<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
_________________
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
1-11109
Commission File Number__________________________________________________________
Lukens Medical Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 22-2429965
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3820 Academy Parkway North NE, Albuquerque, NM 87109
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (505) 342-9638
Indicate by check mark whether the registrant has (1) 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 __
---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at September 30, 1997
---------------------------- -----------------------------------
Common Stock, $.01 Par Value 3,009,001 Shares
1
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LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K 10
SIGNATURES 11
</TABLE>
2
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LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
(Unaudited) Audited
June 30, December 31,
Assets 1997 1996
------ --------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 97,193 $ 878,090
Accounts receivable, net of allowance
for doubtful accounts of $5,790 2,558,414 1,901,947
Inventory (Note 2) 6,886,681 5,565,210
Prepaid expenses 221,580 34,290
--------------- ---------------
Total current assets 9,763,868 8,379,537
Land, building and equipment, net of accumulated depreciation
of $1,650,323 at September 30, and $1,358,081 at December 31 3,068,483 2,062,842
Intangible assets, net of accumulated amortization of
$1,083,506 at September 30, and $966,065 at December 31 1,528,848 1,098,487
Investments in Joint Ventures 1,147,574 0
Other assets 261,544 261,294
--------------- ---------------
Total assets $ 15,770,317 $ 11,802,160
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable $ 1,729,303 $ 1,406,243
Accrued liabilities 147,056 62,139
Current maturities of long-term debt and
capital leases 1,862,799 2,042,016
--------------- ---------------
Total current liabilities 3,739,158 3,510,398
Long-term debt, excluding current maturities 3,389,542 1,953,854
Obligations under capital leases, excluding
current maturities 64,988 59,378
--------------- ---------------
Total liabilities 7,193,688 5,523,630
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares: issued and outstanding
3,009,001 shares 30,144 27,320
Additional paid-in capital 18,847,276 17,213,952
Accumulated deficit (10,300,791) (10,962,742)
--------------- ---------------
Total stockholders' equity 8,576,629 6,278,530
--------------- ---------------
Total liabilities and stockholders' equity $ 15,770,317 $ 11,802,160
=============== ===============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets
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LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
UNAUDITED
---------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 2,068,828 $ 2,236,282 $ 6,802,626 $ 6,143,783
Cost of sales 1,341,765 1,414,224 4,504,658 4,127,099
----------- ----------- ----------- -----------
Gross profit 727,063 822,058 2,297,968 2,016,684
----------- ----------- ----------- -----------
Selling expenses 247,344 245,932 676,374 511,031
General and administrative expenses 220,316 233,121 693,954 683,612
Research and development expenses 14,197 35,748 39,098 108,619
----------- ----------- ----------- -----------
Total operating expenses 481,857 514,801 1,409,426 1,303,262
----------- ----------- ----------- -----------
Earnings from operations 245,206 307,257 888,542 713,422
----------- ----------- ----------- -----------
Other (expense) income:
Interest income 432 1,114 4,303 5,246
Interest expense (112,875) (70,850) (235,282) (122,411)
Other, net 0 (8,377) 4,388 (21,910)
----------- ----------- ----------- -----------
Total other (expense) income (112,443) (78,113) (226,591) (139,075)
----------- ----------- ----------- -----------
Earnings (loss) before income taxes 132,763 229,144 661,951 574,347
Income tax expense (note 3) - - - -
----------- ----------- ---------- -----------
Net earnings (loss) $ 132,763 $ 229,144 $ 661,951 $ 574,347
=========== =========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding 3,302,554 3,045,060 3,324,362 3,045,060
=========== =========== =========== ===========
Income (loss) per common and common
equivalent share: $ 0.04 $ 0.08 $ 0.20 $ 0.19
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-4-
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LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
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UNAUDITED
---------
<TABLE>
<CAPTION>
Nine Months
Ended September
-----------------------------
1997 1996
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<S> <C> <C>
Cash flows from operations:
Net earnings (loss) $ 661,951 $ 574,347
Adjustments to reconcile net earnings (loss)
to cash provided (used) by operating activities:
Depreciation 292,242 194,476
Amortization of intangible assets 117,441 220,186
Changes in current assets and liabilities:
Accounts receivable (656,467) (774,324)
Inventory (1,321,471) (557,332)
Prepaid expenses (187,290) (20,513)
Accounts payable 323,060 368,555
Accrued liabilities 84,927 9,636
Change in other assets (250) (37,102)
----------- --------------
Net cash provided (used) by operating activities (685,857) (22,071)
----------- --------------
Cash flows from investing activities:
Purchase of plant and equipment (1,297,883) (403,733)
Investments in Joint Ventures (1,147,574) -
Purchase of intangible assets (547,862) (766,141)
----------- --------------
Net cash used in investing activities (2,993,319) (1,169,874)
----------- --------------
Cash flows from financing activities:
Proceeds from the issuance of common stock and equivalents 1,636,238 272,316
Borrowings on long-term debt & obligations under capital leases 2,341,683 1,074,516
Principal payments on long-term debt & obligations under capital (1,079,642) (78,737)
----------- --------------
Net cash provided by financing activities 2,898,279 1,268,095
----------- --------------
Net increase (decrease) in cash and cash equivalents (780,897) 76,150
Cash and cash equivalents at beginning of period 878,090 39,049
=========== ==============
Cash and cash equivalents at end of period $ 97,193 $ 115,199
=========== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
5
<PAGE>
LUKENS MEDICAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
(1) Summary of Significant Accounting Policies
------------------------------------------
The Company's principal business activity is the manufacture and sale of
disposable surgical products. The Company's main product lines are
surgical sutures, lancets, sharps containers, and diagnostic products. The
accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and therefore do not
include all information and footnote disclosure necessary for a full
presentation of financial position, results of operations, and cash flows.
The information furnished, in the opinion of management, reflects all
adjustments necessary to present fairly the results of operations of the
Company for the nine-month periods ended September 30, 1997 and 1996. The
accounting policies followed by the Company are set forth in note (1) of
Notes to the Company's Consolidated Financial Statements in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996 (the
"1996 Form 10-K") filed with the Securities and Exchange Commission. The
results of operations of interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the year
as a whole.
(2) Inventory
---------
Inventory consists of the following components at:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
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<S> <C> <C>
Raw Materials $3,244,264 $2,767,214
Work-in-Process 2,119,685 1,419,685
Finished Goods 1,522,732 1,378,311
---------- ----------
$6,886,681 $5,565,210
========== ==========
</TABLE>
(3) Income Taxes
------------
The Company uses the asset and liability method of accounting for income
taxes.
6
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Components of the net deferred income tax asset at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred income tax assets:
Resulting from net operating
loss carryforwards $ 3,845,000
Carryforward of capital loss $ 105,000
Carryforward credit from
increasing research
activities $ 105,000
Other $ 264,000
-----------
$ 4,319,000
Deferred income tax liabilities:
Depreciation and other
basis differences $ (75,000)
-----------
Net deferred tax asset before
valuation allowance $ 4,244,000
Valuation allowance $(4,244,000)
Net deferred income tax asset $ -0-
===========
</TABLE>
The Company conducts a periodic evaluation of its valuation allowance. Factors
considered in the evaluation include recent demonstrable future earnings, the
Company's liquidity and equity positions. For 1996, all deferred tax assets
were reserved for in the valuation allowance given the Company's limited history
of profitable operations.
There is no income tax payable at December 31, 1996 or at September 30, 1997
because of the usage of net operating loss carryforwards, which expire as
follows:
<TABLE>
<CAPTION>
Approximate Increasing Research
Net Operating Activities Book/Tax
Loss Carryforward Credits
----------------- -------
State Loss Federal Loss
Amount Amount Tax Effect Tax Effect
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
1999 $2,537,000 $ --- $ 122,000 $ 3,800
2000 --- 2,056,000 699,000 37,200
2001 --- 1,835,000 624,000 37,500
2002 --- 1,132,000 385,000 1,400
2003 1,480,000 2,086,000 780,000 25,100
2004 315,000 390,000 148,000 ---
2005 161,000 278,000 102,000 ---
2006 --- 50,000 17,000 ---
2008 --- 88,000 30,000 ---
2009 --- 2,760,000 938,000 ---
---------- ----------- ----------
$4,493,000 $10,675,000 $3,845,000 $105,000
========== =========== ========== ========
</TABLE>
The capital loss carryforwards of approximately $271,000, tax effect of
$105,000, expire in 1998.
7
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
---------------------
Three Months Ended September 30, 1997
- -------------------------------------
The decrease in the Company's overall sales in the current quarter is primarily
due to decreased sales of the Company's suture products. Suture sales decreased
approximately $171,000 or 7.5% for the quarter ended September 30, 1997 compared
to the quarter ended September 30, 1996 due to lower sales of veterinary and
other sutures. This in turn was aggravated by decreased productivity in the
Company's primary suture manufacturing facility due to certain labor supply
interruptions. Veterinary suture sales were also negatively affected by the
delay in launching the Company's new monofilament synthetic absorbable suture
due to a supplier's inability to provide suture raw material meeting the
Company's specifications. Assuming this supply problem is rectified, the
Company believes this launch will take place early in the first quarter of 1998.
Additionally, non-suture sales were characterized by an increase in the sales of
sharps containers sold under the PRO-TEC brand name, which increases were offset
by decreases in sales of the Company's diagnostic products marketed under the
Ulster Scientific brand name.
Gross margins were down to 36% on average from 37% in the 1996 quarter due to
inefficiencies which resulted from certain labor interruptions which occurred in
the Company's primary suture manufacturing facility. These issues have been
addressed, and the relocation of certain manufacturing functions to another site
is expected to result ultimately in lower per unit manufacturing costs. Gross
profits as a whole were down by approximately $95,000 due to the margin
reduction and the lower revenue figures.
Selling expenses and General & Administrative expenses were approximately equal
for the two quarters, as overall staffing levels have not changed. R&D is down
significantly to $15,000 from $36,000 in the 1996 quarter due to completion in
January 1997 of the Company's project to develop and receive FDA clearance for
its braided synthetic absorbable suture.
As a result of the foregoing, earnings from Operations decreased 20%, or
$62,000, to $245,000 for the 1997 quarter versus earnings from Operations of
$307,000 for the same quarter in 1996.
Interest expense increased $47,000 from $71,000 in 1996 to $117,000 in 1997 due
to the increases in net borrowings to finance the acquisitions of PRO-TEC and
Techsynt in May 1997.
As a result of the foregoing, the Company incurred a net profit for the quarter
of $133,000, or $.04 per share, for 1997, compared to a net profit of $229,000,
or $.08 per share, in 1996.
Nine Months Ended September 30, 1997
- ------------------------------------
Notwithstanding decreased revenues to the U.S. Government of $1 million during
the first six months for the reason set forth below, sales increased
approximately $658,000, or 11% for the nine months ended September 30, 1997,
compared to the nine months ended September 30, 1996,
8
<PAGE>
due primarily to revenue generated from the product lines acquired from Ulster
in March 1996 and the PRO-TEC and Techsynt acquisitions in May 1997.
Gross margins increased to 34% from 33% due to shifts in the product mix,
yielding gross profits of $2,298,000 for the nine months ended September 30,
1997, compared to $2,017,000 for the nine months ended September 30, 1996.
Total operating expenses increased $175,000 or 24% for the nine months ended
September 30, 1997 due to increases in sales and marketing staff resulting from
the PRO-TEC and Ulster acquisitions. Research & Development decreased $70,000,
or 65% due to the successful completion of the Company's synthetic absorbable
suture project.
Interest expense increased $113,000 due to higher levels of borrowing related to
its joint venture in India and the PRO-TEC and Techsynt acquisitions.
As a result of the foregoing, the Company incurred a net profit of $662,000 or
$.20 per share, for the nine months ended September 30, 1997, compared to a net
profit of $529,000 or $.19 per share during the same period in 1996.
Sales to the U.S. Government. During 1996, the department of the U.S.
- -----------------------------
Government responsible for procuring medical supplies, such as sutures, began
purchasing the majority of such items outside the traditional bid system. This
trend has continued in 1997, with traditional bid activity almost ceasing. The
Company had been successful over the last several years in obtaining substantial
awards under the bid system, with revenues of $1,000,000 in 1997 and $600,000 in
1996 from the Government. There have now been virtually no U.S. Government
sales for approximately one year. The new system, which incorporates local
dealers called Prime Vendors, is less sensitive to price and more sensitive to
the impact of a direct sales force. As a result of the foregoing, since the
Company has only a limited sales force, it is unlikely that the Company will
generate significant sales of its products to the U.S. Government in the future.
Liquidity and Capital Resources
-------------------------------
At September 30, 1997, the Company had cash and cash equivalents of $97,000 and
working capital of $6,025,000.
In August 1997, the Company's lines of credit were renewed through August 31,
1998. As part of this renewal, the balance on the working capital line of
credit was converted to a term loan, repayable over five years, and the letter-
of-credit line was increased from $1,650,000 to $2,000,000. In September, the
Company further amended and re-balanced its working capital and letter of credit
lines to allow $1,750,000 in working capital and $1,250,000 in letters of
credit. As of September 30, 1997, the Company had outstanding advances on the
working capital line of $1,150,000, and there were approximately $929,851 in
letters-of-credit outstanding relating to raw material purchases and other
general purposes, under the letter of credit line. The bank refinancing also
included a reduction in the Company's interest rate to .75 over prime from 1.0
over prime.
The Company also has an SBA export working capital line-of-credit agreement,
which provides working capital for export sales up to the lesser of (a) $350,000
or (b) 80 percent of the face
9
<PAGE>
amount of negotiated Letters of Credit issued for the benefit of the Borrower
and delivered to Lender. At September 30, 1997, there was $68,000 outstanding
under this line-of-credit agreement.
In February 1997, two outside directors (who are also substantial stockholders)
committed to loan the Company $1,000,000. Terms of the loans include an
interest rate of 10%, and issuance of up to 100,000 warrants to purchase common
stock of the Company at an exercise price equal to the market price of common
stock at the time of issuance. As of June 30, 1997, the aforementioned
directors had loaned the Company $500,000 each, and were issued 50,000 warrants
each. The funds have been used for continued expansion of Lukens' recently
acquired India facility, expansion of capacity for its new synthetic absorbable
suture product, and acquisition-related activities.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
10
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LUKENS MEDICAL CORPORATION
Date: November 13, 1997 By: /s/ Robert S. Huffstodt
-----------------------------------------
Robert S. Huffstodt
President and Chief Executive Officer
Date: November 13, 1997 By: /s/ Robert S. Huffstodt
-----------------------------------------
Robert S. Huffstodt
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 97,193 0
<SECURITIES> 0 0
<RECEIVABLES> 2,558,414 0
<ALLOWANCES> 5,790 0
<INVENTORY> 6,886,681 0
<CURRENT-ASSETS> 9,763,868 0
<PP&E> 3,068,483 0
<DEPRECIATION> 1,650,323 0
<TOTAL-ASSETS> 15,770,317 0
<CURRENT-LIABILITIES> 3,739,158 0
<BONDS> 0 0
0 0
0 0
<COMMON> 30,144 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 15,770,317 0
<SALES> 2,068,828 6,802,626
<TOTAL-REVENUES> 2,068,828 6,802,626
<CGS> 1,341,765 4,504,658
<TOTAL-COSTS> 1,823,622 5,914,084
<OTHER-EXPENSES> 112,443 226,591
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 112,875 235,282
<INCOME-PRETAX> 132,763 661,951
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 132,763 661,951
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 132,763 661,951
<EPS-PRIMARY> .04 .20
<EPS-DILUTED> .04 .20<F1>
<FN>
<F1> THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THE STATEMENTS.
</FN>
</TABLE>
