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, 1998
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File Number 1-11109
--------
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, 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 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 5. Other Matters 11
Item 6. Exhibits and Report on Form 8-K 11
SIGNATURES 12
2
<PAGE>
LUKENS MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED AUDITED
JUNE 30, DECEMBER 31,
1998 1997
---------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $6,583 $74,048
Accounts Receivable, net of allowance for doubtful $2,504,342 $1,836,542
accounts of $40,000 as of December 31,1997
and $40,00 as of June 30,1998
Inventory $5,822,224 $5,105,900
Prepaid Expenses $265,518 $127,080
---------------- -----------------
TOTAL CURRENT ASSETS $8,598,667 $7,143,570
Land, building and equipment, net of accumulated $3,446,871 $3,599,150
depreciation of $1,963,377as of December 31,1997
and $2,161,643 as of June 30,1998
Intangible assets and Investments in Joint Ventures, $2,796,551 $3,001,139
net of amortization of $1,283,569 as of December 31,1997
and $1,488,157 as of June 30,1998
Other assets $78,533 $85,754
---------------- -----------------
TOTAL ASSETS $14,920,622 $13,829,613
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,376,924 $1,864,832
Accrued liabilities $106,958 $138,016
Current maturities of long term debt $4,618,840 $5,146,950
Current maturities of obligations under capital leases $139,672 $146,893
TOTAL CURRENT LIABILITIES $7,242,394 $7,296,691
Long-term debt, excluding current maturities $1,477,226 $73,483
Long Term Stockholder Payable $1,233,075 $2,290,991
Obligations under cap leases, excl current maturities $211,062 $266,256
---------------- -----------------
TOTAL LIABILITIES $10,163,757 $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
3,043,359 shares as of December 31, 1997
and 3,093,359 as of June 30,1998.
Additional paid-in capital $18,725,535 $18,526,035
Accumulated Deficit ($14,066,520) ($14,730,760)
Foreign Currency Adjustment ($62,615) ($53,048)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY $4,757,334 $3,772,661
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,920,622 $13,829,613
================ =================
</TABLE>
3
<PAGE>
LUKENS MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30,1998 JUNE 30,1998
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $2,839,069 $2,329,859 $5,498,002 $4,733,798
Cost of sales $1,696,981 $1,524,609 $3,321,043 $3,162,893
---------------- ----------------- ----------------- ---------------
Gross profit $1,142,088 $805,250 $2,176,959 $1,570,905
---------------- ----------------- ----------------- ---------------
Selling expenses $220,371 $200,656 $447,375 $429,030
General and administrative expenses $395,946 $254,880 $747,754 $473,638
Research and development expenses $15,898 $12,881 $32,996 $24,901
---------------- ----------------- ----------------- ---------------
Total operating expenses $632,215 $468,417 $1,228,125 $927,569
---------------- ----------------- ----------------- ---------------
Earnings from operations $509,873 $336,833 $948,834 $643,336
---------------- ----------------- ----------------- ---------------
Other (expense) income:
Interest income $0 ($2,011) ($50) ($3,871)
Interest expense $167,731 $68,941 $290,197 $122,407
Other, net $0 ($5,888) $0 ($4,388)
---------------- ----------------- ----------------- ---------------
Total other (expense) income $167,731 $61,042 $290,147 $114,148
---------------- ----------------- ----------------- ---------------
Earnings (loss) before extraordinary $342,142 $275,791 $658,687 $529,188
items
Income tax expense $0 $0 $0 $0
---------------- ----------------- ----------------- ---------------
Net earnings (loss) $342,142 $275,791 $658,687 $529,188
================ ================= ================= ===============
Basic net earnings (loss) per share $0.11 $0.09 $0.21 $0.18
================ ================= ================= ===============
Dilutive net earnings (loss) per share $0.10 $0.08 $0.19 $0.16
================ ================= ================= ===============
Weighted average number of common
shares outstanding - basic 3,093,359 2,998,571 3,171,745 2,865,280
================ ================= ================= ===============
Weighted average number of common
and common equivalent shares
outstanding - dilutive 3,591,551 3,354,795 3,445,841 3,335,296
================ ================= ================= ===============
</TABLE>
4
<PAGE>
LUKENS MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
NET EARNINGS (LOSS) $658,687 $529,188
ADJUSTMENTS TO RECONCILE NET EARNINGS
(LOSS) TO CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
Depreciation $207,832 $209,910
Amortization of intangible assets $204,588 $82,202
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable ($667,800) ($739,756)
Inventory ($716,324) ($229,153)
Prepaids ($138,438) ($14,310)
Accounts payable $512,092 $209,891
Accrued liabilities ($31,058) $40,776
Change in other assets $7221 ($22,448)
----------------- ----------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ($36,800) $66,300
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment ($50,000) ($1,244,228)
Investment in Joint ventures $0 ($943,941)
Purchase of intangible assets $0 ($435,401)
----------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES
($50,000) ($2,623,570)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long term debt & obligations under capital $0 $1,611,477
leases
Principal payments on long term debt & obligations under ($254,265) $1,175,303
capital leases
Proceeds from the issuance of common stock and equivalents $200,000 ($1,000,098)
----------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES
($54,265) $1,786,682
----------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
($67,465) ($770,588)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
$74,048 $878,090
================= ================
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$6,583 $107,502
================= ================
</TABLE>
5
<PAGE>
LUKENS MEDICAL CORPORATION
Notes to Consolidated Financial Statements
June 30, 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 six-month period ended June 30, 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:
June 30, December 31
1998 1997
---- ----
Raw Materials $2,154,812 $1,938,343
Work-in-Process 1,972,124 1,972,124
Finished Goods 1,428,105 1,261,603
Inventory Reserve (66,170) (66,170)
------------ -------------
$5,822,224 $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>
(4) Pending Litigation
Owen Mumford Ltd. ("Owen Mumford"), one of the Company's competitors, filed a
complaint in the United States District Court for the Eastern District of
Virginia, Richmond Division on April 29, 1998 and served a summons and complaint
on the Company on June 1, 1998, alleging that one of the Company's products, the
"Gentle-Let 1" infringes on a patent owned by Owen Mumford. The complaint seeks
damages adequate to compensate Owen Mumford for the alleged patent infringement,
as well as costs and expenses. The Company intends to vigorously defend itself
in this proceeding. The matter is currently in the discovery phase.
(5) Status of Default Under Credit Facility
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. 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended June 30, 1998
Sales increased approximately $509,000 or 22% for the quarter ended June 30,
1998, compared to the quarter ended June 30, 1997 due mainly to revenue
generated from the product lines acquired with Pro-Tec Containers, Inc. in May
1997 (the "Acquisition"), increases in lancet sales, and increased dental suture
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 40% margins compared to 35%
last year.
General and Administrative expenses increased $141,000 to $396,000 for the 1998
quarter, versus $255,000 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 $3,000
to $16,000 for the 1998 quarter, versus $13,000 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 51%, or $173,000,
to $510,000 for the 1998 quarter versus Income from Operations of $337,000 for
the same quarter in 1997.
Interest expense increased $99,000 from $69,000 in 1997 to $168,000 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 $342,000 or $.10 per share, for 1998, compared to a net profit of $276,000,
or $.08 per share, in 1997.
Six Months Ended June 30, 1998
Sales increased approximately $764,000 or 16% for the six months ended June 30,
1998 compared to the six months ended June 30, 1997 due mainly to revenue
generated from the product lines acquired from Pro-Tec and Techsynt acquisitions
in May 1997, increases in Lancet sales and increased dental suture sales.
Gross margins increased to 39% from 33% due to shifts in the product mix,
yielding gross profits of $2,176,959 for the six months ended June 30, 1998,
compared to $1,570,905 for the six months ended June 30, 1997. Total operating
expenses increased $300,000 or 32% for the six months ended June 30, 1998 due,
again, to increases in Sales and Administrative Staff resulting from the PRO-TEC
and Ulster acquisitions due to amortization, selling expenses increased $18,000
or 4% and G&A expenses increased $274,000 or 58%. R&D increased by $8,000 or 33%
due to the successful completion of the Company's synthetic absorbable suture
project.
Interest expense increased $168,000 due to higher levels of borrowing related to
its joint venture in India and the PRO-TEC and Techsynt acquisitions.
9
<PAGE>
As a result of the foregoing, the Company incurred a net profit of $658,000 or
$.19 per share, for the six months ended June 30, 1998 compared to a net profit
of $529,000 or $.16 per share during the same period in 1997.
Liquidity and Capital Resources
At June 30, 1998, the Company had cash and cash equivalents of $6,583 and
working capital of $1,479,052.
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 June 30, 1998, the Company had
fully drawn the working capital line, and there was approximately $111,000 in
stand-by letters of credit and $553,000 in letters-of-credit outstanding
relating to raw material purchases, and other general purposes, under the letter
of credit line.
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. 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. The Company's credit facility expires and needs to be renewed
prior to the end of August 1998. There can be no assurance that such credit
facility will be so renewed, or that it will be renewed on terms favorable to
the Company. In the event that such credit facility is not so renewed, there can
be no assurance that the Company will be able to obtain alternate financing.
During the quarter ended June 30, 1998, the Company experienced lower levels of
productivity at its primary suture manufacturing facility in Juarez, Mexico.
This was caused by unusually high turnover of staff. As a result, the Company
fell short of its produciton goals which in turn created incresed levels of
inventory. The Company's decreased ability to convert its inventory into cash or
accounts receivable has resulted in a working capital shortfall. The Company is
currently working to remedy its production problems, but no assurance can be
given that a remedy will be forthcoming in the immediate future.
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. The
merger is expected to close by the end of September the Company has set a record
date of August 14, 1998 for shareholders entitled to vote at the Special Meeting
being held to approve the merger.
Year 2000 Disclosure. The Company believes that its operations will not be
materially disrupted by any problems associated with the "Year 2000" syndrome
after January 1, 2000; however there can be no assurances in this regard.
Other than statements of historical fact, this Management's Discussion and
Analysis of Financial Condition and Results of Operations as well as the
accompanying Form 10-QSB contains forward looking statements that involve
certain risks and uncertainties. Such risks and uncertainties include the
continued ability of the Company to obtain financing for its activities, the
impact of competition, the ability of joint venture partners and distributors to
sell the Company's products, changes in customer preferences and trends and
other risks detailed in the Company's Securities and Exchange Commission
filings.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Owen Mumford Ltd. ("Owen Mumford"), one of the Company's competitors, filed a
complaint in the United States District Court for the Eastern District of
Virginia, Richmond Division on April 29, 1998 and served a summons and complaint
on the Company on June 1, 1998, alleging that one of the Company's products, the
"Gentle-Let 1" infringes on a patent owned by Owen Mumford. The complaint seeks
damages adequate to compensate Owen Mumford for the alleged patent infringement,
as well as costs and expenses. The Company intends to vigorously defend itself
in this proceeding. The matter is currently in the discovery phase.
Item 2. Changes in Securities
(c)(i) During the most recently completed quarter, the Company issued
and sold the following equity securities:
1. The Company issued 25,000 shares of Common Stock to Medisys in April
1998 at a price of $4.00 per share. The Company issued an additional 57,500
shares in July 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.
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. 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.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
(i) On May 5, 1998, the Company filed a Current Report on Form
8-K to report the execution of the merger agreement with
Medisys.
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 12, 1998 By: /s/ Robert S. Huffstodt
-----------------------------
Robert S. Huffstodt
President and Chief Executive
Officer
Date: August 12, 1998 By: /s/ Michael E. Sobieski
-----------------------------
Michael E. Sobieski
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 6,583
<SECURITIES> 0
<RECEIVABLES> 2,504,342
<ALLOWANCES> 40,000
<INVENTORY> 5,822,224
<CURRENT-ASSETS> 8,598,667
<PP&E> 3,446,871
<DEPRECIATION> 2,161,643
<TOTAL-ASSETS> 14,920,622
<CURRENT-LIABILITIES> 7,242,394
<BONDS> 0
0
0
<COMMON> 30,934
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,920,622
<SALES> 2,839,069
<TOTAL-REVENUES> 2,839,069
<CGS> 1,698,981
<TOTAL-COSTS> 2,329,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167,731
<INCOME-PRETAX> 342,142
<INCOME-TAX> 0
<INCOME-CONTINUING> 342,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 342,142
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.10
</TABLE>
