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 June 30, 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
(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 August 8, 1997, there were 16,718,608 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 I: FINANCIAL STATEMENTS
<TABLE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
ASSETS
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 549,429 $ 1,134,125
Accounts receivable, net of allowance for
doubtful accounts of $2,573,275 and
$1,774,300 in 1997 and 1996,
respectively 6,751,475 5,888,205
Notes Receivable - 200,000
Inventory 453,380 453,119
Prepaid expenses and other assets 1,637,351 1,940,114
Deferred tax asset - 2,700,000
Total current assets 9,391,635 12,315,563
PROPERTY AND EQUIPMENT, net 9,699,961 1,249,763
OTHER ASSETS
Deposits 59,429 1,208,849
Restricted cash 435,750 -
Contract rights, net of accumulated
amortization of $269,744 and $187,234 in
1997 and 1996, respectively 903,304 1,346,052
Excess of costs over net assets acquired,
net of accumulated amortization of
$482,131 and $372,128 in 1997 and 1996,
respectively 3,079,879 3,885,767
Notes Receivable 2,773,904 4,423,324
Organization costs, net of accumulated
amortization of $71,865 and $37,066
in 1997 and 1996, respectively 216,590 221,843
Loans receivable and other assets 1,446,548 3,344,070
Deferred tax asset 2,700,000 -
11,615,404 14,429,905
Total Assets $30,707,000 $27,995,231
</TABLE>
<TABLE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
CURRENT LIABILITIES
Notes payable, banks and other $ 3,038,960 $ 792,663
Current portion of long-term debt 10,876 374,881
Current portion of capital lease
obligations 197,404 230,761
Accounts Payable 2,755,172 2,690,260
Accrued payroll and related
liabilities 853,174 685,505
Accrued expenses and other current
liabilities 635,763 854,522
Preferred stock dividends payable 470,000 390,000
Net current liabilities of
discontinued operations 650,000 500,000
Total current liabilities 8,611,349 6,518,592
LONG-TERM DEBT 9,585,099 328,138
SUBORDINATED CONVERTIBLE DEBENTURES - 600,000
CAPITAL LEASE OBLIGATIONS 248,420 232,721
COMMITMENT AND CONTINGENCIES
18,444,868 7,679,451
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value,
5,000,000 shares authorized;
Series A, 533,333 shares issued
and outstanding
Series B, 100,000 shares issued 533 533
and outstanding 100 100
Common Stock, $.001 par value,
25,000,000 shares authorized; 16,718,608
and 15,931,500 shares issued or to be
issued and outstanding in 1997 and
1996, respectively 16,719 15,931
Additional Paid-In Capital 34,896,631 34,142,970
Accumulated deficit (22,651,851) (13,843,754)
12,262,132 20,315,780
Total Liabilities and Stockholders'
Equity $30,707,000 $27,995,231
<FN>
The accompanying notes are an integral part of the consolidated financial
statements
</TABLE>
<TABLE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended June 30, Six months ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue
Nursing home operations $3,693,764 $ - $3,693,764 $ -
Ancillary services 3,161,686 2,522,608 5,631,176 4,190,756
Management services 1,586,717 2,011,623 4,358,571 4,532,092
Development services - 3,095,220 100,000 5,022,720
8,442,167 7,629,451 13,783,511 13,745,568
Operating expenses
Nursing home operations 3,643,076 - 3,643,076 -
Ancillary services 2,599,954 2,114,164 5,046,813 4,043,137
Management services 1,595,584 2,525,855 4,331,242 4,612,980
General and
administrative 1,319,394 1,002,563 2,212,979 1,640,318
9,158,008 5,642,582 15,234,110 10,296,435
Income/(loss) from
operations before other
income (expenses) and
income tax expenses (715,841) 1,986,869 (1,450,599) 3,449,133
Other income (expense)
Interest income 97,816 100,892 157,360 210,632
Interest expense (78,109) (225,989) (122,353) (508,346)
Depreciation and
Amortization (213,536) (356,976) (414,822) (555,318)
Write-down of
assets (6,742,162) - (6,742,162) -
Other income (expense) (94,830) 6,385 (155,523) 17,009
(7,030,821) (475,688) (7,277,500) (836,023)
Income/(loss) from
operations before tax
expense (7,746,662) 1,511,181 (8,728,099) 2,613,110
Income tax expense - 602,405 - 1,062,405
Net income (loss) ($7,746,662) $ 908,776 ($8,728,099) $1,550,705
Earnings (loss)
per common and common
equivalent share ($0.47) $0.06 ($0.53) $0.10
Net Income(loss) ($0.47) $0.06 ($0.53) $0.10
Weighted average number
of shares of common stock
and equivalents
outstanding 16,513,975 15,604,636 16,328,621 14,993,302
<FN>
The accompanying notes are an integral part of the
consolidated financial statements
</TABLE>
<TABLE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<CAPTION>
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net Income(loss) ($8,728,099) $ 1,550,705
Adjustments to reconcile net income
(loss) to net cash utilized by
operating activities:
Depreciation and amortization 414,822 555,318
Provision for doubtful accounts 411,658 -
Write-off of uncollectible notes,
loans and deposits receivable 5,690,608 -
Write-down of intangible assets 1,051,554 -
Loss on disposal of property and equipment 92,114 -
Deferred taxes - 937,405
Changes in (net of disposals):
Accounts receivable (1,874,928) (1,616,281)
Notes and loans receivable 166,518 (5,342,428)
Inventory (261) 7,702
Prepaid expenses and other current
assets (197,421) (335)
Accounts payable 64,912 675,353
Accrued expenses and other current
liabilities 98,910 (763,204)
Net cash utilized by operating activities (2,809,613) (3,995,765)
INVESTING ACTIVITIES
Purchase of property and equipment (8,725,252) (60,910)
Acquisition of business - (626,937)
Acquisition of contracts rights - (249,634)
Loans to third parties - (1,250,000)
Deposits, net 139,420 (719,241)
Restricted cash and cash equivalents (435,750) 150,000
Organization costs (29,546) (1,508,194)
Net cash utilized by investing activities (9,051,128) (4,264,916)
FINANCING ACTIVITIES
Net proceeds from issuance of capital
stock and other capital contributions 154,449 1,667,499
Proceeds from issuance of subordinated
convertible debentures - 12,900,000
Fees paid on issuance of debentures - (876,331)
Short-term borrowings (payments), net 2,246,297 (30,985)
Long-term debt borrowings (payments), net 8,892,957 (917,949)
Payments of capital lease obligations (17,658) (23,803)
Net cash provided by financing activities 11,276,045 12,718,431
INCREASE (DECREASE) IN CASH (584,696) 4,457,750
Cash and cash equivalents,
beginning of period 1,134,125 682,505
Cash and cash equivalents, end of period $ 549,429 $ 5,140,255
<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
IatrosHealth 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
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)
such factors as the age of receivables, the contract terms and the
nature of the contracted services.
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:
Buildings 40 Years
Leasehold improvements 3 - 10 Years
Property and equipment
held under capital leases 5 - 7 Years
Equipment 5 Years
Furniture and fixtures 3 - 7 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
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.
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.
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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.
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 own and directly lease
long-term care facilities in geographic concentrations sufficient to
provide a basis for their economically efficient operation. Such facilities
provide a platform for the efficient delivery of the Company's cost
effective, quality oriented ancillary products and services. This
represents a change in emphasis from previous development initiatives
focused solely on contract management and service engagements. Together
with ongoing operating overhead cost reductions discussed further below,
this strategy is reflective of managements efforts to develop a stronger
and more tangible balance sheet while broadening its revenue base and
increasing operating control over facilities managed.
The Company emphasizes the localized nature of the long-term care industry,
using its operating resources to achieve maximum economies. Strategic
alliances with local owners, operators and health care providers in
developing area service networks are essential ingredients to the Company's
strategy.
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 the facilities it operates and serves.
Long-Term Care Facility Operations
As of June 30, 1997, the Company directly owned two nursing homes with 171
beds and operated two nursing homes with 222 beds under 10 year lease
agreements with associated purchase options. These four facilities combined
have historically generated annualized operating revenues approximating
$17,600,000.
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
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Section I - Business Description (Continued)
Ancillary Services (Continued)
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.
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.
As of June 30, 1997, the Company provided contractual management or
financial services to 36 long-term care facilities representing
approximately 3,900 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.
Development Services
The Company has de-emphasized the provision of development services to
third parties consistent with its present focus on direct leasing and
ownership of long-term care facilities.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Section I - Business Description (Continued)
Significant Transactions
Significant transactions completed by the Company or its wholly owned
subsidiaries during the quarter ended June 30, 1997 include the following:
On April 1, 1997, the Company closed the operation of its Baltimore,
Maryland based operating management division. Service contracts
being administered through the Baltimore office were assigned to the
Company's Philadelphia based operating subsidiary. Consolidated
overhead reductions accomplished through this assignment of
contracts approximate $1,000,000 on an annualized basis.
Additionally, the Company has recorded a charge of $770,000 in the
June 1997 quarter associated with the write-down of certain
intangible assets of this division.
On May 31, 1997, the Company (through its wholly owned subsidiary
OHI Corporation) acquired two long-term care facilities near Boston,
Massachusetts with a total of 171 beds utilizing REIT mortgage
financing. Historical annualized operating revenues generated by
these two facilities approximate $7,600,000.
In December, 1995, the Company recorded a $1,000,000 deposit against
the anticipated purchase of a nursing facility in New Jersey. This
transaction was pending as of June 30,1997. The Company's deposit
has been forfeited. Accordingly, the Company has recorded a charge
to earnings during the three months ended June 30, 1997.
On March 31, 1997, the Company's Baltimore based operating division
was terminated as manager of a 224 bed nursing home in Hyattsville,
Maryland. Annualized management fees from this property were
projected to be $495,000. In June, 1997, the mortgage lender on
this property
foreclosed and assumed responsibility for property operations. In
July, 1997, the Company executed an Assignment and Release Agreement
(the Agreement) with the lender. The Agreement granted to the
lender the Company's interest in unpaid management fees and
outstanding operating deficit advances due from the property in
exchange for release by the lender of alleged claims against the
Company. Eventhough the agreement was not executed until July, 1997
the Company has recorded a charge to earnings in the June, 1997
quarter approximating $400,000 in light of commencement of the
foreclosure proceedings.
On May 16, 1997, a 325 bed nursing home in Olathe, Kansas under
management by the Company's Philadelphia based operating subsidiary
filed a Voluntary Chapter 11 Petition for Relief with the United
States Bankruptcy Court in Topeka, Kansas. The management contract
with the Company's subsidiary was terminated as of the filing.
Annualized management fees from this property were projected to be
$375,000.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Section I - Business Description (Continued)
Significant Transactions (Continued)
The Company was a lender to the owner of this property by means of a
Loan Participation Agreement entered into on April 25, 1996. In
July,
1997 the Company executed an Assignment and Release Agreement (the
Agreement) with its co-lender in the project. The Agreement
granted to the co-lender collection rights to various unpaid
management fees and outstanding operating deficit advances due from
the property, as well as the Company's loan participation interest,
in exchange for release from the co-lender of alleged claims against
the Company and its subsidiary. In accordance with the terms of the
Agreement, the Company has recorded a charge to earnings during the
three months ended June 30, 1997 totaling $1,075,000.
In June, 1997, the Bond Trustee to the owner of two Assisted Living
projects in Salisbury and Annapolis, Maryland foreclosed. In
August, 1997 a receiver was appointed at the project. In conjunction
with this action, the Company was terminated as developer and
manager of the project effective as of June 30,1997. As a result of
this action, development notes and outstanding operating deficit
agreements from the properties are in jeopardy. In recognition of
this fact, the Company has recorded a charge to earnings of
$650,000.
In July 1997 the first mortgage lender on a nursing home in
Baltimore, Maryland under management by the Company's Philadelphia
based subsidiary foreclosed. As a result of this action, the
Company has recorded a collection reserve against notes and advances
receivable from this property totaling $665,000.
In August 1997 the Company reached agreement with a client that
provides for discounted early pay-off of subordinated notes
receivable due between 1998 and 2005. Pay-off is scheduled to occur
in August 1997. In accordance with terms of the agreement, the
Company has recorded a charge to earnings of $500,000 during the
three months ended June 30, 1997.
Section II - Results of Operations
The Company's consolidated financial statements reflect a loss from
operations of ($715,841) for the quarter ended June 30, 1997.
Additionally, the Company has recorded charges to earnings
aggregating ($7,030,821) during the three months ended June 30, 1997
for a reported net loss of ($7,746,662). This compares to reported
net income from operations of $908,776 for the quarter ended June
30, 1996. The decrease in net income results largely from non-
recurring charges to earnings in the quarter ended June 30, 1997
associated with four property management contracts which were
terminated during the quarter. Additionally, there were no
Development Service revenues associated with the quarter ending June
30, 1997 versus $3,095,220 which was reported during the quarter
ended June 30, 1996.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Section II - Results of Operations (Continued)
These developments are reflective of managements ongoing initiatives to
refocus efforts on direct leasing and ownership of nursing homes. Such
initiatives include the consolidation of resources, elimination of
redundant employee positions, and reduction of associated overhead
expenses. Cost reductions associated with these initiatives began to take
effect during the June 30, 1997 quarter and presently amount to over
$5,000,000 on an annualized basis. Management is aggressively continuing
these efforts.
Consolidated operating revenue reported for the quarter ended
June 30, 1997 totaling $8,442,167 compares with $7,629,451 reported
for the quarter ended June 30, 1996 and represents an increase of $812,716
or 11%. The reported increase is the net result of an increase in
nursing home operation services revenue of $3,693,764 or 100%. an increase in
ancillary services revenue of $639,078 or 25%, a decrease in
management services revenue of $424,906 or 21%, and a decrease in
development services revenue of $3,095,220 or 100%.
Consolidated operating revenue reported for the six months ended June 30,
1997 totaling $13,783,511 compares with $13,745,568 reported for the six
months ended June 30, 1996 and represents an increase of $37,943 or .25%.
The reported increase is the net result of an increase in ancillary
services revenue of $1,440,420 or 34%, a decrease in management services
revenue of $173,521 or 4%, a decrease in development services revenue of
$4,922,720 or 98%, and, an increase in nursing home operation services
revenue of $3,693,764 or 100%.
The components of ancillary services revenue reported for the quarter ended
June 30, 1997 include medical supplies and pharmacy revenue totaling
$1,657,908 and therapy services revenue totaling $1,503,778. During the
prior year quarter, the Company reported medical supplies and pharmacy
revenue of $1,375,913 and therapy services revenue of $1,146,695.
The components of ancillary services revenue reported for the six months
ended June 30, 1997 include medical supplies and pharmacy revenue totaling
$3,246,901 and therapy services revenue totaling $2,384,275. During the six
months ended June 30, 1996, the Company reported medical supplies and
pharmacy revenue of $2,775,282 and therapy services revenue of $1,415,474.
The increase in reported ancillary services revenue during 1997 resulted
principally from the Company having secured additional ancillary service
contracts in the Pennsylvania market area through business acquisitions as
well as having developed an expanded market presence in New England.
Management services revenue reported by the Company for the quarter ended
June 30, 1997 relates exclusively to long-term care facilities for which
the Company provides both financial and operational management services
under contractual arrangements.
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 June 30,
1997 total $9,158,008 or 108% of reported revenue compared with the same
period during 1996 totaling $5,642,582 or 74% of reported revenue. Total
operating expenses for the quarter ended June 30, 1997 increased $3,515,426
or 62% compared with 1996. This net increase is comprised of an increase
of $3,643,076 or 100% relating to nursing home operation services
expenses., an increase of $485,790 or 23% relating to ancillary services, a
decrease of $930,271 or 37% relating to management services, and, an
increase of $316,831 or 32% relating to general and administrative.
Consolidated operating expenses reported for the six months ended June 30,
1997 total $15,234,110 or 111% of reported revenue compared with the same
period during 1996 totaling $10,296,435 or 75% of reported revenue. Total
operating expenses for the six months ended June 30, 1997 increased
$4,937,675 or 48% compared with 1996. This net increase is comprised of an
increase of $3,643,076 or 100% relating to nursing home operation services
expenses, an increase of $1,003,676 or 25% relating to ancillary services,
a decrease of $281,738 or 6% relating to management services, an increase
of $572,661 or 35% relating to general and administrative.
The reported increases in operating expenses for the current periods are
primarily associated with general and administrative and nursing home
operation services 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
managements 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 June 30, 1997
total $2,599,954 and include $1,531,322 relating to medical supplies and
pharmacy services and $1,068,632 relating to therapy services. For the
prior year quarter, ancillary services operating expenses total $2,114,164
and include $1,339,217 relating to medical supplies and pharmacy services
and $774,947 relating to therapy services. Total ancillary services
operating expenses for the quarter ended June 30, 1997 represent an
increase of $485,790 or 23% over the prior year period. Operating profits
relating to ancillary services for the quarters ended June 30, 1997 and
1996 were $561,732 and $408,444, respectively. This increase reflects
additional growth in ancillary services volume.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Section II - Results of Operations (Continued)
Ancillary services operating expenses for the six months ended June 30,
1997 total $5,046,813 and include $2,870,539 relating to medical supplies
and pharmacy services and $2,176,274 relating to therapy services. For the
six months ended June 30, 1996, ancillary services operating expenses total
$4,043,137 and include $2,569,040 relating to medical supplies and pharmacy
services and $1,474,097 relating to therapy services. Total ancillary
services operating expenses for the six months ended June 30, 1997
represent an increase of $1,003,676 or 25% over the prior year period.
Operating profits relating to ancillary services for the six months ended
June 30, 1997 and 1996 were $584,363 and $147,619, respectively.
Management services operating expenses reported for the quarter ended June
30, 1997 total $1,595,584 and relate to the long-term care facilities for
which the Company provides financial and operational management services.
For the quarter ended June 30, 1997, management services reported an
operating loss of $8,867. Management services operating expenses for the
quarter ended June 30, 1996 totaled $2,525,855 resulting in an operating
loss of $514,232. Operating losses resulting from management services
during 1997 have been substantially reduced compared to 1996. These
reductions were the direct result of managements ongoing realignment and
overhead reduction efforts.
General and administrative expenses for the quarters ended June 30, 1997
and 1996 totaled $1,319,394 and $1,002,563, respectively. Significant
components of general and administrative expenses for the quarters ended
June 30, 1997 and 1996, include contracted services of $68,316 and
$215,700, respectively; professional fees of $305,044 and $77,235,
respectively; salaries of $577,739 and $332,426, respectively; and, travel
and related expenses of $207,136 and $86,283, respectively. Other general
and administrative expenses aggregating $161,159 and $290,919, respectively
for the quarters, relate to corporate overhead.
General and administrative expenses for the six months ended June 30, 1997
and 1996 totaled $2,212,979 and $1,640,318, respectively. Significant
components of general and administrative expenses for the six months ended
June 30, 1997 and 1996 include contracted services of $127,489 and
$317,808, respectively; professional fees of $421,662 and $217,084,
respectively; salaries of $961,300 and $551,359, respectively, and; travel
and related expenses of $311,174 and $144,439, respectively. Other general
and administrative expenses aggregating $391,354 and $409,628, respectively
for the six months ended, relate to corporate overhead.
For the quarters ended June 30, 1997, the Company reported an operating
loss from total services revenue of $715,841 compared to an operating
profit for the quarter ended June 30, 1996 of $1,986,869 representing a
decrease of $2,702,710 or 136%. 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
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Section II - Results of Operations (Continued)
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 June 30, 1997 and 1996 total
($7,030,821) and ($475,688), respectively. The principal component of
other income (expense) is the write down of intangible assets totaling
($6,742,162) for the quarter ended June 30, 1997.
Section III - Liquidity and Capital Resources
During April, 1997, the Company's New England based 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 one of the Company's
subsidiaries. The line is due on demand and accrues interest at the banks
base rate plus 1% on amounts drawn and outstanding. As of June 30, 1997,
the Company has utilized $1,362,500 of this financing to support working
capital and development activities of its operating subsidiaries.
During May, 1997, the Company's Philadelphia based subsidiaries secured a
working line of credit of up to $4,000,000. This line of credit is secured
by the subsidiaries' accounts receivable. The line of credit is due on
demand and accrues interest at the rate of prime plus 2.25% on amounts
drawn and outstanding. As of June 30, 1997 the Company has utilized
$1,676,400 of this financing to support working capital and development
activities of its operating subsidiaries.
During August, 1997, the Company agreed to a pursue a proposed private
equity offering and in connection therewith secured a bridge loan in the
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Section III - Liquidity and Capital Resources (Continued)
amount of $300,000. There can be no assurance that the proposed equity
offering will proceed as contemplated. The Bridge Loan bears interest at
the rate of 10% per annum and matures 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 5-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 are 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 Warrant is automatically reduced to
$0.25 per share.
In January of 1997, the Company obtained a $500,000 loan from National
Employer Solutions, Inc. (NES). This loan bears interest at the rate of
prime plus 1% and is secured by a $550,000 note receivable from AHF/Gull
Creek, Inc. in respect of a project it developed in Virginia. The loan had
an original maturity date of March 31, 1997 but has been extended on a
month to month basis. In August of 1997, NES gave the Company notice that
it would no longer extend the maturity date of the loan. This loan becomes
due in full on August 21, 1997.
The Company is presently operating with limited cash reserves and its
subsidiaries participate in a two asset based financing transaction to
support current working capital requirements. One has a maximum loan limit
of $1,500,000 and the other has a limit of $4,000,000. As of June 30, 1997
outstanding borrowings against these facilities totaled $3,038,900.
Additionally, senior executives of the Company have deferred payment of
certain salaries and expense reimbursements as of June 30, 1997 in support
of working capital obligations.
In addition to ongoing overhead expense reductions and in recognition of
persistent working capital shortfalls, the Company has reached agreements
(the Agreements) with two of its operating subsidiaries whereby effective
in principle, July 1, 1997 the subsidiaries will separate from the Company.
For the six month period ended June 30, 1997 the two subsidiaries combined
generated a net operating loss of $944,871. In accordance with the
Agreements, the Company is eliminating associated annualized overhead
expenses approximating $3,500,000. Additionally, effective July 1, 1997,
the Company is assigning certain management contracts to the separated
subsidiaries with aggregate historical annualized management fee revenues
approximating $2,300,000. In accordance with the separation agreement, one
of the subsidiaries has committed to contract with the Company's ancillary
and financial services division whenever possible. The Agreements are
subject to negotiation definitive documentation.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Section III - Liquidity and Capital Resources (Continued)
The Company in August, 1997 has discontinued operation of its Baltimore,
Maryland based rehabilitation services subsidiary. For the six months ended
June 30, 1997, this subsidiary had generated net operating losses
approximating $200,000.
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 total $4,980,000 of which approximately
$2,329,000 has been advanced by the Company and approximately $2,651,000
remains outstanding at June 30, 1997. No additional advances under these
agreements are contemplated by management until the Company is able to
strengthen its liquid working capital position. Except as released by the
Company, 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.
Cash and cash equivalents at June 30, 1997 and December 31, 1996 totaled
$549,429 and $1,134,125 respectively. Cash and cash equivalents at June
30,1997 are composed of unrestricted amounts of $549,429 and restricted
amounts of $435,750. Such restricted cash represents funds received from a
third party as security for future payments associated with the purchase of
two nursing homes in Massachusetts in May 1997.
At June 30, 1997 the Company reports a working capital surplus of $780,286
compared with $9,314,529 as of June 30,1996.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Section III - Liquidity and Capital Resources (Continued)
At June 30, 1997 and 1996, notes receivable total $2,773,904 and
$6,242,515, respectfully and 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.
At June 30, 1997 and 1996, loans receivable and other assets totaled
$1,446,548 and $2,935,734, respectively. As of June 30, 1997, $360,000
represents currently realizable 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
$2,651,000.
In addition, as of June 30, 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.
Forward-looking Statements
This form 10-Q contains forward-looking statements within the meaning of
Section Act of 1933, as amended, and made purchase to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements involve known and unknown risks, uncertainties and other factors
described herein and in other documents that could cause the actual results
of the Company to differ materially from the results expressed or implied
by such statements. Readers should carefully review the risk factors and
other information contained herein and in other documents the Company files
from time to time with the Securities and Exchange Commission, specifically
the form 10-K filed by the Company for its fiscal year ended December 31,
1997, the Quarterly Reports on Form 10-Q , including the Form 10-Q for its
fiscal quarter ended march 31, 1997 and the Current Reports on Form 8-K.
Accordingly, although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove correct.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. In June, 1997, Scott Schuster an action against Iatros and OHI
Corporation in the United States District Court for the District of
Massachusetts.
Schuster became an employee of a subsidiary of Iatros in Spring 1996
contemporaneously with Schuster had worked under contract for Iatros prior
to that time. In Spring 1997, Schuster had rejected company efforts to
reduce costs and consolidate operations, sought to buy that subsidiary, and
then sued seeking to acquire the subsidiary, to be paid additional
incentive compensation and for various alleged misrepresentation in
connection with the merger.
Iatros answers denying the asserted claims and claiming the right to
reserve the original transaction because of misrepresentations made by
Schuster as part of it and because of various wrongful acts of Schuster.
Iatros is vigorously defending against all allegations made in this action.
Management does not believe that the outcome of this matter will
materially, adversely affect the Company's financial position, results of
operations, or cash flows.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (Continued)
2. In March, 1996 a skilled nursing home facility in Baltimore, Maryland,
known as the Ravenwood Facility was acquires 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 face amount of which is currently
approximately $2.2 million. The note provided for a deferred payment
schedule to provide the Ravenwood facilities access to receivables proceeds
for working capital purposes. More than the face amount of the note was
collected from the receivables was collected. However, Ravenwood
experienced operational deficiencies sufficient to exhaust receivables
proceeds and the facility lacked sufficient operating income to make all
schedule 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, demand was made in the
amount of $946,698.99, which was entered against Iatros, subject to its
right to file a motion to vacate within thirty days. On June 27,1997 all
parties entered into a Forbearance Agreement. Pursuant to that agreement
$375,000 has been paid, as of July 30, 1997, and the remaining note balance
was $571,698.99.
The Forbearance Agreement provides for future 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 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 September 2, 1997.
3. Other Litigation.
In addition to the foregoing pending actions, Iatros and its subsidiaries
(collectively, the Defendants) have outstanding a number of other routine
actions, as well as a number of threatened actions, involving their
respective creditors, vendors, customers, and/or former employees. Some of
them are in the process of being settled, and the remainder of them are
being vigorously defended by the Defendants. Management does not believe
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (Continued)
that the outcome of any of these matters will materially, adversely affect
the Company's financial position, results of operations, or cash flows.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27. Financial Data Schedule
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: August 14, 1997 By: /s/ Joseph L. Rzepka
Joseph L. Rzepka
Executive Vice President
Chief Financial Officer
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 549,429
<SECURITIES> 0
<RECEIVABLES> 9,324,750
<ALLOWANCES> 2,573,275
<INVENTORY> 453,380
<CURRENT-ASSETS> 9,391,635
<PP&E> 9,699,961
<DEPRECIATION> 1,047,177
<TOTAL-ASSETS> 30,707,000
<CURRENT-LIABILITIES> 8,611,349
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0
633
<COMMON> 16,719
<OTHER-SE> 12,244,780
<TOTAL-LIABILITY-AND-EQUITY> 30,707,000
<SALES> 3,246,901
<TOTAL-REVENUES> 13,783,511
<CGS> 1,884,867
<TOTAL-COSTS> 15,234,110
<OTHER-EXPENSES> 7,277,500
<LOSS-PROVISION> 411,658
<INTEREST-EXPENSE> 122,353
<INCOME-PRETAX> (8,728,099)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,728,099)
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