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
March 31, 1998
For the quarterly period ended .................................................
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)
(505) 342-9638
Issuer's telephone number, including area code .................................
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 March 31, 1998
............................. ------------------------------
Common Stock, $.01 Par Value 3,093,359 Shares
1
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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 9
Item 3. Defaults Upon Senior Securities 9
Item 5. Other Matters 9
Item 6. Exhibits and Report on Form 8-K 10
SIGNATURES 11
2
<PAGE>
LUKENS MEDICAL CORPORATION
--------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) AUDITED
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ ------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $53,882 $74,048
Accounts Receivable, net of allowance for doubtful $2,262,518 $1,836,542
accounts of $40,000 as of December 31,1997 and
$40,00 as of March 31,1998
Inventory $5,333,559 $5,105,900
Prepaid Expenses $138,846 $127,080
---------------- ----------------
TOTAL CURRENT ASSETS $7,788,805 $7,143,570
Land, building and equipment, net of accumulated $3,542,600 $3,599,150
depreciation of $1,963,377as of December 31,1997
and depreciation of $2,069,927 as of March 31,1998
Intangible assets and Investments in Joint Ventures, $2,899,224 $3,001,139
net of amortization of $1,283,569 as of December 31,1997
and net of amortization of $1,385,484 as of March 31,1998
Other assets $85,754 $85,754
================ ================
TOTAL ASSETS $14,316,383 $13,829,613
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $1,953,128 $1,864,832
Accrued liabilities $134,783 $138,016
Current maturities of long term debt $5,065,341 $5,146,950
Current maturities of obligations under capital leases $146,893 $146,893
---------------- ----------------
TOTAL CURRENT LIABILITIES $7,300,145 $7,296,691
Long-term debt, excluding current maturities $58,483 $73,483
Stockholder Payable $2,315,991 $2,290,991
Obligations under cap leases, excl current maturities $223,027 $266,256
---------------- ----------------
TOTAL LIABILITIES $9,897,646 $9,927,421
Minority interest $129,531 $129,531
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized $30,934 $30,434
20,000,000 shares: issued and outstanding
3,093,359 shares as of December 31,1997and 3,300,130
as of March 31, 1998.
Additional paid-in capital $18,725,535 $18,525,035
Accumulated Deficit + foreign Currency Adjustment $(14,467,283) ($14,783,808)
---------------- ----------------
Total stockholders' equity $4,289,206 $3,772,661
---------------- ----------------
Total liabilities and stockholders' equity $14,316,383 $13,829,613
================ ================
</TABLE>
3
<PAGE>
LUKENS MEDICAL CORPORATION
--------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
UNAUDITED
---------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
-------------- --------------
<S> <C> <C>
SALES $2,658,933 $2,403,939
Cost of sales $1,624,062 $1,638,284
-------------- --------------
GROSS PROFIT $1,034,871 $765,655
-------------- --------------
Selling expenses $227,004 $228,374
General and administrative expenses $351,808 $218,758
Research and development expenses $17,098 $12,020
-------------- --------------
TOTAL OPERATING EXPENSES $595,910 $459,152
-------------- --------------
EARNINGS FROM OPERATIONS $438,961 $306,503
-------------- --------------
OTHER (EXPENSE) INCOME:
Interest income ($50) ($1,860)
Interest expense $122,466 $53,466
Other, net $0 $1,500
-------------- --------------
TOTAL OTHER (EXPENSE) INCOME $122,416 $53,106
------------- --------------
EARNINGS (LOSS) BEFORE $316,545 $253,397
EXTRAORDINARY ITEMS
Income tax expense $0 $0
-------------- --------------
NET EARNINGS (LOSS) $316,545 $253,397
============== ==============
Weighted average number of common and common
equivalent shares outstanding 3,300,130 3,315,737
============== ==============
Income (loss) per common and common $0.10 $0.08
equivalent shares outstanding
============== ==============
</TABLE>
4
<PAGE>
LUKENS MEDICAL CORPORATION
--------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---------------- -------------
Cash flows from operations:
<S> <C> <C>
Net earnings (loss) $316,545 $253,397
Adjustments to reconcile net earnings (loss) to cash
provided (used) by operating activities:
Depreciation $106,550 $82,309
Amortization of intangible assets $101,915 $37,049
Changes in current assets and liabilities:
Accounts receivable ($425,976) ($218,117)
Inventory ($227,659) $38,337
Prepaids ($11,766) ($74,849)
Accounts payable $113,296 ($13,786)
Accrued liabilities ($3,233) $165,534
Change in other assets $0 ($83,606)
---------------- -------------
Net cash provided (used) by operating activities ($30,328) $186,268
---------------- -------------
Cash flows from investing activities:
Purchase of plant and equipment ($50,000) ($31,547)
Investment in Joint ventures $0 ($22,913)
Purchase of intangible assets $0 ($583,689)
---------------- -------------
Net cash used in investing activities ($50,000) ($638,149)
---------------- -------------
Cash flows from financing activities:
Borrowings on long term debt & obligations under
capital leases $0 ($239,470)
Principal payments on long term debt & obligations
under capital leases ($139,838) ($25,783)
Proceeds from the issuance of common stock and
equivalents $200,000 $13,154
---------------- -------------
Net cash provided by financing activities $60,162 ($252,099)
---------------- -------------
Net increase (decrease) in cash and cash
equivalents ($20,166) ($703,980)
Cash and cash equivalents at beginning of period $74,048 $878,090
================ =============
Cash and cash equivalents at end of period $53,882 $174,110
================ =============
</TABLE>
5
<PAGE>
LUKENS MEDICAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1998
(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 three-month period ended March 31, 1998 and 1997. 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, 1997 (the
"1997 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:
March 31 December 31
1998 1997
---------- ---------------
Raw Materials $2,127,718 $1,938,343
Work-in-Process 1,950,637 1,972,124
Finished Goods 1,255,204 1,195,433
---------- ----------
$5,335,559 $5,105,900
========== ==========
6
<PAGE>
(3) Income Taxes
The net operating loss and credit for increasing research activities
carryforwards as of December 31, 1997, expire as follows:
Approximate Increasing Research
Net Operating Activities Book/Tax
Loss Carryforward Credits
----------------- -------
State Loss Federal Loss
Amount Amount Tax Effect Tax Effect
------ ------ ---------- ----------
1999 $2,537,000 $ --- $ 122,000 $ 3,800
2000 --- 1,930,000 656,000 37,200
2001 2,400,000 1,835,000 739,000 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 ---
2007 --- 26,000 9,000 ---
2008 --- 88,000 30,000 ---
2009 --- 2,760,000 938,000
2017 --- 2,400,000 816,000 ---
- --------------------------------------------------------------------------
$6,893,000 $12,975,000 $4,742,000 $105,000
========== =========== ========== =========
The capital loss carryforwards of approximately $271,000, tax effect of
$105,000, expire in 1998.
The deduction of federal net operating loss carryforwards is limited to
approximately $3,962,000 as of December 31, 1997. This limitation is based on an
annual limitation of $460,000 plus available carryover of $654,000 and losses
incurred subsequent to 1992 of $5,248,000. In addition, should the sale of the
Company occur (See "Liquidity and Capital Resources"), there may be additional
limitations.
7
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation
Results of Operations
---------------------
Three Months Ended March 31, 1998
- ---------------------------------
Sales increased approximately $255,000 or 11% for the quarter ended March 31,
1998, compared to the quarter ended March 31, 1997 due mainly to revenue
generated from the product lines acquired with Pro-Tec Containers, Inc. in May
1997 (the "Acquisition"), and due to increases in lancet sales.
The gross margin percentage increased due to cost reductions resulting from the
manufacture of certain raw materials in India, and the generally higher margins
in the Pro-Tec line. The first quarter generated 39% margins compared to 32%
last year.
General and Administrative expenses increased $134,000 to $352,000 for the 1998
quarter, versus $228,000 for the 1997 quarter. The majority of this increase was
a result of increased amortization expenses relating to the various acquisitions
in 1997, and the addition of staff in Brazil. Sales and Marketing expenses were
approximately the same for the 1998 and 1997 quarters, and R&D increased $5,000
to $17,000 for the 1998 quarter, versus $12,000 for the 1997 quarter. The
increase in R&D expenses reflects the cost of the Company's focus on obtaining
ISO Certification in 1998.
As a result of the foregoing, Income from Operations increased 142%, or
$132,000, to $439,000 for the 1998 quarter versus Income from Operations of
$307,000 for the same quarter in 1997.
Interest expense increased $69,000 from $53,500 in 1997 to $122,000 in 1998 due
to an increase in net borrowings to finance the Acquisition in May 1997, and the
investment in the Brazil joint venture in September 1997.
As a result of the foregoing, the Company achieved a net profit for the quarter
of $316,000, or $.10 per share, for 1998, compared to a net profit of $253,000,
or $.08 per share, in 1997.
Liquidity and Capital Resources
-------------------------------
At March 31, 1998, the Company had cash and cash equivalents of $53,882 and
working capital of $488,660.
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 increased from $1,000,000 to $1,750,000, and the letter-of-credit line was
decreased from $1,500,000 to $1,250,000. As of March 31, 1998, the Company had
fully drawn the working capital line, and there were approximately $360,000 in
letters-of-credit outstanding relating to raw material purchases, and other
general purposes, under the letter of credit line.
8
<PAGE>
During the quarter ended March 31, 1998, the Company was in technical default of
certain financial covenants and in payment default under certain of its term
loans with its lending bank as more fully described in the Company's Annual
Report on Form 10- KSB for the year ended December 31, 1997. In April 1998, the
Company cured its payment default under the term loans and its lending bank
amended certain of the financial covenants so that the Company is no longer in
default under any of its lines of credit.
On April 29, 1998, the Company announced that on April 28, 1998, it entered into
an Agreement and Plan of Merger with London-based Medisys PLC ("Medisys"),
pursuant to which Medisys would acquire the Company, and the stockholders of the
Company would receive $4.00, in cash, for each share of Common Stock of the
Company. The consummation of the merger is subject to a number of conditions,
including without limitation, approval by the stockholders of the Company,
satisfactory completion of due diligence and securing of financing by Medisys
sufficient to consummate the merger and the transactions contemplated thereby.
The merger is expected to close this summer.
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 March 24, 1998, the Company issued 50,000 shares of Common Stock to
Medisys at a price of $4.00 per share. The Company subsequently issued an
additional 25,000 shares of Common Stock to Medisys in April 1998 at a price of
$4.00 per share.
(ii) The 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 a public offering.
Item 3. Defaults Upon Senior Securities
-------------------------------
See Part 1, Item 2 above for a discussion of the Company's defaults under its
line of credit with its lending bank, which defaults have been cured.
Item 5. Other Matters.
--------------
As discussed in Part I, Item 2 above, on April 28, 1998, the Company entered
into a merger agreement with Medisys pursuant to which Medisys would acquire the
Company, and the stockholders of the Company would receive $4.00, in cash, for
each share of Common Stock of the Company.
9
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On March 6, 1998, the Company filed a Current Report on Form 8-K to report the
receipt of an offer to purchase the Company by an unnamed party for $4.00 per
share.
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: May 14, 1998 By: /s/ Robert S. Huffstodt
------------------------------------------
Robert S. Huffstodt
President and Chief Executive Officer
Date: May 14, 1998 By: /s/ Michael E. Sobieski
------------------------------------------
Michael E. Sobieski
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 53,882
<SECURITIES> 0
<RECEIVABLES> 2,282,518
<ALLOWANCES> 40,000
<INVENTORY> 5,333,559
<CURRENT-ASSETS> 7,788,805
<PP&E> 3,542,800
<DEPRECIATION> 2,069,927
<TOTAL-ASSETS> 14,316,383
<CURRENT-LIABILITIES> 7,300,145
<BONDS> 0
0
0
<COMMON> 30,934
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,316,383
<SALES> 2,658,933
<TOTAL-REVENUES> 2,658,933
<CGS> 1,624,062
<TOTAL-COSTS> 2,219,972
<OTHER-EXPENSES> (50)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122,455
<INCOME-PRETAX> 316,545
<INCOME-TAX> 0
<INCOME-CONTINUING> 316,545
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 316,545
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
