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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 March 31, 1998
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
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(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 ( ) No ( X )
The number of shares outstanding of the registrant's common stock, par value
$.002 per share, at March 31, 1998, was 9,164,117 shares.
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Rx MEDICAL SERVICES CORP.
FORM 10-Q
Three Months Ended March 31, 1998
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 12
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
(Dollars in thousands except per share amounts)
Three Months Ended March 31,
------------------------------
1998 1997
------------ -----------
(Unaudited) (Unaudited)
Revenues:
Hospitals and medical clinics $ 4,615 $ 5,314
Pharmaceutical products 52 339
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4,667 5,653
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Costs and expenses:
Compensation and benefits 2,460 2,958
Pharmaceutical products 41 279
Supplies 519 471
Fees for services 690 694
Bad debts 45 527
Depreciation and amortization 54 39
Occupancy 180 164
Occupancy-related party 241 241
Equipment rental and maintenance 123 133
Equipment rental-related party 46 46
Other 536 694
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4,935 6,246
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Operating loss (268) (593)
Other income (expense):
Interest (94) (3)
Interest - related party (1,575) (1,534)
Gain on settlement of liabilities 150 2
Other income 19 22
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(1,500) (1,513)
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Loss from continuing operations (1,768) (2,106)
Gain from discontinued operations 43 27
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Net loss $(1,725) $(2,079)
========== =========
Net loss per common share:
Loss from continuing operations $ (0.20) $ (0.24)
Gain from discontinued operations 0.01 0.01
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Net loss per common share $ (0.19) $ (0.23)
========== =========
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)
March 31, December 31,
1998 1997
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(Unaudited)
Assets:
Current assets:
Cash $ 40 $ 110
Accounts receivable (less allowance for doubtful accounts
of $3,851 and $3,730 at 1998 and 1997, respectively) 3,843 4,074
Inventories 586 533
Other 262 85
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Total current assets 4,731 4,802
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Property and equipment, at cost
Land and buildings 713 713
Equipment 978 930
Furniture, fixtures and improvements 193 192
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1,884 1,835
Less: accumulated depreciation and amortization (352) (298)
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1,532 1,537
Other assets (less allowance for doubtful accounts of $258
and $671 at 1998 and 1997, respectively) 325 134
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Total assets $ 6,588 $ 6,473
========== =========
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)
March 31, December 31,
1998 1997
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(Unaudited)
Liabilities and shareholders' deficit:
Current liabilities:
Notes payable $ 20 $ 20
Notes payable - related party 41,374 40,232
Accounts payable 3,523 2,793
Accrued liabilities 2,183 2,052
Accrued liabilities - related party 502 640
Accrued compensation, benefits and related taxes 908 849
Current portion of long-term debt 3,087 3,087
Current portion of capital lease obligations 48 41
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Total current liabilities 51,645 49,714
Long-term liabilities:
Long-term debt 196 202
Net liabilities of discontinued operations 75 100
Obligations under capital leases 86 86
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Total long-term liabilities 357 388
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Total liabilities 52,002 50,102
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Commitments and contingencies -- --
Shareholders' deficit:
Convertible preferred stock, $.001 par value, authorized shares
20,000,000, issued and outstanding 422,488 shares at 1998
and 1997; aggregate liquidation preference of $2,134 at 1998
and 1997 1 1
Convertible preferred stock, $5.00 par value, authorized shares
1,091,250, issued and outstanding 600,270 shares at 1998 and
1997; aggregate liquidation preference of $3,662 and $3,602 at
1998 and 1997, respectively 3,001 3,001
Common stock, $.002 par value, authorized 25,000,000 shares,
issued and outstanding 9,164,117 shares at 1998 and 1997 18 18
Additional paid-in capital 37,173 37,233
Accumulated deficit (85,606) (83,881)
Treasury stock, 605,554 shares of common stock, at par value,
at 1998 and 1997 (1) (1
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Total shareholders' deficit (45,414) (43,629)
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Total liabilities and shareholders' deficit $ 6,588 $ 6,473
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The accompanying notes are an integral part of these financial statements.
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Rx MEDICAL SERVICES CORP.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended March 31,
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1998 1997
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(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(1,725) $(2,079)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 54 39
Provision for bad debts 45 527
(Gain) loss on settlement of liabilities (150) 72
Changes in operating assets and
liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable 185 (682)
Increase in inventories (53) (10)
Increase in other assets (368) (21)
Increase in accounts payable
and accrued liabilities 1,012 241
Decrease in accrued liabilities - related party (138) (13)
Change in discontinued operations (25) --
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Net cash used in operating activities (1,163) (1,926)
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Cash flows from investing activities:
Acquisition of property and equipment (29) (30)
Acquisition, net of cash acquired -- (1,166)
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Net cash used in investing activities (29) (1,196)
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Cash flows from financing activities:
Proceeds from notes payable - related party 1,141 3,088
Payments on notes payable, long-term debt and
obligations under capital leases (19) (15)
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Net cash provided by financing activities 1,122 3,073
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Net decrease in cash (70) (49)
Cash - beginning of period 110 685
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Cash - end of period $ 40 $ 636
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(Continued)
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Rx MEDICAL SERVICES CORP.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Three Months Ended March 31,
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1998 1997
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(Unaudited) (Unaudited)
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
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Cash paid $ -- $ 1,166
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Noncash investing and financing activities:
Equipment purchased under capital leases $ 19 $ --
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For the three months ended March 31, 1998 and 1997, interest paid, including
interest on obligations under capitalized leases was $2,032 and $60
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, 1997 of Rx Medical
Services Corp. (the "Company"), as filed with the Securities and Exchange
Commission. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (which are of a normal
recurring nature) necessary for a fair presentation of the financial position
and results of operations. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the full year. The
December 31, 1997 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, 1997, 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 $46.9 million at March 31, 1998, 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,
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Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Note 2 - Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
requires public companies to present basic earnings (net loss) per share and, if
applicable, diluted earnings (net loss) per share for all periods that
statements of operations are presented. The statement is effective for all
financial statements issued for periods ending after December 15, 1997 and
requires restatement of earnings (net loss) per share for all periods presented.
The Company has only presented basic net loss per share since (a) the potential
common shares of the Company would be anti-dilutive and (b) the Company has
reflected net losses from continuing operations for all periods presented and
thus the diluted net loss per share would be the same as basic net loss per
share.
The following table reflects the computation of the net loss per common share:
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Three Months Ended March 31,
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1998 1997
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Per-Share Per-Share
Amount Amount Amount Amount
---------------- ---------------- --------------- -----------------
Loss from continuing operations $ (1,768) $ (0.19) $ (2,106) $ (0.23)
Dividends on preferred stock (60) (0.01) (60) (0.01)
---------------- ---------------- --------------- -----------------
Loss available to common
shareholders (1,828) (0.20) (2,166) (0.24)
Gain from discontinued operations 43 0.01 27 0.01
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Net loss $ (1,785) $ (0.19) $ (2,139) $ (0.23)
================ ================ =============== =================
Weighted average common
shares outstanding 9,164 9,164
================ ===============
Note 3 - Notes Payable - Related Party
At March 31, 1998, notes payable included approximately $40.6 million due to the
Financing Source, through which the Company has obtained financing
collateralized by certain accounts receivable.
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Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4 - Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," requires entities presenting a complete set of financial statements to
include details of comprehensive income that arises in the reporting period in a
financial statement that is displayed with the same prominence as other
financial statements. The statement does not affect the measurement of the
components of comprehensive income or introduce new categories of comprehensive
income. The statement does not apply to entities that have no items of
comprehensive income in any period presented. This statement is effective for
periods beginning after December 31, 1997. This statement does not apply to the
Company's financial statements as there are no items of comprehensive income in
any of the periods being presented.
Note 5 - Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," requires disclosure of net profit or
loss, certain specific revenue and expense items and certain asset items by
reportable segments and how reportable segments are determined. The statement
defines a reportable segment as a component of an entity about which separate
financial information is produced internally, that is evaluated by the chief
operating decision-maker to assess performance and allocate resources. This
statement is effective for fiscal years beginning after December 15, 1997.
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 table presents information on the Company's two business segments
for the three months ended March 31, 1998 (in thousands):
---------------- ------------------- -------------- ---------------
Hospitals and
Medical Pharmaceutical
Clinics Products Corporate Total
---------------- ------------------- -------------- ---------------
Revenues $ 4,615 $ 52 $ -- $ 4,667
Operating profit (loss) $ 137 $ (41) $ (364) $ (268)
Capital expenditures $ 28 $ -- $ 20 $ 48
Depreciation and
amortization expense $ 42 $ -- $ 12 $ 54
Identifiable assets at
end of period $ 6,338 $ 61 $ 189 $ 6,588
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Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents information on the Company's two business segments
for the three months ended March 31, 1997 (in thousands):
------------- -------------- --------------- -----------
Hospitals and
Medical Pharmaceutical
Clinics Products Corporate Total
------------- -------------- --------------- -----------
Revenues $ 5,314 $ 339 $ -- $ 5,653
Operating loss $ (215) $ (68) $ (310) $ (593)
Capital expenditures $ 18 $ 4 $ 8 $ 30
Depreciation and
amortization expense $ 31 $ -- $ 8 $ 39
Identifiable assets at
end of period $ 7,772 $ 127 $ 162 $ 8,061
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Revenues from hospitals and medical clinics for the three months ended March 31,
1998 were $4.6 million compared to $5.3 million for the three months ended March
31, 1997. The decrease in revenues from hospitals and medical clinics is
primarily the result of (a) a decrease in patient services provided at DCMC
which resulted in a decrease of revenues of approximately $0.6 million, and (b)
a cumulative decrease at other Company hospital and medical clinics of
approximately $0.1 million.
The pharmaceutical products distribution division generated nominal revenues
during the three months ended March 31, 1998 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 greater revenues in the
second quarter of 1998 as compared to the revenues generated during the first
quarter of 1998.
Costs and expenses decreased 27% to $4.9 million for the three months ended
March 31, 1998 from $6.2 million for the three months ended March 31, 1997. Of
these 1998 expenses, hospital management operations accounted for $4.5 million,
pharmaceutical products 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) a decrease in patient services provided
at DCMC resulting in a decrease of costs and expenses of approximately $0.5
million; (b) a decrease in patient services at PHP resulting in a decrease of
costs and expenses of approximately $0.1 million; (c) a decrease in sales from
the pharmaceutical products distribution division resulting in a decrease in
costs and expense of approximately $0.3 million, and (d) a cumulative decrease
at other Company hospital and medical clinics and the Company's corporate
headquarters of approximately $0.4 million.
Interest expense increased 9% to $1.7 million for the three months ended March
31, 1998 from $1.5 million for the three months ended March 31, 1997. This
increase is due to a higher level of borrowings from the Financing Source. (see
"Financial Condition, Liquidity, and Capital Resources" below).
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
During the three months ended March 31, 1998, the Company's working capital
deficit increased by approximately $2.0 million to $46.9 million. This increase
in the working capital deficit was primarily due to a $1.1 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 March 31,
1998, 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
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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 are presently being funded through financing
agreements with the Financing Source and the Company's various operating
subsidiaries. Agreements to finance eligible accounts receivable exist with five
of the Company's operating subsidiaries.
While the Company has not yet reached profitability operationally, it has
several plans of action in progress designed to improve profitability as well as
cash flow. The Company 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.
GOING CONCERN
The reports of the independent auditors of the Company on its 1997, 1996 and
1995 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.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A) Reports on Forms 8-K were filed as follows:
On February 12, 1998, the Company filed a current report on Form 8-K
(Date of Report - January 29, 1998) indicating that the pending
shareholders' lawsuit under the title KRELOFF AND RICH V. Rx MEDICAL
SERVICES CORP. AND MICHAEL L. GOLDBERG was voluntarily dismissed. In
consideration for the voluntary dismissal without prejudice, the
Company agreed to pay plaintiffs' counsel their out of pocket costs
amounting to approximately $16,000. No release of any claims was given
to the defendants by virtue of the stipulation of dismissal.
Exhibit 27.1 Financial Data Schedule (for SEC use only).
Exhibit 27.2 Financial Data Schedule (for SEC use only).
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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: June 8, 1998
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