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 September 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 of I.R.S. Employer Identification No.
incorporation of organization)
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. ____ YES __X__ NO
As of November 12, 1999, there were 27,440,337 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.
2
<PAGE>
PHOENIX HEALTHCARE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 4
September 30, 1999 and December 31, 1998
Consolidated Statements of Operations for 5
the periods ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows for 6
the nine months ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 17
3
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
ASSETS 1999 1998
------------------------ -----------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................................... $ 148,712 $ 279,364
Accounts receivable, net.................................................... 5,688,210 470,416
Inventory................................................................... 2,662,852 14,968
Prepaid expenses and other current assets................................... 71,712 -
------------ ------------
Total current assets......................................................... 8,571,486 764,748
PROPERTY AND EQUIPMENT, net................................................... 1,057,661 200,000
OTHER ASSETS
Intangible assets, net...................................................... 2,442,353 347,753
Net long-term assets of discontinued operations............................. - 6,971,911
------------ ------------
2,442,353 7,319,664
------------ ------------
TOTAL ASSETS.................................................................. $ 12,571,500 $ 8,284,412
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1999 1998
------------------------ -----------------------
CURRENT LIABILITIES
Notes payable, banks and other.............................................. $ 4,564,137 $ 3,359,431
Accounts payable............................................................ 4,458,802 1,214,597
Due to Stockholder.......................................................... 1,059,539 -
Accrued expenses and other current liabilities.............................. 4,973,858 267,716
Net current liabilities of discontinued operations.......................... 6,837,513 10,945,000
------------ ------------
Total current liabilities................................................... 21,893,849 15,786,244
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; 27,440,337
and 20,969,958 issued and outstanding in 1999 and 1998, respectively........ 27,440 20,970
Additional Paid-In Capital.................................................. 37,327,182 36,059,867
Accumulated Deficit......................................................... (46,677,604) (43,583,802)
------------ ------------
(9,322,349) (7,502,332)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).......................... $ 12,571,500 $ 8,284,412
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(unaudited) (unaudited)
----------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Operating revenue.......................................... $ 3,124,963 $ 1,271,805 $ 9,188,301 $ 7,541,344
Operating expenses
Ancillary services....................................... 3,507,216 1,563,986 10,990,592 6,979,745
General and administrative............................... 502,894 232,357 1,325,314 1,395,711
Interest expense......................................... 439,251 37,140 802,698 403,068
Property lease expense................................... 96,247 29,405 268,061 198,981
Depreciation and amortization expense.................... 138,220 33,897 518,558 320,219
------------------ --------------- --------------- -----------------
4,683,828 1,896,785 13,905,223 9,297,724
------------------ --------------- --------------- -----------------
Income (loss) from continuing operations before other income
(expense) and discontinued operations ................... (1,558,865) (624,980) (4,716,922) (1,756,380)
Other income (expense)
Write down of intangible assets.......................... - (897,578) - (897,578)
Interest income and other income (expense) ............ 59,410 36,881 (28,985) 160,201
------------------ --------------- --------------- -----------------
59,410 (860,697) (28,985) (737,377)
------------------ --------------- --------------- -----------------
Income (loss) from continuing operations before discontinued
operations .............................................. (1,499,455) (1,485,677) (4,745,907) (2,493,757)
Discontinued operations....................................
Income from discontinued operations...................... 480,226 217,857 180,277 626,875
Net gain on disposition of property interests and
settlement of corporate obligations...................... 1,471,828 - 1,471,828 -
------------------ --------------- --------------- -----------------
1,952,054 217,857 1,652,105 626,875
Net Income (Loss) ........................................ $ 452,599 $ (1,267,820) $ (3,093,802) $ (1,866,882)
================== =============== =============== =================
Basic and diluted loss per share
Continuing operation................................... $ (.06) $ (.07) $ (.20) $ (.12)
Discontinued operations................................ .07 .01 .07 .03
------------------ --------------- --------------- -----------------
Loss per Common Shares..................................... $ .01 $ (.06) $ (.13) $ (.09)
================== =============== =============== =================
Weighted average number of shares of
common stock and equivalents outstanding............... 27,440,337 20,869,958 24,564,613 20,869,958
================== =============== =============== =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net loss..................................................................... $ (3,093,802) $ (1,866,862)
Adjustments to reconcile net loss to net cash provided (utilized) by operating
activities:
Depreciation and amortization................................................ 518,558 320,219
Provision for doubtful accounts receivable................................... - 973,668
Write down of intangible assets.............................................. - 897,578
Net gain on disposition of property, interest and settlement of corporate
obligations.................................................................. (1,471,828)
Income from discontinued operations (180,277) (626,875)
Changes in:
Accounts receivable........................................................... (5,217,794) 2,410,003
Notes and loans payable....................................................... 2,264,245 273,515
Inventory..................................................................... (2,647,884) 605,094
Prepaid expenses and other.................................................... (71,712) (924,813)
Accounts payable.............................................................. 3,244,205 (999,291)
Accrued expenses and other.................................................... 6,906,142 (1,855,964)
----------------------- ---------------------
Net cash provided (utilized) by operating activities.......................... 249,853 (793,728)
----------------------- ---------------------
INVESTING ACTIVITIES
Purchase of property and equipment........................................... (250,000) (429,392)
----------------------- ---------------------
Net cash utilized by investing activities.................................... (250,000) (429,392)
----------------------- ---------------------
FINANCING ACTIVITIES
Net proceeds (reduction) of long-term debt.................................... (148,565) 1,202,041
Net cash provided (utilized) by financing activities.......................... (148,565) 1,202,041
----------------------- ---------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (130,652) (21,079)
Cash and cash equivalents, beginning of period................................ 279,364 90,696
----------------------- ---------------------
Cash and cash equivalents, end of period...................................... $ 148,712 $ 69,617
======================= =====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During interim periods, Phoenix Healthcare Corporation 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.
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.
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. The Company operates
Trinity Rehab, Inc. ("Trinity"), which provides comprehensive
rehabilitation therapy services through private pay contracts in Texas
and Oklahoma. In addition, the Company operates Southland Medical
Supply, Inc. based in Knoxvillle, Tennessee, a distributor of medical
supplies to hospitals, skilled nursing homes, assisted living
facilities and to home care patients in sixteen states.
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 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
Operating revenue is comprised of ancillary services revenue which is
reported at the estimated net realizable amounts due from residents,
third party payors, and others. Certain 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.
7
<PAGE>
PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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.
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:
Leasehold improvements................................ 3-10 Years
Property and equipment held under capital leases......Life of lease
Equipment............................................. 5 Years
Furniture and fixtures................................ 3-7 Years
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, 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.
8
<PAGE>
PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Contract rights
Contract rights represent the value assigned to ancillary
service contracts obtained by the Company. Ancillary service
contracts are generally provided for a fee per unit of service
rendered. Contract rights are being amortized over the term of
the related contracts.
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 is being amortized
over their lives of 15 to 20 years.
Organization costs
Organization costs incurred in connection with the acquisition
or 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
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 September 30, 1999
were $830,000.
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 liabilities 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.
9
<PAGE>
PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 2: GOING CONCERN
For the nine months ended September 30, 1999, the Company reported a
net loss of $3,093,802. Recent operating losses reported by the Company
through September 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 September 30, 1999, the Company reports a working capital deficit of
$12,822,363 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.
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.
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 total business assets represented by this purchase
transaction totaled $5,895,500.
During the third quarter ended September 30, 1999, the Company
converted approximately $850,000 of long-term debt associated with
Trinity operations to equity through the issuance of 3,200,000 shares
of the Company's Common Stock.
The pro forma effect of the Trinity acquisition on the Company's
operations for the prior quarter and nine months ended September
30, 1998 would have been an increase in revenues by $1,369,217 and
$4,804,708; an increase in the net loss by $21,169 and $45,378,
respectively.
NOTE 4: COMMITMENTS AND CONTINGENCIES
The Company is a defendant in certain lawsuits involving third-party
creditors whose claims arise from transactions, which largely occurred
under prior management. Management believes that it has sufficiently
reserved for these claims in its financial statements at September 30,
1999.
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 other third parties. Some of them
are in the process of being settled, while others are being vigorously
defended.
10
<PAGE>
PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 1999 AND 1998
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 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. The total business assets represented by
this purchase transaction totaled approximately $10,100,000.
The pro forma effect of the Southland acquisition on the Company's
operations for the prior quarter and nine months ended September
30, 1998 would have been an increase in revenues by $6,446,628 and
$19,370,850; an increase in the net loss by $141,739 and $1,639,954
or $.0 and $.08 per common share, respectively.
NOTE 6: DISCONTINUED OPERATIONS
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. The
discontinued operations reported during 1999 result exclusively from
this transaction.
Net long-term assets of discontinued operations of $6,971,911 as
reported at December 31, 1998, includes property and equipment of
$8,192,222 other assets of $476,189 less long-term debt of $1,696,500.
Net current liabilities of discontinued operations of $10,945,000
reported at December 31, 1998, includes long-term debt in technical
default of $8,300,000 plus net working capital accounts of $2,645,000.
Net current liabilities of discontinued operations of $6,837,513 is
comprised of notes payable, bank and other of $3,500,000, and other
net working capital accounts of $3,337,513.
11
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
Business
Phoenix Healthcare Corporation (formerly Iatros Health Network, Inc.)
is a provider of ancillary health care services. The Company provides
these services through Southland Medical Supply, Inc. ("Southland") a
distributor of medical supplies to hospitals, skilled nursing homes,
assisted living facilities and to home care patients in sixteen 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
The Company's strategy is to be a low cost provider of high quality
services in selected markets in order to address market demands created
by ongoing changes in the health care delivery system, changes in
patient demographics, and pressures to contain costs of delivering
care. The Company intends to further concentrate its growth and
development efforts towards providing ancillary services to the
healthcare industry.
Results of Operations
The Company's consolidated financial statements reflect a loss from
continuing operations of $1,499,455 for the quarter ended September 30,
1999, compared with a net loss of $1,485,677 for the prior year quarter
ended September 30, 1998. The current period 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 September 30, 1999 include a net loss of
$140,608 associated with the operations of Trinity Rehab, Inc.
("Trinity") and a net loss of $814,075 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 form continuing operations reported for the
quarter ended September 30, 1999 totaling $3,124,963 compares with
$1,271,805 for the prior year quarter representing an increase of
$1,853,158 or 146 %. This revenue increase relates exclusively to the
Company's acquisition of Trinity and Southland during the first and
second quarters of 1999, respectively. Operating revenue associated
with Trinity and Southland for the current quarter totaled $964,144 and
$2,160,819 , respectively.
Consolidated operating expenses form continuing operations for the
quarter ended September 30, 1999 total $4,683,828 compared with
$1,896,785 for the prior year quarter representing an increase of
$2,787,043 or 147%. The reported increase in operating expenses is
primarily associated with ancillary services representing an increase
of $1,943,230 for the quarter and associated with current year business
acquisitions. Operating expenses associated with Trinity and Southland
for the current quarter totaled $1,024,097 and $2,483,119,
respectively.
Consolidated revenues from continuing operations reported for the nine
months ended September 30, 1999 totaling $9,188,301 compares with
$7,541,344 for the prior year nine month period representing an
increase of $1,646,957 or 22%. Operating expenses associated with
Trinity and Southland for the nine-month period totaled $2,733,115 and
$6,421,155, respectively
Consolidated operating expenses from continuing operations for the nine
months ended September 30, 1999 totaling $13,905,223 compares with
$9,927,724 for the prior year period reflecting an increase of
$4,607,499 or 50%. This increase is primarily attributable to ancillary
services for the year to date period where related operating expenses
have increased $4,010,847 over the prior year period. Operating
expenses associated with Trinity and Southland for the current
nine-month period totaled $3,673,524 and $7,239,240, respectively.
12
<PAGE>
General and administrative expenses reported by the Company are
exclusively related to corporate expenses and related corporate
overhead. For the quarter ended September 30, 1999, total general and
administrative expenses of $502,894 include $389,662 representing legal
and professional fees. For the nine month period ended September 30,
1998, general and administrative expenses totaled $1,325,314 of which
$993,508 was related to legal and professional fees. Professional fees
incurred during 1999 are principally legal expenses associated with
corporate litigation and settling various corporate obligations. For
1999, there has been no cash compensation paid to corporate executives.
Interest expense reported for the quarter and nine months ended
September 30, 1999 includes amounts associated with Southland, Trinity
and Corporate debt obligations. For the current quarter, interest
expense included $316,718, $80,655, and $41,878 for Southland, Trinity
and Corporate debt obligations, respectively. For the current
nine-month period, interest expense included $497,506, $263,314, and
$41,878 for Southland, Trinity and Corporate debt obligations,
respectively. For 1998, reported interest expense is exclusively
related to Corporate debt obligations.
Property lease expense reported for the current quarter and nine month
period ended September 30, 1999 includes amounts associated with the
Southland operations in the amounts of $138,220 and $310,034,
respectively. Other amounts reported for 1999 and 1998 relate to lease
expense for the Company's corporate offices.
As described in Note 6 to the financial statements, the Company
discontinued its nursing home and management services operations during
the third quarter of 1999. In connection with this transaction, the
Company recognized a net gain in the amount of $1,471,828 resulting
from settling corporate obligations related to the discontinued
operations. Among these, a note obligation in the principal amount of
approximately $1,500,000 payable to a secured creditor was forgiven.
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 nine months ended September 30, 1999, the Company reported a
net loss of $3,093,802. Recent operating losses reported by the Company
through September 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 September 30, 1999, the Company reports a working capital deficit of
$12,822,363 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.
Accounts receivable at September 30, 1999 of $5,688,210 representing
66% of total current assets, is comprised of $2,314,223 and $3,373,987
relating to the operations of Trinity and Southland, respectively. The
increase in accounts receivable at September 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.
13
<PAGE>
Notes payable, banks and other at September 30, 1999 totaled $4,564,137
representing working capital financing associated with Trinity and
Southland in the amounts of $1,517,320 and 3,046,817, respectively. The
increase in Notes payable, banks and other from $3,359,431 at December
31, 1998 relates largely to the increased working capital and
obligations associated with new business acquisitions represented by
Trinity and Southland.
Accounts payable at September 30, 1999 totaled $4,458,802 and includes
$469,314 associated with Trinity operations, $3,697,733 associated with
Southland operations and $291,755 representing corporate accounts
payable. Comparable amounts at December 31, 1998 totaled $1,214,597.
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 and other current liabilities at September 30, 1999
totaled $4,973,858 compared with $267,716 at December 31, 1998. For
1999, significant components include note obligations of $2,545,000
associated with the Trinity purchase obligations, accrued expenses and
equipment lease obligations totaling $1,761,868 and associated with
Southland operations, and other accrued expenses totaling $666,990. For
1998, reported amounts represent accrued corporate expenses only.
At 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 release of its debt
obligations. The residual accounts associated with these discontinued
operations resulted in net current liabilities totaling $6,387,513 at
September 30, 1999. The principal components of these liabilities
include notes payable to secured and judgment creditors totaling
$4,030,000 and net working capital accounts of $2,337,513.
Due to Stockholder at September 30, 1999 of $1,059,539, reflects
capital advances received by the Company from Match, Inc. Advances have
been used by the Company to satisfy corporate obligations.
Other Developments
Gerard Kauder Mattison & Co., Inc.
On November 8, 1999, the ("Company") announced that it had established
a new investment banking relationship. The Company engaged the New York
headquartered investment bank Gerard Kauder Mattison & Co, Inc.
("Gerard") as its exclusive financial advisor to provide financial
advisory, investment banking and placement services. Gerard'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
re-capitalize the Company, and is assisting the Company in considering
other strategic alternatives to increase shareholder value.
14
<PAGE>
NHI Settlement Agreement - Discontinued Operations
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 direct debt obligations in the amount of $9.8
million and a loan guarantee aggregating $35.8 million.
As part of the settlement, the Company agreed to convey to NHI nine
long-term care facilities that the Company operated in New England
through its subsidiary Oasis Healthcare and that served as collateral
for the outstanding loan obligations. This agreement was effected
through the formal assignment to NHI of the Company's ownership,
leasehold and management interests in the properties.
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.
15
<PAGE>
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 to
date, 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 was substantially 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, 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 personnel
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.
16
<PAGE>
Part II. Other Information
Item 1: Legal Proceedings
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.
The purchase acquisition of Trinity included 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. Trinity
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.
Item 2: Changes In Securities and Use of Proceeds
During the third quarter ended September 30, 1999, the Company
converted approximately $850,000 of long-term debt associated
with Trinity operations to equity through the issuance of
3,200,000 shares of the Company's Common Stock.
Item 3: Defaults Upon Senior Securities
At September 30, 1999 and to date, the Company is in payment
default on senior debt obligations in the principal amount
totaling approximately $4.0 million. The interest payment
arrearage through September 30, 1999 for senior securities
approximates $300,000.
Item 4: Submission Of Matters To A Vote Of Security Holders
Nothing to report
Item 5: Other Information
Nothing to report.
Item 6: Exhibits And Reports On Form 8-K
(a) Exhibits
27 Financial Data Schedule
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 HEALTHCARE CORPORATION
November 12, 1999
By: /s/ Ronald Lusk
Ronald Lusk, Chairman of the Board and
Chief Executive Officer
17
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