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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 September 28, 1997, 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 or Identification No.)
organization)
U.S. Hwy. 521 West, Andrews, South Carolina 29510
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(Address of principal executive offices) (Zip Code)
(803)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)
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years.
Check whether the Registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act of 1934 after the
distribution of securities under a plan confirmed by a court.
Yes X No
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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 1,963,563
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(Outstanding at Sept. 28, 1997)
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PHOENIX MEDICAL TECHNOLOGY, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 28, 1997 AND DECEMBER 31, 1996
September 28 December 31
1997 1996
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(unaudited) *
ASSETS
Current Assets
Cash $ 5,833 $ 54,161
Receivables 1,724,426 1,826,399
Inventories (Note 2) 2,045,884 1,556,118
Prepaid expenses 58,648 76,660
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Total current assets 3,834,791 3,513,338
Operating property, plant and equipment - at cost 11,726,761 11,618,348
Less accumulated depreciation (8,133,527) (7,883,968)
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Net operating property, plant and equipment 3,593,234 3,734,380
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Nonoperating equipment, net 638,522 638,522
Other assets, net 411,103 447,665
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Total assets $ 8,477,650 $ 8,333,905
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LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities
Accounts payable and accrued expenses $ 1,679,750 $ 1,281,158
Revolving line of credit 2,393,078 1,739,304
Current portion of long-term debt 358,140 252,232
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Total current liabilities 4,430,968 3,272,694
Long-term debt 2,002,702 2,299,277
Other liabilities 709,699 760,501
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Total liabilities 7,143,369 6,332,472
Shareholders' investment
Shares issued and outstanding:
1,963,563 shares 9/28/97 and 12/31/96 196,356 196,356
Paid-in capital 7,224,503 7,224,503
Warrant 1,235,184 1,235,184
Deficit (7,321,762) (6,654,610)
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Total shareholders' investment 1,334,281 2,001,433
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Total liabilities and shareholders' investment $ 8,477,650 $ 8,333,905
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*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)
FOR THE THREE MONTH ENDED FOR THE NINE MONTHS ENDED
Sept 28, 1997 Sept 29, 1996 Sept 28, 1997 Sept 29, 1996
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Net sales $ 3,394,368 $ 3,240,016 $10,059,277 $10,601,153
Operating expenses:
Cost of goods sold (3,087,182) (2,917,734) (9,091,460) (9,380,997)
Selling and administrative expense (400,999) (400,002) (1,267,475) (1,253,123)
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Loss from operations (93,813) (77,720) (299,658) (32,967)
Other expense and income:
Interest expense, net (159,219) (104,978) (407,235) (346,729)
Miscellaneous income, net 2,132 831 39,741 30,640
Gain on sale of asset -0- -0- -0- 760,731
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(Loss) Income before extraordinary item
and income tax provision (250,900) (181,867) (667,152) 411,675
Extraordinary item:
Gain on debt discharge -0- 174,522 -0- 174,522
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(Loss) Income before income tax provision (250,900) (7,345) (667,152) 586,197
Income tax provision 12,000 -0- -0- -0-
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Net (loss) income $ (238,900) $ (7,345) $ (667,152) $ 586,197
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(Loss) Income per share:
(Loss) Income before extraordinary item
and income tax provision $ (0.13) $ (0.09) $ (0.34) 0.21
Extraordinary Item -0- 0.09 -0- 0.09
Income tax provision 0.01 -0- -0- -0-
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Net (loss) income per share $ (0.12) $ 0.00 $ (0.34) 0.30
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Weighted average shares outstanding used to
compute earning per share 1,963,563 1,963,563 1,963,563 1,963,563
See accompanying Notes to unaudited Condensed Financial Statements
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PHOENIX MEDICAL TECHNOLOGY, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
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Sep 28, 1997 Sep 29, 1996
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Cash flows from operating activities:
Net (loss) income $ (667,152) $ 586,197
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 249,559 337,496
Extraordinary item-gain debt discharge -0- (174,522)
Gain on sale of assets -0- (760,731)
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable, net 101,973 (86,220)
Increase in inventories (489,766) (310,572)
Decrease in prepayments 18,012 23,600
Decrease (Increase) in other assets 36,562 (132,693)
Increase (Decrease) in accounts payable
and accrued liabilities 347,790 (253,553)
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Net cash used in operating activities (403,022) (770,998)
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Cash flows from investing activities:
Additions to property plant and equipment (108,413) (187,297)
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Cash flows from financial activities:
Net proceeds from sale of assets (apply to debt) -0- 1,114,341
Increase in (Reduction of) line of credit 653,774 (588,014)
Addition of notes payable -0- 750,000
Reduction of long term debt (190,667) (402,430)
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Net cash provided by financing activities 463,107 873,897
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Net decrease in cash (48,328) (84,398)
Cash at beginning of period 54,161 89,411
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Cash at end of period $ 5,883 $ 5,013
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Cash paid during the period for interest $ 364,934 $ 350,178
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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 Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. 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 Company's Form 10-KSB for the year ended December 31, 1996.
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.
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 ten years of 11.5% of its sales of patented incise
drapes and 3% of its sales of other products in the Company's product line
incorporating the patented process, with a maximum of $1,825,000 on 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
1.2% of its total sales in 1996.
2. Inventories
Inventories at September 28, 1997 and December 31, 1996 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. The Company changed to
the FIFO from the LIFO (Last-in, last-out) method of inventory accounting in the
fourth quarter of 1996. This change has been applied by retroactively restating
the accompanying financial statements for the prior year. The effect of changing
the accounting method for valuing inventories decreased net income by $24,000 or
1.2 cents per share in the third quarter of 1996, and decreased net income by
$54,000 or 2.7 cents per share during the first nine months of 1996. The
accounting change is further discussed in the Form 10-KSB for the year ending
December 31, 1996.
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Sept 29, 1997 Dec 31, 1996
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Raw materials $ 556,512 $ 430,549
Work-in-process -0- -0-
Finished goods 1,489,372 1,125,569
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$ 2,045,884 $ 1,556,118
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3. Earnings
Earnings per share for the three months and nine months ended September 28,
1997 and September 29, 1996 were based on the weighted average number of common
shares outstanding, 1,963,563 for each period.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATIONS
As reported in the previous quarter's 10-QSB, July orders and sales were
unexpectedly strong for what has historically been a very slow period. A
vacation week shutdown was scheduled during July in conjunction with the July
4th holiday, to take advantage of an anticipated slow demand month. As a result,
management was forced to schedule substantial overtime operations during the
latter half of July and August which resulted in premium labor costs.
Net sales for the third quarter of 1997 were $3,394,000, 4.8% greater than
in the similar quarter a year ago. Because of the continuing improvement in
product mix, average selling prices were up 4.3% as compared with the 1996
period.
Through three quarters, glove sales were 3.1% or $324,000 less than in the
similar nine month period of 1996. Combined second and third quarter gloves
sales are up 2.2% over the 1996 similar period, but first quarter 1997 sales
were 19% below the 1996 quarter. The Company's new nitrile cleanroom glove began
to achieve acceptable market penetration during the final month of the third
quarter and management hopes the new product will add approximately 5% to fourth
quarter 1997 sales.
Cost of goods sold was 91% in the third quarter of this year compared with
90% in the prior year third quarter. The costs associated with overtime
operations in July and August and continuing nitrile glove development trials
adversely affected the quarter's cost of goods. Fourth quarter operating results
probably will not be better than third quarter results due to the number of
holidays in November and December which affect operating time and overhead
absorption.
Selling and Administrative ("S&A") expenses were $401,000 or 11.8% of sales
as compared with $400,000, 12.4% in the similar quarter of 1996. Selling expense
in the third quarter was $134,000, 4% of sales as compared with $155,000, 4.8%
in the prior year quarter. The 13.5% decrease in selling expense represents the
full effect of the Company's change from manufacturer's representatives to a
dedicated sales force. Administrative expense was $22,000 greater in the third
quarter than a year ago and reflects the addition of a systems analyst and an
accounting clerk and increased R&D expenses related to product development.
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The Company experienced a net loss of $239,000 in the third quarter of 1997
and had a $94,000 loss on operations. This compares with a net loss of $7,000 a
year ago and an operating loss of $78,000. The 1996 third quarter had an
extraordinary gain of $175,000 from debt discharge. For the first nine months of
1997, the Company experienced a net loss of $667,000. Exclusive of the $761,000
gain on the sale of an asset and the $175,000 gain from debt discharge, the
Company experienced a net loss of $349,000 in the first nine months of 1996.
The Company has elected to not pursue the approval of the FDA to market a
nitrile examination glove. If the intended transaction with LIG as discussed in
Item 5 herein, proceeds, the Company will attempt to manufacture a nitrile
examination glove to the specifications of LIG and may or may not offer similar
gloves for sale under the Phoenix label.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations during the third quarter of 1997 was $16,000 as
compared with $173,000 cash used in the similar quarter a year ago. Through
three quarters of 1997, $403,000 of cash has been used in operations as compared
with $771,000 used in the similar three quarters of 1996. Capital expenditures
were $15,000 in the third quarter and $108,000 in the three quarters of 1997.
Accounts payable increased $262,000 in the latest quarter and the sum of
inventories and accounts receivable increased $145,000 during the third quarter
of 1997. The Company has paid $365,000 interest expense during the first three
quarters of 1997 and has reduced its long term debt $191,000. Net cash increased
$2,000 in the third quarter of this year and has decreased $48,000 through three
quarters of 1997. The Company increased its borrowing against its line of credit
by $92,000 during the third quarter. Total bank debt is $4,754,000, $32,000
greater than at the end of the second quarter of 1997 and $463,000 greater than
at year end 1996. During September 1997, the Company's lender increased its
available line of credit from $3,000,000 to $3,750,000 to support the Company's
normal growth and its anticipated increased sales to LIG. In addition, if the
transaction with LIG (discussed in Item 5 herein) proceeds and is approved by
the Company's stockholders, the Company will receive $500,000 as payment of the
Option purchase price.
In the event the Company's operating results fall short of its projections,
the borrowings described above are insufficient to fund its capital expenditures
requirements or the transaction with LIG is not consummated or approved by the
stockholders, the Company could be required to seek additional financing. For
any such additional financing, the Company will consider borrowings
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from commercial lenders and other sources of debt financing as well as equity
financing. No assurance can be given, however, that the Company will be able to
obtain any such additional financing when needed upon terms satisfactory to the
Company.
CAUTIONARY STATEMENT AS TO FORWARD-LOOKING INFORMATION
Statements contained in this report as to the Company's outlook for sales,
operations, capital expenditures and other amounts, budgeted amounts and other
projections of future financial or economic performance of the Company, and
statements of the Company'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 Company's markets, including inflation, recession, interest
rates and other economic factors, especially in the United States and other
areas of the world where the Company markets its products; any loss of the
services of the Company'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 Company's
business; the failure to obtain any required governmental approvals; casualty to
or disruption of the Company's production facilities and equipment; delays or
disruptions in the shipment of the Company'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
PHOENIX MEDICAL TECHNOLOGY, INC.
ITEMS 1, 2, 3, AND 4 ARE INAPPLICABLE AND ARE OMITTED.
ITEM 5. OTHER INFORMATION.
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
acquisition of an option to purchase all of the stock or substantially all of
the assets of Phoenix and other related transactions. LIG is a U.K. corporation
which is a leading manufacturer of personal protective products utilizing thin-
film barrier technology, including Marigold(R) Industrial Gloves.
As contemplated by the letter of intent, LIG will pay to Phoenix $500,000
as consideration for an option to buy either all of the issued and outstanding
stock of Phoenix or substantially all of its assets and the assumption of all of
Phoenix's stated liabilities, at an exercise price of $2.75 per outstanding
share of common stock and certain shares subject to warrants and options,
exercisable for a period of up to one year from the date of a definitive option
agreement. In addition, LIG has agreed to finance the acquisition of capital
equipment and other capital improvements for Phoenix of up to $750,000 and to
participate in the joint development of technology for the manufacture by
Phoenix of new nitrile glove products. Finally, LIG will enter into an agreement
to purchase industrial gloves from Phoenix. The terms of the principal
transaction have been approved by the Board of Directors of Phoenix, but a
definitive Option Agreement has not yet been entered into. The definitive
agreement will be subject to the approval of Phoenix's stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibit 27, Financial Data Schedule filed in electronic format only.
b. Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended September 28, 1997.
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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.
DATE: November 7, 1997 BY:/s/ Edward W. Gallaher, Sr.
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EDWARD W. GALLAHER, SR.
PRESIDENT AND TREASURER
DATE: November 7, 1997 BY:/s/ DELORES P. WILLIAMS
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DELORES P. WILLIAMS
CONTROLLER
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