<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 June 30, 1997
. . . . . . . . . . . . . . . . . . . . . . . . .
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . . . to . . . . . . . . . . .
Commission file number 1-11109
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 June 30, 1997
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock, $.01 par value 2,998,571 shares
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
INDEX
Page
----
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 2. Changes in Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX 12
EXHIBITS 13
2
<PAGE>
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 $ 107,502 878,090
Accounts receivable, net of allowance
for doubtful accounts of $5,790 2,641,703 1,901,947
Inventory (Note 2) 5,794,363 5,565,210
Prepaid expenses 48,608 34,290
------------ ------------
Total current assets 8,592,176 8,379,537
Land, building and equipment, net of accumulated depreciation
of $1,567,991 at June 30, and $1,358,081 at December 31 3,097,160 2,062,842
Intangible assets, net of accumulated amortization of
$1,048,267 at June 30, and $966,065 at December 31 1,451,686 1,098,487
Investments in Joint Ventures 943,941 0
Other assets 283,742 261,294
------------ ------------
Total assets 14,368,705 $ 11,802,160
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable 1,616,134 $ 1,406,243
Accrued liabilities 102,915 62,139
Current maturities of long-term debt and
capital leases 1,695,799 2,042,016
------------ ------------
Total current liabilities 3,414,848 3,510,398
Long-term debt, excluding current maturities 2,454,542 1,953,854
Obligations under capital leases, excluding
current maturities 80,210 59,378
------------ ------------
Total liabilities 5,949,600 5,523,630
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares: issued and outstanding
2,998,571 shares 30,050 27,320
Additional paid-in capital 18,822,609 17,213,952
Accumulated deficit (10,433,554) (10,962,742)
------------ ------------
Total stockholders' equity 8,419,105 6,278,530
------------ ------------
Total liabilities and stockholders' equity $ 14,368,705 $ 11,802,160
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets
-3-
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
UNAUDITED
---------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 2,329,859 $ 2,362,938 $ 4,733,798 $ 3,907,501
Cost of sales 1,524,609 1,633,942 3,162,893 2,712,875
--------------- --------------- -------------- ---------------
Gross profit 805,250 728,996 1,570,905 1,194,626
--------------- --------------- -------------- ---------------
Selling expenses 200,656 164,382 429,030 265,099
General and administrative expenses 254,880 231,935 473,638 450,491
Research and development expenses 12,881 36,011 24,901 72,871
--------------- --------------- -------------- ---------------
Total operating expenses 468,416 432,328 927,569 788,461
--------------- --------------- -------------- ---------------
Earnings from operations 336,834 296,668 643,336 406,165
--------------- --------------- -------------- ---------------
Other (expense) income:
Interest income 2,011 1,403 3,871 4,132
Interest expense (68,941) (30,115) (122,407) (51,561)
Other, net 5,888 (26,618) 4,388 (13,533)
--------------- --------------- -------------- ---------------
Total other (expense) income (61,043) (55,330) (114,148) (60,962)
--------------- --------------- -------------- ---------------
Earnings (loss) before income taxes 275,791 241,338 529,188 345,962
Income tax expense (note 3) - - - -
--------------- --------------- -------------- ---------------
Net earnings (loss) $ 275,791 $ 241,338 $ 529,188 $ 345,962
=============== =============== ============== ===============
Weighted average number of common and common
equivalent shares outstanding 3,354,795 3,017,388 3,335,296 3,017,388
=============== =============== ============== ===============
Income (loss) per common and common
equivalent share: $ 0.08 $ 0.08 $ 0.16 $ 0.11
=============== =============== ============== ===============
</TABLE>
- 4 -
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
UNAUDITED
---------
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operations:
Net earnings (loss) $ 529,188 $ 345,203
Adjustments to reconcile net earnings (loss)
to cash provided (used) by operating activities:
Depreciation 209,910 132,030
Amortization of intangible assets 82,202 169,680
Changes in current assets and liabilities:
Accounts receivable (739,756) (267,030)
Inventory (229,153) (247,893)
Prepaid expenses (14,310) (43,629)
Accounts payable 209,891 183,337
Accrued liabilities 40,776 (25,176)
Change in other assets (22,448) (30,273)
----------- -------------
Net cash provided (used) by operating activities 66,300 216,249
----------- -------------
Cash flows from investing activities:
Purchase of plant and equipment (1,244,228) (198,114)
Investments in Joint Ventures (943,941) -
Purchase of intangible assets (435,401) (718,810)
----------- -------------
Net cash used in investing activities (2,623,570) (916,924)
----------- -------------
Cash flows from financing activities:
Proceeds from the issuance of common stock and equivalents 1,611,477 237,500
Borrowings on long-term debt & obligations under capital leases 1,175,303 625,283
Principal payments on long-term debt & obligations under capital leases (1,000,098) (50,799)
----------- -------------
Net cash provided by financing activities 1,786,682 811,984
----------- -------------
Net increase (decrease) in cash and cash equivalents (770,588) 111,309
Cash and cash equivalents at beginning of period 878,090 39,049
=========== =============
Cash and cash equivalents at end of period $ 107,502 $ 150,358
=========== =============
</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
June 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, 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 six-
month periods ended June 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>
June 30, December 31,
1997 1996
---------- -----------
<S> <C> <C>
Raw materials $2,393,190 $2,767,214
Work-in-process 1,842,594 1,419,685
Finished goods 1,558,579 1,378,311
---------- ----------
$5,794,363 $5,565,210
========== ==========
</TABLE>
(3) Income Taxes
------------
The Company uses the asset and liability method of accounting for income
taxes.
6
<PAGE>
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 June 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 June 30, 1997
- --------------------------------
Sales were approximately level for the quarter ended June 30, 1997 compared to
the quarter ended June 30, 1996. Increases in revenue attributable to increased
exports and the acquisition by the Company of PRO-TEC Containers, Inc. ("PRO-
TEC") in May, 1997 (the "PRO-TEC Acquisition") and the acquisition of Techsynt
Lukens Ltd. ("Techsynt") also in May 1997 were offset by decreased sales to the
U.S. Government. In the second quarter of 1996, the Company's sales to the U.S.
Government were approximately $450,000. In the 1997 quarter, such sales were
nil. (See "Sales to the U.S. Government" below.)
The gross margin percentage improved slightly due to shifts in product mix, with
the second quarter generating 35% margins compared to 31% last year. Selling
expenses increased $36,000 to $201,000 for the 1997 quarter, versus $165,000 for
the 1996 quarter. This increase was a result of the addition of support
personnel for new product lines purchased from Ulster Scientific, Inc.
("Ulster") in March 1996 and the PRO-TEC Acquisition. General and
Administrative expenses and Research & Development expenses increased and
decreased, respectively, in the 1997 quarter versus the 1996 quarter, with G&A
up $23,000 to $255,000, and R&D reduced $24,000 to $12,000. The increase in G&A
expense is mostly attributable to cost of living, while R&D has decreased due to
the successful completion of the Company's synthetic absorbable suture project.
As a result of the above, Income from Operations increased 14%, or $40,000, to
$337,000 for the 1997 quarter versus Income from Operations of $297,000 for the
same quarter in 1996.
Interest expense increased $39,000 from $30,000 in 1997 to $69,000 in 1997 due
to the net borrowings related to the various acquisitions.
As a result of the foregoing, and due to higher weighted average number of
shares outstanding at June 30, 1997 versus June 30, 1996, the Company incurred a
net profit for the quarter of $276,000, or $.08 per share, for 1997, compared to
a net profit of $241,000, or $.08 per share, in 1996.
Six Months Ended June 30, 1997
- ------------------------------
Notwithstanding the decreased revenues to the U.S. Government, sales increased
approximately $826,000, or 21% for the six months ended June 30, 1997, compared
to the six months ended June 30, 1996 due mainly 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 33% from 31% due to shifts in the product mix,
yielding gross profits of $1,570,905 for the six months ended June 30, 1997,
compared to $1,194,626 for the six months ended June 30, 1996. Total operating
expenses increased $139,000 or 18% for the six months ended June 30, 1997 due,
again, to increases in Sales and Administrative Staff resulting
8
<PAGE>
from the PRO-TEC and Ulster acquisitions. For the same reason, selling expenses
increased $164,000 or 62% and G&A expenses increased $24,000 or 5%. R&D
decreased by $48,000, or 67% due to the successful completion of the Company's
synthetic absorbable suture project.
Interest expense increased $71,000 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 $529,000 or
$.16 per share, for the six months ended June 30, 1997 compared to a net profit
of $345,000 or $.11 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 has been successful over the last several years in obtaining substantial
awards under the bid system, and has averaged approximately $600,000 in annual
sales to the U.S. Government over the last five years. 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 continue to meet or exceed its historical levels or generate
significant new sales of its products to the U.S. Government in the future.
Liquidity and Capital Resources
-------------------------------
At June 30, 1997, the Company had cash and cash equivalents of $107,000 and
working capital of $5,177,000.
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. As of June 30,
1997, the Company had drawn advances on the working capital line of $1,000,000,
and there were approximately $842,000 in letters-of-credit outstanding relating
to raw material purchases and other general purposes, under the line 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 amount of negotiated Letters of Credit issued for
the benefit of the Company and delivered to the Lender. At June 30, 1997, there
was $50,000 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
9
<PAGE>
India facility, expansion of capacity for its new synthetic absorbable suture
product, and for other acquisition-related activities.
On May 13, 1997, the Company acquired PRO-TEC. PRO-TEC manufacturers and
markets a broad line of specialized containers for the disposal of used
"sharps", such as needles and scalpel blades, and have been a pioneer in the
industry for over ten years. PRO-TEC was acquired for 200,000 shares of newly-
issued Common Stock and approximately $380,000 in cash. The acquisition was
effected by a merger with the result that PRO-TEC is now a wholly-owned
subsidiary of the Company. The acquisition has been accounted for under the
"purchase" method.
On June 11, 1997, 65,000 warrants issued in May 1992 were exercised by an
outside investor for $6.00 per share (the "1992 Warrants"). While the 1992
Warrants did not expire until May 1998, the Company offered as an inducement for
exercise, 65,000 new warrants exercisable for two years at $4.50 per share. As
of August 8, 1997, there are 435,000 of the 1992 Warrants still outstanding and
exercisable for $6.00 per share.
In the past, the Company has been reliant upon two of its outside directors to
finance the costs associated with certain acquisitions and to restructure
certain indebtedness on terms favorable to the Company. There can be no
assurance the such financing, or other third party or equity financing, will be
available in the future or, if available, will be on terms acceptable to the
Company.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
---------------------
(c) (i) During the most recently completed quarter, the Company
issued and sold the following equity securities:
1. On May 12, 1997, the Company issued 200,000 shares of common
stock to the sole stockholder of PRO-TEC in connection with the PRO-TEC
Acquisition at a deemed valuation of approximately $1,200,000 (approximately
$6.00 per share).
2. In June, 1997, the Company issued a warrant to purchase
35,000 shares of common stock at an exercise price of $6.00 per share to each of
its two outside directors in consideration of the making of a second tranche of
a loan to the Company in the amount of $350,000 each (these two directors were
each previously granted a warrant to purchase 15,000 shares of common stock in
February in connection with the making of the first tranche of a loan to the
Company in the amount of $150,000 each).
3. On June 11, 1997, the Company issued 65,000 shares of common
stock for an exercise price of $6.00 per share to an accredited investor in
connection with the exercise of a warrant issued to such investor in May, 1992.
(ii) All transactions described in this Item 2(c) were effected in
reliance upon the exemption from the registration requirements of the Securities
Act contained in Section 4 (2) of the Securities Act on the basis that such
transactions did not involve any public offering.
10
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Company held its Annual Meeting of Stockholders (the "Meeting") during the
fiscal quarter ending June 30, 1997.
(a) The date of the Meeting was June 6, 1997.
(b) At the Meeting, the following persons were elected as directors of the
Company, each receiving the number of votes set forth opposite their
names below:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD
--- ------- --------
<S> <C> <C> <C>
Robert S. Huffstodt 2,632,918 --- 1,726
John H. Robinson 2,631,318 --- 3,326
Robert L. Priddy 2,620,795 --- 13,849
</TABLE>
(c) The only other matter acted on at the Meeting was the ratification of
Neff & Company as the independent auditors of the Company.
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, except as follows:
1. On May 21, 1997, the Company filed a report on Form 8-K to report
the PRO-TEC acquisition.
11
<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: August 15, 1997 By: /s/ Robert S. Huffstodt
----------------------------------
Robert S. Huffstodt
President and Chief
Executive Officer
Date: August 15, 1997 By: /s/ Robert S. Huffstodt
----------------------------------
Robert S. Huffstodt
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10 QSB AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 107,502 0
<SECURITIES> 0 0
<RECEIVABLES> 2,641,703 0
<ALLOWANCES> 5,790 0
<INVENTORY> 5,794,363 0
<CURRENT-ASSETS> 8,592,176 0
<PP&E> 3,097,160 0
<DEPRECIATION> 1,567,991 0
<TOTAL-ASSETS> 14,368,705 0
<CURRENT-LIABILITIES> 3,414,848 0
<BONDS> 0 0
0 0
0 0
<COMMON> 30,505 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 14,368,705 0
<SALES> 2,329,859 4,733,798
<TOTAL-REVENUES> 2,329,859 4,733,798
<CGS> 1,524,609 3,162,893
<TOTAL-COSTS> 1,993,025 4,090,462
<OTHER-EXPENSES> 61,043 114,148
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 68,941 122,407
<INCOME-PRETAX> 275,791 529,188
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 275,791 529,188
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 275,791 529,188
<EPS-PRIMARY> .08 .16
<EPS-DILUTED> .08 .16
</TABLE>
