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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 1-10963
RX MEDICAL SERVICES CORP.
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(Exact name of registrant as specified in its charter)
NEVADA 87-0436782
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
888 EAST LAS OLAS BOULEVARD, SUITE 210, FORT LAUDERDALE, FLORIDA 33301
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(Address of principal executive offices) (Zip code)
(954) 462-1711
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
The number of shares outstanding of the registrant's common stock, par value
$.002 per share, at September 30, 1997, was 9,164,117 shares.
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RX MEDICAL SERVICES CORP.
FORM 10-Q
Nine Months Ended September 30, 1997
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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Item 1. Financial Statements.
Rx Medical Services Corp.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands except per share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------- ----------- ----------
Revenues:
Hospitals and medical clinics $ 4,685 $ 6,043 $ 15,218 $ 13,836
Pharmaceutical products 7 -- 346 --
-------- -------- -------- --------
4,692 6,043 15,564 13,836
-------- -------- -------- --------
Costs and expenses:
Compensation and benefits 2,725 3,285 8,604 7,601
Pharmaceutical products 6 -- 288 --
Supplies 454 701 1,438 1,533
Fees for services 757 944 2,209 2,081
Bad debts 413 860 1,320 1,898
Depreciation and amortization 40 58 118 119
Occupancy 182 504 516 1,128
Occupancy-related party 241 -- 722 --
Equipment rental and maintenance 150 269 407 502
Equipment rental-related party 46 -- 137 --
Other 619 728 1,838 1,444
-------- -------- -------- --------
5,633 7,349 17,597 16,306
-------- -------- -------- --------
Operating loss (941) (1,306) (2,033) (2,470)
Other income (expense):
Interest (12) (40) (37) (142)
Interest - related party (1,608) (1,175) (4,698) (2,941)
Loss on investment in partnership -- -- -- (124)
Gain (loss) on settlement of liabilities 43 495 (30) 518
Other income 19 21 83 94
-------- -------- -------- --------
(1,558) (699) (4,682) (2,595)
-------- -------- -------- --------
Loss from continuing operations (2,499) (2,005) (6,715) (5,065)
Gain from discontinued operations -- -- 80 --
-------- -------- -------- --------
Net loss $ (2,499) $ (2,005) $ (6,635) $ (5,065)
======== ======== ======== ========
Net loss per common share:
Loss from continuing operations $ (0.27) $ (0.23) $ (0.73) $ (0.59)
Gain from discontinued operations -- -- 0.01 --
-------- -------- -------- --------
Net loss per common share $ (0.27) $ (0.23) $ (0.72) $ (0.59)
======== ======== ======== ========
Weighted average common shares
outstanding 9,164 8,539 9,164 8,539
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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Rx Medical Services Corp.
Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Assets:
Current assets:
Cash $ 369 $ 685
Accounts receivable (less allowance for doubtful accounts
of $4,173 and $3,607 at 1997 and 1996, respectively) 4,129 4,106
Inventories 467 301
Other 93 167
------- -------
Total current assets 5,058 5,259
------- -------
Assets held for sale -- 750
Property and equipment, at cost
Land and buildings 713 --
Equipment 828 425
Furniture, fixtures and improvements 183 85
------- -------
1,724 510
Less: accumulated depreciation and amortization (240) (129)
------- -------
1,484 381
Other assets (less allowance for doubtful accounts of $671
at 1997 and 1996) 60 --
------- -------
Total assets $ 6,602 $ 6,390
======= =======
The accompanying notes are an integral part of these financial statements.
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Rx Medical Services Corp.
Consolidated Balance Sheets (continued)
(Dollars in thousands)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Current liabilities:
Notes payable - related party $ 37,878 $ 32,022
Accounts payable 2,200 1,753
Accrued liabilities 2,007 1,767
Accrued liabilities - related party 1,339 245
Accrued compensation, benefits and related taxes 863 851
Current portion of long-term debt 25 229
Current portion of long-term debt - related party 3,062 3,062
Current portion of capital lease obligations 41 41
-------- --------
Total current liabilities 47,415 39,970
Long-term liabilities:
Long-term debt 204 592
Net liabilities of discontinued operations 100 100
Obligations under capital leases 95 124
-------- --------
Total long-term liabilities 399 816
-------- --------
Total liabilities 47,814 40,786
-------- --------
Commitments and contingencies -- --
Shareholders' deficit:
Convertible preferred stock, $.001 par value, authorized shares
20,000,000, issued and outstanding 708,775 shares at 1997
and 1996; aggregate liquidation preference of $2,134 at 1997
and 1996 1 1
Convertible preferred stock, $5.00 par value, authorized shares
1,091,250, issued and outstanding 600,270 shares at 1997
and 1996; aggregate liquidation preference of $3,542 and $3,362
at 1997 and 1996, respectively 3,001 3,001
Common stock, $.002 par value, authorized 25,000,000 shares, issued
and outstanding 9,164,117 shares at 1997 and 1996 18 18
Additional paid-in capital 37,293 37,473
Accumulated deficit (81,524) (74,888)
Treasury stock, 605,554 and 589,450 shares of common stock,
at par value, at 1997 and 1996, respectively (1) (1)
-------- --------
Total shareholders' deficit (41,212) (34,396)
-------- --------
Total liabilities and shareholders' deficit $ 6,602 $ 6,390
======== ========
The accompanying notes are an integral part of these financial statements.
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Rx Medical Services Corp.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net loss $ (6,635) $ (5,065)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 111 119
Provision for bad debts 1,320 1,898
Loss on sale and disposal of property and equipment 13 38
(Gain) loss on settlement of liabilities 30 (518)
Loss on investment in partnership -- 124
Changes in operating assets and
liabilities, net of effects of acquisition:
Increase in accounts receivable (1,067) (3,769)
Increase in inventories (16) --
(Increase) decrease in other assets 8 (175)
Increase in accounts payable
and accrued liabilities 455 445
Increase in accrued liabilities - related party 1,094 --
Change in discontinued operations -- (1,091)
-------- --------
Net cash used in operating activities (4,687) (7,994)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (237) (202)
Acquisition, net of cash acquired (1,166) --
Purchase of accounts receivable -- (3,131)
-------- --------
Net cash used in investing activities (1,403) (3,333)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable - related party 5,856 12,241
Proceeds from long-term debt -- 26
Payments on long-term debt and obligations under
capital leases (82) (121)
-------- --------
Net cash provided by financing activities 5,774 12,146
-------- --------
Net increase (decrease) in cash (316) 819
Cash - beginning of period 685 --
-------- --------
Cash - end of period $ 369 $ 819
======== ========
(continued)
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Rx Medical Services Corp.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
(Dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1997 1996
---------- -----------
The following is supplementary information relating to the
consolidated statement of cash flows:
Details of businesses acquired:
Fair value of assets acquired $1,542 $ --
Liabilities assumed $ 376 $ --
------ ------
Cash paid $1,166 $ --
====== ======
Non cash investing and financing activities:
Equipment purchased under capital leases $ -- $ 193
====== ======
For the nine months ended September 30, 1997 and 1996, interest paid, including
interest on obligations under capitalized leases was $3,402, and $118
respectively. No income taxes were paid during these periods.
The accompanying notes are an integral part of these financial statements.
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Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements, which are for
interim periods, do not include all disclosures provided in the audited annual
consolidated financial statements. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the footnotes thereto, together with management's discussion and
analysis of financial condition and results of operations, contained in the
Annual Report on Form 10-K for the year ended December 31, 1996 of Rx Medical
Services Corp. (the "Company"), as filed with the Securities and Exchange
Commission. The December 31, 1996 balance sheet was derived from audited
consolidated financial statements, but does not include all disclosures required
by generally accepted accounting principles.
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 from April 1, 1996 and WMC from April 1, 1996 to October 31,
1996. In 1997, the Company began operating the Podiatry Hospital of Pittsburgh
("PHP") located in Pittsburgh, Pennsylvania, and revenues include the results of
operations from that facility from January 1, 1997.
For the year ended December 31, 1996, the medical diagnostic services business
segment has been reflected as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30 which provides for the reporting of
operating results of discontinued operations separately from the continuing
operations.
The Company has experienced significant losses in each of the past three years,
had a working capital deficit of $42.4 million at September 30, 1997, is in
default with respect to certain indebtedness and there are uncertainties
regarding the Company's compliance with federal and state self-referral
regulations while operating its medical diagnostic services business segment.
However, the accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern because management believes it
has an attainable plan to overcome these matters and provide sufficient capital
to operate for the coming year. The Company's ability to continue as a going
concern is also dependent on the settlement of various lawsuits and the
continued funding of its operations from its primary lender, National Century
Financial Enterprises, Inc. (the "Financing Source") or an alternative source,
without which funding the Company's ability to continue as a going concern would
be adversely impacted.
While the Company has not yet reached operational profitability, 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.
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Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (which are of a normal recurring nature)
necessary for a fair presentation of the financial position and results of
operations. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - Earnings Per Share
Net loss per common share was computed by dividing net loss by the weighted
average number of shares outstanding. Common share equivalents resulting from
options and warrants have not been included since their effect would be
antidilutive.
NOTE 3 - Notes Payable - Related Party
At September 30, 1997, notes payable included approximately $37.9 million due to
the Financing Source, through which the Company has obtained financing
collateralized by certain accounts receivable.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS:
Revenues from hospitals and medical clinics for the three months ended September
30, 1997 were $4.7 million compared to $6.0 million for the three months ended
September 30, 1996. The decrease in revenues from hospitals and medical clinics
is primarily the result of (a) an increase in patient services provided at DCMC
which resulted in an increase of revenues of approximately $0.2 million; (b) the
Company ceased operating WMC on October 31, 1996, therefore no revenues were
generated during the three months ended September 30, 1997, which resulted in a
decrease of approximately $1.9 million; (c) the acquisition of PHP effective
January 1, 1997 which generated revenues of approximately $0.6 million for the
three months ended September 30, 1997; and (d) a cumulative decrease at other
Company hospital and medical clinics of approximately $0.2 million.
The pharmaceutical products distribution division generated nominal revenues
during the three months ended September 30, 1997 due to litigation commenced as
a result of a dispute between the Company and its joint venture partner.
Notwithstanding this litigation the pharmaceutical products distribution
division is moving forward and anticipates generating revenues in the first
quarter of 1998. The Company began this division in 1996 but it did not generate
revenues until the fourth quarter of 1996 and thus the reason why no revenues
are reflected for the three months ended September 30, 1996.
Costs and expenses decreased 24% to $5.6 million for the three months ended
September 30, 1997 from $7.3 million for the three months ended September 30,
1996. Of these 1997 expenses, hospital management operations accounted for $5.2
million, pharmaceutical distribution accounted for $0.1 million, and the
corporate expenses of the Company were $0.3 million. The decrease in costs and
expenses is primarily the result of (a) an increase in patient services provided
at DCMC resulting in an increase of costs and expenses of approximately $0.3
million; (b) the Company ceased operating WMC on October 31, 1996, therefore no
costs and expenses were incurred during the three months ended September 30,
1997, which resulted in a decrease of approximately $2.2 million; (c) the
acquisition of PHP effective January 1, 1997 which generated costs and expenses
of approximately $1.0 million for the three months ended September 30, 1997; (d)
costs and expenses associated with the pharmaceutical products distribution
division, which first incurred costs in the fourth quarter of 1996, of
approximately $0.1 million; and (e) a cumulative decrease at other Company
hospital and medical clinics and the Company's corporate headquarters of
approximately $0.9 million.
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Interest expense increased 33% to $1.6 million for the three months ended
September 30, 1997 from $1.2 million for the three months ended September 30,
1996. This increase is due to a higher level of borrowings from the Financing
Source. (see "Financial Condition, Liquidity, and Capital Resources" below).
NINE MONTHS:
Revenues from hospitals and medical clinics for the nine months ended September
30, 1997 were $15.2 million compared to $13.8 million for the nine months ended
September 30, 1996. The increase in revenues from hospitals and medical clinics
is primarily the result of (a) the nine months ended September 30, 1997 includes
nine months of operations from DCMC while the nine months ended September 30,
1996 only includes six months of operations from DCMC resulting in an increase
of revenues of approximately $4.9 million; (b) the Company ceased operating WMC
on October 31, 1996, therefore no revenues were generated during the nine months
ended September 30, 1997, which resulted in a decrease of approximately $4.2
million; (c) the acquisition of PHP on January 1, 1997 which generated revenues
of approximately $1.7 million for the nine months ended September 30, 1997; and
(d) a cumulative decrease at other Company hospital and medical clinics of
approximately $1.0 million.
Revenues from the pharmaceutical products distribution division for the nine
months ended September 30, 1997 were $0.3 million. The Company began this
division in 1996 but it did not generate revenues until the fourth quarter of
1996 and thus the reason why no revenues are reflected for the nine months ended
September 30, 1996.
Costs and expenses increased 8% to $17.6 million for the nine months ended
September 30, 1997 from $16.3 million for the nine months ended September 30,
1996. Of these 1997 expenses, hospital management operations accounted for $16.0
million, pharmaceutical distribution accounted for $0.6 million, and the
corporate expenses of the Company were $1.0 million. The increase in costs and
expenses is primarily the result of (a) the nine months ended September 30, 1997
includes nine months of operations from DCMC while the nine months ended
September 30, 1996 only includes six months of operations from DCMC which
resulted in an increase of costs and expenses of approximately $4.8 million; (b)
the Company ceased operating WMC on October 31, 1996, therefore no costs and
expense were incurred during the nine months ended September 30, 1997, which
resulted in a decrease of approximately $4.4 million; (c) the acquisition of PHP
on January 1, 1997 which generated costs and expenses of approximately $2.9
million for the nine months ended September 30, 1997; (d) costs and expenses
associated with the pharmaceutical products distribution division, which first
incurred costs in the fourth quarter of 1996, of approximately $0.6 million; and
(e) a cumulative decrease at other Company hospital and medical clinics and the
Company's corporate headquarters of approximately $2.6 million.
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Interest expense increased 52% to $4.7 million for the nine months ended
September 30, 1997 from $3.1 million for the nine months ended September 30,
1996. This increase is due primarily to a higher level of borrowings from the
Financing Source (see "Financial Condition, Liquidity, and Capital Resources"
below).
No provision for income taxes has been provided on the gain from discontinued
operations since existing net operating loss carryforwards from continuing
operations may be substantially limited.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
During the nine months ended September 30, 1997, the Company's working capital
deficit increased by approximately $7.6 million to $42.4 million. This increase
in the working capital deficit was primarily due to a $5.9 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 September 30,
1997, 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 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 Company's various
operating facilities. Agreements to finance eligible accounts receivable exist
with Smith County Hospital, DCMC, PHP, and the retail pharmacy used by BHC in
Florida to facilitate the delivery of biological products to patients. At
September 30, 1997, approximately $16.9 million had been funded (net) by the
Financing Source and its related affiliates under these current agreements. Of
this amount, approximately $3.5 million had been funded under agreement with
WMC, which the Company ceased operating on October 31, 1996.
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 a portion of 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 reports 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's subsidiary that operated the medical
diagnostic services business segment ("Manatee") 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 in April 1996, the likelihood of such
enforcement actions occurring is remote.
As mentioned in the Financial Condition section, the Company is dependent on the
continued funding currently being received from the Financing Source 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.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
The registrant held its 1997 annual meeting of stockholders on November 20, 1997
in Columbus, Ohio.
At the annual meeting, the following directors were elected to hold office until
the next annual meeting of stockholders or until their respective successors are
elected and qualify: Michael L. Goldberg, Phillip E. Pearce, Michael J.
Pickering, M.D. and Randolph H. Speer. Lance K. Poulsen, a nominee to be a
director of registrant, withdrew his nomination prior to the annual meeting for
personal reasons. No terms of existing directors continued after the annual
meeting of stockholders. The number of votes cast for, or withheld, with respect
to each nominee, was as follows:
FOR WITHHELD
--- --------
Michael L. Goldberg 6,518,522 64,258
Phillip E. Pearce 6,534,628 48,152
Michael J. Pickering, M.D. 6,534,628 48,152
Randolph H. Speer 6,529,003 53,777
No other matter was submitted to a vote of stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SEQUENTIALLY
NUMBERED PAGE
-------------
a) Exhibit 11: Computation of primary earnings per share. 16
b) Reports on Forms 8-K were filed as follows:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Rx MEDICAL SERVICES CORP.
By: /s/ Randolph H. Speer
---------------------------
Randolph H. Speer
President and
Principal Accounting Officer
Date: January 5, 1998
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