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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996 [NO FEE
REQUIRED, EFFECTIVE OCTOBER 7, 1996] or
[ ] Transition Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from
to
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Commission File Number 0-13401
PHOENIX MEDICAL TECHNOLOGY, INC.
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(Name of small business issuer in its charter)
Delaware 31-092-9195
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(State or other jurisdic- (I.R.S. Employer
tion of incorporation Identification No.)
or organization)
Route 521 West
P.0. Box 346
Andrews, South Carolina 29510
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (803) 221-5100
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, without par value
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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
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The issuer is unable to state the aggregate market value of shares of the
issuer's no par value Common Stock, its only outstanding class of voting stock,
held by non-affiliates as of a specified date within 60 days prior to the date
of filing. There has been no active trading market in the Registrant's Common
Stock since April
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1991. There have been sporadic bid and ask quotations for the Common Stock
generally at the level of $.125 to $.375 bid and $.25 to $.50 ask. Based on
these quotations the aggregate market value of shares of the Common stock held
by non-affiliates, as of March 15, 1997, would be $431,384.
The Registrant's revenues for the fiscal year ended December 31, 1996 were
$13,987,555.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes X No
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The number of issued and outstanding shares of the issuer's no par value Common
Stock, its only outstanding class of Common Stock, as of February 28, 1997 was
1,963,563.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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. [X]
Items incorporated by reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Registrant was organized as an Ohio corporation under the
name "Phoenix Glove Company" in March 1978 and commenced vinyl glove
manufacturing operations on a limited basis in February 1979. In January 1984
the Registrant reincorporated as a Delaware corporation and changed its name to
Phoenix Medical Technology, Inc. All references in this Report to the
"Registrant" are to Phoenix Medical Technology, Inc. and its predecessor unless
otherwise indicated by the context.
On August 2, 1991, the Registrant filed a petition under
Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the
District of South Carolina. On February 7, 1994, the Registrant's Plan of
Reorganization was confirmed by the Bankruptcy Court. The Registrant's
business operations and marketing efforts are hampered by the Registrant's poor
financial condition. See the discussion under "Management's Discussion and
Analysis or Plan of Operation" under Item 6, Part II of this Report.
The Registrant primarily manufactures and markets single use
gloves for use in various applications where clean, protective handcovers are
important, such as the medical market, beauty and barber shops, food
processing, electronics and computer assembly, photo finishing and janitorial
services. The Registrant manufactures vinyl and latex gloves.
During 1996 five of the Registrant's six glove making machines
operated. Not all five machines operated continually, but four machines
generally operated 24 hours per day on a five-day a week basis. The
Registrant's vinyl and latex glove manufacturing facilities operated at
approximately 65% and 43% of its five-day capacity, respectively, in 1996.
The Registrant also manufactured a line of surgical adhesive
drapes and a limited line of other single use medical items. The Registrant
sold its surgical drape assets in March of 1996. See "Sale of Surgical Drape
Assets" below.
The Registrant markets its products primarily to medical and
industrial supply companies. These supply companies frequently resell the
Registrant's products under their private labels. The Registrant has focused
on serving these supply companies as an independent product source and
generally does not make direct sales to end users.
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MEDICAL MARKET
Initially the Registrant sold only vinyl gloves to the medical
market, but began selling latex gloves also in 1989. Because of changes in the
market, the Registrant elected to discontinue vinyl glove sales to the medical
market in March 1993. In 1996, 41% of the Registrant's latex glove sales were
to the medical market. The Registrant sold its surgical drapes and scrub and
prep sponges exclusively to the medical market.
In the medical market, the Registrant sells its products
principally to medical supply companies, which generally resell the
Registrant's products under their private labels. The Registrant serves
medical supply companies as an independent product source without making direct
sales to their customers. The Registrant's major competitors generally sell
their products directly to end users.
NON-MEDICAL MARKET
The non-medical glove market is comprised of industries in
which clean, protective handcovers are important for employee health and safety
or to protect the integrity of the manufacturing process. For example, the
Registrant sells vinyl gloves to distributors that supply beauty and barber
shops, safety supply companies, food processors, photo finishing businesses,
janitorial supply companies and the electronics and computer assembly and
service industries. Law enforcement agencies are also emerging as a new market
for protective handcovers. Gloves sold to the non-medical market are primarily
vinyl gloves.
Since 1983, the Registrant has been increasing its marketing
efforts in the sale of vinyl gloves to the non-medical market, which is more
fragmented and less price competitive than the medical market and presents
opportunities for more favorable margins. The Registrant's principal
competitors, which are large medical products companies, have generally focused
their marketing efforts on large hospital chains and associations, rather than
the non-medical market. The Registrant's ability to compete effectively in the
non-medical market is enhanced by its willingness to provide products under
private labels for independent distributors, to develop custom packaging to
meet a distributor's requirements, and to fill orders on an immediate basis.
DESCRIPTION OF PRODUCTS
Single Use Gloves. Vinyl and latex gloves are single use
protective handcovers which are generally worn once and discarded. They are
ambidextrous (the same glove fits either hand). Vinyl gloves range in size
from extra-small to extra-large and latex gloves range in size from small to
large.
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The gloves are used in applications in which hand-contour,
tactile sensitivity, flexibility and a reduction of the risk of contamination
and disease transfer are important. The Registrant's vinyl and latex glove
lines include lightly powdered and powder free gloves. Medical gloves are used
for non-invasive medical procedures as well as in non-medical applications,
such as beauty and barber shops, food processing, janitorial services, photo
finishing and for consumer use. Powder free gloves are used primarily in
non-medical applications such as in the electronics and computer manufacturing
industries and other "cleanroom" environments.
The Registrant has pending an application to the Food and Drug
Administration ("FDA") for approval to market a new line of antimicrobial vinyl
gloves which incorporate the antimicrobial substance Micreban(R) into the
glove. The Registrant has an exclusive license in the United States and Canada
for the use of Micreban(R) in its gloves. The Registrant's application has
been pending since December 1991 and is still active. The Registrant filed
requested substantiating technical data with the FDA during March of 1996.
Additional technical data was filed with the FDA in November 1996. The FDA and
Environmental Protection Agency are currently determining which Agency has
final determination over food additive petitions. Phoenix has been advised
that this should not cause additional delays in the approval process.
For many applications either latex or vinyl gloves may be
used. Latex gloves stretch and are deemed more appropriate for use with small
instruments or other applications where a tight fit is important. Vinyl gloves
are appropriate in applications where maximum retention of the user's feel is
important and a snug fit is not important. Latex gloves historically have been
more expensive than vinyl gloves. However, during 1990 latex glove prices
declined substantially to the point where latex glove prices were less than or
equal to vinyl glove prices. This price relationship continued through 1996.
The Registrant offers its gloves in a variety of packages
depending upon the intended end use. Gloves are sold in dispenser packs,
resealable bags and heat-sealed pouches. Dispenser packs contain up to 100
gloves and are similar to facial tissue boxes. Dispenser packs for medical
uses are generally sold to medical supply companies which market them under
private labels. Dispenser packs which are not resold under a customer's
private label are marketed under the Registrant's name when sold for medical
uses, and under the tradename "Sup-pli Line" when sold for non-medical uses.
Vinyl gloves accounted for 57.9%, 59.8% and 71.7% of the
Registrant's total sales in 1994, 1995 and 1996, respectively. Latex gloves
accounted for 35.6%, 35.4% and 28.3% of the Registrant's total sales in 1994,
1995 and 1996, respectively.
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Surgical Drapes and Related Products. Surgical drapes are
body surface covers used to maintain a sterile field during medical procedures.
The Registrant's drapes, which generally are made of polyethylene film, are
produced in various configurations including incise, aperture and towel drapes.
Incise drapes are designed for making incisions directly through the drape.
Aperture drapes have an opening which is positioned around the operative site.
Towel drapes are applied with an adhesive backing along the operative site to
enhance protection of the prepared surgical area. Surgical drapes accounted
for 4.8% and 3.7% of total sales in 1994 and 1995, respectively. The Registrant
also manufactures scrub and prep sponges for the medical market. Sales of these
products accounted for less than 3% of total sales in 1994 and 1995 and
$163,000 or 1.2% in 1996. The Registrant sold its surgical drape assets in
March of 1996. See "Sale of Surgical Drape Assets" below.
MANUFACTURING OPERATIONS
Vinyl glove manufacturing requires control in the formulation
of liquid vinyl, as well as in the dipping, molding and curing of the gloves at
specified temperatures. Gloves are manufactured on long, integrated,
continuous process machines. The Registrant currently has five vinyl glove
machines. The Registrant began manufacturing vinyl gloves on a six and
two-thirds day week, three-shift production schedule in the third quarter of
1987. Since 1989, because of an oversupply of vinyl gloves, the Registrant has
manufactured gloves on a five-day a week schedule with frequent periods of time
when one or more of the Registrant's machines was not operating. One of the
Registrant's vinyl glove machines will require upfitting at a cost of more than
$200,000 to make it operational.
Latex glove manufacturing is similar to that of vinyl gloves.
The primary difference between the two processes is that latex gloves go
through a multiple dip process while vinyl gloves go through a single dip
process. The Registrant's latex glove machine has a capacity of approximately
59% of the Registrant's total vinyl glove manufacturing capacity. The latex
machine operated at approximately 43% of its five-day a week capacity during
1996.
The manufacturing process for surgical drapes involves the
layout and cutting of sheets of polyethylene film into various sizes and
configurations. Adhesive transfers are applied to the drapes before they are
individually packaged in heat-sealed pouches. The Registrant sold its surgical
drape assets in March of 1996. See "Sale of Surgical Drape Assets" below.
The Registrant places great emphasis upon controlling the
quality of its products. Quality control procedures include the
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testing of statistical samples of products every 30 minutes to assure
conformance to certain specifications.
The Registrant believes that its manufacturing equipment
generally uses state-of-the-art technology.
MARKETING AND DISTRIBUTION
The Company conducts its sales and marketing activities
through a network of manufacturers' representatives whose efforts are directed
by a national sales manager and two area sales managers. The Company's
President is responsible for all export sales, which accounted for 10% of total
sales in 1996, and for several national accounts. The Company's major
customers are industrial, safety and lab supply distributors.
The major portion of the Registrant's products are shipped
within 30 days after being ordered; the remainder of its orders are placed from
three to nine months in advance of the requested delivery date. Advance orders
are not considered firm until the customer issues a release for shipment, so
backlog is not necessarily indicative of the Registrant's level of business
activity. The Registrant's backlogs at the end of 1994, 1995 and 1996 were
$230,000, $483,000 and $247,000, respectively. The 1996 backlog reflects a
5-day service level, the norm for the industry. The backlog figures are based
on firm orders to be filled over the subsequent four weeks.
MAJOR CUSTOMERS
The Registrant's five largest customers accounted for
approximately 28.2% of sales in 1996. No customer individually accounted for
10% or more of total sales in 1996.
RAW MATERIALS
The primary raw materials used in the manufacturing of vinyl
gloves are PVC resin (a granular polymer) and plasticizer, both of which are
petrochemicals and in adequate supply from several sources. The primary raw
material for latex gloves is natural latex, which is available in adequate
supply.
COMPETITION
The principal manufacturer of vinyl gloves sold in the United
States is MAXXIM. Other major United States manufacturers of vinyl gloves
include Baxter Healthcare Corp., The Oak Rubber Company and the Registrant.
The leading United States manufacturers of latex examination gloves include
Baxter Healthcare Corporation, Tillotson Corp. and Aladan Corporation. The
Registrant's competitors are generally larger and have greater financial
resources than the Registrant.
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The Registrant also faces competition from foreign
manufacturers. In addition, certain of the United States manufacturers have
foreign manufacturing plants. These manufacturing plants are generally located
in countries with labor costs significantly lower than those in the United
States.
The principal competitive factors relating to the Registrant's
products are price, quality and delivery. The Registrant believes that a
favorable competitive factor is its ability to supply a broad line of both
latex and vinyl gloves.
LICENSES AND TRADEMARKS
The Registrant has license agreements with Micreban(R)
Products Co. for the use of Micreban(R) and Micreban(R) Extended Polymer Film
in single use gloves. These agreements give the Registrant an exclusive
license in the United States and Canada for the use of such materials in single
use gloves and a non-exclusive license for the sale of such gloves in the rest
of the world. The licenses are contingent on the Registrant making purchases
from or payments to Micreban(R) Products Co. of up to $3,000 per month, once
the Registrant has received FDA approval to market the products. FDA approval
to market gloves with Micreban(R) has been applied for but not yet granted.
The licenses were renewed in October 1995 and are renewable for additional
two-year periods at the Registrant's option. The licenses may be terminated by
the Registrant on 120 days notice.
Patents. The Registrant has a patent pending for its
antimicrobial glove (Patent Application S.N. 239,880).
SALE OF SURGICAL DRAPE ASSETS
On March 22, 1996, the Registrant sold to Microtek Medical,
Inc. ("Microtek") all of the Registrant's machinery, equipment and related
tangible property (including inventory and work-in-process) and all of its
proprietary information, and all other property and rights related to the
Registrant's manufacture and sale of scrub-and-prep products. The purchase
price consisted of $1,175,000 in cash and Microtek's undertaking to make
contingent payments for ten years of 11.5% of its sales of patented incise
drapes and 3% of its sales of other products in the Registrant's product line
incorporating the patented process, with a maximum of $1,825,000 on all
contingent payments, resulting in a maximum total purchase price of $3,000,000.
Registrant's sales of items produced by the assets sold to Microtek accounted
for 4% of its total sales in 1995 and 5% in 1994.
EMPLOYEES
As of December 31, 1996, the Registrant employed 284 persons,
of whom 246 were hourly employees engaged in production,
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25 were engaged in executive, administrative or clerical functions and 13 were
supervisors. One employee is part time; all other employees are full time.
The Company's hourly production employees are represented by
the Union of Needletraders, Industrial and Textile Employees ("UNITE"). In
March 1997 the Company entered into a new agreement with UNITE which will
expire in March 2000. The Company considers its present relationship with its
employees to be good.
GOVERNMENT REGULATION
The Registrant is subject in the manufacture, testing and
marketing of certain of its products to mandatory procedures and safety
standards which are administered by the United States Food and Drug
Administration (FDA). The FDA regulates the Registrant as to the quality and
safety of its products and the practices by which they are manufactured and
sold. The FDA's regulations for patient examination gloves apply to both vinyl
and latex gloves. The FDA also regulates the introduction of new products,
makes periodic inspections of manufacturing processes to confirm that such
processes meet FDA standards, and receives, investigates and resolves any
complaints against the Registrant. The Registrant believes that all of its
products are manufactured in compliance with the FDA's manufacturing standards
which are called "Good Manufacturing Practices." The Registrant's most recent
FDA inspection found no deficiencies.
The U.S. Department of Health and Human Resources lists
dioctyl phthalate, a primary raw material used by most manufacturers of vinyl
gloves, as a suspected carcinogen. The Registrant has eliminated the use of
dioctyl phthalate in the manufacture of its products. No claims have been made
against the Registrant for its prior use of dioctyl phthalate and the
Registrant does not anticipate any liability associated with its prior use.
The Registrant is subject to various regulations relating to
the maintenance of safe working conditions and manufacturing practices. The
Registrant believes it is currently in compliance with all such regulations.
ENVIRONMENTAL REGULATION
The Registrant's manufacturing process involves the use of one
regulated chemical--zinc. Waste water from the Registrant's latex glove
operations is collected in leach pools and zinc is precipitated out of the
waste water. Zinc is then collected in wetcake and disposed of by a hazardous
waste disposal contractor. The waste water is disposed of in the City of
Andrews' water system.
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During a Phase II environmental audit of the Registrant's
properties in 1993, an area of approximately 750 to 1000 square feet was
identified as contaminated by a petroleum product. Corrective action is
currently in process. Estimated total expenditures are $75,000 to $100,000
over a three year period.
The Registrant believes it is otherwise in compliance with all
environmental regulations. The Registrant does not believe that laws
regulating the discharge of materials into the environment have had a material
effect on the Registrant's expenditures during the prior three (3) fiscal years
and does not anticipate any material capital expenditures for environmental
control in the foreseeable future, assuming there are no changes in
environmental laws or regulations.
ITEM 2. DESCRIPTION OF PROPERTY
The Registrant's executive offices, manufacturing operations
and warehouse are housed in an approximately 150,000 square foot building owned
by the Registrant and located on a 96 acre site one mile west of Andrews, South
Carolina. At December 31, 1996, such properties were subject to a mortgage
with a principal balance of $1,659,300. See also the discussion below in
"Legal Proceedings" under Item 3, Part I of this Report. The building was
constructed in phases from 1978 through 1988 specifically for use by the
Registrant. In 1988, the Registrant approximately doubled the size of its
manufacturing and warehouse space. The Registrant's main plant is constructed
of brick and metal siding and is designed for expansion without interruption to
production. The Registrant believes the building is adequately covered by
insurance. The Federal tax basis for the buildings is $527,020. The
Registrant's current tax rate is 20%. For Federal income tax purposes, the
Registrant takes depreciation on the building using the straight-line method
and an assumed useful life of 39 years.
The Registrant's vinyl and latex glove manufacturing
facilities operated at approximately 65% and 43%, respectively, of its
twenty-four hour, five-day a week capacity, in 1996 versus 56% and 59%,
respectively, in 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There has been no active trading market in the Registrant's
Common Stock since April 1991. During the year ended December 31, 1995, for
the first time since 1991, bid and ask quotations appeared sporadically in the
National Quotation Bureau "pink sheets." During 1996 these quotations
generally were at a bid price of 1/8 and an ask price of 5/8 per share.
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The Registrant has not paid cash dividends. Because of the
Registrant's financial condition, the Registrant does not expect to pay
dividends in the foreseeable future.
As of February 28, 1997, there were 759 shareholders of
record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Operations
Sales for 1996 were $13,988,000, up 2.5% over sales in 1995.
Latex glove sales were $3,965,000 in 1996, 16.3% less than 1995's sales of
$4,730,000. The decrease of $765,000 was attributable to the expiration of the
Company's contract with the Department of Defense in November 1995 which
accounted for $1.1 million in sales or 23.3% of 1995 latex glove sales. The
Company's other latex glove sales increased 9.2% in 1996. Vinyl glove sales
were $9,758,000, 19.7% greater than for 1995. More than ninety percent of the
$1,618,000 increase in vinyl glove sales resulted from increased sales to
cleanroom operators, such as semiconductor chip manufacturers. During 1996,
less than 2% of the Company's sales resulted from the sale of non-glove
products. Non-glove product sales were 5% of total sales in 1995. The
decrease resulted from the March 1996 sale of the Company's skin drape
business. See "Sale of Surgical Drape Assets."
Cost of goods sold, as a percent of net sales, was 89.8% in
1996 and 90% in 1995. The slight decrease reflected an improved product mix
with higher selling prices, offset to a large extent by plastics material cost
increases and energy cost increases.
Selling and Administrative ("S&A") expenses increased $61,000
during 1996 to $1,705,000. As a percent of sales, S&A expense was 12.2% in
1996 as compared with 12.0% in 1995. Selling expense was $689,000 in 1996,
down from $728,000 in 1995. Administrative expense was $1,016,000 in 1996,
7.3% of sales, as compared with $916,000, 6.7% of sales in 1995. The increase
resulted from the addition of a Systems Analyst, the realignment of some
production reporting clerical functions from manufacturing to finance and
accounting, and costs related to the Company's efforts toward IS09001
certification, an international standards organization for product quality.
Net income for 1996 was $324,000 as compared with a net income
of $3,792,000 for 1995. The 1996 results include a gain of $760,000 from the
sale of assets, an extraordinary gain of $272,000 from debt forgiveness by
unsecured trade creditors and a loss of $112,000 resulting from the writedown
of a non-operating asset. The 1995 results include a $4,619,000 gain from debt
discharge and a retroactive adjustment for an accounting change which resulted
in a gain of $112,000. Excluding the extraordinary gains and losses, the
Company experienced losses of $597,000 in 1996 and $938,000 in 1995.
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During 1996 the Company changed its method of determining the
cost of inventories from the last-in, first-out ("LIFO") method to the
first-in, first-out ("FIFO") method. The years' 1995, 1994 and 1993 results
have been retroactively restated for the accounting change.
Liquidity and Capital Resources
During 1996, the Company's operations used $1,001,000 of cash
compared with $383,000 used in 1995. The Company used $250,000 cash on needed
capital expenditures during 1996, as compared with $72,000 in 1995. The sum of
inventories, accounts receivable and prepayments increased $530,000 during
1996, compared with an increase of $488,000 during 1995. During 1996, the
Company decreased its accounts payable, accrued expenses and other liabilities
by $219,000 as compared with the prior year's increase of $716,000. At
December 31, 1996, the Company's borrowing against its $3,000,000 line of
credit was $2,452,000.
At December 31, 1996, the Company was not in compliance with
some financial covenants in its credit agreements, but the violations have been
waived by the banks. The Company was not in compliance with the financial
covenants related to working capital and the current ratio due to financial
accounting rules changes relating to the classification of certain long term
debt which is subject to a subjective acceleration clause and a lock box
arrangement. As a result, the Company's revolving credit facility, which
expires in March 1999, was reclassified in 1996 as current debt. In addition,
the report of Arthur Andersen LLP on the financial statements for the year
ended December 31, 1996 contains explanatory language which raises doubt about
the Company's ability to continue as a going concern; the financial covenants
require an unqualified accountants' report.
The Company is hoping for a 1997 increase in sales of
approximately 15% due to continuing market share growth in cleanroom vinyl
gloves and the introduction of new cleanroom gloves manufactured of 100%
synthetic, latex-like nitrile. Initial evaluations are good and sales of the
new product have begun. Second half 1997 should produce substantial sales
growth. During 1997 the Company also expects to market antimicrobial food
service gloves to European markets, where the antimicrobial agent has been
approved for direct food contact. Initial start-up costs associated with both
new glove products should be overcome before mid-1997.
Cash from operations and expected additions to the Company's
line of credit will, in the opinion of management, be adequate to support the
Company's operations in 1997. Borrowing against the line of credit during 1997
will not exceed the credit limit of $3,000,000.
The Company's bank debt at December 31, 1996 stood at
$4,300,000 versus $4,200,000 at December 31, 1995. Interest expense for 1996
was $491,000 as compared with $644,000 in 1995.
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ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Phoenix Medical Technology, Inc.:
We have audited the accompanying balance sheets of Phoenix Medical Technology,
Inc., (a Delaware corporation) as of December 31, 1996 and 1995, and the
related statements of operations, shareholders' investment and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Medical Technology,
Inc. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, the Company has given
retroactive effect to the change in accounting for inventory from the last-in,
first-out (LIFO) method to the first-in, first-out (FIFO) method.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As described in Note 4, the Company
has experienced significant losses from operations in the prior three fiscal
years and those losses have continued subsequent to the year ended December 31,
1996. These matters, among others, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are discussed in Note 4. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might result should the Company be unable to continue as a going concern.
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Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying Schedule II is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Columbia, South Carolina,
February 28, 1997.
ITEM 7. FINANCIAL STATEMENTS
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BALANCE SHEETS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ......................................................................... $ 54,161 $ 89,411
Accounts receivable (net of allowance for doubtful
accounts of $20,000 in 1996 and $70,000 in 1995) ........................... 1,826,399 1,782,804
Inventories (Note 2) ........................................................ 1,556,118 1,423,280
Prepayments and other ....................................................... 76,660 56,417
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TOTAL CURRENT ASSETS ...................................................... 3,513,338 3,351,912
OPERATING PROPERTY, PLANT AND EQUIPMENT:
Land ........................................................................ 175,000 175,000
Buildings and improvements .................................................. 4,536,958 4,521,352
Machinery and equipment ..................................................... 6,802,801 6,993,373
Construction in progress .................................................... 103,589 -0-
- -------------------------------------------------------------------------------------------------------------
11,618,348 11,689,725
Less-accumulated depreciation ............................................... (7,883,968) (7,748,033)
- -------------------------------------------------------------------------------------------------------------
Net operating property, plant and equipment ............................... 3,734,380 3,941,692
- -------------------------------------------------------------------------------------------------------------
NONOPERATING EQUIPMENT, NET .................................................. 638,522 751,008
OTHER ASSETS ................................................................. 447,665 335,307
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS .............................................................. $ 8,333,905 $ 8,379,919
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable and accrued expenses ....................................... $ 1,281,158 $ 1,334,980
Revolving line of credit .................................................... 1,739,304 1,921,015
Current portion of long term debt ........................................... 252,232 346,497
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES ................................................. 3,272,694 3,602,492
- -------------------------------------------------------------------------------------------------------------
LONG TERM DEBT ............................................................... 2,299,277 1,922,338
OTHER LIABILITIES ............................................................ 760,501 1,177,614
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES ........................................................ 6,332,472 6,702,444
- -------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT:
Common stock - stated value $.10; shares authorized,
5,000,000 in 1996 and 1995; shares issued and
outstanding, 1,963,563 in 1996 and 1995 ..................................... 196,356 196,356
Paid-in capital ............................................................. 7,224,503 7,224,503
Warrant (Note 6) ............................................................. 1,235,184 1,235,184
Deficit (Note 2) ............................................................. (6,654,610) (6,978,568)
- -------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT ............................................. 2,001,433 1,677,475
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT ............................. $ 8,333,905 $ 8,379,919
=============================================================================================================
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
13
<PAGE> 16
STATEMENTS OF OPERATIONS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
FOR THE YEARS ended DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales .......................................................... $ 13,987,555 $13,644,441 $12,705,820
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of goods sold ............................................... (12,561,495) (12,219,671) (11,130,467)
Selling and administrative expenses .............................. (1,705,152) (11,643,702) (1,678,014)
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses ......................................... (14,266,647) (13,863,373) (12,808,481)
- ---------------------------------------------------------------------------------------------------------------------------
Loss from operations ............................................... (279,092) (218,932) (102,661)
Other income (expense):
Interest income .................................................. 60,981 2,591 14,983
Interest expense ................................................. (490,758) (610,425) (715,198)
Gain on sale of assets (Note 11) ................................. 760,731 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before reorganization items and
extraordinary items .............................................. 51,862 (826,766) (802,876)
- ---------------------------------------------------------------------------------------------------------------------------
Reorganization items (Note 3) ...................................... -0- -0- (5,550)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items ........................... 51,862 (826,766) (808,426)
- ---------------------------------------------------------------------------------------------------------------------------
Extraordinary items:
Gain on debt discharge (Notes 3 and 6) ........................... 272,096 4,618,842 1,131,726
- ---------------------------------------------------------------------------------------------------------------------------
Net income ......................................................... $ 323,958 $31,792,076 $ 323,300
===========================================================================================================================
Income (loss) per share (Note 2):
Before extraordinary items ....................................... $ 0.03 $ (0.42) $ (0.42)
Extraordinary items .............................................. 0.14 2.35 0.58
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share ............................................... $ 0.17 $ 1.93 $ 0.16
===========================================================================================================================
Weighted average shares and share equivalents
outstanding used to compute earnings per share ................... 1,963,563 1,963,563 1,963,563
===========================================================================================================================
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
14
<PAGE> 17
STATEMENTS OF SHAREHOLDERS' INVESTMENT
Phoenix Medical Technology, Inc.
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
RETAINED TOTAL
PAID-IN EARNINGS SHAREHOLDERS
SHARES AMOUNT CAPITAL WARRANT (DEFICIT) INVESTMENT
--------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993
as previously reported ............. 1,963,563 $196,356 $7,224,503 $ -0- $(11,227,879) $(3,807,020)
Retroactive effect on prior
years of change in accounting
(Note 2) ........................... -0- -0- -0- -0- 133,935 133,935
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993,
as restated ....................... 1,963,563 $196,356 $7,224,503 $ -O- $(11,093,944) $(3,673,085)
Net income (Note 2) ............... -0- -0- -0- -0- 323,300 323,300
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ........... 1,963,563 $196,356 $7,224,503 $ -0- $(10,770,644) $(3,349,785)
Net income (Note 2) ............... -0- -0- -0- -0- 3,792,076 3,792,076
Warrant issued ................... -0- -0- -0- 1,235,184 -0- 1,235,184
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 ........... 1,963,563 $196,356 $7,224,503 $1,235,184 $ (6,978,568) $ 1,677,475
Net income ......................... -0- -0- -0- -0- 323,958 323,958
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ........... 1,963,563 $196,356 $7,224,503 $1,235,184 $ (6,654,610) $ 2,001,433
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
15
<PAGE> 18
STATEMENTS OF CASH FLOWS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 323,958 $ 3,792,076 $ 323,300
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization .......................................... 496,662 469,977 522,272
Extraordinary items: Gain on debt discharge ............................ (272,096) (4,618,842) (1,131,726)
Gain on sale of assets (Note 11) ....................................... (760,731) -0- -0-
Loss on nonoperating equipment ......................................... 112,486 -0- -0-
Changes in assets and liabilities:
Increase in accounts receivable, net ............................... (43,595) (238,467) (279,474)
Increase in inventories ............................................ (466,448) (289,751) (36,711)
(Increase) decrease in prepayments and other ....................... (20,243) 39,765 (29,174)
Increase in other assets ........................................... (151,708) (253,686) (97,830)
(Decrease) increase in accounts payable,
accrued expenses, and other liabilities ......................... (218,839) 715,744 671,891
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities ................................ (1,000,554) (383,184) (57,452)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to operating property, plant
and equipment, net .................................................. (250,000) (71,640) (101,248)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................................ (250,000) (71,640) (101,248)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of assets (applied to debt) ........................... 1,114,341 -0- -0-
Proceeds from issuance of long term debt ................................. 750,000 -0- -0-
(Repayments on) borrowings under
revolving loan agreement, net .......................................... (181,711) 587,941 253,825
Reduction of long term debt .............................................. (467,326) (90,125) (191,372)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............................ 1,215,304 497,816 62,453
- -----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash .......................................... (35,250) 42,992 (96,247)
Cash at beginning of year ................................................ 89,411 46,419 142,666
- -----------------------------------------------------------------------------------------------------------------------
Cash at end of year ...................................................... $ 54,161 $ 89,411 $ 46,419
=======================================================================================================================
Supplemental disclosures' of cash flow information:
Cash paid during the year for interest ................................... $ 492,484 $ 441,104 $ 427,702
Cash paid during the year for reorganization items:
Professional fees .................................................. -0- 3,857 9,186
Trustee fees ....................................................... -0- -0- 8,750
Other .............................................................. -0- -0- 9,230
Unsecured creditors ................................................ 134,867 43,448 39,368
Supplemental schedule of non cash investing and
financing activities:
Conversion of accrued expenses to long term debt ................... -0- 531,769 925,245
Conversion of long term debt to warrant ............................ -0- $1,235,184 -0-
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Phoenix Medical Technology, Inc.
December 31, 1996, 1995, and 1994
NOTE I - ORGANIZATION AND GENERAL
Phoenix Medical Technology, Inc. (a Delaware Corporation) ,
hereinafter referred to as the Company, manufactures, markets and distributes a
range of single use vinyl and latex gloves for use in various applications
where clean, protective handcovers are important. The Company's gloves are
primarily used for healthcare services, beauty and barber shop services, food
processing, electronics and computer manufacturing and assembly, photo
finishing and janitorial services. The Company markets its products to medical
and industrial supply companies and generally does not make direct sales to end
users.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Change - During the fourth quarter of 1996, the Company
changed its method of determining the cost of inventories from the last-in,
first-out ("LIFO") method to the first-in, first-out ("FIFO") method. Under
the current economic environment of low inflation, the Company believes that
the FIFO method will result in a better measurement of operating results and
a better matching of inventory costs with product sales. This change has
been applied by retroactively restating the accompanying financial statements
for prior years. The balances of retained earnings for the years ended
December 31, 1995, 1994 and 1993 have been adjusted for the effect of applying
retroactively the new method of valuing inventories. The following summarizes
the effect of changing the accounting method for valuing inventories.
17
<PAGE> 20
Note 2 (continued)
<TABLE>
<CAPTION>
1995 1994
--------------------------------- ---------------------------------
Income (Loss) Income (Loss)
Before Extraor- Before Extraor-
dinary Gain Net Income dinary Gain Net Income
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As previously reported $(938,479) $3,680,363 $(873,599) $258,127
Effect of change in ac-
counting method for
inventories 111,713 111,713 65,173 65,173
- -----------------------------------------------------------------------------------------------------------------------
As restated (826,766) 3,792,076 (808,426) 323,300
Per share amounts, as
previously reported $ (0.48) $ 1.87 $ (0.45) $ 0.13
Effect of change in ac-
counting method for
inventories 0.06 0.06 0.03 0.03
- -----------------------------------------------------------------------------------------------------------------------
Per share amounts, as
restated $ (0.42) $ 1.93 $ (0.42) $ 0.16
</TABLE>
Inventories - Inventories are stated at the lower of cost or market. Cost
is determined for substantially all inventories using the first-in, first-out
"FIFO") method of inventory accounting (See Accounting Change note above.)
Inventory costs include materials, direct labor and factory overhead.
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Raw materials and supplies................................ $ 430,549 $ 572,358
Work-in-process........................................... -0- 5,976
Finished goods............................................ 1,125,569 844,946
---------- ----------
$1,556,118 $1,423,280
========== ==========
</TABLE>
18
<PAGE> 21
Note 2 (continued)
Property, Plant and Equipment - All property, plant and equipment are
stated at cost. Interest capitalized during construction periods is included in
plant and equipment and depreciated over the life of the asset. No interest was
capitalized during 1996, 1995 or 1994. Plant and equipment are depreciated
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements............. 20-33 years
Machinery and equipment................ 3-9 years.
</TABLE>
Other Assets - The Company capitalized certain costs related to the
refinancing of debt (see Note 6). Loan costs are amortized on a straight-line
basis over the term of the related loans.
Income Taxes - The Company accounts for income taxes in accordance with
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). This Standard requires recognition
of deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based
upon the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Fair Values of Balance Sheet Financial Instruments - The carrying amounts
reported in the accompanying Balance Sheets for cash, accrued expenses and
short-term debt approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amounts reported for
long-term debt approximates fair value because the underlying instruments are
variable rate notes that reprice frequently. The fair values of long-term other
liabilities are estimated by discounting future cash flows using borrowing rates
currently available to the Company for unsecured obligations with similar terms
and maturities. At December 31, 1996, the estimated fair value of the Company's
long-term other liabilities approximates $583,000.
Revenue Recognition - The Company recognizes revenue upon shipment of
products to customers.
Earnings Per Share - Earnings per share are computed based on the
weighted average number of shares of common stock and equivalents outstanding
during the year of computation.
19
<PAGE> 22
Note 2 (continued)
Use of Estimates - The preparation of the 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. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Reclassifications - Certain prior year balances were reclassified to
conform to the 1996 presentation.
20
<PAGE> 23
NOTE 3 - BANKRUPTCY PROCEEDINGS
In August 1991, the Company filed a petition for relief under Chapter 11
of the United States Bankruptcy Code. Under Chapter 11, certain claims against
the Company in existence prior to the filing of the petitions for relief under
the federal bankruptcy laws were stayed while the Company continued business
operations as a Debtor-in-possession. On October 21, 1993, the Company filed a
Plan of Reorganization (the Plan) with the Bankruptcy Court. The Plan was
confirmed by the Court on February 7, 1994.
The Company accounted for all transactions related to the reorganization
proceedings in accordance with Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" issued by the American
Institute of Certified Public Accountants in November 1990. Certain expenses,
primarily professional fees, resulting from the reorganization proceedings, are
reported separately in the 1994 statement of operations as reorganization
items.
As of December 31, 1996, the following obligations are outstanding
related to the Company's bankruptcy proceedings:
Unsecured Claims - Unsecured creditors who were owed a total of $1,475,715
in prepetition accounts payable and accrued liabilities are being paid a pro
rata portion of $11,200, plus interest at the prime rate, on the fifteenth day
of each quarter for twenty quarters. In addition, if the Company has net income
after debt principal and interest payments in the fifth fiscal year after
Confirmation, unsecured creditors will be paid a pro rata portion of $300,000
beginning March 31 of the sixth year after Confirmation. If sufficient net
income is not generated in the fifth year after Confirmation to pay the
$300,000 in full, pro rata payments shall be made on March 31 of each year
following the year in which the Company has had net income, until the $300,000
is paid in full. The total of both forms of payment, as allowed by the Plan, is
$524,000. Therefore, the amount of debt forgiven under the Plan for unsecured
claims is $951,715. However, the Company made a $4,000 payment on a priority
claim which had been forgiven by the Plan. The adjusted debt forgiveness is
$947,715, which is included in the gain on debt discharge reported in the 1994
Statement of Operations.
During fiscal 1996, the Company offered its unsecured creditors an
option to receive payment of the remaining portion of allowed claims in a
single payment. This option required the unsecured creditors to release their
bankruptcy claims against the Company including their right to receive future
payments of the pro rata portion of $300,000 discussed above. In fiscal 1996,
the Company recognized a $272,096 gain on debt discharge resulting from the
release by certain of its unsecured creditors of their unsecured bankruptcy
claims against the Company.
21
<PAGE> 24
NOTE 3 (continued)
Deferred Compensation - Post-petition deferred compensation owed to two
officers of the Company in the amount of $170,000 was to be paid in cash over a
48 month period beginning in the thirteenth month after confirmation of the
Plan. The debt refinancing discussed at Note 6 modified the terms of repayment.
Under separate agreements with NationsBank and CIT, the two officers have agreed
to waive their right to receive payment of all or any portion of their deferred
compensation of $170,000 until such time as all obligations of the Company to
NationsBank and CIT have been repaid.
Pre- and Post-Petition Property Taxes - The payment terms for pre- and
post-petition property taxes were modified in conjunction with the debt
refinancing discussed at Note 6. The agreement between the Company and
Williamsburg County, South Carolina requires interest payments at the rate of 7%
on the unpaid balance and 84 monthly principal payments beginning April 1, 1997.
NOTE 4 - GOING CONCERN
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern and presumes the realization
of assets and the settlement of liabilities in the ordinary course of business.
As discussed in Note 3, the Company received approval of the reorganization plan
from the Bankruptcy Court in 1994. As discussed in Note 6, the Company
completed the refinancing of the NationsBank debt in 1995.
The Company has continued to incur substantial operating losses that raise
substantial doubt about its ability to continue as a going concern. Management's
operating plans include adding salesmen to increase its sales volume, and
continued close monitoring of cost, as well as concentrating their sales efforts
on a more profitable product mix. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or the amounts and classification of liabilities that might result should the
Company be unable to continue as a going concern.
NOTE 5 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of the
following at December 31, 1996 and 1995:
22
<PAGE> 25
NOTE 5 (continued)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
--------------------------------
<S> <C> <C>
Accounts payable.......................................... $ 645,716 $ 727,224
Accrued compensation and
payroll taxes........................................ 291,826 249,970
Accrued property taxes.................................... 193,127 184,472
Other current liabilities................................. 150,489 173,314
---------- ----------
Total accounts payable and
accrued expenses..................................... $1,281,158 $1,334,980
========== ==========
Accounts payable, long term............................... 31,417 396,388
Accrued property taxes.................................... 559,084 611,226
Deferred compensation..................................... 170,000 170,000
---------- ----------
Total other liabilities................................... $ 706,501 $1,177,614
========== ==========
</TABLE>
NOTE 6 - DEBT
On March 29, 1995, the Company completed a refinancing of the NationsBank
debt by replacing such debt with debt facilities provided by Carolina First Bank
and The CIT Group/Credit Finance. The Company used the net proceeds of the
Carolina First loan and the initial funding of the CIT facility to settle its
indebtedness with NationsBank. Pursuant to such settlement, the Company also
issued a note recorded in the amount of $248,959 to NationsBank and a warrant to
purchase up to 496,058 shares of the Company's Common Stock exercisable at a
price of $0.03125 per share. The warrants are exercisable within two to ten
years from March 27, 1995, the date of the loan agreement and were valued at
$1,235,184. The Company has reported in the 1995 Statement of Operations, a
gain on debt discharge of $4,618,842 related to the debt forgiven.
Summarized below is the Company's debt at December 31, 1996 and 1995 and
the terms of the debt. Substantially all assets are pledged as collateral
against the loans.
23
<PAGE> 26
NOTE 6 (continued)
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revolving loan payable to bank, interest accrues
at prime plus 3.25% (8.25% at December 31, 1996)
with scheduled maturity in 1999, secured by the
Company's eligible inventory and receiveables........... $1,739,304 $1,921,015
Term loan payable to bank, due in scheduled monthly
installments of $20,184, including interest at
prime plus 2.0% with scheduled maturity in 2010,
secured by the Company's real property and
fixtures................................................ 1,659,316 1,723,572
Term loan payable to bank, due in scheduled monthly
installments of $12,500 plus interest at prime
plus 3.25% with scheduled maturity in 1999, secured
by certain assets of the Company........................ 712,500 -0-
Term note payable to bank, renegotiated in 1996, due in
scheduled monthly installments of $5,000 including
interest at prime plus 2% with scheduled
maturity in 1998........................................ 179,693 221,959
Term loan payable to bank, repaid in 1996................... -0- 306,250
Other notes payable, repaid in 1996......................... -0- 17,054
---------- ----------
Total debt.................................................. 4,290,813 4,189,850
Less - current portion...................................... 1,991,536 2,267,512
---------- ----------
$2,299,277 $1,922,338
========== ==========
</TABLE>
Maturities of long term debt are as follows:
<TABLE>
<S> <C>
1997 1,991,536
1998 351,613
1999 485,710
2000 81,320
2001 91,354
Thereafter 1,289,280
</TABLE>
The Company had outstanding borrowings of $1,739,304 under its revolving
loan as of December 31, 1996. Commitment fees are .50% of the unused portion
of the revolving loan. Borrowings under this arrangement are secured by liens
on receivables and inventory. Pursuant to the revolving credit facility, the
Company can borrow up to 50% of the value of the Company's eligible inventory
and 85% of the value of the Company's eligible accounts receivable. The total
loan availability is $3,000,000, including
24
<PAGE> 27
NOTE 6 (continued)
the $750,000 term loan from the same bank. The Company's revolving loan
agreement contains a lock box requirement and a subjective acceleration clause
that require the revolving line of credit to be classified as a current
liability.
Borrowings under the Company's revolving loan averaged $1,587,000 during
1996 and $1,847,000 during 1995. Maximum borrowings were $1,944,000 in 1996 and
$1,985,000 in 1995. The weighted average interest rate for such borrowings was
14.9% in 1996 and 12.3% in 1995.
The Company's loan agreements contain certain financial covenant and ratio
requirements such as minimum current ratio, minimum working capital, maximum
leverage and minimum net worth as defined. The Company is also restricted to
maximum annual capital expenditures. As of December 31, 1996, the Company was
in compliance with or had obtained appropriate waivers for all covenants of the
loan agreements.
NOTE 7 - INCOME TAXES
The components of deferred taxes as of December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net loss carryforwards $2,014,000 $2,480,000
General business credit
carryforwards 455,000 572,000
Other liabilities and reserves 134,000 173,000
Valuation allowance (2,034,000) (2,678,000)
---------- ----------
Total deferred tax assets 569,000 547,000
---------- ----------
Deferred tax liabilities:
Basis difference in oper-
ating property, plant
and equipment 569,000 547,000
---------- ----------
Net deferred taxes -0- -0-
---------- ----------
</TABLE>
The valuation allowances of $2,034,000 and $2,678,000 as of December 31,
1996 and 1995 respectively were established because in the Company's assessment,
it is uncertain whether the deferred tax assets will be realized.
As of December 31, 1996, net operating loss carryforwards of approximately
$7,450,000 for financial reporting purposes and $5,300,000 for tax purposes and
general business credits of approximately $455,000 are available to reduce
future income taxes payable by the Company. The carryforwards will expire as
follows:
25
<PAGE> 28
NOTE 7 (continued)
<TABLE>
<CAPTION>
Net Net
Operating Operating General
Losses Losses Business
(book basis) (tax basis) Credits
------------ ----------- ----------
<S> <C> <C> <C>
1997 $ - $ - $ 43,000
1998 - - 25,000
1999 - - 71,000
2000 - - 168,000
2001 - - 58,000
2002 - - 40,000
2003 - - 50,000
2004 - - -
2005 3,550,000 600,000 -
2006 1,900,000 2,400,000 -
2007 800,000 600,000 -
2008 1,200,000 1,600,000 -
2009 - 100,000 -
------------ ----------- ----------
$7,450,000 $5,300,000 $ 455,000
============ =========== ==========
</TABLE>
Due to the loss carryforward position in 1991, the Company eliminated
approximately $93,000 of deferred tax liabilities and approximately $31,000 of
income taxes payable. As the Company either provided a valuation allowance for
or did not recognize tax benefits generated from the net operating losses at
December 31, 1996, 1995 and 1994, no income tax provision or benefit was
recorded in these years. Deferred income taxes will be reinstated when the
above carryforwards are recognized for tax purposes.
The effective tax rate varied from the federal statutory rate because no
deferred tax assets applicable to the net operating losses have been recorded.
The effective tax rate varied from the federal statutory rate because of
the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate (34)% (34)% (34)%
Losses carried forward
for future years 34 34 34
------ ------ ------
- - -
====== ====== ======
</TABLE>
NOTE 8 - MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND OTHER
MATTERS
Sales to the Company's five largest customers were approximately 28% in
1996, 29% in 1995 and 26% in 1994. No customer individually accounted for more
than 10% of total sales in 1996, 1995 or 1994. The Company extends credit to
its customers, most of which are in the safety supply, medical supply and
contamination control industries, or are government agencies.
26
<PAGE> 29
NOTE 8 (continued)
The Company entered into non-competition and consulting agreements with
two of its officers. In the event of their termination, they will be required
to not compete and to provide up to 60 days consulting services per year for two
years (can be extended to a third year at the option of the Company). Annual
expenses under these agreements will equal each officer's final annual
compensation at the time of termination. Total annual compensation related to
the officers was $193,000 in 1996, $185,000 in 1995 and $288,000 in 1994. These
officers have forgiven $94,700 of such compensation in 1996 and $103,000 in 1995
and 1994. These officers have no present or future rights to the forgiven
compensation.
The Company is subject to (a) government regulations and periodic
inspection of its facilities by the United States Food and Drug Administration,
(b) various federal, state and local laws and regulations regarding the
protection of the environment, (c) manufacturers' product liability for which
the Company currently maintains liability insurance and (d) adherence to the
patent and other intellectual property rights of others.
The Company manufactures and distributes its products principally to
medical, contamination control and industrial supply companies. Substantially,
all of the Company's accounts receivable are due from companies in the above
lines of business. The Company performs periodic credit evaluations of its
customers' financial conditions and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information. The Company recognizes revenue when
goods are shipped and the resulting receivables are generally due within 30
days.
NOTE 9 - RETIREMENT PLAN
Effective July 1, 1988, the Company adopted the Phoenix Medical
Technology, Inc. Savings Plan (the "Savings Plan") to provide employees with a
source of income after retirement. The Savings Plan includes 401(k) salary
reduction provisions. The Company's contributions are at the discretion of the
Board of Directors, subject to certain limitations, and may be made in the form
of Company common stock. Contribution expense under the Savings Plan was
approximately $4,800 in 1996, $4,600 in 1995 and $4,500 in 1994.
NOTE 10 - STOCK OPTIONS
In March 1984, the Board of Directors adopted an incentive stock option
plan for management and key employees. The plan authorizes up to 50,000 shares
to be available for options to be granted by a committee of the Board. Options
will be exercisable within two to ten years from the dates of grant and at not
less than fair market value of the stock at the dates the options are granted.
27
<PAGE> 30
NOTE 10 (continued)
In April 1988, the Company's shareholders approved a new incentive stock
option plan for management and key employees. The plan authorizes up to 50,000
shares to be available for options to be granted by a committee of the Board of
Directors. Options will be exercisable within six months to ten years from the
dates of grant at not less than the fair market value of the stock at the dates
the options are granted.
In April 1989, the Company's shareholders approved a new non-qualified
stock option plan for non-employee directors. The 1989 plan authorizes up to
28,000 shares to be available for issuance upon the exercise of options granted
under the 1989 plan. Under the 1989 plan, each eligible director will be
granted an option for 1,000 shares of the Company's common stock on May 1, 1989,
1990, 1991 and 1992. The shares granted are exercisable within six months to
ten years from the dates of the grants. In April 1989 and May 1990, options for
the purchase of 7,000 shares of common stock were granted by the Board of
Directors. In May 1991 and 1992, the Board of Directors granted options for the
purchase of 3,000 shares of common stock in accordance with the 1989 stock
option plan. Options for the purchase of 6,000 shares expired during 1990.
Transactions under the Option Plans are as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
--------- ---------------
<S> <C> <C>
Outstanding 12/31/94 ................ 68,200 $0.06 to $15.00
Granted ............................. 15,000 $0.375
Expired ............................. (6,750) $8.00
Outstanding 12/31/95 and 12/31/96.... 76,450 $0.06 to $15.00
</TABLE>
As of December 31, 1996, 128,000 shares have been reserved for issuance
under the option plans discussed above.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
the Statement of Financial Accounting Standards NO. 123, Accounting For Stock
Based Compensation ("SFAS 123"). The provisions of SFAS 123 establish a fair
value based method of accounting for stock based compensation plans, the effect
of which can either be disclosed or recorded. The Company adopted the
provisions of SFAS 123 in fiscal 1996 and has retained the intrinsic value
method of accounting for stock based compensation required under APB Opinion No.
25. The impact of adopting SFAS 123 was not material and no additional
disclosures are required for 1995 and 1996 transactions in the Company's option
plans.
NOTE 11 - SALE OF ASSETS
On March 22, 1996, the Company sold to Microtek Medical, Inc.
("Microtek"), all of the Company's machinery, equipment and related tangible
property (including inventory and work-in-process) and all of its proprietary
information and all other property and rights related to the Company's
manufacture and sale of adhesive skin drapes and scrub-and-prep products. The
purchase
28
<PAGE> 31
NOTE 11 (continued)
price consisted of $1,175,000 in cash and Microtek's undertaking to make
contingent payments for ten years of 11.5% of its sales of patented incise
drapes and 3% of its sales of other products in the Company's product line
incorporating the patented process, with a maximum of $1,825,000 of all
contingent payments and a maximum total purchase price of $3,000,000. The
Company's sales of items produced by the assets sold to Microtek accounted for
4% of their total sales in 1995 and 5% of total sales in 1994. This sale
resulted in a gain of approximately $760,000. The contingent payments will be
recorded when earned.
29
<PAGE> 32
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Registrant's Board of Directors is divided into three
classes, with one class of directors elected at each annual meeting of
shareholders for a three-year term (or until their successors are elected and
qualify). Set forth below is information with respect to each director and
executive officer of the Registrant, including their business experience for at
least the last five years.
DIRECTOR ELECTED APRIL 22, 1988:
Edward W. Gallaher, Sr. Director since 1978. President of the
Registrant since its organization in 1978, Treasurer since 1981 and Chief
Executive Officer since 1987. He is 64.
DIRECTOR ELECTED APRIL 21, 1989:
Grover C. Mixon. Director since 1978. Executive Vice President and
Chief Operating Officer of the Registrant since 1988. Senior Vice President of
the Registrant from 1985 to 1988. Vice President-Operations of the Registrant
1978-1985. He is 53.
DIRECTORS ELECTED APRIL 20, 1990:
Harold H. Heath. Director since 1979. Owner/Operator of the Big
Valley Ranch in the State of Washington since 1981. He is 74.
Byron M. Layman. Director since 1979. Retired in 1977 as Treasurer
of Payne & Company, a wholesale distributor of fabrics. He is 87.
William T. Sena. Director since 1980. Chairman of Sena, Weller,
Rohs, & Williams, Inc., an investment advisory firm, since 1977. He is 60.
The Registrant's Bylaws provide for a range in the number of
directors, with the provision that, until otherwise determined by the Board of
Directors, the number of directors shall be fixed at nine. Because of the
resignations of directors, there are currently only five directors. There has
not been a meeting of the Registrant's shareholders since April 20, 1990. The
Board of Directors did not formally meet in 1996, but conferred several times
by telephone and exchanged correspondence.
30
<PAGE> 33
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Registrant's knowledge, based solely on a review of the copies
of such reports furnished to the Registrant and written representations that no
other reports were required, during the fiscal year ended December 31, 1996,
all Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial shareholders were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid to
or for the account of the Registrant's chief executive officer. The annual
salary and bonus of only the chief executive officer exceeded $100,000 the
fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
-------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL COMPENSATION COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($)(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Edward W. Gallaher, Sr. 1996 $107,750(1) 0 (3) $924
President, Treasurer, Chief ------------------------------------------------------------------------------------
Executive Officer and Director 1995 $ 95,000(3) 0 (3) $924
------------------------------------------------------------------------------------
1994 $ 95,000(3) 0 (3) $924
========================================================================================================================
</TABLE>
- ---------------------------
(1) Amount of vested and unvested Registrant contributions under the
Registrant's Savings Plan, a 401(k) Plan.
(2) Does not include $53,250, $60,000 and $60,000 in 1996, 1995 and 1994,
respectively, of annual salary forgiven by Mr. Gallaher. Mr. Gallaher has
no present or future right to such amount; however, Mr. Gallaher's annual
salary as established by the Board of Directors remains $155,000.
(3) Mr. Gallaher did not receive personal benefits during the listed years in
excess of 10% of annual salary and bonus.
The following table shows, on an aggregated basis the 1996 fiscal year-end
value of unexercised options and SARs held by Mr. Gallaher. No stock options
or tandem SARs were exercised by Mr. Gallaher during the fiscal year ended
December 31, 1996.
31
<PAGE> 34
AGGREGATED OPTION/SAR EXERCISES IN 1996
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES OPTIONS/SARS AT FY-END THE-MONEY OPTIONS/SARS
ACQUIRED ON VALUE REALIZED (# SH) AT FY-END ($)
NAME EXERCISE (#SH) ($) EXERCISABLE /UNEXERCISABLE EXERCISABLE /UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward W. Gallaher, Sr. 0 0 7,250 / 0 0
==========================================================================================================================
</TABLE>
EMPLOYMENT AGREEMENTS
In March 1984, the Registrant entered into non-competition and
consulting agreements with Messrs. Gallaher and Mixon. Under these agreements,
after the officers' termination, each of them will be required not to compete
with the Registrant and to provide up to 60 days consulting services per year
for two years. Annual payments under these agreements will equal each
officer's final annual compensation at the time of termination. The current
annual salaries of Messrs. Gallaher and Mixon, as established by the Board of
Directors is $155,000 and $133,000, respectively. However, Messrs. Gallaher
and Mixon forgave $53,250 and $41,450, respectively, of such salaries for the
fiscal year ended December 31, 1996 and have no present or future right to such
forgiven amounts.
DIRECTORS' FEES
The Directors of the Company who are not employees are traditionally
paid an annual fee of $3,000 plus $500 for each Board meeting attended and each
Committee meeting attended which is not held on the same day as a Board
meeting. The Chairman of the Board traditionally receives an annual fee of
$5,000, in lieu of the $3,000 fee paid to non-employee Directors. Each
Chairman of a Committee who is not an employee traditionally receives an
additional $1,000. No fees were paid to the Directors during 1996 due to the
severe financial condition of the Registrant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 15,
1997, with respect to the beneficial ownership of the Registrant's Common Stock
by (i) each person known by the Registrant to be the beneficial owner of more
than 5% of such outstanding shares, (ii) each director of the Registrant, (iii)
the named executive officers and (iv) all directors and officers of the
Registrant as a group:
32
<PAGE> 35
<TABLE>
<CAPTION>
Number of Shares Percentage
and Nature of of Shares
Name and Address Beneficial Ownership(1) Outstanding
- --------------------- ---------------------- -----------
<S> <C> <C>
Harold H. Heath 19,000 (2)(3) (4)
Byron M. Layman 26,000 (5) 1.2% (6)
William T. Sena 21,400 (2) 1.1%
Edward W. Gallaher, Sr. 108,445 (7) 5.5% (6)
Route 521 West
P.O. Box 346
Andrews, SC 29510
Grover C. Mixon 69,584 (8) 3.5% (6)
Route 521 West
P.O. Box 346
Andrews, SC 29510
All Officers and
Directors of the
Registrant as a Group 238,029 (9) 12.1% (10)
</TABLE>
- -------------------------
(1) All shares are owned directly and with sole voting and dispositive
power except as otherwise noted.
(2) Includes 4,000 shares subject to options which are currently
exercisable or exercisable within 60 days.
(3) Includes 2,000 shares owned by Mr. Heath's daughters.
(4) Less than 1%.
(5) Includes 2,805 shares owned by Mr. Layman's wife and 4,000 shares
subject to options which are currently exercisable or exercisable
within 60 days.
(6) Based on the number of shares outstanding and shares subject to
options held by the Director which are currently exercisable or
exercisable within 60 days.
(7) Includes 7,250 shares subject to options which are currently
exercisable or exercisable within 60 days and 15,550 shares held by
Mr. Gallaher's wife.
(8) Includes 500 shares owned by Mr. Mixon's wife and 6,950 shares
subject to options which are currently exercisable or exercisable
within 60 days.
33
<PAGE> 36
(9) Includes 24,200 shares subject to options which are currently
exercisable or exercisable within 60 days.
(10) Based on number of shares outstanding and shares subject to options
held by the officers and directors which are currently exercisable
or exercisable within 60 days.
34
<PAGE> 37
PART IV
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(A) EXHIBITS
See INDEX to EXHIBITS.
(B) REPORTS ON FORM 8-K
The Registrant did not file any Reports on Form 8-K during the
quarter ended December 31, 1996.
ITEMS 3, 4, 8 AND 12 ARE INAPPLICABLE AND ARE OMITTED.
35
<PAGE> 38
SIGNATURES
In accordance with Sections 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.
PHOENIX MEDICAL TECHNOLOGY, INC.
Dated: March 24, 1997 By: /s/ Edward W. Gallaher, Sr.
------------------------------------
Edward W. Gallaher, Sr.
President
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:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Edward W. Gallaher, Sr. President, Treasurer March 24, 1997
- --------------------------- and Director
Edward W. Gallaher, Sr. (Principal Executive
and Financial Officer)
/s/ Grover C. Mixon Executive Vice March 24, 1997
- ----------------------- President and
Grover C. Mixon Director
/s/ Harold H. Heath Director March 24, 1997
- -----------------------
Harold H. Heath
/s/ Byron M. Layman Director March 24, 1997
- -----------------------
Byron M. Layman
/s/ William T. Sena Director March 24, 1997
- -----------------------
William T. Sena
/s/ Delores Williams Controller March 24, 1997
- ----------------------- (Principal Accounting
Delores Williams Officer)
</TABLE>
36
<PAGE> 39
SCHEDULE II
PHOENIX MEDICAL TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994 1995 AND 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------
Additions Deductions-
Balance at Charged Write-offs, Balance at
Beginning to Costs and net of End of
Description of Period Expenses Recoveries Period
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31,
1994:
Allowance for doubtful
accounts $ 70,024 $ 11,800 $(11,800) $ 70,024
======== ======== ======== ========
Year ended December 31,
1995:
Allowance for doubtful
accounts $ 70,024 $ 19,386 $(19,386) $ 70,024
======== ======== ======== ========
Year ended December 31,
1996:
Allowance for doubtful
accounts $ 70,024 $(36,312) $(13,712) $ 20,000
======== ======== ======== ========
</TABLE>
<PAGE> 40
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
Item 13
FORM 10-KSB
ANNUAL REPORT
For the fiscal year ended Commission File Number
December 31, 1996 0-13401
PHOENIX MEDICAL TECHNOLOGY, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
LOCATED AT
MANUALLY
NUMBERED PAGE
-----------
<S> <C> <C>
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION
2.1 Plan of Reorganization, confirmed February 7, 1994, U.S. Bankruptcy
Court for the District of South Carolina, Columbia Division, was
filed as an Exhibit to the Registrant's Form 10-QSB for the
quarter ended October 3, 1993................................................. *
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Certificate of Incorporation of Phoenix Medical Technology, Inc., as
amended, was filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (Reg. No. 2-90708)...................................... *
3.2 Certificate of Amendment to the Certificate of Incorporation was
filed as an Exhibit to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1988.......................................... *
3.3 Amendment to Article VIII of the By-Laws of Phoenix Medical
Technology, Inc., approved at the Annual Meeting of Stockholders on
</TABLE>
37
<PAGE> 41
<TABLE>
<S> <C> <C>
April 22, 1988, was filed as an Exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1988.......................................................................... *
3.4 By-Laws of Phoenix Medical Technology, Inc., as amended, were
filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1988..................................... *
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES:
4.1 Warrant dated March 27, 1995 between the Registrant and
NationsBank, N.A. (Carolinas), was filed as an Exhibit
to the Registrant's Form 8-K dated March 29, 1995............................. *
4.2 Loan Agreement dated March 27, 1995 between the Registrant
and Carolina First Bank was filed as an Exhibit
to the Registrant's Form 8-K dated March 29, 1995............................. *
4.3 Loan and Security Agreement dated March 28, 1995 between
the Registrant and The CIT Group/Credit Finance, Inc.
was filed as an Exhibit to the Registrant's Form 8-K dated
March 29, 1995................................................................ *
(10) MATERIAL CONTRACTS:
10.1 1984 Incentive Stock Option Plan was filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No. 2-90708)............ *
10.2 Form of Consulting and Noncompetition Agreements, dated March 23,
1984, between the Registrant and Edward W. Gallaher, Sr. and Grover-
C. Mixon was filed as an Exhibit to the Registrant's Registration
Statement on Form No. S-1 (Reg. No. 2-90708).................................. *
</TABLE>
38
<PAGE> 1
EXHIBIT 18
ARTHUR
ANDERSEN
February 28, 1997
-------------------
Arthur Andersen
-------------------
Phoenix Medical Technology, Inc. Suite 2000
Post Office Box 346 121 Main Street
Andrews, South Carolina 29412 Columbia, SC 29201
803 254-8102
Re: Form 10-KSB Report for the year ended December 31, 1996.
Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As of September 30, 1996, the Company changed from the last-in, first-out
(LIFO) method of accounting for inventory to the first-in, first-out (FIFO)
method. Accounting to the management of the Company, this change was made to
provide a better measurement of operating results and better matching of
inventory costs with product sales.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion, stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to
an acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under
the circumstances in this particular case. In arriving at this opinion, we
have relied on the business judgment and business planning of your management.
Very truly yours,
/s/ Arthur Andersen LLP
41
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH PHOENIX MEDICAL TECHNOLOGY FORM 10-KSB FOR THE PERIOD ENDING DECEMBER
31, 1996.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 54,161
<SECURITIES> 0
<RECEIVABLES> 1,903,059<F1>
<ALLOWANCES> 0
<INVENTORY> 1,556,118
<CURRENT-ASSETS> 3,513,338
<PP&E> 4,820,567<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,333,905
<CURRENT-LIABILITIES> 3,272,694
<BONDS> 3,059,778
0
0
<COMMON> 196,356
<OTHER-SE> 1,805,077
<TOTAL-LIABILITY-AND-EQUITY> 8,333,905
<SALES> 13,987,555
<TOTAL-REVENUES> 821,712
<CGS> 12,561,495
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,705,152
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 490,758
<INCOME-PRETAX> 51,862
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 272,096
<CHANGES> 0
<NET-INCOME> 323,958
<EPS-PRIMARY> $0.17
<EPS-DILUTED> 0
<FN>
<F1>REPRESENTS NET AMOUNT
</FN>
</TABLE>
