SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal years ended December 31, 1996
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 0-20345
Iatros Health Network, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 23-2596710
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Piedmont Center, Suite 400
Atlanta, Georgia 30305
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(Address of principal executive offices) (Zip Code)
(404) 266-3643
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(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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and no disclosure will be contained to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
The Registrant had revenue of $22,106,815 from continuing
operations for its most recent fiscal year.
As of March 31, 1997, the aggregate market value of the
Registrant's Common Stock held by non-affiliates was $19,736,908
based upon the average bid and asked price of $1-5/16 on March
31, 1997.
As of March 31, 1997, 16,134,852 shares of the Registrant's
Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain exhibits are incorporated by reference to the
Company's Registration Statement on Form S-1 and to certain of
its Current Reports on Form 8-K, as listed in response to
13(a)(3) of Part III.
FORWARD LOOKING STATEMENTS
THIS FORM 10-K INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND BUSINESS OF THE COMPANY. SUCH STATEMENTS REFLECT
SIGNIFICANT ASSUMPTIONS AND SUBJECTIVE JUDGMENTS BY THE COMPANY'S
MANAGEMENT CONCERNING ANTICIPATED RESULTS. THESE ASSUMPTIONS AND
JUDGMENTS MAY OR MAY NOT PROVE TO BE CORRECT. MOREOVER SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES
THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. FORWARD LOOKING
STATEMENTS SPEAK ONLY AS TO THE DATE HEREOF.
PART I
ITEM 1. BUSINESS
Iatros Health Network, Inc., and its subsidiaries (together
referred to as the "Company") are involved in the operation of
long term-care facilities and provide services and products to
the long-term care industry. These include a broad range of
management, ancillary and development services. The Company's
principal market areas currently are Pennsylvania, Maryland and
New England.
Business Strategy
The Company's principal business strategy is to position
itself in selected market areas, having established a network of
formal operating and service relationships involving long-term
care facilities and health care providers. Through the
introduction of its specialized operating skills and ancillary
service programs, the Company provides cost effective and
efficient, quality-oriented services to area health care
facilities. The Company emphasizes the localized nature of the
long-term care industry, utilizing its operating resources to
achieve maximum economies. Strategic alliances with local
owners, operators and health care providers in developing the
area network are key ingredients to the Company's business
strategy.
The Company's growth and development plans are to more
actively pursue opportunities involving the direct leasing and
ownership of long-term care facilities. This represents a change
in emphasis from previous development initiatives focused solely
on contract management and service engagements. This strategy
reflects management's efforts to develop a stronger and more
tangible balance sheet while broadening its revenue base and
increasing operating control over facilities managed.
In view of continuing health care reform initiatives, the
Company believes it is important to position itself as a low cost
quality provider of heath care services in its respective
markets. The Company seeks to provide value added services that
promote revenue enhancement, cost containment and quality
assurance to the facilities it serves.
Management Services
The Company provides a full range of management services to
the long-term care facilities it serves. These include financial
as well as operational management services, quality assurance
services, and special consulting services.
The Company currently provides management services to 41
facilities representing 4,604 beds located in the market areas of
Pennsylvania, Maryland and New England.
The Company's operating objective is to achieve the optimum
integration of financial services and operations management in
all of the facilities it serves. Embodied in this philosophy is
the Company's priority to develop its key people as both
financial and operational managers. The Company emphasizes the
development of its financial service capabilities to both support
and enhance its operating programs. An important ingredient to
promoting the integration of financial and operating management
is the integrity of the underlying information systems. The
Company is committed to utilizing state-of-the-art technology to
support its operating needs. This includes the development and
utilization of information systems technology that is financially
as well as clinically oriented.
Ancillary Services
The Company provides a full range of ancillary services to
long-term care facilities operating in its market areas. These
include institutional pharmacy services, durable medical
equipment, wound care management, infusion therapy, respiratory
therapy services and rehabilitation therapy services. The
Company currently provides ancillary services to in excess of 40
facilities representing nearly 5,000 beds located in the market
areas of Pennsylvania, Maryland and New England.
Institutional pharmacy and medical supply service programs,
which extend beyond product delivery, emphasize operational
support services including drug consultation, resident care
management, quality assurance practices, and documentation and
administrative support. During 1996, the Company expanded its
pharmacy and durable medical equipment programs in its
Pennsylvania market area.
The Company's business plan is to continue to expand upon
the array of products and services it can provide to the long-
term care networks it develops. The Company intends to
accomplish this through strategic alliances with preferred
providers of health care services as well as by further
developing its direct service capabilities.
Development Services
The Company provides a full range of development services on
behalf of owners and operators as well as lenders and investors
who are active in the long-term care industry. The Company seeks
opportunities to be engaged in a development, consulting or
financial advisory capacity on a fee for service basis,
particularly where possibility exists to realize development
income while securing ownership, management and ancillary
services business.
The Company is currently involved in development activities
of long-term care facilities located in its existing as well as
new market areas. These transactions, upon completion, will
provide opportunities for management and ancillary services for
the Company.
Significant Transactions
Significant transactions completed by the Company or its
wholly-owned subsidiaries during the last fiscal year include the
following:
Effective January 1, 1996, the Company entered into a five
(5) year management agreement to manage a 60 bed nursing center
in Nelsonia, Virginia. The agreement may be terminated by either
party without cause after three (3) years and as otherwise
provided in the management agreement. As manager, the Company is
paid a stated base fee plus an incentive fee equal to the amount
by which 5% of total operating revenues of the facilities exceeds
the base fee. The Company also entered into a development
agreement pursuant to which it assisted the owner in purchasing
the nursing center, in developing a 34-bed assisted living wing
adjacent to the nursing center and in purchasing the property on
which the assisted living facility is to be located for a fee of
$250,000 payable in three annual installments of $80,000, $90,000
and $80,000. Pursuant to an operating deficits agreement, the
Company agreed to lend up to $250,000 to the owner of the
facility to pay certain costs associated with the construction of
the assisted living facility and certain operating expenses to
the extent the owner does not have sufficient unrestricted cash
to pay such obligations. Upon completion of the assisted living
facility, the maximum amount to be lent by the Company will be
reduced to $150,000. If at such time, the Company has advanced
more than $150,000 to the owner, the owner is not obliged to
immediately repay the amount in excess of $150,000. All amounts
are repaid to the Company as provided in the operating deficits
agreement. To date no advances under the operating deficits
agreement have been required. Payment of the management fee,
payment of the development fee and repayment of advances made by
the Company pursuant to the operating deficits agreement are
subordinated to other obligations of the owner of the facilities,
including payment of principal and interest on the bonds issued
to finance the owner's acquisition of the nursing center and
construction of the assisted living facility.
In February 1996, the Company entered into a five (5) year
management agreement to manage a 49-bed Long-Term Acute Care
Hospital (the "Hospital") in Rancho Cucamonga, California. The
agreement may be terminated by either party without cause on the
third anniversary date and as otherwise provided in the
management agreement. As manager of the Hospital, the Company is
paid a monthly fee of $50,000. Up to 50% of this fee is
subordinated to payment of principal and interest on the bonds, a
portion of the proceeds from the sale of which was used by the
owner to acquire the Hospital and an adjoining medical office
building. The Company also entered into a development agreement
pursuant to which it will coordinate projects for renovating the
Hospital for a fee of $50,000, half of which was paid upon
execution of the agreement and the balance of which is payable
after completion of the renovation projects. Pursuant to an
operating deficits agreement, the Company agreed to lend up to
$500,000 to the owner of the Hospital to pay certain operating
expenses and debt service on the bonds to the extent the owner
does not have sufficient unrestricted cash to pay such
obligations. To date no advances under the operating deficits
agreement have been required. Repayment of advances made by the
Company is subordinated to other obligations of the owner,
including payment of principal and interest on the bonds.
On May 31, 1996, Oasis HealthCare, Inc., a long-term care
management company located in Chestnut Hill, Massachusetts was
merged into the Company's wholly owned subsidiary, OHI
Acquisition Corporation. The shareholders of Oasis HealthCare,
Inc. received a total of 52,838 shares of Common Stock and
$215,050 in exchange for their shares in Oasis HealthCare, Inc.
In addition, an amount will be paid to the former shareholders of
Oasis HealthCare, Inc. within thirty (30) days of the execution
of agreements with respect to any of twelve (12) management
contract opportunities specifically identified in the Merger
Agreement. Each amount (half of which will be payable in cash
and half in Common Stock) will be determined based upon a
percentage of the value of each such agreement, the aggregate of
which will not exceed $1,500,000. As part of the transaction OHI
Acquisition Corporation entered into a five (5) year employment
agreement with the former president of Oasis HealthCare, Inc. The
name of the subsidiary has been changed to OHI Corporation. An
additional $162,000 has been paid to the shareholders of Oasis
HealthCare, Inc. as an adjustment to the purchase price.
The Company completed a transaction involving a third party
purchase of three long-term care properties totalling
approximately 500 beds/units located in the State of New
Hampshire. In connection with this transaction, and as a part of
securing the associated project financing, the Company recognized
development services revenue of approximately $1,032,000.
Effective July 1, 1996, the Company secured fifteen (15) year
management service contracts for each of the facilities. Each
such contract provides for a base management fee equal to four
percent (4%) of the total operating revenues of the facility and
an incentive management fee equal to four percent (4%) of the
total operating revenues of the facility. The contracts are
terminable by either party for cause as defined in those
contracts. The management services contracts are subordinate in
all respects to the project financing. The Company has
guaranteed payment by the owner to the lender of the monthly
interest payments on the principal amount financed. This
transaction represents a significant addition for the Company's
New England operating subsidiary, OHI Corporation.
The Company served as a financial advisor and completed a
property transaction involving a third party purchase of a 60
unit assisted living and retirement facility located in the State
of Maryland. This project contemplates renovation and expansion
of the existing facility by 24 independent living units.
Effective May 15, 1996, the Company entered into a five (5) year
management agreement to manage this facility. The agreement may
be terminated by either party without cause after three (3) years
and may be otherwise terminated as provided in the agreement. As
manager, the Company is paid a base management fee of $6,000 per
month and an incentive management fee equal to the amount by
which five percent (5%) of the adjusted gross revenues of the
facility exceeds the base management fee. The Company also
entered into a development and marketing agreement with the owner
of the facility pursuant to which it provides development and
marketing services for the facility for a fee of $100,000.
Pursuant to an operating deficits agreement, the Company agreed
to lend up to $250,000 to the owner of the facility to pay
certain operating expenses and debt service on the bonds issued
to finance the owner's acquisition, renovation and expansion of
the facility to the extent the owner does not have sufficient
unrestricted cash to pay such obligations. To date no advances
under the operating deficits agreement have been required.
Payment of the management fees and repayment of advances made by
the Company pursuant to the operating deficits agreement are
subordinated to other obligations of the owner, including payment
of principal and interest on the bonds. In addition, as part of
this transaction, the Company recognized $100,000 of development
services revenue as compensation for its services.
The Company completed a transaction involving a third party
purchase of a 225 bed comprehensive care nursing facility and a
17 bed domiciliary care facility located in the State of
Maryland. Effective May 1, 1996, the Company entered into a five
(5) year management agreement to manage these facilities. The
term of the agreement may be renewed by the Company for two
successive five (5) year periods. The agreement may be terminated
by either party without cause after three (3) years and as
otherwise provided in the management agreement. As manager, the
Company is paid a management fee equal to six percent (6%) of net
operating revenues of the facilities. Pursuant to an operating
deficits agreement, the Company agreed to lend up to $350,000 to
the owner of the facilities to pay certain operating expenses and
debt service on the project financing to the extent the owner
does not have sufficient unrestricted cash to pay such
obligations. At March 31, 1997, the Company had advanced $350,000
pursuant to the operating deficits agreement. Payment of up to
50% of the management fee and repayment of advances made by the
Company pursuant to the operating deficits agreement are
subordinated to other obligations of the owner of the facilities,
including debt service on the project financing.
The Company has received notice of default from the owner of this
facility under the management agreement and is in the process of
responding to such default notice, which provides for a 90 day
cure period.
The Company completed a transaction involving a third party
purchase of two long-term care properties totalling approximately
350 beds located in the State of Ohio. Effective July 1, 1996,
the Company entered into a five (5) year management service
contract for these facilities. The contract may be terminated by
either party without cause after three (3) years and may be
otherwise terminated as provided in the contract. As manager,
the Company will receive a management fee in an amount equal to
five and one-half percent (5 1 /2 %) of the total operating
revenues of the facilities. The Company has entered into a
submanagement agreement with a third party to manage these
facilities. The submanager is paid a fee by the Company in an
amount equal to two percent (2%) of the total operating revenues
of the facilities. The termination provision of the submanagement
agreement are the same as the termination provisions in the
management agreement. As a result of this transaction, the
Company intends to further develop and expand its market presence
in proximity to these facilities. Pursuant to an operating
deficits agreement, the Company agreed to lend up to $500,000 to
the owner of the facilities to pay certain operating expenses to
the extent the owner does not have sufficient unrestricted cash
to pay such obligations. Payment of the management fee and the
submanagement fee and repayment of advances made by the Company
are subordinated to other obligations of the owner. At March 31,
1997 the Company had advanced $350,000 pursuant to the operating
deficits agreement. The facilities are in the process of
securing working capital financing to repay the Company. The
Company has received notice of default from the owner of this
facility under the management agreement and is in the process of
responding to such default notice, which provides that the
Company may cure such default by June 1997.
In June 1996, the Company agreed to purchase a long term
care facility in Maine with approximately one hundred twenty
(120) beds and ninety one (91) congregate and assisted living
units. The purchase price of this facility is $10,800,000. The
facility is in proximity to other long-term care facilities
currently managed by the Company. Completion of this transaction
is pending regulatory approval by the State of Maine. The
purchase agreement is assignable by the Company. The Company
intends to assign its purchase rights to a third party and enter
into a management agreement with the assignee to manage the
facilities after the purchase.
In September, 1996, the Company agreed to purchase a long
term care facility in Maine with 50 licensed ICF beds, 18 of
which are skilled care beds, 84 congregate care apartment units,
a 17 bed licensed skilled care unit and a 15 unit child day care
center. The purchase price of this facility is $16,200,000.
Completion of this transaction is pending regulatory approval by
the State of Maine. The purchase agreement is assignable by the
Company. The Company intends to assign its purchase rights to a
third party and to enter into a management agreement with the
assignee to manage the facility.
In August, 1996, the Company entered into a five (5) year
management agreement to manage a 358- bed facility in Baltimore,
Maryland. The agreement may be terminated by either party
without cause on the third anniversary date and as otherwise
provided in the management agreement. As manager, the Company is
paid a stated monthly fee which increases annually during the
term of the management agreement. The Company also provides
construction oversight services in connection with the renovation
of the facility for a fee of $250,000, which was paid to the
Company out of the proceeds from the sale of bonds issued to
finance the owner's acquisition and renovation of the facility.
Greenbrier Healthcare Services, Inc., a subsidiary of the
Company, entered into a development agreement with the owner
pursuant to which it assisted the owner in evaluating and
acquiring the facility, in preparing a renovation plan for the
facility and in preparing and submitting applications for permits
and other governmental approvals for a fee of $150,000. Pursuant
to an operating deficits agreement, the Company agreed to lend up
to $250,000 to the owner of the facility to pay certain operating
expenses and debt service on the bonds to the extent the owner
does not have sufficient unrestricted funds to pay such
obligations. To date no advances pursuant to the operating
deficits agreement have been required. Payment of up to 70% of
the management fee and repayment of advances made by the Company
pursuant to the operating deficits agreement are subordinated to
other obligations of the owner of the facility including payment
of principal and interest on the bonds.
In December, 1996, Iatros Respiratory Corporation, a wholly
owned subsidiary of the Company, entered into a five (5) year
management agreement to manage a healthcare facility in Texas
City, Texas. Using the proceeds from the sale of bonds, the
owner acquired the existing facility and is renovating and
converting the facility into a 134-bed continuum of care
Alzheimer's facility. Pursuant to the terms of the construction
contract, the renovation of the facility is to be completed by
September 1, 1997. The management agreement may be terminated by
either party without cause on the third anniversary date, and as
otherwise provided in the agreement. During the renovation
period, the manager is paid a monthly fee of $5,000. Upon
completion of the renovation and the opening of the facility, the
monthly fee increases to $14,000. The management fee will be
increased on each January 1 during the term of the management
agreement commencing January 1, 1998 by an amount equal to the
percentage increase in the Consumer Price Index for Galveston
County (All Urban Consumers-All Items) compared to January 1 of
the last year on which the fee was paid. Pursuant to an
operating deficits agreement, the Company agreed to lend up to
$250,000 to the owner of the facility to pay certain operating
expenses and debt service on the bonds. At March 31, 1997, the
Company had advanced $250,000 pursuant to the operating deficits
agreement. Payment of up to 50% of the management fee and
repayment of advances made by the Company pursuant to the
operating deficits agreement are subordinated to other
obligations of the owner, including payment of principal and
interest on the bonds.
Competition
Intense competition exists in the market for management of
long-term care facilities as well as for providing ancillary
services. The long-term care facilities operated or serviced by
the Company compete for patients with other long-term care
facilities and, to a lesser extent, with home health care
providers, acute care hospitals and facilities that provide long-
term care services. Facilities which the Company manages or
provides services to operate in localities that are also served
by similar facilities operated by others. Some competing
facilities are newer than those operated by the Company and
provide services not offered by the Company.
Many competitors have greater financial resources than the
Company. Certain of those providers are operated by
not-for-profit organizations and similar businesses that can
finance capital expenditures on a tax exempt basis or receive
charitable contributions unavailable to the Company. Competition
for acquisition of long-term care facilities is expected to
increase in the future.
Construction of new long-term care facilities near the
facilities managed and serviced by the Company could adversely
affect its business. While state regulations generally require
that a Certificate of Need be obtained before any long-term care
facility can be constructed or additional beds added to existing
facilities, no assurances can be given that such additional
facilities or beds will not be built and result in increased
competition for the facilities managed and serviced by the
Company.
Human Resources
As of March 31, 1997, the Company had 155 employees, of
which 32 were employed in pharmacy and durable medical equipment
operations, 47 in management services, 27 in corporate, and 49 in
therapy services operations. The Company believes that it has
good employee relations.
Government Regulation
The long-term health care industry is subject to extensive
federal, state and, in some cases, local regulation with respect
to reimbursement, licensing, certification and health planning,
conduct of operations at existing facilities, construction of new
facilities, acquisition of existing facilities, addition of new
services and certain capital expenditures. Compliance with such
regulatory requirements, as interpreted and amended from time to
time, can increase operating costs and thereby adversely affect
the financial viability of the Company and the facilities managed
by the Company. Failure to comply with regulatory requirements
could also result in restrictions on admission, the revocation of
licensure, decertification or the closure of the facilities
managed by the Company.
The operation of a long-term health care facility is
licensed by the Department of Health or other agency of the
jurisdiction in which it is located and by the U.S. Department of
Health and Human Services ("HHS"). Other state and local
agencies may have regulatory authority over certain facility
matters. Operators of such facilities are also subject to
various federal, state and local environmental laws.
All facilities operated and managed by the Company are
licensed under applicable state law and are certified or approved
as providers under one or more of the Medicaid, Medicare or other
third party payor programs. Both initial and continuing
qualification of a long-term health care facility to participate
in such programs depends upon many factors, including
accommodations, equipment, services, patient care, safety,
personnel, physical environment and adequate policies, procedures
and controls. Licensing, certification, and other applicable
standards vary from jurisdiction to jurisdiction and are revised
periodically. State and federal agencies survey all long-term
health care facilities on a regular basis to determine whether
such facilities are in compliance with the requirements for
continued licensure and for participation in government sponsored
and third party payor programs. The Company believes that the
facilities it manages are in material compliance with the various
state licensing, Medicare and Medicaid regulatory requirements
applicable to them. However, in the ordinary course of its
business, the Company may receive notices of alleged deficiencies
at the facilities for failure to comply with various regulatory
requirements. The Company reviews such notices and assists the
owners of the facilities in filing and implementing appropriate
plans of corrective action. In most cases, the Company, the
respective owner, and the reviewing agency will agree upon the
measures to be taken to bring the facility into compliance. In
some cases or upon repeat violations, the reviewing agency has
the authority to take various adverse actions against a facility,
including the imposition of fines, temporary suspension of
admission of new residents to the facility, suspension or
decertification from participation in the Medicare or Medicaid
Program and, in extreme circumstances, revocation of a facility's
license. These actions would adversely affect a facility's
ability to continue to operate, and to provide certain services,
and its eligibility to participate in Medicare, Medicaid or other
third-party payor programs. These actions would adversely affect
a facility's ability to pay for management and ancillary services
provided by the Company. Additionally, conviction of abusive or
fraudulent behavior with respect to one facility could subject
other facilities under common control or ownership to
disqualification from participation in the Medicare and Medicaid
programs. It is not possible to predict the content or effect of
future legislation and regulations affecting the health care
industry.
Pharmacists and those providing pharmacy services in the
United States are regulated by state statutes and the rules and
regulations of state boards of pharmacy. Currently, the Company
operates pharmacies only in the Commonwealth of Pennsylvania. As
required by applicable law, the Company's subsidiary, Durant
Medical, and its pharmacists are licensed as a retail pharmacy,
and as pharmacists, respectively.
In addition, both state and federal regulators prohibit the
dispensing of certain drugs or medicines other than pursuant to a
prescription written by a licensed physician. In order to
implement these restrictions, regulations impose strict
recordkeeping requirements with respect to the handling and
dispensing of controlled substances, small quantities of which
are maintained in Durant Medical's pharmacy for use in filling
prescriptions. These requirements also impose significant
recordkeeping obligations upon Durant Medical and its
pharmacists. The Company is subject to regular audits by
governmental authorities to monitor compliance with recordkeeping
and other requirements imposed by law and regulation. Penalties
for failure to comply with applicable regulations can range from
imposition of fines to the suspension or revocation of the
license of the pharmacy, one or more pharmacists, or both.
The Company currently provides pharmacy services to ten
facilities in Pennsylvania.
Fraud and Abuse and Anti-Kickback Laws
The Medicare and Medicaid Patient and Program
Protection Act of 1987 (the "MMPPPA") provided authority to the
Office of Inspector General ("OIG") of HHS to exclude a person or
entity from participation in Medicare or state health care
programs if it is determined that the party is engaged in a
prohibited scheme involving direct or indirect payments or fee-
splitting arrangements designed to pay remuneration in exchange
for referrals. The legislation prohibiting payments for referrals
is general and has been construed broadly by the courts. The OIG
may exclude a person or entity from participation under Medicare
or state health programs if it is determined that the party is
engaged in a prohibited remuneration scheme. Other possible
sanctions for violations of the aforementioned restrictions
include loss of licensure, and civil or criminal penalties.
Fraud and Abuse Laws. Various federal and state laws
regulate the relationship between providers of health care
services and other health care providers in a position to make or
influence referrals. These laws include the fraud and abuse
provisions of the federal Medicare/Medicaid laws and similar
state statutes (the "Fraud and Abuse Laws"). These prohibit the
payment, receipt, solicitation or referring of any direct or
indirect remuneration, in cash or in kind, intended to induce the
referral of a Medicare/Medicaid patient for the ordering or
providing of Medicare or Medicaid coverage services, items or
equipment. Violations of these provisions carry criminal and
civil penalties, including exclusion from participation in the
Medicare and Medicaid programs. The Federal government in various
judicial and administrative decisions, has interpreted these
provisions broadly to include the payment of anything of value to
influence a referral of a Medicare or Medicaid beneficiary. The
Federal agencies responsible for administering the statutes have
published regulations establishing "safe harbors" applicable to
certain business arrangements between entities that otherwise
might be subject to the Fraud and Abuse Laws. Nevertheless, the
interpretations and applications of the broadly worded Fraud and
Abuse Laws by governmental authorities cannot be predicted or
guaranteed.
Medicare
Medicare is a federal reimbursement program for those aged
65 or older and those with certain specified disabilities.
Medicare covers post-hospital nursing care which requires the
intensive care of a skilled nursing facility. Medicare reimburses
long-term health care facilities for routine operating costs,
capital costs and ancillary costs. Routine operating costs are
subject to a routine cost limitation set for each location. Such
routine cost limitations are not applicable for the first three
years. Capital costs include interest expenses, property taxes
and insurance, lease payments and depreciation expense. Interest
and depreciation are calculated based upon the original owner's
historical cost when changes in ownership occur after July 1984.
Payment for skilled nursing facility services is based upon
a facility's actual allowable costs to the extent that such costs
are reasonable and related to patient care. Medicare
reimbursement for a provider's reimbursable costs is limited to
amounts determined by HHS, through its intermediaries, to be
necessary and appropriate for the efficient delivery of needed
health services. If the Company's costs exceed the Medicare
established schedule of limits on routine costs, payment to the
Company will be based upon such limits and the Company will not
receive payments to cover the actual costs of providing that
service. Furthermore, otherwise allowable reimbursable costs may
be disallowed if regulatory or procedural guidelines are not
followed by the Company.
Government reimbursement programs, particularly Medicaid and
Medicare, are subject to statutory and regulatory changes,
administrative rulings, interpretations of policy, determinations
by fiscal intermediaries, and government funding restrictions,
all of which may materially increase or decrease the rate of
program payments to long-term health care facilities. As a
result, the long-term health care facility industry is sensitive
to legislative and regulatory changes in and limitations on
governmental spending for such programs. Over the past several
years, Congress has consistently attempted to curb the growth of
federal spending on health care programs. Recent actions include
limitations on spending for such programs, limitations on
specific categories of payments, elimination of funding for
health planning agencies, severe restrictions on any "step-up" in
basis for reimbursement purposes upon a sale of a health care
facility and an increased emphasis on competition and other
programs. Such legislative or administrative proposals could
potentially have adverse effects on the results of operation of
the Company.
The Company derives a significant portion of its net
revenues, directly or indirectly, from the Medicare and Medicaid
programs. Any significant decrease in Medicare or Medicaid
reimbursement amounts could have a material adverse effect on the
Company. The Company also obtains payment from private insurers,
including managed care organizations and private pay patients.
The facilities managed by the Company also have contracts with
private payors, including health maintenance organizations and
other managed care organizations, to provide certain health care
services to covered patients for a set per diem payment for each
patient. There can be no assurance that the rates paid by these
payors will remain at comparable levels or be adequate to
reimburse the Company for the cost of providing services to
covered patients. In addition, cost increases due to inflation
without corresponding increases in reimbursement rates could
adversely affect the Company's business.
Medicare covers and pays for rehabilitation therapy services
furnished in facilities in various ways. Medicare reimburses the
skilled nursing facility based on a reasonable cost standard. In
the event the Company provides rehabilitation services directly,
specific guidelines exist for evaluating the reasonable cost of
physical therapy and occupational therapy services. Medicare
applies salary equivalency guidelines in determining the
reasonable cost of physical therapy and respiratory services,
which is the cost that would be incurred if the therapist was
employed by a nursing facility, plus an amount designed to
compensate the provider for certain general administrative
overhead costs. Medicare pays for occupational therapy services
on a reasonable cost basis, subject to the so-called "prudent
buyer" rule for evaluating the reasonableness of the costs. The
Company's gross margins for its physical therapy services under
the salary equivalency guidelines are significantly less than for
its services under the "prudent buyer" rule.
On April 14, 1995, the Health Care Financing Administration
("HCFA") issued a memorandum to Regional Office Administrators in
response to requests by intermediaries for information as to
reasonable costs for occupational therapy services. The cost data
in the memorandum sets forth rates for occupational therapy
services that are lower than the Medicare reimbursement rates
currently received by the Company for occupational therapy
services. Although the memorandum states that the cost data is to
be informative and not to serve as a limit on reimbursement rates
for occupational therapy services, intermediaries and customers
of the Company may apply the cost data guidelines as absolute
limits on payments. The cost data figures contained in the
memorandum have been subject to criticism by the industry, and
the Company is unable to determine what effect, if any, such
criticism will have on future actions or policy decisions taken
by HCFA in connection with Medicare reimbursement rates for
occupational therapy services. The Company cannot predict when,
or if, any changes will be made to the current Medicare
reimbursement methodologies for rehabilitation therapy services,
or to the extent to which the data in the HCFA memorandum will be
used by intermediaries in providing reimbursement. The imposition
of salary equivalency guidelines on occupational therapy
services, or the use by intermediaries of the data in the
memorandum, could significantly impact the Company's margin
expectations.
Medicaid
Medicaid is a joint federal-state medical assistance program
for individuals who meet certain income and resource standards.
Medicaid programs are operated by state agencies which adopt
their own medical reimbursement formulas and standards, but which
are entitled to receive supplemental funds from the federal
government if their programs comply with certain federal
government regulations. Facilities participating in the Medicaid
program are required to meet state licensing requirements to be
certified in accordance with state and federal regulations and to
enter into contracts with the state agency to provide services at
the rates established by the state. The states have flexibility
to determine Medicaid eligibility and coverage criteria, subject
to the Federal statutory requirement that the reimbursement
system provide adequate rates for efficiently and economically
operated facilities. The United States Supreme Court has held in
the case of Wilder v. Virginia Hospital Association, decided in
June 1990, that providers have the right to enforce this standard
in the Federal courts. Beyond this general mandate, however,
states have considerable flexibility in establishing their
Medicaid reimbursement systems, and as a result, the payment
methodologies and rates vary significantly from state to state.
All of the states in which the Company operates Medicaid-
certified facilities use a cost-based reimbursement system under
which reimbursement rates are determined by the state from cost
reports filed annually by each facility, on a prospective or
retrospective basis. Recently, several states have adopted case-
mix prospective payment systems, pursuant to which payment levels
increase based on a patient's acuity level and need of services.
Reimbursable costs normally include the costs of providing health
care services to patients, administrative and general costs, and
the costs of property and equipment. Not all costs incurred are
reimbursed, however, because of cost ceilings applicable to both
operating and fixed costs. Some state Medicaid programs include
an incentive allowance for providers whose costs are less than
the ceilings and who meet other requirements. In addition,
certain Medicaid payments are subject to relatively long
collection cycles and payment delays due to budget shortfalls in
state Medicaid programs.
Congress has established a program to reduce Federal
matching payments to states under the Medicaid program.
Regulations promulgated by HCFA also provide that states are not
required to pay for long-term services on a cost-related basis
but may do so according to rates that are adequate to meet costs
incurred by efficiently and economically operated facilities.
Changes in state Medicaid reimbursement, particularly in light of
emphasis on deficit reduction and cost control, may have an
adverse effect upon the revenues of the Company. It is likely
that the Congress of the United States will continue to propose
new health care legislation for the United States, which, if
enacted, could have a material adverse effect upon the revenues
of the Company.
ITEM 2. PROPERTY
The Company leases 46,624 square feet of office space in the
following properties (rates and square footage approximate): (1)
4,100 square feet for its executive offices in Atlanta, Georgia
at a rate of $7,609 per month, with term ending September 30,
2000; (2) 16,545 square feet of office space in Malvern,
Pennsylvania, at a rate of $7,315 per month, with term ending
April 1999; (3) 5,200 square feet for financial and accounting
services in Taylor, Pennsylvania, at a rate of $4,640 per month,
with term ending December 31, 1997; (4) 5,194 square feet for
administrative offices in Baltimore, Maryland, at a rate of
$12,471 per month, with term ending September 30, 2000; and (5)
4,620 square feet for administrative offices in Bala Cynwyd,
Pennsylvania, also subleasing 4,600 square feet for restorative
therapy services in that same city (the lease is at a rate of
$9,163 per month, with term for the administrative space ending
January 25, 1999, the sublease is at $8,000 per month); and (6)
6,365 square feet for administrative offices in Newton,
Massachusetts, at a rate of $11,666, with term ending June, 2001.
All leases include taxes and insurance.
ITEM 3. LEGAL PROCEEDINGS
In July 1993, one subsidiary and three former subsidiaries
of the Company under prior management entered into an agreement
with NPFII-W, Inc. pursuant to which NPFII-W, Inc. was to
purchase certain receivables of those companies on an ongoing
basis. In December 1995, NPF II-W, Inc. filed suit in the United
States District Court for the Southern District of Ohio, Eastern
Division against Durant Medical, Inc., and against former
subsidiaries GCHS of Columbia, Inc., GCHS of Cleveland, Inc. and
GCHS of Eastern PA, Inc., also naming Iatros Health Network, Inc.
on an alter ego theory, seeking approximately $960,000 plus
costs, interest and penalties, attorneys' fees and punitive
damages, with respect to receivables purportedly purchased by
NPFII-W, Inc. and apparently relating to periods during which the
Company was being operated by prior management. The Complaint
also alleges that the defendants breached the terms of the
agreement with NPFII-W, Inc. and collected and retained the
proceeds of the receivables sold to NPFII-W, Inc. The Company
filed an answer to the Complaint denying the allegations made.
The Company is vigorously defending against the allegations made.
In addition, a codefendant has asserted a cross claim against the
Company for indemnification of any liability to NPFII-W, Inc.
The Company has denied the allegations. Management does not
believe that the outcome of this matter will materially adversely
affect the Company's financial position, results of operations or
cash flows.
In December of 1994 Gull Creek, Inc., a wholly-owned
subsidiary of the Company, Dennis Nooner, Jr. and the Company, as
guarantor of payment, entered into an Employment Agreement with
Mr. Nooner, Jr. for a term of five years commencing January 1,
1995 and granted to Mr. Nooner, Jr. stock warrants, in connection
with the lease of a facility controlled by Mr. Nooner, Jr. and
his father, Mr. Nooner, Sr. and an option to purchase the
Nooners' interests in the facility. On February 29, 1996 Gull
Creek, Inc. terminated Mr. Nooner, Jr. for cause under the terms
of the Employment Agreement. In April 1996, Mr. Nooner, Jr.
filed suit against Gull Creek, Inc. and the Company in the
Circuit Court for Worcester County, Maryland alleging that Gull
Creek, Inc. and the Company had breached their obligations to Mr.
Nooner, Jr. under his Employment Agreement and Stock Option
Agreement, had converted stock options to which Mr. Nooner, Jr.
believes he is entitled and have violated the Maryland Wage
Payment and Collection Act by failing to deliver to Mr. Nooner,
Jr. stock underlying certain options. The action has been
removed to the United States District Court for the District of
Maryland. The Company and Gull Creek, Inc. have denied the
allegations of Mr. Nooner, Jr.'s Complaint. The Company is
vigorously defending the action.
In May 1996, the Company and Gull Creek, Inc., filed suit
against Dennis Nooner, Sr., Dennis Nooner, Jr., Ewing Land
Development, Inc. and Ewing Health Systems, Inc. in the District
Court for the Northern District of Georgia, Atlanta Division
alleging that Mr. Nooner, Jr. through his acts and misdeeds
breached his Employment Agreement with Gull Creek, Inc. and that
Mr. Nooner, Sr. breached a Consulting and Development Agreement
he entered into with Ewing Land Development, Inc., payment under
which was guaranteed by the Company. In addition, the Complaint
alleged claims of fraud, conspiracy and bad faith against all the
Defendants and breach of fiduciary duties and agency by Mr.
Nooner, Jr. The Company and Gull Creek, Inc. filed an Amended
Complaint dismissing without prejudice Mr. Nooner, Sr. and Ewing
Health Systems, Inc., a Delaware corporation, as Defendants and
asserting claims against Gull Creek Retirement Village Limited
Partnership, Ewing Retirement Corporation, Inc., IHN Personal
Care, Inc. and Ewing Health Systems, Inc. This suit has since
been transferred to Maryland to be consolidated with the prior
pending action. The Defendants in this action have denied
liability. Management does not believe that the outcome of the
two related lawsuits will materially adversely affect the
Company's financial position, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 19, 1996 the Board of Directors of the Company
notified the stockholders of the Company of the Annual Meeting of
the Stockholders to be held on December 19, 1996 in Atlanta,
Georgia. The Board of Directors of the Company solicited proxies
for the election of directors and the ratification of the
election of the Company's independent certified public
accountants pursuant to Regulation 14A of the 1934 Act. There
was no solicitation in opposition to management's nominees as
listed in the proxy statement and all such nominees were elected.
The Company sought to reelect its four directors: 13,527,175
votes were cast for the election of Robert T. Eramian and 580,408
against; 13,527,175 votes were cast for the election of Joseph C.
McCarron and 580,408 against; 13,527,675 votes were cast for the
election of John D. Higgins and 579,908 against; and 13,527,175
votes were cast for the election of Robert A. Kasirer and 580,408
against. In addition the stockholders ratified Asher & Company,
Ltd. as the Company's independent certified public accountants:
13,608,403 votes were cast for the ratification, 230,119 against
and 269,061 abstained.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Market Information
The Company's Common Stock is listed and traded on the
National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") SmallCap Market SystemSM under the
following symbol:
Common Stock. . . . . . . . . . . IHNI
The following table sets forth the high and low sales price
as determined from NASDAQ for the Common Stock for the periods
indicated. No trading market existed for the Company's
securities prior to April 21, 1992. For six trading days during
the period from September 1 through September 9, 1994, the
Company's securities were delisted from The NASDAQ SmallCap
Market SystemSM.
Common Stock
Fiscal 1995 HIGH LOW
First Quarter 6-3/4 2-5/8
Second Quarter 6-5/8 4-7/8
Third Quarter 12-1/8 5-5/8
Fourth Quarter 13 7-1/2
Fiscal 1996
First Quarter 9-3/8 5-1/2
Second Quarter 5-5/8 3-1/2
Third Quarter 4-5/8 2-3/8
Fourth Quarter 3-1/16 1-1/2
Fiscal 1997
First Quarter 2-3/8 1-1/8
The high and low prices (based on the average bid and ask
price) for the Company's Common Stock are as reported by NASDAQ
and rounded to the nearest 1/32, are indicated above. These are
inter-dealer prices without retail mark-ups, mark-downs, or
commissions and may not represent actual transactions. The
Company has applied for listing upon the NASDAQ National Market
System.
According to the Company's Stock Transfer Agent as of March
31, 1997 there were approximately 175 holders of record of the
Company's Common Stock and as of November 18, 1996, there were
6,332 beneficial holders 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, a 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 Series A Senior
Convertible Preferred Stock are outstanding. Cumulative
dividends paid to the holders of the Series A Senior Convertible
Preferred Stock prior to July 1, 1996 are payable in cash or in
shares of the Company's Common Stock. Since the shares of Series
A Senior Convertible Preferred Stock were issued, no dividends
have been declared or paid. At March 31, 1997 dividends on the
Series A Senior Convertible Preferred Stock totalling $430,000
had accrued. 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 or its preferred stock other than the Series A
Senior Convertible Preferred Stock unless all accrued cumulative
dividends on the Series A Senior Convertible Preferred Stock are
simultaneously paid.
The Company's Certificate of Incorporation provides for a
Board of Directors consisting of 6 directors. Holders of the
Common Stock and the Series A Senior Convertible Preferred Stock
voting together as one class are entitled to elect this number of
directors. The size of the Board is increased, up to a maximum
of 13 directors, by 1 director 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 directors. Currently, the holders of the Series A
Senior Convertible Preferred Stock voting separately as a single
class are entitled to elect 4 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, and at such time the number of directors
constituting the full Board of Directors is decreased to 6.
At the Annual Meeting for 1996 the holders of the Series A
Senior Convertible Preferred Stock did not nominate any persons
for election as directors.
ITEM 6. SELECTED FINANCIAL DATA.
SUMMARY FINANCIAL DATA
IATROS HEALTH NETWORK, INC.
(in dollars, except number of shares)
Year Ended December 31
1996 1995 1994 1993 1992
Statement of Operations:
Revenues
$ 22,106,815 $ 16,628,264 $ 2,866,093 $ 1,197,215 $ 417,859
Operating Expenses $ 26,952,031 $ 13,452,318 $ 4,015,254 $ 3,507,621 $ 1,670,324
Income (Loss)
from Continuing Operations $(10,314,561) $ 3,655,188 $ (391,315) $ (2,257,495) $ (1,080,788)
Income (Loss)
from Discontinued Operations $ - $ - $ (805,294) $ (1,629,955) $ (6,688)
Net Loss $(10,314,561) $ 3,655,188 $ (1,196,609) $ (3,834,560) $ (1,135,545)
Earnings Per Share
Continuing Operations $ (.74) $ .29 $ (.06) $ (.39) $ (.23)
Discontinued Operations $ - $ - $ (.13) $ (.29) $ -
$ (.74) $ .29 $ (.19) $ (.68) $ (.23)
Weighted Average Shares
of Common Stock and
equivalents outstanding 13,946,359 12,054,741 6,281,584 5,688,411 4,864,247
Balance Sheet Data: 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
Working Capital $ 5,796,971 $ 3,291,330 $ 168,890 $ (2,050,354) $ 1,667,603
Total Assets $ 27,995,231 $ 24,026,448 $ 5,383,027 $ 2,483,173 $ 7,234,714
Total Long-Term Debt
and Capital Lease Obligations $ 1,160,859 $ 754,370 $ 81,980 $ 33,414 $ 2,365,280
Total Liabilities $ 7,679,451 $ 6,942,527 $ 2,827,221 $ 2,782,633 $ 3,729,614
Stockholders' Equity $ 20,315,780 $ 17,083,921 $ 2,555,806 $ (299,460) $ 3,505,100
<FN>
No cash dividends have been declared on the Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
Business Background
Prior to July 1994, the Company concentrated its efforts in
providing health care services for post-acute, ventilator
dependent and medically complex patients in long-term care
nursing facilities ("Specialized Programs"). Commencing in July
1994, the Company's new management implemented a plan for
redirecting operations, by pursuing service and development
opportunities involving long-term care properties, while
eliminating the prior focus on Specialized Programs, and
discontinuing such operations. Further, through its
subsidiaries, the Company has continued to expand its operations
in providing ancillary, management and development services to
the long-term care industry.
In connection with implementing its business plan for
redirection, the Company entered into a series of transactions
which were consummated in July 1994. Generally, the plan was
designed to provide additional equity capital to satisfy
operating obligations, to provide new working capital resources,
to discontinue nonprofitable operations and to reduce corporate
overhead. The plan resulted in a change of the Company's
executive management.
The plan included the following:
(a) the sale of both common and preferred stock whereby the
Company sold 533,333 shares of Series A Senior Convertible
Preferred Stock, and 2,000,000 shares of Common Stock, realizing
gross proceeds of $3,500,000;
(b) assignment to the Company of the rights to manage
certain long-term care facilities;
(c) termination of the Company's capital lease and transfer
of the operations of the Fox Nursing and Rehabilitation Center
(the "Fox Facility") in Warrington, Pennsylvania, resulting in
discontinuation of associated operations;
(d) termination and settlement of the Company's obligations
under a lease (the "Lorien Agreement") for beds in the Lorien
Nursing and Rehabilitation Center in Columbia, Maryland,
resulting in discontinuation of associated operations;
(e) the exchange of 666,667 shares of Common Stock owned by
certain Stockholders of the Company for 300,000 shares of Series
B Preferred Stock;
(f) transfers of ownership of three subsidiaries to a
private entity controlled by former management; and
(g) termination of former management of the Company and
installation of new management.
The Company's primary sources of revenue are derived from
ancillary services, management services and development services
provided to long-term care facilities.
Year Ended December 31, 1996 Compared to Year Ended December 31,
1995
Results of Operations
For the year ended December 31, 1996, the Company's
consolidated financial statements reflect a net loss of
$10,314,561 compared with net income of $3,655,188 for the year
ended December 31, 1995. The net loss reported for 1996 largely
results from the fourth quarter reduction in the carrying value
of intangible assets totaling $6,697,974, together with the
increase in the allowance for doubtful accounts of $1,630,900,
and the write-off of uncollectible accounts receivable and notes
and loans receivable of $405,103 and $1,200,000, respectively.
Consolidated operating revenue relating to the Company's
continuing operations totals $22,106,815 for 1996, representing
an increase of $5,478,551 or 33% over the same period for 1995.
Of the reported increase in 1996 revenue, $2,995,865 relates to
increased ancillary services and $5,577,074 relates to increased
management services offset by a decrease in development services
revenue of $3,094,388. The increase in reported revenue during
1996 results principally from the Company's having increased its
business volume in the Pennsylvania and Maryland markets as well
as having expanded into a new market area represented by New
England. Decrease in development services revenue in 1996 is due
to a reduction in the number of development contracts entered
into during the year.
Operating income from ancillary services during 1996 totaled
$792,959 compared with $346,001 for 1995. Ancillary services
revenue reported for the year ended 1996 included $6,200,924
relating to pharmacy and medical supply services compared with
$4,527,294 for 1995, and respiratory and restorative therapy
services of $3,558,413 compared with $2,236,178 for 1995.
Consolidated operating expenses reported for 1996, exclusive
of depreciation and amortization, total $25,718,013 representing
an increase of $12,842,128 over 1995. Of the reported increase,
$8,536,945 or 66% relates to management services, $1,756,276 or
14% relates to general and administrative services and
$2,548,907 or 20% relates to ancillary services.
Of total reported operating expenses, operating expenses
associated with management services amounted for $12,097,877 or
47% in 1996 compared to $3,560,932 or 28% in 1995. Of the 1996
amount significant components included: salaries and related
expenses of $7,032,264; professional fees of $1,067,838; travel
and development fees of $532,269; bad debts of $1,343,097; office
rent and related expenses of $1,161,032; and general overhead
expenses totaling $961,377. Of the 1995 amount, significant
components included: salaries and related expenses of $1,467,568;
professional fees of $623,270; general overhead expenses totaling
$496,276; and operating expenses associated with an assisted
living leased property totaling $973,818. This lease arrangement
was terminated in 1995. Increased employee salaries and related
expenses during 1996 compared to 1995 relate to New Health
Management ($3,000,000); Greenbrier Healthcare Services, Inc.
($2,000,000); and Oasis Healthcare ($500,000). During the second
quarter 1997, management commenced efforts to eliminate salaries
and overhead represented by Greenbrier Healthcare Services, Inc.
The continuing management and ancillary services are being
assumed by New Health Management. In addition, the Company is in
the process of affecting salary and overhead cost reduction
associated with New Health Management Services.
Commencing in the first quarter 1997, the Company has
consolidated its Maryland regional management division with its
Pennsylvania operation. This organizational change is designed
to reduce the Company's management overhead expenses by merging
its resources and eliminating otherwise redundant costs.
Management overhead, salaries and expenses associated with the
Maryland regional division during 1996 totaled $2,833,268 and is
expected to be largely diminished if not eliminated during 1997.
In addition, management is in the process of effecting overhead
cost reductions associated with the Pennsylvania regional
division for which operating expenses during 1996 totaled
$7,007,321.
Of the total reported operating expenses, operating expenses
associated with general and administrative expenses amounted to
$4,653,758 or 18% in 1996 compared to $2,897,482 or 23% in 1995.
Of the 1996 amount significant components included: salaries and
related expenses of $1,484,893; professional fees of $716,956,
contracted services of $797,907, corporate travel and development
expenses of $366,783 bad debt expenses of $1,000,000, and office
related and office overhead expenses aggregating $287,219. Of
the 1995 amount, significant components included: salaries and
related expenses of $736,281; professional fees of $693,744,
contracted services of $498,035, corporate travel and development
expenses of $324,113, and office related and office overhead
expenses aggregating $645,309.
Of the total reported operating expenses, operating expenses
associated with ancillary services amounted to $8,966,378 or 35%
in 1996 compared to $6,417,471 or 50% in 1995. Of the 1996
amount significant components included: $5,616,522 relating to
pharmacy and medical supply services compared with $4,246,399 for
1995, and $3,349,856 relating to respiratory and restorative
therapy services compared with $2,171,072 for 1995.
Management projects continued revenue growth during 1997 and
anticipates returning to operating profitability. Revenue growth
during 1997 is expected principally from plans to secure
leasehold as well as ownership interests in operating long-term
care facilities. In addition, Management expects continued
growth in both ancillary and management services in existing and
new market areas. In particular, Management plans to emphasize
the development of ancillary service programs associated with the
facilities it operates.
Commencing in the fourth quarter of 1996, the Company
employed a strategic change in its business development plans to
more actively pursue opportunities involving a direct leasing and
ownership of long-term care properties. This represents a change
from previous development initiatives focused solely on contract
management and service engagements. This strategy reflects
management's efforts to develop a stronger and more tangible
balance sheet while broadening its revenue base and increasing
its operating control over facilities. In connection with these
efforts management has begun to adopt a more conservative policy
and practice of accounting for intangible assets. In 1996, the
Company determined that the value of its recorded intangible
assets had been impaired, based upon historical operating
deficits with respect to related subsidiaries and the uncertainty
that the Company will be able to generate sufficient future cash
flows to recover the recorded amounts of the intangible assets.
The total impairment loss of $6,697,974 which is included in the
results of operations for 1996 was determined by evaluating a net
realizable value of the intangible assets as of December 31, 1996
based upon the projected results of future operations. Of this
total impairment loss, $4,504,476 relates to excess of cost over
net assets acquired, $1,233,178 relates to organization costs,
and $960,320 relates to contract rights.
During the fourth quarter of 1996, management re-evaluated
the operating viability of Iatros Respiratory Corporation (d/b/a
King Care Respiratory Services) in light of its history of
operating losses, changing health care regulations relevant to
respiratory services and increased competition from acute care
hospitals adversely effecting contractual terms and management
relationships. As a result of this evaluation, management has
restructured the nature in which it continues to provide
respiratory therapy services, and continues to evaluate the
expense to which it will continue to provide respiratory therapy
services.
Management routinely evaluates the realizable value of its
assets. In connection with this evaluation, during the fourth
quarter of 1996, management re-evaluated all of its development
projects in connection with determining the current value of
note instruments and accounts receivable resulting from
development fee income which had been recognized by the Company.
Accounting write-offs were developed on a case by case valuation
and resulted from management's determination that current
circumstances had impaired the realization of income or otherwise
a deliberate decision by management to abandon specific
development projects. Write-offs taken against development fee
income notes and accounts receivable for the quarter ended
December 31, 1996 total $5,481,250.
Liquidity and Capital Resources
At December 31, 1996, the Company reports working capital of
$5,796,971 representing a working capital ratio of 1.89 compared
with working capital of $3,291,330 representing a working capital
ratio of 1.53 at December 31, 1995. The Company's ability to
continue to satisfy its working capital requirements is largely
dependent upon the timely realization of its net accounts
receivable outstanding of $5,888,205 at December 31, 1996. While
management expects that working capital resources being provided
from continuing operations will satisfy working capital
requirements, the Company is presently pursuing working capital
financing opportunities to further enhance its liquidity and
working capital position. This includes accounts receivable
financing initiatives as well as financing prospects associated
with the Company's outstanding notes and loans receivable. Notes
and loans receivable outstanding at December 31, 1996 and to date
available to secure working capital financings are in excess
of $7,500,000. However, certain of these receivables are
subordinated to other obligations of the maker. See, Item 1,
"BUSINESS- Significant Transactions," hereinabove. Management is
in the process of completing related efforts and expects to
secure a working capital arrangement during the second quarter of
1997. This financing is expected to provide working capital
proceeds approximating $2,000,000-$3,000,000 for the Company.
There can be no assurance that the Company will be successful in
securing such arrangements or in realizing on its outstanding
accounts receivable, or that resources from continuing operations
will satisfy working capital requirements. In addition,
management is reviewing various aspects of its working capital
requirements in an effort to restructure and reduce the Company's
general operating expenses.
During 1996 and 1995, the Company was involved in a number
of project financings wherein the Company was contracted to
provide development, marketing and management services. In
connection therewith, the Company committed to lend working
capital as may be required in the form of operating deficit
agreements. Aggregate amounts committed to date by the Company
relating to project financings total $4,980,000 of which
$2,329,000 has been advanced by the Company and $2,651,000 has
not yet been required to be advanced. The Company's ability to
satisfy these obligations should additional advances be required
is dependent upon its ability to secure additional sources of
capital.
During March 1997, the Company secured a working capital
line of credit from a financial institution in the amount of
$1,500,000. The line is secured by various notes receivable and
management contract rights associated with one of the Company's
operating subsidiaries. The line is due on demand and accrues
interest at the bank's base rate plus 1% on amounts drawn and
outstanding. The Company intends to utilize this financing to
support working capital and development activities.
Cash and cash equivalents at December 31, 1996 totaled
$1,134,125 and include a certificate of deposit held by a
financial institution in the amount of approximately $520,000.
This certificate was redeemed in March 1997 and was utilized to
satisfy an outstanding credit obligation totaling $516,000 which
is included in notes payable, at December 3l, 1996.
Cash and cash equivalents at December 31, 1995, totaled
$l,057,505, comprised of unrestricted amounts of $682,505 and
restricted amounts of $375,000. Restricted cash of $275,000
represented funds received from a third party as security for
future payment obligations pursuant to a management subcontract
agreement, which was satisfied in the fourth quarter of 1996. The
balance of restricted funds totaling $100,000 related to escrowed
funds associated with contractual obligations involving the
Company's development activities, which were satisfied in 1996.
At December 31, 1995, cash and cash equivalents included two
certificates of deposit held by separate financial institutions
in amounts aggregating approximately $707,000. These certificates
matured in March l996 and served as collateral for two
outstanding credit obligations totaling $691,000 which are
included in notes payable, banks at December 31, 1995.
Accounts receivable at December 31, 1996 of $5,888,205,
representing 48% of total current assets in 1996, were comprised
of $4,761,263 relating to ancillary services, and $2,901,242
relating to management services and is net of an allowance for
doubtful accounts of $1,774,300. The allowance for doubtful
accounts during 1996 reflects an increase of $1,630,900 over the
prior year. The reported increase in total accounts receivable
for 1996 reflects business growth realized by the Company in
1996.
Accounts receivable at December 31, 1995 of $4,237,452,
representing 45% of total current assets in 1995, were comprised
of $2,275,092 relating to ancillary services, $1,105,760 relating
to management services, and $1,000,000 relating to development
services and, were net of an allowance for doubtful accounts of
$143,400.
Prepaid expenses and other current assets at December 31,
1996 and 1995 include approximately $800,000 and $1,150,000
respectively, of project costs advanced in connection with
transactions involving the Company in a development capacity.
These amounts include legal and professional as well as financing
issue costs which are recoverable upon completion of the property
acquisition and project financing or development activity for
which such costs were advanced. The Company routinely advances
project costs associated with its development services as it
deems necessary to secure business prospects and complete
transactions. These amounts are classified as current insofar as
they are expected to be recovered within the year in connection
with completion of the related transactions.
Deposits at December 31, l996 include a purchase deposit of
$1,000,000 associated with the planned acquisition of a long-term
care nursing facility. This transaction remains pending and is
expected to be completed during 1997.
At December 31, 1996 notes receivable resulting from
development, financial advisory, and consulting services which
the Company has provided to several long-term care properties
totaled $4,423,324 as compared with $2,535,295 at December 31,
1995. The notes, which are generally formalized as long-term,
mature over a period not to exceed ten years, bear simple
interest ranging between eight and ten percent per annum and are
secured by a mortgage position on the properties to which they
relate. Further, the notes are generally subordinated to senior
debt and other priority operating obligations associated with the
properties. The Company intends to utilize notes receivable as
security for working capital financing arrangements during 1997.
Year Ended December 31, 1995 compared with Year Ended December
31, 1994
Results of Operations
For the year ended December 31, 1995, the Company's
consolidated financial statements reflect net income of
$3,655,188 compared with a net loss of $1,196,609 for the year
ended December 31, 1994. This positive trend resulted from new
management's efforts, commencing in July 1994, to redirect the
Company and eliminate operating losses associated with
discontinued operations. Further, the Company realized
substantial revenue growth during 1995 as a result of business
acquisitions and development income recognized. Losses
associated with discontinued operations were $805,294 for 1994
related to the specialized care programs provided by the Company.
Consolidated operating revenues relating to the Company's
continuing operations totalled $16,628,264 for 1995, representing
an increase of $13,762,171 over the same period for 1994. Of the
reported increase in 1995 revenues, $4,431,686 or 32% related to
ancillary services; $3,809,377 or 28% related to management
services, and, $5,521,108 or 40% related to development services.
The increase in reported revenues during 1995 resulted
principally from the Company's having increased its business
volume in the Pennsylvania market area as well as having expanded
into new market areas represented by Maryland, California and New
England.
Consolidated operating expenses, exclusive of other income
(expense), reported for 1995 total $12,875,885 or 77% of reported
revenues compared with 1994 where operating expenses exceeded
reported revenues. Total operating expenses reported for 1995
represented an increase of $8,938,727 comprised of $4,327,035 or
49% relating to ancillary services, $3,560,932 or 40% relating to
management services, and, $1,050,760 or 11% relating to general
and administrative expenses.
Of the total reported operating expenses, general and
administrative expenses accounted for $2,897,482 or 23% in 1995
compared to $1,846,722 or 47% in 1994. Of the 1995 amount,
significant components included salaries and related expenses of
$736,281, professional fees of $693,744, contract services of
$498,035, corporate travel and development expenses of $324,113,
and office related and corporate overhead expenses aggregating
$645,309. Of the 1994 amount, significant components included
salaries and related expenses of $643,138, professional fees of
$382,312, contract services of $189,783, and, office related and
corporate overhead expenses aggregating $631,489. Increased
general and administrative expenses incurred during 1995 over the
prior year relate largely to the Company's growth and expenses
associated with corporate development efforts.
Operating income reported for 1995 totalled $3,752,379
representing 23% of total revenue and was comprised of $346,001
or 9% relating to ancillary services, $782,752 or 21% relating to
management services, and, $2,623,626 or 70% relating to
development services. For 1994, the Company reported a net
operating loss of $1,071,065 which resulted primarily from
general and administrative expenses incurred in connection with
redirecting the Company and prior to realization of new revenue
growth as reported during 1995.
Ancillary services revenue reported for the year ended
December 31, 1995 included $4,527,295 related to pharmacy and
medical supply services compared with $2,331,786 for 1994, and
respiratory and restorative therapy services of $2,236,177 that
were not provided by the Company during 1994.
Ancillary services operating expenses for the year ended
December 31, 1995 included $4,246,399 related to pharmacy and
medical supply services compared with $2,090,436 for 1994, and
respiratory and restorative therapy services of $2,171,072 that
were not provided by the Company during 1994.
Management services revenues reported for the year ended
December 31, 1995 increased by $3,809,377 over the prior year and
reflected new management contract revenues of $2,843,293
principally relating to growth in the Pennsylvania, Maryland and
New England markets. In addition, management services revenue
included $966,084 relating to the operations of the Gull Creek
facility under a lease management arrangement which was
terminated by the Company during 1995.
Management services operating expenses reported for the year
ended December 31, 1995 totalling $3,560,932 included $973,816 of
operating expenses relating to the Gull Creek facility.
Operating expenses for 1995 associated with other management
services revenue totals $2,587,116. Resulting operating profit
margin from management services during 1995 was $790,484,
excluding the Gull Creek facility.
Development services revenues reported for the year ended
December 31, 1995 relate to a number of engagements as well as
property transactions during 1995 wherein the Company provided
development, consulting and advisory services on a fee for
service basis. Among these, the Company recognized revenue of
$850,000 associated with three long-term care properties located
in Maryland and Virginia for which the Company is engaged in a
development, marketing and management capacity. In addition, the
Company recognized revenue of $1,350,000 associated with debt
restructuring of three nursing facilities in New England for
which the Company acted as financial advisor and concurrently
secured long term management contracts. Further, the Company
recognized aggregate fee income of $2,000,000 relating to a
series of other service engagements rendered on behalf of third
party corporations involved in the ownership and operation of
long-term care facilities and providing of ancillary services.
Liquidity and Capital Resources
During January 1996, Company realized $12,000,000, net of
costs associated with the issuance of the Subordinated
Convertible Debentures. Through September 30, 1996, the funds
realized were utilized to fund recent acquisitions and other
corporate development and operating obligations of the Company.
Uses of the 10% Subordinated Convertible Debentures proceeds
included the following: (1) corporate overhead- $900,000; (2)
working capital advances to Company subsidiaries - $4,750,000;
(3) development capital advances for various transactions -
$3,965,000; and (4) operating deficit agreement and project
working capital advances - $2,385,000.
Cash and cash equivalents at December 31, 1995, totaled
$l,057,505 and was comprised of unrestricted amounts of $682,505
and restricted amounts of $375,000. Restricted cash of $275,000
represented funds received from a third party as security for
future payment obligations pursuant to a management subcontract
agreement, which was satisfied in the fourth quarter of 1996. The
balance of restricted funds totaling $100,000 related to escrowed
funds associated with contractual obligations involving the
Company's development activities, which were satisfied in 1996.
At December 31, 1995, cash and cash equivalents included two
certificates of deposit held by separate financial institutions
in amounts aggregating approximately $707,000. These certificates
matured in March l996 and served as collateral for two
outstanding credit obligations totaling $691,000 which are
included in notes payable, banks at December 31, 1995.
At December 31, 1994, cash and cash equivalents included two
certificates of deposit, each with a separate financial
institution, in the amounts of $502,000 and $503,000. These
certificates of deposit matured in January 1995.
Accounts receivable at December 31, 1995 of $4,237,452 were
comprised of $2,275,092 relating to ancillary services,
$1,105,760 relating to management services, $1,000,000 relating
to development services, and, is net of an allowance for doubtful
accounts of $143,400. Accounts receivable at December 31, 1994
of $1,277,192 were comprised of $1,031,392 relating to ancillary
services, $309,983 relating to management services, and, is net
of an allowance for doubtful accounts of $64,183. This reported
increase in accounts receivable for 1995 reflects business growth
realized by the Company in 1995.
Approximately $1,150,000 of prepaid expenses and other
current assets reported by the Company at December 31, 1995
represent project costs advanced in connection with transactions
involving the Company in a development capacity. These include
legal and professional as well as financing issue costs that are
recoverable upon completion of the property acquisition and
project financing or development activity for which such costs
were advanced. The Company routinely advances project costs
associated with its development services as it deems necessary to
secure business prospects and complete transactions. In addition
to project costs, prepaid expenses and other current assets
include $300,000 relating to prepayment of a consulting contract
with a former officer and stockholder of the Company while
$125,000 represents bank held certificates of deposit which
mature in one year.
Deposits at December 31, 1995 include a purchase deposit of
$345,511 associated with the planned acquisition of a management
company, and office lease related deposits of $28,602.
Deposits at December 31, 1994 include a purchase deposit of
$371,875 associated with a nursing facility and a lease security
and purchase deposit of $350,000 associated with an assisted
living facility.
At December 31, 1995, notes receivable result from
development, financial advisory, and consulting services which
the Company has provided to several long-term care properties.
The notes, which are generally formalized as long-term, mature
over a period not to exceed ten years, bear simple interest
ranging between eight and ten percent per annum and are secured
by the mortgage position on the properties to which they relate.
Further, the notes are generally subordinated to senior debt and
other priority operating obligations associated with the
properties.
During 1995, the Company provided development and marketing
services to a third party corporation in the amount of
$1,000,000. Payment for such services was made in the form of a
promissory note. At December 31, 1996, the Company wrote-off the
full amount of this note.
At December 31, 1994, the Company had a note receivable
totalling $47,100 related to equipment financing. This note was
paid during 1995.
At December 31, 1995, $250,526 of loans receivable and other
assets represented loans due from a director in connection with
the merger of King Care Respiratory Services, Inc. This note
accrues interest at the rate of 9% and is payable in January
2000. The remaining balance of $425,000 represents development
fees payable in connection with two properties for which the
Company provides development, marketing and management services.
These fees are subordinated obligations of the properties to
which they relate and are payable from operations of the
properties.
During 1995, the Company was involved in a number of project
financings in which it was contracted to provide development,
marketing and management services. Pursuant to operating deficit
agreements the Company committed to lend required working
capital. Aggregate amounts committed as of December 31, 1995 by
the Company relating to project financings totaled $1,150,000.
In December 1995, the Company entered into a consulting
services agreement with a third party providing for payments by
the Company totalling $157,500. The agreement required an
initial payment of $37,500 on January 1, 1996 and twelve monthly
payments of $10,000 throughout 1996. Payments totalling $67,500
were made in January, February and March, 1996. In April 1996,
the Company paid a lump sum amount of $85,500 in full
satisfaction of all amounts due to the consultant under the
agreement.
Pursuant to the terms of an underwriting agreement dated
April 21, 1992 between the Company and Royce Investment Group
("Royce") the Company agreed to pay a commission equal to five
percent (5%) of the exercise price of the Common Stock Purchase
warrants which were included in the units which were offered and
sold by the Company in its public offering in 1992. In addition,
Royce acted as placement agent for the Company in a number of
securities offerings in 1995. During 1995, fees aggregating
approximately $430,000 were earned by Royce in accordance with
the underwriting agreement and its services as placement agent
for the Company. This amount included accrued expenses at
December 31, 1995 and was satisfied by the Company in February,
1996. A Royce officer is a director of the Company. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Events Subsequent to December 31, 1996
During March 1997, the Company entered into a ten year lease
agreement including two long term care facilities located in the
Commonwealth of Massachusetts representing a total of 229 beds.
The lease agreement includes a purchase option to acquire the
facilities during the lease term for a purchase price totaling
$10,000,000. Historical annualized operating revenues
represented by these facilities approximates $10,000,000.
During March, 1997 the Company secured a working capital
line of credit from a financial institution in the amount of
$1,500,000. The line is secured by various notes receivable and
management contract rights associated with one of the Company's
operating subsidiaries. The line is due on demand and accrues
interest at the bank's base rate plus 1% on amounts drawn and
outstanding. The Company intends to utilize this financing to
support working capital and development activities of its
operating subsidiaries.
During March 1997, the Company executed a letter of intent
to acquire the stock of a management company having long term
management contracts. This purchase would represent management
services revenue for the Company and provide an opportunity for
securing ancillary services revenue. The Company is currently
performing its due diligence and is seeking to secure purchase
financing for the transaction.
The Company is pursuing financing to provide working
capital. See "Year Ended December 31, 1996 compared with Year
Ended December 31, 1995; Liquidity and Capital Resources."
Effects of Inflation
The Company does not expect inflation to materially effect
its results of operations. However, the health care industry is
labor intensive. Wages and other related labor costs are
especially sensitive to inflation and future operating costs
could be subject to general economic and inflationary pressures.
Accordingly, the Company cannot predict its ability to control
such costs increases.
New Accounting Standards
In 1995, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). In accordance with SFAS 121, the Company evaluates
the carrying value of its long-lived assets and identifiable
intangibles, including contract rights, excess of costs over net
assets acquired and organization costs, when events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. The effect of the adoption of SFAS 121
was not material.
The Company adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123 "Accounting
For Stock-Based Compensation" ("SFAS 123") in the first quarter
of 1996 which allows companies the option to retain the current
accounting approach for recognizing stock-based compensation
expense in the financial statements or to adopt a new accounting
method based on the estimated fair value of the employee stock
options and warrants. The Company will continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" for employee stock compensation measurement
and therefore is required to provide expanded disclosures in the
notes to the consolidated financial statements.
The Company will be required to implement Statement of
Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128") in the fourth quarter of 1997. The effect of the
implementation of SFAS No. 128 has not been determined.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required to be filed
pursuant to this Item 8 begin on Page F-1 of this report. Such
consolidated financial statements are hereby incorporated by
reference into this Item 8. The Supplementary Data requirement
as set forth in Item 302 of Regulation S-K is inapplicable to the
Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
INAPPLICABLE
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The following table sets forth certain information with
respect to the current directors and executive officers of the
Company:
Name Age Present Office or Position
Robert T. Eramian (1) 52 Chairman of the Board, Chief
Executive Officer and Director
Reginald D. Strickland 42 President and Chief Operating
Officer
Joseph L. Rzepka 44 Executive Vice President and
Chief Financial Officer
Judson H. Simmons 51 Executive Vice President-
Strategic Planning and
Corporate Organization
Joseph C. McCarron, Jr. 42 Executive Vice President and
Director
Robert A. Kasirer 47 Director and President of Iatros
Respiratory Corporation and
IHN/Health Services Group,
Inc.
John D. Higgins (1)(2) 64 Director
(1) Member of the Compensation Committee of the Board of
Directors.
(2) Member of the Audit Committee of the Board of Directors.
Business Experience
Robert T. Eramian
Mr. Eramian has been a director since July 1994, and was
elected Chairman of the Board in September, 1994. Mr. Eramian
was appointed Chief Executive Officer and President on January
17, 1995. Mr. Eramian resigned as President of the Company on
March 20, 1997. Mr. Eramian served as Chairman of the Board of
HealthCare Concepts, Inc., a health care financial advisory and
management consulting firm from 1989 through 1994. Prior to co-
founding HealthCare Concepts, Inc., Mr. Eramian was involved in
investment banking, with Bear Stearns in Atlanta, Georgia. Mr.
Eramian received his BA from Merrimack College, his Master's
Degree from the University of Dayton and participated in doctoral
studies in political philosophy at Emory University. Mr. Eramian
is the President of Etel Corporation which was founded in 1994.
Etel corporation is a health care financial and advisory
consulting firm. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Reginald D. Strickland
Mr. Strickland was appointed Chief Operating Officer in
January 1997 and President in March, 1997. Mr. Strickland
previously served as Vice President of Operations for the long-
term care division of Horizon/CMS HealthCare, overseeing the
operation of 130 principally long-term care facilities from 1994
through 1996. Mr. Strickland served as Vice President of Waverly
Group from 1990 through 1993. Mr. Strickland began his career in
1977 with Beverly Enterprises where he worked for approximately
15 years and where he was ultimately Vice President of Operations
for over 100 facilities located in seven states in the
Southeastern United States. Mr. Strickland has twenty years of
experience in long-term care operations. Mr. Strickland received
his Bachelors Degree in Applied Behavioral Sciences from National-
Louis University.
Joseph L. Rzepka
Mr. Rzepka was appointed Executive Vice President and Chief
Financial Officer of the Company in September 1996. Mr. Rzepka
served as Vice President of Operations of Omega HealthCare
Investors, Inc., a long-term care real estate investment trust
from 1993 through 1996. Mr. Rzepka has held executive financial
positions in the long-term care industry for over twelve years.
Mr. Rzepka was the Vice President of Finance of International
Health Care Management, Inc. from 1991 through 1993 and was Vice
President and Chief Financial Officer of National Heritage, Inc.,
the nation's fourth largest operator of long-term care facilities
from 1989 through 1991. Mr. Rzepka received his Bachelor's
Degree in Business Administration from the University of Michigan
in Ann Arbor and completed masters studies in Business
Administration Program at Xavier University. Mr. Rzepka is a
certified public accountant.
Judson H. Simmons
Mr. Simmons was appointed Executive Vice President of
Strategic Planning of the Company in July 1995. From 1993
through the end of 1995, Mr. Simmons was President of Retirement
Corporation of America, an Atlanta based owner, manager, and
operator of independent living, assisted living, and congregate
care facilities throughout the Eastern United States. From 1980
to 1993, Mr. Simmons was a Partner and Of Counsel with two
different Atlanta based law firms, where he had a broad based
international corporate practice. His legal experience in the
health care industry included serving as outside general counsel
for Retirement Corporation of America, HealthCare Concepts, Inc.,
the National Investment Conference for the Senior Living and Long-
term Care Industries, and a wholesale distributor of
pharmaceutical products and medical supplies. Mr. Simmons
received his B.S. degree, with Special Attainment in Commerce
(concentration in Finance), from Washington & Lee University; a
Certificate of High Honors from the Department of Economics of
the University of Nottingham, England; his J.D. degree, cum
laude, from the University of Georgia School of Law; his LL.M.
degree from Columbia University School of Law; and a Certificate
in Foreign and Comparative Law from Columbia University's Parker
School. Mr. Simmons is a member of the State Bar of Georgia.
Joseph C. McCarron, Jr.
Mr. McCarron was appointed a director of the Company in July
1994. From July 1994 to January 17, 1995, Mr. McCarron served as
Chief Executive Officer and President of the Company. Mr.
McCarron served as Chief Financial Officer from July 1994 through
September 1996. On January 17, 1995, Mr. McCarron was appointed
Executive Vice President. Mr. McCarron served as President of
HealthCare Concepts, Inc., a health care financial advisory and
management consulting firm from 1989 through 1994. Mr. McCarron
has held executive management positions in the long-term care
industry for over fifteen years. Mr. McCarron was a senior
manager with Ernst & Young in the New England area. Mr. McCarron
graduated cum laude with a BA in Business Administration from
Northeastern University. Mr. McCarron is a Certified Public
Accountant. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Robert A. Kasirer
Mr. Kasirer has been a director of the Company since
February 1995. Mr. Kasirer was appointed Managing Director of
Iatros Respiratory Corporation in January 1995 and in May 1996
was appointed President of Western Region Operations of
IHN/Health Services Group, Inc. and Iatros Respiratory
Corporation. From 1991 to 1994, Mr. Kasirer was the owner and
Chief Executive Officer of King Care Respiratory Services, Inc.
From 1986 to 1991, Mr. Kasirer developed retirement communities,
assisted living facilities and health care facilities for not-for-
profit owners as a consultant. Prior to 1986, Mr. Kasirer
practiced law and was Of Counsel at Manatt, Phelps, Rosenberg &
Phillips. Mr. Kasirer graduated from New York University with a
BA degree in 1970. Mr. Kasirer received his J.D. degree from St.
John's University School of Law in 1973 and is a member of the
New York Bar Association.
John D. Higgins
Mr. Higgins has been a director since July 1994. Since
October 1990, Mr. Higgins has served as Vice President and Senior
Vice President - Corporate Finance of Royce Investment Group,
Inc., an investment banking firm. From March 1987 to May 1990,
Mr. Higgins served as an executive officer of Lombard Securities
Corp., an investment banking firm. Mr. Higgins holds BBA and MBA
degrees in finance from Hofstra University. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Each director and executive officer of the Company is
required to file a Form 3 with the Securities and Exchange
Commission reporting initial ownership of the Company's
securities at the time such person is elected or appointed a
director or executive officer. Messers. Kasirer and Simmons
filed such report late. In addition Mr. Simmons filed his Form 4
for January 1997 late.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information with respect to the compensation
paid by the Company to executive officers of the Company whose total annual
salary and bonus exceeded $100,000 for the fiscal years ended December 31, 1996,
December 31, 1995 and December 31, 1994.
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
OTHER RESTRICTED SECURITIES ALL
ANNUAL STOCK UNDERLYING LTIP OTHER
YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/SAR PAYOUTS COMPENSATION
Robert T. 1996 $245,192 $0 $14,700 0 401,348
Eramian 1995 $229,000 $0 $0 0 0 $0 $0
Chief 1994 N/A N/A N/A N/A N/A N/A N/A
Executive
Officer
and
Chairman
of the
Board(1)
Joseph L. 1996 $47,115 $0 $2,250 0 100,000
Rzepka 1995 N/A N/A N/A N/A N/A N/A N/A
Executive 1994 N/A N/A N/A N/A N/A N/A N/A
Vice
President
and Chief
Financial
Officer
Gordon 1996 $119,798 $0 $0 0 100,000(4)
Simmons 1995 N/A N/A N/A N/A N/A N/A N/A
Chief 1994 N/A N/A N/A N/A N/A N/A N/A
Operating
Officer
Joseph C. 1996 $196,154 $0 $9,000 0 40,000
McCarron, 1995 $162,500 $0 $0 0 30,000 $0 $0
Jr., 1994 $64,822 N/A $3,750 N/A 650,000 $0 $0
Executive
Vice
President
and
Director(2)
Judson H. 1996 $66,346 $0 $150,000 0 40,000
Simmons 1995 $0 $0 $125,000 0 $0 $0 $0
Executive 1994 N/A N/A N/A N/A N/A N/A N/A
Vice
President
- -
Strategic
Planning
and
Corporate
Organizat
ion(3)
<FN>
(1) Mr. Eramian was appointed Chief Executive Officer on January 17, 1995. Mr
Eramian resigned as President of the Company in March, 1997.
(2) Mr. McCarron was appointed President and Chief Executive Officer in July
1994 and resigned such offices on January 17, 1995. He was appointed
Executive Vice President and Chief Financial Officer on January 17, 1995.
(3) Mr. Simmons was appointed Executive Vice President - Strategic Planning and
Corporate Organization in July 1995.
(4) The option was terminated as a result of Mr. Gordon Simmons' resignation as
Chief Operating Officer of the Company, in December 1996.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR (FISCAL YEAR END DECEMBER 31, 1996)
INDIVIDUAL GRANTS POTENTIAL
REALIZABLE VALUE
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
NUMBER OF % OF TOTAL OPTION TERM
SECURITIES OPTIONS/SARs
UNDERLYING GRANTED EXERCISE EXPIRATION 5% 10%
OPTION/SARs TO OR DATE
NAME GRANTED EMPLOYEES BASE
(#) IN FISCAL PRICE
YEAR(1) ($/Share)
Robert T. Eramian 40,000(1) 5.3% $2.20 April 16,2006 $490,506 $1,243,040
Chief Executive 281,348(2) 37.4% See April 12,2006 (7) (8)
Officer 50,000(3) 6.7% below(2)
and Chairman of
the Board
Joseph L. Rzepka 100,000(4) 13.3% $1.50 Sept. 9,2006 $94,334 $239,061
Executive Vice (9) (10)
President and
Chief Financial
Officer
Gordon Simmons 100,000(5) 13.3% $6.00 Terminated N/A N/A
Chief Operating upon
Officer leaving
employment
Joseph C. 40,000(1) 5.3% $2.20 April 16,2006 $55,343 $140,249
McCarron, Jr. (11) (12)
Executive Vice
President
Judson H. Simmons 40,000(1) 5.3% $2.20 April 16,2006 $55,343 $140,249
Executive Vice (11) (12)
President -
Strategic Planning
and Corporate
Organization
<FN>
(1) Warrant granted on April 16, 1996 based upon the closing bid price of the
Company's Common Stock on that date of $4.375 as traded on the NASDAQ
SmallCap MarketSM. The Warrant was exercisable at grant.
(2) In satisfaction of obligations owed Etel Corporation, the Company granted
Mr. Eramian a total of 281,348 warrants as follows: a warrant for 89,600
shares at $1.00 per share, 7,652 shares at $1.44 per share, 38,880 shares
at $1.25 per share, 9,956 shares at $1.41 per share, 18,240 shares at $1.25
per share, 18,112 shares at $2.31 per share, 14,961 shares at $2.41 per
share, 25,333 areas at $3.00 per share, 39,000 shares at $3.00 per share,
7,805 shares at $1.28 per share, 6,809 shares at $1.47 per share, 5,000
shares at $3.00 per share. These warrants were granted on April 12, 1996,
but the warrants were granted in connection with transactions in completed
in fiscal year 1995.
(3) Bonus granted to Mr. Eramian by the Company on April 12, 1996 at $4.00 per
share. The warrant was exercisable at grant.
(4) Warrant was granted on September 9, 1996 in connection with Mr. Rzepka's
employment agreement and vests over a two year period, based upon closing
bid price of the Company's Common Stock on that date of $2.75 as traded on
the NASDAQ SmallCap MarketSM.
(5) Warrant was terminated as a result of Mr. Simmons' resignation as Chief
Operating Officer of the Company, in December 1996.
(6) The values shown are based on the indicated assumed annual rates of
appreciation compounded annually. Actual gains realized, if any, on stock
option exercises and Common Stock holdings are dependent on the future
performance of the Common Stock and overall stock market conditions. There
can be no assurance that the values shown in this table will be achieved.
(7) Represents an assumed market price per share of Common Stock of $3.39.
(8) Represents an assumed market price per share of Common Stock of $5.42.
(9) Represents an assumed market price per share of Common Stock of $2.44.
(10) Represents an assumed market price per share of Common Stock of $3.89.
(11) Represents an assumed market price per share of Common Stock of $3.58.
(12) Represents an assumed market price per share of Common Stock of $5.71.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
Number of Securities Value
Underlying Unexercised of Unexercised
Shares Options/SARs In-the-Money
Name Acquired Value at FY-End (#) Options/SARs
on Realized Exercisable/Unexercisab at Fiscal Year
Exercise le End($)
(#) Exercisable/Unexerc
isable
Robert T. Eramian -0- -0- 1,265,827(E)/0(U) $60,238(1)(E)/$0(U)
Chief Executive
Officer and Chairman
of the Board
Joseph L. Rzepka -0- -0- 100,000/(E)/0(U) $0(E)/$N/A(U)
Executive Vice
President and Chief
Financial Officer
Gordon Simmons -0- -0- N/A/(E)/N/A(U) $N/A(E)/$N/A(U)
Chief Operating
Officer
Joseph C. McCarron -0- -0- 720,000(E)/0(U) $202,800(2)(E)/$0(U)
Executive Vice
President
Judson H. Simmons -0- -0- 40,000/(E)/0(U) $0(E)/$N/A(U)
Vice President -
Strategic Planning
and Corporate
Organization
<FN>
(1) Based upon the closing bid price of the Company's Common Stock ($1.31 per share) on
December 31, 1996 (fiscal year end), as traded on the NASDAQ SmallCap market, minus
the exercise price for the following options/warrants (30,000 shares at $0.35, 89,600
shares at $1.00 per share, 38,880 shares at $1.25 per share, 18,240 shares at $1.25
per share, 7,805 shares at $1.28 per share).
(2) Based upon the closing bid price of the Company's Common Stock ($1.31) on December
31, 1996 (fiscal year end), as traded on the NASDAQ SmallCap market, minus the
exercise price of $0.35 for an option for 30,000 shares. In addition based upon the
closing bid price of the Company's Common Stock ($1.31) on December 31, 1996 (fiscal
year end), as traded on the NASDAQ SmallCap market, minus the exercise price of $0.75
for an option for 200,000 shares and the exercise price of $1.00 for another option
for 200,000 shares.
LONG TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Number of Shares, Performance or
Units and Other Rights Other Period Until Threshold Target Maximum
(#) Maturation or Payout ($ or #) ($ or #) ($ or #)
Robert T. Eramian N/A N/A N/A N/A N/A
Chief Executive
Officer and
Chairman of the
Board
Joseph L. Rzepka N/A N/A N/A N/A N/A
Executive Vice
President and
Chief Financial
Officer
Gordon Simmons N/A N/A N/A N/A N/A
Chief Operating
Officer
Joseph C. McCarron N/A N/A N/A N/A N/A
Executive Vice
President
Judson H. Simmons N/A N/A N/A N/A N/A
Vice President -
Strategic Planning
and Corporate
Organization
Compensation of Directors
There is no standard compensation for the Directors of the
Company beyond direct reimbursement for expenses incurred in
attending board meetings. On April 16, 1996 each director was
granted a warrant to purchase 40,000 shares of Common Stock,
exercisable at $2.20 per share. Such warrants expire April 16,
2006. Shares of Common Stock had a fair market value of $4.375
on the date the warrants were granted.
Employment Contracts and Termination, Severance and Change-of-
Control Agreements
Robert T. Eramian
In February, 1996, the Company's Board of Directors approved
an employment agreement with Mr. Eramian effective January 1,
1996. The term of the agreement is five (5) years. The
employment agreement provides for an annual base salary of
$250,000 with such salary increases and incentive compensation as
determined by the Company's Board of Directors. The employment
agreement also provides for reimbursement of travel expenses, an
automobile allowance of $750 per month and health and life
insurance benefits.
Joseph C. McCarron, Jr.
The Company entered into an employment agreement with Mr.
McCarron as of October 21, 1994 for a term of three (3) years
beginning July 25, 1994. The employment agreement provides for an
annual base salary of $150,000, a maximum annual bonus equal to
100% of base salary, at the discretion of the Board of Directors,
stock options to purchase 200,000 shares of Common Stock at $.75
per share, which vested upon employment, with a three-year
exercise period and stock options to purchase 200,000 shares of
Common Stock at $1.00 per share with a vesting period of one year
and a three-year exercise period. The employment agreement also
provides for reimbursement of travel expenses, an automobile
allowance of $750 per month and health and life insurance
benefits. During 1995, the Board of Directors approved the
increase of the annual base salary of Mr. McCarron to $200,000.
Reginald D. Strickland
The Company entered into an employment agreement with Mr.
Strickland as of January 1, 1997 for a term of three (3) years
beginning January 1, 1997. The employment agreement provides for
a $15,000 signing bonus, and an annual base salary of $185,000,
nonqualified stock warrants to purchase 330,000 shares of Common
Stock at $1.50 per share with a nine year exercise period which
vest over a two year period. The employment agreement also
provides for reimbursement of travel expenses, an automobile
allowance of $750 per month and health and life insurance
benefits.
Joseph L. Rzepka
The Company entered into an employment agreement with Mr.
Rzepka as of September 9, 1996 for a term of five (5) years
beginning September 9, 1996. The employment agreement provides
for an annual base salary of $175,000, a warrant to purchase
100,000 shares of Common Stock at $1.50 per share with a ten year
exercise period which vest over a two year period. The employment
agreement also provides for health and life insurance benefits,
reimbursement of travel expenses, an automobile allowance of $750
per month.
Judson H. Simmons
The Company entered into an employment agreement with Mr.
Simmons as of January 1, 1997 for a term of five (5) years
beginning January 1, 1997. The employment agreement provides for
an annual base salary of $225,000, a warrant to purchase 360,000
shares of Common Stock at $1.50 per share with a ten year
exercise period which vests over a two year period. The
employment agreement also provides for health and life insurance
benefits, reimbursement of travel expenses and an automobile
allowance of $750 per month.
There are no family relationships among any Directors or
executive officers of the Company.
Compensation Committee Interlocks and Insider Participation
Mr. Eramian served on the Compensation Committee for the
past fiscal year. Although Mr. Eramian, the Company's Chief
Executive Officer and President, served on the Company's
Compensation Committee, he did not participate in any
recommendation or decision regarding his own compensation as an
executive officer. The Company's Board of Directors as a whole
determines the method by which the Company's executive
compensation is determined based upon recommendations of the
Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information as of March 31,
1997 with respect to the securities holdings of all persons which
the Company, by virtue of filings with the Securities and
Exchange Commission or otherwise, has reason to believe may be
deemed the beneficial owners of more than 5% of the Company's
outstanding Common Stock or securities convertible into Common
Stock as of March 31, 1997, based upon a total of 16,134,852.
Also set forth in the table is the beneficial ownership of all of
the Company's outstanding Common Stock as of such date by
directors, executive officers and all directors and executive
officers of the Company as a group.
Number of Shares
Name of Beneficial Owner Beneficially
Owned(1) Percent
Robert T. Eramian(2) 1,880,306 11.7%
Reginald D. Strickland(3) 330,000 2.0%
Joseph L. Rzepka(4) 103,000 0.6%
Joseph C. McCarron, Jr.(5) 720,000 4.5%
Judson H. Simmons(6) 405,000 2.5%
Robert A. Kasirer(7) 1,070,000 6.6%
John D. Higgins(8) 365,775 2.3%
All executive officers
and directors
as a group (7 persons) 4,874,081 30.2%
__________________
(1) Unless otherwise noted, all shares are beneficially owned
and the sole voting and investment power is held by the
persons indicated. Ownership does not include options, or
portions of options, to purchase shares which are not
currently exercisable, or exercisable within sixty days.
(2) Includes 1,228,958 shares owned by James and Ellen Foulke
("Foulke"), Bentley-Midas Group, Ltd. ("Bentley") and Family
Investment Association, L.P. ("Family") that Mr. Eramian has
the power to vote pursuant to irrevocable proxies granted to
him by Foulke, Bentley and Family, 250,000 shares of Common
Stock purchasable by Etel Corporation, a corporation
controlled by Mr. Eramian, under a Warrant granted by the
Company, 70,000 shares of Common Stock purchasable under
Warrants granted to Mr. Eramian by the Company, 281,348
shares of Common Stock purchasable under warrants granted to
Mr. Eramian by the Company and 50,000 shares of Common Stock
purchasable under a warrant granted to Mr. Eramian by the
Company. See "OPTION AND PROXY AGREEMENTS." See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
(3) Includes a warrant for 330,000 shares of Common Stock
granted to Mr. Strickland pursuant to his employment
agreement with the Company.
(4) Includes 3,000 shares of Common Stock purchased by Mr.
Rzepka in an open market transaction and a warrant for
100,000 shares of Common Stock granted to Mr. Rzepka by the
Company pursuant to his employment agreement.
(5) Includes 400,000 shares of Common Stock purchasable under an
option granted to Mr. McCarron pursuant to his employment
agreement, 250,000 shares of Common Stock purchasable under
a warrant granted to Mr. McCarron by the Company and 70,000
shares of Common Stock purchasable under warrants granted to
Mr. McCarron by the Company. See "OPTION AND PROXY
AGREEMENTS." See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
(6) Includes 5,000 shares of the Company's Common Stock
purchased by Mr. Simmons in an open market transaction prior
to becoming an officer of the Company. Also includes a
warrant for 40,000 shares of Common Stock granted to Mr.
Simmons by the Company and a warrant for 360,000 granted to
Mr. Simmons by the Company in 1997.
(7) Includes 1,000,000 shares of Common Stock held of record by
Health Care Holdings, Ltd., a limited partnership of which
Mr. Kasirer is a General Partner and 70,000 shares of Common
Stock purchasable under a warrant granted to Mr. Kasirer by
the Company. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
(8) Includes the following: (i) 54,488 shares held of record;
(ii) 7,500 shares of Common Stock purchasable under a
warrant granted by the Company to Royce Investment Group,
Ltd. ("Royce") and transferred to Mr. Higgins; (iii) 15,948
shares of Common Stock purchasable under a warrant granted
by the Company to Mr. Higgins as to a debt conversion; (iv)
95,000 shares of Common Stock purchasable under a warrant
granted by the Company to Royce; (v) an option to purchase
152,839 shares of Common Stock granted to Royce by
shareholders of the Company and transferred to Mr. Higgins
by Royce; and (vi) 40,000 shares of Common Stock purchasable
under a Warrant granted by the Company. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Option and Proxy Agreements
In July 1994, Family Investment Associates L.P. ("Family"),
James M. Foulke and Ellen Foulke ("Foulke") and Bentley-Midas
Group, Ltd. ("Bentley") each of whom was a principal stockholder
of the Company (collectively, the "Issuing Parties") entered into
a series of agreements granting options to purchase shares of
Common Stock owned by them to Etel, Royce and Joseph C. McCarron,
Jr. and giving irrevocable proxies to vote those shares of Common
Stock to Mr. Eramian. The options are to purchase shares of
Common Stock from Family, Foulke and Bentley, not for the
purchase of shares of Common Stock from the Company.
Royce has exercised a portion of the option and transferred
a portion of the option granted to it and Etel by the Issuing
Parties. Etel has not exercised the option granted to it by the
Issuing Parties. Either Royce or Etel may separately exercise
all of its respective portion of this option. The term of the
option is thirty-three months from July 25, 1994. Pursuant to the
terms of this option, the exercise price ranges from $4.00 per
share during the first fifteen months to $8.00 per share after
the twenty-seventh month. The aforementioned shares (1,228,958)
are subject to a thirty-three month irrevocable proxy granted to
Mr. Eramian, which terminates on April 25, 1997.
The Issuing Parties also granted to Etel another option to
purchase 297,000 shares of the Company's Common Stock. The option
expired on July 25, 1996.
The Issuing Parties also granted to Mr. McCarron an option
to purchase 196,125 shares of the Company's Common Stock. The
option expired on July 25, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1996, the Company's Board of Directors approved
an employment agreement with Mr. Eramian, granted warrants to
purchase shares of the Company's Common Stock to Mr. Eramian in
satisfaction of amounts due to Etel under the Etel Agreement and
terminated those parts of the Etel Agreement that had not been
terminated earlier. The warrants granted to Mr. Eramian were for
an aggregate of 281,348 shares of the Company's Common Stock, are
exercisable for a term of ten years at exercise prices ranging
from $1.00 per share to $3.00 per share.
At December 31, 1996, net loans due to the Company from
Robert Kasirer, a Director of the Company amounted to $239,760.
PART IV
ITEM 14. EXHIBITS AND REPORTS OR FORM 8-K
(a) The following documents are filed as part of this
report:
1. The consolidated financial statements filed
as part of this report are listed under the
caption "Index to Financial Statements",
appearing elsewhere in this report.
2. The consolidated financial schedules of the
Company are filed as part of that report.
Schedules:
Schedule II - Valuation and Qualifying
Accounts
3. The following exhibits are filed herein:
Exhibit No. Description
10.1(1) Form of Convertible Subordinated Debenture.
10.2(2) Agreement and Plan of Merger dated May 31,
1996 by and between Oasis Healthcare,
Inc., OHI Acquisition Corporation and
Iatros Health Network, Inc.
10.3 Management Agreement dated as of July
1, 1996 by and between Iatros Health
Network, Inc. and Villa Crest, Inc.,
VCP Realty Limited Partnership and
Heartland Healthcare Corporation.
10.4 Management Agreement dated as of July
1, 1996 by and between Iatros Health
Network, Inc., Epsom Manor, Inc.,Epsom
Manor RCLC, Inc., Epsom Health Limited
Partnership and Heartland Healthcare
Corporation.
10.5 Management Agreement dated as of July
1, 1996 by and between Iatros Health
Network, Inc., Maple Leaf HealthCare,
Inc., Maple Leaf Health Limited
Partnership and Heartland Healthcare
Corporation.
22.0 Subsidiaries of Registrant.
23.0 Consent of Asher & Company,
Ltd., independent certified public
accountants for the Company for 1996,
1995 and 1994.
(1) Incorporated by reference from Form 8-K dated January 29,
1996 (Date of Report-January 26, 1996)
(2) Incorporated by reference from Form 8-K dated June 3, 1996
(Date of Report-May 31, 1996)
(b) During the quarter ended December 31, 1996, the Company
filed the following reports on Form 8-K:
1. Report dated October 9, 1996- Item 5 (Date of
Report-September 24, 1996)
2. Report dated October 17, 1996-Item 5 (Date of
Report-September 27, 1996)
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Certified Public Accountants
F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders'
Equity F-7
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-13
Report of Independent Certified Public Accountants on
Financial Statement Schedule F-35
Schedule II - Valuation and Qualifying Accounts F-36
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant certifies that it has reasonable grounds
to believe that it meets all requirements for filing on Form 10-
K, and has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized on the 15th day of
April, 1997.
IATROS HEALTH NETWORK, INC.
By: /s/ Robert T. Eramian
Robert T. Eramian,
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange
Act of 1934, as amended, this Form 10-K has been signed below by
the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
/s/ Robert T. Eramian 4/15/97
Robert T. Eramian Chief Executive Officer
and Director
/s/ Reginald D. Strickland
Reginald D. Strickland President and Chief 4/15/97
Operating Officer
/s/ Joseph L. Rzepka
Joseph L. Rzepka Chief Financial
Officer 4/15/97
/s/ Joseph C. McCarron, Jr. 4/15/97
Joseph C. McCarron, Jr. Executive Vice President
and Director
/s/ John D. Higgins 4/15/97
John D. Higgins Director
/s/ Judson H. Simmons 4/15/97
Judson H. Simmons Executive Vice President -
Strategic Planning and
Corporate Organization
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders'
Equity F-7
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-13
Report of Independent Certified Public Accountants on
Financial Statement Schedule.... F-35
Schedule II - Valuation and Qualifying Accounts F-36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Iatros Health Network, Inc. and Subsidiaries
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of
Iatros Health Network, Inc. and Subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of operations, changes
in Stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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 consolidated
financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Iatros Health Network, Inc. and Subsidiaries as of December
31, 1996 and 1995 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
ASHER & COMPANY, Ltd.
Philadelphia, Pennsylvania
April 2, 1997
F-2
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 1,134,125 $ 682,505
Accounts receivable, net 5,888,205 4,237,452
Note receivable 200,000 1,000,000
Inventory 453,119 460,344
Prepaid expenses and other current assets 1,940,114 1,579,186
Deferred tax asset, net 2,700,000 1,520,000
----------- -----------
Total current assets 12,315,563 9,479,487
PROPERTY AND EQUIPMENT, net 1,249,763 965,289
OTHER ASSETS
Cash and cash equivalents, restricted - 375,000
Deposits 1,208,849 368,762
Contract rights, net of accumulated
amortization of $187,234 and $7,995
in 1996 and 1995, respectively 1,346,052 631,710
Excess of cost over net assets acquired,
net of accumulated amortization of
$372,128 and $310,582 in 1996 and 1995,
respectively 3,885,767 8,418,078
Notes receivable 4,423,324 2,535,295
Organization costs, net of accumulated
amortization of $35,793 and $112,396
1996 and 1995, respectively 221,843 1,002,301
Loans receivable and other assets 3,344,070 250,526
----------- -----------
14,429,905 13,581,672
----------- -----------
Total Assets $27,995,231 $24,026,448
=========== ===========
- Continued -
F-3
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
CURRENT LIABILITIES
Notes payable, banks $ 792,663 $ 879,811
Current portion of long-term debt 374,881 1,052,017
Current portion of capital lease obligations 230,761 127,001
Accounts payable 2,690,260 1,188,650
Accrued payroll and related liabilities 685,505 353,017
Accrued expenses and other current liabilities 854,522 1,857,661
Preferred stock dividends payable 390,000 230,000
Net current liabilities of discontinued
operations 500,000 500,000
----------- -----------
Total current liabilities 6,518,592 6,188,157
LONG-TERM DEBT 328,138 545,041
SUBORDINATED CONVERTIBLE DEBENTURES 600,000 -
CAPITAL LEASE OBLIGATIONS 232,721 209,329
----------- -----------
7,679,451 6,942,527
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value,
5,000,000 shares authorized;
Series A, 533,333 shares issued and
outstanding 533 533
Series B, 100,000 shares issued and
outstanding 100 100
Common Stock, $.001 par value,
25,000,000 shares authorized;
15,931,500 and 11,351,745 issued
and outstanding in 1996 and 1995,
respectively 15,931 11,351
Additional Paid-In Capital 34,142,970 20,441,130
Accumulated Deficit (13,843,754) (3,369,193)
----------- -----------
20,315,780 17,083,921
----------- -----------
Total Liabilities and Stockholders'
Equity $27,995,231 $24,026,448
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
Revenue
Ancillary services $ 9,759,337 $ 6,763,472 $ 2,331,786
Management services 9,920,758 4,343,684 534,307
Development services 2,426,720 5,521,108 -
----------- ----------- -----------
22,106,815 16,628,264 2,866,093
Operating expenses
Ancillary services 8,966,378 6,417,471 2,090,436
Management services 12,097,877 3,560,932 -
General and administrative 4,653,758 2,897,482 1,846,722
----------- ----------- -----------
25,718,013 12,875,885 3,937,158
----------- ----------- -----------
Income(loss) from continuing
operations before other income
(expense), income tax benefit and
discontinued operations (3,611,198) 3,752,379 (1,071,065)
Other income(expense)
Interest income 550,416 63,816 15,863
Interest expense (699,895) (254,574) (38,737)
Depreciation and amortization (1,234,018) (576,433) (78,096)
Write-down of intangible assets (6,697,974) - -
Other income 198,108 - 254,684
----------- ----------- -----------
(7,883,363) (767,191) 153,714
----------- ----------- -----------
Income(loss) from continuing
operations before income
tax benefit and discontinued
operations (11,494,561) 2,985,188 (917,351)
Income tax benefit, net 1,180,000 670,000 526,036
----------- ----------- -----------
Income(loss) from continuing
operations before
discontinued operations (10,314,561) 3,655,188 (391,315)
Discontinued operations
Loss from operations - - (511,186)
Loss on disposal - - (294,108)
----------- ----------- -----------
- - (805,294)
----------- ----------- -----------
Net Income(loss) $(10,314,561) $ 3,655,188 $ (1,196,609)
=========== ============ ===========
- Continued -
F-5
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
Primary earnings(loss) per
common share:
Earnings(loss) per common
and common equivalent share:
Continuing operations $ (.74) $ .29 $ (.06)
Discontinued operations - - (.13)
----------- ----------- -----------
Net Income(loss) $ (.74) $ .29 $ (.19)
=========== =========== ===========
Weighted average number
of shares of common stock
and equivalents outstanding 13,946,359 12,054,741 6,281,584
=========== =========== ===========
Fully diluted earnings per
common share:
Earnings per common
and common equivalent share $ - $ .28 $ -
----------- -----------
Net Income $ - $ .28 $ -
=========== =========== ===========
Weighted average number
of shares of common stock
and equivalents outstanding - 13,248,133 -
=========== =========== ===========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Preferred Stock Common Stock Additional
Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 1994 - - 5,678,000 $ 5,678 $5,292,634 $(5,597,772) $(299,460)
Issuance of Common Stock on
July 25,1994 in connection
with an unregistered
sale of securities - - 2,000,000 2,000 1,498,000 - 1,500,000
Issuance of Series A Preferred
Stock on July 25, 1994 in
connection with an unregistered
sale of securities 533,333 $ 533 - - 1,999,467 - 2,000,000
Issuance of Series B Preferred
Stock in exchange for common
stock on July 25, 1994 in
connection with an unregistered
sale of securities 300,000 300 (666,667) (667) 367 - -
Costs of Issuance incurred on
July 25, 1994 in connection
with an unregistered sale
of securities - - - - (575,000) - (575,000)
Related party loan outstanding
on July 25, 1994 and contributed
to capital - - - - 250,000 - 250,000
Issuance of Common Stock on
September 30, 1994 in
connection with an unregistered
sale of securities - - 100,000 100 224,900 - 225,000
Issuance of Common Stock on
December 28,1994 in connection
with a leased property transaction - - 158,333 158 349,842 - 350,000
Issuance of Common Stock on
December 31, 1994 in connection
with obtaining a property
purchase commitment - - 166,667 167 371,708 - 371,875
Series A Preferred Stock
dividends declared - - - - - (70,000) (70,000)
Net loss - - - - - (1,196,609) (1,196,609)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 833,333 833 7,436,333 7,436 9,411,918 (6,864,381) 2,555,806
<FN>
- Continued -
F-7
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Preferred Stock Common Stock Additional
Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Issuance of Common Stock on
January 23,1995 in connection
with an unregistered sale
of securities - - 1,000,000 $ 1,000 $1,750,250 - $1,751,250
Issuance of Common Stock on
April 12, 1995 in connection
with an unregistered sale
of securities - - 14,060 14 99,986 - 100,000
Issuance of Common Stock on
June 30,1995 in connection
with the termination of a
lease and assignment of a
purchase option - - 30,489 30 149,969 - 149,999
Issuance of Common Stock on
August 29,1995 in connection
with an unregistered sale
of securities - - 170,000 170 1,019,830 - 1,020,000
Issuance of Common Stock on
August 31,1995 in connection
with an unregistered sale
of securities - - 100,000 100 224,900 - 225,000
Issuance of Common Stock on
September 28,1995 in connection
with conversion of debt - - 189,941 190 664,605 - 664,795
Issuance of Common Stock on
September 28,1995 in connection
with an unregistered sale
of securities - - 400,000 400 1,399,600 - 1,400,000
Issuance of Common Stock on
September 29,1995 in connection
with an unregistered sale
of securities - - 316,667 317 1,899,683 - 1,900,000
Costs of issuance incurred
during 1995, in connection
with unregistered sales
of securities - - - - (542,270) - (542,270)
<FN>
- Continued -
F-8
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Preferred Stock Common Stock Additional
Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Redemption of Series B
Preferred Stock on
November 30, 1995 (200,000) $(200) - - - - $(200)
Issuance of Common Stock on
December 29,1995 in connection
with exercise of warrants held
by a Company Director - - 30,000 $ 30 $ 86,220 - 86,250
Issuance of Common Stock during
1995 in connection with exercise
of public warrants - - 1,664,255 1,664 3,842,439 - 3,844,103
Compensation incurred during 1995, in
connection with an unregistered
sale of securities - - - - 419,000 - 419,000
Director compensation incurred during
1995, in connection with an unregistered
sale of securities - - - - 15,000 - 15,000
Series A Preferred Stock dividends
declared - - - - - $(160,000) (160,000)
Net Income - - - - - 3,655,188 3,655,188
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 633,333 633 11,351,745 11,351 20,441,130 (3,369,193) 17,083,921
Issuance of Common Stock during
1996 in connection with the conversion
of a registered sale of
convertible debt securities - - 3,815,020 3,815 12,707,394 - 12,711,209
Costs of Issuance incurred on
January 26, 1996 in connection
with a registered sale of
convertible debt securities - - - - (683,466) - (683,466)
Issuance of Common Stock during
1996 in connection with exercise
of public warrants - - 92,572 93 267,522 - 267,615
<FN>
- Continued -
F-9
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Preferred Stock Common Stock Additional
Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Issuance of Common Stock during
1996 in connection with the exercise
of warrants and options - - 619,325 $ 619 $ 1,147,393 - $ 1,148,012
Issuance of Common Stock on
April 1,1996 in connection
with an unregistered sale
of securities - - 52,838 53 214,997 - 215,050
Compensation incurred during 1996, in
connection with an unregistered
sale of securities - - - - 18,000 - 18,000
Director compensation incurred during
1996, in connection with an unregistered
sale of securities - - - - 30,000 - 30,000
Series A Preferred Stock dividends
declared - - - - - $(160,000) (160,000)
Net Loss - - - - - (10,314,561) (10,314,561)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 633,333 $ 633 15,931,500 $ 15,931 $34,142,970 $(13,843,754) $20,315,780
=========== =========== =========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
F-10
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
OPERATING ACTIVITIES
Net income(loss) $(10,314,561) $ 3,655,188 $ (1,196,609)
Adjustments to reconcile
net income(loss) to net cash
utilized by operating activities:
Loss from discontinued operations - - 511,186
Loss on disposal of
discontinued operations - - 294,108
Net cash utilized by
discontinued operations - (681,544) (315,063)
Depreciation and amortization 1,234,018 576,433 130,425
Provision for doubtful
accounts receivable 2,036,003 79,217 34,332
Write-off of uncollectible
notes and loans receivable 1,200,000 - -
Write-down of intangible assets 6,697,974 - -
Loss on disposal of property
and equipment 12,217 - -
Common stock issued for
services rendered 48,000 99,750 -
Third party settlements - - (129,684)
Deferred taxes (1,180,000) (870,000) (526,036)
Changes in:
Accounts receivable (3,686,755) (2,794,121) (852,308)
Notes and loans receivable (2,820,369) (2,175,000) -
Inventory 7,225 (216,257) (45,162)
Prepaid expenses and other (360,928) (1,302,379) 10,628
Accounts payable 1,501,608 463,850 (71,888)
Accrued expenses and other (59,458) 766,181 397,886
----------- ----------- -----------
Net cash utilized by
operating activities (5,685,026) (2,398,682) (1,758,185)
INVESTING ACTIVITIES
Purchase of property
and equipment (305,497) (147,319) (120,971)
Acquisition of businesses (215,050) (2,074,219) -
Acquisition of contract rights (2,364,478) (639,705) -
Proceeds from sale of
property and equipment - - 140,000
Loans to third parties (3,185,541) (710,295) -
Repayment of loans to
third parties 445,555 - -
Deposits, net (1,110,000) (73,636) 5,580
Restricted cash and cash
equivalents 375,000 (25,000) (350,000)
Organization costs (42,067) (597,106) (111,403)
Net cash utilized by
investing activities (6,402,078) (4,267,280) (436,794)
<FN>
- Continued -
F-11
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
FINANCING ACTIVITIES
Net proceeds from issuance
of capital stock and other
capital contributions $ 1,415,627 $ 5,087,332 $ 3,400,000
Proceeds from issuance
of convertible debentures 12,900,000 - -
Fees paid on issuance of
convertible debentures (876,331) - -
Short term borrowings, net (87,148) 1,342,761 -
Payments of long-term debt (242,258) (606,586) (162,306)
Stockholders' loan borrowings
(payments), net (686,664) 761,759
(201,775)
Redemption of Preferred Stock - (200) -
Payments of capital lease
obligations (154,413) (67,626) (15,832)
Security deposits, net 269,911 (16,376) -
----------- ----------- -----------
Net cash provided by
financing activities 12,538,724 6,501,064 3,020,087
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 451,620 (164,898) 825,108
Cash and cash equivalents,
beginning of year 682,505 847,403 22,295
----------- ----------- -----------
Cash and cash equivalents,
end of year $ 1,134,125 $ 682,505 $ 847,403
=========== =========== ===========
<FN>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid $720,552, $177,398 and $331,526 in cash for
interest during 1996, 1995 and 1994, respectively.
The accompanying notes are an integral part of
these consolidated financial statements.
F-12
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A summary of the Company's significant accounting policies con-
sistently applied in the preparation of the accompanying con-
solidated financial statements is as follows:
Business
Iatros Health Network, Inc. and Subsidiaries (the "Company")
is a Delaware Corporation organized in June 1988. The
Company is engaged in providing services to the long-term
care industry. The Company's principal markets include the
metropolitan areas of Philadelphia, Pennsylvania; Baltimore,
Maryland; and, New England.
Principles of consolidation
The consolidated financial statements include the accounts of
Iatros Health Network, Inc. and its wholly-owned
subsidiaries. All intercompany transactions and accounts
have been eliminated in consolidation.
Cash and cash equivalents
The Company considers all highly liquid debt instruments pur
chased with an original maturity of three months or less to
be cash equivalents.
The Company maintains cash accounts which at times may exceed
federally insured limits. The Company has not experienced
any losses from maintaining cash accounts in excess of
federally insured limits. Management believes that the
Company does not have significant credit risk related to its
cash accounts.
Revenue and accounts receivable
Ancillary services revenue is reported at the estimated net
realizable amounts due from residents, third party payors,
and others. Management services revenue is reported pursuant
to the terms and amounts provided by the associated
management service contracts. Development services revenue
is generally realized on a fee for service basis recognized
upon completion of the service transaction.
The Company's credit risk with respect to accounts receivable
is concentrated in services related to the healthcare
industry, which is highly influenced by governmental
regulations. This concentration of credit risk is limited
due to the number and types of entities comprising the
Company's customer base and their geographic distribution.
The Company routinely monitors its exposure to credit losses
and maintains an allowance for doubtful accounts.
The allowance for doubtful accounts is maintained at a level
determined to be adequate by management to provide for
potential losses based upon an evaluation of the accounts
receivable. This evaluation considers such factors as the
age of receivables, the contract terms and the nature of the
contracted services.
F-13
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue and accounts receivable (Continued)
Certain ancillary revenues are recorded based on standard
charges applicable to patients. Under Medicare, Medicaid and
other cost-based reimbursement programs, the provider is
reimbursed for services rendered to covered program patients
as determined by reimbursement formulas. The differences
between established billing rates and the amounts
reimbursable by the programs and patient payments are
recorded as contractual adjustments and deducted from
revenues.
Inventory
Inventory is principally comprised of pharmaceutical and
medical supplies and is valued at the lower of cost (first-
in, first-out method) or market.
Property and equipment
Property and equipment is stated at cost. The cost of
property and equipment is depreciated over the estimated
useful lives of the respective assets using primarily the
straight-line method. Property and equipment under capital
leases is amortized over the lives of the respective leases
or over the service lives of the assets. Leasehold
improvements are amortized over the lesser of the term of the
related lease or the estimated useful lives of the assets.
Normal maintenance and repair costs are charged against
income. Major expenditures for renewals and betterment which
extend useful lives are capitalized. When property and
equipment is sold or otherwise disposed of, the asset
accounts and related accumulated depreciation or amortization
accounts are relieved, and any gain or loss is included in
operations.
The useful lives of property and equipment for purposes of
computing depreciation and amortization are:
Leasehold improvements 3 - 10 Years
Property and equipment
held under capital leases 5 - 7 Years
Equipment 5 Years
Furniture and fixtures 3 - 7 Years
Intangible assets
The Company evaluates the carrying value of its long-lived
assets and identifiable intangibles including, contract
rights, excess of cost over net assets acquired and
organization costs when events or changes in circumstances
indicate that the carrying amount of such assets may not be
recoverable. The review includes an assessment of industry
factors, contract retentions, cash flow projections and other
factors the Company believes are relevant.
F-14
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Intangible assets (Continued)
Contract rights
Contract rights represent the value assigned to
management contracts obtained by the Company.
Management contracts provide for a management fee in
exchange for management, marketing and development
services provided to the facilities. Contract rights
are being amortized over the term of the related
contracts which range from 5 to 10 years.
Excess of cost over net assets acquired
The excess of cost over net assets acquired relates to
the acquisition of the Company's operating subsidiaries.
The excess of cost over net assets acquired is being
amortized over the lives of 15 to 20 years.
Organization costs
Organization costs incurred in connection with the
acquisition or formation of new business activities for
the Company are being amortized using the straight-line
method over five years.
Income taxes
The Company employs the asset and liability method in
accounting for income taxes pursuant to Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for
Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on temporary differences
between the financial reporting and tax bases of assets and
liabilities and net operating loss carryforwards, and are
measured using enacted tax rates and laws that are expected
to be in effect when the differences are reversed.
Earnings per share
Both primary and fully diluted earnings per share of common
stock and common stock equivalents are computed based on the
weighted average number of shares of common stock and common
stock equivalents outstanding in each period. For 1996 and
1994, fully diluted loss per share amounts are not computed
because they are antidilutive.
In 1995, Common Stock equivalents include additional shares
assuming the exercise of stock options and warrants and
Convertible Series A Preferred Stock when their effect is
dilutive. The inclusion of additional shares for conversion
of Preferred Series A Stock, in primary earnings per share
calculations, would have been antidilutive for 1995.
Net earnings used in the computation of primary earnings per
share for 1995 are reduced by Preferred Stock dividend
requirements.
F-15
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Earnings per share (Continued)
The weighted average number of shares of Common Stock
and Common Stock equivalents was determined as follows:
1996 1995 1994
Primary earnings per share:
Weighted average common
shares outstanding 13,946,359 9,002,561 6,281,584
Weighted average Common Stock
equivalents assuming the
exercise of outstanding
warrants and options - 3,052,180 -
---------- ---------- ----------
13,946,359 12,054,741 6,281,584
========== ========== ==========
Fully diluted earnings per share:
Weighted average common
shares outstanding - 9,002,561 -
Weighted average Common Stock
equivalents assuming the
exercise of outstanding
warrants, options and
conversion of convertible
Series A Preferred Stock - 4,245,572 -
---------- ---------- ----------
- 13,248,133 -
========== ========== ==========
During 1996, the Company issued Common Stock in connection
with the conversion of its 10% Subordinated Convertible
Debentures and with the exercise of its Redeemable Common
Stock Purchase Warrants. In addition, all of the outstanding
10% Subordinated Convertible Debentures as of December 31,
1996 have subsequently been converted. Had all exercises and
conversions occurred on January 1, 1996, the reported primary
loss per common share would have been antidilutive.
During 1995, the Company issued Common Stock in connection
with the exercise of its Redeemable Common Stock Purchase
Warrants and the conversion of convertible debt during the
year. In addition, all of the outstanding Redeemable Common
Stock Purchase Warrants as of December 31, 1995 were
exercised in 1996. Had all exercises and conversions
occurred on January 1, 1995, the reported primary earnings
per common and common equivalent share would have decreased
$0.02 to $0.27.
F-16
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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 those estimates.
Reclassifications
Certain amounts have been reclassified in 1995 and 1994 to
conform with the 1996 presentation.
NOTE 2: SIGNIFICANT CAPITAL STOCK TRANSACTIONS
During 1996 and 1995, the Company completed a number of Capital
Stock transactions. Significant transactions included the
following:
In January 1996, the Company completed the sale of
$12,900,000 of its 10% Subordinated Convertible Debentures.
The Debentures pay interest in quarterly installments at the
rate of 10% per annum. The Debentures are convertible into
shares of the Company's Common Stock, with the conversion
rate determined by a formula based upon the share price of
the Company's Common Stock. Costs associated with the
issuance of the Debentures totaled $876,331. Through
December 31, 1996, $12,300,000 were converted into a total of
3,815,020 shares of Common Stock.
On May 31, 1996, Oasis HealthCare, Inc., a long-term care
management company located in Chestnut Hill, Massachusetts
was merged into the Company's wholly owned subsidiary, OHI
Acquisition Corporation. The shareholders of Oasis
HealthCare, Inc. received a total of 52,828 shares of Common
Stock and $215,050 in cash in exchange for their shares in
Oasis HealthCare, Inc. In addition, an amount will be paid
to the former shareholders of Oasis HealthCare, Inc. within
thirty days of the execution of agreements with respect to
any of twelve management contract opportunities specifically
identified in the Merger Agreement. Each amount (half of
which will be payable in cash and half in Common Stock) will
be determined based upon a percentage of the value of each
such agreement, the aggregate of which will not exceed
$1,500,000. As part of the transaction OHI Acquisition
Corporation entered into a five year employment agreement
with the former president of Oasis HealthCare, Inc. The name
of the subsidiary has been changed to OHI Corporation.
F-17
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 2: SIGNIFICANT CAPITAL STOCK TRANSACTIONS (Continued)
In January 1995, the Company, through a newly-created
subsidiary, Iatros Respiratory Corporation ("IRC"), merged
with King Care Respiratory Services, Inc. ("King Care"), with
IRC being the surviving entity. King Care, located in Los
Angeles, California, manages and provides respiratory therapy
services to skilled long-term care facility patients and
managed out-patient respiratory therapy programs for acute
care hospitals. All of the outstanding shares of King Care
were converted into the right to receive 1,000,000 shares of
the Company's Common Stock and the right to receive a
deferred payment of up to $480,000, plus simple interest on
such payment of nine percent (9%) payable in January 2000.
The 1,000,000 shares of Common Stock issued by the Company in
connection with this transaction were valued at $1,751,250.
In 1996, the intangible assets related to this transaction
were reviewed for impairment.(See Note 17)
In April 1995, the Company through its newly-created
subsidiary, Iatros Therapy Corporation, acquired the business
operations and assets of Physical Therapy and Restorative
Care Associates, P.C. and Therapyworks, P.C., a
rehabilitation agency and out-patient clinic which provides
physical, occupational and speech therapy services in
Philadelphia, Pennsylvania. The purchase price of the
acquisition totaled $550,000.
In August 1995, the Company, through a newly-created
subsidiary, Greenbrier Healthcare Services, Inc.
("Greenbrier") merged with Greenbrier Health Care Management,
Inc., with Greenbrier being the surviving entity. Greenbrier
serves as the manager of several health care facilities
located in Maryland. At the effective date of the merger,
the outstanding shares of the Common Stock of Greenbrier
Health Care Management, Inc. were converted into the right to
receive: (i) 170,000 shares of Common Stock of the Company,
(ii) $574,219, and (iii) payments of $100,000 within 30 days
after the execution of each of five anticipated management
contracts. The 170,000 shares issued by the Company in
connection with this transaction were valued at $1,020,000.
In 1996, the intangible assets related to this transaction
were reviewed for impairment.(See Note 17)
In September 1995, New Health Management Systems, Inc., a
Pennsylvania corporation ("New Health") was merged into NHMS
Acquisition Corp. ("NHMS"), a wholly owned subsidiary of the
Company, pursuant to an Agreement and Plan of Merger (the
"Merger"). At the effective date of the merger, the
outstanding shares of New Health were converted into the
right to receive (i) 316,667 shares of Common Stock of the
Company and (ii) $1,900,000, in cash and (iii) short-term
notes payable totaling $500,000. The 316,667 shares issued by
the Company were valued at $1,900,000. In 1996, the
intangible assets related to this transaction were reviewed
for impairment.(See Note 17)
In November 1995, the Company expended $1,350,000 in
connection with acquiring the contract rights to three
nursing facilities representing approximately 400 beds
located in the Massachusetts market area. Of the amount
expended, $710,295 was provided as a long term loan to the
corporate owner of the facilities while $639,705 was
attributable to acquiring contract rights to the facilities.
The contract rights to these facilities secured by the
Company included a five year contract commencing on November
1, 1995. The costs associated with acquiring these contract
rights are being amortized over the contract term.
F-18
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 3: CASH AND CASH EQUIVALENTS
At December 31, 1996, cash and cash equivalents totals $1,134,125
and includes a certificate of deposit held by a financial
institution in the amount of approximately $520,000. This
certificate was redeemed in March 1997 and was utilized to satisfy
an outstanding credit obligation totaling $516,000 which is
included in notes payable, banks, at December 31, 1996.
Cash and cash equivalents at December 31, 1995 totaled $1,057,505
and was comprised of unrestricted amounts of $682,505 and
restricted amounts of $375,000. Restricted cash of $275,000
represented funds received from a third party as security for
future payment obligations pursuant to a management subcontract
agreement, which was satisfied in the fourth quarter of 1996. The
balance of restricted funds totaling $100,000 related to escrowed
funds associated with contractual obligations involving the
Company's development activities which were satisfied in 1996.
At December 31, 1995, cash and cash equivalents included two
certificates of deposit held by separate financial institutions in
amounts aggregating approximately $707,000. These certificates
matured in March 1996 and served as collateral for two outstanding
credit obligations totaling $691,000 which are included in notes
payable, banks at December 31, 1995.
NOTE 4: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During 1996, the Company acquired property and equipment and
incurred a note payable in the amount of $34,882.
During 1996, the Company acquired one business, recording excess
of cost over net assets acquired of $430,100 in connection with
the acquisition. As consideration for the net assets acquired,
the Company issued 52,838 shares of Common Stock in the amount of
$215,050 to the related parties.
During 1996, the Company issued 10% Subordinated Convertible
Debentures in the amount of $12,900,000. As of December 31, 1996,
$12,300,000 of the Debentures were converted into 3,815,020 shares
of Common Stock. Accrued interest on the Debentures converted
into Common Stock during 1996 resulted in an increase to
Additional Paid-In Capital in the amount of $411,209.
During 1996 and 1995, annual dividends on shares of Preferred
Stock of $160,000 were declared but not paid.
During 1996, 1995 and 1994, the Company acquired property and
equipment under capital leases and incurred capital lease
obligations in the amounts of $281,564, $230,822 and $29,000,
respectively.
During 1995, the Company acquired property and equipment from a
related party and incurred a note payable in the amount of
$112,850.
F-19
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 4: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES (Continued)
During 1995, the Company acquired three businesses, recording
excess of cost over net assets acquired of $6,147,030 in
connection with the acquisitions. As consideration for the net
assets acquired, the Company issued 1,501,000 shares of Common
Stock and notes payable in the amount of $1,200,000 to the
principals of the acquired companies. Various assets and
liabilities were assumed in connection with the acquisitions.
During 1995, the Company issued 331,438 warrants to purchase
shares of Common Stock as compensation to a third party
corporation whose principal officer serves on the Company's Board
of Directors. In addition, in January 1995, this officer assumed
the position of President and Chief Executive Officer of the
Company, resulting in the capitalization of organization costs of
$410,000.
During 1995, the Company issued 189,941 shares of Common Stock and
514,941 warrants to purchase shares of Common Stock in connection
with the conversion of long-term debt in the amount of $664,795.
During 1995, the Company incurred a note receivable from a related
party in the amount of $240,000 as consideration for accrued
payments to be made in the future.
During 1995, the Company received notes receivable of $650,000 and
incurred accrued expenses of $200,000 as a return of property
deposits of $450,000. During 1996, the Company offset $200,000 of
the notes receivable against the accrued expense due to the
termination of the contractual obligation.
NOTE 5: ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
1996 1995
Ancillary services $ 4,761,263 $ 2,275,092
Management services 2,901,242 1,105,760
Development services - 1,000,000
----------- -----------
7,662,505 4,380,852
Allowance for doubtful accounts (1,774,300) (143,400)
----------- -----------
$ 5,888,205 $ 4,237,452
=========== ===========
NOTE 6: PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 1996 and
1995 include approximately $800,000 and $1,150,000, respectively,
of project costs advanced in connection with transactions
involving the Company in a development capacity. These amounts
include legal and professional as well as financing issue costs
which are recoverable upon completion of the property acquisition
and project financing or development activity for which such costs
were advanced. The Company routinely advances project costs
associated with its development services as it deems necessary to
secure business prospects and complete transactions.
F-20
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 7: PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1996 1995
Leasehold improvements $ 74,254 $ 54,076
Property and equipment held
under capital leases 686,236 378,164
Equipment 826,487 623,568
Furniture and fixtures 590,858 513,596
----------- -----------
2,177,835 1,569,404
Less: Accumulated depreciation
and amortization 928,072 604,115
----------- -----------
$1,249,763 $ 965,289
=========== ===========
Depreciation and amortization expense charged to continuing
operations was $347,320, $175,858 and $114,921 in 1996, 1995 and
1994, respectively. Additionally, depreciation and amortization
expense charged to discontinued operations was $159,614 in 1994.
NOTE 8: DEPOSITS
Deposits at December 31, 1996 include a purchase deposit of
$1,000,000 associated with the planned acquisition of a long-term
care nursing facility, and a $100,000 deposit on land associated
with the future development of a long-term care or assisted living
facility.
NOTE 9: NOTES RECEIVABLE
At December 31, 1996 and 1995, notes receivable result from
development, financial advisory, and consulting services which the
Company has provided to several long-term care properties. The
notes, which are generally formalized as long-term, mature over a
period not to exceed ten years, bear simple interest ranging
between eight and ten percent per annum and are secured by a
mortgage position on the properties to which they relate.
Further, the notes are generally subordinated to senior debt and
other priority operating obligations associated with the
properties.
During 1995, the Company provided development and marketing
services to a third party corporation in the amount of $1,000,000.
Payment for such services was made in the form of a promissory
note. During 1996, the full amount of this note was written-off.
NOTE 10: 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-21
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Cash and cash equivalents, accounts receivable, prepaid expenses
and other current assets, accounts payable, accrued expenses and
other current liabilities are carried at amounts that approximate
their fair values because of the short-term maturity of these
instruments.
The Company believes that the carrying value of notes and loans
receivable and long-term debt approximates fair value.
NOTE 11: LOANS RECEIVABLE AND OTHER ASSETS
At December 31, 1996, loans receivable and other assets include
$2,329,000 advanced by the Company pursuant to the terms of
operating deficits agreements for the operating needs of
properties managed by the Company. Such advances generally accrue
interest at market rates and are recoverable from permanent
financing proceeds anticipated from the properties.
In addition, other assets include approximately $530,000
representing a loan receivable due from an officer in connection
with the merger transaction with King Care Respiratory Services,
Inc. The loan accrues interest at 9% and matures in January 2000.
The Company expects to partially realize this loan in connection
with satisfying its deferred purchase obligation of approximately
$240,000 plus accrued interest which is also payable in January
2000. At December 31, 1995, this loan receivable totaled
$250,526.
NOTE 12: 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 of net operating loss
carryforwards, certain permanently non-deductible charges to net
income and certain temporary differences between the financial and
income tax bases. The reconciliation of these differences is as
follows:
1996 1995 1994
Federal income tax rate (34%) 34% (34%)
State income taxes, net of
Federal tax benefit (1) 2 -
Tax benefit of prior years'
net operating losses (11) (75) (92)
Deferred tax asset
valuation allowance 10 19 98
Writedown of intangible assets,
non-deductible for tax 14 - -
Current year provision for
doubtful accounts, non-
deductible for tax in current
year 6 - -
Other 6 (2) (3)
----- ----- -----
(10%) (22%) (31%)
===== ===== =====
F-22
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 12: INCOME TAXES (Continued)
Deferred income taxes arise primarily as a result of differences
between the financial and income tax basis of reporting
principally for differences in the bases of allowances for
doubtful accounts, property and equipment, contract rights, excess
of cost over net assets acquired, organization costs and capital
lease obligations as well as the effects of future benefits to be
realized from net operating losses for financial reporting
purposes.
Deferred tax assets at December 31, 1996 and 1995 are comprised of
the following:
1996 1995
Deferred tax assets
Tax benefit of net operating loss
carryforwards $ 3,159,000 $ 1,495,000
Capitalized lease obligations - 114,000
Allowance for doubtful accounts 605,000 49,000
Organization costs 120,000 -
Excess of costs over net assets
acquired and contract rights 15,000 -
Total deferred tax assets 3,899,000 1,658,000
----------- -----------
Less: valuation allowance (1,150,000) (60,000)
Net deferred tax assets 2,749,000 1,598,000
Deferred tax liabilities
Property and equipment 49,000 42,000
Excess of cost over net assets
acquired - 36,000
----------- -----------
Total deferred tax liabilities 49,000 78,000
----------- -----------
Net deferred tax asset $ 2,700,000 $ 1,520,000
=========== ===========
During 1996, the deferred tax asset valuation allowance increased
by $1,090,000, and during 1995, the valuation allowance decreased
by $1,633,000.
At December 31, 1996, the Company has available net operating loss
carryforwards for Federal income tax purposes of approximately
$8,116,000, which can be offset against future earnings of the
Company. These net operating losses expire from 2008 through
2011, and are subject to annual limitations. In addition the
Company has available various state net operating loss
carryforwards of approximately $5,932,000 at December 31, 1996,
which expire from 1997 to 2011.
The provision for (benefit of) income taxes include:
1996 1995 1994
Current:
State $ 200,000
Deferred:
Federal $(1,030,000) (820,000) $(526,036)
State (150,000) (50,000) -
----------- ----------- -----------
$(1,180,000) $(670,000) $(526,036)
F-23
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 13: NOTES PAYABLE, BANKS
1996 1995
Note payable to bank, due on demand,
bearing interest at the bank's one year
certificate of deposit rate plus 1.5% (6%,
at December 31, 1996),secured by a
certificate of deposit $ 516,000 $ 491,000
Note payable to bank, due on demand,
bearing interest at the bank's prime rate
plus 1% (9.5% at December 31, 1995),
secured by accounts receivable, property
and equipment; satisfied in 1996 - 150,000
Note payable to bank, due in 1996,
bearing interest at the bank's prime rate
plus 1/2% (9% at December 31, 1995),
secured by a certificate of deposit;
satisfied in 1996 - 200,000
Note payable to bank, due on demand,
bearing interest at the bank's prime rate
plus 1% (9.25% at December 31, 1996),
secured by accounts receivable and
property and equipment 26,874 38,811
Note payable to bank, due on demand,
bearing interest at the bank's prime rate
plus 2.5% (10.75% at December 31, 1996),
secured by accounts receivable and
property and equipment 99,774 -
Note payable to bank, due on demand,
bearing interest at the bank's prime rate
plus 1.5% (9.75% at December 31, 1996),
secured by accounts receivable and
property and equipment 150,015 -
----------- -----------
$ 792,663 $ 879,811
=========== ===========
The weighted average rate of interest charged to the Company
during 1996 and 1995 was approximately 9% and 9.5%, respectively.
F-24
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 14: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities reported at
December 31, 1996 include accrued legal and professional fees of
approximately $400,000 and other current liabilities totaling
$454,522.
Accrued expenses and other liabilities reported at December 31,
1995 include placement fees due to underwriter of $430,000;
commissions associated with respiratory services of $285,000;
legal and professional costs of $300,000; resident refund
obligations of $200,000 and state income taxes payable of $200,000
and other current liabilities totaling $442,661.
NOTE 15: LONG-TERM DEBT
1996 1995
Notes payable to third parties, due between
1997 and 1999, payable in monthly installments
of $2,684, bearing interest at approximately
10%, secured by accounts receivable and
property and equipment $ 43,525 $ 69,085
Note payable to a third party, due on demand,
bearing interest at 8%, unsecured 37,500 250,000
Notes payable to Stockholders, due during
1997, non-interest bearing, unsecured 140,812 383,793
Notes payable to a third party, due in 1999,
payable in monthly installments of $1,139,
including interest at the banks' prime rate
plus 1.5%,(9.75% at December 31, 1996), secured
by equipment 30,684 -
Notes payable to Stockholders, due 1997 through
through 2000, bearing interest at 8% to 10%,
unsecured 450,498 894,180
----------- -----------
703,019 1,597,058
=========== ===========
Less current portion 374,881 1,052,017
----------- -----------
$ 328,138 $ 545,041
=========== ===========
Annual maturities of long-term debt in the next four years are as
follows:
Year Ending December 31, Amount
1997 $ 374,881
1998 22,225
1999 17,975
2000 287,938
F-25
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 16: LEASES
The Company leases its executive offices, operating facilities and
certain equipment accounted for as operating leases. Rent expense
under these leases charged to continuing operations was $823,516,
$563,303, and $121,260 for the years ended December 31, 1996, 1995
and 1994, respectively. Additionally, rent expense under these
leases charged to discontinued operations was $330,909 in 1994.
The following represents future minimum rental payments required
under operating leases with remaining noncancelable lease terms in
excess of one year as of December 31, 1996:
Year Ending December 31, Amount
1997 $ 612,974
1998 556,234
1999 388,791
2000 327,036
2001 160,000
-----------
$2,045,035
===========
The Company also leases property and equipment under capital
leases. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease
payments or the fair value of the assets. The assets are
amortized over the lesser of their related lease terms or their
estimated useful lives. Amortization under capital leases charged
to continuing operations was $78,688, $48,786 and $11,003 in 1996,
1995 and 1994, respectively. Additionally, amortization under
capital leases charged to discontinued operations was $80,000 in
1994.
The following is a summary of property held under capital leases
as of December 31, 1996 and 1995:
1996 1995
Equipment $ 686,236 $ 378,164
Less: Accumulated amortization 142,645 63,957
----------- -----------
$ 543,591 $ 314,207
=========== ===========
Minimum future lease payments under capital leases for the three
years subsequent to December 31, 1996 are as follows:
F-26
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 16: LEASES (Continued)
Year Ending December 31, Amount
1997 $289,214
1998 198,535
1999 58,420
Total minimum lease payments 546,169
Less: Amount representing interest 82,687
Present value of net minimum lease
payments 463,482
Less: current portion 230,761
-----------
$232,721
===========
Interest rates on capitalized leases range from 9% to 15% and
are imputed based upon the lower of the Company's incremental
borrowing rate at the inception of each lease or the lessor's
implicit rate of return.
NOTE 17: IMPAIRMENT OF INTANGIBLE ASSETS
In 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No.
121"). In accordance with SFAS No. 121, the Company is
required to analyze the value of its recorded intangible assets
on an ongoing basis to determine that the recorded amounts are
reasonable and are not impaired. In 1996, the Company
determined that the value of its recorded intangible assets had
been impaired, based upon historical operating deficits with
respect to the related subsidiaries and the uncertainty that
the Company will be able to generate sufficient future cash
flows to recover the recorded amounts of the intangible assets.
The total impairment loss of $6,697,974 which is included in
the results of operations for 1996, was determined by
evaluating the net realizable value of the intangible assets as
of December 31, 1996 based upon the projected results of future
operations. Of this total impairment loss, $4,504,476 relates
to excess of cost over net assets acquired, $1,233,178 relates
to organization costs, and $960,320 relates to contract rights.
NOTE 18: RELATED PARTY TRANSACTIONS
During 1995 and 1994, the Company had a consulting agreement
with a third party corporation whose principal officer serves
on the Company's Board of Directors. In addition, in January
1995, this officer assumed the position of President and Chief
Executive Officer of the Company. Fees paid during 1995 and
1994 for financial advisory and development services totaled
approximately $112,000 and $122,000, respectively. In
addition, for services rendered during 1995, this officer was
granted Common Stock purchase warrants of the Company as
incentive compensation pursuant to this consulting agreement.
This consulting agreement was terminated effective December 31,
1995.
F-27
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 18: RELATED PARTY TRANSACTIONS (Continued)
In connection with a private offering of its securities in July
1994, the Company paid $70,000 to the underwriter, as placement
agent, and issued warrants to the placement agent to purchase
400,000 shares of the Company's Common Stock for a five year
period at an exercise price of $.75 per share. A member of the
Company's Board of Directors is an Executive Officer of the
placement agent.
During October 1995, the Company reached a settlement with the
principals of prior management involving numerous obligations
that existed between the parties. The settlement agreement
resulted in payments by the Company to a former principal
totaling approximately $533,000. Of this amount, $300,000
represents a prepayment of a consulting agreement with one of
prior management's principals which terminates in June 1997.
NOTE 19: COMMITMENTS
The Company has entered into several executive employment
agreements with executive officers, providing for terms ranging
between three and five years. Aggregate annual compensation
provided by these agreements totals $2,493,150. In addition,
certain of these agreements provide options and warrants for
the executives to purchase an aggregate of 1,390,000 shares of
the Company's Common Stock at prices ranging from $.75 to $2.38
per share.
During 1996 and 1995, the Company was involved in a number of
project financings wherein the Company was contracted to
provide development, marketing and management services. In
connection therewith, the Company committed to loan working
capital as may be required in the form of operating deficit
agreements. Aggregate amounts committed to date by the Company
relating to project financings total $4,980,000 of which
approximately $2,329,000 has been advanced by the Company and
approximately $2,651,000 remains outstanding at December 31,
1996.
In February 1996, the Company had granted a put option
exercisable by Courtland Health Care, Inc. for the Company to
purchase all of the issued and outstanding shares of Courtland
II, Inc., a third party services corporation, for not less than
$2,000,000. In anticipation of this service transaction, the
Company had entered into a series of service agreements
involving several long-term care facilities affiliated with
Courtland II, Inc. In December 1996, the Company consummated a
termination and settlement agreement with respect to all such
service agreements. In addition, the put option purchase
granted by the Company has expired.
In June 1996, the Company agreed to purchase a long-term care
facility in Maine with approximately 120 beds and 91 congregate
and assisted living units. The purchase price of this facility
is $10,800,000. The facility is in proximity to other long-
term care facilities currently managed by the Company.
Completion of this transaction is pending regulatory approval
by the State of Maine.
In September 1996, the Company agreed to purchase a long-term
care facility in Maine with 50 licensed ICF beds, 18 of which
are skilled care beds, 84 congregate care apartment units, a 17
ICF licensed bed skilled care unit and a 15 unit child day care
center. The purchase price of this facility is $16,200,000.
Completion of this transaction is pending regulatory approval
by the State of Maine.
F-28
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 19: COMMITMENTS (Continued)
The Company guarantees aggregate debt service relating to
approximately $30,000,000 of long-term debt and working capital
financing associated with long-term care facilities for which
it provides management services on a long-term basis.
NOTE 20: CONTINGENCIES
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, 1996. 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 a defendant in a lawsuit relating to the
termination of a former employee for cause under the terms of an
employment agreement. The former employee seeks damages
alleging that the Company breached its obligations under the
employment agreement and a stock option agreement. The Company
has denied these allegations and is vigorously defending this
action. Further, the Company has filed a counter suit against
this individual. Management does not believe that the outcome
of this matter will have a material adverse affect on the
Company's financial position, results of operations or cash
flows.
NOTE 21: PREFERRED STOCK
On July 25, 1994 in connection with implementing a business
plan for redirection, the Company sold 533,333 shares of Series
A Senior Convertible Preferred Stock include 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. The liquidation preference of each Senior
Preferred Convertible share is $3.75 per share plus unpaid
dividends, which amounts to $2,390,000 at December 31, 1996.
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, 1996, dividends in arrears on the 8% Cumulative
Series A Senior Convertible Preferred Stock totaled $390,000.
On July 25, 1994, the Company exchanged 666,667 shares of
Common Stock owned by certain stockholders of the Company for
300,000 shares of Series B Preferred Stock. The Series B
Preferred Stock is nonvoting and pays no dividends. During
1995, 200,000 shares of the Series B Preferred Stock were
redeemed.
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS
The Company has a Stock Option Plan (the Plan) which provides
for the granting of incentive and nonqualified stock options and
stock appreciation rights to certain officers, directors, key
employees and consultants. Currently, a maximum of 750,000
shares of Common Stock may be issued under the Plan.
F-29
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS
(Continued)
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.
Transactions involving the Plan are summarized as follows:
Options Shares
Weighted Weighted
Average Price Average Price
1996 Per Share 1995 Per Share
Outstanding January 1 688,153 $2.21 688,153 $2.21
Granted 50,000 $1.00 - -
Exercised - - - -
Canceled (25,000) $1.50 - -
Expired (213,153) $5.10 - -
--------- ---------
Outstanding December 31 500,000 $.90 688,153 $2.21
========= =========
Exercisable December 31 500,000 $.90 490,000 $1.10
========= =========
The options outstanding on December 31 1996 expire from 1997
through 1998.
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.
Redeemable Common Stock Purchase Warrants
The Company, in connection with its initial public offering in
1992, issued Redeemable Common Stock Purchase Warrants for
1,145,000 shares of the Company's Common Stock, with an exercise
price of $4.00 and an expiration date of April 21, 1996.
Warrants 1996 1995
Outstanding January 1 184,150 1,145,000
Exercised (52,301) (960,850)
Canceled (131,849) -
--------- ----------
Outstanding December 31 - 184,150
========= ==========
F-30
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS
(Continued)
Underwriter's Unit Purchase Warrants
The Company sold to the Underwriter, for a price of $.0001 per
Warrant, an amount of warrants (the "Underwriter's Unit Purchase
Warrants") equal to 10% of the aggregate number of Units
(90,000) in connection with the Company's initial public
offering.
Underwriter's Common Stock
Unit Purchase
Purchase Warrants
Warrants Effective Exercise Exercise Expiration
Issued Date Price/Unit Price/Share Date
---------- ---------- ---------- ----------- -----------
90,000 4/26/92 $8.70 $5.80 4/20/97
None of these warrants have been exercised as of December 31,
1996.
During 1995 and 1994, the Company consummated a series of
transactions whereby its securities were sold for less than fair
market value. Accordingly, the exercise price of the
Underwriter's Unit Purchase Warrants remains at $5.80 per unit,
however, the number of shares of Common Stock issuable upon
exercise of the warrants has increased from 1.00 to 1.77 shares
per warrant. Accordingly, the total Underwriters Unit Purchase
Warrants outstanding upon exercise would aggregate 159,300
shares of Common Stock.
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.
Warrants Effective Exercise Expiration
Issued Date Price Date
800,000 7/25/94 $ .75 7/25/99
500,000 7/25/94 $ 1.50 7/25/04
200,000 7/25/94 $ 1.00 7/25/99
100,000 7/25/94 $ 3.50 7/25/99
---------
1,600,000
=========
None of these warrants were exercised as of December 31, 1996.
F-31
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS
(Continued)
Private Warrants
Transactions involving private warrants are summarized as
follows:
Warrants
Weighted Weighted
Average Price Average Price
1996 Per Share 1995 Per Share
Outstanding January 1 2,175,375 $5.11 809,086 $7.98
Granted 730,000 $3.17 1,366,289 $3.41
Exercised (370,529) $3.29 - -
Canceled (100,000) - - -
--------- ---------
Outstanding December 31 2,434,846 $4.88 2,175,375 $5.11
========= =========
Exercisable December 31 2,370,178 $4.88 2,175,375 $5.11
========= =========
The warrants outstanding on December 31 1996 expire from 1997
through 2006.
During 1995, the Company granted as compensation 150,000
warrants to purchase Common Stock of the Company to members of
the Company's Board of Directors. These warrants were issued
with an exercise price of $.35. In December 1995, 30,000 of
these warrants were exercised resulting in a charge to earnings
for the quarter ended December 31, 1995 of $75,000. The
remaining value attributed to these warrants totals $300,000 and
is being amortized over ten years, which is the exercise period
of the warrants.
Under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company is
permitted to continue accounting for the issuance of stock
options and warrants in accordance with Accounting Principles
Board ("APB") Opinion No. 25, which does not require recognition
of compensation expense for option and warrant grants unless the
exercise price is less than the market price on the date of
grant. As a result, the Company has recognized compensation
cost for stock options and warrants for 1996 and 1995 of $48,000
and 75,000, respectively. If the Company had recognized
compensation cost for the "fair value" of option grants under
the provisions of SFAS No. 123, the pro forma financial results
for 1996 and 1995 would have differed from the actual results as
follows:
1996 1995
Net income (loss)
As reported $(10,314,561) $ 3,655,188
Proforma $(10,711,154) $ 1,184,643
Earnings (loss) per share
As reported $(.74) $.29
Proforma $(.77) $.09
F-32
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS
(Continued)
The per share weighted average fair value of the stock options
and warrants granted during 1996 and 1995 was $3.30 and $7.20,
respectively. The fair value was estimated at the date of grant
using the Modified Black-Scholes Stock Option Pricing Model with
the following average assumptions for 1996 and 1995,
respectively: risk free interest rates of approximately 6% for
both years; expected volatility factors of 116.2% and 96.9% and
expected lives of 3-10 years and 1-10 years and expected
dividends rate of 0% for both years.
Under SFAS 123, the fair value of stock options issued in any
given year is expensed as compensation over the vesting period,
which for substantially all of the Company's options is three to
ten years; therefore, the pro forma net earnings and net
earnings per share do not reflect the total compensation cost
for options granted in the respective years. Furthermore, the
pro forma results only include the effect of options granted in
1996 and 1995; options granted prior to 1995 were not
considered.
NOTE 23: RETIREMENT SAVINGS PLAN
The Company has a savings plan available to substantially all
employees, under Section 401(k) of the Internal Revenue Code.
The Company's contributions to this plan are discretionary.
Employee contributions are generally limited to 10% of their
compensation subject to Internal Revenue Code limitations. The
Company made no contributions to this plan during the three year
period ended December 31, 1996.
NOTE 24: SUBSEQUENT EVENTS
During March 1997, the Company entered into a ten year lease
agreement, including two long-term care facilities located in
the Commonwealth of Massachusetts, representing a total of 229
beds. The lease agreement includes a purchase option to acquire
the facilities during the lease term for a purchase price
totaling $10,000,000. Annualized operating revenue represented
by these facilities is projected to be approximately
$10,000,000.
During March 1997, the Company secured a working capital line of
credit from a financial institution in the amount of $1,500,000.
The line is secured by various notes receivable and management
contract rights associated with one of the Company's operating
subsidiaries. The line is due on demand and accrues interest at
the bank's base rate plus 1% on amounts drawn and outstanding.
The Company intends to utilize this financing to support working
capital and development activities of its operating subsidiary.
During March 1997, the Company executed a letter of intent to
acquire the stock of a management company having long-term
management contracts. This purchase would represent management
services revenue for the Company and provide an opportunity for
securing ancillary services revenue. The Company is currently
performing its due diligence and is seeking to secure purchase
financing for the transaction.
F-33
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 25: ADOPTION OF NEW ACCOUNTING PRINCIPLES
The Company will be required to implement Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
in the fourth quarter of 1997. The effects of the implementation
of SFAS No. 128 have not been determined.
F-34
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Iatros Health Network, Inc. and Subsidiaries
Atlanta, Georgia
We have audited the consolidated financial statements of Iatros
Health Network, Inc. and Subsidiaries, referred to in our report dated
April 2, 1997. In connection with our audit of these consolidated
financial statements, we also have audited the accompanying related
financial statement schedule for 1996, 1995 and 1994. In our opinion,
such financial statement schedule for 1996, 1995 and 1994, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ASHER & COMPANY, Ltd.
Philadelphia, Pennsylvania
April 2, 1997
F-35
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance
Beginning Operating Deductions at End of
of Year Expenses (1) (2) Year (3)
Year Ended December 31, 1996
Allowance for doubtful accounts
(deducted from accounts receivable) $143,400 $2,036,003 $405,103 $1,774,300
Year Ended December 31, 1995
Allowance for doubtful accounts
(deducted from accounts receivable) $319,183 $ 79,217 $255,000 $143,400
Year Ended December 31, 1994
Allowance for doubtful accounts
(deducted from accounts receivable) $496,566 $324,120 $501,503 $319,183
<FN>
(1) Amounts charged to continuing operations were $2,036,003, $79,217 and
$34,332 for 1996, 1995 and 1994, respectively. The amount charged to discontinued
operations was $289,788 for 1994.
(2) Amounts deemed to be uncollectible. $501,503 was charged to discontinued
operations for 1994.
(3) Included in the allowance for doubtful accounts at December 31, 1994 is
a balance related to discontinued operations in the amount of $255,000.
F-36
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
EXHIBITS
Filed with
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
____________________
IATROS HEALTH NETWORK, INC.
(Exact name of registrant as specified in its charter)
EXHIBIT 10.3
MANAGEMENT AGREEMENT
(Villa Crest)
THIS AGREEMENT, made and entered into as of the first day of
July, 1996, by and between Iatros Health Network, Inc., a
corporation organized under the laws of State of Delaware
(hereinafter referred to as "Manager") on the one hand, and Villa
Crest, Inc., a New Hampshire corporation ("Facility Operator"),
VCP Realty Limited Partnership, a New Hampshire limited
partnership ("Owner") and Heartland Healthcare Corporation, a
Massachusetts non-profit corporation, hereinafter referred to as
"Heartland." Certain terms used herein are defined in the last
item of this Agreement.
W I T N E S E T H:
WHEREAS, Owner is the owner of a 123 bed licensed nursing
center and a 42 bed supported care center located in Manchester,
New Hampshire, together with the equipment, furnishings and other
tangible personal property used in connection therewith (the
"Facility");
WHEREAS, Owner and Heartland (among others) have borrowed
the proceeds of a $25,805,500.00 loan agreement with National
Health Investors, Inc. ("NHI") pursuant to the Loan Agreement
dated as of this same date (the "Loan Agreement") to purchase the
Facility and three other long-term care facilities;
WHEREAS, Manager has guaranteed repayment of certain
payments and agreed to make contributions to certain reserves and
accounts under certain circumstances as specified in the Loan
Agreement;
WHEREAS, Owner has leased the Facility to the Facility
Operator who operates the Facility;
WHEREAS, Facility Operator wishes to retain the services of
Manager as manager of the Facility; and
WHEREAS, Manager is willing to perform such services with
regard to the management, operation, maintenance, marketing, and
servicing of the Facility (the "Management Services"), upon the
terms and subject to the conditions contained herein.
NOW, THEREFORE, in consideration of the foregoing and of the
full and faithful performance of all the terms, conditions, and
obligations herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, Manager and Facility Operator, Owner and Heartland
intending to be legally bound hereby, agree as follows:
ARTICLE I
OPERATING TERMS AND APPOINTMENT AND EMPLOYMENT OF
MANAGER AS AGENT AND GENERAL MANAGER OF THE FACILITIES
1.1 Term. The term of this Agreement shall commence on the
date hereof and shall continue for fifteen (15) calendar years
from that date, subject to earlier termination as set forth in
Article V hereof. If a party to this Agreement desires to enter
into a new management agreement at the end of its fifteen (15)
year term, it shall give sixty (60) days prior written notice of
such fact to the other party to facilitate negotiation of the new
management agreement.
1.2 Employment of General Manager. Facility Operator
hereby appoints and employs Manager as operating manager of the
Facility, and Manager agrees to act as operating manager of the
Facility, to supervise and direct the day-to-day business
activities, management and operation and repair of the Facility
and all phases of its operation in the name of and on behalf of
Facility Operator and the Owner and for its account during the
term of this Agreement upon the terms and conditions hereinafter
stated. Manager shall be responsible for managing the Facility
and all of its assets and services with the same degree of
diligence and skill as is customary in the nursing facility
industry and as is employed by the Manager or its affiliates in
the management of similar homes, in full compliance with all
obligations imposed on Facility Operator which are known to, or
disclosed to Manager by Facility Operator in writing, including
the obligations under those documents listed in Exhibit A,
attached hereto (the "Financing Documents"). Facility Operator
will deliver to Manager concurrent with the execution hereof all
of the Financing Documents. Manager confirms that it has
reviewed drafts of the Financing Documents and will comply with
all of its obligations in the Financing Documents, and will use
its best efforts to enable the Facility Operator to comply with
all of its obligations under such Financing Documents. Manager
shall, subject to compliance of Facility Operator with its
obligations hereunder and under applicable laws and regulations,
do all things as may be required to maintain and preserve all
necessary licenses, permits and approvals to operate the Facility
so as to substantially comply with all applicable laws, rules and
regulations and, when applicable and desired by Facility
Operator, to make the Facility eligible for participation in any
government reimbursement program which may be developed during
the term of this Agreement; provided, however, that Manager shall
not be required to expend its own funds for any costs of
operating or repairing the Facility except as otherwise provided
herein, or except as provided in the Financing Documents.
Manager shall not be deemed to be in violation of this Agreement
if it is prevented from performing any of its obligations
hereunder for any reason beyond its control including, without
limitation, strikes, lockouts, acts of God, unforeseen changes in
statutes, regulations or rules of appropriate governmental or
other regulatory authorities, so long as Manager attempts
diligently to overcome such obstacles. Manager makes no
warranties, express or implied, and shall not assume any
financial or other responsibilities in connection with its
obligations hereunder, except as hereinafter specifically
provided.
1.3 Retention of Control by Facility Operator. Facility
Operator and Owner shall at all times continue to exercise
control over the assets and operations of the Facility, and
Manager shall perform its responsibilities as described in this
Agreement in accordance with policies, directives and bylaws
adopted by Facility Operator and Owner and communicated in
writing to Manager and pursuant to a Budget adopted hereunder,
and except as may affect repayment of obligation under the Loan
Agreement. By entering into this Agreement, Facility Operator
and Owner do not delegate to Manager any of the powers, duties
and responsibilities vested in the Facility Operator or Owner by
law, or by their respective organization documents. Facility
Operator may, according to the terms of this Agreement, in
writing direct Manager to implement policies for the Facility and
may adopt as policy for the Facility, recommendations and/or
proposals made by Manager. Whenever this Agreement calls for the
approval of Facility Operator, such approval shall be expressed
in writing executed by a duly authorized officer or director of
Facility Operator or by action of the board of directors of
Facility Operator evidenced by the minutes of the board of
directors, and such approval shall not be unreasonably withheld
or delayed. In the absence of specific written direction from
Facility Operator, Manager shall be entitled to rely upon its
prudent business judgment.
1.4 Management Services to be Provided by Manager. In
connection with such supervision, direction and management,
Manager shall use its best reasonable efforts to perform or cause
to be performed, the following services within the confines of an
Initial Budget and an Annual Budget, subject to budgetary
overruns which may occur due to events beyond Manager's control.
During the terms of this Agreement, Manager shall as agent
and on behalf of Facility Operator and Owner, manage all aspects
of the operation of the Facility, including, but not limited to,
the provision of assistance with activities of daily living to
residents of the Facility, staffing, accounting (but not audit),
billing, collections, setting of rates and charges and general on-
site administration. In connection therewith, Manager (either
directly or through supervision of employees of the Facility)
shall use its best efforts to:
1) Select, employ, supervise and train on behalf of
Facility Operator and Owner, an adequate staff, as
required by law and subject to availability, of nurse
aides, office and other employees, including an
administrator for the Facility ("Administrator") and
promote, direct, assign and discharge all such
employees on behalf of Facility Operator at Manager's
sole discretion. All such employees shall be employees
of Facility Operator or the Owner and carried on the
payroll of the Facility and shall not be deemed
employees or agents of Manager. Except as otherwise
agreed to by Facility Operator, all personnel not
involved in the day-to-day operation of the Facility
shall be employees of Manager;
2) Institute and amend from time to time, subject to
any policy disclosed by Facility Operator pursuant to
Section 1.3, general salary scales, personnel policies
and appropriate employee benefits for all employees;
3) Issue appropriate bills for services and materials
furnished by the Facility and use its best efforts to
collect accounts receivable and monies owed to the
Facility and deposit such monies in suitable accounts,
design and maintain accounting, billing, resident and
collection records; and prepare and file insurance and
any and all other necessary or desirable applications,
reports and claims related to revenue production.
Facility Operator and Owner hereby grant Manager the
right to enforce either of their rights as creditor
under any contract relating to the Facility or in
connection with rendering any services at the Facility
for purposes of collecting accounts receivable and
monies owed the Facility;
4) Plan, supervise and conduct a program of regular
maintenance and repair pursuant to an approved Budget,
except that any single physical improvement (other than
approved budgeted maintenance and repair) costing more
than Ten Thousand Dollars ($10,000.00) shall be subject
to the prior approval of Facility Operator;
5) Purchase all necessary food, beverage, medical,
cleaning and other supplies, equipment, furniture and
furnishings for the operation and maintenance of the
Facility and contract for all necessary services for
the account of Facility Operator and Owner. The
purchase of any single item of equipment, furniture or
furnishings (other than approved budgeted items) which
costs more than Ten Thousand Dollars ($10,000.00) shall
also be subject to the approval of Facility Operator;
6) Administer, supervise and schedule all resident
and other services of the Facility. All providers
affiliated with the Manager shall be identified;
7) Provide for the orderly and timely payment of
accounts payable, employee payroll, taxes, insurance
premiums and all other obligations of the Facility on
behalf of Facility Operator and Owner and assist
Facility Operator in making provision for the orderly
payment of amounts due on any obligations and other
indebtedness. Notwithstanding the foregoing, this
shall not create an obligation for Manager to fund such
payments;
8) Institute written standards and procedures, for
admitting and discharging residents, for charging
residents for services and for collecting the charges
from the residents (or residents' relatives or other
third parties);
9) Furnish to Facility Operator for review, any and
all policy and procedure manuals needed with reference
to the operation of the Facility and propose revisions
to said policy manuals as is needed from time to time
to assure, to the best of Manager's ability, that the
Facility complies with all applicable local, state and
federal laws, regulations and requirements (provided
that the foregoing does not constitute a guaranty of
the same by Manager). A copy of such manuals shall be
kept at the Facility at all times;
10) Obtain and maintain (subject to market conditions)
insurance coverage for the Facility naming Facility
Operator, Owner, Manager, or such other persons as
insureds, in such amounts and of such types as may be
required under the Loan Agreement. Manager shall use
reasonable best efforts to have Facility Operator and
Owner named as additional insureds under medical
malpractice coverage policies of any physician or any
other licensed practitioner employed or under contract
with the Facility. Facility Operator and Owner may,
at their sole option, arrange for any other insurance
as they determine to be necessary;
11) Negotiate and enter into, in the name of and on
behalf of Facility Operator and Owner, such agreements,
contracts for professional services, consultants, or
attorneys, and orders as it may deem necessary or
advisable for the furnishings of services, concessions
and supplies for the operation and maintenance of the
Facility, subject to Facility Operator's approval for
all agreements or contracts for services or supplies
that exceed the Budget by Ten Thousand Dollars
($10,000.00) per year;
12) Negotiate and settle all employee relation
matters, union and non-union, and negotiate on behalf
of Facility Operator and Owner (and in conjunction with
Facility Operator's counsel or other representative)
with any labor union lawfully entitled to represent
employees of Facility Operator and Owner who work at
the Facility, but any collective bargaining agreement
or labor contract that raises the cost of such labor by
more than $50,000 per year beyond the amount for such
labor in the Budget must be submitted to Facility
Operator for its approval;
13) Manager shall assist Facility Operator in
maintaining all licenses, certifications and permits in
the name of Facility Operator and Owner, all as
required for the operation of the Facility;
14) Maintain an accounting and internal control system
using accounts and classifications consistent with
those used in similar facilities in the geographical
area of the Facility, including suitable books of
control and account as are necessary in order to comply
with all state and federal standards, rules and
regulations;
15) Manager shall be responsible for the coordination
of such ancillary services, including but not limited
to, speech therapy, occupational therapy, inhalation
therapy, physical therapy and rental of equipment, as
Manager may deem reasonable, necessary or desirable in
connection with the operation of the Facility. Manager
shall select such consultants in connection therewith;
16) Prepare all certifications required to be prepared
by the Manager under any document executed by the
Facility Operator, Owner or Heartland in connection
with the Financing Documents;
17) Establish charges for medical, nursing and other
health care services, and credit policies;
18) Perform or supervise the performance of all record
keeping functions so that Facility Operator and Owner
may meet the record keeping requirements of the
Financing Documents and all applicable statutes, rules
or regulations of governmental agencies;
19) Solicit bids for architectural, engineering, and
construction services in connection with appropriate
capital improvements to the Facility, evaluate
contracts for such services, award contracts for such
capital improvements, and oversee the construction of
such capital improvements; and
20) Repair and maintain the Facility as may be
reasonable and necessary for the proper maintenance and
operation thereof, including but not limited to proper
handling and addressing of all environmental issues.
All costs of facilitating and implementing the above
activities and services which are to be supervised by Manager
shall be borne by Facility Operator and Owner and provided at
Facility Operator's and Owner's sole cost and expense.
Notwithstanding any of the above provisions, in the event of
any emergency requiring prompt action for the protection and
safety of the Facility or the residents and staff therein or for
the protection of the Facility operating licenses, Manager shall
be entitled to take necessary action without prior approval,
following which a report of the occasion for such action and the
action taken shall be made to Facility Operator within a
reasonable period thereafter.
1.5 Budget. Not less than thirty (30) days before the end
of each fiscal year of the Facility, Manager shall submit to
Facility Operator a reasonable annual budget covering the
operations of and proposed capital expenditures to be made with
respect to the Facility for the next fiscal year (or the
remainder of the current fiscal year, in the case of the initial
budget which shall be submitted to the Facility Operator within
60 days after the execution of this Agreement) and designed to
cover, to the extent possible under then existing reimbursement
policies and other conditions, the projected requirements under
the Financing Documents, all Costs of Operations (as defined in
Section 1.7(b) hereof) and other fees and expenses, as well as
anticipated expenditures for the purchase of capital assets and
for capital improvements to operate and maintain the Facility.
Each annual budget shall include the following:
a) Capital Expenditures. A capital expenditure budget for
the Facility outlining a program of capital expenditures and
major repairs as may be required by applicable law (a "mandatory
capital expenditure") or desirable in Manager's best reasonable
business judgment for the next fiscal year (or the remainder of
the current fiscal year, in the case of the initial budget) (a
"desirable capital expenditure"), on a per annum basis, in which
each proposed expenditure will be designated as either mandatory
or desirable. Facility Operator may approve or reject in its
discretion, each proposed capital expenditure, except those
required by law, which shall be approved by Facility Operator,
and those in Manager's best reasonable business judgment as being
necessary and appropriate, to which Facility Operator shall not
unreasonably withhold or delay its consent. If Facility Operator
has not notified Manager of its rejection of a proposed capital
expenditure budget within ten (10) days of receiving the budget,
it shall be deemed to have approved of the capital expenditure
budget. Manager shall be responsible for designating as a
"mandatory capital expenditure" any such expenditure which, if
not made would in Manager's judgment, result in a Facility losing
its license (or, if applicable, becoming ineligible under any
third party payor program applicable to that Facility) or the
issuance of a formal notice that the operating license for any of
the Facility or any substantial portion thereof will be qualified
in any material respect or placed on a conditional or provisional
status, revoked or suspended.
b) Operating Budget. Budgets for the Facility setting
forth an estimate of operating revenues and expenses for the next
fiscal year (or the remainder of the current fiscal year, in the
case of the initial budget), on both a month-by-month and a per
annum basis, together with an explanation of anticipated changes
in facility utilization, charges to residents, payroll rate and
positions, non-wage cost increases, or to a third party payor,
and all other factors differing significantly from the current
year. If Facility Operator has not notified Manager of its
rejection of a proposed operating budget within ten (10) days of
receiving the budget, it shall be deemed to have approved of the
proposed operating budget.
c) Cash Flow Projections. If NHI (or any lender to the
Facility) so requests, Manager shall prepare, projections of cash
receipts and disbursements for the Facility for the next fiscal
year (or the remainder of the current fiscal year, in the case of
the initial budget), on both a month-by-month and a per annum
basis, based on the proposed operating and capital budgets,
together with recommendations as to the use of projected cash
flow in excess of short-term operating requirements and/or as to
the sources and amounts of additional cash flow that may be
required to meet operating requirements and capital requirements.
It is understood that any budget is an estimate and target
only and that unforeseen circumstances may make adherence to the
budget impracticable, and Manager shall be entitled to make
insignificant departures therefrom or departures therefrom due to
such causes upon fully explaining such unforeseen circumstances
to Facility Operator.
An "insignificant departure" shall mean any expenditure in
the aggregate that exceeds the amount of the Budget by less than
two (2%) of the total annual applicable Budget for the Facility.
As approved, each annual budget will be referred to herein
as an "Annual Budget" and the initial budget will be referred to
herein as the "Initial Budget."
1.6 Reports.
a) Manager shall prepare and deliver to Facility Operator
such reports or financial statements as may be required by NHI
(or any lender to the Facility) within the time period prescribed
by NHI (or such other lender).
b) Manager shall schedule management meetings to be
attended by representatives of both Manager and Facility
Operator, no more frequently than quarterly. Manager shall
provide such other reports, including cost comparison reports,
from time to time, but in no event more frequently than once each
calendar quarter.
c) Manager shall make available to Facility Operator for
inspection during normal business hours and copying by Facility
Operator upon request and at Facility Operator's expense, all
books, records, financial data relating to the Facility.
d) Manager shall notify Facility Operator immediately of
the start of a survey and shall provide Facility Operator with
copies of all licensure inspections conducted at any of the
Facility immediately upon receipt, but in no event later than
three (3) business days after they are received by the Manager or
the Facility.
1.7 Bank Accounts and Working Capital.
a) Except as otherwise provided in the Financing
Documents, Manager, in the Facility's name and on behalf of
Facility Operator and Owner, shall supervise the deposit of all
funds received from the operations of the Facility into a bank
account for the Facility (the "Revenue Account") established in
Facility Operator's name. Manager is permitted and authorized to
collect all monies owed the Facility Operator and Owner and
deposit such monies into the Revenue Account or to sell such
receivables on such terms as Manager deems appropriate. The
Manager shall supervise the disbursements from the Revenue
Account on behalf of Facility Operator of such amounts and at
such times as the same are required. Manager is permitted and
authorized by Facility Operator, Owner and Heartland to make
payments to NHI of the Monthly Interest Payments, payments to
reserve accounts or working capital accounts, and other payments
to NHI under the Financing Documents from this account. Manager
shall discharge such supervisory responsibilities in accordance
with reasonable and customary business standards and practices.
Facility Operator and Owner shall have the obligation of
providing funds for all capital assets (including personal
property and equipment and improvements to the Facility) required
(i) for the efficient operation of the Facility, (ii) by the
rules and regulations of any government authority, (iii) to
maintain the operating licenses of the Facility and the
certification and provider agreements for the Facility under the
applicable Medicaid programs, and (iv) to maintain the Facility
in a good condition competitive with the standard and quality of
other similar facilities. Facility Operator shall provide
sufficient working capital for the operation of the Facility and
otherwise and shall deposit such working capital in the Revenue
Account from time to time upon request of Manager, unless
required to do otherwise under the Financing Documents. Except
as otherwise provided in the Financing Documents, all costs and
expenses incurred in the operation of the Facility shall be paid
out of the Revenue Account. Manager shall designate the
signatory or signatories required on all checks or other
documents of withdrawal on the Revenue Account. Manager shall
have the right to change the authorized signatories for the
Revenue Account without the prior notice to or approval from any
other party. Manager shall not withdraw any monies from the
Revenue Account to pay any item other than budgeted capital
expenditures and the Cost of Operations of the Facility and
otherwise than in accordance with any other agreement executed
contemporaneously herewith in respect of the Facility.
b) The Costs of Operations shall mean all costs and
expenses incurred in, arising out of or related to the operation
of the Facility, including, without limiting the generality of
the foregoing, (i) wages, salaries, and benefits of the staff of
the Facility and related payroll taxes, and other related costs
(ii) the costs of repairs to and maintenance of the Facility (but
not the cost of capital improvement or capital assets), (iii) all
premiums, charges and other costs and expenses for insurance with
respect to the Facility and the operations thereof, (iv) all
taxes payable with respect to the Facility or the income thereof
or goods or services purchased thereby, (v) expenses and costs
incurred in connection with the purchase of necessary services
and supplies, the furnishing of utilities to the Facility, and
other necessary services and supplies provided by independent
contractors and other third parties, (vi) rental payments on
operational leases, (vii) amounts specified in the operating
Budget, (viii) payment of Monthly Interest Payments under the
Loan Agreement, and (ix) the Management Fee. Notwithstanding the
foregoing, amortization of deferred expenses, depreciation and
bad debt allowances and other reserves shall not be included in
the Costs of Operation.
c) The Revenue Account may not be used to pay debt service
on any Subordinated Payables (as defined in the Subordination
Agreement), except as permitted in the Subordination Agreement.
1.8 Licenses, Permits and Certifications.
a) Manager shall use its reasonable best efforts to assist
Facility Operator and Owner in applications for, in the name of
the Facility Operator and Owner, and to obtain and maintain, on
behalf of Facility Operator and Owner, all necessary licenses,
permits, consents, approvals and certifications from all
governmental agencies which have jurisdiction over the operation
of the Facility.
b) Neither Facility Operator nor the Owner nor Manager
shall knowingly take any action or fail to take any action which
may cause any governmental authority having jurisdiction over the
operation of the Facility to institute any proceeding for the
suspension, rescission or revocation of any necessary license,
permit, consent or approval. Manager shall not knowingly take
any action or fail to take action which may materially adversely
affect the amount of and Facility Operator's right to accept and
obtain payments under any public or private third party medical
payment program.
c) Facility Operator and Owner shall comply with all
applicable federal, state and local laws, rules and regulations
and requirements, provided that Facility Operator, at its sole
expense and without cost to Manager, shall have the right to
contest by appropriate legal proceedings, the validity or
application of any law, ordinance, rule, ruling, regulation, or
requirement of any governmental agency having jurisdiction over
the operation of the Facility. Manager, after having been given
written notice, shall cooperate with Facility Operator with
regard to the contest, and Facility Operator shall pay all
reasonable attorneys' fees incurred with regard to the contest
from the Revenue Account. Counsel for any such contest shall be
selected by Manager. Manager shall, with the consent of Facility
Operator, process all third party payment claims for the services
provided at the Facility, including, without limitation, contest
to the exhaustion of all applicable administrative proceedings or
procedures, adjustment and denials by governmental agencies or
their fiscal intermediaries as third party payors.
d) Facility Operator and Owner shall comply with all
federal, state and local laws, rules, regulations and
requirements which are applicable to Facility Operator and Owner
provided that Facility Operator, at its sole expense and without
cost to Manager, shall have the right to contest by proper legal
proceedings the validity, so far as applicable to it, of any such
law, rule, regulation or requirement, provided that such contest
shall not result in a suspension of operations of the Facility,
and provided further, Facility Operator shall not be deemed to be
in breach of this covenant if its failure to comply with any such
law, rule, regulation or requirement is the result of a failure
by Manager to comply with its obligations hereunder. Facility
Operator and Owner shall send notice immediately, but in any
event, within three (3) business days of any notice from any
governmental authority or any other regulator regarding the
Facility, and shall send copies of any filing with such
authorities to Manager.
1.9 Administrator and Health Service Coordinator. Manager
shall, from time to time as necessary, recruit for the Facility a
Qualified Administrator and a Director of Nursing Services. The
Qualified Administrator and the Director of Nursing Services are
herein referred to as the "Key Employees." The Key Employees may
be employees of, and be compensated by Manager; provided,
however, if the Key Employees are employees of Manager, Facility
Operator shall reimburse Manager for all reasonable compensation,
including salary, fringe benefits, bonuses, and reasonable
business expense reimbursements approved as shown in a Budget or
otherwise by Manager and Facility Operator, payable to the Key
Employees. The term "fringe benefits" shall include, without
limitation, employer's FICA payments, unemployment compensation
and other employment taxes, bonuses, vacation, personal and sick
leave benefits, worker's compensation, group life, health and
accident insurance premiums and disability and other benefits.
The compensation, including fringe benefits, payable to the Key
Employees shall be reasonable and in line with compensation
payable by other assisted living operators to administrators and
health service coordinators of like facilities in the Facility's
market area, shall be budgeted pursuant to Section 1.5(b) hereof
and shall be paid or reimbursed from the Revenue Account. Any
reimbursement to Manager on account of any Key Employee shall not
be subject to the Subordination of Management Agreement, but
shall be an operating expense of the Facility.
1.10 Government Regulations. Manager agrees to use its best
reasonable efforts to operate and maintain the Facility in
substantial compliance with the requirements of any statute,
ordinance, law, rule, regulation or order of any governmental or
regulatory body having jurisdiction over the Facility and with
all orders and requirements of the local board of fire
underwriters or any other body which may exercise similar
functions.
1.11 Quality Controls. Manager shall activate and maintain
on a continuing basis, a Quality Assurance Program ("QAP"),
including a safety program that meets all OSHA standards, in
order to provide objective measurements of the quality of
resident services, provided at the Facility and in connection
therewith shall utilize inspections and other techniques as
deemed appropriate.
1.12 Staff Specialists. In addition to the other managerial
services provided herein, Manager shall make available to the
Facility for consultation and advice, when necessary, specialists
in such fields as accounting, budgeting, dietary services,
janitorial and housekeeping, management, maintenance, nursing,
personnel, pharmacy operations, purchasing, quality assurance,
policies and procedures, and third party reimbursements.
1.13 Tax Returns and Regulatory Filings. Owner shall
receive copies of all annual tax returns or regulatory filings at
the same time that said returns or reports are filed.
1.14 Taxes. Any federal, state or local, taxes, assessments
or other governmental charges imposed on the Facility and arising
from Owner's period of ownership are the obligations of Facility
Operator or Owner, not of Manager, and shall be paid out of the
Revenue Account of the Facility. With the Facility Operator's
prior written consent, Manager may contest the validity or amount
of any such tax or imposition on any Facility in the same manner
as described in Section 1.8(c) hereof. Manager shall cause all
social security and federal and state income tax withholding and
other employee taxes which may be due and payable to be paid from
the revenues of the Facility before the payment of any other
expenses therefrom.
1.15 Non-Diversion of Residents Manager covenants that it
will not permit residents of the Facility to be moved to other
nursing centers owned or managed by it or any affiliate thereof,
or divert persons seeking admission as residents into the
Facility to such other facility, unless the special needs of such
residents cannot be met at the Facility or unilaterally requested
by such person or unless the Facility is full.
1.16 Financial Reports. The Manager shall provide the
Facility Operator with copies of such financial reports as are
required by NHI (or any other lender to the Facility).
1.17 Land Use Restrictions. Manager shall use its best
efforts to ensure that the Facility comply with any land use
restrictions currently in effect for the property of the
Facility.
1.18 Heartland's, Owner's and Facility Operator's
Indemnification of Manager. From and after the date of this
Agreement, Heartland, Owner and Facility Operator agree jointly
and severally to reimburse, indemnify and hold harmless Manager
against and in respect of (i) any and all debts, liabilities or
obligations of the Facility Operator pertaining to the Facility,
(ii) all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by Manager that result from, relate
to or arise out of (A) any misrepresentation, breach of warranty
or nonfulfillment of any agreement or covenant on the part of
Heartland, Owner or Facility Operator hereunder or from any
misrepresentation in or omission from any certificate, schedule,
statement, document or instrument furnished to Manager pursuant
hereto, (B) any of the matters referred to in subparagraph (i)
above, or (C) any claim by any third party alleging that the
execution, delivery or performance of this Agreement breaches any
duty or obligations of the parties hereto to such third party or
contravenes any rights or any such third party and (iii) any and
all actions, suits, claims, proceedings, investigations, demands,
assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and
expenses of investigation) incident to any of the foregoing or to
the enforcement of this Section.
ARTICLE II
2.1 Management Fee.
a) Each month during the term hereof, Manager shall
receive from Facility Operator, and Facility Operator shall pay
to Manager, as the amount due for the services being provided
pursuant to this Agreement, a fee (the "Management Fee")
consisting of a base fee (the "Base Management Fee"), plus an
incentive payment (the "Incentive Management Fee").
The Base Management Fee shall be that amount equal to four
(4%) of the Total Operating Revenue for the current year,
The Incentive Management Fee shall be that amount equal to
four (4%) percent of the Total Operating Revenues of the
Facility.
b) Under no circumstances shall the Incentive Management
Fee for any month exceed the remainder obtained by subtracting
one dollar ($l) from the Base Management Fee for such month.
c) In the event it should be determined following the
payment of any Management Fee or accrual of any Management Fee in
favor of Manager that the amount of Total Operating Revenues for
the period in question was greater or lesser than the amount of
Total Operating Revenues on which such amount of Management Fee
was calculated, then the parties shall account to each other
promptly for any resulting overpayment or over accrual or
underpayment or under accrual of incentive payments.
For purposes of this Agreement, the term "Total Operating
Revenue" shall mean all operating revenues, including all routine
and ancillary revenues net of any provisions from third party
payor contracts of Owner and Facility Operator from any source
whatsoever, determined in accordance with generally accepted
accounting principles.
2.2 Payment of Management Fees. Payment shall be made
monthly, in arrears, by the fifth (5th) day of the next
succeeding month commencing on August 5, 1996. Payments due on
an non-business day may be paid the next business day.
2.3 Subordination. Facility Operator and Manager agree
that as to payment of the Management Fee, the terms and
provisions of that certain Subordination of Management Agreement
of even date herewith, between Facility Operator and Manager
shall, to the extent of any inconsistency, supersede the terms
and conditions of this Agreement.
ARTICLE III
OTHER TRANSACTIONS WITH MANAGER OR ITS AFFILIATES
3.1 Transactions with Manager and its Affiliates. Except for
those certain agreements executed simultaneously herewith, and
obligations taken thereunder notwithstanding anything else herein
contained, Manager may, with full disclosure by Manager of such
affiliation and interest, cause Facility Operator or Owner to
enter into any contract with Manager or any affiliate thereof for
services required to be provided by Manager under this Agreement,
or pay any fee to Manager or its affiliates. Manager agrees that
it will not request Facility Operator to enter into any contract
with any affiliate of Manager unless that contract is no less
favorable to Facility Operator or Owner than could be obtained by
the Facility Operator or Owner in an arm's length transaction
with a third party.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Heartland, Owner and
Facility Operator. Heartland, Owner and Facility Operator make
the following representations and warranties which are material
representations and warranties upon which Manager relies as an
inducement to enter into this Agreement:
a) Status. Heartland is a non-profit corporation, duly
organized and validly existing in good standing under the laws of
the State of Massachusetts. Owner is limited partnership duly
organized and validly existing in good standing under the laws of
the State of New Hampshire. Facility Operator is a corporation
duly organized and validly existing in good standing under the
laws of the State of New Hampshire. Heartland, Owner and
Facility Operator have all necessary power to carry on their
business as now being conducted, to operate its properties as now
being operated, to carry on its contemplated business, to enter
into this Agreement and to observe and perform its terms.
b) Authority and Due Execution. Heartland, Owner and
Facility Operator have full power and authority to execute and to
deliver this Agreement and all related documents and to carry out
the transactions contemplated herein; which actions will not with
the passing of time, the giving of notice, or both, result in a
default under or a breach or violation of (i) the Heartland's,
Owner's or Facility Operator's Articles of Incorporation, Bylaws
or Partnership Agreement; or (ii) any law, regulation, court
order, injunction or decree of any court, administrative agency
or governmental body, or any mortgage, note, bond, indenture,
agreement, lease, license, permit or other instrument or
obligation to which any such entity is now a party or by which
any such entity or any of their assets may be bound or affected.
This Agreement constitutes a valid and binding obligation of
Heartland, Owner and Facility Operator, enforceable in accordance
with its terms, except to the extent that its enforceability is
limited by applicable bankruptcy, reorganization, insolvency,
receivership or other laws of general application or equitable
principles relating to or affecting the enforcement of creditors'
rights.
c) Litigation. There is no litigation, claim,
investigation, challenge or other proceeding pending or, to the
knowledge of Heartland, Owner or Facility Operator, threatened
against any of such parties, their properties or business which
seeks to enjoin or prohibit any of them from entering into this
Agreement or constitutes an investigation by any governmental
agency or authority into the business or financial affairs of
Heartland, Owner or Facility Operator.
d) Ownership of Facility. The Facility is owned by Owner.
e) Compliance with Applicable Law. The Facility is
currently operating in compliance with all applicable laws, rules
and regulations.
f) Disclosure. No agreement, representation, warranty or
covenant contained in this Agreement or in any statement or other
document required to be delivered by Heartland, Owner or Facility
Operator hereunder contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
the statements contained therein or herein not misleading.
4.2 Representations and Warranties of Manager. Manager
makes the following representations and warranties which are
material representations and warranties upon which the other
parties rely as an inducement to enter into this Agreement:
a) Status of Manager. Manager is a corporation duly
organized and validly existing in good standing under the laws of
the State of Delaware, and has all necessary power to carry on
its business as now being conducted, to operate its properties as
now being operated, to carry on its contemplated business, to
enter into this Agreement and to observe and perform its terms.
b) Authority and Due Execution. Manager has full power
and authority to execute and deliver this Agreement and all
related documents and to carry out the transactions contemplated
herein; which actions will not with the passing of time, the
giving of notice, or both, result in a default under or a breach
or violation of (i) the Manager's Articles of Incorporation or
By-Laws; or (ii) any law, regulation, court order, injunction or
decree of any court, administrative agency or governmental body,
or any mortgage, note, bond, indenture, agreement, lease,
license, permit or other instrument or obligation to which
Manager is now a party or by which Manager or any of its assets
may be bound or affected. This Agreement constitutes a valid and
binding obligation of Manager, enforceable in accordance with its
terms, except to the extent that its enforceability is limited by
applicable bankruptcy, reorganization, insolvency, receivership
or other laws of general application or equitable principles
relating to or affecting the enforcement of creditors' rights.
c) Litigation. There is no litigation, claim,
investigation, challenge or other proceeding pending or, to the
knowledge of Manager, threatened against Manager, its properties
or business which seeks to enjoin or prohibit it from entering
into this Agreement or constitutes an investigation by any
governmental agency or authority into the business or financial
affairs of Manager.
ARTICLE V
TERMINATION
5.1 Termination for Cause.
a) If any party is dissolved or liquidated, or shall apply
for or consent to the appointment of a receiver, trustee or
liquidator of it or all or a substantial part of its assets, file
a voluntary petition in bankruptcy, make a general assignment for
the benefit of creditors, file a petition or an answer seeking
reorganization or arrangement with creditors or to take advantage
of any insolvency law, or if an order, judgment or decree shall
be entered by a court of competent jurisdiction, on the
application of a creditor, adjudicating said party as bankrupt or
insolvent or approving a petition seeking reorganization of said
party or appointing a receiver, trustee or liquidator for said
party or all or a substantial part of its assets, and such order,
judgment or decree shall continue unstated and in effect for any
period of ninety (90) consecutive days, then in case of any such
event, the term of this Agreement shall expire, at the other
party's option, on five (5) days written notice.
b) Facility Operator shall have the right to terminate
this Agreement at any time if because of Manager's acts or
omissions: (i) there has been a formal notice the operating
license for the Facility or any substantial portion thereof will
be qualified in any substantial respect or placed on a
conditional or provisional status, revoked or suspended which is
not rescinded, vacated or stayed by action of Manager, (or
otherwise) within thirty (30) days of its issuance, unless
Manager has diligently pursued such cure; (ii) Manager shall have
caused to occur an Event of Default under the Financing
Documents, which event of default is not cured within thirty (30)
days after Manager's receipt of notice of such event;
c) Manager shall have the right to terminate (i) upon
failure to pay Management Fee for thirty (30) days unless the
nonpayment is the result of the provisions of the Subordination
of Management Agreement, provided, however, that the Facility
Operator has the right to cure such failure to pay during such
thirty (30) day period, (ii) upon a termination of any management
agreement to which Manager and Heartland are both parties.
d) Notwithstanding anything else herein contained, neither
party shall have the right to terminate this Management Agreement
as a result of any of the reasons set forth in clauses (b) or (c)
above, if: (i) the acts or omissions of the party seeking the
termination materially contribute to the reason for termination;
or (ii) the event is caused by strikes, other labor disturbances,
fires, windstorm, earthquake, arbitrary and capricious action by
third party payors, war or other state of national emergency,
terrorism, or acts of God, or other events not the fault of
either party, in which negligence of the party sought to be
terminated is not a materially contributing factor to the
occurrence of such event.
5.2 Effect of Termination.
a) Heartland, Owner and Facility Operator agree that in
the event this Agreement should be terminated for any reason,
Heartland, Owner and Facility Operator jointly and severally
agree to repay in full all fees and indebtedness owned by
Heartland, Owner or Facility Operator to Manager.
b) Upon termination of Manager or the Management Agreement
for any reason whatsoever, Manager shall be released from its
obligations pursuant to the Guaranty Agreement, any obligations
to contribute to the Debt Service Reserve under the Debt Service
Reserve Agreement or to the working capital account under the
Loan Agreement.
ARTICLE VI
MISCELLANEOUS COVENANTS
6.1 Assignment.
Facility Operator shall not assign its rights and/or
obligations under this Agreement without prior written consent of
Manager. Manager shall not assign its rights and/or obligations
under this Agreement except to a wholly-owned subsidiary,
provided, however, that after such assignment Manager shall
remain fully liable for (i) all obligations of the Manager
hereunder and (ii) all of its obligations under the Continuing
Guaranty, any guaranty to fund working capital, and the guaranty
to fund the Debt Service Reserve under Section 2.10 of the Loan
Agreement.
6.2 Special Covenants of Heartland, Owner and Facility
Operator. Heartland, Owner and Facility Operator, as applicable,
shall comply with each of the following covenants:
a) Neither Owner nor Facility Operator shall incur any
indebtedness other than under the Loan Agreement, nor sell the
accounts receivable of the Facility.
b) Owner and Facility Operator will cooperate with Manager
in every reasonable respect and will furnish Manager with all
information required by it for the performance of its services
hereunder and will permit Manager to examine and copy any data in
the possession and control of Owner or Facility Operator
affecting management and/or operation of the Facility and will in
every way cooperate with Manager to enable Manager to perform
its services hereunder.
c) Facility Operator will examine documents submitted by
Manager and render decisions and take action pertaining thereto,
when required, promptly, to avoid unreasonable delay in the
progress of Manager's work.
d) Except for acts involving gross negligence or willful
disregard of Heartland, Owner or Facility Operator interests,
Heartland, Owner and Facility Operator shall jointly and
severally indemnify and hold Manager harmless from all claims,
liability, loss, damage, cost and expense (including reasonable
attorney's fees) asserted by any other person for any obligation
or liability of Heartland, Owner or Facility Operator for any
obligations, liability or claim that arises in the course of the
business of the Facility.
e) Heartland, Owner and Facility Operator covenant that
Manager shall quietly hold, occupy and enjoy the Facility
throughout the term of this Agreement free from hindrance,
ejection by Facility Operator or any other party claiming under,
through or by right of Facility Operator. Owner will not sell
the Facility during the term of this Agreement, nor will the
Facility Operator sublease this facility except as is permitted
in writing by Manager. Facility Operator agrees to pay and
discharge any payments and charges and, at its expense, to
prosecute all appropriate actions, judicial or otherwise,
necessary to assure such free and quiet occupation.
f) As long as Heartland, Owner and Facility Operator are
indebted to or owe funds to Manager or any affiliate on account
unpaid Management Fees, Arrangement Fees, Guaranty Fees or
Manager is obligated to make contributions to the Debt Service
Reserve or pursuant to the Debt Service Reserve Agreement or to
the working capital account under the Loan Agreement or as
Manager is obligated under the Continuing Guaranty, or Manager's
guarantee of indebtedness owed by Heartland to Claire Y. Lemire,
Heartland, Owner and Facility Operator shall not (without the
consent of Manager, which may be withheld in its complete
discretion) withdraw, lend, pledge or divert any revenues of the
Facility otherwise than to the Revenue Account other than as
provided in the Financing Documents and shall not act in any
manner which interferes with or prevents Manager from withdrawing
funds from the Revenue Account to pay amounts owed under the Loan
Agreement.
6.3 Additional Covenants of Facility Operator. Facility
Operator hereby makes the additional covenants set forth in the
Section, which are material covenants and upon which Manager
relies as an inducement to enter into this Agreement:
a) Facility Operator will cooperate with Manager in every
reasonable respect and will furnish Manager with all information
required by it for the performance of its services hereunder and
will permit Manager to examine and copy any data in the
possession and control of Facility Operator affecting management
and/or operation of the Facility and will in every way cooperate
with Manager to enable Manager to perform its services hereunder.
b) Facility Operator will examine documents submitted by
Manager and render decisions pertaining thereto, when required,
promptly, to avoid unreasonable delay in the progress of
Manager's work. Facility Operator shall execute and deliver any
and all applications and other documents that may be deemed by
Manager to be necessary or proper to be executed by Facility
Operator in connection with the Facility, subject to the
limitations in this Agreement with respect to the budget and
other rights of Facility Operator.
6.4 Negligence by Manager. Manager will use its best
efforts to perform its obligations hereunder. Nevertheless,
Heartland, Owner and Facility Operator expressly release Manager
from all acts undertaken in good faith by Manager, unless such
acts involve gross negligence or a willful disregard of those
parties' interests. Any acts taken by Manager upon the advice of
Facility Operator or of Manager's professional consultants will
be conclusively deemed to have been taken in good faith and not
to have been acts of gross negligence or willful disregard of
Heartland's, Owner's or Facility Operator's interests. Manager
shall indemnify and hold Facility Operator harmless from all
claims, liability, loss, damage, cost and expense (including
reasonable attorney's fees) asserted by any other person for any
obligation, liability or claim from an act or acts of Manager's
gross negligence.
6.5 Binding Agreement. The terms, covenants, conditions,
provisions and agreements herein contained shall be binding upon
and inure to the benefit of the parties hereto, their successors
and assigns.
6.6 Relationship of Parties. Nothing contained in this
Agreement shall constitute or be construed to be or to create a
partnership, joint venture or lease between Heartland, Owner or
Facility Operator and Manager with respect to the Facility. The
parties acknowledge that each is an independent entity which has
negotiated the terms of, and entered into this Agreement, on an
arm's length basis represented by separate legal counsel and that
neither is owned or otherwise controlled, directly or indirectly,
by the other party. Neither party possesses any ownership or
equity interest in the other party and neither party has the
power, directly or indirectly to significantly influence or
direct the actions or policies of the other party. Each party
shall be liable for their own debts, obligations, acts, and
omissions, including the payment of all required withholding,
social security, and other taxes or benefits on behalf of their
respective employees. Manager will not be obligated to advance
any of its own funds to or for Facility Operator's account or to
incur any liability hereunder unless Facility Operator shall have
furnished to Manager funds sufficient for the discharge thereof.
The relationship of Manager to Facility Operator is that of an
independent contractor, not that of an agent, and nothing
contained herein shall be construed to create a relationship of
agency between Manager and Facility Operator.
6.7 Notices.
a) If Manager shall desire the approval of Facility
Operator to any matter, Manager may give written notice to
Facility Operator that it requests such approval, specifying in
the notice the matter as to which approval is requested and
reasonable detail respecting the matter. If Facility Operator
shall not respond negatively in writing to the notice within ten
(10) days after the sending thereof (unless some other period for
response is specified in this Agreement), Facility Operator shall
be deemed to have approved the matter referred to in the notice.
Any provision hereof to the contrary notwithstanding, in
emergency situations (as determined by Manager), Manager shall
not be required to seek or obtain Facility Operator's approval
for any actions or omissions which Manager, in its sole judgment,
deems necessary or appropriate to respond to such situations,
provided Manager promptly thereafter reports such action or
omission to Facility Operator in writing.
b) All notices, demands and requests contemplated
hereunder by either party to the other shall be in writing, and
shall be delivered by hand, transmitted by cable or telegram, or
mailed, postage prepaid, registered or certified mail, return
receipt requested or any nationally recognized overnight courier:
(i) To Heartland, Owner or Facility Operator, by addressing
the same to:
Heartland Healthcare Corporation
60 Atkinson Lane
Sudbury, Massachusetts 01776
Attn: Gerald Tulman
with a copy to
Smith Gambrell & Russell
Promenade II, Suite 3100
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309-3592
Attn: Stan Brading
(ii) To Manager, by addressing the same to:
Iatros Health Network, Inc.
Ten Piedmont Center, Suite 400
Atlanta, GA 30305
Attention: Joseph C. McCarron
Oasis Healthcare
250 Boylston Street
Chestnut Hill, Massachusetts 02167
Attn: Scott Schuster
with a copy to:
Harkleroad & Hermance, P.C.
229 Peachtree Street, Suite 2500
Atlanta, GA 30303
Attention: James P. Hermance
or to such other address or to such other person as may be
designated by notice given from time to time during the term
hereof by one party to the other. Any notice hereunder shall be
deemed given three (3) days after mailing, if given by mailing in
the manner provided above, or on the date delivered or
transmitted if given by hand, cable or facsimile.
6.8 Entire Agreement; Amendments. This Agreement contains
the entire agreement between the parties hereto with respect to
the subject matter, and no prior oral or written, and no
contemporaneous oral, representations or agreements between the
parties with respect to the subject matter of this Agreement
shall be of any force and effect. Any additions, amendments or
modifications to this Agreement shall be of no force and effect
unless in writing and signed by all parties hereto.
6.9 Governing Law. This Agreement has been negotiated in
part in the State of Georgia, and the terms and provisions hereof
and the rights and obligations of the parties hereto shall be
construed and enforced in accordance with the laws thereof.
6.10 Captions and Headings. The captions and headings
throughout this Agreement are for convenience and reference only,
and the words contained therein shall in no way be held or deemed
to define, limit, describe, explain, modify, amplify or add to
the interpretation, construction or meaning of any provision of
or the scope or intent of this Agreement nor in any way affect
this Agreement.
6.11 Costs and Expenses; Indemnity. Except as otherwise
expressly provided herein, all fees, costs, expenses and
purchases arising out of, relating to or incurred in the
operation of the Facility, including, without limitation, the
fees, costs and expenses of outside consultants and
professionals, shall be the sole responsibility of Facility
Operator. Manager, by reason of the execution of this Agreement
or the performance of its services hereunder, shall not be liable
for or deemed to have assumed any liability for such fees, costs
and expenses, or any other liability or debt of Facility Operator
whatsoever, arising out of or relating to the Facility or
incurred in its operation, except the salaries of its employees
and the expenses and costs incurred at its central administrative
offices in the performance of its obligations hereunder and any
civil penalties imposed upon the Facility Operator pursuant to
OBRA. Manager shall have no obligation to advance any sums
required to maintain necessary licenses and permits and to
otherwise keep the Facility operating as a nursing center, except
as set forth in the Continuing Guaranty, any guaranty of working
capital, or Section 2.10 of the Loan Agreement.
6.12 Liability Limited. No officer or director of
Heartland, Owner, Facility Operator or Manager shall have any
personal liability hereunder, nor shall Iatros Health Network,
Inc. nor any of its affiliated entities other than the parties
hereto shall have any obligations whatsoever hereunder.
6.13 Arbitration of Certain Matters. If any controversy
whatsoever should arise between the parties in the payment,
performance, interpretation and application of this Agreement,
either party may serve upon the other a written notice stating
that such party desires to have the controversy reviewed by an
arbitrator, who shall be a representative of a firm specializing
in the nursing home/assisted living facility sector of medical
services. If the parties cannot agree within fifteen (15) days
from the service of such notice, upon the selection of such an
arbitrator, the arbitrator shall be selected or designated by the
American Arbitration Association upon the written request of
either party hereto. Arbitration of such controversy,
disagreement or dispute shall be conducted in accordance with the
rules then in force of the American Arbitration Association and
the decision and award of the arbitrator so selected shall be
binding upon both parties hereto. BOTH PARTIES HERETO HEREBY
WAIVE ANY RIGHT TO A TRIAL BY JURY OF ANY CONTROVERSY ARISING
HEREUNDER.
6.14 Access to Books, Record and Documents if Medicare
Payments Received.
This Section 6.14 is included herein because of the possible
application of Section 1861(v)(l)(I) of the Social Security Act
to this Agreement. If such Section 1861(v)(l)(I) should not be
found applicable to this Agreement under the terms of such
Section and the regulations promulgated thereunder, then this
Section shall be deemed to not be a part of this Agreement and
shall be null and void
a) Until the expiration of four (4) years after the
furnishing of services pursuant to this Agreement, Manager shall,
as provided in Section 1861(v)(l)(I) of the Social Security Act,
and regulations promulgated thereunder make available, upon
written request, to the Secretary of Health and Human Services,
or upon request, to the Comptroller General of the United States,
or any of their duly authorized representatives, this Agreement,
and all books, documents and records of Manager that are
necessary to verify the nature and extent of the costs of any
services furnished pursuant to this Agreement for which payment
may be made under the Medicare Program.
b) If Manager carries out any of the duties of this
Agreement through a subcontract or subcontracts with an aggregate
value or cost of $10,000 or more over a twelve (12) month period
with a related organization, such subcontract or subcontracts
shall contain a clause to the effect that until the expiration of
four (4) years after the furnishing of such services pursuant to
such subcontract or subcontracts, the related organization shall,
as provided in Section 1861(v)(l)(I), make upon written request,
to the Secretary of Health and Human Services, or upon request,
to the Comptroller General of the United States, or any of their
duly authorized representatives, the subcontract or subcontracts,
and all books, documents and records of such organization that
are necessary to verify the nature and extent of the costs of any
services furnished pursuant to such subcontract or subcontracts
for which payment may be made under the Medicare Program.
6.15 Definition of Certain Terms. For purposes of this
Agreement all capitalized terms shall have the meanings set forth
in this Agreement or the Loan Agreement executed this same day.
6.16 Severability. If any term or provision of this
Agreement or application thereof to any person or circumstance
shall to any extent be invalid or unenforceable, the remainder of
this Agreement or the application of such term or provision to
persons or circumstances other than those to which it is held
invalid or unenforceable shall not be affected thereby, and each
term and provision of the Agreement shall be valid and
enforceable to the fullest extent permitted by law.
6.17 Waivers. No waiver of any term, provision, or
condition of this Agreement, whether by conduct or otherwise, in
any one or more instances, shall be deemed to be construed as a
further and continuing waiver of any such term, provision or
condition of this Agreement.
6.18 Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the
same agreement, and shall become a binding agreement when one or
more counterparts have been signed by each of the parties and
delivered to the other party.
IN WITNESS WHEREOF, the parties hereto have executed, sealed
and delivered this Agreement through their duly authorized
representatives, as of the day and year first above written.
ATTEST/WITNESS: HEARTLAND HEALTHCARE CORPORATION
___________________________By:________________________________
ATTEST/WITNESS: VCP REALTY LIMITED PARTNERSHIP
___________________________By:________________________________
ATTEST/WITNESS: VILLA CREST, INC.
___________________________By:________________________________
IATROS HEALTH NETWORK, INC.
___________________________By:________________________________
Joseph C. McCarron
Executive Vice President
EXHIBIT A
1. The Loan Agreement
2. The Leases
3. Debt Service Reserve Agreement
4. The Continuing Guaranty
5. The Subordination of Management Agreement
6. The Subordination and Attornment Agreement
7. The Security Agreement/Facility
8. Capital Improvement Reserve Agreement
9. First Refusal Purchase Agreement
10. Security and Pledge Agreement
11. Equity Participation Agreement
12. Collateral Assignment of Partnership Interests
13. The Stock Purchase and Sale Agreement
14. Other Management Agreements for Properties executed this
same date
15. Any other document executed contemporaneously herewith
specifying duties of
Manager with respect to the Facility
EXHIBIT 10.4
MANAGEMENT AGREEMENT
(Epsom Manor)
THIS AGREEMENT, made and entered into as of the first day of
July, 1996, by and between Iatros Health Network, Inc., a
corporation organized under the laws of State of Delaware
(hereinafter referred to as "Manager") on the one hand, and Epsom
Manor, Inc. and Epsom Manor RCLC, Inc., two New Hampshire
corporations (together collectively referred to as "Facility
Operator"), Epsom Helath Limited Partnership, a New Hampshire
limited partnership ("Owner") and Heartland Healthcare
Corporation, a Massachusetts non-profit corporation, hereinafter
referred to as "Heartland." Certain terms used herein are
defined in the last item of this Agreement.
W I T N E S E T H:
WHEREAS, Owner is the owner of a 108 bed licensed nursing
center and an 80 unit retirement and congregate facility, both
located in Epsom, New Hampshire, together with the equipment,
furnishings and other tangible personal property used in
connection therewith (together referred to collectively as the
"Facility");
WHEREAS, Owner and Heartland (among others) have borrowed
the proceeds of a $25,805,500.00 loan agreement with National
Health Investors, Inc. ("NHI") pursuant to the Loan Agreement
dated as of this same date (the "Loan Agreement") to purchase the
Facility and two other long-term care facilities;
WHEREAS, Manager has guaranteed repayment of certain
payments and agreed to make contributions to certain reserves and
accounts under certain circumstances as specified in the Loan
Agreement;
WHEREAS, Owner has leased the Facility to the Facility
Operator who operates the Facility;
WHEREAS, Facility Operator wishes to retain the services of
Manager as manager of the Facility; and
WHEREAS, Manager is willing to perform such services with
regard to the management, operation, maintenance, marketing, and
servicing of the Facility (the "Management Services"), upon the
terms and subject to the conditions contained herein.
NOW, THEREFORE, in consideration of the foregoing and of the
full and faithful performance of all the terms, conditions, and
obligations herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, Manager and Facility Operator, Owner and Heartland
intending to be legally bound hereby, agree as follows:
ARTICLE I
OPERATING TERMS AND APPOINTMENT AND EMPLOYMENT OF
MANAGER AS AGENT AND GENERAL MANAGER OF THE FACILITIES
1.1 Term. The term of this Agreement shall commence on the
date hereof and shall continue for fifteen (15) calendar years
from that date, subject to earlier termination as set forth in
Article V hereof. If a party to this Agreement desires to enter
into a new management agreement at the end of its fifteen (15)
year term, it shall give sixty (60) days prior written notice of
such fact to the other party to facilitate negotiation of the new
management agreement.
1.2 Employment of General Manager. Facility Operator
hereby appoints and employs Manager as operating manager of the
Facility, and Manager agrees to act as operating manager of the
Facility, to supervise and direct the day-to-day business
activities, management and operation and repair of the Facility
and all phases of its operation in the name of and on behalf of
Facility Operator and the Owner and for its account during the
term of this Agreement upon the terms and conditions hereinafter
stated. Manager shall be responsible for managing the Facility
and all of its assets and services with the same degree of
diligence and skill as is customary in the nursing facility
industry and as is employed by the Manager or its affiliates in
the management of similar homes, in full compliance with all
obligations imposed on Facility Operator which are known to, or
disclosed to Manager by Facility Operator in writing, including
the obligations under those documents listed in Exhibit A,
attached hereto (the "Financing Documents"). Facility Operator
will deliver to Manager concurrent with the execution hereof all
of the Financing Documents. Manager confirms that it has
reviewed drafts of the Financing Documents and will comply with
all of its obligations in the Financing Documents, and will use
its best efforts to enable the Facility Operator to comply with
all of its obligations under such Financing Documents. Manager
shall, subject to compliance of Facility Operator with its
obligations hereunder and under applicable laws and regulations,
do all things as may be required to maintain and preserve all
necessary licenses, permits and approvals to operate the Facility
so as to substantially comply with all applicable laws, rules and
regulations and, when applicable and desired by Facility
Operator, to make the Facility eligible for participation in any
government reimbursement program which may be developed during
the term of this Agreement; provided, however, that Manager shall
not be required to expend its own funds for any costs of
operating or repairing the Facility except as otherwise provided
herein, or except as provided in the Financing Documents.
Manager shall not be deemed to be in violation of this Agreement
if it is prevented from performing any of its obligations
hereunder for any reason beyond its control including, without
limitation, strikes, lockouts, acts of God, unforeseen changes in
statutes, regulations or rules of appropriate governmental or
other regulatory authorities, so long as Manager attempts
diligently to overcome such obstacles. Manager makes no
warranties, express or implied, and shall not assume any
financial or other responsibilities in connection with its
obligations hereunder, except as hereinafter specifically
provided.
1.3 Retention of Control by Facility Operator. Facility
Operator and Owner shall at all times continue to exercise
control over the assets and operations of the Facility, and
Manager shall perform its responsibilities as described in this
Agreement in accordance with policies, directives and bylaws
adopted by Facility Operator and Owner and communicated in
writing to Manager and pursuant to a Budget adopted hereunder,
and except as may affect repayment of obligation under the Loan
Agreement. By entering into this Agreement, Facility Operator
and Owner do not delegate to Manager any of the powers, duties
and responsibilities vested in the Facility Operator or Owner by
law, or by their respective organization documents. Facility
Operator may, according to the terms of this Agreement, in
writing direct Manager to implement policies for the Facility and
may adopt as policy for the Facility, recommendations and/or
proposals made by Manager. Whenever this Agreement calls for the
approval of Facility Operator, such approval shall be expressed
in writing executed by a duly authorized officer or director of
Facility Operator or by action of the board of directors of
Facility Operator evidenced by the minutes of the board of
directors, and such approval shall not be unreasonably withheld
or delayed. In the absence of specific written direction from
Facility Operator, Manager shall be entitled to rely upon its
prudent business judgment.
1.4 Management Services to be Provided by Manager. In
connection with such supervision, direction and management,
Manager shall use its best reasonable efforts to perform or cause
to be performed, the following services within the confines of an
Initial Budget and an Annual Budget, subject to budgetary
overruns which may occur due to events beyond Manager's control.
During the terms of this Agreement, Manager shall as agent
and on behalf of Facility Operator and Owner, manage all aspects
of the operation of the Facility, including, but not limited to,
the provision of assistance with activities of daily living to
residents of the Facility, staffing, accounting (but not audit),
billing, collections, setting of rates and charges and general on-
site administration. In connection therewith, Manager (either
directly or through supervision of employees of the Facility)
shall use its best efforts to:
1) Select, employ, supervise and train on behalf of
Facility Operator and Owner, an adequate staff, as
required by law and subject to availability, of nurse
aides, office and other employees, including an
administrator for the Facility ("Administrator") and
promote, direct, assign and discharge all such
employees on behalf of Facility Operator at Manager's
sole discretion. All such employees shall be employees
of Facility Operator or the Owner and carried on the
payroll of the Facility and shall not be deemed
employees or agents of Manager. Except as otherwise
agreed to by Facility Operator, all personnel not
involved in the day-to-day operation of the Facility
shall be employees of Manager;
2) Institute and amend from time to time, subject to
any policy disclosed by Facility Operator pursuant to
Section 1.3, general salary scales, personnel policies
and appropriate employee benefits for all employees;
3) Issue appropriate bills for services and materials
furnished by the Facility and use its best efforts to
collect accounts receivable and monies owed to the
Facility and deposit such monies in suitable accounts,
design and maintain accounting, billing, resident and
collection records; and prepare and file insurance and
any and all other necessary or desirable applications,
reports and claims related to revenue production.
Facility Operator and Owner hereby grant Manager the
right to enforce either of their rights as creditor
under any contract relating to the Facility or in
connection with rendering any services at the Facility
for purposes of collecting accounts receivable and
monies owed the Facility;
4) Plan, supervise and conduct a program of regular
maintenance and repair pursuant to an approved Budget,
except that any single physical improvement (other than
approved budgeted maintenance and repair) costing more
than Ten Thousand Dollars ($10,000.00) shall be subject
to the prior approval of Facility Operator;
5) Purchase all necessary food, beverage, medical,
cleaning and other supplies, equipment, furniture and
furnishings for the operation and maintenance of the
Facility and contract for all necessary services for
the account of Facility Operator and Owner. The
purchase of any single item of equipment, furniture or
furnishings (other than approved budgeted items) which
costs more than Ten Thousand Dollars ($10,000.00) shall
also be subject to the approval of Facility Operator;
6) Administer, supervise and schedule all resident
and other services of the Facility. All providers
affiliated with the Manager shall be identified;
7) Provide for the orderly and timely payment of
accounts payable, employee payroll, taxes, insurance
premiums and all other obligations of the Facility on
behalf of Facility Operator and Owner and assist
Facility Operator in making provision for the orderly
payment of amounts due on any obligations and other
indebtedness. Notwithstanding the foregoing, this
shall not create an obligation for Manager to fund such
payments;
8) Institute written standards and procedures, for
admitting and discharging residents, for charging
residents for services and for collecting the charges
from the residents (or residents' relatives or other
third parties);
9) Furnish to Facility Operator for review, any and
all policy and procedure manuals needed with reference
to the operation of the Facility and propose revisions
to said policy manuals as is needed from time to time
to assure, to the best of Manager's ability, that the
Facility complies with all applicable local, state and
federal laws, regulations and requirements (provided
that the foregoing does not constitute a guaranty of
the same by Manager). A copy of such manuals shall be
kept at the Facility at all times;
10) Obtain and maintain (subject to market conditions)
insurance coverage for the Facility naming Facility
Operator, Owner, Manager, or such other persons as
insureds, in such amounts and of such types as may be
required under the Loan Agreement. Manager shall use
reasonable best efforts to have Facility Operator and
Owner named as additional insureds under medical
malpractice coverage policies of any physician or any
other licensed practitioner employed or under contract
with the Facility. Facility Operator and Owner may,
at their sole option, arrange for any other insurance
as they determine to be necessary;
11) Negotiate and enter into, in the name of and on
behalf of Facility Operator and Owner, such agreements,
contracts for professional services, consultants, or
attorneys, and orders as it may deem necessary or
advisable for the furnishings of services, concessions
and supplies for the operation and maintenance of the
Facility, subject to Facility Operator's approval for
all agreements or contracts for services or supplies
that exceed the Budget by Ten Thousand Dollars
($10,000.00) per year;
12) Negotiate and settle all employee relation
matters, union and non-union, and negotiate on behalf
of Facility Operator and Owner (and in conjunction with
Facility Operator's counsel or other representative)
with any labor union lawfully entitled to represent
employees of Facility Operator and Owner who work at
the Facility, but any collective bargaining agreement
or labor contract that raises the cost of such labor by
more than $50,000 per year beyond the amount for such
labor in the Budget must be submitted to Facility
Operator for its approval;
13) Manager shall assist Facility Operator in
maintaining all licenses, certifications and permits in
the name of Facility Operator and Owner, all as
required for the operation of the Facility;
14) Maintain an accounting and internal control system
using accounts and classifications consistent with
those used in similar facilities in the geographical
area of the Facility, including suitable books of
control and account as are necessary in order to comply
with all state and federal standards, rules and
regulations;
15) Manager shall be responsible for the coordination
of such ancillary services, including but not limited
to, speech therapy, occupational therapy, inhalation
therapy, physical therapy and rental of equipment, as
Manager may deem reasonable, necessary or desirable in
connection with the operation of the Facility. Manager
shall select such consultants in connection therewith;
16) Prepare all certifications required to be prepared
by the Manager under any document executed by the
Facility Operator, Owner or Heartland in connection
with the Financing Documents;
17) Establish charges for medical, nursing and other
health care services, and credit policies;
18) Perform or supervise the performance of all record
keeping functions so that Facility Operator and Owner
may meet the record keeping requirements of the
Financing Documents and all applicable statutes, rules
or regulations of governmental agencies;
19) Solicit bids for architectural, engineering, and
construction services in connection with appropriate
capital improvements to the Facility, evaluate
contracts for such services, award contracts for such
capital improvements, and oversee the construction of
such capital improvements; and
20) Repair and maintain the Facility as may be
reasonable and necessary for the proper maintenance and
operation thereof, including but not limited to proper
handling and addressing of all environmental issues.
All costs of facilitating and implementing the above
activities and services which are to be supervised by Manager
shall be borne by Facility Operator and Owner and provided at
Facility Operator's and Owner's sole cost and expense.
Notwithstanding any of the above provisions, in the event of
any emergency requiring prompt action for the protection and
safety of the Facility or the residents and staff therein or for
the protection of the Facility operating licenses, Manager shall
be entitled to take necessary action without prior approval,
following which a report of the occasion for such action and the
action taken shall be made to Facility Operator within a
reasonable period thereafter.
1.5 Budget. Not less than thirty (30) days before the end
of each fiscal year of the Facility, Manager shall submit to
Facility Operator a reasonable annual budget covering the
operations of and proposed capital expenditures to be made with
respect to the Facility for the next fiscal year (or the
remainder of the current fiscal year, in the case of the initial
budget which shall be submitted to the Facility Operator within
60 days after the execution of this Agreement) and designed to
cover, to the extent possible under then existing reimbursement
policies and other conditions, the projected requirements under
the Financing Documents, all Costs of Operations (as defined in
Section 1.7(b) hereof) and other fees and expenses, as well as
anticipated expenditures for the purchase of capital assets and
for capital improvements to operate and maintain the Facility.
Each annual budget shall include the following:
a) Capital Expenditures. A capital expenditure budget for
the Facility outlining a program of capital expenditures and
major repairs as may be required by applicable law (a "mandatory
capital expenditure") or desirable in Manager's best reasonable
business judgment for the next fiscal year (or the remainder of
the current fiscal year, in the case of the initial budget) (a
"desirable capital expenditure"), on a per annum basis, in which
each proposed expenditure will be designated as either mandatory
or desirable. Facility Operator may approve or reject in its
discretion, each proposed capital expenditure, except those
required by law, which shall be approved by Facility Operator,
and those in Manager's best reasonable business judgment as being
necessary and appropriate, to which Facility Operator shall not
unreasonably withhold or delay its consent. If Facility Operator
has not notified Manager of its rejection of a proposed capital
expenditure budget within ten (10) days of receiving the budget,
it shall be deemed to have approved of the capital expenditure
budget. Manager shall be responsible for designating as a
"mandatory capital expenditure" any such expenditure which, if
not made would in Manager's judgment, result in a Facility losing
its license (or, if applicable, becoming ineligible under any
third party payor program applicable to that Facility) or the
issuance of a formal notice that the operating license for any of
the Facility or any substantial portion thereof will be qualified
in any material respect or placed on a conditional or provisional
status, revoked or suspended.
b) Operating Budget. Budgets for the Facility setting
forth an estimate of operating revenues and expenses for the next
fiscal year (or the remainder of the current fiscal year, in the
case of the initial budget), on both a month-by-month and a per
annum basis, together with an explanation of anticipated changes
in facility utilization, charges to residents, payroll rate and
positions, non-wage cost increases, or to a third party payor,
and all other factors differing significantly from the current
year. If Facility Operator has not notified Manager of its
rejection of a proposed operating budget within ten (10) days of
receiving the budget, it shall be deemed to have approved of the
proposed operating budget.
c) Cash Flow Projections. If NHI (or any lender to the
Facility) so requests, Manager shall prepare, projections of cash
receipts and disbursements for the Facility for the next fiscal
year (or the remainder of the current fiscal year, in the case of
the initial budget), on both a month-by-month and a per annum
basis, based on the proposed operating and capital budgets,
together with recommendations as to the use of projected cash
flow in excess of short-term operating requirements and/or as to
the sources and amounts of additional cash flow that may be
required to meet operating requirements and capital requirements.
It is understood that any budget is an estimate and target
only and that unforeseen circumstances may make adherence to the
budget impracticable, and Manager shall be entitled to make
insignificant departures therefrom or departures therefrom due to
such causes upon fully explaining such unforeseen circumstances
to Facility Operator.
An "insignificant departure" shall mean any expenditure in
the aggregate that exceeds the amount of the Budget by less than
two (2%) of the total annual applicable Budget for the Facility.
As approved, each annual budget will be referred to herein
as an "Annual Budget" and the initial budget will be referred to
herein as the "Initial Budget."
1.6 Reports.
a) Manager shall prepare and deliver to Facility Operator
such reports or financial statements as may be required by NHI
(or any lender to the Facility) within the time period prescribed
by NHI (or such other lender).
b) Manager shall schedule management meetings to be
attended by representatives of both Manager and Facility
Operator, no more frequently than quarterly. Manager shall
provide such other reports, including cost comparison reports,
from time to time, but in no event more frequently than once each
calendar quarter.
c) Manager shall make available to Facility Operator for
inspection during normal business hours and copying by Facility
Operator upon request and at Facility Operator's expense, all
books, records, financial data relating to the Facility.
d) Manager shall notify Facility Operator immediately of
the start of a survey and shall provide Facility Operator with
copies of all licensure inspections conducted at any of the
Facility immediately upon receipt, but in no event later than
three (3) business days after they are received by the Manager or
the Facility.
1.7 Bank Accounts and Working Capital.
a) Except as otherwise provided in the Financing
Documents, Manager, in the Facility's name and on behalf of
Facility Operator and Owner, shall supervise the deposit of all
funds received from the operations of the Facility into a bank
account for the Facility (the "Revenue Account") established in
Facility Operator's name. Manager is permitted and authorized to
collect all monies owed the Facility Operator and Owner and
deposit such monies into the Revenue Account or to sell such
receivables on such terms as Manager deems appropriate. The
Manager shall supervise the disbursements from the Revenue
Account on behalf of Facility Operator of such amounts and at
such times as the same are required. Manager is permitted and
authorized by Facility Operator, Owner and Heartland to make
payments to NHI of the Monthly Interest Payments, payments to
reserve accounts or working capital accounts, and other payments
to NHI under the Financing Documents from this account. Manager
shall discharge such supervisory responsibilities in accordance
with reasonable and customary business standards and practices.
Facility Operator and Owner shall have the obligation of
providing funds for all capital assets (including personal
property and equipment and improvements to the Facility) required
(i) for the efficient operation of the Facility, (ii) by the
rules and regulations of any government authority, (iii) to
maintain the operating licenses of the Facility and the
certification and provider agreements for the Facility under the
applicable Medicaid programs, and (iv) to maintain the Facility
in a good condition competitive with the standard and quality of
other similar facilities. Facility Operator shall provide
sufficient working capital for the operation of the Facility and
otherwise and shall deposit such working capital in the Revenue
Account from time to time upon request of Manager, unless
required to do otherwise under the Financing Documents. Except
as otherwise provided in the Financing Documents, all costs and
expenses incurred in the operation of the Facility shall be paid
out of the Revenue Account. Manager shall designate the
signatory or signatories required on all checks or other
documents of withdrawal on the Revenue Account. Manager shall
have the right to change the authorized signatories for the
Revenue Account without the prior notice to or approval from any
other party. Manager shall not withdraw any monies from the
Revenue Account to pay any item other than budgeted capital
expenditures and the Cost of Operations of the Facility and
otherwise than in accordance with any other agreement executed
contemporaneously herewith in respect of the Facility.
b) The Costs of Operations shall mean all costs and
expenses incurred in, arising out of or related to the operation
of the Facility, including, without limiting the generality of
the foregoing, (i) wages, salaries, and benefits of the staff of
the Facility and related payroll taxes, and other related costs
(ii) the costs of repairs to and maintenance of the Facility (but
not the cost of capital improvement or capital assets), (iii) all
premiums, charges and other costs and expenses for insurance with
respect to the Facility and the operations thereof, (iv) all
taxes payable with respect to the Facility or the income thereof
or goods or services purchased thereby, (v) expenses and costs
incurred in connection with the purchase of necessary services
and supplies, the furnishing of utilities to the Facility, and
other necessary services and supplies provided by independent
contractors and other third parties, (vi) rental payments on
operational leases, (vii) amounts specified in the operating
Budget, (viii) payment of Monthly Interest Payments under the
Loan Agreement, and (ix) the Management Fee. Notwithstanding the
foregoing, amortization of deferred expenses, depreciation and
bad debt allowances and other reserves shall not be included in
the Costs of Operation.
c) The Revenue Account may not be used to pay debt service
on any Subordinated Payables (as defined in the Subordination
Agreement), except as permitted in the Subordination Agreement.
1.8 Licenses, Permits and Certifications.
a) Manager shall use its reasonable best efforts to assist
Facility Operator and Owner in applications for, in the name of
the Facility Operator and Owner, and to obtain and maintain, on
behalf of Facility Operator and Owner, all necessary licenses,
permits, consents, approvals and certifications from all
governmental agencies which have jurisdiction over the operation
of the Facility.
b) Neither Facility Operator nor the Owner nor Manager
shall knowingly take any action or fail to take any action which
may cause any governmental authority having jurisdiction over the
operation of the Facility to institute any proceeding for the
suspension, rescission or revocation of any necessary license,
permit, consent or approval. Manager shall not knowingly take
any action or fail to take action which may materially adversely
affect the amount of and Facility Operator's right to accept and
obtain payments under any public or private third party medical
payment program.
c) Facility Operator and Owner shall comply with all
applicable federal, state and local laws, rules and regulations
and requirements, provided that Facility Operator, at its sole
expense and without cost to Manager, shall have the right to
contest by appropriate legal proceedings, the validity or
application of any law, ordinance, rule, ruling, regulation, or
requirement of any governmental agency having jurisdiction over
the operation of the Facility. Manager, after having been given
written notice, shall cooperate with Facility Operator with
regard to the contest, and Facility Operator shall pay all
reasonable attorneys' fees incurred with regard to the contest
from the Revenue Account. Counsel for any such contest shall be
selected by Manager. Manager shall, with the consent of Facility
Operator, process all third party payment claims for the services
provided at the Facility, including, without limitation, contest
to the exhaustion of all applicable administrative proceedings or
procedures, adjustment and denials by governmental agencies or
their fiscal intermediaries as third party payors.
d) Facility Operator and Owner shall comply with all
federal, state and local laws, rules, regulations and
requirements which are applicable to Facility Operator and Owner
provided that Facility Operator, at its sole expense and without
cost to Manager, shall have the right to contest by proper legal
proceedings the validity, so far as applicable to it, of any such
law, rule, regulation or requirement, provided that such contest
shall not result in a suspension of operations of the Facility,
and provided further, Facility Operator shall not be deemed to be
in breach of this covenant if its failure to comply with any such
law, rule, regulation or requirement is the result of a failure
by Manager to comply with its obligations hereunder. Facility
Operator and Owner shall send notice immediately, but in any
event, within three (3) business days of any notice from any
governmental authority or any other regulator regarding the
Facility, and shall send copies of any filing with such
authorities to Manager.
1.9 Administrator and Health Service Coordinator. Manager
shall, from time to time as necessary, recruit for the Facility a
Qualified Administrator and a Director of Nursing Services. The
Qualified Administrator and the Director of Nursing Services are
herein referred to as the "Key Employees." The Key Employees may
be employees of, and be compensated by Manager; provided,
however, if the Key Employees are employees of Manager, Facility
Operator shall reimburse Manager for all reasonable compensation,
including salary, fringe benefits, bonuses, and reasonable
business expense reimbursements approved as shown in a Budget or
otherwise by Manager and Facility Operator, payable to the Key
Employees. The term "fringe benefits" shall include, without
limitation, employer's FICA payments, unemployment compensation
and other employment taxes, bonuses, vacation, personal and sick
leave benefits, worker's compensation, group life, health and
accident insurance premiums and disability and other benefits.
The compensation, including fringe benefits, payable to the Key
Employees shall be reasonable and in line with compensation
payable by other assisted living operators to administrators and
health service coordinators of like facilities in the Facility's
market area, shall be budgeted pursuant to Section 1.5(b) hereof
and shall be paid or reimbursed from the Revenue Account. Any
reimbursement to Manager on account of any Key Employee shall not
be subject to the Subordination of Management Agreement, but
shall be an operating expense of the Facility.
1.10 Government Regulations. Manager agrees to use its best
reasonable efforts to operate and maintain the Facility in
substantial compliance with the requirements of any statute,
ordinance, law, rule, regulation or order of any governmental or
regulatory body having jurisdiction over the Facility and with
all orders and requirements of the local board of fire
underwriters or any other body which may exercise similar
functions.
1.11 Quality Controls. Manager shall activate and maintain
on a continuing basis, a Quality Assurance Program ("QAP"),
including a safety program that meets all OSHA standards, in
order to provide objective measurements of the quality of
resident services, provided at the Facility and in connection
therewith shall utilize inspections and other techniques as
deemed appropriate.
1.12 Staff Specialists. In addition to the other managerial
services provided herein, Manager shall make available to the
Facility for consultation and advice, when necessary, specialists
in such fields as accounting, budgeting, dietary services,
janitorial and housekeeping, management, maintenance, nursing,
personnel, pharmacy operations, purchasing, quality assurance,
policies and procedures, and third party reimbursements.
1.13 Tax Returns and Regulatory Filings. Owner shall
receive copies of all annual tax returns or regulatory filings at
the same time that said returns or reports are filed.
1.14 Taxes. Any federal, state or local, taxes, assessments
or other governmental charges imposed on the Facility and arising
from Owner's period of ownership are the obligations of Facility
Operator or Owner, not of Manager, and shall be paid out of the
Revenue Account of the Facility. With the Facility Operator's
prior written consent, Manager may contest the validity or amount
of any such tax or imposition on any Facility in the same manner
as described in Section 1.8(c) hereof. Manager shall cause all
social security and federal and state income tax withholding and
other employee taxes which may be due and payable to be paid from
the revenues of the Facility before the payment of any other
expenses therefrom.
1.15 Non-Diversion of Residents Manager covenants that it
will not permit residents of the Facility to be moved to other
nursing centers owned or managed by it or any affiliate thereof,
or divert persons seeking admission as residents into the
Facility to such other facility, unless the special needs of such
residents cannot be met at the Facility or unilaterally requested
by such person or unless the Facility is full.
1.16 Financial Reports. The Manager shall provide the
Facility Operator with copies of such financial reports as are
required by NHI (or any other lender to the Facility).
1.17 Land Use Restrictions. Manager shall use its best
efforts to ensure that the Facility comply with any land use
restrictions currently in effect for the property of the
Facility.
1.18 Heartland's, Owner's and Facility Operator's
Indemnification of Manager. From and after the date of this
Agreement, Heartland, Owner and Facility Operator agree jointly
and severally to reimburse, indemnify and hold harmless Manager
against and in respect of (i) any and all debts, liabilities or
obligations of the Facility Operator pertaining to the Facility,
(ii) all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by Manager that result from, relate
to or arise out of (A) any misrepresentation, breach of warranty
or nonfulfillment of any agreement or covenant on the part of
Heartland, Owner or Facility Operator hereunder or from any
misrepresentation in or omission from any certificate, schedule,
statement, document or instrument furnished to Manager pursuant
hereto, (B) any of the matters referred to in subparagraph (i)
above, or (C) any claim by any third party alleging that the
execution, delivery or performance of this Agreement breaches any
duty or obligations of the parties hereto to such third party or
contravenes any rights or any such third party and (iii) any and
all actions, suits, claims, proceedings, investigations, demands,
assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and
expenses of investigation) incident to any of the foregoing or to
the enforcement of this Section.
ARTICLE II
2.1 Management Fee.
a) Each month during the term hereof, Manager shall
receive from Facility Operator, and Facility Operator shall pay
to Manager, as the amount due for the services being provided
pursuant to this Agreement, a fee (the "Management Fee")
consisting of a base fee (the "Base Management Fee"), plus an
incentive payment (the "Incentive Management Fee").
The Base Management Fee shall be that amount equal to four
(4%) of the Total Operating Revenue for the current year,
The Incentive Management Fee shall be that amount equal to
four (4%) percent of the Total Operating Revenues of the
Facility.
b) Under no circumstances shall the Incentive Management
Fee for any month exceed the remainder obtained by subtracting
one dollar ($l) from the Base Management Fee for such month.
c) In the event it should be determined following the
payment of any Management Fee or accrual of any Management Fee in
favor of Manager that the amount of Total Operating Revenues for
the period in question was greater or lesser than the amount of
Total Operating Revenues on which such amount of Management Fee
was calculated, then the parties shall account to each other
promptly for any resulting overpayment or over accrual or
underpayment or under accrual of incentive payments.
For purposes of this Agreement, the term "Total Operating
Revenue" shall mean all operating revenues, including all routine
and ancillary revenues net of any provisions from third party
payor contracts of Owner and Facility Operator from any source
whatsoever, determined in accordance with generally accepted
accounting principles.
2.2 Payment of Management Fees. Payment shall be made
monthly, in arrears, by the fifth (5th) day of the next
succeeding month commencing on August 5, 1996. Payments due on
an non-business day may be paid the next business day.
2.3 Subordination. Facility Operator and Manager agree
that as to payment of the Management Fee, the terms and
provisions of that certain Subordination of Management Agreement
of even date herewith, between Facility Operator and Manager
shall, to the extent of any inconsistency, supersede the terms
and conditions of this Agreement.
ARTICLE III
OTHER TRANSACTIONS WITH MANAGER OR ITS AFFILIATES
3.1 Transactions with Manager and its Affiliates. Except for
those certain agreements executed simultaneously herewith, and
obligations taken thereunder notwithstanding anything else herein
contained, Manager may, with full disclosure by Manager of such
affiliation and interest, cause Facility Operator or Owner to
enter into any contract with Manager or any affiliate thereof for
services required to be provided by Manager under this Agreement,
or pay any fee to Manager or its affiliates. Manager agrees that
it will not request Facility Operator to enter into any contract
with any affiliate of Manager unless that contract is no less
favorable to Facility Operator or Owner than could be obtained by
the Facility Operator or Owner in an arm's length transaction
with a third party.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Heartland, Owner and
Facility Operator. Heartland, Owner and Facility Operator make
the following representations and warranties which are material
representations and warranties upon which Manager relies as an
inducement to enter into this Agreement:
a) Status. Heartland is a non-profit corporation, duly
organized and validly existing in good standing under the laws of
the State of Massachusetts. Owner is limited partnership duly
organized and validly existing in good standing under the laws of
the State of New Hampshire. Facility Operator is a corporation
duly organized and validly existing in good standing under the
laws of the State of New Hampshire. Heartland, Owner and
Facility Operator have all necessary power to carry on their
business as now being conducted, to operate its properties as now
being operated, to carry on its contemplated business, to enter
into this Agreement and to observe and perform its terms.
b) Authority and Due Execution. Heartland, Owner and
Facility Operator have full power and authority to execute and to
deliver this Agreement and all related documents and to carry out
the transactions contemplated herein; which actions will not with
the passing of time, the giving of notice, or both, result in a
default under or a breach or violation of (i) the Heartland's,
Owner's or Facility Operator's Articles of Incorporation, Bylaws
or Partnership Agreement; or (ii) any law, regulation, court
order, injunction or decree of any court, administrative agency
or governmental body, or any mortgage, note, bond, indenture,
agreement, lease, license, permit or other instrument or
obligation to which any such entity is now a party or by which
any such entity or any of their assets may be bound or affected.
This Agreement constitutes a valid and binding obligation of
Heartland, Owner and Facility Operator, enforceable in accordance
with its terms, except to the extent that its enforceability is
limited by applicable bankruptcy, reorganization, insolvency,
receivership or other laws of general application or equitable
principles relating to or affecting the enforcement of creditors'
rights.
c) Litigation. There is no litigation, claim,
investigation, challenge or other proceeding pending or, to the
knowledge of Heartland, Owner or Facility Operator, threatened
against any of such parties, their properties or business which
seeks to enjoin or prohibit any of them from entering into this
Agreement or constitutes an investigation by any governmental
agency or authority into the business or financial affairs of
Heartland, Owner or Facility Operator.
d) Ownership of Facility. The Facility is owned by Owner.
e) Compliance with Applicable Law. The Facility is
currently operating in compliance with all applicable laws, rules
and regulations.
f) Disclosure. No agreement, representation, warranty or
covenant contained in this Agreement or in any statement or other
document required to be delivered by Heartland, Owner or Facility
Operator hereunder contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
the statements contained therein or herein not misleading.
4.2 Representations and Warranties of Manager. Manager
makes the following representations and warranties which are
material representations and warranties upon which the other
parties rely as an inducement to enter into this Agreement:
a) Status of Manager. Manager is a corporation duly
organized and validly existing in good standing under the laws of
the State of Delaware, and has all necessary power to carry on
its business as now being conducted, to operate its properties as
now being operated, to carry on its contemplated business, to
enter into this Agreement and to observe and perform its terms.
b) Authority and Due Execution. Manager has full power
and authority to execute and deliver this Agreement and all
related documents and to carry out the transactions contemplated
herein; which actions will not with the passing of time, the
giving of notice, or both, result in a default under or a breach
or violation of (i) the Manager's Articles of Incorporation or
By-Laws; or (ii) any law, regulation, court order, injunction or
decree of any court, administrative agency or governmental body,
or any mortgage, note, bond, indenture, agreement, lease,
license, permit or other instrument or obligation to which
Manager is now a party or by which Manager or any of its assets
may be bound or affected. This Agreement constitutes a valid and
binding obligation of Manager, enforceable in accordance with its
terms, except to the extent that its enforceability is limited by
applicable bankruptcy, reorganization, insolvency, receivership
or other laws of general application or equitable principles
relating to or affecting the enforcement of creditors' rights.
c) Litigation. There is no litigation, claim,
investigation, challenge or other proceeding pending or, to the
knowledge of Manager, threatened against Manager, its properties
or business which seeks to enjoin or prohibit it from entering
into this Agreement or constitutes an investigation by any
governmental agency or authority into the business or financial
affairs of Manager.
ARTICLE V
TERMINATION
5.1 Termination for Cause.
a) If any party is dissolved or liquidated, or shall apply
for or consent to the appointment of a receiver, trustee or
liquidator of it or all or a substantial part of its assets, file
a voluntary petition in bankruptcy, make a general assignment for
the benefit of creditors, file a petition or an answer seeking
reorganization or arrangement with creditors or to take advantage
of any insolvency law, or if an order, judgment or decree shall
be entered by a court of competent jurisdiction, on the
application of a creditor, adjudicating said party as bankrupt or
insolvent or approving a petition seeking reorganization of said
party or appointing a receiver, trustee or liquidator for said
party or all or a substantial part of its assets, and such order,
judgment or decree shall continue unstated and in effect for any
period of ninety (90) consecutive days, then in case of any such
event, the term of this Agreement shall expire, at the other
party's option, on five (5) days written notice.
b) Facility Operator shall have the right to terminate
this Agreement at any time if because of Manager's acts or
omissions: (i) there has been a formal notice the operating
license for the Facility or any substantial portion thereof will
be qualified in any substantial respect or placed on a
conditional or provisional status, revoked or suspended which is
not rescinded, vacated or stayed by action of Manager, (or
otherwise) within thirty (30) days of its issuance, unless
Manager has diligently pursued such cure; (ii) Manager shall have
caused to occur an Event of Default under the Financing
Documents, which event of default is not cured within thirty (30)
days after Manager's receipt of notice of such event;
c) Manager shall have the right to terminate (i) upon
failure to pay Management Fee for thirty (30) days unless the
nonpayment is the result of the provisions of the Subordination
of Management Agreement, provided, however, that the Facility
Operator has the right to cure such failure to pay during such
thirty (30) day period, (ii) upon a termination of any management
agreement to which Manager and Heartland are both parties.
d) Notwithstanding anything else herein contained, neither
party shall have the right to terminate this Management Agreement
as a result of any of the reasons set forth in clauses (b) or (c)
above, if: (i) the acts or omissions of the party seeking the
termination materially contribute to the reason for termination;
or (ii) the event is caused by strikes, other labor disturbances,
fires, windstorm, earthquake, arbitrary and capricious action by
third party payors, war or other state of national emergency,
terrorism, or acts of God, or other events not the fault of
either party, in which negligence of the party sought to be
terminated is not a materially contributing factor to the
occurrence of such event.
5.2 Effect of Termination.
a) Heartland, Owner and Facility Operator agree that in
the event this Agreement should be terminated for any reason,
Heartland, Owner and Facility Operator jointly and severally
agree to repay in full all fees and indebtedness owned by
Heartland, Owner or Facility Operator to Manager.
b) Upon termination of Manager or the Management Agreement
for any reason whatsoever, Manager shall be released from its
obligations pursuant to the Guaranty Agreement, any obligations
to contribute to the Debt Service Reserve under the Debt Service
Reserve Agreement or to the working capital account under the
Loan Agreement.
ARTICLE VI
MISCELLANEOUS COVENANTS
6.1 Assignment.
Facility Operator shall not assign its rights and/or
obligations under this Agreement without prior written consent of
Manager. Manager shall not assign its rights and/or obligations
under this Agreement except to a wholly-owned subsidiary,
provided, however, that after such assignment Manager shall
remain fully liable for (i) all obligations of the Manager
hereunder and (ii) all of its obligations under the Continuing
Guaranty, any guaranty to fund working capital, and the guaranty
to fund the Debt Service Reserve under Section 2.10 of the Loan
Agreement.
6.2 Special Covenants of Heartland, Owner and Facility
Operator. Heartland, Owner and Facility Operator, as applicable,
shall comply with each of the following covenants:
a) Neither Owner nor Facility Operator shall incur any
indebtedness other than under the Loan Agreement, nor sell the
accounts receivable of the Facility.
b) Owner and Facility Operator will cooperate with Manager
in every reasonable respect and will furnish Manager with all
information required by it for the performance of its services
hereunder and will permit Manager to examine and copy any data in
the possession and control of Owner or Facility Operator
affecting management and/or operation of the Facility and will in
every way cooperate with Manager to enable Manager to perform
its services hereunder.
c) Facility Operator will examine documents submitted by
Manager and render decisions and take action pertaining thereto,
when required, promptly, to avoid unreasonable delay in the
progress of Manager's work.
d) Except for acts involving gross negligence or willful
disregard of Heartland, Owner or Facility Operator interests,
Heartland, Owner and Facility Operator shall jointly and
severally indemnify and hold Manager harmless from all claims,
liability, loss, damage, cost and expense (including reasonable
attorney's fees) asserted by any other person for any obligation
or liability of Heartland, Owner or Facility Operator for any
obligations, liability or claim that arises in the course of the
business of the Facility.
e) Heartland, Owner and Facility Operator covenant that
Manager shall quietly hold, occupy and enjoy the Facility
throughout the term of this Agreement free from hindrance,
ejection by Facility Operator or any other party claiming under,
through or by right of Facility Operator. Owner will not sell
the Facility during the term of this Agreement, nor will the
Facility Operator sublease this facility except as is permitted
in writing by Manager. Facility Operator agrees to pay and
discharge any payments and charges and, at its expense, to
prosecute all appropriate actions, judicial or otherwise,
necessary to assure such free and quiet occupation.
f) As long as Heartland, Owner and Facility Operator are
indebted to or owe funds to Manager or any affiliate on account
unpaid Management Fees, Arrangement Fees, Guaranty Fees or
Manager is obligated to make contributions to the Debt Service
Reserve or pursuant to the Debt Service Reserve Agreement or to
the working capital account under the Loan Agreement or as
Manager is obligated under the Continuing Guaranty, or Manager's
guarantee of indebtedness owed by Heartland to Claire Y. Lemire,
Heartland, Owner and Facility Operator shall not (without the
consent of Manager, which may be withheld in its complete
discretion) withdraw, lend, pledge or divert any revenues of the
Facility otherwise than to the Revenue Account other than as
provided in the Financing Documents and shall not act in any
manner which interferes with or prevents Manager from withdrawing
funds from the Revenue Account to pay amounts owed under the Loan
Agreement.
6.3 Additional Covenants of Facility Operator. Facility
Operator hereby makes the additional covenants set forth in the
Section, which are material covenants and upon which Manager
relies as an inducement to enter into this Agreement:
a) Facility Operator will cooperate with Manager in every
reasonable respect and will furnish Manager with all information
required by it for the performance of its services hereunder and
will permit Manager to examine and copy any data in the
possession and control of Facility Operator affecting management
and/or operation of the Facility and will in every way cooperate
with Manager to enable Manager to perform its services hereunder.
b) Facility Operator will examine documents submitted by
Manager and render decisions pertaining thereto, when required,
promptly, to avoid unreasonable delay in the progress of
Manager's work. Facility Operator shall execute and deliver any
and all applications and other documents that may be deemed by
Manager to be necessary or proper to be executed by Facility
Operator in connection with the Facility, subject to the
limitations in this Agreement with respect to the budget and
other rights of Facility Operator.
6.4 Negligence by Manager. Manager will use its best
efforts to perform its obligations hereunder. Nevertheless,
Heartland, Owner and Facility Operator expressly release Manager
from all acts undertaken in good faith by Manager, unless such
acts involve gross negligence or a willful disregard of those
parties' interests. Any acts taken by Manager upon the advice of
Facility Operator or of Manager's professional consultants will
be conclusively deemed to have been taken in good faith and not
to have been acts of gross negligence or willful disregard of
Heartland's, Owner's or Facility Operator's interests. Manager
shall indemnify and hold Facility Operator harmless from all
claims, liability, loss, damage, cost and expense (including
reasonable attorney's fees) asserted by any other person for any
obligation, liability or claim from an act or acts of Manager's
gross negligence.
6.5 Binding Agreement. The terms, covenants, conditions,
provisions and agreements herein contained shall be binding upon
and inure to the benefit of the parties hereto, their successors
and assigns.
6.6 Relationship of Parties. Nothing contained in this
Agreement shall constitute or be construed to be or to create a
partnership, joint venture or lease between Heartland, Owner or
Facility Operator and Manager with respect to the Facility. The
parties acknowledge that each is an independent entity which has
negotiated the terms of, and entered into this Agreement, on an
arm's length basis represented by separate legal counsel and that
neither is owned or otherwise controlled, directly or indirectly,
by the other party. Neither party possesses any ownership or
equity interest in the other party and neither party has the
power, directly or indirectly to significantly influence or
direct the actions or policies of the other party. Each party
shall be liable for their own debts, obligations, acts, and
omissions, including the payment of all required withholding,
social security, and other taxes or benefits on behalf of their
respective employees. Manager will not be obligated to advance
any of its own funds to or for Facility Operator's account or to
incur any liability hereunder unless Facility Operator shall have
furnished to Manager funds sufficient for the discharge thereof.
The relationship of Manager to Facility Operator is that of an
independent contractor, not that of an agent, and nothing
contained herein shall be construed to create a relationship of
agency between Manager and Facility Operator.
6.7 Notices.
a) If Manager shall desire the approval of Facility
Operator to any matter, Manager may give written notice to
Facility Operator that it requests such approval, specifying in
the notice the matter as to which approval is requested and
reasonable detail respecting the matter. If Facility Operator
shall not respond negatively in writing to the notice within ten
(10) days after the sending thereof (unless some other period for
response is specified in this Agreement), Facility Operator shall
be deemed to have approved the matter referred to in the notice.
Any provision hereof to the contrary notwithstanding, in
emergency situations (as determined by Manager), Manager shall
not be required to seek or obtain Facility Operator's approval
for any actions or omissions which Manager, in its sole judgment,
deems necessary or appropriate to respond to such situations,
provided Manager promptly thereafter reports such action or
omission to Facility Operator in writing.
b) All notices, demands and requests contemplated
hereunder by either party to the other shall be in writing, and
shall be delivered by hand, transmitted by cable or telegram, or
mailed, postage prepaid, registered or certified mail, return
receipt requested or any nationally recognized overnight courier:
(i) To Heartland, Owner or Facility Operator, by addressing
the same to:
Heartland Healthcare Corporation
60 Atkinson Lane
Sudbury, Massachusetts 01776
Attn: Gerald Tulman
with a copy to
Smith Gambrell & Russell
Promenade II, Suite 3100
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309-3592
Attn: Stan Brading
(ii) To Manager, by addressing the same to:
Iatros Health Network, Inc.
Ten Piedmont Center, Suite 400
Atlanta, GA 30305
Attention: Joseph C. McCarron
Oasis Healthcare
250 Boylston Street
Chestnut Hill, Massachusetts 02167
Attn: Scott Schuster
with a copy to:
Harkleroad & Hermance, P.C.
229 Peachtree Street, Suite 2500
Atlanta, GA 30303
Attention: James P. Hermance
or to such other address or to such other person as may be
designated by notice given from time to time during the term
hereof by one party to the other. Any notice hereunder shall be
deemed given three (3) days after mailing, if given by mailing in
the manner provided above, or on the date delivered or
transmitted if given by hand, cable or facsimile.
6.8 Entire Agreement; Amendments. This Agreement contains
the entire agreement between the parties hereto with respect to
the subject matter, and no prior oral or written, and no
contemporaneous oral, representations or agreements between the
parties with respect to the subject matter of this Agreement
shall be of any force and effect. Any additions, amendments or
modifications to this Agreement shall be of no force and effect
unless in writing and signed by all parties hereto.
6.9 Governing Law. This Agreement has been negotiated in
part in the State of Georgia, and the terms and provisions hereof
and the rights and obligations of the parties hereto shall be
construed and enforced in accordance with the laws thereof.
6.10 Captions and Headings. The captions and headings
throughout this Agreement are for convenience and reference only,
and the words contained therein shall in no way be held or deemed
to define, limit, describe, explain, modify, amplify or add to
the interpretation, construction or meaning of any provision of
or the scope or intent of this Agreement nor in any way affect
this Agreement.
6.11 Costs and Expenses; Indemnity. Except as otherwise
expressly provided herein, all fees, costs, expenses and
purchases arising out of, relating to or incurred in the
operation of the Facility, including, without limitation, the
fees, costs and expenses of outside consultants and
professionals, shall be the sole responsibility of Facility
Operator. Manager, by reason of the execution of this Agreement
or the performance of its services hereunder, shall not be liable
for or deemed to have assumed any liability for such fees, costs
and expenses, or any other liability or debt of Facility Operator
whatsoever, arising out of or relating to the Facility or
incurred in its operation, except the salaries of its employees
and the expenses and costs incurred at its central administrative
offices in the performance of its obligations hereunder and any
civil penalties imposed upon the Facility Operator pursuant to
OBRA. Manager shall have no obligation to advance any sums
required to maintain necessary licenses and permits and to
otherwise keep the Facility operating as a nursing center, except
as set forth in the Continuing Guaranty, any guaranty of working
capital, or Section 2.10 of the Loan Agreement.
6.12 Liability Limited. No officer or director of
Heartland, Owner, Facility Operator or Manager shall have any
personal liability hereunder, nor shall Iatros Health Network,
Inc. nor any of its affiliated entities other than the parties
hereto shall have any obligations whatsoever hereunder.
6.13 Arbitration of Certain Matters. If any controversy
whatsoever should arise between the parties in the payment,
performance, interpretation and application of this Agreement,
either party may serve upon the other a written notice stating
that such party desires to have the controversy reviewed by an
arbitrator, who shall be a representative of a firm specializing
in the nursing home/assisted living facility sector of medical
services. If the parties cannot agree within fifteen (15) days
from the service of such notice, upon the selection of such an
arbitrator, the arbitrator shall be selected or designated by the
American Arbitration Association upon the written request of
either party hereto. Arbitration of such controversy,
disagreement or dispute shall be conducted in accordance with the
rules then in force of the American Arbitration Association and
the decision and award of the arbitrator so selected shall be
binding upon both parties hereto. BOTH PARTIES HERETO HEREBY
WAIVE ANY RIGHT TO A TRIAL BY JURY OF ANY CONTROVERSY ARISING
HEREUNDER.
6.14 Access to Books, Record and Documents if Medicare
Payments Received.
This Section 6.14 is included herein because of the possible
application of Section 1861(v)(l)(I) of the Social Security Act
to this Agreement. If such Section 1861(v)(l)(I) should not be
found applicable to this Agreement under the terms of such
Section and the regulations promulgated thereunder, then this
Section shall be deemed to not be a part of this Agreement and
shall be null and void
a) Until the expiration of four (4) years after the
furnishing of services pursuant to this Agreement, Manager shall,
as provided in Section 1861(v)(l)(I) of the Social Security Act,
and regulations promulgated thereunder make available, upon
written request, to the Secretary of Health and Human Services,
or upon request, to the Comptroller General of the United States,
or any of their duly authorized representatives, this Agreement,
and all books, documents and records of Manager that are
necessary to verify the nature and extent of the costs of any
services furnished pursuant to this Agreement for which payment
may be made under the Medicare Program.
b) If Manager carries out any of the duties of this
Agreement through a subcontract or subcontracts with an aggregate
value or cost of $10,000 or more over a twelve (12) month period
with a related organization, such subcontract or subcontracts
shall contain a clause to the effect that until the expiration of
four (4) years after the furnishing of such services pursuant to
such subcontract or subcontracts, the related organization shall,
as provided in Section 1861(v)(l)(I), make upon written request,
to the Secretary of Health and Human Services, or upon request,
to the Comptroller General of the United States, or any of their
duly authorized representatives, the subcontract or subcontracts,
and all books, documents and records of such organization that
are necessary to verify the nature and extent of the costs of any
services furnished pursuant to such subcontract or subcontracts
for which payment may be made under the Medicare Program.
6.15 Definition of Certain Terms. For purposes of this
Agreement all capitalized terms shall have the meanings set forth
in this Agreement or the Loan Agreement executed this same day.
6.16 Severability. If any term or provision of this
Agreement or application thereof to any person or circumstance
shall to any extent be invalid or unenforceable, the remainder of
this Agreement or the application of such term or provision to
persons or circumstances other than those to which it is held
invalid or unenforceable shall not be affected thereby, and each
term and provision of the Agreement shall be valid and
enforceable to the fullest extent permitted by law.
6.17 Waivers. No waiver of any term, provision, or
condition of this Agreement, whether by conduct or otherwise, in
any one or more instances, shall be deemed to be construed as a
further and continuing waiver of any such term, provision or
condition of this Agreement.
6.18 Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the
same agreement, and shall become a binding agreement when one or
more counterparts have been signed by each of the parties and
delivered to the other party.
IN WITNESS WHEREOF, the parties hereto have executed, sealed
and delivered this Agreement through their duly authorized
representatives, as of the day and year first above written.
ATTEST/WITNESS: HEARTLAND HEALTHCARE CORPORATION
___________________________By:________________________________
ATTEST/WITNESS: EPSOM HEALTH
LIMITED PARTNERSHIP
___________________________By:________________________________
ATTEST/WITNESS: EPSOM MANOR, INC.
___________________________By:________________________________
ATTEST/WITNESS: EPSOM MANOR RCLC, INC.
___________________________By:________________________________
IATROS HEALTH NETWORK, INC.
___________________________By:________________________________
Joseph C. McCarron
Executive Vice President
EXHIBIT A
1. The Loan Agreement
2. The Leases
3. Debt Service Reserve Agreement
4. The Continuing Guaranty
5. The Subordination of Management Agreement
6. The Subordination and Attornment Agreement
7. The Security Agreement/Facility
8. Capital Improvement Reserve Agreement
9. First Refusal Purchase Agreement
10. Security and Pledge Agreement
11. Equity Participation Agreement
12. Collateral Assignment of Partnership Interests
13. The Stock Purchase and Sale Agreement
14. Other Management Agreements for Properties executed this
same date
15. Any other document executed contemporaneously herewith
specifying duties of Manager with respect to the Facility
EXHIBIT 10.5
MANAGEMENT AGREEMENT
(Maple Leaf)
THIS AGREEMENT, made and entered into as of the first day of
July, 1996, by and between Iatros Health Network, Inc., a
corporation organized under the laws of State of Delaware
(hereinafter referred to as "Manager") on the one hand, and Maple
Leaf Health Care, Inc., a New Hampshire corporation ("Facility
Operator"), Maple Leaf Health Limited Partnership, a New
Hampshire limited partnership ("Owner") and Heartland Healthcare
Corporation, a Massachusetts non-profit corporation, hereinafter
referred to as "Heartland." Certain terms used herein are
defined in the last item of this Agreement.
W I T N E S E T H:
WHEREAS, Owner is the owner of a 114 bed licensed nursing
center located in Manchester, New Hampshire, together with the
equipment, furnishings and other tangible personal property used
in connection therewith (the "Facility");
WHEREAS, Owner and Heartland (among others) have borrowed
the proceeds of a $25,805,500.00 loan agreement with National
Health Investors, Inc. ("NHI") pursuant to the Loan Agreement
dated as of this same date (the "Loan Agreement") to purchase the
Facility and three other long-term care facilities;
WHEREAS, Manager has guaranteed repayment of certain
payments and agreed to make contributions to certain reserves and
accounts under certain circumstances as specified in the Loan
Agreement;
WHEREAS, Owner has leased the Facility to the Facility
Operator who operates the Facility;
WHEREAS, Facility Operator wishes to retain the services of
Manager as manager of the Facility; and
WHEREAS, Manager is willing to perform such services with
regard to the management, operation, maintenance, marketing, and
servicing of the Facility (the "Management Services"), upon the
terms and subject to the conditions contained herein.
NOW, THEREFORE, in consideration of the foregoing and of the
full and faithful performance of all the terms, conditions, and
obligations herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, Manager and Facility Operator, Owner and Heartland
intending to be legally bound hereby, agree as follows:
ARTICLE I
OPERATING TERMS AND APPOINTMENT AND EMPLOYMENT OF
MANAGER AS AGENT AND GENERAL MANAGER OF THE FACILITIES
1.1 Term. The term of this Agreement shall commence on the
date hereof and shall continue for fifteen (15) calendar years
from that date, subject to earlier termination as set forth in
Article V hereof. If a party to this Agreement desires to enter
into a new management agreement at the end of its fifteen (15)
year term, it shall give sixty (60) days prior written notice of
such fact to the other party to facilitate negotiation of the new
management agreement.
1.2 Employment of General Manager. Facility Operator
hereby appoints and employs Manager as operating manager of the
Facility, and Manager agrees to act as operating manager of the
Facility, to supervise and direct the day-to-day business
activities, management and operation and repair of the Facility
and all phases of its operation in the name of and on behalf of
Facility Operator and the Owner and for its account during the
term of this Agreement upon the terms and conditions hereinafter
stated. Manager shall be responsible for managing the Facility
and all of its assets and services with the same degree of
diligence and skill as is customary in the nursing facility
industry and as is employed by the Manager or its affiliates in
the management of similar homes, in full compliance with all
obligations imposed on Facility Operator which are known to, or
disclosed to Manager by Facility Operator in writing, including
the obligations under those documents listed in Exhibit A,
attached hereto (the "Financing Documents"). Facility Operator
will deliver to Manager concurrent with the execution hereof all
of the Financing Documents. Manager confirms that it has
reviewed drafts of the Financing Documents and will comply with
all of its obligations in the Financing Documents, and will use
its best efforts to enable the Facility Operator to comply with
all of its obligations under such Financing Documents. Manager
shall, subject to compliance of Facility Operator with its
obligations hereunder and under applicable laws and regulations,
do all things as may be required to maintain and preserve all
necessary licenses, permits and approvals to operate the Facility
so as to substantially comply with all applicable laws, rules and
regulations and, when applicable and desired by Facility
Operator, to make the Facility eligible for participation in any
government reimbursement program which may be developed during
the term of this Agreement; provided, however, that Manager shall
not be required to expend its own funds for any costs of
operating or repairing the Facility except as otherwise provided
herein, or except as provided in the Financing Documents.
Manager shall not be deemed to be in violation of this Agreement
if it is prevented from performing any of its obligations
hereunder for any reason beyond its control including, without
limitation, strikes, lockouts, acts of God, unforeseen changes in
statutes, regulations or rules of appropriate governmental or
other regulatory authorities, so long as Manager attempts
diligently to overcome such obstacles. Manager makes no
warranties, express or implied, and shall not assume any
financial or other responsibilities in connection with its
obligations hereunder, except as hereinafter specifically
provided.
1.3 Retention of Control by Facility Operator. Facility
Operator and Owner shall at all times continue to exercise
control over the assets and operations of the Facility, and
Manager shall perform its responsibilities as described in this
Agreement in accordance with policies, directives and bylaws
adopted by Facility Operator and Owner and communicated in
writing to Manager and pursuant to a Budget adopted hereunder,
and except as may affect repayment of obligation under the Loan
Agreement. By entering into this Agreement, Facility Operator
and Owner do not delegate to Manager any of the powers, duties
and responsibilities vested in the Facility Operator or Owner by
law, or by their respective organization documents. Facility
Operator may, according to the terms of this Agreement, in
writing direct Manager to implement policies for the Facility and
may adopt as policy for the Facility, recommendations and/or
proposals made by Manager. Whenever this Agreement calls for the
approval of Facility Operator, such approval shall be expressed
in writing executed by a duly authorized officer or director of
Facility Operator or by action of the board of directors of
Facility Operator evidenced by the minutes of the board of
directors, and such approval shall not be unreasonably withheld
or delayed. In the absence of specific written direction from
Facility Operator, Manager shall be entitled to rely upon its
prudent business judgment.
1.4 Management Services to be Provided by Manager. In
connection with such supervision, direction and management,
Manager shall use its best reasonable efforts to perform or cause
to be performed, the following services within the confines of an
Initial Budget and an Annual Budget, subject to budgetary
overruns which may occur due to events beyond Manager's control.
During the terms of this Agreement, Manager shall as agent
and on behalf of Facility Operator and Owner, manage all aspects
of the operation of the Facility, including, but not limited to,
the provision of assistance with activities of daily living to
residents of the Facility, staffing, accounting (but not audit),
billing, collections, setting of rates and charges and general on-
site administration. In connection therewith, Manager (either
directly or through supervision of employees of the Facility)
shall use its best efforts to:
1) Select, employ, supervise and train on behalf of
Facility Operator and Owner, an adequate staff, as
required by law and subject to availability, of nurse
aides, office and other employees, including an
administrator for the Facility ("Administrator") and
promote, direct, assign and discharge all such
employees on behalf of Facility Operator at Manager's
sole discretion. All such employees shall be employees
of Facility Operator or the Owner and carried on the
payroll of the Facility and shall not be deemed
employees or agents of Manager. Except as otherwise
agreed to by Facility Operator, all personnel not
involved in the day-to-day operation of the Facility
shall be employees of Manager;
2) Institute and amend from time to time, subject to
any policy disclosed by Facility Operator pursuant to
Section 1.3, general salary scales, personnel policies
and appropriate employee benefits for all employees;
3) Issue appropriate bills for services and materials
furnished by the Facility and use its best efforts to
collect accounts receivable and monies owed to the
Facility and deposit such monies in suitable accounts,
design and maintain accounting, billing, resident and
collection records; and prepare and file insurance and
any and all other necessary or desirable applications,
reports and claims related to revenue production.
Facility Operator and Owner hereby grant Manager the
right to enforce either of their rights as creditor
under any contract relating to the Facility or in
connection with rendering any services at the Facility
for purposes of collecting accounts receivable and
monies owed the Facility;
4) Plan, supervise and conduct a program of regular
maintenance and repair pursuant to an approved Budget,
except that any single physical improvement (other than
approved budgeted maintenance and repair) costing more
than Ten Thousand Dollars ($10,000.00) shall be subject
to the prior approval of Facility Operator;
5) Purchase all necessary food, beverage, medical,
cleaning and other supplies, equipment, furniture and
furnishings for the operation and maintenance of the
Facility and contract for all necessary services for
the account of Facility Operator and Owner. The
purchase of any single item of equipment, furniture or
furnishings (other than approved budgeted items) which
costs more than Ten Thousand Dollars ($10,000.00) shall
also be subject to the approval of Facility Operator;
6) Administer, supervise and schedule all resident
and other services of the Facility. All providers
affiliated with the Manager shall be identified;
7) Provide for the orderly and timely payment of
accounts payable, employee payroll, taxes, insurance
premiums and all other obligations of the Facility on
behalf of Facility Operator and Owner and assist
Facility Operator in making provision for the orderly
payment of amounts due on any obligations and other
indebtedness. Notwithstanding the foregoing, this
shall not create an obligation for Manager to fund such
payments;
8) Institute written standards and procedures, for
admitting and discharging residents, for charging
residents for services and for collecting the charges
from the residents (or residents' relatives or other
third parties);
9) Furnish to Facility Operator for review, any and
all policy and procedure manuals needed with reference
to the operation of the Facility and propose revisions
to said policy manuals as is needed from time to time
to assure, to the best of Manager's ability, that the
Facility complies with all applicable local, state and
federal laws, regulations and requirements (provided
that the foregoing does not constitute a guaranty of
the same by Manager). A copy of such manuals shall be
kept at the Facility at all times;
10) Obtain and maintain (subject to market conditions)
insurance coverage for the Facility naming Facility
Operator, Owner, Manager, or such other persons as
insureds, in such amounts and of such types as may be
required under the Loan Agreement. Manager shall use
reasonable best efforts to have Facility Operator and
Owner named as additional insureds under medical
malpractice coverage policies of any physician or any
other licensed practitioner employed or under contract
with the Facility. Facility Operator and Owner may,
at their sole option, arrange for any other insurance
as they determine to be necessary;
11) Negotiate and enter into, in the name of and on
behalf of Facility Operator and Owner, such agreements,
contracts for professional services, consultants, or
attorneys, and orders as it may deem necessary or
advisable for the furnishings of services, concessions
and supplies for the operation and maintenance of the
Facility, subject to Facility Operator's approval for
all agreements or contracts for services or supplies
that exceed the Budget by Ten Thousand Dollars
($10,000.00) per year;
12) Negotiate and settle all employee relation
matters, union and non-union, and negotiate on behalf
of Facility Operator and Owner (and in conjunction with
Facility Operator's counsel or other representative)
with any labor union lawfully entitled to represent
employees of Facility Operator and Owner who work at
the Facility, but any collective bargaining agreement
or labor contract that raises the cost of such labor by
more than $50,000 per year beyond the amount for such
labor in the Budget must be submitted to Facility
Operator for its approval;
13) Manager shall assist Facility Operator in
maintaining all licenses, certifications and permits in
the name of Facility Operator and Owner, all as
required for the operation of the Facility;
14) Maintain an accounting and internal control system
using accounts and classifications consistent with
those used in similar facilities in the geographical
area of the Facility, including suitable books of
control and account as are necessary in order to comply
with all state and federal standards, rules and
regulations;
15) Manager shall be responsible for the coordination
of such ancillary services, including but not limited
to, speech therapy, occupational therapy, inhalation
therapy, physical therapy and rental of equipment, as
Manager may deem reasonable, necessary or desirable in
connection with the operation of the Facility. Manager
shall select such consultants in connection therewith;
16) Prepare all certifications required to be prepared
by the Manager under any document executed by the
Facility Operator, Owner or Heartland in connection
with the Financing Documents;
17) Establish charges for medical, nursing and other
health care services, and credit policies;
18) Perform or supervise the performance of all record
keeping functions so that Facility Operator and Owner
may meet the record keeping requirements of the
Financing Documents and all applicable statutes, rules
or regulations of governmental agencies;
19) Solicit bids for architectural, engineering, and
construction services in connection with appropriate
capital improvements to the Facility, evaluate
contracts for such services, award contracts for such
capital improvements, and oversee the construction of
such capital improvements; and
20) Repair and maintain the Facility as may be
reasonable and necessary for the proper maintenance and
operation thereof, including but not limited to proper
handling and addressing of all environmental issues.
All costs of facilitating and implementing the above
activities and services which are to be supervised by Manager
shall be borne by Facility Operator and Owner and provided at
Facility Operator's and Owner's sole cost and expense.
Notwithstanding any of the above provisions, in the event of
any emergency requiring prompt action for the protection and
safety of the Facility or the residents and staff therein or for
the protection of the Facility operating licenses, Manager shall
be entitled to take necessary action without prior approval,
following which a report of the occasion for such action and the
action taken shall be made to Facility Operator within a
reasonable period thereafter.
1.5 Budget. Not less than thirty (30) days before the end
of each fiscal year of the Facility, Manager shall submit to
Facility Operator a reasonable annual budget covering the
operations of and proposed capital expenditures to be made with
respect to the Facility for the next fiscal year (or the
remainder of the current fiscal year, in the case of the initial
budget which shall be submitted to the Facility Operator within
60 days after the execution of this Agreement) and designed to
cover, to the extent possible under then existing reimbursement
policies and other conditions, the projected requirements under
the Financing Documents, all Costs of Operations (as defined in
Section 1.7(b) hereof) and other fees and expenses, as well as
anticipated expenditures for the purchase of capital assets and
for capital improvements to operate and maintain the Facility.
Each annual budget shall include the following:
a) Capital Expenditures. A capital expenditure budget for
the Facility outlining a program of capital expenditures and
major repairs as may be required by applicable law (a "mandatory
capital expenditure") or desirable in Manager's best reasonable
business judgment for the next fiscal year (or the remainder of
the current fiscal year, in the case of the initial budget) (a
"desirable capital expenditure"), on a per annum basis, in which
each proposed expenditure will be designated as either mandatory
or desirable. Facility Operator may approve or reject in its
discretion, each proposed capital expenditure, except those
required by law, which shall be approved by Facility Operator,
and those in Manager's best reasonable business judgment as being
necessary and appropriate, to which Facility Operator shall not
unreasonably withhold or delay its consent. If Facility Operator
has not notified Manager of its rejection of a proposed capital
expenditure budget within ten (10) days of receiving the budget,
it shall be deemed to have approved of the capital expenditure
budget. Manager shall be responsible for designating as a
"mandatory capital expenditure" any such expenditure which, if
not made would in Manager's judgment, result in a Facility losing
its license (or, if applicable, becoming ineligible under any
third party payor program applicable to that Facility) or the
issuance of a formal notice that the operating license for any of
the Facility or any substantial portion thereof will be qualified
in any material respect or placed on a conditional or provisional
status, revoked or suspended.
b) Operating Budget. Budgets for the Facility setting
forth an estimate of operating revenues and expenses for the next
fiscal year (or the remainder of the current fiscal year, in the
case of the initial budget), on both a month-by-month and a per
annum basis, together with an explanation of anticipated changes
in facility utilization, charges to residents, payroll rate and
positions, non-wage cost increases, or to a third party payor,
and all other factors differing significantly from the current
year. If Facility Operator has not notified Manager of its
rejection of a proposed operating budget within ten (10) days of
receiving the budget, it shall be deemed to have approved of the
proposed operating budget.
c) Cash Flow Projections. If NHI (or any lender to the
Facility) so requests, Manager shall prepare, projections of cash
receipts and disbursements for the Facility for the next fiscal
year (or the remainder of the current fiscal year, in the case of
the initial budget), on both a month-by-month and a per annum
basis, based on the proposed operating and capital budgets,
together with recommendations as to the use of projected cash
flow in excess of short-term operating requirements and/or as to
the sources and amounts of additional cash flow that may be
required to meet operating requirements and capital requirements.
It is understood that any budget is an estimate and target
only and that unforeseen circumstances may make adherence to the
budget impracticable, and Manager shall be entitled to make
insignificant departures therefrom or departures therefrom due to
such causes upon fully explaining such unforeseen circumstances
to Facility Operator.
An "insignificant departure" shall mean any expenditure in
the aggregate that exceeds the amount of the Budget by less than
two (2%) of the total annual applicable Budget for the Facility.
As approved, each annual budget will be referred to herein
as an "Annual Budget" and the initial budget will be referred to
herein as the "Initial Budget."
1.6 Reports.
a) Manager shall prepare and deliver to Facility Operator
such reports or financial statements as may be required by NHI
(or any lender to the Facility) within the time period prescribed
by NHI (or such other lender).
b) Manager shall schedule management meetings to be
attended by representatives of both Manager and Facility
Operator, no more frequently than quarterly. Manager shall
provide such other reports, including cost comparison reports,
from time to time, but in no event more frequently than once each
calendar quarter.
c) Manager shall make available to Facility Operator for
inspection during normal business hours and copying by Facility
Operator upon request and at Facility Operator's expense, all
books, records, financial data relating to the Facility.
d) Manager shall notify Facility Operator immediately of
the start of a survey and shall provide Facility Operator with
copies of all licensure inspections conducted at any of the
Facility immediately upon receipt, but in no event later than
three (3) business days after they are received by the Manager or
the Facility.
1.7 Bank Accounts and Working Capital.
a) Except as otherwise provided in the Financing
Documents, Manager, in the Facility's name and on behalf of
Facility Operator and Owner, shall supervise the deposit of all
funds received from the operations of the Facility into a bank
account for the Facility (the "Revenue Account") established in
Facility Operator's name. Manager is permitted and authorized to
collect all monies owed the Facility Operator and Owner and
deposit such monies into the Revenue Account or to sell such
receivables on such terms as Manager deems appropriate. The
Manager shall supervise the disbursements from the Revenue
Account on behalf of Facility Operator of such amounts and at
such times as the same are required. Manager is permitted and
authorized by Facility Operator, Owner and Heartland to make
payments to NHI of the Monthly Interest Payments, payments to
reserve accounts or working capital accounts, and other payments
to NHI under the Financing Documents from this account. Manager
shall discharge such supervisory responsibilities in accordance
with reasonable and customary business standards and practices.
Facility Operator and Owner shall have the obligation of
providing funds for all capital assets (including personal
property and equipment and improvements to the Facility) required
(i) for the efficient operation of the Facility, (ii) by the
rules and regulations of any government authority, (iii) to
maintain the operating licenses of the Facility and the
certification and provider agreements for the Facility under the
applicable Medicaid programs, and (iv) to maintain the Facility
in a good condition competitive with the standard and quality of
other similar facilities. Facility Operator shall provide
sufficient working capital for the operation of the Facility and
otherwise and shall deposit such working capital in the Revenue
Account from time to time upon request of Manager, unless
required to do otherwise under the Financing Documents. Except
as otherwise provided in the Financing Documents, all costs and
expenses incurred in the operation of the Facility shall be paid
out of the Revenue Account. Manager shall designate the
signatory or signatories required on all checks or other
documents of withdrawal on the Revenue Account. Manager shall
have the right to change the authorized signatories for the
Revenue Account without the prior notice to or approval from any
other party. Manager shall not withdraw any monies from the
Revenue Account to pay any item other than budgeted capital
expenditures and the Cost of Operations of the Facility and
otherwise than in accordance with any other agreement executed
contemporaneously herewith in respect of the Facility.
b) The Costs of Operations shall mean all costs and
expenses incurred in, arising out of or related to the operation
of the Facility, including, without limiting the generality of
the foregoing, (i) wages, salaries, and benefits of the staff of
the Facility and related payroll taxes, and other related costs
(ii) the costs of repairs to and maintenance of the Facility (but
not the cost of capital improvement or capital assets), (iii) all
premiums, charges and other costs and expenses for insurance with
respect to the Facility and the operations thereof, (iv) all
taxes payable with respect to the Facility or the income thereof
or goods or services purchased thereby, (v) expenses and costs
incurred in connection with the purchase of necessary services
and supplies, the furnishing of utilities to the Facility, and
other necessary services and supplies provided by independent
contractors and other third parties, (vi) rental payments on
operational leases, (vii) amounts specified in the operating
Budget, (viii) payment of Monthly Interest Payments under the
Loan Agreement, and (ix) the Management Fee. Notwithstanding the
foregoing, amortization of deferred expenses, depreciation and
bad debt allowances and other reserves shall not be included in
the Costs of Operation.
c) The Revenue Account may not be used to pay debt service
on any Subordinated Payables (as defined in the Subordination
Agreement), except as permitted in the Subordination Agreement.
1.8 Licenses, Permits and Certifications.
a) Manager shall use its reasonable best efforts to assist
Facility Operator and Owner in applications for, in the name of
the Facility Operator and Owner, and to obtain and maintain, on
behalf of Facility Operator and Owner, all necessary licenses,
permits, consents, approvals and certifications from all
governmental agencies which have jurisdiction over the operation
of the Facility.
b) Neither Facility Operator nor the Owner nor Manager
shall knowingly take any action or fail to take any action which
may cause any governmental authority having jurisdiction over the
operation of the Facility to institute any proceeding for the
suspension, rescission or revocation of any necessary license,
permit, consent or approval. Manager shall not knowingly take
any action or fail to take action which may materially adversely
affect the amount of and Facility Operator's right to accept and
obtain payments under any public or private third party medical
payment program.
c) Facility Operator and Owner shall comply with all
applicable federal, state and local laws, rules and regulations
and requirements, provided that Facility Operator, at its sole
expense and without cost to Manager, shall have the right to
contest by appropriate legal proceedings, the validity or
application of any law, ordinance, rule, ruling, regulation, or
requirement of any governmental agency having jurisdiction over
the operation of the Facility. Manager, after having been given
written notice, shall cooperate with Facility Operator with
regard to the contest, and Facility Operator shall pay all
reasonable attorneys' fees incurred with regard to the contest
from the Revenue Account. Counsel for any such contest shall be
selected by Manager. Manager shall, with the consent of Facility
Operator, process all third party payment claims for the services
provided at the Facility, including, without limitation, contest
to the exhaustion of all applicable administrative proceedings or
procedures, adjustment and denials by governmental agencies or
their fiscal intermediaries as third party payors.
d) Facility Operator and Owner shall comply with all
federal, state and local laws, rules, regulations and
requirements which are applicable to Facility Operator and Owner
provided that Facility Operator, at its sole expense and without
cost to Manager, shall have the right to contest by proper legal
proceedings the validity, so far as applicable to it, of any such
law, rule, regulation or requirement, provided that such contest
shall not result in a suspension of operations of the Facility,
and provided further, Facility Operator shall not be deemed to be
in breach of this covenant if its failure to comply with any such
law, rule, regulation or requirement is the result of a failure
by Manager to comply with its obligations hereunder. Facility
Operator and Owner shall send notice immediately, but in any
event, within three (3) business days of any notice from any
governmental authority or any other regulator regarding the
Facility, and shall send copies of any filing with such
authorities to Manager.
1.9 Administrator and Health Service Coordinator. Manager
shall, from time to time as necessary, recruit for the Facility a
Qualified Administrator and a Director of Nursing Services. The
Qualified Administrator and the Director of Nursing Services are
herein referred to as the "Key Employees." The Key Employees may
be employees of, and be compensated by Manager; provided,
however, if the Key Employees are employees of Manager, Facility
Operator shall reimburse Manager for all reasonable compensation,
including salary, fringe benefits, bonuses, and reasonable
business expense reimbursements approved as shown in a Budget or
otherwise by Manager and Facility Operator, payable to the Key
Employees. The term "fringe benefits" shall include, without
limitation, employer's FICA payments, unemployment compensation
and other employment taxes, bonuses, vacation, personal and sick
leave benefits, worker's compensation, group life, health and
accident insurance premiums and disability and other benefits.
The compensation, including fringe benefits, payable to the Key
Employees shall be reasonable and in line with compensation
payable by other assisted living operators to administrators and
health service coordinators of like facilities in the Facility's
market area, shall be budgeted pursuant to Section 1.5(b) hereof
and shall be paid or reimbursed from the Revenue Account. Any
reimbursement to Manager on account of any Key Employee shall not
be subject to the Subordination of Management Agreement, but
shall be an operating expense of the Facility.
1.10 Government Regulations. Manager agrees to use its best
reasonable efforts to operate and maintain the Facility in
substantial compliance with the requirements of any statute,
ordinance, law, rule, regulation or order of any governmental or
regulatory body having jurisdiction over the Facility and with
all orders and requirements of the local board of fire
underwriters or any other body which may exercise similar
functions.
1.11 Quality Controls. Manager shall activate and maintain
on a continuing basis, a Quality Assurance Program ("QAP"),
including a safety program that meets all OSHA standards, in
order to provide objective measurements of the quality of
resident services, provided at the Facility and in connection
therewith shall utilize inspections and other techniques as
deemed appropriate.
1.12 Staff Specialists. In addition to the other managerial
services provided herein, Manager shall make available to the
Facility for consultation and advice, when necessary, specialists
in such fields as accounting, budgeting, dietary services,
janitorial and housekeeping, management, maintenance, nursing,
personnel, pharmacy operations, purchasing, quality assurance,
policies and procedures, and third party reimbursements.
1.13 Tax Returns and Regulatory Filings. Owner shall
receive copies of all annual tax returns or regulatory filings at
the same time that said returns or reports are filed.
1.14 Taxes. Any federal, state or local, taxes, assessments
or other governmental charges imposed on the Facility and arising
from Owner's period of ownership are the obligations of Facility
Operator or Owner, not of Manager, and shall be paid out of the
Revenue Account of the Facility. With the Facility Operator's
prior written consent, Manager may contest the validity or amount
of any such tax or imposition on any Facility in the same manner
as described in Section 1.8(c) hereof. Manager shall cause all
social security and federal and state income tax withholding and
other employee taxes which may be due and payable to be paid from
the revenues of the Facility before the payment of any other
expenses therefrom.
1.15 Non-Diversion of Residents Manager covenants that it
will not permit residents of the Facility to be moved to other
nursing centers owned or managed by it or any affiliate thereof,
or divert persons seeking admission as residents into the
Facility to such other facility, unless the special needs of such
residents cannot be met at the Facility or unilaterally requested
by such person or unless the Facility is full.
1.16 Financial Reports. The Manager shall provide the
Facility Operator with copies of such financial reports as are
required by NHI (or any other lender to the Facility).
1.17 Land Use Restrictions. Manager shall use its best
efforts to ensure that the Facility comply with any land use
restrictions currently in effect for the property of the
Facility.
1.18 Heartland's, Owner's and Facility Operator's
Indemnification of Manager. From and after the date of this
Agreement, Heartland, Owner and Facility Operator agree jointly
and severally to reimburse, indemnify and hold harmless Manager
against and in respect of (i) any and all debts, liabilities or
obligations of the Facility Operator pertaining to the Facility,
(ii) all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by Manager that result from, relate
to or arise out of (A) any misrepresentation, breach of warranty
or nonfulfillment of any agreement or covenant on the part of
Heartland, Owner or Facility Operator hereunder or from any
misrepresentation in or omission from any certificate, schedule,
statement, document or instrument furnished to Manager pursuant
hereto, (B) any of the matters referred to in subparagraph (i)
above, or (C) any claim by any third party alleging that the
execution, delivery or performance of this Agreement breaches any
duty or obligations of the parties hereto to such third party or
contravenes any rights or any such third party and (iii) any and
all actions, suits, claims, proceedings, investigations, demands,
assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and
expenses of investigation) incident to any of the foregoing or to
the enforcement of this Section.
ARTICLE II
2.1 Management Fee.
a) Each month during the term hereof, Manager shall
receive from Facility Operator, and Facility Operator shall pay
to Manager, as the amount due for the services being provided
pursuant to this Agreement, a fee (the "Management Fee")
consisting of a base fee (the "Base Management Fee"), plus an
incentive payment (the "Incentive Management Fee").
The Base Management Fee shall be that amount equal to four
(4%) of the Total Operating Revenue for the current year,
The Incentive Management Fee shall be that amount equal to
four (4%) percent of the Total Operating Revenues of the
Facility.
b) Under no circumstances shall the Incentive Management
Fee for any month exceed the remainder obtained by subtracting
one dollar ($l) from the Base Management Fee for such month.
c) In the event it should be determined following the
payment of any Management Fee or accrual of any Management Fee in
favor of Manager that the amount of Total Operating Revenues for
the period in question was greater or lesser than the amount of
Total Operating Revenues on which such amount of Management Fee
was calculated, then the parties shall account to each other
promptly for any resulting overpayment or over accrual or
underpayment or under accrual of incentive payments.
For purposes of this Agreement, the term "Total Operating
Revenue" shall mean all operating revenues, including all routine
and ancillary revenues net of any provisions from third party
payor contracts of Owner and Facility Operator from any source
whatsoever, determined in accordance with generally accepted
accounting principles.
2.2 Payment of Management Fees. Payment shall be made
monthly, in arrears, by the fifth (5th) day of the next
succeeding month commencing on August 5, 1996. Payments due on
an non-business day may be paid the next business day.
2.3 Subordination. Facility Operator and Manager agree
that as to payment of the Management Fee, the terms and
provisions of that certain Subordination of Management Agreement
of even date herewith, between Facility Operator and Manager
shall, to the extent of any inconsistency, supersede the terms
and conditions of this Agreement.
ARTICLE III
OTHER TRANSACTIONS WITH MANAGER OR ITS AFFILIATES
3.1 Transactions with Manager and its Affiliates. Except for
those certain agreements executed simultaneously herewith, and
obligations taken thereunder notwithstanding anything else herein
contained, Manager may, with full disclosure by Manager of such
affiliation and interest, cause Facility Operator or Owner to
enter into any contract with Manager or any affiliate thereof for
services required to be provided by Manager under this Agreement,
or pay any fee to Manager or its affiliates. Manager agrees that
it will not request Facility Operator to enter into any contract
with any affiliate of Manager unless that contract is no less
favorable to Facility Operator or Owner than could be obtained by
the Facility Operator or Owner in an arm's length transaction
with a third party.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Heartland, Owner and
Facility Operator. Heartland, Owner and Facility Operator make
the following representations and warranties which are material
representations and warranties upon which Manager relies as an
inducement to enter into this Agreement:
a) Status. Heartland is a non-profit corporation, duly
organized and validly existing in good standing under the laws of
the State of Massachusetts. Owner is limited partnership duly
organized and validly existing in good standing under the laws of
the State of New Hampshire. Facility Operator is a corporation
duly organized and validly existing in good standing under the
laws of the State of New Hampshire. Heartland, Owner and
Facility Operator have all necessary power to carry on their
business as now being conducted, to operate its properties as now
being operated, to carry on its contemplated business, to enter
into this Agreement and to observe and perform its terms.
b) Authority and Due Execution. Heartland, Owner and
Facility Operator have full power and authority to execute and to
deliver this Agreement and all related documents and to carry out
the transactions contemplated herein; which actions will not with
the passing of time, the giving of notice, or both, result in a
default under or a breach or violation of (i) the Heartland's,
Owner's or Facility Operator's Articles of Incorporation, Bylaws
or Partnership Agreement; or (ii) any law, regulation, court
order, injunction or decree of any court, administrative agency
or governmental body, or any mortgage, note, bond, indenture,
agreement, lease, license, permit or other instrument or
obligation to which any such entity is now a party or by which
any such entity or any of their assets may be bound or affected.
This Agreement constitutes a valid and binding obligation of
Heartland, Owner and Facility Operator, enforceable in accordance
with its terms, except to the extent that its enforceability is
limited by applicable bankruptcy, reorganization, insolvency,
receivership or other laws of general application or equitable
principles relating to or affecting the enforcement of creditors'
rights.
c) Litigation. There is no litigation, claim,
investigation, challenge or other proceeding pending or, to the
knowledge of Heartland, Owner or Facility Operator, threatened
against any of such parties, their properties or business which
seeks to enjoin or prohibit any of them from entering into this
Agreement or constitutes an investigation by any governmental
agency or authority into the business or financial affairs of
Heartland, Owner or Facility Operator.
d) Ownership of Facility. The Facility is owned by Owner.
e) Compliance with Applicable Law. The Facility is
currently operating in compliance with all applicable laws, rules
and regulations.
f) Disclosure. No agreement, representation, warranty or
covenant contained in this Agreement or in any statement or other
document required to be delivered by Heartland, Owner or Facility
Operator hereunder contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
the statements contained therein or herein not misleading.
4.2 Representations and Warranties of Manager. Manager
makes the following representations and warranties which are
material representations and warranties upon which the other
parties rely as an inducement to enter into this Agreement:
a) Status of Manager. Manager is a corporation duly
organized and validly existing in good standing under the laws of
the State of Delaware, and has all necessary power to carry on
its business as now being conducted, to operate its properties as
now being operated, to carry on its contemplated business, to
enter into this Agreement and to observe and perform its terms.
b) Authority and Due Execution. Manager has full power
and authority to execute and deliver this Agreement and all
related documents and to carry out the transactions contemplated
herein; which actions will not with the passing of time, the
giving of notice, or both, result in a default under or a breach
or violation of (i) the Manager's Articles of Incorporation or
By-Laws; or (ii) any law, regulation, court order, injunction or
decree of any court, administrative agency or governmental body,
or any mortgage, note, bond, indenture, agreement, lease,
license, permit or other instrument or obligation to which
Manager is now a party or by which Manager or any of its assets
may be bound or affected. This Agreement constitutes a valid and
binding obligation of Manager, enforceable in accordance with its
terms, except to the extent that its enforceability is limited by
applicable bankruptcy, reorganization, insolvency, receivership
or other laws of general application or equitable principles
relating to or affecting the enforcement of creditors' rights.
c) Litigation. There is no litigation, claim,
investigation, challenge or other proceeding pending or, to the
knowledge of Manager, threatened against Manager, its properties
or business which seeks to enjoin or prohibit it from entering
into this Agreement or constitutes an investigation by any
governmental agency or authority into the business or financial
affairs of Manager.
ARTICLE V
TERMINATION
5.1 Termination for Cause.
a) If any party is dissolved or liquidated, or shall apply
for or consent to the appointment of a receiver, trustee or
liquidator of it or all or a substantial part of its assets, file
a voluntary petition in bankruptcy, make a general assignment for
the benefit of creditors, file a petition or an answer seeking
reorganization or arrangement with creditors or to take advantage
of any insolvency law, or if an order, judgment or decree shall
be entered by a court of competent jurisdiction, on the
application of a creditor, adjudicating said party as bankrupt or
insolvent or approving a petition seeking reorganization of said
party or appointing a receiver, trustee or liquidator for said
party or all or a substantial part of its assets, and such order,
judgment or decree shall continue unstated and in effect for any
period of ninety (90) consecutive days, then in case of any such
event, the term of this Agreement shall expire, at the other
party's option, on five (5) days written notice.
b) Facility Operator shall have the right to terminate
this Agreement at any time if because of Manager's acts or
omissions: (i) there has been a formal notice the operating
license for the Facility or any substantial portion thereof will
be qualified in any substantial respect or placed on a
conditional or provisional status, revoked or suspended which is
not rescinded, vacated or stayed by action of Manager, (or
otherwise) within thirty (30) days of its issuance, unless
Manager has diligently pursued such cure; (ii) Manager shall have
caused to occur an Event of Default under the Financing
Documents, which event of default is not cured within thirty (30)
days after Manager's receipt of notice of such event;
c) Manager shall have the right to terminate (i) upon
failure to pay Management Fee for thirty (30) days unless the
nonpayment is the result of the provisions of the Subordination
of Management Agreement, provided, however, that the Facility
Operator has the right to cure such failure to pay during such
thirty (30) day period, (ii) upon a termination of any management
agreement to which Manager and Heartland are both parties.
d) Notwithstanding anything else herein contained, neither
party shall have the right to terminate this Management Agreement
as a result of any of the reasons set forth in clauses (b) or (c)
above, if: (i) the acts or omissions of the party seeking the
termination materially contribute to the reason for termination;
or (ii) the event is caused by strikes, other labor disturbances,
fires, windstorm, earthquake, arbitrary and capricious action by
third party payors, war or other state of national emergency,
terrorism, or acts of God, or other events not the fault of
either party, in which negligence of the party sought to be
terminated is not a materially contributing factor to the
occurrence of such event.
5.2 Effect of Termination.
a) Heartland, Owner and Facility Operator agree that in
the event this Agreement should be terminated for any reason,
Heartland, Owner and Facility Operator jointly and severally
agree to repay in full all fees and indebtedness owned by
Heartland, Owner or Facility Operator to Manager.
b) Upon termination of Manager or the Management Agreement
for any reason whatsoever, Manager shall be released from its
obligations pursuant to the Guaranty Agreement, any obligations
to contribute to the Debt Service Reserve under the Debt Service
Reserve Agreement or to the working capital account under the
Loan Agreement.
ARTICLE VI
MISCELLANEOUS COVENANTS
6.1 Assignment.
Facility Operator shall not assign its rights and/or
obligations under this Agreement without prior written consent of
Manager. Manager shall not assign its rights and/or obligations
under this Agreement except to a wholly-owned subsidiary,
provided, however, that after such assignment Manager shall
remain fully liable for (i) all obligations of the Manager
hereunder and (ii) all of its obligations under the Continuing
Guaranty, any guaranty to fund working capital, and the guaranty
to fund the Debt Service Reserve under Section 2.10 of the Loan
Agreement.
6.2 Special Covenants of Heartland, Owner and Facility
Operator. Heartland, Owner and Facility Operator, as applicable,
shall comply with each of the following covenants:
a) Neither Owner nor Facility Operator shall incur any
indebtedness other than under the Loan Agreement, nor sell the
accounts receivable of the Facility.
b) Owner and Facility Operator will cooperate with Manager
in every reasonable respect and will furnish Manager with all
information required by it for the performance of its services
hereunder and will permit Manager to examine and copy any data in
the possession and control of Owner or Facility Operator
affecting management and/or operation of the Facility and will in
every way cooperate with Manager to enable Manager to perform
its services hereunder.
c) Facility Operator will examine documents submitted by
Manager and render decisions and take action pertaining thereto,
when required, promptly, to avoid unreasonable delay in the
progress of Manager's work.
d) Except for acts involving gross negligence or willful
disregard of Heartland, Owner or Facility Operator interests,
Heartland, Owner and Facility Operator shall jointly and
severally indemnify and hold Manager harmless from all claims,
liability, loss, damage, cost and expense (including reasonable
attorney's fees) asserted by any other person for any obligation
or liability of Heartland, Owner or Facility Operator for any
obligations, liability or claim that arises in the course of the
business of the Facility.
e) Heartland, Owner and Facility Operator covenant that
Manager shall quietly hold, occupy and enjoy the Facility
throughout the term of this Agreement free from hindrance,
ejection by Facility Operator or any other party claiming under,
through or by right of Facility Operator. Owner will not sell
the Facility during the term of this Agreement, nor will the
Facility Operator sublease this facility except as is permitted
in writing by Manager. Facility Operator agrees to pay and
discharge any payments and charges and, at its expense, to
prosecute all appropriate actions, judicial or otherwise,
necessary to assure such free and quiet occupation.
f) As long as Heartland, Owner and Facility Operator are
indebted to or owe funds to Manager or any affiliate on account
unpaid Management Fees, Arrangement Fees, Guaranty Fees or
Manager is obligated to make contributions to the Debt Service
Reserve or pursuant to the Debt Service Reserve Agreement or to
the working capital account under the Loan Agreement or as
Manager is obligated under the Continuing Guaranty, or Manager's
guarantee of indebtedness owed by Heartland to Claire Y. Lemire,
Heartland, Owner and Facility Operator shall not (without the
consent of Manager, which may be withheld in its complete
discretion) withdraw, lend, pledge or divert any revenues of the
Facility otherwise than to the Revenue Account other than as
provided in the Financing Documents and shall not act in any
manner which interferes with or prevents Manager from withdrawing
funds from the Revenue Account to pay amounts owed under the Loan
Agreement.
6.3 Additional Covenants of Facility Operator. Facility
Operator hereby makes the additional covenants set forth in the
Section, which are material covenants and upon which Manager
relies as an inducement to enter into this Agreement:
a) Facility Operator will cooperate with Manager in every
reasonable respect and will furnish Manager with all information
required by it for the performance of its services hereunder and
will permit Manager to examine and copy any data in the
possession and control of Facility Operator affecting management
and/or operation of the Facility and will in every way cooperate
with Manager to enable Manager to perform its services hereunder.
b) Facility Operator will examine documents submitted by
Manager and render decisions pertaining thereto, when required,
promptly, to avoid unreasonable delay in the progress of
Manager's work. Facility Operator shall execute and deliver any
and all applications and other documents that may be deemed by
Manager to be necessary or proper to be executed by Facility
Operator in connection with the Facility, subject to the
limitations in this Agreement with respect to the budget and
other rights of Facility Operator.
6.4 Negligence by Manager. Manager will use its best
efforts to perform its obligations hereunder. Nevertheless,
Heartland, Owner and Facility Operator expressly release Manager
from all acts undertaken in good faith by Manager, unless such
acts involve gross negligence or a willful disregard of those
parties' interests. Any acts taken by Manager upon the advice of
Facility Operator or of Manager's professional consultants will
be conclusively deemed to have been taken in good faith and not
to have been acts of gross negligence or willful disregard of
Heartland's, Owner's or Facility Operator's interests. Manager
shall indemnify and hold Facility Operator harmless from all
claims, liability, loss, damage, cost and expense (including
reasonable attorney's fees) asserted by any other person for any
obligation, liability or claim from an act or acts of Manager's
gross negligence.
6.5 Binding Agreement. The terms, covenants, conditions,
provisions and agreements herein contained shall be binding upon
and inure to the benefit of the parties hereto, their successors
and assigns.
6.6 Relationship of Parties. Nothing contained in this
Agreement shall constitute or be construed to be or to create a
partnership, joint venture or lease between Heartland, Owner or
Facility Operator and Manager with respect to the Facility. The
parties acknowledge that each is an independent entity which has
negotiated the terms of, and entered into this Agreement, on an
arm's length basis represented by separate legal counsel and that
neither is owned or otherwise controlled, directly or indirectly,
by the other party. Neither party possesses any ownership or
equity interest in the other party and neither party has the
power, directly or indirectly to significantly influence or
direct the actions or policies of the other party. Each party
shall be liable for their own debts, obligations, acts, and
omissions, including the payment of all required withholding,
social security, and other taxes or benefits on behalf of their
respective employees. Manager will not be obligated to advance
any of its own funds to or for Facility Operator's account or to
incur any liability hereunder unless Facility Operator shall have
furnished to Manager funds sufficient for the discharge thereof.
The relationship of Manager to Facility Operator is that of an
independent contractor, not that of an agent, and nothing
contained herein shall be construed to create a relationship of
agency between Manager and Facility Operator.
6.7 Notices.
a) If Manager shall desire the approval of Facility
Operator to any matter, Manager may give written notice to
Facility Operator that it requests such approval, specifying in
the notice the matter as to which approval is requested and
reasonable detail respecting the matter. If Facility Operator
shall not respond negatively in writing to the notice within ten
(10) days after the sending thereof (unless some other period for
response is specified in this Agreement), Facility Operator shall
be deemed to have approved the matter referred to in the notice.
Any provision hereof to the contrary notwithstanding, in
emergency situations (as determined by Manager), Manager shall
not be required to seek or obtain Facility Operator's approval
for any actions or omissions which Manager, in its sole judgment,
deems necessary or appropriate to respond to such situations,
provided Manager promptly thereafter reports such action or
omission to Facility Operator in writing.
b) All notices, demands and requests contemplated
hereunder by either party to the other shall be in writing, and
shall be delivered by hand, transmitted by cable or telegram, or
mailed, postage prepaid, registered or certified mail, return
receipt requested or any nationally recognized overnight courier:
(i) To Heartland, Owner or Facility Operator, by addressing
the same to:
Heartland Healthcare Corporation
60 Atkinson Lane
Sudbury, Massachusetts 01776
Attn: Gerald Tulman
with a copy to
Smith Gambrell & Russell
Promenade II, Suite 3100
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309-3592
Attn: Stan Brading
(ii) To Manager, by addressing the same to:
Iatros Health Network, Inc.
Ten Piedmont Center, Suite 400
Atlanta, GA 30305
Attention: Joseph C. McCarron
Oasis Healthcare
250 Boylston Street
Chestnut Hill, Massachusetts 02167
Attn: Scott Schuster
with a copy to:
Harkleroad & Hermance, P.C.
229 Peachtree Street, Suite 2500
Atlanta, GA 30303
Attention: James P. Hermance
or to such other address or to such other person as may be
designated by notice given from time to time during the term
hereof by one party to the other. Any notice hereunder shall be
deemed given three (3) days after mailing, if given by mailing in
the manner provided above, or on the date delivered or
transmitted if given by hand, cable or facsimile.
6.8 Entire Agreement; Amendments. This Agreement contains
the entire agreement between the parties hereto with respect to
the subject matter, and no prior oral or written, and no
contemporaneous oral, representations or agreements between the
parties with respect to the subject matter of this Agreement
shall be of any force and effect. Any additions, amendments or
modifications to this Agreement shall be of no force and effect
unless in writing and signed by all parties hereto.
6.9 Governing Law. This Agreement has been negotiated in
part in the State of Georgia, and the terms and provisions hereof
and the rights and obligations of the parties hereto shall be
construed and enforced in accordance with the laws thereof.
6.10 Captions and Headings. The captions and headings
throughout this Agreement are for convenience and reference only,
and the words contained therein shall in no way be held or deemed
to define, limit, describe, explain, modify, amplify or add to
the interpretation, construction or meaning of any provision of
or the scope or intent of this Agreement nor in any way affect
this Agreement.
6.11 Costs and Expenses; Indemnity. Except as otherwise
expressly provided herein, all fees, costs, expenses and
purchases arising out of, relating to or incurred in the
operation of the Facility, including, without limitation, the
fees, costs and expenses of outside consultants and
professionals, shall be the sole responsibility of Facility
Operator. Manager, by reason of the execution of this Agreement
or the performance of its services hereunder, shall not be liable
for or deemed to have assumed any liability for such fees, costs
and expenses, or any other liability or debt of Facility Operator
whatsoever, arising out of or relating to the Facility or
incurred in its operation, except the salaries of its employees
and the expenses and costs incurred at its central administrative
offices in the performance of its obligations hereunder and any
civil penalties imposed upon the Facility Operator pursuant to
OBRA. Manager shall have no obligation to advance any sums
required to maintain necessary licenses and permits and to
otherwise keep the Facility operating as a nursing center, except
as set forth in the Continuing Guaranty, any guaranty of working
capital, or Section 2.10 of the Loan Agreement.
6.12 Liability Limited. No officer or director of
Heartland, Owner, Facility Operator or Manager shall have any
personal liability hereunder, nor shall Iatros Health Network,
Inc. nor any of its affiliated entities other than the parties
hereto shall have any obligations whatsoever hereunder.
6.13 Arbitration of Certain Matters. If any controversy
whatsoever should arise between the parties in the payment,
performance, interpretation and application of this Agreement,
either party may serve upon the other a written notice stating
that such party desires to have the controversy reviewed by an
arbitrator, who shall be a representative of a firm specializing
in the nursing home/assisted living facility sector of medical
services. If the parties cannot agree within fifteen (15) days
from the service of such notice, upon the selection of such an
arbitrator, the arbitrator shall be selected or designated by the
American Arbitration Association upon the written request of
either party hereto. Arbitration of such controversy,
disagreement or dispute shall be conducted in accordance with the
rules then in force of the American Arbitration Association and
the decision and award of the arbitrator so selected shall be
binding upon both parties hereto. BOTH PARTIES HERETO HEREBY
WAIVE ANY RIGHT TO A TRIAL BY JURY OF ANY CONTROVERSY ARISING
HEREUNDER.
6.14 Access to Books, Record and Documents if Medicare
Payments Received.
This Section 6.14 is included herein because of the possible
application of Section 1861(v)(l)(I) of the Social Security Act
to this Agreement. If such Section 1861(v)(l)(I) should not be
found applicable to this Agreement under the terms of such
Section and the regulations promulgated thereunder, then this
Section shall be deemed to not be a part of this Agreement and
shall be null and void
a) Until the expiration of four (4) years after the
furnishing of services pursuant to this Agreement, Manager shall,
as provided in Section 1861(v)(l)(I) of the Social Security Act,
and regulations promulgated thereunder make available, upon
written request, to the Secretary of Health and Human Services,
or upon request, to the Comptroller General of the United States,
or any of their duly authorized representatives, this Agreement,
and all books, documents and records of Manager that are
necessary to verify the nature and extent of the costs of any
services furnished pursuant to this Agreement for which payment
may be made under the Medicare Program.
b) If Manager carries out any of the duties of this
Agreement through a subcontract or subcontracts with an aggregate
value or cost of $10,000 or more over a twelve (12) month period
with a related organization, such subcontract or subcontracts
shall contain a clause to the effect that until the expiration of
four (4) years after the furnishing of such services pursuant to
such subcontract or subcontracts, the related organization shall,
as provided in Section 1861(v)(l)(I), make upon written request,
to the Secretary of Health and Human Services, or upon request,
to the Comptroller General of the United States, or any of their
duly authorized representatives, the subcontract or subcontracts,
and all books, documents and records of such organization that
are necessary to verify the nature and extent of the costs of any
services furnished pursuant to such subcontract or subcontracts
for which payment may be made under the Medicare Program.
6.15 Definition of Certain Terms. For purposes of this
Agreement all capitalized terms shall have the meanings set forth
in this Agreement or the Loan Agreement executed this same day.
6.16 Severability. If any term or provision of this
Agreement or application thereof to any person or circumstance
shall to any extent be invalid or unenforceable, the remainder of
this Agreement or the application of such term or provision to
persons or circumstances other than those to which it is held
invalid or unenforceable shall not be affected thereby, and each
term and provision of the Agreement shall be valid and
enforceable to the fullest extent permitted by law.
6.17 Waivers. No waiver of any term, provision, or
condition of this Agreement, whether by conduct or otherwise, in
any one or more instances, shall be deemed to be construed as a
further and continuing waiver of any such term, provision or
condition of this Agreement.
6.18 Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the
same agreement, and shall become a binding agreement when one or
more counterparts have been signed by each of the parties and
delivered to the other party.
IN WITNESS WHEREOF, the parties hereto have executed, sealed
and delivered this Agreement through their duly authorized
representatives, as of the day and year first above written.
ATTEST/WITNESS: HEARTLAND HEALTHCARE CORPORATION
___________________________By:________________________________
ATTEST/WITNESS: MAPLE LEAF HEALTH
LIMITED PARTNERSHIP
___________________________By:________________________________
ATTEST/WITNESS: MAPLE LEAF HEALTH CARE, INC.
___________________________By:________________________________
IATROS HEALTH NETWORK, INC.
___________________________By:________________________________
Joseph C. McCarron
Executive Vice President
a:\mapleman1.agm
EXHIBIT A
1. The Loan Agreement
2. The Leases
3. Debt Service Reserve Agreement
4. The Continuing Guaranty
5. The Subordination of Management Agreement
6. The Subordination and Attornment Agreement
7. The Security Agreement/Facility
8. Capital Improvement Reserve Agreement
9. First Refusal Purchase Agreement
10. Security and Pledge Agreement
11. Equity Participation Agreement
12. Collateral Assignment of Partnership Interests
13. The Stock Purchase and Sale Agreement
14. Other Management Agreements for Properties executed this
same date
15. Any other document executed contemporaneously herewith
specifying duties of Manager with respect to the Facility
EXHIBIT 22.0
IATROS SUBSIDIARIES
1. Pace Rehabilitation & Home Care Services, Inc.
2. Gulf Creek, Inc.
3. New Health Management Systems, Inc.
4. IHN/Iatros Financial Services Corporation
5. Greenbrier Services, Inc.
6. Iatros Caring Services, Inc.
7. Iatros Therapy Corporation
8. OHI Corporation
9. Iatros Management Corporation
10. Iatros Assisted Living Services
11. Greenbrier Healthcare Services, Inc.
12. Greenbrier Rehabilitation Services, Inc.
13. Champion Rehab, Inc.
14. New Generations Healthcare Associates, Inc.
15. IHN Health Services Group, Inc.
16. Gati-Durant Healthcare Venture, Inc., d/b/a Durant Pharmacy
17. Durant Medical, Inc.
18. IHN Rehab, Inc.
19. Iatros Respitory Corporation
EXHIBIT 23.0
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent
to the use of our report dated April 2, 1997, relating to the
consolidated financial statements of Iatros Health Network, Inc. and
Subsidiaries and to all references to our Firm included in or made a
part of this Annual Report on Form 10-K.
ASHER & COMPANY, Ltd.
Philadelphia, Pennsylvania
April 2, 1997