UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________________ to __________________
Commission File No. 1-11109
LUKENS MEDICAL CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 22-2429965
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
3820 Academy Parkway North NE
Albuquerque, New Mexico 87109
- ----------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (505) 342-9638
--------------
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
- ---------------------------- -----------------------------------------
Common Stock, $.01 par value Pacific Stock Exchange
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
<PAGE>
Check if the disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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. [ ]
State issuer's revenues for its most recent fiscal year: $8,618,863.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked price of such stock, as of March 25, 1998: $7,002,820. In
determining the market value of voting stock held by non-affiliates, share of
Common Stock of the registrant beneficially owned by directors, officers and
holders or more than 10% of the outstanding shares of Common Stock of the
registrant have been excluded. The determination of affiliate status is not
necessarily a conclusive determination for other persons.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of March 1, 1998: 3,043,359 shares of Common Stock, $.01 par
value.
2
<PAGE>
The undersigned Registrant hereby amends the following items of its Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997, as set forth
on the pages attached hereto:
Item 6: Management's Discussion and Analysis or Plan of Operations.
Item 7: Financial Statements.
3
<PAGE>
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1997 ("1997") COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996 ("1996").
Sales increased 5% to approximately $8.6 million during 1997 from
approximately $8.2 million during 1996, primarily as a result of the Pro-Tec
Acquisition. Domestic sales of sutures primarily in the dental and veterinary
market in 1997 were approximately even with sales in 1996. Anticipated sales
growth in the veterinary market as a result of the introduction of the
monofilament synthetic absorbable suture was not realized in 1997 due to
production problems experienced by the Company's supplier of suture material.
The Company believes that these supply problems have been remedied. The
Company's export sales in 1997 and 1996 totaled $1,651,451 and $2,295,066,
respectively, which represents 19% and 28% of total sales in each of those
years, respectively.
Before the product restructuring charge, the Company's gross margins
decreased slightly, from 29% in 1996 to 28% in 1997. Gross Margins for 1997 were
negatively impacted by a repricing of inventory at December 31, 1997. Such
repricing is reflected in the Audited Financial Statements as an inventory cost
reduction totaling approximately $772,000. The Company expects that gross
margins in its most rapidly growing product line, lancets, will improve in the
second quarter of 1998 due to in-house manufacturing of needles (the most
expensive component) at its new facility in Cochin, India. The Company also
expects overall margins to increase in 1998 as the suture sales mix shifts from
the lower priced international markets to the more lucrative OEM domestic
markets, and due partially to the addition of the Pro-Tec Product Lines which
typically carry a higher gross margin than the Company has experienced
historically.
Selling expenses increased 51% in 1997 from $716,042 in 1996, to
$1,087,171, as a result of increases in the number of employees required to sell
and service the Pro-Tec and Ulster Product Lines, increased marketing expenses
relating to the Ulster Product Lines, such as convention and literature
expenditures, and charges for uncollected commissions and an increase in the
reserve for uncollectible accounts receivable.
General and administrative expenses increased approximately 248% to
$2,399,657 in 1997 compared to $965,180 in 1996, due mainly to the costs
incurred in connection with the Pro-Tec Acquisition, the costs related to the
discontinued product line, start-up costs relating to the India facility and the
development costs related to the synthetic absorbable suture.
4
<PAGE>
Research and development expenses decreased approximately 35%, to $70,386
in 1997 compared to approximately $108,594 in 1996, due primarily to the
finalization of the synthetic absorbable suture development project. The Company
does not expect to expend significant funds on research and development
activities in 1998.
During 1996 and most of 1997, the Company saw the international suture
market as a significant growth area for the Company. A number of markets,
including the Middle East, India, South Africa and Brazil, expressed serious
interest in the Company's cardiovascular suture line (the "Cardio Line"), and
its new synthetic absorbable suture in development at that time. Also, in late
1996, the Company was approached by a new U.S. venture which was interested in a
broad line of both products as well. Significant stocking orders were placed for
the products in these lines in early 1997. In February 1997, the Company
received FDA approval for the synthetic absorbable suture, and began actively
marketing this new line.
By late 1997, several new facts became apparent to the Company, including:
(i) international customers of the Cardio Line were unable to meet their sales
goals with respect to the products, (ii) reorders were not meeting the Company's
expectations and (iii) several customers in India and South Africa were actually
returning products to the Company. In addition, the synthetic absorbable suture,
due to the high cost of new materials, had a market price that was too high for
many export markets. The large U.S. customer for both suture lines was unable to
fulfill its initial commitments to the Company, and their large initial purchase
order had been canceled. By December 31, 1997 the Company determined that most
of the Cardio Line inventory should be written off. While the synthetic
absorbable suture had not met with widespread acceptance or success
internationally, it had been well accepted in certain markets, including the
domestic dental and veterinary markets. As a result, the Company's revenue
expectations from these two product lines internationally have been scaled back
significantly.
Concurrently with events surrounding the Company's Cardio Line, in the
third quarter of 1997, the Company also decided to refocus its international
marketing strategy to limit its product offerings to higher margin products and
regions. Historically, the Company carried a very large product line and
attempted to sell into numerous international markets, many of which were
unprofitable. By revising its international marketing strategy, the Company
hoped to increase its profitability. As a result, the Company reduced its
standard suture product line to include only approximately 250 catalog codes
(down from approximately 750) and intended to de-emphasize and even abandon
certain international markets. As a result of the foregoing, in December 1997
the Company wrote off approximately $3,030,000 of inventory consisting of
discontinued catalog codes and expired inventory, which included approximately
$300,000 of inventory relating to the Company's "Sed-Control" product. The
resulting aggregate inventory write-off and repricing in December 1997 was equal
to approximately $4,100,000 (the "Inventory Writeoff"). As a result of the
Inventory Writeoff, and increased expenses described above, the Company
experienced an operating loss of approximately $4,200,000 for the year ended
December 31, 1997.
Despite the foregoing, the overall volume for the Company's suture products
has continued to increase in 1998 due to successes in other markets with its
other suture products. The Company's joint venture in India, because it does not
produce sutures, was and is unaffected by the Company's refocused international
strategy for these lines. The Company's joint venture
5
<PAGE>
in Brazil was and is also relatively unaffected due to the fact that while the
Brazil joint venture does produce suture products, the Cardio Line is very
limited in scope and had no significant related inventory. Additionally, the
products produced by the Brazil joint venture are targeted to different markets
than those that the Company determined to exit.
Interest income was $5,000 in 1997 compared to $6,000 in 1996. Interest
expense increased to approximately $433,000 in 1997 from approximately $198,000
in 1996 due primarily to the additional debt incurred relating to the India and
Brazil Joint Ventures, and the Pro-Tec Acquisition.
As result of the Inventory Writeoff, increased expenses and the other
income adjustments referred to above, the Company experienced a net loss of
$4,182,958 for the year ended December 31, 1997 compared to a net profit of
$463,481 for the year ended December 31, 1996. Without giving effect to the
Inventory Writeoff or acquisition costs, the Company experienced a net profit of
$334,262 for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the working capital
requirements created by its sales growth and to make acquisitions.
Bank Financing. As of December 31, 1997, the Company had drawn all of its
$1,750,000 working capital portion of its line of credit with its lending bank
(the "Line of Credit"). The Line of Credit also includes an additional
$1,250,000 commitment for the issuance of standby and commercial letters of
credit. On December 31, 1997, approximately $882,000 in letters of credit were
outstanding under this letter of credit commitment. The Line of Credit matures
and expires on August 30, 1998 unless it is renewed, and all outstanding amounts
are due and payable on such date. The Company expects the Line of Credit to be
renewed for an additional year prior to its expiration. There can be no
assurances, however, that such a renewal will be forthcoming, or, if available,
will be on terms acceptable to the Company.
As of December 31, 1997, the Company had approximately $142,000 outstanding
under a working capital line of credit (the "SBA L/C Facility") with the U.S.
Small Business Administration ("SBA"), which provided working capital for
foreign sales up to the lesser of (a) $600,000 or (b) 80% of the face amount of
negotiated letters of credit issued for the benefit of the Company and delivered
to the lender. It is the Company's understanding that due to the fact that the
majority of the letters of credit received by the Company from its international
customers did not meet the criteria set forth by the SBA, combined with various
other factors, including the existence of technical financial covenant defaults
under the Line of Credit as a result of the Inventory Writeoff, the SBA declined
to renew this line for 1998 and all outstanding amounts are required to be
repaid as each outstanding letter of credit is drawn upon.
6
<PAGE>
At the same time, during December 1997 and the first quarter of 1998, the
Company has experienced increased sales of certain products, requiring it to
significantly increase its purchases of raw materials necessary to fill such
orders. Due to the decreased liquidity caused by losing the SBA L/C Facility, as
well as the increased outlays for raw materials, the Company has recently
experienced a shortage of working capital. As a result, the Company has recently
experienced difficulties financing its sales growth and has failed to timely pay
certain amounts due under certain term loans granted to the Company by its
lending bank in connection with the Line of Credit. The Company's lending bank
has indicated to the Company that it does not currently intend to accelerate the
indebtedness outstanding under the Line of Credit. No assurance can be given
that the Company's lending bank will not hereafter accelerate the indebtedness
due under the Line of Credit if the Company's payment default is not cured in a
timely manner.
The Company is currently seeking to renegotiate its financial covenants in
the Line of Credit to remove the existing technical covenant defaults. There can
be no assurance given that the Company will successfully renegotiate its
financial covenants or cure the payment default under certain of its term loans.
In any such case, in the event that the Company's lending bank decides to
accelerate all amounts payable under the Line of Credit, there can be no
assurance given that the Company would be able to refinance or repay such
indebtedness. Additionally, no assurance can be given that the Company will be
able to increase its liquidity, either through increased availability under its
lines of credit or internally generated cash flow, to enable it to continue to
fund its growth.
To fund future acquisitions and joint ventures, the Company is reliant upon
obtaining long-term borrowing and/or equity financing. Management believes that
the Company will have access to the capital resources necessary to continue to
fund such expansion, although there is no assurance that such financing will be
available or, if available, will be on terms acceptable to the Company. For a
more complete description of the Company's current credit facilities, see Note 5
to Notes to Consolidated Financial Statements.
Stockholder Loans. On February 28, 1997, the Company entered into an
agreement with John H. Robinson and Robert L. Priddy, each a director and
substantial stockholder of the Company, whereby Messrs. Robinson and Priddy
loaned the Company an aggregate of $1,000,000. Such loans bear interest at the
rate of 10% per annum, are repayable on or before January 1, 1999 and are
subordinated to the Line of Credit. In connection therewith, Messrs. Robinson
and Priddy were each issued warrants to purchase 15,000 shares of Common Stock
at an exercise price of $8.25 per share, and warrants to purchase an additional
35,000 shares of Common Stock at $6.00 per share. See "Item 12. Certain
Relationships and Related Transactions."
In the past, the Company has been reliant upon Messrs. Robinson or Priddy
to finance the costs associated with certain acquisitions and to
7
<PAGE>
restructure certain indebtedness, on terms favorable to the Company. There can
be no assurance the such financing, or other third party debt or equity
financing, will be available in the future or, if available, will be on terms
acceptable to the Company.
OTHER INFORMATION
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 more of such items outside the traditional bid system. The Company
has been successful over the last several years in obtaining substantial awards
under the bid system. 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, there can be no assurance that the Company will continue to
meet or exceed its historical levels of sales of its products to the U.S.
Government in the future and during 1997 sales were nominal.
Acquisition of the Pro-Tec Product Lines. For a description of the
consideration paid and payable by the Company in connection with the Pro-Tec
Acquisition, including, without limitation, the Common Stock issued in
connection therewith, see Note 15 to Notes to Consolidated Financial Statements
and the Company's Current Report of Form 8-K filed in connection with the
Pro-Tec Acquisition.
Pro-Tec Stock Price Guarantee. In connection with the Pro-Tec Acquisition,
the Company agreed to guarantee the value of the Common Stock issued to the
former owner pursuant to such acquisition for a period of six months from the
effective date of the Registration Statement on Form S-3 which was filed by the
Company to register the resale of such shares. As a result of the decline in the
price to the Company's Common Stock during such period (and taking into account
certain other adjustments), the Company owes the former owner of Pro-Tec
approximately $300,000, which amount is payable either by the issuance of shares
of the Company's Common Stock or a one-year promissory note. The Company and
such individual are currently negotiating to extend the term of the payment of
this amount. No agreement, however, has yet been finalized and there can be no
assurance given that any such agreement will be reached.
Net Operating Loss Carryforwards. As of December 31, 1997, the Company had
net operating loss carryforwards ("NOLs") of approximately $13,775,000 which
will expire from 1998 through 2010. The deductibility of portion of the NOLs is
subject to an annual limitation of approximately $460,000; the excess of such
annual limitation over the amount to be used in subsequent year until they
expire. See Note 10 of Notes to Consolidated Financial Statements.
8
<PAGE>
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 no assurances in this regard.
ITEM 7. FINANCIAL STATEMENTS.
The responses to this item are submitted in a separate section of this
Annual Report on Form 10-KSB/A. See Index to Consolidated Financial Statements
on page 11.
9
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
10
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT .............................................. 12
FINANCIAL STATEMENTS
Consolidated Balance Sheets for the years ended
December 31, 1997 and 1996 ............................................. 13
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 ............................................. 15
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1996 ............................................. 16
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 ............................................. 17
Notes to Consolidated Financial Statements as of December 31, 1997 ....... 19
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Lukens Medical Corporation
We have audited the accompanying consolidated balance sheets of Lukens
Medical Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These 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 financial position of Lukens
Medical Corporation and Subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
NEFF & COMPANY LLP
Albuquerque, New Mexico
March 27, 1998
12
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 11) ............... $ 74,048 878,090
Accounts receivable, net of allowance of
$40,000 in 1997 and $5,790 in 1996
(Notes 5 and 6) ................................. 1,836,542 1,901,947
Inventory (Notes 2, 5, 6, and 14) ................. 5,105,900 5,565,210
Prepaid expenses .................................. 127,080 34,290
----------- ---------
Total current assets ............................ 7,143,570 8,379,537
Fixed assets, net (Notes 3, 5, 6 and 8) ............ 3,599,150 2,062,842
Intangible assets, net of accumulated amortization
of $1,222,264 and $966,065 in 1997 and 1996,
respectively (Notes 4 and 15) ..................... 2,215,420 1,098,487
Other assets ....................................... 85,754 261,294
----------- ---------
Total assets .................................... $13,043,894 11,802,160
=========== ==========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 1,864,832 1,406,243
Accrued liabilities ......................................... 138,016 62,139
Current maturities of long-term debt (Notes 5 and 6) ........ 5,146,950 2,002,191
Current maturities of obligations under
capital leases (Note 8) ................................... 146,893 39,825
------------- ---------
Total current liabilities ................................. 7,296,691 3,510,398
Long-term debt, excluding current maturities
(Notes 5, 6 and 11) ......................................... 73,483 796,446
Stockholder payable and accrued interest (Notes 7 and 11)..... 2,290,991 1,157,408
Obligations under capital leases, excluding current maturities
(Note 8) .................................................... 266,256 59,378
------------- ---------
Total liabilities ......................................... 9,927,421 5,523,630
------------- ---------
Commitments and contingencies (Notes 5, 8, 13, 15, and 16) .
Minority interests ........................................... 74,955 --
------------- ---------
Stockholders' equity (Notes 5 and 9):
Common stock $.01 par value, authorized 20,000,000 shares;
issued and outstanding 3,043,359 shares in 1997 and
2,731,988 shares in 1996 .................................... 30,434 27,320
Additional paid-in capital .................................. 18,526,035 17,213,952
Accumulated deficit ......................................... (15,461,903) (10,962,742)
Foreign currency translation adjustments .................... (53,048) --
------------- -----------
Total stockholders' equity ................................ 3,041,518 6,278,530
------------- -----------
Total liabilities and stockholders' equity ................ $ 13,043,894 11,802,160
============= ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
14
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ------------
<S> <C> <C>
Net sales (Note 12) ............................. $ 8,618,863 8,178,576
Cost of sales (Note 14) ......................... 5,469,327 5,496,534
Inventory cost reduction ........................ 770,000 300,000
Product restructuring charge (Note 14) .......... 3,005,280 --
------------ ---------
Gross profit (loss) ............................ (625,744) 2,382,042
------------ ---------
Selling expenses ................................ 1,087,171 716,042
General and administrative expenses ............. 2,399,657 965,180
Research and development expenses ............... 70,386 108,594
------------ ---------
Total operating expenses ..................... 3,557,214 1,789,816
------------ ---------
Earnings (loss) from operations .............. (4,182,958) 592,226
------------ ---------
Other income (expense):
Interest income ................................ 5,236 6,578
Interest expense ............................... (433,463) (197,566)
Minority interests' share of loss .............. 80,570 --
Other, net ..................................... 31,454 62,243
------------ ---------
Total other expense, net ..................... (316,203) (128,745)
------------ ---------
Earnings (loss) before income taxes .......... (4,499,161) 463,481
Income tax expense (Note 10) .................... -- --
------------ ---------
Net earnings (loss) .......................... $ (4,499,161) 463,481
============ =========
Basic net earnings (loss) per share ............. $ (1.48) .17
============ =========
Dilutive net earnings (loss) per share .......... $ (1.48) .15
============ =========
Weighted average number of common shares
outstanding - basic ............................ 3,043,359 2,677,698
============ =========
Weighted average number of common shares
outstanding - dilutive ......................... 3,043,359 3,068,113
============ =========
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
15
<PAGE>
LUKENS MEDICAL CORPORTATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
(NOTES 9 AND 15) ADDITIONAL CURRENCY
---------------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENTS TOTAL
----------- ---------- ------------ ----------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ......... 2,611,418 $26,115 16,938,696 $ (11,426,223) -- 5,538,588
Exercise of options for common
stock ............................. 120,570 1,205 275,256 -- -- 276,461
Net earnings (loss) ................ -- -- -- 463,481 -- 463,481
--------- ------- ---------- ------------- -- ---------
Balance December 31, 1996 .......... 2,731,988 27,320 17,213,952 (10,962,742) -- 6,278,530
Exercise of options for common
stock ............................. 111,371 1,114 478,103 -- -- 479,217
Issuance of common stock for busi-
ness acquisition .................. 200,000 2,000 833,980 -- -- 835,980
Net earnings (loss) ................ -- -- -- (4,499,161) -- (4,499,161)
Foreign currency translation adjust-
ments ............................. -- -- -- -- (53,048) (53,048)
--------- ------- ---------- ------------- ------- ----------
Balance, December 31, 1997 ......... 3,043,359 $30,434 18,526,035 $ (15,461,903) (53,048) 3,041,518
========= ======= ========== ============= ======= ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
16
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Cash flows from operations:
Net earnings (loss) ............................................ $ (4,499,161) 463,481
Adjustments to reconcile net earnings
to cash flows applied to operating activities:
Minority interest in net loss ................................ (80,570) --
Depreciation ................................................. 398,943 262,941
Amortization of intangible assets ............................ 256,199 169,563
Decrease in inventory valuation allowance .................... -- 250,000
Loss on disposal of fixed assets ............................. -- 9,855
Accrued interest due stockholder ............................. 133,583 79,024
Changes in current assets and liabilities:
Accounts receivable ............................................ 245,235 (632,736)
Inventory ...................................................... 472,310 (1,966,159)
Prepaid expenses ............................................... (92,305) (10,834)
Other assets ................................................... 4,667 (176,579)
Accounts payable ............................................... 385,025 741,163
Accrued liabilities ............................................ 62,634 (20,916)
------------ ----------
Net cash applied to operating activities ..................... (2,713,416) (831,197)
------------ ----------
Cash flows from investing activities:
Purchase of equipment ........................................... (1,311,378) (561,910)
Purchase of intangible assets ................................... (29,602) (785,377)
Proceeds from disposal of equipment ............................. 26,417 --
Proceeds from joint venture formation,
net of cash transferred ........................................ 155,525 --
Business acquisitions, net of cash purchased .................... (224,916) --
------------ ----------
Net cash flows applied to investing activities ............... (1,383,954) (1,347,287)
------------ ----------
Cash flows from financing activities:
Proceeds from issuance of common stock
and equivalents ................................................ 479,217 276,461
Borrowings on long-term debt .................................... 5,174,575 2,621,155
Principal payments on long-term debt and capital leases ......... (3,360,440) (280,091)
Borrowings from major stockholders .............................. 1,000,000 400,000
------------ ----------
Net cash flows provided by
financing activities ........................................... 3,293,352 3,017,525
------------ ----------
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
17
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- ----------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents .......... (804,042) 839,041
Cash and cash equivalents at beginning of year ................ 878,090 39,049
-------- -------
Cash and cash equivalents at end of year ...................... $ 74,048 878,090
========== =======
Supplemental disclosures:
Cash paid for interest ........................................ $ 274,767 113,532
========== =======
Production equipment acquired with capital
leases ....................................................... $ 375,484 63,095
========== =======
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
18
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities. Lukens Medical Corporation, a
Delaware corporation, and its wholly-owned subsidiaries, (the Company) is a
disposable surgical products company engaged in the design, development,
manufacture, and marketing of needle suture products, disposable safety
scalpels, lancets, disposal supplies, and bone wax. The Company markets its
products worldwide to hospitals, independent care facilities, physicians'
offices, and to the United States government directly and through independent
distributors.
In addition to its facility in Albuquerque, New Mexico which includes the
operations of Lukens Medical Corporation and its wholly owned subsidiary ProTec,
Inc., the Company's operations include the following:
Lukens Medical Products Limited, a 90 percent owned joint venture in
Cochin, India that serves primarily as a manufacturing facility.
Techsynt-Lukens Industrial, Commercial, Import and Export Limited, a
51 percent owned joint venture in Sao Paolo, Brazil, that manufactures and
sells the Company's products.
Somar-Lukens S.A de C.V., a 50 percent owned joint venture in Piedras
Negras, Mexico that is not yet active and as of December 31, 1997, had no
assets or operations.
The Company utilizes contract manufacturing facilities in Piedras Negras
and Ciudad Juarez, Mexico for certain suture products. These facilities are
operated by contractors and are not owned by the Company.
Principles of Consolidation. The consolidated financial statements include
the accounts of Lukens Medical Corporation and its wholly-owned subsidiary and
majority owned joint ventures. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents. Cash and cash equivalents consist substantially
of cash in banks and repurchase agreements which are collateralized by
government securities at a 102 percent of fair market value and recorded in the
bank's name. The Company considers all highly liquid financial instruments with
original maturities of three months or less to be cash equivalents.
Inventory. Inventory, which consists principally of the Company's products,
supplies and components, is stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method. Market value for raw
materials is based on replacement costs and for other inventory classifications
on net realizable value. Appropriate consideration is given to deterioration,
obsolescence and other factors in evaluating net realizable value. Inventory
costs include material, labor, and manufacturing overhead.
Fixed Assets. Equipment and leasehold improvements are recorded at cost.
Depreciation expense is calculated using the straight-line method based on the
estimated useful lives of the respective assets which approximate three to ten
years. The Company follows the policy of capitalizing expenditures that
materially increase asset useful lives and charging ordinary maintenance and
repairs to operations as incurred.
Intangible Assets. Intangible assets consist principally of costs incurred
to obtain Food and Drug Administration approvals, trademarks, organizational
costs, patents, non compete agreements and goodwill. The Company evaluates its
intangible assets annually to determine potential impairment that may have been
caused due to changing circumstances or events by comparing the carrying value
to the undiscounted future net cash flows of related assets. No impairment
losses have been recognized in the periods presented. Intangible assets are
being amortized using the straight-line method over periods of 8 to 10 years.
19
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Capitalization of Interest. Interest is capitalized in connection with the
construction and start-up of major facilities. The capitalized interest is
recorded as part of the asset to which it relates and is amortized over the
asset's estimated useful life. In 1997, $80,828 of interest was capitalized. No
interest was capitalized in 1996.
Income Taxes. The Company accounts for its income taxes in accordance with
Financial Accounting Standards Statement No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 requires a company to recognize deferred tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in a company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. The Company has provided a valuation
allowance to offset the benefit of any net operating loss carryforwards or
deductible temporary differences.
Translation of Foreign Currencies. The translation of foreign currencies
into U.S. dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense accounts
using an average exchange rate for the period. The gains or losses resulting
from translation are included in shareholders' equity. The functional currency
of operations in India and Brazil is the local currency - the functional
currency of the operations in Mexico is the US dollar, which is also the
currency of the books of record.
Net Sales. Sales are recorded at the time products are shipped, net of
sales returns and allowances.
Research and Development Expenses. Research and development costs are
expensed as incurred.
Long-Lived Assets. Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of (SFAS 121), was adopted as of January 1, 1996. SFAS 121
standardized the accounting practices for the recognition and measurement of
impairment losses on certain long-lived assets. The adoption of SFAS 121 had no
effect on the results of operations or financial position.
Effect of New Accounting Pronouncements. Effective January 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based Compensation. The
Company adopted this pronouncement by making the required pro forma note
disclosure only. Accordingly, the adoption of SFAS No. 123 did not impact the
Company's results of operation or financial condition.
Earnings Per Share. Effective for the year ended December 31, 1997, the
Company adopted SFAS 128, Earnings Per Share. In adopting this pronouncement,
the Company computed the earnings (loss) per share on the basis of the weighted
average number of common shares outstanding during the year and included the
effect of potential common stock to the extent they are dilutive. This
pronouncement was adopted for both 1997 and 1996, however, there was no impact
on the earnings per share previously reported for 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Net loss .................................. $ (4,499,161) -- --
------------ -- --
Loss to common stockholders-
basic and diluted loss per share ......... $ (4,499,161) 3,043,359 (1.48)
============ ========= =====
</TABLE>
The warrants and options described in Note 9 and 15 were not included in
potential common stock as the effect of conversion would be antidilutive.
20
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Net earnings .................................... $463,481
--------
Basic EPS ....................................... 463,481 2,677,698 .17
Effect of dilutive options and warrants ......... -- 390,415 --
-------- --------- ---
Diluted EPS ..................................... $463,481 3,068,113 .15
======== ========= ===
</TABLE>
Warrants and options described in Note 9 and 15 to purchase 964,227 shares
of common stock were not included in potential common stock as the offset of
conversion would be antidilutive.
The Company uses the fair value of goods or services received or the fair
value of the options or warrants issued, whichever is more reliably measurable,
to determine the expense to record for options or warrants issued to
non-employees. Such amounts were not material and not recorded in 1996 or 1997.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassification. The Company has reclassified certain amounts in the 1996
financial statements to conform to the 1997 presentation.
NOTE 2. INVENTORY
Inventory consists of the following components at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Raw materials ............ $1,938,343 2,767,214
Work-in-process .......... 1,972,124 1,419,685
Finished goods ........... 1,261,603 1,444,481
Less reserves ............ (66,170) (66,170)
---------- ---------
$5,105,900 5,565,210
========== =========
</TABLE>
NOTE 3. FIXED ASSETS
Fixed assets owned or held under capital lease (see Note 8) consist of the
following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Building ................................ $ 899,762 --
Leasehold improvements .................. 227,112 172,677
Production equipment .................... 3,951,117 3,018,600
Office equipment ........................ 286,461 229,646
Construction in progress ................ 198,075 --
5,562,527 3,420,923
Less accumulated depreciation .......... 1,963,377 1,358,081
---------- ---------
$3,599,150 2,062,842
========== =========
</TABLE>
21
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 3. FIXED ASSETS - (CONTINUED)
Production equipment valued at $807,543 and $776,553, respectively, was not
being utilized in 1996 or 1997 and as of December 31, 1997, was in Piedras
Negras, Mexico in anticipation of the start up of a joint venture (See Note 15).
NOTE 4. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31,:
<TABLE>
<CAPTION>
1997 1996
--------------- ------------
<S> <C> <C>
Suture regulatory approvals ............. $ 963,448 920,089
Ulster Scientific non-compete agreements,
patents and trademarks ................. 642,069 642,069
ProTec patents and goodwill ............. 1,296,968 --
Other ................................... 535,199 502,394
------------ -------
Total .................................. 3,437,684 2,064,552
Accumulated amortization ................ (1,222,264) (966,065)
------------ ---------
$ 2,215,420 1,098,487
============ =========
</TABLE>
NOTE 5. BANK FINANCING INSTRUMENTS
At December 31, 1997, the Company had the following bank borrowing
agreements:
A working capital line-of-credit agreement, which provides for borrowings
for working capital up to the lesser of (a) $1,750,000 or (b) the sum of 80
percent of eligible accounts receivable (as defined in the agreement) plus the
lesser of 40 percent of qualified inventory. Interest is payable monthly on the
amount drawn at the Bank's corporate base rate (the Bank's prime rate) plus .75
percent. At December 31, 1997, there was $1,750,000 outstanding under this
line-of-credit agreement.
A letter-of-credit line, which provides for other credit instruments
including commercial letters-of-credit and banker's acceptances which guarantee
payment to raw material suppliers, and standby letters-of-credit which may also
be used for the purchase of raw material on forward currency contracts. The sum
of these shall not exceed $1,250,000 at any one time. At December 31, 1997,
there was $634,127 of Bankers' acceptances and commercial letters of credit and
$124,577 in standby letters of credit outstanding under this line. Additionally,
under a separate letter of credit, there was a $360,000 letter of credit
relating to the purchase of the India facility.
A SBA equipment term loan, which provides for the purchase of equipment and
machinery up to $150,000, interest and principal payable monthly on equal
installments of $2,510 at the New York prime rate as published in the Wall
Street Journal, plus 1.5 percent. At December 31, 1997, there was $114,018
outstanding under this agreement.
A SBA equipment term loan, which provides for the purchase of equipment and
machinery up to $150,000, interest and principal payable monthly on equal
installments of $2,535 at the New York prime rate as published in the Wall
Street Journal, plus 1.5 percent. At December 31, 1997, there was $135,221
outstanding under this agreement.
On May 24, 1996, the Company obtained a bank term loan for the purchase of
equipment and machinery in the amount of $120,000, interest and principal
payable monthly on equal installments of $3,859 at the bank's corporate base
rate plus 1.5 percent. At December 31, 1997, there was $68,268 outstanding under
this agreement.
22
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 5. BANK FINANCING INSTRUMENTS - (CONTINUED)
On December 30, 1996, the Company obtained a bank term loan for funding of
a joint venture in India in the amount of $700,000, interest and principal
payable monthly on equal installments of $14,700 at the bank's corporate base
rate plus 1 percent. At December 31, 1997, there was $613,575 outstanding under
this agreement.
On August 31, 1997, the Company obtained a bank term loan for funding of
general operations in the amount of $1,000,000, interest plus principal payable
in equal monthly installments of $21,011, at the bank's corporate rate plus .75
percent. At December 31, 1997, there was $972,099 outstanding under this
agreement.
On November 27, 1997, the Company obtained a bank term loan for payment of
expired letters-of-credit in the amount of $184,087 interest plus principal due
on March 27, 1998, at the bank's corporate rate plus 1.5 percent. At December
31, 1997, there was $141,958 outstanding under this agreement.
At December 31, 1997, these bank credit instruments had covenants which
provided, among other things, for: the maintenance of tangible net worth of the
corporate affiliates on a consolidated basis at any time to be less than
$6,800,000, a minimum current ratio, as defined in the agreement, of 2:1;
aggregate debt to consolidated stockholders' equity of not greater than 1:1 and
fixed charges coverage not less than 1:3. The agreements also provide for a
security interest in substantially all of the Company's assets and has certain
covenants which restrict the Company's payment of dividends and prohibit
incurring any additional material indebtedness without the consent of the Bank.
As of December 31, 1997, the Company was in arrears on its bank notes
payable and did not meet the financial ratios required. The bank has not granted
a waiver for any default by the Company; as a result, the notes payable have
been classified as current.
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Bank Debt:
Outstanding letter-of-credit payable to NationsBank,
N.A. interest is accrued at the corporate base rate
plus .75% (9.25% at December 31, 1997), maturing
August 30, 1998 ........................................ $ 634,127 796,838
Outstanding line-of-credit payable to NationsBank,
N.A. interest is accrued at the corporate base rate
plus .75% (9.25% at December 31, 1997), maturing
August 30,1998 ......................................... 1,750,000 966,102
Various notes payable to NationsBank, N.A. interest is
accrued at the base corporate rate (8.5% at December 31,
1997) plus 1% to 1.5%, maturing between March
1998 and November 2003 ................................. 2,045,138 952,074
</TABLE>
23
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 6. LONG-TERM DEBT - (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Other debt:
Community Development Block Grant note, due in monthly
installments of $4,167, plus interest at a rate equal
to the six-month Treasury Bill rate with a minimum of
7% and a maximum of 9% (7% at December 31, 1997),
maturing July 7, 1998, secured by equipment purchased
with the proceeds
from the note ........................................... $ 20,973 83,623
Note payable to Kerala State Industrial Corporation,
due in monthly principal installments of $15,000,
plus interest due quarterly at an annual rate of
15.5%, maturing March 1999 secured by a standby
letter of credit with
NationsBank, N.A. ....................................... 240,000 --
Notes payable to the sole stockholder of ProTec for
acquisition of ProTec Containers, Inc., terms to be
finalized (Note 15) ..................................... 454,163 --
Other bank notes .......................................... 76,032 --
--------- ------
Total long-term debt ..................................... 5,220,433 2,798,637
Current maturities of long-term debt ..................... 5,146,950 2,002,191
--------- ---------
Long-term debt, excluding current maturities ............. $ 73,483 796,446
========= =========
</TABLE>
The NationsBank, N.A. debt is secured by accounts receivable, inventory and
fixed assets of the Company, except for those purchased with the proceeds
obtained from the Community Development Block Grant note.
Future scheduled debt payments at December 31 are:
1998 ..................................... $5,146,950
1999 ..................................... 73,483
----------
$5,220,433
==========
NOTE 7. STOCKHOLDER PAYABLE
During 1995, a major stockholder loaned the Company $400,000 which defeased
a $350,000 line of credit and provided $50,000 for general operations. The note
is due April 1999, including all interest, accrued at 8 percent. The major
stockholder also received warrants for 400,000 shares of common stock
exercisable at 1.10 per share (Note 9).
In September 1995, the Company received $250,000 from the stockholder for
repayment of various capital leases. The note is due October 1999, including all
interest, accrued at 10 percent.
In March 1996, the Company received $400,000 from the stockholder for use
in the Ulster acquisition. The note is due September 2000, including all
interest, accrued at 10 percent.
In March, May and June 1997, the Company received a total of $1,000,000
from two major stockholders to fund expansion of the recently acquired India
Facility, expansion of capacity for synthetic absorbable sutures and for the
acquisition of ProTec Containers, Inc. The notes are due May 1998
24
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 7. STOCKHOLDER PAYABLE - (CONTINUED)
bearing interest at 10%. Each major stockholder also received warrants for
50,000 shares of common stock. These warrants are exercisable at $6.25 per share
(Note 9). Subsequent to year end these notes were extended to January 1999.
NOTE 8. LEASES
The Company has five capital lease obligations for production equipment. At
December 31, 1997 and 1996, the Company had $501,992 and $126,508, respectively,
recorded as production equipment under capital leases with related accumulated
depreciation of $42,120 and $4,206, respectively (see Note 3).
The present value of future minimum capital lease payments as of December
31, 1997 follows:
1998 .................................. $190,530
1999 .................................. 157,186
2000 .................................. 92,152
2001 .................................. 59,805
--------
Total minimum lease payments ........ 499,673
Less amount representing interest
(at rates ranging from 8% to 16%) ... 86,524
--------
Present value of net minimum capital
lease payments ...................... 413,149
Current maturities of obligations under
capital leases ...................... 146,893
--------
Obligations under capital leases, ex-
cluding current maturities .......... $266,256
========
The Company leases its facilities and certain equipment under terms of
various operating leases. Future minimum rental payments required under the
operating leases as of December 31, 1997, are as follows:
Year ending December 31:
1998 ............................................ $125,748
1999 ............................................ 128,953
2000 ............................................ 132,253
2001 ............................................ 86,925
--------
Total minimum payments required ......... $473,879
========
Total rental expense for operating leases during 1997 and 1996 was $147,807
and $111,787, respectively.
25
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 9. STOCK WARRANTS AND OPTIONS
Warrants for Common Stock
The following warrants are outstanding at December 31, 1997:
NUMBER OF SHARES EXERCISE DATE DATE OF
COVERED BY WARRANTS PRICE EXERCISABLE EXPIRATION
--------------------- ---------- ------------- ---------------
435,000 6.00 Presently May 6, 1998
65,000 4.50 Presently June 11, 1999
400,000 1.10 Presently April 13, 2000
30,000 6.25 Presently March 1, 2002
70,000 6.25 Presently May 1, 2002
50,000 3.00 Presently March 5, 2004
Each warrant allows the holder to purchase one share of common stock at the
warrant price.
Options for Common Stock
In 1992, the Company adopted a stock option plan (1992 Plan) which provides
for the issuance of incentive and nonqualified stock options for officers,
directors, key employees, and consultants of the Company. The 1992 Plan replaced
a similar plan in effect in prior years. The 1992 Plan allows the issuance of a
maximum of 850,000 options for exercise into common stock at an option price not
less than the fair market value (trading value) of the common stock on the date
such options are granted. Options outstanding under the 1992 Plan total 623,508
and 243,223 at December 31, 1997 and 1996, respectively. As of December 31, 1997
and 1996, an additional 104,800 and 108,000, respectively, of options were
granted under various other plans. The weighted average remaining life of
employee options is six years. The weighted average remaining life of
non-employee options is four years. The Company has filed a registration
statement for its stock option plans.
A summary of the common stock options for employees for the year ended
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE OPTIONS
OPTIONS PRICE EXERCISABLE
------------- --------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 ......... 316,305 2.310
Granted ........................... 82,800 3.500
Expired ........................... (135,112) 2.395
Exercised ......................... (20,570) 1.954
--------
Balance, December 31, 1996 ......... 243,423 2.710 82,425
----- ------
Granted ........................... 164,600 5.780
Expired ........................... (41,144) 4.539
Exercised ......................... (43,371) 2.089
-------- -----
Balance, December 31, 1997 ......... 323,508 4.125 108,400
======== ===== =======
</TABLE>
26
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 9. STOCK WARRANTS AND OPTIONS - (CONTINUED)
A summary of the common stock options for non-employees for the year ended
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE OPTIONS
OPTIONS PRICE EXERCISABLE
------------ --------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 ......... 167,837 2.650
Granted ........................... 103,000 5.167
Expired ........................... (63,037) 2.375
Exercised ......................... (100,000) 2.650
--------
Balance, December 31, 1996 ......... 107,800 5.220 33,000
===== =======
Granted ........................... 300,000 4.000
Exercised ......................... (3,000) 3.500
-------- -----
Balance, December 31, 1997 ......... 404,800 4.331 171,600
======== ===== =======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ----------------------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES AT 12/31/97 LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- ----------------------- ------------- ------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$1.06 to 1.88 ......... 45,500 7.7 years $ 1.35 24,294 $ 1.45
$3.00 to 4.00 ......... 479,908 5.6 3.78 202,639 3.75
$4.50 to 5.00 ......... 63,100 3.7 4.93 14,358 4.95
$6.25 to 6.87 ......... 139,800 3.6 6.46 38,709 6.52
------- -------
$1.06 to 6.87 ......... 728,308 5.2 3.69 280,000 3.99
======= =======
</TABLE>
On February 5, 1998, the Company granted additional options under the 1992
plan to purchase 19,200 shares at an exercise price of $4.00 per share.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. FASB Statement No. 123 Accounting for Stock-Based
Compensation (SFAS 123) was issued by the FASB and, if fully adopted, changes
the methods for recognition of cost or plans similar to those of the Company.
Adoption of SFAS 123 is optional; however, proforma disclosures as if the
Company adopted the cost recognition requirements under SFAS 123 are presented
below:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------
AS AS
REPORTED PROFORMA REPORTED PROFORMA
---------------- --------------- ---------- ---------
<S> <C> <C> <C> <C>
Net income (loss) ......................... $ (4,499,161) (5,264,788) 463,481 267,225
Basic earnings (loss) per share ........... (1.48) (1.73) .17 .10
Diluted earnings (loss) per share ......... (1.48) (1.73) .15 .09
</TABLE>
The calculation model used to determine the stocked based compensation cost
included in the above proforma was the straight line method with graded vesting
compensation calculations. The calculation uses the 5 year Treasury Bill rate,
an expected life of three years and an 82 percent volitity rate. No dividends
were used in the calculation.
27
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 9. STOCK WARRANTS AND OPTIONS - (CONTINUED)
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1996
and additional awards in future years are anticipated.
NOTE 10. INCOME TAXES
At December 31, 1997 and 1996, the Company had deferred tax assets
amounting to approximately $5,400,000 and $4,200,000, respectively. The deferred
tax assets consist primarily of the tax benefit of net operating loss
carryforwards and temporary differences in depreciation and are fully offset by
a valuation allowance of the same amount.
The net change in the valuation allowance for deferred tax assets was an
increase of approximately $1,200,000 in 1997 and did not change materially for
1996. The net change for 1997 is primarily due to the recording of the increase
of net operating loss carryforwards.
Recoveries for income taxes differs from the amount of income tax
recoveries determined by applying the applicable U.S. statutory Federal income
tax rate to the pretax loss as a result of the increase in the valuation
allowance to offset the increase in the deferred tax assets.
There is no income tax payable at December 31, 1996, because of the usage
of net operating loss carryforwards.
The net operating loss and credit for increasing research activities
carryforwards as of December 31, 1997, expire as follows:
<TABLE>
<CAPTION>
INCREASING RESEARCH
APPROXIMATE 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 ......... -- 1,930,000 656,000 37,200
2001 ......... 3,000,000 1,835,000 789,000 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 --
2012 ......... -- 3,000,000 1,020,000 --
---------- --------- --------- ------
$7,493,000 13,575,000 4,996,000 105,000
========== ========== ========= =======
</TABLE>
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 discussed in Note 16 occur, there may be additional limitations.
28
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions are used by the Company in
determining its fair value disclosures for financial investments:
Cash and cash equivalents. The carrying amount reported in the balance
sheet approximates fair value.
Long-term debt including current maturities and stockholder payable. The
floating-rate long-term debt approximates its fair value. The fair value of the
fixed-rate stockholder payable is estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
are:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------------- -------------
<S> <C> <C>
Cash and cash equivalents ............................ $ 74,078 $ 74,078
Long-term debt, including current maturities ......... $5,220,433 $5,220,433
Stockholder payable and accrued interest ............. $2,290,991 $2,198,846
</TABLE>
NOTE 12. GEOGRAPHIC SEGMENT REPORTING
The Company sells its products throughout the world. The Company's export
sales from U.S. operations for 1997 and 1996 totaled $1,651,451 and $2,295,066,
respectively which represent 21 percent and 28 percent of total sales in each of
those years. Accounts receivable related to these sales is $878,000 and
$1,033,000 at December 31, 1997 and 1996, respectively.
Geographic information for the year ended December 31, 1997, is presented
in the following table. Transfers between geographic area are accounted for at
amounts that are generally above cost and consistent with rules and regulations
of governing tax authorities. Such transfers are eliminated in the consolidated
financial statements. Operating income by geographic segment does not include an
allocation of general corporate expenses which are included in United States
operations. Identifiable assets are those that can be directly associated with a
particular geographic area and include intangible assets.
29
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 12. GEOGRAPHIC SEGMENT REPORTING - (CONTINUED)
<TABLE>
<S> <C>
Customer sales:
Brazil ..................... $ 87,330
India ...................... --
Mexico ..................... --
USA ........................ 8,531,533
Eliminations ............... --
------------
Consolidated ............... $ 8,618,863
============
Intercompany sales
Brazil ..................... $ --
India ...................... 3,362
Mexico ..................... --
USA ........................ 134,105
Eliminations ............... (137,467)
------------
Consolidated ............... $ --
============
Loss before taxes:
Brazil ..................... $ (128,324)
India ...................... (188,335)
Mexico ..................... --
USA ........................ (4,172,444)
Eliminations ............... (10,058)
------------
Consolidated ............... $ (4,499,161)
============
Assets:
Brazil ..................... $ 356,007
India ...................... 1,447,804
Mexico ..................... 2,381,085
USA ........................ 9,021,104
Eliminations ............... (153,106)
------------
Consolidated ............... $ 13,043,894
============
</TABLE>
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings abroad.
The Company does not regard these risks as a deterrent to further expansion of
its methods of operations abroad. However, the Company closely reviews its
methods of operations, particularly in less developed countries, and adopts
strategies responsive to changing economic and political conditions.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Employment Agreement. The Company has entered into an employment agreement
with its Chief Executive Officer which provides for a three-year term expiring
in January 1998, with automatic one-year extensions thereafter. This agreement
provides for a base salary of $135,000 per annum. This agreement allows for an
annual base salary increase at least equal to the percentage increase in the
Consumer Price Index (or closest substitute for such index then available). For
future years, the employee's base salary shall increase no less than 10 percent
if the Company's net income increases at least 10 percent as compared to the
preceding year. The Chief Executive Officer is entitled to an annual bonus of up
to 35 percent of base compensation for such year for achieving objectives
established jointly by the employees and Board of Directors, as defined in the
agreement.
30
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 13. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Litigation. The Company is involved in litigation in the ordinary course of
business. Management believes, after consulting with legal counsel, that the
ultimate outcome of this litigation will not result in a material adverse impact
on the Company's financial statements.
The Company has been notified by a competitor asserting that it is in
violation of a certain patent which relates to the single-stick lancet product.
The Company believes it is indemnified under an agreement with a supplier and
its agreement with Ulster Scientific, Inc. for the purchase of the Ulster
product lines. Management intends to vigorously contest the competitor's
assertion and cannot estimate the potential liability, if any, at this time.
Consulting Agreement. Effective March 1, 1996, the Company entered into a
one year consulting agreement, which can be extended annually, with a major
stockholder. Payments under the agreement are $4,167 per month.
Profit Sharing/Savings Plan. The Company has a voluntary profit
sharing/savings plan (Plan) covering substantially all employees residing in the
United States over age 21 and who have been employed at least six months by the
Company. The Plan is qualified under section 401(k) of the Internal Revenue
Code. The Plan provides for voluntary employee contributions and discretionary
Company profit sharing/savings plan contributions. The Company matches employee
contributions at a rate of 50 percent of their contributions up to 3 percent of
their base pay. In addition, the Plan provides that the Company may pay for
certain administrative costs of the Plan. For 1997 and 1996, there were no
Company profit sharing contributions. Company matching contributions and
administrative expenses for 1997 and 1996 were approximately $36,000 and
$24,500, respectively.
NOTE 14. PRODUCT LINE RESTRUCTURING AND INVENTORY REDUCTION
During the fourth quarter of 1997, the Company implemented a new strategy
of focusing its marketing efforts for sutures mainly on domestic accounts. This
new strategy lead to a review of the product lines manufactured by the Company
and inventories held by the Company in certain cases for more than three years.
These inventories had been purchased or manufactured to service a clientele that
failed to grow, thereby putting the value of such inventories in question. After
attempting with limited success, to sell these inventories at any price below
the costs necessary is some cases to finish the product, the Company elected to
write off the items in question as of December 31, 1997. The resultant product
line restructuring charge was $2,855,012.
Also in 1997, the Company attempted to launch a new product into the
diagnostic market. This effort was unsuccessful. The costs of the product
purchased for his effort amounting to $150,268 was written off.
Certain international markets for sutures were abandoned and the related
receivables aggregating to $327,000 were written off to operating expenses as
part of the product line restructuring.
During 1997 and 1996, the Company reduced inventory values to net
realizable value (replacement cost) which was lower than cost due to the
reduction in utility. As a result, inventory carrying amounts were reduced and
cost of sales increased by approximately $770,000 in 1997 and $300,000 in 1996.
NOTE 15. ACQUISITIONS AND JOINT VENTURES
On March 4, 1996, the Company completed an acquisition of three product
lines from Ulster Scientific, Inc. (USI), a New York corporation. The
acquisition was accounted for under the purchase method. USI was a wholesale
distributor of medical supplies. The Company paid $248,000 cash, and assumed
$320,000 in supplier liabilities for a total purchase price of $568,000. The
Company also agreed to terms on a consulting and royalty contract with payments
of 2 percent or more of certain Ulster sales
31
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 15. ACQUISITIONS AND JOINT VENTURES - (CONTINUED)
over eight years and with minimum payments of $90,000 per year for the next five
years. The Company assigned no value to this contract in recording the purchase.
In addition, the Company agreed to issue warrants to the seller to purchase
200,000 shares of common stock at $3.00 per share expiring in eight years. No
value was assigned to these warrants in recording the purchase, 150,000 of which
are contingent upon future product sales. The Company acquired, in addition to
inventory and equipment, patents, trademarks, and other intangible assets. The
intangibles purchased totaled $490,000 related to a non compete agreement,
patents, and trademarks. All intangibles are amortized over eight years.
On May 12, 1997, the Company acquired 100 percent of the stock of ProTec
Containers, Inc. a Florida corporation. The acquisition was accounted for under
the purchase method. ProTec is a manufacturer of containers for the disposal of
used medical "sharps", such as hypodermic needles. The Company paid $250,000 in
cash to the owner of the ProTec for manufacturing molds, and issued 200,000
shares of its common stock, valued at $835,980 and recorded liabilities totaling
approximately $515,328 in exchange for all outstanding shares of ProTec. All
intangibles are amortized over ten years.
In connection with the ProTec Acquisition, the Company agreed to guarantee
the value of the common sock issued to the former owner pursuant to such
acquisition for a period of six months from the effective date of the
Registration Statement on Form S-3 which was filed by the Company to register
the resale of such shares. As a result of the decline in the price to the Lukens
Common Stock during such period (and taking into account certain other
adjustments), the Company owes the former owner of ProTec approximately
$300,000, which amount is payable by the issuance of a one-year promissory note.
The amount was recorded by reducing the value of the common stock and recording
the liability as a one year note payable (see Note 6).
As a result of the acquisition of ProTec, the Company had the following
non-cash activity:
<TABLE>
<S> <C>
Assets acquired:
Accounts receivable, net ......................... $ 179,830
Inventory ........................................ 13,000
Fixed assets ..................................... 77,854
Intangible assets ................................ 1,164,091
Other ............................................ 9,051
----------
1,443,826
Liabilities assumed:
Accounts payable and accrued liabilities ......... (86,807)
Notes payable .................................... (30,795)
----------
(117,602)
Notes payable issued ..................... (515,328)
Value of common stock issued ............. (835,980)
----------
Cash acquired ............................ $ (25,084)
==========
</TABLE>
32
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 15. ACQUISITIONS AND JOINT VENTURES - (CONTINUED)
The proforma results of operations for the year ended December 31, 1997 and
1996, as though the companies had been combined at the beginning of that period
is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- ------------
<S> <C> <C>
Net sales ............................ $ 9,035,443 9,289,455
============ =========
Net earnings (loss) .................. $ (4,429,621) 648,923
============ =========
Weighted average number of common and
common equivalent shares outstanding:
Basic ............................... $ 2,996,612 2,877,698
============ =========
Dilutive ............................ $ 2,996,612 3,268,113
============ =========
Net earnings (loss) per common and
common equivalent share:
Basic ............................... $ (1.48) .23
============ =========
Dilutive ............................ $ (1.48) .20
============ =========
</TABLE>
In 1996, the Company formed a joint venture (Somar Lukens) with Serral, S.A
de C.V., a Mexican Corporation, to produce needles. The joint venture is an
equal partnership, with each partner retaining ownership of the equipment it
provides and purchasing the products produced. As of December 31, 1997, the
venture was still in the process of setting up the equipment and configuring the
production process. As of December 31, 1997, the Company had not contributed any
capital to the joint venture.
In May 1997, the Company entered into another joint venture with two
individuals in Brazil to manufacture and market sutures into international
markets. The Company owns 51 percent of the venture. The venture assumed the
suture operations of a pre-existing Brazilian company, Medical Express Ltda.
Under the terms of the joint venture, the Company agreed to purchase and sell
inventory to the joint venture at fully-loaded manufacturing cost plus 25
percent and not to sell products purchased from the joint venture in Brazil. In
addition, the Company may not transfer its interest in the joint venture without
allowing the other shareholders the option of purchasing it. The new venture did
not become operational until October 1, 1997. As of December 31, 1997, the
Company had invested $125,000 in the joint venture.
On January 9, 1997, the Company became the majority shareholder in a new
joint manufacturing venture based in Cochin, India. Under the joint venture
agreement, the Company was required to contribute $800,000 in capital and may
not transfer its interest in the joint venture without allowing the other
shareholders the option of purchasing it. The venture, which manufactures
syringes, hypodermic needles, and components for other Company products,
acquired the basic equipment required for the process, as well as a 22,000
square-foot facility and began operations in November 1997. The venture will
market the products through Lukens and the two minority shareholders, who are
all current distribution partners of Lukens, in various parts of the world. As
of December 31, 1997, the Company owned 90 percent of the joint venture and had
invested $940,000.
NOTE 16. SUBSEQUENT EVENT
On February 20, 1998, the Company announced that it was negotiating the
sale of the Company to an unnamed third party. The proposal most recently
received by the Company contemplates a merger pursuant to which existing
shareholders of Lukens would receive approximately $4.00 in cash for each
33
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 16. SUBSEQUENT EVENT - (CONTINUED)
share of Lukens Common Stock. No definitive terms have, as yet, been agreed upon
and the proposal is, and any other matters are subject to further review by both
boards, the completion of due diligence reviews and the negotiation and
execution of definitive agreements. No assurance can be given that the current
negotiations will result in any transaction or as to the ultimate terms or
timing of any such transaction.
NOTE 17. LIQUIDITY
The Company produced a net loss in 1997. At December 31, 1997, current
liabilities exceed current assets, the Company is in arrears on its note
payments to the bank and has violated its debt covenants. The bank has not
granted a waiver on any default by the Company. However, the bank has stated
that as long as the Company adheres to the payment plan submitted, no action
will be taken. Total long-term debt to the bank and a major stockholder has
increased over 1996 levels. Some of these borrowings have been used to acquire a
subsidiary and to fund the start up of joint ventures causing an increase in
intangible and other assets. The Company's capacity to meet its obligations is
dependent upon several factors, such as returning to profitability, developing
adequate liquidity, adhering to debt covenants and required payments, possible
debt restructuring or sale (see Note 16).
In 1997, the Company implemented a major strategic shift in its marketing
approach regarding its largest product line, sutures. This shift, away from
lower priced markets where the Company had been successful in securing new
business to a focus on certain domestic accounts, was a result of the Company's
desire to improve margins, reduce inventory requirements, and provide a more
consistent order flow. While the Company intends to utilize its Brazilian
facility to continue to service selected international customers, many
unprofitable markets will be abandoned. This strategy led to a significant
write-off of inventory at the end of 1997.
In 1997, the Company also expanded its product lines further with the
acquisition of ProTec Containers, Inc., and brought its facility in Cochin,
India on-line for the manufacture of certain key raw materials. These actions
provide an opportunity to increase revenues and overall margins. Cash flow
projections by management anticipate more abundant cash becoming available in
May 1998.
While the Company has been successful in increasing its orders in the new
areas of focus, and has been successful in producing certain raw materials at a
lower cost, there can be no assurance that the Company efforts will result in
profitability from operations consistently in the future. Additionally, the
Company's write-off of inventory makes the expansion of its credit lines
unlikely in the near term, and the financing of continued internal growth and
acquisitions difficult.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LUKENS MEDICAL CORPORATION
By: /s/ Robert S. Huffstodt
------------------------------
Robert S. Huffstodt, President
Date: August 28, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE AND TITLE DATE
/s/ Robert S. Huffstodt August 28, 1998
- -----------------------------------------------------
Robert S. Huffstodt
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael Sobieski August 28, 1998
- -----------------------------------------------------
Michael Sobieski
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
/s/ John H. Robinson August 28, 1998
- -----------------------------------------------------
John H. Robinson
Director
/s/ Robert L. Priddy August 28, 1998
- -----------------------------------------------------
Robert L. Priddy
Chairman of the Board of Directors
/s/ John Holmes August 28, 1998
- -----------------------------------------------------
John Holmes
Director
