through the medical distribution
network of large and small dealers. The Company's products are advertised in
trade periodicals and also exhibited at industry trade shows. The Company has
approximately 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 volume.
Sources of Supply
Instruments
Instruments are purchased from approximately 115 suppliers primarily in
Germany and Pakistan. Purchases from these vendors are paid for in Deutsche
Marks and dollars respectively. These instruments are produced to the Company's
exacting specifications, generally under non-exclusive arrangements. Although
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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 with Sklar brand identity.
Disposable and Other Products
Disposable products are purchased from approximately 20 vendors in the
United States and the world. Payment for these items are made in U.S. dollars.
These products are not sourced from the traditional instrument vendors. The
disposable products carry the Sklar brand name and packaging with an ordering
lead-time of up to six months.
Instrument Inventory and Lead-Time
Although the changing healthcare market has enabled the Company to make
less of its purchases in foreign currency the Company's earnings can still be
affected by currency fluctuations. The substantial lead times between order date
and delivery date (ranging up to six months) require that the Company maintain
substantial inventory levels to serve its customers' needs. This is due to the
fact that high fill rates and quick delivery are key to maintaining competitive
advantage. The Company believes that its operations do not differ materially
from other companies in the industry with respect to inventory carrying costs.
Competition
The Company is faced with two distinct types of competitors. One is the
"direct selling" company. The other is the "dealer oriented" company. The
"direct selling" companies are manufacturers that are typically divisions of
large corporations having their own sales force who call on and sell directly to
the end-user, primarily hospitals. The "dealer oriented" companies tend to be
smaller and with the exception of the Company, privately owned. The "direct
selling" companies account for approximately 70% of the sales to end users but
the Company believes the market share held by "dealer oriented" companies such
as itself, has been stable in recent years. The Company believes that the
"dealer oriented" companies control approximately 30% of the instrument market.
The company believes that there are approximately three significant "dealer
oriented" companies and six "direct sales" companies.
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Competitive Strengths
The Company believes the following factors have been critical to its
success to date and will be important in realizing growth potential in the
future.
Broad Product Offering
The Company offers a broad range of products consisting of over 10,000
unique items (SKU's) for use in a wide range of procedures. Within the broad
range of products are distinct "grades" of products. The Company's customers may
purchase the same device in a low cost disposable version, the finest crafted
German version, or four grades and prices in between, depending upon the
application and the customer's budgetary requirements.
Established Relationships With Distributors
The Company either has contracts or agreements with the major industry
distributors or is pursuing them. These agreements provide for "preferred
status" or some form of "partnering" agreement, giving the Company access to the
distributors supply chain. Not only is this important in view of the pressure in
the healthcare industry to consolidate suppliers, it is the method by which the
Company will seek to put its new products into the market. The large
distributors have extensive sales forces allowing the Company to have access to
a significantly larger number of end users than would be possible through its
own sales organization.
Leveraged Sales Organization
The Company employs more than thirty sales and marketing personnel. It
develops specialty catalogs, extensive promotions and sample programs in-house.
Active coordination of these programs through the distributor sales organization
to the end user, leverages Sklar's sales effort into a much larger presence in
the market
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Customer Service Focus
The Company's sales and service operation provides customers with fast,
knowledgeable responses to their inquiries, fast and accurate order turnaround,
and is Electronic Data Interchange ("EDI") capable.
Sklar Brand Name
The company believes its Sklar brand name is well recognized and has
been highly respected for over 106 years. Although the Company maintained the
lines it acquired through acquisitions for many years such as Herwig and Germain
Prime, it is currently reducing the number of SKU's in those lines to only the
products with the highest demand with the plan of eventually phasing the lines
out entirely. Additional lines that are completely different from the Sklar line
of hand-held surgical instruments, such as disposables, sterile kits, and
syringes, are being brought under the Sklar umbrella. The Company believes this
process to be effective in the marketplace and will streamline and lower the
costs of internal operations.
The Leverage of the Sklar Brand Name and The Sales Organization Through
New Products and Supply Chain Management.
The company believes its highly visible and well respected Sklar name
will enable it to continue to create successful partnering agreements with major
distributors further enhancing its sales organization. To take full advantage of
the supply chain it has created, the Company plans to continuously develop or
acquire new products that are branded Sklar and managed through the supply chain
to the end user.
Patents and Trademarks
The Company has no material patents. The Company has registered the
following trademarks: "Misdom-Frank", "Merit", "MIFCO", "Ralks", "Sklar",
"SklarCut", "SklarHone", "SklarKleen", "Sklar Polish", "SklarLite", "Sklar
Lube", "Sklar Soak", and "Sklar Disinfectant". The recognition of these
trademarks is considered to have significant commercial value.
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Government Regulation
The Company's products are medical devices and as such are subject to
the provisions of the Federal Food, Drug and Cosmetic Act ("FDCA") and
implementing regulation. Pursuant to the FDCA, the Food and Drug Administration
("FDA") regulates the manufacturing, distribution, labeling, and promotion of
medical devices in the U.S. Additionally, various foreign countries in which the
Company's products are or may be distributed impose additional regulatory
requirements.
The FDCA provides that, unless exempted by regulation, medical devices
may not be distributed in the U.S. unless they have been approved or cleared for
marketing by the FDA. The vast majority of the Company's products are Class I
devices that have been exempted by regulation and do not require approval. A
very few products have been qualified for clearance to be marketed under section
510 (k). Under this section, the Company requires the manufacturer to provide a
pre-market notification that it intends to begin marketing the product and shows
that the product is substantially equivalent to another legally marketed
product.
The FDCA requires that all medical device distributors register with
the FDA annually. Distributors must also comply with labeling requirements,
Quality System Regulations, and good manufacturing practices (GMP). The FDA
inspects medical device distributors and has authority to seize non-complying
medical devices, to enjoin and/or impose civil penalties on distributors
marketing non-complying medical devices, to criminally prosecute the violator
and to order recalls in certain instances. The Company believes it is in full
compliance with all FDCA, GMP, and Quality System Regulations.
Since a large percentage of its products are imported, the Company is
also subject to regulation by the U.S. Customs Service, particularly relating to
"country of origin" markings. The Company believes it is in full compliance with
all regulations.
To the extent they apply, the Company believes it is in compliance with
all regulatory requirements of OSHA, EPA, and others.
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Orthodontic Instruments and Products
Orthodontic instruments and products provided 9.5%, 6.1% and 5% of the
Company's revenue for the years ending March 31, 1996, 1997, and 1998
respectively. Absolute sales of these products, which are 40% private label and
60% non-proprietary, have been flat or declining for several years. Dental
Corporation of America ("DCA") serves a niche market of very small customers
with a small average order size. DCA is a "direct selling" division marketing
products through catalogs, promotions, and selling shows.
DCA has registered the following trademarks. "DCA Athletic Mouth
Protector", "DCA Ceramic", "DCA Disposable Toothbrush", "DCA Kleen", "DCA Lube",
"DCA Soak", "Traginate", and "Kno-Kurl Tracing Acetate".
Management has invested minimal capital and time in DCA. The Company
believes its resources are better invested in surgical products and the Sklar
brand name and is looking to divest DCA so as to concentrate on the core medical
business.
Research and Development
Generally the Company is a distribution company and does not perform
research and development of new products.
Costs of Compliance to Environmental Regulations
The Company incurs minimal costs associated with environmental laws and
regulations.
Employees
The Company currently has approximately sixty employees including its
principal executive officers. None of its employees are covered by collective
bargaining agreements. The Company believes its employee relations are
satisfactory. The Company provides a 401(k) savings plan with matching
contribution and profit savings features.
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Year 2000 Issues
Although Sklar does not have a written Year 2000 Compliance plan, there
are no current date related problems and Sklar anticipates no future compliance
problems. Sklar currently has five information systems (IS) in place, all of
which the Company believes to be 2000 compliant.
Sklar does not sell electronic products, therefore no compliance issues
exists in this area. Although there have been no discussions with vendors, the
hand made nature of surgical instruments, virtually eliminates any potential
problems with Year 2000 issues.
Item 2. Properties
The Company's executive offices, warehouse, and all operations are
presently located at 889 South Matlack Street, West Chester, Pennsylvania,
19382. The building consists of approximately 10,000 square feet of office space
and 12,500 square feet of warehouse space and is leased at an annual rental of
$232,800. The current lease expires April 30, 1999. The Company is currently
negotiating with a related party, J. B. Associates, to extend that term. The
Company is also negotiating with its bank, relative to expanding the current
facility. The Company believes its current space will be sufficient for the
Company's needs for six months. An additional 8,000 sq.ft. of space may be
required as the sales of disposable product increase. To the extent the
additional space is needed, the Company intends to utilize public warehousing or
lease a satellite warehouse.
Item 3. Legal Proceedings
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.
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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 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 4. Submissions of Matters to a Vote of Security Holders
No matters were submitted to a vote of the holders of the Company's
Common Stock during the fourth quarter of the Company's fiscal year ended March
31, 1998
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PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Except for limited or sporadic transactions, there is no established
public trading market for the Common Stock of the Company.
As of June 1, 1998 the Company had 774 holders of record of its Common
Stock. The Company believes there are approximately 1000 beneficial owners of
the Company's Common Stock.
The Company has not paid any dividends on its Common Stock and does not
foresee that it will pay dividends on its Common Stock in the near future. 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 continued to decline to declare
dividends in all subsequent years.
Under the terms of the Preferred Stock, if there exists cumulative
unpaid preferred dividends, 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
Stockholders own or control approximately 62.5% of the outstanding preferred
stock. See Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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Item 6. Management's Discussion and Analysis of Financial Conditions 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
1998 1997
Net Sales 100.0% 100.0%
Cost of Sales 55.5 57.0
Gross Profit 44.5 43.0
Selling, General & Admin. Expenses 40.0 38.7
Other Expense 0.1 0.3
Income Before Interest & Taxes 4.4 4.0
Interest Expense 2.3 2.5
Income Before Income Taxes 2.1 1.5
Net Income 1.8 1.3
Results of Operations
1998 Compared to 1997:
Net sales for 1998 decreased 3.9% from 1997. This decrease was a result
of several unrelated factors. During 1998 the Company was involved in litigation
concerning SMS and a former controller, which it believed diverted management
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and company resources. In the SMS matter, settlement was reached prior to
arbitration. The settlement was satisfactory to the Company. Additionally, the
company lost a major bulk commodity Pakistan instrument customer during the past
year.
Management believes these to be isolated events with no impact on future sales
growth.
Cost of Sales, as a percent of sales, decreased from 57% in
1997 to 55.5% in 1998. This decrease reflects a change in product mix sold
during the past year resulting from the loss of a major bulk Pakistan customer
which purchased high volume, low margin items. Additionally, the company
negotiated a reduction in incoming freight costs. The company experienced a
benefit from a currency gain of $103,169 and $135,062 in 1998 and 1997
respectively. Due to the increasing competitive medical market pressures, the
introduction of disposable products and the potential for foreign currency
exchange rate volatility, the Company expects cost of sales as a percent of
sales to increase in future years.
Selling, General and Administrative Expenses for fiscal 1998
decreased $41,035 but increased from 38.7% to 40% as a percent of sales compared
to 1997. The dollar decrease resulted from tighter expense control, specifically
a renegotiation of the Company's long distance phone contract and a reduction in
warehouse supply costs. This percent increase relative to sales resulted from
expenses related to the company's development of its operational and sales
infrastructure which are necessary to implement the new sales and marketing
programs during fiscal 1999. As part of this preparation, the company hired
additional salesmen during the year and upgraded its computer and IS systems.
Management believes that these investments will result in increased future sales
and lower SG&A expenses relative to sales. Additionally, the company incurred
significant expenses related to the SMS litigation and the separate litigation
against a former controller. Settlement was reached prior to arbitration in the
SMS matter. The settlement was satisfactory to the Company.
Effects of Dollar Strength
In 1998 and 1997 the Company purchased 40.7% and 41%, respectively, of
its medical instrument products in Deutsche marks. Orders are placed in Deutsche
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marks and payment is made within three to six months after the order is placed.
The Company has engaged in forward purchases of foreign currency. During the
year ended March 31, 1998, the Company's involvement in this activity, which
generally equates to one to two months of anticipated purchase payment, provided
an effective hedge against the potential for increases in the cost of purchasing
German Deutsche Marks. The effect on earnings during the year was immaterial.
During 1998 the Deutsche mark continued to weaken against the dollar resulting
in a $103,169 benefit to the Company. A similar effect of the dollar
strengthening in fiscal 1997 resulted in a gain for the year of $135,062. 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.
Liquidity and Capital Resources
The Company primarily funds its operations by cash provided by
operating activities. The 1998 income level and recurring non-cash expenses
resulted in increased working capital of $672,000 amounting to $916,000 at March
31,1998. The reduction in the level of inventory in the current year
($1,062,000) combined with operating cash flow enabled the company to
significantly reduce its line of credit balance ($683,000), and decrease its
trade accounts payable ($907,000). The later reduction was also affected by the
favorable settlements negotiated with SMS related vendors.
The Company's peak short term borrowing during 1998 occurred in the
earlier part of the year and was followed by a fairly steady decline in the last
eight months of the year. Available borrowing under the line of credit facility,
subject to adequate collateralization, amounted to $816,000 at March 31,1998.
Because there still continues to be a redundancy of certain inventory product
groups and excess stock quantities the company believes it will be able to
further reduce inventory during 1999 by the continuing consolidation of
inventory acquired from acquisitions. Due to the anticipated reduction in
inventory, the Company believes its current credit facility to be adequate to
provide any short-term working capital needs, which are not funded by operating
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cash flow. While anticipated future capital additions as well as required debt
service on the SBA loan will likely be funded exclusively from operations, there
are no assurances that this funding source will be adequate.
Cash flow from operations in 1997 was only slightly less than the
current year but liquidity and working capital were negatively affected by the
financing of the SMS acquisition. $1,700,000 of the line of credit facility was
used to fund the cash portion of the purchase. Also, increased sales volume
resulting from the purchase increased accounts receivable and further strained
liquidity. $206,000 of availability existed under the line of credit facility at
March 31, 1997.
The Company's peak short-term borrowing, pursuant to lines of credit,
was $ 2,942,000 in 1998 and $2,999,000 in 1997. At March 31, 1998, the Company's
outstanding line of credit was $2,085,000, leaving $816,000 available, after
reduction for $66,000 in stand-by letters of credit and a 20% market risk
reserve on forward currency contracts totaling $165,000. 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, together with amounts available under current bank facilities,
will be sufficient to meet the Company's liquidity needs in the foreseeable
future.
On June 4, 1996 the Company entered into an amended and restated loan
security agreement for a $3,750,000 line of credit 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 March 31,
1998 borrowing totaled $5,330,553.
-19-
<PAGE>
Item 7. Financial Statements
See the Financial Statements listed in the accompanying Index to
Financial Statements on Page F-1 herein. Information required by Schedules
called for under Regulation S-X is either not applicable or is included in the
Financial Statements or notes thereto.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not Applicable.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The Directors and Executive Officers of the Company, their ages, their
principal occupations during the past five years or more, and directorships of
each in public companies in addition to the Company are as follows:
Don Taylor. Mr. Taylor, age 52, was appointed to the Board in November
1988 and was elected President of the Company 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.
Michael Malinowski. Mr. Malinowski, age 44 was appointed to the Board
in April, 1991, and has served as Executive Vice President since 1994 and Chief
Financial Officer since 1998. He has been employed by the company since 1986 in
the positions of General Manager and Vice President of Operations. Mr.
Malinowski has a background in computer systems management and operations. His
responsibilities as Chief Financial Officer include the oversight of the
financial department and Information Systems
George Kellam. Mr. Kellam, age 58, was appointed to the Board in 1993.
Mr. Kellam has been the owner and President of G&M. Enterprises, Inc, a company
which specializes in the advertising and promotional business, for twenty years.
-20-
<PAGE>
William R. Knepshield. Mr. Knepshield, age 63, was appointed to the
Board in 1991. Mr. Knepshield has twenty-one years experience as the Chief
Executive of several publicly held companies involved with the medical
technology field and the inventions of innovative medical devices. From 1989 to
1993 Mr. Knepshield was president and Chief Executive Officer of KMI, Inc. a
company involved in the development and sale of sophisticated microsurgical
instruments for opthalmology. Currently Mr. Knepshield is president and Chief
Executive Officer of WBSK, Inc. which has developed and owns numerous patents
pertaining to needles and the protection of healthcare workers.
Albert Wicks. Mr. Wicks, age 49, was appointed to the Board in 1990.
Mr. Wicks has been the owner, President and Chairman of C&S Medical Supply, a
company specializing in the distribution of medical supplies to the physician
market, for fourteen years. Prior to founding C&S Medical Supply, 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.
Item 10. Executive and Director Compensation
Summary Compensation Table
The following table sets forth the aggregate cash compensation paid by
the Company for the fifty-two weeks ended March 31, 1998 to those executive
officers whose salary and bonus exceeded $100,000 and the Chief Executive
Officer.
-21-
<PAGE>
<TABLE>
<CAPTION>
Long-Term Awards
Annual Compensation Compensation
Name and Principal Other Annual Restricted Securities All Other
Position Year Salary Bonus Compensation Stock Underlying Compensation
(1) Awards Options
<S> <C> <C> <C> <C> <C> <C> <C>
Don Taylor 1998 $163,765 $ 40,000 $ 12,540 0 0 0
President 1997 $170,170 0 $ 26,173 0 0 0
1996 $194,465 0 $ 7,548 0 0 0
Michael Malinowski
Vice Pres.,
Chief Financial 1998 $103,931 $ 34,500 $ 10,281 0 0 0
Officer 1997 $125,364 0 $ 20,833 0 0 0
</TABLE>
(1) For 1998, Mr. Taylor's and Mr. Malinowski's Other Annual Compensation
includes $2,567 and $2,711 respectively for car allowance. Other Annual
Compensation is also comprised of the Company's matching 401K
contributions and the Company's profit sharing contribution. Profit
sharing contributions are allocated among all participants in the
401(k) Plan. In 1997, Other Annual Compensation included amounts paid
by the Company automobile allowances.
-22-
<PAGE>
Stock Option Grants
The Company granted no stock options or stock appreciation rights in
the last fiscal year.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last
Fiscal Year and FY-End Option Values
# of Securities Value of
Underlying Value of unexercised
Unexercised unexercised in- in-the-money
Shares Value # of Securities Underlying Options at FY- the-money option option at FY-
acquired on Realized Unexercised Options at FY- End at FY-End End
Name exercise (#) ($) End Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Don Taylor 0 0 100,000 Common Shares 0 *1 0
0 0 4,000 Preferred Shares 0 *2 0
Michael Malinowski 0 0 100,000 Common Shares 0 *3 0
</TABLE>
Director Compensation
Directors who are officers or employees of the company receive no
additional compensation for service as members of the Board of Directors.
- --------------------------
1 Represents options granted to Mr. Taylor in 1993 under the Company's Incentive
Stock Option Plan. The options have an exercise price of $.25 per share and
expire on December 31, 2002. As there is currently no trading market for the
Company's Common Stock, the value of these options is unascertainable.
2 Represents options to purchase shares of Series A subordinate convertible
preferred stock at $10.00 per share granted in 1988. These options expire
December 31, 2002. The Company is unable to determine the value of these options
at FY-end.
3 Represents options granted to Mr. Malinowski in 1993 under the Company's
Incentive Stock Option Plan. The options have an exercise price of $.20 per
share and expire on December 31, 2002. As there is currently no trading market
for the Company's Common Stock, the value of these options is unascertainable.
-23-
<PAGE>
Directors who are not officers or employees of the Company receive such
compensation for their services as the Board of Directors may from time to time
determine. Non-employee directors receive a fee of $500 for each board and
shareholder meeting attended.
The Company does not have a standing audit, nominating or compensation
committee.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The table below sets forth certain information as of June 1, 1998
regarding the beneficial ownership, as defined in regulations of the Securities
and Exchange Commission, of (i) each person who is known to the Company to be
the beneficial owner of more than 5% of any class of the Company's voting
securities, (ii) each director of the Company, and (iii) all directors and
executive officers as a group. On June 1, 1998, there were 754,940 shares of the
Company's Common Stock, 22,078 Shares of Series A Preferred Stock and 0 (zero)
shares of Series B subordinated Preferred Stock outstanding. Unless otherwise
specified, the named beneficial owner has sole voting and investment power. The
information in the table below was furnished by the persons listed. "Beneficial
Ownership" as used herein has been determined in accordance with the rules and
regulations of the Securities and Exchange Commission and is not to be construed
as a representation that any of such shares are in fact beneficially owned by
any person.
-24-
<PAGE>
<TABLE>
<CAPTION>
Names and Address of Title of Class Amount and Nature of Percentage of Class
Beneficial Owner Beneficial Owner
<S> <C> <C> <C>
Don Taylor Preferred 10,575 (1) 47.9
241Clonmell-Upland Rd. Common 303,715 (2) 40.2
West Grove, PA 19390
Michael Malinowski Preferred 6,199 28.1
613 Aberdeen Drive Common 158,000 (2) 20.9
Kennett Square, PA 19348
George Kellam Preferred 20 (Less than 1%)
1060 North State St. Common 0
Dover, DE 19901
William R. Knepshield Preferred 50 (Less than 1%)
11 Roselawn Lane Common 0
Malvern, PA 19355
Albert Wicks Preferred 0 (Less than 1%)
1604 Dogwood Drive Common 0
West Lawn, PA 19607
All directors and officers as Preferred 16,844 76.3
a group Common 461,715 61.2
</TABLE>
(1) Includes 4,000 options to purchase Series A Subordinated Preferred Stock
currently exercisable.
(2) Includes 100,000 options to purchase Common Stock currently exercisable
Item 12. Certain Relationships and Related Transactions
The Company has entered into several transactions with affiliates. The
Company believes that the terms of the transactions with affiliates are on terms
at least as favorable as could have been obtained from unaffiliated third
parties. The Company will require that in the future, transactions with
affiliates will continue to be made on terms the Company believes are at least
as favorable as those obtainable from unaffiliated third parties.
J.B. Associates
The Company leases the space in which its executive office and
warehouse is located from J.B. Associates. J.B. Associates is owned by Don
Taylor and William Knepshield. Mr. Taylor is President and director of the
Company and Mr. Knepshield is a director. Rent expense for this building was
$232,800 and $196,800 in 1998 and 1997, respectively. Three months rent are
prepaid in the amount of $58,200 at March 31, 1998.
-25-
<PAGE>
Officer Advances
The Company has advanced funds from time to time to certain of its
officers and directors. As of March 31, 1998 the total amount due to the Company
from Don Taylor and Michael Malinowski for funds advances was $238,556 and
$25,326 respectively. In addition, during 1998, the Company paid $4,500 to the
former wife of Mr. Taylor. The funds were advanced on a short-term basis and are
non-interest bearing. As of March 31, 1997, the amounts due the Company from Mr.
Taylor and Mr. Malinowski were $199,952 and $0 respectively.
T/S Instrument Co.
The Company purchases medical instruments and repair services from a
company in which Don Taylor, the Company's President, was a minority
shareholder. Mr. Taylor receives a percentage of the gross revenue of this
company for a period of time as compensation for the sale of his interest.
Purchases from this company amounted to $653,419 and $281,940 for 1998 and 1997,
respectively. In addition, the Company has a note receivable from this company
in the amount of $50,000 at March 31, 1998.
-26-
<PAGE>
<TABLE>
<CAPTION>
Item 13. Exhibits and Reports on Form 8-K [Electronic Filing Exhibits]
<S> <C> <C>
(a) Exhibits
3(a)(1) Restated Certificate of Incorporation of Registrant (1)
3(a)(2) Certificate of Amendment of Certificate of Incorporation of Registrant (2)
3(b)(1) By-Laws of Registrant (3)
3(b)(2) Change name from Medco Group Incorporated to Sklar Corporation (4)
4(a)(1) Form of Common Stock Certificates *
4(b)(2) Form of Series A Preferred Stock Certificate *
21 Subsidiaries of the Registrant *
</TABLE>
* Filed Herewith
(b) Reports on Form 8-K
None
(1) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended March 26, 1983.
(2) Incorporated by reference from Registrant's Registration Statement on Form
S-1, No. 2-90189.
(3) Incorporated by reference from Registrant's Current Report on Form 8-K
dated November 29, 1984.
(4) Incorporated by reference from Registrant's Current Report on form 8-K
dated December 12, 1993.
-27-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the issuer has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Sklar Corporation, Inc.
By: /s/ Don Taylor
Don Taylor, President
Date: July 1, 1999
In accordance with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the issuer
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Don Taylor President and Director July 1, 1999
Don Taylor
/s/ Michael Malinowski Executive Vice President, Chief Financial July 1, 1999
Michael Malinowski Officer and Director
/s/ George Kellam Director July 1, 1999
George Kellam
/s/ William R. Knepshield Director July 1, 1999
William R. Knepshield
/s/ Albert Wicks Director July 1, 1999
Albert Wicks
</TABLE>
-28-
<PAGE>
F1
SKLAR CORPORATION
MARCH 31, 1998
<TABLE>
<CAPTION>
CONTENTS
Page
<S> <C>
Independent Auditors' Report F2
FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 1998 F3 - 5
Consolidated Statement of Income for the Years
Ended March 31, 1998 and 1997 F6
Consolidated Statement of Stockholders' Equity for the
Years Ended March 31, 1998 and 1997 F7- 9
Consolidated Statement of Cash Flows for the Years
Ended March 31, 1998 and 1997 F10
Notes to Consolidated Financial Statements F11- 25
</TABLE>
<PAGE>
F2
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, 1998 and the related consolidated statements of income,
stockholders' equity and cash flows for the years ended March 31, 1998 and 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial position of Sklar
Corporation as of March 31, 1998, and the consolidated results of its operations
and its cash flows for the years ended March 31, 1998 and 1997, in conformity
with generally accepted accounting principles.
/S/ STOCKTON BATES & COMPANY, P.C.
STOCKTON BATES & COMPANY, P.C.
Lancaster, Pennsylvania
June 11, 1998
<PAGE>
F3
SKLAR CORPORATION
CONSOLIDATED BALANCE SHEET
<PAGE>
F4
SKLAR CORPORATION
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
ASSETS
CURRENT ASSETS:
Cash $ 12,885
Accounts receivable 2,547,506
Inventories 3,142,043
Prepaid expense 199,262
----------
Total current assets 5,901,696
----------
FIXED ASSETS, net 630,264
GOODWILL 879,830
OTHER ASSETS 106,636
----------
TOTAL ASSETS $7,518,426
==========
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
F5
SKLAR CORPORATION
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C>
Bank overdraft $ 294,816
Short-term borrowings 2,085,000
Current portion of long-term debt 218,094
Current portion of capital lease obligation 14,120
Accounts payable 2,100,424
Accrued expenses and taxes 273,303
-----------------
Total current liabilities 4,985,757
LONG-TERM PORTION OF NOTES AND CAPITAL LEASE PAYABLE 90,337
-----------------
Total liabilities 5,076,094
CONTINGENT LIABILITIES 0
STOCKHOLDERS' EQUITY:
Series A preferred stock, par value $.01, per share, authorized
35,000 shares, 24,825 issued and 21,954 outstanding 248 Series A
subordinate preferred stock, no par value, authorized
4,000 shares, issued and outstanding 0 0
Common stock, par value $.10 share, authorized 1,500,000 shares,
1,247,952 issued and 754,940 outstanding 124,795
Additional paid-in capital 2,105,458
Retained earnings 362,869
-----------------
2,593,370
Less treasury stock 151,038
Total stockholders' equity 2,442,332
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,518,426
=================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
F6
SKLAR CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Years Ended
March 31,
-------------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
NET SALES $ 13,766,868 $ 14,325,963
Cost of goods sold 7,640,866 8,162,770
----------------- -----------------
GROSS PROFIT 6,126,002 6,163,193
Selling, general and administrative expenses 5,508,841 5,549,876
----------------- -----------------
INCOME FROM OPERATIONS 617,161 613,317
OTHER INCOME (EXPENSE):
Other (31,931) (42,437)
Interest expense (309,452) (358,641)
Settlement gain (See Note B) 17,226 -
----------------- -----------------
Other expenses - net (324,157) (401,078)
----------------- -----------------
INCOME BEFORE TAXES 293,004 212,239
Provision for income taxes 40,000 32,200
----------------- -----------------
NET INCOME 253,004 180,039
Preferred dividend requirement 275,975 274,425
----------------- -----------------
LOSS APPLICABLE TO COMMON SHARES $ (22,971) $ (94,386)
================= =================
PER SHARE DATA:
Weighted average common shares outstanding 744,423 744,423
Basic and diluted Loss per common share $ (.03) $ (.13)
====== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
F7
SKLAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<PAGE>
F8
SKLAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
MARCH 31, 1998
<TABLE>
<CAPTION>
Series A Additional
Series A Subordinated Common Paid-In
Preferred Preferred. Stock Capital
---------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C>
Balances, March 31, 1996 $ 248 $ 0 $ 124,795 $ 2,105,458
Net income for the year
ended March 31, 1997
---------------- ------------------ --------------- -----------------
Balance, March 31, 1997 248 0 124,795 2,105,458
Net income for the year
ended March 31, 1998
---------------- ------------------ --------------- -----------------
BALANCES, MARCH 31, 1998 $ 248 $ 0 $ 124,795 $ 2,105,458
================ ================== =============== =================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
F9
SKLAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
MARCH 31, 1998
<TABLE>
<CAPTION>
Retained Total
Earnings Treasury Stockholders'
(Deficit) Total Stock Equity
<S> <C> <C> <C>
$ (70,174) $ 2,160,327 $ (151,038) $ 2,009,289
180,039 180,039 180,039
---------------- ----------------- ------------------ -----------------
109,865 2,340,366 (151,038) 2,189,328
253,004 253,004 253,004
---------------- ----------------- ------------------ -----------------
$ 362,869 $ 2,593,370 $ (151,038) $ 2,442,332
================ ================= ================== =================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
F10
SKLAR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase(Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
For the Years Ended
March 31,
-------------------------------------------
1998 1997
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 253,004 $ 180,039
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 293,280 463,102
Provision for losses and returns on accounts receivable 39,000 54,000
Loss on abandonment of assets - 5,748
Gross settlement gain (109,506) -
Obsolescence reserve 50,000 -
Write down of goodwill 50,000 -
Change in operating assets and liabilities:
Accounts receivable (118,971) (1,111,516)
Inventory 1,061,869 585,423
Prepaid expenses 39,049 (215,676)
Accounts payable (907,320) 559,090
Accrued expenses and taxes 82,903 121,179
----------------- -----------------
Total adjustments 480,304 461,350
----------------- -----------------
Net cash provided by operating activities 733,308 641,389
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (170,212) (236,823)
(Acquisition) settlement of SMS 150,000 (1,700,000)
Intangible assets - (54,083)
----------------- -----------------
Net cash used in investing activities (20,212) (1,990,906)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 96,573 198,243
Net payment on line of credit (683,089) (410,734)
Borrowing agreement on credit line for acquisition - 1,700,000
Principal payments of long-term debt and capital lease (121,201) (259,355)
----------------- -----------------
Net cash provided by (used in) financing activities (707,717) 1,228,154
----------------- -----------------
NET INCREASE (DECREASE) IN CASH 5,379 (121,363)
CASH, BEGINNING OF YEAR 7,506 128,869
----------------- -----------------
CASH, END OF YEAR $ 12,885 $ 7,506
================= =================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
F11
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
Sklar Corporation is importer and distributor 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. The largest dollar volume of instruments is 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.
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES:
Financial Statements:
The financial statements include those of Sklar Corporation and Sales
and Marketing Specialists, Inc., ("SMS") a wholly owned subsidiary
which serves as a service company housing the Company's outside sales
force.
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. The company continually monitors inventory by product group
and on-hand quantities to sales level to determine inventory
impairment. During 1998, specific inventory items determined to be
without value or severely overstocked were written off in the amount of
$391,609, from an allocation of the 3/31/97 valuation reserve of
$450,000. In 1997, the Company made an accounting change wherein
elements of overhead were eliminated from the total inventory
valuation. Note E to the March 31, 1997 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
<PAGE>
F12
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES: (Continued)
Equipment and Improvements: (Continued)
over the useful lives of the assets which are estimated to be three to
ten years for equipment and fifteen years 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. The
Company continually evaluates the carrying amount of this asset by
estimating the sum of expected future undiscounted cash flows related
to specific acquisitions and comparing it to originally booked goodwill
net of related accumulated amortization.
Cash Flow Information:
For purposes of the statement of cash flows, the Company considers cash
in bank and on hand as cash equivalents.
Advertising Costs:
The Company policy is to expense advertising costs as incurred.
Loss Per Share:
Loss per 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.
Revenue Recognition:
Revenue, net of an allowance for estimated returns, is recognized upon
the shipment of goods to customers. The Company records as additional
revenue credits which are not applied to customers.
<PAGE>
F13
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES: (Continued)
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 the 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. ACQUISITION AND SETTLEMENT:
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.
On January 20, 1998, a settlement agreement was negotiated which entailed a
significant restructuring of the original purchase. As part of the settlement
the seller forgave the aforementioned notes payable by the Company, made a
$150,000 payment to the Company and a $100,000 payment to a certain vendor
<PAGE>
F14
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
B. ACQUISITION AND SETTLEMENT: (Continued)
included in the original assumed liabilities. Additionally, the seller is
precluded from operating in any competitive fashion with the Company. In a
related settlement the Company negotiated the forgiveness of $134,301 of assumed
vendor liabilities related to the original purchase with a cash payment of
$30,000. The Company continues to pursue additional settlements related to the
assumed liabilities in the original purchase.
At March 31, 1998, the Company has recorded the settlement transaction as a
reduction of goodwill in the amount of $1,060,706. This represents the
negotiated reduction of liabilities and receipt of cash payment. Excess goodwill
amortization and accrued interest expense recorded in 1997 have been recorded as
other income in 1998, net of legal fees related to the settlement.
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, 1998, the Company had the following concentrations of cash subject
to credit risk:
Germany $ 12,825
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.
<PAGE>
F15
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
C. FINANCIAL INSTRUMENTS: (Continued)
Beginning in fiscal 1998, the Company routinely enters into forward contracts
for German currency related to its inventory purchasing activity when favorable
conditions exist. The forward contracts are financial instruments with
off-balance-sheet risk. Those instruments involve, to varying degrees, elements
of market risk in excess of the amount recognized in the Statement of Financial
Position. The contract or notational amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments. The Company does not anticipate any material adverse effect on its
financial position resulting from its involvement in these instruments.
During the year ended March 31, 1998, the Company's involvement in this
activity, which generally equates to one to two months of anticipated purchase
payment, provided an effective hedge against the potential for increases in the
cost of purchasing German Deutsche Marks. The effect on earnings during the year
was immaterial.
At March 31, 1998, the Company had contracts maturing in April and May of 1998
to purchase 300,000 Deutsche Marks. Market movement creating unfavorable terms
for the Company related to the forward contracts would be addressed with the
purchase of offsetting contracts at a premium. The Company collateralized its
position in these contracts through its line of credit facility.
The estimated fair value of the Company's financial instruments, both on and off
balance sheet, are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1998
Carrying Estimated
Amount Fair Value
<S> <C> <C>
Cash $ 12,885 $ 12,885
Long-term debt $ 277,130 $ 288,843
Forward contracts $ 0 $ 3,138
</TABLE>
<PAGE>
F16
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
D. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following at March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Trade receivables $ 2,340,404
Other receivables (including a
related party receivable of $313,882) 314,102
-----------------
2,654,506
Allowance for doubtful accounts
and sales returns (107,000)
-----------------
$ 2,547,506
=================
</TABLE>
The related party receivable at March 31, 1998 includes $238,556 due from the
Company's president, and $25,326 from the Company's chief financial officer. In
connection with the larger receivable, substantial personal assets of the
president are pledged as collateral for Company loans. The related party
receivable also includes $50,000 due from a supplier/related party.
E. INVENTORIES:
Inventories consist of the following at March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
German sourced surgical instruments (including
customs and freight of $124,183) $ 1,725,643
Surgical instruments and products not sourced
from Germany (including customs and freight of $58,234) 1,214,931
DCA products (including freight of $4,931) 251,469
-----------------
3,192,043
Less valuation allowance (50,000)
-----------------
$ 3,142,043
=================
</TABLE>
<PAGE>
F17
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
F. FIXED ASSETS:
Fixed assets at March 31, 1998 consist of:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements $ 314,313
Furniture and fixtures 109,952
Equipment, including assets held under capital lease of $87,336 802,507
Computer software 96,545
-----------------
1,323,317
Less accumulated depreciation and amortization (693,053)
-----------------
$ 630,264
=================
G. GOODWILL AND OTHER ASSETS:
Other assets consists of the following:
Catalog development costs (net) $ 71,519
Acquisition costs (net) 34,253
Patents (net) 864
-----------------
$ 106,636
=================
</TABLE>
The following table summarizes the lives and amortization expense for goodwill
and other assets:
<TABLE>
<CAPTION>
Amortization Expense
Life in Years 1998 1997
-------------- ------------------- -----------------
<S> <C> <C> <C>
Goodwill 15-20 $ 131,975 $ 138,163
Catalog development costs 21/2-5 58,622 186,685
Acquisition costs 5 10,816 16,428
Patents 161/2 909 909
------------------- ----------------
Total $ 202,322 $ 342,185
=================== =================
</TABLE>
<PAGE>
F18
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
G. GOODWILL AND OTHER ASSETS: (Continued)
Additions to other assets arise from the acquisition of companies, in the case
of goodwill, or related loans, in the case of acquisition costs. Prior to fiscal
year 1996 costs incurred in creating, producing and distributing new and
existing catalogs were added to other assets. Reductions in intangible assets
result from amortization over their useful or prescribed lives or from
adjustments necessary to revalue previously recorded amounts. In the quarter
ended March 31, 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 sales volume and related cash flow in that division.
Subsequent to fiscal year 1995 catalog development costs are expensed as
incurred except, beginning in 1997, catalogs not distributed are treated as
prepaid expenses. The dollar effect of the change relating to finished catalogs
amounted to $201,260 in 1997.
Advertising expense, including the amortization of catalog development costs
incurred prior to 1996, amounted to $240,564 and $69,528 in 1998 and 1997,
respectively.
Goodwill may also be reduced by an amount equal to the amount of federal tax net
operating loss carryforwards used to reduce the Company's federal income tax
liability to the extent that the benefit amount computed exceeds normal goodwill
amortization.
H. SHORT-TERM BANK BORROWINGS:
The following table shows the Company's short-term bank borrowings for the past
two fiscal years:
<TABLE>
<CAPTION>
Maximum Average Weighted
Interest Amount Amount Average
Balance Rate Outstanding Outstanding Interest
at End at End During During Rate During
March 31, of Period of Period the Period (a) the Period (b) the Period (c)
- ------------- -------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
1998 $ 2,085,000 9.75% $ 2,942,000 $ 2,641,330 9.75%
1997 $ 2,768,000 9.75% $ 2,999,000 $ 2,382,064 9.50%
</TABLE>
<PAGE>
F18
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
H. SHORT-TERM BANK BORROWINGS:(Continued)
(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.
At March 31, 1998, the Company's revolving credit facility of $3,000,000 is
available to the extent of collateral determined by the sum of 80% of qualifying
accounts receivable plus 50% of inventories (capped at $2,000,000). Qualifying
accounts receivable and inventory used as a basis for the March 31, 1998
borrowing totaled $5,330,553. Unused available credit at March 31, 1998 was
$816,000 after considering outstanding letters of credit totaling $66,000 and a
20% market risk reserve on forward currency contracts totaling $165,000.
Borrowings from this line bear interest at the bank's prime rate plus 1.25%. The
interest expense on short-term bank borrowings for 1998 and 1997 amounted to
$261,788 and $226,394, 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.
I. LONG-TERM DEBT:
<TABLE>
<CAPTION>
<S> <C>
Long-term debt outstanding at March 31, 1998:
SBA loan, payable in monthly installments of $10,000
plus interest at prime plus 2.25% through July 1999 $ 160,000
DCA note, held by seller 117,130
-----------------
277,130
Less current portion 218,094
-----------------
Long-term portion $ 59,036
=================
</TABLE>
<PAGE>
F20
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
I. LONG-TERM DEBT:(Continued)
The aggregate maturities for the next five years of all long-term debt are as
follows at March 31, 1998:
March 31, 1999 $ 218,094
March 31, 2000 $ 59,036
Thereafter $ 0
The DCA note represents the balance of a 1992 renegotiated contract. 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.
J. LEASE COMMITMENTS:
The Company leases its office and warehouse location on a net basis from a
related party under an operating lease expiring in 1999. Additionally, the
Company leases certain equipment, including a vehicle, under various operating
leases expiring in 1999 through 2002.
The Company leases computer equipment under a capital lease included in the
equipment caption on the accompanying consolidated balance sheet.
The asset and liability are recorded at the net present value of the minimum
lease payments, based on the interest rate approximating 9.5%, implicit in the
lease. Amortization of assets acquired under the capital lease is included in
depreciation expense.
<PAGE>
F21
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
J. LEASE COMMITMENTS: (Continued)
Future minimum annual rentals under all the aforementioned lease arrangements at
March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Total
Noncancellable
Capital Operating Related
Lease Leases Party
<S> <C> <C> <C>
1999 $ 15,561 $ 253,207 $ 232,800
2000 15,561 32,090 19,400
2001 18,501 12,356 -
2002 - 8,675 -
Later Years - - -
------------------ ----------------- -----------------
49,623 $ 306,328 $ 252,200
================= =================
Less amount representing
interest 4,202
Present value of capital
lease obligation 45,441
Less current portion 14,120
------------------
Long-term obligation $ 31,301
==================
</TABLE>
Total rent expense for the years ended March 31, 1998 and 1997 was $259,252 and
$225,584, respectively.
K. STOCKHOLDERS' EQUITY:
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 $3,841,950 at March 31, 1998. 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 of $100 per share,
$2,195,400 aggregate, plus cumulative dividends.
<PAGE>
F22
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
K. STOCKHOLDERS' EQUITY: (Continued)
Treasury stock is recorded at cost. The number of shares of stock held in the
treasury was as follows at March 31, 1998:
Series A Convertible Preferred 2,871
Common 493,288
L. STOCK OPTIONS:
The Company granted no stock options or stock appreciation rights in the last
fiscal year. During the fiscal year 1993 the Corporation issued to Mr. Michael
Malinowski an option for 100,000 shares exercisable at $.20 per share under the
above Stock Option Plan. The Board of Directors during the fiscal year beginning
April 1, 1993 also granted an option for 100,000 shares of Common Stock to Mr.
Donald Taylor at an exercise price of $.25 per share. Both Mr. Malinowski's and
Mr. Taylor's Options will expire on December 31, 2002. In 1988 the Board granted
Mr. Donald Taylor 4,000 options on a new class of subordinated preferred stock
at $10.00 per share. Mr. Taylor has not exercised these options as of the last
fiscal year
M. EMPLOYEE BENEFIT PLANS:
The Company maintains an employee retirement plan under which employees may
defer a portion of their annual compensation pursuant to Section 401(K) of the
Internal Revenue Code. The Company matches employee contributions up to 50% of
the first 6% of eligible compensation. There is also a discretionary profit
sharing feature incorporated into the plan. Eligible employees are those with
more than one year of service and who work more than 1,000 hours per year.
Company contributions to the plan amounted to $65,823 and $60,609 including
discretionary profit sharing contributions of $40,000 and $30,000 in 1998 and
1997, respectively.
<PAGE>
F23
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
N. INCOME TAXES:
As a result of the merger of Medco Jewelry Corporation and Misdom-Frank
Corporation, management believes there may be federal net operating losses
carryforwards available to Medco Jewelry Corporation at the date of merger that
have transferred to Sklar Corporation. Such loss carryforwards and additional
post-merger operating losses totaling approximately $1,036,000, which expire in
tax years, 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 carryforwards will be used
to reduce goodwill as the benefit is realized. There are no operating loss
carryforwards for state tax purposes. In fiscal 1998 and 1997, $350,000 and
$308,000, respectively, of the available federal net operating loss carryforward
was applied to reduce federal taxable income. As a result, no federal income tax
was paid by the Company in these years. The Company's federal tax filings
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 and the use of allowance
accounts for financial statement purposes. Deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Total deferred tax asset $ 407,183 $ 703,695
Less valuation allowance 407,183 703,695
----------------- -----------------
Net deferred tax asset 0 0
Total deferred tax liability 0 0
----------------- -----------------
Total deferred tax asset $ 0 $ 0
================= =================
</TABLE>
<PAGE>
F24
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
N. INCOME TAXES: (Continued)
The net change in the valuation allowance for the year ended March 31, 1998 and
1997 was a reduction of $296,512 and $80,879, respectively.
Permanent differences arise due to the amortization of goodwill, which accounts
for approximately 75% of the difference between pre-tax financial statement
income and income for tax purposes.
O. RELATED PARTY TRANSACTIONS:
The Company has the following transactions with related parties:
(a) The partners in J.B. Associates, the owner of the Company
premises, are directors of Sklar Corporation. Rent expense for
this building was $232,800 and $196,800 in 1998 and 1997,
respectively. Three months rent are prepaid in the amount of
$58,200 at March 31, 1998.
(b) The Company has outstanding notes receivable from current officers
and directors amounting to $263,882 at March 31, 1998.
(c) The Company purchases medical instruments and repair services from
a company in which the president had been a minority shareholder.
The president receives a percentage of the gross revenue of this
company for a period of time as compensation for the sale of his
interest. Purchases from this company amounted to $653,419 and
$281,940 for 1998 and 1997, respectively. The Company has a note
receivable from this company in the amount of $50,000 at March 31,
1998.
(d) During 1998, the Company paid $4,500 to the former wife of the
president.
<PAGE>
F25
SKLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
P. SIGNIFICANT CUSTOMER INFORMATION:
Two customers of the Company provided significant sales volume in 1998 and 1997.
During these fiscal years sales to one customer comprised 38.6% and 35.3%,
respectively, of the Company's total sales. The second customer accounted for
12.9% and 13.1% of the respective years' total sales.
Q. FOREIGN CURRENCY TRANSACTION AND TRANSLATION GAINS (LOSSES):
Gains and (losses) recognized from foreign currency activity amounted to
$103,169 and $135,062 in 1998 and 1997, respectively.
R. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
A capital lease obligation of $46,623 was incurred in 1998, when the Company
entered into a lease for new computer equipment.
S. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid amounted to $288,617 and $324,109 in 1998 and 1997, respectively.
Income taxes paid amounted to $40,895 and $11,236 in 1998 and 1997,
respectively.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
<S> <C> <C>
Status Company Name & Address Percentage
of Ownership
INACTIVE Sklar Purchasing Corporation 100%
889 S. Matlack Street
West Chester, PA 19382
INACTIVE Sklar Surgical Instrument Corporation 100%
889 S. Matlack Street
West Chester, PA 19382
INACTIVE Ralks Ltd. 100%
889 S. Matlack Street
West Chester, PA 19382
ACTIVE Sales and Marketing Specialists, Inc. 100%
889 S. Matlack Street
West Chester, PA 19382
</TABLE>
