<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 87-0436782
- ------------------------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
888 EAST LAS OLAS BOULEVARD, SUITE 210, FORT LAUDERDALE, FLORIDA 33301
----------------------------------------------------------------------
(Address of principal executive offices) (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 ( ) No ( X )
The number of shares outstanding of the registrant's common stock, par value
$.002 per share, at September 30, 1998, was 17,353,864 shares.
<PAGE> 2
RX MEDICAL SERVICES CORP.
FORM 10-Q
Nine Months Ended September 30, 1998
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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<PAGE> 3
Item 1. Financial Statements.
RX MEDICAL SERVICES CORP.
Consolidated Statements of Operations
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Hospitals and medical clinics $ 3,776 $ 4,685 $ 12,232 $ 15,218
Pharmaceutical products 424 7 892 346
-------- -------- -------- --------
4,200 4,692 13,124 15,564
-------- -------- -------- --------
Costs and expenses:
Compensation and benefits 2,331 2,725 7,183 8,604
Pharmaceutical products 224 6 572 288
Supplies 513 454 1,411 1,438
Fees for services 580 757 1,964 2,209
Bad debts 507 413 984 1,320
Depreciation and amortization 63 40 179 118
Occupancy 187 182 543 516
Occupancy-related party 241 241 722 722
Equipment rental and maintenance 90 150 304 407
Equipment rental-related party 46 46 137 137
Other 456 619 1,462 1,838
-------- -------- -------- --------
5,238 5,633 15,461 17,597
-------- -------- -------- --------
Operating loss (1,038) (941) (2,337) (2,033)
Other income (expense):
Interest (43) (12) (230) (37)
Interest - related party (1,942) (1,608) (5,415) (4,698)
Gain (loss) on settlement of liabilities (200) 43 (50) (30)
Other income 36 19 139 83
-------- -------- -------- --------
(2,149) (1,558) (5,556) (4,682)
-------- -------- -------- --------
Loss from continuing operations (3,187) (2,499) (7,893) (6,715)
Gain from discontinued operations 31 -- 105 80
Extraordinary Item:
Gain on settlement of indebtedness 3,195 -- 3,195 --
-------- -------- -------- --------
Net loss $ 39 $ (2,499) $ (4,593) $ (6,635)
======== ======== ======== ========
Net loss per common share:
Loss from continuing operations $ (0.20) $ (0.28) $ (0.68) $ (0.75)
Gain from discontinued operations 0.01 -- 0.01 0.01
Gain on settlement of indebtedness 0.19 -- 0.27 --
-------- -------- -------- --------
Net loss per common share $ -- $ (0.28) $ (0.40) $ (0.74)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
RX MEDICAL SERVICES CORP.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash $ 203 $ 110
Accounts receivable (less allowance for doubtful accounts of
$3,435 and $3,730 at 1998 and 1997, respectively) 3,121 4,074
Inventories 441 533
Other 243 85
-------- --------
Total current assets 4,008 4,802
-------- --------
Property and equipment, at cost
Land and buildings 713 713
Equipment 1,262 930
Furniture, fixtures and improvements 193 192
-------- --------
2,168 1,835
Less: accumulated depreciation and amortization (477) (298)
-------- --------
1,691 1,537
Other assets (less allowance for doubtful accounts of $263 and $671
at 1998 and 1997, respectively) 175 134
-------- --------
Total assets $ 5,874 $ 6,473
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
RX MEDICAL SERVICES CORP.
Consolidated Balance Sheets (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Liabilities and shareholders' deficit:
Current liabilities:
Notes payable $ 20 $ 20
Notes payable - related party 44,865 40,232
Accounts payable 4,023 2,793
Accrued liabilities 1,008 2,052
Accrued liabilities - related party 83 640
Accrued compensation, benefits and related taxes 905 849
Current portion of long-term debt 25 3,087
Current portion of long-term debt-related party 86 --
Current portion of capital lease obligations 41 41
Current portion of capital lease obligations-related party 58 --
-------- --------
Total current liabilities 51,114 49,714
Long-term liabilities:
Long-term debt 183 202
Long-term debt-related party 484
Net liabilities of discontinued operations 25 100
Obligations under capital leases 69 86
Obligations under capital leases-related party 166 --
-------- --------
Total long-term liabilities 927 388
-------- --------
Total liabilities 52,041 50,102
-------- --------
Commitments and contingencies --
Shareholders' deficit:
Convertible preferred stock, $.001 par value, authorized shares
20,000,000, issued and outstanding 63,836 and 422,488 shares
at 1998 and 1997; aggregate liquidation preference of $322 and
$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 1997;
aggregate liquidation preference of $3,602 at 1997 -- 3,001
Convertible preferred stock, $.001 par value, authorized shares
1,500,000, issued and outstanding 800,000 shares at 1998;
aggregate liquidation preference of $27 at 1998 1 --
Common stock, $.002 par value, authorized 25,000,000 shares,
issued and outstanding 17,353,864 and 9,164,117 shares at 1998
and 1997, respectively 34 18
Additional paid-in capital 42,272 37,233
Accumulated deficit (88,474) (83,881)
Treasury stock, 605,554 shares of common stock, at par value,
at 1998 and 1997 (1) (1)
-------- --------
Total shareholders' deficit (46,167) (43,629)
-------- --------
Total liabilities and shareholders' deficit $ 5,874 $ 6,473
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
RX MEDICAL SERVICES CORP.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
-------- --------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,593) $ (6,635)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 179 111
Provision for bad debts 984 1,320
Loss on sale and disposal of property and equipment -- 13
(Gain) loss on settlement of liabilities (150) 30
Gain on settlement of indebtedness (3,195) --
Changes in operating assets and liabilities, net of effects of
acquisition:
Increase in accounts receivable (26) (1,067)
(Increase) decrease in inventories 92 (16)
(Increase) decrease in other assets (200) 8
Increase in accounts payable and accrued liabilities 1,556 455
Increase (decrease) in accrued liabilities - related party (556) 1,094
Change in discontinued operations (75) --
-------- --------
Net cash used in operating activities (5,984) (4,687)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (70) (237)
Acquisition, net of cash acquired -- (1,166)
-------- --------
Net cash used in investing activities (70) (1,403)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt - related party 6,004 5,856
Payments on notes payable, long-term debt and obligations under
capital leases (633) (82)
Payments on obligations under capital leases - related party (24) --
Proceeds from the sale of preferred stock 800 --
-------- --------
Net cash provided by financing activities 6,147 5,774
-------- --------
Net decrease in cash 93 (316)
Cash - beginning of period 110 685
-------- --------
Cash - end of period $ 203 $ 369
======== ========
</TABLE>
(Continued)
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<PAGE> 7
RX MEDICAL SERVICES CORP.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
-------- --------
(Unaudited) (Unaudited)
<S> <C> <C>
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 $ 263 $ --
======== ========
Common stock issued for payment of dividends in arrears $ 600 $ --
======== ========
Common stock issued to reduce note payable - related party $ 800 $ --
======== ========
</TABLE>
For the nine months ended September 30, 1998 and 1997, interest paid, including
interest on obligations under capitalized leases was $6,566 and $3,402,
respectively. No income taxes were paid during these periods.
The accompanying notes are an integral part of these financial statements.
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<PAGE> 8
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"), formerly known as the Podiatry Hospital of Pittsburgh, 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 $47.1 million at September 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 dependent on the continued funding of its operations from its primary
lender, National Century Financial Enterprises, Inc. and it's 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, the Company is
exploring plans to improve profitability, as well as cash flow, including the
continued development of its hospital
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<PAGE> 9
management and pharmaceutical products distribution businesses, while also
seeking the acquisition of ancillary related businesses. This expansion will
focus on increased revenues, market share and positive cash flow. Also, expense
reductions are expected to be achieved through the continuing implementation of
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):
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Three Months Ended September 30,
----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Per-Share Per-Share
Amount Amount Amount Amount
---------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Loss from continuing operations $ (3,187) $ (0.19) $ (2,499) $ (0.27)
Dividends on preferred stock (25) (0.01) (60) (0.01)
---------------- ---------------- --------------- -----------------
Loss available to common
shareholders' (3,212) (0.20) (2,559) (0.28)
Gain from discontinued operations 31 0.01 -- --
Gain on settlement of indebtedness 3,195 0.19 -- --
================ ================ =============== =================
Net income (loss) $ 14 $ (0.00) $ (2,559) $ (0.28)
================ ================ =============== =================
Weighted average common
shares outstanding 16,408 9,164
================ ===============
</TABLE>
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<PAGE> 10
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Per-Share Per-Share
Amount Amount Amount Amount
---------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Loss from continuing operations $ (7,893) $ (0.67) $ (6,715) $ (0.73)
Dividends on preferred stock (145) (0.01) (180) (0.02)
---------------- ---------------- --------------- -----------------
Loss available to common
shareholders' (8,038) (0.68) (6,895) (0.75)
Gain from discontinued operations 105 0.01 80 0.01
Gain on settlement of indebtedness 3,195 0.27 -- --
================ ================ =============== =================
Net loss $ (4,738) $ (0.40) $ (6,815) $ (0.74)
================ ================ =============== =================
Weighted average common
shares outstanding 11,777 9,164
================ ===============
</TABLE>
Note 3 - Notes Payable - Related Party
At September 30, 1998, notes payable included approximately $44.9 million due
to the Financing Source, through which the Company has obtained financing
collateralized by certain accounts receivable and property.
Note 4 - Long-Term Debt
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. 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. Pursuant to the settlement $3.1 million of
long-term debt and $0.7 million of accrued interest was retired for $0.6
million in cash. The Company, due to the settlement of this lawsuit, recognized
a gain on settlement of indebtedness of $3.2 million during the third quarter
of 1998.
Note 5 - Commitments and Contingencies
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-F-95-5596
REC/DIR) was settled for $200,000 in cash. A notice of settlement and a
stipulation for settlement were filed with Clerk of the Court
The "Year 2000 Issue" exists because many computer systems and applications,
building infrastructure components, computer aided medical equipment and other
operations related equipment that have date sensitive systems, which currently
use two-digit fields to designate a year, may recognize the year 2000 as 1900,
or not at all. This could result in system and/or equipment failures or
miscalculations causing disruption of operations. The Company has
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<PAGE> 11
performed an initial assessment of the impact of the "Year 2000 Issue" and
based on this initial assessment, the Company believes that its accounting
systems and operations may substantially avoid the "Year 2000 Issue", thereby
enabling it to properly process critical financial and operational information
and that the cost associated with addressing the "Year 2000 Issue" is not
expected to be material. There can be no assurance, however, that the systems
of other entities on which the Company's systems and operations rely will be
timely converted to address the "Year 2000 Issue", or that a failure to convert
by another entity, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company's financial
position and results of operations.
Note 6 - Shareholders' Deficit
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
cash funding to the Company by the Financing Source of approximately $800,000
which was utilized by the Company to finance the litigation settlements
described above. No registration was required for the issuance of these 800,000
shares under the Securities Act of 1933, as amended, based on the exemption
contained in Section 4(2) thereof as a transaction not involving a public
offering.
On July 14, 1998, the Company authorized the issuance of 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 owed by the Company to an affiliate of the 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.
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<PAGE> 12
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.
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 September 30, 1998. This ownership represents 53.2% of the issued and
outstanding shares of the Company's $.002 par value Common Stock as of
September 30, 1998. The ownership percentage does not take into account
following:
a) Dividends in arrears of $120,054 on the Series F Preferred Stock,
which were in the name of IIA, as of September 30, 1998, which is to
be paid by the issuance of 628,950 shares of the Company's Common
Stock,
b) the issuance to IIA of 800,000 shares of Series G Preferred Stock,
which are convertible into the Company's Common Stock, or
c) dividends in arrears of $25,643 on the Series G Preferred Stock as of
September 30, 1998, which are to be paid by the issuance of 170,960
shares of the Company's Common Stock.
Note 7- 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 8 - Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," requires disclosure of net
profit or loss, certain specific revenue and expense items and certain asset
items by reportable segments and how reportable segments are determined. The
statement defines a reportable segment as a component of an entity about which
separate financial information is produced internally, that is evaluated by the
chief operating decision-maker to assess performance and allocate resources.
This statement is effective for fiscal years beginning after December 15, 1997.
The Company operates in two business segments: the operation and management of
hospitals and medical clinics, and the distribution of pharmaceutical products.
During 1995, the Company
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<PAGE> 13
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):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
As Of And For The Nine Months Ended September 30, 1998
----------------------------------------------------------------------------------
Hospitals and
Medical Pharmaceutical
Clinics Products Corporate Total
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues $12,232 $892 $ -- $13,124
Operating profit (loss) $(1,513) $158 $(982) $(2,337)
Capital expenditures $ 333 $ -- $ -- $ 333
Depreciation and
Amortization expense $ 155 $ 3 $ 21 $ 179
Identifiable assets at
end of period $ 5,664 $ 27 $ 183 $ 5,874
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
As Of And For The Nine Months Ended September 30, 1997
----------------------------------------------------------------------------------
Hospitals and
Medical Pharmaceutical
Clinics Products Corporate Total
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues $15,218 $ 346 $ -- $15,564
Operating loss $ (790) $(255) $(988) $(2,033)
Capital expenditures $ 165 $ 9 $ 63 $ 237
Depreciation and
Amortization expense $ 94 $ -- $ 24 $ 118
Identifiable assets at
end of period $ 6,366 $ 44 $ 192 $ 6,602
</TABLE>
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<PAGE> 14
Note 9 - Subsequent Events
On October 16, 1998 the Company issued 628,950 shares of the Company's Common
Stock to pay the dividends in arrears, as of September 30, 1998, on the Series F
Preferred Stock of $120,054.
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS:
Revenues from hospitals and medical clinics for the three months ended
September 30, 1998 were $3.8 million compared to $4.6 million for the three
months ended September 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 $0.6
million, and (b) a cumulative decrease at other Company hospital and medical
clinics of approximately $0.2 million.
Revenues from the pharmaceutical products distribution division for the three
months ended September 30, 1998 were $0.4 million. Nominal revenues were
generated during the three months ended September 30, 1997 due to litigation
commenced as a result of a dispute between the Company and its joint venture
partner. Notwithstanding this litigation, the pharmaceutical products
distribution division is moving forward and anticipates generating revenues
during the fourth quarter of 1998.
Costs and expenses decreased 8% to $5.2 million for the three months ended
September 30, 1998 from $5.6 million for the three months ended September 30,
1997. Of these 1998 expenses, hospital management operations accounted for $4.6
million, pharmaceutical products distribution accounted for $0.3 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
$0.4 million; (b) an increase in sales from the pharmaceutical products
distribution division resulting in a increase in costs and expense 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 $0.2 million.
Interest expense increased 25% to $2.0 million for the three months ended
September 30, 1998 from $1.6 million for the three months ended September 30,
1997. This increase is due to a higher level of borrowings from the Financing
Source. (see "Financial Condition, Liquidity, and Capital Resources" below).
NINE MONTHS:
Revenues from hospitals and medical clinics for the nine months ended September
30, 1998 were $12.3 million compared to $15.2 million for the nine months ended
September 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 $2.3 million, and (b)
a cumulative decrease at other Company hospital and medical clinics of
approximately $0.6 million.
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<PAGE> 16
Revenues from the pharmaceutical products distribution division for the nine
months ended September 30, 1998 were $0.8 million compared to $0.3 million for
the nine months ended September 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 14% to $15.5 million for the nine months ended
September 30, 1998 from $17.6 million for the nine months ended September 30,
1997. Of these 1998 expenses, hospital management operations accounted for
$13.8 million, pharmaceutical products distribution accounted for $0.7 million,
and the corporate expenses of the Company were $1.0 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 $1.4 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 $0.5 million.
Interest expense increased 19% to $5.6 million for the nine months ended
September 30, 1998 from $4.7 million for the nine months ended September 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 nine months ended September 30, 1998, the Company's working capital
deficit increased by approximately $2.2 million to $47.1 million. This increase
in the working capital deficit was primarily due to the $4.6 million increase
in the level of funding from the Financing Source, the settlement of the
Manatee Medical Laboratories, Inc. lawsuit which reduced the current portion of
long-term debt and related accrued interest by $3.2 million and continuing
operating losses. Through September 30, 1998, 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. 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.
16 of 19
<PAGE> 17
While the Company has not yet reached profitability operationally, it has
several plans of action in progress designed to improve profitability as well
as cash flow. The Company has divested a portion of its loss operations and
will continue to pursue additional sources of revenues by expanding its
hospital operations and other specialty medical services.
YEAR 2000 COMPLIANCE
See Note 5 - Commitments and Contingencies in Item 1 Financial Statements.
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.
17 of 19
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
a) See Note 4 - Long-Term Debt in Item 1 Financial Statements
b) See Note 5 - Commitments And Contingencies in Item 1
Financial Statements
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
See Note 6 - Shareholders' Deficit in Item 1 Financial Statements
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
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
18 of 19
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Rx MEDICAL SERVICES CORP.
By: /s/ Randolph H. Speer
---------------------------------
Randolph H. Speer
President and
Principal Accounting Officer
Date: January 4, 1999
19 of 19
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