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 September 30,1998
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.)
11 Piedmont Center, Suite 403
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 |_| No |X|
As of November 18, 1998, there were 20,869,958 shares of Common Stock issued or
be issued and outstanding,533,333 shares of Series A Senior Convertible
Preferred Stock issued and outstanding, and 100,000 shares of Series B Preferred
Stock issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
Iatros Health Network, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
ASSETS
(UNAUDITED)
SEPTEMBER, 30 DECEMBER 31,
1998 1997
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 387,807 $ 190,696
Accounts receivable, net 5,002,050 7,596,741
Subscription receivable 789,000
Inventory 83,894 357,409
Prepaid expenses and other current assets 107,249 712,343
------------ ------------
Total current assets 5,581,000 9,646,189
PROPERTY AND EQUIPMENT, net 9,005,788 9,108,815
OTHER ASSETS
Cash and cash equivalents, restricted 455,282 448,540
Intangible assets, net 2,858,407 2,954,677
Notes receivable 2,957,904 2,573,904
Loans receivable and other assets 2,041,983 414,160
Net long-term assets of discontinued operations 90,993
------------ ------------
Total Assets $ 22,900,364 $ 25,237,278
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, banks and other $ 3,782,298 $ 5,638,262
Accounts payable 3,034,044 3,439,953
Accrued expenses and other current liabilities 1,606,116 2,605,407
Net current liabilities of discontinued operations 518,904
------------ ------------
Total current liabilities 8,422,458 12,202,526
LONG-TERM DEBT 11,489,074 8,550,000
OTHER LONG TERM LIABILITIES 438,440 67,478
PREFERRED STOCK DIVIDENDS PAYABLE 670,000 550,000
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value, 5,000,000 shares
authorized
Series A, 533,333 shares issued and outstanding 533 533
Series B, 100,000 shares issued and outstanding 100 100
Common Stock, $.001 par value, 25,000,000 shares
authorized; 20,869,958 shares issued or to be
issued and outstanding in 1998 and 1997,
respectively 20,870 20,870
Additional Paid-in Capital 36,059,867 36,059,867
Accumulated deficit (34,200,978) (32,214,096)
------------ ------------
1,880,392 3,867,274
Total Liabilities and Stockholders' Equity $ 22,900,364 $ 25,237,278
============ ============
The accompanying notes are an integral part of the consolidated financial
statements
2
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Sept.30, Nine months ended Sept. 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Nursing home operations $ 4,772,099 $ 4,654,900 $ 14,276,046 $ 8,348,664
Ancillary services 1,271,805 3,280,360 7,541,344 8,341,168
Management services 343,977 687,918 972,177 1,929,192
------------ ------------ ------------ ------------
6,387,881 8,623,178 22,789,567 18,619,024
------------ ------------ ------------ ------------
Operating expenses
Nursing home operations 3,872,621 4,149,950 11,871,480 7,456,151
Ancillary services 1,563,986 2,838,830 7,178,726 7,370,972
Management services 121,631 299,801 563,076 1,445,45
General and
Administrative 232,357 928,760 1,395,711 3,766,739
------------ ------------ ------------ ------------
5,790,595 8,217,341 21,008,993 20,039,319
------------ ------------ ------------ ------------
Income/ (loss) from
Operations before other
Income (expenses) and
Discontinued operations 597,286 405,837 1,780,574 (1,420,295)
------------ ------------ ------------ ------------
Other income (expense)
Interest income 13,777 51,339 43,248 189,265
Interest expense (371,399) (360,147) (1,285,961) (474,862)
Property lease expense (294,046) (288,750) (870,271) (625,625)
Depreciation and
Amortization (338,962) (199,810) (753,847) (463,063)
Write-down of
Intangible Assets (897,578) (897,578)
Other income (expense) 23,102 (85,230) 116,953 (35,319)
------------ ------------ ------------ ------------
(1,865,106) (882,598) (3,647,456) (1,382,604)
------------ ------------ ------------ ------------
Income/ (loss) from
Operations before discontinued
Operations (1,267,820) (476,761) (1,866,882) (2,802,899)
------------ ------------ ------------ ------------
Discontinued operations
(Loss from operations) (1,564,687) (7,966,648)
------------ ------------ ------------ ------------
Net Loss $ (1,276,820) $ (2,041,448) $ (1,866,882) $(10,769,547)
============ ============ ============ ============
Basic Loss per share
Continuing Operations $ (.06) $ (.03) $ (.09) $ (.17)
Discontinued Operations (.09) (.48)
------------ ------------ ------------ ------------
Net Loss Per Share $ (.06) $ (.12) $ (.09) $ .65)
============ ============ ============ ============
Weighted average number
of shares of common stock
and equivalents
outstanding 20,869,958 16,735,984 20,869,958 6,465,901
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
SEPT 30, SEPT 30,
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
OPERATING ACTIVITIES
Net Loss $(1,866,882) $(2,802,899)
Adjustments to reconcile net loss to
net cash provided (utilized)by operating
activities:
Depreciation and amortization 753,847 463,063
Provision for doubtful accounts 973,688 217,949
Write down of intangible assets 897,578 600,000
Changes in (net of disposals):
Accounts and subscriptions receivable 2,410,003 (3,024,134)
Inventory 273,515 (123,155)
Prepaid expenses and other 605,094 448,488
current assets
Accounts payable (924,813) (425,120)
Accrued expenses and other current
liabilities (999,291) (223,330)
Notes payable (1,855,964) 3,071,264
----------- -----------
Net cash provided (utilized)
by operating activities 266,775 (1,797,874)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (429,392) (8,594,612)
Change in intangible and other assets (1,175,308) 985,585
----------- -----------
Net cash provided (utilized)
by operating activities (1,604,700) (7,609,027)
----------- -----------
FINANCING ACTIVITIES
Net proceeds from issuance of capital
stock and other capital contributions 224,616
Long-term debt proceeds 1,164,074 8,857,151
Other long term liabilities 370,962
----------- -----------
Net cash provided
by financing activities 1,535,036 9,081,767
----------- -----------
INCREASE (DECREASE) IN CASH 197,111 (325,134)
Cash and cash equivalents, beginning of period 190,696 654,197
----------- -----------
Cash and cash equivalents, end of period $ 387,807 $ 329,063
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During 1998, the Company entered into certain non-cash transactions to retain
property rights in exchange for long-term notes aggregating $1,775,000.
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE>
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 market is 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
Nursing home operations and 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.
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.
5
<PAGE>
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
revenue.
Inventory
Inventory is principally comprised of pharmaceutical and medical
supplies and is valued at the lower of cost (first-in, first-out
method) or market.
Property and equipment
Property and equipment is stated at cost. The cost of property and
equipment is depreciated over the estimated useful lives of the
respective assets using primarily the straight-line method. Property
and equipment under capital leases is amortized over the lesser of
the lives of the respective leases or 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 Life of Lease
Equipment 5 Years
Furniture and fixtures 3 - 7 Years
Intangible assets
The Company evaluates the carrying value of its long-lived assets
and identifiable intangibles including contract rights, leasehold
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 retention
periods, 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.
6
<PAGE>
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 and is
being amortized over the lives of 15 to 20 years.
Leasehold Rights
Leasehold rights represent costs associated with securing
leasehold interests in connection with operating nursing
facilities and are being amortized using the straight-line
method up to 15 years, the maximum lease term.
Organization costs
Organization costs incurred in connection with the acquisition
or formation of new business activities for the Company are
being amortized using the straight-line method over five
years.
Income taxes
The Company employs the asset and liability method in accounting for
income taxes pursuant to Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on
temporary differences between the financial reporting and tax bases
of assets and liabilities and net operating loss carryforwards, and
are measured using enacted tax rates and laws that are expected to
be in effect when the differences are reversed.
Earnings per share
The Company adopted Statement of Financial Standard No. 128
"Earnings per Share" (`SFAS 128") in 1997. All prior period earnings
per common share data have been restated to conform to the
provisions of this statement.
Basic earnings per share is based upon the weighted average number
of common shares outstanding during the period.
Diluted earnings per share is based upon the weighted average number
of common shares outstanding during the period plus the number of
incremental shares of common stock contingently issuable upon
exercise of stock options and warrants.
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.
7
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: GOING CONCERN
During 1997 and 1998, the Company has been successful in reducing
levels of its corporate overhead and general and administrative
costs. Continued cost reductions are required, however, for the
Company to achieve positive cash flow from continuing operations. In
the alternative, the Company requires a higher revenue base to
support the corporate overhead represented by its executive
management structure. In addition, the Company requires an infusion
of capital in order to satisfy its short-term obligations. The
Company has to date been unsuccessful in its efforts to secure
relief from its existing creditors as well as to raise new sources
of capital.
In light of the Company's current financial position, its inability
to independently meet its short term corporate obligations, its need
to further capitalize existing operations and its dependency on
continued cost reductions and revenue growth to support continuing
operations, its viability to continue as a going concern is
uncertain.
NOTE 3: DISCONTINUED OPERATIONS
The Company's current business strategy is to pursue the direct
ownership or lease of long-term care facilities for its own account.
Accordingly, during 1997, the Company discontinued operations
associated with certain segments of its long-term care business.
Specifically, these included subsidiary operations providing third
party development and management services to independent owners and
operators of long-term care facilities and relating to the Company's
prior business acquisitions.
Information pertaining to the Company's discontinued operations is
more fully described in its Form 10-K filing for the year ended
December 31, 1997.
8
<PAGE>
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") is involved in the operation of long term-care facilities
and provides services and products to the long-term care industry. These
include a broad range of management and ancillary services. The Company's
principal market is New England, and its corporate offices are located in
Atlanta, Georgia. During 1997, the Company discontinued certain business
activities as previously disclosed in its Annual Report and filing on Form
10K for the year ended December 31, 1997.
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.
During 1996, the Company embarked on an aggressive acquisition phase of
growth following the raising of $12 million in equity capital. Substantial
amounts of this equity capital were utilized to fund the Company's
continuing growth, support working capital requirements of subsidiary
operations and in many instances provide credit support for property
transactions. Throughout 1996, the Company continued to experience revenue
growth yet failed to sustain operating profitability. This trend evidenced
the need for the Company to lessen its emphasis on development activities
and focus more heavily on operations management. To this end, the Company
employed a strategic business plan for redirection. Specifically, this
plan included engaging new executive management having stronger operating
capabilities and transitioning Corporate interests away from management
and service relationships to direct ownership and leasing of properties.
In this way, the Company believed it could more effectively secure a long
term operating position with respect to health care facilities while at
the same time developing a more tangible balance sheet in keeping with its
long term operating interests. The Company continued to harbor its
philosophy that long term care is a localized business that is highly
market sensitive requiring local management resources.
Revenue for 1997 exceeded $25.5 million while the Company reported a net
loss of $18.2. This substantial loss reflected new management's actions to
stabilize the Company through severe restructuring and redirection of
operations. Substantially all of the reported loss represented
non-recurring and non-cash charges to operations associated with
discontinuing non-profitable operations and the associated write down of
intangible assets. Specifically, the reported net loss was comprised of
approximately $7 million relating to discontinued operations,
approximately $5.6 million resulting from the write-down of intangible
assets, and approximately $4.4 million associated with the Company's
historic level of corporate overhead.
The Company in 1997 changed its strategy to actively pursue opportunities
involving the direct leasing and ownership of long-term care facilities.
This resulted during 1997 in the purchase of two nursing facilities and
the lease of two others in New England. This represented a change in
emphasis from previous development initiatives focused solely on contract
management and service engagements.
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 operates.
9
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Nursing Home Operations
The Company provides a full range of services to the long-term care
facilities it operates. These include financial as well as operational
management services, quality assurance services, and special consulting
services.
The New England region, doing business as Oasis Healthcare ("Oasis"), is
represented by a full complement of management personnel operating eight
nursing and assisted living facilities located in New Hampshire and
Massachusetts. Management personnel include financial and accounting,
reimbursement, clinical, quality assurance, dietary, property management
and administrative disciplines. Of the New England facilities, four
facilities are owned or leased by the Company while the remaining are
under management contracts. Oasis is in the process of converting its
management contracts to leasehold positions. In addition to the nursing
facility business, Oasis operates a rehabilitation services subsidiary in
the region.
Ancillary Services
During the third quarter of 1998, ancillary service contracts relating to
several nursing facilities located in the Philadelphia market area were
terminated. These facilities, which were under common ownership and
control, represented a material portion of the company's business base in
this area. As a result of this development, the Company has ceased
operations in this market and is in the process of liquidating its
residual business interests.
Significant Transactions
Significant Transactions of the Company and/or its subsidiaries occurring
during the quarter ended September 30,1998, are as follows:
On May 5, 1998, the Company received a management termination notice from
the owner of three nursing homes in Massachusetts ("the facilities") that
continued through September 30, 1998 under an at-risk contract management
arrangement pending conversion to a lease. This cancellation notice
resulted from the Company's voluntary deferral in obtaining appropriate
licensure to operate the facilities from the state of Massachusetts.
Effective on October 8, 1998, the Company engaged a third party to assume
full management responsibilities for the facilities. This action resulted
from the Company's decision not to further pursue the leasehold proposal
offered from the property owners, An annual management fee represented by
this management contract approximate $680,000.
In August 1998, Robert A. Kasirer resigned as a Director of the Company.
The vacancy on the Company's Board of Directors created by Mr. Kasirer's
resignation has not yet been filled.
During 1997 and 1998, DVI Business Credit ("DVI") extended a revolving
line of credit (the "Loan") to the following subsidiaries of the Company,
which Loan was secured by all of such subsidiaries' accounts receivable
and guaranteed by the Company: IHN Therapy Works, Inc. (fka Iatros Therapy
Corporation), IHN Rehabcare, Inc., Champion Rehab, Inc., and Durant
Medical, Inc. (dba Gatti-Durant Pharmacy Services and as Durant Pharmacy
Services). In September 1998, DVI called the Loan in default, elected to
terminate all future advances under the Loan, and accelerated payment of
the existing indebtedness owing under the Loan. As a result of these
actions, the Company has discontinued all operations of the affected
subsidiaries and is in the process of orderly liquidating their assets.
The Company has informed all of the employees and creditors of these
affected subsidiaries that all proceeds from such liquidations will be
utilized to make distributions in the same priority and in the same
proportions as if the affected subsidiaries were being liquidated in a
Chapter 7 Bankruptcy Proceeding.
10
<PAGE>
Significant Transactions (CONTINUED)
In September of 1998, the Company was informed by The Nasdaq Stock Market,
Inc. ("NASDAQ") that, effective with the close of business on September
25, 1998, the Company's common stock would be delisted from NASDAQ. The
reasons for this delisting were (1) the Company's common stock not meeting
the $1.00 minimum bid price requirement set forth in NASD Marketplace Rule
4310(c)(4) and (2) the Company's not meeting the net tangible
assets/market capitalization/net income requirements set forth in NASD
Marketplace Rule 4310(c) (2). The Company's stock is now traded on the OTC
Bulletin Board under the symbol "IHNI".
On November 17, 1998, Match, Inc. acquired all of the outstanding shares
of the Company's Series A Convertible Preferred Stock (the "Preferred
Stock") from the former shareholder. As the owner of the Company's
Preferred Stock, Match, Inc. immediately elected to increase the size of
the Company's Board of Directors and to elect the following persons as
Directors: Ronald E. Lusk, Robert E. Woodson, III, Joe Wiliams and Albert
Sousa. The size of the Company's Board is now ten members with three
vacancies. John D. Higgins, Joseph C. McCarron, Jr., and Reginald D.
Strickland are the other three remaining Directors. At a duly called
meeting of the Company's Board of Directors held on November 17, 1998,
Ronald E. Lusk was elected by the Directors as the new Chairman of the
Board.
11
<PAGE>
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 for the quarter ended
September 30, 1998 reflect a net loss from operations of ($1,276,820)
compared with a net loss of ($2,041,448) reported for the prior year
quarter. The net loss reported for the prior period results largely from
the write-down of intangible assets and operating losses associated with
discontinued operations. During the current year quarter, operations
include a charge of $879,578 associated with the write-down of intangible
assets relating to the Company's Philadelphia based ancillary service
businesses. The net loss from continuing operations, exclusive of this
write-down for the current year quarter, is reported as ($370,242),
compared to ($476,761) for the prior year quarter.
For the nine month period ended September 30, 1998, the Company reports a
net loss of ($1,866,882) compared with a net loss of ($10,769,547)
reported for the prior year period. The substantial loss reported for the
prior period results largely from the write-down of intangible assets and
operating losses associated with discontinued operations. During the prior
year period, operations associated with the Company's continuing business
reported a loss of ($2,822,899). This reflects a decrease in the net loss
from continuing operations of ($956,017) or 34% compared with the prior
year nine month period.
The decrease in consolidated operating losses reported over the prior year
periods result from improved operating margins associated with the
Company's nursing operations and certain ancillary services coupled with
reductions in general and administrative costs.
Consolidated operating revenue for the quarter ended September 30, 1998
totaling $6,387,881 compares with $ 8,623,178 for the prior year quarter,
representing a decrease of $2,235,297 or 26%. The reported decrease
results principally from decreased ancillary service revenue of $2,008,555
or 61% relating to the Philadelphia market area.
Consolidated operating revenue for the nine months ended September 30,
1998 totaling $22,789,567 compares with $ 18,619,024 for the prior year
period, representing an increase of $4,170,543 or 22%. The reported
increase is the net result of an increase in nursing home revenue of
$5,927,382 or 71% offset by the decreases in ancillary service and
management revenue of $799,824 and $957,015, respectively.
The increase in nursing home operating revenue in 1998 results from the
lease of two facilities in Massachusetts in March 1997 and the purchase of
two Massachusetts facilities in June 1997. Decreased management services
revenue during 1998 resulted from the termination during 1997 of nursing
home management contracts. The reduction in related management revenue
evidences the Company's redirection towards the direct ownership and lease
of nursing facilities.
Consolidated operating expenses reported for the quarter ended September
30, 1998 totaled $5,790,595 or 91% of reported revenue compared with the
same period during 1997 totaling $8,217,341 or 95% . Total operating
expenses for the quarter ended September 30, 1998 decreased $2,426,746 or
30% compared with 1997. This net decrease in reported operating expenses
for the quarter results principally from reduction of ancillary service
expenses of $1,274,844 as well as a reduction in general and
administrative expenses of $694,403. Reduced ancillary expenses correspond
to the reduction in revenue while the decreased general and administrative
expenses reflect management's continuing overhead reduction initiatives.
12
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Continued)
Operating margins reported from nursing home revenue for the quarter and
nine months ended September 30, 1998 total $899,478 or 19% and $2,404,566
or 17%; respectively. For 1997 periods, operating margins reported from
nursing home revenue for the quarter and nine months ended total $ 504,950
or 11 % and $892,513 or 11%, respectively.
The Medicare program is changing to a prospective payment system (PPS)
effective January 1, 1999 for nursing facilities. Of the four facilities
owned and leased by the Company, management estimates that the effect of
PPS on operations will be a reduction in associated revenue exceeding
$125,000 for 1999. Management is continuing to evaluate the effect of PPS
on its operations and developing operating strategies to minimize its
impact.
Operating margins reported from ancillary service revenue for the quarter
and nine months ended September 30, 1998 total ($ 292,181)or 23% and
$362,618 or 5%, respectively. For 1997 periods, operating margins reported
from ancillary service revenue for the quarter and nine months ended total
$441,530 or 9% and $970,196 or 12%, respectively. The reduced operating
margins on ancillary services revenue during 1998 result principally from
a decrease in Philadelphia based ancillary service volume over the prior
year without a corresponding decrease in related service overhead.
Commencing in the fourth quarter 1998, the Company is no longer generating
ancillary service revenue in the Philadelphia market area. This results
from the increasing loss of ancillary service contracts during 1998 and
the Company's consequent decision to discontinue local operations. For the
quarter and nine month period ended September 30, 1998, ancillary service
revenue associated with this market totaled $924,413 and $4,963,969,
respectively. In addition, operations for the quarter ended September 30,
1998 include a charge of $897,578 reflecting the write down of related
intangible assets and an increase in the related accounts receivable
allowance by $433,538.
In the New England market area, ancillary service revenue associated with
therapy services is expected by the Company to diminish. As a result of
the adverse impact of PPS anticipated for therapy services commencing on
January 1, 1999, the Company has initiated efforts to transition
therapists directly to its nursing facility payrolls. Continuing therapy
services rendered by the Company are expected to be more in a management
and consultant capacity rather than as a direct service provider. For the
quarter and nine months ended September 30, 1998, ancillary service
revenue associated with therapists in New England totaled $872,466 and
$3,102,375, respectively.
General and administrative expenses reported for the quarter and nine
months ended September 30, 1998 reflect the results of management's cost
reduction initiatives and have decreased by $696,403 or 75% and $2,371,028
or 63%, respectively from the prior year periods. General and
administrative expense reductions reported in 1998 relate principally to
executive salaries and related expenses; professional fees; and, corporate
office overhead.
Other income (expense) reported for the quarter and nine months ended
September 30, 1998 totals $1,865,106 and $3,647,456, respectively,
representing increases of $982,508 and $2,264,852, respectively. The
reported increase in other expense results principally from the third
quarter write-down of intangible assets associated with Philadelphia based
ancillary service business in the amount of $897,578 coupled with the
increased interest expense reported over the prior year nine month period
totaling $838,099. Increased interest expense relates to nursing facility
acquisition financing totaling approximately $350,000 and approximately
$400,000 relating to working capital and other corporate debt.
13
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Section III - Liquidity and Capital Resources
During 1997 and 1998 the Company has been successful in reducing levels of
its corporate overhead and general administrative costs. Notwithstanding
such reductions, the Company has yet to generate sufficient operating
margins and cash flow from continuing operations to meet the demands of
its current operating obligations. Such demands principally relate to
capital requirements needed to satisfy remaining corporate liabilities
reported as current at September 30, 1998 and largely associated with
discontinued operations and historical corporate matters. While management
continues to effect reductions in corporate overhead, an expanded business
base is required to support its executive management structure and the
Company requires an infusion of capital in order to satisfy its short-term
obligations. The Company has been unsuccessful in its independent efforts
to secure financial relief from its existing creditors as well as to raise
new sources of capital. The Company continues to actively consider
selected opportunities involving corporate merger and acquisition
prospects with third parties having expressed interest in the Company. To
date, no such prospects have been formalized.
As discussed in Note 2 to the Financial Statements, the Company's
viability as a going concern in questionable due to its inability to
satisfy currently outstanding corporate liabilities. In the absence of
securing capital relief from existing creditors, accessing new sources of
capital or completing a material corporate transaction, the Company will
need to consider remaining alternatives, including filing bankruptcy.
At September 30, 1998, the Company reports a negative working capital
position of $2,841,458 compared with a negative working capital position
of $2,556,337 at December 31, 1997. The Company's negative working capital
has resulted largely from having had to subsidize during 1997 working
capital associated with discontinued operations as well as having had to
utilize working capital reserves to settle corporate obligations
associated with prior business and development activities of the Company.
While continuing operations of the Company are reporting positive
operating margins, the limited working capital available to the Company
through its credit facilities is constraining and limits the Company's
ability to effectively support existing lines of business.
Cash and cash equivalents at September 30, 1998 and December 31, 1997
totaled $387,807 and $190,696,respectively. Unrestricted cash reported at
September 30, 1998 includes $213,765 associated with nursing home
operations and $174,042 reported by ancillary and management operations.
Restricted cash balances reported at September 30, 1998 and December 31,
1997 reflect loan reserve funds associated with long-term debt.
Accounts receivable at September 30, 1998 of $ 5,002,050, representing 80%
of total current assets, were comprised of $3,076,446 relating to nursing
home operations; $1,398,615 relating to ancillary service operations;
$489,958 relating to management operations; and, $37,031 relating to
corporate accounts. Accounts receivable at September 30, 1998 is reported
net of an allowance for doubtful accounts of approximately $1,075,640.
Accounts receivable at December 31, 1997 of $7,596,741, representing 78%
of total current assets, were comprised of $3,958,735 relating to nursing
home operations; $4,720,521 relating to ancillary service operations; and
$2,300,151 relating to management operations.
14
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Section III - Liquidity and Capital Resources (Continued)
For the periods ended September 30, 1998 and December 31, 1997, notes
receivable result from development, financial advisory and consulting
services that the Company has provided in connection with several
long-term care properties. These notes receivable are formalized
obligations generally subordinated to senior debt and other priority
operating obligations associated with the properties. The Company is
undertaking to convert certain of these notes to leasehold interest
positions in the properties to which they relate. These notes are
considered to be long term assets.
Loans receivable and other assets at September 30, 1998 and December 30,
1997 totaled $2,041,983 and $414,160, respectively. Amounts reported at
September 30, 1998 include accounts receivable associated with ancillary
and management service revenue which the Company believes to be
realizable. These accounts have been classified as long-term pending
formalization of payment arrangements with the various nursing facilities
to which they relate.
Notes payable, banks and other at September 30, 1998 and December 31, 1997
totaled $3,782,298 and $5,638,262, respectively. The reported amounts
include $1,856,000 and $3,910,000, respectively, and relating to working
capital financing of accounts and notes receivable and associated with the
Company's nursing home operations and ancillary services business. The
working capital availability under these financing arrangements is limited
by the level of associated accounts receivable collateral and restrictive
terms determining the advance rate of funding. At September 30, 1998 and
to date, these credit facilities are fully extended. The remaining amounts
included in this Notes Payable, banks and other totaling $1,926,298 and
$1,728,262 for 1998 and 1997, respectively, generally represent formalized
corporate note obligations currently due and payable. The Company
continues to seek relaxed lending arrangements and payment terms with the
creditors represented by these note instruments.
Accounts payable reported at September 30,1998 totaled $3,034,044 and
includes $1,457,643 associated with nursing home operations; $731,803
relating to ancillary services; $383,695 relating to management services;
and, $460,903 representing corporate accounts payable. Accounts payable
reported at December 31, 1997 totaled $3,439,953 and includes $1,323,128
associated with nursing home operations; $1,160,364 relating to ancillary
services; $435,212 relating to management services; and, $521,249
representing corporate accounts payable.
Accrued expenses and other liabilities at September 30, 1998 totaled
$1,606,116. Significant components include accrued payroll and related
costs of $404,190; accrued expenses associated with nursing home
operations of $741,050; and, accrued expenses associated with ancillary
services and corporate accounts of $460,876. Accrued expenses and other
liabilities at December 31, 1997 totaled $2,605,407. Significant
components include accrued payroll and related costs of $335,026; accrued
expenses associated with nursing home operations of $1,755,866; and,
accrued expenses associated with ancillary services and corporate accounts
of $514,515.
15
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Section III - Liquidity and Capital Resources (Continued)
Long-term debt reported by the Company at September 30,1998 and December
31,1997 includes $ 8,550,000 of mortgage indebtedness relating to two
owned nursing facilities. Additional long-term debt of approximately
$2,939,074 is comprised of a note purchase agreement in the amount of
$1,330,574 undertaken by the Company during the first quarter of 1998
together with the reclassification of notes payable aggregating $1,608,500
to bank and other from current liabilities as a result of efforts to
extend repayment terms.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In view of the Company's current financial condition, the adverse
determination of any of any pending litigation is reasonably likely to
have a material effect upon the Company.
Various material pending litigation matters, involving amounts in excess
of $25,000, were specifically described in detail in the Company's Form
10-K for the year ended December 31m, 1997 and the Company's FORM 10-Q for
the quarter ended June 30, 1998, which are incorporated herein by
reference. There have been no material developments in any of such pending
matters described in the Company's Form 10-K for the year ended December
31, 1997, since it was filed except as hereinafter noted; nor have been
any material developments in any such pending litigation matters described
in the Company's Form 10-Q for the quarter ended June 30, 1998, except as
hereinafter noted:
1. Ceneur Services, Inc. v. Iatros Health Network, Inc. et al, Civil
Action No. E-71012, filed in the Superior Court of Fulton County,
Georgia:
In June 1998, the attorneys for Ceneur induced an Executive of
Iatros to execute a Consent Judgement in favor of Ceneur in the
amount of $652,243. In October 1998, after negotiations with the
attorneys for Ceneur to voluntarily have this Consent Judgement
vacated and dismissed proved unsuccessful, the Company filed a
motion to vacate the Consent Judgement. Management believes that it
has valid grounds for having the Consent Judgement set aside.
2. Piedmont Ivy Associates, LLC v. Iatros Health Network, Inc., Civil
Action No. 98ED0374185, filed in the Magistrate Court of Fulton
County, Georgia.
This is a landlord/tenant case in which the Plaintiff is seeking to
collect approximately $24,478 in unpaid rent and to obtain a writ of
possession for the premises occupied by Iatros in Atlanta, Georgia.
The Company concluded an amicable settlement of this matter by
signing an unsecured note for the amount of unpaid rent, bearing
interest at the rate of 12.5 % per annum and payable in 12 principal
installments of $2,039 with accrued interest payable monthly with
each principal installment.
3. Advanta Business Services Corp. v. Iatros Health Network, Inc.,
Civil Action No. 98-04117, filed in the Court of Common Pleas of
Chester County, Pennsylvania:
This is a collection case for $21,833 in unpaid equipment lease
payments. In November 1998, the Plaintiff obtained a Judgement for
$16,833.
4. PAM Financial Corp. f/k/a First Valley Leasing, Inc. v. Iatros
Health Network, Inc., Civil Action NO. 97-062555, filed in the Court
of Common Pleas of Chester County, Pennsylvania:
In August 1998, the Plaintiff was granted a judgement for $67,617 on
its Motion for Partial Summary Judgement in connection with this
collection suit for the amounts owed for certain equipment financed
by the Plaintiff.
5. Buyers' Marketing Services, Inc. v. Iatros Health Network, Inc.
Civil Action No. 22-C-98-000692CN, filed in the Circuit Court of
Wicomico County, Maryland:
This is a collection case for approximately $38,000 for materials
furnished to three long-term care facilities owned by AHF/Severn,
Inc. and the development of which was coordinated by Iatros. In
October 1998, the Plaintiff was granted a Judgement in the amount of
$35,622, plus attorneys' fees of $5,000 and the costs of the action.
17
<PAGE>
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
6. Scott Schuster et al. V. Iatros Health Network, Inc and OHI
Corporation, Civil Action No.97-11304-DPW, filed in the United
States District Court for the District of Massachusetts:
In October 1998, the Company's attorneys in this matter, the Atlanta
based firm of Harkleroad & Hermance and the Boston based firm of
Perkins, Smith & Cohen, filed a motion to withdraw as counsel to the
Company. In November 1998, the Court granted such Motion and gave
the Company until December 16, 1998 to retain counsel who must file
an appearance by that date or default will be entered against the
Defendants.
7. Seton Hill Manor, Inc. v. Iatros Health Network, Inc., Civil Action
No. JFM97-1642, filed in the Unites States District Court for the
District of Maryland:
In September 1998, the Plaintiff and the Company entered into a
Joint Stipulation for Order Vacating the Confessed Judgement and
Dismissing the Complaint For Confessed Judgement.
8. Maryland Health and Higher Education Facilities Authority v. Iatros
Health Network, Inc., Civil Action No. C97-39090CN, filed in the
Circuit Court of Maryland for Anne Arundel County:
On October 19, 1998, the Company filed Counterclaims against MHEFA
for its wrongful misappropriation of the Security Account and for
tortuous interference with the Company's contractual relationship
with AHF.
On October 22, 1998, all parties to this action agreed to enter into
a mutual release of claims, cross-claims, and third-party claims, if
any. Accordingly, also on October 22, 1998, the Court entered an
Order of Dismissal of this action.
9. Trinity Geriatric Center, Inc. v. Trinity Retirement Community,
Inc., Maryland General Hospital Long Term Care ,Inc. Greenbriar
Health Services, Inc. and Iatros Health Network, Inc., Civil Action
No. 03-C97-009546, filed in the Circuit Court of Maryland for
Baltimore County:
In September 1998, the attorneys for the Company in this matter, the
Baltimore based firm of Venable, Beajter & Howard, LLP, filed a
motion for an Order to Withdraw its Appearance as counsel to the
Company in this matter.
Rouse& Associates v. Durant Medical, Inc., Civil Action No.
98.02620, filed in the Court of Common Pleas of Chester County,
Pennsylvania:
This matter was amicably settled by Durant agreeing to pay the
unpaid rent and agreeing to voluntarily vacate the Premises on
September 30, 1998, which it did.
11. Neuman Distributors, Inc. v. Durant Medical, Inc., Civil Action No.
98-1285, filed in the United States District Court for the Eastern
District of Pennsylvania:
This is a collection instituted in March 1998 for $353,746, together
with interest and costs, for certain pharmaceutical products and
other merchandise delivered by the Plaintiff to the Company's Durant
subsidiary in Malvern, Pennsylvania. In August 1998, the Plaintiff
filed a Motion for Summary Judgement in the aggregate amount of
$391,792 (including $27,871) in disputed service charges). The
Company timely filed a Response to this Motion disputing the service
charges. In September 1998, the Court entered a Judgement in favor
of the Plaintiff and against Durant in the amount of $363,921.
18
<PAGE>
LEGAL PROCEEDINGS (CONTINUED)
12. National Employer Solutions, Inc. v. Iatros Health Network, Inc.,
Civil Action No. E-65359, filed in the Superior Court of Fulton
County, Georgia.
In July 1998, following the occurrence of a Judgement Default, a
Judgement in favor of the Plaintiff and against the Company for
$459,791 was entered. In August 1998, the Plaintiff served a Summons
of Regular Garnishment upon the Company's account with First Union
Bank of Georgia, and the Plaintiff also served the Company with
Post-Judgement Discovery, to which the Company has not yet
responded. In November 1998, the Plaintiff threatened to proceed
with any and all Post-Judgment remedies at its disposal to collect
its Judgement, including, but not limited to, executing and levying
on any stock owned by the Company and in its subsidiaries or other
entities.
12. Dennis Nooner, Jr. v. Gull Creek, Inc. and Iatros Health Network,
Inc., Civil Action No. L96-1695, filed in the United States
Drsitrict Court for the District of Maryland:
In September 1998, Orders were entered granting Motions filed by the
Company's attorney's in this matter, the Baltimore based firm of
Veneable, Baejter & Howard, LLP and the Atlanta based firm of
Harkleroad & Hermance, to Withdraw their Appearances as Counsel to
the Company in this matter.
In addition to the material pending litigation matters specifically
described in the Company's Form 10K for the year ended December 31,
1997, and in the Company's 10-Q for the quarter ended June 30, 1998
the following Judgements have been entered and the following
material pending litigation matters, involving amounts in excess of
$25,000.00, have arisen:
1. Dominick A. Garcia, Esquire v. Iatros Health Network, Inc.,
Civil Action No. 0804-0012026-98, filed in the District Court
of Maryland For Baltimore County:
In August 1998, the Plaintiff in this matter obtained a
Judgement in the amount of $4,500 for attorney fees for legal
services previously rendered to the Company.
2. OccuCare USA, Inc, v. Iatros Health Network, Inc. Civil Action
No. 98-05016, filed in the Court of Common Pleas of Chester
County, Pennsylvania:
This is a collection matter for approximately $59,000 in
worker's compensation premiums allegedly owing to the
Plaintiff by the Company. The Company has timely filed an
answer in this matter. Management believes that the Company
had credits due it that should offset, in whole or in part,
the amount alleged by the Plaintiff to be owing.
3. Ross Laboratories Div. Of Abbot Laboratories v. Durant
Medical, Inc., Civil Action No. 98-CV-3934, filed in the
United States District Court For the Eastern District of
Philadelphia:
In September 1998, the Plaintiff in this action obtained a
Default Judgement in the amount of $143,072 for products and
supplies previously sold and delivered by the Plaintiff to the
Company's Durant subsidiary.
19
<PAGE>
LEGAL PROCEEDINGS (CONTINUED)
4. Summit Services, Inc. v. OHI Corporation DBA Mary Lyons
Nursing Home and Riverdale Gardens: and Iatros Health Network,
Inc., DBA Buckley Nursing Home, Buckley Center For Nursing
Rehabilitation and Longmeadow of Taunton, Civil Action No.
98-1776, filed in the Trial Court of Massachusetts, Superior
Court Department Norfolk Division:
This is a collections action for $85,874 against the Company's
OHI subsidiary and for $119,122 against the Company for
housekeeping services provided to certain facilities operated
by OHI. Answer denying liability had been timely filed.
Management believes that both OHI and the Company have valid
defenses to the Plaintiff's claims.
In addition to the foregoing, the Company and its subsidiaries have a number of
routine pending or threatened actions involving their respective creditors,
vendors, customers, former employees, and/or third persons. Some of them are in
the process of being settled, and the remainder of them are being vigorously
defended. Management believes that the Company has valid defenses to those
actions it is defending.
Given the present financial circumstances of the Company, the failure of the
Company to prevail in its defense of any of the material pending litigation
matters it is facing could have a material adverse impact upon the Company's
financial condition and operations. Moreover, given the present financial
constraints of the Company, the Company may not be able to pay all the legal
expenses and associated costs necessary to vigorously defend itself.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
20
<PAGE>
Item 3(b) DIVIDENDS
The payment by the Company of dividends, if any, rests within the
discretion of the Board of Directors and among other things, will
depend upon the Company's earnings, capital requirements and
financial condition, as well as other relevant factors.
The Company has not paid cash dividends on its Common Stock to date
and does not anticipate doing so in the foreseeable future. It is
the present intention of management to utilize all available funds
for working capital of the Company. The holders of Series A Senior
Convertible Preferred Stock are entitled to receive out of funds
legally available therefore, when and if declared by the Company,
dividends at the rate per annum of $.30 for each outstanding share
of Series A Senior Convertible Preferred Stock. Dividends cumulate
and accrue ratably from and after the date of issuance of the Series
A Senior Convertible Preferred Stock, for each day that shares of
the Company's Series A Senior Convertible Preferred Stock are
outstanding. Although no such preferred dividends have been declared
or are currently due and payable, the Company accrues such preferred
dividends because no dividends may be paid in respect of shares of
the Company's Common Stock until all cumulative dividends in respect
of the Company's Series A Senior Convertible Preferred Stock have
been declared and paid and also because such cumulative preferred
dividends carry a liquidation preference. At September 30, 1998,
dividends on the Series A Senior Convertible Preferred Stock
totaling $670,000 had been accrued. The Series B Preferred Stock is
non-voting and pays no dividends. The Company may not pay dividends
on any shares of its Common Stock or its preferred stock other than
as the Series A Senior Convertible Preferred Stock are
simultaneously paid.
The Company's Certificate of Incorporation provides for a Board of
Directors consisting of 6 directors. Holders of the Common Stock and
the Series A Senior Convertible Preferred Stock voting together as
one class are entitled to elect this number of directors. The size
of the Board is increased, up to a maximum of 13 directors, by 1
director each time the cumulative dividends payable on the Series A
Senior Convertible Preferred Stock are in arrears in the amount
equal to two (2) full quarterly dividend payments. The holders of
the Series A Senior Convertible Preferred Stock, voting separately
as a single class, are entitled to elect these additional directors.
The voting rights of the holders of the Series A Senior Convertible
Preferred Stock for these directors continue until all Cumulative
Dividends have been paid in full, and at such time the number of
directors constituting the full Board of Directors is decreased to
6.
Currently, the holders of the Series A Senior Convertible Preferred
Stock, voting separately as a single class, are entitled to increase
the number of directors comprising the Company's Board from 6
directors to 13 and to elect all 7 additional directors.
21
<PAGE>
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: November 18, 1998 By: /s/ Joseph C. McCarron, Jr.
---------------------------
Joseph C. McCarron, Jr.
Executive Vice President
22
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