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 30,1998
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.)
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 No X
As of August 14, 1998, there were 20,869,958 shares of Common
Stock issued or to 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.
Part I - Financial Information
ITEM I: FINANCIAL STATEMENTS
Iatros Health Network, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
<TABLE>
ASSETS
(UNAUDITED)
JUNE 30 DECEMBER 31,
1998 1997
---------------- ---------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 558,135 $ 190,696
Accounts receivable, net 5,336,341 7,596,741
Subscription receivable 789,000
Inventory 240,659 357,409
Prepaid expenses and other current assets 204,162 712,343
---------------- ---------------
Total current assets 6,339,297 9,646,189
PROPERTY AND EQUIPMENT, net 8,863,185 9,108,815
OTHER ASSETS
Cash and cash equivalents, restricted 485,253 448,540
Intangible assets, net 4,603,473 2,954,677
Notes receivable 2,573,904 2,573,904
Loans receivable and other assets 1,658,512 414,160
Net long-term assets of
discontinued operations 90,993 90,993
---------------- ---------------
Total Assets $24,614,617 $25,237,278
================ ===============
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Notes payable, banks and other $ 4,081,741 $ 5,638,262
Accounts payable 2,978,835 3,439,953
Accrued expenses and
other current liabilities 1,571,517 2,605,407
Net current liabilities
of discontinued operations 518,904 518,904
---------------- ---------------
Total current liabilities 9,150,997 12,202,526
LONG-TERM DEBT 11,500,675 8,550,000
CAPITAL LEASE OBLIGATIONS 44,426 67,478
PREFERRED STOCK DIVIDENDS PAYABLE 630,000 550,000
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 36,160,174 36,059,867
Accumulated deficit (32,893,158) (32,214,096)
3,288,519 3,867,274
Total Liabilities
and Stockholders' Equity $24,614,617 $25,237,278
================ =================
<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
</TABLE>
<TABLE>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
---------------------------------------------------------------------------------------
Revenue
<S> <C> <C> <C> <C>
Nursing home operations $4,904,750 $3,693,764 $9,503,947 $3,693,764
Ancillary services 2,985,083 2,723,861 6,269,539 4,872,991
Management services 313,772 366,427 628,200 1,429,073
-------------- ------------- -------------- -------------
8,203,605 6,784,052 16,401,686 9,995,828
Operating expenses
Nursing home operations 4,090,396 3,236,326 7,998,859 3,236,326
Ancillary services 2,738,887 2,237,801 5,614,740 4,158,783
Management services 195,075 360,356 441,445 869,479
General and
Administrative 431,656 1,319,394 1,163,354 2,212,979
------------- ------------- ------------- -------------
7,456,014 7,153,877 15,218,398 10,477,567
Income/ (loss) from
Operations before other
Income (expenses) and
Discontinued operations 747,591 (369,825) 1,183,288 (481,739)
Other income (expense)
Interest income 15,669 115,153 29,471 157,360
Interest expense (548,118) (160,190) (914,562) (193,603)
Property lease expense (313,725) (335,500) (576,225) (335,500)
Depreciation and
Amortization (261,390) (277,711) (414,885) (414,822)
Write-down of
Assets - (1,121,582) - (1,121,582)
Other income (expense) 57,338 (97,848) 93,851 (155,523)
-------------- -------------- --------------- -------------
(1,050,226) (1,877,678) (1,782,350) (2,063,670)
Income/ (loss) from
Operations before discontinued
Operations (302,635) (2,247,503) (599,062) (2,545,409)
Discontinued operations
(Loss from operations) - (5,499,159) - (6,182,690)
------------ --------------- ------------- --------------
Net Loss ($302,635) ($7,746,662) ($599,062) ($8,728,099)
============== ================ ============= ==============
Basic Loss per share
Continuing Operations ($0.01) ($0.14) ($0.03) ($0.15)
Discontinued Operation - ($0.33) - ($0.38)
Net Loss Per Share
--------- --------- ---------- ---------
($0.01) ($0.47) ($0.03) ($0.53)
========= ========= ========== =========
Weighted average number
of shares of common stock
and equivalents
outstanding 20,869,958 16,513,975 20,869,958 16,328,621
<CAPTION>
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
<TABLE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
JUNE 30, JUNE 30,
1998 1997
(UNAUDITED) (UNAUDITED)
-------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net Loss ($ 599,062) ($2,545,409)
Adjustments to reconcile net loss to
net cash utilized by operating activities:
Depreciation and amortization 414,885 285,134
Provision for doubtful accounts 465,300 335,863
Write-offs of uncollectable notes,
loans and deposits receivable --- 1,121,582
Changes in (net of disposals):
Accounts and subscriptions receivable 1,795,100 (1,427,845)
Notes and loans receivable (1,244,352) 86,518
Inventory 116,750 ( 261)
Prepaid expenses and other 508,181 (147,421)
current assets
Accounts payable (461,118) ( 60,088)
Accrued expenses and other current
liabilities (1,033,890) ( 26,090)
Notes Payable (1,756,521) ---
------------- ----------------
Net cash utilized by operating activities (1,794,727) (2,378,017)
INVESTING ACTIVITIES
Purchase of property and equipment (111,823) (8,725,252)
Change in intangible and other 11,457 ---
Deposits, net --- 139,420
Restricted cash and cash equivalents (36,713) (435,750)
Organization costs --- (29,546)
-------------- -------------
( 137,079) (9,051,128)
-------------- -------------
FINANCING ACTIVITIES
Net proceeds from issuance of capital
stock and other capital contributions 789,000 154,449
Short term borrowings (payments, net) --- 2,246,297
Increase in long-term debt 1,541,269 8,874,989
Long-term debt payments ( 7,972) ---
Payments of capital lease obligations (23,052) 14,838
------------- -------------
Net cash provided by financing activities 2,299,245 11,290,573
------------- -------------
INCREASE (DECREASE) IN CASH 367,439 (138,572)
Cash and cash equivalents,
beginning of period 190,696 630,742
------------- --------------
Cash and cash equivalents,
end of period $ 558,135 $ 492,170
=============== ===============
</TABLE>
PART I - FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
The accompanying notes are an integral part of the consolidated
financial statements
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 and New England.
Principles of consolidation
---------------------------
The consolidated financial statements include the
accounts of Iatros Health Network, Inc. and its wholly
owned subsidiaries. All intercompany transactions and
accounts have been eliminated in consolidation.
Cash and cash equivalents
-------------------------
The Company considers all highly liquid debt
instruments purchased with an original maturity of
three months or less to be cash equivalents.
The Company maintains cash accounts which at times may
exceed federally insured limits. The Company has not
experienced any losses from maintaining cash accounts
in excess of federally insured limits. Management
believes that the Company does not have significant
credit risk related to its cash accounts.
Revenue and accounts receivable
-------------------------------
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.
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue and accounts receivable (Continued)
-------------------------------
Certain ancillary revenues are recorded based on
standard charges applicable to patients. Under
Medicare, Medicaid and other cost-based reimbursement
programs, the provider is reimbursed for services
rendered to covered program patients as determined by
reimbursement formulas. The differences between
established billing rates and the amounts reimbursable
by the programs and patient payments are recorded as
contractual adjustments and deducted from revenues.
Inventory
---------
Inventory is principally comprised of pharmaceutical
and medical supplies and is valued at the lower of cost
(first-in, first-out method) or market.
Property and equipment
----------------------
Property and equipment is stated at cost. The cost of
property and equipment is depreciated over the
estimated useful lives of the respective assets using
primarily the straight-line method. Property and
equipment under capital leases is amortized over the
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.
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 over 15
years, the maximum lease term.
Organization costs
------------------
Organization costs incurred in connection with the
acquisition or formation of new business
activities for the Company are being amortized
using the straight-line method over five years.
Income taxes
------------
The Company employs the asset and liability method in
accounting for income taxes pursuant to Statement of
Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined
based on temporary differences between the financial
reporting and tax bases of assets and liabilities and
net operating loss carryforwards, and are measured
using enacted tax rates and laws that are expected to
be in effect when the differences are reversed.
Earnings per share
------------------
The Company adopted Statement of Financial 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.
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.
NOTE 4: CONTRACT CANCELLATION
- ------------------------------
On May 5, 1998, the Company received a management
termination notice from the owner of three nursing
homes in Massachusetts ("the facilities") that continue
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.
Annual management fees represented by this management
contract approximate $680,000.
The Company as of August 1998, continues to manage
these properties pursuant to its contract rights. While
the potential for loss of this contract continues, the
Company is negotiating to retain its position.
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 areas currently are Pennsylvania
and 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.
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 eleven nursing and assisted living
facilities representing in excess of 1200 beds and 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 seven 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
------------------
The Company provides ancillary services to long-term care
facilities operating in the market area of Philadelphia,
Pennsylvania. These include institutional pharmacy services,
durable medical equipment, infusion therapy, and
rehabilitation therapy services.
Significant Transactions
------------------------
Significant Transactions of the Company and/or its
subsidiaries occurring during the quarter ended June 30,
1998, are as follows:
In April 1998, the Company entered into a formal letter of
intent (the "Letter of Intent") with NewCare Health
Corporation (NASDAQ: "NWCA") concerning a statutory merger
between NWCA and the Company as more fully described in the
Company's Form 10Q for the quarter ended March 30, 1998 (the
"Merger"). In June 1998, the Company and NWCA terminated
negotiations concerning the Merger pursuant to the terms of
the Letter of Intent.
The Company has been formally notified by NASDAQ of their
intent to effect delisting of its trading rights as a result
of non-compliance with certain financial criteria.
Specifically cited was the Company's stock price trading
below one dollar. Final determination of this matter is
pending the outcome of a formal hearing which is expected
shortly.
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 June 30, 1998 reflect a net loss from
operations of ($302,635) compared with a net loss of
($7,746,662) reported for the prior year quarter. 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 quarter, operations associated with
the Company's continuing business reported a loss of
($2,247,503). This reflects a decrease in the net loss of
($1,944,868) or 85% compared with the prior year quarter.
For the six month period ended June 30, 1998, the Company
reports a net loss of ($599,062) compared with a net loss of
($8,728,099) 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
($2,545,409). This reflects a decrease in the net loss of
($1,946,347) or 76% compared with the prior year six 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 June
30, 1998 totaling $8,203,605 compares with $6,784,052 for
the prior year quarter, representing an increase of
$1,419,553 or 21%. The reported increase is the net result
of an increase in nursing home operating revenues of
$1,210,986 or 33%, an increase in ancillary service revenue
of $261,222 or 10%, and, a decrease in management services
revenue of $52,655 or 14%.
Consolidated operating revenue for the six months ended June
30, 1998 totaling $16,401,686 compares with $9,995,828 for
the prior year period, representing an increase of
$6,405,858 or 64%. The reported increase is the net result
of an increase in nursing home revenue of $5,810,183 or
157%; an increase in ancillary service revenue of $1,396,548
or 29%; and, a decrease in management services revenue of
$800,873 or 56%.
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. The increase in reported ancillary revenue
during 1998 results principally from the Company's
development of expanded market presence in New England
during the second half of 1997 and during 1998. 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 June 30, 1998 totaled $7,456,014 or 91% of reported
revenue compared with the same period during 1997 totaling
$7,153,877 or 105%. Total operating expenses for the quarter
ended June 30, 1998 increased $302,137 or 4% compared with
1997. This net increase is comprised of $854,070 or 26%
relating to nursing home operations: $501,086 or 22%
relating to ancillary services, a decrease of $165,281 or
46% relating to management services; and, a decrease of
$887,738 or 67% relating to general and administrative
expenses.
The reported net increase in operating expenses for the
current period is primarily associated with the Company's
nursing home operations (owned and leased), which were not
fully on line during the second quarter 1997. Increased
costs also result from additional ancillary service volume
primarily within the New England market area.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Operating margins reported from nursing home revenue for the
quarter and six months ended June 30, 1998 total $814,354 or
17% and $1,505,088 or 16%; respectively. For 1997 periods,
operating margins reported from nursing home revenue for the
quarter and six months ended total $457,438 or 12 % and
$457,438 or 12%, respectively.
The Medicare program is changing to a prospective payment
system (PPS) effective January 1, 1999 for the nursing
facilities owned and operated by the Company. 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 revenues exceeding $125,000 for
1999. For all facilities operated and managed by the
Company, management estimates that such effect may result in
a reduction of associated facility Medicare revenue
exceeding $815,000 in the aggregate for 1999. Management is
continuing to evaluate the effect of PPS on its operations
and developing operating strategies to minimize its impact.
Ancillary service operating expenses for the quarter ended
June 30, 1998 total $2,738,887 and include $1,383,260 or 51%
relating to medical supplies and pharmacy services and
$1,355,627 or 49% relating to therapy services. For the
prior year quarter, ancillary operating expenses totaled
$2,237,801 and include $1,423,882 or 64% relating to medical
supplies and pharmacy services and $813,919 or 36% relating
to therapy services.
Ancillary service operating expenses for the six months
ended June 30, 1998 total $5,614,740 and include $2,862,604
or 51% relating to medical supplies and pharmacy services
and $2,752,136 or 49% relating to therapy services. For the
prior year period, ancillary operating expenses total
$4,158,783 and include $2,870,539 or 69% relating to medical
supplies and pharmacy services and $1,288,244 or 31%
relating to therapy services.
Operating margins reported from ancillary service revenue
for the quarter and six months ended June 30, 1998 total
$246,196 or 8% and $654,799 or 10%, respectively. For 1997
periods, operating margins reported from ancillary service
revenue for the quarter and six months ended total $486,060
or 18% and $714,208 or 15%, respectively. The reduced
operating margins on ancillary services revenue during 1998
result principally from a decrease in medical supply service
volume over the prior year without a corresponding decrease
in related service overhead.
General and administrative expenses reported for the quarter
and six months ended June 30, 1998 reflect the results of
management's cost reduction initiatives and have decreased
by $887,738 or 67% and $1,049,625 or 47%, respectively from
the prior year periods. Among such cost reductions,
salaries, travel and related expenses have been decreased
over the prior year by $432,232 for the quarter to date
period and $568,374 for the year to date period. Similarly,
professional fees expenses have been decreased over the
prior year by $193,571 for the quarter to date and $149,550
for the year to date period.
Other income (expense) reported for the quarter and six
months ended June 30,1998 totals $1,050,226 and $1,782,350,
respectively, representing a decrease of $827,452 or 44% and
$281,320 or 14%, respectively. The reported decrease in
other income (expense) for the 1998 periods results from the
decrease in write-down of notes and accounts receivable
during 1997 partially offset by increases in interest and
property lease expenses associated with the Company's more
recent owned and leased nursing facilities. Interest expense
reported for the quarter and six months period during 1998
include approximately $213,750 and $427,500, respectively,
associated with the nursing facilities' mortgage debt. The
remaining interest expense relates
principally to the Company's working capital credit
arrangements associated with the nursing home operations and
ancillary service revenue.
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 June 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-tem 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 June 30, 1998, the Company reports a negative working
capital position of $2,811,700 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 June 30, 1998 and December 31,
1997 totaled $558,135 and $190,696 respectively.
Unrestricted cash reported at June 30, 1998 includes
$378,101 associated with nursing home operations and
$180,034 reported by ancillary and management operations.
Restricted cash balances reported at June 30, 1998 and
December 31, 1997 reflect loan reserve funds associated with
long-term debt.
Accounts receivable at June 30, 1998 of $5,336,341,
representing 84% of total current assets, were comprised of
$2,790,456 relating to nursing home operations; $1,723,655
relating to ancillary service operations; $625,861 relating
to management operations; and, $196,369 relating to
corporate accounts. Accounts receivable at June 30, 1998 is
reported net of an allowance for doubtful accounts of
approximately $800,000.
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, net of an aggregate
allowance for doubtful accounts of $3,382,667. The
substantial level of allowance relates to accounts
receivable from nursing home operations which amounts were
assumed in connection with acquiring property leasehold
rights ($1,025,000) and amounts relating to ancillary and
management services for unrelated nursing facilities
associated with discontinued operations (approximately
$2,000,000).
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Section III - Liquidity and Capital Resources (Continued)
During the first quarter of 1998, the Company realized cash
proceeds of $789,000 associated with its 1997 issuance of
four million shares of common stock to NewCare Health
Corporation and reported as subscriptions receivable at
December 31, 1997. Such proceeds were fully utilized to
satisfy corporate obligations during 1998.
For the periods ended June 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.
Loans receivable and other assets at June 30, 1998 and
December 31, 1997 totaled $1,658,512 and $414,160,
respectively. Amounts reported at June 30, 1998 include
accounts receivable associated with ancillary service
revenue which management 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. Remaining loan
receivable amounts reported at June 30, 1998 and December
31, 1997 include $334,000 representing cash advanced by the
Company pursuant to the terms of operating deficit
agreements for the operating needs of properties previously
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 $525,000.
No additional advances under these agreements are
contemplated by management.
Notes payable, banks and other at June 30, 1998 and December
31, 1997 totaled $4,081,741 and $5,638,262, respectively.
The reported amounts include $1,917,560 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 June 30, 1998
and to date, these credit facilities are fully extended. The
remaining amounts included in Notes payable, banks and other
totaling $2,164,181 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 June 30,1998 totaled $2,978,835
and includes $975,172 associated with nursing home
operations; $1,300,549 relating to ancillary services;
$451,910 relating to management services; and, $251,204
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 June 30, 1998
totaled $1,571,517. Significant components include accrued
payroll and related costs of $356,088; accrued expenses
associated with nursing home operations of $920,945; and,
accrued expenses associated with ancillary services and
corporate accounts of $294,484. 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.
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 June 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 $2,950,000 is
comprised of a note purchase agreement in the amount of
$1,475,000 undertaken by the Company during the first
quarter of 1998 together with the reclassification of notes
payable to bank and other from current liabilities as a
result of extending repayment terms.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various material pending litigation matters were specifically
described in detail in the Company's Form-10K for the year ended
December 31, 1997. There have been no material developments in
any of these pending matters since the Company filed its Form-10K
for the year ended December 31, 1997.
In addition to the material pending litigation matters
specifically described in the Company's Form-10K for the year
ended December 31, 1997, the following material pending
litigation matters have arisen:
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 $652,243.84. Iatros is
negotiating with the attorneys for Ceneur to have this
Consent Judgement vacated and dismissed. If these
negotiations are not successful Iatros intends to
vigorously contest the propriety of its having been
obtained in the first place, as well as vigorously
defend against its enforcement. 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 $24,000 in unpaid
rent and to obtain a writ of possession for the
premises occupied by Iatros in Atlanta, Georgia. Iatros
is negotiating with the Plaintiff to resolve this
matter amicably. If it is unable to do so, Iatros
intends to timely file an answer and to vigorously
defend itself. Management is, however, unable to
express a belief as to the likelihood of Iatros
prevailing in such defense.
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 $21,833.74 in unpaid
equipment lease payments. Iatros timely filed an answer
and intends to vigorously defend itself. Management, is
however, unable to express a belief as to the
likelihood of Iatros prevailing in such defense.
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 Please of Chester
County, Pennsylvania:
In June of 1998, the Plaintiff in this action filed
Motion for Partial Summary Judgement in connection with
a collection suit for approximately $68,000 originally
filed in August of 1997. Iatros has timely filed an
Response to the Motion for Partial Summary Judgement
and intends to vigorously defend itself. Management is,
however, unable to express a belief as to the
likelihood of Iatros prevailing in such defense.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
5. Nena Magowan v. Iatros Health Network, Inc., Del Mar
Healthcare, Inc., and Centurion Management Group,
Civil Action 98-0694, filed in the Common Pleas Court
of Montgomery County, Ohio:
This is a wrongful death action involving a patient in
a nursing home facility in Dayton, Ohio, that was owned
by Del Mar Healthcare, Inc. and jointly managed by
Centurion Management Group and a former wholly owned
subsidiary of Iatros, which has since been sold.
Iatros' only involvement with the facility was that of
an unsecured lender to cover operating deficits of the
facility of up to $350,000. Iatros has not yet been
served in this matter, but intends to timely file an
answer after it has been served and to vigorously
defend itself. Management believes that the Company has
valid defenses to all of the Plaintiff's allegations.
6. 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 as a independent contractor.
Iatros has timely filed an answer, as well as a third-
party complaint against AHF/Severn, Inc. Management
believes that the Company has valid defenses to all of
the Plaintiff's allegations.
7. Fleetway Leasing Company v. Durant Medical, Inc. and
Iatros Health Network, Inc., Civil Action No. 98-06365,
filed in the Court of Common Pleas of Chester
County, Pennsylvania:
This is a collection case for approximately $68,000 in
unpaid equipment lease payments. Iatros intends to
timely file an answer and to vigorously defend itself.
Management is, however, unable to express a belief as
to the likelihood of Iatros prevailing in such defense.
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 other 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None
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 June 30,
1998, dividends on the Series A Senior Convertible
Preferred Stock totaling $630,000 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. In 1998, such preferred shareholders
increased the size of the Company's Board of Directors
to 7 and elected 1 additional director, Scott W. Ryan.
During April 1998, Mr. Ryan resigned from the Company's
Board of Director's with no successor being nominated
to replace him by the holders of the Series A Senior
Convertible Preferred Stock.
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 17, 1998 By: /s/ Joseph C. McCarron, Jr.
---------------------------------
Joseph C. McCarron, Jr.
Executive Vice President
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