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

~~Table~~Page No. -------- PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of ~~Contents~~Financial Condition and Results of Operations 14 PART II. OTHER INFORMATION 16 Item 1. Legal Proceedings 16 Item 2. Changes In Securities and Use Of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6 (a) Exhibits 16 Item 6 (b) Reports on Form 8-K 16 SIGNATURES 17

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

~~FORM~~Three 10Months Ended Six Months Ended June 30, June 30, -~~Q SECURITIES~~-------------------------- ~~AND~~--------------------------- ~~EXCHANGE~~2002 ~~COMMISSION Washington~~2001 2002 2001 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues: Hospitals and medical clinics $ 2,676 D$ 2,916 $ 5,253 $ 5,460 ------- ------- ------- ------- Costs and expenses: Compensation and benefits 1,971 1,791 3,796 3,599 Supplies 312 308 607 601 Fees for services 317 317 668 600 Bad debts 405 247 674 487 Depreciation and amortization 50 49 97 88 Occupancy 143 125 278 268 Occupancy-related party 241 241 481 481 Equipment rental and maintenance 93 56 190 121 Equipment rental-related party 46 46 92 92 Other 347 187 595 368 ------- ------- ------- ------- 3,925 3,367 7,478 6,705 ------- ------- ------- ------- Operating loss (1,249) (451) (2,225) (1,245) Other income (expense): Interest (13) (9) (54) (19) Interest - related party (4,146) (3,008) (8,029) (5,947) Gain on sale of intangible asset -- -- 300 -- Gain on retirement/settlement of liabilities 1,365 500 1,365 500 Other income 84 19 106 41 ------- ------- ------- ------- (2,710) (2,498) (6,312) (5,425) ------- ------- ------- ------- Net loss $(3,959) $(2,949) $(8,537) $(6,670) ======= ======= ======= ======= Basic and diluted net loss per common share $ (0.C17) $ (0.13) ~~20549~~ $ (0.37) $ (0.29) ======= ======= ======= =======

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

[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2001
		OR
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

~~For~~June ~~the~~30, ~~transition~~December ~~period~~31, ~~from~~2002 ~~___~~2001 to----------- ~~___~~ ------------ (Unaudited) Liabilities and shareholders' deficit: Current liabilities: Notes payable $ 16 $ 16 Notes payable - related party 99,645 89,224 Accounts payable 1,492 3,205 Accrued liabilities 1,746 1,489 Accrued liabilities - related party 247 227 Accrued compensation, benefits and related taxes 765 699 Current portion of long-term debt - related party 142 133 Current portion of capital lease obligations 37 43 Current portion of capital lease obligations-related party -- 16 ---------- ---------- Total current liabilities 104,090 95,052 ---------- ---------- Long-term liabilities: Long-term debt - related party 39 113 Obligations under capital leases 78 91 ---------- ---------- Total long-term liabilities 117 204 ---------- ---------- Total liabilities 104,207 95,256 ---------- ---------- Commitments and contingencies -- -- Shareholders' deficit: Convertible preferred stock, $.001 par value, authorized shares 1,500,000, issued and outstanding 800,000 shares at 2002 and 2001; aggregate liquidation preference of $1,100 and $1,070 at 2002 and 2001, respectively 1 1 Common stock, $.002 par value, authorized 25,000,000 shares, issued and outstanding 23,145,034 shares at 2002 and 2001 46 46 Additional paid-in capital 44,989 45,019 Accumulated deficit (145,479) (136,942) ---------- ---------- Total shareholders' deficit (100,443) (91,876) ---------- ---------- Total liabilities and shareholders' deficit $ 3,764 $ 3,380 ========== ==========

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

~~Commission~~Six ~~File~~Months ~~Number~~Ended June 30, ------------------------------- 2002 2001 ----------- ----------- (Unaudited) (Unaudited) Cash flows from operating activities: Net loss $ (8,537) $ (6,670) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 97 88 Provision for bad debts 674 487 Gain on retirement/settlement of liabilities (1,365) (697) Changes in operating assets and liabilities: Increase in accounts receivable (631) (530) Increase in inventories (37) (25) Increase in other assets (20) (212) Decrease in accounts payable and accrued liabilities (56) (622) Increase (decrease) in accrued liabilities -~~10963~~ related party 21 (101) ---------- ---------- Net cash used in operating activities (9,854) (8,282) ---------- ---------- Cash flows from investing activities: Acquisition of property and equipment (160) (154) ---------- ---------- Net cash used in investing activities (160) (154) ---------- ---------- Cash flows from financing activities: Proceeds from notes payable and long-term debt - related party 10,421 8,736 Payments on notes payable, long-term debt and obligations under capital leases (19) (27) Payments on notes payable, long-term debt and obligations under capital leases - related party (80) (86) ---------- ---------- Net cash provided by financing activities 10,322 8,623 ---------- ---------- Net increase in cash 308 187 Cash - beginning of period 421 81 ---------- ---------- Cash - end of period $ 729 $ 268 ========== ==========

(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)

RxSix ~~MEDICAL~~Months ~~SERVICES~~Ended ~~CORP.~~ June 30, ------------------------------- 2002 2001 ------------ ----------- (Unaudited) (Unaudited) The following is supplementary information relating to the consolidated statement of cash flows: Noncash investing and financing activities: Equipment purchased under capital leases $ -- $ 105 ==== =====

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:

Three Months Ended June 30, ------------------------------------------------------- 2002 2001 ----------------------- ----------------------- Per-Share Per-Share Amount Amount Amount Amount ------- --------- ------- --------- Loss from continuing operations $(~~Exact~~3,959) ~~name~~$ of(0.17) ~~registrant~~$(2,949) as$ ~~specified~~(0.13) inDividends ~~its~~on ~~charter~~preferred stock -- -- (30) (0.00) ------- ------- ------- ------- Loss available to common shareholders' (3,959) (0.17) (2,979) (0.13) Other Items -- -- -- -- ------- ------- ------- ------- Net loss $(3,959) $ (0.17) $(2,979) $ (0.13) ======= ======= ======= ======= Weighted average common shares outstanding 23,145 23,146 ======= =======

NEVADA		87-0436782
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

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):

888 EAST LAS OLAS BOULEVARD, SUITE 210,FORT LAUDERDALE, FLORIDA		33301
(Address of principal executive offices)		(Zip code)

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

(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 March 31, 2002, was 23,145,034 shares.

TABLE OF CONTENTS

Item 1. Financial Statements. PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K

Rx MEDICAL SERVICES CORP.

FORM 10-Q

Six Months Ended June 30, 2001

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

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,
		2001			2000			2001			2000
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues:
	Hospitals and medical clinics	$	2,916		$	2,403		$	5,460		$	4,723
Costs and expenses:
	Compensation and benefits		1,791			1,664			3,599			3,352
	Supplies		308			254			601			517
	Fees for services		317			314			600			604
	Bad debts		247			193			487			401
	Depreciation and amortization		49			36			88			73
	Occupancy		125			128			268			234
	Occupancy-related party		241			241			481			481
	Equipment rental and maintenance		56			93			121			187
	Equipment rental-related party		46			46			92			92
	Other		187			184			368			349
			3,367			3,153			6,705			6,290
Operating loss			(451	)		(750	)		(1,245	)		(1,567	)
Other income (expense):
	Interest		(9	)		(12	)		(19	)		(22	)
	Interest — related party		(3,008	)		(2,639	)		(5,947	)		(5,089	)
	Gain on retirement/settlement of liabilities		500			—			500			—
	Other income		19			102			41			139
			(2,498	)		(2,549	)		(5,425	)		(4,972	)
Net loss		$	(2,949	)	$	(3,299	)	$	(6,670	)	$	(6,539	)
Basic and diluted net loss per common share		$	(0.13	)	$	(0.14	)	$	(0.29	)	$	(0.29	)

The accompanying notes are an integral part of these financial statements

Rx MEDICAL SERVICES CORP.

Consolidated Balance Sheets (Dollars in thousands)

				June 30,			December 31,
				2001			2000
				(Unaudited)
Assets:
	Current assets:
		Cash		$	268		$	81
		Accounts receivable (less allowance for doubtful accounts of $1,907 and $2,624 at 2001 and 2000, respectively)			2,076			2,033
		Inventories			320			294
		Other			263			52
			Total current assets		2,927			2,460
	Property and equipment, at cost Equipment				1,009			756
		Furniture, fixtures and improvements			100			94
					1,109			850
		Less: accumulated depreciation and amortization			(634	)		(546	)
					475			304
	Other assets				11			11
			Total assets	$	3,413		$	2,775

The accompanying notes are an integral part of these financial statements

Rx MEDICAL SERVICES CORP.

Consolidated Balance Sheets (continued) (Dollars in thousands)

				June 30,			December 31,
				2001			2000
				(Unaudited)
Liabilities and shareholders’ deficit:
	Current liabilities:
		Notes payable		$	16		$	16
		Notes payable — related party			79,734			70,999
		Accounts payable			3,575			4,541
		Accrued liabilities			1,433			1,580
		Accrued liabilities — related party			179			280
		Accrued compensation, benefits and related taxes			762			907
		Current portion of long-term debt — related party			124			116
		Current portion of capital lease obligations			52			50
		Current portion of capital lease obligations-related party			48			62
			Total current liabilities		85,923			78,551
	Long-term liabilities:
		Long-term debt — related party			181			245
		Obligations under capital leases			104			28
		Obligations under capital leases-related party			—			16
			Total long-term liabilities		285			289
			Total liabilities		86,208			78,840
Commitments and contingencies					—			—
Shareholders’ deficit:
	Convertible preferred stock, $.001 par value, authorized shares 1,500,000, issued and outstanding 800,000 shares at 2001 and 2000; aggregate liquidation preference of $1,010 and $950 at 2001 and 2000, respectively				1			1
	Common stock, $.002 par value, authorized 25,000,000 shares, issued and outstanding 23,145,034 and 23,751,920 shares at 2001 and 2000, respectively				46			47
	Additional paid-in capital				45,079			45,139
	Accumulated deficit				(127,921	)		(121,251	)
	Treasury stock, 605,554 shares of common stock, at par value, at 2000				—			(1	)
			Total shareholders’ deficit		(82,795	)		(76,065	)
			Total liabilities and shareholders’ deficit	$	3,413		$	2,775

The accompanying notes are an integral part of these financial statements

Rx MEDICAL SERVICES CORP.

Consolidated Statements of Cash Flows (Dollars in thousands)

					Six Months Ended June 30,
					2001			2000
					(Unaudited)			(Unaudited)
Cash flows from operating activities:
	Net loss				$	(6,670	)	$	(6,539	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization				88			73
		Provision for bad debts				487			401
		Loss on sales of property and equipment				—			2
		Gain on retirement/settlement of liabilities				(697	)		—
		Changes in operating assets and liabilities:
			Increase in accounts receivable			(530	)		(455	)
			(Increase) decrease in inventories			(25	)		41
			(Increase) decrease in other assets			(212	)		27
			Decrease in accounts payable and accrued liabilities			(622	)		(627	)
			Increase (decrease) in accrued liabilities — related party			(101	)		30
				Net cash used in operating activities		(8,282	)		(7,047	)
Cash flows from investing activities:
	Proceeds from the disposition of property and equipment					—			1
	Acquisition of property and equipment					(154	)		(3	)
				Net cash used in investing activities		(154	)		(2	)
Cash flows from financing activities:
	Proceeds from notes payable and long-term debt — related party					8,736			7,193
	Payments on notes payable, long-term debt and obligations under capital leases					(27	)		(14	)
	Payments on notes payable, long-term debt and obligations under capital leases — related party					(86	)		(76	)
				Net cash provided by financing activities		8,623			7,103
Net increase in cash						187			54
Cash — beginning of period						81			46
Cash — end of period					$	268		$	100

(Continued)

The accompanying notes are an integral part of these financial statements

Rx MEDICAL SERVICES CORP.

Consolidated Statements of Cash Flows (Continued) (Dollars in thousands)

		Six Months Ended June 30,
		2001		2000
		(Unaudited)		(Unaudited)
The following is supplementary information relating to the consolidated statement of cash flows:
Noncash investing and financing activities:
	Equipment purchased under capital leases	$	105	$	—

Effective December 30, 1999 the Company sold Consolidated Health Corporation Of Pittsburgh, Inc. (“PSH”). During the six months ended June 30, 2000, the Financing Source provided $113 to process certain PSH transactions and $1,121 to settle certain PSH trade debts. Due to the related party aspects of the transactions no gain or loss was recognized on the transactions and these amounts were recorded to paid in capital.

For the six months ended June 30, 2001 and 2000, interest paid, which includes interest on obligations under capitalized leases, was $1,921 and 1,296, respectively. No income taxes were paid during these periods.

The accompanying notes are an integral part of these financial statements

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, 2000 of Rx Medical Services Corp. (the “Company”), as filed with the Securities and Exchange Commission. The December 31, 2000 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 $82.9 million at June 30, 2001, 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 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 has several plans of action in progress designed to improve 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’s 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.

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 — 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 $79.7 million at June 30, 2001.

NOTE 3 — GAIN ON RETIREMENT OF LIABILITIES

In April 1996, due to continuing operating losses and intense pressure from creditors, Manatee Medical Laboratories, Inc. (“Manatee”), a wholly owned subsidiary of the Company which operated the Company’s medical diagnostic services business segment, filed a voluntary petition under Chapter 7 of the U.S. Bankruptcy Code. The Company established certain trade liability accounts, as of December 31, 1995, for potential Manatee trade liabilities the Company believed it could potentially be held liable for regardless on the bankruptcy petition. None of the entities for which these liability accounts were established have sought legal action against the Company since the filing of Manatee’s bankruptcy petition and thus the statute of limitations for filing any legal action against the Company has expired. Based on these facts the Company retired these liability accounts in the second quarter of 2001 and recognized a gain on retirement of liabilities in the amount of approximately $0.5 million.

In addition, the Company, in the normal course of business, established certain trade liability accounts, as of December 31, 1995. None of the entities for which these liability accounts were established have sought legal action against the Company since December 31, 1995 and thus the statute of limitations for filing any legal action against the Company has expired. Based on these facts the Company retired these liability accounts in the second quarter of 2001 and recognized a gain on retirement of liabilities in the amount of approximately $0.2 million.

NOTE 4 — 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.

Rx MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 reflects the computation of the net loss per common share:

	Three Months Ended June 30,
	2001						2000
				Per-Share						Per-Share
	Amount			Amount			Amount			Amount
Loss from continuing operations	$	(2,949	)	$	(0.13	)	$	(3,299	)	$	(0.14	)
Dividends on preferred stock		(30	)		(0.00	)		(30	)		(0.00	)
Loss available to common shareholders’		(2,979	)		(0.13	)		(3,329	)		(0.14	)
Other Items		—			—			—			—
Net loss	$	(2,979	)	$	(0.13	)	$	(3,329	)	$	(0.14	)
Weighted average common shares outstanding		23,146						23,146

	Six Months Ended June 30,
	2001						2000
				Per-Share						Per-Share
	Amount			Amount			Amount			Amount
Loss from continuing operations	$	(6,670	)	$	(0.29	)	$	(6,539	)	$	(0.28	)
Dividends on preferred stock		(60	)		(0.00	)		(60	)		(0.01	)
Loss available to common shareholders’		(6,730	)		(0.29	)		(6,599	)		(0.29	)
Other items		—			—			—			—
Net loss	$	(6,730	)	$	(0.29	)	$	(6,599	)	$	(0.29	)
Weighted average common shares outstanding		23,146						23,146

Rx MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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, 2001, into approximately 80,000,000 shares of the Company’s Common Stock, c) dividends in arrears on the Company’s Series G Preferred Stock that could convert into approximately 15,428,571 shares of the Company’s Common Stock.

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, 2001, 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 5 — 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.

The Company operates in two business segments: the operation of hospitals and medical clinics, and the distribution of biological products.

Rx MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents information on the Company’s two business segments for the six months ended June 30, 2001 and 2000 (in thousands):

			Hospitals and
			Medical			Biological
			Clinics			Products			Corporate			Total
		2001
Revenues			$	5,460		$	—		$	—		$	5,460
Operating profit (loss)			$	(796	)	$	(77	)	$	(372	)	$	(1,245	)
Capital expenditures
	(including capital leases)		$	259		$	—		$	—		$	259
Depreciation and amortization expense			$	84		$	1		$	3		$	88
Identifiable assets at end of period			$	3,162		$	2		$	249		$	3,413
		2000
Revenues			$	4,723		$	—		$	—		$	4,723
Operating profit (loss)			$	(1,121	)	$	(87	)	$	(359	)	$	(1,567	)
Capital expenditures (including capital leases)			$	3		$	—		$	—		$	3
Depreciation and amortization expense			$	68		$	2		$	3		$	73
Identifiable assets at end of period			$	3,340		$	7		$	111		$	3,458

NOTE 6 — LEGAL PROCEEDINGS

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 Manatee was a general partner. This subsidiary was included in voluntary bankruptcy petition of Manatee 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 has established a liability account, which is 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 will recognize a gain on the settlement of this action, in the second quarter of 2002, of approximately $1.4 million.

Rx MEDICAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In November 1998, an action was commenced against Biologic Health Care (“BHC”), which the Company’s wholly owned subsidiary RxMIC was a 25% general partner, in the Superior Court of California, County of Santa Clara, under the title of CENTEON LLC v. BIOLOGIC HEALTH (Case No. CV775830). The complaint stated that BHC owed Centeon LLC for biological and other medical products purchased but not paid for. The partnership was subsequently dissolved and Centeon LLC on January 8, 1999, entered and was granted a default judgment against RxMIC, who was the 25% general partner in BHC, and Biologic Health Resources, who was the 75% general partner in BHC, in the amount of $437,343. This default judgment as of May 22, 2000, had increased to $472,245. The Company has not established a liability account for this judgment as the only asset of RxMIC was the investment in the BHC partnership, which was written off in a previous year, and the Company did not guarantee the performance of BHC or RxMIC. Therefore, Centeon LLC, in the Company’s opinion, has no viable way to collect on the default judgment granted to them.

In addition to the foregoing, the Company is involved in routine litigation arising in the ordinary course of its business which the Company believes would not have a material adverse effect on its financial position.

Item 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, 2001 were $2.9 million compared to $2.4 million for the three months ended June 30, 2000. The increase in revenues from hospitals and medical clinics is primarily the result of an increase in patient services provided at and a decrease in contractual adjustments realized at the Dickenson County Medical Center (“DCMC”) which resulted in an increase of revenues of approximately $0.5 million.

There were no revenues generated from the distribution of biological products for the three months ended June 30, 2001 and 2000. This is the result of the Company facing challenges in securing reliable suppliers of biological products in which to distribute and the Company’s decision to de-emphasize this line of business.

Costs and expenses increased 7% to $3.3 million for the three months ended June 30, 2001 from $3.1 million for the three months ended June 30, 2000. Of these 2001 expenses, hospital management operations accounted for $3.1 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 patient services provided at DCMC resulting in an increase of costs and expenses of approximately $0.2 million.

Interest expense increased 15% to $3.0 million for the three months ended June 30, 2001 from $2.6 million for the three months ended June 30, 2000. 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, 2001 were $5.4 million compared to $4.7 million for the six months ended June 30, 2000. The increase in revenues from hospitals and medical clinics is primarily the result of an increase in patient services provided at DCMC which resulted in an increase of revenues of approximately $0.7 million.

There were no revenues generated from the distribution of biological products for the six months ended June 30, 2001 and 2000. This is the result of the Company facing challenges in securing reliable suppliers of biological products in which to distribute and the Company’s decision to de-emphasize this line of business.

Costs and expenses increased 6% to $6.7 million for the six months ended June 30, 2001 from $6.3 million for the six months ended June 30, 2000. Of these 2001 expenses, hospital management operations accounted for $6.2 million, biological product distribution accounted for $0.1 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 patient services provided at DCMC resulting in an increase of costs and expenses of approximately $0.4 million.

Interest expense increased 15% to $5.9 million for the six months ended June 30, 2001 from $5.1 million for the six months ended June 30, 2000. 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, 2001, the Company’s working capital deficit increased by approximately $6.9 million to $82.9 million. This increase in the working capital deficit was primarily due to a $8.7 million increase in the level of funding from the Financing Source, and a $1.4 million decrease in accounts payable and accrued liabilities. Through June 30, 2001, 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 has several plans of action in progress designed to improve 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 2000, 1999 and 1998 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, delinquencies and defaults on its accounts payable and other outstanding liabilities, litigation, as well as, to the uncertainty of the Company’s compliance with certain Medicare and state statutes and regulations. As of January 1, 1995, the Company was unable to comply with certain provisions of the OBRA 1993 amendments to the Stark Act, as well as, certain similar state statutes. Although the Company has not been the subject of, and is not currently the subject of, any administrative proceedings concerning violations of federal or state self-referral statutes or regulations, in the event that the Company is found to have violated such statutes and regulations, it could be subject to cumulative fines and penalties and could also be required to make refunds, which may aggregate up to approximately $50.0 million. The Company believes, however, that due to the filing of the Chapter 7 bankruptcy petition for Manatee, the Company’s subsidiary that operated the medical diagnostic services business segment, 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 6 — Legal Proceedings in Item 1 Financial Statements of Part I Financial Information.

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

See Note 2 — 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. Exhibits and Reports on Form 8-K

None

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 Director, Chairman, and Chief Executive Officer Date: June 24, 2002 By: /s/ DENNIS DOLNICK Dennis Dolnick Chief Financial Officer Date: June 24, 2002

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Filing Compare · RX MEDICAL SERVICES CORP