<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
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 NUMBER 0-20354
PHOENIX HEALTHCARE CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2596710
------------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporattion of organization) Identification No.)
4514 Travis Street, Suite 330
DALLAS, TEXAS 75205
(Address of principal executive offices) (Zip Code)
214-599-9777
----------------------------------------------------
(Registrant's telephone number, including area code)
------------------------------
Former name or former address, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ YES / / NO
As of August 13, 1999, there were 23,555,337 shares of Common Stock
issued and outstanding, 533,333 shares of Series A Senior Convertible
Preferred Stock issued and outstanding, and 100,000 shares of Series B
Preferred Stock issued and outstanding.
<PAGE>
FORWARD LOOKING STATEMENTS
- --------------------------------------------------------------------------------
THIS FORM 10-Q INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. WHEN
USED HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "EXPECT" AND
SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY'S MANAGEMENT, ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT SIGNIFICANT
ASSUMPTIONS, RISKS AND SUBJECTIVE JUDGMENTS BY THE COMPANY'S MANAGEMENT
CONCERNING ANTICIPATED RESULTS. THESE ASSUMPTIONS AND JUDGMENTS MAY OR MAY NOT
PROVE TO BE CORRECT. MOREOVER SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS TO THE DATE HEREOF.
<PAGE>
Phoenix Healthcare Corporation
Form 10-Q
Table of Contents
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - 4
June 30, 1999 and December 31, 1998
Consolidated Statements of Operations for 5
the three months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for 6
the three months ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 23
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
,
PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................................... $ 1,135,254 $ 279,364
Accounts receivable, net...................................................... 8,138,725 2 ,470,416
Inventory..................................................................... 3,238,388 14,968
Prepaid expenses and other current assets..................................... 554,550 -
------------------------ -----------------------
Total current assets.......................................................... 13,066,917 2,764,748
PROPERTY AND EQUIPMENT, net..................................................... 9,512,109 8,392,222
OTHER ASSETS
Cash and cash equivalents, restricted......................................... 475,875 476,189
Intangible assets, net........................................................ 5,046,773 347,753
Other assets................................................................. 162,466 -
------------------------ -----------------------
5,685,114 823,942
------------------------ -----------------------
TOTAL ASSETS.................................................................... $ 28,264,140 $ 11,980,912
------------------------ -----------------------
------------------------ -----------------------
1999 1998
------------------------ -----------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable, banks and other................................................ $ 14,179,474 $ 4,840,931
Accounts payable.............................................................. 7,787,690 3,214,597
Accrued expenses and other current liabilities................................ 4,904,500 1,217,716
Current portion of long-term debt and capital lease obligations............... 213,500 213,500
Long-term debt in technical default........................................... 9,746,500 8,300,000
------------------------ -----------------------
Total current liabilities..................................................... 36,831,664 17,786,744
LONG-TERM DEBT.................................................................. 2,125,924 1,696,500
------------------------ -----------------------
38,957,588 19,483,244
COMMITMENTS AND CONTINGENCIES................................................... - -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $.001 par value, 5,000,000 shares authorized:
Series A, 533,333 shares issued and outstanding............................... 533 533
Series B, 100,000 shares issued and outstanding............................... 100 100
Common Stock, $.001 par value, 50,000,000 shares authorized; 23,555,337 and 23,555 20,970
20,869,958 issued and outstanding in 1999 and 1998, respectively.............
Additional Paid-In Capital.................................................... 36,412,567 36,059,867
Accumulated Deficit........................................................... (47,130,203) (43,583,802)
------------------------ -----------------------
(10,693,448) (7,502,332)
------------------------ -----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)............................ $ 28,264,140 $ 11,980,912
------------------------ -----------------------
------------------------ -----------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue
Nursing home operations 4,673,543 4,904,750 9,244,704 9,503,947
Ancillary services 5,443,283 2,985,083 6,063,338 6,269,539
Management services 153,100 313,772 297,700 628,200
------------------ ---------------- ---------------- ----------------
10,269,926 8,203,605 15,605,742 16,401,686
Operating expenses
Nursing home operations 4,259,260 4,090,396 8,460,600 7,998,859
Ancillary services 5,971,198 2,738,887 7,483,376 5,614,740
Management services 155,369 195,075 361,725 441,445
General and
Administrative 467,413 431,656 822,420 1,163,354
------------------ ---------------- ---------------- ----------------
10,853,240 7,456,014 17,128,121 15,218,398
Property and capital related expenses
Interest expense 378,451 548,118 758,059 914,562
Property lease expense 504,730 313,725 797,230 576,225
Depreciation and Amortization 219,190 261,390 380,338 414,885
------------------ ---------------- ---------------- ----------------
1,102,371 1,123,233 1,935,627 1,905,672
------------------ ---------------- ---------------- ----------------
------------------ ---------------- ---------------- ----------------
Loss from operations (1,685,685) (375,642) (3,458,006) (722,384)
Other income (expense) (88,395) 73,007 (88,395) 123,322
------------------ ---------------- ---------------- ----------------
Net Loss (1,774,080) (302,635) (3,546,401) (599,062)
------------------ ---------------- ---------------- ----------------
------------------ ---------------- ---------------- ----------------
Basic loss and dilution per Common
Share ($0.08) ($0.01) ($0.16) ($0.03)
------------------ ---------------- ---------------- ----------------
------------------ ---------------- ---------------- ----------------
Weighted average number
of common shares of common stock
and equivalents
Outstanding 22,313,147 20,869,958 22,313,147 20,869,958
------------------ ---------------- ---------------- ----------------
------------------ ---------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
5
<PAGE>
PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss....................................................................... (3,546,401) (599,062)
Adjustments to reconcile net loss to net cash provided (utilized) by operating
activities:
Depreciation and amortization.................................................. 411,939 414,885
Provision for doubtful accounts receivable..................................... 390,212 465,300
Changes in:
Accounts receivable............................................................ 459,682 1,795,100
Changes in other assets........................................................ (137,539) 11,457
Inventory...................................................................... 576,872 116,750
Prepaid expenses and other..................................................... (281,946) 508,181
Accounts payable............................................................... 605,347 (461,118)
Accrued expenses and other..................................................... 271,469 (1,033,890)
Common Stock Issued for Services Rendered...................................... 330,000
----------------------- ---------------------
Net cash provided (utilized) by operating activities.............................
----------------------- ---------------------
(920,365) 1,217,603
INVESTING ACTIVITIES
Purchase of property and equipment............................................. (18,283) (111,823)
Business Acquistion (5,000)
Increase in restricted cash.................................................... 314 (36,713)
----------------------- ---------------------
Net cash utilized by investing activities...................................... (22,969) (137,079)
----------------------- ---------------------
FINANCING ACTIVITIES
Net proceeds from issuance of capital stock and other
capital contributions............................................................ 789,000
Increase in long-term debt 185,810 1,541,269
Short term debt.................................................................. 1,538,543 (7,972)
Payments of long-term debt....................................................... (135,160)
Notes and loans payable.......................................................... (59,969) (3,000,873)
Capital Lease Obligations, Net...................................................
----------------------- ---------------------
Net cash provided (utilized) by financing activities............................. 1,529,224 2,299,245
Cash obtained from Business Acquisiton........................................... 270,000
----------------------- ---------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 855,890 367,439
Cash and cash equivalents, beginning of period................................... 279,364 190,696
----------------------- ---------------------
Cash and cash equivalents, end of period......................................... 1,135,254 558,135
----------------------- ---------------------
----------------------- ---------------------
</TABLE>
6
<PAGE>
PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 1999 AND 1998
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements is as follows:
Business
Phoenix Healthcare Corporation, (formerly Iatros Health Network,
Inc.) and Subsidiaries (the "Company") is a Delaware Corporation
organized in June 1988. The Company is engaged in providing health
care services principally to the long-term care industry. As of June
30,1999, the Company provides these services through nine (9)
long-term care facilities (seven skilled nursing facilities and two
assisted living facilities) in Massachusetts and New Hampshire. In
addition, the Company operates Trinity Rehab, Inc. ("Trinity") which
provides comprehensive rehabilitation therapy services through 131
private pay contracts in Texas and Oklahoma. In April 1999, the
Company acquired Southland Medical Supply, Inc. based in Knoxville,
Tennessee, a distributor of medical supplies to hospitals, skilled
nursing homes, assisted living facilities and to home care patients
in 16 states. (See NOTE 6: SUBSEQUENT EVENTS)
Principles of Consolidation
The consolidated financial statements include the accounts of Phoenix
Healthcare Corporation, and its wholly-owned subsidiaries. All
intercompany transactions and accounts have been eliminated.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
The Company maintains all cash accounts, which at times may exceed
federally insured limits. The Company has not experienced any losses
from maintaining cash accounts in excess of federally insured limits.
Management believes that the Company does not have significant credit
risk related to its cash accounts.
Revenue and accounts receivable
Nursing home operations and ancillary services revenue is reported at
the estimated net realizable amounts due from residents, third party
payors, and others. Management services revenue is reported pursuant
to the terms and amounts provided by the associated management
services contracts.
The Company's credit risk with respect to accounts receivable is
concentrated in services related to the healthcare industry, which is
highly influenced by governmental regulations. A substantial portion
of the Company's revenue is through Medicare, Medicaid and other
governmental programs. This concentration of credit risk is limited
due to the number and types of entities comprising the Company's
customer base and their geographic distribution. The Company
routinely monitors exposure to credit losses and maintains an
allowance for doubtful accounts.
The allowance for doubtful accounts is maintained at a level
determined to be adequate by management to provide for potential
losses based upon an evaluation of the accounts receivable. The
evaluation considers such factors as the age of receivables, the
contract terms and the nature of the contracted services.]
7
<PAGE>
PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 1999 AND 1998
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
REVENUE AND ACCOUNTS RECEIVABLE (Continued)
Certain nursing home and ancillary revenue is recorded based on
standard charges applicable to patients. Under Medicare, Medicaid
and other cost-based reimbursement programs, the provider is
reimbursed for services rendered to covered program patients as
determined by reimbursement formulas. The differences between
established billing rates and the amounts reimbursable by the
programs and patient payments are recorded as contractual
adjustments and deducted from revenue.
Inventory
Inventory is principally comprised of pharmaceutical and medical
supplies and is valued at the lower of cost (first-in, first-out
method) or market.
Property and equipment
Property and equipment is stated at cost. The cost of property and
equipment is depreciated over the estimated useful lives of the
respective assets using primarily the straight-line method. Property
and equipment under capital leases is amortized over the lives of the
respective leases or over the service lives of the assets. Leasehold
improvements are amortized over the lesser of the term of the related
lease or the estimated useful lives of the assets.
Normal maintenance and repair costs are charged against income.
Major expenditures for renewals and betterments which extend useful
lives are capitalized. When property and equipment is sold or
otherwise disposed of, the asset gain or loss is included in
operations.
The useful lives of property and equipment for purposes of computing
depreciation and amortization are:
<TABLE>
<S> <C>
Building.............................................. 25 Years
Leasehold improvements................................ 3-10 Years
Property and equipment held under capital leases...... Life of lease
Equipment............................................. 5 Years
Furniture and fixtures................................ 3-7 Years
</TABLE>
Intangible assets
The Company evaluates the carrying value of its long-lived assets and
identifiable intangibles including contract rights, excess of cost
over net assets acquired, leasehold rights and organization costs when
events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. The review includes an
assessment of industry factors, contract retentions, cash flow
projections and other factors the Company believes are relevant.
Contract rights
Contract rights represent the value assigned to management and
ancillary service contracts obtained by the Company. Management
contracts provide for a management fee in exchange for
management, marketing and development services provided to the
facilities. Ancillary service contracts are generally provided
for a fee per unit of service renedered. Contract rights are
being amortized over the term of the related contracts.
8
<PAGE>
PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 1999 AND 1998
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Excess of cost over net assets acquired.
The excess of cost over net assets acquired relates to the
acquisition of the Company's operating subsidiaries. The excess
of cost over net assets acquired are being amortized over their
lives of 15 to 20 years.
Organization costs
Organization costs incurred in connection with the acquistion of
formation of new business activities for the Company are being
amortized using the straight-line method over five years.
Income taxes
The Company employs the asset and liability method in accounting
for income taxes pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109 "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on
temporary differences between the financial reporting and tax bases
of assets and liabilities and net operating loss carryforwards, and
are measured using enacted tax rates and laws that are expected to
be in effect when the differences are reversed.
Earnings per share
The Company adopted Statement of Financial Accounting Standard No. 128
"Earnings per Share" ("SFAS 128") in 1997. All prior period earnings
per common share data have been restated to conform to the provisions
of this statement.
Basic and diluted loss per share is based upon the weighted average
number of common shares outstanding during the period, less preferred
dividends of $40,000 for each calendar quarter. Preferred dividends
in arrears at June 30,1999 were $790,000.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income", Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" and Statement of Financial
Accounting Standards No. 132 "Employers Disclosures About Pensions
and Other Past Retirement Benefits" in 1998. Adoption of these
statements had no material effects on the Company's financial
position, results of operations or cash flows.
Use of Estimates
The preparation of 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 liabilites at
the dates of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from these estimates.
Adjustment to Prior Period
In the first quarter the Company reported results of operations as a
net loss of $2,389,450. This amount included operating results for
Trinity (see Note 3) for the period of January 1,1999 to February 14,
1999 of a net loss of $617,129 which should not have been included.
The operating results of the Company, reflecting only operations of
Trinity from the purchase date of February
9
<PAGE>
15, 1999 forward, for the first quarter should have been reported as
a net loss of $1,772,321. In addition, the Company reflected total
net intangible assets of $3,341,010 as of March 31,1999 which should
have been reflected as $3,958,139. The effect of these prior period
adjustments is reflected as a change to the opening balance of
accumulated deficit for the quarter ended June 30, 1999.
10
<PAGE>
PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 1999 AND 1998
NOTE 2: GOING CONCERN
For the six months ended June 30, 1999, the Company reported a net
loss of $3,546,401. Recent operating losses reported by the Company
through June 30,1999 coupled with adverse corporate developments
have exhausted the Company's capital resources and had a material
adverse effect on short-term liquidity and the Company's ability to
satisfy its obligations.
At June 30, 1999, the Company reports a working capital deficit of
$23,764,747 compared with a working capital deficit of $15,021,996 at
December 31,1998. The working capital deficit position results
largely from the increase in reserve for doubtful notes and accounts
receivable during 1998 and the reclassification to current
liabilities of certain long-term debt obligations in default at
December 31,1998 and to date. The Company requires an infusion of
new capital, an increased business base and a higher level of
profitability to meet its short-term obligations.
During the fourth quarter of 1998, the Company experienced a change
of control, which included the introduction of new executive
management. New management plans include pro-actively dealing with
the Company's current financial and creditor issues while implementing
a growth plan for the future.
In light of the Company's current financial position, its inability
to independently meet its short-term corporate obligations, its need
to further capitalize existing operations and its dependency on
revenue growth to support continuing operations, its viability as
a going concern is uncertain. While the Company has experienced a
change in control together with an infusion of limited new working
capital, there can be no assurance that new management's efforts to
re-direct and re-capitalize the Company will be successful.
NOTE 3: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
On March 17, 1999, the Company consummated a non-cash purchase
transaction, effective February 15, 1999, pursuant to which it
acquired all of the common stock of Trinity Rehab, Inc., ("Trinity").
The purchase price paid for Trinity included the issuance of a long
term note in the principal amount of $1,495,000 as well as 100,000
shares of the Company's common stock, which shares were valued at
approximately $25,000. The acquisition of Trinity has resulted in
an increase in the Company's assets and liabilities as follows:
<TABLE>
<S> <C>
Accounts receivable and other current assets $2,297,804
Intangible assets representing contract rights and other 3,597,696
------------
Total Assets $5,895,500
------------
------------
Accounts payable and accrued expenses $1,167,726
Notes payable 1,505,194
Long-term debt 3,222,580
------------
Total Liabilities $5,895,500
------------
------------
</TABLE>
The pro forma effect of the Trinity acquisition on the Company's
operations for the prior year quarter ended March 31,1998 would have
been an increase in revenues by $1,569,217 and a decrease in the net
loss by $188,392 or $.01 per common share.
During interim periods, Phoenix Healthcare Corporation (the Company")
follows the accounting policies set forth in its Annual Report on
Form 10-K filed with the Securities and Exchange Commission. Users
of financial information produced in interim periods are encouraged
to refer to the footnotes contained in the Annual Report when
reviewing interim financial results.
11
<PAGE>
In management's opinion, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, the
results of operations, and the statements of cash flows of Phoenix
Healthcare Corporation for the interim periods.
NOTE 4: COMMITMENTS AND CONTINGENCIES
On January 1, 1999, in connection with the change in corporate
control, the Company entered into employment agreements with four
executive officers to succeed prior management. The employment
agreements, each for a period of five years, include aggregate
annual base compensation of $875,000 to be paid in the form of stock,
cash or a combination thereof. In addition, in connection with
entering into such employment contracts, each executive officer was
granted 500,000 shares of the Company's common stock. Change in
control agreements providing, among other things, termination
entitlements of up to two and one-half times base compensation were
also entered into with the new executive officers. During the
second quarter of 1999, two of the four executives resigned from
the Company. In connection with such resignations, the Company
issued an aggregate of 285,379 shares of Common Stock in full
settlement of all related employment obligations.
During 1998, the Company entered into an agreement with a third party
to assume its rights to manage three nursing facilities representing
391 beds located in the State of Massachusetts. While the Company
remains the primary manager of these facilities, it derives no
current management services revenue. The prior management
arrangement applicable to the Company had contemplated conversion
to a long-term lease position upon receipt by the Company of the
requisite regulatory approval for change in operators from the
State of Massachusetts. The Company abandoned its efforts to secure
such approval and, at the request of the property owner, allowed
for the introduction of the successor manager. The original
agreements between the Company and property owner involving these
facilities contemplated certain financial arrangements and the
assumption of certain financial obligations which the Company
maintains were largely contingent upon its securing the long term
leasehold position for the facilities. Legal action has been
initiated by the property owner with respect to alleged note
obligations aggregating up to approximately $2 million. The Company
has not recognized this liability in its financial statements at
June 30, 1999 and, moreover, believes there exists a right of
offset to any such claim resulting from notes and accounts
receivable due the Company from the subject facilities. Such
amounts exceed $1.5 million and were fully reserved for collection
by the Company at June 30, 1999. The Company does not believe that
the outcome of this matter will have an adverse material impact on
its financial position or results of operations.
The Company is a defendant in certain lawsuits involving third-party
creditors whose claims arise from transactions which occurred
under prior management. Management believes that it has
sufficiently reserved for these claims in its financial statements
at June 30, 1999. Management does not believe that the outcome of
these matters will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
In addition to the foregoing, the Company and its subsidiaries have
outstanding a number of other routine actions, as well as a number
of threatened actions involving their respective creditors, vendors,
customers, former employees and/or third parties. Some of them are
in the process of being settled, and the remainder of them are
being vigorously defended. Management does not believe that the
outcome of these matters will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
NOTE 5: BUSINESS ACQUISITION
On April 7, 1999 the Company consummated a purchase transaction
pursuant to which it acquired all of the issued and outstanding common
stock of Southland Medical Supplies, Inc. d/b/a Southland Medical
Supply ("Southland"). The Company acquired the shares for a purchase
price of $5,000. Immediately prior to the acquisition, Southland
entered into an accounts receivable financing program and received
financing in the amount of $3,750,000. Pursuant to the Stock
Purchase and Note Payoff Agreement, immediately following the
closing of the acquisition, Southland paid $2,450,000 to former
stockholders of Southland in full satisfaction of indebtedness to
these former stockholders in the amount of $4,395,460. In addition,
all former stockholders released Southland from any other
obligations by Southland to them. The acquisition of
12
<PAGE>
Southland generated goodwill, which is being amortized over a period
of 10 years. Southland, based in Knoxville, Tennessee, is a
distributor of medical supplies to hospitals, skilled nursing homes,
assisted living facilities and home care patients in 16 states. Shown
below is unaudited pro forma condensed consolidated balance sheet
information as of December 31, 1998 and unaudited pro forma
condensed consolidated operating information for the three month
period ended June 30, 1998.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31,
1998
<TABLE>
<CAPTION>
Historical
---------------------------
Phoenix Pro Forma Pro Forma
Healthcare Southland Adjustments Combined
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Current Assets 2,764,748 7,671,384 10,436,132
Property and Equipment, net 8,392,222 1,565,192 9,957,414
Goodwill, Intangible Assets
and Other Assets 823,942 850,590 102,022 (b) 1,776,554
Total Assets 11,980,912 10,087,166 102,022 22,170,100
--------------------------------------------------------------
--------------------------------------------------------------
Current Liabilities 17,786,744 8,364,060 26,150,804
Long-Term Debt and Capital
Lease Obligations 1,696,500 3,765,588 (1,945,460) (a) 3,516,628
Stockholders Equity (7,502,332) (2,042,482) 1,945,460 (a)
102,022 (b) (7,497,332)
Total Liabilities and
Stockholders Equity 11,980,912 10,087,166 102,022 22,170,100
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR
3 MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
--------------------------------------------------------------
Historical
---------------------------
Phoenix Pro Forma Pro Forma
Healthcare Southland Adjustments Combined
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue 8,203,605 6,298,665 14,502,270
Routine Operating Expenses 7,024,358 6,570,531 31,650 (c) 13,626,539
General and Administrative 431,656 973,621 1,405,277
Property and Capital Related
Expenses 1,123,233 224,845 1,348,078
Income from Operations
before Other Income (375,642) (1,470,332) (31,650) (c) (1,877,624)
Other Income (expense) 73,007 (11,349) 61,658
--------------------------------------------------------------
Net Loss (302,635) (1,481,681) (31,650) (1,815,966)
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
(a) To record the effect of debt forgiveness with the parent company
as outlined in the Stock Purchase and Note Payoff agreement
(b) To record goodwill on Southland in the amount of the net cost
over the asset value
(c) To reflect the additional amortization expense related to the
goodwill
13
<PAGE>
NOTE 6: SUBSEQUENT EVENTS
Effective on August 10, 1999, the Company entered into an agreement
with National Health Investors, Inc. ("NHI"), its largest creditor,
resulting in the divestiture of its New England based nursing home
operations and related management services. Specifically, the
Company has formally assigned its ownership, lease and management
interests held by OHI Corporation (d/b/a Oasis Healthcare), its
operating subsidiary in New England, to NHI. In connection with
this agreement, the Company is relieved of its direct debt
obligations in the amount of $9.8 million and loan guarantees
aggregating $35.8 million. As a result of this transaction, the
Company has secured a full release and indemnification from NHI with
regard to all capital debt and credit obligations associated with
nursing home operations. Accounting recognition for this transaction
has not been reflected in the Company's financial statements at
June 30, 1999 as its completion is conditioned upon the receipt of
regulatory and certain other third party approvals.
14
<PAGE>
Item 2 - Managements's Discussion and Analysis of Financial Condition and
Results of Operations
Business
Phoenix Healthcare Corporation (formerly Iatros Health Network, Inc.) is a
provider of post acute healthcare services primarily skilled nursing and
assisted living and ancillary health care services. The Company provides these
services through (9) nine long-term care facilities in Massachusetts and New
Hampshire, and Southland Medical Supply, Inc. ("Southland") a distributor of
medical supplies to hospitals, skilled nursing homes, assisted living
facilities and to home care patients in 16 states. In addition, the Company
operates Trinity Rehab, Inc. ("Trinity"), which provides comprehensive
rehabilitation therapy services through private pay contracts in Texas
and Oklahoma.
Business Strategy
Effective August 10, 1999, the Company entered into an agreement with
National Health Investors, Inc. ("NHI"), its largest secured creditor, to
divest of its nursing home operations. As part of this transaction, the
Company has secured a full release and settlement of all of its capital debt
and credit obligations aggregating $45.6 million and associated with nursing
home operations. Completion of this transaction represents a major element of
new management's strategic initiative and business strategy to restructure
and redirect its business operations. Having been successfully relieved of
the capital and operating burden relating to the nursing home operations,
management believes it can now more effectively pursue new capital resources
and growth opportunities. The Company intends to now aggressively pursue such
opportunities.
Results of Operations
The Company's consolidated financial statements reflect a net loss of
$1,774,080 for the quarter ended June 30, 1999, compared with a net loss of
$302,365 for the prior year quarter ended June 30, 1998. The increase in the
reported net loss results largely from initial operating losses associated
with the Company having established new ancillary service businesses in 1999.
Specifically, operations reported for the quarter ended June 30, 1999 include
a net loss of $639,380 associated with the operations of Trinity Rehab, Inc.
("Trinity") and a net loss of $1,091,325 associated with the operations of
Southland Medical Supplies, Inc. ("Southland"). The Trinity acquisition was
consummated on March 17, 1999 while the Southland acquisition was consummated
on April 7, 1999.
Consolidated revenues reported for the quarter ended June 30, 1999 totaling
$10,269,926 compares with $8,203,605 for the prior year quarter representing
an increase of $2,066,321 or 20.2%. The revenue increase related principally
to the increase in ancillary services revenue of $2,458,200 for the quarter.
Ancillary services revenue reported in 1999 is exclusively related to the
Company's acquisition of Trinity and Southland during the first and second
quarters of 1999, respectively.
Consolidated operating expenses for the quarter ended June 30, 1999 total
$10,853,240 compared with $7,456,014 for the prior year quarter representing
an increase of $3,397,226 or 45%. The reported increase in operating expenses
is primarily associated with ancillary services representing an increase of
$3,232,311 for the quarter and associated with current year business
acquisitions.
Consolidated revenues reported for the six months ended June 30, 1999
totaling $15,605,742 compares with $16,401,686 for the prior year period.
Components of operating revenue for 1999 and 1998 have remained consistent
with approximately 59% attributable to nursing home operations and 38%
attributable to ancillary services revenue. With the growth through purchase
acquisition of ancillary service companies in 1999, management expects that
ancillary services revenue will become an increasing component of operating
revenue substituting that which has been provided by nursing home operations.
15
<PAGE>
Consolidated operating expenses for the six months ended June 30, 1999
totaling $17,128,121 compares with $15,218,398 for the prior year period
reflecting an increase of $1,909,723 or 13%. This increase is primarily
attributable to ancillary services for the year to date period where related
operating expenses have increased $1,868,636 over the prior year period.
Nursing home operations for the three and six month periods ended June 30,
1999 have yielded operating income of $414,283 and $784,104 or 8% on related
revenues, respectively. For the three and six month periods ended June 30,
1998, nursing home operations report operating income of $814,354 or 16% and
$1,505,088 or 15% on related revenues, respectively. The significant decrease
in operating margins reported during 1999 reflect the increased operating
costs and revenue constraints being experienced by the nursing home industry
generally. In connection with its restructuring and redirection efforts, new
management of the Company has divested of its nursing home operations
division as well as related management and will focus on the growth and
development of its ancillary healthcare services. Management believes that
the separation agreement with its creditors associated with nursing home
operations will alleviate a material capital and operating burden that
otherwise constrains the Company's strategic growth and development efforts.
General and administrative expenses reported by the Company are exclusively
related to corporate expenses and related corporate overhead. For the six
month period ended June 30, 1999, total general and administrative expenses
of $822,420 include $603,846 representing professional fees. Professional
fees incurred during 1999 are principally legal expenses associated with
corporate litigation and settling various corporate obligations. For the six
month period ended June 30, 1998, general and administrative expenses totaled
$1,163,354, representing a decrease of $340,934. This reported decrease in
general and administrative expense reflects a decrease in executive
compensation over the prior year period. For 1999, there has been no cash
compensation paid to corporate executives represented by new management.
Property and capital related expenses reported for the three and six month
periods ended June 30, 1999 and 1998 are primarily associated with nursing
home operations and their related capital obligations. With the separation of
such operations, remaining operating costs will be largely limited to
interest expense associated with the Company's residual corporate obligations
and working capital associated with ongoing ancillary services. Interest
expense for the six month period ended June 30, 1999 of $758,059 is comprised
of $394,612 associated with nursing home operations and $363,447 associated
with ancillary services represented by Trinity and Southland. Interest
expenses reported for the prior year periods were comparably apportioned
between nursing operations and ancillary services. Property lease expense
reported for the 1999 and 1998 periods relate largely to facility lease
expense associated with nursing home properties. Property lease expense for
1999 includes $171,814 associated with ancillary services represented by
Southland commencing in the second quarter. Depreciation and amortization
expenses reported for the 1999 and 1998 periods have remained relatively
consistent. For the six month period ended June 30, 1999, total expense of
$380,338 includes property depreciation of $181,410 and amortization of
intangible assets totaling $198,928.
Ancillary services revenue for the six months ended June 30, 1999 total
$6,063,338 and is comprised of $1,803,002 and $4,260,336 relating to Trinity
and Southland operations, respectively. Associated operating expenses for
1999 total $7,483,376 and is comprised of $2,727,255 and $4,756,121 relating
to Trinity and Southland resulting in operating losses for the current period
of $924,253 and $495,785, respectively. The business acquisitions of
Trinity and Southland in 1999 represent transactions having a substantial
revenue base that were purchased by the Company for minimal capital. While
these companies have historically generated operating losses, management
believes that its efforts to recapitalize operations and introduce operating
efficiencies will ultimately yield profitability. The initial operating
losses reported by the Company during 1999 have yet to reflect the operating
initiatives that management has employed to stabilize and improve these
operations. Such initiatives include continuing efforts to effect staffing
and related payroll efficiencies, consolidation of redundant operating
overhead and general economies that are anticipated from continued growth
plans. This expected trend is already evidenced by Trinity operations where
the reported operating loss for the second quarter of 1999 has been reduced
by $639,380 compared with the first quarter of 1999. In addition,
16
<PAGE>
management efforts to secure more cost effective working capital sources to
support ancillary business operations is intended to result in a substantial
cost savings to the Company.
Net loss reported for the three and six month periods ended June 30, 1999
result largely from the initial operating losses associated with Trinity and
Southland. Notwithstanding such performance, management believes that its
successful efforts to stabilize and develop these operations over time will
yield favorable results. In light of continuing regulatory and market
influences challenging the healthcare industry, the Company intends to focus
its operating and growth efforts in a a more narrowed and concentrated
fashion, with no dependency on nursing home operations. This strategic
redirection of business is considered by management to be more risk averse,
requiring less demand for long-term capital and providing the Company with a
more competitive advantage in its market.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Note 2 to the Financial Statements, in light of the Company's
current financial position, its viability as a going concern is uncertain.
For the six months ended June 30, 1999, the Company reported a net loss of
$3,546,401. Recent operating losses reported by the Company through June 30,
1999 coupled with adverse corporate developments have exhausted the Company's
capital resources and had a material adverse effect on short-term liquidity
and the Company's ability to satisfy its obligations.
At June 30, 1999, the Company reports a working capital deficit of
$23,764,747 compared with a working capital deficit of $15,021,996 at
December 31, 1998. The working capital deficit position results largely from
the increase in reserve for doubtful notes and accounts receivable during
1998 and the reclassification to current liabilities of long-term debt
obligations in default at December 31,1998 and to date. The Company requires
an infusion of new capital, an increased business base and a higher level of
profitability to meet its short-term obligations.
Cash and cash equivalents at June 30, 1999 and December 31, 1998 totaled
$1,135,254 and $279,364, respectively, representing operating funds
associated with the Company's continuing operations. The substantial increase
in operating cash at June 30, 1999 includes $493,236 in corporate reserves
funded through Match, Inc. while the remainder relates primarily to the
nursing home operations. Restricted cash balances principally relate to loan
reserves associated with the Company's mortgage financing of two nursing
facilities. At June 30, 1999 and December 31, 1998, such reserve amounts
totaled $475,875 and $470,000, respectively.
Accounts receivable at June 30, 1999 of $8,138,725, representing 62% of total
current assets, is comprised of $2,401,707 relating to nursing operations;
$5,255,883 relating to ancillary services; and, $481,135 relating to
management services. Accounts receivable at December 31, 1998 of $2,470,416,
representing 89% of total current assets, is comprised of $2,187,499 relating
to nursing operations and $282,917 relating to management services. The
increase in accounts receivable at June 30, 1999 is attributable to the
ancillary accounts resulting from the acquisition of Trinity during the first
quarter of 1999 and Southland during the second quarter of 1999. Accounts
receivable as a percent of total current assets have decreased as a result of
the increase in inventory of medical supplies reported in the second quarter
of 1999 and relating to the Southland acquisition. Reported amounts of
accounts receivable for 1999 and 1998 are net of allowances for doubtful
accounts.
Notes payable, banks and other at June 30, 1999 totaled $14,179,474 and
includes notes payable to bank and financing institutions aggregating
$9,343,405 of which $1,121,077 relates to working capital financing
associated with nursing operations; $6,204,280 for working capital financing
associated with ancillary services and, $2,018,048 for working capital
advances provided through Match, Inc. for corporate purposes. Other current
note obligations at June 30, 1999 total $4,836,069 and include $2,291,069
representing corporate note obligations (primarily associated with judgment
creditors) and $2,545,000 representing corporate note obligations associated
with the Trinity acquisition. The increase in Notes payable, banks and other
from $4,840,931 at December 31, 1998 relates largely to increased working
capital and corporate obligations associated with new business acquisitions
represented by Trinity and Southland. In addition,
17
<PAGE>
increased funds provided through Match, Inc. during the second quarter were
utilized for working capital purposes and to settle selected corporate
creditor obligations.
Accounts payable at June 30, 1999 totaled $7,787,690 and includes $2,706,940
associated with nursing home operations; $4,682,119 associated with ancillary
services; and $398,631 associated with management services and corporate
accounts. Comparable amounts at December 31, 1998 totaled $3,214,549 and
include $1,167,596 associated with nursing operations; $1,396,399 associated
with ancillary services; $250,554 associated with management services; and,
$400,000 associated with corporate accounts. The increase in accounts payable
for ancillary services reported at June 30, 1999 relate to amounts associated
with the Trinity and Southland business acquisitions.
Accrued expenses, current portion of long-term debt and capital lease
obligations, and other current liabilities at June 30, 1999 totaled
$5,118,000 compared with $1,431,215 at December 31, 1998. For 1999,
significant components include $870,402 associated with nursing operations;
$2,851,001 associated with ancillary services; $323,508 associated with
management services; $400,000 associated with corporate obligations; and
accrued salaries and related expenses approximating $673,089. For 1998,
significant components include $721,608 associated with nursing operations;
$207,748 associated with management services; and, $288,360 in accrued
salaries and related costs. The increase in accrued expenses for ancillary
services reported at June 30, 1999 relate to amounts associated with the
Trinity and Southland business acquisitions.
At June 30, 1999 and December 31, 1998, the Company was in payment default on
$9,746,500 of mortgage debt associated with property obligations involving
nursing home operations. Effective on August 10, 1999, the Company entered
into a settlement agreement with the mortgage lender to convey its interests
in the related nursing facilities in exchange for a full release of its debt
obligations. This agreement and completion of the associated business
transaction is subject to regulatory and certain other third party approvals.
Having divested of its nursing home operations division and being relieved of
the associated operating and capital burden, management of the Company
believes that it is better positioned to pursue growth opportunities;
entertain prospects for new sources of capitalization to fund such growth;
and, more effectively settle corporate obligations remaining from prior
period operations.
Other Developments
JOHN NUVEEN & CO., INC.
On May 6, 1999, the "Company announced that it had engaged the Chicago-based
investment bank John Nuveen & Co, Inc. ("Nuveen") as its exclusive financial
advisor to provide financial advisory, investment banking and placement
services. Nuveen's Corporate Finance Group is advising the Company in
developing a general strategy for the continued growth of the Company;
advising and assisting the Company in private placements of debt and equity
intended to recapitalize the Company, and is assisting the Company in
considering other strategic alternatives to increase shareholder value.
OFFICER RESIGNATIONS
On May 14, 1999, Michael Seeliger resigned his position as Executive Vice
President of the Company.
Effective May 25, 1999, Albert Sousa resigned his position as Executive Vice
President and Secretary of the Company and as President of Trinity Rehab,
Inc. ("Trinity"), a wholly owned subsidiary of the Company. Mr. Sousa also
resigned his position as a member of the Board of Directors of the Company.
Mr. Lusk was appointed President of Trinity. Ms. Kathryn D. Fuller was
appointed Corporate Secretary in August 1999.
In connection with the departure of each Mr. Seeliger and Mr. Sousa, the
Company issued 137,349 and 148,030 shares of Common Stock in lieu of accrued
compensation, as provided in Mr. Seeliger's and Mr. Sousa's employment
agreements.
18
<PAGE>
ALTERNATIVE CARE (VOLUNTEER MEDICAL)
On February 17, 1999, the Company acquired certain assets of Alternative Care
Medical Services ("ACMS") located in Providence, Rhode Island (the "ACMS
Assets"). The consideration paid by the Company for this purchase was the
assumption of certain liabilities of ACMS. On that date, upon completion of
this transaction, the Company transferred all the ACMS assets and obligations
assumed thereunder to Volunteer Medical Acquisition Corp., a wholly owned
subsidiary of the Company ("Volunteer").
At the time of the transaction, it was believed that the ACMS Assets were
owned by Travel Nurse ("Travel Nurse"). Following the purchase of the ACMS
assets, and upon further investigation, it was determined that ACMS Assets
were in fact owned by Hospital Staffing of Rhode Island, Inc. ("HSS-RI"), a
subsidiary of HSSI. At the time of the transaction, HSS-RI was a debtor in
possession under Chapter 11 of Title 11 of the United States Code before the
United States Bankruptcy Court for the Southern District of Florida (the
"Bankruptcy Court"). HSS-RI has since converted to Chapter 7 liquidation and
a trustee has been appointed by the Bankruptcy Court.
Due to the belief that Travel Nurse owned ACMS assets, the Company did not
seek prior approval from the Bankruptcy Court. On May 3, 1999, the Bankruptcy
Court conducted a hearing in connection with the Trustee's request that the
business (the "Providence Facility") be turned over to the bankruptcy estate.
During the course of the hearing, the Company and the Trustee reached certain
agreements to accommodate the needs of the Trustee and to provide for
adequate protection of the Company's interests. Specifically, pursuant to the
court approved stipulation, the Bankruptcy Trustee agreed to temporarily
operate the Providence Facility. The Company has since abandoned its
interests in this business venture.
TRINITY REHAB, INC.
On March 17, 1999, the Company and Martha Louise Ashworth, the widow and the
independent executrix of the estate of George Ashworth, consummated a
transaction pursuant to which the Company acquired from Ms. Ashworth all the
outstanding shares of Trinity Rehab, Inc. ("Trinity"). In connection with the
transaction, the Company issued and delivered to Ms. Ashworth a promissory
note in the amount of approximately $1,495,000 payable in monthly
installments over a five-year period starting March 1, 1999, secured by a
pledge of the Trinity shares acquired by the Company in the transaction.
On July 20, 1999, Ms. Ashworth filed a suit against the Company and against
Mr. Lusk, individually, alleging that the Company had defaulted on its
promissory note obligation of $1,495,000. The Company intends to defend
against the claim and believes that it has sufficient defenses to succeed.
In connection with the purchase acquisition of Trinity, the Company assumed a
note obligation approximating $1,050,000. On July 23, 1999, Mr. Turley, as
the note holder, filed a suit alleging a breach of the promissory note. The
Company is current in its payments on the note, however, Mr. Turley claims
that, upon the acquisition of Trinity, the note became due and payable
immediately. The Company disagrees with Mr. Turley's claim and intends to
defend itself against the claim.
NHI SETTLEMENT AGREEMENT
On August 10, 1999, the Company entered into an agreement with National
Health Investors, Inc. ("NHI"), its largest creditor, for the full release
and settlement of $45.6 million of the Company's debt obligations.
As part of the settlement, the Company agreed to convey to NHI nine long-term
care facilities that the Company operates in New England through its
subsidiary Oasis Healthcare and that are the existing collateral for the
outstanding loan obligations. This agreement has been effected through the
formal assignment to NHI of the Company's ownership, leasehold and management
interests
19
<PAGE>
in the properties. Completion of the associated business transaction is
subject to securing regulatory and certain other third party approvals.
SETTLEMENT OF OTHER OUTSTANDING DEBTS AND OBLIGATIONS
As described in Part II, Item 2, "Changes in Securities", during the second
quarter, the Company reached a settlement with Neuman Distributors, Inc.,
Ceneur Services, Inc. and Harkleroad & Hermance, P.C.
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue stems from the way dates are recorded and
computed in many computer systems because such programs use only the last two
digits to indicate the year. If uncorrected, these computer programs will be
unable to interpret dates beyond the year 1999, which could cause computer
system failure or other computer errors, thereby disrupting operations. The
Company understands the importance of being prepared for Y2K. The Company's
objective is to ensure an uninterrupted transition into Y2K and is taking
steps to assure the achievement of that goal. The scope of the Company's Y2K
readiness efforts includes (1) evaluating information technology such as
software and hardware, (2) investigating other systems, which may include
embedded technology such as microcontrollers contained in certain lab
equipment, environmental and safety systems, and facilities and utilities,
and (3) assessing the readiness of key third parties, including suppliers,
customers and key financial institutions.
The Company's efforts involve inventorying, assessing and prioritizing those
items which have Y2K implications; remediating (repairs, replacing or
upgrading) non-compliant items; and testing items with major exposure to
ensure compliance and developing contingency plans to minimize potential
business interruptions. With regard to the Company's information technology
systems, hardware, equipment and instrumentation, the Company has identified
mission critical and non-critical items and is in the process of updating
and/or replacing items that are non-compliant. The Company believes that it
should be able to substantially complete implementation of critical aspects
of its Y2K plan prior to the commencement of Y2K. Because the Company has
relied primarily on "off-the-shelf" software for its information technology
needs and because much of the hardware, equipment and instrumentation is
currently compliant, the Company does not anticipate that the costs for
internal remediation efforts will be significant.
The Company does not currently have an Y2K contingency plan established. The
Company believes that its most likely worst case scenario would be delayed
payments from reimbursers and delays in products or services necessary for
the operation of the Company's facilities. To mitigate this risk, the Company
plans, among other things, to stock extra inventory and supplies. The Company
does not currently have available data to predict the impact of delayed
payments on its business operations. Should there be any material delays
caused by Y2K issues, the Company anticipates that the governmental entities
will make estimated payments.
With regard to the Company's Y2K readiness plan, there can be no assurances
that: 1) the Company will be able to identify all aspects of its business
that are subject to Y2K problems, including issues of its customers or
suppliers, 2) the Company's software vendors, third parties and others will
be correct in their assertions that they are Y2K ready, 3) the Company's
estimate of the cost of Y2K readiness will prove ultimately to be accurate,
and 4) the Company will be able to successfully address its Y2K issues and
that this could result in interruptions in, or failures of, certain normal
business activities or operations that may have a material adverse effect.
The Company does not separately track the internal costs of its Y2K
compliance efforts and therefore these costs are unknown. As of June 30,
1999, the Company has incurred expenses of approximately $25,000 to replace,
upgrade or repair systems and/or equipment that were non-compliant. The
Company expects any future costs toward these efforts should not exceed
$100,000. The Company believes that its remediation efforts are substantially
completed. Testing of certain business critical items is expected to be
completed in the third quarter of 1999.
The above contains forward looking statements including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequate resources,
20
<PAGE>
that are made pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Readers are cautioned that
forward-looking statements contained in the Y2K disclosure should be read in
conjunction with the following disclosure of the Company:
The costs of the project and the dates on which the Company plans to complete
the necessary Y2K modifications are based on Management's best estimates,
which were derived utilizing numerous assumptions of future events including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personal trained in this area, the ability to locate
and correct all relevant computer codes, and the ability of the Company's
significant suppliers, customers and others with which it conducts business,
including Federal and state entities.
21
<PAGE>
PART II
ITEM 1: LEGAL PROCEEDINGS
1. LEMIRE ENTERPRISES, INC. ET AL V. IATROS HEALTH NETWORK, INC. ET AL, in
the Superior Court of the State of New Hampshire, Hillsborough.
In December 1998, the Company was named as a defendant in a collection
case involving a payment guarantee it had provided for certain seller
note obligations associated with four long-term care facilities for
which it had secured a long-term management contract commencing in 1996.
The owner of the properties has defaulted on the payment of such note
obligations, which aggregate approximately $1,500,000, and, as a result,
the note holder has sought relief against the Company's payment
guarantee. During August 1999, the parties reached a tentative
settlement of this matter. The settlement contemplates a payment by the
Company of $125,000 together with issue of 750,000 shares of the
Company's Common Stock.
2. SCOTT SCHUSTER ET AL. V. IATROS HEALTH NETWORK, INC. AND OHI
CORPORATION, filed in the United States District Court for the District
of Massachusetts.
This matter involving a former executive's material claims for
compensation and damages was heard at a jury trial conducted in June
1999. During the course of the trial, the presiding judge made rulings
on certain claims of the parties while certain other matters were
submitted to the jury. The trial resulted in certain claims being
awarded to the plantiff while the Company prevailed on certain of its
counterclaims. A net judgment awarded to the plaintiff was not material
and has not yet been officially entered on the docket of the court.
The Company and OHI intend to move for entry of judgment as a matter of
law, seeking to dismiss claims for any payment to the plaintiff. If
necessary, the Company and OHI intend to appeal from selected portions
of the judgement.
ITEM 2: CHANGES IN SECURITIES
Effective April 30, 1999, the Company issued 1,200,000 shares of Common
Stock to Neuman Distributors, Inc. ("Neuman") in full satisfaction of a
$363,921.23 judgment held by Neuman against the Company. The Common
Stock was issued pursuant to an exemption under the Securities Act of
1933, as amended.
Pursuant to a settlement agreement, dated June 25, 1999, among the
Company and its subsidiaries, Ceneur Services, Inc. ("Cenuer") and
Harkleroad & Hermance, P.C. ("H&H"), the Company issued 333,333 shares
of Common Stock to Ceneur and 666,667 shares of Common Stock to H&H. In
addition, as part of the settlement agreement, the Company executed a
note agreement in the principal sum amount of $600,000.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
At June 30, 1999 and to date, the Company is in payment default on
senior debt obligations totaling $12.8 million. Of this amount, $9.8
million is associated with nursing home operations and has been
tentatively settled resulting in a release of the Company's associated
payment obligations. In addition, two note obligations totaling $3 million
are in default for interest payments which aggregate arrearage through
June 30, 1999 approximates $187,500. These note obligations include one
in the amount of approximately $1.5 million payable to Key Healthcare
Finance representing a working capital loan obligation and the other in
the amount of approximately $1.5 million payable to the Seller in
connection with the Trinity acquisition. The Company is attempting to
settle these two note obligations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on April 29, 1999,
Ronald E. Lusk, Robert L. Woodson, III, Albert Sousa and Bart A. Houston
were elected to serve as members of the Company's Board of Directors. In
addition, the following proposals were approved by the margins indicated.
22
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES VOTES FOR VOTES AGAINST ABSTAIN BROKER NON-VOTES
<S> <C> <C> <C> <C>
1. Approval of an amendment 17,393,243 994,037 84,125 --
to the Company's Restated
Certificate of Incorporation
to increase the number of
authorized shares of
Common Stock from
25,000,000 to 50,000.
2. Approval of an amendment 18,067,187 68,716 34,535 300,967
to the Company's Restated
Certificate of Incorporation
to change the name of the
Company to Phoenix
Healthcare Corporation.
3. Approval of the Company's 8,431,377 556,419 475,982 9,007,627
1999 Stock Option Plan.
4. Approval of the Company's 8,648,632 421,114 394,032 9,007,627
Employee Stock Purchase
Plan.
5. Ratification of the 18,185,803 196,087 89,515 --
appointment of Weaver
and Tidwell, L.L.P. as
independent auditors for
the Company.
</TABLE>
ITEM 5: OTHER INFORMATION
Nothing to report.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Date Schedule
(b) Reports on Form 8-K
The Company filed the following current reports on Form 8-K
during the second Quarter of 1999:
DATE ITEMS REPORTED
---- --------------
4/22/99 Report of Acquisition or Disposition of
Assets
5/17/99 Amended Report of Acquisition or
Disposition of Assets
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX HEALTHCARE CORPORATION
August 16, 1999
By: /s/ RONALD LUSK
--------------------------------------
Ronald Lusk, Chairman of the Board and
Chief Executive Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
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