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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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1996.
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 .
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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, Fort Lauderdale, Florida 33301 (954) 462-1711
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(Address of principal executive offices) (Zip Code) (Registrant's telephone num-
ber, 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. [ ] Yes [x ] 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 July 31, 1997) was
$902,220.
As of July 31, 1997, Registrant had outstanding 9,164,117 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Rx Medical Services Corp. ("RXM" or the "Company") is a holding company which,
through its subsidiaries, is a provider of healthcare services in the United
States. At December 31, 1996, the Company was engaged in two healthcare
businesses: the operation and management of hospitals and clinics located
predominantly in rural markets in the southeast, and the wholesale distribution
of pharmaceutical products. The hospital management operation is conducted
through the Company's wholly-owned subsidiary, Consolidated Health Corporation
of Mississippi, Inc. ("CHC"), a Mississippi corporation which the Company
acquired in July 1995 through a merger transaction. CHC operates and/or manages
three hospitals and one medical clinic in Mississippi, one hospital and four
medical clinics in Virginia and a hospital in Pittsburgh, Pennsylvania, with a
total of 161 licensed hospital beds. The pharmaceutical distribution operation,
known as BioLogic Health Care ("BHC"), is conducted through Rx Medical Imaging
Corp. ("RxMIC") and Rx Medical Management, Inc., ("RxM Management"), two
Florida corporations wholly-owned by the Company. BHC engages in the business
of distributing, on a wholesale basis, biological and biotech products for
chronic care outpatients through a network of retail pharmacy providers.
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
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. Since July 1995, the Company has acquired all of the assets
that are used in its current operations.
Historical Perspective: The Company acquired its first operating assets in May
1990, and entered the health care industry in 1991 when it acquired a group of
clinical laboratories in several separate transactions. In 1992 and 1993
additional clinical laboratories were purchased, as well as three magnetic
resonance imaging ("MRI") centers. The medical diagnostic facilities were
acquired by the Company's wholly-owned subsidiary, Manatee Medical
Laboratories, Inc. ("Manatee"). Operations were concentrated primarily on the
east and west coasts of Florida and southern and central California.
From inception, the Company was unable to achieve profitability in its medical
diagnostic business. The losses stemmed mainly from reductions in Medicare and
Medicaid reimbursement levels, the rise of managed health care plans and
resulting cost containment pressures, and the inability to effectively
consolidate the various clinical laboratory operations that were acquired by
the Company. The Company unsuccessfully attempted many strategies to increase
revenues, effect consolidations of business lines and reduce operating costs.
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Commencing in 1995, and continuing in 1996, management embarked on a plan to
reorganize the Company. In March 1995, the Company closed an MRI center in Fort
Lauderdale, Florida that had been acquired in July 1993. An MRI center, in
Victorville, California, had previously been closed by the Company in June
1994. In August 1995, the Company sold its California clinical laboratory
operation. In January 1996, the Company sold its Louisiana laboratory
operation. Finally, in April 1996, Manatee filed a voluntary petition under
Chapter 7 of the U.S. Bankruptcy Code resulting in the closing of the Company's
remaining medical diagnostic facilities primarily located on the west coast of
Florida (see "Discontinued Operations" below).
Recent Developments: In July 1995, the Company acquired all of the issued and
outstanding shares of capital stock of CHC. At the time of acquisition, CHC
operated and managed three hospitals and three medical clinics in rural
Mississippi. In the same month, the Company entered into a joint venture with
Biologic Health Resources, a Nevada corporation, to form BHC, a business
specializing in the delivery of biotech products and home infusion services to
chronically ill patients.
The Company's strategy is to continue to develop its hospital management and
wholesale pharmaceutical distribution businesses, while seeking, at the same
time, to acquire other ancillary businesses in the medical services industry
that would complement its existing businesses. With respect to its hospital
management business, the Company will focus on increasing revenues and market
share by acquiring and integrating existing rural hospitals and clinics and
other related health care businesses into the Company's operations. In addition
to outright acquisitions of hospitals, the Company will seek to expand its
third-party management business by negotiating management contracts and
operating leases for medical facilities located in rural markets. This emphasis
on non-urban communities affords the Company the opportunity to grow in a less
competitive environment that heretofore has been poorly serviced.
Notwithstanding the emphasis in seeking acquisition candidates located in rural
markets, the Company also intends to acquire or obtain management of specialty
care hospitals in urban locations.
With respect to its pharmaceutical products distribution and home infusion
services business, the Company originally entered the business in July 1995 as
a minority partner (25%) of a California partnership with the same name,
Biologic Health Care, which operates in the Northern California market. During
1996, the Company expanded the BHC operation into Southern California and the
State of Florida. The Company intends to promote BHC as a cost effective,
alternate site care model for the distribution of biological and biotech
products and services through a vertically integrated pharmacy benefits
management network.
The Company is also seeking to expand its presence into new markets in related
health care businesses with perceived growth potential. The Company anticipates
limiting its acquisitions to those which meet these criteria and with expected
positive cash flow. There can be no assurance, however, that suitable
acquisition candidates can be found, that 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.
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Financing: In April 1994, the Company received a commitment from National
Century Financial Enterprises, Inc., the Company's primary financing source
(the "Financing Source") to provide the Company with a $20 million acquisition
line of credit which is intended to finance the medical accounts receivable of
the businesses that may be acquired by the Company. See Item 13. "Certain
Relationships and Related Transactions". As of December 31, 1996, the $20
million line of credit remained available under this commitment. Competition in
the health care industry for acquisition candidates is intense, and there can
be no assurance that candidates will be available to the Company on favorable
terms or at all.
BUSINESS SEGMENTS
HOSPITAL MANAGEMENT DIVISION - CHC
In furtherance of its growth strategy, the Company, in July 1995, acquired,
through a merger transaction, all of the stock of CHC, then based in Nashville,
Tennessee. CHC, a hospital company, at the time it was acquired, operated three
acute care hospitals, with a total of 98 licensed beds, and three medical
clinics, all located in rural communities in Mississippi. Under the acquisition
agreement, in exchange for all of the issued and outstanding common and
preferred stock of CHC, the Company paid $1.0 million in cash, agreed to issue
330,000 shares of RXM Common Stock and 1.09 million shares of preferred stock
(designated series F convertible preferred stock) convertible into RXM Common
Stock at $5.00 per share. The cash portion of this acquisition was provided by
a loan from an affiliate of the Financing Source. In consideration for the
financing and as security for repayment, the Company pledged to the Financing
Source the stock of CHC it received in the merger transaction. See Item 12.
"Security Ownership of Certain Beneficial Owners and Management", and Item 13.
"Certain Relationships and Related Transactions". This financing is not part of
the overall $20 million in acquisition financing that the Financing Source has
committed to the Company for its use based on the qualifying receivables of the
companies to be acquired (see "Business Strategy" above).
Effective as of March 30, 1996, newly formed subsidiaries of CHC entered into
operating lease agreements on two rural hospitals owned by an affiliate of the
Financing Source. The hospitals are the Whitwell Medical Center located in
Whitwell, Tennessee, which has 17 medical/surgical and 35 alcohol and drug
abuse beds, and the Dickenson County Medical Center, a 50 bed acute care
facility located in Clintwood, Virginia. Included in the operations of
Dickenson County Medical Center are four medical clinics. These facilities were
acquired by the affiliate of the Financing Source on March 29, 1996, from
Volunteer Healthcare Systems, Inc., a debtor in bankruptcy pursuant to a
petition for reorganization under Chapter 11 of the Bankruptcy Code. The
operating leases, each for 20 years, provide that CHC will operate and manage
the facilities and pay the lessor approximately $95,500 per month for the
Dickenson facility and equipment and approximately $27,300 per month for the
Whitwell facility and equipment. In connection with the operating leases, the
owner granted CHC an option to purchase both hospitals, during the one year
period commencing May 1, 1996, for a purchase price equal to the assumption of
all liabilities and indebtedness attributable to or secured by the facilities
and equipment.
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In May 1996, the Company repurchased (a) the rights to the 330,000 shares of
RXM Common Stock and (b) a total of 400,000 shares of series F convertible
preferred stock issued to the minority shareholders of CHC at the time CHC was
acquired by the Company in July 1995. In consideration therefore, the Company
transferred to such minority shareholders the right to exercise CHC's option to
purchase the Whitwell Medical Center, and entered into various agreements
pursuant to which the minority shareholders, through their company Star Health
Services, Inc., now Ameris Health Systems, ("Ameris"), would manage or
sub-manage, as the case may be, four hospital facilities in CHC's portfolio
(excluding Dickenson County Medical Center) and the one medical clinic in
Mississippi, and be paid a portion of the management fees payable to CHC. On
August 13, 1996, Ameris notified the Company and the owner of Whitwell Medical
Center, of its decision to exercise the option to purchase the land, building
and equipment comprising the Whitwell Medical Center. Closing on this purchase
occurred on October 31, 1996, at which date CHC ceased operating the Whitwell
Medical Center.
CHC's option to purchase Dickenson County Medical Center has been extended by
the owner of that facility from May 1, 1997 to December 31, 1997.
On April 30, 1996, one month following the acquisition of Dickenson County
Medical Center by the affiliate of the Financing Source, the bankruptcy court
entered an order rejecting all executory contracts, including Dickenson County
Medical Center's Medicare provider contract. This occurred without the
knowledge or consent of CHC or the purchaser of the facility, and has resulted
in the denial of Medicare claims from that facility for the period from March
30, 1996 through June 2, 1996, amounting to $ 793,856. CHC has requested the
Health Care Financing Administration ("HCFA") to reconsider its decision to
issue a new provider agreement effective June 3, 1996 and to revise the
effective date of the agreement to March 30, 1996, or, alternatively, May 1,
1996. Since HCFA may refuse to reconsider its decision, and CHC and the owner
of the facility may have no further viable legal recourse to contest that
decision, the Company has recorded a loss of revenue equal to 100% of the
denied Medicare claims.
Two of the three medical clinics operated by CHC at the time of the Company's
acquisition of CHC, the Dedeaux and Owen clinics, located in Morton,
Mississippi, were closed in March 1996 due to poor performance. Effective
October 1, 1996, CHC agreed to a lease arrangement for the remaining clinic,
the Family Medical Group clinic in Forest, Mississippi, pursuant to which CHC
transferred operational control of the clinic to a Meridien, Mississippi
medical services company for a monthly lease fee. The term of the lease was for
one year, with the lessee having the option during the year to purchase the
clinic from CHC at a price of $750,000. The lessee exercised its right under
the lease agreement to purchase the clinic and the closing of this sale
occurred on July 21, 1997.
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The following table sets forth the name of each of CHC's hospitals, its
location, the number of licensed beds and whether the hospital is owned, leased
or managed:
Owned, Leased
Name Location Licensed Beds or Managed
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Smith County General Hospital Raleigh, MS 29 Leased
Scott Regional Hospital Morton, MS 30 Managed
Newton Regional Hospital Newton, MS 39 Managed
Dickenson County Med. Center Clintwood, VA 50 Leased
Podiatry Hospital of Pittsburgh Pittsburgh, PA 13 Owned
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. Managed hospitals
are operated by CHC under management agreements pursuant to which the owners of
the hospitals pay a stipulated management fee to CHC for the services performed
by CHC in managing the hospitals. The risk of loss remains with the hospital
owners in such instances.
The Company intends to expand CHC's operations in the future through the
acquisition of additional management contracts, operating leases and the
purchase of acute care hospitals.
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 hospitals as the providers of primary care
services in their respective markets 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 and, as such, its strategic plan for each hospital is designed to meet
the healthcare needs of the local population and employers. These plans
generally respond to the healthcare service needs identified by the referral
patterns within the community and the general demographic characteristics of
the market.
CHC employs experienced administrators and controllers at each of the hospitals
operated or managed by CHC who have responsibility for carrying out the
strategic plan established for their respective hospital. CHC's management
works closely with its local administrators to review hospital performance and
provide operating and financial guidance.
The significant components of the Company's hospital operating strategy are
outlined below:
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Networks. At each of its hospitals, CHC seeks to develop an integrated
healthcare delivery network which includes local physicians, with the hospital
as the nucleus of the healthcare services offered. Through these networks, CHC
is able to provide to local employers and insurers a collaborative offering of
both physician and hospital services. These integrated networks, the Company
believes, will reduce migration of the local population to other hospitals and
will discourage the entry into such markets of specialty healthcare providers.
Physician Recruiting. At each of its hospitals, CHC seeks to attract
physicians who are trained in the latest clinical methodologies and who expand
the range of services offered.
Outpatient Services. CHC offers a variety of outpatient services at
each of its hospitals, including outpatient surgery, emergency room treatment,
physical rehabilitation, diagnostic services and home health care. This is
consistent with the Company's strategy of offering a broad range of primary
care services to the community.
Cost Controls. A critical element in the Company's strategic plan is
to establish a series of controls for each of the hospitals CHC may acquire or
contracts to operate or manage. The primary control is one of cost. Cost
controls include staffing efficiency, the consolidation of purchasing
contracts, and improved information systems. In addition, as CHC acquires
ownership and/or management of additional hospitals, it will increase its
corporate staff support to handle insurance/risk management, business systems
management, Medicare reimbursement and administration, and other significant
accounting and support functions.
Acquisition Strategy
CHC seeks to acquire acute care hospitals in rural communities that have a
diversified economic and business base. CHC targets hospitals that are either
the dominant providers in their markets or have the potential to dominate their
markets. Acquisition targets are generally operated by tax-exempt entities or
municipal governments which may lack adequate resources to operate at maximum
efficiency or profitability or, in certain cases, by large hospital management
companies focusing on urban hospital systems. CHC assesses potential
acquisitions based on expected improvement in operating efficiencies, potential
to increase market penetration, future capital requirements and historical cash
flow.
Upon acquisition of the hospital, CHC will take immediate steps to implement
its financial and operating policies which are designed to improve the
operating performance of the hospital and achieve the Company's financial
goals. CHC endeavors to improve the hospital's efficiency through more
effective staff management and the renegotiation or elimination of agreements
for the purchase of hospital services. As CHC's portfolio of hospitals under
management increases, CHC will initiate volume purchasing arrangements with
suppliers and thereafter convert each hospital's purchasing activities into
such volume purchasing agreements.
In furtherance of its strategic plan, a CHC subsidiary acquired, effective as
of January 1, 1997, the operating assets of the Podiatry Hospital of
Pittsburgh, a 13 licensed bed specialty hospital, with current operations
consisting entirely of podiatry surgical procedures. The purchase price for the
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hospital assets, which consist of land, buildings, inventory and equipment, was
$1,542,000, of which $1,166,000 was cash, $250,000 was in the form of a
purchase money second mortgage taken by the seller, and $126,366 represented
the assumption of certain liabilities. The cash portion of the purchase price
was funded by an affiliate of the Financing Source through an accounts
receivable credit facility designed for the hospital and the issuance by the
purchaser (a subsidiary of CHC) of two promissory notes totaling $635,000,
secured by a first mortgage on the acquired assets. One of the notes, in the
amount of $335,000, bears interest at the rate of 17% per annum, with the
principal amount and all accrued interest currently due on July 15, 1998. The
other note, in the amount of $300,000, bears interest at a rate equal to three
percentage points over the prime rate, with the principal amount and all
accrued interest due also on July 15, 1998. This financing is not part of the
overall $20 million in acquisition financing that the Financing Source has
committed to the Company for its use based on the qualifying receivables of the
companies to be acquired (see "Business Strategy" above).
SOURCE OF REVENUE
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 hospitals from each category of payor for the year
ended December 31, 1996:
Medicare and Medicaid............................. 48.1%
Private and other sources......................... 51.9%
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 by expanding
services within its market area and by implementing more efficient operating
and cost control systems, there can be no assurance that the Company's
profitability will not be adversely affected. (see "Business Segments -
Hospital Management Division-CHC" above for a description of a Medicare denial
of claims at one of CHC's hospitals).
EMPLOYEES AND MEDICAL STAFFS
CHC has approximately 366 full-time and part-time employees at its hospitals,
of which approximately 45% are nursing personnel (i.e. registered nurses,
licensed vocational nurses and licensed practical nurses). Other than for the
Dickenson County Medical Center in Clintwood, Virginia, which has 235
employees, CHC's employees are not represented by any labor union. The union
agreement pertaining to Dickenson County Medical Center has an initial
expiration
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date of July 1, 1998, 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 staffs of CHC's hospitals are generally not employees
of CHC or its hospitals; however, they utilize the hospitals 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 hospitals are dependent upon the physicians practicing in the communities
served by CHC's hospitals. A small number of physicians account for a
significant portion of patient admissions at some of CHC's hospitals. Changes
in the healthcare industry may increase the competition for physicians
specializing in primary care. There can be no assurance that, despite their
vigorous physician recruitment efforts, CHC's hospitals will be able to recruit
physicians successfully or to retain the loyalty of the physicians whose
patient admissions are important to the hospitals. Many of the markets where
CHC's hospitals are located are also facing shortages of nursing personnel, and
it is expected that such shortage will continue.
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. In certain areas in which CHC operates, there are
other hospitals or facilities that provide inpatient and outpatient services
comparable to those offered by CHC's hospitals. Certain of these facilities may
have greater financial resources and may offer a wider range of services than
CHC's hospitals. Even in communities in which CHC's hospitals are the sole or
dominant providers of acute care hospital services, CHC may face competition
from hospitals and other healthcare providers in nearby communities. The
competitive position of CHC's hospitals 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
Of the five hospitals owned, leased or managed by CHC, one is accredited by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). With
regard to accreditation by JCAHO, or the American Osteopathis Association,
another accrediting body, it is CHC's intention to meet the requirements of the
managed care contract providers for each of its hospitals. 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. Each of CHC's hospitals is licensed by the department of health or an
equivalent agency in the state in which the hospital is located. These federal
and
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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 hospitals 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.
Certificate of Need. Certificate of need regulations continue to
control the development and expansion of healthcare services and facilities in
many of the states in which CHC's leased or managed hospitals operate. Those
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.
BIOLOGICAL PRODUCTS DISTRIBUTION DIVISION - BHC
In July 1995, the Company entered into a joint venture with Biologic Health
Resources, a Nevada corporation ("BHR"), to establish a pharmacy benefits
management company specializing in the delivery of biotech products and patient
services known as BioLogic Health Care ("BHC"). Initially, BHC was formed as a
general partnership in California to service the northern California
market("BHC-Northern California"). The Company owns a 25% interest in
BHC-Northern California, through its wholly-owned subsidiary, RxMIC. BHC's
managed care structure provides health care payors and providers a cost
efficient alternative to the traditional home infusion companies for the
delivery of biotech products and services. BHC will seek to lower the cost of
care associated with home infusion services through a vertically integrated
pharmacy benefits management organization for biological and biotech
therapeutics used to treat many rare chronic diseases. BHC is concentrating its
efforts in northern California on providing services and biological products to
hemophilia patients. As an alternative to hemophilia treatment centers and home
infusion companies, BHC contracts with pharmaceutical manufacturers to purchase
biological and biotech products and through arrangements with non-chain retail
pharmacies, BHC facilitates the dispensing of these products to the patients.
The BHC delivery model is patient focused and can be custom-tailored to
function effectively within any integrated delivery system for their rare
chronically-ill patients. The BHC model enables a more efficient management of
all the cost points relative to alternate-site chronic care and will enhance
the health care provider's ability to better manage risk.
BHC-Northern California has been operating since July 1995 with the first
revenues generated in September 1995. For the period ended December 31, 1996
revenues and net earnings for BHC-Northern California amounted to approximately
$4,800,000 and $290,000, respectively. The Company expanded the BHC operation
into Southern California and Florida during the second
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half of 1996. In October 1996, BioLogic Health Care-Florida, Inc. ("BHC-FL")
was incorporated in Florida to operate the BHC Florida operation. BHC-FL is
owned 87.5% by Rx Medical Management Inc. ("RXM Management"), a wholly-owned
subsidiary of the Company. The remaining 12.5% of BHC-FL is owned by one of the
principals of BHR. In November 1996, BioLogic Health Care-Southern California,
Inc. ("BHC-SC") was incorporated in California. BHC-SC is owned 75% by RxM
Management. The remaining 25% of BHC-SC is owned by one of the principals of
BHR. As of December 31, 1996, the Company, due to a partnership dispute
described below, has provided a reserve equal to 100% of its investment in
BHC-Northern California of $180,000.
In March 1997, the Company learned that the principals of BHR had conspired to
violate the BHC agreements by entering into direct competition with the BHC
operations in Florida and California. The Company has commenced an action in
Florida Circuit Court (Dade County) against BHR's new Florida operation seeking
to enjoin BHR from stealing BHC-FL's patients and for damages in an unspecified
amount for breach of contract and tortious interference with BHC-FL's business.
In addition, the Company has commenced an action in Superior Court of
California (Santa Clara County) seeking a dissolution of the BHC-Northern
California general partnership, an accounting of monies alleged to have been
diverted by BHR from BHC- Northern California for BHR's own use, and for
damages for breach of contract. Notwithstanding the pendency of this
litigation, the Company is proceeding with its business plan of building the
BHC business in the Florida and California markets. See Item 3. "Legal
Proceedings".
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,
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1996 1995 1994
---- ---- ----
Hospitals and Medical Clinics 16,926 1,844 N/A
Pharmaceutical Products 54 - N/A
Financial information for 1994 is not available due to the start-up of both
segments in 1995, and such information presented is not indicative of the
Company's future financial condition or results of operations.
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
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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 offering, paying,
soliciting, or receiving remuneration to induce, or in exchange for, 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
of up to $25,000, imprisonment for up to five years, civil monetary penalties,
and exclusion from 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 civil money penalties of up to $15,000 per
prohibited service provided, assessments equal to 200% 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 in which the Company operates
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.
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Certain Company Transactions. Certain of the Company's prior or
current arrangements with physicians, including joint ventures, may be subject
to enforcement action under the Antikickback Statute, Stark Law, or state laws.
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 those 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.
As of January 1, 1995, the Company was unable to comply with certain provisions
of the Stark Law, as well as certain similar state self-referral statutes, as
they applied to the medical diagnostic business of the Company's Manatee
subsidiary. The Company took steps during 1995, before the Company's medical
diagnostic business ceased operations, to notify its physician shareholders of
its intent not to accept referrals that would be prohibited under the Stark
Law. The Company has determined that, based on prohibited referrals to the
Company's medical diagnostic business (before it ceased operations), the
Company could be subject to penalties and the return of monies collected on
certain services provided in an aggregate amount of up to approximately $50
million. The Company believes, however, that enforcement action is unlikely,
because of the filing of the Chapter 7 bankruptcy petition by Manatee and the
cessation of the Company's medical diagnostic operations. Nevertheless, the
Company cannot be certain concerning the probability of an enforcement action.
In June 1996, the Company was served with a subpoena duces tecum issued by the
Office of Inspector General ("OIG") of the Department of Health and Human
Services in connection with an investigation then being conducted by the OIG.
The investigation related to possible false claims or otherwise improper
billing practices at the Company's Quail Diagnostic Laboratories in Fresno,
California. The Company sold Quail Diagnostic Laboratories in August 1995 (see
Item 1. "Business - Business Strategy - Historical Perspective"). The Company
complied with the document production requested in the OIG subpoena. In
September 1996, the OIG informed the Company that it had terminated the
investigation and that there would be no further proceedings in connection with
the subject matter of the investigation.
Medicare and Medicaid Reimbursement. The Company is dependent upon
reimbursement from the Medicare and Medicaid programs. Recent legislation
adopted or proposed in Congress in connection with efforts to reduce the
federal budget deficit likely will 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.
DISCONTINUED OPERATIONS
Following the sale of its California clinical laboratory operations in August
1995, the Company, through its Manatee subsidiary, owned and operated eight
clinical laboratories which analyzed human tissue, blood and other bodily
fluids for the medical community. The Company's clinical laboratories serviced
clients in the metropolitan areas surrounding Tampa, Miami, Orlando and
Jacksonville, Florida and New Orleans, Louisiana. In addition, Manatee owned
and operated an imaging center in Pinole, California which performs MRI's. In
early March 1995, the Company
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had closed an MRI center in Fort Lauderdale, Florida that had been acquired in
July 1993. Due to continuing unprofitability of Manatee, and intense pressure
from certain of Manatee's creditors who were in the process of executing on
previously obtained judgments, on April 4, 1996 Manatee filed a voluntary
petition under Section 301 of Chapter 7 of Title 11 of the United States Code,
11 U.S.C. Sections 101 et. seq. in the Bankruptcy Court for the Southern
District of Florida (Case No. 96-21552 BKC-RBR). On April 10, 1996, John P.
Barbee of Fort Lauderdale, Florida was appointed Trustee of the bankrupt
estate. The bankruptcy filing forced the closing of all the Company's remaining
clinical laboratory facilities in Florida (the assets of the New Orleans lab
had been sold in January 1996 to another laboratory company in an arms-length
transaction). The trustee in bankruptcy has assumed Manatee's position as
general partner of the partnership that owns and operates the Pinole,
California MRI center. The bankruptcy proceeding is presently pending.
EMPLOYEES.
The Company has a total of approximately 376 employees, of whom approximately
370 are engaged in the operation of the Company's hospital management and
pharmaceutical products distribution divisions, and the remainder are engaged
in administrative functions at the Company's Fort Lauderdale, Florida corporate
headquarters.
Item 2. PROPERTIES
The Company's corporate headquarters are located in Fort Lauderdale, Florida,
where it leases approximately 3,000 square feet at a monthly rental of $4,700
through September 1998. In addition, BHC operates four locations in leased
premises in Pinole, California (1,000 square feet), Santa Clara, California
(1,000 square feet), Pasadena, California (1,100 square feet) and Clearwater,
Florida (1,000 square feet) at an aggregate monthly rental of $4,205, with
lease terms ending at various dates through August 31, 1999. Other than the
Podiatry Hospital of Pittsburgh, CHC has no owned or leased properties. The
Podiatry Hospital consists of two buildings (the hospital and an administrative
building) and adjacent parking lots, and is situated on approximately 2.8
acres.
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Item 3. LEGAL PROCEEDINGS
In September 1996, the Company paid $108,000 to Hickstead, Limited in return
for a satisfaction of the judgment obtained by Hickstead against the Company in
Florida Circuit Court in the amount of $666,920, plus post-judgment interest.
As additional consideration for this settlement, the Company repurchased, for
$117,000, 50,000 shares of RXM Common Stock that had previously been delivered
to Hickstead as security for the Company's performance of the underlying
agreement with Hickstead, which agreement was the basis of the original suit
brought by Hickstead that ultimately resulted in the aforementioned judgment.
On July 22, 1994, two individuals who hold an aggregate of 1,125 shares of RXM
Common Stock filed a stockholders' lawsuit against the Company and the
Company's Chief Executive Officer (who is also a director of the Company), in
the United States District Court for the Southern District of Florida under the
title Abraham Kreloff and Sheila Rich v. Rx Medical Services Corp. and Michael
L. Goldberg (Case No. 94-6671-Civ-Zloch). The Company was served with the
summons and complaint on August 3, 1994. The two plaintiffs in this action seek
to represent a class composed of all persons who purchased or otherwise
acquired shares of RXM Common Stock in the period from June 3, 1992 through
April 22, 1994. The complaint alleges the dissemination of materially false and
misleading statements in connection with certain press releases and filings by
the Company with the Securities and Exchange Commission between 1991 and 1994
allegedly causing an artificial inflation of the market price of RXM Common
Stock. The complaint seeks damages in an unspecified amount. The Company has
retained securities litigation counsel to represent it and Michael L. Goldberg
in this matter. The Company and Mr. Goldberg filed an answer denying the
allegations contained in the complaint and raising several affirmative
defenses. In February 1996, the parties entered into a stipulation in which
settlement of the class action lawsuit was reached. Pursuant to the terms of
the settlement, the Company will pay to the class $150,000 in cash, $40,000 of
which is allocated to administrative costs, and issue 1.9 million warrants to
purchase an equal number of shares of RXM Common Stock at an exercise price of
$1.30 per warrant and with an exercise period of not less than two years
beginning August 11, 1996. If, prior to final approval of the settlement by the
Court in the form of execution of an Order and Final Judgment, the Company's
Common Stock rises above $2.00 per share and remains above $2.00 per share
through the date the Court signs the Order and Final Judgment, the exercise
price of the warrants will be $1.75. The documents formalizing the settlement
have been signed by the parties and were presented to the Court for its
approval in mid-February 1996, but the Order and Final Judgment have yet to be
signed. Due to the decrease in the market price of RxM Common Stock since the
time the settlement agreement was originally negotiated, the Plaintiffs'
attorneys have requested a renegotiation of the settlement terms.
In September 1996, the Company paid $105,000 in return for a complete
satisfaction of the $655,000 judgment obtained in the action commenced in
October 1994 against the Company in the Superior Court of California, County of
Orange, under the title General Electric Company v. Rx Medical Services Corp.
(Case No. 736302).
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The Company, in March 1995, received from the U.S. Securities and Exchange
Commission (the "Commission") a Formal Order Directing Private Investigation
And Designating Officers To Take Testimony In The Matter of Rx Medical Services
Corp., dated March 8, 1995. The Company has been advised by the Commission that
the investigation is confidential and should not be construed as an indication
by the Commission or its staff that any violation of law has occurred.
On July 21, 1995, an action was commenced against the Company and three of its
directors in the United States District Court, Eastern District of California
(Fresno), under the title Shari Rainwater and Greg Rainwater v. Rx Medical
Service Corp., et. al. (Case No. CV-F-95-5596 REC/DIR). The complaint alleges
fraud and misrepresentation and breach of a written employment agreement and
seeks damages of not less than $600,000, declaratory relief and injunctive
relief. The suit relates to the acquisition by the Company, through a merger
transaction, of Quail Diagnostic Laboratories, Inc. in October 1992 and the
subsequent employment of Shari Rainwater as the officer in charge of the
Company's California clinical laboratory operations. Due to the filing of the
Chapter 7 petition in bankruptcy by Manatee, most of the claims made by the
plaintiffs can no longer be prosecuted. The only cause of action remaining to
be litigated is one in fraud and rescission against the Company as a result of
the merger. The Company intends to vigorously defend this action and has filed
an answer denying liability as claimed by the plaintiffs. The action is
presently in the discovery stage and the trial is anticipated to take place in
January 1998.
In February 1996, an action was commenced against the Company and Manatee by
Eduardo R. Latour, as Trustee for Physicians Reference Lab Short Term Trust (the
"Trust") in the Circuit Court for Pinellas County, Florida (Case No.
96-00683-CI-15). The beneficiary of the Trust is Deborah H. Behar, the wife of
Morris Behar. Mr. Behar is a director of the Company and formerly an executive
vice president and a director of Manatee, and was previously the trustee of the
Trust. The complaint filed in this action alleges a default under a promissory
note from Manatee, which note had been guaranteed by the Company, and seeks
damages in the amount of $3,060,000 against Manatee and the Company. In
addition, the complaint seeks to foreclose a security interest in certain assets
of Manatee that had been pledged to the Trust by Manatee. The promissory note
and pledge had been delivered to the Trust in connection with the Trust's sale,
in December 1991, to Manatee of the Physician's Reference Laboratory Services
group of clinical laboratories located in Florida. Due to the Manatee
bankruptcy, the Company remains the sole defendant in the action. Plaintiff
filed a motion for summary judgment which was recently denied by the Circuit
Court. Should the Court ultimately render judgement against the Company in the
amount claimed in the complaint, the Company, which has no current ability to
pay such a judgment, will seek to negotiate a settlement with the plaintiff on
terms acceptable to both the Company and its Financing Source. In the event such
a settlement cannot be reached and the plaintiff subsequently seeks to execute
on the judgment against the Company's assets, the Company may have no
alternative but to seek protection under the federal bankruptcy laws. No trial
date has been set in this action.
On April 4, 1996, Manatee filed a voluntary petition under Section 301 of
Chapter 7 of Title 11 of the United States Code, 11 U.S.C. Sections 101 et.
seq. in the Bankruptcy Court for the Southern District of Florida (Case No.
96-21552 BKC-RBR). On April 10, 1996, John P. Barbee of Fort
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Lauderdale, Florida was appointed trustee of the bankrupt estate. The
bankruptcy proceeding is pending.
On April 8, 1997, the Company commenced an action against Biologic Health
Resources (Florida) LLC ("BHR LLC") and five individuals, in the Circuit Court
for Dade County, Florida, under the title Biologic Health Care - Florida, Inc.
v. Biologic Health Resources (Florida) LLC, et. al. (Case No. 97-07747 CA 25).
The complaint alleges that the principals of BHR conspired to violate the BHC
agreements by entering into direct competition with the BHC-FL operation, and
seeks injunctive relief and damages against two former BHC employees for
violations of restrictive covenants contained in their employment agreements,
and damages against BHR LLC and its principals for tortious interference with
the business of BHC-FL. A motion by the Company for a temporary injunction
against one of the former BHC-FL employees was recently granted. The action is
presently in discovery and no trial date has been set.
On June 10, 1997, the Company commenced an action against BHR in the Superior
Court of California, County of Santa Clara, under the title Rx Medical Imaging
Corp v. Biologic Health Resources, et. al. (Case No. CV-766768). The complaint
alleges that the defendants violated the partnership agreement of BHC in a
number of respects, including misappropriation of partnership assets and
diverting partnership customers, and seeks a dissolution of BHC, an accounting
of BHC's affairs, and damages. On August 7, 1997, the defendants filed a
cross-complaint in the pending action against the Company, RxMIC, the Financing
Source, the Company's president and general counsel, and Bay Cities
Pharmaceutical Services and its two principals, seeking a dissolution of the
partnership and an accounting, and damages for breach of contract, breach of
fiduciary duty, fraud, recission, conversion, constructive trust, and
conspiracy to defraud. The Company asserts that the allegations contained in
the cross-complaint are totally without merit, and on behalf of itself and its
two employees the Company intends to vigorously defend against such allegations
and pursue the causes of action contained in the complaint. Since discovery has
not yet commenced, it is too early to anticipate a trial date in this action.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS
The executive officers of the Company as of December 31, 1996, are as follows:
NAME AGE POSITION
---- --- --------
Michael L. Goldberg 48 Chairman of the Board and
Chief Executive Officer
Randolph H. Speer 47 Director, President and
Chief Operating Officer
Donald J. Brumlik 59 Director and Secretary
Michael L. Goldberg, 48 (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.
Randolph H. Speer, 47 (a director since 1994). Mr. Speer was named President
and Chief Operating Officer of the Company in July 1994. On August 2, 1994, Mr.
Speer was appointed to the Board of Directors. Previously, he was Senior Vice
President, Treasurer and Chief Financial Officer of Summit Health Ltd. from
April 1989 through April 1994. In April 1994, Summit Health Ltd. was merged
into OrNda HealthCorp. Previous to Summit Health Ltd., from January 1981 until
April 1989, Mr. Speer was Vice President and Chief Financial Officer of Sierra
Land Group, Inc. which, prior to the merger with OrNda HealthCorp., was the
largest shareholder of Summit Health Ltd. Mr. Speer is a CPA, licensed in the
State of California.
Donald J. Brumlik, 59 (a director since 1992). Mr. Brumlik was a manager in the
tax department in the Chicago office of Arthur Young & Company, C.P.A.s, from
1963 to 1968. Thereafter, he practiced law in Chicago from 1968 to 1977. From
1978 to 1980, Mr. Brumlik was active in several real estate ventures as
promoter and developer in the Los Angeles, California area, and from 1980 to
1985, was employed with Watt Industries, Inc. of Santa Monica, California, with
his final position there as a vice president. In 1985, Mr. Brumlik joined
Calmark Holding Corp. of Los Angeles, California and left that company as its
President in 1990. In his positions as Chief Operating Officer and as
President, Mr. Brumlik directed and administered companies with annual revenues
in excess of $200 million and more than 1,500 employees. Shortly thereafter, he
began serving the Company as an independent consultant through his wholly owned
real estate development and management company, Saxony Asset Management, Inc.
On January 1, 1992, Mr. Brumlik accepted the position of Executive Vice
President and a director with the Company. Mr. Brumlik became the Secretary of
the Company in September 1995.
The executive officers hold office at the pleasure of the Board of Directors.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Effective December 3, 1996, shares of RXM Common Stock were formally delisted
from the American Stock Exchange (the "Exchange"). Prior to that date, there
had been no trading of the RXM Common Stock since April 1, 1996. The Company is
informed that the RXM Common Stock qualified for trading on the OTC Electronic
Bulletin Board (the "OTC Bulletin Board"). Trading of the RXM 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 Exchange for
1995 and 1996 and on the OTC Bulletin Board for the first two quarters of 1997:
HIGH LOW
---- ----
1995 First Quarter 2.25 1.44
Second Quarter 1.88 .88
Third Quarter 1.63 .94
Fourth Quarter 1.19 .69
1996 First Quarter 1.50 .50
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter N/A N/A
1997 First Quarter .56 .06
Second Quarter .38 .13
On July 31, 1997, the closing price of RXM Common Stock on the OTC Bulletin
Board was $.16 per share. In December 1993, RXM Common Stock was combined in a
1 for 4 reverse stock split. The prices in the preceding table have been
adjusted to reflect this combination. As of July 31, 1997, based on the records
of the Company's transfer agent, there were 793 holders of record of RXM Common
Stock, excluding the number of beneficial owners whose shares are held in
street name.
Although the RXM 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.
Effective November 1, 1996, the 1,250,000 shares of the Company's Series E
Preferred Stock were automatically fully converted into 625,000 shares of RXM
Common Stock, as specified in the preferences and rights of the Series E
Preferred Stock. Pursuant to the terms of the Series E Preferred Stock, the
Company was required to make monthly dividend payments at the rate of 12% per
annum payable in arrears, calculated on the average of the total dollar value
of the Series
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E Preferred Stock remaining unconverted for the preceding month
(see Note 6 to the Notes to Consolidated Financial Statements). At December 31,
1996 the Company had dividends in arrears in the amount of $304,589.
On January 1, 1996 and on a quarterly basis thereafter (April 1, July 1, and
October 1) until the shares of the Company's Series F Preferred Stock are fully
converted (on or before July 1, 1998), as specified in the preferences and
rights of the Series F Preferred Stock, the Company is required to make
quarterly dividend payments, in cash at the rate of $.40 per annum per share
or, at the election of the holder, in RXM Common Stock, payable in arrears (see
Note 6 to the Notes to Consolidated Financial Statements). At December 31,
1996, the Company had dividends in arrears in the amount of 180,081 shares of
RXM Common Stock.
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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)
Years Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 16,980 $ 1,844 -- -- --
Loss from continuing operations $ (9,988) $ (4,731) $ (3,637) $ (4,051) $ (6,448)
Net loss $ (7,669) $(20,421) $(12,904) $(14,025) $ (8,752)
Loss per common share:
Loss from continuing operations $ (1.16) $ (0.55) $ (0.58) $ (1.18) $ (2.71)
Net loss $ (0.89) $ (2.39) $ (2.05) $ (4.09) $ (3.68)
Distributions -- -- -- -- --
Total assets $ 6,390 $ 2,547 $ 9,379 $ 12,666 $ 18,419
Working capital deficit $(34,711) $(25,503) $(15,381) $ (8,492) $ (9,878)
Long-term debt $ 592 $ 736 -- $ 1,210 --
Total shareholders' equity (deficit) $(34,396) $(26,361) $ (6,059) $ 2,181 $ 7,881
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
From inception, the Company was unable to achieve profitability in its medical
diagnostic business. Commencing in 1995, and continuing in 1996, management
embarked on a plan to reorganize the Company. In March 1995, the Company closed
an MRI center in Fort Lauderdale, Florida. An MRI center, in Victorville,
California, was closed in June 1994. In August 1995, the Company sold its
entire clinical laboratory operation in California and in January 1996 it sold
its Louisiana laboratory operation.
In April 1996, due to continuing losses and intense pressure from creditors,
Manatee, which operated the Company's medical services business segment, filed
a voluntary petition under Chapter 7 of the U.S. Bankruptcy Code. This resulted
in the closing of the Company's remaining medical diagnostic facilities.
Management decided that it was in the best interests of the Company and its
shareholders to discontinue the operations of this division, and to focus its
future efforts on the expansion of its hospital management and pharmaceutical
distribution businesses.
As a result of this decision, for all years presented, the medical services
business segment has been accounted for as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30, which provides for
the reporting of operating results of discontinued operations separately from
the continuing operations. Gains and (losses) from discontinued operations
amounted to $229,000, $(15,183,000) and $(9,393,000) for the years ended
December 31, 1996, 1995 and 1994, respectively.
Also, gains and losses on the settlement of liabilities and on the purchase of
accounts receivable have been accounted for as extraordinary items in
accordance with APB 30, which provides for the reporting of such material,
non-recurring events separately from the continuing operations. Gains and
(losses) from extraordinary items amounted to $2,090,000, $(507,000) and
$126,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Including losses from continuing operations, net losses of the Company were
$(7,669,000), $(20,421,000) and $(12,904,000) for the fiscal years 1996, 1995
and 1994, respectively.
Results of Operations
1996 vs. 1995
Revenues from hospitals and medical clinics for 1996 were $16.9 million
compared to $1.8 million in 1995. The Company began operating its hospital
management division in 1995 and revenues include the results of operations from
August 1, 1995. In 1996, the Company began operating two additional hospitals -
the Dickenson County Medical Center located in Clintwood, Virginia ("DCMC") and
the Whitwell Medical Center located in Whitwell, Tennessee ("WMC"). Revenues
include the results of operations of DCMC for the nine month period from April
1,
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1996 to December 31, 1996 and WMC for the seven month period from April 1,
1996 to October 31, 1996.
Revenues from pharmaceutical products for 1996 were $0.1 million compared to $0
revenues in 1995. The Company began operating this business in 1996 and
revenues include the results of operations from July 1, 1996.
Costs and expenses increased 320% from $5.3 million in 1995 to $22.2 million in
1996. Of these 1996 expenses, hospital management operations accounted for
$20.4 million, pharmaceutical distribution accounted for $0.3 million, and the
corporate expenses of the Company were $1.5 million. This decrease of 40% in
corporate expenses is the result of management's efforts to aggressively
control costs.
Interest expense increased 230% from $1.4 million in 1995 to $4.7 million in
1996. This increase was due primarily to a higher level of borrowings from the
Financing Source. (See "Financial Condition, Liquidity, and Capital
Resources").
No provision for income taxes has been provided on the losses from discontinued
operations since existing net operating loss carryforwards from continuing
operations may be substantially limited.
1995 vs. 1994
Revenues from hospitals and medical clinics for 1995 were $1.8 million compared
to $0 revenues in 1994. The Company began operating this business in 1995 and
revenues include the results of operations from August 1, 1995.
Costs and expenses increased 84% from $2.9 million in 1994 to $5.3 million in
1995. Of these 1995 expenses, hospital management operations accounted for $2.7
million and the corporate expenses of the Company were $2.6 million. This
decrease of 10% in corporate expenses is the result of management's efforts to
aggressively control costs.
Interest expense increased 90% from $0.7 million in 1994 to $1.4 million in
1995. This increase was due primarily to a higher level of funding from the
Financing Source. (See "Financial Condition, Liquidity, and Capital
Resources").
No provision for income taxes has been provided on the losses from discontinued
operations since existing net operating loss carryforwards from continuing
operations may be substantially limited.
Financial Condition, Liquidity, and Capital Resources
At December 31, 1996 and 1995, the Company's working capital deficit was $34.7
million and $25.5 million, respectively. This increase in the working capital
deficit was primarily due to a $13.9 million increase in the level of funding
from the Financing Source as well as operating losses. In addition, the Company
is a defendant in various lawsuits. Through December 31, 1996, the Company's
ability to continue as a going concern is dependent on successful resolution of
the lawsuits and the continued funding of its operations by the Financing
Source. Without this
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funding, the Company's ability to operate its business would be adversely
impacted. As a result of the elimination by the Company of a portion of its
unprofitable operations, the continued dependence on the Financing Source has
been lessened. However, until the Company's revenues increase so as to exceed
the Company's operating expenses, the Company will continue to utilize funding
from the Financing Source, or other alternative sources of funding, to the
extent available. To the extent fundings from the Financing Source are
insufficient to pay the Company's operating expenses, the Company will require
alternative sources of funding. There can be no assurance that any alternative
sources of financing will be available to the Company at such point in time, or
if obtainable, on terms that are commercially feasible.
The Company's continuing operations (i.e. hospital management ("CHC") and
pharmaceutical products distribution ("BHC")) are presently being funded
through financing agreements with the Financing Source and the various
operating facilities. Agreements to purchase the eligible accounts receivable
exist with Smith County Hospital, Dickenson County Medical Center, and the
retail pharmacy used by BHC in Florida to facilitate the delivery of the
biological products to patients. At December 31, 1996, approximately $12.4
million had been funded (net) by the Financing Source and its related
affiliates under these current agreements. Of this amount, approximately $4.9
million had been funded under agreement with WMC, which was sold on October 31,
1996.
In April 1994, the Company entered into an agreement-in-principle with the
Financing Source, pursuant to which the Financing Source, through one or more
of its subsidiaries or affiliates, would provide up to $20.0 million to be used
to purchase the medical accounts receivable of businesses which may be acquired
in the future by the Company. As a stipulation of this arrangement, the Company
employed a new President and Chief Operating Officer in August 1994. See Item
13. "Certain Relationships and Related Transactions".
In October 1993, the Company entered into an agreement with the Financing
Source, providing the Company with accounts receivable based financing which
initially produced cash to the Company of approximately $2.6 million (the "1993
Commitment"). That agreement, scheduled to expire in April 1997, provided that
the Financing Source would periodically purchase certain eligible accounts
receivable, up to an aggregate of $25 million. However, due to the bankruptcy
of Manatee, the Company is not generating accounts receivable that could be
purchased under the 1993 Commitment. The Financing Source and its related
affiliates, through April 4, 1996, had funded and invested approximately $21.0
million in debt and equity in the Company. Of that amount, $2.3 million was
paid for equity and $18.7 million was advanced pursuant to the 1993 Commitment
and additional advances. The Financing Source had, and continues to have, no
contractual obligation to fund additional advances pursuant to the 1993
Commitment.
While the Company has not yet reached profitability operationally, it has
several plans of action in progress designed to improve profitability as well
as cash flow. The Company has divested its loss operations and will continue to
pursue additional sources of revenues by expanding its hospital operations and
other specialty medical services.
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Going Concern
The report of the independent auditors of the Company on its 1996, 1995 and
1994 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, defaults on its accounts payable and other
outstanding liabilities, litigation, as well as to the uncertainty of the
Company's compliance with certain Medicare and state statutes and regulations.
As of January 1, 1995, the Company was unable to comply with certain provisions
of the OBRA 1993 amendments to the Stark Act, as well as, certain similar state
statutes. Although the Company has not been the subject of, and is not
currently the subject of, any administrative proceedings concerning violations
of federal or state self-referral statutes or regulations, in the event that
the Company is found to have violated such statutes and regulations, it could
be subject to cumulative fines and penalties and could also be required to make
refunds, which may aggregate up to approximately $50.0 million. The Company
believes, however, that due to the filing of the Chapter 7 bankruptcy petition
for Manatee, the likelihood of such enforcement actions occurring is remote.
As mentioned in the Financial Condition section, the Company is dependent on
the continued funding currently being received from the Financing Source 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.
Outlook
The Company views its decision to discontinue the operation of its medical
diagnostic services business segment and to invest its current and future
resources on the expansion of its hospital management and pharmaceutical
products distribution businesses as positive from a strategic standpoint. The
hospital management division is expected to provide strong growth for the
Company through the use of proper operating and acquisition strategies; the
pharmaceutical products distribution division is presently expanding its
operations from Northern California into Southern California and the State of
Florida; and the Company is currently seeking to acquire other synergistic
lines of business. (See Part I Item 1. "Business"). There can be no assurance,
however, that the Company will achieve its strategic objectives.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the index of financial statements and schedules as presented on page
39. Information on selected quarterly financial data is not required for the
Registrant pursuant to the rules of the Commission.
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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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 September 15, 1995. 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 fall of 1997. The
number of directors is currently set at nine. Only seven persons, however, are
currently serving as directors. Following is information concerning each of the
current directors of the Company:
Michael L. Goldberg, 48 (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.
Randolph H. Speer, 47 (a director since 1994). Mr. Speer was named President
and Chief Operating Officer of the Company in July 1994 and in August 1994, he
was appointed to the Board of Directors. Previously, Mr. Speer was Senior Vice
President, Treasurer and Chief Financial Officer of Summit Health Ltd. from
April 1989 through April 1994. In December 1993, Summit Health Ltd. was merged
into OrNda HealthCorp. Previous to Summit Health Ltd., from January 1981 until
April 1989, Mr. Speer was Vice President and Chief Financial Officer of Sierra
Land Group, Inc. which, prior to the merger with OrNda HealthCorp., was the
largest shareholder of Summit Health Ltd. Mr. Speer is a CPA licensed in the
State of California.
Donald J. Brumlik, 59 (a director since 1992). Mr. Brumlik was a manager in the
tax department in the Chicago office of Arthur Young & Company, C.P.A.s, from
1963 to 1968. Thereafter, he practiced law in Chicago from 1968 to 1977. From
1978 to 1980, Mr. Brumlik was active in several real estate ventures as
promoter and developer in the Los Angeles, California area, and from 1980 to
1985, was employed with Watt Industries, Inc. of Santa Monica, California, with
his final position there as a vice president. In 1985, Mr. Brumlik joined
Calmark Holding Corp. of Los Angeles, California and left that company as its
President in 1990. In his positions as Chief Operating Officer and as
President, Mr. Brumlik directed and administered companies with annual revenues
in excess of $200 million and more than 1,500 employees. Shortly thereafter, he
began serving the Company as an independent consultant through his wholly owned
real estate development and management company, Saxony Asset Management, Inc.
On January 1, 1992, Mr. Brumlik accepted the position of Executive Vice
President and a director with the Company. Mr. Brumlik became the Secretary of
the Company in September 1995.
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Morris Behar, 49 (a director since 1992). Mr. Behar was instrumental in the
establishment and development of Physicians' Reference Laboratory Services
("PRLS") of Charlotte County, Inc.; PRLS of Countryside, Inc.; PRLS of Fort
Myers, Inc. and PRLS of New Port Richey, Inc., which were acquired by the
Company in December 1991. Mr. Behar was also instrumental in developing Gulf
Coast Medical Supply, Inc. ("Gulf Coast"), a laboratory medical supply company
that provides certain laboratory products and supplies to ARM laboratories and
to other domestic and foreign medical facilities. Mr. Behar also manages
nuclear cardiology centers and radiation cancer treatment centers. Prior to
April 1, 1994, Mr. Behar had been employed as a Vice President of Manatee
(since December 1991) and as the Executive Vice President of Manatee Medical
Laboratories, Inc. ("Manatee") (since March 1993). On April 1, 1994, Mr. Behar
relinquished his title of Executive Vice President of Manatee in connection
with the termination of his employment agreement and the supply agreement
between Gulf Coast and the Company.
Don L. Dominick, 51 (a director since 1992). Mr. Dominick has been President
and Chief Executive Officer of Genesis Corporation of Escondido, California
since May 1991. Genesis Corporation is active in insurance sales and training,
scholarship assistance and real estate development and management. Mr. Dominick
was also National Sales Director with the A.L. Williams Corporation, a life
insurance company located in Atlanta, Georgia, for twelve years and has been
active in numerous private real estate and other business ventures during the
last five years.
Phillip E. Pearce, 68 (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., 66 (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
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
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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 18 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.
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Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides a summary of cash and non-cash compensation for
each of the fiscal years ended December 31, 1996, 1995 and 1994 with respect to
the Company's Chief Executive Officer and the only other executive officers
whose compensation exceeded $100,000 in the fiscal year ended December 31, 1996
(the "Named Officers").
Long Term
Compensation
Annual Compensation Awards
----------------------------------------------------------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary ($) Bonus Compensation Option/SARs (#)
--------------------------- ---- ---------- ----- ------------ ---------------
($) ($)
Michael L. Goldberg 1996 165,000 -0- -0- -0-
Chief Executive Officer 1995 165,000 -0- -0- -0-
1994 165,000 -0- -5,700- 175,000
Randolph H. Speer 1996 200,000 -0- -0- -0-
President and Chief Operating 1995 200,000 -0- -0- -0-
Officer 1994 76,900(1) -0- -0- 100,000
Donald Brumlik (2) 1996 149,000 -0- -0- -0-
Secretary 1995 149,000 -0- 3,500 -0-
1994 149,000 -0- 3,500 120,000
- -------------------
(1) Mr. Speer commenced employment with the Company in August 1994.
(2) Effective January 1996, Mr. Brumlik ceased active employment with the
Company, yet remained an officer and a director of the Company. His
compensation for 1996 was pursuant to a severance plan previously
adopted by the Board of Directors. As of January 1997, Mr. Brumlik was
not entitled to receive any additional compensation.
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STOCK OPTIONS
There were no grants of stock options by the Company to the Named Officers
during 1996.
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 1996 and unexercised options
held as of December 31, 1996:
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at FY-End (#) FY-End ($)
--------------------------- --------------------------
Shares
Acquired on
Name Exercise (#) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------------ ----------- ------------- ----------- -------------
Michael L. Goldberg -0- -0- 200,000 -0- -0- -0-
Randolph H. Speer -0- -0- 100,000 -0- -0- -0-
Donald Brumlik -0- -0- 120,000 -0- -0- -0-
Compensation of Directors
It has been the policy of the Company not to compensate its directors for their
services as directors; however, in July 1993, the Company granted options to
purchase 12,500 shares of the Company's Common Stock to each director as
compensation for their respective 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. One of the directors, Morris Behar, was employed by Manatee
pursuant to an employment agreement which provided, among other things, a
position as the Executive Vice President of Manatee at an annual salary of
$200,000 extending through 1996. Effective April 1, 1994, this arrangement was
terminated and Mr. Behar served as an independent contractor pursuant to a
consulting agreement through April 1996, at which time said agreement was
terminated as a result of the Manatee bankruptcy. See Item 3. "Legal
Proceedings" and Item 13. "Certain Relationships and Related Transactions".
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors of Rx Medical Services
Corp has not met since September 1995. The following report, which documents
the components of the Company's executive officer compensation programs with
respect to the executive officers of the Company, was included in last year's
annual report. Since there have been no changes in the report, it is repeated
in its entirety. As of December 31, 1996, the Company had three executive
officers:
Compensation Philosophy and Strategy
With regard to executive compensation, the Company's strategy is to
maintain a strong pay-for-performance culture and align reward systems
with shareholders'
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interests. The compensation structure is intended to reflect the
Company's current financial circumstances and places a heavy emphasis
on the long-term objectives of increasing value and providing
significant returns to shareholders. The particular elements of the
compensation program for executive officers are explained below:
- BASE SALARY. Attract and retain executive officers by delivering
a competitive rate of base pay. Market competitive rates are
determined by comparison with average compensation levels of
comparable companies. The Board of Directors believes that the
average pay of these companies is a reasonable reference point to
which to target and manage base pay over time, recognizing the
Company's growth potential and need for executive-level
experience and skills in the current phase of the Company's
development. Until recently, the Company had been unable to
compensate its executive officers at a competitive rate and,
therefore, chose to supplement the base salary of its executive
officers with Stock Option awards, as more fully described below.
- STOCK OPTION PROGRAM. The Company, through its 1992 Long Term
Incentive Plan, offers a stock option program to its executive
officers. The Board strongly believes that by providing those
persons who have substantial responsibility for the management
and growth of the Company with an opportunity to increase their
ownership of Company stock, the best interests of shareholders
and executives will be closely aligned. This is particularly
important given the Company's current financial condition. The
Compensation Committee believes that stock options are an
excellent vehicle for compensating its employees because options
tend to reward their holders for realizing longer term market
performance. As with other compensation components, the
Compensation Committee looks to individual performance as a guide
in determining option awards to executives.
- ANNUAL INCENTIVE COMPENSATION. The Company is authorized
pursuant to the 1992 Long Term Incentive Plan to provide annual
incentive pay to its executive officers in cash; however, no such
compensation has been provided to date. The Committee believes
that this policy is appropriate given the difficulties faced by
the Company. The Company intends to implement the practice of
providing annual incentive pay once the Company's earnings and
cash flow are sufficient to justify such a program. The purpose
of such annual incentive compensation would be to deliver
competitive levels of compensation for the attainment of
strategic goals that the Board believes are primary determinants
of financial stability and share price over time.
Chief Executive Officer Compensation
In considering the compensation for the Chairman and Chief Executive
Officer, the Committee considered both Company and individual
performance. Factors considered include how well the CEO performed in:
- Establishing strategic direction for the Company.
- Building and maintaining a sound management team.
- Providing leadership to achieve the Company's goals and
objectives.
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- Taking the actions necessary to reduce the Company's losses and
otherwise improve its financial condition.
The Committee has made the following determination regarding the
compensation of Mr. Goldberg:
- Mr. Goldberg's base salary was changed to $165,000 effective
January 1, 1992. His prior annual salary was $60,000. The
Committee believes that a salary increase was justified given the
growth of the Company despite its then current financial
condition and Mr. Goldberg's willingness to accept a lower than
competitive pay level during such growth. Mr. Goldberg's current
base salary is still significantly below the levels of CEO
positions at comparable medical laboratory companies. Given the
Company's financial difficulties, the Board believes Mr.
Goldberg's base salary has been at an appropriate level and
expects that it will not increase until the Company becomes
profitable and achieves it performance objectives.
- Mr. Goldberg did not receive annual incentive cash compensation
for his performance in 1995. The Committee recommends that Mr.
Goldberg be eligible to receive such annual incentive cash
compensation when the Company becomes profitable.
- Mr. Goldberg received stock options to purchase 57,500 shares of
the Company's Common Stock in 1994.
Chief Operating Officer Compensation
Mr. Speer commenced employment with the Company in August 1994 and is
the Company's President and Chief Operating Officer. Mr. Speer's base
salary of $200,000 per year was approved by the Board of Directors at
the time Mr. Speer was hired. In addition, at the commencement of his
employment with the Company, Mr. Speer received stock options to
purchase 100,000 shares of the Company's Common Stock. Neither the
Board nor the Committee have established specific Company and
individual performance criteria in 1995 pertaining to Mr. Speer.
Conclusion
The Committee believes that its stated compensation philosophy serves
the Company's best interests and believes its decision regarding 1995
executive compensation adequately reflects the significant challenges
the Company faced in 1995 and the current operating environment.
THE COMPENSATION COMMITTEE
Don L. Dominick
Phillip E. Pearce
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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 (HOSPITAL MANAGEMENT) INDEX
Cumulative Total Return
-------------------------------------------------
12/91 12/92 12/93 12/94 12/95 12/96
Rx MEDICAL SERVICES CORP. RXMS 100 147 126 40 16 1
NASDAQ STOCK MARKET (U.S.) INAS 100 116 134 131 185 227
S & P HEALTH CARE (HOSPITAL MGMT) IHSM 100 78 117 125 174 204
- ---------------------------
* $100 invested on 12/31/91 in stock or index including reinvestment of
dividends. Fiscal year ending December 31.
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 RXM Common Stock. The Company currently has two series of
preferred stock outstanding, designated Series C and F. Effective November 1,
1996, the Financing Source exercised its right to receive 625,000 shares of the
Company's Common Stock in converting the 1,250,000 shares of Series E Preferred
Stock that had been issued to the Financing Source in 1994 in connection with
the disposition of the balance of the Company's real estate portfolio. For a
description of the relative rights and preferences of each such series, see
Note 6 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 Preferred Stock and RXM Common Stock vote together
as a single class except as may otherwise be required by law. At December 31,
1996, the 1,325,000 shares in the name of the Financing Source were transferred
to Intercontinental Investment Associates, Ltd. ("IIA"), a Nevada limited
liability company affiliated with the Financing Source. At December 31, 1995,
422,488 shares of Series C Preferred Stock outstanding were owned of record and
beneficially by three directors of the Company individually.
The following table sets forth information as of July 31, 1997, 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 RXM 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.
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AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER TITLE OF CLASS OWNERSHIP (1) OF CLASS
---------------- -------------- ----------------- ----------
Michael L. Goldberg Common 514,633 (2) 5.6%
(also a director) Preferred 63,836 (3) 6.2%
888 East Las Olas Blvd., Suite 210
Fort Lauderdale, FL 33301
Morris Behar Common 257,245 (4) 2.8%
(also a director) Preferred 341,893 (5) 33.4%
209 State Street
Oldsmar, FL 34677
Kachina, Inc. Common 750,000 (6) 8.2%
6125 Memorial Drive
Dublin, OH 43017
Intercontinental Investment Assoc. Common 1,325,000 (7) 14.5%
6125 Memorial Drive
Dublin, OH 43017
Directors: (all with an address at
888 East Las Olas Blvd., Suite 210
Fort Lauderdale, FL 33301
Donald J. Brumlik Common 368,995 (8) 4.0%
Preferred 16,759 (9) 1.6%
Don L. Dominick Common 79,112 (10) .86%
Phillip E. Pearce Common 39,914 (11) .43%
Michael J. Pickering, M.D. Common 82,345 (12) .90%
Randolph H. Speer Common 108,000 (13) 1.2%
All Executive Officers, Directors Common 1,450,244 (14) 15.8%
and Nominees as a Group Preferred 422,488 (15) 41.3%
(1) As of July 31, 1997, there were 9,164,117 shares of RXM Common Stock
and 1,022,758 shares of Preferred Stock issued and outstanding.
(2) Includes 241,250 shares representing stock options exercisable within
60 days.
(3) Represents 2,014,824 shares of RXM Common Stock that may be obtained
by conversion of Series C Preferred Stock.
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(4) Includes 25,000 shares representing stock options exercisable within
60 days and 232,245 shares of RxM Common Stock registered in the name
of Gulf Coast Medical, Inc., a company controlled by Mr. Behar.
(5) Represents 10,790,997 shares of RXM Common Stock that may be obtained
by conversion of Series C Preferred Stock. Of the 341,893 shares of
Series C Preferred Stock attributable to Mr. Behar, 56,26 shares are
registered in the name of Gulf Coast Medical, Inc.
(6)(7) In July 1996, Kachina distributed, in equal amounts, the 750,000
shares to Lance K. Poulsen, Donald H. Ayers, Rebecca S. Parrett and
Barbara C. Larson. These individuals are officers, directors and the
sole shareholders of the Financing Source, Kachina and IIA and may be
deemed to be the beneficial owners of the shares of RXM Common Stock
owned by the Financing Source and its affiliates, Kachina and IIA.
(8) Includes 159,500 shares representing stock options exercisable within
60 days.
(9) Represents 528,956 shares that may be obtained by conversion of Series
C Preferred Stock.
(10) Includes 12,500 shares representing stock options exercisable within
60 days.
(11) Consists of 39,914 shares representing stock options exercisable
within 60 days.
(12) Includes 56,409 shares representing stock options exercisable within
60 days.
(13) Includes 100,000 shares representing stock options exercisable within
60 days.
(14) Includes 578,323 shares representing stock options exercisable within
60 days.
(15) Represents 13,334,777 shares that may be obtained by conversion of
Series C Preferred Stock.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an agreement, dated April 20, 1994 (the "Merger Agreement"), with
an affiliate of Kachina, Inc. ("Kachina"), the Company will sell, and Kachina
will purchase, up to 500,000 shares of RXM Common Stock at $6.00 per share,
subject to the completion of future acquisitions by the Company. This is in
addition to the 500,000 shares of RXM Common Stock previously issued to Kachina
as part of the Merger Agreement. The additional 500,000 shares are to be sold
to Kachina on the basis of 100,000 shares for every $4.0 million paid by the
Company in acquisition price, inclusive of consideration to be paid in cash,
property, services, stock, assumption of debt or other form of benefit to the
seller. Accordingly, the Company may receive up to an additional $3.0 million
for the additional shares of RXM Common Stock to be so issued. The Financing
Source is an affiliate of Kachina.
In conjunction with the Merger Agreement, on April 20, 1994, the Company
entered into an agreement-in-principle (the "Purchase Commitment") with the
Financing Source, pursuant to which the Financing Source, through one or more
of its subsidiaries or affiliates, would provide up to $20.0 million to be used
to purchase the medical accounts receivable of businesses which may be acquired
in the future by the Company. The terms of the Purchase Commitment are to be
substantially similar to the terms of the present purchase arrangement between
Manatee and
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affiliates of the Financing Source, pursuant to which the Company's accounts
receivable are financed. The Company has utilized the Purchase Commitment to
obtain the funds required to acquire CHC in July 1995, the Company's hospital
management subsidiary (see Item 1. "Business"). In addition, the Company agreed
to employ a new executive officer for a one year term who would also be a
member of the Company's Board of Directors. Pursuant to that agreement,
Randolph H. Speer was appointed by the Company to the Board of Directors and
elected President and Chief Operating Officer and has been elected to serve on
the Board for a one year term or until his successor is elected and qualified.
On September 20, 1994, the Company entered into an agreement which resulted in
the disposition of the wrap mortgage portfolio owned by a partnership in which
a subsidiary of the Company is the general partner. See Item 1. "Business -
Discontinued Operations." The transaction entailed a transfer of the
partnership's mortgage portfolio and a return to the Company for cancellation
of the 286,287 shares of the Company's Series B Preferred Stock which was
contributed by the Company to the partnership. In addition, the sum of $200,000
has been paid in settlement of outstanding obligations totaling $242,000 owed
to an individual unaffiliated with the Company, who performed consulting
services to the partnership. The Financing Source provided the Company with a
loan of $200,000 to make the aforesaid settlement payment and the Financing
Source received as collateral, to secure repayment of that loan, a pledge of
286,287 shares of a new class (Series D) of the Company's Preferred Stock. The
loan by the Financing Source to the Company was by a note, originally for one
year, at an interest rate of 20%, payable monthly, interest only, with a
balloon payment of $200,000, plus any accrued interest, due on September 19,
1995. On September 26, 1995, the due date of this loan was extended until
January 31, 1996, and subsequently further extended until September 30, 1997.
Effective December 31, 1996, however, the Financing Source canceled the note
and added the principal and accrued interest on this loan, totaling
$243,333.29, to the outstanding balance of the debt due to Financing Source. As
a result of the cancellation of the note, the shares of the Company's Series D
Preferred Stock were released from the pledge.
On October 20, 1994, the Company entered into an agreement, pursuant to which
the Company divested itself of its interests in, and future obligations with
respect to, the balance of its real estate portfolio. In consideration for the
payment of $1,250,000 in cash, provided to the Company by the Financing Source
pursuant to the transaction described below, and the issuance by the Company of
stock options to purchase 50,000 shares of RXM Common Stock exerciseable at
$1.00 per share, the Company was completely released from any and all liability
resulting from and out of the operations of its income properties.
To consummate the above-described transaction, the Company sold to the
Financing Source for $1,250,000, (a) 700,000 shares of RXM Common Stock and (b)
1,250,000 shares of a new Series E Convertible Preferred Stock. The Series E
Preferred Stock provides for an annual dividend of 12%, payable monthly, and is
convertible into Common Stock at the rate of one share of RXM Common Stock for
every two shares of Series E Preferred Stock. The conversion in any one
calendar quarter cannot exceed 156,250 shares of RXM Common Stock, and any
shares of Series E Preferred Stock not converted by November 1, 1996 shall
automatically convert to shares of RXM Common Stock as of that date. The
Company agreed, with respect to the 700,000 shares
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of RXM Common Stock issued on October 24, 1994, which had a market value as of
that date of $787,500, and the 625,000 shares of RXM Common Stock to be issued
on conversion of the Series E Preferred Stock, to include all of these shares
in a registration statement that the Company had previously filed with the
Securities and Exchange Commission, which registration statement has not yet
been declared effective. As of December 31, 1994, a total of $29,589 has
accrued on account of dividends payable on the Series E Preferred Stock. As
part of this transaction, and the transaction referred to above, relating to
the disposition of the Company's wrap mortgage portfolio, the Company issued
250,000 shares of RXM Common Stock with a market value of $265,625 on the date
of issuance (September 26, 1994), to an affiliate of the Financing Source.
In consideration of the funding of $1.0 million by the Financing Source to
facilitate the acquisition by the Company of CHC (see Item 1. "Business"), the
Company pledged to the Financing Source all of the issued and outstanding
common and preferred stock of CHC as collateral for the repayment of the loan.
On March 29, 1996, an affiliate of the Financing Source, purchased the Whitwell
Medical Center, Whitwell, Tennessee and the Dickenson County Medical Center,
Clintwood, Virginia, and simultaneously with the purchase, leased the two
facilities to subsidiaries of CHC for a term of 20 years pursuant to separate
operating agreements. Under the operating agreements, CHC is to pay a
stipulated rental for the facilities and equipment contained therein. In a
related agreement, CHC was granted an option to purchase both hospitals,
exerciseable at any time prior to May 1, 1997, for a purchase price equal to
the assumption of all liabilities and indebtedness attributable to or secured
by the land, buildings and equipment comprising both facilities. See Item 1.
"Business" with regard to CHC's transfer of its option to purchase the Whitwell
Medical Center to Ameris Health Systems, the subsequent exercise of the option
by Ameris Health Systems, and the sale of Whitwell Medical Center to Ameris
Health Systems on October 31, 1996.
38
39
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:
Page
----
Report of Independent Certified Public Accountants 42
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 43
Consolidated Balance Sheets at December 31, 1996 and 1995 44-45
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31,
1996, 1995 and 1994 46
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 47-48
Notes to Consolidated Financial Statements 49-63
(a)(2) List of Financial Statement Schedule
The following consolidated financial statement schedule (numbered in accordance
with Regulation S-X) of Rx Medical Services Corp. for the years ended December
31, 1996, 1995 and 1994 are included in this Report:
Page
----
Reports of Independent Certified Public Accountants on Schedule 64
II - Valuation and Qualifying Accounts 65
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)(3) List of Exhibits: (numbered in accordance with Item 601 of Regulation
S-K)
Exhibit Incorporation by
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 3(c)**
of Stock, filed with Nevada Secretary of State (December 1991)
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 4(a)****
Registrant
4(b) Certificate of Designation, Series C Preferred Stock 4(b)#
4(c) Certificate of Designation, Series D Preferred Stock 4(c)#
39
40
4(d) Certificate of Designation, Series E Preferred Stock 4(d)#
4(e) Certificate of Designation, Series F Preferred Stock 4(e)#
10(a) Sale and Subservicing Agreement dated as of October 7, 1993, by and 10(kk)+
among Manatee Medical Laboratories, Inc., NPFII-W, Inc. and National
Premier Financial Services, Inc.
10(b) Agreement of Merger, dated April 20, 1994, together with supplementary 10(a)++
letter from Kachina, Inc., dated April 20, 1994
10(c) Purchase Commitment, dated April 20, 1994, from NCFE 10(b)++
10(d) Promissory Note, Security Agreement and Pledge Agreement, dated 10(c)+++
September 19, 1994, from Rx Medical Services Corp. to NCFE
10(e) Plan and Agreement of Merger, dated July 7, 1995, by and among Rx 10(a)++++
Medical Services Corp., CHC Acquisition Corp. and Consolidated
Health Corporation of Mississippi, Inc.
10(f) Asset Purchase Agreement, dated as of August 11, 1995, by and among 10(e)++++
Meris Laboratories, Inc., Rx Medical Services Corp. and Manatee
Medical Laboratories, Inc. [for northern California]
10(g) Asset Purchase Agreement, dated as of August 11, 1995, by and among 10(f)++++
Meris Laboratories, Inc., Rx Medical Services Corp. and Manatee
Medical Laboratories, Inc. [for southern California]
10(h) Laboratory Services Agreement, made as of August 12, 1995, between 10(g)++++
Meris Laboratories, Inc. and Rx Medical Services Corp.
10(i) Amendment to Asset Purchase Agreement, dated as of August 17, 1995 by 10(h)++++
and among Meris Laboratories, Inc., Rx Medical Services Corp. and
Manatee Medical Laboratories, Inc. [for southern California]
10(j) Pledge Agreement, dated as of July 13, 1995, from Rx Medical Services 10(j)#
Corp. to NCFE
10(k) Hospital Lease Agreement, dated as of November 1, 1995, 10(k)#
between Smith County, MS and CHC Management, Inc.
10(l) Articles of Merger (CHC) filed November 14, 1995 with MS Secretary of 10(l)#
State
10(m) Operating Agreement, dated as of March 30, 1996, between NPF-X, Inc 10(m)#
and CHC Whitwell, Inc.
10(n) Operating Agreement, dated as of March 30, 1996, between NPF-X, Inc 10(n)#
and CHC Clintwood, Inc.
10(o) Option to Purchase Agreement, effective as of March 29, 1996, between 10(o)#
NPF-X, Inc. and CHC
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 2(a)##
Hospital of Pittsburgh and CHC
10(t) Amendment to Asset Purchase Agreement, undated 2(b)##
11 Computation of Primary Earnings Per Share
21 Subsidiaries of Registrant 21#
27 Financial Data Schedule (for SEC use only)
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
40
41
+ 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
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K, dated December 3,
1996, reporting that Registrant's common stock had been delisted by
the American Stock Exchange.
41
42
Suite 2000
200 East Broward Boulevard
Ft. Lauderdale, FL 33301-1915
954 768-9900 o FAX 954 768-9908
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
GRANT THORNTON
Grant Thornton LLP Accountants and
Management Consultants
Board of Directors
Rx Medical Services Corp.
We have audited the accompanying consolidated balance sheets of Rx Medical
Services Corp. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996, 1995 and 1994.
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 generally accepted auditing
standards. 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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, 1995 and 1994, in conformity with generally
accepted accounting principles.
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,
lessors, taxing authorities and others, is in default of certain loan covenants
and is dependent on the settlement of various lawsuits, the SEC investigation
and on continued funding by the senior lender. In addition, as described in
Note 10, there are uncertainties concerning the Company's compliance with
various federal and state statutes and certain provisions of the Omnibus Budget
Reconciliation Act of 1993, as well as, certain similar state statutes. 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 Notes 1 and 10. 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
Fort Lauderdale, Florida
June 27, 1997 (except for Note 11, as to
which the date is July 21, 1997)
42
43
RX MEDICAL SERVICES CORP.
Consolidated Statements of Operations
(Dollars in thousands except per share amounts)
Years ended December 31,
--------------------------------
1996 1995 1994
------- -------- --------
Revenues:
Hospitals and medical clinics $ 16,926 $ 1,844 $ -
Pharmaceutical products 54 -- --
-------- -------- --------
16,980 1,844 --
-------- -------- --------
Costs and expenses:
Compensation and benefits 10,546 2,310 1,454
Pharmaceutical products 45 -- --
Supplies 1,889 168 --
Fees for services 2,927 423 207
Bad debts 2,313 723 106
Depreciation and amortization 160 73 37
Occupancy 784 432 262
Occupancy - related party 805 -- --
Equipment rental and maintenance 472 63 61
Equipment leased - related party 244 -- --
Other 1,978 1,079 738
-------- -------- --------
22,163 5,271 2,865
-------- -------- --------
Operating loss (5,183) (3,427) (2,865)
Other (income) expenses:
Interest 132 42 12
Interest - related party 4,540 1,373 734
Loss due to impairment of assets held for sale 53 -- --
Loss due to impairment of goodwill -- 107 --
Loss on investment of partnership 108 -- --
Equity in earnings of partnership -- (31) --
Other (income) expense (28) (187) 26
-------- -------- --------
4,805 1,304 772
-------- -------- --------
Loss from continuing operations (9,988) (4,731) (3,637)
Gain (loss) from discontinued operations 229 (15,183) (9,393)
-------- -------- --------
Net loss before extraordinary items (9,759) (19,914) (13,030)
Extraordinary items:
Gain (loss) on settlement of liabilities 1,511 (507) 126
Gain on purchase of accounts receivable 579 -- --
-------- -------- --------
Net Loss $ (7,669) $(20,421) $(12,904)
======== ======== ========
Net loss per common share:
Loss from continuing operations $ (1.16) $ (0.55) $ (0.58)
Gain (loss) from discontinued operations 0.03 (1.78) (1.49)
Gain (loss) from extraordinary items 0.24 (0.06) 0.02
-------- -------- --------
Net loss per common share $ (0.89) $ (2.39) $ (2.05)
======== ======== ========
Weighted average common shares
outstanding 8,644 8,557 6,280
======== ======== ========
The accompanying notes are an integral part of these financial statements.
43
44
RX MEDICAL SERVICES CORP.
Consolidated Balance Sheets
(Dollars in thousands)
December 31
------------------
1996 1995
------- -------
Assets:
Current Assets:
Cash $ 685 $ -
Accounts receivable (less allowance for doubtful accounts
of $3,607 and $380 in 1996 and 1995, respectively) 4,106 1,277
Inventories 301 -
Other 167 79
------- -------
Total current assets 5,259 1,356
------- -------
Assets held for sale 750 -
Property and equipment, at cost
Land and building - 792
Equipment 425 219
Furniture, fixtures and improvements 85 144
------- -------
510 1,155
Less: accumulated depreciation and amortization (129) (157)
------- -------
381 998
Investment in partnership - 124
Other assets (less allowance for doubtful accounts of $671
and $627 at 1996 and 1995, respectively) - 69
------- -------
$ 6,390 $ 2,547
======= =======
The accompanying notes are an integral part of these financial statements.
44
45
RX MEDICAL SERVICES CORP.
Consolidated Balance Sheets (continued)
(Dollars in thousands)
December 31
---------------------
1996 1995
--------- --------
Liabilities and equity:
Current liabilities:
Notes payable - related party $ 32,022 $ 18,146
Accounts payable 1,753 3,763
Accrued liabilities 1,767 946
Accrued liabilities - related party 245 -
Accrued compensation, benefits and related taxes 851 740
Current portion of long-term debt 229 202
Current portion of long-term debt - related party 3,062 3,062
Current portion of capital lease obligations 41 -
-------- --------
Total current liabilities 39,970 26,859
Long-term liabilities:
Long-term debt 592 736
Net liabilities of discontinued operations 100 1,313
Obligations under capital leases 124 -
-------- --------
Total long-term liabilities 816 2,049
-------- --------
Total liabilities 40,786 28,908
-------- --------
Commitments and contingencies - -
Shareholders' deficit:
Convertible preferred stock, $.001 par value, authorized shares 20,000,000,
issued and outstanding 708,775 and 1,958,775 shares at 1996 and 1995,
respectively; aggregate liquidation
preference of $2,134 and $3,624 at 1996 and 1995, respectively 1 2
Convertible preferred stock, $5.00 par value, authorized shares
1,091,250, issued and outstanding 600,270 shares at 1996 and
1995; aggregate liquidation preference of $3,362 and $3,121 at
1996 and 1995, respectively 3,001 3,001
Common stock, $.002 par value, authorized
25,000,000 shares, issued and outstanding
9,164,117 and 8,539,117 shares at 1996 and 1995,
respectively 18 15
Additional paid-in capital 37,473 37,840
Accumulated deficit (74,888) (67,219)
Treasury stock, 589,450 shares of common stock at par (1) -
-------- --------
Total shareholders' deficit (34,396) (26,361)
-------- --------
$ 6,390 $ 2,547
======== ========
The accompanying notes are an integral part of these financial statements.
45
46
RX MEDICAL SERVICES CORP.
Consolidated Statements of Shareholders' Equity (Deficit)
(Dollars and shares in thousands)
Convertible Additional Stock Accumu-
Preferred Stock Common Stock paid-in Subscription lated
----------------- ------------
Shares Amount Shares Amount Warrants capital Receivable deficit
------ ------ ------ ------ -------- ------- ---------- -------
Balance January 1, 1994 867 $ 1 3,921 $ 8 $137 $37,929 $(2,000) $(33,894)
Issued for cash 1,250 1 1,200 2 2,246
Conversion (158) 629 1 (1)
Reacquisition of stock (286) (78) (500)
Issued for services 270 88
Issued for liabilities 529 1 577
Issued for payment of debt 996 2 2,041
Issued to collateralize debt 286 50
Issuance of warrants 13
Exercise of warrants 1,071 2 (150) 163
Exercise of options 229 13
Cancellation of note receivable (250) (1) (1,999) 2,000
Stock option grants 194
Dividends on preferred stock (29)
Net loss (12,904)
------ ------ ----- --- ---- ------- ------- --------
Balance December 31, 1994 1,959 2 8,567 15 - 40,722 - (46,798)
Acquisitions 600 3,001 (3,001)
Issued for cash 1 2
Cancellation of options (46)
Dividends on preferred stock (270)
Reacquisition of stock (29) (41)
Issued for liabilities 474
Net loss (20,421)
------ ------ ----- --- ---- ------- ------- --------
Balance December 31, 1995 2,559 3,003 8,539 15 - 37,840 0 (67,219)
Conversion (1,250) (1) 625 1
Adjustments 2 (2)
Dividends on preferred stock (365)
Net loss (7,669)
----- ------ ----- --- ---- ------- ------- --------
Balance December 31, 1996 1,309 $3,002 9,164 $18 $ - $37,473 $ - $(74,888)
===== ====== ==== === ==== ======= ======= ========
The accompanying notes are an integral part of these financial statements.
46
47
RX MEDICAL SERVICES CORP.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31,
----------------------------------
1996 1995 1994
--------- -------- ---------
Cash flows from operating activities:
Net loss $(7,669) $(20,421) $(12,904)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 160 73 37
Provision for bad debts 2,313 723 106
Loss due to impairment of goodwill - 107 -
Loss on sale and disposal of property and equipment 86 6 -
(Gain) loss on settlement of liabilities (1,511) 507 (126)
Loss on investment (equity in earnings)
of partnership 124 (31) -
Expenses paid by stock issuance - - 21
Stock options granted (canceled) - (46) 73
Loss due to impairment of assets held for sale 53 - -
Loss on settlement of management fees receivable 115 - -
Gain on purchase of accounts receivable (579) - -
Changes in operating assets and
liabilities, net of effects of acquisitions:
Increase in accounts receivable (5,145) (495) -
Increase in inventories (314) - -
Decrease (increase) in other assets (69) (42) 292
Increase in accounts payable
and accrued liabilities 168 2,104 838
Increase in accrued liabilities - related party 245 - -
Change in discontinued operations (1,213) 10,456 4,546
-------- -------- --------
(13,236) (7,059) (7,117)
Cash flows from investing activities:
Proceeds from sale of property and equipment 13 - -
Acquisition of property and equipment (282) (19) (219)
Purchase of accounts receivable (4,348) - -
Payments received on purchased accounts receivable 4,816 - -
Investment in partnership - (93) -
Acquisitions, net of cash acquired - (834) -
-------- -------- --------
199 (946) (219)
Cash flows from financing activities:
Issuance of stock for cash - 2 2,246
Purchase of stock for cash - (41) -
Proceeds from notes payable - related party 13,876 8,413 5,684
Proceeds from long term debt 21 - -
Payments on notes payable - - (1,092)
Payments on long-term debt and obligations under
capital leases (175) (369) (237)
Exercise of warrants and options - - 24
-------- -------- --------
13,722 8,005 6,625
-------- -------- --------
Net increase (decrease) in cash 685 - (711)
Cash - beginning of year - - 711
-------- -------- --------
Cash - end of year $ 685 $ - $ -
======== ======== ========
47
48
RX MEDICAL SERVICES CORP.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Years ended December 31,
--------------------------
1996 1995 1994
----- ------- -------
The following is supplementary information relating to the
consolidated statement of cash flows:
Noncash investing and financing activities:
Cancellation of stock subscription receivable $ - $ - ($2,000)
Stock issued for note receivable $ - $ - $ -
Stock and options issued to retire liabilities $ - $ - $ 873
Equity to debt swap $ - $ - $ 350
Stock issued to retire debt $ - $ - $ 2,043
Preferred stock issued for obligations $ - $ - $ 0
Equipment purchased under capital lease $287 $ - $ 348
==========================
Details of businesses acquired:
Fair value of assets acquired $ - $ 2,764 $ -
Liabilities assumed $ - ($1,872) $ -
Common stock issued $ - $ - $ -
Minority interest $ - $ - $ -
==== ======= =======
Cash paid $ - $ 1,000 $ -
Less cash acquired $ - $ 166 $ -
==== ======= =======
Net cash paid $ - $ 834 $ -
==== ======= =======
For the years ended December 31, 1996, 1995 and 1994, interest paid, including
interest on the capitalized leases was $4,359, $3,471, and $1,956,
respectively. No income taxes were paid during these periods.
The accompanying notes are an integral part of these financial statements.
48
49
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
a. Principles of consolidation
The consolidated financial statements of Rx Medical Services Corp. ("RXM")
include the accounts of Rx Medical Services Corp. and its subsidiaries (the
"Company"). The subsidiaries are three wholly-owned operating companies,
Consolidated Health Corporation of Mississippi, Inc., Rx Medical Management,
Inc., and Rx Medical Imaging Corp. All significant intercompany transactions
have been eliminated.
Rx Medical Imaging Corp. is a minority partner in a related business. The
Company reports this investment, as well as its share of earnings or losses, by
application of the equity method.
b. Basis of presentation
For all years presented, the medical services business segment has been
reflected as discontinued operations in accordance with Accounting Principles
Board Opinion No. 30 which provides for the reporting of operating results of
discontinued operations separately from the continuing operations (see Note 3).
The Company has experienced significant losses in each of the past three years,
reflects a working capital deficit of $34.7 million at December 31, 1996, is in
default with respect to certain indebtedness and there are uncertainties
regarding the Company's compliance with federal and state self-referral
regulations while operating its medical diagnostic services business segment
(see Note 10b). 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 also dependent on the settlement of various
lawsuits and the continued funding of its operations from its primary financing
source, National Century Financial Enterprises, Inc. (the "Financing Source") or
an alternative source (see Note 8), without which funding the Company's ability
to continue as a going concern would be adversely impacted.
While the Company has not yet reached operational profitability, the Company has
several plans in progress to improve profitability, as well as cash flow,
including the continued development of its hospital management and
pharmaceutical products distribution businesses, while also seeking the
acquisition of ancillary related businesses. This expansion will focus on
increased revenues, market share and positive cash flow. Also, expense
reductions are expected to be achieved through the continuing implementation of
aggressive cost cutting and reorganization strategies.
c. 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 48% and 34% of the Company's revenues for the years
ended 1996 and 1995 respectively, were reimbursements provided by Medicare and
Medicaid.
Contractual allowances represent the difference between the Company's basic fee
schedule and the known 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 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 other third party payors and individuals considering past
collection history and the current status of such related
49
50
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
receivable. Accordingly, the allowance for doubtful accounts does not contain
any amounts relative to contractual allowances.
d. Property and equipment
Depreciation on the building is computed on the straight-line method over 20
years. 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 seven years.
e. Net loss per share
Net loss per share of common stock has been determined on the basis of the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. The exercise of outstanding options, computed under
the treasury stock method based upon average stock prices during the year, has
been included in the computation when dilutive. The computation of fully diluted
loss per share resulted in no material dilution. For the years ended December
31, 1996, 1995, and 1994, the weighted average common shares outstanding were
8,644,000, 8,557,000 and 6,280,000, respectively.
f. 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.
g. Goodwill
Goodwill represents the excess of cost over the fair value of net tangible and
identifiable intangible assets acquired. In assessing the continuing value of
the recorded goodwill, the Company determines its undiscounted cash flows over
the remaining life of the goodwill and compares this to the recorded value of
certain identifiable assets including goodwill net of related liabilities. Any
excess in the carrying value over the expected cash flows, discounted at the
Company's borrowing rate, is charged to operations.
At December 31, 1995 the Company determined that the net carrying amount of its
hospitals and medical clinics business segment was in excess of its fair value.
Excesses amounted to $0.1 million and this permanent impairment was recorded as
an expense in the consolidated financial statements and was equal to 100% of
remaining goodwill.
h. 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.
In November 1995, the Financial Accounting Standards Board issued Statement 123,
"Accounting for Stock-Based Compensation," which will require 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 in 1996
is the new disclosure requirement.
i. Accounting for Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that carrying amount of an asset may not be recoverable.
50
51
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
At December 31, 1996 the Company determined that the net carrying amount of
assets held for sale at one of its medical clinics was in excess of fair market
value. The Company has been offered $0.75 million for the sale of these assets
and, accordingly has reduced the carrying amount by $0.1 million. This
impairment was recorded as an expense in the consolidated financial statements.
j. 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.
k. Fair Value of Financial Instruments
The financial statements include various estimated fair value information as at
December 31, 1996, as required by Statement of Financial Accounting Standards
107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107). 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 following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Accounts Receivable and Payable: The carrying amounts approximate fair value
because of the short maturity of those instruments.
Debt: The carrying value approximates fair value because of the maturity of
those instruments.
2. Business Combinations
In July 1995, the Company acquired, through a merger transaction, a hospital
company with operations in Tennessee and Mississippi, for 1.09 million shares of
RXM Series F Preferred Stock, an agreement to issue 330,000 shares of the
Company's Common Stock and $1.0 million in cash. This business combination was
accounted for using the purchase method of accounting. In connection with an
amendment to the merger agreement, effective May 1, 1996, 400,000 shares of the
Series F Preferred Stock were returned to the Company and the agreement to issue
the 330,000 shares of Common Stock was canceled.
The consolidated financial statements include the results of operations of this
acquisition from August 1, 1995.
The following unaudited proforma information combines the consolidated results
of operations of the Company and CHC as if the acquisition had occurred on
January 1, 1994 (in thousands, except per share amounts):
DECEMBER 31,
1995 1994
---- ----
Net revenues $ 4,802 $ 1,371
Net loss $(20,359) $(12,669)
Net loss per common share $ (2.38) $ (2.02)
The proforma results do not necessarily represent results which would have
occurred if the acquisition had taken place at the beginning of the period, nor
are they indicative of the results of future consolidated operations.
51
52
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
3. Discontinued Operations
In April 1996, due to continuing losses from the Company's medical diagnostic
services business and intense pressure from creditors, Manatee Medical
Laboratories, Inc. ("Manatee"), a wholly-owned subsidiary of the Company which
operated the medical services business segment filed a voluntary petition under
Chapter 7 of the U.S. Bankruptcy Code. This resulted in the closing of the
Company's remaining medical diagnostic facilities.
At December 31, 1995, assets and liabilities and for the years ended December
31, 1995 and 1994 the results from operations of the discontinued operations,
are reflected below (in thousands):
- -----------------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------------
Results from operations:
Revenues $ 11,496 $ 18,517
Costs and expenses (19,642) (27,910)
Estimated loss until disposition and current estimated
excess of cost over fair value (7,037) (--)
-----------------------
Loss from discontinued operations $(15,183) $ (9,393)
=======================
Accounts receivable - net 1,039 --
Property and equipment - net 514 --
Other assets 265 --
Intangibles - net 9,196 --
Accounts payable and accrued expenses (3,871) --
Notes payable 0 --
Long term debt (1,131) --
Other liabilities (288) --
Reserve for future costs (7,037) --
-----------------------
Net liabilities of discontinued operations $ (1,313) --
- -----------------------------------------------------------------======================
4. Notes Payable - Related Party
At December 31, 1996 and 1995, notes payable included amounts due to the
Financing Source, through which the Company has obtained financing
collateralized by certain accounts receivable.
The 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, 1996 and 1995. Effective January 1, 1997, the Company will be
required to account for this transaction in accordance with Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, on a prospective basis,
the effects of which have not yet been determined. Under FASB No. 125, the sale
of accounts receivable would be recognized when control has been transferred. In
those instances, the Company would be required to recognize and record the
appropriate recourse obligation.
52
53
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
The notes payable due to the Financing Source at December 31, 1996 and 1995
consisted of the following (in thousands):
1996 1995
------------------------
Note payable, interest at 14%, matures April 1997, collateralized by accounts
receivable [subject to a sale and subservicing agreement] $ 19,549 $ 15,577
Note payable, interest at 14%, matures May 1997, collateralized by accounts
receivable [subject to a sale and subservicing agreement] 525 --
Note payable, interest at 14%, matures July 1999, collateralized by accounts
receivable [subject to a sale and subservicing agreement] 11,892 2,313
Note payable, interest at 20%, matured January 1996, collateralized by 286,287
shares of Series D Preferred Stock (in default, paid in full on December 31,
1996) -- 200
Unsecured note payable, interest at 12%, due on demand 56 56
------------------------
$ 32,022 $ 18,146
========================
5. Long-Term Debt
Long-term debt at December 31, 1996 and 1995 consisted of the following (in
thousands):
1996 1995
----------------------
Unsecured promissory note payable to a trust (related party), interest at 9%,
principal and interest payable due quarterly through April 1997 (in default) $ 3,062 $ 3,062
Note payable to individuals, interest at prime plus 2%, payable in twenty equal
quarterly installments of principal and interest, commencing September 1994
through June 1999, collateralized by property and the assets of a medical clinic 324 383
Mortgage note payable to bank, interest at prime plus 1 1/2%, payable in
monthly installments of principal and interest through December 2000,
collateralized by property, equipment and accounts receivable 219 248
Note payable to the Small Business Administration, interest at 8.95%, payable in
monthly installments of principal and interest of $2,826 through March
2011, collateralized by property, equipment and accounts receivable 262 266
Unsecured non-interest bearing note payable, payable in monthly installments of
$2,000, through July 1996 16 38
Note payable to bank, interest at 8.5%, matured May 1995, collateralized by equipment
(in default) -- 3
Note payable to bank, interest at 9%, due March 1996, collateralized by equipment and
vehicles (in default, paid in full in January 1996) -- 23
----------------------
3,883 4,023
Less: Scheduled current maturities (229) (202)
Non-current maturities reclassified to current (3,062) (3,085)
----------------------
$ 592 736
======================
53
54
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
Scheduled principal maturities for each of the five years subsequent to December
31, 1996, and thereafter are estimated as follows: 1997 - $3,291,000; 1998 -
$174,000; 1999 - $129,000; 2000 - $75,000; 2001 - $13,000; thereafter $201,000.
6. Shareholders' Equity
a. Preferred stock
At December 31, 1996 the Company has authorized and issued three series of
preferred stock as follows:
Series C Preferred Stock, par value of $.001, with voting rights equivalent to
the Company's Common Stock. This preferred stock is convertible into shares of
the Company's Common Stock quarterly, using a conversion value of $5.05 per
share, with the quarterly conversion being limited to 1% of the Company's issued
and outstanding shares of common stock at the end of each quarter. On December
31, 1999, any remaining unconverted shares will automatically be converted into
the Company's Common Stock. This series of preferred stock does not pay
dividends. The Company has reserved sufficient shares of authorized and unissued
Common Stock to effect the conversion of Series C Preferred Stock. At December
31, 1996, 422,488 issued and outstanding shares of Series C Preferred Stock
remain unconverted.
Series D Preferred Stock, par value of $.001, with voting rights equivalent to
the Company's Common Stock. This preferred stock is convertible into shares of
the Company's Common Stock monthly, using a conversion value of $15.00 per
share, with the monthly conversion being limited to 25,000 shares of the
Company's Common Stock. On December 31, 1996, any remaining unconverted shares
will automatically be converted into the Company's Common Stock. This series of
preferred stock does not pay dividends. The Company has reserved sufficient
shares of authorized and unissued common stock to effect the conversion of
Series D Preferred Stock. At December 31, 1996, 286,287 issued and outstanding
shares of Series D Preferred Stock remain unconverted.
Series F Preferred Stock, par value of $5.00, with voting rights equivalent to
the Company's Common Stock. This preferred stock is convertible into shares of
the Company's common stock quarterly, using a conversion value of $5.00 per
share, without limitation. On April 1, 1998, any remaining unconverted shares
may be converted into the Company's common stock. This series of preferred stock
pays annual dividends of $.40 in arrears. The Company has reserved sufficient
shares of authorized and unissued common stock to effect the conversion of
Series F Preferred Stock. At December 31, 1996, 600,270 issued and outstanding
shares of Series F Preferred Stock remain unconverted.
b. Settlement of Litigation
On August 3, 1994 a judgment was entered in Broward County, Florida against the
Company in the amount of $666,920, plus post-judgment interest. On January 11,
1995, the Company lost its appeal of this judgment. This lawsuit is a direct
outgrowth of a judgment obtained against the Company in England by Hickstead,
Ltd. which alleged that the amount claimed represented damages resulting from a
breach by the Company to pay Hickstead on a contract to perform services. The
action resulted from an investment made by the Company in pursuit of financing
that never materialized. In September 1996, the Company settled this action. In
payment of $108,000 to Hickstead, the Company received a satisfaction of the
judgment. As additional consideration for this settlement, the Company, in
payment of $117,000, repurchased 50,000 shares of RXM Common Stock that had been
delivered to Hickstead as security for the Company's performance of the
underlying agreement.
54
55
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
On October 17, 1994, an action was commenced against the Company by a
manufacturer claiming breach of contract and rescission and seeking $1.1 million
in damages. The suit related to leased equipment (a CAT scanner) used in the
Company's discontinued medical services business segment. The Company has a
remaining liability of $655,000 recorded in the accompanying consolidated
financial statements as of December 31, 1995, related to the obligation under
this capital lease. In September 1996, the Company settled this action by paying
the sum of $105,000 in return for a satisfaction of the $655,000 judgment.
During 1996, the Company settled additional outstanding litigation with eight
creditors by paying the aggregate sum of $393,600, including monies for the
repurchase of an additional 539,450 shares of RXM Common Stock. These
settlements relate to $617,215 of current liabilities recorded in the
accompanying consolidated financial statements as of December 31, 1995
c. 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 issuable upon exercise of stock warrants, and Common Stock issuable 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.
d. Stock issuances
Effective November 1, 1996, 1.250 million shares of Series E Preferred Stock,
representing all of the issued and outstanding shares of that class of Preferred
Stock, were converted into 625,000 shares of the Company's Common Stock at the
prescribed rate of one-half share of Common Stock for each share of Series E
Preferred Stock.
During 1995, the Company issued 1.09 million shares of Series F Preferred Stock
pursuant to an agreement to acquire a hospital company with operations in
Tennessee and Mississippi.
During 1995, the Company reacquired and retired 49,019 shares of the Company's
Common Stock for approximately $41,000.
e. Warrants
The Company issued warrants in conjunction with private placements of debt and
the Company's Common Stock and as consideration for other expenses. Certain of
these warrants were re-priced based on the market price of the Company's Common
Stock at the time they were re-priced. The following table summarizes the
warrant transactions for the years ended December 31, 1994, 1995, and 1996:
Shares Grant Date Exercise Price
---------------------------------------------
Outstanding at January 1, 1994 1,321,008
Granted 62,500 4/94 $ 2.63
Exercised (1,071,080) 9/92 & 11/93 $ .01 - $ .20
Canceled (193,738) 8/92 & 11/93 $ .20 - $21.45
----------
Outstanding at December 31, 1994 118,690
Canceled (18,690) 8/93 $13.80
----------
Outstanding at December 31, 1995 100,000
Canceled (37,500) 11/93 $ 8.00
----------
Outstanding at December 31, 1996 62,500
==========
55
56
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
The outstanding warrants as of December 31, 1996 expire at various dates ranging
from August 1997 through December 1999.
f. 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 has also granted stock options which are classified as
non-qualified, and which are not included in the 1992 Employees' Incentive Stock
Option Plan. Prior to December 31, 1995, the Company accounted for such options
under APB Opinion 25 and related Interpretations. Commencing January 1, 1996,
the Company accounts for non-qualified options issued to non-employees, under
SFAS 123, Accounting for Stock Based Compensation.
The exercise price of all options granted by the Company equals the market price
at the date of grant. No compensation expense has been recognized.
Had compensation cost for the Employees' Incentive Stock Option Plans and
non-qualified options issued to employees been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS 123,
the Company's net loss and loss per share would have been changed to the pro
forma amounts indicated below. Disclosure of such amounts is not required for
the fiscal year ended December 31, 1994 and accordingly is not presented below.
1996 1995
--------- ---------
Net loss
As reported $ (7,669) $(20,421)
Pro forma $ (7,669) $(20,537)
Primary loss per share
As reported $ (0.89) $ (2.39)
Pro forma $ (0.89) $ (2.40)
The above pro forma disclosures may not be representative of the effects on
reported net income for future years as options vest over several years and the
Company may continue to grant options to employees.
The fair value of each option grant is estimated on the date of grant using the
binomial option-pricing model with the following weighted-average assumptions
used for grants in 1995: dividend yield of 0.0 percent; expected volatility of
90.38 percent: risk-free interest rates of 7.86 percent; and expected holding
period of 5 years. There were no options granted in 1996; therefore no proforma
adjustments were required.
A summary of the status of the Company's fixed stock options as of December 31,
1996 and 1995, and changes during the years ending on those dates is as follows:
56
57
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
1996 1995
-------------------------- --------------------------
Weighted - Weighted -
Average Average
Shares Exercise Price Shares Exercise Price
-------- -------------- --------- --------------
Outstanding at beginning
of year 967,228 $ 2.62 1,047,990 $ 2.58
Granted -- -- 80,750 1.96
Exercised -- -- (100) .04
Expired (32,360) 7.81 -- --
Forfeited -- -- (161,412) 2.03
-------- ---------
Outstanding at end of year 934,868 2.79 967,228 2.62
======== =========
Options exercisable at end
of year 934,868 967,228
Weighted-average fair
value of options granted
during the year $ - $ 1.44
The following information applies to options outstanding at December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------
Weighted - Average Weighted - Weighted -
Range of Remaining Average Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- ------------------- ------- ------------------ -------------- ------- --------------
$ .0 - $ .01 55,641 1.64 .01 55,641 .01
$ .04 6,100 2.25 .04 6,100 .04
$.0875 - $ 1.00 175,000 2.59 .93 175,000 .93
$1.938 - $2.625 621,432 3.07 2.54 621,432 2.54
$4.00 24,875 2.20 4.00 24,875 4.00
$ 8.00 - $11.00 51,820 2.44 8.54 51,820 8.54
------- -------
934,868 934,868
======= =======
7. Income Taxes
Income tax expense differs from the amounts computed by applying the statutory
federal tax rate to income before income taxes. The difference is reconciled as
follows (in thousands):
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Tax (benefit) expense computed at federal statutory rate $ (2,608) $ (6,943) $ (4,387)
Financial statement losses that are not deductible for income tax purposes 33 286 1,018
Financial statement losses and tax credits with no tax benefit as a
result of net operating loss carryforwards 2,575 6,657 3,369
----------------------------------
$ -- $ -- $ --
- --------------------------------------------------------------------------------------------------------------
57
58
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
At December 31, 1996, the Company has a federal net operating loss carryforward
of approximately $52.7 million. In addition, the Company has various state net
operating loss carryforwards.
As a result of certain cumulative changes in the Company's stock ownership over
the last few years, the use of the Company's federal net operating loss
carryforward may be substantially limited. The tax net operating loss
carryforward begins to expire in 2005.
Differences between pre-tax income for financial reporting purposes and taxable
income for income tax purposes relate primarily to allowances for doubtful
accounts, goodwill amortization, valuation reserves, accrued compensation and
financial statement expenses recorded for certain stock option transactions.
Deferred tax assets and liabilities at December 31, 1996, and 1995, arose from
the following items (in thousands):
----------------------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts receivable $ 2,590 $ 1,484
Allowance for doubtful notes receivable 40 215
Accrued compensation 132 177
Loss reserve from discontinued operations 38 1,760
Outstanding stock options issued for services 172 303
Net operating loss carryforward 20,028 16,340
Reserve for impairment on assets held for sale 20 --
--------------------
23,020 20,279
Deferred tax liabilities:
Goodwill amortization -- 7
--------------------
23,020 20,272
Valuation allowance 23,020 20,272
--------------------
Net deferred amount $ -- $ --
----------------------------------------------------------------------------------
No provision for income taxes has been provided on the gains (losses) from
discontinued operations (Note 3) since existing net operating loss carryforwards
from continuing operations may be substantially limited.
8. Related Party Transactions
The Financing Source is being categorized as a related party due to the
Financing Source's stock ownership in the Company. As of December 31, 1996, the
Company is indebted to NCFE in the amount of $32.0 million. NCFE and a related
affiliate own 2.1 million shares of RXM Common Stock and 0.3 million shares of
the Company's Series D Preferred Stock.
At December 31, 1996 and 1995, the Company is indebted to a related party in the
amount of $3.1 million. This related party is Morris Behar, a director of the
Company. A consulting agreement was also implemented effective January 1, 1994,
with this director, which called for annual consideration of $200,000 and was to
extend through December 31, 1996. This agreement was terminated in April 1996 as
a result of the Manatee bankruptcy (see Note 10c).
58
59
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
9. Extraordinary Items
During 1996, the Company recorded a gain on the settlement of $2.2 million of
outstanding liabilities with ten creditors by paying the aggregate sum of $0.7
million.
During February and March 1996, the Company purchased accounts receivable from
the Financing Source at a discounted cost of $4.3 million. During the year,
collections of these receivables resulted in a gain.
These items have been accounted for as extraordinary items in accordance with
APB 30, which provides for the reporting of such material, non-recurring events
separately from the continuing operations.
10. 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 ten
years; also, the Company leases one of its facilities from an affiliate of the
Financing Source, a related party, with an initial lease term of twenty years.
Certain of the facilities leases provide for optional renewal periods. Scheduled
future minimum commitments under operating leases with remaining terms in excess
of one year at December 31, 1996 are as follows (in thousands):
- ---------------------------------------------------------------------------
All Related-Party
Years ending December 31, Leases Leases
- ---------------------------------------------------------------------------
1997 $ 1,617 $ 1,146
1998 1,502 1,146
1999 1,401 1,146
2000 1,353 1,145
2001 1,233 1,145
Thereafter 16,371 16,324
-------- --------
$ 23,477 $ 22,052
======== ========
Rent expense was $1,646,000, $167,000, and $158,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
b. Government regulation
The Company's operations are subject to extensive 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. Certain proposed changes in regulations, if enacted, could
have an adverse effect on the Company's operations and such effects could be
material.
Federal and certain state regulations restrict the nature and types of financial
relationships that medical service providers receiving reimbursement under the
Medicare and Medicaid program may have with referring physicians (the
self-referral regulations). A financial relationship is defined by the federal
regulations as an ownership or investment interest through equity or debt or
certain compensation arrangements. The Company believes that
59
60
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
there may have been violations of certain applicable statutes and regulations
with respect to the operation of certain of its clinical laboratories in
Florida.
The Omnibus Budget Reconciliation Act of 1989, often referred to as the "Stark
Act", included restrictions on physician financial relationships with
laboratories to which they refer patients but provided an exemption for publicly
traded entities that have total assets in excess of $100 million. The Omnibus
Budget Reconciliation Act of 1993 ("OBRA 1993") expanded these restrictions to
apply beyond physician financial relationships with laboratories to physician
relationships with entities that provide "Designated Health Services" (including
clinical laboratory services, radiology and other diagnostic services). However,
the Act deleted the previous exemption and substituted a requirement that the
entity have $75 million in stockholders' equity at the end of its most recent
fiscal year or on average during its prior three fiscal years. The OBRA 1993
amendments became effective on January 1, 1995.
For the period prior to January 1, 1995, should it be determined that the
Company did not comply with the federal regulations the Company may be subjected
to refunding a portion of Medicare and Medicaid revenues collected, in addition
to paying substantial penalties. As of January 1, 1995, the Company did not meet
the OBRA 1993 amendments to the Stark Act requiring $75 million in stockholders'
equity. Physician/shareholder referrals since January 1, 1995 could cause
penalties to be imposed of up to $15,000 for each item or service claimed, plus
twice the amount billed.
In April 1992, the Florida Legislature enacted the Patient Self-Referral Act of
1992 (the "Florida Act") which prohibits referrals for certain designated health
services (including clinical laboratory testing and diagnostic imaging) by a
physician to a facility in which such physician has an investment. The effective
date of this prohibition was October 1, 1994 for investment interests acquired
prior to May 1, 1992; otherwise, the effective date of the Florida Act was July
1, 1992. The Company's financial relationships with referring physicians in
respect of its clinical laboratories in Florida since October 1, 1994 and its
imaging center in Fort. Lauderdale, Florida since July 1993 did not comply with
the Act and may require the Company to refund substantial revenues.
In October 1993, the California legislature enacted legislation relating to
health care referrals which has a public company exception similar in scope to
the Stark Act as it existed prior to the OBRA 1993 amendments. The major
difference with the California self-referral legislation, effective January 1,
1995, is that it applies to both clinical laboratory and diagnostic imaging
services subsequent to January 1, 1995. The Company could be assessed
substantial fines and penalties. Legislatures in other states are considering or
have considered similar legislation which, if enacted, may have an adverse
impact on the Company to the extent that the Company acquires facilities in
those states.
The Company's inability to meet the OBRA 1993 amendment to the Stark Act
requiring $75 million in stockholders' equity, and provisions of the Florida Act
and the California self-referral legislation, could result in the imposition of
penalties and the return of revenues collected for certain services provided,
which may aggregate up to approximately $50.0 million. The Company believes,
however, that due to the filing of the Chapter 7 bankruptcy petition for
Manatee, the likelihood of such enforcement actions occurring is remote.
As of April 1996, the Company no longer operates clinical laboratories and
imaging centers, thereby eliminating additional potential fines, penalties and
refunds that could be imposed under the Stark Act (as amended) and the State
Acts.
The Company may be liable for certain delinquency penalties associated with
untimely payment of reoccurring assessments at its Florida medical diagnostic
operations. The Company believes that in the event that such penalties are
levied, they will not have a material financial impact on the Company.
60
61
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
c. Legal proceedings
On July 22, 1994, two individuals who hold an aggregate of 1,125 shares of the
Company's common stock filed a stockholders' lawsuit against the Company and the
Company's Chief Executive Officer (who is also a director of the Company). The
two plaintiffs in this action seek to represent a class composed of all persons
who purchased or otherwise acquired shares of the Company's common stock in the
period from June 3, 1992 through April 22, 1994. The complaint alleges the
dissemination of materially false and misleading statements in connection with
certain press releases and filings by the Company with the Securities and
Exchange Commission between 1991 and 1994 causing an artificial inflation of the
market price of the Company's common stock. The Company has retained securities
litigation counsel to represent it and its Chief Executive Officer in this
matter. The Company and the Chief Executive Officer have filed an answer denying
the allegations contained in the Complaint and raising several affirmative
defenses. In February 1996, the parties entered into a stipulation in which
settlement of the class action lawsuit was reached. Pursuant to the terms of the
settlement, the Company will pay to the class $150,000 in cash, $40,000 of which
is allocated to administrative costs, and issue 1.9 million warrants to purchase
an equal number of shares of the Company's Common Stock at an exercise price of
$1.30 per warrant and with an exercise period of not less than two years
beginning August 11, 1996. If, prior to final approval of the settlement by the
Court in the form of execution of an Order and Final Judgment, the Company's
Common Stock rises above $2.00 per share and remains above $2.00 per share
through the date the Court signs the Order and Final Judgment, the exercise
price of the warrants will be $1.75. The documents formalizing the settlement
have been signed by the parties and presented to the Court for its approval.
The Company has received from the U.S. Securities and Exchange Commission (the
"Commission") a Formal Order Directing Private Investigation and Designating
Officers To Take Testimony In The Matter of Rx Medical Services Corp., dated
March 8, 1995. The Company has been advised by the Commission that the
investigation is confidential and should not be construed as an indication by
the Commission or its staff that any violation of law has occurred.
On July 21, 1995, an action was commenced against the Company and three of its
directors in the United States District Court, Eastern District of California.
The complaint alleges fraud and misrepresentation and breach of a written
employment agreement and seeks damages, declaratory relief and injunctive
relief. The suit relates to an acquisition by the Company, through a merger
transaction in October 1992 and a subsequent employment agreement. Due to the
filing of the Chapter 7 petition in bankruptcy by Manatee, most of the claims
made by the plaintiffs can no longer be prosecuted. The only cause of action
remaining to be litigated is one in fraud and rescission against the Company as
a result of the merger. The Company intends to vigorously defend this action and
has filed an answer denying liability as claimed by the plaintiffs.
In February 1996, an action was commenced against the Company and Manatee by a
trust (related party). The complaint filed in this action alleges a default
under a promissory note and seeks damages in the amount of $3,060,000. The maker
of the note was Manatee. In addition, the complaint seeks to foreclose a
security interest in certain assets of Manatee that had been pledged to the
trust by Manatee. The plaintiff recently submitted an amended complaint in this
action and the Company has filed an answer containing a number of defenses to
the claims asserted in the amended complaint, as well as a third party complaint
against the former trustee of the trust alleging fraud and breach of fiduciary
duty.
On April 4, 1996, Manatee filed a voluntary petition under Section 301 of
Chapter 7 of Title 11 of the United States Code, 11 U.S.C. Sections 101 et. seq.
in the Bankruptcy Court for the Southern District of Florida. On April 10, 1996,
John P. Barbee of Fort Lauderdale, Florida was appointed trustee of the bankrupt
estate. The bankruptcy proceeding is pending.
61
62
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
11. Subsequent Events
Effective October 1, 1996, CHC agreed to a lease arrangement for its medical
clinic in Forest, Mississippi, pursuant to which CHC transferred operational
control of the clinic to a Meridien, Mississippi medical services company for a
monthly lease fee. The term of the lease was for one year, with the lessee
having the option during the year to purchase the clinic from CHC at a price of
$750,000. The lessee has exercised its right under the lease agreement to
purchase the clinic and closing of this sale occurred on July 21, 1997.
Effective January 1, 1997, a subsidiary of CHC acquired the operating assets of
a hospital in Pittsburgh, Pennsylvania. The purchase price was $1,542,000, as
follows: $1,166,000 cash, $250,000 debt in the form of a purchase money second
mortgage taken by the seller, and $126,000 assumption of liabilities. The cash
portion of the purchase price was funded by an affiliate of the Financing Source
through a $500,000 cash advance on an accounts receivable credit facility
designed for the hospital and the issuance by the purchaser of two promissory
notes totaling $635,000 secured by a first mortgage on the acquired assets.
On April 8, 1997, the Company commenced an action against Biologic Health
Resources (Florida) LLC ("BHR LLC") and five individuals, in the Circuit Court
for Dade County, Florida, under the title Biologic Health Care - Florida, Inc.
v. Biologic Health Resources (Florida) LLC, et. al. (Case No. 97-07747 CA 25).
The complaint alleges that the principals of BHR conspired to violate the BHC
agreements by entering into direct competition with the BHC-FL operation, and
seeks injunctive relief and damages against two former BHC employees for
violations of restrictive covenants contained in their employment agreements,
and damages against BHR LLC and its principals for tortious interference with
the business of BHC-FL. A motion by the Company for a temporary injunction
against one of the former BHC-FL employees was recently granted. The action is
presently in discovery and no trial date has been set.
On June 10, 1997, the Company commenced an action against BHR in the Superior
Court of California, County of Santa Clara, under the title Rx Medical Imaging
Corp v. Biologic Health Resources, et. al. (Case No. CV-766768). The complaint
alleges that the defendants violated the partnership agreement of BHC in a
number of respects, including misappropriation of partnership assets and
diverting partnership customers, and seeks a dissolution of BHC, an accounting
of BHC's affairs, and damages. On August 7, 1997, the defendants filed a
cross-complaint in the pending action against the Company, RxMIC, the Financing
Source, the Company's president and general counsel, and Bay Cities
Pharmaceutical Services and its two principals, seeking a dissolution of the
partnership and an accounting, and damages for breach of contract, breach of
fiduciary duty, fraud, recission, conversion, constructive trust, and conspiracy
to defraud. The Company asserts that the allegations contained in the
cross-complaint are totally without merit, and on behalf of itself and its two
employees the Company intends to vigorously defend against such allegations and
pursue the causes of action contained in the complaint. Since discovery has not
yet commenced, it is too early to anticipate a trial date in this action.
62
63
RX MEDICAL SERVICES CORP.
Notes to Consolidated Financial Statements
12. Segment Information
The Company operates in two business segments: the operation and management of
hospitals and medical clinics, and the distribution of pharmaceutical products.
During 1995, the Company discontinued its medical diagnostic services business
segment which has been reported as net liabilities of discontinued operations in
the consolidated financial statements. The following presents information on the
two business segments (in thousands):
------------------------------------------------------------------------------------------------------------------
Hospitals
Year ended and Medical Pharmaceutical
December 31 Clinics Products Corporate Total
------------------------------------------------------------------------------------------------------------------
Revenues 1996 $ 16,926 $ 54 $ -- $ 16,980
1995 $ 1,844 $ -- $ -- $ 1,844
1994 $ -- $ -- $ -- $ --
--------------------------------------------------------------------------
Operating profit (loss) 1996 $ (3,429) $ (201) $ (1,553) $ (5,183)
1995 $ (821) $ -- $ (2,606) $ (3,427)
1994 -- $ -- $ (2,865) $ (2,865)
--------------------------------------------------------------------------
Capital expenditures 1996 $ 547 $ -- $ 22 $ 569
1995 $ 19 $ -- $ -- $ 19
1994 -- $ -- $ 219 $ 219
--------------------------------------------------------------------------
Depreciation and amortization expense 1996 $ 131 $ -- $ 29 $ 160
1995 $ 30 $ -- $ 43 $ 73
1994 -- $ -- $ 37 $ 37
--------------------------------------------------------------------------
Identifiable assets at year end 1996 $ 6,032 $ 56 $ 302 $ 6,390
1995 $ 2,296 $ 124 $ 127 $ 2,547
1994 $ -- $ -- $ 9,379 (a) $ 9,379
-----------------------------------------------------------------------------------------------------------------
(a) Includes net assets of discontinued operations of $9,143.
13. Fourth Quarter Adjustments
In the fourth quarters of 1996, 1995 and 1994, the Company recorded significant
adjustments which effected the net losses for the years. Following is a summary
of such adjustments (unaudited, in thousands):
- --------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
Related party interest expense adjustments $ (575) $ -- $ --
Gain on purchase of accounts receivable 579 -- --
Loss on settlement of liabilities -- ( 856) --
Reserve for discontinued operations -- (1,313) --
Asset valuation adjustments (847) (6,482) (4,610)
--------------------------------------------
$ (843) $(8,651) $(4,610)
- ------------------------------------------------------------============================================
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE II
Board of Directors
Rx Medical Services Corp.
In connection with our audit of the consolidated financial statements of Rx
Medical Services Corp. referred to in our report dated June 27, 1997, which is
included in the Company's Annual Report on Form 10-K, we have also audited
Schedule II for the years ended December 31, 1996, 1995 and 1994. In our
opinion, the schedule and exhibit present fairly, in all material respects, the
information required to be set forth therein. Our report on the financial
statements referred to above includes an explanatory paragraph which discusses
uncertainties and other matters concerning the Company's compliance with
various federal and state regulations and conditions which raise substantial
doubt about the Company's ability to continue as a going concern.
/s/ Grant Thornton LLP
Fort Lauderdale, Florida
64
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Rx Medical Services Corp.
Schedule II
Valuation and Qualifying Accounts
(Dollars in thousands)
Additions
Balance at charged to Balance at
beginning costs and end of
of period expenses Deductions Adjustments period
---------- --------- ---------- ----------- ----------
Year ended December 31, 1996:
- --------------------------------------
Allowance for doubtful
accounts receivable $ 380 $3,227 (a) $ 0 $ 0 $3,607
====== ====== ===== ===== ======
Allowance for uncollectible notes
and other receivables $ 627 $ 89 $ 45 $ 0 $ 671
====== ====== ===== ===== ======
Year ended December 31, 1995:
- --------------------------------------
Allowance for doubtful
accounts receivable $ 0 $ 380 $ 0 $ 0 $ 380
====== ====== ===== ===== ======
Allowance for uncollectible notes
and other receivables $ 106 $ 521 $ 0 $ 0 $ 627
====== ====== ===== ===== ======
Year ended December 31, 1994:
- --------------------------------------
Allowance for doubtful
accounts receivable $ 0 $ 0 $ 0 $ 0 $ 0
====== ====== ===== ===== ======
Allowance for uncollectible notes
and other receivables $ 0 $ 106 $ 0 $ 0 $ 106
====== ====== ===== ===== ======
(a) includes $1003 charged to gain on purchase of accounts receivable in the
Statement of Operations.
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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/ Randolph H. Speer
--------------------------------
Randolph H. Speer
President and Chief Operating Officer
Dated: August 29, 1997
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 Dated: August 29, 1997
- ----------------------- Chief Executive Officer
Michael L. Goldberg
/s/ Randolph H. Speer Director, President, Chief Dated: August 29, 1997
- --------------------- Operating Officer and Principal
Randolph H. Speer Financial Officer
- --------------------- Director Dated:
Donald J. Brumlik
- --------------------- Director Dated:
Don L. Dominick
- --------------------- Director Dated:
Morris Behar
/s/ Phillip E. Pearce Director Dated: August 29, 1997
- ---------------------
Phillip E. Pearce
/s/ Michael J. Pickering Director Dated: August 29, 1997
- ------------------------
Michael J. Pickering, M.D.
66