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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 June 30, 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 June 30, 1998, was 10,724,819 shares.
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RX MEDICAL SERVICES CORP.
FORM 10-Q
Six Months Ended June 30, 1998
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
RX MEDICAL SERVICES CORP.
Consolidated Statements of Operations
(Dollars in thousands except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ------------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Hospitals and medical clinics $ 3,840 $ 5,218 $ 8,456 $ 10,533
Pharmaceutical products 417 -- 468 339
-------- -------- -------- --------
4,257 5,218 8,924 10,872
-------- -------- -------- --------
Costs and expenses:
Compensation and benefits 2,391 2,928 4,851 5,879
Pharmaceutical products 306 2 347 282
Supplies 379 512 899 984
Fees for services 695 741 1,385 1,452
Bad debts 433 354 477 907
Depreciation and amortization 61 39 115 78
Occupancy 175 170 356 334
Occupancy - related party 241 240 481 481
Equipment rental and maintenance 91 139 214 256
Equipment rental - related party 46 46 92 92
Other 470 591 1,005 1,219
-------- -------- -------- --------
5,288 5,762 10,222 11,964
-------- -------- -------- --------
Operating loss (1,031) (544) (1,298) (1,092)
Other income (expense):
Interest (92) (22) (187) (26)
Interest - related party (1,898) (1,557) (3,473) (3,090)
Gain (loss) on settlement of liabilities -- -- 150 (73)
Other income 84 43 103 65
-------- -------- -------- --------
(1,906) (1,536) (3,407) (3,124)
-------- -------- -------- --------
Loss from continuing operations (2,937) (2,080) (4,705) (4,216)
Gain from discontinued operations 31 23 74 80
-------- -------- -------- --------
Net loss $ (2,906) $ (2,057) $ (4,631) $ (4,136)
======== ======== ======== ========
Net loss per common share:
Loss from continuing operations $ (0.32) $ (0.24) $ (0.51) $ (0.47)
Gain from discontinued operations 0.01 0.01 0.01 0.01
-------- -------- -------- --------
Net loss per common share $ (0.31) $ (0.23) $ (0.50) $ (0.46)
======== ======== ======== ========
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)
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
Assets:
Current assets:
Cash $ 71 $ 110
Accounts receivable (less allowance for doubtful accounts of
$3,582 and $3,730 at 1998 and 1997, respectively) 3,375 4,074
Inventories 540 533
Other 262 85
------- -------
Total current assets 4,248 4,802
------- -------
Property and equipment, at cost
Land and buildings 713 713
Equipment 1,236 930
Furniture, fixtures and improvements 193 192
------- -------
2,142 1,835
Less: accumulated depreciation and amortization (413) (298)
------- -------
1,729 1,537
Other assets (less allowance for doubtful accounts of $258 and $671
at 1998 and 1997, respectively) 157 134
------- -------
Total assets $ 6,134 $ 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)
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
Liabilities and shareholders' deficit:
Current liabilities:
Notes payable $ 20 $ 20
Notes payable - related party 43,196 40,232
Accounts payable 4,324 2,793
Accrued liabilities 1,599 2,052
Accrued liabilities - related party 191 640
Accrued compensation, benefits and related taxes 921 849
Current portion of long-term debt 3,087 3,087
Current portion of capital lease obligations 47 41
Current portion of capital lease obligations-related party 50 --
-------- --------
Total current liabilities 53,435 49,714
Long-term liabilities:
Long-term debt 190 202
Net liabilities of discontinued operations 50 100
Obligations under capital leases 77 86
Obligations under capital leases-related party 161 --
-------- --------
Total long-term liabilities 478 388
-------- --------
Total liabilities 53,913 50,102
-------- --------
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 $3,121 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 10,724,819 and 9,164,117 shares at 1998
and 1997, respectively 22 18
Additional paid-in capital 37,710 37,233
Accumulated deficit (88,512) (83,881)
Treasury stock, 605,554 shares of common stock, at par value,
at 1998 and 1997 (1) (1
-------- --------
Total shareholders' deficit (47,779) (43,629)
-------- --------
Total liabilities and shareholders' deficit $ 6,134 $ 6,473
======== ========
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)
Six Months Ended June 30,
-------------------------
1998 1997
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(4,631) $(4,136)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 115 70
Provision for bad debts 477 907
(Gain) loss on settlement of liabilities (150) 73
Changes in operating assets and liabilities, net of effects of
acquisition:
(Increase) decrease in accounts receivable 221 (1,082)
Increase in inventories (7) (10)
(Increase) decrease in other assets (199) 49
Increase in accounts payable and accrued liabilities 1,780 162
Increase (decrease) in accrued liabilities - related party (448) 1,042
Change in discontinued operations (50) --
------- -------
Net cash used in operating activities (2,892) (2,925)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (64) (86)
Acquisition, net of cash acquired -- (1,166)
------- -------
Net cash used in investing activities (64) (1,252)
------- -------
Cash flows from financing activities:
Proceeds from notes payable - related party 2,964 3,996
Payments on notes payable, long-term debt and obligations under
capital leases (35) (51)
Payments on obligations under capital leases - related party (12) --
------- -------
Net cash provided by financing activities 2,917 3,945
Net decrease in cash (39) (232)
Cash - beginning of period 110 685
------- -------
Cash - end of period $ 71 $ 453
======= =======
(Continued)
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RX MEDICAL SERVICES CORP.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Six Months Ended June 30,
--------------------------
1998 1997
------------- -----------
(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
------ ------
Cash paid $ -- $1,166
====== ======
Noncash investing and financing activities:
Equipment purchased under capital leases $ 242 $ --
====== ======
Common stock issued for payment of dividends in arrears $ 600 $ --
====== ======
For the six months ended June 30, 1998 and 1997, interest paid, including
interest on obligations under capitalized leases was $3,949 and $2,727,
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 Pittsburgh Specialty Hospital
("PSP") 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 $49.2 million at June 30, 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 tables reflect the computation of the net loss per common share
(in thousands except per share amounts):
---------------------------------------------------------
Three Months Ended June 30,
---------------------------------------------------------
1998 1997
----------------------- ------------------------------
Per-Share Per-Share
Amount Amount Amount Amount
-------- --------- ----------- ---------
Loss from continuing operations $(2,937) $ (0.31) $ (2,080) $ (0.23)
Dividends on preferred stock (60) (0.01) (60) (0.01)
------- ------- --------- --------
Loss available to common
shareholders' (2,997) (0.32) (2,140) (0.24)
Gain from discontinued operations 31 0.01 23 0.01
------- ------- --------- --------
Net loss $(2,966) $ (0.31) $ (2,117) $(0.23)
======= ======= ========= ========
Weighted average common
shares outstanding 9,679 9,164
======= =========
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Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
---------------------------------------------------------
Six Months Ended June 30,
---------------------------------------------------------
1998 1997
----------------------- ------------------------------
Per-Share Per-Share
Amount Amount Amount Amount
-------- --------- ----------- ---------
Loss from continuing operations $ (4,705) $ (0.50) $ (4,216) $ (0.46)
Dividends on preferred stock (120) (0.01) (120) (0.01)
-------- ---------- -------- -------
Loss available to common
shareholders' (4,825) (0.51) (4,336) (0.47)
Gain from discontinued operations 74 0.01 80 0.01
-------- ---------- -------- -------
Net loss $ (4,751) $ (0.50) $ (4,256) $ (0.46)
======== ========== ======== =======
Weighted average common
shares outstanding 9,423 9,164
======== ========
Note 3 - Notes Payable - Related Party
At June 30, 1998, notes payable included approximately $43.2 million due to the
Financing Source, through which the Company has obtained financing
collateralized by certain accounts receivable and property.
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.
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Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 tables present information on the Company's two business segments
(in thousands):
--------------------------------------------------------------
As Of And For The Six Months Ended June 30, 1998
--------------------------------------------------------------
Hospitals and
Medical Pharmaceutical
Clinics Products Corporate Total
------------- -------------- ----------- ----------
Revenues $ 8,456 $ 468 $ -- $ 8,924
Operating profit (loss) $ (649) $ 13 $ (662) $(1,298)
Capital expenditures $ 306 $ -- $ -- $ 306
Depreciation and
amortization expense $ 97 $ 2 $ 16 $ 115
Identifiable assets at
end of period $ 6,044 $ 27 $ 63 $ 6,134
--------------------------------------------------------------
As Of And For The Six Months Ended June 30, 1997
--------------------------------------------------------------
Hospitals and
Medical Pharmaceutical
Clinics Products Corporate Total
------------- -------------- ----------- ----------
Revenues $ 10,533 $ 339 $ -- $ 10,872
Operating loss $ (278) $ (172) $ (642) $ (1,092)
Capital expenditures $ 63 $ 6 $ 17 $ 86
Depreciation and
amortization expense $ 62 $ -- $ 16 $ 78
Identifiable assets at
end of period $ 7,630 $ 37 $ 180 $ 7,847
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Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6 - Subsequent Events
Effective July 1, 1998, the 600,270 issued and outstanding shares of the
Company's Series F Preferred Stock, held in the name of Intercontinental
Investment Associates, Ltd., a Nevada limited liability company ("IIA"), which
is an affiliate of the Financing Source, were converted into 600,270 shares of
the Company's Common Stock.
On July 1, 1998, a holder of Series C Preferred Stock exchanged 16,759 shares of
Series C Preferred Stock for 28,775 shares of the Company's Common Stock.
On July 14, 1998, the Board of Directors of the Company authorized the creation
of the Series G Preferred Stock. The number of shares of Series G Preferred
Stock, par value of $.001, that the Company is authorized to issue is 1,500,000
shares. Each share of Series G Preferred Stock is convertible into the Company's
Common Stock based on the market value of the Company's Common Stock on the date
of conversion. The holders of the shares of Series G Preferred Stock can convert
twenty-five percent (25%) of their original shares into the Company's Common
Stock commencing on July 1, 1999 and on July 1st of each succeeding year,
through July 1, 2002, when all remaining shares of Series G Preferred Stock
automatically convert into the Company's Common Stock. This series of preferred
stock pays dividends quarterly at the rate of $.15 per share per annum, payable
at the Company's discretion in cash or the Company's Common Stock.
On July 14, 1998, the Board of Directors of the Company authorized the issuance
to IIA of 800,000 shares of Series G Preferred Stock in consideration for a
funding to the Company by the Financing Source of approximately $800,000 which
was utilized by the Company to finance the litigation settlements described
below.
On July 23, 1998, the pending lawsuit against the Company and Manatee Medical
Laboratories, Inc. by Eduardo R. Latour, as Trustee for Physicians Reference Lab
Short Term Trust filed in the Circuit Court for Pinellas County, Florida (Case
No. 96-00683 - CI-15) was settled for $577,500 in cash. A stipulation of
settlement was entered into by the parties pursuant to which a voluntary
dismissal with prejudice was filed with the Clerk of the Court. The Company, due
to the settlement of this lawsuit, will recognize a gain on settlement of
indebtedness of approximately $3.2 million in the third quarter of 1998.
On July 23, 1998, a holder of Series C Preferred Stock exchanged 341,893 shares
of Series C Preferred Stock for 1,000,000 shares of the Company's Common Stock.
On July 27, 1998, the lawsuit pending in the United States District Court,
Eastern District of California (Fresno) under the title SHARI RAINWATER AND GREG
RAINWATER V. RX MEDICAL SERVICES CORP., et. al. (Case No. CV-F95-5596 REC/DIR)
was settled for $200,000 in cash. A notice of settlement and a stipulation for
settlement were filed with the Clerk of the Court.
On August 26, 1998, the Company issued 5,000,000 shares of its Common Stock, par
value $.002 per share, to IIA. These shares were issued in consideration of the
cancellation by the Financing Source of $800,000 of indebtedness owned by the
Company to an affiliate of the
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Rx MEDICAL SERVICES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financing Source and was based on the market value of the Company's Common Stock
of $.16 per share on July 14, 1998, the date the indebtedness was canceled.
Based on the number of shares of the Company's Common Stock issued to IIA and
the four individual owners of IIA, a change in the control of the Company has
occurred. IIA owns directly or indirectly 9,235,972 shares of the 17,353,864
shares of the Company's $.002 par value Common Stock issued and outstanding as
of August 31, 1998. This ownership represents 53.2% of the issued and
outstanding shares of the Company's $.002 par value Common Stock as of August
31, 1998. This ownership percentage does not take into account the dividends in
arrears of $120,054 on the Series F Preferred Stock, which were in the name of
IIA, as of June 30, 1998, which is to be paid by the issuance of 628,950 shares
of the Company's Common Stock or the issuance to IIA of 800,000 shares of Series
G Preferred Stock.
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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 June 30,
1998 were $3.8 million compared to $5.2 million for the three months ended June
30, 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 $1.1 million, and (b)
a cumulative decrease at other Company hospital and medical clinics of
approximately $0.3 million.
Revenues from the pharmaceutical products distribution division for the three
months ended June 30, 1998 were $0.4 million. No revenues were generated during
the three months ended June 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 during the third and fourth quarters
of 1998.
Costs and expenses decreased 9% to $5.3 million for the three months ended June
30, 1998 from $5.8 million for the three months ended June 30, 1997. Of these
1998 expenses, hospital management operations accounted for $4.6 million,
pharmaceutical products distribution accounted for $0.4 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 $0.6
million; (b) a decrease in patient services and the implementation of cost
cutting strategies at PSP resulting in a decrease of costs and expenses of
approximately $0.1 million; (c) an increase in sales from the pharmaceutical
products distribution division resulting in an increase 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 $0.1 million.
Interest expense increased 26% to $2.0 million for the three months ended June
30, 1998 from $1.6 million for the three months ended June 30, 1997. This
increase is due to a higher level of borrowings from the Financing Source. (see
"Financial Condition, Liquidity, and Capital Resources" below).
SIX MONTHS:
Revenues from hospitals and medical clinics for the six months ended June 30,
1998 were $8.5 million compared to $10.5 million for the six months ended June
30, 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 $1.7 million, and (b)
a cumulative decrease at other Company hospital and medical clinics of
approximately $0.3 million.
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Revenues from the pharmaceutical products distribution division for the six
months ended June 30, 1998 were $0.5 million compared to $0.3 million for the
six months ended June 30, 1997. This increase is primarily due to the current
pharmaceutical product mix being in high demand and thus commanding higher sales
prices.
Costs and expenses decreased 17% to $10.2 million for the six months ended June
30, 1998 from $12.0 million for the six months ended June 30, 1997. Of these
1998 expenses, hospital management operations accounted for $9.1 million,
pharmaceutical products distribution accounted for $0.4 million, and the
corporate expenses of the Company were $0.7 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 $1.0
million; (b) a decrease in patient services and the implementation of cost
cutting strategies at PSP resulting in a decrease of costs and expenses of
approximately $0.2 million; and (c) a cumulative decrease at other Company
hospital and medical clinics and the Company's corporate headquarters of
approximately $0.6 million.
Interest expense increased 17% to $3.7 million for the six months ended June 30,
1998 from $3.1 million for the six months ended June 30, 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 six months ended June 30, 1998, the Company's working capital deficit
increased by approximately $4.3 million to $49.2 million. This increase in the
working capital deficit was primarily due to a $3.0 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 June 30, 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 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
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portion of its loss operations and will continue to pursue additional sources of
revenues by expending 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 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
See Note 6 - Subsequent Events in Item 1 Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
4(f) - Certificate Of Designation, Series G Preferred Stock
(b) Reports on Form 8-K:
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: September 21, 1998
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