10-Q 1 g77908e10vq.txt RX MEDICAL SERVICES FORM 10-Q 06/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___ 1-10963 ------------------------------------------------------------------------------- (Commission File Number) Rx Medical Services Corp. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 87-0436782 ---------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 888 East Las Olas Blvd., Suite 210, Fort Lauderdale, Florida 33301 ------------------------------------------------------------------------------- (Address of principal executive offices and zip code) (954) 462-1711 ------------------------------------------------------------------------------- (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 June 30, 2002, was 23,145,034 shares. RX MEDICAL SERVICES CORP. FORM 10-Q Six Months Ended June 30, 2002 INDEX

ITEM 1. FINANCIAL STATEMENTS. RX MEDICAL SERVICES CORP. Consolidated Statements of Operations (Dollars in thousands except per share amounts)

The accompanying notes are an integral part of these financial statements 3 RX MEDICAL SERVICES CORP. Consolidated Balance Sheets (Dollars in thousands)

The accompanying notes are an integral part of these financial statements 4 RX MEDICAL SERVICES CORP. Consolidated Balance Sheets (continued) (Dollars in thousands)

The accompanying notes are an integral part of these financial statements 5 RX MEDICAL SERVICES CORP. Consolidated Statements of Cash Flows (Dollars in thousands)

(Continued) The accompanying notes are an integral part of these financial statements 6 RX MEDICAL SERVICES CORP. Consolidated Statements of Cash Flows (Continued) (Dollars in thousands)

For the six months ended June 30, 2002 and 2001, interest paid, which includes interest on obligations under capitalized leases, was $2,834 and $1,921, respectively. No income taxes were paid during these periods. The accompanying notes are an integral part of these financial statements 7 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, 2001 of Rx Medical Services Corp. (the "Company"), as filed with the Securities and Exchange Commission. The December 31, 2001 balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. 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 Company has experienced significant losses in each of the past three years, had a working capital deficit of $100.8 million at June 30, 2002 and is in default with respect to certain indebtedness. However, the accompanying financial statements have been prepared on the basis that the Company will continue as a going concern because management believes it has an attainable plan to overcome these matters and provide sufficient capital to operate for the coming year. The Company's ability to continue as a going concern is dependent on the continued funding of its operations from its primary financing source, National Century Financial Enterprises, Inc. and its affiliates (the "Financing Source") 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, it is attempting to improve operational profitability, as well as, cash flow. The Company's primary focus though is on the reorganization of the hospital ownership and management business. As mentioned above, the Company intends to continue reorganizing the hospital ownership and management line of business. This line of business has and currently is incurring significant operating losses due to a reduction in patient services eligible for reimbursement and reimbursement rates from third party payors, such as Medicare and Medicaid. The Company anticipates entering into an agreement to sell or to close the hospital it currently operates. There can be no assurance that suitable candidates can be found or that a sale can be negotiated on terms acceptable or economically feasible to the Company. If the Company can not find a suitable candidate to acquire its hospital, the Company may have to or could be forced to close the remaining hospital it operates. 8 RX MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company is looking to expand its presence, through joint ventures and/or acquisitions, into new markets in related health care businesses with perceived growth potential. The Company anticipates limiting its joint ventures and/or acquisitions to those that meet certain criteria and are expected to generate positive cash flow. NOTE 2 - GAIN ON SETTLEMENT OF LIABILITY In July 1998, an action was commenced against the Company in the Superior Court of California, County of Contra Costa, under the title North Bay MRI Associates v. Rx Medical Services Corp. (Case No. C 98-02610). The complaint stated many issues though the primary issue was that Rx Medical Services Corp. guaranteed the performance of a lease agreement entered into by a partnership of which a subsidiary of the Company was a general partner. This subsidiary was included in voluntary bankruptcy petition of Manatee Medical Laboratories, Inc. filed on April 4, 1996. The Company chose not to defend against this action and on October 20, 1998, a judgment by default was entered against the Company in the amount of $1,432,900. The Company established a liability account, which was included in accounts payable, for the full amount of the judgment. In February 2002, the Company settled this action with the plaintiffs for $80,000 in cash and the transference from the Company's Chief Executive Officer of 210,000 shares of the Company's Common Stock. The Company recognized a gain on settlement of liability, in the second quarter of 2002, of approximately $1.4 million. NOTE 3 - NOTES PAYABLE - RELATED PARTY Notes payable - related party includes notes payable due to the Financing Source that are collateralized by accounts receivable and equipment. The collateral also includes all the issued and outstanding common stock of Consolidated Health Corporation of Mississippi, Inc. The Company has defaulted on the required payments due under these notes payable, which aggregate $99.6 million at June 30, 2002. NOTE 4 - PREFERRED STOCK Pursuant to an agreement, dated June 27, 2002, between the Company and Healthcare Capital, LLC ("HCC"), the sole shareholder of the Company's Series G Preferred Stock, the Company has amended the preferences, rights and limitations of the Company's Series G Preferred Stock effective April 2, 2002 (the "Amendment Date"). The amendments to this series of Preferred Stock are as follows: a) As of the Amendment Date this series of Preferred Stock shall cease to accrue dividends, b) HCC, anytime after July 1, 2002 and until June 30, 2004, can convert any or all remaining unconverted shares, 9 RX MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) c) A change in control of the Company will result in the automatic conversion of all remaining unconverted shares of the Company's Series G Preferred Stock on the date the change in control occurs, d) The automatic conversion date of July 1, 2002 has been changed to July 1, 2004. Also pursuant to this agreement the Company and HCC have agreed: a) That as of the Amendment Date the Company owes HCC 19,857,142 shares of the Company's Common Stock for dividends which have been accrued for but not paid pursuant to the preferences, rights and limitations of the Company's Series G Preferred Stock and b) to reduce the number of shares of the Company's Common Stock owed to HCC for dividends which have been accrued for but not paid pursuant to the preferences, rights and limitations of the Company's Series G Preferred Stock to a certain number of shares of the Company's Common Stock to be agreed upon prior to the amended automatic conversion date of July 1, 2004 or to any conversion event that shall take place prior to July 1, 2004. NOTE 5 - 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 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. 10 RX MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following tables reflects the computation of the net loss per common share:

The Company has issued potential common share securities that could potentially dilute basic earnings per share in the future. These potentially dilutive securities, as of June 30, 2002, are as follows: a) stock options for 163,627 shares of the Company's Common Stock, b) the Company's Series G Preferred Stock that could convert, based on the market value of the Company Common Stock on June 30, 2002, into approximately 26,666,667 shares of the Company's Common Stock, c) dividends in arrears on the Company's Series G Preferred Stock convertible into 19,857,142 shares of the Company's Common Stock. 11 RX MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) These securities were not included in the computations of net loss per common share presented in the financial statements because they were anti-dilutive. At June 30, 2002, the Company does not have enough authorized shares of Common Stock to either convert the Company's Series G Preferred Stock and/or pay the dividends in arrears on the Company's Series G Preferred Stock. NOTE 6 - BUSINESS SEGMENTS 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. As of June 30, 2002, the Company effectively discontinued the distribution of biological products line of business and thus the Company's only remaining operating segment is the operation of hospitals and medical clinics. The following table presents information on the Company's applicable business segments for the six months ended June 30, 2002 and 2001 (in thousands):

12 RX MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 - SUBSEQUENT EVENTS On August 9, 2002, options to acquire 12,502 shares of the Company's Common Stock expired unexercised. 13 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, 2002 were $2.6 million compared to $2.9 million for the three months ended June 30, 2001. The decrease in revenues from hospitals and medical clinics is primarily the result of a decrease in patient services provided at and an increase in contractual adjustments realized at the Dickenson County Medical Center ("DCMC") which resulted in a decrease of revenues of approximately $0.3 million. Costs and expenses increased 17% to $3.9 million for the three months ended June 30, 2002 from $3.3 million for the three months ended June 30, 2001. Of these 2002 expenses, hospital management operations accounted for $3.7 million and the corporate expenses of the Company were $0.2 million. The increase in costs and expenses is primarily the result of an increase in compensation and benefits, an increase in the provision for doubtful accounts and an increase in other operating expenses incurred in providing patient services at DCMC. Interest expense increased 38% to $4.1 million for the three months ended June 30, 2002 from $3.0 million for the three months ended June 30, 2001. This increase is due to a higher level of borrowings from the Financing Source. (see "Financial Condition, Liquidity, and Capital Resources" below). Interest expense for the three months ended June 30, 2001 was reduced $0.3 million for the reversal of accrued interest. Six Months: Revenues from hospitals and medical clinics for the six months ended June 30, 2002 were $5.2 million compared to $5.4 million for the six months ended June 30, 2001. The decrease in revenues from hospitals and medical clinics is primarily the result of a decrease in patient services provided at DCMC which resulted in a decrease of revenues of approximately $0.2 million. Costs and expenses increased 12% to $7.4 million for the six months ended June 30, 2002 from $6.7 million for the six months ended June 30, 2001. Of these 2002 expenses, hospital management operations accounted for $7.0 million and the corporate expenses of the Company were $0.4 million. The increase in costs and expenses is primarily the result of an increase in compensation and benefits, an increase in the provision for doubtful accounts and an increase in other operating expenses incurred in providing patient services at DCMC. Interest expense increased 35% to $8.0 million for the six months ended June 30, 2002 from $5.9 million for the six months ended June 30, 2001. This increase is due to a higher level of borrowings from the Financing Source. (see "Financial Condition, Liquidity, and Capital Resources" below). Interest expense for the six months ended June 30, 2001 was reduced $0.3 million for the reversal of accrued interest. 14 Financial Condition, Liquidity, and Capital Resources During the six months ended June 30, 2002, the Company's working capital deficit increased by approximately $8.7 million to $100.8 million. This increase in the working capital deficit was primarily due to a $10.4 million increase in the level of funding from the Financing Source, and a $1.3 million decrease in accounts payable and accrued liabilities. Through June 30, 2002, the Company's ability to continue as a going concern is dependent on 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. 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 current operations are presently being funded through financing agreements with the Financing Source. Financing agreements exist between the Financing Source, the Company and four of the Company's subsidiaries. While the Company has not yet reached profitability operationally, it is attempting to improve operational profitability, as well as, cash flow. The Company intends to continue reorganizing the hospital operation and management business. The Company is also looking to expand its presence, through joint ventures and/or acquisitions, into new markets in related health care businesses with perceived growth potential. There can be no assurance, however, that the Company will achieve these strategic objectives. Going Concern The reports of the independent auditors of the Company on its 2001, 2000 and 1999 consolidated financial statements express substantial doubt about the Company's ability to continue as a going concern. Factors contributing to this substantial doubt include recurring operating losses, a working capital deficiency and delinquencies and defaults on its accounts payable and other outstanding liabilities. As mentioned in the Financial Condition section, the Company is dependent on the continued funding currently being received from the Financing Source 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. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 2 - Gain On Settlement Of Liability in Item 1 Financial Statements of Part I Financial Information. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS See Note 4 - Preferred Stock in Item 1 Financial Statements of Part I Financial Information. ITEM 3. DEFAULTS UPON SENIOR SECURITIES See Note 3 - Notes Payable - Related Party in Item 1 Financial Statements of Part I Financial Information. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6 (A). EXHIBITS See Exhibit 99.1 - Certification to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. See Exhibit 99.2 - Certification to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. ITEM 6 (B). REPORTS ON FORM 8-K None 16 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/ Michael L. Goldberg -------------------------------- Michael L. Goldberg Chief Executive Officer Date: August 14, 2002 By: /s/ Dennis Dolnick -------------------------------- Dennis Dolnick Chief Financial Officer Date: August 14, 2002

RX MEDICAL SERVICES CORP 10-Q