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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, 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 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
--- ---
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
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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 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 3, 1998, would be $431,384.
The Registrant's revenues for the fiscal year ended December 31, 1997 were
$13,836,522.
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
--- ---
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 March 3, 1998 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.
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, nitrile and latex gloves.
During 1997 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 machines operated at approximately 61% and
48% of their five-day capacity, respectively, in 1997.
Until March 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, and no longer
manufactures or sells surgical drapes. See "Sale of Surgical Drape Assets"
below.
The Registrant markets its products primarily to medical and
industrial supply companies. These supply companies may 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.
On December 22, 1997, the Registrant entered into an Option
Agreement with London International Group, Inc. ("LIG"), pursuant to which LIG
purchased, at an option purchase price of $500,000, an option to purchase
substantially all of the assets of the Registrant at a purchase price of
$6,821,708 and to assume certain liabilities of the Registrant. In addition, the
Registrant and LIG entered into a Loan and Security Agreement, a Research and
Development Agreement and a Supply Agreement. The Option Agreement and release
of the option purchase price to the Registrant are subject to the approval of
the Registrant's stockholders at a
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Special Meeting of Stockholders currently expected to be held on April 28, 1998.
A brief description of the Option Agreement and the related agreements, together
with copies of such agreements, are included in the Registrant's Form 8-K dated
January 6, 1998.
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 1997, 56% 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. None of the Registrant's nitrile
glove sales were to the medical market.
In the medical market, the Registrant sells its products
principally to agencies of the Federal government and 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 a prompt basis.
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DESCRIPTION OF PRODUCTS
Single Use Gloves. Vinyl, nitrile and latex gloves are single
use protective handcovers which are generally worn once and discarded. Gloves
are worn either to protect the wearer or to protect product from the wearer.
They are ambidextrous (the same glove fits either hand). Vinyl gloves range in
size from extra-small to extra-large and nitrile and latex gloves range in size
from small to extra-large.
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 Micr0ban(R) into the glove.
The Registrant has an exclusive license in the United States and Canada for the
use of Micr0ban(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 the
Environmental Protection Agency recently determined that the Environmental
Protection Agency has final determination over food additive petitions. Phoenix
has been advised that this should not cause additional delays in the approval
process, but cannot speculate as to when or if such approval will be received.
For many applications either nitrile, latex or vinyl gloves
may be used. Latex and nitrile 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 1997. Nitrile gloves are more expensive than either vinyl or latex
gloves.
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.
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Vinyl gloves accounted for 59.8% , 71.7% and 68.4% of the
Registrant's total sales in 1995, 1996 and 1997, respectively. Latex gloves
accounted for 35.4%, 28.3% and 28.2% of the Registrant's total sales in 1995,
1996 and 1997, respectively. Nitrile gloves accounted for 3.4% of the
Registrant's total sales in 1997, their introductory year.
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 were made of polyethylene film, were
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
3.7% of total sales in 1995. The Registrant also manufactured scrub and prep
sponges for the medical market. Sales of these products accounted for less than
3% of total sales in 1995 and $163,000 or 1.2% in 1996. The Registrant sold its
surgical drape assets in March of 1996, and no longer manufactures or sells
surgical drapes. See "Sale of Surgical Drape Assets" below.
MANUFACTURING OPERATIONS
Vinyl gloves are manufactured on long, integrated, continuous
process machines on which hand-shaped molds are dipped into liquid vinyl, then
cured under controlled heat and finally stripped from the molds. 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.
The Registrant currently has five vinyl glove machines with a
total capacity to produce 1,100,000 gloves per day. During 1997, the vinyl glove
machines operated at 59% of capacity. 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 and nitrile glove manufacturing is similar to that of
vinyl gloves. The primary difference between the two processes is that latex and
nitrile gloves go through a multiple dip process while vinyl gloves go through a
single dip process. The Registrant's latex glove machine has the capacity to
produce 625,000 gloves per day. The latex machine operated at approximately 48%
of its five-day a week capacity during 1997.
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, and no longer manufactures or sells surgical
drapes. See "Sale of Surgical Drape Assets" below.
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The Registrant places great emphasis upon controlling the
quality of its products. Quality control procedures include the testing of
statistical samples of products every 30 minutes to assure conformance to
certain specifications.
The Registrant believes that its manufacturing equipment
generally incorporates state-of-the-art technology.
MARKETING AND DISTRIBUTION
The Registrant conducts its sales and marketing activities
using a combination of direct sales representatives and manufacturer's
representatives. Both groups report to and take direction from a national sales
manager. The Registrant's export sales which accounted for approximately 10% of
total sales in 1997 are the responsibility of the Registrant's President.
Industrial, safety and laboratory supply distributors are the Registrant's major
customers.
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 backlog at the end of 1995, 1996 and 1997 were
$483,000, $247,000 and $305,000 respectively. The 1997 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 28.0% of sales in 1997. No customer individually accounted for 10%
or more of total sales in 1997.
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 from a number of sources. The primary raw material for nitrile gloves is
nitrile polymer which is available in adequate supply from a number of sources.
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 leading
United States manufacturers of nitrile unsupported disposable gloves are
Tillotson Corp.
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and Ansell-Edmont Industrial, Inc. The Registrant's competitors are generally
larger and have greater financial resources than the Registrant.
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 favorable
competitive factors include its ability to supply a broad line of latex, nitrile
and vinyl gloves and to respond to customers' needs for prompt delivery.
LICENSES AND TRADEMARKS
The Registrant has license agreements with Micr0ban(R)
Products Co. for the use of Micr0ban(R) and Micr0ban(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 Micr0ban(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 Micr0ban(R) has been applied for but not yet granted. The
licenses were renewed in October 1997 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.
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EMPLOYEES
As of December 31, 1997, the Registrant employed 295 persons,
of whom 255 were hourly employees engaged in production, 26 were engaged in
executive, administrative or clerical functions and 14 were supervisors. One
employee is part time; all other employees are full time.
The Registrant's hourly production employees are represented
by the Union of Needletraders, Industrial and Textile Employees ("UNITE"). In
March 1997 the Registrant entered into a new agreement with UNITE which will
expire in March 2000. The Registrant 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 Town of Andrews'
water system. The Town of Andrews has not yet imposed enforceable limitations on
the Registrant's zinc discharges and it is unclear at this time when such
limitations will be imposed and what, if any, capital expenditures will be
required in order for the Registrant to comply with any such limitations.
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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. In 1997, $6,687 was expended for ground water testing.
Recent testing indicates that the contaminant is not moving outward and the
contamination level is decreasing. A purchase order for $9,750 has been issued
for 1998 testing by Integrated Science and Technology, a State EPA-approved
contractor. The contractor estimates two to five years of testing before the
State EPA delists the site. Estimated total expenditures are $50,000 to $100,000
over a three year period. Such expenditures have not been accrued in the
Company's financial statements, as the ultimate liability within the range
cannot be reasonably estimated at this time.
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, 1997 such properties were subject to a mortgage with a
principal balance of $1,589,400. 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. 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 61% and 48%, respectively, of its
twenty-four hour, five-day a week capacity, in 1997 versus 65% and 43%,
respectively, in 1996.
ITEM 3. LEGAL PROCEEDINGS
The Registrant has been named in litigation and notified of potential
litigation involving alleged injuries sustained in connection with latex-related
allergies. The Registrant has been named as a defendant in a lawsuit styled
Thomas D. Mazer, M.D. v. Baxter Healthcare Corp., et al., Docket No. 97-6879,
filed in the United States District Court for the District of Minnesota on
September 12, 1997. Plaintiff in the lawsuit alleges that he has suffered injury
as a result of an allergic reaction to proteins found in latex gloves, and has
named as defendants a number of manufacturers of latex gloves. The suit, along
with a number of others filed by plaintiffs alleging latex-related allergies,
has been assigned to a multi-district panel and is currently being handled by
the United States District Court for the Eastern District of Pennsylvania. These
suits, collectively,
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bear docket No. MDL-1148. An Answer to the Complaint was filed by counsel on
December 31, 1997.
Management of the Registrant intends to vigorously contest the Mazer
claim and any other suits alleging latex-related allergy injuries, or indemnity
and/or contribution claims derived from such alleged injuries, which may be
brought against it. At this time, due to the recent nature of these claims,
management is unable to make an evaluation of the likelihood of any such loss.
The Registrant maintains product liability coverage, and in the opinion of
management, this coverage would be adequate to cover any potential losses
related to these potential claims. However, there is no guarantee that such
insurance coverage would fully cover all losses sustained in connection with
these potential claims.
In addition, the Registrant is involved in other legal proceedings and
claims arising in the ordinary course of business. In the opinion of management,
the outcome of such legal proceedings and claims will not materially affect the
Registrant's financial position.
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 1997 these quotations generally
were at a bid price of 1/4 and an ask price of 3/4 per share.
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 March 3, 1998, there were 760 shareholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Operations
Sales for 1997 were $13,837,000, 1% less than sales in 1996.
Total glove sales in 1997 were level with sales in 1996. In 1996, the Registrant
had sales of $163,000, 1.2% of total sales, from skin drapes, a product line
which was sold by the Registrant in March 1996. See "Sale of Surgical Drape
Assets." Glove sales during 1997 versus 1996 on a quarter by quarter comparison
were down 15.3% in quarter one, flat in quarter two, up 2.2% in quarter three
and up 11.6% in quarter four. Latex glove sales, 28% of all glove sales in 1997,
were down 2% as compared with 1996 sales. Vinyl glove sales, 68.5% of all glove
sales in 1997, were 3% less as compared with
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1996 sales. The sales of nitrile cleanroom gloves, a new product for Phoenix,
contributed 3.5% of 1997 glove sales and 8.3% of sales in the fourth quarter of
1997.
Sluggishness in the manufacture of semiconductor chips during
late 1996 and early 1997 adversely affected the Registrant's sales of cleanroom
related gloves. Sales to that market segment in 1997 were either down or flat
through mid-1997, but second half 1997 sales into the cleanroom glove market
segment were 27% above the first half's sales. Practically all, 98%, of the
sales from the Registrant's nitrile cleanroom gloves were in the second half of
1997.
Through two months of 1998, order receipt and shipments are
strong, unlike the first two months of 1997 when order receipt was very weak.
Based on January and February, orders and shipments are running about 17% ahead
of the same period in 1997.
Cost of goods sold, as a percentage of net sales, was 92.1% in
1997 versus 89.8% in 1996. Included in the 1997 cost of goods sold was the
write-off of non-operating equipment for $139,000. In addition costs directly
related to improving product quality increased $91,000, or 14%. All costs
related to completing the development and introduction of the nitrile cleanroom
glove products were expensed as incurred as cost of goods sold. All other
related manufacturing costs were relatively unchanged from 1996.
Selling and Administrative ("S&A") expenses increased $78,000
during 1997 to $1,783,000. As a percentage of sales, S&A expense was 12.9% in
1997 as compared with 12.2% in 1996. Selling expense was $624,000 in 1997, down
from $689,000 in 1996. The reduction resulted from the Registrant's change to a
predominantly employee sales force versus using manufacturer's representatives.
Administrative expense was $1,159,000, up from $1,016,000 in 1996. The major
contributors to the change were the professional fees related to the
Registrant's negotiations with London International Group, Inc. ("LIG") (see the
Registrant's Form 8-K filed January 6, 1998) and the $50,000 favorable
adjustment to 1996 Administrative expenses related to the Registrant's reserve
for bad debts.
In 1997, the Registrant incurred a net loss of $1,217,000 as
compared with a net income of $324,000 for 1996. The 1997 results include a loss
of $139,000, resulting from the write-down of a non-operating asset and certain
expenses related to the negotiations with LIG as previously discussed. 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 from the write-down of a non-operating asset. Excluding both
ordinary and extraordinary gains and losses noted above, the Registrant
experienced losses of $1,078,000 in 1997 and $597,000 in 1996.
During 1996, the Registrant 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 1995 results were retroactively
restated for the accounting change.
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Liquidity and Capital Resources
During the year 1997, the Registrant's operations used
$660,000 of cash compared with $1,001,000 used in the year 1996. $126,000 of
cash was used on needed capital expenditures during 1997, as compared with
$250,000 used in 1996. The sum of inventories, accounts receivable and
prepayments increased $181,000 in 1997, compared with a $530,000 increase during
the prior year. The inventory increase in 1997 was $224,000, reflecting the
additional inventory to support two new products, nitrile gloves and vinyl
gloves with antistatic additive, and the additional inventory to support timely
deliveries to new customers. Accounts payable, accrued expenses and other
liabilities increased $164,000 in 1997 as compared with a decrease of $219,000
in 1996. At December 31, 1997, the Registrant's borrowing against its $3,750,000
line of credit was $3,334,000.
At December 31, 1997, the Registrant was not in compliance
with several financial covenants in its credit agreements but the violations
have been waived by the banks. The Registrant was not in compliance with the
financial covenants related to working capital and the current ratio due to
financial accounting rule changes relating to the classification of long term
debt where the debt contains a subjective acceleration clause and a lock box
arrangement. The Registrant's revolving credit facility, which expires in March
1999, was reclassified in 1996 as current debt. In addition, the Registrant was
not in compliance with the financial covenants related to net worth and the
leverage ratio and the report of Arthur Andersen LLP on the financial statements
for the year ended December 31, 1997 contains explanatory language which raises
substantial doubt about the Registrant's ability to continue as a going concern;
the financial covenants require an unqualified accountants' report.
The Registrant is hopeful that the strong order receipt
experienced October 1997 through February 1998 will continue throughout 1998.
The fourth quarter 1997 sales growth of 11% compared with the prior year quarter
and an increase year to date 1998 of more than 15%, if continued throughout
1998, will help reverse the Registrant's problem of using cash in operations. If
the current availability ($416,000) under the Company's credit line is
insufficient to fund continuing operations, and if the transaction with LIG
(discussed in the Registrant's Form 8-K dated January 6, 1998) does not receive
approval from the Registrant's stockholders, the Registrant could be required to
seek additional financing. For any such additional financing, the Registrant
will consider borrowings from commercial lenders and other sources of debt
financing as well as equity financing. No assurance can be given, however, that
the Registrant will be able to obtain any such additional financing, when
needed.
The Registrant's bank debt at December 31, 1997 stood at
$5,060,000 versus $4,300,000 at December 31, 1996. Interest expense for 1997 was
$567,000 as compared with $491,000 for the year 1996.
The Registrant has assessed the impact of the Year 2000 issue
on its reporting systems and operations. Nearly all of the Registrant's systems
utilize a four-digit field and are
11
<PAGE> 14
therefore unaffected by the Year 2000 issue. In addition, the Registrant's
systems do not interface with outside entities except for EDI, which system's
software is Year 2000 compatible. Therefore, the Registrant believes the Year
2000 issue is not material with respect to its reporting systems and operations.
Cautionary Statement as to Forward-Looking Information
Statements contained in this report as to the Registrant's
outlook for sales, operations, capital expenditures and other amounts, budgeted
amounts and other projections of future financial or economic performance of the
Registrant, and statements of the Registrant's plans and objectives for the
future are "forward-looking" statements, and are being provided in reliance upon
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Important factors that could cause actual results or events to differ
materially from those projected, estimated, assumed or anticipated in any such
forward-looking statements include without limitation: general economic
conditions in the Registrant's markets, including inflation, recession, interest
rates and other economic factors, especially in the United States and other
areas of the world where the Registrant markets its products; any loss of the
services of the Registrant's key management personnel; increased competition in
the United States and abroad, both from existing competitors and from any new
interests in the business; changes in the cost and availability of raw
materials; changes in governmental regulations applicable to the Registrant's
business; the failure to obtain any required governmental approvals; casualty to
or disruption of the Registrant's production facilities and equipment; delays or
disruptions in the shipment of the Registrant's products and raw materials;
disruption of operations due to strikes or other unrests; and other factors that
generally affect the business of manufacturing companies with international
operations.
12
<PAGE> 15
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1997 and 1996, and the
related statements of operations, shareholders' investment and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, 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 discussed in Note 5 to the
financial statements, 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, 1997. 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 also described in
Note 5. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset carrying
amounts and classification of liabilities that might result should the Company
be unable to continue as a going concern.
AA-1
<PAGE> 16
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 27, 1998
AA-2
<PAGE> 17
BALANCE SHEETS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................. $ 38,236 $ 54,161
Accounts receivable (net of allowance for doubtful
accounts of $20,000 in 1997 and $20,000 in 1996) .... 1,822,522 1,826,399
Inventories (Note 2) .................................. 1,779,505 1,556,118
Prepayments and other ................................. 37,723 76,660
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS ............................ 3,677,986 3,513,338
- ---------------------------------------------------------------------------------------------
OPERATING PROPERTY, PLANT AND EQUIPMENT:
Land .................................................. 175,000 175,000
Buildings and improvements ............................ 4,565,149 4,536,958
Machinery and equipment ............................... 6,993,334 6,802,801
Construction in progress .............................. 10,759 103,589
- ---------------------------------------------------------------------------------------------
11,744,242 11,618,348
Less-accumulated depreciation ......................... (8,261,185) (7,883,968)
- ---------------------------------------------------------------------------------------------
Net operating property, plant and equipment ..... 3,483,057 3,734,380
- ---------------------------------------------------------------------------------------------
NONOPERATING EQUIPMENT, NET (NOTE 3) ..................... 499,765 638,522
OTHER ASSETS ............................................. 389,228 447,665
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS .................................... $ 8,050,036 $ 8,333,905
=============================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Revolving line of credit .............................. $ 2,771,769 $ 1,739,304
Accounts payable and accrued expenses (Note 6) ........ 1,521,891 1,281,158
Current portion of long term debt ..................... 354,716 252,232
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES ....................... 4,648,376 3,272,694
LONG TERM DEBT (NOTE 7) .................................. 1,933,886 2,299,277
OTHER LIABILITIES (NOTE 6) ............................... 683,786 760,501
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 14)
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES ............................... 7,266,048 6,332,472
- ---------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT:
Common stock - stated value $.10; shares authorized,
5,000,000 in 1997 and 1996; shares issued and
outstanding, 1,963,563 in 1997 and 1996 ............ 196,356 196,356
Paid-in capital ....................................... 7,224,503 7,224,503
Warrant (Note 7) ...................................... 1,235,184 1,235,184
Deficit (Note 2) ...................................... (7,872,055) (6,654,610)
- ---------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT .................. 783,988 2,001,433
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT .. $ 8,050,036 $ 8,333,905
=============================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
13
<PAGE> 18
STATEMENTS OF OPERATIONS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales ....................................... $ 13,836,522 $ 13,987,555 $ 13,644,441
- ------------------------------------------------------------------------------------------------
Operating expenses:
Cost of goods sold ........................... (12,743,556) (12,561,495) (12,219,671)
Selling and administrative expenses .......... (1,782,803) (1,705,152) (1,643,702)
- ------------------------------------------------------------------------------------------------
Total operating expenses ........................ (14,526,359) (14,266,647) (13,863,373)
- ------------------------------------------------------------------------------------------------
Loss from operations ............................ (689,837) (279,092) (218,932)
Other income (expense):
Interest income .............................. 39,771 60,981 2,591
Interest expense ............................. (567,379) (490,758) (610,425)
Gain on sale of assets (Note 12) ............. 0 760,731 0
- ------------------------------------------------------------------------------------------------
(Loss) income before extraordinary item ......... (1,217,445) 51,862 (826,766)
Extraordinary item:
Gain on debt discharge (Notes 4 and 7) ....... 0 272,096 4,618,842
- ------------------------------------------------------------------------------------------------
Net (loss) income ............................... $ (1,217,445) $ 323,958 $ 3,792,076
================================================================================================
Basic earnings (loss) per common share (Note 2)
(Loss) income before extraordinary item ...... $ (0.62) $ 0.03 $ (0.42)
Extraordinary item ........................... 0 0.14 2.35
- ------------------------------------------------------------------------------------------------
Net (loss) income per common share .............. $ (0.62) $ 0.17 $ 1.93
Diluted earnings (loss) per common share (Note 2)
(Loss) income before extraordinary item ...... $ (0.62) $ 0.02 $ (0.42)
Extraordinary item ........................... 0 O.11 2.35
- ------------------------------------------------------------------------------------------------
Net (loss) income per common share .............. $ (0.62) $ 0.13 $ 1.93
================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
14
<PAGE> 19
STATEMENTS OF SHAREHOLDERS' INVESTMENT
Phoenix Medical Technology, Inc.
For the years ended December 31, 1997, 1996 and 1995
<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, 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
Net loss ..................... 0 0 0 0 (1,217,445) (1,217,445)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ...... 1,963,563 $196,356 $7,224,503 $1,235,184 $(7,872,055) $ 783,988
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
15
<PAGE> 20
STATEMENTS OF CASH FLOWS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income .................................... $(1,217,445) $ 323,958 $ 3,792,076
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization ........................ 450,655 496,662 469,977
Extraordinary item: Gain on debt discharge ........... 0 (272,096) (4,618,842)
Gain on sale of assets (Note 12) ..................... 0 (760,731) 0
Loss on nonoperating equipment ....................... 138,757 112,486 0
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net ... 3,877 (43,595) (238,467)
Increase in inventories ........................... (223,387) (466,448) (289,751)
Decrease (increase) in prepayments and other ...... 38,937 (20,243) 39,765
Increase in other assets .......................... (15,000) (151,708) (253,686)
Increase (decrease) in accounts payable,
accrued expenses, and other liabilities ........ 164,016 (218,839) 715,744
- -----------------------------------------------------------------------------------------------------
Net cash used in operating activities ................ (659,590) (1,000,554) (383,184)
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to operating property, plant
and equipment, net ................................... (125,893) (250,000) (71,640)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities ................ (125,893) (250,000) (71,640)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of assets (applied to debt) .......... 0 1,114,341 0
Proceeds from issuance of long term debt ................ 0 750,000 0
Borrowings under (repayments on)
revolving loan agreement, net ......................... 1,032,465 (181,711) 587,941
Reduction of long term debt ............................. (262,907) (467,326) (90,125)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............ 769,558 1,215,304 497,816
- -----------------------------------------------------------------------------------------------------
Net (decrease) increase in cash ......................... (15,925) (35,250) 42,992
Cash at beginning of year ............................... 54,161 89,411 46,419
- -----------------------------------------------------------------------------------------------------
Cash at end of year ..................................... $ 38,236 $ 54,161 $ 89,411
=====================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .................. $ 555,044 $ 492,484 $ 441,104
Cash paid during the year for reorganization items:
Unsecured creditors ............................... 2,810 134,867 43,448
Deferred Taxes .................................... 28,630 0 0
Supplemental schedule of non-cash investing and
financing activities:
Conversion of accrued expenses to long term debt .. 0 0 531,769
Conversion of long term debt to warrant ........... 0 0 1,235,184
=====================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
16
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
Phoenix Medical Technology, Inc.
December 31, 1997, 1996, and 1995
- ---------------------------------
NOTE 1 - 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, latex and nitrite 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. (See
Note 5 for discussion regarding continuity of operations and realization of
assets.)
17
<PAGE> 22
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 statement for the
previous year. Retained earnings for the year ended December 31, 1995 has 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.
<TABLE>
<CAPTION>
Income (Loss)
Before Extraor-
dinary Item Net Income
---------------------------------------------------------------------------------
<S> <C> <C>
As previously reported $(938,479) $3,680,363
Effect of change in ac-
counting method for
inventories 111,713 111,713
---------------------------------------------------------------------------------
As restated (826,766) 3,792,076
Basic EPS, as
previously reported $ (0.48) $ 1.87
Effect of change in ac-
counting method for
inventories 0.06 0.06
---------------------------------------------------------------------------------
Basic EPS, as
restated $ (0.42) $ 1.93
</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,
------------------------
1997 1996
------------------------
<S> <C> <C>
Raw materials and supplies......................... $ 503,881 $ 430,549
Finished goods..................................... 1,275,624 1,125,569
---------- ----------
$1,779,505 $1,556,118
========== ==========
</TABLE>
Property, Plant and Equipment - All property, plant and equipment are
stated at cost. Interest capitalized during cons-
18
<PAGE> 23
Note 2 (continued)
truction periods is included in plant and equipment and depreciated over the
life of the asset. No interest was capitalized during 1997, 1996 or 1995. 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 7). 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
amount 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, 1997, the estimated fair
value of the Company's long-term other liabilities approximates $658,000.
Revenue Recognition - The Company recognizes revenue upon shipment of
products to customers.
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.
Adoption of SFAS No. 128 - In 1997, the Company adopted SFAS No. 128,
"Earnings per Share," effective December 15, 1997. As a result, the Company's
reported earnings per share for 1996 and 1995 were restated. The effect of this
accounting change on previously reported earnings per share ("EPS") data was as
follows:
19
<PAGE> 24
Note 2 (continued)
<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C>
Per share amounts:
Primary EPS as reported $0.17 $1.93
Effect of adoption of SFAS No. 128 0 0
--------------------------
Basic EPS, as restated $0.17 $1.93
==========================
Diluted EPS as reported $0.17 $1.93
Effect of adoption of SFAS No. 128 (0.04) 0
--------------------------
Diluted EPS, as restated $0.13 $1.93
==========================
</TABLE>
In 1997 and 1995, diluted earnings per share is equal to basic earnings
per share since the Company has recorded a loss from continuing operations for
both years.
The following is a reconciliation of the basic and diluted per share
computations for income before extraordinary item for 1996.
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
------------------------------
<S> <C> <C> <C>
Basic earnings per share $51,862 1,963,563 $ 0.03
Warrants issued -- 496,058 --
Options issued -- 21,000 --
-------------------
Diluted earnings per share $51,862 2,480,621 $ 0.02
===================
</TABLE>
20
<PAGE> 25
NOTE 3 - NONOPERATING EQUIPMENT
During 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." This statement requires that
long-lived assets and certain identifiable intangible assets to be held and used
by an entity be reviewed for impairment whenever events occur which indicate
that the carrying amount of the asset might not be recoverable. The review
should assess fair value based on estimated future cash flows expected from the
use and disposition of the asset. The asset should be reported at the lower of
carrying amount or fair value less cost to sell. The adoption of SFAS No. 121
did not have a material effect on the Company's results of operations.
At December 31, 1997, nonoperating equipment includes a vinyl
auto-glove stripper machine with a net book value of approximately $500,000. To
be fully operational, this machine will require an additional cash investment
between $50,000 to $150,000. Management intends to use a portion of the $750,000
capital expenditure term loan, to be received from LIG (see Note 13), to make
necessary modifications to the vinyl auto-glove stripper.
During 1997, the Company recorded a $139,000 impairment loss to
write-off the remaining net book value of the co-poly machine which was not
operational.
NOTE 4 - 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, 1997, 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
21
<PAGE> 26
Note 4 (continued)
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.
Deferred Compensation - Post-petition deferred compensation owed to two
officers of the Company in the amount of $170,000 (see Note 6) 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 7 modified the terms of
repayment. Under separate agreements with NationsBank and The CIT Group/Credit
Finance (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 7. 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.
As of December 31, 1997, the Company was delinquent on 4 monthly payments to
Williamsburg County, totaling approximately $37,000, including principal and
interest.
NOTE 5 - CONTINUITY OF OPERATIONS AND REALIZATION OF ASSETS
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a going concern
22
<PAGE> 27
Note 5 (continued)
and presumes the realization of assets and the settlement of liabilities in the
ordinary course of business. As discussed in Note 4, the Company received
approval of the reorganization plan from the Bankruptcy Court in 1994. As
discussed in Note 7, 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. As
such, the Company's ability to realize its assets in the ordinary course of
business is dependent upon many factors, the most significant of which include:
- - Obtaining approval from the Company's shareholders for the proposed
transaction with LIG (See Note 13), which will provide the following:
- A $500,000 cash payment for the Option
- A $750,000 capital expenditure term loan facility
- A one year Research and Development (R&D) agreement whereby
LIG will fund R&D expenditures for the development of
technology for the manufacture of nitrile gloves for medical
uses
- A one year nitrile glove supply agreement at a price of cost
plus 10%
- - The Company's ability to compete effectively in the non-medical vinyl
glove market
- - Securing a patent and obtaining approval from the EPA for the Company's
antimicrobial vinyl glove product
- - Successful commercial introduction of the Company's 100% synthetic
cleanroom nitrile glove product
- - Successful defense of any litigation resulting from alleged injuries
arising from latex-related allergies (see Note 14)
- - Maintaining compliance with loan covenants (or obtaining sufficient
waivers for any loan covenant violations)
Management's plans to address the above matters include:
- - Obtaining shareholder approval for the proposed transaction with LIG
- - Continuing efforts to increase sales of the Company's existing
non-medical vinyl glove products through the conversion of major
semiconductor chip manufacturers from competitors to the Company
- - Continuing to pursue a patent and obtaining EPA approval for the
antimicrobial vinyl glove product
- - Continuing to develop the medical nitrite glove with R&D assistance to
be provided by LIG
- - Vigorously defending any litigation resulting from alleged injuries
arising from latex-related allergies
- - Monitoring compliance with existing loan covenants and obtaining
sufficient waivers for any loan covenant violations
23
<PAGE> 28
NOTE 6 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of
the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Accounts payable ............ $ 662,293 $ 645,716
Accrued compensation and
payroll taxes ............ 332,758 291,826
Accrued property taxes ...... 222,230 193,127
Other current liabilities ... 304,610 150,489
---------- ----------
Total accounts payable and
accrued expenses ......... $1,521,891 $1,281,158
========== ==========
Accounts payable, long term . 28,607 31,417
Accrued property taxes ...... 485,179 559,084
Deferred compensation ....... 170,000 170,000
---------- ----------
Total other liabilities .. $ 683,786 $ 760,501
========== ==========
</TABLE>
NOTE 7 - 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, 1997 and 1996
and the terms of the debt. Substantially all assets are pledged as collateral
against the loans.
24
<PAGE> 29
Note 7 (continued)
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- -----------
<S> <C> <C>
Revolving loan payable to bank,
interest accrues at prime plus 3.25%
(11.75% at December 31, 1997) with
scheduled maturity in 1999, secured by
the Company's eligible inventory and
receiveables ......................... $2,771,769 $1,739,304
Term loan payable to bank, due in
scheduled monthly installments
of $20,184, including interest at
prime plus 2.0% (10.5% at December
31, 1997) with scheduled maturity
in 2010, secured by the Company's
real property and fixtures ........... 1,589,360 1,659,316
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 ................ 562,500 712,500
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 ..................... 136,742 179,693
---------- ----------
Total debt ............................. 5,060,371 4,290,813
Less - current portion ................. 3,126,485 1,991,536
---------- ----------
$1,933,886 $2,299,277
========== ==========
</TABLE>
Maturities of long term debt are as follows:
<TABLE>
<S> <C>
1998 $3,126,486
1999 485,710
2000 81,320
2001 91,354
2002 102,079
Thereafter 1,173,423
==========
</TABLE>
The Company had outstanding borrowings of $2,771,770 under its
revolving loan as of December 31, 1997. 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 $3,750,000, including 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.
25
<PAGE> 30
Note 7 (continued)
Borrowings under the Company's revolving loan averaged $2,161,000
during 1997 and $1,587,000 during 1996. Maximum borrowings were $2,393,000 in
1997 and $1,944,000 in 1996. The weighted average interest rate for such
borrowings was 12.5% in 1997 and 14.9% in 1996.
The Company's loan agreements contain certain financial covenants 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, 1997, the
Company was in compliance with or had obtained appropriate waivers for all
covenants of the loan agreements.
NOTE 8 -- INCOME TAXES
The components of deferred taxes as of December 31, 1997 and 1996 were
as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
--------------------------
<S> <C> <C>
Deferred tax assets:
Net loss carryforwards $ 2,327,000 $ 2,014,000
General business credit
carryforwards 412,000 455,000
Other liabilities and reserves 142,000 134,000
Valuation allowance (2,377,000) (2,034,000)
----------- -----------
Total deferred tax assets 504,000 569,000
----------- -----------
Deferred tax liabilities:
Basis difference in operating
property, plant and equipment 504,000 569,000
----------- -----------
Net deferred taxes 0 0
----------- -----------
</TABLE>
The valuation allowances of $2,377,000 and $2,034,000 as of December
31, 1997 and 1996 respectively were established because in the Company's
assessment, it is uncertain whether the deferred tax assets will be realized.
As of December 31, 1997, the Company has net operating loss
carryforwards of approximately $6,125,000 for tax purposes and general business
credits of approximately $412,000 available through 2012 and 2003,
respectively, to reduce future income taxes payable by the Company.
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:
26
<PAGE> 31
Note 8 (continued)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate (34)% (34)% (34)%
Losses carried forward
for future years 34 34 34
---- ---- ----
- - -
==== ==== ====
</TABLE>
NOTE 9 - MAJOR CUSTOMERS, CONCENTRATION OF CREDIT RISK AND RELATED PARTY
TRANSACTIONS
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.
Sales to the Company's five largest customers were approximately 28%
in 1997, 28% in 1996 and 29% in 1995. No customer individually accounted for
more than 10% of total sales in 1997, 1996 or 1995. 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. Export sales,
primarily to customers in Europe and Asia, were approximately 10%, 12% and 7%
in 1997, 1996 and 1995 respectively.
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, net of amount forgiven, related to the
officers was $202,000 in 1997, $193,000 in 1996 and $185,000 in 1995. These
officers have forgiven $86,400 of such compensation in 1997, $94,700 in 1996
and $103,000 in 1995. These officers have no present or future rights to the
forgiven compensation.
NOTE 10 - 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
27
<PAGE> 32
Note 10 (continued)
Directors, subject to certain limitations, and may be made in the form of
Company common stock. Contribution expense under the Savings Plan was
approximately $5,300 in 1997, $4,800 in 1996 and $4,600 in 1995.
NOTE 11 - STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense was recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits companies to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows companies to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net earnings (loss) and pro forma earnings (loss) per share disclosures for
employee stock option grants made in 1995 and future years as if the fair-value
based method defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123. The adoption of SFAS No. 123 did
not have a material impact on the Company's financial position.
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. During 1997, management terminated this plan and options for the
purchase of 35,000 shares expired.
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. As of December 31, 1997, options to purchase
29,450 shares were outstanding under this plan.
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 was 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
28
<PAGE> 33
Note 11 (continued)
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. As of December 31, 1997, options to
purchase 41,450 shares were outstanding under this plan.
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 12/31/96 and 12/31/95.. 76,450 $0.06 to $15.00
Granted ........................... 0 N/A
Expired ........................... (35,000) $8.06
Outstanding 12/31/97 .............. 41,450 $0.06 to $15.00
</TABLE>
As of December 31, 1997, 78,000 shares have been reserved for issuance
under the option plans discussed above.
The Company applied APB Opinion No. 25 in accounting for its stock
options and, accordingly, no compensation expense has been recognized for stock
options in the accompanying financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net earnings (loss) would have been
adjusted to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Net (loss) earnings
As reported $ (1,217) $ 324
Pro forma (1,218) 323
Basic (loss) earnings per share
As reported $ (0.62) $ 0.17
Pro forma (0.62) 0.16
Diluted (loss) earnings per share
As reported $ (0.62) $ 0.13
Pro forma (0.62) 0.13
</TABLE>
Pro forma net (loss) earnings reflect only options granted since 1995.
Therefore, the full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma net (loss)
earnings amounts presented above because compensation expense is reflected over
the options' vesting period of five years and compensation expense for options
granted prior to January 1, 1995, is not considered.
NOTE 12 - SALE OF ASSETS
On March 22, 1996, the Company sold to Microtek Medical, Inc.
("Microtek"), all of the Company's machinery, equipment and
29
<PAGE> 34
Note 12 (continued)
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 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. This sale resulted in a gain of approximately
$760,000 in 1996. Contingent payments were $4,200 in 1997.
NOTE 13 - POSSIBLE SALE OF THE COMPANY
On September 15, 1997, the Company announced that it had entered into a
letter of intent with London International Group, Inc. ("LIG") with respect to
LIG's intent to purchase an option to acquire substantially all of the assets of
the Company and other related transactions. LIG is a U.K. corporation and a
leading manufacturer of personal protective products utilizing thin-film barrier
technology, including Marigold(R) Industrial Gloves.
As contemplated by the letter of intent, LIG will pay $500,000 as
consideration for an option to purchase substantially all of the Company's
assets and assume certain of the Company's stated liabilities, for a $6,800,000
cash purchase price, for a period of one year from the date of a definitive
Option Agreement. In addition, LIG has agreed to finance the acquisition of
certain capital equipment and certain other capital improvements for the
Company in an amount up to $750,000 and to participate in the joint development
of technology for the manufacture of the Company's new nitrile glove products.
In addition, LIG will enter into an agreement to purchase industrial gloves
from the Company. The terms of the principal transaction have been approved by
the Company's Board of Directors but the definitive Option Agreement will be
subject to the approval of the Company's stockholders.
30
<PAGE> 35
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company has been named in as a defendant in a class action lawsuit
and notified of potential class action lawsuits in association with alleged
injuries sustained in connection with latex-related allergies. Management of the
Company intends to vigorously contest the claims and any other suits alleging
latex-related allergy injuries, or indemnity and/or contribution claims derived
from such alleged injuries, which may be brought against it. At this time, due
to the recent nature of these claims, management is unable to make an evaluation
of the likelihood of an unfavorable potential loss, or to estimate the range of
any such loss. The Company maintains product liability coverage, and in the
opinion of management, this coverage would be adequate to cover any potential
losses related to these potential claims. However, there is no guarantee that
the Company will be fully covered for potential claims.
In addition, the Company is involved in other legal proceedings and
claims arising in the ordinary course of business. In the opinion of
management, the outcome of such legal proceedings and claims will not
materially affect the Company's financial position.
ENVIRONMENTAL MATTERS
During a Phase II environmental audit of the Company's properties in
1993, an area of approximately 750 to 1,000 square feet was identified as
contaminated by a petroleum product. Corrective action is currently in process
and the estimated total expenditures will be $50,000 to $75,000 over the next
five years, which has not been accrued in the accompanying balance sheet.
The Company believes it is otherwise in compliance with all
environmental regulations and does not expect that any sums it may have to pay
in connection with the above environmental matters would have a material effect
on the Company's financial position.
REGULATION
The Company is subject to (a) governmental 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.
31
<PAGE> 36
PURCHASE COMMITMENTS
At December 31, 1997, the Company had contractual commitments to
purchase certain raw materials from suppliers at specified prices. These
commitments included agreements to purchase latex through March 1998 at a
designated price per pound and in addition, 100% of the Company's requirement
of phythalate plasticizers effective through February 28, 1998, at the seller's
list price at the time of shipment.
32
<PAGE> 37
SCHEDULE II
PHOENIX MEDICAL TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<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,
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
======= ======== ======== =======
Year ended December 31,
1997:
Allowance for doubtful
accounts $20,000 $ 5,551 $ (5,551) $20,000
======= ======== ======== =======
</TABLE>
S-1
<PAGE> 38
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 65.
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 54.
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 75.
Byron M. Layman. Director since 1979. Retired in 1977 as
Treasurer of Payne & Company, a wholesale distributor of fabrics. He is 88.
William T. Sena. Director since 1980. Chairman of Sena,
Weller, Rohs, & Williams, Inc., an investment advisory firm, since 1977. He is
61.
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 met three times in 1997, conferred several times by
conference telephone and exchanged correspondence.
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
33
<PAGE> 39
the fiscal year ended December 31, 1997, 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 $100,000 the
fiscal year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
-------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL COMPENSATION COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($)(1)
- ------------------------------------ ------------ ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Edward W. Gallaher, Sr. 1997 $108,500(1) 0 (3) $924
President, Treasurer, Chief
Executive Officer and Director
-------------------------------------------------------------------------------
1996 $107,750(3) 0 (3) $924
-------------------------------------------------------------------------------
1995 $ 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 $46,500, $53,250 and $60,000 in 1997, 1996 and 1995,
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
$155,000.
(3) Mr. Gallaher did not receive personal benefits during the listed years
in excess of 10% of annual salary and bonus.
The following table shows, on an aggregated basis the 1997
fiscal year-end value of unexercised options and SARs held by Mr. Gallaher. No
stock options or tandem SARs were exercised by Mr. Gallaher during the fiscal
year ended December 31, 1997.
34
<PAGE> 40
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS/SARS AT FY-END THE-MONEY OPTIONS/SARS
SHARES (# SH) AT FY-END ($)
ACQUIRED ON VALUE REALIZED EXERCISABLE / EXERCISABLE /
NAME EXERCISE (# SH) ($) UNEXERCISABLE UNEXERCISABLE
- -------------------------- ---------------- ------------------ -------------------------- --------------------------
<S> <C> <C> <C> <C>
Edward W. Gallaher, Sr. 0 0 5,000 / 0 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, are $155,000 and $133,000, respectively. However, Messrs. Gallaher
and Mixon forgave $46,500 and $39,900, 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 Registrant 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 1997 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
February 28, 1998, 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:
35
<PAGE> 41
<TABLE>
<CAPTION>
Number of Shares Percentage
and Nature of of Shares
Name and Address Beneficial Ownership(1) Outstanding
- -------------------- ----------------------- -----------
<S> <C> <C>
Harold H. Heath 18,500 (2) (3)
Byron M. Layman 26,000 (4) 1.3% (5)
William T. Sena 21,400 (2) 1.1%
Edward W. Gallaher, Sr. 108,495 (6) 5.5% (5)
Route 521 West
P.O. Box 346
Andrews, SC 29510
Grover C. Mixon 69,584 (7) 3.5% (5)
Route 521 West
P.O. Box 346
Andrews, SC 29510
NationsBank, N.A. (Carolinas) 496,058 (8) 20.0% (9)
901 W. Trade St., 4th Floor
Charlotte, NC 28255
All Officers and
Directors of the
Registrant as a Group 243,979 (10) 12.3% (11)
</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) Less than 1%.
(4) 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.
36
<PAGE> 42
(5) 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.
(6) 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.
(7) 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.
(8) Represents shares subject to a warrant which is currently exercisable
at an exercise price of $0.03125 per share.
(9) Based on the number of shares outstanding and shares subject to the
warrant held by the beneficial owner which is currently exercisable or
exercisable within 60 days.
(10) Includes 26,200 shares subject to options which are currently
exercisable or exercisable within 60 days.
(11) 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.
37
<PAGE> 43
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, 1997.
ITEMS 4, 8 AND 12 ARE INAPPLICABLE AND ARE OMITTED.
38
<PAGE> 44
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 9, 1998 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 9, 1998
- --------------------------- and Director
Edward W. Gallaher, Sr. (Principal Executive
and Financial Officer)
/s/ Grover C. Mixon Executive Vice March 9, 1998
- ----------------------- President and
Grover C. Mixon Director
Director March , 1998
- -----------------------
Harold H. Heath
/s/ Byron M. Layman Director March 10, 1998
- -----------------------
Byron M. Layman
/s/ William T. Sena Director March 9, 1998
- -----------------------
William T. Sena
/s/ Delores Williams Controller March 9, 1998
- ----------------------- (Principal Accounting
Delores Williams Officer)
</TABLE>
39
<PAGE> 45
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, 1997 0-13401
PHOENIX MEDICAL TECHNOLOGY, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
LOCATED AT
MANUALLY
NUMBERED PAGE
-------------
<S> <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 *
2.2 Option Agreement, dated as of December 22, 1997, by
and between the Registrant and London International
Group, Inc., was filed as an Exhibit to the Registrant's
Form 8-K dated January 6, 1998. *
(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 *
</TABLE>
40
<PAGE> 46
<TABLE>
<CAPTION>
<S> <C>
3.3 Amendment to Article VIII of the By-Laws of Phoenix Medical
Technology, Inc., approved at the Annual Meeting of
Stockholders on 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 *
</TABLE>
41
<PAGE> 47
<TABLE>
<CAPTION>
<S> <C>
(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) *
10.3 License Agreement, dated February 24, 1983, among the
Registrant, Baxter Travenol Laboratories, Inc., Travenol
Laboratories, Inc., William E. LeMay, Edward W. Gallaher,
Sr., John J. Sullivan, and Grover C. Mixon, relating to the
licensing by the Registrant of certain technology from
Baxter Travenol Laboratories, Inc. and Travenol
Laboratories, Inc. was filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
2-90708) *
10.4 Deferred Compensation Plan was filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No. 2-90708) *
10.5 Form of Option dated April 24, 1987 used in connection with
grant of option to purchase 2,000 shares of Common Stock to
each of six non-employee directors of the Registrant was
filed as an Exhibit to the Registrant's Registration
Statement on Form S-2 (Reg. No. 33-16918) *
10.6 1988 Stock Option Plan for Officers and Other Key Employees of the
Registrant, as approved at the Annual Meeting of Stockholders on
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 *(1)
</TABLE>
42
<PAGE> 48
<TABLE>
<CAPTION>
<S> <C>
10.7 Registrant's Savings Plan Qualified Under Section 401(k) of the
Internal Revenue Code, as adopted by the Board of Directors in
July, 1988, was filed as an Exhibit to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988 *
10.8 1989 Nonqualified Stock Option Plan for Non-Employee Directors,
as approved at the Annual Meeting of Stockholders on April 21,
1989 was filed as an Exhibit to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1989 *
10.9 Asset Purchase Agreement dated as of March 22, 1996, between
the Registrant and Microtek Medical, Inc. for the sale to
Microtek of all of Registrant's assets relating to its
manufacture and sale of adhesive skin drapes and scrub-and-prep
products was filed as an Exhibit to the Registrant's Form 8-K
dated March 22, 1996 *
18 Letter regarding change in accounting principles was filed as an
Exhibit to the Registrant's Form 10-KSB for the year ended
December 31, 1996. *
27 Financial Data Schedule (filed in electronic format only) N/A
</TABLE>
- ---------------------
"*" Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-KSB from the referenced previous filing with
the Commission.
(1) Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
43
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-KSB FOR THE YEAR ENDING DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 38,236
<SECURITIES> 0
<RECEIVABLES> 1,860,245<F1>
<ALLOWANCES> 0
<INVENTORY> 1,779,505
<CURRENT-ASSETS> 3,677,986
<PP&E> 4,372,050<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,050,036
<CURRENT-LIABILITIES> 4,648,376
<BONDS> 2,617,672
0
0
<COMMON> 196,356
<OTHER-SE> 587,632
<TOTAL-LIABILITY-AND-EQUITY> 8,050,036
<SALES> 13,836,522
<TOTAL-REVENUES> 39,771
<CGS> 12,743,556
<TOTAL-COSTS> 12,743,556
<OTHER-EXPENSES> 1,782,803
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 567,379
<INCOME-PRETAX> (1,217,445)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,217,445)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
<FN>
<F1>REPRESENTS NET AMOUNT
</FN>
</TABLE>
