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, 1997
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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.
_______________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 23-2596710
______________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10 Piedmont Center, Suite 400
Atlanta, Georgia 30305
_________________________________ _____________________________
(Address of principal executive (Zip Code)
offices)
(404) 266-3643
_______________________________________________________________________
(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.
YES X 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 $25,512,540 from continuing
operations for its most recent fiscal year.
As of March 31, 1998, the aggregate market value of the
Registrant's Common Stock held by non-affiliates was $8,478,420 based
upon the average bid and asked price of $13/32 on March 31, 1998.
As of March 31, 1998, 20,869,958 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
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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. The Company's principal market areas currently are
Pennsylvania and New England.
The Company's corporate offices are located in Atlanta, Georgia.
During 1997, the Company discontinued operations associated with
certain of its business segments.
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.
During 1997, the Company changed its growth and development plans
to more actively pursue opportunities involving the direct leasing and
ownership of long-term care facilities. This represents a change from
previous development initiatives which 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. However, the Company's growth
initiatives are constrained by its current financial position. As a
result, the Company is pursuing a merger transaction that would result
in the Company being acquired by NewCare Health Corporation (NASDAQ:
"NWCA") [See "Year Ended December 31, 1997 Compared with Year Ended
December 31, 1996 Liquidity and Capital Resources" and "Events
Subsequent to December 31, 1997".]
In view of continuing health care reform initiatives, the Company
believes it is important to position itself as a low cost quality
provider of health care services in its respective markets. The
Company seeks to provide value added services that promote revenue
enhancement, cost containment and quality assurance to its facilities.
Management Services
-------------------
The Company provides a full range of management services to the
long-term care facilities it owns and operates. These include
financial as well as operational management services, quality assurance
services, and special consulting services.
The Company currently provides management services to 10
facilities representing approximately 1,200 beds located in the New
England market area.
The Company's operating objective is to achieve the optimum
integration of financial services and operations management in all of
its facilities. 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. 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.
The Company currently provides ancillary services to approximately
14 long-term care facilities in the Philadelphia, Pennsylvania market
representing in excess of 2,200 beds. In addition, the Company is
expanding its ancillary service business into the New England market
area.
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, lease,
and ancillary services business.
Significant Transactions
------------------------
During March 1997, the Company's wholly-owned subsidiary, OHI
Corporation, which does business as Oasis Healthcare ("Oasis") leased
two nursing facilities located in Holyoke and Greenfield, Massachusetts
having a combined total of 222 beds. The term of each lease is for ten
years with a five year renewal period and a combined facilities
purchase option for $11.5 million which is exercisable through March
2000. These leases are being accounted for as operating leases. In
connection with this transaction, the Company recorded leasehold rights
totaling $1,025,000.
During May 1997, OHI Realty I, LLP, a Massachusetts limited
partnership with the Company as general partner and it's wholly-owned
Oasis subsidiary as limited partner, acquired two nursing facilities
for $8,164,000 located in Taunton and Quincy, Massachusetts, having a
combined total of 171 beds. The Company recorded mortgage debt
totaling $8,550,000 with respect to this transaction. Of this amount,
approximately $450,000 represents escrowed loan reserves for the
mortgage financing.
During August 1997, the Company's wholly-owned Oasis subsidiary
entered into management contracts with respect to a 90 bed skilled
nursing and retirement center located in North Falmouth, Massachusetts
known as "Royal Megansett" ("the Royal Megansett Agreement"). At the
time of this transaction, Royal Megansett was leased by a partnership
controlled by an officer of Oasis (the "Royal Megansett officer")
pursuant to a ten-year lease (the "Royal Megansett lease"). Because
the parties contemplated that such lease would be assigned to, and
assumed by, Oasis immediately after it obtained approval by the
Massachusetts Department of Public Health, the Company guaranteed the
Royal Megansett lease. In November, 1997, the Royal Megansett officer
resigned as an officer of Oasis and the Royal Megansett Management
Agreement was terminated. The Company and the Royal Megansett officer
are in a dispute over such actions, but no litigation has commenced.
During 1997, the Company discontinued operations associated with
certain segments of its long-term care business. Specifically, these
included subsidiary operations providing third party development and
management services to independent owners and operators of long-term
care facilities and relating to the Company's prior business
acquisitions of Greenbrier Healthcare Services, Inc. and New Health
Management Systems, Inc. In addition, the Company discontinued
operations associated with providing respiratory therapy services and
relating to the prior business acquisition of King Care Respiratory
Services, Inc.
In December 1997, the Company issued four million shares of its
Common Stock to NewCare Health Corporation ("NewCare") for an aggregate
investment of $1,000,000. This investment was made in connection with
the commencement of discussions between the Company and NewCare
concerning NewCare's possible acquisition of the Company through a
statutory merger transaction. [See "Events Subsequent to December 31,
1997."]
Competition
-----------
Intense competition exists in the market for operation 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. However, given
the Company's current financial position, it is unlikely that the
Company will acquire any new facility in the near future.
Construction of new long-term care facilities near the facilities
operated and serviced by the Company could adversely affect its
business. While state regulations generally require that a Certificate
of Need be obtained before any long-term care facility can be
constructed or additional beds added to existing facilities, no
assurances can be given that such additional facilities or beds will
not be built and result in increased competition for the facilities
managed and serviced by the Company.
Human Resources
---------------
As of March 31, 1998, the Company had 659 employees, of which 35
were employed in pharmacy and durable medical equipment operations, 494
associated with nursing home operations and management personnel, 23
corporate, and 107 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 admissions, the revocation of licensure,
decertification or the closure of the facilities operated by the
Company.
The operation of a long-term health care facility is licensed by
the Department of Health or other agency of the jurisdiction in which
it is located and by the U.S. Department of Health and Human Services
("HHS"). Other state and local agencies may have regulatory authority
over certain facility matters. Operators of such facilities are also
subject to various federal, state, and local environmental laws.
All facilities operated by the Company are licensed under
applicable state law and are certified or approved as providers under
one or more of the Medicaid, Medicare or other third party payor
programs. Both initial and continuing qualification of a long-term
health care facility to participate in such programs depends upon many
factors, including accommodations, equipment, services, patient care,
safety, personnel, physical environment and adequate policies,
procedures and controls. Licensing, certification, and other
applicable standards vary from jurisdiction to jurisdiction and are
revised periodically. State and federal agencies survey all long-term
health care facilities on a regular basis to determine whether such
facilities are in compliance with the requirements for continued
licensure and for participation in government sponsored and third party
payor programs. The Company believes that the facilities it operates
are in material compliance with the various state licensing, Medicare
and Medicaid regulatory requirements applicable to them. However, in
the ordinary course of its business, the Company may receive notices of
alleged deficiencies at the facilities for failure to comply with
various regulatory requirements. The Company reviews such notices and
assists the facility personnel in filing and implementing appropriate
plans of corrective action. In most cases, the Company, and the
reviewing agency will agree upon the measures to be taken to bring the
facility into compliance. In some cases or upon repeat violations, the
reviewing agency has the authority to take various adverse actions
against a facility, including the imposition of fines, temporary
suspension of admission of new residents to the facility, suspension or
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 meet
operating costs. Additionally, conviction of abusive or fraudulent
behavior with respect to one facility could subject other facilities
under common control or ownership to disqualification from
participation in the Medicare and Medicaid programs. It is not
possible to predict the content or effect of future legislation and
regulations affecting the health care industry.
Pharmacists and those providing pharmacy services in the United
States are regulated by state statutes and 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 record keeping
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 record keeping obligations upon
Durant Medical and its pharmacists. The Company is subject to regular
audits by governmental authorities to monitor compliance with record
keeping 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 approximately
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
--------
The Medicare program is a federally-administered and financed
program which provides health insurance protection to qualified
individuals over the age of 65 and the chronically disabled. This
program has been a retrospective reimbursement system that is based on
a prior period's cost report filed with a Medicare intermediary. In
1997, Congress passed the Balance Budget Act of 1997 ("BBA") which
provides for a phase-in of a prospective payment system ("PPS") for
skilled nursing facilities over a four-year period, effective for the
Company in January 1999. Under PPS, Medicare will pay skilled nursing
facilities a fixed fee per patient day based on the acuity level of the
patient to cover all post-hospital extended care routine service costs,
including ancillary and capital related costs for beneficiaries
receiving skilled services. The per diem rate will also cover
substantially all items and services furnished during a covered stay
for which reimbursement was formerly made separately under Medicare.
During the phase-in, payments will be based on a blend of the
facility's historical costs and a federally established per diem rate.
Since the federally established per diem rates have not been
finalized, it is unclear what the impact of PPS will be on the Company.
Effective October 1, 1990, the Omnibus Budget Reconciliation Act
of 1987 ("OBRA") eliminated the different certification standards for
"skilled" and "intermediate care" nursing facilities under Medicaid and
Medicare programs in favor of a single "nursing facility" standard.
This standard has required the Company to have at least one registered
nurse on each shift and has increased training requirements for nurses'
aides by requiring a minimum number of training hours and a
certification test before a nurses' aide can commence work. States
also must certify that nursing facilities provide skilled care in order
to obtain Medicare reimbursement. OBRA has also increased the
enforcement powers of state and federal certification agencies.
Additional sanctions have been authorized including fines, temporary
suspension of admission of new patients to nursing facilities,
decertification from participation in the Medicaid or Medicare programs
and, in extreme circumstances, revocation of a nursing facility's
license.
The Medicaid and Medicare programs provide criminal penalties for
entities that knowingly and willfully offer, pay, solicit or receive
remuneration in order to induce business that is reimbursed under these
programs. The illegal remuneration provisions of the Social Security
Act, also known as the anti-kickback statute, prohibit remuneration
intended to induce the purchasing, leasing, ordering, or arranging for
any goods, facility, service or item to be paid by Medicaid or Medicare
programs.
There is increasing scrutiny by law enforcement authorities, the
Office of Inspector General ("OIG") of the Department of Health and
Human Services ("HHS"), the courts, and Congress of arrangements
between health care providers and potential referral sources to ensure
that the arrangements are not designed as a mechanism to exchange
remuneration for patient care referrals and opportunities.
Investigators have also demonstrated a willingness to look behind the
formalities of a business transaction to determine the underlying
purpose of payments between health care providers and potential
referral sources. Enforcement actions have increased, as evidenced by
recent highly publicized enforcement investigations of certain hospital
activities. Although, to its knowledge, the Company is not currently
the subject of any investigation which is likely to have a material
adverse effect on its business, financial condition or results of
operations, there can be no assurance that the Company and its
hospitals will not be the subject of investigations or inquiries in the
future.
The Social Security Act also imposes criminal and civil penalties
for making false claims to the Medicaid and Medicare programs for
services not rendered or for misrepresenting actual services rendered
in order to obtain higher reimbursement. The Medicare program has
published certain "Safe Harbor" regulations which describe various
criteria and guidelines for transactions which are deemed to be in
compliance with the anti-remuneration provisions. Although the Company
has contractual arrangements with some health care providers,
management believes it is in compliance with the anti-kickback statute
and other provisions of the Social Security Act and with the state
statutes. However, there can be no assurance that government officials
responsible for enforcing these statutes will not assert that the
Company or certain transactions in which it is involved are in
violation of these statutes.
The Company derives a significant portion of its revenue from
these programs, particularly with respect to ancillary services. With
respect to Medicaid, reimbursement rates are determined by the
appropriate administrative state agency based on the cost report filed
by each individual nursing facility. Changes in the reimbursement
policies of the Medicaid and Medicare programs as a result of
legislative and regulatory actions by federal and state governments
could adversely affect the revenues of the Company. Governmental
funding for health care programs is subject to statutory and regulatory
changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all
of which may materially increase or decrease program reimbursement to
health care facilities. Congress has consistently attempted to curb
the growth of federal spending on such programs. Recent actions
include limitations on payments to hospitals and nursing facilities
under the Medicaid and Medicare programs, limitations on payments for
physicians' services and elimination of funding for health planning
agencies. No assurance can be given that the future funding of
Medicaid and Medicare programs will remain at levels comparable to the
present levels.
Medicaid
--------
The Medicaid program is a state-administered program financed by
state and matching federal funds. The program provides for federal
assistance to the indigent and certain other eligible persons.
Although administered under broad federal regulations, states are given
flexibility to construct programs and payment methods consistent with
their individual goals. Currently, certain states including,
Massachusetts, have Medicaid reimbursement plans which are prospective
systems of reimbursement. Under a prospective system, per diem rates
are established based on cost of services provided for a prior year,
and are adjusted to reflect such factors as inflation.
Health Care Reform
------------------
The Clinton Administration and various federal legislators have
introduced health care reform proposals, which are intended to control
health care costs and to improve access to medical services for
uninsured individuals. These proposals include proposed cutbacks to
the Medicare and Medicaid programs and steps to permit greater
flexibility in the administration of Medicaid. Changes in
reimbursement levels under Medicare or Medicaid and changes in
applicable governmental regulations could significantly affect the
Company's results of operations. While no federal legislation
regarding health care reform was enacted in the calendar year 1997, it
is uncertain at this time what legislation on health care reform will
ultimately be enacted or whether other changes in the administration or
interpretation of governmental health care programs will occur. There
can be no assurance that future health care legislation or other
changes in the administration or interpretation of governmental health
care programs will not have an adverse effect on the results of
operations of the Company.
Compliance with Environmental Laws
----------------------------------
The Company's health care operations generate medical waste that
must be disposed of in compliance with federal, state and local
environmental laws, rules and regulations. The Company's operations,
as well as the Company's purchases and sales of facilities, are also
subject to various other environmental laws, rules and regulations.
The Company believes that it is in material compliance with applicable
environmental laws and regulations. Management believes that there are
no material environmental contingencies.
Property
--------
The Company leases 25,900 square feet of office space in the
following properties representing an aggregate monthly lease payment of
$25,589 (rates and square footage approximate): (1) 4,100 square feet
for its executive offices in Atlanta, Georgia at a rate of $7,186 per
month, with term ending September 30, 2000; (2) 2,300 square feet for
its New England operations office in Bedford, New Hampshire at rates of
$2,500 per month increasing to $3,500 per month over a three-year term
ending October 31, 2000; (3) 1,500 square feet for its restorative
therapy offices in Hampden, Massachusetts at a rate of $1,125 per
month, with a term ending September 30, 1999; (4) 16,5000 square feet
of office and ancillary services space in Malvern, Pennsylvania at a
rate of $11,500 per month with a term ending April 30, 1999; (5) 1,500
square feet of space for other restorative therapy services in the
greater Philadelphia, Pennsylvania area at a rate of $6,330 per month
with a term ending September 30, 1999. Company leases generally
include taxes and insurance.
The Company owns two long-term care nursing facilities located in
Taunton and Quincy, Massachusetts having a combined total of 171 beds.
The Company acquired these existing properties during May 1997 for a
purchase price of $8,164,000. In connection with this purchase
acquisition, the Company recorded mortgage debt totaling $8,550,000
which amount includes loan reserves of approximately $450,000.
The Company operates two long-term care nursing facilities located
in Holyoke and Greenfield, Massachusetts having a combined total of 222
beds pursuant to terms of a lease purchase agreement. The term of the
lease agreement is for ten years with a five year renewal period and a
combined facilities purchase option for $11.5 million, which is
exercisable through March 2000. These leases are being accounted for
as operating leases. In connection with this transaction, the Company
recorded leasehold rights totaling $1,025,000.
ITEM 3. LEGAL PROCEEDINGS
---------------------------
1. Dennis Nooner, Jr. v. Gull Creek, Inc. and Iatros Health Network,
Inc., Civil Action No. L-96-1695, filed in the United States District
Court for the District of Maryland:
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. In February
of 1996, Gull Creek, Inc. terminated Mr. Nooner, Jr. for cause under
the terms of his Employment Agreement. In April of 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 had
violated the Maryland Wage Payment and Collection Act by failing to
deliver to Mr. Nooner, Jr. stock underlying certain options. The
action was 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.
In May of 1996, the Company and Gull Creek, Inc. filed suit
against Dennis Nooner, Sr., Dennis Nooner, Jr., Ewing Land Development,
Inc. and Ewing Health Services, Inc. in the District Court for the
Northern District of Georgia, Atlanta Division, alleging that Mr.
Nooner, Jr., through his acts and misdeeds, 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. Later, in May of 1996, the Company and Gull Creek,
Inc. filed an Amended Complaint dismissing without prejudice Mr.
Nooner, Sr. and Ewing Health Services, Inc. as Defendants and asserting
claims against Dennis Nooner, Jr., Gull Creek Retirement Village
Limited Partnership, Ewing Retirement Corporation, Inc., IHN Personal
Care, Inc., and Ewing Health Systems, Inc. (collectively, the "Nooner
Parties". This suit has since been transferred to Maryland and
consolidated with the prior pending action. All of the Nooner Parties
in this action have denied liability.
The Company is vigorously prosecuting its claims against the
Nooner Parties, as well as vigorously defending against all allegations
made by Dennis Nooner, Jr. Discovery has been concluded, but no trial
date has been set. Management believes that the Company has valid
defenses against all such allegations, as well as valid counterclaims
against the Nooner Parties.
2. Scott Schuster et al. v. Iatros Health Network, Inc. and OHI
Corporation, Civil Action No. 97-11304-DPW, filed in the United States
District Court for the District of Massachusetts:
Scott Schuster became an employee of OHI Corporation ("OHI"),
which is a wholly-owned subsidiary of Iatros, in the Spring of 1996
contemporaneously with the merger of Schuster's company, Oasis
Healthcare, Inc., with and into OHI. Prior to this merger, Schuster's
company had worked under contract for Iatros. In the Spring of 1997,
Schuster refused to comply with the Company's directives to reduce
costs and to consolidate OHI's financial functions with those of the
Company. Instead of complying with the Company's directives, Schuster
made an offer to buy OHI from the Company.
In June of 1997, after his purchase offer was rejected by the
Company, Schuster filed suit against the Company and OHI seeking to
acquire such subsidiary, to be paid additional incentive compensation,
and for damages in connection with various alleged misrepresentation in
connection with the merger. Schuster claims he is entitled to more
than 3.5 million shares of Iatros's common stock, plus approximately
$1.0 million in damages.
Iatros answered denying the allegations and claiming the right to
rescind the original merger transaction because of alleged
misrepresentations made by Schuster in connection with such merger, as
well as the right to terminate Schuster's employment and to recover
damages from him because of various wrongful acts of Schuster.
In July of 1997, the Court denied Schuster's motion for an order
to prevent the Company from consolidating OHI's financial functions and
from terminating Schuster's employment for cause. Immediately
following entry of the Court's order denying this motion, Schuster's
employment with OHI was terminated for cause.
The Company is vigorously prosecuting its claims against Schuster,
as well as vigorously defending against all allegations made by the
Plaintiffs in this action. Discovery has been concluded, but no trial
date has been set. Management believes that the Company has valid
defenses against all allegations made by the Plaintiffs in this action,
as well as valid counterclaims against Schuster.
3. Seton Hill Manor, Inc. v.Iatros Health Network, Inc., Civil
Action No. JFM97-1642, filed in the United States District Court for
the District of Maryland:
In March of 1996, a skilled nursing home facility in Baltimore,
Maryland, known as the Ravenwood Facility was acquired by Ravenwood
Healthcare, Inc. ("RHI") from Seton Manor, Inc. ("Seton Hill"); and
Ravenwood's receivables for the period prior to the purchase were
purchased for a note in the amount of $1,860,560.69. The note is
collateralized by all the prior and future receivables of Ravenwood,
the aggregate face amount which approximated $2.2 million. The note
provided for a deferred payment schedule to provide the Ravenwood
Facility access to receivables proceeds for working capital purposes.
More than the face amount of the note was collected from the
receivables. However, Ravenwood experienced operational deficiencies
sufficient to exhaust these receivables collections, and the facility
lacked sufficient operating income to make all scheduled payments under
the note.
After the acquisition, Ravenwood was managed on behalf of RHI by a
Iatros subsidiary and Iatros guaranteed timely payment of the note.
The guarantee included a confession of judgment provision allowing
prompt exercise upon the guaranty. The purchaser defaulted on the
note.
In May of 1997, a Confessed Judgment in the amount of $946,698.99
was entered against Iatros, subject to its right to file a motion to
vacate within thirty days. In June of 1997, all parties entered into a
Forbearance Agreement. Pursuant to the terms of the Forbearance
Agreement, $736,057.97 had been paid on the note as of December 31,
1997, and the remaining note balance (which the Company has guaranteed)
was $210,641.02 as of December 31, 1997.
The Forbearance Agreement provides for payments of $50,000 per
month, commencing August 1, 1997, until payment in full. In addition,
beginning on August 15, 1997, and continuing on the 15th day of each
month thereafter, Iatros shall calculate and certify in writing to
Seton Hill, the total Management fee that it is permitted to be paid
under the Management Agreement and applicable Bond documents (the
"Payable Management Fee"). Iatros is entitled to receive the lesser
of: (a) $35,000.00 or (b) one-half (1/2) of the Payable Management
Fee, and shall pay, or cause Ravenwood to pay, to Seton Hill an amount
equal to the balance of the Payable Management Fee. Pursuant to the
terms of the Split-Off Agreement concerning the Company's former
subsidiary, IHN/New Health Management, Inc. ("New Health"), New Health
is, effective as of June 30, 1997, entitled to receive these amounts
and is obligated to ensure that all required monthly payments are made
to Seton Hill in accordance with the terms of the Forbearance
Agreement. To date, New Health has complied with the provisions of the
Forbearance Agreement and, as of March 31, 1998, the outstanding
balance of the note (which the Company has guaranteed) was $6,686.09.
Pursuant to the terms of the Forbearance Agreement, so long as no
default occurs thereunder, the time that Iatros has to file a motion to
vacate the Confessed Judgment will be extended on a month-to-month
basis. The current expiration date for filing such a motion is May 4,
1998.
4. Sundance Rehabilitation Corporation v. Heritage Housing
Development of Kansas, Inc., New Health Management Systems, Inc., and
Iatros Health Network, Inc., Civil Action No. 97-C5430, filed in the
District Court of Johnson County, Kansas, Civil Court Department:
This is an action to collect $741,695.76 for rehabilitation
services rendered by Sundance to patients at a nursing home facility
owned by Heritage Housing Development of Kansas, Inc. ("Heritage"),
located in Olathe, Kansas and known as the Phoenix Nursing Home (the
"Phoenix"), which was formerly managed by the Company's former "New
Health" subsidiary. Subsequent to the filing of this litigation, all
members of the Board of Heritage were replaced, the name of Heritage
was changed to "The Phoenix Rehabilitation Center, Inc." ("TPRCI" or
the "Owner"), the Management Agreement between TPRCI and New Health was
mutually terminated, and they entered into a mutual release.
Immediately after these changes, TPRCI filed bankruptcy.
The contract for therapy services in question was between The
Phoenix and Sundance, and it was signed on behalf of The Phoenix by an
employee of the Owner, in his capacity as Executive Director. However,
pursuant to regulatory requirements of the Kansas Health Department,
The Phoenix was licensed in the joint names of the Owner and New
Health, as manager.
Sundance sued the Company on the theory that it was a co-owner of
The Phoenix, along with TPRCI and, therefore, that the Company was
jointly and severally liable under the contract between Sundance and
The Phoenix. In actuality, the Company never owned any interest in The
Phoenix. Moreover, the Company is not subject to the jurisdiction of
any court in Kansas because it has never conducted any business there.
The Company is vigorously defending against all allegations made
by the Plaintiff in this action. Management believes that the Company
has valid defenses against all allegations made by the Plaintiff in
this action.
5. Maryland Health and Higher Education Facilities Authority v.
Iatros Health Network, Inc., Civil Action No. C-97-39090CN, filed in
the Circuit Court of Maryland for Anne Arundel County:
In May of 1995, the Company entered into a $400,000 Operating
Deficits Agreement (the "ODA") with AHF/Severn, Inc. ("AHF") and The
First National Bank of Maryland (the "Trustee"), respecting a Facility
in Annapolis, Maryland, and one in Salisbury, Maryland (collectively,
the "Facilities"). The ODA required the Company to make loans to AHF,
subject to AHF's satisfying certain loan preconditions, to cover AHF's
operating deficits. The Facilities were developed and managed by the
Company for AHF pursuant to a Management Agreement and a Development
Agreement (the "M&D Agreements"). In compliance with the terms of the
ODA, the Company funded a $200,000 Security Account with the Trustee as
security for any wrongful failure by the Company to fund any proper
request by AHF for an advance under the ODA.
The Maryland Health and Higher Education Facilities Authority
("MAHHEFA") filed suit against the Company in July of 1997, allegedly
in its capacity as a secured party of AHF, seeking to enforce the ODA
and to compel the Company to fund a $200,000 loan advance thereunder.
In the meantime, the Company and AHF had mutually terminated the M&D
Agreements effective as of June 30, 1997. The Company believes that
MAHHEFA has no standing to assert this claim because they have no
security in interest in the ODA or any proceeds of loan advances made
to AHF pursuant thereto. Indeed, the ODA specifically prohibits its
assignment without the prior written consent of the Company, which it
never gave. Moreover, in November of 1997, MAHHEFA foreclosed against
the facilities. The ODA relates solely to operating deficits
experienced by AHF in its capacity of owner/operator of the facilities.
Thus, the Company believes that, because AHF is no longer the owner or
operator of the facilities, AHF cannot incur any further operating
deficits.
The Company is vigorously defending this action. Discovery has
been concluded, but no trial date has been set. Management believes
that the Company has valid defenses against all allegations made by the
Plaintiff in this action.
6. Trinity Geriatric Center, Inc. v. Trinity Retirement
Community, Inc., Maryland General Hospital Long Term Care, Inc.,
Greenbrier Healthcare Services, Inc., and Iatros Health Network, Inc.,
Civil Action No. 03-C-97-009546, filed in the Circuit Court of Maryland
for Baltimore County:
In January of 1996, Trinity Geriatric Center, Inc. ("TGC") sold a
nursing home, known as "Trinity" to Trinity Retirement Community, Inc.
("TR"). Contemporaneously with the Closing, TR entered into a
Management Agreement for the facility with Maryland General Hospital
Long Term Care, Inc. ("LTC"); and LTC, in turn, entered into a Sub-
Management Agreement respecting the facility with the Company's wholly-
owned subsidiary, Greenbrier Healthcare Services, Inc. ("Greenbrier"),
the operations of which were discontinued during the first quarter of
1997. The Company itself was not a party to, or guarantor of, the Sub-
Management Agreement.
Prior to the sale of the Trinity facility by TG to TR, the State
of Maryland paid TG $280,000 as an advance payment for Medicaid patient
care for November and December, 1995. Subsequent to the sale of the
Facility, TG received another check from the State of Maryland in the
amount of $236,658.89. Apparently, believing this check represented
funds due to TR, TG endorsed the check and sent it to TR. Later, the
State of Maryland made a refund claim against TG, claiming that the
State had overpaid TG for the months of November and December, 1995, by
$231,000. TG then made demand upon TR to reimburse it for the $231,000
overpayment. It is unclear why TG sent TR the $236,658.89 check,
rather than returning it to the State of Maryland.
In September of 1997, TG filed suit against TR, as well as against
LTC, Greenbrier, and the Company, seeking to recover the $231,000
overpayment. TG's claims against Greenbrier and the Company are based
upon TG's belief that they managed and controlled the expenditures of
the funds of the Trinity facility, they owed a duty to TG, and that
they breached this duty by not ensuring that the overpayment from the
State of Maryland was reimbursed. TG also claims that they further
breached their duty to TG by not ensuring that TR paid payables of TG
that TR assumed pursuant to the purchase of the Trinity facility. TG
does not articulate any theory on which it bases its claim that
Greenbrier and the Company owed it any duty. Moreover, TG is
apparently unaware of the fact that because the Trinity facility was
unable to pay the management fees due under the Management Agreement
with LTC, LTC terminated its Management Agreement effective as of
October 31, 1997. As a result of LTC not being paid, Greenbrier was
also not paid its fees due under its Sub-Management Agreement; and, as
a result of LTC's termination of its Management Agreement, Greenbrier
had no further duties under its Sub-Management Agreement.
The Company is vigorously defending this action. The Company's
Management believes that the Company has valid defenses against all
allegations made by the Plaintiff in this action.
7. Therapists Unlimited, Baltimore/Washington, D.C., L.P. v. Champion
Rehab, Inc., Iatros Health Network, Inc., and Greenbrier Health Care
Services, Inc., Civil Action No. 693,314, filed in the County Civil
Court of Harris County, Texas:
This is a collection action for $57,955.50 of fees for the
services of therapists furnished by the Plaintiff to Champion pursuant
to the terms of a written contract between Champion and the Plaintiff
(the "Contract"), an 80% owned subsidiary of Greenbrier, which is, in
turn, a wholly-owned subsidiary of the Company. The operations of
Champion and Greenbrier were discontinued during the first quarter of
1997.
The Plaintiff sued the Company, Greenbrier, and Champion on an
alter ego theory. All of the Defendants have made a Special Appearance
in this Action objecting to personal jurisdiction in Texas and
requesting that the Action be dismissed for lack of jurisdiction for
the following reasons: (1) none of the Defendants have ever done any
business in Texas, (2) the Contract in question was negotiated and
executed in Maryland, and (3) all services provided pursuant to the
Contract were performed in Maryland.
The Company's Management believes that the Company has valid
defenses against all allegations made by the Plaintiff in this action.
8. CGB Occupational Therapy, Inc. and Cindy Brillman v. Iatros Health
Network, Inc., Civil Action No. 97-00105, filed in the Court of Common
Pleas of Montgomery County, Pennsylvania:
In October of 1994, the Company entered into a non-binding letter
of intent with Ms. Brillman concerning the possible purchase of her
therapy business and executed a Confidentiality Agreement.
Subsequently, after determining that it was unwilling to close on the
transaction as outlined in the non-binding letter of intent, the
Company terminated negotiations with Ms. Brillman. Since then, Ms.
Brillman has been unable to sell her therapy business.
In April of 1998, she filed suit, alleging that the Company
breached its duty of good faith to negotiate the transaction as
outlined in the non-binding letter of intent, that the Company breached
its confidentiality obligations contained in the Confidentiality
Agreement, that the Company interfered with her company's contractual
relationships, and that the Company, as financial manager of certain
nursing facilities owned by third persons, should be held responsible
for the failure of such facilities to promptly pay her company in full
for therapy services rendered to patients in these facilities in
accordance with the payment terms Ms. Brillman negotiated with the
owners of these facilities even though neither such owners nor such
facilities had sufficient working capital to comply with such payment
terms. The total amount of her claims is to be proven at trial, but
she alleges that she believes they will exceed $300,000 in the
aggregate.
The Company has not yet filed its answer to these claims, but
intends to vigorously defend against all allegations made by the
Plaintiffs in this action. Management believes that the Company has
valid defenses against all allegations made by the Plaintiff in this
action.
9. Rouse & Associates v. Durant Medical, Inc., Civil Action No. 9-
8-02620, filed in the Court of Common Pleas of Chester County,
Pennsylvania:
The Plaintiff in this action is the landlord of the premises
occupied by the Company's medical supply and pharmacy subsidiary
("Durant") in Malvern, Pennsylvania. During March of 1998, the
Plaintiff obtained an ex parte judgment for possession of Durant's
premises based on a confession of judgment contained in the lease and
the Plaintiff's allegation that Durant owed the Plaintiff $18,968.81 in
unpaid rent, attorneys' fees, and court costs.
Durant is negotiating with the Plaintiff to resolve this dispute
amicably. If it is unable to do so, Durant intends to timely file a
petition vigorously defending itself and seeking relief from the
confessed judgment in accordance with applicable laws and procedures.
10. Neuman Distributors, Inc. v. Durant Medical, Inc., Civil Action
No. 98-1285, filed in the United States District Court for the Eastern
District of Pennsylvania:
This is a collection action instituted in March of 1998 for
$353,746.49 for certain pharmaceutical products and other merchandise
allegedly delivered by the Plaintiff to the Company's Durant subsidiary
in Malvern, Pennsylvania. Durant disputes the amount alleged to be
owed and believes it is entitled to certain credits and adjustments.
Durant is negotiating with the Plaintiff to resolve this dispute
amicably. If it is unable to do so, Durant intends to vigorously
defend itself.
11. National Employer Solutions, Inc. v. Iatros Health Network, Inc.,
Civil Action No. E-65359, filed in the Superior Court of Fulton County,
Georgia:
In December of 1997, the Plaintiff in this action filed suit to
collect a $500,000 demand note issued by the Company to the Plaintiff
in January of 1997. This demand note is secured by one of the Company's
notes receivable having a face value of $550,000. In February of 1998,
the Company and the Plaintiff entered into a Settlement Agreement and
Consent Judgment in the amount of $504,791.65, plus post judgment
interest of 9% per annum and costs. Pursuant to the terms of the
Consent Judgment, the Plaintiff has agreed to take no action to enforce
the Consent Judgment so long as no "Judgment Default" (as defined
therein) occurs. A Judgment Default includes the Company's failure to
timely make payments on the Consent Judgment in accordance with a
payment schedule requiring the principal amount of $504,791.65 to be
paid at the rate of $15,000 per month during the 5-month period of
February through June of 1998 and with a final balloon payment due on
July 23, 1998 in an amount equal to $429,791.65, plus post judgment
interest and costs.
12. Other Litigation:
-----------------------
In addition to the foregoing pending actions, the Company and its
subsidiaries have outstanding a number of other routine actions, as
well as a number of threatened actions, involving their respective
creditors, vendors, customers, former employees, and/or other third
persons. Some of them are in the process of being settled, and the
remainder of them are being vigorously defended. With respect to all
actions that the Company is not attempting to settle, Management
believes that the Company has valid defenses to such actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------------
The last annual meeting of the Company's stockholders was held in
Atlanta, Georgia, on December 19, 1996. The Company anticipates
holding the next annual meeting of stockholders prior to December 31,
1998.
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 Systema under the following symbol:
Common Stock............IHNI
The following table sets forth the high and low sales price as
determined form 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 Systema.
Common Stock
Fiscal 1998 HIGH LOW
-----------
First Quarter 21/32 5/16
Fiscal 1997
-----------
First Quarter 2-3/8 1-1/4
Second Quarter 1-1/2 17/32
Third Quarter 1-13/32 29/32
Fourth Quarter 1 7/16
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 1995
-----------
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
The high and low prices (based on the average bid and ask price)
for the Company's Common Stock 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,
1998, 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, as well as other relevant factors. The Company has not paid
cash dividends on its Common Stock to date and does not anticipate
doing so in the foreseeable future. It is the present intention of
management to utilize all available funds for working capital of the
Company. The holders of Series A Senior Convertible Preferred Stock
are entitled to receive out of funds legally available therefore, when
and if declared by the Company, dividends at the rate per annum of $.30
for each outstanding share of Series A Senior Convertible Preferred
Stock. Dividends cumulate and accrue ratably from and after the date
of issuance of the Series A Senior Convertible Preferred Stock, for
each day that shares of the Company's Series A Senior Convertible
Preferred Stock are outstanding. Although no such preferred dividends
have been declared or are currently due and payable, the Company
accrues such preferred dividends because no dividends may be paid in
respect of shares of the Company's Common Stock until all cumulative
dividends in respect of the Company's Series A Senior Convertible
Preferred Stock have been declared and paid and also because such
cumulative preferred dividends carry a liquidation preference. At
March 31, 1998, dividends on the Series A Senior Convertible Preferred
Stock totaling $590,000 had been 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 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 additional directors. The voting
rights of the holders of the Series A Senior Convertible Preferred
Stock for these directors continue until all Cumulative Dividends have
been paid in full, and at such time the number of directors
constituting the full Board of Directors is decreased to 6.
Currently, the holders of the Series A Senior Convertible
Preferred Stock, voting separately as a single class, are entitled to
increase the number of directors comprising the Company's Board from 6
directors to 13 and to elect all 7 additional directors. To date, such
preferred shareholders have only increased the size of the Company's
Board of Directors to 7 and elected 1 additional director, Scott W.
Ryan.
During April of 1998, Mr. Ryan resigned from the Company's Board
of Directors with no successor being nominated to replace him by the
holders of the Series A Senior Convertible Preferred Stock. [See Events
Subsequent to December 31, 1997.]
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
SUMMARY FINANCIAL DATA
IATROS HEALTH NETWORK, INC.
(in dollars, except number of shares)
Year Ended December 31
Statement of Operations
1997 1996 1995 1994 1993
---- ---- ---- ---
Revenues $ 25,512,540 $ 11,261,119 $ 11,017,865 $ 2,331,786 $ 1,197,215
Operating Expenses $ 26,204,750 $ 13,316,234 $ 7,441,146 $ 4,015,254 $ 3,507,621
Net Operating Income (Loss) $( 692,210) $( 2,055,115) $ 3,576,719 $( 1,683,468) $( 2,310,406)
Income(Loss)
from Continuing Operations $(11,093,116) $( 4,240,680) $ 3,343,439 $( 943,658) $( 2,257,495)
Income (Loss)
from Discontinued Operations $( 7,117,226) $( 6,073,881) $ 311,741 $( 241,049) $( 1,629,955)
Net Income (Loss) $(18,210,342) $(10,314,561) $ 3,655,188 $( 1,196,609) $( 3,834,560)
Earnings Per Share
Continuing Operations $ (.73) $ (.33) $ .35 $ (.15) $ (.39)
Discontinued Operations $ (.40) $ (.44) $ .03 $ (.04) $ (.29)
--------- --------- --------- --------- ---------
$ (1.13) $ (.77) $ .38 $ (.19) $ (.68)
Weighted Average Shares
of Common Stock and
equivalents outstanding 16,666,375 13,946,359 9,002,561 6,281,584 5,668,411
Balance Sheet Data: 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
- -------------------
Working Capital $( 3,106,337) $ 3,077,162 $ 2,832,702 $ 487,682 $( 97,625)
Total Assets $ 25,237,278 $ 25,105,242 $ 23,044,380 $ 1,547,265 $ 1,018,992
Total Long-Term Debt
and Capital Lease obligations $ 8,617,478 $ 746,813 $ 131,140 $ 50,165 $ 44,015
Total Liabilities $ 21,370,004 $ 4,789,462 $ 4,227,132 $ 1,311,194 $ 898,809
Stockholders' Equity $ 3,867,274 $ 20,315,780 $ 18,817,250 $ 236,071 $ 120,182
NOTES:
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
-------------------
Iatros Health Network, Inc. (formerly Gracecare Health Systems,
Inc.) is a Delaware corporation incorporated in June 1988 and completed
its initial public offering in April 1992. The Company's initial
business activities were concentrated in providing health care services
for post-acute, ventilator dependent and medically complex patients
residing in long-term care nursing facilities. Commencing in July
1994, management of the Company redirected operations by pursuing
development, management and ancillary service opportunities involving
unrelated long-term care facilities, while discontinuing operations
involving specialized programs. Commencing in 1997, the Company began
to develop long-term care operating and ancillary service opportunities
exclusively for its own account. Continuing business activities of the
Company include operating long-term care facilities through direct
ownership and lease as well as providing related ancillary services.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Results of Operations
---------------------
For the year ended December 31, 1997, the Company reported a net
loss of $18,210,342. This is largely attributed to losses associated
with discontinued operations ($7,117,226); write-down of intangible
assets ($5,637,703); substantial general and administrative expenses
($3,114,413) associated with the Company's business history and
corporate expenses; and the write-down of deferred tax assets
($2,341,000) for which future realization is uncertain. In addition,
recent operating losses reported by the Company during 1997 and 1996
together with other adverse corporate developments have exhausted the
Company's capital resources and had a material adverse effect on short-
term liquidity and the Company's ability to service its debts At
December 31, 1997, the Company reports a negative working capital
position of $3,106,337.
The Company reported revenue from continuing operations for the
years ended December 31, 1997 and 1996 of $25,512,540 and $11,261,119,
respectively, representing an increase of $14,251,421 or 127%. During
1997, the operating expenses incurred for continuing operations,
exclusive of general and administrative costs, totaled $21,827,890
yielding an operating margin of $3,684,650 or 14% on related revenues.
Notwithstanding this increase in revenue, the operating margins
attained by the Company are insufficient to cover the levels of general
and administrative costs as well as other expense requirements.
Consolidated operating revenue relating to the Company's
continuing operations for 1997 include $12,191,384 associated with
nursing home operations in the New England market area. This revenue
relates to nursing facilities, which are owned or leased by the Company
beginning in 1997, and reflects the Company's business plan in this
direction. Operating income from nursing home operations reported in
1997 totaled $1,680,148 and represents a return of approximately 14% on
related revenue.
Ancillary services revenue relating to the Company's continuing
operations for 1997 totaled $11,283,832 representing an increase of
$2,964,681 or approximately 37% over 1996. This increase is largely
attributable to the Company's ancillary services business developed in
New England where related revenue totaled $2,088,523 for 1997.
Operating income from ancillary services revenue reported in 1997
totaled $1,196,479 and represents a return of approximately 11% on
related revenue. The operating margin reported on ancillary services
revenue for 1996 approximated 8.5%.
Management services revenue relating to the Company's continuing
operations for 1997 totaled $2,037,324 representing an increase of
$1,052,577 or approximately 107% over 1996. This revenue relates to
six nursing facilities located in the New England market area managed
by the Company. The Company is attempting to convert these management
contracts into lease arrangements during 1998. Operating income from
management services reported in 1997 totaled $808,023 and represents a
return of approximately 40% on related revenue.
Revenue derived from development services has diminished
materially and reflects the Company's concentration on existing
operations and emphasis on growth efforts in the area of direct
ownership and lease of nursing facilities. Consequently, the Company
is precluded from realizing development fee income which historically
had been derived from third party projects and related transactions.
Consolidated operating expenses relating to the Company's
continuing operations reported for 1997 totaled $26,204,750 compared to
$13,316,234 for 1996, representing an increase of $12,888,516 or 97%
during 1997. This compares to an increase in related revenue during
1997 of 127% over 1996. Of this reported increase in consolidated
operating expenses, $10,511,236 or 82% relates to the Company's nursing
home operations developed in New England; $2,472,734 or 19% relates to
increased ancillary services; $472,159 or 4% relates to increased
management services costs in New England; and, ($567,613) or (5%)
relates to decreased general and administrative expenses effected by
the Company during 1997.
General and administrative expenses reported for 1997 include
$4,072,880 associated with the Company's corporate management and
related costs of corporate overhead. Comparable corporate expenses
reported for 1996 totaled $3,955,804. Significant components of such
costs for 1997 included salaries and related costs for executive
management of $1,735,409; legal and professional fees of $857,786;
contracted services of $174,562; travel and related expenses of
$550,305; insurance expenses of $307,478; and other general expenses.
Significant components of such costs for 1996 included salaries and
related costs for executive management of $1,384,337; legal and
professional fees of $716,956; contracted services of $797,907; travel
and related expenses of $366,783; insurance expenses of $213,563; and
other general expenses. During 1997 and to date, in connection with
discontinuing non-profitable operations, the Company has been
substantially effecting cost reductions relating to general and
administrative expenses. The annualized level of general and
administrative expenses for continuing operations for 1998 has been
reduced to less than $2,500,000. Despite these efforts, the Company
has insufficient cash-flow to timely pay all of its general and
administrative expenses.
Other income (expense) reported for 1997 totaled a net expense of
$8,059,906 representing an increase of $5,055,416 over 1996. Of this
amount reported in 1997, $5,637,703 represents non-cash charges to
current year operations associated with the write down of intangible
assets associated with discontinued operations. Other major components
for 1997 include interest expense of $1,015,534 and property lease
expense of $916,839. Significant components of 1997 interest expense
include $225,806 relating to corporate debt obligations; $637,047
relating to property mortgages and working capital debt associated with
New England nursing home operations; and $103,338 in interest costs
associated with the Company's ancillary services business. Property
lease expense reported totaling $916,839 in 1997 relates to two nursing
facilities in New England which operations were assumed under a lease
purchase arrangement commencing in March 1997.
The 1997 intangible asset write-downs were comprised of
uncollectible nursing home operating advances totaling $2,080,000;
uncollectible development notes receivable of $1,500,000; forfeited
facility acquisition deposits of $1,616,000; and accelerated
amortization of goodwill and contract rights totaling $441,703.
The income tax expense reported for 1997 totaling $2,800,000
results principally from the Company's reserve against deferred tax
assets reported in prior periods and represents a non cash charge to
current year operations. The deferred tax asset relates to net
operating loss carry forward benefits available to the Company for
which the future utilization against taxable income is uncertain.
The Company's current business strategy is to pursue the direct
ownership or lease of long-term care facilities for its own account.
Accordingly, during 1997, the Company discontinued operations
associated with certain segments of its long-term care business.
Specifically, these included subsidiary operations providing third
party development and management services to independent owners and
operators of long-term care facilities and relating to the Company's
prior business acquisitions of Greenbrier Healthcare Services, Inc. and
New Health Management Systems, Inc. In addition, the Company
discontinued operations associated with providing respiratory therapy
services and relating to the prior business acquisition of King Care
Respiratory Services, Inc.
Year Ended December 31, 1996 Compared with 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 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 $11,261,119 for 1996, representing an
increase of $243,254 over 1995. Of the reported increase in 1996
revenue, $2,729,380 relates to increased ancillary services revenue and
$984,747 relates to increased management services revenue offset by a
decrease in development services revenue of $3,470,873. The increase
in recorded revenue during 1996 results principally from the Company
having expanded into a new market area represented by New England. The
reported reduction in development services revenue reflects
management's efforts away from outside development initiatives and more
directed towards the demands of existing business as well as
emphasizing the direct ownership or lease of long-term care nursing
facilities.
Consolidated operating expenses relating to the Company's
continuing operations reported for 1996 totaled $13,316,234 compared to
$7,441,146 for 1995, representing an increase of $5,875,088 or 79%
during 1996. Of this reported increase, $2,487,597 or 42% relates to
increased ancillary services; $757,142 or 13% relates to new costs
associated with initiating management services in New England; and,
$2,630,350 or 45% relates to increased general and administrative
expenses incurred by the Company.
General and administrative expenses reported for 1996 include
$3,955,804 associated with the Company's corporate management and
related costs of corporate overhead. Comparable corporate expenses
reported for 1995 totaled $2,751,951. Significant components of such
costs for 1996 included salaries and related costs for executive
management of $1,384,337; legal and professional fees of $716,956;
contracted services of $797,907; travel and related expenses of
$366,783; insurance expenses of $213,563; and other general expenses.
Significant components of such costs for 1995 included salaries and
related costs for executive management of $527,016; legal and
professional fees of $690,210; contracted services of $471,464; travel
and related expenses of $122,211; insurance expenses of $86,181; and
other general expenses.
Operating income from ancillary services relating to the Company's
continuing operations during 1996 totaled $704,532 representing 8.5% on
related revenues. Comparable income reported for 1995 totaled $462,749
representing 8.3% on related revenues. Operating income derived from
management services revenue for 1996 totaled $227,605 representing 23%.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Liquidity and Capital Resources
-------------------------------
During 1997 and to date, the Company has been successful in
reducing levels of its corporate overhead and general and
administrative costs. Continued cost reductions are required however
for the Company to achieve positive cash flow from continuing
operations. In the alternative, the Company requires a higher revenue
base to support the corporate overhead represented by its executive
management structure. In addition, the Company requires infusion of
capital in order to satisfy its short-term obligations. The Company
has been unsuccessful in its independent efforts to secure financial
relief from its existing creditors as well as to raise new sources of
capital.
The Company has been engaged in discussions with third parties
having an interest in corporate merger opportunities or the purchase of
certain of its business holdings. The Company has been particularly
focused on growth prospects which would yield added economies and
eliminate redundancy of overhead costs through merger or acquisition.
As further described in Events Subsequent to December 31, 1997,
the Company has entered into a formal letter of intent with NewCare
Health Corporation (NASDAQ: NWCA) to complete a statutory merger
transaction. Among the benefits to be derived by the Company in
consummating such a transaction would be immediate infusion of working
capital needed to revitalize existing operations and access to added
capital resources required to meet corporate obligations.
In light of the Company's current financial position, its
inability to independently meet its short-term corporate obligations,
its need to further capitalize existing operations and its dependency
on continued cost reductions and revenue growth to support continuing
operations, its viability to continue as a going concern is uncertain.
While the Company intends to pursue and consummate a merger
transaction with NewCare Health Corporation, there can be no assurance
that this transaction will be completed.
At December 31, 1997, the Company reports a working capital
deficit of $3,116,337 compared with a positive working capital position
at December 31,1996 of $3,077,163. This deterioration in the Company's
working capital position during 1997 has resulted largely from having
had to subsidize working capital associated with discontinued
operations as well as having had to utilize working capital reserves to
settle corporate obligations associated with prior business and
development activities of the Company. While continuing operations of
the Company is profitable, the limited working capital available to the
Company internally is constraining and limits the Company's ability to
effectively support existing lines of business.
Cash and cash equivalents relating to the Company's continuing
operations at December 31, 1997 totaled $639,236 and include restricted
amounts of $448,540. Restricted cash represents a loan reserve for
mortgage indebtedness associated with two nursing home properties owned
by the Company and located in New England. Cash and cash equivalents
at December 31, 1996 totaled $654,197 and include a certificate of
deposit held by a financial institution in the amount of approximately
$520,000. This certificate was redeemed in March 1997 and was utilized
to satisfy an outstanding credit obligation totaling $516,000, which is
included in notes payable at December 31, 1996.
Accounts receivable relating to the Company's continuing
operations at December 31, 1997 of $7,596,741, representing 78% of
total current assets, were comprised of $3,958,735 relating to nursing
home operations; $4,720,521 relating to ancillary services; and,
$2,300,151 relating to management services; net of an aggregate
allowance for doubtful accounts of $3,382,667. The substantial level of
allowance relates to accounts receivable from nursing home operations
which amounts were assumed in connection with acquiring property
leasehold rights ($1,025,000) and amounts relating to ancillary and
management services for unrelated nursing facilities associated with
discontinued operations (approximately $2,000,000). Accounts
receivable relating to the Company's continuing operations at December
31, 1996 of $3,724,952, representing 52% of total current assets, were
comprised of $3,707,981 relating to ancillary services and $327,911
relating to management services, net of an aggregate allowance for
doubtful accounts of $310,940.
Prepaid expenses and other current assets relating to the
Company's continuing operations at December 31, 1997 totaled $712,343.
Subscriptions receivable of $789,000 represent a common stock
subscription receivable from NewCare Health Corporation pursuant to an
investment agreement and corporate merger proposal. This receivable
was fully realized by the Company during the first quarter of 1998.
Other prepaid expenses and current assets reported include deposits and
interest receivable associated with the Company's outstanding notes and
loans due from third parties. Significant components of prepaid and
other current assets at December 31, 1996 include project costs
advanced in connection with transactions involving the Company in a
development capacity in New England. Such costs were largely recovered
during 1997 or written-off at December 31, 1997.
Notes and loans receivable relating to the Company's continuing
operations at December 31, 1997 aggregate $2,988,064 and predominantly
relate to long term care facilities for which the Company had provided
development services or otherwise advanced capital to secure management
rights. Of the amounts outstanding, nearly $2,000,000 relates to
nursing home properties in New England that are currently managed by
the Company. The Company is presently attempting to convert these
management arrangements to long term leasehold positions whereby it is
expected to forego the cash realization of these notes and loans.
Otherwise, the notes and loans are generally formalized as long term,
mature over periods approximating ten years, bear simple interest
between eight and ten percent and are partially secured by a mortgage
position on the properties to which they relate. Further, payments are
generally subordinated to senior debt and other priority operating
obligations of the properties. Notes and loans receivable reported at
December 31, 1996 resulted largely from development services income
recognized by the Company in prior periods as well as from working
capital advances made by the Company to support facilities pursuant to
its obligations under operating deficit agreements. At December 31,
1997, approximately $2,500,000 was written-off.
Notes payable to banks and other relating to the Company's
continuing operations at December 31, 1997 totaled $5,638,262 and
include $3,910,000 outstanding and relating to working capital
financing of accounts and notes receivable and associated with the
Company's continuing operations. Specifically, $3,085,000 relates to
working capital financing associated with ancillary services and
$825,000 relates to working capital financing associated with nursing
home operations in New England. At December 31, 1997, the availability
under these working capital financing arrangements is fully extended.
Other notes payable at December 31, 1997 totaled $1,705,000 and
represent various corporate obligations that have been formalized as
short-term note instruments and remain outstanding. Notes payable
reported outstanding at December 31, 1996 relate to working capital and
equipment notes associated with ancillary services.
In January 1997, the Company obtained a $500,000 loan from
National Employer Solutions, Inc. ("NES"). This loan is due on demand,
bears interest at the rate of prime plus 5% and is secured by one of
the Company's notes receivable having a face value of $550,000. The
loan had an original maturity of March 1997, was extended to August
1997 and is currently past due. At December 31, 1997, the loan
obligation due NES, including accrued interest, totaled approximately
$515,000 and is reported in Notes payable banks and other. Litigation
was commenced by NES to collect this note in December of 1997. In
February of 1998, this litigation was settled. [See "Legal
Proceedings."]
During April 1997, the Company's New England based operating
subsidiary 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
the Company's operating subsidiary. The line is due on demand and
accrues interest at the bank's base rate plus 1% on amounts
outstanding. At December 31, 1997, the Company has utilized $1,481,500
of this financing to support working capital and development activities
of its New England based operating subsidiaries. The Company is in the
process of renewing the loan term associated with this financing which
term expired on April 30, 1998. This note payable is reported in Notes
payable banks and other at December 31, 1997.
During May 1997, the Company's Philadelphia based ancillary
service subsidiaries secured a working line of credit of up to
$4,000,000 of which approximately $1,600,000 was outstanding at
December 31, 1998 representing the maximum availability under the
credit arrangement at year end. This line of credit is secured by the
subsidiaries' accounts receivable; is due on demand and accrues
interest at the rate of prime plus 2.25% on amounts drawn and
outstanding. To date this working capital line of credit remains
outstanding in the amount of the maximum availability. This note
payable is reported in Notes payable banks and other at December 31,
1997.
In April and July 1997, the Company entered into two working
capital lending programs regarding four nursing homes owned and leased
in Massachusetts. These programs allow for maximum borrowings of
$2,000,000 in the aggregate and are collateralized by accounts
receivable of the nursing homes. Interest is incurred at the rate of
11% on one program and 12.5% on the other. Total borrowings under the
two programs approximated $828,000 at December 31.
In September 1997, the Company settled an outstanding lawsuit with
NPFII-W as described in the Company's 10-K for the year ended December
31, 1996. The settlement calls for the Company to pay NPFII-W $500,000
over 5 years, with the unpaid balance accruing interest at the rate of
10% per annum, together with 50,000 shares of the Company's Common
Stock.
During August 1997, the Company agreed to pursue a proposed
private equity offering and in connection therewith secured a bridge
loan in the amount of $300,000. The bridge loan included interest at
10% per annum and was to mature upon the earlier of (i) December 5,
1997 or (ii) the successful consummation by the Company of any
financing raising at least $500,000. In addition, in consideration of
the bridge loan, the Company issued to the lender a five-year warrant
to purchase 325,000 shares of the Company's Common Stock at an exercise
price of $0.50 per share. In the event of a default under the bridge
loan, the principal thereof and all accrued, unpaid interest thereon
would be convertible into shares of the Company's Common Stock at a
price of $0.25 per share; and, in such event, the exercise price of the
warrants issued would automatically reduce to $0.25 per share. During
1997, the Company realized net proceeds of approximately $255,000 in
connection with this bridge loan and financing transaction. The
Company subsequently abandoned the proposed equity offering
contemplated and negotiated a cancellation of its obligations
associated with the issue of Company warrants. Total expenditures
incurred by the Company to satisfy the loan obligation and effect
cancellation of the related consideration amounted to $430,492. At
December 31, 1997, approximately $211,000 had been paid by the Company
towards this settlement and the balance was fully paid during the first
quarter of 1998. At December 31, 1997, the principal loan obligation
outstanding totaled $150,000 and is reported in Notes payable banks and
other.
During 1997 and to date, the Company has formalized a note payable
associated with certain legal and professional fees incurred. The note
payable is for approximately $450,000, is unsecured, bears interest at
approximately 12%, and is due on demand. At December 31, 1997, this
note is reported in Notes payable banks and other.
Accounts payable relating to the Company's continuing operations
at December 31, 1997 totaled $3,439,953 and includes $1,323,128
associated with nursing home operations; $521,249 representing
corporate accounts payable; $1,160,364 relating to ancillary services;
and, $435,212 relating to management services. Accounts payable
reported at December 31, 1996 totaled $1,770,842 and includes $264,539
representing corporate accounts payable; $1,117,506 relating to
ancillary services; and, $388,797 relating to management services.
Accrued expenses and other liabilities relating to the Company's
continuing operations at December 31, 1997 totaled $2,459,197.
Significant components include accrued payroll and related costs of
$335,026; and accrued expenses associated with nursing home operations
totaling $1,755,866. Accrued expenses and other liabilities reported
at December 31, 1996 totaled $767,404 and included accrued payroll and
related costs of $244,756 together with accrued expenses associated
with ancillary services of $243,887 and corporate obligations totaling
$278,761.
Long-term debt reported by the Company relating to the Company's
continuing operations at December 31, 1997 totaled $8,550,000 and
relates exclusively to mortgage financing associated with nursing home
acquisitions in New England during 1997. Initial terms of this
financing provide for interest only payable monthly at annual rates
that approximate ten percent.
In December of 1997, the Company executed a note payable for
approximately $145,000 to one of its former subsidiaries in exchange
for certain retained assets of the former subsidiary. The note bears
interest at 10% and is payable over two years.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents relative to the Company's continuing
operations at December 31, 1996, totaled $654,197 and included a
certificate of deposit held by a financial institution in the amount of
approximately $520,000 which was redeemed in March 1997 and was utilized to
satisfy an outstanding credit obligation totaling $516,000 which is
included in notes payable, at December 31, 1996.
Cash and cash equivalents relative to the Company's continuing
operations at December 31, 1995, totaled $931,772, comprised of
unrestricted amounts of $556,772 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.
Accounts receivable relative to the Company's continuing
operations at December 31, 1996 of $3,724,952, representing 52% of
total current assets in 1996, were comprised of $3,707,981 relating to
ancillary services, and $327,911 relating to management services and is
net of an allowance for doubtful accounts of $310,940.
Accounts receivable relative to the Company's continuing
operations at December 31, 1995 of $3,848,454, representing 56% of
total current assets in 1995, were comprised of $1,848,454 relating to
ancillary services, and $2,000,000 relating to development services and
were net of an allowance for doubtful accounts of $143,400.
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. This transaction was abandoned by the Company during
1997 and the purchase deposit was forfeited.
At December 31, 1996 notes receivable relative to the Company's
continuing operations resulting from development, financial advisory,
and consulting services which the Company had provided to several long-
term care properties totaled $4,403,393 as compared with $2,110,295 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. To
date, approximately $2.5 million in reserves have been established by
the Company for these notes.
The Company utilized certain of these notes receivable as security
for working capital financing arrangements during 1997 and associated
with its New England operations.
Events Subsequent to December 31, 1997
--------------------------------------
During January of 1998, the Company entered into a note purchase
and loan agreement whereby the Company purchased a note instrument in
the principal amount $1,475,000 from third party lender with whom the
Company has extensive business relationships. The note purchase
financing was provided by such lender with collateral and security
relating to nursing facilities in New England financed by the lender
and in which the Company has an interest. The loan agreement
associated with the purchase financing has a maturity date of April 1,
2007; requires monthly payments of principal and interest payable at
10.5% per annum and amortized over a period of twenty-five years. The
note instrument acquired by the Company is secured by a subordinated
mortgage position held on a nursing facility that was previously
managed by the Company. The prior management of this facility was
provided by one of the Company's subsidiaries, which operations were
discontinued during 1997. The note instrument acquired by the Company
is currently non-performing.
During April of 1998, the Company renegotiated the terms of merger
previously announced by NewCare Health Corporation (NASDAQ: "NWCA").
The Company and NWCA have entered into a non-binding letter of intent
for the acquisition by means of a statutory merger of the outstanding
common and Series B Preferred Stock and options and warrants of IHNI
(excluding, however, any shares of IHNI common stock issued to NWCA by
IHNI) for approximately $7,000,000 in NWCA common stock, valued at the
average closing bid price of the NWCA common stock for the 20 trading
days ending 2 trading days prior to the closing date of the merger
("NWCA Price"), or a combination of NWCA common stock and cash at the
option of NWCA, and of the outstanding Series A Preferred Stock for
approximately $1,000,000 in a combination of NWCA common stock, cash
and warrants for 250,000 shares of NWCA common stock at an exercise
price of $1.00 above the NWCA Price. The acquisition transaction is
subject to, among other things, execution of a definitive merger
agreement and approval of the shareholders of IHNI and NWCA.
Also during April of 1998, NWCA nominated Mr. Frank Camma and Mr.
Jim Sanregret to the Company's Board of Directors to fill two existing
vacancies. These nominations were made pursuant to rights granted to
NWCA by the Company in connection with NWCA's $1,000,000 investment in
the Company made in December of 1997. [See "Significant Transactions."]
In addition, during April of 1998, Scott W. Ryan resigned as a
member of the Company's Board of Directors. Mr. Ryan had been elected
by the holders of the Series A Senior Convertible Preferred Stock
voting separately as a class. No successor has been nominated by such
holders to replace Mr. Ryan as a Director. [See "Dividends."]
Year 2000 Issue
---------------
In common with users of computers around the world, the Company is
investigating if and to what extent the date change from 1999 to 2000
may affect its networks and systems. There can be no assurance that
the costs of implementing a program to address this issue will not be
material, that such a program will be successful, or that the date
change from 1999 to 2000 will not materially adversely affect the
Company's business, financial condition and results of operations. The
ability of third parties with which the Company transacts business to
adequately address their year 2000 issues is outside the Company's
control. Although the Company will seek alternative vendors, where its
current vendors are unwilling or unable to become year 2000 compliant
in a timely manner, there can be no assurance that the Company's
operations will not be materially adversely affected by the ability of
third parties dealing with the Company, including Medicare and
Medicaid, to also manage the effect of the year 2000 date change.
Effects of Inflation
--------------------
The Company does not expect inflation to materially effect its
results of operations. However, the health care industry is labor
intensive. Wages and other related labor costs are especially
sensitive to inflation and future operating costs could be subject to
general economic and inflationary pressures. Accordingly, the Company
cannot predict its ability to control such cost increases.
New Accounting Standards
------------------------
The Company was required to implement Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") in the
fourth quarter of 1997. The effect of the implementation of SFAS No.
128 was not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The consolidated financial statements required to be filed
pursuant to this Item 8 begin on Page F-1 of this report. Such
consolidated financial statements are hereby incorporated by reference
into this Item 8. The Supplementary Data requirement as set forth in
Item 302 of Regulation S-K is inapplicable to the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
INAPPLICABLE
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
NAME AGE PRESENT POSITION
(1)
Reginald D. Strickland 43 President/Chief Executive
Officer and Director
Joseph C. McCarron, Jr. 43 Executive Vice President and
Director, President - OHI
Corporation
Judson H. Simmons 52 Executive Vice President of
Strategic Planning/Corporate
Development and Secretary
William T. Filippone 47 Executive Vice President and
Chief Operating Officer
Joseph L. Rzepka 45 Executive Vice President and
Chief Financial Officer
(1) (2)
John D. Higgins 65 Director
Robert A. Kasirer 48 Director
(2)(4)
Scott W. Ryan 53 Director
(3)(5)
James H. Sanregret 47 Director
(3)(5)
Frank Camma 28 Director
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
(3) Nominated to fill an existing vacancy on the Board of Directors in
April of 1998.
(4) Mr. Ryan resigned as a Director in April of 1998 [See "Events
Subsequent to December 31, 1997."]
(5) Nominated to fill two vacancies on the Board of Directors in April
of 1998. [See "Events Subsequent to December 31, 1998" and
"Certain Relationships and Related Transactions."]
Reginald D. Strickland
Mr. Strickland was appointed Chief Executive Officer in May 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 operations. Mr. Strickland received his
Bachelor's 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 a Bachelor's
Degree in Business Administration from the University of Michigan in
Ann Arbor and completed masters studies in a 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 BS 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 JD degree, cum
laude, from the University of Georgia School of Law; his LLM 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.
In July 1997, Mr. McCarron was appointed President of Oasis
Healthcare, the Company's New England based operating subsidiary. 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.
William T. Filippone
Mr. Filippone was appointed Executive Vice President and Chief
Operating Officer of the Company effective June 1, 1997. Mr. Filippone
previously served as President and Chief Executive Officer of Horizon
Facilities Management, Inc., located in Dallas, Texas from 1995 through
May 1997. Before his association with Horizon HealthCare, he served as
Executive Vice President/COO of Community Care of America, located in
Naples, Florida from 1993 through August 1995. There he was a
cofounder and instrumental in the initial public offering of the
company. Before his relationship with CCA, he held key senior
management roles with other healthcare companies nationwide. Mr.
Filippone began his healthcare career in 1974, after receiving his
Bachelor's Degree in Business from West Virginia University.
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 JD degree from St.
John's University School of Law in 1973 and is a member of the New York
Bar Association. [See "Certain Relationships and Related
Transactions."]
John D. Higgins
Mr. Higgins has been a director since July 1994. Since October
1994, 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 a BBA and MBA degree in
finance from Hofstra University.
Scott W. Ryan
Mr. Ryan founded S.W. Ryan & Company, Inc. in Philadelphia,
Pennsylvania in 1988 through the present. Mr. Ryan is a registered
securities broker and dealer. He has established himself with several
investment firms in the Northeast. Mr. Ryan began his career in 1973.
He holds a BS degree from the US Naval Academy and a Master's Degree
in Business from the University of Virginia.
James H. Sanregret
Has served as Chief Financial Officer of NewCare Health
Corporation since June 1997. Mr. Sanregret was previously employed by
Delta Air Lines for 24 years. He was Treasurer of Delta from 1992 to
May 1997. As Treasurer, he was responsible for all Corporate Finance,
Tax and Corporate Insurance activities on a global basis for the $12
billion airline. He was Assistant Vice President of Financial Planning
in 1992, and was responsible for analyzing the economics of all
proposed spending activities, preparation of projected income
statements for quarterly Board of Directors' meetings, and the
development of expense levels and capital outlays for all major
corporate acquisitions/mergers. From 1985 to 1992, he was the Director
of Financial Planning. He coordinated all financial activities related
to the acquisition of Western Airlines. He functioned as Manager of
Financial Planning from 1981 to 1985, Analyst of Financial Planning
from 1974 to 1981, and Accountant of Property Accounting from 1973 to
1974. Mr. Sanregret received a Bachelor of Business Administration
from the University of Wisconsin in 1972. [See "Certain Relationships
and Related Transactions."]
Frank Camma
Has served as Vice President of Strategic Planning of NewCare
Health Corporation since July of 1997. Mr. Camma began his career in
the healthcare industry in 1990, when he served as an accountant in the
Contract Services division of NovaCare Incorporated, a rehabilitation
services company until 1992. From June 1992 to October 1993, he served
as a Financial Analyst at First Fidelity Bank Corporation. He
completed the Professional Banker training program and returned to
NovaCare Incorporated as a Financial Analyst in the Corporate Finance
department. In this capacity, he was responsible for the annual budget
as well as weekly operating reports. From September 1994 to August
1996, he served as a Senior Financial Analyst at Acquisition Management
Services. Acquisition Management Services is a captive investment
banking boutique for Foster Management Company, a $250 million venture
capital firm specializing in the consolidation of niche healthcare
businesses. He was responsible for valuing, performing due diligence
and negotiating potential transactions. His primary client was NovaCare
Incorporated. From August 1996 to March 1997, he served as an
Associate with the investment banking firm of NatWest Markets. Mr.
Camma graduated summa cum laude from Villanova University with a
Bachelors Degree in Business Administration in 1992. [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.
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 $100,000 for the years ended December 31, 1997, December 31, 1996,
and December 31, 1995.
ANNUAL COMPENSATION
LONG-TERM COMPENSATION
YEAR SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER
($) ($) ANNUAL STOCK UNDERLYING PAYOUTS COMPENSATION
COMPENSATION AWARDS OPTIONS/SARs (#) ($)
IONM ($) (#)
Robert T. Eramian 1997 $102,163 $0 $6,125 0 100,000 $0 $0
Chief Executive 1996 $245,192 $0 $14,700 0 401,348 $0 $0
Officer & Chairman 1995 $229,000 $0 $0 0 30,000 $0 $0
of the Board (1)
Reginald D. Strickland 1997 $245,000 $50,000 $9,000 0 420,000 $0 $0
President and Chief 1996 N/A N/A N/A N/A N/A N/A N/A
Executive Officer (6) 1995 N/A N/A N/A N/A N/A N/A N/A
William T. Filippone 1997 $131,250 $45,000 $9,000 0 200,000 $0 $0
Executive Vice 1996 N/A N/A N/A N/A N/A N/A N/A
President & Chief 1995 N/A N/A N/A N/A N/A N/A N/A
Operating Officer (3)
Joseph L. Rzepka 1997 $175,000 $0 $9,000 100,000 $0 $0
Executive Vice 1996 $47,115 $0 $2,250 0 100,000 $0 $0
President & Chief 1995 N/A N/A N/A N/A N/A N/A N/A
Financial Officer
Gordon Simmons 1997 N/A N/A N/A N/A N/A N/A N/A
Chief Operating 1996 $119,798 $0 $0 0 100,000 (4) $0 $0
Officer (4) 1995 N/A N/A N/A N/A N/A $0 $0
Joseph C. McCarron, 1997 $200,000 $0 $9,000 300,000 $0 $0
Jr. Executive Vice 1996 $196,154 $0 $9,000 0 40,000 $0 $0
President & Director(6) 1995 $162,500 $0 $0 0 30,000 $0 $0
Judson H. Simmons 1997 $225,000 $0 $9,000 0 360,000 $0 $0
Executive Vice 1996 $66,346 $0 $150,000 0 40,000 $0 $0
President of Strategic 1995 $0 $0 $125,000 0 0 $0 $0
Planning/Corporate
Development and
Secretary (6)
(1) Mr. Eramian resigned as Chief Executive Officer and Chairman of the company in May 1997.
(2) Mr. Strickland was appointed Cheif Executive Officer of the compnay in May 1997.
(3) Mr. Filippone was appointed Executive Vice President and Chief Operating Officer of the
company on June 1, 1997.
(4) Mr. Gordon Simmons resigned as an officer of the company in December 1996.
(5) Mr. Mccarron was also appointed President of the company's subsidiary in July 1997.
(6) Considering the company's working capital restraints, Messrs. Strickland, Simmons,
and McCarron deferred payment of $93,500 in the aggregate of their salaries during 1997.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR (FISCAL YEAR ENDED DECEMBER 31, 1997)
POTENTIAL
INDIVIUAL GRANTS REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPECIATION
FOR OPTION TERM
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or Expiration 5% 10%
Options/SARs Employees in Base Price Date
NAME Granted (#) Fiscal Year (1) ($/Share)
Robert T. Eramian 100,000 (1) 6.54% $0.38 May 22, 2007 $23,584 (5) $59,765 (6)
Chief Executive Officer and
Chairman of the Board
Reginald D. Strickland 420,000 (2) 27.45% $0.50 May 22, 2007 $132,068 (7) $334,686 (8)
Chief Executive Officer
Joseph L. Rzepka 100,000 (3) 6.54% $0.50 June 9, 2007 $31,445 (7) $79,687 (8)
Executive Vice President and
Chief Financial Officer
Joseph C. McCarron, Jr. 100,000 (1) 6.54% $0.38 May 22, 2007 $23,584 (5) $59,765 (6)
Executive Vice President 200,000 (3) 13.07% $0.50 June 9, 2007 $62,889 (7) $159,374 (8)
William P. Filippone 200,000 (3) 13.07% $0.38 June 9, 2007 $47,167 (5) $119,531 (6)
Executive Vice President
Judson H. Simmons 360,000 (3) 23.53% $1.50 Dec 31, 2006 $254,702 (9) $645,466 (10)
Exective Vice President-
Strategic Planning and
Corporate Organization
(1) Warrant granted on May 22, 1997 based upon the closing bid price of the Company's Common Stock on that date of $0.75 as
traded on the NASDAQ SmallCap Market SM. The warrant was exercisable at grant.
(2) Warrant granted on May 22, 1997 in connection wit Mr. Strickland's employment agreement, based upon closing bid price of
the Company's Common Stock on that date of $0.75 as traded on the NASDAQ SmallCap Market SM. The warrant was exercisable at
grant.
(3) Warrant granted on June 9, 1997 based upon the closing bid price of the Company's Common Stock on that date of $1.25 as
traded on the NASDAQ SmallCap Market SM. The warrant was exercisable at grant.
(4) Warrant granted on January 1, 1997 in connection with Mr. Simmons employment agreement, based upon closing bid price of
the Company's Common Stock on that date of $1.88 as traded on the NASDAQ SmallCap Market SM. The warrant was exercisable as
follows:
180,000 shares on signing of employment agreement; and 7,500 shares on the last day of each calendar month thereafter through
December, 1998 so long as Mr. Simmons is employed on those dates.
(5) Represents an assumed market price per share of Common Stock of $0.61
(6) Represents an assumed market price per share of Common Stock of $0.97
(7) Represents an assumed market price per share of Common Stock of $0.81
(8) Represents an assumed market price per share of Common Stock of $1.30
(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 $3.89
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTIONS/SAR VALUES
Name Shares Number of Securities Value
Acquired Value Underlying Unexercised of Unexercised
On Realized Options/SARs at Fry-End In-the-Money Options/SARs
Exercise (#) at Fiscal Year End ($)
(#) Exercisable/Unexercisable Exercisable/Unexercisable
Robert T. Eramian -0- -0- 1,365,827 (E) / 0 (U) $24,800 (1) (E) / $0 (U)
Chief Executive Officer
Reginald D. Strickland -0- -0- 420,000 (E) / 0 (U) $25,200 (2) (E) / $0 (U)
Chief Executive Officer
Joseph L. Rzepka -0- -0- 200,000 (E) / 0 (U) $6,000 (3) (E) / $0 (U)
Chief Financial Officer
Joseph C. McCarron, Jr. -0- -0- 1,020,000 (E) / 0 (U) $36,800 (4) (E) / $0 (U)
Executive Vice President
William T. Filippone -0- -0- 200,000 (E) / 0 (U) $37,000 (5) (E) / $0 (U)
Executive Vice President
Judson H. Simmons -0- -0- 310,000 (E) / 90,000 (U) $0 (5) (E) / $0 (U)
Vice President Strategic
Planning and Corporate
Organization
(1) Based upon the closing bid of the Company's Common Stock ($0.56 per share) on December 31, 1997
(fiscal year end), as traded on the NASDAQ SmallCap market, minus the exercise price
for the following options/warrants (30,000 share at $0.35, 100,000 shares at $0.38)
(2) Based upon the closing bid of the Company's Common Stock ($0.56 per share) on December 31, 1997
(fiscal year end), as traded on the NASDAQ SmallCap market, minus the exercise price
for the following options/warrants (420,000 shares at $0.50)
(3) based upon the closing bid of the Company's Common Stock ($0.56 per share) on December 31, 1997
(fiscal year end), as traded on the NASDAQ SmallCap market, minus the exercise price
for the following options/warrants (100,000 shares at $0.50)
(4) Based upon the closing bid of the Company's Common Stock ($0.56 per share) on December 31, 1997
(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, 100,000 shares at $0.38, 200,000
shares at $0.50)
(5) Based upon the closing bid of the Company's Common Stock ($0.56 per share) on December 31, 1997
(fiscal year end), as traded on the NASDAQ SmallCap market, minus the exercise price
for the following options/warrants (200,000 shares at $0.38)
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 May 22, 1997, each of the following directors were
granted a 10-year warrant to purchase 100,000 shares of the Company's
Common Stock, exercisable at $0.375 per share: Messrs. Eramian,
Higgins, Kasirer, and McCarron. Shares of the Company's Common Stock
had a fair market value of approximately $0.75 per share as of the date
of grant. In addition, on June 9, 1997, each of the following directors
were granted a 10-year warrant to purchase the following respective
number of shares of the Company's Common Stock, exercisable at $0.50
per share: Mr. McCarron (200,000 shares), Mr. Kasirer (175,000), Mr.
Higgins (75,000). Shares of the Company's Common Stock had a fair
market value of approximately $1.08 per share as of the date of grant.
Employment Contracts and Termination, Severance and Change-of-Control
Agreements
Robert T. Eramian
In February of 1996, the Company's Board of Directors approved an
employment agreement with Mr. Eramian effective January 1, 1996. The
term of the agreement was for five (5) years. The employment agreement
provided 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 provided for
reimbursement of travel expenses, an automobile allowance of $750 per
month and health and life insurance benefits. The employment agreement
was mutually terminated effective as of May 22, 1997 upon his
resignation as an officer and director of the Company.
Simultaneously with Mr. Eramian's resignation, the Company entered
into a consulting agreement with him having a term expiring as of June
1, 1999, and providing for payment of consulting fees to him of $16,200
per month. To date, no payments have been made pursuant to the
Agreement. The Company believes that it has an offset against the
consulting fees due under this agreement in an amount that has not yet
been determined.
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% base salary, at the
discretion of the Board of Directors, non-qualified 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 based salary of Mr. McCarron to $200,000.
During 1997, Mr. McCarron's employment agreement was extended for one
additional year.
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 provided for a
$15,000 signing bonus, and an annual base salary of $185,000, a warrant
to purchase 330,000 shares of Common Stock at $1.50 per share with a
10-year exercise period which vested over two years. The employment
agreement also provided for reimbursement of travel expenses, an
automobile allowance of $750 per month and health and life insurance
benefits. During May of 1997, Mr. Strickland's employment agreement
was modified by extending the term to five years, increasing his annual
base salary to $245,000, increasing his bonus to $50,000, increasing
the number of shares of the Company's Common Stock purchasable under
his warrant to 420,000 shares, and decreasing the exercise price under
such warrant to $0.50.
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,
and 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 provided for health and life
insurance benefits, reimbursement of travel expenses, and an automobile
allowance of $750 per month.
William T. Filippone
The Company entered into an employment agreement with Mr.
Filippone as of June 1, 1997, for a term of five (5) years. The
employment agreement provides for a $30,000 signing bonus, a $15,000
relocation allowance, and an annual base salary of $183,000, a warrant
to purchase 200,000 shares of Common Stock at $.375 per share with a
10-year exercise period. The employment agreement also provides for an
additional 10-year warrant to purchase 100,000 shares to be issued on
January 1, 1998, at an exercise price of $.375 per share. The
employment agreement also provides for reimbursement of all travel
expenses related to business, an automobile allowance of $750 per
month, and health, life and disability insurance benefits.
Change of Control Agreements
During 1997, the Company executed Change of Control Agreements
with its five executive officers. This action was undertaken to assure
continuity of management in the event of actual or threatened change in
control of the Company. Further the Company believes it is important
for its key executives to be able to assess and advise whether
supporting a change in control would be in the best interest of the
Company and its shareholders without being influenced by the uncertain
effect of such a change upon the executive's role within the Company.
The Change of Control Agreements provide for severance
compensation to the executives in the event of a change as defined by
the agreements and generally provide for such compensation to equate to
the respective executives annual compensation multiplied by factors of
either two or three times. In addition, the Change of Control
Agreements provide for immediate vesting of all outstanding stock
purchase options and warrants attributable to the executives.
Compensation Committee Interlocks and Insider Participation
Mr. Eramian, the Company's former Chief Executive Officer and
President, served on the Compensation Committee until his resignation
in May of 1997. Although Messrs. Eramian and Strickland, respectively,
served on the Company's Compensation Committee, neither of them
participated in any recommendation or decision regarding his own
compensation as an executive officer or director. 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 the information as of March 31,
1998 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, 1998,
based upon a total of 20,869,958. 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.
(1) Number of Shares
Name of Beneficial Owner Beneficially Owned Percent
----------------------------------------------------------------------
(2)
Robert T. Eramian 751,348 3.5%
(3)
Reginald D. Strickland 422,500 2.0%
(4)
Joseph L. Rzepka 209,000 1.0%
(5)
Joseph C. McCarron, Jr. 1,020,000 4.7%
(6)
Judson H. Simmons 405,000 1.9%
(7)
William T. Filippone 300,000 1.4%
(8)
Robert A. Kasirer 1,345,000 6.3%
(9)
John D. Higgins 623,275 2.9%
NewCare Health (10)
Corporation 4,000,000 19.2%
All executive officers and
directors as a group
8 persons) 5,070,123 20.4%
All officers and directors
and 5% or greater
shareholders as a group 9,070,123 36.5%
(1)
Unless otherwise noted, all shares are beneficially owned and the
sole voting and investment power is held by 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 the following: (i) 250,000 shares of Common Stock
purchasable under a warrant granted by the Company in 1994 to Etel
Corporation (which is controlled by Mr. Eramian), (ii) 30,000
shares of Common Stock purchasable under a warrant granted by the
Company in 1995 to Mr. Eramian, (iii) an aggregate of 371,348
shares of Common Stock purchasable under warrants granted by the
Company in 1996 to him, (iv) 100,000 shares of Common Stock
purchasable under a warrant granted by the Company in 1997 to him.
(3)
Includes the following: (i) 420,000 shares of Common Stock
purchasable under warrants granted by the Company in 1997 and (ii)
2,500 shares purchased by Mr. Strickland in an open market
transaction.
(4)
Includes the following: (i) 100,000 shares of Common Stock
purchasable under warrants granted by the Company in 1996 to Mr.
Rzepka, (ii) 100,000 shares of Common Stock purchasable under a
warrant granted by the Company in 1997 to him, and (iii) 9,000
shares purchased by Mr. Rzepka in open market transactions.
(5)
Includes the following: (i) 250,000 shares of Common Stock
purchasable under warrants granted by the Company in 1994 to Mr.
McCarron, (ii) 400,000 shares of Common Stock purchasable under a
Non-qualified Option granted by the Company in 1994 to him, (iii)
30,000 shares of Common Stock purchasable under a warrant granted
by the Company in 1995 to him, (iv) 40,000 shares of Common Stock
purchasable under a warrant granted by the Company in 1996 to him,
and (v) includes an aggregate of 300,000 shares of Common Stock
purchasable under warrants issued to by the Company to him in
1997.
(6)
Includes the following: (i) 5,000 shares of Common Stock purchased
by Mr. Simmons in an open market transaction, (ii) 40,000 shares
of Common Stock purchasable under warrants granted by the Company
in 1996 to him, and (iii) 360,000 shares purchasable under a
warrant granted by the Company in 1997 to him.
(7)
Includes the following: (i) 200,000 shares of Common Stock
purchasable under warrants issued by the Company in 1997 to him
and (ii) 100,000 shares of Common Stock purchasable under a
warrant granted by the Company in 1998 to him.
(8)
Includes the following: (i) 1,000,000 shares of Common Stock held
by record by Health Care Holdings, Ltd., a limited partnership of
which Mr. Kasirer is a general partner, (ii) 30,000 shares of
Common Stock purchasable under warrants granted by the Company in
1995 to Mr. Kasirer, (iii) 40,000 shares of Common Stock
purchasable under a warrant granted by the Company to him in 1996,
and (iv) an aggregate of 275,000 shares of Common Stock
purchasable under warrants granted by the Company in 1997 to him.
(9)
Includes the following: (i) 54,488 shares of Common Stock held of
record by Mr. Higgins, (ii) 95,000 shares of Common Stock
purchasable under warrants issued by the Company in 1994 to Royce
Investment Group, Ltd. ("Royce") and transferred by Royce to Mr.
Higgins, (iii) an aggregate of 15,948 shares of Common Stock
purchasable under warrants issued by the Company in 1995 to him,
(iv) includes 90,000 shares of Common Stock purchasable under a
warrant issued by the Company in 1995 to Royce and transferred to
him by Royce, (v) an option to purchase 152,839 shares of Common
Stock granted to Royce by shareholders of the Company and
transferred to him by Royce, (vi) 40,000 shares of Common Stock
purchasable under a warrant issued by the Company in 1996 to him,
and (vii) an aggregate of 175,000 shares of Common Stock
purchasable under warrants granted by the Company in 1997 to him.
(10)
Includes 4,000,000 shares issued by the Company in December 1997
for an aggregate investment of $1,000,000.
There are no family relationships among any directors or executive
officers of the Company
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 Corporation (which is controlled by Robert T. Eramian) and
to 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. These options
and irrevocable proxies expired during April of 1997 without any of
them having been exercised by Etel or Mr. McCarron.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
At December 31, 1997, net loans and other amounts owing to the
Company from Robert A. Kasirer, a director of the Company, aggregated
$243,585.
During April of 1998, NewCare Health Corporation nominated Mr.
Frank Camma and Mr. Jim Sanregret to the Company's Board of Directors
to fill two existing vacancies. These nominations were made pursuant
to rights granted NewCare in connection with NewCare's $1,000,000
investment in the Company made in December of 1997. During April of
1998, the Company also executed a non-binding letter of intent with
NewCare concerning NewCare's possible acquisition of the Company by
means of a statutory merger. [See "Significant Transactions" and
"Events Subsequent to December 31, 1997."]
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:
Schedules II - Valuation and Qualifying Accounts
3. The following exhibits are filed herein:
Exhibit No. Description
----------- -----------
10.1 Agreement and Plan of Split-off dated as of July 1,
1997, among Iatros Health Network, Inc., IHN/New
Health Management, Inc., Andrea G. Dawkins, and
Ronald A. Halko.
10.2 Lease and Security Agreement dated March 15, 1997
by and between Greenfield Associates Real Estate
Trust and Oasis Healthcare, a/k/a OHI Corporation.
10.3 Lease and Security Agreement dated March 15, 1997
by and between Buckley Nursing Home and Oasis
Healthcare a/k/a OHI Corporation.
10.4 Mortgage Deed, Assignment of Rents and Leases and
Security Agreement made as of May 31, 1997 made by
OHI Realty Limited Partnership I for and for the
benefit of National Health Investors, Inc.
10.5 Mortgage Deed, Assignment of Rents and Leases and
Security Agreement made as of May 31, 1997 by OHI
Realty Limited Partnership I to and for the benefit
of National Health Investors, Inc.
(1)
10.6 Investment Agreement dated December 22, 1997,
between Iatros Health Network, Inc. and NewCare
Health Corporation.
21.0 Subsidiaries of Registrant.
(1) Incorporated by reference from Form 8-K of even date herewith
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-10
Notes to Consolidated Financial Statements...................F-12
Report of Independent Certified Public Accountants on
Financial Statement Schedule.................................F-34
Schedule II - Valuation and Qualifying Accounts..............F-35
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, 1997 and 1996 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, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Iatros Health Network, Inc. and Subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company experienced
significant net losses in 1997 and 1996, has a negative working capital as
of December 31, 1997, and is currently in default on certain covenants of
its debt agreements. The Company is seeking to restructure its current
debt requirements, obtain new financing or consummate a corporate merger
transaction. There can be no assurance that the Company will be successful
with any of these transactions. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's
plans regarding those matters also are described in Note 2. The
accompanying financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
ASHER & COMPANY, Ltd.
Philadelphia, Pennsylvania
April 23, 1998
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
CURRENT ASSETS
Cash and cash equivalents $ 190,696 $ 654,197
Accounts receivable, net 7,596,741 3,724,952
Subscription receivable 789,000 -
Inventory 357,409 443,755
Prepaid expenses and other current assets 712,343 1,232,254
Net current assets of discontinued operations - 1,064,653
-------- ----------
Total current assets 9,646,189 7,119,811
PROPERTY AND EQUIPMENT, net 9,108,815 783,899
OTHER ASSETS
Cash and cash equivalents, restricted 448,540 -
Intangible assets, net 2,954,677 2,762,378
Notes receivable 2,573,904 4,423,325
Loans receivable and other assets 414,160 3,609,571
Deferred tax asset, net - 2,700,000
Net long-term assets of discontinued operations 90,993 3,706,258
-------- ----------
6,482,274 17,201,532
--------- ----------
Total Assets $25,237,278 $25,105,242
========== ==========
F-3
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
CURRENT LIABILITIES
Notes payable, banks and other $ 5,638,262 $ 985,907
Accounts payable 3,439,953 1,770,842
Accrued expenses and other current liabilities 2,459,197 767,404
Preferred stock dividends payable 550,000 390,000
Current portion of capital lease obligations 146,210 128,496
Net current liabilities of discontinued operations 518,904 -
---------- -----------
Total current liabilities 12,752,526 4,042,649
LONG-TERM DEBT 8,550,000 -
SUBORDINATED CONVERTIBLE DEBENTURES - 600,000
CAPITAL LEASE OBLIGATIONS 67,478 146,813
---------- ----------
21,370,004 4,789,462
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;
20,869,958 and 15,931,500 issued
and outstanding in 1997 and 1996,
respectively 20,870 15,931
Additional Paid-In Capital 36,059,867 34,142,970
Accumulated Deficit (32,214,096) (13,843,754)
------------ ------------
3,867,274 20,315,780
---------- -----------
Total Liabilities and Stockholders'
Equity $25,237,278 $25,105,242
=========== ===========
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, 1997, 1996 AND 1995
1997 1996 1995
Revenue
Nursing home operation services $ 12,191,384 $ - $ -
Ancillary services 11,283,832 8,319,151 5,589,771
Management services 2,037,324 984,747 -
Development services - 1,957,221 5,428,094
---------- ---------- ----------
25,512,540 11,261,119 11,017,865
Operating expenses
Nursing home operation services 10,511,236 - -
Ancillary services 10,087,353 7,614,619 5,127,023
Management services 1,229,301 757,142 -
General and administrative 4,376,860 4,944,473 2,314,123
---------- ---------- ---------
26,204,750 13,316,234 7,441,146
---------- ---------- ----------
Income(loss) from continuing
operations before other income
(expense), income tax benefit and
discontinued operations (692,210) (2,055,115) 3,576,719
Other income(expense)
Interest income 257,000 421,577 53,290
Interest expense (1,015,534) (620,224) (190,473)
Property lease expense (916,839) - -
Depreciation and amortization (677,345) (690,022) (518,606)
Write-down of intangible assets (5,637,703) (2,228,923) -
Other income (expense) (69,485) 112,027 (205,491)
---------- ---------- ----------
(8,059,906) (3,005,565) (861,280)
----------- ----------- ----------
Income(loss) from continuing
operations before income tax
benefit and discontinued operations (8,752,116) (5,060,680) 2,715,439
Income tax benefit (expense), net (2,341,000) 820,000 628,000
------------- ------------ -------------
Income(loss) from continuing
operations before discontinued
operations (11,093,116) (4,240,680) 3,343,439
Discontinued operations
Income(loss)from operations, net
of income taxes of $(202,000),
$360,000 and $42,000 in 1997,
1996 and 1995, respectively (3,125,544) (6,073,881) 311,749
Loss on separation, net of income
taxes of $(257,000) (3,991,682) - -
------------- -------------- --------------
(7,117,226) (6,073,881) 311,749
------------- -------------- --------------
Net Income(loss) $(18,210,342) $(10,314,561) $ 3,655,188
============= ============= ============
F-5
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Basic earnings(loss) per share:
Continuing operations $ (.70) $ (.33) $ .35
Discontinued operations (.43) (.44) .03
------------- ------------ ------------
Net Income(loss) $ (1.13) $ (.77) $ .38
============= ============= ============
Weighted average number
of shares of common stock
outstanding 16,666,375 13,946,359 9,002,561
============ ============ ============
Diluted earnings per share:
Continuing operations $ - $ - $ .26
Discontinued operations - - .03
------------ -------------- -------------
Net Income(loss) $ - $ - $ .29
============ ============= =============
Weighted average number
of shares of common stock
outstanding - - 12,759,969
============ ============ ============
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, 1997, 1996 AND 1995
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ -------- ---------- -----
Balance, January 1, 1995 833,333 $833 7,436,333 $7,436 $9,411,918 $(6,864,381) $2,555,806
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)
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
F-7
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
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
recorded - - - - - (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
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
recorded - - - - - (160,000) (160,000)
F-8
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
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
Issuance of Common Stock during
1997 in connection with the conversion
of a registered sale of
convertible debt securities - - 679,268 679 666,772 - 667,451
Issuance of Common Stock during
1997 in connection with the exercise
of warrants and options - - 209,190 210 91,379 - 91,589
Issuance of Common Stock during
1997 in connection with
conversion of debt - - 4,050,000 4,050 1,042,825 - 1,046,875
Costs of Issuance incurred in
1997 in connection with a registered
sale of convertible debt securities - - - - (67,079) - (67,079)
Compensation incurred during 1997 in
connection with an unregistered
sale of securities - - - - 63,000 - 63,000
Director compensation incurred during
1997 in connection with an unregistered
sale of securities - - - - 120,000 - 120,000
Series A Preferred Stock dividends
recorded - - - - - (160,000) (160,000)
Net Loss - - - - - (18,210,342) (18,210,342)
-------- ----- ---------- --------- ----------- ------------ -----------
Balance, December 31, 1997 633,333 $ 633 20,869,958 $ 20,870 $36,059,867 $(32,214,096) $ 3,867,274
========= ====== ========== ========= =========== ============= ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-9
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
OPERATING ACTIVITIES ---- ---- ----
Net income (loss) $(18,210,342) $(10,314,561) $ 3,655,188
Adjustments to reconcile
net income (loss) to net cash
utilized by operating activities:
Loss (income) from discontinued operations 3,734,342 6,433,881 (269,749)
Loss on disposal of
discontinued operations 2,923,544 - -
Net cash utilized by
discontinued operations (467,773) (3,378,138) (1,633,407)
Depreciation and amortization 677,346 690,021 509,607
Provision for doubtful
accounts receivable 1,164,101 467,906 79,217
Write-off of uncollectible
Notes, loans and deposits
receivable 4,402,324 1,150,000 -
Write-down of intangible assets 577,971 2,173,485 -
Common stock issued for
services rendered 183,000 48,000 99,750
Deferred taxes 2,750,000 (1,180,000) (870,000)
Changes in:
Accounts receivable (5,891,941) (928,434) (1,642,678)
Notes and loans receivable 357,154 (2,145,197) (1,648,355)
Inventory 86,346 16,590 (216,257)
Prepaid expenses and other (476,542) (489,131) (1,019,769)
Accounts payable 1,884,227 819,562 289,657
Accrued expenses and other 1,838,983 304,185 319,057
Net cash utilized by
operating activities (4,466,920) (6,331,831) (2,347,739)
INVESTING ACTIVITIES
Purchase of property
and equipment (173,729) (135,322) (156,488)
Acquisition of businesses - (215,050) (2,074,219)
Acquisition of contract rights - (2,164,478) (639,705)
Loans to third parties - (3,185,541) (710,295)
Repayment of loans to
third parties - 445,555 -
Deposits, net 100,000 (1,110,000) 271,875
Restricted cash and cash
equivalents (12,790) 375,000 (25,000)
Organization costs (63,064) (37,563) (545,743)
Net cash utilized by
investing activities (149,583) (6,027,399) (3,879,575)
F-10
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
FINANCING ACTIVITIES ---- ---- ----
Net proceeds from issuance
of capital stock and other
capital contributions $ 302,589 $ 1,415,627 $ 5,087,332
Proceeds from issuance
of convertible debentures - 12,900,000 -
Fees paid on issuance of
convertible debentures - (876,331) -
Short term borrowings, net 3,937,239 33,330 1,342,761
Payments of long-term debt - (438,013) (130,000)
Stockholders' loan payments - (443,683) (197,086)
Redemption of Preferred Stock - - (200)
Capital lease obligations, net (100,966) (65,023) (57,162)
Security deposits, net 14,140 (69,351) 16,771
Net cash provided by
financing activities 4,153,002 12,456,556 6,062,416
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (463,501) 97,326 (164,898)
Cash and cash equivalents,
beginning of year 654,197 556,871 721,769
Cash and cash equivalents,
end of year $ 190,696 $ 654,197 $ 556,871
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid $1,015,534, $640,881 and $113,297 in cash for interest during 1997, 1996 and 1995, respectively.
Interest paid attributable to discontinued operations totaled $50,102, $79,761 and $64,101 as of December 31, 1997,
1996 and 1995.
The accompanying notes are an integral part of
these consolidated financial statements.
F-11
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 consolidated
financial statements is as follows:
Business
--------
Iatros Health Network, Inc. and Subsidiaries (the "Company") is a
Delaware Corporation organized in June 1988. The Company is
engaged in providing services to the long-term care industry.
The Company's principal markets include the metropolitan areas of
Philadelphia, Pennsylvania; Baltimore, Maryland; and, New
England. During 1997, the Company discontinued operations in
Maryland (See Note 3).
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of
Iatros Health Network, Inc. and its wholly-owned subsidiaries.
All intercompany transactions and accounts have been eliminated
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-12
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue and accounts receivable (Continued)
-------------------------------
Certain nursing home and ancillary revenue is recorded based on
standard charges applicable to patients. Under Medicare,
Medicaid and other cost-based reimbursement programs, the
provider is reimbursed for services rendered to covered program
patients as determined by reimbursement formulas. The
differences between established billing rates and the amounts
reimbursable by the programs and patient payments are recorded as
contractual adjustments and deducted from revenue.
Inventory
---------
Inventory is principally comprised of pharmaceutical and medical
supplies and is valued at the lower of cost (first-in, first-out
method) or market.
Property and equipment
----------------------
Property and equipment is stated at cost. The cost of property
and equipment is depreciated over the estimated useful lives of
the respective assets using primarily the straight-line method.
Property and equipment under capital leases is amortized over the
lives of the respective leases or over the service lives of the
assets. Leasehold improvements are amortized over the lesser of
the term of the related lease or the estimated useful lives of
the assets.
Normal maintenance and repair costs are charged against income.
Major expenditures for renewals and betterments which extend
useful lives are capitalized. When property and equipment is sold
or otherwise disposed of, the asset 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:
Building 40 Years
Leasehold improvements 3 - 10 Years
Property and equipment
held under capital leases Life of lease
Equipment 5 Years
Furniture and fixtures 3 - 7 Years
Intangible assets
-----------------
The Company evaluates the carrying value of its long-lived assets
and identifiable intangibles including contract rights, excess of
cost over net assets acquired, leasehold rights and organization
costs when events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. The
review includes an assessment of industry factors, contract
retentions, cash flow projections and other factors the Company
believes are relevant.
F-13
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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.
Excess of cost over net assets acquired
---------------------------------------
The excess of cost over net assets acquired relates to the
acquisition of the Company's operating subsidiaries. The
excess of cost over net assets acquired is being amortized
over their lives of 15 to 20 years.
Leasehold Rights
----------------
Leasehold rights represent costs associated with securing
leasehold interests in connection with operating nursing
facilities and are being amortized using the straight-line
method over 15 years, the maximum lease term.
Organization costs
------------------
Organization costs incurred in connection with the
acquisition or formation of new business activities for the
Company are being amortized using the straight-line method
over five years.
Income taxes
------------
The Company employs the asset and liability method in accounting
for income taxes pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109 ``Accounting for Income Taxes.'' Under
this method, deferred tax assets and liabilities are determined
based on temporary differences between the financial reporting
and tax bases of assets and liabilities and net operating loss
carryforwards, and are measured using enacted tax rates and laws
that are expected to be in effect when the differences are
reversed.
Earnings per share
------------------
The Company adopted Statement of Financial Accounting Standard
No. 128 ``Earnings per Share ''(``SFAS 128'') in 1997. All prior
period earnings per common share data have been restated to
conform to the provisions of this statement.
Basic earnings per share is based upon the weighted average
number of common shares outstanding during the period.
Diluted earnings per share is based upon the weighted average
number of common shares outstanding during the period plus the
number of incremental shares of common stock contingently
issuable upon exercise of stock options and warrants.
F-14
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 1996 and 1995 to
conform with the 1997 presentation.
NOTE 2: GOING CONCERN
For the year ended December 31, 1997, the Company reported a net loss
of $18,210,342. This is largely attributed to losses associated with
discontinued operations of $6,658,226; a write-down of intangible
assets of $5,637,703; and substantial general and administrative
expenses of $4,376,860 associated with the Company's business history
and corporate expenses. Recent operating losses reported by the
Company during 1997 and 1996 together with other adverse corporate
developments have exhausted the Company's capital resources and had a
material adverse effect on short term liquidity and the Company's
ability to service its debts. At December 31, 1997, the Company has a
negative working capital position of $3,106,337.
The Company reported revenue from continuing operations for the years
ended December 31, 1997 and 1996 of $25,512,540 and $11,261,119,
respectively, representing an increase of $14,251,421 or 127%. During
1997, the operating expenses incurred for continuing operations,
exclusive of general and administrative costs, totaled $21,827,890
yielding an operating margin of $3,684,650 or 14% on related revenue.
Notwithstanding this increase in revenue, the operating margins
attained by the Company are insufficient to cover the levels of
general and administrative costs as well as other expense
requirements.
During 1997 and to date, the Company has been successful in reducing
levels of its corporate overhead and general and administrative costs.
Continued cost reductions are required, however, for the Company to
achieve positive cash flow from continuing operations. In the
alternative, the Company requires a higher revenue base to support the
corporate overhead represented by its executive management structure.
In addition, the Company requires an infusion of capital in order to
satisfy its short-term obligations. The Company has been unsuccessful
in its independent efforts to secure financial relief from its
existing creditors as well as to raise new sources of capital.
The Company has been engaged in discussions with third parties having
an interest in corporate merger opportunities or otherwise in the
purchase of certain of its business holdings. The Company has been
particularly focused on growth prospects which would yield added
economies and eliminate redundancy of overhead costs through merger or
acquisition.
As further described in Note 27 to the financial statements, the
Company has entered into a formal letter of intent with NewCare Health
Corporation to complete a statutory merger transaction. Among the
benefits to be derived by the Company in consummating such a
transaction would be an immediate infusion of working capital needed
to revitalize existing operations and provide access to additional
capital resources required to meet corporate obligations.
F-15
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 2: GOING CONCERN (Continued)
In light of the Company's current financial position, its inability to
independently meet its short term corporate obligations, its need to
further capitalize existing operations and its dependency on continued
cost reductions and revenue growth to support continuing operations,
its viability to continue as a going concern is uncertain. While the
Company intends to expediently pursue and consummate a merger
transaction with NewCare Health Corporation, there can be no assurance
that this transaction will be completed.
NOTE 3: DISCONTINUED OPERATIONS
The Company's current business strategy is to pursue the direct
ownership or lease of long-term care facilities for its own account.
Accordingly, during 1997, the Company discontinued operations
associated with certain segments of its long-term care business.
Specifically, these included subsidiary operations providing third
party development and management services to independent owners and
operators of long-term care facilities and relating to the Company's
prior business acquisitions of Greenbrier Healthcare Services, Inc.
and New Health Management Systems, Inc. In addition, the Company
discontinued operations associated with providing respiratory therapy
services and relating to the prior business acquisition of King Care
Respiratory Services, Inc. See Significant Capital Stock Transactions
(Note 4).
Assets and liabilities of discontinued operations as of December 31,
1997 and 1996 are as follows:
1997 1996
---- ----
Assets
Current assets
Cash $ 12,155 $ 479,928
Accounts receivable - 2,163,253
Inventory - 9,363
Prepaid expenses and other
current assets 37,031 907,860
Net current liabilities of
discontinued operations 518,904 -
---------- -----------
568,090 3,560,404
---------- ----------
Property and equipment, net 90,809 465,864
Deposits 6,553 17,650
Intangible assets, net - 2,691,284
Loans receivable - 925,698
---------- -----------
97,362 4,100,496
---------- -----------
Total $ 665,452 $ 7,660,900
========== ===========
F-16
NOTE 3: DISCONTINUED OPERATIONS (Continued)
1997 1996
Liabilities
Current liabilities
Current portion of long-
term debt $ - $ 60,633
Current portion of capital
lease obligations 69,354 102,265
Accounts payable 310,835 919,418
Accrued payroll and related 9,280 405,929
Accrued expenses and other 28,621 507,506
Reserve for contingencies 150,000 500,000
Net current assets of
discontinued operations - 1,064,653
---------- -----------
568,090 3,560,404
--------- -----------
Long-term debt - 308,330
Capital lease obligations 6,369 85,908
Net long-term assets of
discontinued operations 90,993 3,706,258
---------- -----------
97,362 4,100,496
---------- ----------
$ 665,452 $7,660,900
========== ==========
Revenue associated with discontinued operations for the years ended December 31, 1997, 1996 and 1995 totaled $3,728,130,
$10,601,633 and $5,610,398 respectively.
NOTE 4: SIGNIFICANT CAPITAL STOCK TRANSACTIONS
During 1997, 1996 and 1995, the Company completed a number of Capital
Stock transactions. Significant transactions included the following:
In December, 1997, the Company issued four million shares of its
common stock to NewCare Health Corporation at a price of $.25 per
share for an aggregate investment of $1 million.
In January 1996, the Company completed the sale of $12,900,000 of
its 10% Subordinated Convertible Debentures. The Debentures pay
interest in quarterly installments at the rate of 10% per annum.
The Debentures are convertible into shares of the Company's
Common Stock, with the conversion rate determined by a formula
based upon the share price of the Company's Common Stock. Costs
associated with the issuance of the Debentures totaled $876,331.
Through December 31, 1996, $12,300,000 was converted into a
total of 3,815,020 shares of Common Stock. During 1997, $600,000
was converted into 679,268 shares of Common Stock.
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, 1997, 1996 AND 1995
NOTE 4: 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
$1,750,250. In 1996, the intangible assets related to this
transaction were reviewed for impairment (See Note 17). In 1997,
operations associated with IRC were discontinued.
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 19). In 1997,
operations associated with Greenbrier were discontinued.
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 19). In 1997,
operations associated with NHMS were discontinued.
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, 1997, 1996 AND 1995
NOTE 5: CASH AND CASH EQUIVALENTS
As of December 31, 1997, cash and cash equivalents totaled $639,236 of
which $448,540 relates to a loan reserve held in escrow in connection
with the long-term mortgage loan payable.
Cash and cash equivalents at December 31, 1996 totaled $654,197 and
included 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 was included in notes payable,
banks and other, at December 31, 1996.
NOTE 6: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During March 1997, the Company's wholly-owned subsidiary, OHI
Corporation, which does business as Oasis Healthcare (``Oasis'')
leased two nursing facilities located in Holyoke and Greenfield,
Massachusetts having a combined total of 222 beds. The term of each
lease is for ten years with a five year renewal period and a combined
facilities purchase option for $11.5 million which is exercisable
through March 2000. These leases are being accounted for as operating
leases. In connection with this transaction, the Company recorded
leasehold rights totaling $1,025,000.
During May 1997, OHI Realty I, LLP, a Massachusetts limited
partnership with the Company as general partner and it's wholly-owned
Oasis subsidiary as limited partner, acquired two nursing facilities
for approximately $8,164,000 located in Taunton and Quincy,
Massachusetts, having a combined total of 171 beds. The Company
recorded mortgage debt totaling $8,550,000 with respect to this
transaction and transfered net assets of approximatley $286,000 to
the cost basis of the facilities.
During 1997, $500,000 of net current liabilities from discontinued
operations were converted into a note payable.
During 1997, accounts payable to a vendor of $215,117 was converted
into a note payable.
During 1997, the Company entered into a short-term loan agreement
with a potential merger partner. Proceeds amounted to $211,000. This
obligation was converted to equity through an investment agreement
whereby the potential merger partner received 844,000 shares of
Common Stock and subscribed to purchase an additional 3,156,000
shares for $789,000. Related costs amounting to $50,000 were recorded
as a charge to additional paid in capital.
During 1997, 1996 and 1995 annual dividends on shares of Preferred
Stock of $160,000 were recorded but not paid.
During 1997, 1996 and 1995, the Company acquired property and
equipment under capital leases and incurred capital lease obligations
in the amounts of $35,388, $281,564 and $230,822, respectively.
In 1996, the Company incurred a note payable associated with an
equipment purchase in the amount of $34,882.
During 1996, the Company acquired one business, recording excess of
cost over net assets acquired of $430,100 in connection with the
acquisition. As consideration for the net assets acquired, the
Company issued 52,838 shares of Common Stock in the amount of $215,050
to the related parties.
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 and as of December 31, 1997, the remaining Debentures
were converted into 679,268 shares of Common Stock. Accrued interest
on the Debentures converted into Common Stock during 1997 and 1996
resulted in an increase to Additional Paid-In Capital
in the amounts of $67,452 and $411,209 respectively. Loan costs of
$17,079 and $683,466 during 1997 and 1996, respectively, were recorded
as a charge to paid in capital.
F-19
NOTE 6: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES (Continued)
During 1995 the Company acquired property and equipment from a related
party and incurred a note payable in the amount of $112,850.
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 7: ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
1997 1996
---- ----
Nursing home operation services $ 3,958,735 -
Ancillary services 4,720,521 $ 3,707,981
Management services 2,300,152 327,911
----------- -----------
10,979,408 4,035,892
Allowance for doubtful accounts (3,382,667) (310,940)
----------- -----------
$ 7,596,741 $ 3,724,952
=========== ===========
NOTE 8: PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 1996 include approximatley
1,000,000 of project costs advanced in connection with tranactions involving the
Company's development initiatives in New England. These amounts include legal and
professional as well as financial issue costs which are recoverable upon completion of the
property aquisition and project financing or development activity for which such costs
were advanced. The Company routinely advances project costs associated with its development
as it deems necessary to secure business prospects and complete tranactions.
Additional prepaid expenses and other current assets approximate $232,000.
F-20
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 1997, 1996 AND 1995
NOTE 9: PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1997 1996
---- ----
Land $ 156,272 $ -
Buildings and building improvements 7,468,345 -
Leasehold improvements 76,659 60,371
Property and equipment held
under capital leases 447,066 418,019
Equipment 1,586,843 636,808
Furniture and fixtures 218,482 172,837
----------- ----------
9,953,667 1,288,035
Less: Accumulated depreciation
and amortization (844,852) (504,136)
----------- -----------
$ 9,108,815 $ 783,899
=========== ===========
Depreciation and amortization expense charged to continuing operations was $345,208, $217,014 and $136,843 in 1997, 1996 and
1995, respectively. Additionally, depreciation and amortization expense charged to discontinued operations was $84,452,
$545,944 and $66,826 with respect to 1997, 1996 and 1995, respectively.
NOTE 10: INTANGIBLE ASSETS
Intangible assets consists of the following at December 31:
1997 1996
---- ----
Excess of costs over net assets acquired $ 1,588,282 $ 1,588,281
Contract rights 715,773 1,333,286
Leasehold rights 1,025,000 -
Organization costs 176,532 229,648
----------- -----------
3,505,587 3,151,215
Less: Accumulated amortization (550,910) (388,837
----------- ------------)
$ 2,954,677 $ 2,762,378
=========== ===========
Amortization expense for intangible assets charged to continuing operations was $332,138, $473,007 and $381,763 in 1997, 1996
and 1995, respectively. Additionally, amortization expense charged to discontinued operations was $85,115, $415,639 and
$23,811 in 1997, 1996 and 1995, respectively.
NOTE 11: NOTES RECEIVABLE
At December 31, 1997 and 1996, 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.
NOTE 12: 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.
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 12: 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.
F-21
NOTE 13: LOANS RECEIVABLE AND OTHER ASSETS
At December 31, 1997 and 1996, loans receivable and other assets
include $384,000 and $2,244,424, respectively, advanced by the Company
pursuant to the terms of operating deficit agreements for the
operating needs of properties managed by the Company. During 1997,
$2,080,424 of such advances outstanding as of December 31, 1996 were
written off as uncollectible. Amounts remaining outstanding as of
December 31, 1997 generally accrue interest at market rates and are
expected to be recoverable from permanent financing proceeds
anticipated from the properties.
In addition, other assets reported 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. During 1997, pursuant to the terms of the respective
agreements, only $100,000 was recovered by the Company.
NOTE 14: 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:
1997 1996 1995
---- ---- -----
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 (18) (11) (75)
Deferred tax asset
valuation allowance 44 10 19
Tax effect of net non-deductible
expenses 19 20 -
------- ------- -------
Other 7 6 (2)
(18)% (10)% (22)%
======= ======= =======
F-22
NOTE 14: 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, organization costs,
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, 1997 and 1996 are comprised of the following:
1997 1996
---- ----
Deferred tax assets
Tax benefit of net operating loss
carryforwards $ 5,699,000 $ 3,159,000
Allowance for doubtful accounts 1,009,000 605,000
Organization costs 33,000 120,000
Other - 15,000
----------- ------------
Total deferred tax assets 6,741,000 3,899,000
Less: valuation allowance (6,741,000) (1,150,000)
------------ ------------
Net deferred tax assets - 2,749,000
Deferred tax liabilities
Property and equipment 50,000 49,000
----------- ------------
Total deferred tax liabilities 50,000 49,000
----------- ------------
Net deferred tax asset(liability) (50,000) $ 2,700,000
=========== ===========
During 1997, the deferred tax asset valuation allowance increased by $5,591,000, and during 1996, the valuation allowance
increased by $1,090,000.
At December 31, 1997, the Company has available net operating loss carryfowards for Federal income tax purposes of
approximately $14,876,000, which can be offset against future earnings of the Company. These net operating losses expire
from 2008 through 2012, and are subject to annual limitations. In addition the Company has available various state net
operating loss carryforwards of approximately $16,892,000 at December 31, 1997, which expire from 1999 to 2012.
The provision for (benefit of) income taxes include:
1997 1996 1995
---- ---- ----
Current:
State $ 50,000 $ 200,000
Deferred:
Federal $ 2,350,000 (1,030,000) $(820,000)
State 400,000 (150,000) (50,000)
----------- ------------ ----------
$ 2,800,000 $(1,180,000) $(670,000)
=========== ============ ==========
F-23
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 15: NOTES PAYABLE, BANKS AND OTHER
1997 1996
---- ----
Note payable to a bank, due on demand,
line of credit of $1.5 million, bearing
interest at prime plus 1%, secured by accounts
receivable and property and equipment $1,481,500 $ 792,663
Note payable to a third party, due on demand,
bears interest at prime rate plus 2.25% (10.75%
at December 31, 1997), serving as working
capital; secured by certain ancillary subsidiaries'
accounts receivable 1,603,505 -
Note payable to a third party, due on demand
bears interest at approximately 12%; serving as
working capital; secured by certain nursing home
subsidiaries' accounts receivable 828,670 -
Note payable to a third party, due on demand,
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 20,760 30,684
Notes payable to third parties, due on
demand, unsecured and accruing interest at
approximately 12% to 13.5% 1,703,827 -
Note payable to a Stockholder, due on demand,
non-interest bearing, unsecured, paid in 1997 - 162,560
---------- -----------
$5,638,262 $ 985,907
========== =========
The weighted average rate of interest charged to the Company during 1997 and 1996 was approximately 10.5% and 9%,
respectively.
NOTE 16: ACCRUED EXPENESES AND OTHER CURRENT LIABITIES
Accrued expenseds and other current liabilities reported at
December 31, 1997 include: accrued expenses of approximately
$1,756,000 associated with nursing home operations;
approximately $335,000 in accrued salaries and related expenses,
and; approximately $368,000 in other current liabilities.
Accrued expenses and other current liabilities reported at
December 31, 1996 include: accrued legal and professional fees of
approximately $275,000; approximately $305,000 in accrued salaries
and related expenses, and; approximately $187,000 in other current
liabilities.
F-24
NOTE 17: LONG-TERM DEBT
Long-term debt consists of:
Mortgage loan payable to a financing institution
with interest having a ten year term; interest only
payable through June 1999, amortizing over a 25 year
period, bearing interest at 10.5%; with a balloon
payment of $7,360,420 due in June 2007; secured
by property, plant and equipment associated with two
nursing home facilities $8,300,000
Long-term debt consists of:
Subordinated mortgage loan payable to a third
party due in June 2000; interest only payable
at 9%; secured by property, plant and equipment
associated with two nursing home facilities $ 250,000
----------
$8,550,000
==========
The Company is not in full compliance with certain financial
covenants of the mortgage loan payable to a financing
institution. Annual maturities of long-term debt in
the next five years are as follows:
Year Ending December 31, Amount
1998 $ -
1999 35,215
2000 326,201
2001 84,598
2002 93,921
NOTE 18: 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 $461,398,
$367,900, and $198,536 for the years ended December 31, 1997, 1996 and
1995, respectively. Additionally, rent expense under these leases
charged to discontinued operations was $182,716, $455,615 and $364,766
for the years ended December 31, 1997, 1996 and 1995, respectively.
The following represents future minimum rental payments required under
operating leases with remaining non-cancelable lease terms in excess
of one year as of December 31, 1997:
Year Ending December 31, Amount
------------------------- -------
1998 $ 1,464,959
1999 1,396,580
2000 1,310,754
2001 1,214,580
2002 1,214,580
Thereafter 13,562,810
-----------
$20,164,263
============
F-25
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 18: LEASES (Continued)
The Company also leases property and equipment under capital leases. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are
amortized over the lesser of their related lease terms or their estimated useful lives. Amortization under capital leases
charged to continuing operations was $77,768, $57,437 and $32,797 in 1997, 1996 and 1995, respectively. Amortization to
discontinued operations for the years ended December 31, 1997, 1996 and 1995 was $29,934, $21,251 and $15,989,
respectively.
The following is a summary of property held under capital leases as of December 31, 1997 and 1996:
1997 1996
---- ----
Equipment $ 447,066 $ 418,019
Less: Accumulated amortization 169,228 121,394
--------- -----------
$ 277,838 $ 296,625
========= =========
Minimum future lease payments under capital leases for continuing operations for the three years subsequent to December 31,
1997 are as follows:
Year Ending December 31, Amount
------------------------- --------
1998 $167,359
1999 65,027
2000 8,864
---------
Total minimum lease payments 241,250
Less: Imputed interest 27,562
--------
Present value of net minimum lease
payments 213,688
Less: Current portion 146,210
---------
$ 67,478
=========
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 19: 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 1997, the Company determined that its recorded intangible assets
had been impaired due to the termination of certain service
relationships, the bankruptcy of a nursing facility in Olathe, Kansas
in which the Company had invested, and the forfeiture of a $1,000,000
security deposit relating to a nursing facility in New Jersey.
Additionally, the Company executed a separation agreement regarding
its unprofitable nursing home management subsidiary in Philadelphia
and discontinued operations of its respiratory therapy operations in
California. Of the total impairment loss of $5,637,703 included in the
results of operations for 1997, $3,580,000 relates to uncollectible
accounts and notes receivable, $1,616,000 to forfeited property
acquisitions deposits and costs, $225,000 to contract rights, and
$216,703 to other intangible assets.
F-26
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 19: IMPAIRMENT OF INTANGIBLE ASSETS (Continued)
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 from continuing operations of $2,228,923 which is
included in the results of operations for 1996,
was determined by evaluating the net realizable
value of the intangable assets as of December 31, 1996 based upon
projected results of future operations. Impairment loss from continuing
operations related to organization costs of $1,266,439 and contract
rights of $962,484. Net impairment loss associated with discontinued
operations totaled $4,469,051 and related to excess of cost over net
assests acquired.
NOTE 20: RELATED PARTY TRANSACTIONS
During 1995, 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 for financial advisory and development services
totaled approximately $112,000. 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. During 1997, this officer formally resigned.
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
terminated in June 1997.
NOTE 21: EARNINGS (LOSS) PER SHARE
Earnings per share is calculated as follows for the years ended December 31, 1997, 1996 and 1995 as follows:
1997 1996 1995
---- ---- ----
Basic Earnings per Share:
-------------------------
Income (loss) from continuing
operations $(11,552,116) $ (3,880,680) $3,385,439
Less preferred stock dividends (550,000) (390,000) (230,000)
------------- ------------- -----------
(12,102,116) (4,270,680) 3,155,439
Income (loss) from discontinued
operations (6,658,226) (6,433,881) 269,748
------------- ------------- -----------
$(18,760,342) $(10,704,561) $3,425,187
============= ============= ============
Weighted average common shares
outstanding 16,666,375 13,946,359 9,002,561
============= ============= ============
Basic earnings (loss) per share:
Continuing operations $ (0.70) $ (0.33) $ 0.35
Discontinued operations (0.43) (0.44) 0.03
------------ ------------ -----------
$ (1.13) $ (0.77) $ 0.38
============ ============ ===========
F-27
NOTE 21: EARNINGS (LOSS) PER SHARE (Continued)
1997 1996 1995
Diluted Earnings per Share: ---- ---- ----
---------------------------
Income from continuing
operations after reduction for
preferred stock dividends $3,113,439
Add preferred stock dividends 230,000
-----------
3,343,439
Income from discontinued
operations 311,749
-----------
$3,655,188
===========
Weighted average common shares
outstanding 9,002,561
Shares from assumed conversions 3,757,408
----------
12,759,969
===========
Diluted earnings per share:
Continuing operations $ 0.26
Discontinued operations 0.03
-----------
$ 0.29
Diluted loss per share for the years ended December 31, 1997 and 1996
have not been computed because they are antidilutive.
During 1997, all of the Company's 10% Subordinated Convertible
Debentures outstanding as of December 31, 1996 were converted.
Additionally, a total of 209,190 common shares were also issued during
1997 in connection with the exercise of certain outstanding warrants,
and, in December 1997, the Company issued four million shares of its
Common Stock to NewCare Health Corporation at a price of $0.25 per
share for an aggregate investment of $1 million. Had all such
conversions and issuances occurred on January 1, 1997, the reported
basic loss per 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. Had all exercises and
conversions occurred on January 1, 1995, the reported basic earnings
per share would have decreased $0.06 to $0.32.
NOTE 22: 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 $1,165,812. In addition, certain of these
agreements provide options and warrants for the executives to purchase
an aggregate of 1,480,000 shares of the Company's Common Stock at
prices ranging from $.375 to $1.50 per share.
Upon the resignation of an officer and director, the Company entered
into a consulting agreement with him having a term expiring as of June
1, 1999, and providing for payment of consulting fees of $16,200 per
month. To date, no payments have been made pursuant to this
agreement. The Company believes that it has an offset against the
consulting fees due under this agreement in an amount that has not yet
been determined.
F-28
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 22: COMMITMENTS (continued)
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 $859,000 of which
approximately $334,000 has been advanced by the Company and
approximately $525,000 remains outstanding at December 31, 1997.
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.
The Company guarantees aggregate debt service payments relating to
approximately $35,000,000 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. The Company may be
unable to independently satisfy debt service payments, if required.
During August 1997, the Company's wholly-owned Oasis subsidiary
entered into management contracts with respect to a 90 bed skilled
nursing and retirement center located in North Falmouth, Massachusetts
known as ``Royal Megansett'' (``the Royal Megansett Agreement''). At
the time of this transaction, Royal Megansett was leased by a
partnership controlled by an officer of Oasis (the``Royal Megansett
officer") pursuant to a ten-year lease (the``Royal Megansett
lease'). Because the parties contemplated that such lease would be
assigned to, and assumed by, Oasis immediately after it obtained
approval by the Massachusetts Department of Public Health, the Company
guaranteed the Royal Megansett lease. In November, 1997, the Royal
Megansett Officer resigned as an officer of Oasis and the Royal
Megansett Management Agreement was terminated. The Company and the
Royal Magansett officer are in a dispute over such actions, but no
litigation has commenced.
NOTE 23: CONTINGENCIES
The Company is a defendant in two lawsuits relating to the termination
of former executive officers for cause under the terms of, in one
case, the executive's employment agreement and, in the second, the
executive's employment and merger agreement. The two former executives
are independently claiming to be paid additional compensation,
and in the case of one, damages for alleged misrepresentations in
connection with the related merger agreement. The Company is
vigorously prosecuting counterclaims with respect to this latter case
and otherwise is vigorously defending both of these cases. Management
believes that the Company has valid defenses against all allegations
made by the Plaintiffs in these actions, as well as valid
counterclaims in its prosecution actions. Further, Management does
not believe that the outcome of these matters will have a material
adverse affect on the Company's financial position, results of
operations or cash flows.
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 is has sufficiently
reserved for these claims in its financial statements at December 31,
1997. Management does not believe that the outcome of these matters
will have a material affect on the Company's financial position,
results of operations or cash flows.
In addition to the foregoing, the Company and its subsidiaries have
outstanding a number of other routine actions, as well as a number of
threatened actions, involving their respective creditors, vendors,
customers, former employees and/or other third parties. Some of them
are in the process of being settled, and the remainder of them are
being vigorously defended. Management does believe that the outcome
of these matters will not have a material, adverse affect on the
Company's financial position, results of operations or cash flows.
F-29
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 24: PREFERRED STOCK
On July 25, 1994, the Company sold 533,333 shares of 8% cumulative
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 $2,550,000
at December 31, 1997. 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, 1997, dividends in arrears on the 8% Cumulative Series A
Senior Convertible Preferred Stock totaled $550,000.
During 1995, 200,000 shares of the Company's Series B Preferred Stock
were redeemed. The Series B Preferred Stock is nonvoting and pays no
dividends.
NOTE 25: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS
The Company has a Stock Option Plan (the Plan) which provides for the
granting of incentive and nonqualified stock options and stock
appreciation rights to certain officers, directors, key employees and
consultants. Currently, a maximum of 750,000 shares of Common Stock
may be issued under the Plan. Stock Options are granted at a price not
less than 100% of the fair market value of the Common Stock at the
date of grant and must be exercised within 10 years from the date of
grant, with certain restrictions. Nonqualified Stock Options will be
granted on terms determined by the Board of Directors.
Transactions involving the Plan are summarized as follows:
Options Shares
---------------
Weighted Weighted Weighted
Average Price Average Price Average Price
1997 Per Share 1996 Per Share 1995 Per Share
---- --------- ---- --------- ---- ---------
Outstanding January 1 500,000 $ .90 688,153 $2.21 688,153 $2.21
Granted - - 50,000 1.00 - -
Exercised - - - - - -
Canceled (100,000) 1.00 (25,000) 1.50 - -
Expired - - (213,153) 5.10 - -
--------- --------- ---------
Outstanding December 31 400,000 $ .87 500,000 $ .90 688,153 $2.21
======== ========= ========
Exercisable December 31 400,000 $ .87 500,000 $ .90 490,000 $1.10
======== ========= ========
The options outstanding on December 31, 1997 expire during 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.
F-30
NOTE 25: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS (Continued)
Warrants 1996 1995
- --------- ---- -----
Outstanding January 1 184,150 1,145,000
Exercised (52,301) (960,850)
Canceled (131,849) -
--------- -----------
Outstanding December 31 - 184,150
========== ===========
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
During 1997, 37,190 warrants were exercised at $.75 per share.
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
=========
During 1997, 37,190 warrents were exercised at $0.75 per share.
Private Warrants
- ----------------
Transactions involving private warrants are summarized as follows:
Warrants
- -------- Weighted Weighted Weighted
Average Price Average Price Average Price
1997 Per Share 1996 Per Share 1995 Per Share
---- --------- ---- ---------- ---- ---------
Outstanding January 1 2,434,846 $4.88 2,175,375 $5.11 809,086 $7.98
Granted 2,250,000 .72 730,000 3.17 1,366,289 3.41
Exercised 172,000 (.38) (370,529) 3.29 - -
Expired (801,586) 2.47 - - -
Canceled (1,116,736) 4.33 (100,000) - - -
----------- ---------- ----------
Outstanding December 31 3,396,110 $1.77 2,434,846 $4.88 2,175,375 $5.11
========== =========== ===========
Exercisable December 31 2,988,450 $1.77 2,370,178 $4.88 2,175,375 $5.11
========== =========== ===========
F-31
NOTE 25: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS (Continued)
The warrants outstanding on December 31, 1997 expire from 1998 through
2007.
Under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company is permitted
to continue accounting for the issuance of stock options and warrants
in accordance with Accounting Principles Board (``APB'') Opinion No.
25, which does not require recognition of compensation expense for
option and warrant grants unless the exercise price is less than the
market price on the date of grant. As a result, the Company has
recognized compensation cost for stock options and warrants for 1997,
1996 and 1995 of $183,000, $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 1997, 1996 and 1995 would have differed from the
actual results as follows:
1997 1996 1995
---- ---- ----
Net income (loss)
As reported (18,210,342) $(10,314,561) $3,655,188
Proforma $(19,434,176) $(10,711,154) $1,184,643
Basic earnings (loss) per share
As reported $(1.13) $(.77) $.38
Proforma $(1.17) $(.77) $.13
The per share weighted average fair value of the stock options and
warrants granted during 1997, 1996 and 1995 was $1.25, $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 1997, 1996 and 1995,
respectively: risk free interest rates of approximately 6% for all
three years; expected volatility factors of 163.6%, 116.2% and 96.9%
and expected lives of 1-10 years, 3-10 years and 1-10 years and no
expected dividends rate for all three years.
Under SFAS 123, the fair value of stock options issued in any given
year is expensed as compensation over the vesting period, which for
substantially all of the Company's options and warrants is three to
ten years; therefore, the pro forma net income (loss) and basic
earnings (loss) per share do not reflect the total compensation cost
for options and warrants granted in the respective years.
Furthermore, the pro forma results only include the effect of options
granted in 1997, 1996 and 1995; options and warrants granted prior to
1995 were not considered.
NOTE 26: 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, 1997.
F-33
NOTE 27: SUBSEQUENT EVENT
In April 1998, the Company entered into a formal letter of intent
agreement whereby NewCare Health Corporation ("NWCA") would, by
means of a statutory merger, acquire all of the issued and outstanding
shares of all classes and series of the Capital Stock of the Company.
NWCA would acquire all of the Company's Capital Stock other than the
Series A Preferred Stock for aggregate consideration of $7,000,000
worth of shares of NWCA Common Stock, valued in accordance with a
predetermined valuation method. At NWCA's option, up to $3,500,000 of
the consideration may be paid in cash, rather than NWCA stock. NWCA
would acquire the Series A Preferred Stock for aggregate consideration
of (a) $500,000 in cash, (b) $500,000 worth of shares of NWCA Common
Stock and (c) 250,000 five-year warrants to purchase NWCA Common Stock
at a strike price of $1 per share above the NWCA market price. As
part of the agreement, NWCA has committed to enter into an " at risk''
management arrangement for the Company's continuing business
operations. The management arrangement would commence on the date
that the parties execute a definitive merger agreement. The merger
transaction remains subject to due diligence, board approvals, receipt
of fairness opinions, regulatory approvals and stockholder vote.
During January 1998, the Company entered into a note purchase and
loanagreement whereby the Company purchased a note instrument in the
principal amount $1,475,000 from a third party lender with whom the
Company has extensive business relationships. The note purchase
financing was provided by such lender with collateral and security
relating to nursing facilities in New England financed by the lender
and in which the Company has interest. The loan agreement associated
with the purchase financing has a maturity date of Apri 1, 2007;
requires monthly payments of principal and interest payable at 10.5%
per annum and amortizes over a period of twenty-five years. The note
instrument acquired by the Company is secured by a subordinated
mortgage position held on a nursing facility that was previously
managed by the Company. The prior management of this facility was
provided by one of the Companys subsidiaries whose operations were
discontinued during 1997. The note instrument acquired by the Company
is currently non-performing.
F-33
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 23,
1998, which includes an explanatory paragraph concerning the Company's
ability to continue as a going concern. In connection with our audit of
these consolidated financial statements, we also have audited the
accompanying relatedd financial statement schedule for 1997, 1996 and 1995.
In our opinion, such financial statement schedule for 1997, 1996 and
1995, 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 23, 1998
F-34
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, 1997
- ----------------------------
Allowance for doubtful accounts
(deducted from accounts receivable) $1,774,300 $3,036,900 $1,428,500 $3,382,700
========== ========== ========== ==========
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
========== ========== ========== ===========
(1) Amounts charged to continuing operations were $3,036,900, $ 572,643 and $158,731 for 1997, 1996 and 1995 respectively.
The amounts charged to discontinued operations were $0, $1,463,360 and $50,000 for 1997, 1996 and 1995.
(2) Amounts deemed to be uncollectible.
(3) Included in the allowance for doubtful accounts at December 31, 1996 and 1995 is
a balance related to discontinued operations in the amount of $1,428,567 and $50,000, respectively.
F-35
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 27th day of April, 1998.
IATROS HEALTH NETWORK, INC.
By:/s/Reginald D. Strickland
Reginald D. Strickland
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/ Reginald D. Strickland Chief Executive Officer
Reginald D. Strickland and Director 4/27/98
/s/ Joseph L. Rzepka Chief Financial Officer
4/27/98
Joseph L. Rzepka
/s/ Joseph C. McCarron, Jr. Executive Vice President
Joseph C. McCarron, Jr. and Director 4/27/98
/s/ Robert A. Kasirer Director 4/27/98
Robert A. Kasirer
/s/ John D. Higgins Director 4/27/98
John D. Higgins
/s/ James H. Sanregret Director
James H. Sanregret 4/27/98
/s/ Frank Camma Director
Frank Camma 4/27/98