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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, 1998, or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
________ to ___________.
Commission File No. 0-13401
PHOENIX MEDICAL TECHNOLOGY, INC.
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(exact name of Registrant as specified 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.O. Box 346
Andrews, South Carolina 29510
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(ADDRESS OF PRINCIPAL EXECUTIVE offices) (Zip Code)
(843)221-5100
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(Registrant's telephone number, including area code)
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
---- ----
There has been no active trading market in the Registrant's Common Stock, its
only class of voting stock, since April 1991. There have
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been sporadic bid and ask quotations for the Common Stock generally at the
level of $.125 to $.70 bid and $.25 to $.75 ask. Based on a per share price of
$.5625, the average of bid and ask prices of the Common Stock on March 17,
1999, the aggregate market value of shares of the Common Stock held by
non-affiliates was $1,257,858.
The Registrant's revenues for the fiscal year ended December 31, 1998 were
$15,387,115.
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 8, 1999 was
2,459,621.
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 1998 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/nitrile glove manufacturing facilities operated at
approximately 63% and 80% of their five-day capacity, respectively, in 1998.
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
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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, subject to adjustments as defined in the agreement, and to
assume certain liabilities of the Registrant. This option expires on April 28,
1999. 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
were approved by the Registrant's stockholders at a Special Meeting of
Stockholders held on April 28, 1998. A brief description of the Option
Agreement and the related agreements, together with copies of such agreements,
is included in the Registrant's Form 8-K filed with the Commission on January
6, 1998.
The Research and Development Agreement and Loan Agreement together
provide for a $750,000 term loan facility for the Registrant to use for joint
research and development efforts with LIG. Since the effective date of the
Option, April 29, 1998, LIG has engaged the Registrant in such research and
development activities. None of the costs of these research and development
efforts have been borne directly by the Registrant's customers.
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 1998, 48% of the Registrant's latex glove sales were to the
medical market. None of the Registrant's nitrile glove sales were to the
medical market. Prior to the sale of its surgical drape business in March 1996,
the Registrant sold its surgical drapes and scrub and prep sponges exclusively
to the medical market.
In the medical market, the Registrant sells its products principally
to agents 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 products manufactured or processed. For example,
the Registrant sells gloves to distributors that supply beauty and barber
shops, safety supply companies, food processors, photo finishing businesses,
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janitorial supply companies and the electronics and computer assembly and
service industries.
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.
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). The gloves range in size
from small to extra-large and are manufactured in different lengths and
thickness to meet user needs.
The gloves are used in applications in which hand-contour, tactile
sensitivity, flexibility, strength and a reduction of the risk of contamination
are important. The Registrant's vinyl, nitrile and latex glove lines include
lightly powdered and powder-free gloves. Medical gloves are used for
non-invasive medical procedures. Non-medical gloves are used for applications
such as electronics and computer manufacturing, beauty and barber shops, food
processing, janitorial services, photo finishing and for consumer use.
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 MicrOban(R) into the glove.
The Registrant has an exclusive license in the United States and Canada for the
use of MicrOban(R) in its gloves. The Registrant's application has been pending
since December 1991 and is still active. The Registrant filed requested
substantiating technical data with the FDA during March of 1996. Additional
technical data was filed with the FDA in November 1996. The FDA and
Environmental Protection Agency ("EPA") recently determined that the EPA has
final determination over food additive petitions. The Registrant 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.
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For many applications either nitrile, latex or vinyl gloves may be
used. Latex and nitrile gloves stretch and are deemed more appropriate 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
1998. Nitrile gloves are more expensive than either vinyl or latex gloves of
similar style.
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, resealable bags and
heat-sealed pouches of gloves 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 trade names "Sup-pli Line" or "ColorLine" or "ToughLine" when sold
for non-medical uses.
Vinyl gloves accounted for 59.3%, 59.8% and 71.7% of the Registrant's
total sales in 1998, 1997 and 1996, respectively. Latex gloves accounted for
23.2%, 35.4% and 28.3% of the Registrant's total sales in 1998, 1997 and 1996
respectively. Nitrile gloves accounted for 17.3% of total sales in 1998 and
3.4% 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 a 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. The Registrant also
manufactured scrub and prep sponges for the medical market. Sales of these
products accounted for less than 1.2% of total sales in 1996. The Registrant
sold its surgical drape and scrub and prep assets in March of 1996 and no
longer manufactures or sells these products. 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
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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 product 1,100,000 gloves per day. During 1998, the vinyl glove
machines operated at 63% of capacity. The Registrant began manufacturing vinyl
gloves on a six and 2/3 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/nitrile glove machine has the
capacity to produce 1,400,000 gloves per day. The latex/nitrile machine
operated at approximately 80% of its five-day a week capacity during 1998.
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 14.5% in 1998, 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 1996, 1997 and
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1998 were $247,000, $304,000 and $220,000 respectively. The 1998 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
28.5% of sales in 1998. No customer individually accounted for 10% or more of
sales in 1998.
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 rubber 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 The
Oak Rubber Company and the Registrant. The leading manufacturers of latex
examination gloves include Tillotson Corporation and London International
Group. The leading United States manufacturers of nitrile unsupported
disposable gloves are Tillotson Corp. 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
costs substantially below 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 Microban Products Company
for the use of MicrOban(R) and MicrOban(R) Extended Polymer Film in single use
gloves. These agreements give the Registrant
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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 Microban Products Company of up to $3,000
per month, once the Registrant has received FDA approval to market the products.
FDA approval to market gloves with Microban(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 for its antimicrobial glove
(Patent S.N.239,880).
SALE OF SURGICAL DRAPE ASSETS
On March 22, 1996, the Registrant sold to Microtek Medical, Inc. 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 12 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.
EMPLOYEES
As of December 31, 1998, the Registrant employed 310 persons, of whom
272 were hourly employees engaged in production, 28 were engaged in
supervision, technical and clerical functions and 10 were executive or
administrative. 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
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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 any gloves sold as examination 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 medical gloves 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 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.
During a Phase II environmental audit of the Registrant'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.
Recent testing by Integrated Science and Technology, ("ISC") an EPA-approved
contractor, concluded that the impacted ground water is not migrating and no
potentially completed exposure pathways exist at this time. As a result, ISC
has indicated to the Registrant that the exposure does not pose a threat to
human health or the environment and recommends the site be closed. Registrant
believes that future liability will not exceed approximately $5,000.
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, 1998 such properties were subject to a mortgage with
a principal balance of
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$1,519,000. 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/nitrile glove manufacturing
facilities operated at approximately 63% and 80% respectively of its
twenty-four hour, five-day a week capacity in 1998 versus 61% and 48%
respectively in 1997.
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. In addition, the Registrant was named as a
defendant in Clark v. Safeskin Corporation, et. al., a lawsuit filed in the U.S.
District Court for the Northern District of Georgia, Rome Division, File No.
4:96-CV-0308-HLM, in October 1998. Plaintiffs in these lawsuits allege that
they have suffered injury as a result of an allergic reaction to protein found
in latex gloves. The Plaintiff seeks damages for their injuries and have named
as defendants a number of distributors and manufacturers of latex gloves,
including the Registrant. These lawsuits have been assigned to a multi-district
panel which is currently hearing both cases in the United States District Court
for the Eastern District of Pennsylvania under Docket No. MDL-1148. Also, the
Registrant was recently named as a defendant in a latex-related allergy case
styled Mackell v. Baxter Healthcare Corp., et. al., filed in the Court of Common
Pleas, Philadelphia County, Pennsylvania, in February 1999.
Management of the Registrant intends to vigorously contest the
lawsuits referenced above 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, the Registrant
believes there is no direct evidence that any of the plaintiffs either used or
were ever exposed to latex-containing products produced, sold or supplied by
Registrant in such amount and with such frequency and duration so as to cause
or contribute to the alleged injuries. St. Paul Companies and CIGNA, the
Registrant's insurance carriers,
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are presently providing a defense for the Registrant in each of these matters.
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 1991. During the year ended 1998, the stock was listed sporadically
in the National Quotation Bureau "pink sheets." During 1998 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 8, 1999, there were 756 shareholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATIONS
London International Group, Inc. ("LIG") currently holds an option,
which expires on April 28, 1999, to purchase all or substantially all of the
Registrant's assets at a purchase price of approximately $6,821,708, subject to
certain adjustments. LIG paid the Registrant $500,000 in cash in consideration
for the option. In connection with the option, LIG and the Registrant also
entered into a Research and Development Agreement and a Loan Agreement, which
together provide for a $750,000 term loan facility for the Registrant to use
for joint research and development efforts between the parties. Since the
effective date of the option, April 28, 1998, LIG has engaged the Registrant in
such research and development activities. In particular the Registrant has
developed technology to improve auto-stripping of powdered vinyl gloves, as
well as a prototype machine for stripping powder-free vinyl gloves. During this
period, representatives of LIG and the Registrant have met on several
occasions, both for operational demonstrations at the Registrant's plant and
for strategic
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management discussions. From the Registrant's perspective, the joint research
and development efforts have been successful thus far. However, there can be no
assurances that LIG will exercise its option to purchase the assets of the
Registrant.
Sales for 1998 were $15,387,000, 11.2% more than sales in 1997,
including sales of $1,345,000, 8.7% of total sales, to LIG under the Research
and Development and Supply Agreements between LIG and the Registrant. Sales for
1998 represented a 1.5% increase over sales in 1997, excluding these sales to
LIG. Glove sales during 1998 versus 1997 on a quarter by quarter comparison
were up in every quarter. Latex glove sales, 23.2% of all glove sales in 1998,
were down 8.1% as compared with 1997 sales. Vinyl glove sales, 59.3% of all
glove sales in 1998, were 3.3% less as compared with 1997 sales. The sales of
nitrile cleanroom gloves, a new product for Phoenix in 1997, contributed 17.3%
of 1998 glove sales, or 5.5 times the 1997 sales of the product.
Sluggishness in the manufacture of semiconductor chips during 1998
have adversely affected the Company's sales of cleanroom related gloves. Sales
into that market segment in 1998, in the face of the end use market downturn,
were up 1% due to new products and market share gain. Through two months of
1999, order receipt and shipments are slightly, 5%, stronger than the first two
months of 1998, but weaker than during the latter half of 1998. The
semiconductor and related industry predicts 1999 to be about 10% stronger than
1998. Almost 50% of the Registrant's sales are into that end use market
segment.
Cost of goods sold, as a percentage of net sales, was 88.6% in 1998
versus 92.1% in 1997. Somewhat lower raw material costs and lower energy costs
contributed to the decrease in cost of goods sold. Labor costs increased
approximately 2.5% during 1998, reflecting changes in hourly labor rates. All
other related manufacturing costs were relatively unchanged from 1997.
Selling and Administrative ("S&A") expenses increased $44,000 during
1998 to $1,734,000. As a percentage of sales, S&A expense was 11.3% in 1998 as
compared with 12.2% in 1997. Selling expense was $575,000 in 1998, down from
$624,000 in 1997. The reduction resulted from the Company's change to a
predominantly employee sales force versus using manufacturer's representatives.
Administrative expense was $1,159,000, in 1998 and $1,066,000 in 1997.
In 1998, the Company incurred a net loss of $608,000 as compared with
a net loss of $1,217,000 for 1997. The 1998 results include a loss of $28,000
from first quarter expenses related to the Option Agreement with LIG. The 1997
results include a loss of ,139,000, resulting from the write-down of a
non-operating asset. Including both ordinary and extraordinary gains and
losses, the
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Company experienced losses of $580,000 in 1998 and $1,078,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the year 1998, the Company's operations provided $19,000 of
cash compared with $660,000 of cash used in the year 1997. $64,000 of cash was
used on needed capital expenditures during 1998, as compared with $126,000 used
in 1997. In addition, $179,000 of 1998 capital expenditures were made and
funded under the Loan & Security Agreement between LIG and the Registrant. The
sum of inventories, accounts receivable and prepayments increased by $215,000
in 1998, compared with a $181,000 increase during the prior year. Receivables
at year end 1998, as a percentage of net sales, were unchanged from year end
1997. Accounts payable, accrued expenses and other liabilities increased
$103,000 in 1998 as compared with an increase of $164,000 in 1997. Accounts
payable, trade, were 5.2% of net sales at year end 1998 versus 4.8% at year end
1997. The increase resulted from fourth quarter 1998 spot purchases of PVC
resin at a discount. At December 31, 1998, the Company's borrowing against its
$3,750,000 line of credit was $3,477,000 and $2,776,000 at February 28, 1999.
The decrease in borrowings against the line of credit between year end 1998 and
February 28, 1999 resulted from the payment by LIG for invoices open at year
end 1998 related to a $700,000 November nitrile glove production run made for
LIG under the Research and Development Agreement. LIG maintains an unsecured
deposit of $351,000 with the Company to fund working capital for nitrile gloves
produced under the Research and Development Agreement.
At December 31, 1998, the Registrant was not in compliance with
several financial covenants in its credit agreements but the violations have
been waived by the banks. The company was not in compliance with the financial
covenants related to working capital and the current ratio due to financial
accounting rules changes relating to the classification of 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 June 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, 1998 contains explanatory language which raises doubt
about the Registrant's ability to continue as a going concern; the financial
covenants require an unqualified accountants I report. Also, the Registrant was
not in compliance with the covenant that requires all taxes be paid promptly as
they come due.
The Registrant is hopeful that the strong order receipt experienced
during 1998 will continue and increase throughout
12
<PAGE> 15
1999. The Registrant believes that its nitrile industrial glove will provide
substantial sales during 1999 and plans to begin marketing medical nitrile exam
gloves in the second half of 1999. The Registrant believes that these products,
and a rebound in the semiconductor related end use segment, will help provide
additional cash for operations. If the Registrant's available credit on its
line of credit, $974,000 at February 28, 1999, is insufficient to fund
continuing operations, or if the Registrant is not successful in improving its
existing credit facility, and if the transaction with LIG (discussed in the
Company's Form 8-K filed January 6, 1998) does not close, the Company 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. The Registrant has engaged the
services of an investment banker/broker to assist it in improving its existing
credit facility. The current lender has extended the current facility to June
28, 1999. No assurance can be given, however, that the Registrant will be able
to obtain any such additional financing, when needed, upon terms satisfactory
to the Registrant.
The Registrant's bank debt at December 31, 1998 stood at $5,069,000
versus $5,060,000 at December 31, 1997. Interest expense for 1998 was $605,000
as compared with $567,000 for the year 1997.
The Registrant has assessed the impact of the Year 2000 on its
reporting systems and operations. The Registrant presently believes that, with
limited modifications to existing software, the Year 2000 will not pose
significant operational or financial reporting problems for the Registrant's
computer systems as so modified. In addition, the Registrant's systems do not
interface with outside entities except for EDI, which the Registrant has been
assured 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,
13
<PAGE> 16
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.
14
<PAGE> 17
[ARTHUR ANDERSEN LLP LOGO]
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, 1998 and 1997, and the related
statements of operations, shareholders' investment and cash flows for each of
the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, 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, 1998. 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 or the amounts and classification of liabilities that might result
should the Company be unable to continue as a going concern.
A-1
<PAGE> 18
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.
ARTHUR ANDERSEN LLP
Columbia, South Carolina,
March 12, 1999.
A-2
<PAGE> 19
Item 7- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BALANCE SHEETS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ...................................................... $ 8,916 $ 38,236
Accounts receivable (net of allowance for doubtful
accounts of $20,000 in 1998 and 1997) ................... 2,009,866 1,822,522
Inventories (Note 2) ...................................... 1,768,519 1,779,505
Prepayments and other (Note 13) ........................... 176,995 37,723
- ---------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS .................................... 3,964,296 3,677,986
- ----------------------------------------------------------------------------------------------------
OPERATING PROPERTY, PLANT AND EQUIPMENT:
Land ......................................................... 175,000 175,000
Buildings and improvements ................................... 4,565,149 4,565,149
Machinery and equipment ...................................... 7,068,347 6,993,334
Construction in progress ..................................... 94,974 10,759
- ----------------------------------------------------------------------------------------------------
11,903,470 11,744,242
Less-accumulated depreciation ................................ (8,530,237) (8,261,185)
- -----------------------------------------------------------------------------------------------------
Net operating property, plant and equipment .................. 3,373,233 3,483,057
- -----------------------------------------------------------------------------------------------------
NONOPERATING EQUIPMENT, NET (NOTE 3) ............................ 584,102 499,765
OTHER ASSETS .................................................... 326,727 389,228
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS ................................................. $ 8,248,358 $ 8,050,036
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Revolving line of credit ..................................... $ 3,064,105 $ 2,771,769
Accounts payable and accrued expenses (Note 6) ............... 1,656,428 1,521,891
Current portion of long term debt............................. 638,500 354,716
Deferred option payment (Note 13)............................. 508,054 -0-
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES .................................. 5,867,087 4,648,376
- -----------------------------------------------------------------------------------------------------
LONG TERM DEBT (Note 7) ......................................... 1,537,896 1,933,886
OTHER LIABILITIES (Note 6) ...................................... 651,409 683,786
COMMITMENTS AND CONTINGENCIES (Notes 5 and 14)
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES ........................................... 8,056,392 7,266,048
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT:
Common stock - stated value $.10; shares authorized,
5,000,000 in 1998 and 1997; shares issued and
outstanding, 2,459,621 in 1998 and 1,963,563 in 1997 ........ 245,962 196,356
Paid-in capital................................................ 8,425,582 7,224,503
Warrant (Note 7) .............................................. -0- 1,235,184
Deficit ....................................................... (8,479,578) (7,872,055)
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT .............................. 191,966 783,988
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT .............. $ 8,248,358 $ 8,050,036
===================================================================================================
The accompanying notes to financial statements are an integral part of these balance sheets.
</TABLE>
15
<PAGE> 20
STATEMENTS OF OPERATIONS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales ....................................... $ 15,387,115 $ 13,836,522 $l3,987,555
- ----------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of goods sold ............................ (13,631,947) (12,743,556) (12,561,495)
Selling and administrative expenses .......... (1,733,774) (1,689,556) (1,705,152)
- ----------------------------------------------------------------------------------------------------------
Total operating expenses ........................ (15,365,721) (14,433,112) (14,266,647)
- ----------------------------------------------------------------------------------------------------------
Income (loss) from operations .................. 21,394 (596,590) (279,092)
Other income (expense):
Interest income ............................... 3,513 39,771 60,981
Interest expense .............................. (604,849) (567,379) (490,758)
Gain on sale of assets (Note 12) ............. -0- -0- 760,731
Option Agreement expense (Note 13) ............ (27,581) (93,247) -0-
- ----------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary item ......... (607,523) (1,217,445) 51,862
Extraordinary item:
Gain on debt discharge (Notes 4 and 7) ........ -0- -0- 272,096
- ----------------------------------------------------------------------------------------------------------
Net (loss) income ............................... $ (607,523) $ (1,217,445) $ 323,958
==========================================================================================================
Basic earnings (loss) per common share (Note 2)
(Loss) income before extraordinary item ....... $ (0.26) $ (0.62) $ 0.03
Extraordinary item ............................ -0- -0- 0.14
- ----------------------------------------------------------------------------------------------------------
Net (loss) income per common share .............. $ (0.26) $ (0.62) $ 0.17
Diluted earnings (loss) per common share (Note 2)
(Loss) income before extraordinary item ...... (0.26) (0.62) 0.02
Extraordinary item ........................... -0- -0- 0.11
- ----------------------------------------------------------------------------------------------------------
Net (loss) income per common share .............. $ (0.26) $ (0.62) $ 0.13
==========================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
16
<PAGE> 21
STATEMENTS OF SHAREHOLDERS' INVESTMENT
Phoenix Medical Technology, Inc.
For the years ended December 31, 1998, 1997 and 1996
<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, 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
Net Loss .................. -0- -0- -0- -0- (607,523) (607,523)
Exercise of Warrants ...... 496,058 49,606 1,201,079 (1,235,184) -0- 15,501
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,459,621 $245,962 $8,425,582 -0- $ 8,479,578 $ 191,966
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
17
<PAGE> 22
STATEMENTS OF CASH FLOWS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ..................................... $(607,523) $(1,217,445) $ 323,958
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization ......................... 350,303 450,655 496,662
Extraordinary item: Gain on debt discharge ............ -0- -0- (272,096)
Gain on sale of assets (Note 12) ...................... -0- -0- (760,731)
Loss on nonoperating equipment ........................ -0- 138,757 112,486
Deferral of Option Agreement, net (Note 13) ........... 407,400 -0- -0
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net ... (187,344) 3,877 (43,595)
(Decrease) (increase) in inventories .............. 10,986 (223,387) (466,448)
(Increase) decrease in prepayments and other ..... (38,618) 38,937 (20,243)
Increase in other assets .......................... (18,750) (15,000) (151,708)
Increase (decrease) in accounts payable,
accrued expenses, and other liabilities ......... 102,160 164,016 (218,839)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ..... 18,614 (659,590) (1,000,554)
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment, net ....... (243,565) (125,893) (250,000)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ............... (243,565) (125,893) (250,000)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of assets (applied to debt) .......... -0- -0- 1,114,341
Proceeds from issuance of long term debt ................ -0- -0- 750,000
Borrowings under (repayments on)
revolving loan agreement, net ......................... 292,336 1,032,465 (181,711)
Reduction of long term debt ............................. (268,705) (262,907) (467,326)
Increase in LIG equipment debt .......................... 172,000 -0- -0-
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ........... 195,631 769,558 1,215,304
- -------------------------------------------------------------------------------------------------------------
Net decrease in cash .................................... (29,320) (15,925) (35,250)
Cash at beginning of year ............................... 38,236 54,161 89,411
- -------------------------------------------------------------------------------------------------------------
Cash at end of year ..................................... $ 8,916 $ 38,236 $ 54,161
=============================================================================================================
Supplemental disclosures of cash flow information
and non-cash items:
Cash paid during the year for interest .................. $ 588,116 $ 555,044 $ 492,484
Cash paid during the year for reorganization items:
Unsecured creditors ............................... 703 2,810 134,867
Deferred property taxes ........................... 59,819 28,630 -0-
Cash paid during the year for Option Agreement .......... 169,719 1,763 -0-
Exercise of warrants - reduction of debt (Note 7) ....... 15,501 -0- -0-
=============================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
18
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Phoenix Medical Technology, Inc.
December 31, 1998, 1997, and 1996
- ----------------------------------
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 nitrile 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.)
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 was applied
by retroactively restating the December 31, 1995 financial statements.
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,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Raw materials and supplies .................. $ 403,504 $ 503,881
Finished goods .............................. 1,365,015 1,275,624
----------- ----------
$ 1,768,519 $ 1,779,505
=========== ===========
</TABLE>
Property, Plant and Equipment - All property, plant and equipment are
stated at cost. Interest capitalized during construction periods is included in
plant and equipment and depreciated over the life of the asset. No interest was
capitalized during 1998, 1997 or 1996. Plant and equipment are depreciated using
the straight-line method over the following estimated useful lives:
19
<PAGE> 24
Note 2 (continued)
<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, 1998, the estimated fair
value of the Company's long-term other liabilities approximates $633,000.
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.
Reclassifications - Certain balances in the prior year financial
statements have been reclassified to conform with the 1998 presentation.
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 was restated. The effect of this accounting
change on previously reported earnings per share ("EPS") data was as follows:
20
<PAGE> 25
Note 2 (continued)
<TABLE>
<CAPTION>
1996
-----
<S> <C>
Per share amounts:
Primary EPS as reported .......... $ 0.17
Effect of adoption of SFAS No. 128 -0-
------
Basic EPS, as restated ........... $ 0.17
======
Diluted EPS as reported .......... $ 0.17
Effect of adoption of SFAS No. 128 $(0.04)
------
Diluted EPS, as restated ......... $ 0.13
======
</TABLE>
In 1997 and 1998, 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>
Adoption of SFAS No. 131 - In 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for disclosures about products and services, geographic
areas, and major customers. The Company considers its current products to
comprise one reportable segment.
Recently Issued Pronouncement - In 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The adoption of the statement is not expected to have a
significant effect on the Company's financial condition or results of
operations.
21
<PAGE> 26
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, 1998, nonoperating equipment consisted of a vinyl
auto-glove stripper machine with a net book value of approximately $584,000.
During fiscal 1998, using proceeds from the capital expenditure term loan from
LIG (See Note 7), the Company invested approximately $84,000 in the auto-glove
stripper in an effort to make it fully operational. To be fully operational and
income producing, this machine will require an additional $500,000 investment.
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, 1998, the following obligations are outstanding
related to the Company's bankruptcy proceedings:
22
<PAGE> 27
Note 4 (continued)
Unsecured Claims - Unsecured creditors who were owed a total of
$1,475,715 in prepetition accounts payable and accrued liabilities have been
paid a pro rata portion of $11,200, plus interest at the prime rate, on the
fifteenth day of each quarter for twenty quarters. In addition, if the Company
has net income after debt principal and interest payments in the fifth fiscal
year after Confirmation, unsecured creditors will be paid a pro rata portion of
$300,000 beginning March 31 of the sixth year after Confirmation. If sufficient
net income is not generated in the fifth year after Confirmation to pay the
$300,000 in full, pro rata payments shall be made on March 31 of each year
following the year in which the Company has had net income, until the $300,000
is paid in full. The total of both forms of payment, as allowed by the Plan, is
$524,000. Therefore, the amount of debt forgiven under the Plan for unsecured
claims is $951,715. However, the Company made a $4,000 payment on a priority
claim which had been forgiven by the Plan. The adjusted debt forgiveness is
$947,715, which is included in the gain on debt discharge reported in the 1994
Statement of Operations.
During fiscal 1996, the Company offered its unsecured creditors an
option to receive payment of the remaining portion of allowed claims in a single
payment. This option required the unsecured creditors to release their
bankruptcy claims against the Company including their right to receive future
payments of the pro rata portion of $300,000 discussed above. In fiscal 1996,
the Company recognized a $272,096 gain on debt discharge resulting from the
release by certain of its unsecured creditors of their unsecured bankruptcy
claims against the Company. These payments are now complete.
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, 1998, the Company was delinquent on 6 monthly payments
23
<PAGE> 28
Note 4 (continued)
to Williamsburg County, totaling approximately $55,000, including principal and
interest. As of March 1, 1999 the Company has paid the delinquent amount and is
current through December 31, 1998.
NOTE 5 - CONTINUITY OF OPERATIONS AND REALIZATION OF ASSETS
The accompanying financial statement have been prepared on the basis of
accounting principles applicable to a going concern and presumes the realization
of assets and the settlement of liabilities in the ordinary course of business.
As discussed in Note 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:
- - The exercise of the LIG option to buy the Company by the Option date,
April 28, 1999. In the event LIG does not exercise the option, the
ability of the Company to continue as a going concern is highly
dependent on management's ability to successfully refinance its
revolving line of credit due on June 28, 1999. (See Note 7)
- - The Company's ability to compete effectively in the non-medical vinyl
and nitrile glove markets
- - Securing a patent and obtaining approval from the EPA for the Company's
antimicrobial vinyl glove product
- - Continuing 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:
- - Continuing to fulfill the expectations outlined by LIG as necessary
to encourage LIG to exercise the Option by April 28, 1999, including
the successful completion of a three week test run starting April 5,
1999
- - Securing additional funding with more favorable terms and interest
rates to refinance the revolving line of credit due June 28, 1999
24
<PAGE> 29
Note 5 (continued)
- - Successful introduction of the medical nitrile glove in fiscal 1999
- - Additional capital investment to complete full automation of auto-glove
stripper
- - 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
- - Obtaining EPA approval for the antimicrobial vinyl glove product
- - Continuing to develop the medical nitrile glove with R&D assistance
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
25
<PAGE> 30
NOTE 6 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of
the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
Accounts payable ........................ $ 798,630 $ 662,293
Accrued compensation and
payroll taxes ....................... 288,803 332,758
Accrued property taxes .................. 233,727 222,230
Other current liabilities ............... 335,268 304,610
---------- -----------
Total accounts payable and
accrued expenses .................... $1,656,428 $ 1,521,891
========== ===========
Accounts payable, long term ............. 27,904 28,607
Accrued property taxes ................ 405,931 485,179
Deferred compensation ................. 170,000 170,000
Other long term liabilities............ 47,574 -0-
---------- -----------
Total other liabilities ............... $ 651,409 $ 683,786
========== ============
</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 were 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 reported in the 1995 Statement of
Operations, a gain on debt discharge of $4,618,842 related to the debt forgiven.
On March 30, 1998, NationsBank exercised its warrant to purchase 496,058 shares
of the Registrant's Common Stock exercisable at a price of $0.03125 per share
which was recorded as a reduction of the Company's note payable with
NationsBank.
Summarized below is the Company's debt at December 31, 1998 and 1997
and the terms of the debt. Substantially all assets are pledged as collateral
against the loans.
26
<PAGE> 31
Note 7 (continued)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revolving line of credit payable
to bank, interest accrues at prime
plus 3.25% (11% at December 31, 1998)
with scheduled maturity in 1999,
secured by the Company's eligible
inventory and receivables .................................. $ 3,064,105 $2,771,769
Term loan payable to bank, due in
scheduled monthly installments
of $20,184, including interest at
prime plus 2.0% (9.75% at December 31, 1998)
with scheduled maturity in 2010, secured by the
Company's real property and fixtures ....................... 1,519,217 1,589,360
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 ...................................... 412,500 562,500
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 ........................................... 72,679 136,742
LIG capital expenditure term loan,
interest accrues at prime plus
2%, due in 24 scheduled monthly
payments, commencing April 30,
1999 (Note 13) ............................................. 172,000 -0-
----------- ----------
Total debt .................................................... 5,240,501 5,060,371
Less - current portion ........................................ 3,702,605 3,126,485
----------- ----------
$ 1,537,896 $1,933,886
=========== ==========
</TABLE>
Maturities of long term debt are as follows:
<TABLE>
<S> <C>
1999 3,702,605
2000 212,028
2001 108,089
2002 120,001
2003 133,226
Thereafter 964,552
========
</TABLE>
The Company had outstanding borrowings of $3,064,000 under its
revolving loan as of December 31, 1998. 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
27
<PAGE> 32
Note 7 (continued)
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.
Borrowings under the Company's revolving loan averaged $2,610,000
during 1998 and $2,161,000 during 1997. Maximum borrowings were $3,064,000 in
1998 and $2,772,000 in 1997. The weighted average interest rate for such
borrowings was 12.6% in 1998 and 12.5% in 1997.
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, 1998, the
Company was in compliance with or had obtained appropriate waivers for all
covenants of the loan agreements.
NOTE 8 - INCONE TAXES
The components of deferred taxes as of December 31, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Deferred tax assets:
Net loss carryforwards $ 2,394,000 $ 2,327,000
General business credit
carryforwards 387,000 412,000
Other liabilities and reserves 146,000 142,000
Valuation allowance (2,591,000) (2,377,000)
----------- -----------
Total deferred tax assets 336,000 504,000
----------- -----------
Deferred tax liabilities:
Basis difference in oper-
ating property, plant
and equipment 336,000 504,000
Net deferred taxes -0- -0-
----------- -----------
</TABLE>
The valuation allowances of $2,591,000 and $2,377,000 as of December
31, 1998 and 1997 respectively were established because in the Company's
assessment, it is uncertain whether the deferred tax assets will be realized.
As of December 31, 1998, the Company has net operating loss
carryforwards of approximately $5,710,000 for tax purposes and general business
credits of approximately $387,000 available
28
<PAGE> 33
Note 8 (continued)
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<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 or government
agencies. 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 30% in
1998, 28% in 1997 and 28% in 1996. No customer individually accounted for more
than 10% of total sales in 1998, 1997 or 1996. 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 Asia, Canada, Europe and Mexico, were approximately
14.5% in 1998, and 10% in 1997 and 12% in 1996, including export sales to LIG
under the Research and Development Agreement.
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.
29
<PAGE> 34
Note 9 (continued)
Total annual compensation, net of amount forgiven, related to the
officers was $202,000 in 1998, $202,000 in 1997 and $193,000 in 1996. These
officers have forgiven $86,400 of such compensation in 1998, $86,400 in 1997 and
$94,700 in 1996. 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 Directors, subject to certain limitations, and may be made in the form
of Company common stock. Contribution expense under the Savings Plan was
approximately $6,300 in 1998, $5,300 in 1997 and $4,800 in 1996.
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
30
<PAGE> 35
Note 10 (continued)
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, 1998, 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 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, 1998, options to purchase 12,000 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 12/31/98 and 12/31/97 41,450 $0.06 to $15.00
</TABLE>
As of December 31, 1998, 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):
31
<PAGE> 36
Note 11 (continued)
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Net (loss) earnings--
As reported .................... $ 608 $ (1,217)
Pro forma ...................... 608 $ (1,218)
Basic (loss) earnings per share--
As reported .................... $ (0.26) $ (0.62)
Pro forma ...................... (0.26) (0.62)
Diluted (loss) earnings per share--
As reported .................... $ (0.26) $ (0.62)
Pro forma ...................... (0.26) $ (0.62)
</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 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 twelve 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 $1,500 in 1998.
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.
In the Letter of Intent, LIG agreed to pay $500,000 as consideration
for an option to purchase substantially all of the Company's assets and assume
certain stated liabilities, for a
32
<PAGE> 37
Note 13 (continued)
$6,821,708 cash purchase price, subject to adjustment as defined in the
Agreement for a period of one year from the date of the definitive Option
Agreement with LIG. On December 22, 1997, the Company entered into a definitive
Option Agreement with LIG, which, in addition to the transactions stated above,
included a Loan and Security Agreement, a Research and Development Agreement and
a Supply Agreement. This Agreement was subject to approval of the Company's
stockholders. On April 28, 1998, the Company's stockholders approved the Option
Agreement with LIG. In conjunction with the approval, on April 29, 1998, the
Company received the $500,000 option payment which will be deferred until the
option is exercised or expires on April 28, 1999. The Company incurred $128,000
and $93,000 of expenses related to this option during 1998 and 1997,
respectively. $100,654 of these expenses related to the option have been
deferred as of December 31, 1998 and will be expensed when the Option is
exercised or expires. The remaining costs have been classified as other expense
in the Statement of Operations. 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. As of December 31, 1998, the Company had received approximately
$172,000 under this financing agreement (See Notes 3 and 7). The Company has
worked closely with LIG in the development of the nitrile gloves and has done
several test runs paid for by LIG. LIG has entered into an agreement to purchase
industrial gloves from the Company. During 1998, sales to LIG under this
Agreement were 8.7% of the total sales.
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
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.
33
<PAGE> 38
Note 14 (continued)
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.
During fiscal 1998, testing by an EPA-approved contractor concluded that the
impacted ground water is not migrating and no potentially completed exposure
pathways exist at this time. The contractor indicated that the exposure does not
pose a threat to human health or the environment and recommends the site be
closed. Estimated total expenditures will not exceed approximately $5,000.
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.
PURCHASE COMMITMENTS
At December 31, 1998, the Company had contractual commitments to
purchase certain raw materials from suppliers at specified prices. These
commitments included agreements to purchase latex through June 1999 and nitrile
through April 1999, each at a designated price per pound.
34
<PAGE> 39
PHOENIX MEDICAL TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996 1997 AND 1998
<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, 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
Year ended December 31, ======== ======== ========= ========
1998
Allowance for doubtful
accounts $ 20,000 $ 13,503 $(13,503) $ 20,000
======== ======== ========= ========
</TABLE>
S-1
<PAGE> 40
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 66.
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 to 1985. He is 55.
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 76.
Byron M. Layman. Director since 1979. Retired in 1977 as Treasurer of
Payne & Company, a wholesale distributor of fabrics. He is 89.
William T. Sena. Director since 1980. Chairman of Sena, Weller, Rohs,
& Williams, Inc., an investment advisory firm, since 1977. He is 62.
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 an annual meeting of the Registrant's shareholders since April 20,
1990. The Board of Directors did not meet during 1998, but conferred several
times by telephone and exchanged correspondence.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
35
<PAGE> 41
To the Registrant's knowledge, based solely on a review of the copies
of such reports furnished to the Registrant and written representations that no
other reports were required, during the fiscal year ended December 31, 1998,
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 $100,000 during the fiscal
year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
Name and Principal Edward W. Gallaher, Sr., President
Position Treasurer, Chief Executive Officer
and Director
<TABLE>
<CAPTION>
Other Annual All Other
Compensation Compensation
Year Salary($) Bonus($) ($) ($)(1)
<S> <C> <C> <C> <C>
1998 $108,500(2) 0 (3) $1,000
1997 $108,500(2) 0 (3) $ 924
1996 $107,750(2) 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, $46,500 and $53,250 in 1998, 1997 and 1996,
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
$155,000.
(3) Mr. Gallaher did not receive personal benefits during the listed years
in excess of 10% of annual salary and bonus.
The following table shows, on a aggregated basis the 1998 fiscal
year-end value of unexercised options and SARs held by Mr. Gallaher during the
fiscal year ended December 31, 1998.
Edward W. Gallaher, Sr.
<TABLE>
<CAPTION>
Value of
Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
Shares Acquired at FY-End (#Sh) at FY-End ($)
on Exercise Value Exercisable/ Exercisable/
(#Shares) Realized Unexercisable Unexercisable
<S> <C> <C> <C>
0 0 5,000/0 0/0
</TABLE>
36
<PAGE> 42
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 to not 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 $133,00 respectively. However, Messrs. Gallaher and
Mixon forgave $46,500 and $39,900, respectively, of such salaries for the
fiscal year ended December 31, 1998 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 1998 due to the
severe financial condition of the Registrant.
ITEM 11. SECURITY OF OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of March 8,
1999, 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:
37
<PAGE> 43
<TABLE>
<CAPTION>
Number of Shares Percentage
and Nature of of Shares
Name and Address Beneficial Ownership(l) Outstanding
- ---------------- -------------------- -----------
<S> <C> <C>
Harold H. Heath 9,000 (2) (3)
Big Valley Ranch
18883 Hwy. 20
Winthrop WA 98862
Byron M. Layman 26,000 (4) (5)
6445 Far Hills Ave
Dayton OH 45459
William T. Sena 21,400 (2) (3)
300 Main Street
Cincinnati OH 45202
Edward W. Gallaher, Sr. 103,495 (6) 4.21%
Route 521 West
P.O. Box 346
Andrews SC 29510
Grover C. Mixon 63,534 (7) 2.58%
Route 521 West (5)
P.O. Box 346
Andrews SC 29510
BankAmerica Corporation 496,058 (8) 20.16%
901 West Trade St, 4 FL.
Charlotte NC 28255
All Officers and
Directors of the
Registrant as a Group 223,429 9.04%
(9)
</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.
(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 15,550 shares held by Mr. Gallaher's wife.
(7) Includes 500 shares held by Mr. Mixon's wife.
38
<PAGE> 44
(8) Share information for BankAmerica obtained from Schedule 13G, (Rule
13d-lb) filed with the SEC by BankAmerica on February 3, 1999.
(9) Based on shares outstanding and shares subject to options held by the
officers and directors which are currently exercisable or exercisable
within 60 days.
39
<PAGE> 45
PART IV
ITEM 13. EXHIBITS, LISTS, AMD 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, 1998.
ITEMS 4, 8 AND 12 ARE INAPPLICABLE AND ARE OMITTED.
40
<PAGE> 46
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 25 , 1999 By: /s/ Edward W. Gallaher, Sr.
Edward W. Gallaher, Sr.
President
In accordance with 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 25, 1999
- ------------------------------ and Director (Principal ---------
Edward W. Gallaher, Sr. Executive and Finan-
cial officer)
/s/Grover C. Mixon Executive Vice President March 25, 1999
- ------------------------------ and Director (Principal ---------
Grover C. Mixon operating officer)
/s/ Harold H. Heath Director March 24, 1999
- ------------------------------ ---------
Harold H. Heath
Director 1999
- ------------------------------ ---------
Byron M. Layman
/s/William T. Sena Director March 23, 1999
- ------------------------------ ---------
William T. Sena
/s/ Delores P. Williams Controller (Principal March 25, 1999
- ------------------------------ Accounting Officer) ---------
Delores P. Williams
</TABLE>
41
<PAGE> 47
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, 1998 0-13401
PHOENIX MEDICAL TECHNOLOGY, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
LOCATED AT
MANUALLY
NUMBERED PAGE
-------------
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT,
LIQUIDATION OR SUCCESSION
<S> <C> <C> <C>
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
</TABLE>
42
<PAGE> 48
<TABLE>
<S> <C> <C> <C>
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988 *
3.3 Amendment to Article VIII of the By-Laws of
Phoenix Medical Technology, Inc., approved at the
Annual Meeting of Stockholders on 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 1O-K for the year ended
December 31, 1988 *
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES:
4.1 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 *
4.2 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 Regis-
trant's Form 8-K dated March 29, 1995 *
(10) MATERIAL CONTRACTS:
10.1 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) *(1)
</TABLE>
43
<PAGE> 49
<TABLE>
<S> <C> <C> <C>
10.2 Deferred Compensation Plan was filed as an Exhibit
to the Registrant's Registration Statement on
Form S-1 (Reg. No. 2-90708) *(1)
10.3 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) *(1)
10.4 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)
10.5 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 *(1)
10.6 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 *(1)
10.7 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 *
</TABLE>
44
<PAGE> 50
<TABLE>
<S> <C> <C>
10.8 Research and Development Agreement
dated as of December 22, 1997 between
the Registrant and London International
Group, Inc. was filed as Annex B to the
Registrant's Proxy Statement dated
March 24, 1998. *
10.9 Loan and Security Agreement dated as of
December 22, 1997 between the Registrant
and London International Group, Inc. was
filed as Annex C to the Registrant's Proxy
Statement dated March 24, 1998. *
10.10 Agreement for the Purchase and Sale of
Goods dated as of December 22, 1997
between the Registrant and London
International Group, Inc. was filed as
Annex D to the Registrant's Proxy
Statement dated March 24, 1998. *
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.
45
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH PHOENIX MEDICAL TECHNOLOGY, INC. FORM 10-KSB FOR THE PERIOD ENDING
DECEMBER 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,916
<SECURITIES> 0
<RECEIVABLES> 2,186,861<F1>
<ALLOWANCES> 0
<INVENTORY> 1,768,519
<CURRENT-ASSETS> 3,964,296
<PP&E> 4,284,062<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,248,358
<CURRENT-LIABILITIES> 5,867,087
<BONDS> 2,189,305
245,962
0
<COMMON> 0
<OTHER-SE> (53,996)
<TOTAL-LIABILITY-AND-EQUITY> 8,248,358
<SALES> 15,387,115
<TOTAL-REVENUES> 3,513
<CGS> 13,631,947
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,761,355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 604,849
<INCOME-PRETAX> (607,523)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (607,523)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
<FN>
<F1>REPRESENTS NET AMOUNT
</FN>
</TABLE>
