CONFORMED COPY
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From __________ To __________
IATROS HEALTH NETWORK, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-20345 23-2596710
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(State of Incorporation) (Commission File No.) (IRS
Employer
Identification No.)
10 Piedmont Center, Suite 400
Atlanta, Georgia, 30305
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (404) 266-3643
Indicate by (X) whether Registrant 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 and has been subject to
such filing requirements for the past 90 days.
Yes X No
As of May 9, 1997, there were 16,695,439 shares of Common Stock
issued or to be issued and outstanding and 533,333 shares of
Series A Senior Convertible Preferred Stock.
PART I - FINANCIAL INFORMATION
ITEM l: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
ASSETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $70,513 $1,134,125
Accounts receivable, net of allowance for
doubtful accounts of $1,834,965 and $1,774,300
in 1997 and 1996, respectively 6,443,898 5,888,205
Notes receivable - 200,000
Inventory 406,077 453,119
Prepaid expenses and other current assets 1,957,789 1,940,114
Deferred tax asset 2,700,000 2,700,000
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Total current assets 11,578,277 12,315,563
PROPERTY AND EQUIPMENT, net 1,290,985 1,249,763
OTHER ASSETS
Deposits 1,112,958 1,208,849
Contract rights, net of accumulated
amortization of $239,235 and $187,234 in 1997 and
1996, respectively 1,159,051 1,346,052
Excess of cost over net assets acquired, net
of accumulated amortization of $427,145 and
$372,128 in 1997 and 1996, respectively 3,830,751 3,885,767
Notes receivable 4,388,326 4,423,324
Organization costs, net of accumulated
amortization of $52,207 and $37,066 in
1997 and 1996, respectively 208,970 221,843
Loans receivable and other assets 3,548,622 3,344,070
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14,248,678 14,429,905
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Total Assets $27,117,940 $27,995,231
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, banks and other $773,600 $792,663
Current portion of long-term debt 349,302 374,881
Current portion of capital lease obligations 323,757 230,761
Accounts payable 2,680,292 2,690,260
Accrued payroll and related liabilities 1,010,584 685,505
Accrued expenses and other current liabilities 572,962 854,522
Preferred stock dividends payable 430,000 390,000
Net current liabilities of discontinued operations 500,000 500,000
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Total current liabilities 6,640,497 6,518,592
LONG-TERM DEBT 312,429 328,138
SUBORDINATED CONVERTIBLE DEBENTURES 150,000 600,000
CAPITAL LEASE OBLIGATIONS 161,764 232,721
COMMITTMENTS AND CONTINGENCIES
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7,264,690 7,679,451
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; 16,362,439 and 15,931,500 shares
issued or to be issued and outstanding in 1997
and 1996, respectively 16,362 15,931
Additional Paid-In Capital 34,701,445 34,142,970
Accumulated deficit (14,865,190) (13,843,754)
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19,853,250 20,315,780
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Total Liabilities and Stockholders' Equity $27,117,940 $27,995,231
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<FN>
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
March 31, March 31,
1997 1996
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Revenue
Ancillary services $2,469,490 $2,179,133
Management services 2,771,854 2,009,484
Development services 100,000 1,927,500
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5,341,344 6,116,117
Operating expenses
Ancillary services 2,446,859 1,928,973
Management services 2,735,658 2,087,125
General and administrative 893,585 637,755
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6,076,102 4,653,853
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Income/(loss) from operations before
other income (expense) and income
tax expense (734,758) 1,462,264
Other income (expense)
Interest income 59,544 109,740
Interest expense (44,244) (282,357)
Depreciation and amortization (201,286) (198,342)
Other income (expense) (60,693) 10,624
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(246,679) (360,335)
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Income/(loss) from operations
before income tax expense (981,437) 1,101,929
Income tax expense - 460,000
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Net Income (loss) ($981,437) $641,929
============ ============
Primary earnings (loss) per common
and common equivalent share ($0.06) $0.05
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Net Income (loss) ($0.06) $0.05
============ ============
Weighted average number of shares of
common stock and equivalents outstanding 16,141,208 14,235,047
============ ============
Fully diluted earnings per common
and common equivalent share N/A $0.04
------------ ------------
Net Income N/A $0.04
============ ============
Weighted average number of shares of
common stock and equivalents outstanding N/A 15,401,733
============ ============
The accompanying notes are an integral part of the consolidated financial
statements
<TABLE>
<CAPTION>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
MARCH 31, MARCH 31
1997 1996
(UNAUDITED) (UNAUDITED)
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income / (loss) ($981,437) $641,929
Adjustments to reconcile net income (loss) to
net cash utilized by operating activities:
Depreciation and amortization 201,286 198,342
Provision for doubtful accounts 60,665
Deferred taxes - 360,000
Changes in (net of disposals):
Accounts receivable (616,358) (1,152,610)
Notes and loans receivable 30,446 (2,128,945)
Inventory 47,043 (53,690)
Prepaid expenses and other current assets 117,325 (13,282)
Accounts payable (9,968) 266,924
Accrued expenses and other current
liabilities 43,519 (604,175)
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Net cash utilized by operating activities (1,107,479) (2,485,507)
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INVESTING ACTIVITIES
Purchase of property and equipment (80,351) (127,640)
Deposits, net 95,891 (1,004,753)
Restricted cash and cash equivalents - 24,200
Organization costs (2,268) (341,426)
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Net cash provided by (utilized by) investing
activities 13,272 (1,449,619)
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FINANCING ACTIVITIES
Net proceeds from issuance of capital
stock and other capital contributions 108,906 (663,736)
Proceeds from issuance of subordinated
convertible debentures, net - 12,900,000
Short-term borrowings (payments), net (19,063) (252,000)
Long-term debt payments (41,288) (618,681)
Payments of capital lease obligations (17,960) (11,522)
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Net cash provided by financing activities 30,595 11,354,062
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INCREASE (DECREASE) IN CASH (1,063,612) 7,418,937
Cash and cash equivalents, beginning of period 1,134,125 682,505
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Cash and cash equivalents, end of period 70,513 8,101,442
============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements is as follows:
Business
Iatros Health Network, Inc. and Subsidiaries (the "Company")
is a Delaware Corporation organized in June 1988. The
Company is engaged in providing services to the long-term
care industry. The Company's principal markets include the
metropolitan areas of Philadelphia, Pennsylvania; Baltimore,
Maryland, and; New England.
Principles of consolidation
The consolidated financial statements include the accounts
of Iatros Health Network, Inc. and its wholly-owned
subsidiaries. All intercompany transactions and accounts
have been eliminated in consolidation.
Cash and cash equivalents
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less
to be cash equivalents.
The Company maintains cash accounts which at times may
exceed federally insured limits. The Company has not
experienced any losses from maintaining cash accounts in
excess of federally insured limits. Management believes
that the Company does not have significant credit risk
related to its cash accounts.
Revenue and accounts receivable
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 health
care 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.
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue and accounts receivable (Continued)
Certain ancillary revenues are recorded based on standard
charges applicable to patients. Under Medicare, Medicaid
and other cost-based reimbursement programs, the provider is
reimbursed for services rendered to covered program patients
as determined by reimbursement formulas. The differences
between established billing rates and the amounts
reimbursable by the programs and patient payments are
recorded as contractual adjustments and deducted from
revenues.
Inventory
Inventory is principally comprised of pharmaceutical and
medical supplies and is valued at the lower of cost (first-
in, first-out method) or market.
Property and equipment
Property and equipment is stated at cost. The cost of
property and equipment is depreciated over the estimated
useful lives of the respective assets using primarily the
straight-line method. Property and equipment under capital
leases is amortized over the lives of the respective leases
or over the service lives of the assets. Leasehold
improvements are amortized over the lesser of the term of
the related lease or the estimated useful lives of the
assets.
Normal maintenance and repair costs are charged against
income. Major expenditures for renewals and betterment which
extend useful lives are capitalized. When property and
equipment is sold or otherwise disposed of, the asset
accounts and related accumulated depreciation or
amortization accounts are relieved, and any gain or loss is
included in operations.
The useful lives of property and equipment for purposes of
computing depreciation and amortization are:
Leasehold improvements 3 - 10 Years
Property and equipment
held under capital leases 5 - 7 Years
Equipment 5 Years
Furniture and fixtures 3 - 7 Years
Intangible assets
The Company evaluates the carrying value of its long-lived
assets and identifiable intangibles including, contract
rights, excess of cost over net assets acquired and
organization costs when events or changes in circumstances
indicate that the carrying amount of such assets may not be
recoverable. The review includes an assessment of industry
factors, contract retentions, cash flow projections and
other factors the Company believes are relevant.
Contract rights
Contract rights represent the value assigned to
management contracts obtained by the Company.
Management contracts provide for a management fee in
exchange for management, marketing and development
services provided to the facilities. Contract rights
are being amortized over the term of the related
contracts which range from 5 to 10 years.
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Intangible assets (Continued)
Excess of cost over net assets acquired
The excess of cost over net assets acquired relates to
the acquisition of the Company's operating
subsidiaries. The excess of cost over net assets
acquired is being amortized over the lives of 15 to 20
years.
Organization costs
Organization costs incurred in connection with the
acquisition or formation of new business activities for
the Company are being amortized using the straight-line
method over five years.
Income taxes
The Company employs the asset and liability method in
accounting for income taxes pursuant to Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting
for Income Taxes." Under this method, deferred tax assets
and liabilities are determined based on temporary
differences between the financial reporting and tax bases of
assets and liabilities and net operating loss carryforwards,
and are measured using enacted tax rates and laws that are
expected to be in effect when the differences are reversed.
Earnings per share
Both primary and fully diluted earnings per share of common
stock and common stock equivalents are computed based on the
weighted average number of shares of common stock and common
stock equivalents outstanding in each period. For 1997,
fully diluted loss per share amounts are not computed
because they are antidilutive.
In 1996, Common Stock equivalents include additional shares
assuming the exercise of stock options and warrants and
Convertible Series A Preferred Stock when their effect is
dilutive. The inclusion of additional shares for conversion
of Preferred Series A Stock, in primary earnings per share
calculations, would have been antidilutive for 1996.
Net earnings used in the computation of primary earnings per
share for 1996 are reduced by Preferred Stock dividend
requirements.
During 1997 and 1996, the Company issued Common Stock in
connection with the conversion of its 10% Subordinated
Convertible Debentures and with the exercise of its
Redeemable Common Stock Purchase Warrants. Had all
exercises and conversions occurred on January 1, 1997, the
reported primary loss per common share would have been
antidilutive.
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.
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Adoption of New Accounting Principles
The Company will be required to implement Statement of
Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128") in the fourth quarter of 1997. The effects of
the implementation of SFAS No. 128 have not been determined.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Section I - Business Description
Iatros Health Network, Inc., and its subsidiaries (together
referred to as the "Company") are involved in the operation of
long term-care facilities and provide services and products to
the long-term care industry. These include a broad range of
management, ancillary and development services. The Company's
principal market areas currently are Pennsylvania, Maryland and
New England.
Business Strategy
The Company's principal business strategy is to position itself
in selected market areas, having established a network of formal
operating and service relationships involving long-term care
facilities and health care providers. Through the introduction of
its specialized operating skills and ancillary service programs,
the Company provides cost effective and efficient, quality-
oriented services to area health care facilities. The Company
emphasizes the localized nature of the long-term care industry,
utilizing its operating resources to achieve maximum economies.
Strategic alliances with local owners, operators and health care
providers in developing the area network are key ingredients to
the Company's business strategy.
The Company's growth and development plans are to more actively
pursue opportunities involving the direct leasing and ownership
of long-term care facilities. This represents a change in
emphasis from previous development initiatives focused solely on
contract management and service engagements. This strategy
reflects management's efforts to develop a stronger and more
tangible balance sheet while broadening its revenue base and
increasing operating control over facilities managed.
In view of continuing health care reform initiatives, the Company
believes it is important to position itself as a low cost quality
provider of heath care services in its respective markets. The
Company seeks to provide value added services that promote
revenue enhancement, cost containment and quality assurance to
the facilities it serves.
Management Services
The Company provides a full range of management services to the
long-term care facilities it serves. These include financial as
well as operational management services, quality assurance
services, and special consulting services.
The Company currently provides management services to 41
facilities representing 4,604 beds located in the market areas of
Pennsylvania, Maryland and New England.
The Company's operating objective is to achieve the optimum
integration of financial services and operations management in
all of the facilities it serves. Embodied in this philosophy is
the Company's priority to develop its key people as both
financial and operational managers. The Company emphasizes the
development of its financial service capabilities to both support
and enhance its operating programs. An important ingredient to
promoting the integration of financial and operating management
is the integrity of the underlying information systems. The
Company is committed to utilizing state-of-the-art technology to
support its operating needs. This includes the development and
utilization of information systems technology that is both
financially and clinically oriented.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Section I - Business Description (Continued)
Ancillary Services
The Company provides a full range of ancillary services to long-
term care facilities operating in its market areas. These
include institutional pharmacy services, durable medical
equipment, wound care management, infusion therapy, respiratory
therapy services and rehabilitation therapy services. The
Company currently provides ancillary services to in excess of 40
facilities representing nearly 5,000 beds located in the market
areas of Pennsylvania, Maryland and New England.
Institutional pharmacy and medical supply service programs, which
extend beyond product delivery, emphasize operational support
services including drug consultation, resident care management,
quality assurance practices, and documentation and administrative
support. During 1996, the Company expanded its pharmacy and
durable medical equipment programs in its Pennsylvania market
area.
The Company's business plan is to continue to expand upon the
array of products and services it can provide to the long-term
care networks it develops. The Company intends to accomplish
this through strategic alliances with preferred providers of
health care services as well as by further developing its direct
service capabilities.
Development Services
The Company provides a full range of development services on
behalf of owners and operators as well as lenders and investors
who are active in the long-term care industry. The Company
strategically seeks opportunities to be engaged in a development,
consulting or financial advisory capacity on a fee for service
basis, particularly where possibility exists to realize
development income while securing ownership, management and
ancillary services business.
The Company is currently involved in development activities of
long-term care facilities located in its existing as well as new
market areas. These transactions, upon completion, will provide
opportunities for management and ancillary services for the
Company.
Significant Transactions
Significant transactions completed by the Company or its wholly-
owned subsidiaries during the quarter ended March 31, 1997
include the following:
During March 1997, the Company entered into two ten year
lease agreements including two long-term care facilities
located in the Commonwealth of Massachusetts representing a
total of 222 beds. The lease agreement includes a purchase
option to acquire the facilities during the lease term for a
purchase price totaling $10,000,000. Historical annualized
operating revenues generated by these facilities approximate
$10,000,000.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Section II - Results of Operations
The Company's consolidated financial statements reflect a net
loss of $981,437 for the quarter ended March 31, 1997, compared
with a net income of $641,929 for the quarter ended March 31,
1996. The decrease in reported net income results largely from a
significant reduction in reported development fee revenues and
increased overhead associated with new management contracts
involving high cost turn-around projects. The Company
anticipates improved income associated with continuing operations
in future quarters. Such improvement is expected to result from
completing cost reductions initiated during the March 1997
quarter while continuing growth of regional service volume is
expected to generate more normative operating margins.
Management's cost reduction initiatives have included substantial
elimination of payroll expense through the consolidation of
resources and resultant elimination of non-essential as well as
redundant employee positions. Specifically, payroll costs
eliminated commencing in the second quarter of 1997 will total
approximately $4,000,000 on and annualized basis. Management is
aggressively continuing to effect operating cost reductions in
other areas.
Management's expectation of regional operating performance is to
routinely sustain net operating margins from facility operations,
facility management and ancillary service revenue in keeping with
industry norms. Development service revenue is expected to be
recognized regionally as the company continues its growth and
development of principal market areas. Such revenue is expected
to contribute further to the Company's operating margins.
Consolidated operating revenue reported for the quarter ended
March 31, 1997 totaling $5,341,344 compares with $6,116,117
reported for the quarter ended March 31, 1996 and represents a
decrease of $774,773 or 12.7%. The reported decrease is the net
result of an increase in ancillary services revenue of $290,357
or 13%, an increase in management services revenue of $762,370 or
38%, and, a decrease in development services revenue of
$1,827,500 or 95%.
The increases in reported ancillary and management services
revenues during 1997 resulted principally from the Company having
secured management and ancillary service contracts in the
Pennsylvania market area through business acquisitions as well as
having developed expanded market presence in New England.
The components of ancillary services revenue reported for the
quarter ended March 31, 1997 include medical supplies and
pharmacy revenue totaling $1,588,993 and therapy services revenue
totaling $880,497. During the prior year quarter, the Company
reported medical supplies and pharmacy revenue of $1,399,368 and
therapy services revenue of $779,765.
Increases in ancillary service revenue generally relate to the
Company having secured new or expanded service relationships with
facilities for which management services are also provided.
Management services revenue reported by the Company for the
quarter ended March 31, 1997 relates exclusively to long-term
care facilities for which the Company provides both financial and
operational management services under contractual arrangements.
Increases in management services revenue reflect increased
revenue resulting from new management service contracts secured
by the Company.
For the quarter ended March 31, 1997, the Company recognized
development services revenue totaling $100,000 which was
associated with securing two ten year lease agreements including
two long-term care facilities. The Company intends to provide
continuing marketing, management and ancillary services to these
facilities as well as expand its service presence in the market
areas represented by this transaction.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Section II - Results of Operations (Continued)
Consolidated operating expenses reported for the quarter ended
March 31, 1997 total $6,076,102 or 114% of reported revenue
compared with the same period during 1996 totaling $4,653,853 or
76% of reported revenue. Total operating expenses for the quarter
ended March 31, 1997 increased $1,422,249 or 31% compared with
1996. This increase is comprised of $517,886 or 27% relating to
ancillary services, $648,533 or 32% relating to management
services, and, $255,830 or 41% relating to general and
administrative expenses.
The reported increases in operating expenses for the current
periods are primarily associated with management services and
general and administrative costs. Increased costs result
generally from business growth, as well as costs incurred to
secure and position regional resources necessary to effectively
support anticipated increases both in management and ancillary
service volume within existing market areas. In addition, the
Company has incurred increases in general and administrative
costs associated with developing its corporate resources
necessary to support regional operations and conduct requisite
oversight for continuing operations.
Management expects operating expenses as a percentage of reported
revenue to decrease in future periods. This is anticipated to
result from management's continuing initiatives to further
develop and effectively position regional organizational
resources while achieving greater economies of scale and improved
operating margins from existing business and continued growth.
Ancillary services operating expenses for the quarter ended March
31, 1997 total $2,446,859 and include $1,423,882 relating to
medical supplies and pharmacy services and $1,022,977 relating to
therapy services. For the prior year quarter, ancillary services
operating expenses total $1,928,973 and include $1,229,823
relating to medical supplies and pharmacy services and $699,150
relating to therapy services. Total ancillary services operating
expenses for the quarter ended March 31, 1997 represent an
increase of 28% over the prior year period. Operating profits
relating to ancillary services for the quarters ended March 31,
1997 and 1996 were $22,631 and $250,160, respectively. This
decrease reflects additional costs and overhead incurred to
accommodate expected growth in ancillary services volume.
Management services operating expenses reported for the quarter
ended March 31, 1997 total $2,735,658 and relate to the long-term
care facilities for which the Company provides financial and
operational management services. For the quarter ended March 31,
1997, management services reported an operating profit of
$36,196. Management services operating expenses for the quarter
ended March 31, 1996 totaled $2,087,125 resulting in an operating
loss of $77,641.
Operating profits resulting from management services during 1997
reflect overhead costs associated with business acquisitions
which management is in the process of reducing and realigning.
Further, increased operating costs have been incurred in
connection with establishing regional management resources
anticipating an increase in the number of management services
contracts secured by the Company.
General and administrative expenses for the quarter ended March
31, 1997 totaled $893,585. Significant components of general and
administrative expenses for the quarter ended March 31, 1997
include contracted services of $59,173; professional fees of
$116,618; salaries of $383,561; and, travel and related expenses
of $104,038. Other general and administrative expenses
aggregating $230,195 for the quarter relate to corporate
overhead.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Section II - Results of Operations (Continued)
For the quarter ended March 31, 1997, the Company reported an
operating loss from total services revenue of $734,758 compared
to an operating profit in the prior year quarter of $1,462,264
representing a decrease of $2,197,022 or 150%. This decrease
results principally from the Company's growth and expansion
achieved during 1996 and to date wherein the Company has incurred
increasing overhead required to effectively support anticipated
business volume. Operating profit margins from management and
ancillary services are expected to increase as the Company
continues to reduce and realign costs, and achieve full
implementation of its service programs in its local service
networks within each market area.
Other income (expense) for the quarter ended March 31, 1997 total
($246,679). The principal component of other income (expense) is
depreciation and amortization expense of $201,286. Depreciation
and amortization expense includes approximately $86,860
associated with depreciation and $114,426 associated with the
amortization of goodwill, contract rights and organizational
costs relating to the Company's business acquisitions. Interest
income and expense reported for the quarter ended March 31, 1996
relates largely to the Subordinated Convertible Debentures.
Section III - Liquidity and Capital Resources
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. At
March 31, 1997, $12,750,000 had been converted into a total of
4,182,234 common shares. As of May 12, 1997, $150,000 in 10%
subordinated convertible Debentures remained outstanding which
the Company believes is likely to be converted by December 31,
1997.
The Company realized $12,000,000, net of costs associated with
the issuance of the 10% subordinated convertible Debentures.
Through March 31, 1997, the funds realized were utilized to fund
acquisitions and other corporate development and operating
obligations of the Company. Uses of the 10% subordinated
convertible Debenture proceeds included the following: (1)
Corporate overhead - $900,000; (2) Operating deficit agreement
and project working capital advances - $2,385,000; (3)
Development capital advances for various transactions -
$3,965,000; and; (4) Working capital advances to Company
subsidiaries - $4,750,000.
The Company is presently operating with limited cash reserves and
has negotiated a $4,000,000 asset based financing transaction to
support current working capital requirements. This financing
transaction is collateralized with various accounts receivable of
the Company. Additionally, the Company is seeking debt financing
to fund its current growth and development plans.
The Company has been involved in a number of project financings
wherein the Company was contracted to provide development,
marketing and management services. In connection therewith, the
Company committed to loan working capital as may be required in
the form of operating deficit agreements. Aggregate amounts
committed to date by the Company relating to project financings
total $4,980,000 of which approximately $2,329,000 has been
advanced by the Company and approximately $2,651,000 remains
outstanding at March 31, 1997. No additional advances under
these agreements are contemplated by management until the Company
is able to strengthen its liquid working capital position.
Advances to date are expected to be recovered by the Company from
sources of working capital financing being established by the
respective facilities. Absent securing such working capital
financing, the Company's advances are recoverable from the
facilities' operating cash flows which are generally subordinated
to other obligations of the facilities.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Section III - Liquidity and Capital Resources (Continued)
During April 1997, the Company secured a working capital line of
credit from a financial institution in the amount of $1,500,000.
The line is secured by various notes receivable and management
contract rights associated with one of the Company's operating
subsidiaries. The line is due on demand and accrues interest at
the bank's base rate plus 1% on amounts drawn and outstanding.
To date, the Company has utilized approximately $900,000 of this
financing to support working capital and development activities
of its operating subsidiaries.
Cash and cash equivalents at March 31, 1997 and 1996 totaled
$70,513 and $8,452,242, respectively. Cash and cash equivalents
at March 31, 1996 were comprised of unrestricted amounts of
$8,101,442 and restricted amounts of $350,000. Restricted cash
of $250,000 represented funds received from a third party as
security for future payment obligations pursuant to a management
subcontract agreement. On a quarterly basis, the Company
utilized such funds for its own corporate purposes in increments
of $25,000. Accordingly, amounts not available to the Company
during the current operating period were classified as long-term.
The balance of restricted funds totaling $100,000 related to
escrowed funds associated with contractual obligations involving
the Company's development activities.
At March 31, 1996, cash and cash equivalents included a
certificate of deposit held by a financial institution in the
approximate amount of approximately $503,000. This certificate
matured in June 1996 and served as collateral for an outstanding
line of credit obligation totaling approximately $491,000 which
was included in current notes payable, bank at March 31, 1996.
This certificate of deposit was utilized to satisfy the
outstanding line of credit obligation in March 1997.
At March 31, 1997, the Company reports a working capital surplus
of $4,937,780 compared with $12,811,986 as of March 31, 1996.
Accounts receivable at March 31, 1997, of $6,443,898 is net of
allowance for doubtful accounts of $1,834,965 and is comprised of
$2,492,379 relating to management services and $3,951,519
relating to ancillary services. Accounts receivable at March 31,
1996 of $5,390,062 was net of allowance for doubtful accounts of
$143,000 and was comprised of $1,517,899 relating to management
services, $2,872,163 relating to ancillary services, and,
$1,000,000 relating to development services.
Prepaid expenses and other current assets reported by the Company
for the quarter ended at March 31, 1997 and 1996 totaled
$1,957,789 and $1,592,468, respectively. Approximately
$1,600,000 and $1,225,000 of prepaid expenses and other current
assets represent project costs advanced in connection with
transactions involving the Company in a development capacity in
1997 and 1996, respectively. These include legal and
professional as well as financing issue costs which are
recoverable upon completion of the property acquisition and
project financing or development activity for which such costs
were advanced. The Company routinely advances project costs
associated with its development services as it deems necessary to
secure business prospects and complete transactions. In
addition, in 1996, prepaid expenses and other current assets
included $250,000 related to the prepayment of a consulting
contract with a former officer and stockholder of the Company.
Deposits reported at March 31, 1997 totaled $1,112,958 and
include a refundable earnest money deposit of $1,000,000 in
connection with a purchase agreement for a long-term care
facility located in New Jersey. The Company intends to assign
this purchase to a third party, as provided for in the agreement,
and retain rights to provide management and ancillary services.
In connection therewith, the purchase deposit is to be refunded
to the Company. In addition, $112,958 represents office lease
and related deposits.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Section III - Liquidity and Capital Resources (Continued)
For the quarter ended March 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.
For the quarter ended March 31, 1997 and 1996, loans receivable
and other assets totaled $3,150,622 and $865,971, respectively.
As of March 31, 1997, $2,124,424 represents cash advanced by the
Company pursuant to the terms of operating deficits agreements
for the operating needs of properties managed by the Company.
Such advances generally accrue interest at market rates and are
recoverable from permanent financing proceeds anticipated from
the properties. The Company is currently obligated under such
operating deficit agreements for additional amounts approximating
$1,700,000.
In addition, as of March 31, 1997 other assets include
approximately $540,000 representing a loan receivable due from an
officer in connection with the merger transaction with King Care
Respiratory Services, Inc. The loan accrues interest at 9% and
matures in January 2000. The Company expects to partially
realize this loan in connection with satisfying its deferred
purchase obligation of approximately $240,000 plus accrued
interest which is also payable in January 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in certain lawsuits involving third-
party creditors whose claims arise from transactions which
occurred under prior management. Management believes that it
has sufficiently reserved for these claims in its financial
statements at March 31, 1997. Management does not believe
that the outcome of these matters will have a material adverse
affect on the Company's financial position, results of
operations or cash flows.
The Company is a defendant in a lawsuit relating to the
termination of a former employee for cause under the terms of
an employment agreement. The former employee seeks damages
alleging that the Company breached its obligations under the
employment agreement and a stock option agreement. The
Company has denied these allegations and is vigorously
defending this action. Further, the Company has filed a
counter suit against this individual. Management does not
believe that the outcome of this matter will have a material
adverse affect on the Company's financial position, results of
operations or cash flows.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
The Company is in arrears in the payment of dividends on the
outstanding shares of its Series A Senior Convertible Preferred
Stock. At May 15, 1997, dividends in arrears on these shares
totalled $430,000.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
IATROS HEALTH NETWORK, INC.
Dated: May 15, 1997 By: /s/ Joseph L. Rzepka
Joseph L. Rzepka
Executive Vice President
Chief Financial Officer
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