UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 2001.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _______________ to _________________.
Commission file number: 1-10963
RX MEDICAL SERVICES CORP.
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(Exact name of Registrant as specified in its charter)
Nevada No. 87-0436782
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
888 East Las Olas Boulevard - Suite 210, Ft. Lauderdale, Florida 33301 (954) 462-1711
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(Address of principal executive offices) (Zip Code) (Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.002 Par Value None
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(Title of each class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act: None
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. [X] Yes [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant (determined on the basis of the closing price of Registrant's
Common Stock on the OTC Electronic Bulletin Board on June 18, 2002) was
$222,812.
As of May 31, 2002, Registrant had 23,145,034 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
PART I
Item 1. BUSINESS
INTRODUCTION
Rx Medical Services Corp. (the "Company") is a holding company, which through
its subsidiaries, is a provider of healthcare services in the United States. At
December 31, 2001, the Company was engaged in two healthcare businesses: the
operation of a hospital and its related clinics, which are located in the state
of Virginia and the distribution of biological products.
The hospital management operation is conducted through the Company's
wholly-owned subsidiary, Consolidated Health Corporation of Mississippi, Inc., a
Mississippi corporation, and its subsidiaries ("CHC"). At December 31, 2001,
CHC, via a wholly owned subsidiary, operated one hospital and three medical
clinics in Virginia, with 50 licensed hospital beds.
The biological product distribution operation, is conducted through BioSource
Corporation ("BSC"), which is subsidiary of a Florida corporation that is a
wholly-owned subsidiary of the Company. BSC is in the business of distributing,
on a wholesale basis, biological and biotech products.
The Company was incorporated in Nevada in 1985. The Company's principal
executive offices are located at 888 East Las Olas Boulevard, Suite 210, Fort
Lauderdale, Florida 33301 and its telephone number is (954) 462-1711.
BUSINESS STRATEGY
HISTORICAL PERSPECTIVE: The Company, through asset sales and a bankruptcy
proceeding, has divested itself of substantially all of the assets that were
acquired and used initially in its business. The majority of the remaining
assets of the Company, as of December 31, 2001, were acquired during the year
ended December 31, 1996 and are comprised of the equipment and fixtures utilized
in the operation of the Company's hospital and its related clinics, which are
located in the state of Virginia.
RECENT DEVELOPMENTS: The Company's strategy is to continue to reorganize the
hospital ownership and management business and de-emphasize the biological
product distribution business.
With respect to its hospital ownership and management business, it is the
Company's intention to continue reorganizing this 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 individual agreement to sell or to close the hospital it
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currently operates while looking to expand its presence, through joint ventures
and/or acquisitions, into new markets with perceived potential. There can be no
assurance that a suitable candidate can be found to acquire the Company's
hospital 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. There also can be no assurance that suitable
joint venture and/or acquisition candidates can be found, that joint ventures
and/or acquisitions can be negotiated on acceptable terms, that adequate
financing can be obtained or that the operations of acquired businesses can be
effectively or profitably integrated into the Company's existing operations.
With respect to its biological product distribution business, the Company has
de-emphasized this line of business as a result of not being able to obtain a
steady supply of product from manufacturers. If, in the future, a reliable
supply of product can be obtained, the Company will at that point decide whether
or not to commit more time and resources to this line of business.
BUSINESS SEGMENTS
HOSPITAL MANAGEMENT
The following table sets forth the name of CHC's hospital and its location,
number of licensed beds and whether the hospital is owned, leased or managed as
of December 31, 2001:
Number Of
Name Location Licensed Beds Owned, Managed Or Leased
- ------------------------------------ ----------------------- ------------------ ----------------------------
Dickenson County Medical Center Clintwood, VA 50 Leased
Leased hospitals are operated by CHC under operating lease agreements pursuant
to which CHC pays the owner a stipulated rental and assumes the risk of the
hospital not generating sufficient revenues to pay all operating expenses. Any
net revenues belong to CHC under these operating agreements.
The Company believes that rural acute care hospitals generally face less direct
competition than similar urban facilities from specialty healthcare providers
such as outpatient surgery and diagnostic treatment centers, and rehabilitation,
psychiatric and chemical dependency hospitals. The Company seeks to develop its
acute care hospital as the provider of primary care services in its respective
market and to reduce the migration of the local population to larger urban
hospitals and other rural hospitals. This is based on the Company's belief that
the delivery of healthcare services is local in nature.
3
The Company employs experienced administrators and controllers at the hospital
operated by CHC who have the responsibility for carrying out the strategic plan
established for that respective hospital. The Company's management works closely
with the local administrators to review hospital performance and provide
operating and financial guidance.
SOURCES OF REVENUES
Hospital revenues are received primarily from three categories of payors:
private payors (primarily private insurance), the federal government under the
Medicare program and state governments under their respective Medicaid programs.
The following table sets forth the percentages of net operating revenues
received by CHC's hospital from each category of payor for the year ended
December 31, 2001:
Medicare and Medicaid 67%
Private and other sources 33%
The Medicare and Medicaid reimbursement programs have been changed by
legislative and regulatory actions many times since their inception. The changes
have usually reduced the rate of growth in reimbursement payments and placed a
greater administrative burden on hospitals and other providers of healthcare
services. Although the Company will attempt to offset the reduction in
reimbursement rates under Medicare and Medicaid and the additional
administrative burdens imposed by applicable laws and regulations there can be
no assurance that the Company's profitability will not be adversely affected.
EMPLOYEES AND MEDICAL STAFFS
CHC, at December 31, 2001, has approximately 190 full-time and part-time
employees at its hospital, of which approximately 34% are nursing personnel
(i.e. registered nurses, licensed vocational nurses and licensed practical
nurses). The employees of the Dickenson County Medical Center in Clintwood,
Virginia, are represented by a labor union. The union agreement pertaining to
Dickenson County Medical Center has an anniversary date of September 20th and is
renewable on a year-to-year basis thereafter unless either party, after due
notice, desires to modify or terminate the agreement.
Physicians on the medical staff of CHC's hospital are generally not employees of
CHC or its hospital; however, they utilize the hospital to serve and treat their
patients. Physician staff members may also serve on the medical staffs of other
hospitals and each may terminate his or her affiliation with CHC's hospital at
any time.
DEPENDENCE ON HEALTHCARE PROFESSIONALS
CHC's hospital is dependent upon the physicians practicing in the communities
served by CHC's hospital. A small number of physicians account for a significant
portion of patient admissions at CHC's hospital. Changes in the healthcare
4
industry may increase the competition for physicians specializing in primary
care. There can be no assurance that, despite vigorous physician recruitment
efforts, CHC's hospital will be able to recruit physicians successfully or to
retain the loyalty of the physicians whose patient admissions are important to
the hospital.
COMPETITION
Competition for patients among hospitals and other healthcare providers has
intensified in recent years. During this period, hospital occupancy rates in the
United States have declined as a result of cost containment pressures, changing
technology, changes in regulations and reimbursement, the advent of managed
care, changes in practice patterns from inpatient to outpatient treatment and
other factors. The market in which CHC operates, there are other hospitals or
facilities that provide inpatient and outpatient services comparable to those
offered by CHC's hospital. Certain of these facilities may have greater
financial resources and may offer a wider range of services than CHC's hospital.
Even in the community in which CHC's hospital is the sole or dominant provider
of acute care hospital services, CHC may face competition from hospitals and
other healthcare providers in nearby communities. The competitive position of
CHC's hospital will, in all likelihood, be affected by cost containment
strategies imposed by the federal and state governments and other major
purchasers of healthcare services.
HOSPITAL ACCREDITATION AND LICENSING
The Dickenson County Medical Center, at December 31, 2001, is accredited by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). With
regard to accreditation by JCAHO, or the American Osteopathic Association,
another accrediting body, it is CHC's intention to meet the requirements of the
managed care contract providers for its hospital. All hospitals, and the
healthcare industry generally, are subject to extensive federal, state and local
regulation relating to licensure, conduct of operations, billing and
reimbursement, relationships with physicians, construction of new facilities,
expansion or acquisition of existing facilities and the offering of new
services. CHC's hospital is licensed by the department in the state in which the
hospital is located. Federal and state agencies conduct periodic inspections to
ensure that a hospital maintains adequate standards of medical care, equipment
and cleanliness. Failure to comply with applicable laws and regulations could
result in, among other things, the imposition of fines, temporary suspension of
the ability to admit new patients to the facility or, in extreme circumstances,
exclusion from participation in government healthcare reimbursement programs
such as Medicare and Medicaid (from which the Company derives substantial
revenues) or the revocation of facility licenses. The Company believes that it
is in substantial compliance with all material regulations, although there is no
assurance that CHC's hospital will be able to comply in the future and there can
be no assurance that future regulatory changes will not have an adverse impact
on the Company.
5
CERTIFICATE OF NEED. Certificate of need regulations continue to
control the development and expansion of healthcare services and facilities in
the state in which CHC's hospital operates. These regulations generally require
proper government approval for the expansion or acquisition of existing
facilities, the construction of new facilities, the addition of new beds, the
acquisition of major items of equipment and the introduction of new healthcare
services. Failure to obtain necessary approval can result in the inability to
complete a project, the imposition of civil and, in some cases, criminal
sanctions, the inability to receive Medicare and Medicaid reimbursement and/or
revocation of a facility's license.
FINANCIAL INFORMATION
The Company's net revenues from continuing operations, by business segment
during the past three fiscal years, were as follows (in thousands):
Years Ended December 31,
-------------------------------------
2001 2000 1999
--------- --------- -------
Hospitals and Medical Clinics $ 10,227 $ 9,157 $12,077
Biological Products $ -- $ -- $ 732
Revenue from hospitals and medical clinics is recognized upon completion of
patient services and is recorded at amounts estimated to be received under
reimbursement arrangements with third party payors.
GOVERNMENTAL REGULATION
GENERAL
The health care industry is subject to extensive federal, state and local
regulation relating to licensure, conduct of operations, ownership of
facilities, addition of facilities and services and prices for services, as
described below. The Company is unable to predict the future course of federal,
state and local regulation or legislation, including Medicare and Medicaid
statutes and regulations. Further changes in the regulatory framework could have
a material adverse effect on the financial results of the Company's operations.
FEDERAL AND STATE ANTI-FRAUD AND ANTI-REFERRAL LEGISLATION
MEDICARE ANTI-KICKBACK STATUTE. Section 1128B(b) of the Social Security
Act (the "Antikickback Statute") prohibits the knowing and willful offering,
paying, soliciting, or receiving remuneration of any type in return for or to
induce the referral of business that is reimbursable under the Medicare or
Medicaid program. A person who violates the Antikickback Statute may be subject
to fines, imprisonment, civil monetary penalties and exclusion from
6
participation in the Medicare and Medicaid programs. The Antikickback Statute
has been interpreted broadly by federal courts and enforcement agencies. Many
common kinds of business arrangements, including joint ventures, investment
interests, leases, and service or supply contracts, can violate the Antikickback
Statute if they involve the payment of any remuneration that is intended to
induce the referral of Medicare or Medicaid business. The federal government
encourages the public to report persons believed to be in violation of the
Antikickback Statute.
"STARK" SELF-REFERRAL STATUTE. If a physician has a financial
relationship with an entity (including any ownership or investment interest in,
or any compensation arrangement with, an entity), Section 1877 of the Social
Security Act (the "Stark Law") prohibits the physician from referring patients
to the entity for the provision of any "designated health service" for which
reimbursement is available under Medicare or Medicaid. The Stark Law also
prohibits the entity from billing Medicare, Medicaid, or any other payer for
services provided pursuant to a prohibited referral. "Designated health
services" include (among others) clinical laboratory services, physical and
occupational therapy services, radiology services, durable medical equipment,
home health services, and inpatient and outpatient hospital services. Sanctions
for violating the Stark Law include assessments equal to 100% of the dollar
value of each such service provided and exclusion from the Medicare and Medicaid
programs. The Stark Law contains certain exceptions to the self-referral
prohibition.
FALSE CLAIMS. The Social Security Act also imposes criminal and civil
penalties for making false claims to Medicare and Medicaid for services not
rendered or for misrepresenting actual services rendered in order to obtain
higher reimbursement. Like the Antikickback Statute, the false claims statute is
very broad. The false claims statute requires careful and accurate coding of
claims for reimbursement.
STATE ANTIKICKBACK LAWS. Many states also have laws that prohibit payments
to physicians for patient referrals. Although some of these statutes are similar
to the federal Antikickback Statute, they are broader in the sense that they
apply regardless of the source of the payment for the care. These statutes
typically provide for criminal and civil penalties as well as loss of licensure.
Many states also have passed legislation similar to the Stark Law, but also with
broader effect because the legislation applies regardless of the source of the
payment for the care.
CERTAIN COMPANY TRANSACTIONS. The Company's future development of joint
ventures and other financial arrangements with physicians also could be
adversely affected by the failure of such arrangements to comply with
Antikickback Statue, Stark Law, State Laws or similar laws adopted in the
future. The Company has not been the subject of, and is not currently the
subject of, any legal proceedings concerning violations of federal or state
anti-kickback or self-referral laws.
7
MEDICARE AND MEDICAID REIMBURSEMENT. The Company is dependent upon
reimbursement from the Medicare and Medicaid programs. Future legislation
adopted or proposed in Congress in connection with efforts to reduce the federal
budget deficit could potentially have the effect of reducing, or limiting
increases in, federal expenditures on the Medicare and Medicaid programs. Such
legislation could have a material adverse effect on the Company.
EMPLOYEES
The Company has a total of approximately 197 employees, of whom approximately
192 are engaged in the operation of the Company's hospital management and
biological product distribution businesses, with the remaining employees engaged
in administrative functions at the Company's corporate headquarters Fort
Lauderdale, Florida.
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Item 2. PROPERTIES
The Company's corporate headquarters are located in Fort Lauderdale, Florida,
where it leases approximately 3,200 square feet at a monthly rental of $9,357
through September 2002.
A wholly owned subsidiary of CHC leases the Dickenson County Medical Center
located in Clintwood, Virginia, which is approximately 33,000 square feet, from
the Financing Source ("Related Party") at a monthly rental of $80,192 through
March 2016. This subsidiary also leases other various premises from unrelated
entities that have varying lease periods for an aggregated monthly rental of
approximately $15,895.
BSC leased premises in Clearwater, Florida of approximately 1,000 square feet at
a monthly rental of $862 on a month-to-month basis until April 30, 2002 when
this lease was terminated.
9
Item 3. 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 the
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.
10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold an annual meeting of its stockholders in 2001.
EXECUTIVE OFFICERS
The executive officers of the Company as of December 31, 2001, are as follows:
Name Age Position
---- --- --------
Michael L. Goldberg 52 Chairman of the Board and
Chief Executive Officer
Dennis A. Dolnick 38 Chief Financial Officer
Greg A. Berube 53 Controller
MICHAEL L. GOLDBERG, 52 (a director since 1990). Mr. Goldberg was an Assistant
District Attorney in the Philadelphia District Attorney's office from 1974 to
1977 before entering private practice with a specialty in complex commercial
litigation. Mr. Goldberg joined the Company in May 1990. He was Chairman,
President and Chief Executive Officer of the Company from November 1991 to June
1994 at which time he relinquished the position of President.
DENNIS A. DOLNICK, 38. Mr. Dolnick joined the Company in 1997 as Chief Financial
Officer. Previously, Mr. Dolnick was Controller of SII Pak-Tek, Ltd. and SII
Cassettes, Ltd. manufacturers of plastic injected molding supplies used
primarily by the entertainment industry. Previous to SII Pak-Tek, Ltd. and SII
Cassettes, Ltd., Mr. Dolnick was a manager in the audit department of Grant
Thornton LLP. Mr. Dolnick is a CPA, licensed in the State of Florida.
GREG A. BERUBE, 53. Mr. Berube joined the Company in January 1996 as Assistant
to the Controller. Previously, Mr. Berube was Operations Manager of Water Taxi,
Inc. where he installed and maintained a network and database computer system.
Previously to Water Taxi, Mr. Berube worked for Aero-Flite Distributing, Inc., a
manufacturer and distributor of toy products sold exclusively in temporary
kiosks.
The executive officers hold office at the pleasure of the Board of Directors.
11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Effective December 3, 1996, shares of the Company's Common Stock were formally
delisted from the American Stock Exchange (the "Exchange"). Prior to that date,
there had been no trading of the Company's Common Stock since April 1, 1996. The
Company's Common Stock is qualified for trading on the OTC Electronic Bulletin
Board (the "OTC Bulletin Board"). Trading of the Company's Common Stock on the
OTC Bulletin Board commenced in mid-December 1996; however, such trading has
been limited due to the Company's inability to comply with the filing
requirements of the Securities Exchange Act of 1934 since April 1, 1996. The
following table sets forth the high and low closing prices on the OTC Bulletin
Board for 1999, 2000, 2001 and 2002:
High Low
--------------- --------------
1999 First Quarter .09 .06
Second Quarter .07 .06
Third Quarter .31 .06
Fourth Quarter .31 .07
2000 First Quarter .10 .01
Second Quarter .02 .01
Third Quarter .14 .01
Fourth Quarter .07 .01
2001 First Quarter .01 .01
Second Quarter .01 .01
Third Quarter .07 .01
Fourth Quarter .07 .01
2002 First Quarter .10 .01
Second Quarter .07 .01
On June 18, 2002, the closing price of the Company's Common Stock on the OTC
Bulletin Board was $0.03 per share. As of May 31, 2002, based on the records of
the Company's transfer agent, there were 739 holders of record of the Company's
Common Stock, excluding all beneficial owners of the Company Common Stock.
Although the Company's Common Stock is qualified for trading on the OTC Bulletin
Board, there can be no assurance that an active trading market will develop for
such common stock.
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On October 1, 1998 and on a quarterly basis thereafter (January 1, April 1, and
July 1) until the shares of the Company's Series G Preferred Stock are fully
converted (on or before July 1, 2002), as specified in the preferences and
rights of the Series G Preferred Stock, the Company is required to make
quarterly dividend payments, at the rate of $.15 per annum per share payable at
the Company's discretion in cash or the Company's Common Stock, payable in
arrears (see Note 7(a) to the Notes to Consolidated Financial Statements). At
December 31, 2001, the Company had dividends in arrears, for this series of
preferred stock, in the amount of $270,000.
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Item 6. SELECTED FINANCIAL DATA
Rx Medical Services Corp.
Summary of Financial Information
(Dollar amounts in thousands, except per share amounts)
For The Years Ended December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Revenues $ 10,227 $ 9,157 $ 12,809 $ 16,498 $ 19,972
Loss from
continuing
operations $(15,691) $(14,706) $(13,424) $(12,571) $ (9,147)
Net loss $(15,691) $(14,706) $(13,424) $ (9,240) $ (8,993)
Loss per common
share:
Loss from
continuing
operations $ (0.68) $ (0.64) $ (0.76) $ (0.95) $ (1.03)
Net loss $ (0.68) $ (0.64) $ (0.76) $ (0.70) $ (1.01)
Distributions $ -- $ -- $ -- $ -- $ --
Total assets $ 3,380 $ 2,775 $ 3,491 $ 5,340 $ 6,473
Working capital
deficit $(92,113) $(76,091) $(62,428) $(51,644) $(44,912)
Long-term debt $ 204 $ 289 $ 460 $ 831 $ 202
Total shareholders'
deficit $(91,876) $(76,065) $(62,473) $(50,724) $(43,629)
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Rx Medical Services Corp. (the "Company") is a holding company, which through
its subsidiaries, is a provider of healthcare services in the United States. At
December 31, 2001, the Company was engaged in two healthcare businesses: the
operation of a hospital and its related clinics, which are located in the state
of Virginia and the distribution of biological products.
The hospital management operation is conducted through the Company's
wholly-owned subsidiary, Consolidated Health Corporation of Mississippi, Inc., a
Mississippi corporation, and its subsidiaries ("CHC"). At December 31, 2001,
CHC, via a wholly owned subsidiary, operated one hospital and three medical
clinics in Virginia, with 50 licensed hospital beds.
The biological product distribution operation, is conducted through BioSource
Corporation ("BSC"), which is subsidiary of a Florida corporation that is a
wholly-owned subsidiary of the Company. BSC is in the business of distributing,
on a wholesale basis, biological and biotech products.
From inception, the Company has been was unable to achieve profitability in any
of its business segments. Including losses from continuing operations, net
losses of the Company were $(15,691,000), $(14,706,000) and $(13,424,000) for
the years ended December 31, 2001, 2000 and 1999 respectively. Commencing in
1995 and continuing on still today, management has embarked on a plan to
reorganize the Company.
Results of Operations
2001 vs. 2000
Revenues from hospitals and medical clinics for the year ended December 31, 2001
were $10.2 million compared to $9.2 million for the year ended December 31,
2000. The increase in revenues from hospitals and medical clinics is primarily
the result of an increase in patient services provided at the Dickenson County
Medical Center located in Clintwood, Virginia ("DCMC") which resulted in an
increase in revenues of approximately $1.0 million.
There were no revenues generated from the distribution of biological products
for the years ended December 31, 2001 and 2000. 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 2% to $13.5 million for the year ended December 31,
2001 from $13.2 million for the year ended December 31, 2000. Of these 2001
expenses, hospital management operations accounted for $12.6 million, biological
product distribution accounted for $0.2 million, and the corporate expenses of
the Company were $0.7 million. The increase in costs and expenses is primarily
15
the result of (a) an increase in patient services provided at DCMC which
resulted in a increase in costs and expenses of approximately $0.9 million, and
(b) a decrease in the provision for bad debts - related party which resulted in
a decrease in costs and expenses of approximately $0.6 million.
Interest expense increased 21% to $13.1 million for the year ended December 31,
2001 from $10.8 million for the year ended December 31, 2000. This increase is
due primarily to a higher level of borrowings from the Financing Source
("Related Party"). (See "Financial Condition, Liquidity, and Capital
Resources").
Results of Operations
2000 vs. 1999
Revenues from hospitals and medical clinics for the year ended December 31, 2000
were $9.2 million compared to $12.1 million for the year ended December 31,
1999. 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 an decrease in revenues of approximately $0.8 million; (b) the sale of the
Pittsburgh Specialty Hospital ("PSH") in Pittsburgh, Pennsylvania effective
December 30, 1999, which resulted in a decrease in revenues of $1.5 million, and
(c) the closing of the Smith County Hospital in Raleigh, Mississippi ("SCH")
effective August 31, 1999, which resulted in a decrease in revenues of $0.6
million.
There were no revenues generated from the distribution of biological products
for the year ended December 31, 2000, as compared to $0.7 million for the year
ended December 31, 1999. This decrease is primarily due to the Company facing
challenges in securing reliable suppliers of biological products in which to
distribute. The Company has decided to de-emphasize this line of business as a
result of not being able to obtain a steady supply of product from
manufacturers.
Costs and expenses decreased 24% to $13.2 million for the year ended December
31, 2000 from $17.3 million for the year ended December 31, 1999. Of these 2000
expenses, hospital management operations accounted for $12.3 million, biological
product distribution accounted for $0.2 million, and the corporate expenses of
the Company were $0.7 million. The decrease in costs and expenses is primarily
the result of (a) the sale of PSH effective December 30, 1999, resulting in a
decrease in costs and expenses of approximately $2.5 million; (b) the closing of
SCH effective August 31, 1999, resulting in a decrease in cost and expenses of
approximately $0.9 million; (c) an decrease in biological product sales which
resulted in an decrease in costs and expenses of $0.5 million, and (d) a
cumulative decrease of costs and expenses at other subsidiaries of the Company
and the Company's corporate headquarters of approximately $0.2 million.
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Interest expense increased 23% to $10.9 million for the year ended December 31,
2000 from $8.8 million for the year ended December 31, 1999. This increase is
due primarily to a higher level of borrowings from the Financing Source
("Related Party"). (See "Financial Condition, Liquidity, and Capital
Resources").
Financial Condition, Liquidity, and Capital Resources
At December 31, 2001 and 2000, the Company's working capital deficit was $92.1
million and $76.1 million, respectively. This increase in the working capital
deficit was primarily due to a $18.2 million increase in the level of funding
from the Financing Source ("Related Party"), and a decrease in accounts payable
and accrued liabilities of $1.7 million. Through December 31, 2001, 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 are presently being funded through financing
agreements with the Financing Source ("Related Party"). Financing agreements
exist between the Financing Source ("Related Party"), 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's primary focus though is on the continuing reorganization of the
hospital ownership and management business.
Going Concern
The report of the independent auditors of the Company on its 2001, 2000 and 1999
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 ("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.
17
Outlook
The Company views its decisions to continue reorganizing the hospital ownership
and management business and the biological product distribution business being
de-emphasized as positive from a strategic standpoint. In the hospital operation
and management business, the Company anticipates entering into an agreement to
sell or closing the hospital it currently operates while looking to expand its
presence, through joint ventures and/or acquisitions, into new markets with
perceived potential. In the biological product distribution business, the
Company has scaled back its emphasis on this line of business. There can be no
assurance, however, that the Company will achieve its strategic objectives.
18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange rates, interest rates and a
decline in the stock market. The Company does not enter into derivatives or
other financial instruments for trading or speculative purposes. The Company is
not exposed to market risk as it relates to changes in foreign currency exchange
rates though the Company is exposed to immaterial levels of market risk as it
relates to changes in interest rates.
19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the index of financial statements and schedules as presented on page
34.
20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
Directors
The Company's by-laws provide that the number of directors shall be not less
than three nor more than ten. The actual number of directors is determined by
resolution of the Board from time to time. The Company's by-laws also provide
that directors are elected at the annual meeting of shareholders for a term of
office of one year or until their successors are elected and qualify. The last
annual meeting of shareholders was held on November 20, 1997. All of the current
directors were elected at that meeting. The Company anticipates that the next
annual meeting of shareholders will be held in the year 2002. The number of
directors is currently set at nine. Only three persons, however, are currently
serving as directors. Following is information concerning each of the current
directors of the Company:
MICHAEL L. GOLDBERG, 52 (a director since 1990). Mr. Goldberg was an Assistant
District Attorney in the Philadelphia District Attorney's office from 1974 to
1977 before entering private practice with a specialty in complex commercial
litigation. Mr. Goldberg joined the Company in May 1990. He was Chairman,
President and Chief Executive Officer of the Company from November 1991 to June
1994 at which time he relinquished the position of President.
PHILLIP E. PEARCE, 73 (a director since 1992). Mr. Pearce has been in the
investment banking and securities business since receiving his Graduate Degree
from the Wharton School in 1954. From 1969 to 1983, he served as Senior Vice
President and a Director of E.F. Hutton of New York City, served on the Board of
Governors of the New York Stock Exchange and was Chairman of the Board of
Governors of the National Association of Securities Dealers, Inc. From 1983 to
1988, Mr. Pearce served as President of Phillip E. Pearce & Co., and since 1988
has been a partner in Pearce-Henry Capital Corp. of Charlotte, North Carolina,
an investment banking firm. Mr. Pearce was also a contributing author and editor
of the Dow Jones publication of the Stock Market Handbook, and sat on the
advisory council to the Securities and Exchange Commission on THE INSTITUTIONAL
STUDY OF THE STOCK MARKETS.
MICHAEL J. PICKERING, M.D., 71 (a director since 1990). Dr. Pickering has
practiced as a medical doctor specializing in nephrology since receiving his
medical degree from the University of Florida in 1961. He has certifications
from the American Board of Internal Medicine and the American Board of Internal
Medicine in the Subspecialty of Nephrology and is a member of the American and
Florida Medical Associations, is a Fellow, American College of Physicians, and
is a member of the American Society of Artificial Internal Organs, American
Society of Internal Medicine, the American Society of Nephrology, the Florida
Society of Internal Medicine, the Florida Society of Nephrology, the
Hillsborough County Medical Association, the International Society of
22
Nephrology, the National Kidney Foundation, the Southeastern Dialysis and
Transplantation Association, the South-Eastern Organ Procurement Foundation, the
Royal Society of Health and the American Board of Quality Assurance &
Utilization Review Physicians. Dr. Pickering currently practices medicine,
serves as an Associate Professor of Medicine at the University of Florida and is
a frequent speaker and lecturer on his area of specialty throughout the country.
He also has had articles and abstracts published in more than one hundred
medical journals and medical conferences.
Executive Officers
Information concerning the executive officers of the Company is contained in
Part I, on page 11 of this annual report.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Ownership of and transactions in the Company's securities by executive officers
and directors of the Company and owners of ten percent or more of the Company's
Common Stock are required to be reported to the Securities and Exchange
Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act").
The Company does not have knowledge of any failure to file a required form to
report such ownership and transactions.
23
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides a summary of cash and non-cash compensation with
respect to the Company's Chief Executive Officer and the only other executive
officer whose compensation exceeded $100,000 (the "Name Officers") in the fiscal
years ended December 31, 2001, 2000 and 1999.
Long Term
Compensation
Annual Compensation Awards
- --------------------------------------------------------------------------------------------------------------------
Name and Other Annual Securities Underlying
Principal Position Year Salary ($) Bonus ($) Compensation ($) Option/SARs (#)
- --------------------------------------------------------------------------------------------------------------------
Michael L. Goldberg 2001 173,000 -0- -0- -0-
Chief Executive 2000 165,000 -0- 8,000 -0-
Officer 1999 165,000 -0- 8,000 -0-
Randolph H. Speer 2001 -0- -0- -0- -0-
President and Chief 2000 -0- -0- -0- -0-
Operating Officer(*) 1999 190,000 -0- -0- -0-
(*) Randolph H. Speer resigned his positions with the Company in the year ended
December 31, 1999.
STOCK OPTIONS
There were no grants of stock options by the Company to the Named Officers
during 2001.
24
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION VALUES
The following table sets forth the information with respect to the Named
Officers concerning the exercise of options during 2001 and unexercised options
held as of December 31, 2001:
------------------------------------------------------------------------------ -----------------------------------
(a) (b) (c) (d) (e)
------------------------------------------------------------------------------ -----------------------------------
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at FY-End (#) Options at FY-End ($)
------------------------------------------------------------------------------ -----------------------------------
Shares
Acquired on Value
Name Excise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------ -----------------------------------
Michael L.
Goldberg -0- -0- 72,500 -0- -0- -0-
Compensation of Directors
It has been the policy of the Company not to compensate its directors for their
services as directors. It is the policy of the Company not to pay its directors
for attending Board or committee meetings, but the Company reimburses directors
for travel expenses incurred in attending such meetings.
Board Compensation Committee Report on Executive Compensation
The Board of Directors of Rx Medical Services Corp. does not have a Compensation
Committee and, as a result, the Board of Directors makes determinations as to
executive officer compensation. As of December 31, 2001, the Company had three
executive officers.
25
Performance Graph
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG RX MEDICAL SERVICES CORP., THE NASDAQ STOCK MARKET (U.S.)
INDEX AND THE S & P HEALTH CARE FACILITIES INDEX
Cumulative Total Return
-----------------------------------------------------------
12/96 12/97 12/98 12/99 12/00 12/01
--------- --------- --------- --------- --------- ---------
Rx Medical Services Corp. RXMS 100 300 120 112 48 40
NASDAQ Stock Market (U.S.) INAS 100 122 173 321 193 153
S & P Health Care Facilties
IHSM 100 103 82 60 100 102
</Table>
- ---------------------------
* $100 invested on 12/31/96 in stock or index - including reinvestment of
dividends. Fiscal year ending December 31.
26
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Each share of Preferred Stock of the Company contains voting rights equivalent
to one share of the Company's Common Stock. The Company currently has one series
of preferred stock outstanding, designated Series G. For a description of the
relative rights and preferences of this series, see Note 7(a) to the Notes to
Consolidated Financial Statements. On all matters submitted for vote by the
stockholders of the Company, including the election of directors, the shares of
the Company's Preferred Stock and Common Stock vote together as a single class
except as may otherwise be required by law.
The following table sets forth information as of May 31, 2002, with respect to
all stockholders known by the Company to be the direct or indirect beneficial
owners of 5% or more of the Company's voting securities and by the executive
officers and directors of the Company as a group. Each percentage is calculated
by assuming that the named stockholder converted or exercised all of such
stockholder's securities convertible within the next 60 days into, or
exercisable for, shares of the Company's Common Stock at a time when no other
stockholder did so, irrespective of the conversion or exercise price thereof.
Except as otherwise noted, all persons and entities have sole voting and
investment power with respect to their shares.
Amount
and Nature
Name and Address of Title of Of Beneficial Percentage
Beneficial Owner Class Ownership (1) Of Class
- --------------------------------------------- ----------------- ----------------------- --------------------
Michael L. Goldberg Common 4,741,194(2) 20.48%
(also a director)
888 East Las Olas Blvd.,
Suite 210
Fort Lauderdale, FL 33301
Healthcare Capital, LLC Common 11,028,717(3) 47.65%
6125 Memorial Drive Preferred 800,000(4) 100.00%
Dublin, OH 43017
Directors: (address for all at)
888 East Las Olas Blvd.,
Suite 210
Fort Lauderdale, FL 33301
Michael J. Pickering, M.D. Common 23,750(5) .10%
All Executive Officers, Directors
and Nominees as a Group Common 4,764,944(6) 20.58%
27
(1) As of May 31, 2002, there were 23,145,034 shares of the Company's Common
Stock and 800,000 shares of the Company's Preferred Stock issued and
outstanding.
(2) Includes 72,500 shares representing stock options exercisable within 60
days.
(3) In July 1996, an entity distributed, in equal amounts, 750,000 shares to
Lance K. Poulsen, Donald H. Ayers, Rebecca S. Parrett and Barbara C.
Larson. These individuals are officers, directors and the majority
shareholders of the Financing Source ("Related Party") and Healthcare
Capital, LLC ("HCC") and may be deemed to be the beneficial owners of the
shares, of the Company's Common Stock, owned by HCC.
(4) These 800,000 shares of the Company's Series G Preferred Stock could
convert, based on the market value of the Company's Common Stock on June
18, 2002, into approximately 26,666,667 shares of the Company's Common
Stock.
(5) Includes 3,182 shares representing stock options exercisable within 60
days.
(6) Includes 75,692 shares representing stock options exercisable within 60
days.
28
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
The Financing Source ("Related Party") is being categorized as a related party
due to the Financing Source's ("Related Party") stock ownership in and its
ability to exercise control over the operations of the Company.
Sale of Subsidiary
Effective December 30, 1999, the Company entered into an Agreement For The Sale
And Purchase of Assets of Consolidated Health Corporation of Pittsburgh, Inc.
(PSH) to ACCI/AllCare of Pennsylvania, Inc. (AllCare). AllCare assumed none of
the liabilities of PSH. In consideration for the sale of the assets, the
purchaser shall enter into a mortgage payable for $3,300,000.
In connection with the sale agreement described above, a second agreement,
Agreement Regarding Acquisition of Assets of Pittsburgh Specialty Hospital was
entered into by and among The Financing Source ("Related Party"), AllCare and
another party. The agreement called for the following:
o The Financing Source ("Related Party") to settle certain debts of
PSH.
o AllCare will enter into a $3,300,000 mortgage payable (described in
the above paragraph) with Financing Source ("Related Party").
o The Financing Source ("Related Party") will provide AllCare with 12
monthly payments of $200,000 commencing on the Closing date in
return for a $2,400,000 mortgage.
In addition, the Financing Source ("Related Party") engaged AllCare as an agent
to attempt to settle the trade debts of Consolidated Health Corporation of
Pittsburgh, Inc, except for approximately $250,000 that was separately
identified as the exclusive responsibility of PSH. PSH's trade debts were
$1,364,000 at December 31, 1999. As this agreement did not relieve PSH of its
legal obligation to pay its trade debts, the accounts payable balance was not
adjusted.
29
A summary of the assets sold to AllCare and liabilities paid off by The
Financing Source ("Related Party") are as follows:
Accounts receivable, net $ (355)
Inventories (50)
Land and buildings (653)
Equipment, net (284)
Notes payable - related party 2,758
Accrued liabilities 7
Accrued liabilities - related party 14
Long-term debt 197
Obligations under capital leases - related party 16
-------
Net adjustment to paid in capital $ 1,650
=======
No gain or loss was recorded for the sale of the PSH assets to AllCare or the
PSH liabilities being settled by The Financing Source ("Related Party"). The
Company recorded the net adjustment to paid in capital due to the substance and
the related party aspects of the transaction.
Forgiveness and Settlement Of Liabilities
Effective December 30, 1999, the Company entered into an Agreement For The Sale
And Purchase of Assets of PSH to AllCare. Although effective control of the
assets of PSH were transferred to Allcare on December 30, 1999, the Company
continued to process certain PSH transactions on behalf of Allcare during the
first and second quarter of 2000 as Allcare was in the process of securing
medical provider numbers. The transactions aggregated $240,037. None of these
transactions were recorded in the Company's statement of operations for the year
ended December 31, 2000. The Company was not compensated for these processing
services subsequent to January 1, 2000. The Financing Source ("Related Party)
funded $352,954 for PSH's on going obligations. The net value of transactions
processed on behalf of Allcare for the year ended December 31, 2000, combined
with the funding received from the Financing Source ("Related Party") resulted
in a liability by the Company to the Financing Source ("Related Party") of
$112,917. The Financing Source ("Related Party") forgave this liability, however
no gain or loss was recorded on the forgiveness of the liability. The Company
recorded the forgiveness to paid in capital due to the related party aspects of
the transactions.
In addition, Allcare was engaged by the Financing Source ("Related Party") on
December 30, 1999 as an agent to attempt to settle the trade debts of PSH. In
the first and second quarter of 2000, the Financing Source ("Related Party")
funded $750,000 to settle $1,121,006 of PSH's trade debts. No gain or loss was
recorded for the settlement of the liability. The Company recorded $1,121,006 to
paid in capital due to the related party aspects of the transaction.
30
Notes Payable
At December 31, 2001, notes payable-related party included amounts due to the
Financing Source ("Related Party"), through which the Company has obtained
financing collateralized by the Company's accounts receivable and equipment. The
collateral also includes all the issued and outstanding common stock of
Consolidated Health Corporation Of Mississippi, Inc.
Certain financing agreements with the Financing Source ("Related Party") provide
that the Company will periodically sell certain eligible accounts receivable to
the Financing Source ("Related Party"). However, the terms of the agreements
specify certain items of limited recourse, including the ability to resell
receivables which have aged beyond 150 days back to the Company. While the
Company believes that legally a sale of its receivables has occurred, due to the
existence of the terms of limited recourse, this transaction does not qualify
for treatment as a sale for accounting purposes and, accordingly, such activity
has been recorded as notes payable at December 31, 2001 and 2000.
The notes payable due to the Financing Source ("Related Party") at December 31,
2001 and 2000 consisted of the following (in thousands):
2001 2000
------- -------
Notes payable, interest at 14%, maturing at various dates in June 2003,
collateralized by accounts receivable (subject to sale and subservicing
agreements) $89,224 $70,982
Unsecured note payable, interest at 12%, matured on July 31, 2001 -- 17
------- -------
$89,224 $70,999
======= =======
Long-Term Debt
Long-term debt - related party consists of an unsecured promissory note,
interest at 14%, due in monthly installments of principal and interest of
$13,232, and matures on September 1, 2003. Scheduled principal maturities for
each of the five years subsequent to December 31, 2001, and thereafter are
estimated as follows (in thousands): 2002 - $133; and 2003 - $113.
Indebtedness
At December 31, 2001, the Company is indebted to the Financing Source ("Related
Party") in the amount of $89.7 million.
31
Stock Ownership
Healthcare Capital, LLC ("HCC"), formerly know as Intercontinental Investment
Associates, Ltd., is affiliated with the Financing Source ("Related Party") via
common individual owners. At December 31, 2001, HCC is the Company's majority
shareholder. HCC owns directly and/or indirectly 47.6% or 11,028,717 of the
23,145,034 shares of the issued and outstanding shares of the Company's $.002
par value Common Stock as of May 31, 2002. The ownership percentage and the
number of shares owned do not take into account following:
a) the 800,000 shares of the Company's Series G Preferred Stock
owned by HCC that could convert, based on the market value of
the Company's Common Stock on June 18, 2002, into
approximately 26,666,667 shares of the Company's Common Stock,
b) dividends in arrears of $270,000 on the Company's Series G
Preferred Stock as of December 31, 2001, which are anticipated
to be paid by the issuance of 18,857,142 shares of the
Company's Common Stock, or
c) shares of the Company's Common Stock held by HCC in street
name.
Leases
The Company leases one of its facilities and certain equipment from the
Financing Source ("Related Party") with initial lease terms of twenty years.
Scheduled future minimum commitments under these operating leases with remaining
terms subsequent to December 31, 2001 are as follows (in thousands):
Years Ending Related-Party
December 31, Leases
-------------------------------- -----------------
2002 $ 1,145
2003 1,145
2004 1,146
2005 1,146
2006 1,146
Thereafter 10,597
-------
16,325
=======
32
Scheduled future minimum commitments under capital lease obligations with
remaining terms subsequent to December 31, 2001 are as follows (in thousands):
Years Ending Related-Party
December 31, Leases
------------ -------------
2002 $ 17
2003 --
2004 --
2005 --
2006 --
Thereafter --
----
17
Less amounts
Representing interest (1)
----
Present value of remaining
minimum capital lease
payments 16
Less:
Scheduled current portion (16)
----
Long-term obligations
Under capital leases --
====
33
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements
The following Consolidated Financial Statements of Rx Medical Services Corp. and
Report of Independent Accountants are filed as a part of this annual report:
<Table>
<Caption>
Page
-------------
Report of Independent Certified Public Accountants 37
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 38
Consolidated Balance Sheets at December 31, 2000 and 1999 39-40
Consolidated Statements of Shareholders' Deficit for the years ended
December 31, 2001, 2000 and 1999 41
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 42-43
Notes to Consolidated Financial Statements 44-60
</Table>
Schedules other than those listed above are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
(a)(2) List of Exhibits: (numbered in accordance with Item 601 of Regulation
S-K)
<Table>
<Caption>
Incorporation by
Exhibit Number Description of Document Reference
- ---------------- ------------------------------------------------------------------------ --------------------
3(a) Certificate of Incorporation 3(a)*
3(b) By-Laws 3(b)*
3(c) Certificate of Decrease in Number of Authorized and Outstanding Shares
of Stock, filed with Nevada Secretary of State (December 1991) 3(c)**
3(d) Certificate of Decrease in Number of Authorized and Outstanding Shares,
filed with Nevada Secretary of State (December 1993) ***
4(a) Certificate of Resolution with respect to Series B Preferred Stock of
Registrant 4(a)****
4(b) Certificate of Designation, Series C Preferred Stock 4(b)^
4(c) Certificate of Designation, Series D Preferred Stock 4(c)^
4(d) Certificate of Designation, Series E Preferred Stock 4(d)^
4(e) Certificate of Designation, Series F Preferred Stock 4(e)^
</Table>
34
Incorporation by
Exhibit Number Description of Document Reference
- ---------------- ------------------------------------------------------------------------ --------------------
10(a) Sale and Subservicing Agreement dated as of October 7, 1993, by and
among Manatee Medical Laboratories, Inc., NPFII-W, Inc. and National
Premier Financial Services, Inc. 10(kk)+
10(b) Agreement of Merger, dated April 20, 1994, together with supplementary
letter from Kachina, Inc., dated April 20, 1994 10(a)++
10(c) Purchase Commitment, dated April 20, 1994, from NCFE 10(b)++
10(d) Promissory Note, Security Agreement and Pledge Agreement, dated
September 19, 1994, from Rx Medical Services Corp. to NCFE 10(c)+++
10(e) Plan and Agreement of Merger, dated July 7, 1995, by and among Rx
Medical Services Corp., CHC Acquisition Corp. and Consolidated Health
Corporation of Mississippi, Inc. 10(a)++++
10(f) Asset Purchase Agreement, dated as of August 11, 1995, by and among
Meris Laboratories, Inc., Rx Medical Services Corp. and Manatee Medical
Laboratories, Inc. [for northern California] 10(e)++++
10(g) Asset Purchase Agreement, dated as of August 11, 1995, by and among
Meris Laboratories, Inc., Rx Medical Services Corp. and Manatee Medical
Laboratories, Inc. [for southern California] 10(f)++++
10(h) Laboratory Services Agreement, made as of August 12, 1995, between
Meris Laboratories, Inc. and Rx Medical Services Corp. 10(g)++++
10(i) Amendment to Asset Purchase Agreement, dated as of August 17, 1995 by
and among Meris Laboratories, Inc., Rx Medical Services Corp. and
Manatee Medical Laboratories, Inc. [for southern California] 10(h)++++
10(j) Pledge Agreement, dated as of July 13, 1995, from Rx Medical Services
Corp. to NCFE 10(j)^
10(k) Hospital Lease Agreement, dated as of November 1, 1995, between Smith
County, MS and CHC Management, Inc. 10(k)^
10(l) Articles of Merger (CHC) filed November 14, 1995 with MS Secretary of
State 10(l)^
10(m) Operating Agreement, dated as of March 30, 1996, between NPF-X, Inc and
CHC Whitwell, Inc. 10(m)^
10(n) Operating Agreement, dated as of March 30, 1996, between NPF-X, Inc and
CHC Clintwood, Inc. 10(n)^
10(o) Option to Purchase Agreement, effective as of March 29, 1996, between
NPF-X, Inc. and CHC 10(o)^
35
Incorporation by
Exhibit Number Description of Document Reference
- ---------------- ------------------------------------------------------------------------ --------------------
10(p) First Amendment to CHC Merger Agreement 10(p)^
10(q) Option Agreement on Whitwell Medical Center, Whitwell, TN 10(q)^
10(r) Note Extension 10(r)^
10(s) Asset Purchase Agreement, dated August 28, 1996, between The Podiatry
Hospital of Pittsburgh and CHC 2(a)^^
10(t) Amendment to Asset Purchase Agreement, undated 2(b)^^
10(u) Stipulation of Dismissal and Order 10(u)^^^
11 Computation of Primary Earnings Per Share
21 Subsidiaries of Registrant 21^
10(v) Asset Sale dated December 30, 1999, between Pittsburgh Specialty
Hospital and AllCare 10(v) ^^^^
Explanation of Incorporation by Reference:
* Form 10 of Registrant, dated October 10, 1990, as amended by Form 8,
dated March 15, 1991
** Amendment No. 2 to Form S-1 of Registrant, dated January 31, 1994
*** Current Report of Registrant on Form 8-K, dated January 7, 1994
**** Current Report of Registrant on Form 8-K, dated December 23, 1991, as
amended on December 29 and 31, 1991, and January 14 and March 14, 1992
+ Amendment No. 1 to Form S-1 of Registrant, dated October 28, 1993
++ Current Report of Registrant on Form 8-K, dated April 20, 1994
+++ Current Report of Registrant on Form 8-K, dated September 20, 1994
++++ Current Report of Registrant on Form 8-K, dated August 10, 1995
^ Annual Report of Registrant on Form 10-K for fiscal year ended December
31, 1995
^^ Current Report of Registrant on Form 8-K, dated April 3, 1997
^^^ Current Report of Registrant on Form 8-K, dated January 29, 1998
^^^^ Annual Report of Registrant on Form 10-K for fiscal year ended December
31, 1999
^^^^^ Annual Report of Registrant on Form 10-K for fiscal year ended December
31, 2000
(b) Reports on Form 8-K
None.
36
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Rx Medical Services Corp.
We have audited the accompanying consolidated balance sheets of Rx Medical
Services Corp. as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Rx
Medical Services Corp. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Rx
Medical Services Corp. will continue as a going concern. However, as more fully
described in Note 1, the Company has incurred recurring operating losses, has a
working capital deficiency, is delinquent in payments due to debt holders, is in
default of certain loan covenants and is dependent on the continued funding by
the senior lender. The forgoing matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
Weston, Florida
June 16, 2002
37
Rx MEDICAL SERVICES CORP.
Consolidated Statements of Operations
(Dollars in thousands except per share amounts)
Years Ended December 31,
--------------------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Hospitals and medical clinics $ 10,227 $ 9,157 $ 12,077
Biological products -- -- 732
-------- -------- --------
10,227 9,157 12,809
-------- -------- --------
Costs and expenses:
Compensation and benefits 7,141 6,551 8,872
Biological products -- -- 470
Supplies 1,185 988 1,251
Fees for services 1,346 1,232 1,263
Bad debts 913 1,070 1,711
Bad debts - related party -- 535 --
Depreciation and amortization 185 151 246
Occupancy 532 488 610
Occupancy-related party 962 962 962
Equipment rental and maintenance 317 323 414
Equipment rental-related party 183 183 183
Other 754 702 1,304
-------- -------- --------
13,518 13,185 17,286
-------- -------- --------
Operating loss (3,291) (4,028) (4,477)
Other income (expense):
Interest (29) (81) (106)
Interest - related party (13,134) (10,807) (8,714)
Loss on sale/abandonment of assets -- -- (149)
Gain (loss) on retirement/settlement of liabilities 625 -- (185)
Other income 138 210 207
-------- -------- --------
(12,400) (10,678) (8,947)
-------- -------- --------
Net loss $(15,691) $(14,706) $(13,424)
======== ======== ========
Basic and diluted net loss per common share $ (0.68) $ (0.64) $ (0.76)
======== ======== ========
The accompanying notes are an integral part of these financial statements.
38
Rx MEDICAL SERVICES CORP.
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
------------------------
2001 2000
------- -------
Assets:
Current assets:
Cash $ 421 $ 81
Accounts receivable (less allowance for doubtful accounts of
$759 and $2,624 at 2001 and 2000, respectively) 1,989 2,033
Inventories 296 294
Other 233 52
------- -------
Total current assets 2,939 2,460
------- -------
Property and equipment, at cost
Equipment 1,056 756
Furniture, fixtures and improvements 105 94
------- -------
1,161 850
Less: accumulated depreciation and amortization (731) (546)
------- -------
430 304
Other assets 11 11
------- -------
Total assets $ 3,380 $ 2,775
======= =======
The accompanying notes are an integral part of these financial statements.
39
Rx MEDICAL SERVICES CORP.
Consolidated Balance Sheets (continued)
(Dollars in thousands)
December 31,
----------------------------
2001 2000
--------- ---------
Liabilities and shareholders' deficit:
Current liabilities:
Note payable $ 16 $ 16
Notes payable - related party 89,224 70,999
Accounts payable 3,205 4,541
Accrued liabilities 1,489 1,580
Accrued liabilities - related party 227 280
Accrued compensation, benefits and related taxes 699 907
Current portion of long-term debt-related party 133 116
Current portion of capital lease obligations 43 50
Current portion of capital lease obligations-related party 16 62
--------- ---------
Total current liabilities 95,052 78,551
--------- ---------
Long-term liabilities:
Long-term debt-related party 113 245
Obligations under capital leases 91 28
Obligations under capital leases-related party -- 16
--------- ---------
Total long-term liabilities 204 289
--------- ---------
Total liabilities 95,256 78,840
--------- ---------
Commitments and contingencies -- --
Shareholders' deficit:
Convertible preferred stock, $.001 par value, authorized shares 1,500,000,
issued and outstanding 800,000 shares at 2001 and 2000; aggregate
liquidation preference of $1,070 and $950 at 2001 and 2000, respectively 1 1
Common stock, $.002 par value, authorized 25,000,000 shares, issued and
outstanding 23,145,034 and 23,751,920 at 2001 and 2000, respectively 46 47
Additional paid-in capital 45,019 45,139
Accumulated deficit (136,942) (121,251)
Treasury stock, 605,554 shares of common stock, at par value, at 2000 -- (1)
--------- ---------
Total shareholders' deficit (91,876) (76,065)
--------- ---------
Total liabilities and shareholders' deficit $ 3,380 $ 2,775
========= =========
The accompanying notes are an integral part of these financial statements.
40
Rx MEDICAL SERVICES CORP.
Consolidated Statements of Shareholders' Deficit
(Dollars and shares in thousands)
Convertible
Preferred Stock Common Stock Additional Treasury Stock Total
----------------- ------------------- Paid-in Accumulated ------------------ Shareholders'
Shares Amount Shares Amount Capital Deficit Shares Amount Deficit
------ ---------- ---------- -------- ----------- ----------- --------- -------- -------------
Balance December 31, 1998 864 $ 2 17,983 $ 35 $ 42,361 $ (93,121) 606 $ (1) $ (50,724)
Issuance of common stock for
conversion of preferred stock (64) (1) 4,605 9 (9) -- -- -- (1)
Issuance of common stock for
dividends in arrears -- -- 1,164 3 143 -- -- -- 146
Dividends on preferred stock -- -- -- -- (120) -- -- -- (120)
Sale of subsidiary -- -- -- -- 1,650 -- -- -- 1,650
Net loss -- -- -- -- -- (13,424) -- -- (13,424)
---- ------ --------- ------ --------- --------- ------ ------ ---------
Balance December 31, 1999 800 1 23,752 47 44,025 (106,545) 606 (1) (62,473)
Dividends on preferred stock -- -- -- -- (120) -- -- -- (120)
Forgiveness of liability
- related party -- -- -- -- 113 -- -- -- 113
Settlement of liabilities
- related party -- -- -- -- 1,121 -- -- -- 1,121
Net loss -- -- -- -- -- (14,706) -- -- (14,706)
---- ------ --------- ------ --------- --------- ------ ------ ---------
Balance December 31, 2000 800 1 23,752 47 45,139 (121,251) 606 (1) (76,065)
Dividends on preferred stock -- -- -- -- (120) -- -- -- (120)
Retirement of treasury stock -- -- (606) (1) -- -- (606) 1 --
Net loss -- -- -- -- -- (15,691) -- -- (15,691)
---- ------ --------- ------ --------- --------- ------ ------ ---------
Balance December 31, 2001 800 $ 1 23,146 $ 46 $ 45,019 $(136,942) -- $ -- $ (91,876)
==== ====== ========= ====== ========= ========= ====== ====== =========
The accompanying notes are an integral part of these financial statements.
41
Rx MEDICAL SERVICES CORP.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net loss $(15,691) $(14,706) $(13,424)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 185 151 246
Provision for bad debts 913 1,605 1,711
Loss on sale/abandonment of assets -- 3 161
(Gain) loss on retirement/settlement of liabilities (697) -- 185
Changes in operating assets and liabilities:
Increase in accounts receivable (868) (1,008) (1,702)
(Increase) decrease in inventories (2) 27 (9)
(Increase) decrease in other assets (182) 33 (1)
Increase (decrease) in accounts payable and accrued liabilities (1,059) (525) 890
Increase (decrease) in accrued liabilities - related party (54) 114 75
-------- -------- --------
Net cash used in operating activities (17,455) (14,306) (11,868)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment -- 2 --
Acquisition of property and equipment (205) (31) (48)
-------- -------- --------
Net cash used in investing activities (205) (29) (48)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt - related party 18,225 14,566 12,092
Payments on notes payable, long-term debt and obligations under capital leases (48) (39) (50)
Payments on notes payable, long-term debt and obligations under capital leases
- related party (177) (157) (101)
-------- -------- --------
Net cash provided by financing activities 18,000 14,370 11,941
-------- -------- --------
Net increase in cash 340 35 25
Cash - beginning of year 81 46 21
-------- -------- --------
Cash - end of year $ 421 $ 81 $ 46
======== ======== ========
(Continued)
The accompanying notes are an integral part of these financial statements.
42
Rx MEDICAL SERVICES CORP.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Years Ended December 31,
--------------------------
2001 2000 1999
----- ----- ----
The following is supplementary information relating to the consolidated
statement of cash flows:
Noncash investing and financing activities:
Note receivable utilized to reduce litigation settlement $ -- $ -- $169
===== ===== ====
Equipment purchased under capital leases $ 105 $ 31 $ --
===== ===== ====
Common stock issued for payment of dividends in arrears $ -- $ -- $146
===== ===== ====
On December 31, 1999, the remaining 63,836 issued and outstanding shares of the
Company's Series C Preferred Stock were converted into 4,605,311 shares of the
Company's Common Stock.
Effective December 30, 1999, the Company sold Consolidated Health Corporation Of
Pittsburgh, Inc.'s (PSH) assets of $1,342. The Financing Source settled certain
liabilities of $2,992.
During the year ended December 31, 2000, the Financing Source provided $113 to
process certain PSH transactions and $1,121 to settled certain PSH trade debts.
Due to the related party aspects of the transactions no gain or loss was
recognized on the transactions and these amounts were recorded to paid in
capital.
For the years ended December 31, 2001, 2000, and 1999, interest paid, which
includes interest on obligations under capitalized leases, was $4,282, $2,843
and $2,307, respectively. No income taxes were paid during these periods.
The accompanying notes are an integral part of these financial statements.
43
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of consolidation
The consolidated financial statements of Rx Medical Services Corp. include the
accounts of Rx Medical Services Corp. and its subsidiaries (the "Company"). The
subsidiaries are four wholly-owned operating companies, Consolidated Health
Corporation of Mississippi, Inc., Rx Medical Management, Inc., Rx Medical
Imaging Corp. and CHC Medical Services Corp. All significant intercompany
transactions have been eliminated.
b. Nature of operations
The Company operates a hospital and clinics in Clintwood, Virginia. The
Company's primary source of revenue is providing medical services to patients in
the geographic area of Clintwood, Virginia.
c. Basis of presentation
The Company has experienced significant losses in each of the past three years,
reflects a working capital deficit of $92.1 million at December 31, 2001 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") (see Note 9) 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 profitability operationally, it is
attempting to improve operational profitability, as well as, cash flow. The
Company's primary focus though is on the continuing 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 while
looking to expand its presence, through joint ventures and/or acquisitions, into
44
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
new markets with perceived potential. There can be no assurance that suitable
candidates can be found to acquire the Company's hospital 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. The
Company anticipates limiting its joint ventures and/or acquisitions to those
that meet certain criteria and are expected to generate positive cash flow.
d. Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers cash
deposited with financial institutions and marketable securities with a maturity
of three months or less at the date of acquisition to be cash and cash
equivalents.
e. Inventory
Inventory, which consists primarily of patient supplies, is stated at the lower
of cost or market; cost is determined using the first-in, first-out (FIFO)
method.
f. Property and equipment
Depreciation on equipment, furniture, fixtures and improvements is computed
principally on the straight-line method over the estimated useful lives of these
assets, which range from three to ten years.
g. Revenues
Revenue from hospitals and medical clinics is recognized upon completion of
patient services and is recorded net of contractual allowances and amounts
estimated to be received under reimbursement arrangements with certain third
party payers. Approximately 67%, 61%, and 56% of the Company's revenues for the
years ended December 31, 2001, 2000 and 1999, respectively, were reimbursements
provided by Medicare and Medicaid.
Contractual allowances represent the difference between the Company's basic fee
schedule and the estimated amount of available reimbursement from third party
payers, such as Medicare, Medicaid and certain clients. Contractual allowances
are deducted directly from gross revenues and accounts receivable at the time
the service is performed and recorded in the Company's financial statements at
the estimated net amount to be received. These revenues are subject to audit and
retroactive adjustment by the respective third party fiscal intermediaries. In
the opinion of management, retroactive adjustments, if any, would not be
material to the financial statements of the Company. An allowance for doubtful
accounts is established based on management's estimates of the net amounts to be
collected from third party payors and individuals considering past collection
history and the current status of such related receivable. Accordingly, the
allowance for doubtful accounts does not contain any amounts relative to
contractual allowances.
45
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
h. Income taxes
The Company accounts for deferred income taxes utilizing the liability method as
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The liability method applies the enacted statutory rates in
effect at the balance sheet date to differences between the book and tax basis
of assets and liabilities. The resulting deferred tax assets and liabilities are
adjusted to reflect changes in tax laws. A valuation allowance is provided
against deferred income tax assets to the extent of the likehood that the
deferred tax asset may not be realized.
i. 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.
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.
j. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of estimated fair values of
financial instruments. These estimated fair values are to be disclosed whether
or not they are recognized in the balance sheet, provided it is practical to
estimate such values. Such information, which pertains to the Company's
financial instruments, is based on the requirements set forth in that Statement
and does not purport to represent the aggregate net fair value of the Company.
The Company estimates that the carrying amount approximates the fair value of
its financial instruments at December 31, 2001 and 2000 due to the maturities of
these financial instruments.
k. Stock options
Options granted under the Company's Stock Option Plans are accounted for under
APB 25, "Accounting for Stock Issued to Employees," and related interpretations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," requires additional proforma disclosures for companies that will
continue to account for employee stock options under the intrinsic value method
specified in APB 25. The Company plans to continue to apply APB 25 and the only
effect of this statement on the Company's financial statements are the new
disclosure requirements.
46
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
l. Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
m. Concentration of credit risk
In connection with the Company's hospital and clinic operations, the Company
extends credit to individuals, government agencies and third party payors.
The Company does not have director and officer liability insurance. The Company
has agreed to indemnify all of its directors and officers from any potential
liability they may have as a result of their actions in fulfilling their
responsibilities as directors and officers.
n. Reclassifications
Certain amounts in the prior years have been reclassified to conform to the 2001
consolidated financial statement presentation.
NOTE 2 - GAIN ON RETIREMENT/SETTLEMENT OF LIABILITIES
In April 1996, due to continuing operating losses and intense pressure from
creditors, Manatee Medical Laboratories, Inc. ("Manatee"), a wholly owned
subsidiary of the Company which operated the Company's medical diagnostic
services business segment, filed a voluntary petition under Chapter 7 of the
U.S. Bankruptcy Code. The Company established certain trade liability accounts,
as of December 31, 1995, for potential Manatee trade liabilities the Company
believed it could potentially be held liable for regardless of the bankruptcy
petition. None of the entities for which these liability accounts were
established have sought legal action against the Company since the filing of
Manatee's bankruptcy petition and thus the statute of limitations for filing any
legal action against the Company has expired. Based on these facts the Company
retired these liability accounts in the second quarter of 2002 and recognized a
gain on retirement of liabilities in the amount of approximately $0.5 million.
The Company, in the normal course of business, established certain trade
liability accounts, as of December 31, 1995. None of the entities for which
these liability accounts were established have sought legal action against the
Company since December 31, 1995 and thus the statute of limitations for filing
any legal action against the Company has expired. Based on these facts the
Company retired these liability accounts in the second quarter of 2002 and
recognized a gain on retirement of liabilities in the amount of approximately
$0.2 million.
47
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
In addition, the Company during the year ended December 31, 2001 settled certain
liabilities with the Financing Source, which resulted in a loss on settlement of
liabilities in the amount of $0.1 million.
NOTE 3 - SALE OF SUBSIDIARY
Effective December 30, 1999, the Company entered into an Agreement For The Sale
And Purchase of Assets of Consolidated Health Corporation of Pittsburgh, Inc.
(PSH) to ACCI/AllCare of Pennsylvania, Inc. (AllCare). AllCare assumed none of
the liabilities of PSH. In consideration for the sale of the assets, the
purchaser shall enter into a mortgage payable for $3,300,000.
In connection with the sale agreement described above, a second agreement,
Agreement Regarding Acquisition of Assets of Pittsburgh Specialty Hospital was
entered into by and among The Financing Source, AllCare and another party. The
agreement called for the following:
o The Financing Source to settle certain debts of PSH.
o AllCare will enter into a $3,300,000 mortgage payable (described in
the above paragraph) with Financing Source.
o The Financing Source will provide AllCare with 12 monthly payments
of $200,000 commencing on the Closing date in return for a
$2,400,000 mortgage.
In addition, the Financing Source engaged AllCare as an agent to attempt to
settle the trade debts of Consolidated Health Corporation of Pittsburgh, Inc,
except for approximately $250,000 that was separately identified as the
exclusive responsibility of PSH. PSH's trade debts were $1,364,000 at December
31, 1999. As this agreement did not relieve PSH of its legal obligation to pay
its trade debts, the accounts payable balance was not adjusted.
48
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
A summary of the assets sold to AllCare and liabilities paid off by The
Financing Source are as follows:
Accounts receivable, net $ (355)
Inventories (50)
Land and buildings (653)
Equipment, net (284)
Notes payable - related party 2,758
Accrued liabilities 7
Accrued liabilities - related party 14
Long-term debt 197
Obligations under capital leases - related party 16
-------
Net adjustment to paid in capital $ 1,650
=======
No gain or loss was recorded for the sale of the PSH assets to AllCare or the
PSH liabilities being settled by The Financing Source. The Company recorded the
net adjustment to paid in capital due to the substance and the related party
aspects of the transaction.
NOTE 4 - FORGIVENESS AND SETTLEMENT OF LIABILITIES - RELATED PARTY
Effective December 30, 1999, the Company entered into an Agreement For The Sale
And Purchase of Assets of PSH to AllCare (See Note 3). Although effective
control of the assets of PSH were transferred to Allcare on December 30, 1999,
the Company continued to process certain PSH transactions on behalf of Allcare
during the first and second quarter of 2000 as Allcare was in the process of
securing medical provider numbers. The transactions aggregated $240,037. None of
these transactions were recorded in the Company's statement of operations for
the year ended December 31, 2000. The Company was not compensated for these
processing services subsequent to January 1, 2000. The Financing Source funded
$352,954 for PSH's on going obligations. The net value of transactions processed
on behalf of Allcare for the year ended December 31, 2000, combined with the
funding received from the Financing Source resulted in a liability by the
Company to the Financing Source of $112,917. The Financing Source forgave this
liability, however no gain or loss was recorded on the forgiveness of the
liability. The Company recorded the forgiveness to paid in capital due to the
related party aspects of the transactions.
In addition, Allcare was engaged by the Financing Source on December 30, 1999 as
an agent to attempt to settle the trade debts of PSH. In the first and second
quarter of 2000, the Financing Source funded $750,000 to settle $1,121,006 of
PSH's trade debts. No gain or loss was recorded for the settlement of the
49
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
liability. The Company recorded $1,121,006 to paid in capital due to the related
party aspects of the transaction.
NOTE 5 - NOTES PAYABLE
a. Note Payable
Note payable, at December 31, 2001 and 2000, consists of an unsecured promissory
note, due in monthly principal and interest installments, that bears interest at
8.00% per annum. This note matured on February 3, 2000. The holder of this note,
as of the date of these financial statements, has not renewed this note or
sought collection of the outstanding principal and accrued interest.
b. Notes Payable - Related Party
At December 31, 2001 and 2000, notes payable-related party included amounts due
to the Financing Source, through which the Company has obtained financing
collateralized by the Company's accounts receivable and equipment. The
collateral also includes all the issued and outstanding common stock of
Consolidated Health Corporation Of Mississippi, Inc.
Certain financing agreements with the Financing Source provide that the Company
will periodically sell certain eligible accounts receivable to the Financing
Source. However, the terms of the agreements specify certain items of limited
recourse, including the ability to resell receivables which have aged beyond 150
days back to the Company. While the Company believes that legally a sale of its
receivables has occurred, due to the existence of the terms of limited recourse,
this transaction does not qualify for treatment as a sale for accounting
purposes and, accordingly, such activity has been recorded as notes payable at
December 31, 2001 and 2000.
The notes payable due to the Financing Source at December 31, 2001 and 2000
consisted of the following (in thousands):
2001 2000
------- -------
Notes payable, interest at 14%, maturing at various dates in June 2003,
collateralized by accounts receivable (subject to sale and subservicing
agreements) $89,224 $70,982
Unsecured note payable, interest at 12%, matured on July 31, 2001
-- 17
------- -------
$89,224 $70,999
======= =======
50
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
The Company has defaulted on the required payments due under the notes payable
of $89,224 and $70,982 collateralized by accounts receivable at December 31,
2001 and 2000, respectively.
NOTE 6 - LONG-TERM DEBT - RELATED PARTY
Long-term debt - related party consists of an unsecured promissory note,
interest at 14%, due in monthly installments of principal and interest of
$13,232, and matures on September 1, 2003. Scheduled principal maturities for
each of the five years subsequent to December 31, 2001, and thereafter are
estimated as follows (in thousands): 2002 - $133 and 2003 - $113.
NOTE 7 - SHAREHOLDERS' EQUITY
a. Preferred stock
At December 31, 2001 the Company had authorized, issued and outstanding one
series of preferred stock as follows:
Series G Preferred Stock, par value of $.001, conversion price is the market
value of the Company's Common Stock, with voting rights equivalent to the
Company's Common Stock. This series of Preferred Stock is convertible into
shares of the Company's Common Stock annually, with the annual conversion being
limited to twenty-five percent (25%) of the original shares issued to each
shareholder. On July 1, 2002, any remaining unconverted shares automatically
convert into the Company's Common Stock. This series of Preferred Stock pays
annual dividends of $0.15 in arrears, payable at the Company's discretion in
cash or the Company's Common Stock. At December 31, 2001 dividends in arrears on
this series of Preferred Stock aggregated approximately $270,000. At December
31, 2001, 800,000 issued and outstanding shares of Series G Preferred Stock
remain unconverted.
b. Registration rights
Pursuant to several separate agreements, the Company is obligated on a best
efforts basis to register shares of issued, but restricted, Common Stock, Common
Stock issued upon exercise of stock warrants, and Common Stock issued upon
conversion of Preferred Stock. Certain of the agreements provide the holders of
the common stock with piggyback registration rights, and certain of the
agreements provide for demand registration rights. In either case, the Company
is obligated to pay all of the expenses associated with such registration
statements.
51
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
c. Stock issuances
The Company issued no shares of the Company's Common or Preferred Stock during
the year ended December 31, 2001.
d. Stock options
The Company's 1992 Long-Term Incentive Stock Option Plan provides for granting
of options of not more than 1,000,000 shares of Common Stock. Options granted
under the plans are exercisable in one-third installments annually from the date
of grant and have a term of four to ten years.
The Company had also granted stock options which were classified as
non-qualified, and which were not included in the 1992 Employees' Incentive
Stock Option Plan. The remaining non-qualified stock options expired unexercised
during the year ended December 31, 2000 and as such there are no remaining
unexercised non-qualified stock options.
There were no options granted in 2001, 2000 and 1999; therefore no proforma
adjustments are required pursuant to SFAS 123.
A summary of the status of the Company's fixed stock options as of December 31,
2001, 2000 and 1999, and changes during the years ending on those dates is as
follows:
` 2001 2000 1999
----------------------------- ----------------------------- ------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------------- --------- ---------------- ---------- ----------------
Outstanding at beginning
of the year 163,627 $ 2.92 242,127 $ 2.60 807,368 $ 2.20
Granted -- -- --
Exercised -- -- --
Expired -- (78,500) $ 1.94 (565,241) $ 2.03
--------- --------- ---------
Outstanding at end
of the year 163,627 $ 2.92 163,627 $ 2.92 242,127 $ 2.60
========= ========= =========
Options exercisable at
end of year 163,627 163,627 242,127
========= ========= =========
Weighted-average fair
value of options granted
during the year $ -- $ -- $ --
========= ========= =========
52
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
The following information applies to options outstanding at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------ -------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- ----------------------- ------------ ----------------- ----------------- ------------ ---------------
$1.000 25,000 0.66 $ 1.00 25,000 $ 1.00
$2.625 121,932 1.14 $ 2.63 121,932 $ 2.63
$4.000 7,375 0.66 $ 4.00 7,375 $ 4.00
$11.000 9,320 0.61 $11.00 9,320 $11.00
------------ ------------
163,627 163,627
============ ============
e. Basic and diluted net loss per common share
The following table reflects the computation of the basic and diluted net loss
per common share (in thousands except for per share data):
Years Ended December 31,
----------------------------------------------------------------------------------
2001 2000 1999
--------------------------- ------------------------- --------------------------
Per-Share Per-Share Per-Share
Amount Amount Amount Amount Amount Amount
-------------- ----------- ------------ ----------- ------------ -----------
Loss from continuing
Operations $(15,691) $(0.68) $(14,706) $(0.63) $(13,424) $(0.75)
Dividends on preferred
Stock (120) (0.00) (120) (0.01) (120) (0.01)
-------- ----- -------- ----- -------- -----
Loss available to common
shareholders' (15,811) (0.68) (14,826) (0.64) (13,544) (0.76)
Other items -- -- -- -- -- --
-------- ----- -------- ----- -------- -----
Net loss $(15,811) $(0.68) $(14,826) $(0.64) $(13,544) $(0.76)
======== ===== ======== ===== ======== =====
Weighted average
common shares
outstanding 23,146 23,146 17,802
======== ======== ========
53
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
The Company has issued potential common share securities (see Notes 7a and 7d)
that could potentially dilute basic earnings per share in the future. These
potentially dilutive securities, as of December 31, 2001, 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
December 31, 2001, into approximately 11,428,571 shares of the
Company's Common Stock,
c) dividends in arrears on the Company's Series G Preferred Stock
that could convert into approximately 18,857,142 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 December 31, 2001, 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 8 - INCOME TAXES
Income tax expense differs from the amounts computed by applying the statutory
federal and state tax rates to income before income taxes. The difference is
reconciled as follows (in thousands):
Years Ended December 31,
---------------------------------------
2001 2000 1999
------- ------- -------
Tax benefit computed at federal and state statutory rates $(5,962) $(5,588) $(5,101)
Financial statement losses that are not deductible for income tax
purposes 18 17 20
Financial statement losses and tax credits with no tax benefit
as a result of net operating loss carryforwards 5,944 5,571 5,081
------- ------- -------
$ -- $ -- $ --
======= ======= =======
At December 31, 2001, the Company has a federal net operating loss carryforward
of approximately $120.8 million. In addition, the Company has various state net
operating loss carryforwards.
54
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
As a result of certain cumulative changes in the Company's stock ownership over
the years, the use of the Company's federal net operating loss carryforward may
be substantially limited. In 2005, certain portions of the federal net operating
loss carryforward begin to expire.
Deferred tax assets and liabilities at December 31, 2001, and 2000, arose from
the following items (in thousands):
2001 2000
------- -------
Deferred tax assets:
Allowance for doubtful accounts receivable $ 288 $ 912
Accrued compensation 122 118
Outstanding stock options issued for services 228 228
Net operating loss carryforward 45,895 39,331
------- -------
46,533 40,589
Valuation allowance 46,533 40,589
------- -------
Net deferred amount $ -- $ --
======= =======
NOTE 9 - RELATED PARTY TRANSACTIONS
The Financing Source is being categorized as a related party due to the
Financing Source's stock ownership in and its ability to exercise control over
the operations of the Company.
Healthcare Capital, LLC ("HCC"), formerly know as Intercontinental Investment
Associates, Ltd., is affiliated with the Financing Source via common individual
owners. At December 31, 2001, HCC is the Company's majority shareholder. HCC
owns directly and/or indirectly 47.6% or 11,028,717 of the 23,145,034 shares of
the issued and outstanding shares of the Company's $.002 par value Common Stock
as of March 31, 2002. The ownership percentage and the number of shares owned do
not take into account following:
a) the 800,000 shares of the Company's Series G Preferred Stock
owned by HCC that could convert, based on the market value of
the Company's Common Stock on June 18, 2002, into
approximately 26,666,667 shares of the Company's Common Stock,
b) dividends in arrears of $270,000 on the Company's Series G
Preferred Stock as of December 31, 2001, which are anticipated
to be paid by the issuance of 18,857,142 shares of the
Company's Common Stock, or
55
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
c) shares of the Company's Common Stock held by HCC in street
name.
At December 31, 2001, the Company is indebted to the Financing Source in the
amount of $89.7 million.
NOTE 10 - RETIREMENT PLAN
The Company has a Combined Profit Sharing/Money Purchase Plan with a Cash or
Deferred Arrangement Option (the "Plan") to which both the Company and eligible
employees contribute. The Plan segregates the Company's employees into two
distinct participant groups (a) non-union participants and (b) union
participants.
The Company, pursuant to a union contract at the Company's hospital, contributes
up to $550 per Plan year for eligible union participants. Company contributions
are discretionary per Plan year for eligible non-union participants.
Employees are eligible to participate in the Plan based on the number of hours
worked in the Plan year and the attainment of a certain age. Company and
employee contributions vest 100% in the first year.
Company contributions to the Plan for the years ended December 31, 2001, 2000
and 1999 aggregated approximately (in thousands) $48, $43 and 52, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
a. Leases
The Company leases its operating and other facilities, as well as certain
equipment, under noncancelable leases with initial lease terms of one to five
years; also, the Company leases one of its facilities and certain equipment from
the Financing Source with initial lease terms of twenty years. Certain of the
facilities leases provide for optional renewal periods.
56
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
Scheduled future minimum commitments under operating leases with remaining terms
subsequent to December 31, 2001 are as follows (in thousands):
Years Ending All Related-Party
December 31, Leases Leases
-------------------------------- ----------------- ------------------
2002 $ 1,608 $ 1,145
2003 1,427 1,145
2004 1,422 1,146
2005 1,280 1,146
2006 1,246 1,146
Thereafter 10,597 10,597
------------- ------------
17,580 16,325
============= ============
Scheduled future minimum commitments under capital lease obligations with
remaining terms subsequent to December 31, 2001 are as follows (in thousands):
Years Ending All Related-Party
December 31, Leases Leases
-------------------------------- ----------------- ------------------
2002 $ 72 $ 17
2003 36 --
2004 36 --
2005 31 --
2006 4 --
Thereafter -- --
------------- ------------
179 17
Less amounts
representing interest (29) (1)
------------- ------------
Present value of remaining
minimum capital lease
payments 150 16
Less:
Scheduled current portion
(59) (16)
------------- ------------
Long-term obligations
under capital leases 91 --
============= ============
Rent expense was approximately (in thousands) $1,675, $1,619 and $1,584, for the
years ended December 31, 2001, 2000 and 1999, respectively.
b. Contracts
The Company has entered into contracts with various individuals and entities to
provide patient and other services for the Company. Scheduled future minimum
57
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
commitments under these contracts with remaining terms subsequent to December
31, 2001 are as follows (in thousands):
-------------------------------
Years Ending
December 31,
-------------------------------
2002 $ 495
2003 70
2004 --
2005 --
2006 --
Thereafter --
----------
565
==========
c. Government regulation
The Company's operations are subject to extensive federal and state government
regulation. Industry compliance with such regulations is under constant scrutiny
by regulatory authorities and legislative bodies and regulations are subject to
change at any time. Changes in federal and/or state regulations could have an
adverse effect on the Company's operations and such effects could be material.
d. 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 the
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.
58
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
e. Union Contract
The Company's hospital has entered into an agreement with the United Mine
Workers of America and its District 28 and its Local Union 7528 (the "Union")
whereby the Union acts as the sole and exclusive bargaining representative in
respect to wages, hours, other working conditions for all employees affiliated
with the Union. This agreement can be renegotiated annually, by either party
giving the other party written notice of its desire to modify or terminate the
agreement, 90 days before the agreements' anniversary date of September 20.
NOTE 12 - SEGMENT INFORMATION
The Company operates in two business segments: the operation of hospitals and
medical clinics, and the distribution of biological products. The following
presents information on the two business segments (in thousands):
Hospitals and
Years ended Medical Biological
December 31 Clinics Products Corporate Total
-------------- --------------- --------------- --------------- -----------
Revenues 2001 $ 10,227 $ -- $ -- $ 10,227
2000 $ 9,157 $ -- $ -- $ 9,157
1999 $ 12,077 $ 732 $ -- $ 12,809
-------- -------- -------- -------- --------
Operating profit (loss) 2001 $ (2,406) $ (152) $ (733) $ (3,291)
2000 $ (3,141) $ (165) $ (722) $ (4,028)
1999 $ (3,614) $ 52 $ (915) $ (4,477)
-------- -------- -------- -------- --------
Capital expenditures (including capital leases) 2001 $ 310 $ -- $ -- $ 310
2000 $ 60 $ -- $ 2 $ 62
1999 $ 40 $ -- $ 8 $ 48
-------- -------- -------- -------- --------
Depreciation and Amortization expense 2001 $ 177 $ 3 $ 5 $ 185
2000 $ 142 $ 4 $ 5 $ 151
1999 $ 230 $ 5 $ 11 $ 246
-------- -------- -------- -------- --------
Identifiable assets at year end 2001 $ 3,111 $ 1 $ 268 $ 3,380
2000 $ 2,689 $ 4 $ 82 $ 2,775
1999 $ 3,327 $ 126 $ 38 $ 3,491
-------- -------- -------- -------- --------
NOTE 13 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
The Company recorded significant fourth quarter adjustments, which affected the
net losses for the following years. Following is a summary of such adjustments
(in thousands):
59
Rx MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
2001 2000 1999
------ ---- -----
Bad debts - related party $ -- $535 $ --
Provision for doubtful accounts receivable -- 255 --
------ ---- -----
$ -- $790 $ --
====== ==== =====
NOTE 14 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly results for the years 2001, 2000 and 1999 are set forth in the
following table (in thousands except for per share data):
Diluted Net
Loss Per
Revenues Loss Operating Loss Net Loss Common Share
------------- -------------- -------- ------------
2001
1st Quarter $ 2,545 $ (793) $ (3,720) $ (0.16)
2nd Quarter 2,916 (451) (2,949) (0.13)
3rd Quarter 2,322 (1,031) (4,292) (0.19)
4th Quarter 2,444 (1,016) (4,730) (0.20)
------- ------- -------- --------
Total $10,227 $(3,291) $(15,691) $ (0.68)
======= ======= ======== ========
2000
1st Quarter $ 2,320 $ (818) $ (3,240) $ (0.14)
2nd Quarter 2,403 (750) (3,299) (0.14)
3rd Quarter 2,311 (757) (3,569) (0.16)
4th Quarter 2,123 (1,703) (4,598) (0.20)
------- ------- -------- --------
Total $ 9,157 $(4,028) $(14,706) $ (0.64)
======= ======= ======== ========
1999
1st Quarter $ 3,332 $ (967) $ (3,118) $ (0.18)
2nd Quarter 3,038 (1,316) (3,374) (0.19)
3rd Quarter 2,918 (1,335) (3,734) (0.20)
4th Quarter 3,521 (859) (3,198) (0.19)
------- ------- -------- --------
Total $12,809 $(4,477) $(13,424) (0.76)
======= ======= ======== ========
60
SIGNATURES
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.
RX MEDICAL SERVICES CORP.
By: /s/ Michael L. Goldberg
----------------------------------
Michael L. Goldberg
Chief Executive Officer
Dated: June 25, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
/s/ Michael L. Goldberg Director, Chairman and
- ------------------------------- Chief Executive Officer Dated: June 25, 2002
Michael L. Goldberg
/s/ Phillip E. Pearce Director Dated: June 25, 2002
- -------------------------------
Phillip E. Pearce
/s/ Michael J. Pickering, M.D. Director Dated: June 25, 2002
- -------------------------------
Michael J. Pickering, M.D.
/s/ Dennis A. Dolnick Chief Financial Officer Dated: June 25, 2002
- -------------------------------
Dennis A. Dolnick
61