PHOENIX HEATHCARE CORP
10-K/A, 2000-04-28
SKILLED NURSING CARE FACILITIES
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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

              (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

            ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                        FOR THE TRANSITION PERIOD FROM TO

                         COMMISSION FILE NUMBER 0-20354

                         PHOENIX HEALTHCARE CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                DELAWARE                                23-2596710
 --------------------------------------    -------------------------------------
      (State or other jurisdiction         (I.R.S. Employer Identification No.)
   of incorporation of organization)
      4514 Travis Street, Suite 330
              DALLAS, TEXAS                                75205
 --------------------------------------    -------------------------------------
(Address of principal executive offices)                (Zip Code)

                                  214-599-9777
                                  ------------
              (Registrant's telephone number, including area code)


           Securities registered pursuant to Section 12(b) of the Act:

                                      NONE

          Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.001 per share

                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such shorter  periods that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. _X_ YES  ___ NO

As of March 20, 2000,  the  aggregate  market value of the  Registrant's  Common
Stock held by  non-affiliates  was  $19,616,415  based upon the closing price of
$.70 on March 20, 2000. As of March 20, 2000,  there were  37,185,187  shares of
Common  Stock  issued  and  outstanding,  533,333  shares  of  Series  A  Senior
Convertible Preferred Stock issued and outstanding, and 100,000 shares of Series
B Preferred Stock issued and outstanding.

<PAGE>


FORWARD LOOKING STATEMENTS


THIS FORM 10-KSB 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  JUDGEMENTS  BY  THE  COMPANY'S  MANAGEMENT
CONCERNING  ANTICIPATED RESULTS. THESE ASSUMPTIONS AND JUDGEMENTS MAY OR MAY NOT
PROVE TO BE CORRECT.  MOREOVER SUCH  FORWARD-LOOKING  STATEMENTS  ARE SUBJECT TO
RISKS AND UNCERTAINTIES  THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE   CONTEMPLATED  IN  SUCH   FORWARD-LOOKING   STATEMENTS.   FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS TO THE DATE HEREOF.

<PAGE>


                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
 Part I
         Item 1. Business....................................................  1
                 General Overview............................................  1
                 Business Strategy...........................................  1
                 Corporate Developments/Significant Transactions.............  2
                 Discontinued Operations.....................................  2
                 Business Acquisition........................................  2
                 Sources of Revenue..........................................  3
                 Human Resources.............................................  3
         Item 2. Properties..................................................  3
         Item 3. Legal Proceedings...........................................  3
         Item 4. Submission of Matters to Vote of Security Holders...........  3
 Part II
         Item 5. Market for Registrant's Common Equity
                  and Related Stockholder Matters............................  4
                 Market Information..........................................  4
                 Dividends...................................................  4
                 Issuance of Securities......................................
         Item 6. Management's Discussion and Analysis
                  of Financial Condition and Results of Operations ..........  5
                 Effects of Inflation .......................................  5
                 Results of Operations ......................................  5
                 Liquidity and Capital Resources ............................  6
         Item 7. Financial Statements .......................................  7
         Item 8. Changes in and Disagreements With Accountants
                  on Accounting and Financial Disclosure ....................  8
  Part III
         Item 9. Directors, and Executive Officers of the
                  Registrant Act ............................................  8
        Item 10. Executive Compensation......................................  8
        Item 11. Security Ownership of Certain Beneficial Owners
                  and Management.............................................  8
        Item 12. Certain Relationships and Related Transactions..............  8
        Item 13. Exhibits and Reports on Form 8-K............................  9

                                       i
<PAGE>


PART I

ITEM 1. BUSINESS

GENERAL OVERVIEW

BUSINESS BACKGROUND
- -------------------

Phoenix  Healthcare  Corporation  (formerly  Iatros Health  Network,  Inc.) is a
Delaware  corporation,  incorporated  in June 1988 (the "Company" or "Phoenix"),
which  completed  its  initial  public  offering in April  1992.  The  Company's
historic  business   activities  were   concentrated  in  providing   healthcare
management and ancillary services for the long-term care industry.

During the fourth quarter of 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 of the Company.

During  1999  and  to  date,  new  management   initiatives   have  resulted  in
discontinuing historical business operations and thereby positioning the Company
for a new strategic direction.

BUSINESS STRATEGY

In December 1999,  Phoenix announced the strategic  repositioning of the Company
through  which it  completed  an exit  from the  under  performing  health  care
services business and anticipates  emerging as a provider of business solutions.
This new  business  strategy is designed to  reposition  Phoenix as a technology
company.

Effective December 15, 1999, Healthcare Information  Technologies,  Inc. ("HIT")
became a wholly owned subsidiary of Phoenix. HIT, located in Dallas, Texas, is a
technology based company that manages data, media and communications  systems to
provide  knowledge based  interactive  software  applications  via a web-centric
communications  model  operating in an  applications  service  provider  ("ASP")
environment.

The HIT  acquisition  represents  the first step in the  Company's  strategy  to
transform  Phoenix into a knowledge-based  interactive media and  communications
company organized into three divisions.

The  Knowledge  Division  will focus on delivery  of  business  to business  web
centric  applications  via  broadband  and  wireless   technologies  in  an  ASP
environment.  The focus of these applications is the transformation of data into
knowledge-based  systems that  facilitate  real time decision making and improve
operating efficiencies.  The first company in the knowledge division is HIT. HIT
expects to release MEDeTRACK,  the first in a suite of modular applications,  in
the second quarter of 2000. This web enabled application automates the ordering,
tracking and billing of medical supplies using patient-specific  information for
healthcare providers and payers.

The Media Division will develop interactive  programming and content designed to
exploit  the  convergence  of  radio,  television  and  internet  communications
technologies. The first company in the Media Division, Converged Media, is being
formed as a business to business  media  company  that will provide an immediate
solution for businesses  needing to take advantage of the  convergence of radio,
television and internet  delivery for high end-end  results at a fraction of the
cost.

The  Communications  Division  will  focus on the  development,  deployment  and
management of  communications  applications and technologies that facilitate the
distribution  and  operation of products and services  provided by the Knowledge
and  Media  Divisions.  The  Communications  Division  will be  responsible  for
providing  technical  support  for HIT and  Converged  Media and will manage the

                                       1
<PAGE>


development of broadband and wireless applications.  The Communications Division
will also  develop and  acquire  technologies  and  applications  which  provide
enhanced communications efficiencies.

These three divisions operate on a business model which manages the functions of
data, media and communications through three distinct levels of development. The
Company's  mission is to fully  develop all of its products  through these three
levels  to  deliver  knowledge-based  applications  via  interactive  media  and
communications technologies.


Consistent  with this new  strategic  direction,  Phoenix will  concentrate  its
efforts on rapidly  growing its technology  initiatives to establish the Company
as  a  viable  player  in  the   development   and  marketing  of  software  and
internet-based   technologies   and   solutions   for   business   and  consumer
applications.

CORPORATE DEVELOPMENTS / SIGNIFICANT TRANSACTIONS

Among the corporate  developments and significant  transactions completed by the
Company during the year ended  December 31, 1999 were  initiatives to effect the
discontinuation of operations  associated with providing  healthcare  management
and ancillary services for the long-term care industry.  These transactions were
as follows:

DISCONTINUED OPERATIONS
- -----------------------

Effective  August 10, 1999, the Company  entered into an agreement with National
Health Investors,  Inc. ("NHI"), its largest creditor,  for the full release and
settlement of over $44 million of the  Company's  debt  obligations  and related
guarantees  associated with nursing home operations  located in New England.  As
part of the settlement  transaction,  the Company  formally  assigned all of its
nursing  home  ownership  and  operating  interests  to NHI in exchange  for the
settlement of the direct debt obligations to NHI of  approximately  $9.8 million
and  thereby   discontinued  its  associated   operations   represented  by  OHI
Corporation   (d/b/a   "Oasis   Healthcare").   The   resultant   gain  on  debt
extinguishments  of $970,399  is  presented  in the  accompanying  statement  of
operations as a component of an extraordinary item.


Effective November 15, 1999, the Company discontinued operations associated with
Trinity Rehab, Inc. ("Trinity") and Southland Medical Supply, Inc. ("Southland")
which  businesses were involved in providing  rehabilitative  and medical supply
services  in the  homecare  market  and to  healthcare  providers.  Trinity  and
Southland were acquired in the first and second quarters of 1999, respectively.

BUSINESS ACQUISITION
- --------------------

On December 15, 1999, the Company consummated a transaction pursuant to which it
acquired  all of the  shares  of the  common  stock  of  Healthcare  Information
Technologies,  Inc. ("HIT").  The purchase price of the HIT shares was 6,513,158
shares of the Company's common stock.  Among the assets acquired through the HIT
acquisition  are certain  healthcare  management  system and software  licensing
agreements for which the Company has secured exclusive interest.

SOURCES OF REVENUE

Historically,  the  Company  has  derived  all of  its  revenue  from  providing
healthcare  management  and ancillary  services to the long-term  care industry.
Insofar as these operations were  discontinued  during 1999, the Company reports
no revenues from continuing operations for the year ended December 31, 1999.

In connection  with strategic  initiatives to further  develop and implement its
information  technology  capabilities,  the  Company  anticipates  deriving  its
primary source of revenue from a newly  developing  customer  base.  This target
market represents a wide array of service providers and customers  utilizing the
Company's emerging software technology and service capabilities.

                                       2
<PAGE>


HUMAN RESOURCES

As of March  2000,  the  Company  employs  eight  individuals  representing  its
executive  management  and  administrative  staff.  This  represents  a material
reduction  in both  executive  management  and  administrative  staff as well as
having  reduced  the  number  of  corporate   employees   associated   with  now
discontinued operations.  There are no collective bargaining agreements existing
within the Company.


ITEM 2. PROPERTIES

In connection  with  discontinuing  prior business  operations,  the Company has
divested of substantially all of its property  interests.  Nursing home property
interests  were  conveyed  to  third  parties  in  settling   secured   creditor
obligations.  Leasehold  interests  have been satisfied  through  termination of
associated  lease  arrangements,  the  assumption  by other parties or otherwise
through the recovery of leased assets.

The Company  continues to lease  premises for its executive  offices  located in
Dallas, Texas. The lease agreement includes a monthly rate of $7,761,  extending
to January 2003, and includes all building costs.

ITEM 3.  LEGAL PROCEEDINGS

During 1999, the Company settled  numerous legal  proceedings  that were pending
actions and disclosed in Form 10K for the year ended December 31, 1998.

The Company and its  discontinued  subsidiaries  continue to have  outstanding a
number of 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 parties. 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.

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. The management arrangement applicable to the Company
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  as well as other
claims for  recovery.  In July 1999,  the property  owner filed a complaint  for
breach of contract seeking $1,800,000 in damages. In September 1999, the Company
filed both an answer denying these claims and also a cross-complaint  for breach
of contract  seeking  damages in the amount of  $810,000.  This action is in the
discovery  stage  with no set  trial  date.  The  Company  continues  settlement
discussions  with the  property  owner and does not believe  that the outcome of
this matter will have an adverse  material  impact on its financial  position or
results of operations.  This case is pending in the Los Angeles  Superior Court,
Case No.  BC213710  by the  parties  of G&L  Realty  Partnership,  L.P.  and G&L
Hampden, LLC v. Phoenix Healthcare Corporation, etc.


Management  believes that it has  sufficiently  reserved for these claims in its
financial  statements at December 31, 1999.  Given the 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  judgments,
should they occur.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Nothing to report.

                                       3
<PAGE>


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 "PHHC".

The following  table sets forth the high and low sales price as determined  from
NASDAQ  and/or  the OTC  Bulletin  Board for the  Common  Stock for the  periods
indicated.

COMMON STOCK

FISCAL 2000                                                     HIGH         LOW
                                                                ----         ---
First Quarter (through March 20, 2000) .......................   .98         .09
FISCAL 1999
First Quarter ................................................   .33         .14
Second Quarter ...............................................   .30         .14
Third Quarter ................................................   .25         .13
Fourth Quarter ...............................................   .14         .06
FISCAL 1998
First Quarter ................................................   .66         .31
Second Quarter ...............................................   .44         .09
Third Quarter ................................................   .31         .31
Fourth Quarter ...............................................   .31         .03

The high  and low  prices  (based  on the  average  bid and ask  price)  for the
Company's  Common Stock as reported by NASDAQ and/or the OTC Bulletin  Board and
rounded to the nearest penny 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 20, 2000, there were
approximately 5,274 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  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, 1999,  dividends on the Series A
Senior Convertible Preferred Stock totaling $870,000 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


                                       4
<PAGE>


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.

ISSUANCE OF SECURITIES
- ----------------------

During  1999,  the  Company  issued  15,283,537  shares of its  common  stock in
connection with various  corporate  transactions  and in satisfaction of certain
corporate  obligations.  The aggregate  market value  attributed to these issues
totaled $2,052,352 comprised of the following transactions.

In March 1999, in connection  with the purchase  acquisition  of Trinity  Rehab,
Inc., the Company issued 100,000 shares of common stock having a market value of
$25,960 as a component of the purchase consideration.

In July 1999,  the Company issued 285,379 shares of common stock having a market
value of $61,043 in connection with the severance of two corporate executives.

In July 1999,  the Company  issued  1,000,000  shares of common  stock  having a
market  value of  $176,900  in  connection  with  the  settlement  of  corporate
obligations relating to accrued legal and professional services.

In  August  1999,  the  Company  issued  3,200,000  shares  of  common  stock in
connection with the conversion of a debt  obligation in the principal  amount of
$800,000,  which  amount  approximated  the  market  value of such  shares  upon
conversion,

In August 1999,  the Company  issued  1,200,000  shares of common stock having a
market value of $165,720 in satisfaction of a creditor obligation outstanding in
the amount of $353,745.  The Company  recognized an  extraordinary  gain on this
transaction in the amount $188,025.

In August  1999,  the Company  issued  400,000  shares of common  stock having a
market  value of $55,240 in  connection  with  settling  litigation  involving a
former executive employee.

In September  1999,  the Company  issued 250,000 shares of common stock having a
market  value of  $34,525  in  connection  with the  severance  of an  executive
employee.

In December  1999,  the Company  issued  750,000 shares of common stock having a
market value of $69,225 in connection with settling corporate litigation.

In December 1999, the Company issued  6,513,158  shares of common stock having a
market value approximating  $400,000 in connection with the purchase acquisition
of Healthcare Information Technologies, Inc.

During 1999, the Company  issued a total of 1,500,000  shares of common stock in
connection  with executive  employment  agreements  and for consulting  services
rendered. The market value associated with these issues totaled $255,000.

During 1999,  the Company  issued  85,000 shares of common stock having a market
value of $8,739 in connection with settling various other corporate obligations.


ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998

RESULTS OF OPERATIONS
- ---------------------

During 1999, new management of the Company  completed a strategic  initiative to
exit its  under-performing  historical  business activities engaged in providing
healthcare  management  and ancillary  services to the long-term  care industry.
Having divested of all previous  business  segments,  the Company believes it is
more  effectively  positioned  to pursue  growth and  development  opportunities
contemplated  by new  management's  business  plan.  This  involves  the Company
emerging,   principally  through  growth  by  business  acquisitions,  in  areas
involving information  technology and related service  capabilities.  A critical
component  of  successfully  implementing  the  new  business  plan  will be the
Company's  ability  to secure  sufficient  capital  to  sustain  its  continuing
operating needs as well as to effectively manage the residual liabilities of now
discontinued operations.

For the year  ended  December  31,  1999,  the  Company  reported  a net loss of
$10,894,212  compared to a net loss of  $11,919,706  for the year ended December
31,1998.  These reported losses for 1999 and 1998 are largely  attributed to the
operating  losses  resulting  from now  discontinued  operations.  The operating
losses  reported  from   continuing   operations  of  $2,778,389  and  $965,913,
respectively,  reflect the operating  costs incurred for  continuing  operations
represented by general and administrative expenses.

General  and  administrative   expenses  reported  for  1999  and  1998  totaled
$2,649,299 and $1,090,948,  respectively, and were associated with the Company's
executive  management  and  related  costs of  corporate  overhead.  Significant
components  for 1999  include  $1,239,942  for  legal,  accounting  and  outside
professional  services;  $1,007,656 for salaries and related  payroll  expenses;
and, $401,701   attributable to other corporate  expenses  including  insurance,
rent, office expenses and other. The outside professional costs incurred in 1999
were almost  exclusively  related to the cost of discontinuing  prior subsidiary
operations and settling  corporate  liabilities  associated  with prior business
activities  of the  Company.  Salaries  and  related  payroll  expenses  include
$475,000 in accrued  executive  compensation that was paid in the form of common
stock issued in March 2000. Significant components of general and administrative
expenses for 1998 included $848,908 for executive salaries and related expenses;
$242,040 for insurance expense; and other corporate expenses.

Discontinued  operations  of the Company  reported for 1999 and 1998 totaled net
losses  of  $9,274,247  and  $11,573,340,  respectively.  In 1999,  the  Company
discontinued  its New England based nursing home  operations  represented by OHI
Corporation (d/b/a "Oasis  Healthcare") as well as its  rehabilitative  services
and medical supply operations represented by Trinity Rehab, Inc. ("Trinity") and
Southland Medical Supply, Inc. ("Southland"), respectively. In 1998, the Company
discontinued  its ancillary  service  operations in  Philadelphia,  Pennsylvania
represented largely by IHN Durant Medical Supply and Pharmacy Services.  Results
of  operations  previously  reported for 1998 have been  restated to reflect the
reclassification of discontinued operations effected in 1999.

For 1999, the total net loss from discontinued  operations is comprised of a net
loss on settlement or disposition of accounts totaling $5,246,231 and a net loss
from related operations  totaling  $4,028,016.  The principal  components of net
loss on settlement or disposition of accounts include $3,345,380 associated with
Trinity operations;  $75,988 associated with Southland operations; and, $606,648
associated  with


                                       5
<PAGE>


accounts  relating to prior  period  discontinued  ancillary  operations.  As to
reported operating losses of discontinued  operations,  the principal components
include $1,306,566 resulting from Trinity operations;  $2,263,165 resulting from
Southland  operations;  and $458,285  resulting  from prior period  discontinued
ancillary operations.

For 1998, the total net loss from discontinued  operations totaling  $11,573,340
relates to total losses  reported by  discontinued  subsidiary  operations.  The
principal  components of such losses include $7,661,545 relating to nursing home
operations and $3,911,795  relating to prior ancillary services  business.  This
includes other  expenses-net  of $5,785,940 and $4,294,978  associated  with the
write-off of intangible  assets and  provision  for doubtful  notes and accounts
receivable for nursing home  operations and prior ancillary  services  business,
respectively.

Extraordinary  items  reported  for the years ended  December  31, 1999 and 1998
totaled net gains of $1,158,424 and $619,547,  respectively. For both years, the
net gains  result from the  extinguishment  of debt  obligations  settled by the
Company at less than their recorded value. For 1999, a significant  component of
extraordinary   items   includes  a  net  gain  of  $970,399   associated   with
discontinuation of nursing home operations represented by OHI Corporation (d/b/a
"Oasis  Healthcare").  The Company was relieved of certain debt  obligations  to
National Health Investors, Inc. in connection with the assignment of its nursing
home and property  interests to the senior  creditor.  In addition,  the Company
realized a gain of $188,025 on the settlement  with a prior  ancillary  services
business  creditor  whose claim was settled for stock.  For 1998, a net gain was
realized on the  settlement  of various  corporate and prior  ancillary  service
obligations totaling $619,547.


LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------

During 1999, the Company has been successful in discontinuing all prior business
segments  that  have  historically   generated   significant  operating  losses.
Nonetheless,  the Company  continues  to be burdened  by material  and  residual
levels of net current liabilities of such discontinued  operations.  At December
31, 1999, the Company reports a negative  working capital deficit of $16,835,394
and, as discussed  in Note 2 to the audited  financial  statements,  requires an
infusion of new capital in order to meet its short- term obligations.  Moreover,
the Company,  having  discontinued  all  operations  and sources of revenue,  is
critically  dependent upon  developing new sources of revenue to provide working
capital.  New  management  of the Company  continues  to work with  creditors to
secure  non-cash  settlement  of  obligations  or otherwise  secure  forbearance
arrangements  with creditors  while  continuing to implement its growth strategy
and capitalization plan for the Company.

In  light  of  the  Company's  current  financial  position,  its  inability  to
independently  meet its short-term  corporate  obligations,  its need to further
capitalize  continuing  operations and its dependency on new revenue growth, its
viability as a going concern is uncertain.  While the Company has  experienced a
change in control  beginning  in the fourth  quarter  of 1998  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, 1999 and 1998,  the Company  reports  virtually no liquid assets
with which to sustain its working capital requirements of continuing operations.
The sole  source of  immediate  cash for the  Company is from the line of credit
agreement it has  established  with Match,  Inc. This line of credit facility is
for an amount of up to $2 million and is reported  outstanding  at December  31,
1999 in the amount of  $1,470,816,  of which $160,795 is included in net current
liabilities  of  discontinued  liabilities  associated  with Trinity.  This loan
agreement is a demand note payable and accrues interest at approximately 10%.

Accounts  payable and accrued  expenses  reported by the Company at December 31,
1999 and  1998  relates  exclusively  to  corporate  obligations  of  continuing
operations.  Accrued expenses of $685,684  reported at December 31, 1999 include
$475,000 relating to accrued executive compensation. This represents a full year
of compensation for two executive officers of the Company who elected to receive
such compensation in the form of common stock during the first quarter of 2000.

                                       6
<PAGE>


During  1999  and  1998,  the  Company   discontinued  all  business  operations
associated with providing healthcare management and ancillary services. In 1999,
the  Company   discontinued  its  New  England  based  nursing  home  operations
represented  by OHI  Corporation  as well  as its  rehabilitative  services  and
medical supply  operations  represented by Trinity Rehab,  Inc.  ("Trinity") and
Southland Medical Supply, Inc. ("Southland"), respectively. In 1998, the Company
discontinued  its ancillary  service  operations in  Philadelphia,  Pennsylvania
represented largely by IHN Durant Medical Supply and Pharmacy Services.

Earlier in 1999, the Company had acquired the businesses  represented by Trinity
and Southland.  These transactions were effected in accordance with the purchase
method of accounting  and  represented  purchases of all of the capital stock of
the   respective   businesses.   In  the  instance  of  Trinity,   the  purchase
consideration  included  the  issuance of 100,000  shares of common stock of the
Company  together with the issuance of a purchase note obligation  approximating
$1.5 million. As to Southland,  the purchase consideration was generally limited
to assumption of the existing liabilities of Southland at the date of purchase.

Net current liabilities of discontinued operations reported at December 31, 1999
and  1998  totaled   $14,472,208  and  $14,249,171,   respectively.   For  1999,
significant  components  include  $2,834,530  relating to prior period ancillary
services;  $5,965,960  associated  with  nursing  home  operations;   $4,321,718
associated with Trinity operations;  and,  $1,350,000  associated with Southland
operations. For 1998, significant components of the net accounts of discontinued
operations  include  net  long-term  assets of  $7,319,664  associated  with the
Company's  nursing home operations  represented  largely by property,  plant and
equipment.  Net current  liabilities of discontinued  operations is comprised of
$14,273,643 associated with the Company's nursing home operations net of current
assets  of  $24,472  associated  with  the  Company's  prior  ancillary  service
businesses.

In August 1999,  the Company  effected the  discontinuation  of its nursing home
operations  business.  This  transaction  was  accomplished  through  the formal
assignment  of all nursing home  operating  interests to the senior  creditor in
full  satisfaction  of the  Company's  related debt  obligations.  This included
direct property debt obligations of approximately $9.8 million together with the
release  of  corporate  debt  guarantees  associated  with  other  nursing  home
properties   leased  and  managed  by  the  Company  in  the  aggregate   amount
approximating $36 million.  The residual net current liabilities of discontinued
operations  associated with nursing home operations  include $1,980,238 in loans
payable to bank and other and $3,985,722 in unsecured creditor liabilities.  The
loans payable have been guaranteed by the Company.

In November 1999, the Company  discontinued  operations  associated with Trinity
through the termination of its service  relationships.  The residual net current
liabilities  of Trinity  include  loans in default of  $2,352,747,  other  notes
payable of $1,660,795 and accounts payable and accrued expenses of $308,176.  Of
the  notes  and  loans  payable,   the  Company  has  guaranteed   approximately
$2,290,000.

In  November  1999,  the Company  voluntarily  surrendered  the common  stock of
Southland Medical Supply,  Inc.,  ("Southland"),  a wholly owned subsidiary,  to
Match, Inc. as consideration in satisfaction of Southland's participation in the
line of credit  note  obligation  in the  amount of  $145,258.  This  action was
contemplated by the Company in connection with efforts to discontinue operations
of  Southland.  In turn,  Match,  Inc. has  proceeded  with the  liquidation  of
residual assets represented by Southland's  inventory,  furniture,  fixtures and
equipment.  In the event such liquidation results in value exceeding Southland's
loan balance, the Company will be entitled to a corresponding  reduction in loan
amounts due to Match, Inc.


ITEM 7.  FINANCIAL STATEMENTS

The consolidated financial statements required to be filed pursuant to this Item
7 begin on Page F-1 of this report. Such consolidated  financial  statements are
hereby  incorporated  by  reference  into  this Item 7. The  Supplementary  Data
requirement  as set forth in Item 302 of Regulation S-K is  inapplicable  to the
Company.

                                       7
<PAGE>


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE

None


PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Directors and executive  officers of the Company at December 31, 1999, their
ages,  their  titles,  their years of  employment  with the  Company,  and their
principal occupation for the last five years are as follows:

Ronald E. Lusk,  43, has served as the Chairman of the Board of Directors of the
Company  since  November  1998 and Chairman and Chief  Executive  Officer  since
January  1, 1999.  Mr.  Lusk is also the  President  of Match,  Inc.,  a holding
company  (since  1998),  President of Barrier,  Inc., a holding  company  (since
1996),  President of Citation  Properties,  Inc.,  an operator of nursing  homes
(since  1994),  and  President of Westlake  Management  Company,  an operator of
nursing  homes  (since  1992).  Mr. Lusk is also a director of each of the above
companies.  From  March  1998 to  February  1999 Mr.  Lusk  served as  Chairman,
President and Chief Executive  Officer of Hospital  Staffing  Services,  Inc., a
home healthcare provider.

Robert L. Woodson,  III, 51, has served as President and Chief Operating Officer
since January 1, 1999.  Mr.  Woodson was President and Chief  Executive  Officer
from November 1998 to January 1999.  Prior to joining the Company,  Mr.  Woodson
was  President  of HFI Home Care  Management  LP, a company  which  acquires and
manages  home health  agencies,  from 1994  through  1997,  and  Executive  Vice
President  and  Secretary of  HealthFirst,  Inc., a company  which  manages home
health agencies,  from 1992 through 1994. In March 2000, Mr. Woodson resigned as
an executive  officer of the Company and continues to serve in the capacity as a
director.

Bart A.  Houston,  40, was  nominated  by the Board of Directors to a serve as a
director of the Company and approved by the  shareholders  at the Annual Meeting
held in April  1999.  Mr.  Houston  has been Vice  President  of the law firm of
Houston & Shahady, P.A. since 1986.

During 1999, Albert Sousa and Michael H. Seeliger resigned as executive officers
of the Company and Joe C.  Williams  resigned as a Director of the Company.  The
terms of Joseph C. McCarron, Jr. and John D. Higgins as Directors of the Company
expired in April 1999.  Effective on July 31, 1999, Mr. McCarron  resigned as an
executive  officer  of the  Company  and  continues  to  serve  in a  consulting
capacity.

ITEM 10.  EXECUTIVE   COMPENSATION   INCORPORATED  BY  REFERENCE  TO  THE  PROXY
          STATEMENT

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT

Incorporated by reference to the Proxy Statement.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company is obligated under the terms of a line of credit agreement to Match,
Inc.  outstanding  in the amount of $1,470,816  at December 31, 1999.  Ronald E.
Lusk,  Chairman and Chief Executive  Officer of the Company controls Match, Inc.
as its sole stockholder and President.  The line of credit agreement with Match,
Inc. is available up to a limit of $2 million;  bears interest at  approximately
10%;  is due on demand  and as of  December  31,  1999 is  unsecured.  This note
obligation  includes accrued interest of $107,064 at December 31, 1999. To date,
there have been no interest payments made to Match, Inc.

                                       8
<PAGE>


In  November  1999,  the Company  voluntarily  surrendered  the common  stock of
Southland Medical Supply,  Inc.,  ("Southland"),  a wholly owned subsidiary,  to
Match, Inc. as consideration in satisfaction of Southland's participation in the
line of credit  note  obligation  in the  amount of  $145,258.  This  action was
contemplated by the Company in connection with efforts to discontinue operations
of  Southland.  In turn,  Match,  Inc. has  proceeded  with the  liquidation  of
residual assets represented by Southland's  inventory,  furniture,  fixtures and
equipment.  In the  event  such  liquidation  results  in  value  exceeding  the
Company's  loan  balance,  the  Company  will  be  entitled  to a  corresponding
reduction in loan amounts due to Match, Inc.

Match,  Inc.  is the sole holder of all of the issued and  outstanding  Series A
Preferred Stock of the Company at December 31, 1999.

In  August  1999,  the  Company  issued  3,200,000  shares  of  common  stock in
connection with  converting a note  obligation of Trinity Rehab,  Inc., a wholly
owned subsidiary of the Company,  to equity. The outstanding amount of this note
obligation  upon  conversion  totaled  approximately  $800,000.  Ronald E. Lusk,
Chairman and Chief Executive Officer of the Company held a one-third interest in
this note obligation and was the beneficiary of 1,066,667 shares of common stock
issued in connection with this transaction.

In December  1999,  the Company  consummated a transaction  pursuant to which it
acquired  all  of  the  issued  and  outstanding  capital  stock  of  Healthcare
Information  Technologies,  Inc. ("HIT").  The purchase price of the HIT capital
stock was the  issuance  of  6,513,158  shares of the  Company's  common  stock.
Immediately  prior to the  transaction,  Ronald  E.  Lusk,  Chairman  and  Chief
Executive  Officer of the Company,  owned  ninety-five  percent (95%) of the HIT
capital stock and served as sole  director and President of HIT.  Other than the
foregoing, there are no material relationships between HIT and the Company.

                                       9
<PAGE>


ITEM 13.

13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits.

     The  exhibits  listed in the  accompanying  index to exhibits  are filed or
incorporated by reference as part of this annual report.

- --------------------------------------------------------------------------------
    *3.1              Amended and Restated Articles of Incorporation
- --------------------------------------------------------------------------------
    *3.2              By-Laws
- --------------------------------------------------------------------------------
    **10.1            Employee Stock Purchase Plan
- --------------------------------------------------------------------------------
    **10.2            1999 Stock Option Plan
- --------------------------------------------------------------------------------
    **10.3            1999 Share Award Plan
- --------------------------------------------------------------------------------
    **10.4            Ronald E. Lusk Employment Agreement
- --------------------------------------------------------------------------------
    +27               Financial Data Schedule
- --------------------------------------------------------------------------------

*    Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     (File No. 000-20354).

**   Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-8 (File No. 333-77731).

+    Filed with the Securities and Exchange Commission with this Form 10-KSB.

(b)  Reports on Form 8-K.

     The  following  reports  on Form 8-K were filed by the  Company  during the
quarter ended December 31, 1999 or thereafter:

     On March 10, 2000,  the Company filed a Form 8-K reporting the  disposition
of Southland  Medical Supply,  Inc., OHI Corporation and Trinity Rehab, Inc. and
the acquisition of Healthcare Information Technologies, Inc.

<PAGE>


                         PHOENIX HEALTHCARE CORPORATION



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            PAGE
                                                                            ----
Report of Independent Certified Public Accountants.......................... F-1
Consolidated Balance Sheets................................................. F-2
Consolidated Statements of Operations....................................... F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)........ F-4
Consolidated Statements of Cash Flows....................................... F-5
Notes to Consolidated Financial Statements.................................. F-6

<PAGE>


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

THE BOARD OF DIRECTORS AND STOCKHOLDERS
PHOENIX HEALTHCARE CORPORATION
DALLAS, TEXAS

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Phoenix
Healthcare  Corporation (formerly Iatros Health Network Inc.) as of December 31,
1999 and 1998, and the related consolidated statements of operations, changes in
stockholders'  equity  (deficit) and cash flows for the years 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 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 Phoenix Healthcare
Corporation as of December 31, 1999 and 1998 and the results of their operations
and their cash flows for the years 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,  discontinued all of its prior business  activities and is currently
in default on the  payment of  certain of its debt  obligations.  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  that
might result from the outcome of this uncertainty.



                                                   WEAVER & TIDWELL LLP

Dallas, Texas
March 29, 2000


                                      F-1
<PAGE>


PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998

                                                          1999          1998
                                                      -----------   -----------

ASSETS

 CURRENT ASSETS
  Cash and cash equivalents ........................  $    15,802   $
  Deposits and other ...............................        8,904         6,189
                                                      -----------   -----------
      Total current assets .........................       24,706         6,189

PROPERTY AND EQUIPMENT, net ........................       92,102       200,000

OTHER ASSETS

  Intangible assets, net ...........................      400,000
  Net long-term assets of
    discontinued operations ........................                  7,319,664

                                                      -----------   -----------
TOTAL ASSETS .......................................  $   516,808   $ 7,525,853
                                                      ===========   ===========


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
  Notes payable - related party ....................  $ 1,310,021   $
  Notes payable - other ............................                    179,014
  Accounts payable .................................      392,177       400,000
  Accrued expenses and other current liabilities ...      685,694       200,000
  Net liabilities of discontinued operations .......   14,472,208    14,249,171
                                                      -----------   -----------
    Total current liabilities ......................   16,860,100    15,028,185

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
  Preferred Stock, $.001, 5,000,000
    shares authorized:
      Series A, 533,333 shares issued
        and outstanding ............................          533           533
      Series B, 100,000 shares issued
        and outstanding ............................          100           100
  Common Stock, $.001 par value,
    50,000,000 shares
      authorized; 36,253,495 and 20,969,958
        issued or issuable and outstanding
        in 1999 and 1998, respectively .............       36,253        20,970
  Additional Paid-In Capital .......................   38,097,836    36,059,867
  Accumulated Deficit ..............................  (54,478,014)  (43,583,802)
                                                      -----------   -----------
                                                      (16,343,292)   (7,502,332)

                                                      -----------   -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY (DEFICIT) .................................  $   516,808   $ 7,525,853
                                                      ===========   ===========

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                      F-2
<PAGE>


PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998

                                                         1999          1998
                                                    ------------   ------------

Operating expenses:
  General and administrative .....................  $  2,649,299   $  1,090,948

                                                    ------------   ------------
Loss from continuing operations before
  other income (expense), discontinued
  operations and extraordinary item ..............    (2,649,299)    (1,090,948)

Other income (expense)
  Interest, net ..................................      (103,243)       125,035
  Depreciation ...................................       (25,847)            --
                                                    ------------   ------------
                                                        (129,090)       125,035
                                                    ------------   ------------
Loss from continuing operations before
  discontinued operations and
  extraordinary item .............................    (2,778,389)      (965,913)

Discontinued operations:
  Net loss on settlement and disposition
    of discontinued accounts .....................    (5,246,231)            --
  Net loss from operations .......................    (4,028,016)   (11,573,340)
                                                    ------------   ------------
                                                      (9,274,247)   (11,573,340)
                                                    ------------   ------------

Loss from operations before extraordinary item ...   (12,052,636)   (12,539,253)

Extraordinary item:
  Net gain on extinguishment of
    debt obligations .............................     1,158,424        619,547

                                                    ------------   ------------
Net Loss .........................................  $(10,894,212)  $(11,919,706)
                                                    ============   ============
Basic and diluted loss per share:
  Continuing operations ..........................  $      (0.12)  $      (0.06)
  Discontinued operations ........................         (0.38)         (0.55)
  Extraordinary item .............................          0.04            .03
                                                    ------------   ------------
Loss per Common Share ............................  $      (0.46)  $      (0.58)
                                                    ============   ============

Weighted Average Common Shares ...................    24,258,453     20,948,862
                                                    ============   ============

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                      F-3
<PAGE>


PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                           ADDITIONAL
                                                  PREFERRED   STOCK    COMMON     STOCK      PAID IN     ACCUMULATED
                                                   SHARES    AMOUNT    SHARES     AMOUNT     CAPITAL       DEFICIT         TOTAL
                                                  ---------  ------    ------     ------   ----------    -----------       -----
<S>                                                 <C>        <C>   <C>         <C>        <C>          <C>           <C>
Balance, December 31, 1997                         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)

Issuance of common stock in connection with
  the purchase acquisition of Trinity Rehab, Inc.       --              100,000      100         25,860            --       25,960

Issuance of common stock in connection
  with the conversion of debt obligations               --            3,200,000    3,200        796,800            --      800,000

Issuance of common stock in settlement of
  corporate creditor obligations                        --            1,285,000    1,285        173,174            --      174,459

Issuance of common stock in connection
  with settling corporate litigation matters            --            2,150,000    2,150        299,215            --      301,365

Issuance of common stock in connection
  with the purchase acquisition of
  Healthcare Information Technologies, Inc.             --            6,513,158    6,513        393,487            --      400,000

Issuance of common stock in connection with
  executive compensation                                --            2,035,379    2,035        349,433            --      351,468

Net Loss                                                --                   --       --             --   (10,894,212) (10,894,212)
                                                 -----------------------------------------------------------------------------------
Balance, December 31, 1999                          633,333    $633  36,253,495  $36,253    $38,097,836  $(54,478,014) $(16,343,292)
                                                 ===================================================================================
</TABLE>

                   The accompanying notes are an integral part
                  of these consolidated financial statements.

                                      F-4
<PAGE>


PHOENIX HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998

                                                        1999           1998
                                                    ------------   ------------
OPERATING ACTIVITIES
  Net loss .......................................  $(10,894,212)  $(11,919,706)
  Adjustments to reconcile net loss to
    net cash provided (utilized) by
    operating activities:
    Depreciation and amortization ................       237,123        762,789
    Provision for doubtful accounts
      receivable .................................       512,520        530,540
    Provision for notes, loans and
      deposits receivable and write-off
      of fixed assets ............................            --      6,829,301
    Write-off of intangible assets ...............            --      3,251,617
    Extraordinary gain on settlement
      of liabilities .............................    (1,158,424)      (619,547)
    Common stock isued for services rendered .....       351,468             --
  Changes in:
    Accounts receivable ..........................     2,657,896      2,502,378
    Inventory ....................................         8,779        193,543
    Prepaid expenses and other ...................        (2,715)       726,141
    Accounts payable and accrued expenses ........     2,338,860       (920,632)
                                                    ------------   ------------
  Net cash provided (utilized) by
    operating activities .........................    (5,948,705)     1,336,424

INVESTING ACTIVITIES
  Purchase of property and equipment .............      (117,949)      (229,567)
  Loans to third parties .........................            --       (434,000)
  Organization costs .............................            --       (295,000)
                                                    ------------   ------------
  Net cash utilized by investing activities ......      (117,949)      (958,567)

FINANCING ACTIVITIES

  Proceeds from issuance of long-term debt .......            --        422,224
  Short-term borrowings, net .....................     5,803,092       (583,539)
  Payments of long-term debt .....................            --       (127,874)
                                                    ------------   ------------
  Net cash provided (utilized)
    by financing activities ......................     5,803,092       (289,189)


INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS . .........................      (263,562)        88,668
  Cash and cash equivalents, beginning of year ...       279,364        190,696
                                                    ------------   ------------
  Cash and cash equivalents, end of year .........  $     15,802   $    279,364
                                                    ============   ============

                  The accompanying notes are an integral part
                   of these consolidated financial statements

                                      F-5
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant  accounting policies consistently applied
in the preparation of the accompanying  consolidated  financial statements is as
follows:

BUSINESS

Phoenix  Healthcare  Corporation  (formerly  Iatros Health  Network,  Inc.) is a
Delaware Corporation organized in June 1988. Phoenix Healthcare Corporation (the
"Company" or "Phoenix") has  historically  been engaged in providing  healthcare
management and ancillary  services to the long-term care industry.  During 1999,
the Company  discontinued all operations  associated with such  businesses.  New
management of the Company has undertaken to implement a strategic  business plan
to reposition Phoenix as an information technology company.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Phoenix Healthcare
Corporation and its wholly-owned  subsidiaries.  All inter-company  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.

Cash and cash  equivalents  of $279,364 at December 31, 1998, is included in net
liabilities of discontinued operations.

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.  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.
Property and equipment is principally  comprised of office  furniture,  fixtures
and equipment having useful lives ranging from three to seven years for purposes
of computing depreciation.  Accumulated depreciation was $25,847 at December 31,
1999.

INTANGIBLE ASSETS

The  Company   evaluates  the  carrying  value  of  its  long-lived  assets  and
identifiable  intangibles 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.  Intangible assets reported
by the Company currently  include  capitalized  license rights  representing the
costs of acquiring software and related intellectual property rights. Such costs
are being  amortized over future  periods  during which the Company  anticipates
deriving  income from the related  assets.  The period over which such costs are
being amortized generally does not exceed fifteen 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.

                                      F-6
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998

NOTE 1:  NATURE OF  BUSINESS  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
(CONTINUED)

EARNINGS PER SHARE

The Company adopted Statement of Financial Accounting Standard No. 128 "Earnings
per Share" ("SFAS 128") in 1997.

Basic  earnings per share are 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 Post  Retirement  Benefits" in 1998.  Adoption of these
statements had no material effects on the Company's financial position,  results
of operations or cash flows.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and liabilities at the dates of the financial  statements and
the  reported  amounts of revenue and  expenses  during the  reporting  periods.
Actual results could differ from these estimates.

RECLASSIFICATIONS

Certain   reclassifications,   particularly   related  to  the  presentation  of
discontinued  operations,  have  been  made to 1998 to  conform  with  the  1999
presentation.


NOTE 2: GOING CONCERN

For the year  ended  December  31,  1999,  the  Company  reported  a net loss of
$10,894,212. This is largely attributable to recent net operating losses and the
resultant  losses  on  disposal  associated  with  now  discontinued  operations
totaling  $9,274,247.  Recent  operating  losses reported by the Company through
December 31, 1999 coupled with the burden of prior period corporate  obligations
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, 1999, the Company  reports a working capital deficit of $16,835,394
compared with a working capital deficit of $15,021,996 at December 31, 1998. 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  have  included  pro-active  dealings  with the  Company's  financial  and
creditor  issues while  implementing a growth plan for the future.  During 1999,
the Company  discontinued all of its existing business associated with providing
healthcare  management  and ancillary  services to the long-term  care industry.
Having  repositioned the Company for  implementing its strategic  business plan,
new  management  now intends to  aggressively  exploit  prospects  in pursuit of
business  acquisitions  and  related  development  opportunities  in the area of
information technology.

                                      F-7
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998


NOTE 2: GOING CONCERN (CONTINUED)

In  light  of  the  Company's  current  financial  position,  its  inability  to
independently  meet its short-term  corporate  obligations,  its need to further
capitalize  existing  operations and its dependency on revenue growth to support
continuing operations,  its viability as a going concern is uncertain. While the
Company has experienced a change in control together with an infusion of limited
new working capital,  there can be no assurance that new management's efforts to
re-direct and re-capitalize the Company will be successful.


NOTE 3:  SIGNIFICANT TRANSACTIONS

On December 15, 1999, the Company consummated a transaction pursuant to which it
acquired all of the common stock of Healthcare  Information  Technologies,  Inc.
("HIT"),  representing  all of the issued  and  outstanding  shares of HIT.  The
purchase  price  paid  for HIT was  the  issuance  of  6,513,158  shares  of the
Company's common stock,  which approximated the historical cost basis of the HIT
shares acquired. HIT, based in Dallas, Texas, is a technology based company that
provides information  technologies to healthcare providers.  The transaction has
been  accounted  for similar to a pooling of interests.  HIT had no  significant
operating  activity  in 1999 or 1998  other  than  the  acquisition  of  certain
software  licenses.  Immediately  prior  to the  transaction,  Ronald  E.  Lusk,
Chairman and Chief Executive Officer of the Company,  owned ninety-five  percent
(95%) of the common stock of HIT.


NOTE 4: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

No  interest  or  income  taxes  were  paid  in 1999  and  1998  for  continuing
operations.

The Company paid $416,855 and  $1,353,314 in cash for interest  attributable  to
discontinued operations during 1999 and 1998, respectively.

In 1999, the Company  conveyed  $8,789,601 in long-term  assets to a creditor in
satisfaction of $9,760,000 in notes payable.

During 1998,  notes payable were settled for $619,547  less than their  recorded
amount.  In addition,  during 1999,  accounts  payable were settled for $188,025
less than their recorded amount.

During  1999 and 1998,  $550,816  and $82,717 of accrued  interest  was added to
notes payable.

During  1999,  the Company  issued  3,435,000  shares of common stock to satisfy
$501,784 in trade  accounts  payable  from  discontinued  operations;  2,035,379
shares of common  stock  in-lieu  of  executive  compensation  in the  amount of
$351,468;  3,200,000 shares of common stock to convert $800,000 in notes payable
to equity;  6,513,158  shares of common stock for the  acquisition of all of the
outstanding  shares  of  Health  Information  Technologies,  Inc.  at a cost  of
$400,000;  and 100,000  shares of common stock in  connection  with the purchase
acquisition of Trinity Rehab, Inc. at a cost of $25,690

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.


NOTE 5: 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.

                                      F-8
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998


NOTE 5: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Cash and cash equivalents, deposits and other current assets, notes and accounts
payable,  accrued expenses and other current  liabilities and net liabilities of
discontinued  operations  are  carried at amounts  that  approximate  their fair
values because of the short-term maturity of these instruments.


NOTE 6: 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 follows:

                                                        1999             1998
                                                        ----             ----
Federal Income Tax Rate                                 (34)%            (34)%
State Taxes, Net of Federal Benefit                    (3.5)%           (3.5)%
Effect of Net Operating Losses                          37.5%            37.5%
                                                     ----------       ----------
                                                         0%               0%
                                                     ==========       ==========

Deferred  income taxes arise  primarily as a result of a difference  between the
financial and tax basis of reporting principally for differences in the bases of
receivables,  property and equipment,  other assets, accrued liabilities and net
operating loss carry forwards.

Deferred  tax  assets  at  December  31,  1999  and 1998  are  comprised  of the
following:

                                                  1999           1998
                                              ------------   ------------
      Deferred tax assets
        Tax benefit of net operating loss
        carryforwards ......................  $ 17,236,000   $ 16,777,000
        Allowance for doubtful accounts ....       --             101,000
        Accrued liabilities ................       --              95,000
                                              ------------   ------------
        Total deferred tax assets ..........    17,236,000     16,973,000
        Less valuation allowance ...........   (17,236,000)   (16,973,000)
                                              ------------   ------------
        Net deferred tax assets ............  $    --        $    --
                                              ============   ============

During 1999, the deferred tax asset  valuation  allowance  increased by $459,000
and during 1998, the valuation allowance increased by $10,232,000.

At December 31, 1999, the Company has available net operating loss carryforwards
for Federal  income tax  purposes  of  approximately  $46,000,000,  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.


NOTE 7: NOTES PAYABLE - RELATED PARTY AND OTHER

Notes  payable  totaling   $1,470,816   (including   $160,795   classified  with
discontinued   operations)  at  December  31,  1999   represents  the  Company's
outstanding line of credit obligation to Match, Inc., a company  wholly-owned by
Ronald E. Lusk,  Chairman and Chief  Executive  Officer of the Company.  Amounts
reported for 1998 represent various corporate obligations, which have since been
settled or otherwise satisfied.

The line of credit  agreement with Match,  Inc. is available up to a limit of $2
million;  bears  interest  at  approximately  10%;  is  due  on  demand;  and is
secured by the stock and assets of the subsidiary companies.

                                      F-9
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998


NOTE 8:  DISCONTINUED OPERATIONS

During  1999  and  1998,  the  Company   discontinued  all  business  operations
associated with providing healthcare management and ancillary services. In 1999,
the  Company   discontinued  its  New  England  based  nursing  home  operations
represented  by OHI  Corporation  as well  as its  rehabilitative  services  and
medical supply  operations  represented by Trinity Rehab,  Inc.  ("Trinity") and
Southland Medical Supply, Inc. ("Southland"), respectively. In 1998, the Company
discontinued  its ancillary  service  operations in  Philadelphia,  Pennsylvania
represented largely by IHN Durant Medical Supply and Pharmacy Services.

Earlier in 1999, the Company had acquired the businesses  represented by Trinity
and Southland.  These transactions were effected in accordance with the purchase
method of accounting  and  represented  purchases of all of the capital stock of
the   respective   businesses.   In  the  instance  of  Trinity,   the  purchase
consideration  included  the  issuance of 100,000  shares of common stock of the
Company  together with the issuance of a purchase note obligation  approximating
$1.5 million. As to Southland,  the purchase consideration was generally limited
to assumption of the existing liabilities of Southland at the date of purchase.

Net current and long term  accounts of  discontinued  operations at December 31,
1999 and 1998, are detailed as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1999                                     PRIOR           NURSING         TRINITY         SOUTHLAND         TOTAL
- -----------------                                  ANCILLARIES       OPERATIONS         REHAB           MEDICAL        ACCOUNTS
                                                   -----------      -----------      -----------      -----------      ------------
<S>                                                <C>              <C>              <C>              <C>              <C>
Accounts payable and accrued expenses              $  (870,516)     $(3,985,722)     $  (308,176)     $   --           $ (5,164,414)
Judgment creditor obligations                       (1,964,014)         --               --               --             (1,964,014)
Loans in default                                        --           (1,980,238)      (2,352,747)         --             (4,332,985)
Other notes payable                                     --              --            (1,660,795)       (1,350,000)      (3,010,795)
                                                   ---------------------------------------------------------------------------------
Total net current liabilities                      $(2,834,530)     $(5,965,960)     $(4,321,718)     $(1,350,000)     $(14,472,208)
                                                   ================================================================================
<CAPTION>

DECEMBER 31, 1998                                     PRIOR           NURSING           TOTAL
- -----------------                                  ANCILLARIES       OPERATIONS       ACCOUNTS
                                                   -----------      -----------      -----------
<S>                                                <C>              <C>              <C>
Net property, plant and equipment                  $    --          $ 8,192,222      $ 8,192,222
Other long term assets                                  --              823,942          823,942
Long-term debt                                          --           (1,696,500)      (1,696,500)
                                                   ---------------------------------------------
Total net long term assets                         $    --          $ 7,319,664      $ 7,319,664
                                                   =============================================

DECEMBER 31, 1998                                     PRIOR           NURSING           TOTAL
- -----------------                                  ANCILLARIES       OPERATIONS       ACCOUNTS
                                                   -----------      -----------      -----------
Cash                                               $    --          $   279,364      $   279,364
Accounts receivable and other                          616,040        1,863,155        2,479,195
Accounts payable and
  accrued expenses                                    (591,568)      (3,240,745)      (3,832,313)
Long-term debt in default                               --           (8,300,000)      (8,300,000)
Other notes payable and debt obligations                --           (4,875,417)      (4,875,417)
                                                   ---------------------------------------------
Total net current assets (liabilities)             $    24,472      $(14,273,643)    $(14,249,171)
                                                   =============================================
</TABLE>

                                      F-10
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998


NOTE 8:  DISCONTINUED OPERATIONS (CONTINUED)

Net losses from discontinued  operations reported for the periods ended December
1999 and 1998, are detailed as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999                          PRIOR           NURSING         TRINITY         SOUTHLAND         TOTAL
- ---------------------------                        ANCILLARIES       OPERATIONS         REHAB           MEDICAL        ACCOUNTS
                                                   -----------      -----------      -----------      -----------      ------------
<S>                                                <C>              <C>              <C>              <C>              <C>
Revenues                                           $      --        $11,412,276      $ 3,312,567      $ 7,104,814      $ 21,829,657
Operating expenses                                    (512,519)     (10,232,275)      (4,429,062)      (7,887,899)      (23,061,755)
Property and capital related                              --         (1,125,767)        (190,071)      (1,480,080)       (2,795,918)
                                                   ---------------------------------------------------------------------------------
Net (Loss)                                         $  (512,519)     $    54,234      $(1,306,566)     $(2,263,165)     $ (4,028,016)
                                                   ================================================================================

<CAPTION>

YEAR ENDED DECEMBER 31, 1998                          PRIOR           NURSING           TOTAL
- ----------------------------                       ANCILLARIES       OPERATIONS       ACCOUNTS
                                                   -----------      -----------      -----------
<S>                                                <C>              <C>              <C>
Revenues                                           $ 7,526,597      $19,611,430      $27,138,027
Operating expenses                                  (6,817,481)     (17,977,923)     (24,795,404)
Property and capital related                          (325,933)      (3,509,112)      (3,835,045)
Other-net                                           (4,294,978)      (5,785,940)     (10,080,918)
                                                   ---------------------------------------------
Net (Loss)                                         $(3,911,795)     $(7,661,545)     $(11,573,340)
                                                   =============================================
</TABLE>

Other-net  charges to  discontinued  operations  for the year ended December 31,
1998 were largely attributed to the write-off of intangible assets and provision
for doubtful notes and accounts receivable associated with prior ancillaries and
nursing operations.


NOTE 9: RELATED PARTY TRANSACTIONS

The Company is obligated under the terms of a line of credit agreement to Match,
Inc. in the amount of $1,470,816 at December 31, 1999. Ronald E. Lusk,  Chairman
and Chief  Executive  Officer of the Company  controls  Match,  Inc. as its sole
stockholder  and President.  The line of credit  agreement  with Match,  Inc. is
available up to a limit of $2 million;  bears interest at approximately  10%; is
due on demand and as of December  31, 1999 is  unsecured.  This note  obligation
includes  accrued interest of $107,064 at December 31, 1999. To date, there have
been no interest payments made to Match, Inc.

In  November  1999,  the Company  voluntarily  surrendered  the common  stock of
Southland Medical Supply,  Inc.,  ("Southland"),  a wholly owned subsidiary,  to
Match, Inc. as consideration in satisfaction of Southland's participation in the
line of credit  note  obligation  in the  amount of  $145,258.  This  action was
contemplated by the Company in connection with efforts to discontinue operations
of  Southland.  In turn,  Match,  Inc. has  proceeded  with the  liquidation  of
residual assets represented by Southland's  inventory,  furniture,  fixtures and
equipment.  In the  event  such  liquidation  results  in  value  exceeding  the
Company's  loan  balance,  the  Company  will  be  entitled  to a  corresponding
reduction in loan amounts due to Match, Inc.

Match,  Inc.  is the sole holder of all of the issued and  outstanding  Series A
Preferred Stock of the Company at December 31, 1999.

In  August  1999,  the  Company  issued  3,200,000  shares  of  common  stock in
connection with  converting a note  obligation of Trinity Rehab,  Inc., a wholly
owned subsidiary of the Company,  to equity. The outstanding amount of this note
obligation  upon  conversion  totaled  approximately  $800,000.  Ronald E. Lusk,
Chairman and Chief Executive Officer of the Company held a one-third interest in
this note obligation and was the beneficiary of 1,066,667 shares of common stock
issued in connection with this transaction.

                                      F-11
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998

NOTE 9: RELATED PARTY TRANSACTIONS (CONTINUED)

In December  1999,  the Company  consummated a transaction  pursuant to which it
acquired  all  of  the  issued  and  outstanding  capital  stock  of  Healthcare
Information  Technologies,  Inc. ("HIT").  The purchase price of the HIT capital
stock was the  issuance  of  6,513,158  shares of the  Company's  common  stock.
Immediately  prior to the  transaction,  Ronald  E.  Lusk,  Chairman  and  Chief
Executive  Officer of the Company,  owned  ninety-five  percent (95%) of the HIT
capital stock and served as sole  director and President of HIT.  Other than the
foregoing, there are no material relationships between HIT and the Company.


NOTE 10: 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:

                                                        1999           1998
                                                    ------------   ------------
Net Loss .........................................  $(10,894,212)  $(11,919,706)
Preferred stock dividends ........................      (160,000)      (160,000)
                                                    ------------   ------------
Loss to common shareholders (numerator) ..........  $(11,054,212)  $(12,079,706)
                                                    ============   ============
Weighted-average number of shares of
  common stock (denominator) .....................    24,258,453     20,948,862
                                                    ============   ============

Potential dilutive securities (1999 and 1998-stock  options,  stock warrants and
convertible preferred stock) have not been considered since the Company reported
a net loss from continuing operations and,  accordingly,  their effects would be
anti-dilutive.


NOTE 11: 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, 1999, 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 $2,870,000 at December 31, 1999. 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,  1999,  dividends in arrears yet not declared by the Company on the
8% Cumulative Series A Senior Convertible Preferred Stock totaled $870,000.

The  Series B  Preferred  Stock is  nonvoting  and does not pay  dividends.  The
liquidation preference of each share is $1.00 per share.


NOTE 12: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS

1999 STOCK OPTION PLAN

On February  18,  1999,  the Board of  Directors  adopted  and the  shareholders
subsequently  approved the 1999 Company Stock Option Plan (Plan), which provides
for the granting of incentive  and  non-qualified  stock options to officers and
key employees.  Currently, a maximum of options to purchase 3,000,000 shares may
be issued under the Plan.  Options are granted on terms  determined by the Board
of Directors.  Incentive  Stock  Options must be granted with an exercise  price
equal to at least 100% of the fair market  value of the stock at the grant date.
Non-qualified  stock options must be granted with an exercise  price equal to at
least 80% of the fair  market  value of the stock at the  grant  date.  The Plan
terminates December 31, 2008.

                                      F-12
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998

NOTE 12: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS (CONTINUED)

During 1999,  the Company  granted to key employees  incentive  stock options to
purchase  1,380,000  shares of common stock.  Options to purchase 600,000 shares
were rescinded during 1999. The remaining  780,000 shares were issued at a grant
price of $.28 per  share.  One third of the  stock  options  become  exercisable
February,  2000, 2001, and 2002, provided the respective employee is employed on
the anniversary date.

EMPLOYEE STOCK PURCHASE PLAN

During 1999,  the Company  adopted an employee  stock purchase plan available to
all employees. Stock is offered under the plan semi-annually and an employee may
subscribe  to up to $25,000  worth of stock in any calendar  year.  The purchase
price of shares  under the plan is 85% of the lower of the fair market  value of
the common stock at the  beginning and ending dates of the offering  period.  No
shares have been offered under the employee stock purchase plan.

PRIOR STOCK OPTION PLAN

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.  During 1998,  400,000  option
shares, that were outstanding at December 31, 1997, expired.

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. Of these, 1,100,000
Non-Redeemable  Common Stock  Purchase  Warrants  expired on July 25, 1999.  The
remaining 500,000 warrants with an exercise price of $1.50 expire July 25, 2004.

PRIVATE WARRANTS

Transactions involving private warrants are summarized as follows:

WARRANTS
                                         WEIGHTED                WEIGHTED
                                       AVERAGE PRICE           AVERAGE PRICE
                                   ---------------------   ---------------------
                                     1999      PER SHARE     1998      PER SHARE
                                   ---------   ---------   ---------   ---------

Outstanding January 1 ........     2,878,848     $1.17     3,396,110     $1.77
  Granted ....................            --        --       589,150       .62
  Exercised ..................            --        --      (100,000)       --
  Expired/Cancelled ..........      (100,000)    (2.00)   (1,006,412)    (2.97)
                                   ---------               ---------

Outstanding December 31 ......     2,778,848     $1.15     2,878,848     $1.17
                                   =========               =========

Exercisable December 31 ......     2,672,184     $1.15     2,772,184     $1.17


The warrants outstanding on December 31, 1999 expire from 2000 through 2007.

                                      F-13
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998

NOTE 12: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS (CONTINUED)

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 no compensation cost for stock options and warrants for 1999 or 1998.
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
1999 and 1998 would have differed from the actual results as follows:

                                              1999           1998
                                          ------------   ------------

      Net income (loss)
        As reported ....................  $(10,194,212)  $(11,919,706)
        Proforma .......................   (10,246,212)  $(12,291,273)
      Basic earnings (loss) per share
        As reported ....................         $(.46)         $(.58)
        Proforma .......................         $(.46)         $(.59)

The per share  weighted  average  fair value of the stock  options and  warrants
granted during 1999 and 1998 was $.28 and $.38, respectively. The fair value was
estimated  at the date of grant using the  Modified  Black-Scholes  Stock Option
Pricing  Model  with the  following  assumptions:  risk free  interest  rates of
approximately 6.5% - 1999; 6% - 1998;  expected volatility of 171%, and expected
lives of 1-10 years, and no expected dividends.

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 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.

NOTE 13: 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 two-year period ended December 31,
1999.


NOTE 14: COMMITMENTS AND CONTINGENCIES

On January 1, 1999,  in  connection  with the change in corporate  control,  the
Company  entered into  employment  agreements  with four  executive  officers to
succeed prior management.  During 1999, two of these executives resigned and the
Company  issued  285,379  shares of  common  stock to such  individuals  in full
satisfaction  of the associated  employment  agreement  commitments.  Of the two
remaining executives,  employment  agreements,  each for a period of five years,
include aggregate annual base compensation of $475,000 to be paid in the form of
stock,  cash  or  a  combination  thereof.  At  December,  31,  1999,  executive
compensation  totaling  $475,000  remained  accrued.  In March 2000, the Company
authorized  the issuance of 3,172,126  shares of the  Company's  common stock in
satisfaction of this obligation.  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.

                                      F-14
<PAGE>


PHOENIX HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998

NOTE 14: COMMITMENTS AND CONTINGENCIES (CONTINUED)

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. The management arrangement applicable to the Company
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  as well as other
claims for  recovery.  In July 1999,  the property  owner filed a complaint  for
breach of contract seeking $1,800,000 in damages. In September 1999, the Company
filed both an answer denying these claims and also a cross-complaint  for breach
of contract  seeking  damages in the amount of  $810,000.  This action is in the
discovery  stage  with no set  trial  date.  The  Company  continues  settlement
discussions  with the  property  owner and does not believe  that the outcome of
this matter will have an adverse  material  impact on its financial  position or
results of operations.

The Company is a defendant in certain lawsuits involving  third-party  creditors
whose claims arise from  transactions,  which occurred  under prior  management.
Management  believes that it has  sufficiently  reserved for these claims in its
financial statements at December 31, 1999.  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.

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.

The Company is obligated under the terms of an operating lease for its executive
and  administrative  offices located Dallas,  Texas. The lease agreement,  which
term extends to January 2003,  requires a monthly  lease payment of $7,761,  and
includes  all  building  costs.  Lease  expense  incurred  and  relating to this
agreement for the year ended December 31, 1999 totaled $85,371.

In March 2000, the Company authorized the issuance of 7,400,000 shares of common
stock in connection  with the  appointment  of a new Executive Vice President of
the  Company  who will also serve in the  capacity of  President  of  Healthcare
Information   Technologies,   Inc.,  the  recently  acquired  and  wholly  owned
subsidiary of the Company.  The Company is committed to enter into an employment
agreement  with this  executive  effective  January 1, 2000 for a period of five
years with an annual  compensation  level of $240,000.  The employment  contract
terms are expected to be  substantially  similar to those used for other Company
executives.

In March 2000,  the Company  accepted  the  resignation  of its Chief  Operating
Officer who will  continue to serve on the  Company's  Board of  Directors.  The
Company  approved  the  conversion  of a $150,000  promissory  note into 454,545
shares  of the  Company's  common  stock  in  full  satisfaction  of  such  note
obligation.

                                      F-15

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<LEGEND>
     (Replace this text with the legend)
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<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                            DEC-31-1999
<PERIOD-START>                               JAN-01-1999
<PERIOD-END>                                 DEC-31-1999
<CASH>                                            15,802
<SECURITIES>                                           0
<RECEIVABLES>                                          0
<ALLOWANCES>                                           0
<INVENTORY>                                            0
<CURRENT-ASSETS>                                  24,706
<PP&E>                                            92,162
<DEPRECIATION>                                         0
<TOTAL-ASSETS>                                   516,808
<CURRENT-LIABILITIES>                         16,860,100
<BONDS>                                                0
                                  0
                                          633
<COMMON>                                          36,253
<OTHER-SE>                                   (16,380,178)
<TOTAL-LIABILITY-AND-EQUITY>                     516,808
<SALES>                                                0
<TOTAL-REVENUES>                                       0
<CGS>                                                  0
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<OTHER-EXPENSES>                              (2,675,146)
<LOSS-PROVISION>                                       0
<INTEREST-EXPENSE>                              (103,243)
<INCOME-PRETAX>                                        0
<INCOME-TAX>                                           0
<INCOME-CONTINUING>                                    0
<DISCONTINUED>                                (9,274,247)
<EXTRAORDINARY>                                1,158,424
<CHANGES>                                              0
<NET-INCOME>                                 (10,894,212)
<EPS-BASIC>                                        (0.46)
<EPS-DILUTED>                                      (0.46)


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