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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-20354
IATROS HEALTH NETWORK, INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 23-2596710
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) 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)
11910 Greenville Avenue
Suite 300
Dallas, TX 75243
______________________________________________
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and no disclosure will be
contained to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
As of March 18, 1999, the aggregate market value of the Registrant's Common
Stock held by non-affiliates was $5,526,384 based upon the closing price of $.30
on March 18, 1999. On that date, 21,069,958 shares of the Registrant's Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Registrant's Annual Meeting
of Shareholders scheduled to be held on April 29, 1999 are incorporated by
reference into Part III of this report.
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FORWARD LOOKING STATEMENTS
THIS FORM 10-K 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.
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TABLE OF CONTENTS
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Part I
Item 1. Business................................................................................. 1
General Overview......................................................................... 1
Business Strategy........................................................................ 1
Industry Background...................................................................... 2
Business................................................................................. 3
Corporate Developments/Significant Transactions.......................................... 4
Sources of Revenue....................................................................... 6
Competition.............................................................................. 7
Human Resources.......................................................................... 7
Facilities & Services.................................................................... 8
Marketing................................................................................ 9
Government Regulation.................................................................... 9
Medicare and Medicaid
Balance Budget Act
Fraud and Abuse and Anti-Kickback Laws................................................... 13
Compliance with Environmental Laws....................................................... 14
Item 2. Properties............................................................................... 14
Item 3. Legal Proceedings........................................................................ 14
Item 4. Submission of Matters to Vote of Security Holders........................................ 15
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 16
Market Information....................................................................... 16
Dividends................................................................................ 16
Item 6. Selected Financial Data.................................................................. 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation..... 19
Year 2000 Compliance..................................................................... 26
Effects of Inflation..................................................................... 28
New Accounting Standards................................................................. 28
Item 8. Financial Statements and Supplementary data.............................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 28
Part III
Item 10. Directors and Executive Officers of the Registrant....................................... 29
Item 11. Executive Compensation................................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 29
Item 13. Certain Relationships and Related Transactions........................................... 29
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K........................ 29
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
BUSINESS BACKGROUND
Iatros Health Network, Inc. (formerly Gracecare Health Systems, Inc.) is a
Delaware corporation, incorporated in June 1988 (the "Company") which completed
its initial public offering in April, 1992. The Company's initial business
activities were concentrated in providing health care services for post acute
ventilator dependent and medically complex patients residing in long-term care
nursing facilities.
Commencing in July 1994, the prior management of the Company redirected
operations by pursuing development, management and ancillary service
opportunities involving unrelated long-term care facilities, while discontinuing
operations involving specialized programs.
Commencing in 1997, the Company began to develop long-term care operating
and ancillary service opportunities.
During the 4(th) quarter of fiscal 1998, Match, Inc., a private company
controlled by Ronald E. Lusk acquired all of the outstanding shares of the
Company's Series A Senior Convertible Preferred Stock from the former holder of
such stock. Former management resigned making way for Mr. Lusk and a new
management team to take control of the Company, which change in control included
the appointment of new directors for the Company. (SEE, CORPORATE
DEVELOPMENTS/SIGNIFICANT TRANSACTIONS)
Continuing business activities of the Company include the operating of
long-term care facilities, the provision of rehabilitation therapy services, and
private duty staffing services. (SEE, CORPORATE DEVELOPMENT/SIGNIFICANT
TRANSACTIONS)
The Company's strategy is to: (1) expand the Company's ancillary service
businesses, rehabilitation therapy business and private duty staffing services,
(2) introduce new lines of business such as a medical supply business,
institutional pharmacy, DME and IV therapy services to complement existing
services, (3) continue to grow through selective acquisitions, (4) form
strategic alliances with other health care providers, hospitals, long-term care
operators and physicians, and (5) expand the range of services it offers its
patients directly, rather than contract with third party providers, through the
acquisition or development of service companies.
The Company's corporate offices are located at 4514 Travis Street, Suite 330
in Dallas, Texas 75205, having been relocated from Atlanta, Georgia during the
fourth quarter of 1998 in connection with the aforementioned change in corporate
control. (SEE, CORPORATE DEVELOPMENTS/SIGNIFICANT TRANSACTIONS)
BUSINESS STRATEGY
The Company's principal objective is to provide a full range of health care
services in order to address market demands created by ongoing changes in the
health care delivery system, changes in patient demographics, and pressures to
contain the cost of delivering care. In order to take advantage of the growth in
the health care services industry, the Company's strategy is to:
EXPAND AND INTEGRATE HEALTH CARE SERVICES OFFERED
The Company intends to further diversify the ancillary health care services
it offers. Specifically, during the 1(st) quarter of fiscal 1999, the Company
acquired Trinity Rehab, Inc. ("Trinity") an all private pay rehabilitation
therapy company that operates in Texas and Oklahoma. In addition, the Company
expanded the services it provides with the acquisition of a private duty
staffing service, operated by its subsidiary, Volunteer Medical Acquisition
Corporation ("Volunteer Medical"), (see, Corporate Developments/Significant
Transactions).
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CROSS SELLING BROAD SERVICE OFFERING
The Company intends to cross-sell the variety of services and products
provided by its business units. The Company will begin to market the healthcare
services it provides to existing and newly acquired operations, as well as to
health care providers with which it currently does business.
CONCENTRATE LONG-TERM CARE OPERATIONS IN TARGETING GEOGRAPHIC AREAS
To realize operating efficiencies and growth opportunities, the Company
intends to continue to concentrate its long-term care operations in the New
England region of the United States. The Company believes that concentration of
its long-term care facilities within selected geographic areas (a) provides a
platform from which it can introduce and expand its ancillary services, (b)
enhances the development of stronger local referral sources through concentrated
marketing efforts, and (c) facilitates the establishment of effective working
relationships with regulatory and legislative authorities in the states in which
the Company operates long-term care facilities. This is consistent with the
Company's philosophy that long-term care is a localized and market sensitive
business.
EXPAND THROUGH ACQUISITION
The Company intends to expand its operations through selective acquisition
in targeted geographic areas of providers of ancillary health care services and
products and long-term care facilities. Management believes such acquisitions
provide opportunities to realize operating efficiencies through (a) margin
improvement from enhanced utilization of rehabilitation therapy services and
other health care services offerings, (b) expansion and/or introduction of new
services and businesses such as institutional pharmacy services, (c) potential
to increase business by providing additional product offerings, and (d)
potential for seizing economies of scale with respect to suppliers and
purchasing programs.
DEVELOP REHABILITATION NETWORKS
Iatros intends to further develop rehabilitation networks by targeting
geographic locations where regional coverage, combined with the ability to
provide additional services in concert with existing contracts and facilities
will strengthen its operating position.
EXPAND PRIVATE DUTY STAFFING SERVICES
The Company's strategy is to expand its newly acquired private duty staffing
business to take advantage of healthcare payors' increased focus on having
healthcare provided in the lowest-cost setting possible and patients' desire to
be treated at home. The Company believes that the nation's aging population when
combined with advanced technology can allow more healthcare procedures to be
performed effectively in the home care setting. The Company currently provides
private duty staffing services in the state of Rhode Island through Volunteer
Medical, its private duty staffing subsidiary acquired in 1999.
INDUSTRY BACKGROUND
The long-term care industry encompasses a broad range of health care
services for patients with medically complex needs who can be cared for outside
of acute care hospitals. The Company believes that it is well positioned to
create a health care delivery system in the geographic region it serves by
capitalizing on favorable industry trends, which include the following:
COST CONTAINMENT INITIATIVES
In response to rapidly rising costs, governmental and private pay sources
have adopted cost containment measures that encourage reduced lengths of stay in
acute care hospitals. These third party payors
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have implemented strong case management and utilization review procedures. In
addition, traditional private insurers have begun to limit reimbursement to
predetermined "reasonable charges," while managed care organizations such as
health maintenance organizations and preferred provider organizations are
attempting to limit hospitalization costs by monitoring and reducing hospital
utilization and by negotiating discounted rates for hospital services or fixed
charges for procedures regardless of length of stay. As a result, average acute
care hospital stays have been shortened, and many patients are discharged
despite a continuing need for specialty healthcare services or nursing care. The
Company provides such necessary care through its long-term care facilities.
DEMOGRAPHIC TRENDS
According to the U.S. Bureau of the Census (the "Census Bureau"), 1997
Statistical Abstract of the United States, approximately 12.7% of the U.S.
population, or approximately 33.9 million people, are over the age of 65.
Furthermore, research indicates that the likelihood of using a nursing home
increases with advanced age (65 years and older). In addition, the Census Bureau
further estimates that both the 65-84 and 85+ age groups will increase
dramatically through 2050 as the "Baby-Boomer" generation ages. Specifically,
the percentage of the total national population represented by those people in
the 65-84 category is expected to increase from 11.3% in 1996 to 17.6% in the
year 2030, before falling to 15.4% in 2050, while the 85+ age group is expected
to rise from 1.4% in 1996 to 2.4% in 2030 and to 4.6% by 2050, more than triple
the 1996 numbers. As the elderly population in the United States continues to
increase, the Census Bureau estimates that the number of nursing facility
residents will also increase from 1.7 million in 1996 to 5.7 million in 2030.
ADVANCES IN MEDICAL TECHNOLOGY
Advances in medical technology have increased the life expectancy of a
growing number of patients who require a high degree of care traditionally not
available outside acute care hospitals. For such patients, home health care
often is not a viable alternative because of the complexity of medical services
and equipment required. As a result, the Company believes that there is an
increasing need for care facilities that provide 24 hour-a-day supervision and
specialty care at a significantly lower cost than traditional acute care and
rehabilitation hospitals.
INDUSTRY CONSOLIDATION
Recently, the industry has been subject to competitive pressures that have
resulted in a trend towards consolidation of smaller local operators into larger
more established regional or national operators. The increasing complexity of
medical services, growing regulatory and complex requirements and increasingly
complicated reimbursement systems have resulted in consolidation of small
operators who lack the sophisticated management information systems, geographic
diversity, operating efficiencies and financial resources to compete
effectively.
BUSINESS
The Company provides a broad range of long-term care services to the elderly
including skilled nursing, assisted living, and ancillary health care services.
As of December 31, 1998, the Company operates nine facilities including seven
nursing facilities containing 738 licensed beds and two assisted living
facilities containing 102 units. The properties are located in the States of
Massachusetts and New Hampshire. The assisted living facilities are located on
the sites of two existing nursing facilities operated by the Company. In
comparison, at December 31, 1997, the Company operated twelve facilities
comprised of ten nursing homes containing 1,129 licensed beds and two assisted
living facilities containing 102 units. The Company currently owns two nursing
facilities, leases two nursing facilities (with options to purchase) and manages
the remaining facilities. The Company intends to convert its managed facilities
into ownership or leasehold positions.
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NURSING FACILITY SERVICES
The nursing homes operated by the Company provide basic health care
services, including room and board, nutrition services, recreational therapy,
social services, housekeeping and laundry services and nursing services. In
addition, the nursing homes dispense medications and otherwise follow care plans
prescribed by the patients' physicians. In an effort to attract patients with
more complex health care needs, the Company also provides for the delivery of
ancillary medical services at the nursing homes it operates. These specialty
services include rehabilitation therapy services, such as speech pathology,
audiology, occupational and physical therapies, which are provided through
licensed therapists and registered nurses, and the provision of medical
supplies, nutritional support, infusion therapies, and related clinical
services. The Company has historically contracted with third parties for a fee
to assist in the provision of various ancillary services to the Company's
patients. During 1998, the Company terminated such third party contract
arrangements and now provides related services directly.
ASSISTED LIVING FACILITY SERVICES
Services and accommodations at assisted living facilities include central
dining facilities, recreational areas, social programs, housekeeping, laundry
and maintenance service, emergency call systems, special features for
handicapped persons and transportation to shopping and special events. The
Company believes that assisted living services will continue to increase as an
attractive alternative to nursing home care because a variety of supportive
services and supervision can be obtained in a far more independent and less
institutional setting. Generally, basic care and support services can be more
cost effective in an assisted living facility than either in a nursing facility
or through home health care assistance.
REHABILITATION THERAPY SERVICES
The Company provides a comprehensive range of rehabilitation therapy
services including physical, occupational and speech therapy services to skilled
nursing facilities and general acute care hospitals through Trinity. As of March
31, 1999, Trinity provided these services through 131 private pay contracts in
the states of Texas and Oklahoma.
PRIVATE DUTY STAFFING SERVICES
The Company operates Volunteer Medical, a recently acquired private duty
staffing subsidiary located in Providence, Rhode Island (SEE, CORPORATE
DEVELOPMENT/SIGNIFICANT TRANSACTIONS). The Company employs certified nursing
assistants and therapists who provide private duty staffing services to skilled
nursing facilities, general acute care hospitals and home care services to
homebound clients.
CORPORATE DEVELOPMENTS/SIGNIFICANT TRANSACTIONS
Significant transactions/corporate developments completed by the Company or
its wholly owned subsidiaries during Fiscal Year 1998 included the following:
During January, 1998, the Company purchased a note instrument in the
principal amount of $1,475,000 from National Health Investors, Inc. ("NHI"), a
third party lender with whom the Company has extensive business relationships.
The note purchase financing was provided by NHI with collateral and security
relating to nursing facilities owned and operated by the Company in New England
and financed by NHI. The loan agreement with the purchase financing has a
maturity date of April 1, 2007, requires monthly payments of principal and
interest at 10.5% per annum and amortizes over a period of twenty-five years.
The note instrument acquired by the Company is secured by a subordinated
mortgage position on a nursing facility which was owned by a not-for-profit
entity and which was previously managed by the Company. The note instrument
acquired by the Company is non-performing and has no carrying value at December
31, 1998 and was written off in the fourth quarter of 1998.
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On May 5, 1998, the Company received a management termination notice from
the owner of three nursing facilities representing 391 beds located in the State
of Massachusetts. The Company continued to operate the facilities through
October 7, 1998 under an at-risk contract management arrangement pending
conversion to a lease. This cancellation notice resulted from the Company's not
obtaining appropriate licensure to operate the facilities from the State of
Massachusetts. Effective on October 8, 1998, the Company engaged a third party
to assume full management responsibilities for the facilities. This action
resulted from the Company's decision not to further pursue the leasehold
proposal offered from the property owners. The approximate annual management fee
represented by this management contract was $680,000.
During the third quarter of 1998, ancillary service contracts relating to
several nursing facilities located in the Philadelphia market area were
terminated. These facilities represented a material portion of the Company's
business base in this area. As a result of this development, the Company has
ceased its unprofitable operations in this market and is in the process of
liquidating its residual business interests.
During 1997 and 1998, DVI Business Credit ("DVI") extended a revolving line
of credit (the "Loan") to the following subsidiaries of the Company, which Loan
was secured by all such subsidiaries' accounts receivable and guaranteed by the
Company: IHN Therapy Works, Inc. (fka Iatros Therapy Corporation), IHN
Rehabcare, Inc., Champion Rehab, Inc., and Durant Medical, Inc., (dba
Gatti-Durant Pharmacy Services and as Durant Pharmacy Services). In September
1998, DVI declared the loan in default, elected to terminate all future advances
under the Loan, and accelerated payment of the existing indebtedness owed under
the loan. As a result of these actions, the Company has closed all operations of
the affected subsidiaries and is in the process of orderly liquidating the
assets. The Company has informed all of the employees and creditors of these
affected subsidiaries that all proceeds from such liquidations will be utilized
to make distributions in the same priority and in the same proportions as if the
affected subsidiaries were being liquidated in a Chapter 7 bankruptcy
proceeding. At December 31, 1998, the DVI loan obligation totaled $775,555. In
addition, the liabilities represented by unsecured creditors associated with the
related ancillary services business totaled $1,126,365. The accounts receivable
associated with the related ancillary services business was fully provided for
at December 31, 1998.
On November 17, 1998, Match, Inc. ("Match"), a corporation wholly owned by
Mr. Ronald E Lusk, acquired 533,333 shares of the Preferred Stock, representing
100% of the issued and outstanding shares of that class of stock, for a purchase
price of $1 million. The shares were acquired in a private transaction from The
Presbyterian Foundation for Philadelphia, Inc. (the "Presbyterian Foundation")
at a price per share of $1.875. The $1.0 million purchase price was paid partly
in cash ($200,000) and partly in the form of a non-recourse, non-interest
bearing promissory note from Match to the Presbyterian Foundation for $800,000,
payable in semi-annual installments over two years and secured by a pledge of
the purchased Preferred Stock. The source of the funds was from Match's working
capital, which was provided through an investment by Mr. Lusk from his personal
funds. The terms of the Preferred Stock provide that at any time that cumulative
dividend on the Preferred Stock remain in arrears for more than two quarters,
the owners of the Preferred Stock will have the right to elect, voting as a
separate class, one additional director to the Board. The holders of the
Preferred Stock will have the right to elect an additional director each time
the dividends remain in arrears for two additional quarters, except that the
maximum number of directors the holders of the Preferred Stock may elect, voting
as a separate class, will be seven. Since the Company had not paid dividends on
Preferred Stock, Match, as sole holder of the Preferred Stock, had the right to
elect up to seven members of the Company's Board of Directors. On November 17,
1998, in accordance with the rights granted to holders of the Preferred Stock,
Match executed a consent of sole holder of the Preferred Stock expanding the
size of the Board from three to seven by electing Mr. Lusk, Robert L. Woodson,
III, Albert Sousa and Joe C. Williams, Jr. to the Board. At a meeting of the
Board of Directors on the same day, the Board appointed Mr. Lusk as Chairman of
the Board. Under the terms of the Stock Purchase Agreement and the Stock Pledge
Agreement between Match and the Presbyterian Foundation, the Presbyterian
Foundation would re-acquire all rights with respect to the Preferred Stock owned
by Match,
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including the rights to vote and dispose of the Preferred Stock, in the event
that Match defaults on its obligations under its promissory note to the
Presbyterian Foundation or the Stock Pledge Agreement.
On November 20, 1998, Reginald D. Strickland, the then President and Chief
Executive Officer of the Company, resigned and the Board of Directors appointed
Mr. Robert L. Woodson, III as President and Chief Executive Officer of the
Company.
On November 24, 1998, the Company closed the corporate office in Atlanta,
Georgia and relocated Iatros' corporate headquarters to Dallas, Texas.
EVENTS SUBSEQUENT TO DECEMBER 31, 1998
On January 7, 1999, the Company terminated its relationship with Asher &
Company, Ltd. ("Asher & Company") as the Company's independent certified public
accountants.
On January 11, 1999, the Board of Directors of the Company approved the
engagement of Weaver and Tidwell L.L.P. ("Weaver and Tidwell") as the Company's
independent certified public accountants to audit the Company's consolidated
financial statements.
On February 3, 1999, pursuant to a credit agreement entered into between the
Company and Match, Match provided the Company with a line of credit with an
aggregate principal amount not to exceed $1,000,000 ("Line of Credit"). The Line
of Credit will be used for the operation of the Company's business, to settle
certain claims and any other general corporate purpose permitted by the
Company's articles of incorporation and applicable law. The Line of Credit bears
an interest rate equal to the annual commercial prime rate charged by Chase
Manhattan Bank plus 1%. As collateral for the Line of Credit, the Company has
pledged the outstanding and issued stock of OHI Corporation (dba "Oasis
Healthcare"), the Company's wholly-owned subsidiary. To date, this credit
facility has been fully utilized by the Company for working capital purposes,
principally in settling corporate creditor claims.
On March 17, 1999, the Company consummated a transaction, effective February
15, 1999, pursuant to which it acquired 1,000 shares of the common stock of
Trinity, representing all the outstanding stock of Trinity (the "Trinity
Shares"). The purchase price of the Trinity Shares was $1,495,703, plus 100,000
shares of the Company's common stock. Trinity is a provider of rehabilitation
services that operates in the states of Texas and Oklahoma, providing physical,
occupational and speech therapy services to long-term providers and acute
hospitals through 131 private pay contracts. In connection with this
transaction, the Company issued and delivered to the seller a promissory note in
the amount of $1,495,703 payable in monthly installments over a five-year period
starting March 1, 1999, secured by a pledge of the Trinity Shares acquired by
Company in the transaction. The monthly payments on the promissory note will be
made out of the Company's operating funds.
On February 17, 1999, the Company purchased certain assets of a private
nursing services company, which the Company then transferred to Volunteer
Medical. As consideration for the purchase of the assets, the Company assumed
liabilities of approximately $16,000 associated with the purchased assets. The
Company believes that revenues in 1999 will be approximately $550,000.
SOURCES OF REVENUE
The Company derives all of its revenues from private pay patients,
non-affiliated long-term care facilities and public funding through Medicare,
Medicaid, the Veterans' Administration and other government programs.
The Company's charges for private pay patients are established by the
Company from time to time and the level of such charges is generally not subject
to regulatory control. The Company classifies payments from individuals who pay
directly for services without government assistance as private pay revenues. The
private pay classification includes revenues from sources such as commercial
insurers and
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health maintenance organizations. The Company bills private pay patients and
rehabilitation therapy customers (or their insurers or health maintenance
organizations) for services rendered on a periodic basis no less frequently than
monthly. These billings are due and payable upon receipt. The Company typically
receives payments on a current basis from individuals and within thirty to sixty
days of billing from commercial insurers and health maintenance organizations.
Under the Medicare program and some state Medicaid programs, the Company's
long-term care facilities are periodically paid in amounts designed to
approximate the facilities' reimbursable costs or the applicable payment rate.
Actual costs incurred are reported by each facility annually. Such cost reports
are subject to audit, which may result in upward or downward adjustment of
Medicare payments received. Most of the Company's Medicaid payments are
prospective payments intended to approximate costs, and normally no retroactive
adjustment is made to such payments. However, under certain of the Company's
ancillary businesses, the Company's Medicare reimbursement is either on a fee
screen or fee for service basis. The Company is generally paid for these
services within sixty to ninety days.
For 1998, the Company's revenue mix associated with its nursing operations
was 23% from private pay sources; 61% from Medicaid sources; and 16% from
Medicare sources. The nursing facility occupancy levels generally exceed 93%.
COMPETITION
The long-term healthcare industry is segmented into a variety of competitive
areas, which market similar services. These competitors include nursing homes,
hospitals, extended care centers, assisted living facilities, retirement centers
and communities and home health and hospice agencies. The Company's facilities
historically have competed on a local basis with other long-term care providers,
and the Company's competitive position will vary from center to center within
the various communities it serves. Significant competitive factors include the
quality of care provided, reputation, location and physical appearance of the
long-term care facilities and, in the case of private pay residents, charges for
services. Since there is little price competition with respect to Medicaid and
Medicare residents, the range of services provided by the Company's facilities
covered by Medicaid and Medicare as well as the location and physical condition
of its facilities will significantly affect its competitive position in its
markets. Competition in the rehabilitation services markets ranges from small
local operators to companies that are national in scope and distribution
capability.
Many competitors have greater financial resources than the Company. Certain
of those providers are operated by not-for-profit organizations and similar
businesses that can finance capital expenditures on a tax exempt basis or
receive charitable contributions unavailable to the Company. Competition for
acquisition of long-term care facilities is expected to increase in the future.
Construction of new long-term care facilities near the facilities operated
and serviced by the Company could adversely affect its business. While state
regulations generally require that a Certificate of Need be obtained before any
long-term care facility can be constructed or additional beds added to existing
facilities, no assurances can be given that such additional facilities or beds
will not be built and result in increased competition for the facilities managed
and serviced by the Company.
HUMAN RESOURCES
As of March 31, 1999, the Company had 1,150 employees associated with
nursing facility operations and management personnel, 152 in its Trinity
operations and 33 associated with Volunteer Medical. The Company's strategy is
to insure that it has good employee relations. There are no collective
bargaining agreements existing within the Company.
Although the Company believes it is able to employ sufficient personnel to
staff its facilities adequately, a shortage of therapists or nurses could
adversely affect the ability of the Company to attract
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and retain qualified professional health personnel or could increase the
Company's labor costs. The Company competes with other health care providers for
both professional and non-professional employees and with non-health care
providers for non-professional employees.
FACILITIES AND SERVICES
OPERATIONS
The Company currently operates seven (7) nursing facilities with 738
licensed beds and two (2) assisted living facilities with 102 units as set forth
below:
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NURSING
FACILITIES BEDS
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Owned John Adams Nursing Home--Quincy, MA...................................................... 71
Longmeadow of Taunton--Taunton, MA....................................................... 100
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171
Leased Buckley Nursing & Retirement--Holyoke, MA................................................ 102
Buckley Nursing Home--Greenfield, MA..................................................... 120
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222
Managed Epsom Manor--Epsom, NH................................................................... 108
Villa Crest Nursing Center--Manchester, NH............................................... 123
Maple Leaf Health Care Center--Manchester, NH............................................ 114
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345
TOTAL 738
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ASSISTED LIVING FACILITIES UNITS
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Managed Heartland Place--Epsom, NH.............................................................. 60
Villa Crest Retirement--Manchester, NH.................................................. 42
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TOTAL 102
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REHABILITATION THERAPY SERVICES
The Company provides a comprehensive range of rehabilitation therapy
services including physical, occupational and speech therapy services to
long-term care facilities and general acute care hospitals through 131 all
private pay contracts in the states of Texas and Oklahoma.
PRIVATE DUTY STAFFING SERVICES
As of February 17, 1999, the Company though its subsidiary, Volunteer
Medical, operates a private duty staffing agency located in Providence, Rhode
Island.
8
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MARKETING
The Company's sales and marketing efforts are designed to promote higher
occupancy levels and optimal payor mix at a local level. Management believes
that the long-term care industry is fundamentally a local industry in which both
patients and residents and the referral sources for them are based in the
immediate geographic area in which the facility is located. The Company's
marketing plan emphasizes the role and performance of the administrator and
social services director of each nursing facility and the administrator of each
assisted living facility, all of whom are responsible for contacting various
referral sources such as doctors, hospitals, hospital discharge planners,
churches, and various community organizations. Administrators are evaluated
based on their ability to meet specific goals and performance standards that are
tied to compensation incentives. The Company's regional managers and corporate
staff assist local marketing personnel and administrators in establishing
relationships and follow-up procedures with such referral sources. In addition
to soliciting admissions from these sources, management emphasizes involvement
in community affairs in order to promote a public awareness of the Company's
nursing facilities and assisted living facilities and their services. The
Company also promotes effective customer relations and seeks feedback through
family and employee surveys.
The Company has initiated an internally-developed marketing program that
focuses on the identification and provision of services needed by the community.
The program assists each facility administrator in analysis of local
demographics and competition with a view toward complementary service
development. The Company believes that the primary referral area in the
long-term care industry generally lies within a five-to-fifteen-mile radius of
each facility depending on population density; consequently, local marketing
efforts are more beneficial than broad-based advertising techniques.
GOVERNMENT REGULATION
The long-term health care industry is subject to extensive federal, state
and, in some cases, local regulation with respect to reimbursement, licensing,
certification and health planning, conduct of operations at existing facilities,
construction of new facilities, acquisition of existing facilities, addition of
new services and certain capital expenditures. Compliance with such regulatory
requirements, as interpreted and amended from time to time, can increase
operating costs and thereby adversely affect the financial viability of the
Company and the facilities managed or operated by the Company. Failure to comply
with regulatory requirements could also result in restrictions on admissions,
the revocation of licensure, de-certification or the closure of the facilities
operated by the Company.
The operation of a long-term health care facility is licensed by the
Department of Health or other agency of the jurisdiction in which it is located
and, if the facility participates in the Medicare or Medicaid programs,
certified by the U.S. Department of Health and Human Services ("HHS"). Other
state and local agencies may have regulatory authority over certain facility
matters. Operators of such facilities are also subject to various federal,
state, and local environmental laws.
All facilities operated by the Company are licensed under applicable state
law and are certified or approved as providers under one or more of the
Medicaid, Medicare or other third party payor programs. Both initial and
continuing qualification of a long-term health care facility to participate in
such programs depends upon many factors, including accommodations, equipment,
services, patient care, safety, personnel, physical environment and adequate
policies, procedures and controls. Licensing, certification, and other
applicable standards vary from jurisdiction to jurisdiction and are revised
periodically. State and federal agencies survey all long-term health care
facilities on a regular basis to determine whether such facilities are in
compliance with the requirements for continued licensure and for participation
in government sponsored and third party payor programs.
The Company believes that the facilities it operates are in material
compliance with the various state licensing, Medicare and Medicaid regulatory
requirements applicable to them. However, in the ordinary course of its
business, the Company may receive notices of alleged deficiencies at the
facilities for failure to
9
<PAGE>
comply with various regulatory requirements. The Company reviews such notices in
an expeditious manner and assists the facility personnel in filing and
implementing appropriate plans of corrective action. In most cases, the Company,
and the reviewing agency will agree upon the measures to be taken to bring the
facility into compliance. In some cases or upon repeat violations, the reviewing
agency has the authority to take various adverse actions against a facility,
including the imposition of fines, temporary suspension of admission of new
residents to the facility, suspension or de-certification from participation in
the Medicare or Medicaid Program and, in extreme circumstances, revocation of a
facility's license. These actions would adversely affect a facility's ability to
meet operating costs. Additionally, conviction of abusive or fraudulent behavior
with respect to one facility could subject other facilities under common control
or ownership to disqualification from participation in the Medicare and Medicaid
programs. It is not possible to predict the content or effect of future
legislation and regulations affecting the health care industry.
Various aspects of the Company's business are regulated by the Federal
government and by the states where the Company has operations. Regulatory
requirements affect the Company's business activities by controlling growth,
requiring licensure and certification for the Company's facilities and
healthcare services, and controlling reimbursement for services provided.
MEDICARE AND MEDICAID: The Medicare program was enacted in 1965 to provide
a nationwide, federally funded health insurance program for the elderly. The
Medicaid program is a joint federal-state cooperative arrangement established
for the purpose of enabling states to furnish medical assistance on behalf of
aged, blind, or disabled individuals, or members of families with dependent
children, whose income and resources are insufficient to meet the costs of
necessary medical services. All of the Company's nursing facilities are licensed
under applicable state law and are certified or approved as providers under
Medicare and state Medicaid programs, as applicable.
COST BASED REIMBURSEMENT: The Medicare program historically utilized a
cost-based retrospective reimbursement system for nursing facilities, long-term
acute care ("LTAC") hospitals and home health agencies for reasonable direct and
indirect allowable costs incurred in providing "routine service" (as defined by
the program and subject to certain limits) as well as capital costs and
ancillary costs. Pursuant to the Balanced Budget Act of 1997 (the "Balanced
Budget Act") discussed below, Medicare is phasing-in a prospective payment
system ("PPS") for skilled nursing facilities and home health services starting
with cost reporting periods beginning on or after July 1, 1998.
Medicare revenues and Medicaid reimbursement rates have historically been
determined from annual cost reports filed by the Company which are subject to
audit by the respective fiscal intermediaries and agencies administering the
programs. The audits generally focus on the reasonableness and necessity of the
costs incurred by providers. Adjustments to the Company's cost reports
historically have not had a material adverse effect on its operating results.
However, there can be no assurance that future adjustments to such costs reports
will not have a material adverse effect on the Company's operating results. The
Company files routine cost limit exception requests with respect to cost
reporting periods prior to the implementation of PPS for the facilities which
exceed the limits and fit the criteria as exception candidates. The Company
benefits from these exceptions, and generally exception requests have been
approved. However, there can be no assurance that any such pending or future
requests for the routine cost limit exception will be granted.
BALANCED BUDGET ACT--MEDICARE: The Balance Budget Act, enacted on August 5,
1997, made numerous changes to the Medicare and Medicaid programs which affect
the Company. With respect to the Medicare program, the new law required the
establishment of a PPS system for Medicare Part A skilled nursing facility
services, under which facilities are paid a federal per diem rate for virtually
all covered services. The PPS system is being phased in over three costs
reporting periods, and started with cost reporting periods beginning on or after
July 1, 1998. The Balanced Budget Act also implemented fee screens with respect
to Medicare Part B therapy services, which became effective January 1, 1999.
These rates were published in November 1998 and revise the reimbursement
methodology with respect to these
10
<PAGE>
services from cost-basis to a set fee. The Balanced Budget Act also imposed a
per beneficiary cap of $1500 per provider for therapy service provided, also
effective January 1, 1999. The Balanced Budget Act also instituted consolidated
billing for skilled nursing facility services, under which payments for
non-physician Part B services for beneficiaries no longer eligible for Part A
skilled nursing facility care are made to the facility regardless if whether the
item or service was directly furnished by the facility or by others under
arrangement. While this provision was to be effective for items or services
furnished on or after July 1, 1998, it has been delayed indefinitely.
On May 12, 1998, the Health Care Financing Administration ("HCFA") released
the nursing home PPS rates for skilled nursing facilities that were in effect
from July 1, 1998 through September 30, 1998. As of January 1, 1999 all of the
Company's facilities were operating in accordance with PPS. PPS has resulted in
more intense price competition and lower margins among ancillary service
providers. However, while the Company believes that PPS will also provide
opportunities for efficiently operated, low cost providers to achieve economies
of scale, there can be no assurance that the Company will be successful in
reducing its costs of services below the PPS reimbursement rates or the Medicare
Part B therapy fee screen rates.
BALANCED BUDGET ACT--MEDICAID: The Balanced Budget Act also contains a
number of changes affecting the Medicaid program. Significantly, the law
repealed the Boren Amendment which required state Medicaid programs to reimburse
nursing facilities for the costs that are incurred by an efficiently and
economically operated providers. There can be no assurance that future changes
in Medicaid reimbursement rates to nursing facilities will not have an adverse
effect on the Company. Further, the Balanced Budget Act allows states to mandate
enrollment in managed care systems without seeking approval from the Secretary
of HHS for waivers from certain Medicaid requirements as long as certain
standards are met. These managed care programs have historically exempted
institutional care although some states have instituted pilot programs to
provide such care under managed care programs. However, no assurance can be
given that these provisions will not have an adverse effect on the Company in
order to meet quality and safety standards. Effective for Medicaid services
provided on or after October 1, 1997, states have considerable flexibility in
establishing payment rates. The Company is not able to predict whether any
states' waiver provisions ultimately will not change the Medicaid reimbursement
systems for long-term care facilities from cost-based or fee-for-service to
managed care negotiated or capitated rates or otherwise affect the level of
payments to the Company.
FUTURE REFORM: Healthcare reform remains an issue for healthcare providers.
Many states are currently evaluating various proposals to restructure the
healthcare delivery system within their respective jurisdictions. It is
uncertain at this time what legislation on healthcare reform will ultimately be
implemented or whether other changes in the administration or interpretation of
governmental healthcare programs will occur. Management anticipates that state
legislatures will continue to review and assess various healthcare reform
proposals and alternative healthcare systems and payment methodologies.
Management is unable to predict the ultimate impact of any future state
restructuring of the healthcare system, but such changes could have a material
adverse impact on the results of operations, financial condition and prospects
of the Company.
The Company expects Congress to continue to consider measures to reduce
growth in Medicare and Medicaid expenditures. The Company cannot predict at this
time whether any additional measures will be adopted or if adopted and
implemented what effect such proposals would have on the Company. There can be
no assurance that payments under state or federal governmental programs will
remain at levels comparable to present levels or will be sufficient to cover
costs of patients eligible for reimbursement pursuant to such programs.
MEDICARE
The Medicare program is a federally-administered and financed program which
provides health insurance protection to qualified individuals over the age of 65
and the chronically disabled. This program has been a retrospective
reimbursement system that is based on a prior period's cost report filed with a
11
<PAGE>
Medicare intermediary. In 1997, Congress passed the Balanced Budget Act which
provides for a phase-in of a prospective payment system for skilled nursing
facilities over three cost reporting periods, effective for the Company in
January 1999. Under PPS, Medicare will pay skilled nursing facilities a fixed
fee per patient day based on the acuity level of the patient to cover all
post-hospital extended care routine service costs, including ancillary and
capital related costs for beneficiaries receiving skilled services. The per diem
rate will also cover substantially all items and services furnished during a
covered stay for which reimbursement was formerly made separately under
Medicare. During the phase-in, payments will be based on a blend of the
facility's historical costs and a federally established per diem rate.
Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987
("OBRA") eliminated the different certification standards for "skilled" and
"intermediate care" nursing facilities under Medicaid and Medicare programs in
favor of a single "nursing facility" standard. This standard has required the
Company to have at least one registered nurse on each shift and has increased
training requirements for nurse's aide by requiring a minimum number of training
hours and a certification test before a nurse's aide may commence work. States
also must certify that nursing facilities provide skilled care in order to
obtain Medicare reimbursement. OBRA has also increased the enforcement powers of
state and federal certification agencies. Additional sanctions have been
authorized including fines, temporary suspension of admission of new patients to
nursing facilities, de-certification from participation in the Medicaid or
Medicare programs and, in extreme circumstances, revocation of a nursing
facility's license.
The Medicaid and Medicare programs provide criminal penalties for entities
that knowingly and willfully offer, pay, solicit or receive remuneration in
order to induce business that is reimbursed under these programs. The illegal
remuneration provisions of the Social Security Act, also known as the
anti-kickback statute, prohibit remuneration intended to induce the purchasing,
leasing, ordering, or arranging for any goods, facility, service or item to be
paid by Medicaid or Medicare programs.
There is increasing scrutiny by law enforcement authorities, the Office of
Inspector General of HHS, the courts, and Congress of arrangements between
health care providers and potential referral sources to ensure that the
arrangements are not designed as a mechanism to exchange remuneration for
patient care referrals and opportunities. Investigators have also demonstrated a
willingness to look behind the formalities of a business transaction to
determine the underlying purpose of payments between health care providers and
potential referral sources. Enforcement actions have increased, as evidenced by
recent highly publicized enforcement investigations of certain hospital
activities. Although, to its knowledge, the Company is not currently the subject
of any investigation which is likely to have a material adverse effect on its
business, financial condition or results of operations, there can be no
assurance that the Company will not be the subject of investigations or
inquiries in the future.
The Medicare program has published certain "Safe Harbor" regulations, which
describe various criteria and guidelines for transactions, which are deemed to
be in compliance with the anti-remuneration provisions. Although the Company has
contractual arrangements with some health care providers, management believes it
is in compliance with the anti-kickback statute and other provisions of the
Social Security Act and with the state statutes. However, there can be no
assurance that government officials responsible for enforcing these statutes
will not assert that the Company or certain transactions in which it is involved
are in violation of these statutes.
The Company derives a significant portion of its revenue from these
programs, particularly with respect to ancillary services. With respect to
Medicaid, reimbursement rates are determined by the appropriate administrative
state agency based on the cost report filed by each individual nursing facility.
Changes in the reimbursement policies of the Medicaid and Medicare programs as a
result of legislative and regulatory actions by federal and state governments
could adversely affect the revenues of the Company. Governmental funding for
health care programs is subject to statutory and regulatory changes,
administrative rulings, interpretations of policy, intermediary determinations
and governmental funding restrictions, all of which may materially increase or
decrease program reimbursement to health care
12
<PAGE>
facilities. Congress has consistently attempted to curb the growth of federal
spending on such programs. Recent actions include limitations on payments to
hospitals and nursing facilities under the Medicaid and Medicare programs,
limitations on payments for physicians' services and elimination of funding for
health planning agencies. No assurance can be given that the future funding of
Medicaid and Medicare programs will remain at levels comparable to the present
levels.
MEDICAID
The Medicaid program is a state-administered program financed by state and
matching federal funds. The program provides for federal assistance to the
indigent and certain other eligible persons. Although administered under broad
federal regulations, states are given flexibility to construct programs and
payment methods consistent with their individual goals. Currently, certain
states including Massachusetts and New Hampshire have Medicaid reimbursement
plans, which are prospective systems of reimbursement. Under a prospective
system, per diem rates are established based on cost of services provided for a
prior year, and are adjusted to reflect such factors as inflation.
FALSE CLAIM REGULATION.
False claims to the Medicare or Medicaid program for services not rendered
or misrepresenting services actually rendered in order to obtain higher
reimbursement are prohibited pursuant to criminal and civil statutes. Criminal
provisions at 42 U.S.C. Section 1320a-7b prohibit filing false claims or making
false statements to receive payment or certification under Medicare or Medicaid,
or failing to refund overpayments or improper payments: offenses for violation
are felonies punishable by up to five years imprisonment, and/or $25,000 fines.
Criminal penalties may also be imposed pursuant to the Federal False Claim Act,
18 U.S.C. Section 287. In addition, under Health Insurance Portability and
Accountability Act of 1996, Congress enacted a criminal health care fraud
statute for fraud involving a health care benefit program, which is defined to
include both public and private payors. Civil provisions at 31 U.S.C. Section
3729 prohibit the knowing filing of a false claim or the knowing use of false
statements to obtain payment; penalties for violations are fines of not less
than $5,000 nor more than $10,000, plus treble damages, for each claim filed.
Also, the statute allows any individual to bring a suit, known as a QUI TAM
action, alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and to potentially share in any amounts paid by the
entity to the government in fines or settlement. Failure to comply with such
laws could have a material adverse effect on the Company.
FRAUD AND ABUSE AND ANTI-KICKBACK LAWS
The Medicare and Medicaid Patient and Program Protection Act of 1987 (the
"MMPPPA") provided authority to the Office of Inspector General of HHS to
exclude a person or entity from participation in Medicare or state health care
programs if it is determined that the party is engaged in a prohibited scheme
involving direct or indirect payments or fee-splitting arrangements designed to
pay remuneration in exchange for referrals. The legislation prohibiting payments
for referrals is general and has been construed broadly by the courts. Other
possible sanctions for violations of the aforementioned restrictions include
loss of licensure, and civil or criminal penalties.
Various federal and state laws regulate the relationship between providers
of health care services and other health care providers in a position to make or
influence referrals. These laws include the fraud and abuse provisions of the
federal Medicare/Medicaid laws and similar state statutes (the "Fraud and Abuse
Laws"). These prohibit the payment, receipt, solicitation or referring of any
direct or indirect remuneration, in cash or in kind, intended to induce the
referral of a Medicare/Medicaid patient for the ordering or providing of
Medicare or Medicaid covered services, items or equipment. Violations of these
provisions carry criminal and civil penalties, including exclusion from
participation in the Medicare and Medicaid programs. The Federal government in
various judicial and administrative decisions, has interpreted these provisions
broadly to include the payment of anything of value to influence a referral of a
Medicare or
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Medicaid beneficiary. The Federal agencies responsible for administering the
statutes have published regulations establishing "safe harbors" applicable to
certain business arrangements between entities that otherwise might be subject
to the Fraud and Abuse Laws. Nevertheless, the interpretations and applications
of the broadly worded Fraud and Abuse Laws by governmental authorities cannot be
predicted or guaranteed.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company's health care operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations, as well as the Company's
purchases and sales of facilities, are also subject to various other
environmental laws, rules and regulations. The Company believes that it is in
material compliance with applicable environmental laws and regulations.
Management believes that there are no material environmental contingencies.
ITEM 2. PROPERTIES
The Company leases 7,320 square feet of office space in the following
properties representing an aggregate monthly lease payment of $10,260 (rates and
square footage approximate): (1)5,034 square feet for its executive offices in
Dallas, Texas at a rate of $7,761 per month, with term ending January 2003,
(2)2,286 square feet for its New England operations office in Bedford, New
Hampshire at rates of $2,500 per month increasing to $3,500 per month over a
three-year term ending October 31, 2000. The Company's leases generally include
taxes and insurance.
During 1998, the Company vacated leased office premises associated with its
ancillary services businesses located in the Philadelphia and Massachusetts
market areas as well as its corporate office lease in Atlanta, GA. The Company
satisfied its lease obligations associated with ancillary services during 1998
and expects to settle the corporate lease obligations during 1999.
The Company is obligated under several capital lease obligations for
equipment purchases. The aggregate obligation associated with such lease
arrangements is approximated at $200,000.
The Company owns two long-term care nursing facilities located in Taunton
and Quincy, Massachusetts having a combined total of 171 beds. The Company
acquired these existing properties during May 1997 for a purchase price of
$7,600,000. In connection with this purchase acquisition, the Company recorded
mortgage debt totaling $8,550,000 which amount includes loan reserves of
approximately $470,000.
The Company operates two long-term care nursing facilities located in
Holyoke and Greenfield, Massachusetts having a combined total of 222 beds
pursuant to terms of a lease purchase agreement. The term of the lease agreement
is for ten years with a five year renewal period and a combined facilities
purchase option for $11.5 million, which is exercisable through March 2000.
These leases are being accounted for as operating leases.
ITEM 3. LEGAL PROCEEDINGS
1. LEMIRE ENTERPRISES, INC. ET AL V. IATROS HEALTH NETWORK, INC. ET AL, CIVIL
ACTION NO. 98-E-0470, 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. The Company has initiated
settlement discussions with the relevant parties which discussions contemplate a
change in the ownership interests in the properties and, in connection
therewith, settling the seller
14
<PAGE>
interests. The Company expects this matter to be settled and does not anticipate
such settlement to require any performance under its payment guarantee
obligation.
2. SCOTT SCHUSTER ET AL. V. IATROS HEALTH NETWORK, INC. AND OHI CORPORATION,
Civil Action No. 97-11304-DPW, filed in the United States District Court for
the District of Massachusetts.
Scott Schuster became an employee of OHI Corporation ("OHI"), which is a
wholly-owned subsidiary of Iatros, in the Spring of 1996 contemporaneous
with the merger of Schuster's company, Oasis Healthcare, Inc., with and into
OHI. In the Spring of 1997, Schuster made an offer to buy OHI from the
Company.
In June 1997, after his purchase offer was rejected by the Company, Schuster
filed suit against the Company and OHI seeking to acquire such subsidiary,
to be paid additional incentive compensation, and for damages in connection
with various alleged misrepresentation in connection with the merger.
Schuster claims he is entitled to more than 3.5 million shares of Iatros's
common stock, plus approximately $1.0 million in damages.
In July 1997, the Court denied Schuster's motion for an order to prevent the
Company from consolidating OHI's financial functions and from terminating
Schuster's employment for cause.
The Company is continuing to pursue its claims against Schuster, as well as
against all allegations made by Schuster in this action. Discovery has been
concluded, and a May 1999 trial date has been set. Management believes that
the Company has valid defenses against all allegations made by Schuster in
this action, as well as valid counterclaims against Schuster.
OTHER LITIGATION
In addition to the foregoing pending actions, the Company and its
subsidiaries have outstanding a number of other routine actions such as
collection matters, landlord/tenant disputes and labor matters, as well as a
number of threatened actions, involving creditors, vendors, customers, former
employees, and/or other third persons. The Company is attempting to reach
settlement in certain of these matters and continues to defend itself in other
matters. With respect to all actions that the Company is not attempting to
settle, management believes that the Company has valid defenses to such actions.
Management believes that it has sufficiently reserved for these claims in
its financial statements at December 31, 1998. 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. Given the
present financial constraints of the Company, the Company may not be able to pay
all the legal expenses and associated costs necessary to defend itself or to
respond to adverse judgements, should they occur.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report.
15
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
In September 1998, the Company was informed by The Nasdaq Stock Market, Inc.
("NASDAQ") that, effective with the close of business on September 25, 1998, the
Company's common stock would be de-listed from NASDAQ for the following reasons:
(1) the Company's common stock did not meet the $1.00 minimum bid price
requirement set forth in NASD Marketplace Rule 4310(c)(4), and (2) the Company
did not meet the net tangible assets/market capitalization/net income
requirements set forth in NASD Marketplace Rule 4310(c)(2). The Company's stock
is now quoted on the OTC Bulletin Board under the symbol "IHNI".
The following table sets forth the high and low sales price as determined
from NASDAQ for the Common Stock for the periods indicated.
COMMON STOCK
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
--------- ---------
<S> <C> <C>
First Quarter (through March 18, 1999)....................................... /32 5/32
FISCAL 1998
First Quarter................................................................ /32 5/16
Second Quarter............................................................... /16 3/32
Third Quarter................................................................ /16 5/16
Fourth Quarter............................................................... /16 1/32
FISCAL 1997
First Quarter................................................................ 23/8 11/4
Second Quarter............................................................... 11/2 17/32
Third Quarter................................................................ 1 /32 29/32
Fourth Quarter............................................................... 1 7/16
FISCAL 1996
First Quarter................................................................ 93/8 51/2
Second Quarter............................................................... 55/8 31/2
Third Quarter................................................................ 45/8 23/8
Fourth Quarter............................................................... 3 /16 11/2
</TABLE>
The high and low prices (based on the average bid and ask price) for the
Company's Common Stock as reported by NASDAQ and the OTC Bulletin Board and
rounded to the nearest 1/32 are indicated above. These are inter-dealer prices
without retail mark-ups, mark-downs, or commissions and may not represent actual
transactions.
According to the Company's Stock Transfer Agent as of March 18, 1999, there
were approximately 3,927 holders of record of the Company's Common Stock.
DIVIDENDS
The payment by the Company of dividends, if any, rests within the discretion
of the Board of Directors and among other things, will depend upon the Company's
earnings, capital requirements and financial condition, as well as other
relevant factors. The Company has not paid cash dividends on its Common Stock to
date and does not anticipate doing so in the foreseeable future. It is the
present intention of
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<PAGE>
management to utilize all available funds for working capital of the Company.
The holders of Series A Senior Convertible Preferred Stock are entitled to
receive out of funds legally available therefore, when and if declared by the
Company, dividends at the rate per annum of $.30 for each outstanding share of
Series A Senior Convertible Preferred Stock. Dividends cumulate and accrue
ratably from and after the date of issuance of the Series A Senior Convertible
Preferred Stock, for each day that shares of the Company's Series A Senior
Convertible Preferred Stock are outstanding. No such preferred dividends have
been declared. At December 31, 1998, dividends on the Series A Senior
Convertible Preferred Stock totaling $710,000 were in arrears. The Series B
Preferred Stock is non-voting and pays no dividends. The Company may not pay
dividends on any shares of its Common Stock at any such time that dividends due
on the Series A remain in arrears. The size of the Board may be increased by 1
director, up to a maximum of 13 directors, each time the cumulative dividends
payable on the Series A Senior Convertible Preferred Stock are in arrears in an
amount equal to two (2) full quarterly dividend payments. The holders of the
Series A Senior Convertible Preferred Stock, voting separately as a single
class, are entitled to elect these additional directors. The voting rights of
the holders of the Series A Senior Convertible Preferred Stock for these
directors continue until all Cumulative Dividends have been paid in full.
Currently, the holders of the Series A Senior Convertible Preferred Stock,
voting separately as a single class, are entitled to increase the number of
directors comprising the Company's Board by 7 members. (see, Corporate
Developments/ Significant Transactions)
17
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ITEM 6. SELECTED FINANCIAL DATA
SUMMARY FINANCIAL DATA
IATROS HEALTH NETWORK, INC.
(IN DOLLARS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994
- ------------------------------------------ -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Routine Revenues.......................... $ 27,138,027 $ 25,512,540 $ 11,261,119 $ 11,017,865 $ 2,331,786
Routine Operating Expense................. $ 25,886,352 $ 26,204,750 $ 13,316,234 $ 7,441,146 $ 4,015,254
Routine Operating Income (Loss)........... 1,251,675 $ (692,210) $ (2,055,115) $ 3,576,719 $ (1,683,468)
Income (Loss) from Continuing
Operations.............................. $ (11,919,706) $ (11,093,116) $ (4,240,680) $ 3,343,439 $ (943,658)
Income (Loss) from Discontinued
Operations.............................. $ (7,117,226) $ (6,073,881) $ 311,749 $ (252,951)
Net Income (Loss)......................... $ (11,919,706) $ (18,210,342) $ (10,314,561) $ 3,655,188 $ (1,196,609)
Basic Earnings (Loss) Per Share...........
Continuing Operations..................... $ (.58) $ (.67) $ (.32) $ .35 $ (.16)
Discontinued Operations................... $ -- $ (.43) $ (.43) $ .04 $ (.04)
-------------- -------------- -------------- ------------- -------------
$ (.58) $ (1.10) $ (.75) $ .39 $ (.20)
Weighted Average Shares of Common Stock
and equivalents outstanding............. 20,969,958 16,666,375 13,946,359 9,002,561 6,281,584
BALANCE SHEET DATA:
Working Capital (Deficit)................. $ (15,021,996) $ (1,574,045) $ 3,467,162 $ 3,062,702 $ 557,682
Total Assets.............................. $ 11,980,912 $ 24,254,986 $ 25,105,242 $ 23,044,380 $ 1,547,265
Total Long-Term Debt & Capital Lease
Obligations............................. $ 1,696,500 $ 8,617,478 $ 746,813 $ 131,140 $ 50,165
Total Liabilities......................... $ 19,483,244 $ 19,837,712 $ 4,399,462 $ 3,997,132 $ 1,241,194
Stockholder's Equity (Deficit)............ $ (7,502,332) $ 4,417,274 $ 20,705,780 $ 19,047,250 $ 306,071
</TABLE>
NOTES:
No cash dividends have been declared on the Common Stock.
Summary Financial Data has been presented exclusive of information relating to
discontinued operations.
Routine operating expenses include the direct expenses associated with the
Company's continuing operations, before capital and property related expenses.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
For the year ended December 31, 1998, the Company reported a net loss of
$11,919,706. This is largely attributable to non-recurring and non-cash charges
to operations associated with the write-down of intangible assets ($3,251,617)
and provision for the collection of notes and accounts receivable ($6,360,256).
The reserve charged to operations during 1998 relates largely to long
outstanding notes and accounts receivable associated with prior year's
operations as well as development activities and, as such, are viewed by the
Company as non-recurring.
The Company reported revenue from continuing operations for the years ended
December 31, 1998 and 1997 of $27,138,027 and $25,512,540, respectively,
representing an increase of $1,625,487 or 6.4%. During 1998, associated routine
operating expenses totaled $25,886,352 representing 95% of related revenue
compared with routine operating expenses totaling $26,204,750 for 1997 which
expenses exceeded routine revenue by $692,210.
Consolidated revenue reported by the Company for 1998 includes $18,526,030
associated with nursing home operations in the New England market area. This
compares to revenue of $12,191,384 reported for 1997 and reflects an increase of
$6,334,646 or 52%. This increase results principally from the full year
operation in 1998 of nursing facilities acquired by the Company during 1997.
During 1998, associated routine operating expenses totaled $16,234,982 yielding
net operating income of $2,291,048 or 12.4% of related revenue for the year.
This reported margin excludes a provision for management costs of approximately
four percent which have been eliminated in consolidation. The reported routine
operating margin on nursing operations for the 1997 period totaled $1,680,148,
representing a return of approximately 14% on related revenue.
Ancillary services revenue reported for 1998 totaled $7,526,597 representing
a decrease of $3,757,235 or 33% compared to the prior year. This decrease in
revenue results principally from the loss of material ancillary services
contracts during 1998 and 1997 relating to the Company's ancillary services
business in the Philadelphia market area. As a result, beginning in the third
quarter of 1998, the Company began to close operations in this market. At
December 31, 1998, the Company had ceased all associated business operations and
initiated efforts to liquidate its residual business interests. Also, beginning
in the third quarter of 1998, the Company commenced efforts to close its New
England based Pace Rehabilitation and Homecare Services ("Pace") subsidiary. The
Pace subsidiary operation had developed predominantly as a Medicare service
provider. In light of regulatory and reimbursement developments anticipated to
adversely impact this business, the Company moved to close its homecare
operation and transition therapy services to be provided directly in its nursing
facilities. At December 31, 1998, Pace operations had ceased and all therapy
services had been transitioned to the nursing facilities. During 1998, routine
operating expenses associated with consolidated ancillary service revenue
totaled $6,817,481 resulting in a routine operating margin of $709,116 or 9.4%
for the year.
Management services revenue reported for 1998 totaled $1,085,400 compared
with $2,073,324 for 1997, representing a decrease of $987,924 or 48% from the
prior period. The decrease in management services revenue reflects the Company's
redirection away from third party management of nursing facilities and emphasis
towards direct ownership or lease positions. In October 1998, the Company
entered into a consulting services agreement with a third party to assume its
management rights and responsibilities associated with three nursing facilities
in the State of Massachusetts aggregating 391 beds. Annual management service
revenue represented by this account approximates $680,000. The remaining
decrease in management service revenue relates to contracts that were terminated
during 1997. The Company currently manages seven nursing facilities and two
assisted living facilities which facilities are located in the States of
Massachusetts and New Hampshire. Management services costs reported for 1998
totaled
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<PAGE>
$1,742,941 representing approximately 4% of annual revenues reported by the
facilities managed. Approximately $672,000 and $315,500 of management service
revenue associated with properties owned or leased by the Company is eliminated
in the consolidated financial statements for the years ended December 31, 1998
and 1997, respectively.
Consolidated routine operating expenses for 1998 totaled $25,886,352
representing a decrease of $318,398 or 1%. Increased routine operating costs
associated with nursing home operations of $5,723,746 correspond with increase
in associated routine revenue, representing 87.6% of related revenue in 1998 and
86.2% of related revenue in 1997. This increase is offset by decreases in
routine ancillary services expense of $3,269,872 and general and administrative
expenses of $3,285,912. The decrease in ancillary services expense corresponds
with decreased services revenue while the decrease in general and administrative
expenses reflects continued cost reduction initiatives associated with corporate
expenses effected during 1998. Management services costs for 1998 include a
provision for bad debts totaling $585,319.
General and administrative expenses reported for 1998 and 1997 totaled
$1,090,948 and $4,376,860, respectively, and were associated with the Company's
executive management and related costs of corporate overhead. Significant
components for 1998 included $848,908 for executive salaries and related
expenses; $185,411 for insurance expense; and other general expenses.
Significant components for 1997 included $1,735,409 for executive salaries and
related expenses; $857,786 for professional fees; contracted services of
$174,562; travel and related expenses of $550,305; insurance expenses of
$307,478; and other general expenses.
Property and capital related expenses reported for 1998 include interest
expense and property lease expense of $1,652,707 and $1,422,549, respectively.
Significant components of 1998 interest expense include $339,627 relating to
corporate obligations; $1,137,134 relating to property mortgages and working
capital debt associated with New England nursing home operations; and $175,946
in interest costs associated with the Company's ancillary services business.
Property lease expense included $1,198,839 relating to two nursing facilities in
Massachusetts which operations were assumed under a lease purchase arrangement
commencing in March 1997. Remaining property lease expense of $223,710 relates
to various office lease arrangements. Depreciation and amortization expense
reported for 1998 includes $477,115 in depreciation, of which $389,847 is
attributable to nursing facilities, and $285,674 in amortization of intangible
assets.
Other income (expense) reported for 1998 totaled a net expense of $9,333,336
and is comprised principally of non-recurring and non-cash charges to
operations. This results from the provision for notes and accounts receivable
associated with prior year's operations and development activities ($6,360,256)
coupled with the write down of substantially all intangible assets previously
reported by the Company ($3,251,651) and a gain on settlement of liabilities of
$619,547.
Property and capital related expenses together with other income (expense)
reported for 1997 totaled a net expense of $8,059,906 and includes a charge to
operations in 1997 of $5,637,703 associated with the write down of intangible
and other assets relating to discontinued operations. Other major components for
1997 include interest expense of $1,015,534 and property lease expense of
$916,839. Significant components of 1997 interest expense include $225,806
relating to corporate debt; $637,047 relating to property mortgages and working
capital debt associated with New England nursing home operations; and $103,338
in interest costs associated with the Company's ancillary services business.
The income tax expense reported for 1997 totaling $2,800,000 results
principally from the Company's reserve against deferred tax assets reported in
prior periods and represents a non cash charge to 1997 operations. The deferred
tax asset relates to net operating loss carry forward benefits available to the
Company for which the future utilization against taxable income is uncertain.
20
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Company reported a net loss of
$18,210,342. This is largely attributed to losses associated with discontinued
operations ($7,117,226); write-down of intangible assets ($5,637,703);
substantial general and administrative expenses ($4,376,860) associated with the
Company's business history and corporate expenses; and the write-down of
deferred tax assets ($2,800,000) for which future realization is uncertain. In
addition, operating losses reported by the Company during 1997 and 1996 together
with other adverse corporate developments exhausted the Company's capital
resources and had a material adverse effect on short-term liquidity and the
Company's ability to service its debts. At December 31, 1997, the Company
reported a negative working capital position of $1,574,045.
The Company reported revenue from continuing operations for the years ended
December 31, 1997 and 1996 of $25,512,540 and $11,261,119, respectively,
representing an increase of $14,251,421 or 127%. During 1997, the routine
operating expenses incurred for continuing operations, exclusive of general and
administrative costs, totaled $21,827,890 yielding a routine operating margin of
$3,684,650 or 14% on related revenues. Notwithstanding this increase in revenue,
the routine operating margins attained by the Company were insufficient to cover
the levels of general and administrative costs as well as other expense
requirements, including property and related capital.
Consolidated operating revenue relating to the Company's continuing
operations for 1997 included $12,191,384 associated with nursing home operations
in the New England market area. This revenue related to nursing facilities,
which are owned or leased by the Company beginning in 1997. Routine operating
income from nursing home operations reported in 1997 totaled $1,680,148 and
represents a return of approximately 14% on related revenue.
Ancillary services revenue relating to the Company's continuing operations
for 1997 totaled $11,283,832 representing an increase of $2,964,681 or
approximately 36% over 1996. This increase is largely attributable to the
Company's ancillary services business developed in New England where related
revenue totaled $2,088,523 for 1997. Routine operating income from ancillary
services revenue reported in 1997 totaled $1,196,479 and represents a return of
approximately 11% on related revenue. The routine operating margin reported on
ancillary services revenue for 1996 approximated 8.5%.
Management services revenue relating to the Company's continuing operations
for 1997 totaled $2,037,324 representing an increase of $1,052,577 or
approximately 107% over 1996. This revenue relates to six nursing facilities
located in the New England market area managed by the Company. Routine operating
income from management services reported in 1997 totaled $808,023 and represents
a return of approximately 40% on related revenue.
Revenue derived from development services has diminished materially and
reflects the Company's concentration on development activities for its own
account. Consequently, the Company is precluded from realizing development fee
income which historically had been derived from third party projects and related
transactions.
Consolidated routine operating expenses relating to the Company's continuing
operations reported for 1997 totaled $26,204,750 compared to $13,316,234 for
1996, representing an increase of $12,888,516 or 97% during 1997. This compares
to an increase in related revenue during 1997 of 127% over 1996. Of this
reported increase in consolidated routine operating expenses, $10,511,236 or 82%
relates to the Company's nursing home operations developed in New England;
$2,472,734 or 19% relates to increased ancillary services; $472,159 or 4%
relates to increased management services costs in New England; and, ($567,613)
or (5%) relates to decreased general and administrative expenses effected by the
Company during 1997.
General and administrative expenses reported for 1997 include $4,072,880
associated with the Company's corporate management and related costs of
corporate overhead. Comparable corporate expenses reported for 1996 totaled
$3,955,804. Significant components of such costs for 1997 included
21
<PAGE>
salaries and related costs for executive management of $1,735,409; legal and
professional fees of $857,786; contracted services of $174,562; travel and
related expenses of $550,305; insurance expenses of $307,478; and other general
expenses. Significant components of such costs for 1996 included salaries and
related costs for executive management of $1,384,337; legal and professional
fees of $716,956; contracted services of $797,907; travel and related expenses
of $366,783; insurance expenses of $213,563; and other general expenses.
Property and capital related expenses together with other income (expense)
reported for 1997 totaled a net expense of $8,059,906 representing an increase
of $5,054,341 over 1996. Of this amount reported in 1997, $5,637,703 represents
non-cash charges to current year operations associated with the write down of
intangible assets associated with discontinued operations. Other major
components for 1997 include interest expense of $1,015,534 and property lease
expense of $916,839. Significant components of 1997 interest expense include
$225,806 relating to corporate debt obligations; $637,047 relating to property
mortgages and working capital debt associated with New England nursing home
operations; and $103,338 in interest costs associated with the Company's
ancillary services business. Property lease expense reported totaling $916,839
in 1997 relates to two nursing facilities in New England which operations were
assumed under a lease purchase arrangement commencing in March 1997.
The income tax expense reported for 1997 totaling $2,800,000 results
principally from the Company's reserve against deferred tax assets reported in
prior periods and represents a non cash charge to 1997 operations. The deferred
tax asset relates to net operating loss carry forward benefits available to the
Company for which the future utilization against taxable income is uncertain.
During 1997, the Company discontinued operations associated with certain
segments of its long-term care business. Specifically, these included subsidiary
operations providing third party development and management services to
independent owners and operators of long-term care facilities and relating to
the Company's prior business acquisitions of Greenbrier Healthcare Services,
Inc. and New Health Management Systems, Inc. In addition, the Company
discontinued operations associated with providing respiratory therapy services
and relating to the prior business acquisition of King Care Respiratory
Services, Inc.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
LIQUIDITY AND CAPITAL RESOURCES
During 1998 and to date, the Company has been successful in reducing levels
of its corporate overhead and general and administrative costs. Nonetheless, the
Company requires an increased business base and higher level of profitability to
support its business structure. In addition, funds provided by Company's
existing operations are insufficient to satisfy its short term obligations and,
consequently, the Company requires significant new sources of working capital.
The new management team is in the proces of settling or otherwise attempting to
secure forebearance arrangements with its creditors while continuing to develop
and implement a growth strategy and capitalization plan for the Company.
Management is currently evaluating its options and alternatives in addressing
the insufficiency of funds to meet its short term obligations.
As further described in Corporate Developments / Significant Transactions,
the Company experienced a change in control during the fourth quarter of 1998.
This change included the introduction of new executive management whose plans
include proactively dealing with the Company's current financial and legal
challenges while implementing a growth strategy for the future. New management
continues to confront and settle numerous corporate creditor issues. Among the
benefits resulting from the change in control has been the infusion of limited
working capital represented by the $1,000,000 line of credit available through
Match that has been needed to revitalize existing operations and access capital
resources required to effectively deal with corporate obligations. To date, this
credit facility has been fully utilized by the Company for working capital
purposes, principally in settling corporate claims.
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
22
<PAGE>
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 working capital, there can be no assurance that new
management will be successful in its efforts to improve the Company's financial
position and operating performance.
At December 31, 1998, the Company reports a working capital deficit of
$15,021,996 compared with a working capital deficit position of $1,574,045 at
December 31, 1997. This deterioration of working capital during 1998 has
resulted largely from the reclassification of long-term debt (see, Note 16 to
the Consolidated Financial Statements) and; collection reserves required for
notes and accounts receivable. The existing working capital deficit position of
the Company has been constraining and limits of the Company's ability to
effectively support existing lines of business.
Cash and cash equivalents reported at December 31, 1998 totaled $755,553 and
include restricted amounts of $476,189. Restricted cash principally represents a
loan reserve for mortgage indebtedness associated with two nursing home
properties owned by the Company and located in Massachusetts. Cash and cash
equivalents reported at December 31, 1997 totaled $639,236 of which $448,540
relates to the mortgage loan reserve account.
Accounts receivable reported at December 31, 1998 totaled $2,470,416
representing 89% to total current assets. This amount is comprised of $2,461,360
relating to nursing home operations, $3,109,702 relating to ancillary services,
and $1,322,051 relating to management services, net of an aggregate allowance
for doubtful accounts of $4,422,697. Accounts receivable reported at December
31, 1997 totaled $7,596,741, representing 79% of total current assets. This
amount is comprised of $3,958,735 relating to nursing home operations;
$4,720,521 relating to ancillary services; and, $2,300,152 relating to
management services; net of an aggregate allowance of doubtful accounts of
$3,382,667.
Notes payable to banks and other at December 31, 1998 totaled $4,840,931 and
includes notes payable to bank and financing companies aggregating $3,311,918 of
which approximately $1,054,862 relates to working capital financing associated
with nursing home operations and $2,257,056 relates to working capital financing
associated with ancillary services business. The notes associated with ancillary
services have been formally declared in default. Other liabilities include
judgment creditors aggregating $1,350,000 and other short-term note and
equipment lease obligations totaling approximately $379,000. Notes payable to
banks and other at December 31, 1997 totaled $5,638,262 and include $3,910,000
relating to working capital financing associated with ancillary services in the
amount of $3,085,000 and nursing home operations in the amount of $825,000.
Other notes payable at December 31, 1997 totaled $1,705,000 and represent
various corporate obligations that have been formalized as short-term note
instruments and remain outstanding. At December 31, 1998 and 1997 the
availability under working capital financing arrangements is fully extended.
Accounts payable at December 31, 1998 totaled $3,214,597 and includes
$1,167,596 associated with nursing home operations; $1,396,399 associated with
ancillary services; $250,602 associated with management services; and $400,000
associated with corporate accounts payable. Accounts payable at December 31,
1997 totaled $3,439,953 and includes $1,323,128 associated with nursing home
operations; $1,160,364 associated with ancillary services; $435,212 associated
with management services; and, $521,249 representing corporate accounts payable.
Accrued expenses and other liabilities at December 31, 1998 totaled
$1,217,716. Significant components include $721,608 in accrued expenses
associated with nursing operations; $207,748 in accrued expenses associated with
management services; and $288,360 in accrued salaries and related costs. Accrued
expenses and other liabilities at December 31, 1997 totaled $1,476,905.
Significant components include $773,905 in accrued expenses associated with
nursing home operations; approximately $368,000 in accrued expenses associated
with ancillary services; and approximately $335,000 in accrued salaries and
related costs.
Long-term debt reported by the Company at December 31, 1998 and 1997 totaled
$1,696,500 and $10,010,000, respectively, and includes $8,550,000 in mortgage
financing associated with nursing home
23
<PAGE>
acquisitions in Massachusetts during 1997. Initial terms of this financing
provide for interest only payable monthly at annual rates that approximate ten
percent. At December 31, 1998, the Company was in technical default on
$8,300,000 of the mortgage financing. Such amount has been classified as a
current liability because of the technical default. In addition, at December 31,
1998, the Company reports a long-term note obligation in the principal amount of
$1,460,000. This note is for a ten year term and is being amortized over
twenty-five years with an interest rate of ten percent. The financing was
incurred for general corporate purposes and the note is secured by the nursing
facilities owned and leased by the Company in Massachusetts.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company reported a working capital deficit of
$1,574,045 compared with a positive working capital position at December 31,1996
of $3,077,163. This deterioration in the Company's working capital position
during 1997 resulted largely from having had to subsidize working capital
associated with discontinued operations as well as having had to utilize working
capital reserves to settle corporate obligations associated with prior business
and development activities of the Company.
Cash and cash equivalents relating to the Company's continuing operations at
December 31, 1997 totaled $639,236 and include restricted amounts of $448,540.
Restricted cash represents a loan reserve for mortgage indebtedness associated
with two nursing home properties owned by the Company and located in New
England. Cash and cash equivalents at December 31, 1996 totaled $654,197 and
include a certificate of deposit held by a financial institution in the amount
of approximately $520,000. This certificate was redeemed in March 1997 and was
utilized to satisfy an outstanding credit obligation totaling $516,000, which is
included in notes payable at December 31, 1996.
Accounts receivable relating to the Company's continuing operations at
December 31, 1997 of $7,596,741, representing 79% of total current assets, were
comprised of $3,958,735 relating to nursing home operations; $4,720,521 relating
to ancillary services; and, $2,300,152 relating to management services; net of
an aggregate allowance for doubtful accounts of $3,382,667. The substantial
level of allowance relates to accounts receivable from nursing home operations
and amounts relating to ancillary and management services for unrelated nursing
facilities associated with discontinued operations. Accounts receivable relating
to the Company's continuing operations at December 31, 1996 of $3,724,952,
representing 52% of total current assets, were comprised of $3,707,981 relating
to ancillary services and $327,911 relating to management services, net of an
aggregate allowance for doubtful accounts of $310,940. At December 31, 1998, all
accounts receivable amounts not realized by the Company were fully reserved.
Prepaid expenses and other current assets relating to the Company's
continuing operations at December 31, 1997 totaled $712,343. Subscriptions
receivable of $789,000 represent a common stock subscription receivable from
NewCare Health Corporation pursuant to an investment agreement and corporate
merger proposal. This receivable was fully realized by the Company during the
first quarter of 1998. The merger proposal was abandoned. Other prepaid expenses
and current assets reported include deposits and interest receivable associated
with the Company's outstanding notes and loans due from third parties.
Significant components of prepaid and other current assets at December 31, 1996
included project costs advanced in connection with transactions involving the
Company in a development capacity in New England. Such costs were largely
recovered during 1997 or otherwise reserved at December 31, 1997. At December
31, 1998, all project cost amounts not realized by the Company were fully
reserved.
Notes and loans receivable relating to the Company's continuing operations
at December 31, 1997 aggregated $2,988,064 and predominantly related to long
term care facilities for which the Company had provided development services or
otherwise advanced capital to secure management rights. Of the amounts
outstanding, nearly $2,000,000 relates to nursing home properties in New England
for which the Company provides or provided management services. The notes and
loans generally formalized as long
24
<PAGE>
term, matured over periods approximating ten years and bear simple interest
between eight and ten percent. Further, payments are generally subordinated to
senior debt and other priority operating obligations of the properties. Notes
and loans receivable reported at December 31, 1996 resulted largely from
development services income recognized by the Company in prior periods as well
as from working capital advances made by the Company to support facilities
pursuant to its obligations under operating deficit agreements. At December 31,
1997, approximately $2,500,000 were reserved for collection. At December 31,
1998, all notes and accounts receivable amounts not realized by the Company were
fully reserved.
Notes payable to banks and other relating to the Company's continuing
operations at December 31, 1997 totaled $5,638,262 and included $3,910,000
outstanding and relating to working capital financing of accounts and notes
receivable and associated with the Company's continuing operations.
Specifically, $3,085,000 related to working capital financing associated with
ancillary services and $825,000 related to working capital financing associated
with nursing home operations in New England. At December 31, 1997, the
availability under these working capital financing arrangements was fully
extended. Other notes payable at December 31, 1997 totaled $1,705,000 and
represented various corporate obligations that have been formalized as
short-term note instruments and remain outstanding. Notes payable reported
outstanding at December 31, 1996 relate to working capital and equipment notes
associated with ancillary services.
In January 1997, the Company obtained a $500,000 loan from National Employer
Solutions, Inc. ("NES"). This loan was due on demand, included interest at the
rate of prime plus 5% and is secured by one of the Company's notes receivable
having a face value of $550,000. The loan having an original maturity of March
1997, was extended to August 1997. At December 31, 1997, the loan obligation
remained due NES, totaled approximately $515,000, including accrued interest and
was reported in Notes payable banks and other. Litigation was commenced by NES
to collect this note in December 1997. In February 1999, this litigation was
settled for $350,000 with an associated installment payment plan.
During April 1997, the Company's New England based operating subsidiary, OHI
Corporation (d/b/a "Oasis Healthcare"), secured a working capital line of credit
from a financial institution in the amount of $1,500,000. The line was secured
by various notes receivable and management contract rights associated with the
Company's operating subsidiary, which amounts were fully reserved by the Company
in 1998. The line was due on demand and accrues interest at the bank's base rate
plus 1% on amounts outstanding. At December 31, 1997, the Company had utilized
$1,481,500 of this financing to support working capital and development
activities of its New England based operating subsidiaries. This note payable is
reported in Notes payable banks and other at December 31, 1997. In December
1998, this note obligation was declared in default by the lender.
During May 1997, the Company's Philadelphia based ancillary service
subsidiaries secured a working line of credit of up to $4,000,000 of which
approximately $1,600,000 was outstanding at December 31, 1997 representing the
maximum availability under the credit arrangement at year end. This line of
credit is secured by the subsidiaries' accounts receivable; was due on demand
and accrues interest at the rate of prime plus 2.25% on amounts drawn and
outstanding. To date this working capital line of credit remains outstanding in
the amount of the maximum availability. This note payable is reported in Notes
payable banks and other at December 31, 1997. During 1998, the Company provided
a full reserve for the collection of the collateral accounts receivable
associated with this note payable. The lender has formally declared a condition
of default resulting from non-payment by the Company.
In April and July 1997, the Company entered into two working capital lending
programs regarding four nursing homes owned and leased in Massachusetts. These
programs allow for maximum borrowings of $2,000,000 in the aggregate and are
collateralized by accounts receivable of the nursing homes. Interest is incurred
at the rate of 11% on one program and 12.5% on the other. Total borrowings under
the two programs approximated $935,000 at December 31, 1997 and $1,055,000 at
December 31, 1998.
In September 1997, the Company settled an outstanding lawsuit with NPFII-W
as described in the Company's 10-K for the year ended December 31, 1996. The
settlement called for the Company to pay NPFII-W $500,000 over 5 years, with the
unpaid balance accruing interest at the rate of 10% per annum, together with
50,000 shares of the Company's Common Stock. At December 31, 1998, the Company
was in default of this settlement agreement.
25
<PAGE>
During August 1997, the Company agreed to pursue a proposed private equity
offering and in connection therewith secured a bridge loan in the amount of
$300,000. The bridge loan included interest at 10% per annum and was to mature
upon the earlier of (i) December 5, 1997 or (ii) the successful consummation by
the Company of any financing raising at least $500,000. In addition, in
consideration of the bridge loan, the Company issued to the lender a five-year
warrant to purchase 325,000 shares of the Company's Common Stock at an exercise
price of $0.50 per share. In the event of a default under the bridge loan, the
principal thereof and all accrued, unpaid interest thereon would be convertible
into shares of the Company's Common Stock at a price of $0.25 per share; and, in
such event, the exercise price of the warrants issued would automatically reduce
to $0.25 per share. During 1997, the Company realized net proceeds of
approximately $255,000 in connection with this bridge loan and financing
transaction. The Company subsequently abandoned the proposed equity offering
contemplated and negotiated a cancellation of its obligations associated with
the issue of Company warrants. Total expenditures incurred by the Company to
satisfy the loan obligation and effect cancellation of the related consideration
amounted to $430,492. At December 31, 1997, approximately $211,000 had been paid
by the Company towards this settlement and the balance was fully paid during the
first quarter of 1998. At December 31, 1997, the principal loan obligation
outstanding totaled $150,000 and is reported in Notes payable banks and other.
This note obligation was fully paid during 1998.
During 1997, the Company had formalized a note payable associated with
certain legal and professional fees incurred. The note payable was for
approximately $450,000, is unsecured, bears interest at approximately 12%, and
is due on demand. At December 31, 1997, this note is reported in Notes payable
banks and other. At December 31, 1998, this obligation remains outstanding and
is the subject of pending litigation.
Accounts payable relating to the Company's continuing operations at December
31, 1997 totaled $3,439,953 and includes $1,323,128 associated with nursing home
operations; $521,249 representing corporate accounts payable; $1,160,364
relating to ancillary services; and, $435,212 relating to management services.
Accounts payable reported at December 31, 1996 totaled $1,770,842 and includes
$264,539 representing corporate accounts payable; $1,117,506 relating to
ancillary services; and, $388,797 relating to management services.
Accrued expenses and other liabilities relating to the Company's continuing
operations at December 31, 1997 totaled $1,476,905. Significant components
include accrued payroll and related costs of $335,026; and accrued expenses
associated with nursing home operations totaling $773,574. Accrued expenses and
other liabilities reported at December 31, 1996 totaled $767,404 and included
accrued payroll and related costs of $244,756 together with accrued expenses
associated with ancillary services of $243,887 and corporate obligations
totaling $278,761.
Long-term debt reported by the Company relating to the Company's continuing
operations at December 31, 1997 totaled $8,550,000 and related exclusively to
mortgage financing associated with nursing home acquisitions in New England
during 1997. Initial terms of this financing provide for interest only payable
monthly at annual rates that approximate ten percent. The mortgage financing
totalling $8,300,000 was in technical default and classified as a current
liability at December 31, 1998.
In December of 1997, the Company executed a note payable for approximately
$145,000 to one of its former subsidiaries in exchange for certain retained
assets of the former subsidiary. The note bears interest at 10% and is payable
over two years. At December 31, 1998, this obligation was discounted to $47,398
and paid in the first quarter of 1999.
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
26
<PAGE>
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 is in contact with suppliers, customers and financial
institutions to assure no interruption in the relationship between the Company
and these third parties concerning Y2K compliance issues. Highest priority is
being placed on working with suppliers that are critical to the business. The
Company may also be affected by the failure of other third parties to be Y2K
compliant even if they do not do business directly with the Company. For
example, the failure of state, Federal and private payors or reimbursers to be
Y2K compliant and thus unable to make timely, proper or complete payments to the
Company or to third party vendors that do business with the Company, could have
a material adverse effect on the Company. The Government Accounting Office has
stated that the Health Care Financing Administration, the principal Federal
reimburser to the Company, may not become fully Y2K compliant on a timely basis.
The Company does not currently have a Y2K contingency plan established. The
Company expects by mid-1999 to have finalized a contingency plan which will
address the most likely worse case Y2K scenario. 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 December 31,
1998, the Company has not incurred any material costs to replace, upgrade or
repair systems and/or equipment that are non-compliant and expects the future
costs to complete these efforts should not exceed $100,000. The Company
presently anticipates that its remediation efforts will be substantially
completed in the second quarter of 1999. Testing of certain business critical
items is expected to be completed in the third quarter of 1999.
27
<PAGE>
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.
EFFECTS OF INFLATION
The Company does not expect inflation to materially effect its results of
operations. However, the health care industry is labor intensive. Wages and
other related labor costs are especially sensitive to inflation and future
operating costs could be subject to general economic and inflationary pressures.
Accordingly, the Company cannot predict its ability to control such cost
increases.
NEW ACCOUNTING STANDARDS
The Company was required to implement Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128") in the fourth quarter of
1997. The effect of the implementation of SFAS 128 was not material.
In 1998, the Company adopted Statements of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income", No. 131 "Disclosures About Segments of
an Enterprise and Related Information" and No. 132 "Employees" Disclosures About
Pensions and Other Post-retirement Benefits". The effects of implementation of
these statements were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required to be filed pursuant to this
Item 8 begin on Page F-1 of this report. Such consolidated financial statements
are hereby incorporated by reference into this Item 8. The Supplementary Data
requirement as set forth in Item 302 of Regulation S-K is inapplicable to the
Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 7, 1999, the Company terminated its relationship with Asher &
Company as the Company's independent certified public accountants. During the
two most recent fiscal years and any subsequent interim period, except for the
auditor's report dated April 23, 1998 which included a going concern explanatory
paragraph, there have been no adverse opinions, disclaimers of opinion or
qualifications or modifications as to uncertainty, audit scope or accounting
principles regarding the reports of Asher & Company and there have been no
disagreements between management and Asher & Company on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure of a nature which if not resolved to the satisfaction of Asher &
Company would have caused it to make reference to the subject matter of such
disagreement in connection with its report.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The consolidated financial statements filed as part of this report are
listed under the caption "Index to Consolidated Financial Statements,"
appearing elsewhere in this report.
2. Financial Statement Schedules
Schedules II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
3. Exhibits.
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this annual report.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the fourth
quarter of 1998:
<TABLE>
<CAPTION>
DATE ITEMS REPORTED FINANCIAL STATEMENTS
- ----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
November 17, 1998 Change in Control None
</TABLE>
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
29
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Reports of Independent Certified Public Accountants........................................................ F-1
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)....................................... F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-8
Reports of Independent Certified Public Accountants on Financial Statement Schedule........................ F-27
Schedule II--Valuation and Qualifying Accounts............................................................. F-29
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
DALLAS, TEXAS
We have audited the accompanying consolidated balance sheet of Iatros Health
Network, Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Iatros
Health Network, Inc. and Subsidiaries as of December 31, 1998 and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company experienced significant
recurring net losses, has negative working capital as of December 31, 1998, and
is currently in default on certain covenants of its debt agreements. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 2. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
WEAVER & TIDWELL LLP
Dallas, Texas
March 30, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
DALLAS, TEXAS
We have audited the accompanying consolidated balance sheet of Iatros Health
Network, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Iatros Health
Network, Inc. and Subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statments have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company experienced significant net
losses in 1997 and 1996, has a negative working capital as of December 31, 1997,
and is currently in default on certain covenants of its debt agreements. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 2. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Asher & Company, Ltd.
Philadelphia, Pennsylvania
April 23, 1998
F-2
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................. $ 279,364 $ 190,696
Accounts receivable, net.............................................................. 2,470,416 7,596,741
Subscription receivable............................................................... -- 789,000
Inventory............................................................................. 14,968 357,409
Prepaid expenses and other current assets............................................. -- 712,343
---------- ----------
Total current assets................................................................ 2,764,748 9,646,189
PROPERTY AND EQUIPMENT, net............................................................. 8,392,222 9,108,815
OTHER ASSETS
Cash and cash equivalents, restricted................................................. 476,189 448,540
Intangible assets, net................................................................ 347,753 1,972,385
Notes receivable...................................................................... -- 2,573,904
Loans receivable and other assets..................................................... -- 414,160
Net long-term assets of discontinued operations....................................... -- 90,993
---------- ----------
823,942 5,499,982
---------- ----------
TOTAL ASSETS............................................................................ $11,980,912 $24,254,986
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable, banks and other........................................................ $4,840,931 $5,638,262
Accounts payable...................................................................... 3,214,597 3,439,953
Current maturities of long term debt.................................................. 13,500 --
Accrued expenses and other current liabilities........................................ 1,217,716 1,476,905
Current portion of capital lease obligations.......................................... 200,000 146,210
Long-term debt in technical default................................................... 8,300,000 --
Net current liabilities of discontinued operations.................................... -- 518,904
---------- ----------
Total current liabilities........................................................... 17,786,744 11,220,234
LONG-TERM DEBT.......................................................................... 1,696,500 8,550,000
CAPITAL LEASE OBLIGATIONS............................................................... -- 67,478
---------- ----------
19,483,244 19,837,712
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, 25,000,000 shares authorized; 20,969,958 and 20,869,958
issued or issuable and outstanding in 1998 and 1997, respectively................... 20,970 20,870
Additional Paid-In Capital............................................................ 36,059,867 36,059,867
Accumulated Deficit................................................................... (43,583,802) (31,664,096)
---------- ----------
(7,502,332) 4,417,274
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).................................... $11,980,912 $24,254,986
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IATROS HEALTH NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues
Nursing home operation services................................ $ 18,526,030 $ 12,191,384 $ --
Ancillary services............................................. 7,526,597 11,283,832 8,319,151
Management services............................................ 1,085,400 2,037,324 984,747
Development services........................................... -- -- 1,957,221
-------------- -------------- --------------
27,138,027 25,512,540 11,261,119
Routine operating expenses
Nursing home operation services................................ 16,234,982 10,511,236 --
Ancillary services............................................. 6,817,481 10,087,353 7,614,619
Management services............................................ 1,742,941 1,229,301 757,142
General and administrative..................................... 1,090,948 4,376,860 4,944,473
-------------- -------------- --------------
25,886,352 26,204,750 13,316,234
-------------- -------------- --------------
Property and capital related expenses
Interest expense............................................... 1,652,707 1,015,534 620,224
Facilities lease expense....................................... 1,422,549 916,839
Depreciation and amortization.................................. 762,789 677,345 690,022
-------------- -------------- --------------
3,838,045 2,609,718 1,310,246
-------------- -------------- --------------
Loss from continuing operations before other income (expense),
income taxes and discontinued operations....................... (2,586,370) (3,301,928) (3,365,361)
Other income (expense)
Write-off of intangible assets................................. (3,251,617) (5,637,703) (2,228,923)
Provision for doubtful notes and accounts receivable........... (6,360,256)
Write-off of fixed assets...................................... (469,045)
Interest and other income...................................... 128,035 187,515 533,604
Gain on settlement of liabilities.............................. 619,547 -- --
-------------- -------------- --------------
(9,333,336) (5,450,188) (1,695,319)
Income (loss) from continuing operations before
income taxes and discontinued operations....................... (11,919,706) (8,752,116) (5,060,680)
Income tax benefit (expense), net................................ -- (2,341,000) 820,000
-------------- -------------- --------------
Income (loss) from continuing operations before
discontinued operations........................................ (11,919,706) (11,093,116) (4,240,680)
Discontinued operations
Income (loss) from operations, net of income taxes expense
(benefit) of $(202,000) in 1997 and $360,000 in 1996........... (3,125,544) (6,073,881)
Loss on separation, net of income taxes of $(257,000)............ (3,991,682)
-------------- -------------- --------------
Net Loss......................................................... $ (11,919,706) $ (18,210,342) $ (10,314,561)
-------------- -------------- --------------
-------------- -------------- --------------
Basic and diluted loss per share:
Continuing operations.......................................... $ (.58) $ (.67) $ (.32)
Discontinued operations........................................ -- (.43) (.43)
-------------- -------------- --------------
Loss per Common Share............................................ $ (.58) $ (1.10) $ (.75)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ----------- --------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 (as
restated)........................... 633,333 $ 633 11,351,745 $ 11,351 $20,441,130 $(3,139,193) $17,313,921
Issuance of common stock in connection
with the conversion of convertible
debt securities..................... -- -- 3,815,020 3,815 12,707,394 -- 12,711,209
Costs of issuance incurred in
connection with a sale of
convertible debt securities......... -- -- -- -- (683,466) -- (683,466)
Issuance of common stock in connection
with exercise of public warrants.... -- -- 92,572 93 267,522 -- 267,615
Issuance of common stock in connection
with the exercise of warrants and
options............................. -- -- 619,325 619 1,147,393 -- 1,148,012
Issuance common stock in connection
with a sale of securities........... -- -- 52,838 53 214,997 -- 215,050
Compensation incurred in connection
with a sale of securities........... -- -- -- -- 48,000 -- 48,000
Net Loss.............................. -- -- -- -- -- (10,314,561) (10,314,561)
--------- ----- --------- ---------- ----------- ------------ -----------
Balance, December 31, 1996 (as
restated)........................... 633,333 633 15,931,500 15,931 34,142,970 (13,453,754) 20,705,780
Issuance of common stock in connection
with the conversion of convertible
debt securities..................... -- -- 679,268 679 666,772 -- 667,451
Issuance of common stock in connection
with the exercise of warrants and
options............................. -- -- 209,190 210 91,379 -- 91,589
Issuance of common stock in connection
with conversion of debt............. -- -- 4,050,000 4,050 1,042,825 -- 1,046,875
Costs of issuance in connection with a
sale of convertible debt
securities.......................... -- -- -- -- (67,079) -- (67,079)
Compensation incurred in connection
with a sale of securities........... -- -- -- -- 183,000 -- 183,000
Net Loss.............................. -- -- -- -- (18,210,342) (18,210,342)
--------- ----- --------- ---------- ----------- ------------ -----------
Balance, December 31, 1997 (as
restated)........................... 633,333 633 20,869,958 20,870 36,059,867 (31,664,096) 4,417,274
Issuance of common stock in connection
with the exercise of warrants....... -- -- 100,000 100 100
Net Loss.............................. -- -- -- -- (11,919,706) (11,919,706)
--------- ----- --------- ---------- ----------- ------------ -----------
Balance, December 31, 1998............ 633,333 $ 633 20,969,958 $ 20,970 $36,059, 867 ($43,583,802) $(7,502,332)
--------- ----- --------- ---------- ----------- ------------ -----------
--------- ----- --------- ---------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
IATROS HEALTH NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................................... $ (11,919,706) $ (18,210,342) $ (10,314,561)
Adjustments to reconcile net loss to net cash provided
(utilized) by operating activities:
Loss from discontinued operations............................ -- 3,734,682 6,433,881
Loss on disposal of discontinued operations.................. -- 2,923,544 --
Net cash utilized by discontinued operations................. -- (467,773) (3,378,138)
Depreciation and amortization................................ 762,789 677,346 690,021
Provision for doubtful accounts receivable................... 530,540 1,164,101 467,906
Provision for notes, loans and deposits receivable and
write-off of fixed assets.................................. 6,829,301 4,402,324 1,150,000
Write-off of intangible assets............................... 3,251,617 577,971 2,173,485
Gain on settlement of liabilities............................ (619,547) -- --
Common stock issued for services rendered.................... -- 183,000 48,000
Deferred taxes............................................... -- 2,750,000 (1,180,000)
Changes in:
Accounts receivable.......................................... 2,502,378 (5,891,941) (928,434)
Notes and loans receivable................................... -- 357,154 (2,145,197)
Inventory.................................................... 193,543 86,346 16,590
Prepaid expenses and other................................... 726,141 (476,542) (489,131)
Accounts payable............................................. (225,256) 1,884,227 819,562
Accrued expenses and other................................... (695,376) 1,838,983 304,185
-------------- -------------- --------------
Net cash provided (utilized) by operating activities......... 1,336,424 (4,466,920) (6,331,831)
INVESTING ACTIVITIES
Purchase of property and equipment............................. (229,567) (173,729) (135,322)
Acquisition of businesses...................................... -- -- (215,050)
Acquisition of contract rights................................. -- -- (2,164,478)
Loans to third parties......................................... (434,000) -- (3,185,541)
Repayment of loans to third parties............................ -- -- 445,555
Deposits, net.................................................. -- 100,000 (1,110,000)
Restricted cash and cash equivalents........................... -- (12,790) 375,000
Organization costs............................................. (295,000) (63,064) (37,563)
-------------- -------------- --------------
Net cash utilized by investing activities...................... (958,567) (149,583) (6,027,399)
-------------- -------------- --------------
</TABLE>
-Continued-
F-6
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net proceeds from issuance of capital stock and other capital
contributions.......................................................... $ $ 302,589 $ 1,415,627
Proceeds from issuance of long-term debt in 1998 and of convertible
debentures in 1996..................................................... 422,224 -- 12,900,000
Fees paid on issuance of convertible debentures.......................... -- (876,331)
Short term borrowings, net............................................... (583,539) 3,937,239 33,330
Payments of long-term debt............................................... (127,874) -- (438,013)
Stockholders' loan payments.............................................. -- (443,683)
Capital lease obligations, net........................................... (100,966) (65,023)
Security deposits, net................................................... 14,140 (69,351)
----------- ------------ ------------
Net cash provided (utilized) by financing activities..................... (289,189) 4,153,002 12,456,556
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 88,668 (463,501) 97,326
Cash and cash equivalents, beginning of year............................. 190,696 654,197 556,871
----------- ------------ ------------
Cash and cash equivalents, end of year................................... $ 279,364 $ 190,696 $ 654,197
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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
Iatros Health Network, Inc. and Subsidiaries (the "Company") is a Delaware
Corporation organized in June 1988. The Company is engaged in providing services
to the long-term care industry. As of December 31, 1998, the Company provides
long-term care services to nursing home patients and assisted living facilities
residents in the states of New Hampshire and Massachusetts. During 1998, the
Company closed its ancillary service operations in Philadelphia, Pennsylvania
and relocated its corporate headquarters from Atlanta, Georgia to Dallas, Texas.
During 1997, the Company discontinued development and management services
operations in Maryland (See Note 3).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Iatros Health
Network, Inc. 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
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. Development
services revenue is generally realized on a fee for service basis recognized
upon completion of the service transaction.
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.
F-8
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(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
Life of
Property and equipment held under capital leases.............. 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 contracts
obtained by the Company. Management contracts provide for a management fee in
exchange for management, marketing and development services provided to the
facilities. Contract rights are being amortized over the term of the related
contracts.
F-9
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 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
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 earnings per share is based upon the weighted average number of common
shares outstanding during the period.
Diluted earnings per share is based upon the weighted average number of
common shares outstanding during the period plus the number of incremental
shares of common stock contingently issuable upon exercise of stock options and
warrants.
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
F-10
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
reported amounts of revenue and expenses during the reporting periods. Actual
results could differ from these estimates.
RECLASSIFICATIONS AND ADJUSTMENTS TO PRIOR PERIODS
Certain amounts have been reclassified in 1997 and 1996 to conform with the
1998 presentation.
Certain balance sheet adjustments have been made to adjust leasehold rights
capitalized in 1997. The effect of this adjustment was to reduce previously
reported leasehold rights and accrued expenses by $982,292 at December 31, 1997.
Previously reported preferred stock dividends payable and accumulated deficit
have been restated because the preferred stock dividends were never declared.
The effects of this restatement were to increase previously reported
stockholders' equity at December 31, 1995, 1996, and 1997 by $230,000, $390,000
and $550,000, respectively and decrease previously reported accrued expenses by
the same amount at those respective dates. Finally, basic loss per share for the
years ended December 31, 1997 and 1996 have been restated due to a calculation
error. The effects were to reduce previously reported basic loss per share $.03
and $.02 per share, respectively, for the years ended December 31, 1997, and
1996.
NOTE 2: GOING CONCERN
For the year ended December 31, 1998, the Company reported a net loss of
$11,919,706. This is largely attributable to adjustments associated with the
write-down of intangible assets of $3,251,617; provision for notes and accounts
receivable of $6,360,256; and operating losses incurred from continuing
operations totaling $2,586,370 for the period. Recent significant net losses
reported by the Company through December 31, 1998 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 December 31, 1998, the Company reports a working capital deficit of
$15,021,996 compared with a working capital deficit of $1,574,045 at December
31, 1997. This deterioration in working capital during 1998 results largely from
the increase in reserve for doubtful notes and accounts receivable during 1998
and the reclassification to current liabilities of a long-term debt obligation
in technical default at December 31, 1998. The Company has been successful in
reducing levels of its corporate overhead and general administrative expenses.
Nonetheless, 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.
F-11
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 3: RESTRUCTURING/DISCONTINUED OPERATIONS
During 1998, the Company closed its ancillary service operations in
Philadelphia, Pennsylvania and relocated its corporate headquarters to Dallas,
Texas. The Company intends to continue to provide a full range of ancillary
services. In March 1999, the Company acquired a rehabilitation therapy services
provider to long-term care facilities in Texas and Oklahoma (see Note 24).
During 1997, the Company discontinued operations associated with certain
segments of its business. Specifically, these included subsidiary operations
providing third party development and management services to independent owners
and operators of long-term care facilities and relating to the Company's prior
business acquisitions of Greenbrier Healthcare Services, Inc. and New Health
Management Systems, Inc. In addition, the Company discontinued operations
associated with providing respiratory therapy services and relating to the prior
business acquisition of King Care Respiratory Services, Inc.
Net current assets and liabilities associated with discontinued operations
at December 31, 1997 totaled $49,186 and $586,090, respectively. Net long-term
assets and liabilities associated with discontinued operations at December 31,
1997 totaled $97,362 and $6,369, respectively. During 1998 all accounts
associated with discontinued operations were realized or otherwise liquidated.
Revenue associated with discontinued operations for the years ended December
31, 1997 and 1996 totaled $3,728,130 and $10,601,633, respectively.
NOTE 4: SIGNIFICANT CAPITAL STOCK TRANSACTIONS
During 1997 and 1996, the Company completed a number of significant capital
stock transactions that include the following:
In December 1997, the Company contracted to issue four million shares of its
common stock to NewCare Health Corporation at a price of $.25 per share for an
aggregate investment of $1,000,000.
In January 1996, the Company completed the sale of $12,900,000 of its 10%
Subordinated Convertible Debentures. The Debentures pay interest in quarterly
installments at the rate of 10% per annum. The Debentures are convertible into
shares of the Company's Common Stock, with the conversion rate determined by a
formula based upon the share price of the Company's Common Stock. Costs
associated with the issuance of the Debentures totaled $876,331. Through
December 31, 1996, $12,300,000 was converted into a total of 3,815,020 shares of
Common Stock. During 1997, $600,000 was converted into 679,268 shares of Common
Stock.
NOTE 5: CASH AND CASH EQUIVALENTS
As of December 31, 1998 and 1997 restricted cash and cash equivalents
relates principally to a loan reserve held in escrow in connection with a
mortgage loan payable.
NOTE 6: SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid $1,353,314, $1,015,534 and $640,881 in cash for interest
during 1998, 1997 and 1996, respectively. Interest paid attributable to
discontinued operations totaled $50,102 and $79,761 as of December 31, 1997 and
1996.
F-12
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 6: SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED)
During 1998, the Company issued $1,475,000 in debt to acquire a note
receivable which was subsequently determined to be impaired and fully charged to
operations.
During 1998, notes payable were settled for $619,547 less than their
recorded amount.
During 1998, $82,717 of accrued interest was added to a note payable.
During March 1997, the Company's wholly-owned subsidiary, OHI Corporation,
which does business as Oasis Healthcare (``Oasis") leased two nursing facilities
located in Holyoke and Greenfield, Massachusetts having a combined total of 222
beds. The term of each lease is for ten years with a five year renewal period
and a combined facilities purchase option for $11.5 million which is exercisable
through March 2000. These leases are being accounted for as operating leases.
During May 1997, OHI Realty I, LLP, a Massachusetts limited partnership with
the Company as general partner and it's wholly-owned Oasis subsidiary as limited
partner, acquired two nursing facilities for approximately $8,164,000 located in
Taunton and Quincy, Massachusetts, having a combined total of 171 beds. The
Company recorded mortgage debt totaling $8,550,000 with respect to this
transaction and transferred net assets of approximately $286,000 to the cost
basis of the facilities.
During 1997, $500,000 of net current liabilities from discontinued
operations were converted into a note payable.
During 1997, accounts payable to a vendor of $215,117 was converted into a
note payable.
During 1997, the Company entered into a short-term loan agreement with a
potential merger partner. Proceeds amounted to $211,000. This obligation was
converted to equity through an investment agreement whereby the potential merger
partner received 844,000 shares of Common Stock and subscribed to purchase an
additional 3,156,000 shares for $789,000. Related costs amounting to $50,000
were recorded as a charge to additional paid in capital.
During 1997 and 1996, the Company acquired property and equipment under
capital leases and incurred capital lease obligations in the amounts of $35,388
and $281,564 respectively.
In 1996, the Company incurred a note payable associated with an equipment
purchase in the amount of $34,882.
During 1996, the Company acquired one business, recording excess of cost
over net assets acquired of $430,100 in connection with the acquisition. As
consideration for the net assets acquired, the Company issued 52,838 shares of
Common Stock in the amount of $215,050 to the related parties.
F-13
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 7: ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Nursing home operations services.................................. $ 2,461,360 $ 3,958,735
Ancillary services................................................ 3,109,702 4,720,521
Management services............................................... 1,322,051 2,300,152
------------ ------------
6,893,113 10,979,408
Allowance for doubtful accounts................................... (4,422,697) (3,382,667)
------------ ------------
$ 2,470,416 $ 7,596,741
------------ ------------
------------ ------------
</TABLE>
NOTE 8: PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land.............................................................. $ 156,272 $ 156,272
Building and building improvements................................ 7,468,345 7,468,345
Leasehold improvements............................................ 136,537 76,659
Property and equipment held under capital leases.................. 447,066 447,066
Equipment, furniture and fixtures................................. 974,635 1,805,325
------------ ------------
9,182,855 9,953,667
------------ ------------
Less: Accumulated depreciation and amortization................... (790,633) (844,852)
------------ ------------
$ 8,392,222 $ 9,108,815
------------ ------------
------------ ------------
</TABLE>
Depreciation and amortization expense charged to continuing operations was
$477,115, $345,208 and $217,014 in 1998, 1997 and 1996, respectively.
Additionally, depreciation and amortization expense charged to discontinued
operations was $84,452 and $545,944 in 1997 and 1996, respectively.
NOTE 9: INTANGIBLE ASSETS
Intangible assets consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- -------------
<S> <C> <C>
Excess of costs over net assets acquired........................... $ 430,000 $ 1,588,282
Contract rights.................................................... -- 715,773
Organization costs................................................. -- 176,532
---------- -------------
430,000 2,480,587
Less: Accumulated amortization..................................... (82,247) (508,202)
---------- -------------
$ 347,753 $ 1,972,385
---------- -------------
---------- -------------
</TABLE>
F-14
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 9: INTANGIBLE ASSETS (CONTINUED)
Amortization expense for intangible assets charged to continuing operations
was $285,674, $332,138 and $473,007 in 1998, 1997 and 1996, respectively.
Additionally, amortization expense charged to discontinued operations was
$85,115 and $415,639 in 1997 and 1996, respectively.
NOTE 10: NOTES RECEIVABLE
At December 31, 1997, notes receivable resulted from development, financial
advisory, and consulting services which the Company had provided to several
long-term care properties. The notes are generally subordinated to senior debt
and other priority operating obligations associated with the properties. At
December 31, 1998, the notes receivable were fully reserved by the Company.
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments", requires that the Company disclose estimated
fair values of financial instruments.
Cash and cash equivalents, accounts receivable, prepaid expenses and other
current assets, accounts payable, accrued expenses and other current liabilities
are carried at amounts that approximate their fair values because of the
short-term maturity of these instruments. The Company believes that the carrying
value of notes and loans receivable, notes payable and long-term debt
approximates fair value.
NOTE 12: LOANS RECEIVABLE AND OTHER ASSETS
At December 31, 1997, loans receivable and other assets included $384,000
advanced by the Company pursuant to the terms of operating deficit agreements
for the operating needs of properties previously managed by the Company. During
1998, such advances were fully reserved by the Company.
NOTE 13: INCOME TAXES
The effective income tax rate differs each year from the statutory Federal
income tax rate due to graduated Federal income tax rates, state income taxes,
utilization and valuation of net operating loss carryforwards, certain
permanently non-deductible charges to net income and certain temporary
differences between the financial and income tax bases. The reconciliation of
these differences is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal income tax rate.................................................. (34)% (34)% (34)%
State income taxes, net of Federal tax benefit........................... -- -- (1)
Tax benefit of prior years' net operating losses......................... -- (18) (11)
Deferred tax asset valuation allowance................................... 34% 44 10
Tax effect of net non-deductible expenses................................ -- 19 20
Other.................................................................... -- 7 6
-- -- --
--% 18% (10)%
-- -- --
-- -- --
</TABLE>
Deferred income taxes arise primarily as a result of a difference between
the financial and income tax basis of reporting principally for differences in
the bases of allowances for doubtful accounts, property and
F-15
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 13: INCOME TAXES (CONTINUED)
equipment, organization costs, as well as the effects of future benefits to be
realized from the net operating losses for financial reporting purposes.
Deferred tax assets at December 31, 1998 and 1997 are comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Deferred tax assets
Tax benefit of net operating loss carryforwards.............. $ 16,777,000 $ 5,699,000
Allowance for doubtful accounts.............................. 101,000 1,009,000
Organization costs........................................... -- 33,000
Accrued liabilities.......................................... 95,000 --
-------------- -------------
Total deferred tax assets...................................... 16,973,000 6,741,000
Less valuation allowance..................................... (16,973,000) (6,741,000)
-------------- -------------
Net deferred tax assets.................................... -- --
-------------- -------------
Deferred tax liabilities
Property and equipment....................................... -- 50,000
-------------- -------------
Net deferred tax liability................................. $ -- $ 50,000
-------------- -------------
-------------- -------------
</TABLE>
During 1998, the tax deferred asset valuation allowance increased by
$10,232,000, and during 1997, the valuation allowance increased by $5,591,000.
At December 1, 1998, the Company has available net operating loss
carryforwards for Federal income tax purposes of approximately $45,300,000,
which can be offset against future earnings of the Company. These net operating
losses expire from 2008 through 2013, and are subject to annual limitations. In
addition, the Company has available various state net operating loss
carryforwards of approximately $46,200,000 at December 31, 1998, which expire
from 1999 to 2013.
The provision for (benefit of) income taxes include:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------------ -------------
<S> <C> <C> <C>
Current:
State................................................ $ -- $ 50,000 $ --
Deferred:
Federal.............................................. -- 2,350,000 (1,030,000)
State................................................ -- 400,000 (150,000)
--------- ------------ -------------
$ -- $ 2,800,000 $ (1,180,000)
--------- ------------ -------------
--------- ------------ -------------
</TABLE>
F-16
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 14: NOTES PAYABLE, BANKS AND OTHER
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Note payable to a bank, due on demand, line of credit of $1.5 million, bears interest
at prime plus 1%, secured by accounts receivable and property and equipment. At
December 31, 1998, this note was in default......................................... $ 1,481,500 $ 1,481,500
Note payable to a third party, due on demand, bears interest at prime rate plus 2.25%
(10.0%) capital; secured by certain ancillary subsidiaries' accounts receivable. At
December 31, 1998, this note was in default......................................... 775,555 1,603,505
Note payable to a third party, due on demand bears interest at approximately 10.5%;
serving as working capital; secured by certain nursing home subsidiaries' accounts
receivable.......................................................................... 1,054,862 828,670
Notes payable to creditors, due on demand, unsecured pending settlement
arrangements........................................................................ 1,350,000 1,703,827
Various equipment and other notes payable (substantially to stockholder in 1998)...... 179,014 20,760
------------ ------------
$ 4,840,931 $ 5,638,262
------------
------------ ------------
------------
</TABLE>
The weighted average rate of interest charged to the Company during 1998 and
1997 was approximately 10.5%.
NOTE 15: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities reported at December 31, 1998
include: accrued compensation of $547,629 associated with nursing home
operations; and $288,360 in corporate accrued salaries and related expenses.
Accrued expenses and other current liabilities reported at December 31, 1997
include: accrued expenses of approximately $773,905 associated with nursing home
operations (comprised mainly of accrued compensation); approximately $335,000 in
corporate accrued salaries and related expenses, and approximately $368,000 in
other current liabilities.
F-17
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 16: LONG-TERM DEBT
<TABLE>
<CAPTION>
LONG-TERM DEBT CONSISTS OF: 1998 1997
------------- ------------
<S> <C> <C>
Mortgage loan payable to a financing institution having a ten year term; interest
only payable through June 1999, amortizing over a 25 year period, bearing interest
at 10.5%; with a balloon payment of $7,360,420 due in June 2007; secured by
property, plant and equipment associated with two nursing home facilities.......... $ 8,300,000 $ 8,300,000
Subordinated mortgage loan payable to a third party due in June 2000; interest only
payable at 9%; secured by property, plant and equipment associated with two nursing
home facilities.................................................................... 250,000 250,000
Note payable to a financing institution with interest at 10.5%, having a term of ten
years, with a balloon payment of $1,299,962 due in April 2007, secured by property
and leasehold rights associated with four nursing home facilities.................. 1,460,000 --
------------- ------------
10,010,000 8,550,000
Less: current maturities.......................................... 13,500
long-term debt in default................................... 8,300,000
---------- ---------
$1,696,500 $8,550,000
---------
---------- ---------
----------
</TABLE>
The Company is not in compliance with certain loan covenants of its
$8,300,000 mortgage loan payable. This mortgage loan relates exclusively to the
property, plant and equipment reported by the Company at December 31, 1998 and
1997. While the lender has not formally declared an event of default, there can
be no assurance that the lender will not exercise its rights in formally
declaring such an event and thereby potentially causing the loan to be currently
payable. The primary collateral security for the mortgage loan is the related
property, and the Company believes there exists sufficient asset value to cover
the loan balance as well as sufficient cash flow being provided by the property
operations to sustain debt service requirements. Moreover, to date, the Company
has not defaulted on its payment obligations associated with the debt. In light
of uncertainty with respect to future lender actions, if any, the Company has
reclassified the mortgage loan payable as a current liability, reflecting the
lender's absolute right to accelerate the debt. Notwithstanding this
classification, management reasonably expects that the lender will continue to
cooperate with the Company in its efforts to attain full loan compliance, at
which point the
F-18
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 16: LONG-TERM DEBT (CONTINUED)
mortgage loan payable will be reclassified as a long-term liability. Annual
maturities of long-term debt in the next five years exclusive of the long-term
debt in default are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- -------------------------------------------------------------- ----------
<S> <C>
1999.......................................................... $ 13,500
2000.......................................................... 205,000
2001.......................................................... 17,135
2002.......................................................... 19,050
2003.......................................................... 21,180
</TABLE>
NOTE 17: LEASES
The Company leases its executive offices, management offices and certain
equipment accounted for as operating leases. Rent expense under these leases
charged to continuing operations was $224,410, $461,398, and $367,900 for the
years ended December 31, 1998, 1997 and 1996, respectively. Additionally, rent
expense under these leases charged to discontinued operations was $182,716 and
$455,615 for the years ended December 31, 1997, and 1996, respectively.
In addition to the foregoing, the Company operates two long-term care
nursing facilities having a combined total of 222 beds pursuant to terms of
lease purchase agreement. The term of the lease agreement is for ten years
commencing in March 1997, with a five year renewal period. The combined
facilities purchase option is for $11.5 million, and is exercisable through
March 2000. These leases are being accounted for as operating leases. The annual
lease payments associated with these facilities approximates $1,200,000.
The following represents future minimum rental payments required under
operating leases with remaining non-cancelable lease terms in excess of one year
as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ----------------------------------------------------------- -------------
<S> <C>
1999....................................................... $ 1,344,709
2000....................................................... 1,344,709
2001....................................................... 1,307,709
2002....................................................... 1,307,709
2003....................................................... 1,307,709
Thereafter................................................. 9,969,685
-------------
$ 16,582,230
-------------
-------------
</TABLE>
The Company also leases property and equipment under capital leases. The
assets and liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the assets. The
assets are amortized over the lesser of their related lease terms or their
estimated useful lives. Amortization under capital leases charged to continuing
operations was $77,838, $57,437 and $32,797 in 1998, 1997 and 1996,
respectively. Amortization charged to discontinued operations for the years
ended December 31, 1997 and 1996 was $29,934 and $21,251, respectively.
F-19
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 17: LEASES (CONTINUED)
The following is a summary of property held under capital leases as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Equipment............................................................. $ 447,066 $ 447,066
Less: Accumulated amortization........................................ 247,066 169,228
---------- ----------
$ 200,000 $ 277,838
---------- ----------
---------- ----------
</TABLE>
Interest rates on capitalized leases range from 9% to 15% and are imputed
based upon the lower of the Company's incremental borrowing rate at the
inception of each lease or the lessor's implicit rate of return.
Equipment and other assets under capital lease arrangements are no longer in
service. Accordingly, the Company has reported the associated capital lease
obligations aggregating $200,000 as current liabilities. The Company expects to
satisfy such obligations during 1999.
NOTE 18: IMPAIRMENT OF INTANGIBLE ASSETS
In 1995, the Company adopted Statement of Financials Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No.121"). In accordance with SFAS No. 121, the
Company is required to analyze the value of its recorded intangible assets on an
ongoing basis to determine that the recorded amounts are reasonable and are not
impaired.
During each of the three years ended December 31, 1998, the Company
determined that its recorded intangible assets had been impaired due to either
the termination of certain business relationships, discontinuation of certain
segments of its business, and other corporate developments. The routine
evaluation of the carrying value of intangible assets, among other things,
included management's determination that, in light of continued operating
deficits with respect to related subsidiaries as well as their associated
business interests, uncertainty existed that the Company would be able to
generate sufficient future cash flows to recover the recorded amounts of the
intangible assets. Such assets included excess of cost over net assets acquired
in connection with establishing certain discontinued subsidiary operations;
organization costs incurred in connection with the acquisition or formation of
discontinued subsidiary companies; and, contract rights representing the value
assigned to property management contracts secured by the Company. Charges to
operations resulting from impairment losses totaled $3,251,617, $5,637,703 and
$2,228,923 for 1998, 1997 and 1996, respectively.
F-20
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 19: LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in
computing loss per share (basic and diluted) from continuing operations:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Loss from continuing operations................................... $ (11,919,706) $ (11,093,116) $ (4,240,680)
Preferred stock dividends......................................... (160,000) (160,000) (160,000)
-------------- -------------- -------------
Loss to common shareholders (numerator)........................... $ (12,079,706) $ (11,253,116) $ (4,400,680)
-------------- -------------- -------------
-------------- -------------- -------------
Weighted-average number of shares of common stock (denominator)... 20,948,862 16,666,375 13,946,359
</TABLE>
Potential dilutive securities (1998--stock warrants and convertible
preferred stock; 1997--stock options, stock warrants and convertible preferred
stock and 1996--stock options, stock warrants, convertible preferred stock and
convertible debentures) have not been considered since the Company reported a
net loss from continuing operations and, accordingly, their effects would be
antidilutive.
NOTE 20: COMMITMENTS AND CONTINGENCIES
During 1998, the Company accepted the resignation of two executive officers
and thereby effected the termination of their associated executive employment
contracts. In addition, in connection with a change in corporate control late in
1998, the Company accepted the resignation of the then President and Chief
Executive Officer and negotiated a final settlement of the Company's obligations
associated with his employment contract and change in control agreement. This
settlement included a final cash payment of $60,000 in full satisfaction of all
claims and employment rights. The Company also accepted the registration of the
then Secretary, although this person was allowed to remain an officer of the
company. The Company is in the process of negotiating final settlements and
separation arrangements relating to the terminated executive as well as an
executive which continues in the Company's employ.
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, subject to shareholder approval of
an increase of the authorized number of shares of common stock from 25,000,000
to 50,000,000. 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.
The Company guarantees aggregate debt service payments relating to
approximately $25,055,000 of long-term debt and working capital financing
associated with long-term care facilities for which it provides management
services on a long-term basis. The Company may be unable to independently
satisfy such debt service payments, if required.
The Company is a defendant in two lawsuits relating to the termination of
former executive officers for cause under the terms of, in one case, the
executive's employment agreement and, in the second, the executive's employment
and merger agreement. The two former executives are independently claiming to
F-21
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 20: COMMITMENTS AND CONTINGENCIES (CONTINUED)
be paid additional compensation, and in the case of one, damages for alleged
misrepresentations in connection with the related merger agreement. The Company
continues to pursue its counterclaims with respect to this latter case and
otherwise continues to defend itself in both of these cases. Management believes
that the Company has valid defenses against all allegations made by the
Plaintiffs in these actions as well as valid counterclaims in its prosecution
actions. Further, Management does not believe that the outcome of these matters
will have a material adverse affect on the Company's financial position, results
of operations or cash flows.
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. This matter is currently in dispute with 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
December 31, 1998 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 December 31, 1998. The Company is in the process of
resolving this matter with the property owner and does not believe that the
outcome of such resolution will have an adverse material impact on its financial
position or results of operations.
In 1996, the Company secured a long-term management position in connection
with a property purchase and sales transaction involving four long-term care
facilities aggregating 447 beds located in the State of New Hampshire. As part
of the originating property transaction, the Company, among other things,
guaranteed the payment of certain seller financing obligations of the purchaser
aggregating approximately $1,500,000. Currently, the owner is in default of the
payment of such obligations and the seller has initiated collection litigation,
including action against the Company to perform on its payment guarantee. As a
result of this action, the Company has initiated settlement discussions with the
relevant parties which discussions contemplate a change in the ownership
interests in the properties and, in connection therewith, amicably settling the
seller interests. Accordingly, the Company has not provided for this matter in
its financial statements at December 31, 1998 and does not believe that the
outcome in settling its guarantee obligation will have an adverse material
impact on 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 December 31, 1998. Management does not
believe that the outcome of these matters will have a material adverse affect on
the Company's financial position, results of operations or cash flows.
F-22
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 20: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, and the remainder of them are being vigorously defended. Management
does not believe that the outcome of these matters will have a material adverse
affect on the Company's financial position, results of operations or cash flows.
NOTE 21: PREFERRED STOCK
On July 25, 1994, the Company sold 533,333 shares of 8% cumulative Series A
Senior Convertible Preferred Stock including voting rights, cumulative dividends
at $.30 per annum for each share and conversion rights to common stock at the
conversion price of $3.75 per share before reduction by an anti-dilution
provision for certain shares of common stock issued by the Company. At December
31, 1998, the 533,333 shares of Series A Senior Convertible Preferred Stock was
convertible into 972,507 shares of common stock. The liquidation preference of
each Senior Preferred Convertible share is $3.75 per share plus unpaid
dividends, which amounts to $2,710,000 at December 31, 1998. The Company had the
option, prior to July 1, 1996, to pay the preferred stock dividends by issuance
of Common stock in lieu of cash. The Company did not exercise their option. At
December 31, 1998, dividends in arrears yet not declared by the Company on the
8% Cumulative Series A Senior Convertible Preferred Stock totaled $710,000.
The Series B Preferred Stock is nonvoting and does not pay dividends. The
liquidation preference of each share is $1.00 per share.
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS
The Company has a Stock Option Plan (the Plan) which provides for the
granting of incentive and nonqualified stock options and stock appreciation
rights to certain officers, directors, key employees and consultants. Currently,
a maximum of 750,000 shares of Common Stock may be issued under the Plan. Stock
Options are granted at a price not less than 100% of the fair market value of
the Common Stock at the date of grant and must be exercised within 10 years from
the date of grant, with certain restrictions. Nonqualified Stock Options will be
granted on terms determined by the Board of Directors.
F-23
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS (CONTINUED)
Transactions involving the Plan are summarized as follows:
OPTIONS SHARES
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE PRICE AVERAGE PRICE AVERAGE PRICE
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
1998 PER SHARE 1997 PER SHARE 1996 PER SHARE
---------- ----------- ---------- ----------- ---------- -----------
Outstanding January 1...................... 400,000 $ .90 500,000 $ .90 688,153 $ 2.21
Granted.................................. -- -- -- -- 50,000 1.00
Exercised................................ -- -- -- -- -- --
Canceled................................. -- -- (100,000) 1.00 (25,000) 1.50
Expired.................................. (400,000) $ .90 -- -- (213,153) 5.10
---------- ---------- ----------
Outstanding December 31.................... -- -- 400,000 $ .87 500,000 $ .90
---------- ---------- ----------
---------- ---------- ----------
Exercisable December 31.................... -- -- 400,000 $ .87 500,000 $ .90
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
COMMON STOCK PURCHASE WARRANTS
In addition to options granted under its Stock Option Plan, the Company has
issued Common Stock Purchase Warrants to the public and underwriter in
connection with its initial public offering and to officers, directors and
employees as compensation for past and future services, all of which are outside
of the Stock Option Plan.
NON-REDEEMABLE COMMON STOCK PURCHASE WARRANTS
During 1994, the Company privately issued Non-Redeemable Common Stock
Purchase Warrants for 1,600,000 shares of the Company's Common Stock.
<TABLE>
<CAPTION>
WARRANTS EFFECTIVE EXERCISE EXPIRATION
ISSUED DATE PRICE DATE
- ---------- --------- ----------- -----------
<S> <C> <C> <C>
800,000... 7/25/94 $ .75 7/25/99
500,000... 7/25/94 $ 1.50 7/25/04
200,000... 7/25/94 $ 1.00 7/25/99
100,000... 7/25/94 $ 3.50 7/25/99
- ----------
1,600,000
- ----------
- ----------
</TABLE>
During 1997, 37,190 warrants were exercised at $0.75 per share.
F-24
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS (CONTINUED)
PRIVATE WARRANTS
Transactions involving private warrants are summarized as follows:
WARRANTS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE PRICE AVERAGE PRICE AVERAGE PRICE
------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
1998 PER SHARE 1997 PER SHARE 1996 PER SHARE
----------- ----------- ----------- ----------- ---------- -----------
Outstanding January 1........................... 3,396,110 $ 1.77 2,434,846 $ 4.88 2,175,375 $ 5.11
Granted....................................... 589,150 .62 2,250.000 .72 730,000 3.17
Exercised..................................... (100,000) -- (172,000) (.38) (370,529) 3.29
Expired/Cancelled............................. (1,006,412) (2.97) (1,116,736) 4.33 (100,000) --
----------- ----------- ----------- ----- ---------- -----
Outstanding December 31......................... 2,878,848 $ 1.17 3,396,110 $ 1.77 2,434,846 $ 4.88
----------- ----------- ----------- ----- ---------- -----
----------- ----------- ----------- ----- ---------- -----
Exercisable December 31......................... 2,772,184 $ 1.17 2,988,450 $ 1.77 2,370,178 $ 4.88
----------- ----------- ----------- ----- ---------- -----
----------- ----------- ----------- ----- ---------- -----
</TABLE>
The warrants outstanding on December 31, 1998 expire from 1999 through 2007.
Under Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation," the Company is permitted to continue
accounting for the issuance of stock options and warrants in accordance with
Accounting Principles Board (``APB") Opinion No. 25, which does not require
recognition of compensation expense for option and warrant grants unless the
exercise price is less than the market price on the date of grant. As a result,
the Company has recognized compensation cost for stock options and warrants for
1998, 1997 and 1996 of $0, $183,000 and $48,000, respectively. If the Company
had recognized compensation cost for the ``fair value" of option grants under
the provisions of SFAS No. 123 the pro forma financial results for 1998, 1997
and 1996 would have differed from the actual results as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss)................................................
As reported.................................................... $ (11,919,706) $ (18,210,342) $ (10,314,561)
Proforma....................................................... $ (12,291,273) $ (19,434,176) $ (10,711,154)
Basic earnings (loss) per share..................................
As reported.................................................... $ (.58) $ (1.10) $ (.75)
Proforma....................................................... $ (.59) $ (1.18) $ (.78)
</TABLE>
The per share weighted average fair value of the stock options and warrants
granted during 1998, 1997 and 1996 was $.38, $1.25 and $3.30, respectively. The
fair value was estimated at the date of grant using the Modified Black-Scholes
Stock Option Pricing Model with the following average assumptions for 1998, 1997
and 1996, respectively: risk free interest rates of approximately 6% for all
three years; expected volatility factors of 171%, 163.6% and 116.2% and expected
lives of 1-10 years, 3-10 years and 1-10 years and no expected dividends rate
for all three years.
Under SFAS 123, the fair value of stock options issued in any given year is
expensed as compensation over the vesting period, which for substantially all of
the Company's options and warrants is three to ten
F-25
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS (CONTINUED)
years; therefore, the pro forma net income (loss) and basic earnings (loss) per
share do not reflect the total compensation cost for options and warrants
granted in the respective years and are not indicative of future amounts.
Furthermore, the pro forma results only include the effect of options granted in
1997, 1996 and 1995; options and warrants granted prior to 1995 were not
considered.
NOTE 23: RETIREMENT SAVINGS PLAN
The Company has a savings plan available to substantially all employees,
under Section 401(k) of the Internal Revenue Code. The Company's contributions
to this plan are discretionary. Employee contributions are generally limited to
10% of their compensation subject to Internal Revenue Code limitations. The
Company made no contributions to this plan during the three year period ended
December 31, 1998.
NOTE 24: SUBSEQUENT EVENTS
On February 3, 1999, Match, Inc., an entity owned by the Company's Chairman,
provided the Company a line of credit which an aggregate principal amount not to
exceed $1,000,000 ("Line of Credit"). The Line of Credit will be used for the
operation of the Company's business, to settle certain claims and any other
general corporate purpose permitted by its articles of incorporation and
applicable by law. The Line of Credit bears an interest rate equal to the annual
commercial prime rate charged by Chase Manhattan Bank plus 1%. As collateral for
the Line of Credit, the Board of Directors has pledged the outstanding and
issued stock of Oasis, Inc., the Company's wholly-owned subsidiary. To date,
this credit facility has been fully withold by the Company for working capital
purpose, principally in settling corporate creditor claims.
On March 17, 1999, the Company consummated a transaction, effective February
15, 1999 pursuant to which it acquired 1,000 shares of the common stock of
Trinity, representing all the outstanding stock of Trinity (the "Trinity
Shares"). The purchase price of the Trinity shares was $1,495,703 plus 100,000
shares of the Company's common stock. Trinity is a provider of rehabilitation
services that operates in Texas and Oklahoma, providing physical, occupational
and speech therapy services to long-term providers and acute hospitals through
131 private pay contracts.
In connection with this transaction, the Company issued and delivered to the
seller a promissory note in the amount of $1,495,703 payable in monthly
installments over a five-year period starting March 1, 1999, secured by a pledge
of the Trinity Shares acquired by Company in the transaction.
In March, 1999, the Company settled an outstanding trade payable of
approximately $363,921. The Company will issue 1,200,000 shares of common stock
in full settlement, subject to shareholder approval of increasing the authorized
number of common shares from 25,000,000 to 50,000,000.
F-26
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 25: THE YEAR 2000
The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date sensitive. Any of the company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation.
The Company has not completed its assessment, but currently believes that
costs of addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company and third parties upon
which it relies are unable to address this issue in a timely manner, it could
result in a material financial statement risk to the Company. In order to assure
that this does not occur, the Company plans to devote the necessary time and
resources to resolve any significant year 2000 issues in a timely manner.
Because of the unprecedented nature of the year 2000 issue, its effects and
the success of related remediation efforts will not be fully determinable until
the year 2000 and thereafter. Management cannot assure that the Company is or
will be year 2000 ready, that the Company's remediation efforts will be
successful in whole or in part, or that parties with whom the Company do
business will be year 2000 ready.
F-27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
DALLAS, TEXAS
We have audited the consolidated financial statements of Iatros Health Network,
Inc and subsidiaries, referred to in our report on Page F-1 dated March 30,
1999, which includes an explanatory paragraph concerning the Company's ability
to continue as a going concern. In connection with our audit of these
consolidated financial statements, we also have audited the accompanying related
financial statement schedule for 1998. In our opinion, such financial statement
schedule for 1998, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
Weaver and Tidwell. L.L.P.
Dallas, Texas
March 30, 1999
F-28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
DALLAS, TEXAS
We have audited the consolidated financial statements of Iatros Health
Network, Inc and subsidiaries, referred to in our report on Page F-2 dated April
23, 1998, which includes an explanatory paragraph concerning the Company's
ability to continue as a going concern. In connection with our audit of these
consolidated financial statements, we also have audited the accompanying related
financial statement schedule for 1997 and 1996. In our opinion, such financial
statement schedule for 1997 and 1996, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Asher & Company, Ltd.
Philadelphia, Pennsylvania
April 23, 1998
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant certifies that it has reasonable grounds to believe that it meets all
requirements for filing on Form 10-K, and has duly caused this Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized on the 31st
of March, 1999.
IATROS HEALTH NETWORK, INC.
By: /s/ RONALD E LUSK
-----------------------------------------
Ronald E Lusk
Chairman
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this Form 10-K has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ RONALD E. LUSK Chairman and Chief
- ------------------------------ Executive Officer 3/31/99
Ronald E. Lusk
/s/ ROBERT L. WOODSON, III President and Chief
- ------------------------------ Operating Officer and 3/31/99
Robert L. Woodson, III Director
/s/ JOSEPH C. MCCARRON, JR Executive Vice President
- ------------------------------ and Director 3/31/99
Joseph C. McCarron, Jr.
/s/ ALBERT SOUSA Executive Vice President
- ------------------------------ and Secretary and 3/31/99
Albert Sousa Director
/s/ JOHN D. HIGGINS Director
- ------------------------------ 3/31/99
John D. Higgins
/s/ JOE C. WILLIAMS, JR. Director
- ------------------------------ 3/31/99
Joe C. Williams, Jr.
