10-Q 1 g70004e10-q.txt RX MEDICAL SERVICES CORP - FORM 10-Q 06/30/1999 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___ Commission File Number 1-10963 RX MEDICAL SERVICES CORP. ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) NEVADA 87-0436782 -------------------------------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 888 EAST LAS OLAS BOULEVARD, SUITE 210, FORT LAUDERDALE, FLORIDA 33301 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (954) 462-1711 ---------------------------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the registrant's common stock, par value $.002 per share, at March 31, 2001, was 23,751,920 shares. 2 RX MEDICAL SERVICES CORP. FORM 10-Q Six Months Ended June 30, 1999 INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION 16 Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 2 of 17 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. RX MEDICAL SERVICES CORP. Consolidated Statements of Operations (Dollars in thousands except per share amounts)

The accompanying notes are an integral part of these financial statements. 3 of 17 4 RX MEDICAL SERVICES CORP. Consolidated Balance Sheets (Dollars in thousands)

The accompanying notes are an integral part of these financial statements. 4 of 17 5 RX MEDICAL SERVICES CORP. Consolidated Balance Sheets (continued) (Dollars in thousands)

The accompanying notes are an integral part of these financial statements. 5 of 17 6 RX MEDICAL SERVICES CORP. Consolidated Statements of Cash Flows (Dollars in thousands)

(Continued) 6 of 17 7 RX MEDICAL SERVICES CORP. Consolidated Statements of Cash Flows (Continued) (Dollars in thousands)

For the six months ended June 30, 1999 and 1998, interest paid, including interest on obligations under capitalized leases was $4,083 and $3,949, respectively. No income taxes were paid during these periods. The accompanying notes are an integral part of these financial statements. 7 of 17 8 Rx MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements, which are for interim periods, do not include all disclosures provided in the audited annual consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the footnotes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Annual Report on Form 10-K for the year ended December 31, 1998 of Rx Medical Services Corp. (the "Company"), as filed with the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial position and results of operations. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The December 31, 1998 balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles. For the year ended December 31, 1998, the medical diagnostic services business segment has been reflected as discontinued operations in accordance with Accounting Principles Board Opinion No. 30 which provides for the reporting of operating results of discontinued operations separately from the continuing operations. The Company has experienced significant losses in each of the past three years, had a working capital deficit of $58.0 million at June 30, 1999, is in default with respect to certain indebtedness and there are uncertainties regarding the Company's compliance with federal and state self-referral regulations while operating its medical diagnostic services business segment. However, the accompanying financial statements have been prepared on the basis that the Company will continue as a going concern because management believes it has an attainable plan to overcome these matters and provide sufficient capital to operate for the coming year. The Company's ability to continue as a going concern is dependent on the continued funding of its operations from its primary financing source, National Century Financial Enterprises, Inc. and its affiliates (the "Financing Source") ("Related Party") or an alternative source, without which funding the Company's ability to continue as a going concern would be adversely impacted. While the Company has not yet reached operational profitability, it has several plans of action in progress to improve profitability, as well as, cash flow. The Company intends to reorganize the hospital ownership and management business and attempt to sustain the biological product distribution business. As mentioned above, the Company's intends to reorganize the hospital ownership and management line of business. This line of business has incurred and is anticipated to continue to incur significant operating losses due to a reduction in patient services eligible for reimbursement and reimbursement rates from third party payors, such as Medicare and Medicaid. The Company anticipates entering into individual agreements to sell each of the hospitals it operates 8 of 17 9 Rx MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) but there can be no assurance that suitable candidates can be found or that the sales can be negotiated on terms acceptable or economically feasible to the Company. If the Company can not find suitable candidates to sell its hospitals to, the Company may have to or could be forced to close the remaining hospitals it operates. The Company is looking to expand its presence, through joint ventures and/or acquisitions, into new markets in related health care businesses with perceived growth potential. The Company anticipates limiting its joint ventures and/or acquisitions to those that meet certain criteria and are expected to generate positive cash flow. Note 2 - Basic and Diluted Net Loss Per Common Share Statement of Financial Accounting Standards No. 128, "Earnings Per Share," requires public companies to present basic earnings (net loss) per share and, if applicable, diluted earnings (net loss) per share for all periods that statements of operations are presented. The statement is effective for all financial statements issued for periods ending after December 15, 1997 and requires restatement of earnings (net loss) per share for all periods presented. Basic and diluted net loss per common share are the same since (a) the potential common shares of the Company would be anti-dilutive and (b) the Company has reflected net losses from continuing operations for all periods presented. The following table reflects the computation of the basic and diluted net loss per common share:

9 of 17 10 Rx MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 3 - Notes Payable - Related Party At June 30, 1999, notes payable included approximately $52.7 million due to the Financing Source ("Related Party"), through which the Company has obtained financing collateralized by certain accounts receivable, real estate and equipment. Note 4 - Commitments and Contingencies The "Year 2000 Issue" exists because many computer systems and applications, building infrastructure components, computer aided medical equipment and other operations related equipment that have date sensitive systems, which currently use two-digit fields to designate a year, may recognize the year 2000 as 1900, or not at all. This could result in system and/or equipment failures or miscalculations causing disruption of operations. The Company has performed an initial assessment of the impact of the "Year 2000 Issue" and based on this initial assessment, the Company believes that its accounting systems and operations may substantially avoid the "Year 2000 Issue", thereby enabling it to properly process critical financial and operational information and that the cost associated with addressing the "Year 2000 Issue" is not expected to be material. There can be no assurance, however, that the systems of other entities on which the Company's systems and operations rely will be timely converted to address the "Year 2000 Issue", or that a failure to convert by another entity, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company's financial position and results of operations. Note 5 - Comprehensive Income Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," requires entities presenting a complete set of financial statements to include details of comprehensive income that arises in the reporting period in a financial statement that is displayed with the same prominence as other financial statements. The statement does not affect the measurement of the components of comprehensive income or introduce new categories of comprehensive income. The statement does not apply to entities that have no items of 10 of 17 11 Rx MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) comprehensive income in any period presented. This statement does not apply to the Company's financial statements as there are no items of comprehensive income in any of the periods being presented. Note 6 - Segment Information Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires disclosure of net profit or loss, certain specific revenue and expense items and certain asset items by reportable segments and how reportable segments are determined. The statement defines a reportable segment as a component of an entity about which separate financial information is produced internally, that is evaluated by the chief operating decision-maker to assess performance and allocate resources. The Company operates in two business segments: the operation of hospitals and medical clinics, and the distribution of biological products. During 1995, the Company discontinued its medical diagnostic services business segment which has been reported as net liabilities of discontinued operations in the consolidated financial statements. The following table presents information on the Company's two business segments for the six months ended June 30, 1999 (in thousands):

11 of 17 12 Rx MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table presents information on the Company's two business segments for the six months ended June 30, 1998 (in thousands):

12 of 17 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS THREE MONTHS: Revenues from hospitals and medical clinics for the three months ended June 30, 1999 were $2.7 million compared to $3.8 million for the three months ended June 30, 1998. The decrease in revenues from hospitals and medical clinics is primarily the result of (a) a decrease in patient services provided at the Dickenson County Medical Center ("DCMC") which resulted in a decrease of revenues of approximately $0.7 million, and (b) a cumulative decrease at other Company hospital and medical clinics of approximately $0.4 million. Revenues from the distribution of biological products for the three months ended June 30, 1999 were $0.3 million compared to $0.4 million for the three months ended June 30, 1998. This decrease in revenues is primarily due to a temporary shortage of biological product being shipped by the Company's most significant supplier. Costs and expenses decreased 18% to $4.3 million for the three months ended June 30, 1999 from $5.3 million for the three months ended June 30, 1998. Of these 1999 expenses, hospital management operations accounted for $3.9 million, biological product distribution accounted for $0.2 million, and the corporate expenses of the Company were $0.2 million. The decrease in costs and expenses is primarily the result of (a) a decrease in patient services provided at DCMC resulting in a decrease of costs and expenses of approximately $0.4 million; (b) a decrease in patient services at the Pittsburgh Specialty Hospital ("PHP") resulting in a decrease of costs and expenses of approximately $0.1 million, and (c) a cumulative decrease at other Company hospital and medical clinics and the Company's corporate headquarters of approximately $0.4 million. Interest expense increased 8% to $2.1 million for the three months ended June 30, 1999 from $1.9 million for the three months ended June 30, 1998. This increase is due to a higher level of borrowings from the Financing Source ("Related Party"). (see "Financial Condition, Liquidity, and Capital Resources" below). SIX MONTHS: Revenues from hospitals and medical clinics for the six months ended June 30, 1999 were $5.9 million compared to $8.5 million for the six months ended June 30, 1998. The decrease in revenues from hospitals and medical clinics is primarily the result of (a) a decrease in patient services provided at DCMC which resulted in a decrease of revenues of approximately $1.7 million; (b) a decrease in patient services provided at PHP which resulted in a decrease of revenues of approximately $0.3 million and (c) a cumulative decrease at other Company hospital and medical clinics of approximately $0.6 million. 13 of 17 14 Revenues from the distribution of biological products for the six months ended June 30, 1999 and June 30, 1998 were $0.4 million. Revenues for the six months ended June 30, 1999 would have increased over the same period in 1998 in not for a temporary shortage of biological product being shipped by the Company's most significant supplier. Costs and expenses decreased 15% to $8.7 million for the six months ended June 30, 1999 from $10.2 million for the six months ended June 30, 1998. Of these 1999 expenses, hospital management operations accounted for $7.8 million, biological product distribution accounted for $0.4 million, and the corporate expenses of the Company were $0.5 million. The decrease in costs and expenses is primarily the result of (a) a decrease in patient services provided at DCMC resulting in a decrease of costs and expenses of approximately $0.8 million; (b) a decrease in patient services at PHP resulting in a decrease of costs and expenses of approximately $0.3 million, and (c) a cumulative decrease at other Company hospital and medical clinics and the Company's corporate headquarters of approximately $0.4 million. Interest expense increased 12% to $4.1 million for the six months ended June 30, 1999 from $3.7 million for the six months ended June 30, 1998. This increase is due to a higher level of borrowings from the Financing Source ("Related Party"). (see "Financial Condition, Liquidity, and Capital Resources" below). FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES During the six months ended June 30, 1999, the Company's working capital deficit increased by approximately $6.4 million to $58.0 million. This increase in the working capital deficit was primarily due to a $5.5 million increase in the level of funding from the Financing Source ("Related Party"), as well as, operating losses. Through June 30, 1999, the Company's ability to continue as a going concern is dependent on the continued funding of its operations by the Financing Source ("Related Party"). Without this funding, the Company's ability to operate its business would be adversely impacted. However, until the Company's revenues increase so as to exceed the Company's operating expenses, the Company will continue to utilize funding from the Financing Source ("Related Party"), or other alternative sources of funding, to the extent available. To the extent fundings from the Financing Source ("Related Party") are insufficient to pay the Company's operating expenses, the Company will require alternative sources of funding. There can be no assurance that any alternative sources of financing will be available to the Company at such point in time, or if obtainable, on terms that are commercially feasible. The Company's current operations (i.e. hospital management and biological product distribution) are presently being funded through financing agreements with the Financing Source ("Related Party") and the Company's various operating facilities. Financing agreements exist between the Financing Source ("Related Party"), the Company and five of the Company's operating subsidiaries. While the Company has not yet reached profitability operationally, it has several plans of action in progress designed to improve profitability, as well as, cash flow. The Company intends reorganize the hospital operation and management business and attempt to sustain the biological product distribution business. The Company is also looking to expand its presence, through joint 14 of 17 15 ventures and/or acquisitions, into new markets in related health care businesses with perceived growth potential. There can be no assurance, however, that the Company will achieve these strategic objectives. YEAR 2000 COMPLIANCE See Note 4 - Commitments and Contingencies in Item 1 Financial Statements. GOING CONCERN The reports of the independent auditors of the Company on its 1998, 1997 and 1996 consolidated financial statements express substantial doubt about the Company's ability to continue as a going concern. Factors contributing to this substantial doubt include recurring operating losses, a working capital deficiency, delinquencies and defaults on its accounts payable and other outstanding liabilities, litigation, as well as, to the uncertainty of the Company's compliance with certain Medicare and state statutes and regulations. As of January 1, 1995, the Company was unable to comply with certain provisions of the OBRA 1993 amendments to the Stark Act, as well as, certain similar state statutes. Although the Company has not been the subject of, and is not currently the subject of, any administrative proceedings concerning violations of federal or state self-referral statutes or regulations, in the event that the Company is found to have violated such statutes and regulations, it could be subject to cumulative fines and penalties and could also be required to make refunds, which may aggregate up to approximately $50.0 million. The Company believes, however, that due to the filing of the Chapter 7 bankruptcy petition for Manatee, the Company's subsidiary that operated the medical diagnostic services business segment, in April 1996, the likelihood of such enforcement actions occurring is remote. As mentioned in the Financial Condition section, the Company is dependent on the continued funding currently being received from the Financing Source ("Related Party") to continue operations. The discontinuance of such funding, and the unavailability of financing to replace such funding, could result in the Company ceasing its operations. 15 of 17 16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. None 16 of 17 17 SIGNATURES Pursuant to the requirements 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. Rx MEDICAL SERVICES CORP. By: /s/ MICHAEL L. GOLDBERG ---------------------------- Michael L. Goldberg Chief Executive Officer Date: June 12, 2001 17 of 17

RX MEDICAL SERVICES CORP 10-Q