RX Medical Services 10-Q 2002 Q1 Quarterly report

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 March 31, 2002

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 incorporation or organization)	(IRS Employer 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 May 31, 2002, was 23,145,034 shares.

Rx MEDICAL SERVICES CORP.

FORM 10-Q

Three Months Ended March 31, 2002

INDEX

	Page No.
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
PART II. OTHER INFORMATION		14
Item 1. Legal Proceedings		14
Item 2. Changes In Securities and Use Of Proceeds		14
Item 3. Defaults Upon Senior Securities		14
Item 4. Submission of Matters to a Vote of Security Holders		14
Item 5. Other Information		14
Item 6. Exhibits and Reports on Form 8-K		14
SIGNATURES		15

2

Item 1. Financial Statements.

Rx Medical Services Corp.
Consolidated Statements of Operations
(Dollars in thousands except per share amounts)

		Three Months Ended March 31,
		2002			2001
		(Unaudited)			(Unaudited)
Revenues:
	Hospitals and medical clinics	$	2,577		$	2,545
Costs and expenses:
	Compensation and benefits		1,824			1,808
	Supplies		295			292
	Fees for services		351			283
	Bad debts		268			240
	Depreciation and amortization		46			40
	Occupancy		136			143
	Occupancy-related party		241			241
	Equipment rental and maintenance		97			65
	Equipment rental-related party		46			46
	Other		249			180
			3,553			3,338
Operating loss			(976	)		(793	)
Other income (expense):
	Interest		(41	)		(9	)
	Interest-related party		(3,883	)		(2,940	)
	Gain on sale of intangible asset		300			—
	Other income		22			22
			(3,602	)		(2,927	)
Net loss		$	(4,578	)	$	(3,720	)
Basic and diluted net loss per common share		$	(0.20	)	$	(0.16	)

The accompanying notes are an integral part of these financial statements.

3

Rx Medical Services Corp.
Consolidated Balance Sheets
(Dollars in thousands)

				March 31,			December 31,
				2002			2001
				(Unaudited)
Assets:
	Current assets:
		Cash		$	988		$	421
		Accounts receivable (less allowance for doubtful accounts of $802 and $759 at 2002 and 2001, respectively)			2,182			1,989
		Inventories			319			296
		Other			328			233
			Total current assets		3,817			2,939
	Property and equipment, at cost Equipment				1,147			1,056
		Furniture, fixtures and improvements			105			105
					1,252			1,161
		Less: accumulated depreciation and amortization			(777	)		(731	)
					475			430
	Other assets				11			11
			Total assets	$	4,303		$	3,380

The accompanying notes are an integral part of these financial statements.

4

Rx Medical Services Corp.
Consolidated Balance Sheets (continued)
(Dollars in thousands)

				March 31,			December 31,
				2002			2001
				(Unaudited)
Liabilities and shareholders’ deficit:
	Current liabilities:
		Notes payable		$	16		$	16
		Notes payable-related party			94,567			89,224
		Accounts payable			3,128			3,205
		Accrued liabilities			1,774			1,489
		Accrued liabilities-related party			237			227
		Accrued compensation, benefits and related taxes			725			699
		Current portion of long-term debt — related party			137			133
		Current portion of capital lease obligations			41			43
		Current portion of capital lease obligations — related party			—			16
			Total current liabilities		100,625			95,052
	Long-term liabilities:
		Long-term debt-related party			76			113
		Obligations under capital leases			85			91
			Total long-term liabilities		161			204
			Total liabilities		100,786			95,256
Commitments and contingencies					—			—
Shareholders’ deficit:
	Convertible preferred stock, $.001 par value, authorized shares 1,500,000, issued and outstanding 800,000 shares at 2002 and 2001; aggregate liquidation preference of $1,100 and $1,070 at 2002 and 2001, respectively					1			1
	Common stock, $.002 par value, authorized 25,000,000 shares, issued and outstanding 23,145,034 shares at 2002 and 2001				46			46
	Additional paid-in capital				44,989			45,019
	Accumulated deficit				(141,519	)		(136,942	)
			Total shareholders’ deficit		(96,483	)		(91,876	)
			Total liabilities and shareholders’ deficit	$	4,303		$	3,380

The accompanying notes are an integral part of these financial statements.

5

Rx Medical Services Corp.
Consolidated Statements of Cash Flows
(Dollars in thousands)

					Three Months Ended March 31,
					2002			2001
					(Unaudited)			(Unaudited)
Cash flows from operating activities:
	Net loss				$	(4,578	)	$	(3,720	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization				46			40
		Provision for bad debts				268			240
		Changes in operating assets and liabilities:
			Increase in accounts receivable			(461	)		(68	)
			Increase in inventories			(23	)		(27	)
			Increase in other assets			(95	)		(16	)
			Increase (decrease) in accounts payable and accrued liabilities			204			(198	)
			Increase (decrease) in accrued liabilities-related party			11			(131	)
				Net cash used in operating activities		(4,628	)		(3,880	)
Cash flows from investing activities:
	Acquisition of property and equipment					(91	)		(140	)
				Net cash used in investing activities		(91	)		(140	)
Cash flows from financing activities:
	Proceeds from notes payable-related party					5,343			4,351
	Payments on notes payable, long-term debt and obligations under capital leases					(9	)		(10	)
	Payments on notes payable, long-term debt and obligations under capital leases-related party					(48	)		(42	)
				Net cash provided by financing activities		5,286			4,299
Net increase in cash						567			279
Cash — beginning of period						421			81
Cash — end of period					$	988		$	360

(Continued)

The accompanying notes are an integral part of these financial statements.

6

Rx Medical Services Corp.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)

The following is supplementary information relating to the consolidated statement of cash flows:

     For the three months ended March 31, 2002 and 2001, interest paid, which includes interest on obligations under capitalized leases, was $1,356 and $892, respectively. No income taxes were paid during these periods.

The accompanying notes are an integral part of these financial statements.

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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, 2001 of Rx Medical Services Corp. (the “Company”), as filed with the Securities and Exchange Commission. The December 31, 2001 balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. 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 Company has experienced significant losses in each of the past three years, had a working capital deficit of $96.8 million at March 31, 2002 and is in default with respect to certain indebtedness. 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”) 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 is attempting to improve operational profitability, as well as, cash flow. The Company’s primary focus though is on the reorganization of the hospital ownership and management business.

As mentioned above, the Company intends to continue reorganizing the hospital ownership and management line of business. This line of business has and currently is incurring 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 an agreement to sell or to close the hospital it currently operates. There can be no assurance that suitable candidates can be found or that a sale can be negotiated on terms acceptable or economically feasible to the Company. If the Company can not find a suitable candidate to acquire its hospital, the Company may have to or could be forced to close the remaining hospital it operates.

8

Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 — Notes Payable — Related Party

Notes payable — related party includes notes payable due to the Financing Source that are collateralized by accounts receivable and equipment. The collateral also includes all the issued and outstanding common stock of Consolidated Health Corporation of Mississippi, Inc. The Company has defaulted on the required payments due under these notes payable which aggregate $94.5 million at March 31      ,2002.

Note 3 — Earnings Per 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 Company has only presented basic net loss per share 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 and thus the diluted net loss per share would be the same as basic net loss per share.

The following table reflects the computation of the net loss per common share:

				Three Months Ended March 31,
	2002						2001
				Per-Share						Per-Share
	Amount			Amount			Amount			Amount
Loss from continuing operations	$	(4,578	)	$	(0.20	)	$	(3,720	)	$	(0.16	)
Dividends on preferred stock		(30	)		(0.00	)		(30	)		(0.00	)
Loss available to common shareholders’		(4,608	)		(0.20	)		(3,750	)		(0.16	)
Other items		—			—			—			—
Net loss	$	(4,608	)	$	(0.20	)	$	(3,750	)	$	(0.16	)
Weighted average common shares outstanding		23,145						23,146

9

Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     The Company has issued potential common share securities that could potentially dilute basic earnings per share in the future. These potentially dilutive securities, as of March 31, 2002, are as follows:

a)	stock options for 163,627 shares of the Company’s Common Stock,
b)	the Company’s Series G Preferred Stock that could convert, based on the market value of the Company Common Stock on March 31, 2002, into approximately 26,666,667 shares of the Company’s Common Stock,
c)	dividends in arrears on the Company’s Series G Preferred Stock that could convert into approximately 19,857,142 shares of the Company’s Common Stock.

These securities were not included in the computations of net loss per common share presented in the financial statements because they were anti-dilutive.

At March 31, 2002, the Company does not have enough authorized shares of Common Stock to either convert the Company’s Series G Preferred Stock and/or pay the dividends in arrears on the Company’s Series G Preferred Stock.

Note 4 — Business Segments

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.

10

Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents information on the Company’s two business segments for the three months ended March 31, 2002 and 2001 (in thousands):

		Hospitals and
		Medical			Biological
		Clinics			Products			Corporate			Total
	2002
Revenues		$	2,577		$	—		$	—		$	2,577
Operating profit (loss)		$	(744	)	$	(37	)	$	(195	)	$	(976	)
Capital expenditures (including capital leases)		$	91		$	—		$	—		$	91
Depreciation and amortization expense		$	45		$	—		$	1		$	46
Identifiable assets at end of period		$	4,031		$	1		$	271		$	4,303
	2001
Revenues		$	2,545		$	—		$	—		$	2,545
Operating profit (loss)		$	(564	)	$	(38	)	$	(191	)	$	(793	)
Capital expenditures (including capital leases)		$	140		$	—		$	—		$	140
Depreciation and amortization expense		$	37		$	1		$	2		$	40
Identifiable assets at end of period		$	2,787		$	3		$	235		$	3,025

Note 5 — Legal Proceedings

In July 1998, an action was commenced against the Company in the Superior Court of California, County of Contra Costa, under the title NORTH BAY MRI ASSOCIATES V. RX MEDICAL SERVICES CORP. (Case No. C 98-02610). The complaint stated many issues though the primary issue was that Rx Medical Services Corp. guaranteed the performance of a lease agreement entered into by a partnership of which a subsidiary of Manatee was a general partner. This subsidiary was included in voluntary bankruptcy petition of Manatee filed on April 4, 1996. The Company chose not to defend against this action and on October 20, 1998, a judgment by default was entered against the Company in the amount of $1,432,900. The Company has established a liability account, which is included in accounts payable, for the full amount of the judgment. In February 2002, the Company settled this action with the plaintiffs for $80,000 in cash and the transference from the Company’s Chief Executive Officer of 210,000 shares of the Company’s Common Stock. The Company will recognize a gain on the settlement of this action, in the second quarter of 2002, of approximately $1.4 million.

In addition to the foregoing, the Company is involved in routine litigation arising in the ordinary course of its business which the Company believes would not have a material adverse effect on its financial position.

11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Revenues from hospitals and medical clinics for the three months ended March 31, 2002 were $2.6 million compared to $2.5 million for the three months ended March 31, 2001. The increase in revenues from hospitals and medical clinics is primarily the result of an increase in patient services provided at and a decrease in contractual adjustments realized at the Dickenson County Medical Center (“DCMC”) which resulted in an increase of revenues of approximately $0.1 million.

There were no revenues generated from the distribution of biological products for the three months ended March 31, 2002 and 2001. This is the result of the Company facing challenges in securing reliable suppliers of biological products in which to distribute and the Company’s decision to de-emphasize this line of business.

Costs and expenses increased 6% to $3.5 million for the three months ended March 31, 2002 from $3.3 million for the three months ended March 31, 2001. Of these 2002 expenses, hospital management operations accounted for $3.3 million and the corporate expenses of the Company were $0.2 million. The increase in costs and expenses is primarily the result of (a) an increase in patient services provided at DCMC; (b) an increase in outsourced professional services utilized at DCMC, and (c) an increase in equipment leased under operating lease agreements at DCMC. These items, when aggregated, resulted in an increase of costs and expenses of approximately $0.2 million.

Interest expense increased 33% to $3.9 million for the three months ended March 31, 2002 from $2.9 million for the three months ended March 31, 2001. This increase is due to a higher level of borrowings from the Financing Source. (see “Financial Condition, Liquidity, and Capital Resources” below).

Financial Condition, Liquidity, and Capital Resources

During the three months ended March 31, 2002, the Company’s working capital deficit increased by approximately $4.7 million to $96.8 million. This increase in the working capital deficit was primarily due to a $5.3 million increase in the level of funding from the Financing Source, and a $0.5 million increase in operating cash. Through March 31, 2002, the Company’s ability to continue as a going concern is dependent on the continued funding of its operations by the Financing Source. 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, or other alternative sources of funding, to the extent available. To the extent fundings from the Financing Source 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.

12

The Company’s current operations are presently being funded through financing agreements with the Financing Source. Financing agreements exist between the Financing Source, the Company and four of the Company’s subsidiaries.

While the Company has not yet reached profitability operationally, it is attempting to improve operational profitability, as well as, cash flow. The Company intends to continue reorganizing the hospital operation and management business. The Company is also looking to expand its presence, through joint 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.

Going Concern

The reports of the independent auditors of the Company on its 2001, 2000 and1999 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 and delinquencies and defaults on its accounts payable and other outstanding liabilities.

As mentioned in the Financial Condition section, the Company is dependent on the continued funding currently being received from the Financing Source 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.

13

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     See Note 5 — Legal Proceedings in Item 1 Financial Statements of Part I Financial Information.

Item 2. Changes in Securities and Use of Proceeds

     None

Item 3. Defaults Upon Senior Securities

     See Note 2 — Notes Payable — Related Party in Item 1 Financial Statements of Part I Financial Information.

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

14

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
Director, Chairman, and Chief Executive Officer

Date: June 27, 2002

By: /s/ Dennis Dolnick

Dennis Dolnick
Chief Financial Officer

Date: June 27, 2002

15