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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended July 2, 2000, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
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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)
U.S. Hwy. 521 West, 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)
Not Applicable
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(Former name, former address, and former fiscal year, if changed since last
report)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, without par value 2,459,621
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(outstanding at August 12, 2000)
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX MEDICAL TECHNOLOGY, INC.
CONDENSED BALANCE SHEET
July 2, 2000 and December 31, 1999
<TABLE>
<CAPTION>
July 2 December 31
2000 1999
------------ ------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current Assets
Cash $ 750 $ 750
Receivables 1,573,295 1,374,950
Inventories (Note 2) 1,224,762 1,682,685
Prepaid expenses 105,454 123,186
------------ ------------
Total current assets 2,904,261 3,181,571
Operating property, plant and equipment - at cost 12,276,613 12,273,502
Less accumulated depreciation (8,908,405) (8,780,038)
------------ ------------
Net operating property, plant and equipment 3,368,208 3,493,464
------------ ------------
Nonoperating equipment, net 902,851 902,851
Other assets, net 270,381 299,631
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Total assets $ 7,445,701 $ 7,877,517
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities
Accounts payable and accrued expenses $ 2,238,183 $ 1,895,309
Revolving line of credit 2,170,563 1,895,072
Term loan (equipment) 1,476,976 -0
Deferred Option payment -0- 151,308
Current portion of long-term debt 2,145,223 543,671
------------ ------------
Total current liabilities 8,030,945 4,485,360
Long-term debt -0- 3,231,045
Other liabilities -0- 485,107
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Total liabilities 8,030,945 8,201,512
Shareholders' investment
Shares issued and outstanding:
2,459,621 shares 7/2/00 and 12/31/99 245,962 245,962
Paid-in capital 8,425,582 8,425,582
Deficit (9,256,788) (8,995,539)
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Total shareholders' deficit (585,244) (323,995)
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Total liabilities and shareholders' deficit $ 7,445,701 $ 7,877,517
============ ============
</TABLE>
*Condensed from audited financial statements.
See accompanying notes to Unaudited Condensed Financial Statements.
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PHOENIX MEDICAL TECHNOLOGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
July 2, 2000 July 4, 1999 July 2, 2000 July 4, 1999
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<S> <C> <C> <C> <C>
Net sales $ 2,724,244 $ 3,744,905 $ 5,635,395 $ 7,193,541
Operating expenses:
Cost of goods sold (2,527,469) (3,344,361) (5,140,981) (6,304,059)
Selling and administrative expense (343,352) (383,188) (676,105) (820,393)
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Income from operations (146,577) 17,356 (181,691) 69,089
Other expense and income:
Interest expense, net (153,741) (147,425) (300,547) (285,703)
Miscellaneous income, net 8,666 376 13,861 36,582
Option Agreement income 240,200 508,054 240,200 508,054
Option Agreement expense (33,072) (100,654) (33,072) (100,654)
Loan processing fee expense -0- (222,066) -0- (222,066)
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Net income (loss) $ (84,524) $ 55,641 $ (261,249) $ 5,302
=======================================================================================================================
Basic income (loss) per share $ (0.03) $ 0.02 $ (0.11) -0-
Diluted income (loss) per share $ (0.03) $ 0.02 $ (0.11) -0-
=======================================================================================================================
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements
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PHOENIX MEDICAL TECHNOLOGY, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(261,249) $ 5,302
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 128,367 127,510
Changes in assets and liabilities:
Increase in accounts receivable, net (198,345) (95,408)
Decrease (increase) in inventory 457,923 (142,586)
(Increase) decrease in prepayments (15,340) 12,018
Decrease (increase) in other assets 29,250 (204,517)
Decrease in loan processing fees (CIT) -0- 222,066
Decrease in deferred expenses 33,072 100,654
(Decrease) increase in accounts payable and
accrued liabilities (142,233) 368,994
Decrease in deferred option payments (151,308) (508,054)
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Net cash used in operating activities (119,863) (114,021)
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Cash flows from investing activities:
Additions to property, plant and equipment, net (3,111) (23,774)
LIG funded property, plant and equipment -0- (434,410)
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Net cash used in investing activities: (3,111) (458,184)
Cash flows from financing activities:
Increase (decrease) in line of credit 275,491 (1,058,212)
(Decrease) increase in long term debt (152,517) 1,168,173
Increase in LIG equipment debt -0- 454,162
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Net cash provided by financing activities 122,974 564,123
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Net increase (decrease) in cash -0- (8,082)
Cash at beginning of period 750 8,916
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Cash at end of period $ 750 $ 834
========= ===========
Cash paid during the period for interest $ 267,191 $ 304,674
========= ===========
Cash paid during the period for loan processing
fees $ -0- $ 229,750
========= ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
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NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. General
The condensed financial statements included herein have been prepared
by the Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission except that these financial statements have
not been reviewed by an independent accountant. (See note 3 below.) Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These unaudited
condensed financial statements should be read in conjunction with the annual
financial statements and related notes contained in the Registrant's Form 10-KSB
for the year ended December 31, 1999.
In the opinion of management, the accompanying unaudited condensed
financial statements include all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the information
therein. Results of operations for interim periods should not be regarded as
necessarily indicative of the results to be expected for the full year.
2. Inventories
Inventories at July 2, 2000 and December 31, 1999 have been stated at
the lower of cost or market. Cost is determined for substantially all
inventories using the first-in, first-out (FIFO) method.
<TABLE>
<CAPTION>
Jul 2, 2000 Dec 31, 1999
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<S> <C> <C>
Raw materials $ 353,020 $ 370,678
Finished goods 871,742 1,312,007
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$ 1,224,762 $ 1,682,685
=========== ===========
</TABLE>
3. Other Relevant Events
The Registrant and London International Group, Inc. ("LIG") were
parties to a Second Option Agreement dated May 31, 1999 pursuant to which LIG
purchased from the Registrant an option to purchase substantially all the assets
of the Registrant (the "Second Option") at a purchase price of $6,071,708
(subject to certain adjustments). Seton-Scholl London International, plc
("SSLI"), the successor to LIG, did not exercise the Second Option, nor did it
seek an extension of the Second Option which expired on May 18, 2000.
The Registrant's financial condition has continued to decline since LIG
(now SSLI) declined to exercise the Second Option. Because the Registrant is not
able to generate cash flow sufficient to pay its debts and obligations and
continue as a going concern, on August 21, 2000 it will file a petition for
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relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court
for the District of South Carolina, Columbia Division. The Registrant will also
file with the court a plan of liquidation which details how the Registrant hopes
to liquidate its assets and satisfy its creditors. The Registrant plans to cease
all operations on August 18, 2000, and all employees will be terminated except
for certain employees needed to manage the orderly liquidation of the
Registrant's assets. During the coming weeks, management will cooperate with its
secured creditors in attempting to liquidate the assets of the Registrant and
satisfy the Registrant's liabilities.
On August 18, 2000, Arthur Andersen LLP resigned as the Registrant's
independent accountant. Because of the short period of time between the
resignation and the due date of this report and the inability of the Registrant
to pay another accounting firm to review the financial statements, the financial
statements filed in this report have not been reviewed by an independent
accountant.
4. Debt
On June 21, 1999, the Registrant and LaSalle Business Credit, Inc.
("LBCI") closed on a $6,000,000 credit facility which included a $1,700,000 term
loan on equipment, a $3,800,000 revolving credit facility on eligible
inventories and eligible accounts receivable and a $500,000 capital expenditure
loan. The LBCI credit facility had an interest rate of prime plus 2.25% for the
term loan and capital expenditure loan and prime plus 2.0% for the revolving
loan.
At July 2, 2000, the Registrant was not in compliance with several
financial covenants in its credit agreements with Carolina First bank. 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 was not in compliance with the Carolina First
financial covenants related to working capital and the current ratio and the
financial covenants related to net worth and the leverage ratio. In addition,
the Registrant was not in compliance with the Carolina First financial covenant
related to taxes and liens. Since April 1, 2000 the Registrant has been unable
to make loan payments to Carolina First Bank. Due to a $250,000 Payment Reserve
Fund deposited with the bank at the time of the March 27, 1995 financing, which
has covered the Registrant's loan payments during this period, the bank has not
accelerated its loan to the Registrant.
At July 2, 2000, the Registrant's borrowing against its $6,000,000 LBCI
credit facility was $3,648,000, including $2,171,000 of borrowing against the
LBCI revolving credit facility. Total bank debt at July 2, 2000 was $5,043,000.
Several Events of Default have occurred under the Loan and Security
Agreement with LBCI. LBCI has agreed to a temporary forbearance from exercising
its rights and remedies with respect to such Events of Default, but nothing
prohibits it from exercising such rights and remedies at anytime in the future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Registrant and London International Group, Inc. ("LIG") were
parties to a Second Option Agreement dated May 31, 1999 pursuant to which LIG
purchased from the Registrant an option to purchase substantially all the assets
of the Registrant ("Second Option") at a purchase price of $6,071,708 (subject
to certain adjustments). Seton-Scholl London International, plc ("SSLI"), the
successor to LIG did not exercise the Second Option. The Second Option expired
on May 18, 2000.
The Registrant's financial condition has continued to decline since LIG
(now SSLI) declined to exercise the Second Option. Because the Registrant is not
able to generate cash flow sufficient to pay its debts and obligations and
continue as a going concern, on August 21, 2000 it will file a petition for
relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court
for the District of South Carolina, Columbia Division. The Registrant will also
file with the court a plan of liquidation which details how the Registrant hopes
to liquidate its assets and satisfy its creditors. The Registrant plans to cease
all operations on August 18, 2000, and all employees will be terminated except
for certain employees needed to manage the orderly liquidation of the
Registrant's assets. During the coming weeks, management will cooperate with its
secured creditors in attempting to liquidate the assets of the Registrant and
satisfy the Registrant's liabilities.
On August 18, 2000, Arthur Andersen LLP resigned as the Registrant's
independent accountant. Because of the short period of time between the
resignation and the due date of this report and the inability of the Registrant
to pay another accounting firm to review the financial statements, the financial
statements filed in this report have not been reviewed by an independent
accountant.
OPERATIONS
Net sales for the quarter ended July 2, 2000 were $2,724,000, down
$1,021,000 or 27.2% as compared with the second quarter of 1999. Net sales for
the second quarter were down $187,000, or 6.9% as compared with the first
quarter of 2000. Latex glove sales, which represent 17% of the Registrant's
total glove sales, were down $287,000, or 38.6%, as compared with the prior year
second quarter. The decrease in latex glove sales was broad in nature but
reflects substantially reduced sales to the US Government and related agencies.
The U.S. Government is sourcing more non-natural rubber latex gloves, such as
nitrile examination gloves and less natural rubber gloves. The Registrant has
received its FDA approval to market its nitrile examination glove to the medical
market but is without financial resources to do so. Second quarter 2000 latex
glove sales were 15.7% greater than in
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the first quarter of 2000 but the Registrant feels the increase, mostly in the
industrial sector, does not foreshadow a change in the trend away from natural
rubber latex gloves. Vinyl glove sales, 69% of total glove sales, in the second
quarter of 2000 were approximately $1,870,000, down 16.7% from the prior year's
similar quarter. The decline in vinyl glove sales was broad in nature. The
Registrant feels that worldwide competition in the commodity type non-reusable
glove market restricts its ability to compete pricewise.
Second quarter 2000 sales of nitrile gloves, 14% of total glove sales,
were $377,000, 49.7% less than the prior year similar quarter sales. Nitrile
gloves manufactured for LIG were 52% less than in the prior year second quarter,
reflecting LIG's decision to not exercise the Second Option. Non-LIG nitrile
glove sales were down 42%, reflecting that Asian nitrile glove selling prices
were below the Registrant's cost to manufacture.
Through the first six months of 2000, net sales were approximately
$5,635,000, 22% less than for the similar six-month period of 1999. Latex glove
sales in the current year six-month period were down 49.3%, vinyl glove sales
were down 11.4% and nitrile glove sales were down 21.6% as compared with the
first six months of 1999.
Purchasing agents of the Registrant's customers continue to be under
substantial pressure to reduce unit purchase costs. The Registrant is unable to
implement significant cost reduction through automation and it has not been able
to grow or maintain market share based on superior quality and service, as it
had in the past. Buyers demand price reductions and with Asian low price imports
available in many product lines, US manufacturers are expected to offer price
reductions. Simultaneously with selling price downward pressure, the Registrant
has incurred substantial energy and raw material cost increases.
Selling and administrative ("S&A") expenses continue to be carefully
controlled and were $343,000 during the second quarter of 2000 and $676,000
during the first six months of 2000, 12.6% and 12.0% of sales respectively. S&A
expenses were down $40,000 in the second quarter and $144,000 for the first six
months of 2000 as compared with the similar prior year periods. Selling expense
continues to be below expenditures for the prior year and is just 2.5% of sales
in the current year and 3.3% in the first half of year 2000. On a continuing
basis, fewer sales have been made by commission representatives than by the
Registrant's direct selling.
The Registrant had a $147,000 loss on operations in the second quarter
of 2000 versus $17,000 of income from operations in the second quarter of 1999.
The loss on operations was $182,000 for the six months of 2000 as compared with
$69,000 income from operations for the prior year first six months. The decrease
is attributable to a decline in the net sales and an increase in cost of goods
sold. Cost of goods sold, as a percentage of net sales,
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was 93% in the second quarter of 2000 as compared with 89% in the second quarter
of 1999. The Registrant has experienced additional raw material and energy
price increases during the second quarter of 2000. The Registrant cannot pass
the cost increases to its customers. Natural gas costs during June 2000 were the
highest of the year and relief is not in sight. The increase in unit cost for
natural gas was nearly 100% over gas costs in the prior year similar quarter.
The Registrant had a net loss of approximately $85,000 in the second
quarter of 2000 as compared with net income of $56,000 in the second quarter of
1999. The 2000 second quarter results include $240,000 of income and $33,000 of
expense resulting from the expiration on May 18, 2000 of the LIG Second Option
Agreement and $154,000 of interest expense. The 1999 second quarter results
include $407,000 of income ($508,000 deferred income less $101,000 deferred
expenses) resulting from the expiration on April 28, 1999 of the initial LIG
Option Agreement, $222,000 of expense related to replacing the CIT Group/Credit
Finance ("CIT") credit facility with a credit facility from LaSalle Business
Credit, Inc. ("LBCI") and $147,000 of interest expense. The Registrant had a net
loss of $261,000 in the first half of 2000 as compared with a net income of
$5,000 in the first half of 1999. Current year six month results include
$240,000 of income and $33,000 of expense resulting from the expiration, on May
18, 2000, of the LIG Second Option Agreement and $301,000 of interest expense.
The 1999 first six months results included $407,000 of income resulting from the
expiration, on April 28, 1999, of the LIG Option Agreement, $222,000 of expense
related to replacing the CIT Group/Credit Finance credit facility with a credit
facility from LaSalle Business Credit, Inc. ("LBCI"), and $286,000 in interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended July 2, 2000, the Registrant's operations
provided $191,000 of cash compared with $550,000 of cash used in the prior year
second quarter. Capital expenditures were $3,000 in the second quarter of 2000.
Accounts payable and accrued expenses decreased $547,000 in the second quarter
of 2000 as compared with an increase of $265,000 in the second quarter of 1999.
The sum of inventories, accounts receivable and prepayments decreased $847,000
in the second quarter of 2000 as compared with an increase of $544,000 in the
similar quarter of 1999. The decrease in accounts receivable in the current year
second quarter is in line with the decrease in sales for the quarter.
Inventories were reduced to generate cash for operations. Prior year results
reflected accounts receivable which resulted from a run of 8 million nitrile
gloves made and shipped to LIG late in the second quarter of 1999.
Through two quarters of 2000, the Registrant's operations have used
$120,000 of cash as compared with $114,000 of cash provided by operations
through the first half of 1999.
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At July 2, 2000, the Registrant's borrowing against its $6,000,000 LBCI
line of credit facility was $3,648,000, including $2,171,000 of borrowing
against the LBCI $3,800,000 revolving loan. Total bank debt at July 2, 2000 was
$5,044,000 versus $4,920,000 at December 31, 1999.
At July 2, 2000, the Registrant was not in compliance with several
financial covenants in its credit agreements with Carolina First bank. 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 was not in compliance with the Carolina First
financial covenants related to working capital and the current ratio and the
financial covenants related to net worth and the leverage ratio. In addition,
the Registrant was not in compliance with the Carolina First financial covenant
related to taxes and liens. Since April 1, 2000 the Registrant has been unable
to make loan payments to Carolina First Bank. Due to a $250,000 Payment Reserve
Fund deposited with the bank at the time of the March 27, 1995 financing, which
has covered the Registrant's loan payments during this period, the bank has not
accelerated its loan to the Registrant.
During the second quarter of 2000, the Registrant was not in compliance
with certain loan covenants in its credit agreements with LBCI. Both the
consolidated interest coverage ratio and the minimum consolidated earnings
before interest, taxes, depreciation and amortizations ("EBITDA") covenants were
out of compliance at July 2, 2000 and continue to be out of compliance at the
filing of this form 10-QSB with the Securities and Exchange Commission. LBCI, on
May 16, 2000, gave notice of default to the Registrant and the two are
cooperating in the filing of a petition by the Registrant under Chapter 11 of
the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the District of
South Carolina, Columbia Division. See Item 5 of this report.
The Registrant's creditors include not only its banks, LBCI and
Carolina First Bank, which are currently owed approximately $5,082,000 including
accrued interest at July 2, 2000, but also LIG (now SSLI), a number of trade
creditors, Williamsburg County, South Carolina for past property taxes, other
unsecured creditors and unpaid allowed class one claims from the Registrant's
1994 Plan of Reorganization in its earlier bankruptcy. Non-bank debt at July 2,
2000, in the aggregate, was approximately $2,773,000.
Since the Registrant will cease operations on August 18, 2000,
management will focus its efforts on liquidating the assets of The Registrant
with the hope that proceeds of the liquidation will be sufficient to satisfy
obligations owed to creditors. There is no assurance that, upon liquidation of
the assets of the Registrant, creditors will be paid in full. In addition, it is
not likely that shareholders of the Registrant will receive any final
distributions upon the Registrant's liquidation. As discussed elsewhere in this
Form 10-QSB, the Registrant will file for bankruptcy relief under Chapter 11 of
the U.S. Bankruptcy Code.
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CAUTIONARY STATEMENT AS TO FORWARD-LOOKING INFORMATION
Statements contained in this report as to the Registrant's outlook for
sales, operations, capital expenditures and other amounts, budgeted amounts and
other projections of future financial or economic performance of the Registrant,
and statements of the Registrant's plans and objectives for the future are
"forward-looking" statements, and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results or events to differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements include without limitation: general economic
conditions in the Registrant's markets, including inflation, recession, interest
rates and other economic factors, especially in the United States and other
areas of the world where the Registrant markets its products; any loss of the
services of the Registrant's key management personnel; increased competition in
the United States and abroad, both from existing competitors and from any new
interests in the business; changes in the cost and availability of raw
materials; changes in governmental regulations applicable to the Registrant's
business; the failure to obtain any required governmental approvals; casualty to
or disruption of the Registrant's production facilities and equipment; delays or
disruptions in the shipment of the Registrant's products and raw materials;
disruption of operations due to strikes or other unrests; and other factors that
generally affect the business of manufacturing companies with international
operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material developments during the quarter ended July 2, 2000
in any of the litigation previously reported by the Registrant, except that
Owens & Minor, Inc. has stipulated to a dismissal of its cross-complaint against
the Registrant in the lawsuit styled Wendy Smith v. Baxter Healthcare, et al.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
During the second quarter of 2000, the Registrant was not in compliance with
certain loan covenants in its credit agreements with LaSalle Business Credit,
Inc. ("LBCI"). Both the consolidated interest coverage ratio and the minimum
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) covenants were out of compliance at July 2, 2000 and continue to be out
of compliance at the time of this filing. The Registrant's non-compliance with
these covenants is an event of default under its Loan Agreement with LBCI. On
May 16, 2000, LBCI gave written notice of default to the Registrant. LBCI and
the Registrant are presently cooperating in the filing by the Registrant on
August 21, 2000 of a petition under Chapter 11 of the U.S. Bankruptcy Code.
At July 2, 2000 the Registrant was not in compliance with several financial
covenants in its real estate loan agreement with Carolina First Bank. Further,
since July 2, 2000 the Registrant has been unable to make its loan payments to
Carolina First. However, due to a $250,000 payment reserve fund deposited with
Carolina First at the time of this financing on March 27, 1995, Carolina First
has not accelerated its loan to the Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
(a) On August 21, 2000, the Registrant will file a petition for relief
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of South Carolina captioned In re Phoenix
Medical Technology, Inc., Case No. 00-07253 - W. The Registrant will be a
debtor in possession under the United States Bankruptcy Code.
(b) On August 18, 2000, Arthur Andersen LLP resigned as the Registrant's
independent accountants. Because of the short period of time between the
resignation
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and the due date of this report and the inability of the Registrant to pay
another accounting firm to review the financial statements, the financial
statements filed in this report have not been reviewed by an independent
accountant. A copy of Arthur Andersen LLP's resignation letter is included as
Exhibit 99 to this report.
During the Registrant's two most recent fiscal years ended December 31,
1999 and December 31, 1998 there were no disagreements with Arthur Andersen LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which disagreement(s), if not
resolved to the satisfaction of Arthur Andersen LLP, would have caused it to
make reference to the subject matter of the disagreement(s) in connection with
its report.
Because Arthur Andersen resigned, rather than being dismissed by the
Registrant, neither the Registrant's Audit Committee or Board of Directors
recommended or approved of a change in the Registrant's independent auditors.
Arthur Andersen LLP's reports on the financial statements of the
company for the years ended December 31, 1998 and December 31, 1999 contained no
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to audit scope or accounting principles; however, the report for the years ended
December 31, 1999 and 1998 did contain an explanatory paragraph as to the
Company's ability to continue as a "going concern" as follows:
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, 1999. 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.
The Registrant has provided Arthur Andersen LLP with a copy of this
Item 5(b) prior to its filing with the Securities and Exchange Commission. A
letter from Arthur Andersen LLP addressed to the Securities and Exchange
Commission indicating its agreement with the statements made by the Registrant
in this Item 5(b) is filed herewith as Exhibit 16 to this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 16, Letter from Arthur Andersen LLP regarding Item 5(b)
Exhibit 27, Financial Data Schedule, filed in electronic format only
Exhibit 99, Resignation Letter of Arthur Andersen LLP
(b) The Registrant filed no reports on Form 8-K during the quarterly period
ended July 2, 2000.
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX MEDICAL TECHNOLOGY, INC.
By: /s/ Edward W. Gallaher, Sr.
-------------------------------
Edward W. Gallaher, Sr.
President and Treasurer
By: /s/ Delores P. Williams
-------------------------------
Delores P. Williams
Controller
DATE: August 18, 2000
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