10-K 1 g76960e10vk.txt RX MEDICAL SERVICES, INC. FORM 10-K 12/31/00 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 2000. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 No. 87-0436782 ----------------------------------------------------------------------- ----------------------------------- (State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.) 888 East Las Olas Boulevard - Suite 210, Ft. Lauderdale, Florida 33301 (954) 462-1711 ------------------------------------------------------------------------- ----------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.002 Par Value None ----------------------------------------------------------------------- ----------------------------------- (Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None 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. [ X ] Yes [ ] No. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting common stock held by non-affiliates of the Registrant (determined on the basis of the closing price of Registrant's Common Stock on the OTC Electronic Bulletin Board on May 22, 2002) was $519,894. As of March 31, 2002, Registrant had 23,145,034 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None. PART I ITEM 1. BUSINESS INTRODUCTION Rx Medical Services Corp. (the "Company") is a holding company, which through its subsidiaries, is a provider of healthcare services in the United States. At December 31, 2000, the Company was engaged in two healthcare businesses: the operation of a hospital and its related clinics, which are located in the state of Virginia and the distribution of biological products. The hospital management operation is conducted through the Company's wholly-owned subsidiary, Consolidated Health Corporation of Mississippi, Inc., a Mississippi corporation, and its subsidiaries ("CHC"). At December 31, 2000, CHC, via a wholly owned subsidiary, operated one hospital and three medical clinics in Virginia, with 50 licensed hospital beds. The biological product distribution operation, is conducted through BioSource Corporation ("BSC"), which is subsidiary of a Florida corporation that is a wholly-owned subsidiary of the Company. BSC is engaged in the business of distributing, on a wholesale basis, biological and biotech products. The Company was incorporated in Nevada in 1985. The Company's principal executive offices are located at 888 East Las Olas Boulevard, Suite 210, Fort Lauderdale, Florida 33301 and its telephone number is (954) 462-1711. BUSINESS STRATEGY Historical Perspective: The Company, through asset sales and a bankruptcy proceeding, has divested itself of substantially all of the assets that were acquired and used initially in its business. The majority of the remaining assets of the Company, as of December 31, 2000, were acquired during the year ended December 31, 1996 and are comprised of the equipment and fixtures utilized in the operation of the Company's hospital and its related clinics, which are located in the state of Virginia. Recent Developments: The Company's strategy is to continue to reorganize the hospital ownership and management business while at the same time de-emphasizing the biological product distribution business. With respect to its hospital ownership and management business, it is the Company's intention to continue reorganizing this 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 individual 2 agreement to sell or to close the hospital it currently operates while looking to expand its presence, through joint ventures and/or acquisitions, into new markets with perceived potential. There can be no assurance that a suitable candidate can be found to acquire the Company's hospital 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. There also can be no assurance that suitable joint venture and/or acquisition candidates can be found, that joint ventures and/or acquisitions can be negotiated on acceptable terms, that adequate financing can be obtained or that the operations of acquired businesses can be effectively or profitably integrated into the Company's existing operations. With respect to its biological product distribution business, the Company intends to de-emphasize this line of business as a result of not being able to obtain a steady supply of product from manufacturers. If, in the future, a reliable supply of product can be obtained, the Company will at that point decide whether or not to commit more time and resources to this line of business. BUSINESS SEGMENTS HOSPITAL MANAGEMENT The following table sets forth the name of CHC's hospital and its location, number of licensed beds and whether the hospital is owned, leased or managed as of December 31, 2000:
------------------------------------ ----------------------- ------------------ ---------------------------- Number Of Owned, Managed Or Leased Name Location Licensed Beds ------------------------------------ ----------------------- ------------------ ---------------------------- Dickenson County Medical Center Clintwood, VA 50 Leased
Leased hospitals are operated by CHC under operating lease agreements pursuant to which CHC pays the owner a stipulated rental and assumes the risk of the hospital not generating sufficient revenues to pay all operating expenses. Any net revenues belong to CHC under these operating agreements. The Company believes that rural acute care hospitals generally face less direct competition than similar urban facilities from specialty healthcare providers such as outpatient surgery and diagnostic treatment centers, and rehabilitation, psychiatric and chemical dependency hospitals. The Company seeks to develop its acute care hospital as the provider of primary care services in its respective market and to reduce the migration of the local population to larger urban hospitals and other rural hospitals. This is based on the Company's belief that the delivery of healthcare services is local in nature. 3 The Company employs experienced administrators and controllers at the hospital operated by CHC who have the responsibility for carrying out the strategic plan established for that respective hospital. The Company's management works closely with the local administrators to review hospital performance and provide operating and financial guidance. SOURCES OF REVENUES Hospital revenues are received primarily from three categories of payors: private payors (primarily private insurance), the federal government under the Medicare program and state governments under their respective Medicaid programs. The following table sets forth the percentages of net operating revenues received by CHC's hospital from each category of payor for the year ended December 31, 2000: Medicare and Medicaid 61% Private and other sources 39%
The Medicare and Medicaid reimbursement programs have been changed by legislative and regulatory actions many times since their inception. The changes have usually reduced the rate of growth in reimbursement payments and placed a greater administrative burden on hospitals and other providers of healthcare services. Although the Company will attempt to offset the reduction in reimbursement rates under Medicare and Medicaid and the additional administrative burdens imposed by applicable laws and regulations there can be no assurance that the Company's profitability will not be adversely affected. EMPLOYEES AND MEDICAL STAFFS CHC, at December 31, 2000, has approximately 190 full-time and part-time employees at its hospital, of which approximately 34% are nursing personnel (i.e. registered nurses, licensed vocational nurses and licensed practical nurses). The employees of the Dickenson County Medical Center in Clintwood, Virginia, are represented by a labor union. The union agreement pertaining to Dickenson County Medical Center has an anniversary date of September 20th and is renewable on a year-to-year basis thereafter unless either party, after due notice, desires to modify or terminate the agreement. Physicians on the medical staff of CHC's hospital are generally not employees of CHC or its hospital; however, they utilize the hospital to serve and treat their patients. Physician staff members may also serve on the medical staffs of other hospitals and each may terminate his or her affiliation with CHC's hospital at any time. DEPENDENCE ON HEALTHCARE PROFESSIONALS CHC's hospital is dependent upon the physicians practicing in the communities served by CHC's hospital. A small number of physicians account for a significant portion of patient 4 admissions at CHC's hospital. Changes in the healthcare industry may increase the competition for physicians specializing in primary care. There can be no assurance that, despite vigorous physician recruitment efforts, CHC's hospital will be able to recruit physicians successfully or to retain the loyalty of the physicians whose patient admissions are important to the hospital. COMPETITION Competition for patients among hospitals and other healthcare providers has intensified in recent years. During this period, hospital occupancy rates in the United States have declined as a result of cost containment pressures, changing technology, changes in regulations and reimbursement, the advent of managed care, changes in practice patterns from inpatient to outpatient treatment and other factors. The market in which CHC operates, there are other hospitals or facilities that provide inpatient and outpatient services comparable to those offered by CHC's hospital. Certain of these facilities may have greater financial resources and may offer a wider range of services than CHC's hospital. Even in the community in which CHC's hospital is the sole or dominant provider of acute care hospital services, CHC may face competition from hospitals and other healthcare providers in nearby communities. The competitive position of CHC's hospital will, in all likelihood, be affected by cost containment strategies imposed by the federal and state governments and other major purchasers of healthcare services. HOSPITAL ACCREDITATION AND LICENSING The Dickenson County Medical Center, at December 31, 2000, is accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). With regard to accreditation by JCAHO, or the American Osteopathic Association, another accrediting body, it is CHC's intention to meet the requirements of the managed care contract providers for its hospital. All hospitals, and the healthcare industry generally, are subject to extensive federal, state and local regulation relating to licensure, conduct of operations, billing and reimbursement, relationships with physicians, construction of new facilities, expansion or acquisition of existing facilities and the offering of new services. CHC's hospital is licensed by the department in the state in which the hospital is located. Federal and state agencies conduct periodic inspections to ensure that a hospital maintains adequate standards of medical care, equipment and cleanliness. Failure to comply with applicable laws and regulations could result in, among other things, the imposition of fines, temporary suspension of the ability to admit new patients to the facility or, in extreme circumstances, exclusion from participation in government healthcare reimbursement programs such as Medicare and Medicaid (from which the Company derives substantial revenues) or the revocation of facility licenses. The Company believes that it is in substantial compliance with all material regulations, although there is no assurance that CHC's hospital will be able to comply in the future and there can be no assurance that future regulatory changes will not have an adverse impact on the Company. 5 Certificate of Need. Certificate of need regulations continue to control the development and expansion of healthcare services and facilities in the state in which CHC's hospital operates. These regulations generally require proper government approval for the expansion or acquisition of existing facilities, the construction of new facilities, the addition of new beds, the acquisition of major items of equipment and the introduction of new healthcare services. Failure to obtain necessary approval can result in the inability to complete a project, the imposition of civil and, in some cases, criminal sanctions, the inability to receive Medicare and Medicaid reimbursement and/or revocation of a facility's license. FINANCIAL INFORMATION The Company's net revenues from continuing operations, by business segment during the past three fiscal years, were as follows (in thousands):
---------------------------------- Years Ended December 31, ---------------------------------- 2000 1999 1998 -------- ------- ------- Hospitals and Medical Clinics $ 9,157 $12,077 $15,486 Biological Products $ -- $ 732 $ 1,012
Revenue from hospitals and medical clinics is recognized upon completion of patient services and is recorded at amounts estimated to be received under reimbursement arrangements with third party payors. GOVERNMENTAL REGULATION GENERAL The health care industry is subject to extensive federal, state and local regulation relating to licensure, conduct of operations, ownership of facilities, addition of facilities and services and prices for services, as described below. The Company is unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations. Further changes in the regulatory framework could have a material adverse effect on the financial results of the Company's operations. FEDERAL AND STATE ANTI-FRAUD AND ANTI-REFERRAL LEGISLATION Medicare Anti-Kickback Statute. Section 1128B(b) of the Social Security Act (the "Antikickback Statute") prohibits offering, paying, soliciting, or receiving remuneration to induce, or in exchange for, the referral of business that is reimbursable under the Medicare or Medicaid program. A person who violates the Antikickback Statute may be subject to fines of up to $25,000, imprisonment for up to five years, civil monetary 6 penalties, and exclusion from participation in the Medicare and Medicaid programs. The Antikickback Statute has been interpreted broadly by federal courts and enforcement agencies. Many common kinds of business arrangements, including joint ventures, investment interests, leases, and service or supply contracts, can violate the Antikickback Statute if they involve the payment of any remuneration that is intended to induce the referral of Medicare or Medicaid business. The federal government encourages the public to report persons believed to be in violation of the Antikickback Statute. "Stark" Self-Referral Statute. If a physician has a financial relationship with an entity (including any ownership or investment interest in, or any compensation arrangement with, an entity), Section 1877 of the Social Security Act (the "Stark Law") prohibits the physician from referring patients to the entity for the provision of any "designated health service" for which reimbursement is available under Medicare or Medicaid. The Stark Law also prohibits the entity from billing Medicare, Medicaid, or any other payer for services provided pursuant to a prohibited referral. "Designated health services" include (among others) clinical laboratory services, physical and occupational therapy services, radiology services, durable medical equipment, home health services, and inpatient and outpatient hospital services. Sanctions for violating the Stark Law include civil money penalties of up to $15,000 per prohibited service provided, assessments equal to 200% of the dollar value of each such service provided, and exclusion from the Medicare and Medicaid programs. The Stark Law contains certain exceptions to the self-referral prohibition. False Claims. The Social Security Act also imposes criminal and civil penalties for making false claims to Medicare and Medicaid for services not rendered or for misrepresenting actual services rendered in order to obtain higher reimbursement. Like the Antikickback Statute, the false claims statute is very broad. The false claims statute requires careful and accurate coding of claims for reimbursement. State Antikickback Laws. Many states also have laws that prohibit payments to physicians for patient referrals. Although some of these statutes are similar to the federal Antikickback Statute, they are broader in the sense that they apply regardless of the source of the payment for the care. These statutes typically provide for criminal and civil penalties as well as loss of licensure. Many states also have passed legislation similar to the Stark Law, but also with broader effect because the legislation applies regardless of the source of the payment for the care. Certain Company Transactions. The Company's future development of joint ventures and other financial arrangements with physicians also could be adversely affected by the failure of such arrangements to comply with Antikickback Statue, Stark Law, State Laws or similar laws adopted in the future. The Company has not been the subject of, and is not currently the subject of, any legal proceedings concerning violations of federal or state anti-kickback or self-referral laws. 7 As of January 1, 1995, the Company was unable to comply with certain provisions of the Stark Law, as well as certain similar state self-referral statutes, as they applied to the medical diagnostic business of Manatee Medical Laboratories, Inc. ("Manatee") a wholly owned subsidiary of the Company. The Company took steps during 1995, before the Company's medical diagnostic business ceased operations, to notify its physician shareholders of its intent not to accept referrals that would be prohibited under the Stark Law. The Company has determined that, based on prohibited referrals to the Company's medical diagnostic business (before it ceased operations), the Company could be subject to penalties and the return of monies collected on certain services provided in an aggregate amount of up to approximately $50 million. The Company believes, however, that enforcement action is unlikely, because of the filing of the Chapter 7 bankruptcy petition by Manatee and the cessation of the Company's medical diagnostic operations. Nevertheless, the Company cannot be certain concerning the probability of an enforcement action. Medicare and Medicaid Reimbursement. The Company is dependent upon reimbursement from the Medicare and Medicaid programs. Future legislation adopted or proposed in Congress in connection with efforts to reduce the federal budget deficit could potentially have the effect of reducing, or limiting increases in, federal expenditures on the Medicare and Medicaid programs. Such legislation could have a material adverse effect on the Company. DISCONTINUED OPERATIONS Following the sale of its California clinical laboratory operations in August 1995, the Company, through its Manatee subsidiary, owned and operated eight clinical laboratories which analyzed human tissue, blood and other bodily fluids for the medical community. The Company's clinical laboratories serviced clients in the metropolitan areas surrounding Tampa, Miami, Orlando and Jacksonville, Florida and New Orleans, Louisiana. In addition, Manatee owned and operated an imaging center in Pinole, California which performed MRI's. Due to continuing unprofitability of Manatee, and intense pressure from certain of Manatee's creditors who were in the process of executing on previously obtained judgments, on April 4, 1996, Manatee filed a voluntary petition under Section 301 of Chapter 7 of Title 11 of the United States Code, 11 U.S.C. Sections 101 et. seq. in the Bankruptcy Court for the Southern District of Florida (Case No. 96-21552 BKC-RBR). On April 10, 1996, John P. Barbee of Fort Lauderdale, Florida was appointed Trustee of the bankrupt estate. The bankruptcy filing forced the closing of all the Company's remaining clinical laboratory facilities in Florida (the assets of the New Orleans lab had been sold in January 1996 to another laboratory company in an arms-length transaction). The trustee in bankruptcy has assumed Manatee's position as general partner of the partnership that owns and operates the Pinole, California MRI center. The bankruptcy trustee is currently proceeding through the administrative process that is anticipated to be finalized in the third quarter of 2002. 8 EMPLOYEES The Company has a total of approximately 197 employees, of whom approximately 192 are engaged in the operation of the Company's hospital management and biological product distribution businesses, with the remaining employees being engaged in administrative functions at the Company's corporate headquarters in Fort Lauderdale, Florida. 9 ITEM 2. PROPERTIES The Company's corporate headquarters are located in Fort Lauderdale, Florida, where it leases approximately 3,200 square feet at a monthly rental of $9,357 through September 2002. A wholly owned subsidiary of CHC leases the Dickenson County Medical Center located in Clintwood, Virginia, which is approximately 33,000 square feet, from the Financing Source ("Related Party") at a monthly rental of $80,192 through March 2016. This subsidiary also leases other various premises from unrelated entities that have varying lease periods for an aggregated monthly rental of approximately $15,895. BSC leased premises in Clearwater, Florida of approximately 1,000 square feet at a monthly rental of $862 on a month-to-month basis until April 30, 2002 when this lease was terminated. 10 ITEM 3. 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 the 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. 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. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not hold an annual meeting of its stockholders in 2000. EXECUTIVE OFFICERS The executive officers of the Company as of December 31, 2000, are as follows:
Name Age Position ----------------------- ----- ------------------------- Michael L. Goldberg 51 Chairman of the Board and Chief Executive Officer Dennis A. Dolnick 37 Chief Financial Officer Greg A. Berube 52 Controller
Michael L. Goldberg, 51 (a director since 1990). Mr. Goldberg was an Assistant District Attorney in the Philadelphia District Attorney's office from 1974 to 1977 before entering private practice with a specialty in complex commercial litigation. Mr. Goldberg joined the Company in May 1990. He was Chairman, President and Chief Executive Officer of the Company from November 1991 to June 1994 at which time he relinquished the position of President. Dennis A. Dolnick, 37. Mr. Dolnick joined the Company in 1997 as Chief Financial Officer. Previously, Mr. Dolnick was Controller of SII Pak-Tek, Ltd. and SII Cassettes, Ltd. manufacturers of plastic injected molding supplies used primarily by the entertainment industry. Previous to SII Pak-Tek, Ltd. and SII Cassettes, Ltd., Mr. Dolnick was a manager in the audit department of the accounting and management consulting firm of Grant Thornton LLP. Mr. Dolnick is a CPA, licensed in the State of Florida. Greg A. Berube, 52. Mr. Berube joined the Company in January 1996 as Assistant to the Controller. Previously, Mr. Berube was Operations Manager of Water Taxi, Inc. where he installed and maintained a network and database computer system. Previously to Water Taxi, Mr. Berube worked for Aero-Flite Distributing, Inc., a manufacturer and distributor of toy products sold exclusively in temporary kiosks. The executive officers hold office at the pleasure of the Board of Directors. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Effective December 3, 1996, shares of the Company's Common Stock were formally delisted from the American Stock Exchange (the "Exchange"). Prior to that date, there had been no trading of the Company's Common Stock since April 1, 1996. The Company's Common Stock is qualified for trading on the OTC Electronic Bulletin Board (the "OTC Bulletin Board"). Trading of the Company's Common Stock on the OTC Bulletin Board commenced in mid-December 1996; however, such trading has been limited due to the Company's inability to comply with the filing requirements of the Securities Exchange Act of 1934 since April 1, 1996. The following table sets forth the high and low closing prices on the OTC Bulletin Board for 1998, 1999, 2000, 2001 and 2002:
-------------- --------------- HIGH LOW -------------- --------------- 1998 First Quarter .31 .19 Second Quarter .25 .17 Third Quarter .23 .15 Fourth Quarter .14 .06 1999 First Quarter .09 .06 Second Quarter .07 .06 Third Quarter .31 .06 Fourth Quarter .31 .07 2000 First Quarter .10 .01 Second Quarter .02 .01 Third Quarter .14 .01 Fourth Quarter .07 .01 2001 First Quarter .01 .01 Second Quarter .01 .01 Third Quarter .07 .01 Fourth Quarter .07 .01 2002 First Quarter .10 .01 Second Quarter .07 .01
On May 22, 2002, the closing price of the Company's Common Stock on the OTC Bulletin Board was $0.07 per share. As of March 31, 2002, based on the records of the 13 Company's transfer agent, there were 731 holders of record of the Company's Common Stock, excluding all beneficial owners of the Company Common Stock. Although the Company's Common Stock is qualified for trading on the OTC Bulletin Board, there can be no assurance that an active trading market will develop for such common stock. On October 1, 1998 and on a quarterly basis thereafter (January 1, April 1, and July 1) until the shares of the Company's Series G Preferred Stock are fully converted (on or before July 1, 2002), as specified in the preferences and rights of the Series G Preferred Stock, the Company is required to make quarterly dividend payments, at the rate of $.15 per annum per share payable at the Company's discretion in cash or the Company's Common Stock, payable in arrears (see Note 7(a) to the Notes to Consolidated Financial Statements). At December 31, 2000, the Company had dividends in arrears, for this series of preferred stock, in the amount of $150,000. 14 ITEM 6. SELECTED FINANCIAL DATA Rx Medical Services Corp. Summary of Financial Information (Dollar amounts in thousands, except per share amounts)
-------------------------------------------------------------------- For The Years Ended December 31, -------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Revenues $ 9,157 $ 12,809 $ 16,498 $ 19,972 $ 16,980 Loss from continuing operations $(14,706) $(13,424) $(12,571) $ (9,147) $ (9,988) Net loss $(14,706) $(13,424) $ (9,240) $ (8,993) $ (7,669) Loss per common share: Loss from continuing operations $ (0.64) $ (0.76) $ (0.95) $ (1.03) $ (1.20) Net loss $ (0.64) $ (0.76) $ (0.70) $ (1.01) $ (0.93) Distributions $ -- $ -- $ -- $ -- $ -- Total assets $ 2,775 $ 3,491 $ 5,340 $ 6,473 $ 6,390 Working capital deficit $(76,091) $(62,428) $(51,644) $(44,912) $(34,711) Long-term debt $ 289 $ 460 $ 831 $ 202 $ 592 Total shareholders' deficit $(76,065) $(62,473) $(50,724) $(43,629) $(34,396)
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview From inception, the Company was unable to achieve profitability in its medical diagnostic business. Commencing in 1995 and continuing on still today, management has embarked on a plan to reorganize the Company. In April 1996, due to continuing losses and intense pressure from creditors, Manatee Medical Laboratories, Inc., which operated the Company's medical diagnostic services business segment, filed a voluntary petition under Chapter 7 of the U.S. Bankruptcy Code. As a result of this decision, for all years presented, the medical diagnostic services business segment has been accounted for 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 continuing operations. Gains from discontinued operations amounted to $136,000 for the year ended December 31, 1998. Also, the gain on the settlement of indebtedness has been accounted for as an extraordinary item in accordance with Accounting Principles Board Opinion No. 30, which provides for the reporting of such material, non-recurring events separately from continuing operations. Gains from extraordinary items amounted to $3,195,000 for the year ended December 31, 1998. Including losses from continuing operations, net losses of the Company were $(14,706,000), $(13,424,000) and $(9,240,000) for the years ended December 31 2000, 1999 and 1998 respectively. Results of Operations 2000 vs. 1999 Revenues from hospitals and medical clinics for the year ended December 31, 2000 were $9.2 million compared to $12.1 million for the year ended December 31, 1999. The decrease in revenues from hospitals and medical clinics is primarily the result of (a) a decrease in patient services provided at the Dickenson County Medical Center located in Clintwood, Virginia ("DCMC") which resulted in an decrease in revenues of approximately $0.8 million; (b) the sale of the Pittsburgh Specialty Hospital ("PSH") in Pittsburgh, Pennsylvania effective December 30, 1999, which resulted in a decrease in revenues of $1.5 million, and (c) the closing of the Smith County Hospital in Raleigh, Mississippi ("SCH") effective August 31, 1999, which resulted in a decrease in revenues of $0.6 million. There were no revenues generated from the distribution of biological products for the year ended December 31, 2000, as compared to $0.7 million for the year ended December 31, 1999. This decrease is primarily due to the Company facing challenges 16 in securing reliable suppliers of biological products in which to distribute. The Company has decided to de-emphasize this line of business as a result of not being able to obtain a steady supply of product from manufacturers. Costs and expenses decreased 24% to $13.2 million for the year ended December 31, 2000 from $17.3 million for the year ended December 31, 1999. Of these 2000 expenses, hospital management operations accounted for $12.3 million, biological product distribution accounted for $0.2 million, and the corporate expenses of the Company were $0.7 million. The decrease in costs and expenses is primarily the result of (a) the sale of PSH effective December 30, 1999, resulting in a decrease in costs and expenses of approximately $2.5 million; (b) the closing of SCH effective August 31, 1999, resulting in a decrease in cost and expenses of approximately $0.9 million; (c) an decrease in biological product sales which resulted in an decrease in costs and expenses of $0.5 million, and (d) a cumulative decrease of costs and expenses at other subsidiaries of the Company and the Company's corporate headquarters of approximately $0.2 million. Interest expense increased 23% to $10.9 million for the year ended December 31, 2000 from $8.8 million for the year ended December 31, 1999. This increase is due primarily to a higher level of borrowings from the Financing Source ("Related Party"). (See "Financial Condition, Liquidity, and Capital Resources"). Results of Operations 1999 vs. 1998 Revenues from hospitals and medical clinics for the year ended December 31, 1999 were $12.1 million compared to $15.5 million for the year ended December 31, 1998. 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 in revenues of approximately $1.7 million; (b) a decrease in patient services provided at the PSH which resulted in a decrease in revenues of $0.7 million; (c) a decrease in patient revenue and the closing of SCH which resulted in a decrease in revenues of approximately $0.8 million, and (d) a cumulative decrease of revenues at other Company hospital and medical clinics of approximately $0.2 million. Revenues from biological product distribution for the year ended December 31, 1999 were $0.7 million compared to $1.0 million for the year ended December 31, 1998. This decrease in revenues is primarily due to the Company facing challenges in securing reliable suppliers of biological products in which to distribute. The Company has decided to de-emphasize this line of business as a result of not being able to obtain a steady supply of product from manufacturers. Costs and expenses decreased 18% to $17.3 million for the year ended December 31, 1999 from $20.4 million for the year ended December 31, 1998. Of these 1999 expenses, hospital management operations accounted for $15.7 million, biological 17 product distribution accounted for $0.7 million, and the corporate expenses of the Company were $0.9 million. The decrease in costs and expenses is primarily the result of (a) a decrease in patient services provided at DCMC which resulted in a decrease in costs and expenses of approximately $1.5 million; (b) a decrease in patient services provided at PSP which resulted in a decrease in costs and expenses of $0.5 million; (c) a decrease in patient revenue and the closing of the SCH which resulted in a decrease in cost and expenses of approximately $1.1 million; (d) an decrease in biological product sales which resulted in an decrease in costs and expenses of $0.1 million, and (e) a cumulative increase of costs and expenses at other Company hospital and medical clinics and the Company's corporate headquarters of approximately $0.1 million. Interest expense increased 15% to $8.8 million for the year ended December 31, 1999 from $7.6 million for the year ended December 31, 1998. This increase is due primarily to a higher level of borrowings from the Financing Source ("Related Party"). (See "Financial Condition, Liquidity, and Capital Resources"). Results of Operations 1998 vs. 1997 Revenues from hospitals and medical clinics for the year ended December 31, 1998 were $15.5 million compared to $19.6 million for the year ended December 31, 1997. The decrease in revenues from hospitals and medical clinics is primarily the result of (a) a decrease in patient services provided at DCMC which resulted in a decrease in revenues of approximately 3.2 million; (b) termination of two hospital management agreements which resulted in a decrease in revenues of approximately $0.4 million; and (c) a cumulative decrease of revenues at other Company hospital and medical clinics of approximately $0.5 million. Revenues from biological product distribution for the year ended December 31, 1998 were $1.0 million compared to $0.3 million for the year ended December 31, 1997. This increase in revenues is primarily due to the current biological product mix being in high demand and commanding higher sales prices. Costs and expenses decreased 12% to $20.4 million for the year ended December 31, 1998 from $22.8 million for the year ended December 31, 1997. Of these 1998 expenses, hospital management operations accounted for $18.4 million, biological product distribution accounted for $0.8 million, and the corporate expenses of the Company were $1.2 million. The decrease in costs and expenses is primarily the result of (a) a decrease in patient services provided at DCMC which resulted in a decrease in costs and expenses of approximately $1.6 million; (b) an increase in biological product sales which resulted in an increase in costs and expenses of $0.2 million; and (c) a cumulative decrease in costs and expenses at other Company hospital and medical clinics and the Company's corporate headquarters of approximately $1.0 million. 18 Interest expense increased 20% to $7.7 million for the year ended December 31, 1998 from $6.4 million for the year ended December 31, 1997. This increase is due primarily to a higher level of borrowings from the Financing Source ("Related Party"). (See "Financial Condition, Liquidity, and Capital Resources"). No provision for income taxes is required on the gain from discontinued operations. Financial Condition, Liquidity, and Capital Resources At December 31, 2000 and 1999, the Company's working capital deficit was $76.1 million and $62.4 million, respectively. This increase in the working capital deficit was primarily due to a $14.5 million increase in the level of funding from the Financing Source ("Related Party") and operating losses. Through December 31, 2000, the Company's ability to continue as a going concern is dependent on the continued funding of its operations by the Financing Source ("Related Party"). 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 ("Related Party"), or other alternative sources of funding, to the extent available. To the extent fundings from the Financing Source ("Related Party") 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 ("Related Party"). Financing agreements exist between the Financing Source ("Related Party"), 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's primary focus though is on the continuing reorganization of the hospital ownership and management business. Going Concern The report 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 19 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 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 ("Related Party") 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. Outlook The Company views its decisions to discontinue the operation of its medical diagnostic services business segment, to continue reorganizing the hospital ownership and management business and to de-emphasize the biological product distribution business as positive from a strategic standpoint. In the hospital operation and management business, the Company anticipates entering into an agreement to sell or closing the hospital it currently operates while looking to expand its presence, through joint ventures and/or acquisitions, into new markets with perceived potential. In the biological product distribution business, the Company has scaled back its emphasis on this line of business. There can be no assurance, however, that the Company will achieve its strategic objectives. 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and a decline in the stock market. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company is not exposed to market risk as it relates to changes in foreign currency exchange rates though the Company is exposed to immaterial levels of market risk as it relates to changes in interest rates. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the index of financial statements and schedules as presented on page 36. 22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 23 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT Directors The Company's by-laws provide that the number of directors shall be not less than three nor more than ten. The actual number of directors is determined by resolution of the Board from time to time. The Company's by-laws also provide that directors are elected at the annual meeting of shareholders for a term of office of one year or until their successors are elected and qualify. The last annual meeting of shareholders was held on November 20, 1997. All of the current directors were elected at that meeting. The Company anticipates that the next annual meeting of shareholders will be held in the year 2002. The number of directors is currently set at nine. Only three persons, however, are currently serving as directors. Following is information concerning each of the current directors of the Company: Michael L. Goldberg, 51 (a director since 1990). Mr. Goldberg was an Assistant District Attorney in the Philadelphia District Attorney's office from 1974 to 1977 before entering private practice with a specialty in complex commercial litigation. Mr. Goldberg joined the Company in May 1990. He was Chairman, President and Chief Executive Officer of the Company from November 1991 to June 1994 at which time he relinquished the position of President. Phillip E. Pearce, 72 (a director since 1992). Mr. Pearce has been in the investment banking and securities business since receiving his Graduate Degree from the Wharton School in 1954. From 1969 to 1983, he served as Senior Vice President and a Director of E.F. Hutton of New York City, served on the Board of Governors of the New York Stock Exchange and was Chairman of the Board of Governors of the National Association of Securities Dealers, Inc. From 1983 to 1988, Mr. Pearce served as President of Phillip E. Pearce & Co., and since 1988 has been a partner in Pearce-Henry Capital Corp. of Charlotte, North Carolina, an investment banking firm. Mr. Pearce was also a contributing author and editor of the Dow Jones publication of the Stock Market Handbook, and sat on the advisory council to the Securities and Exchange Commission on The Institutional Study of the Stock Markets. Michael J. Pickering, M.D., 70 (a director since 1990). Dr. Pickering has practiced as a medical doctor specializing in nephrology since receiving his medical degree from the University of Florida in 1961. He has certifications from the American Board of Internal Medicine and the American Board of Internal Medicine in the Subspecialty of Nephrology and is a member of the American and Florida Medical Associations, is a Fellow, American College of Physicians, and is a member of the American Society of Artificial Internal Organs, American Society of Internal Medicine, the American Society of Nephrology, the Florida Society of Internal Medicine, the Florida Society of Nephrology, the Hillsborough County Medical Association, the International Society of 24 Nephrology, the National Kidney Foundation, the Southeastern Dialysis and Transplantation Association, the South-Eastern Organ Procurement Foundation, the Royal Society of Health and the American Board of Quality Assurance & Utilization Review Physicians. Dr. Pickering currently practices medicine, serves as an Associate Professor of Medicine at the University of Florida and is a frequent speaker and lecturer on his area of specialty throughout the country. He also has had articles and abstracts published in more than one hundred medical journals and medical conferences. Executive Officers Information concerning the executive officers of the Company is contained in Part I, on page 12 of this annual report. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Ownership of and transactions in the Company's securities by executive officers and directors of the Company and owners of ten percent or more of the Company's Common Stock are required to be reported to the Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). The Company does not have knowledge of any failure to file a required form to report such ownership and transactions. 25 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table provides a summary of cash and non-cash compensation with respect to the Company's Chief Executive Officer and the only other executive officer whose compensation exceeded $100,000 (the "Name Officers") in the fiscal years ended December 31, 2000, 1999 and 1998.
------------------------- Long Term --------------------------------------------- Compensation Annual Compensation Awards -------------------------------------------------------------------------------------------------------------------- Name and Other Annual Securities Underlying Principal Position Year Salary ($) Bonus ($) Compensation ($) Option/SARs (#) -------------------------------------------------------------------------------------------------------------------- Michael L. Goldberg 2000 165,000 -0- 8,000 -0- Chief Executive 1999 165,000 -0- 8,000 -0- Officer 1998 165,000 -0- 8,000 -0- Randolph H. Speer 2000 -0- -0- -0- -0- President and Chief 1999 190,000 -0- -0- -0- Operating Officer(*) 1998 200,000 -0- -0- -0-
(*) Randolph H. Speer resigned his positions with the Company in the year ended December 31, 1999. STOCK OPTIONS There were no grants of stock options by the Company to the Named Officers during 2000. 26 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES The following table sets forth the information with respect to the Named Officers concerning the exercise of options during 2000 and unexercised options held as of December 31, 2000:
------------------------------------------------------------------------------ ----------------------------------- (a) (b) (c) (d) (e) ------------------------------------------------------------------------------ ----------------------------------- Number of Securities Underlying Value of Unexercised In-the-Money Unexercised Options at FY-End (#) Options at FY-End ($) ------------------------------------------------------------------------------ ----------------------------------- Shares Acquired Value on Excise Realized Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable ------------------------------------------------------------------------------ ----------------------------------- Michael L. Goldberg -0- -0- 72,500 -0- -0- -0-
Compensation of Directors It has been the policy of the Company not to compensate its directors for their services as directors. It is the policy of the Company not to pay its directors for attending Board or committee meetings, but the Company reimburses directors for travel expenses incurred in attending such meetings. Board Compensation Committee Report on Executive Compensation The Board of Directors of Rx Medical Services Corp. does not have a Compensation Committee and, as a result, the Board of Directors makes determinations as to executive officer compensation. As of December 31, 2000, the Company had three executive officers. 27 Performance Graph COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN * AMONG RX MEDICAL SERVICES CORP., THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE S & P HEALTH CARE (HOSPITAL MANAGEMENT) INDEX
-------------------------------------------------- Cumulative Total Return -------------------------------------------------- 12/95 12/96 12/97 12/98 12/99 12/00 ----- ----- ----- ----- ----- ----- Rx MEDICAL SERVICES CORP RXMS 100 9 27 11 10 4 NASDAQ STOCK MARKET (U.S.) INAS 100 123 151 212 395 237 S & P HEALTH CARE (HOSPITAL MANAGEMENT) IHSM 100 118 103 84 95 155
----------------- * $100 invested on 12/31/95 in stock or index - including reinvestment of dividends. Fiscal year ending December 31. 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Each share of Preferred Stock of the Company contains voting rights equivalent to one share of the Company's Common Stock. The Company currently has one series of preferred stock outstanding, designated Series G. For a description of the relative rights and preferences of this series, see Note 6(a) to the Notes to Consolidated Financial Statements. On all matters submitted for vote by the stockholders of the Company, including the election of directors, the shares of the Company's Preferred Stock and Common Stock vote together as a single class except as may otherwise be required by law. The following table sets forth information as of March 31, 2002, with respect to all stockholders known by the Company to be the direct or indirect beneficial owners of 5% or more of the Company's voting securities and by the executive officers and directors of the Company as a group. Each percentage is calculated by assuming that the named stockholder converted or exercised all of such stockholder's securities convertible within the next 60 days into, or exercisable for, shares of the Company's Common Stock at a time when no other stockholder did so, irrespective of the conversion or exercise price thereof. Except as otherwise noted, all persons and entities have sole voting and investment power with respect to their shares.
--------------------------------------- ----------------- --------------------- ------------------- AMOUNT AND NATURE NAME AND ADDRESS OF TITLE OF OF BENEFICIAL PERCENTAGE BENEFICIAL OWNER CLASS OWNERSHIP (1) OF CLASS --------------------------------------- ----------------- --------------------- ------------------- Michael L. Goldberg Common 4,741,194 (2) 20.48% (also a director) 888 East Las Olas Blvd., Suite 210 Fort Lauderdale, FL 33301 Healthcare Capital, LLC Common 11,028,717 (3) 47.65% 6125 Memorial Drive Preferred 800,000 (4) 100.00% Dublin, OH 43017 Directors: (address for all at) 888 East Las Olas Blvd., Suite 210 Fort Lauderdale, FL 33301 Michael J. Pickering, M.D. Common 23,750 (5) .10% All Executive Officers, Directors and Nominees as a Group Common 4,764,944 (6) 20.58%
29 1) As of March 31, 2002, there were 23,145,034 shares of the Company's Common Stock and 800,000 shares of the Company's Preferred Stock issued and outstanding. 2) Includes 72,500 shares representing stock options exercisable within 60 days. 3) In July 1996, an entity distributed, in equal amounts, 750,000 shares to Lance K. Poulsen, Donald H. Ayers, Rebecca S. Parrett and Barbara C. Larson. These individuals are officers, directors and the majority shareholders of the Financing Source ("Related Party") and Healthcare Capital, LLC ("HCC") and may be deemed to be the beneficial owners of the shares, of the Company's Common Stock, owned by HCC. 4) These 800,000 shares of the Company's Series G Preferred Stock could convert, based on the market value of the Company's Common Stock on May 22, 2002, into approximately 11,428,571 shares of the Company's Common Stock. 5) Includes 3,182 shares representing stock options exercisable within 60 days. 6) Includes 75,692 shares representing stock options exercisable within 60 days. 30 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS General The Financing Source ("Related Party") is being categorized as a related party due to the Financing Source's ("Related Party") stock ownership in and its ability to exercise control over the operations of the Company. Sale of Subsidiary Effective December 30, 1999, the Company entered into an Agreement For The Sale And Purchase of Assets of Consolidated Health Corporation of Pittsburgh, Inc. (PSH) to ACCI/AllCare of Pennsylvania, Inc. (AllCare). AllCare assumed none of the liabilities of PSH. In consideration for the sale of the assets, the purchaser shall enter into a mortgage payable for $3,300,000. In connection with the sale agreement described above, a second agreement, Agreement Regarding Acquisition of Assets of Pittsburgh Specialty Hospital was entered into by and among The Financing Source ("Related Party"), AllCare and another party. The agreement called for the following: - The Financing Source ("Related Party") to settle certain debts of PSH. - AllCare will enter into a $3,300,000 mortgage payable (described in the above paragraph) with Financing Source ("Related Party"). - The Financing Source ("Related Party") will provide AllCare with 12 monthly payments of $200,000 commencing on the Closing date in return for a $2,400,000 mortgage. In addition, the Financing Source ("Related Party") engaged AllCare as an agent to attempt to settle the trade debts of Consolidated Health Corporation of Pittsburgh, Inc, except for approximately $250,000 that was separately identified as the exclusive responsibility of PSH. PSH's trade debts were $1,364,000 at December 31, 1999. As this agreement did not relieve PSH of its legal obligation to pay its trade debts, the accounts payable balance was not adjusted. 31 A summary of the assets sold to AllCare and liabilities paid off by The Financing Source ("Related Party") are as follows: Accounts receivable, net $ (355) Inventories (50) Land and buildings (653) Equipment, net (284) Notes payable - related party 2,758 Accrued liabilities 7 Accrued liabilities - related party 14 Long-term debt 197 Obligations under capital leases - related party 16 ------- Net adjustment to paid in capital $ 1,650 =======
No gain or loss was recorded for the sale of the PSH assets to AllCare or the PSH liabilities being settled by The Financing Source ("Related Party"). The Company recorded the net adjustment to paid in capital due to the substance and the related party aspects of the transaction. Forgiveness and Settlement Of Liabilities Effective December 30, 1999, the Company entered into an Agreement For The Sale And Purchase of Assets of PSH to AllCare. Although effective control of the assets of PSH were transferred to Allcare on December 30, 1999, the Company continued to process certain PSH transactions on behalf of Allcare during the first and second quarter of 2000 as Allcare was in the process of securing medical provider numbers. The transactions aggregated $240,037. None of these transactions were recorded in the Company's statement of operations for the year ended December 31, 2000. The Company was not compensated for these processing services subsequent to January 1, 2000. The Financing Source ("Related Party) funded $352,954 for PSH's on going obligations. The net value of transactions processed on behalf of Allcare for the year ended December 31, 2000, combined with the funding received from the Financing Source ("Related Party") resulted in a liability by the Company to the Financing Source ("Related Party") of $112,917. The Financing Source ("Related Party") forgave this liability, however no gain or loss was recorded on the forgiveness of the liability. The Company recorded the forgiveness to paid in capital due to the related party aspects of the transactions. In addition, Allcare was engaged by the Financing Source ("Related Party") on December 30, 1999 as an agent to attempt to settle the trade debts of PSH. In the first and second quarter of 2000, the Financing Source ("Related Party") funded $750,000 to settle $1,121,006 of PSH's trade debts. No gain or loss was recorded for the settlement of the liability. The Company recorded $1,121,006 to paid in capital due to the related party aspects of the transaction. 32 Notes Payable At December 31, 2000, notes payable-related party included amounts due to the Financing Source ("Related Party"), through which the Company has obtained financing collateralized by the Company's accounts receivable and equipment. The collateral also includes all the issued and outstanding common stock of Consolidated Health Corporation Of Mississippi, Inc. Certain financing agreements with the Financing Source ("Related Party") provide that the Company will periodically sell certain eligible accounts receivable to the Financing Source ("Related Party"). However, the terms of the agreements specify certain items of limited recourse, including the ability to resell receivables which have aged beyond 150 days back to the Company. While the Company believes that legally a sale of its receivables has occurred, due to the existence of the terms of limited recourse, this transaction does not qualify for treatment as a sale for accounting purposes and, accordingly, such activity has been recorded as notes payable at December 31, 2000 and 1999. The notes payable due to the Financing Source ("Related Party") at December 31, 2000 and 1999 consisted of the following (in thousands):
------- -------- 2000 1999 ------- -------- Notes payable, interest at 14%, maturing at various dates in June 2003, collateralized by accounts receivable (subject to sale and subservicing agreements) $ 70,982 $ 56,501 Unsecured note payable, interest at 12%, matures on July 31, 2001 17 43 ------- -------- $70,999 $ 56,544 ======= ========
Long-Term Debt Long-term debt - related party consists of an unsecured promissory note, interest at 14%, due in monthly installments of principal and interest of $13,232, and matures on September 1, 2003. Scheduled principal maturities for each of the five years subsequent to December 31, 2000, and thereafter are estimated as follows (in thousands): 2001 - $116; 2002 - $132; and 2003 - $113. 33 Indebtedness At December 31, 2000, the Company is indebted to the Financing Source ("Related Party") in the amount of $71.7 million. Stock Ownership Healthcare Capital, LLC ("HCC"), formerly know as Intercontinental Investment Associates, Ltd., is affiliated with the Financing Source ("Related Party") via common individual owners. At December 31, 2000, HCC is the Company's majority shareholder. HCC owns directly and/or indirectly 47.6% or 11,028,717 of the 23,145,034 shares of the issued and outstanding shares of the Company's $.002 par value Common Stock as of March 31, 2002. The ownership percentage and the number of shares owned do not take into account following: a) the 800,000 shares of the Company's Series G Preferred Stock owned by HCC that could convert, based on the market value of the Company's Common Stock on May 22, 2002, into approximately 11,428,571 shares of the Company's Common Stock, b) dividends in arrears of $150,000 on the Company's Series G Preferred Stock as of December 31, 2000, which are anticipated to be paid by the issuance of 9,428,571 shares of the Company's Common Stock, or c) shares of the Company's Common Stock held by HCC in street name. Leases The Company leases one of its facilities and certain equipment from the Financing Source ("Related Party") with initial lease terms of twenty years. Scheduled future minimum commitments under these operating leases with remaining terms subsequent to December 31, 2000 are as follows (in thousands):
-------------- ------------- Years Ending Related-Party December 31, Leases -------------- ------------- 2001 $ 1,145 2002 1,145 2003 1,146 2004 1,146 2005 1,146 Thereafter 11,742 ----------- $ 17,470 ===========
34 Scheduled future minimum commitments under capital lease obligations with remaining terms subsequent to December 31, 2000 are as follows (in thousands):
-------------------- --------- Related- Years Ending Party December 31, Leases -------------------- --------- 2001 $ 66 2002 17 2003 -- 2004 -- 2005 -- Thereafter -- ----- 83 Less amounts Representing interest (5) ------ Present value of remaining minimum capital lease payments 78 Less: Scheduled current portion (62) Non-current obligations Reclassified to current -- ----- Long-term obligations Under capital leases 16 =====
35 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) List of Financial Statements The following Consolidated Financial Statements of Rx Medical Services Corp. and Report of Independent Accountants are filed as a part of this annual report:
----------- Page ----------- Report of Independent Certified Public Accountants 39 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 40 Consolidated Balance Sheets at December 31, 2000 and 1999 41-42 Consolidated Statements of Shareholders' Deficit for the years ended December 31, 2000, 1999 and 1998 43 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 44-45 Notes to Consolidated Financial Statements 46-64
Schedules other than those listed above are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (a)(2) List of Exhibits: (numbered in accordance with Item 601 of Regulation S-K)
------------ --------------------------------------------------------------- ---------------- Exhibit Incorporation by Number Description of Document Reference ------------ --------------------------------------------------------------- ---------------- 3(a) Certificate of Incorporation 3(a)* 3(b) By-Laws 3(b)* 3(c) Certificate of Decrease in Number of Authorized and 3(c)** Outstanding Shares of Stock, filed with Nevada Secretary of State (December 1991) 3(d) Certificate of Decrease in Number of Authorized and *** Outstanding Shares, filed with Nevada Secretary of State (December 1993) 4(a) Certificate of Resolution with respect to Series B Preferred 4(a)**** Stock of Registrant 4(b) Certificate of Designation, Series C Preferred Stock 4(b)- 4(c) Certificate of Designation, Series D Preferred Stock 4(c)- 4(d) Certificate of Designation, Series E Preferred Stock 4(d)- 4(e) Certificate of Designation, Series F Preferred Stock 4(e)-
36 10(a) Sale and Subservicing Agreement dated as of October 7, 1993, 10(kk)+ by and among Manatee Medical Laboratories, Inc., NPFII-W, Inc. and National Premier Financial Services, Inc. 10(b) Agreement of Merger, dated April 20, 1994, together with 10(a)++ supplementary letter from Kachina, Inc., dated April 20, 1994 10(c) Purchase Commitment, dated April 20, 1994, from NCFE 10(b)++ 10(d) Promissory Note, Security Agreement and Pledge Agreement, 10(c)+++ dated September 19, 1994, from Rx Medical Services Corp. to NCFE 10(e) Plan and Agreement of Merger, dated July 7, 1995, by and among 10(a)++++ Rx Medical Services Corp., CHC Acquisition Corp. and Consolidated Health Corporation of Mississippi, Inc. 10(f) Asset Purchase Agreement, dated as of August 11, 1995, by and 10(e)++++ among Meris Laboratories, Inc., Rx Medical Services Corp. and Manatee Medical Laboratories, Inc. [for northern California] 10(g) Asset Purchase Agreement, dated as of August 11, 1995, by and 10(f)++++ among Meris Laboratories, Inc., Rx Medical Services Corp. and Manatee Medical Laboratories, Inc. [for southern California] 10(h) Laboratory Services Agreement, made as of August 12, 1995, 10(g)++++ between Meris Laboratories, Inc. and Rx Medical Services Corp. 10(i) Amendment to Asset Purchase Agreement, dated as of August 17, 10(h)++++ 1995 by and among Meris Laboratories, Inc., Rx Medical Services Corp. and Manatee Medical Laboratories, Inc. [for southern California] 10(j) Pledge Agreement, dated as of July 13, 1995, from Rx Medical 10(j)- Services Corp. to NCFE 10(k) Hospital Lease Agreement, dated as of November 1, 1995, 10(k)- between Smith County, MS and CHC Management, Inc. 10(l) Articles of Merger (CHC) filed November 14, 1995 with MS 10(l)- Secretary of State 10(m) Operating Agreement, dated as of March 30, 1996, between 10(m)- NPF-X, Inc and CHC Whitwell, Inc. 10(n) Operating Agreement, dated as of March 30, 1996, between 10(n)- NPF-X, Inc and CHC Clintwood, Inc. 10(o) Option to Purchase Agreement, effective as of March 29, 1996, 10(o)- between NPF-X, Inc. and CHC
37 10(p) First Amendment to CHC Merger Agreement 10(p)- 10(q) Option Agreement on Whitwell Medical Center, Whitwell, TN 10(q)- 10(r) Note Extension 10(r)- 10(s) Asset Purchase Agreement, dated August 28, 1996, between The 2(a)-- Podiatry Hospital of Pittsburgh and CHC 10(t) Amendment to Asset Purchase Agreement, undated 2(b)-- 10(u) Stipulation of Dismissal and Order 10(u)--- 11 Computation of Primary Earnings Per Share 21 Subsidiaries of Registrant 21- 10(v) Asset Sale dated December 30, 1999, between Pittsburgh 10(v) ---- Specialty Hospital and AllCare
Explanation of Incorporation by Reference: * Form 10 of Registrant, dated October 10, 1990, as amended by Form 8, dated March 15, 1991 ** Amendment No. 2 to Form S-1 of Registrant, dated January 31, 1994 *** Current Report of Registrant on Form 8-K, dated January 7, 1994 **** Current Report of Registrant on Form 8-K, dated December 23, 1991, as amended on December 29 and 31, 1991, and January 14 and March 14, 1992 + Amendment No. 1 to Form S-1 of Registrant, dated October 28, 1993 ++ Current Report of Registrant on Form 8-K, dated April 20, 1994 +++ Current Report of Registrant on Form 8-K, dated September 20, 1994 ++++ Current Report of Registrant on Form 8-K, dated August 10, 1995 - Annual Report of Registrant on Form 10-K for fiscal year ended December 31, 1995 -- Current Report of Registrant on Form 8-K, dated April 3, 1997 --- Current Report of Registrant on Form 8-K, dated January 29, 1998 ---- Annual Report of Registrant on Form 10-K for fiscal year ended December 31, 1999 (b) Reports on Form 8-K None. 38 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Rx Medical Services Corp. We have audited the accompanying consolidated balance sheets of Rx Medical Services Corp. as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' deficit, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rx Medical Services Corp. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that Rx Medical Services Corp. will continue as a going concern. However, as more fully described in Note 1, the Company has incurred recurring operating losses, has a working capital deficiency, is delinquent in payments due to debt holders, taxing authorities and others, is in default of certain loan covenants and is dependent on the continued funding by the senior lender. In addition, as described in Note 12, there are uncertainties concerning the Company's compliance with various federal and state statutes and certain provisions of the Omnibus Budget Reconciliation Act of 1993, as well as, certain similar state statutes. The forgoing matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Notes 1 and 12. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Grant Thornton LLP Weston, Florida May 22, 2002 39 RX MEDICAL SERVICES CORP. Consolidated Statements of Operations (Dollars in thousands except per share amounts)
Years Ended December 31, -------------------------------------------------- 2000 1999 1998 -------- -------- -------- Revenues: Hospitals and medical clinics $ 9,157 $ 12,077 $ 15,486 Biological products -- 732 1,012 -------- -------- -------- 9,157 12,809 16,498 -------- -------- -------- Costs and expenses: Compensation and benefits 6,551 8,872 9,716 Biological products -- 470 633 Supplies 988 1,251 1,820 Fees for services 1,232 1,263 2,489 Bad debts 1,070 1,711 1,389 Bad debts - related party 535 -- -- Depreciation and amortization 151 246 243 Occupancy 488 610 698 Occupancy-related party 962 962 962 Equipment rental and maintenance 323 414 422 Equipment rental-related party 183 183 183 Other 702 1,304 1,857 -------- -------- -------- 13,185 17,286 20,412 -------- -------- -------- Operating loss (4,028) (4,477) (3,914) Other income (expense): Interest (81) (106) (257) Interest - related party (10,807) (8,714) (7,393) Provision for legal judgment -- -- (1,130) Loss on sale/abandonment of assets -- (149) -- Loss on settlement of liabilities -- (185) (50) Other income 210 207 173 -------- -------- -------- (10,678) (8,947) (8,657) -------- -------- -------- Loss from continuing operations (14,706) (13,424) (12,571) Gain from discontinued operations -- -- 136 Extraordinary item: Gain on settlement of indebtedness -- -- 3,195 -------- -------- -------- Net loss $(14,706) $(13,424) $ (9,240) ======== ======== ======== Basic and diluted net loss per common share: Loss from continuing operations $ (0.64) $ (0.76) $ (0.95) Gain from discontinued operations -- -- 0.01 Gain from extraordinary item -- -- 0.24 -------- -------- -------- Basic and diluted net loss per common share $ (0.64) $ (0.76) $ (0.70) ======== ======== ========
The accompanying notes are an integral part of these financial statements. 40 RX MEDICAL SERVICES CORP. Consolidated Balance Sheets (Dollars in thousands)
December 31, --------------------------- 2000 1999 ------- ------- Assets: Current assets: Cash $ 81 $ 46 Accounts receivable (less allowance for doubtful accounts of $2,624 and $2,690 at 2000 and 1999, respectively) 2,033 2,630 Inventories 294 322 Other 52 78 ------- ------- Total current assets 2,460 3,076 ------- ------- Property and equipment, at cost Equipment 756 706 Furniture, fixtures and improvements 94 92 ------- ------- 850 798 Less: accumulated depreciation and amortization (546) (401) ------- ------- 304 397 Other assets 11 18 ------- ------- Total assets $ 2,775 $ 3,491 ======= =======
The accompanying notes are an integral part of these financial statements. 41 RX MEDICAL SERVICES CORP. Consolidated Balance Sheets (continued) (Dollars in thousands)
December 31, ------------------------------- 2000 1999 --------- --------- Liabilities and shareholders' deficit: Current liabilities: Note payable $ 16 $ 16 Notes payable - related party 70,999 56,544 Accounts payable 4,541 6,430 Accrued liabilities 1,580 872 Accrued liabilities - related party 280 166 Accrued compensation, benefits and related taxes 907 1,254 Current portion of long-term debt-related party 116 100 Current portion of capital lease obligations 50 65 Current portion of capital lease obligations-related party 62 57 --------- --------- Total current liabilities 78,551 65,504 Long-term liabilities: Long-term debt-related party 245 361 Obligations under capital leases 28 21 Obligations under capital leases-related party 16 78 --------- --------- Total long-term liabilities 289 460 --------- --------- Total liabilities 78,840 65,964 --------- --------- Commitments and contingencies -- -- Shareholders' deficit: Convertible preferred stock, $.001 par value, authorized shares 1,500,000, issued and outstanding 800,000 shares at 2000 and 1999; aggregate liquidation preference of $950 and $830 at 2000 and 1999, respectively 1 1 Common stock, $.002 par value, authorized 25,000,000 shares, issued and outstanding 23,751,920 at 2000 and 1999 47 47 Additional paid-in capital 45,139 44,025 Accumulated deficit (121,251) (106,545) Treasury stock, 605,554 shares of common stock, at par value, at 2000 and 1999 (1) (1) --------- --------- Total shareholders' deficit (76,065) (62,473) --------- --------- Total liabilities and shareholders' deficit $ 2,775 $ 3,491 ========= =========
The accompanying notes are an integral part of these financial statements. 42 RX MEDICAL SERVICES CORP. Consolidated Statements of Shareholders' Deficit (Dollars and shares in thousands)
Convertible Addi- Treasury Total Preferred Stock Common Stock tional Accumu- Stock Share ----------------- -------------- Paid-In lated ------------- holders' Shares Amount Shares Amount Capital Deficit Shares Amount Deficit ------ ------- ------ ------ -------- -------- ------ ------ -------- Balance December 31, 1997 1,023 $ 3,002 9,164 $18 $ 37,233 $ (83,881) 606 $(1) (43,629) Issuance of preferred stock 800 1 -- -- 800 -- -- -- 801 Issuance of common stock -- -- 5,000 10 790 -- -- -- 800 Issuance of common stock for conversion of preferred stock (600) (3,001) 600 1 3,000 -- -- -- -- Issuance of common stock in exchange for preferred stock (359) -- 1,029 2 (2) -- -- -- -- Issuance of common stock for dividends in arrears -- -- 2,190 4 716 -- -- -- 720 Dividends on preferred stock -- -- -- -- (176) -- -- -- (176) Net loss -- -- -- -- -- (9,240) -- -- (9,240) ------ ------- ------ --- -------- --------- --- --- -------- Balance December 31, 1998 864 2 17,983 35 42,361 (93,121) 606 (1) (50,724) Issuance of common stock for conversion of preferred stock (64) (1) 4,605 9 (9) -- -- -- (1) Issuance of common stock for dividends in arrears -- -- 1,164 3 143 -- -- -- 146 Dividends on preferred stock -- -- -- -- (120) -- -- -- (120) Sale of subsidiary -- -- -- -- 1,650 -- -- -- 1,650 Net loss -- -- -- -- -- (13,424) -- -- (13,424) ------ ------- ------ --- -------- --------- --- --- -------- Balance December 31, 1999 800 1 23,752 47 44,025 (106,545) 606 (1) (62,473) Dividends on preferred stock -- -- -- -- (120) -- -- -- (120) Forgiveness of liability - related party -- -- -- -- 113 -- -- -- 113 Settlement of liabilities - related party -- -- -- -- 1,121 -- -- -- 1,121 Net loss -- -- -- -- -- (14,706) -- -- (14,706) ------ ------- ------ --- -------- --------- --- --- -------- Balance December 31, 2000 800 $ 1 23,752 $47 $ 45,139 $(121,251) 606 $(1) $(76,065) ====== ======= ====== === ======== ========= === === ========
The accompanying notes are an integral part of these financial statements. 43 RX MEDICAL SERVICES CORP. Consolidated Statements of Cash Flows (Dollars in thousands)
Years Ended December 31, ------------------------------------- 2000 1999 1998 -------- -------- ------- Cash flows from operating activities: Net loss $(14,706) $(13,424) $(9,240) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 151 246 243 Provision for bad debts 1,605 1,711 1,389 Provision for legal judgment -- -- 1,130 Loss on sale/abandonment of assets 3 161 15 (Gain) loss on settlement of liabilities -- 185 (150) Gain on settlement of indebtedness -- -- (3,195) Changes in operating assets and liabilities, net of effects of acquisition: Increase in accounts receivable (1,008) (1,702) (304) (Increase) decrease in inventories 27 (9) 154 (Increase) decrease in other assets 33 (1) (110) Increase (decrease) in accounts payable and accrued liabilities (525) 890 2,276 Increase (decrease) in accrued liabilities - related party 114 75 (534) Change in discontinued operations -- -- (100) -------- -------- ------- Net cash used in operating activities (14,306) (11,868) (8,426) -------- -------- ------- Cash flows from investing activities: Proceeds from sale of property and equipment 2 -- -- Acquisition of property and equipment (31) (48) (75) -------- -------- ------- Net cash used in investing activities (29) (48) (75) -------- -------- ------- Cash flows from financing activities: Proceeds from notes payable and long-term debt - related party 14,566 12,092 8,308 Payments on notes payable, long-term debt and obligations under capital leases (39) (50) (632) Payments on notes payable, long-term debt and obligations under capital leases - related party (157) (101) (64) Proceeds from the sale of preferred stock -- -- 800 -------- -------- ------- Net cash provided by financing activities 14,370 11,941 8,412 -------- -------- ------- Net increase (decrease) in cash 35 25 (89) Cash - beginning of year 46 21 110 -------- -------- ------- Cash - end of year $ 81 $ 46 $ 21 ======== ======== =======
(Continued) The accompanying notes are an integral part of these financial statements. 44 RX MEDICAL SERVICES CORP. Consolidated Statements of Cash Flows (Continued) (Dollars in thousands)
Years Ended December 31, --------------------------------- 2000 1999 1998 ---- ---- ---- The following is supplementary information relating to the consolidated statement of cash flows: Noncash investing and financing activities: Note receivable utilized to reduce litigation settlement $ -- $ 169 $ -- ==== ===== ==== Equipment purchased under capital leases $ 31 $ -- $263 ==== ===== ==== Common stock issued for payment of dividends in arrears $ -- $ 146 $720 ==== ===== ==== Common stock issued to reduce notes payable - related party $ -- $ -- $800 ==== ===== ====
On July 1, 1998, the 600,270 issued and outstanding shares of the Company's Series F Preferred Stock, were converted into 600,270 shares of the Company's Common Stock. On December 31, 1999, the remaining 63,836 issued and outstanding shares of the Company's Series C Preferred Stock were converted into 4,605,311 shares of the Company's Common Stock. Effective December 30, 1999, the Company sold Consolidated Health Corporation Of Pittsburgh, Inc.'s (PSH) assets of $1,342. The Financing Source settled certain liabilities of $2,992. During the year ended December 31, 2000, the Financing Source provided $113 to process certain PSH transactions and $1,121 to settled 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. (See Note 2) For the years ended December 31, 2000, 1999, and 1998, interest paid, which includes interest on obligations under capitalized leases, was $2,843, $2,307 and $2,607, respectively. No income taxes were paid during these periods. The accompanying notes are an integral part of these financial statements. 45 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of consolidation The consolidated financial statements of Rx Medical Services Corp. include the accounts of Rx Medical Services Corp. and its subsidiaries (the "Company"). The subsidiaries are four wholly-owned operating companies, Consolidated Health Corporation of Mississippi, Inc., Rx Medical Management, Inc., Rx Medical Imaging Corp. and CHC Medical Services Corp. All significant intercompany transactions have been eliminated. b. Nature of operations The Company operates a hospital and clinics in Clintwood, Virginia. The Company's primary source of revenue is providing medical services to patients in the geographic area of Clintwood, Virginia. c. Basis of presentation For all years presented, 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 (see Note 4). The Company has experienced significant losses in each of the past three years, reflects a working capital deficit of $76.1 million at December 31, 2000, 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 (see Note 12c). 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") (see Note 9) 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 profitability operationally, it is attempting to improve operational profitability, as well as, cash flow. The Company's primary focus though is on the continuing reorganization of the hospital ownership and management business. 46 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements 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 while looking to expand its presence, through joint ventures and/or acquisitions, into new markets with perceived potential. There can be no assurance that suitable candidates can be found to acquire the Company's hospital 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. The Company anticipates limiting its joint ventures and/or acquisitions to those that meet certain criteria and are expected to generate positive cash flow. d. Cash and cash equivalents For purposes of the statement of cash flows, the Company considers cash deposited with financial institutions and marketable securities with a maturity of three months or less at the date of acquisition to be cash and cash equivalents. e. Inventory Inventory, which consists primarily of patient supplies, is stated at the lower of cost or market; cost is determined using the first-in, first-out (FIFO) method. f. Property and equipment Depreciation on equipment, furniture, fixtures and improvements is computed principally on the straight-line method over the estimated useful lives of these assets, which range from three to ten years. g. Revenues Revenue from hospitals and medical clinics is recognized upon completion of patient services and is recorded net of contractual allowances and amounts estimated to be received under reimbursement arrangements with certain third party payers. Approximately 61%, 56% and 54% of the Company's revenues for the years ended December 31, 2000, 1999 and 1998, respectively, were reimbursements provided by Medicare and Medicaid. Contractual allowances represent the difference between the Company's basic fee schedule and the estimated amount of available reimbursement from third party payers, such as Medicare, Medicaid and certain clients. Contractual allowances are deducted directly from gross revenues and accounts receivable at the time the service is performed and recorded in the Company's financial statements at the estimated net amount to be received. These revenues are subject to audit and retroactive adjustment 47 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements by the respective third party fiscal intermediaries. In the opinion of management, retroactive adjustments, if any, would not be material to the financial statements of the Company. An allowance for doubtful accounts is established based on management's estimates of the net amounts to be collected from third party payors and individuals considering past collection history and the current status of such related receivable. Accordingly, the allowance for doubtful accounts does not contain any amounts relative to contractual allowances. h. Income taxes The Company accounts for deferred income taxes utilizing the liability method as prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The liability method applies the enacted statutory rates in effect at the balance sheet date to differences between the book and tax basis of assets and liabilities. The resulting deferred tax assets and liabilities are adjusted to reflect changes in tax laws. A valuation allowance is provided against deferred income tax assets to the extent of the likelihood that the deferred tax asset may not be realized. i. Basic and diluted net loss per common 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. Basic and diluted net loss per common share are the same 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. j. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of estimated fair values of financial instruments. These estimated fair values are to be disclosed whether or not they are recognized in the balance sheet, provided it is practical to estimate such values. Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company. The Company estimates that the carrying amount approximates the fair value of its financial instruments at December 31, 2000 and 1999 due to the maturities of these financial instruments. k. Stock options Options granted under the Company's Stock Option Plans are accounted for under APB 25, "Accounting for Stock Issued to Employees," and related interpretations. 48 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," requires additional proforma disclosures for companies that will continue to account for employee stock options under the intrinsic value method specified in APB 25. The Company plans to continue to apply APB 25 and the only effect of this statement on the Company's financial statements are the new disclosure requirements. l. Use of estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. m. Concentration of credit risk In connection with the Company's hospital and clinic operations, the Company extends credit to individuals, government agencies and third party payors. The Company does not have director and officer liability insurance. The Company has agreed to indemnify all of its directors and officers from any potential liability they may have as a result of their actions in fulfilling their responsibilities as directors and officers. o. Reclassifications Certain amounts in the prior years have been reclassified to conform to the 2000 consolidated financial statement presentation. 2. SALE OF SUBSIDIARY Effective December 30, 1999, the Company entered into an Agreement For The Sale And Purchase of Assets of Consolidated Health Corporation of Pittsburgh, Inc. (PSH) to ACCI/AllCare of Pennsylvania, Inc. (AllCare). AllCare assumed none of the liabilities of PSH. In consideration for the sale of the assets, the purchaser shall enter into a mortgage payable for $3,300,000. In connection with the sale agreement described above, a second agreement, Agreement Regarding Acquisition of Assets of Pittsburgh Specialty Hospital was entered into by and among The Financing Source, AllCare and another party. The agreement called for the following: - The Financing Source to settle certain debts of PSH. - AllCare will enter into a $3,300,000 mortgage payable (described in the above paragraph) with Financing Source. - The Financing Source will provide AllCare with 12 monthly payments of $200,000 commencing on the Closing date in return for a $2,400,000 mortgage. 49 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements In addition, the Financing Source engaged AllCare as an agent to attempt to settle the trade debts of Consolidated Health Corporation of Pittsburgh, Inc, except for approximately $250,000 that was separately identified as the exclusive responsibility of PSH. PSH's trade debts were $1,364,000 at December 31, 1999. As this agreement did not relieve PSH of its legal obligation to pay its trade debts, the accounts payable balance was not adjusted. A summary of the assets sold to AllCare and liabilities paid off by The Financing Source are as follows: Accounts receivable, net $ (355) Inventories (50) Land and buildings (653) Equipment, net (284) Notes payable - related party 2,758 Accrued liabilities 7 Accrued liabilities - related party 14 Long-term debt 197 Obligations under capital leases - related party 16 ------ Net adjustment to paid in capital $1,650 ======
No gain or loss was recorded for the sale of the PSH assets to AllCare or the PSH liabilities being settled by The Financing Source. The Company recorded the net adjustment to paid in capital due to the substance and the related party aspects of the transaction. 3. FORGIVENESS AND SETTLEMENT OF LIABILITIES - RELATED PARTY Effective December 30, 1999, the Company entered into an Agreement For The Sale And Purchase of Assets of PSH to AllCare (See Note 2). Although effective control of the assets of PSH were transferred to Allcare on December 30, 1999, the Company continued to process certain PSH transactions on behalf of Allcare during the first and second quarter of 2000 as Allcare was in the process of securing medical provider numbers. The transactions aggregated $240,037. None of these transactions were recorded in the Company's statement of operations for the year ended December 31, 2000. The Company was not compensated for these processing services subsequent 50 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements to January 1, 2000. The Financing Source funded $352,954 for PSH's on going obligations. The net value of transactions processed on behalf of Allcare for the year ended December 31, 2000, combined with the funding received from the Financing Source resulted in a liability by the Company to the Financing Source of $112,917. The Financing Source forgave this liability, however no gain or loss was recorded on the forgiveness of the liability. The Company recorded the forgiveness to paid in capital due to the related party aspects of the transactions. In addition, Allcare was engaged by the Financing Source on December 30, 1999 as an agent to attempt to settle the trade debts of PSH. In the first and second quarter of 2000, the Financing Source funded $750,000 to settle $1,121,006 of PSH's trade debts. No gain or loss was recorded for the settlement of the liability. The Company recorded $1,121,006 to paid in capital due to the related party aspects of the transaction. 4. DISCONTINUED OPERATIONS In April 1996, due to continuing losses from the Company's medical diagnostic services business and intense pressure from creditors, Manatee Medical Laboratories, Inc. ("Manatee"), a wholly-owned subsidiary of the Company which operated the medical diagnostic services business segment filed a voluntary petition under Chapter 7 of the U.S. Bankruptcy Code. This resulted in the closing of the Company's remaining medical diagnostic facilities and imaging center. The result of operations of discontinued operations for the year ended December 31, 1998 resulted in a gain from discontinued operations of $136,000. There were no net assets/liabilities of discontinued operations at December 31, 1998. 5. NOTES PAYABLE a. Note Payable Note payable, at December 31, 2000 and 1999, consists of an unsecured promissory note, due in monthly principal and interest installments, that bears interest at 8.00% per annum. This note matured on February 3, 2000. The holder of this note, as of the date of these financial statements, has not renewed this note or sought collection of the outstanding principal and accrued interest. b. Notes Payable - Related Party At December 31, 2000 and 1999, notes payable-related party included amounts due to the Financing Source, through which the Company has obtained financing collateralized by the Company's accounts receivable and equipment. The collateral 51 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements also includes all the issued and outstanding common stock of Consolidated Health Corporation Of Mississippi, Inc. Certain financing agreements with the Financing Source provide that the Company will periodically sell certain eligible accounts receivable to the Financing Source. However, the terms of the agreements specify certain items of limited recourse, including the ability to resell receivables which have aged beyond 150 days back to the Company. While the Company believes that legally a sale of its receivables has occurred, due to the existence of the terms of limited recourse, this transaction does not qualify for treatment as a sale for accounting purposes and, accordingly, such activity has been recorded as notes payable at December 31, 2000 and 1999. The notes payable due to the Financing Source at December 31, 2000 and 1999 consisted of the following (in thousands):
2000 1999 ------- ------- Notes payable, interest at 14%, maturing at various dates in June 2003, collateralized by accounts receivable (subject to sale and subservicing agreements) $70,982 $56,501 Unsecured note payable, interest at 12%, matures on July 31, 2001 17 43 ------- ------- $70,999 $56,544 ======= =======
The Company has defaulted on the required payments due under the notes payable of $70,982 and $56,501 collateralized by accounts receivable at December 31, 2000 and 1999, respectively. 6. LONG-TERM DEBT - RELATED PARTY Long-term debt - related party consists of an unsecured promissory note, interest at 14%, due in monthly installments of principal and interest of $13,232, and matures on September 1, 2003. Scheduled principal maturities for each of the five years subsequent to December 31, 2000, and thereafter are estimated as follows (in thousands): 2001 - $116; 2002 - $132; and 2003 - $113. 52 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements 7. SHAREHOLDERS' EQUITY a. Preferred stock At December 31, 2000 the Company had authorized, issued and outstanding one series of preferred stock as follows: Series G Preferred Stock, par value of $.001, conversion price is the market value of the Company's Common Stock, with voting rights equivalent to the Company's Common Stock. This series of Preferred Stock is convertible into shares of the Company's Common Stock annually, with the annual conversion being limited to twenty-five percent (25%) of the original shares issued to each shareholder. On July 1, 2002, any remaining unconverted shares automatically convert into the Company's Common Stock. This series of Preferred Stock pays annual dividends of $0.15 in arrears, payable at the Company's discretion in cash or the Company's Common Stock. At December 31, 2000 dividends in arrears on this series of Preferred Stock aggregated approximately $150,000. At December 31, 2000, 800,000 issued and outstanding shares of Series G Preferred Stock remain unconverted. b. Registration rights Pursuant to several separate agreements, the Company is obligated on a best efforts basis to register shares of issued, but restricted, Common Stock, Common Stock issued upon exercise of stock warrants, and Common Stock issued upon conversion of Preferred Stock. Certain of the agreements provide the holders of the common stock with piggyback registration rights, and certain of the agreements provide for demand registration rights. In either case, the Company is obligated to pay all of the expenses associated with such registration statements. c. Stock issuances The Company issued no shares of the Company's Common or Preferred Stock during the year ended December 31, 2000. d. Stock options The Company's 1992 Long-Term Incentive Stock Option Plan provides for granting of options of not more than 1,000,000 shares of Common Stock. Options granted under the plans are exercisable in one-third installments annually from the date of grant and have a term of four to ten years. The Company had also granted stock options which were classified as non-qualified, and which are not included in the 1992 Employees' Incentive Stock Option Plan. The remaining non-qualified stock options expired unexercised during the year ended 53 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements December 31, 2000 and as such there are no remaining unexercised non-qualified stock options. There were no options granted in 2000, 1999 and 1998; therefore no proforma adjustments are required pursuant to SFAS 123. A summary of the status of the Company's fixed stock options as of December 31, 2000, 1999 and 1998, and changes during the years ending on those dates is as follows:
2000 1999 1998 ---------------------------- ---------------------------- ---------------------------- Weighted-Average Weighted-Average Weighted-Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- ---------------- --------- ---------------- --------- ---------------- Outstanding at beginning of the year 242,127 $ 2.60 807,368 $ 2.20 849,868 $ 2.49 Granted -- -- -- Exercised -- -- -- Expired (78,500) $ 1.94 (565,241) $ 2.03 (42,500) $ 8.00 --------- --------- --------- Outstanding at end of the year 163,627 $ 2.92 242,127 $ 2.60 807,368 $ 2.20 ========= ========= ========= Options exercisable at end of year 163,627 242,127 807,368 ========= ========= ========= Weighted-average fair value of options granted during the year $ -- $ -- $ -- ========= ========= =========
The following information applies to options outstanding at December 31, 2000:
Options Outstanding Options Exercisable ------------------------------------------- ----------------------------- Weighted - Average Weighted - Weighted - Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life Price Shares Price --------------- ------- ----------- ---------- ------- ---------- $ 1.000 25,000 1.66 $ 1.00 25,000 $ 1.00 $ 2.625 121,932 2.14 $ 2.63 121,932 $ 2.63 $ 4.000 7,375 1.66 $ 4.00 7,375 $ 4.00 $11.000 9,320 1.61 $11.00 9,320 $11.00 ------- ------- 163,627 163,627 ======= =======
54 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements e. Basic and diluted net loss per common share The following table reflects the computation of the basic and diluted net loss per common share (in thousands except for per share data):
Years Ended December 31, ------------------------------------------------------------------------------------------ 2000 1999 1998 -------------------------- ------------------------- ------------------------- Per-Share Per-Share Per-Share Amount Amount Amount Amount Amount Amount -------- --------- -------- --------- -------- --------- Loss from continuing Operations $(14,706) $(0.63) $(13,424) $(0.75) $(12,521) $(0.94) Dividends on preferred Stock (120) (0.01) (120) (0.01) (176) (0.01) -------- ------ -------- ------ -------- ----- Loss available to common shareholders' (14,826) (0.64) (13,544) (0.76) (12,697) (0.95) Gain from discontinued Operations -- -- -- -- 136 0.01 Extraordinary items - gain -- -- -- -- 3,145 0.24 -------- ------ -------- ------ -------- ------ Net loss $(14,826) $(0.64) $(13,544) $(0.76) $ (9,416) $(0.70) ======== ====== ======== ====== ======== ====== Weighted average common shares outstanding 23,146 17,802 13,310 ======== ======== ========
The Company has issued potential common share securities (see Notes 7a and 7d) that could potentially dilute basic earnings per share in the future. These potentially dilutive securities, as of December 31, 2000, 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 December 31, 2000, 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 9,428,571 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. 55 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements At December 31, 2000, 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. 8. INCOME TAXES Income tax expense differs from the amounts computed by applying the statutory federal and state tax rates to income before income taxes. The difference is reconciled as follows (in thousands):
Years Ended December 31, ----------------------------------------------- 2000 1999 1998 ------- ------- ------- Tax benefit computed at federal and state statutory rates $(5,588) $(5,101) $(3,511) Financial statement losses that are not deductible for income tax purposes 17 20 26 Financial statement losses and tax credits with no tax benefit as a result of net operating loss carryforwards 5,571 5,081 3,485 ------- ------- ------- $ -- $ -- $ -- ======= ======= =======
At December 31, 2000, the Company has a federal net operating loss carryforward of approximately $103.3 million. In addition, the Company has various state net operating loss carryforwards. As a result of certain cumulative changes in the Company's stock ownership over the years, the use of the Company's federal net operating loss carryforward may be substantially limited. In 2005, certain portions of the federal net operating loss carryforward begin to expire. Differences between pre-tax income for financial reporting purposes and taxable income for income tax purposes relate primarily to allowances for doubtful accounts, accrued compensation, financial statement expenses recorded for certain stock option transactions and net operating loss carryforwards. 56 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements Deferred tax assets and liabilities at December 31, 2000, and 1999, arose from the following items (in thousands):
2000 1999 ------- ------- Deferred tax assets: Allowance for doubtful accounts receivable $ 997 $ 1,022 Accrued compensation 118 136 Outstanding stock options issued for services 228 228 Net operating loss carryforward 39,246 33,632 ------- ------- 40,589 35,018 Valuation allowance 40,589 35,018 ------- ------- Net deferred amount $ -- $ -- ======= =======
9. RELATED PARTY TRANSACTIONS The Financing Source is being categorized as a related party due to the Financing Source's stock ownership in and its ability to exercise control over the operations of the Company. Healthcare Capital, LLC ("HCC"), formerly know as Intercontinental Investment Associates, Ltd., is affiliated with the Financing Source via common individual owners. At December 31, 2000, HCC is the Company's majority shareholder. HCC owns directly and/or indirectly 47.6% or 11,028,717 of the 23,145,034 shares of the issued and outstanding shares of the Company's $.002 par value Common Stock as of March 31, 2002. The ownership percentage and the number of shares owned do not take into account following: a) the 800,000 shares of the Company's Series G Preferred Stock owned by HCC that could convert, based on the market value of the Company's Common Stock on May 22, 2002, into approximately 11,428,571 shares of the Company's Common Stock, b) dividends in arrears of $150,000 on the Company's Series G Preferred Stock as of December 31, 2000, which are anticipated to be paid by the issuance of 9,428,571 shares of the Company's Common Stock, or c) shares of the Company's Common Stock held by HCC in street name. At December 31, 2000, the Company is indebted to the Financing Source in the amount of $71.7 million. 57 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements 10. EXTRAORDINARY ITEMS 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 year ended December 31, 1998. This item has been accounted for as an extraordinary item in accordance with Accounting Principals Board Opinion No. 30, which provides for the reporting of such material, non-recurring events separately from the continuing operations. 11. RETIREMENT PLAN The Company has a Combined Profit Sharing/Money Purchase Plan with a Cash or Deferred Arrangement Option (the "Plan") to which both the Company and eligible employees contribute. The Plan segregates the Company's employees into two distinct participant groups (a) non-union participants and (b) union participants. The Company, pursuant to a union contract at the Company's hospital, contributes up to $550 per Plan year for eligible union participants. Company contributions are discretionary per Plan year for eligible non-union participants. Employees are eligible to participate in the Plan based on the number of hours worked in the Plan year and the attainment of a certain age. Company and employee contributions vest 100% in the first year. Company contributions to the Plan for the years ended December 31, 2000, 1999 and 1998 aggregated approximately (in thousands) $43, 52 and 60, respectively. 12. COMMITMENTS AND CONTINGENCIES a. Leases The Company leases its operating and other facilities, as well as certain equipment, under noncancelable leases with initial lease terms of one to ten years; also, the Company leases one of its facilities and certain equipment from the Financing Source with initial lease terms of twenty years. Certain of the facilities leases provide for 58 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements optional renewal periods. Scheduled future minimum commitments under operating leases with remaining terms subsequent to December 31, 2000 are as follows (in thousands):
Related- Years Ending All Party December 31, Leases Leases ------------ ------- -------- 2001 $ 1,353 $ 1,145 2002 1,192 1,145 2003 1,149 1,146 2004 1,146 1,146 2005 1,146 1,146 Thereafter 11,742 11,742 ------- ------- $17,728 $17,470 ======= =======
Scheduled future minimum commitments under capital lease obligations with remaining terms subsequent to December 31, 2000 are as follows (in thousands):
Related- Years Ending All Party December 31, Leases Leases ------------ ------- -------- 2001 $ 156 $ 66 2002 20 17 2003 -- -- 2004 -- -- 2005 -- -- Thereafter -- -- ----- ------ 176 83 Less amounts Representing interest (20) (5) ----- ------ Present value of remaining minimum capital lease payments 156 78 Less: Scheduled current portion (112) (62) Non-current obligations Reclassified to current -- -- ----- ------ Long-term obligations under capital leases 44 16 ===== ======
59 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements Rent expense was approximately (in thousands) $1,619, $1,584, and $1,643, for the years ended December 31, 2000, 1999 and 1998, respectively. b. Contracts The Company has entered into contracts with various individuals and entities to provide patient and other services for the Company. Scheduled future minimum commitments under these contracts with remaining terms subsequent to December 31, 2000 are as follows (in thousands):
Years Ending December 31, ------------ 2001 $ 545 2002 135 2003 67 2004 -- 2005 -- Thereafter -- ------ 747 ======
c. Government regulation The Company's operations are subject to extensive government regulation. Industry compliance with such regulations is under constant scrutiny by regulatory authorities and legislative bodies and regulations are subject to change at any time. Certain proposed changes in regulations, if enacted, could have an adverse effect on the Company's operations and such effects could be material. Federal and certain state regulations restrict the nature and types of financial relationships that medical service providers receiving reimbursement under the Medicare and Medicaid program may have with referring physicians (the self-referral regulations). A financial relationship is defined by the federal regulations as an ownership or investment interest through equity or debt or certain compensation arrangements. The Company believes that there may have been violations of certain applicable statutes and regulations with respect to the operation of certain of its clinical laboratories in Florida. The Omnibus Budget Reconciliation Act of 1989, often referred to as the "Stark Act", included restrictions on physician financial relationships with laboratories to which they refer patients but provided an exemption for publicly traded entities that have total assets in excess of $100 million. The Omnibus Budget Reconciliation Act of 1993 ("OBRA 60 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements 1993") expanded these restrictions to apply beyond physician financial relationships with laboratories to physician relationships with entities that provide "Designated Health Services" (including clinical laboratory services, radiology and other diagnostic services). However, the Act deleted the previous exemption and substituted a requirement that the entity have $75 million in stockholders' equity at the end of its most recent fiscal year or on average during its prior three fiscal years. The OBRA 1993 amendments became effective on January 1, 1995. For the period prior to January 1, 1995, should it be determined that the Company did not comply with the federal regulations the Company may be subjected to refunding a portion of Medicare and Medicaid revenues collected, in addition to paying substantial penalties. As of January 1, 1995, the Company did not meet the OBRA 1993 amendments to the Stark Act requiring $75 million in stockholders' equity. Physician/shareholder referrals since January 1, 1995 could cause penalties to be imposed of up to $15,000 for each item or service claimed, plus twice the amount billed. The Company believes, however, that due to the filing of the Chapter 7 bankruptcy petition for Manatee, the likelihood of such enforcement actions occurring is remote. In April 1992, the Florida Legislature enacted the Patient Self-Referral Act of 1992 (the "Florida Act") which prohibits referrals for certain designated health services (including clinical laboratory testing and diagnostic imaging) by a physician to a facility in which such physician has an investment. The effective date of this prohibition was October 1, 1994 for investment interests acquired prior to May 1, 1992; otherwise, the effective date of the Florida Act was July 1, 1992. The Company's financial relationships with referring physicians in respect of its clinical laboratories in Florida since October 1, 1994 and its imaging center in Fort. Lauderdale, Florida since July 1993 did not comply with the Act and may require the Company to refund substantial revenues. The Company believes, however, that due to the filing of the Chapter 7 bankruptcy petition for Manatee, the likelihood of such enforcement actions occurring is remote. In October 1993, the California legislature enacted legislation relating to health care referrals which has a public company exception similar in scope to the Stark Act as it existed prior to the OBRA 1993 amendments. The major difference with the California self-referral legislation, effective January 1, 1995, is that it applies to both clinical laboratory and diagnostic imaging services subsequent to January 1, 1995. The Company could be assessed substantial fines and penalties. The Company believes, however, that due to the filing of the Chapter 7 bankruptcy petition for Manatee, the likelihood of such enforcement actions occurring is remote. Legislatures in other states are considering or have considered similar legislation which, if enacted, may have an adverse impact on the Company to the extent that the Company acquires facilities in those states. 61 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements The Company's inability to meet the OBRA 1993 amendment to the Stark Act requiring $75 million in stockholders' equity, and provisions of the Florida Act and the California self-referral legislation, could result in the imposition of penalties and the return of revenues collected for certain services provided, 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 likelihood of such enforcement actions occurring is remote. As of April 1996, the Company no longer operates clinical laboratories and imaging centers, thereby eliminating additional potential fines, penalties and refunds that could be imposed under the Stark Act (as amended) and the State Acts. d. 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 the 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. 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 62 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements 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. e. Union Contract The Company's hospital has entered into an agreement with the United Mine Workers of America and its District 28 and its Local Union 7528 (the "Union") whereby the Union acts as the sole and exclusive bargaining representative in respect to wages, hours, other working conditions for all employees affiliated with the Union. This agreement can be renegotiated annually, by either party giving the other party written notice of its desire to modify or terminate the agreement, 90 days before the agreements' anniversary date of September 20. 13. SEGMENT INFORMATION The Company operates in two business segments: the operation of hospitals and medical clinics, and the distribution of biological products. The following presents information on the two business segments (in thousands):
Hospitals and Years ended Medical Biological December 31 Clinics Products Corporate Total ----------- --------- ---------- --------- ------- Revenues 2000 $ 9,157 $ -- $ -- $ 9,157 1999 $12,077 $ 732 $ -- $12,809 1998 $15,486 $1,012 $ -- $16,498 ---- ------- ------ ------- ------- Operating profit (loss) 2000 $(3,141) $ (165) $ (722) $(4,028) 1999 $(3,614) $ 52 $ (915) $(4,477) 1998 $(2,856) $ 163 $(1,221) $(3,914) ---- ------- ------ ------- ------- Capital expenditures (including capital leases) 2000 $ 60 $ -- $ 2 $ 62 1999 $ 40 $ -- $ 8 $ 48 1998 $ 316 $ -- $ -- $ 316 ---- ------- ------ ------- ------- Depreciation and amortization expense 2000 $ 142 $ 4 $ 5 $ 151 1999 $ 230 $ 5 $ 11 $ 246 1998 $ 213 $ 4 $ 26 $ 243 ---- ------- ------ ------- ------- Identifiable assets at year end 2000 $ 2,689 $ 4 $ 82 $ 2,775 1999 $ 3,327 $ 126 $ 38 $ 3,491 1998 $ 5,286 $ 16 $ 38 $ 5,340 ---- ------- ------ ------- -------
63 RX MEDICAL SERVICES CORP. Notes to Consolidated Financial Statements 14. FOURTH QUARTER ADJUSTMENTS (UNAUDITED) The Company recorded significant fourth quarter adjustments which effected the net losses for the following years. Following is a summary of such adjustments (in thousands):
2000 1999 1998 ---- ------ ------ Bad debts - related party $535 $ -- $ -- Provision for doubtful accounts receivable 255 -- -- Provision for legal judgment -- -- 1,130 ---- ------ ------ $790 $ -- $1,130 ==== ====== ======
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The quarterly results for the years 2000, 1999 and 1998 are set forth in the following table (in thousands except for per share data):
Diluted Net Loss From Net Loss Per Operating Continuing Income Common Revenues Loss Operations (Loss) Share ------- -------- ---------- -------- ----------- 2000 1st Quarter $ 2,320 $ (818) $ (3,240) $ (3,240) $ (0.14) 2nd Quarter 2,403 (750) (3,299) (3,299) (0.14) 3rd Quarter 2,311 (757) (3,569) (3,569) (0.16) 4th Quarter 2,123 (1,703) (4,598) (4,598) (0.20) ------- ------- -------- -------- -------- Total $ 9,157 $(4,028) $(14,706) $(14,706) $ (0.64) ======= ======= ======== ======== ======== 1999 1st Quarter $ 3,332 $ (967) $ (3,118) $ (3,118) $ (0.18) 2nd Quarter 3,038 (1,316) (3,374) (3,374) (0.19) 3rd Quarter 2,918 (1,335) (3,734) (3,734) (0.20) 4th Quarter 3,521 (859) (3,198) (3,198) (0.19) Total $12,809 $(4,477) $(13,424) $(13,424) (0.76) 1998 1st Quarter $ 4,667 $ (236) $ (1,768) $ (1,725) $ (0.19) 2nd Quarter 4,257 (1,031) (2,937) (2,906) (0.31) 3rd Quarter 4,200 (1,038) (3,187) 39 (0.00) 4th Quarter 3,374 (1,609) (4,629) (4,648) (0.20) ------- ------- -------- -------- -------- Total $16,498 $(3,914) $(12,521) $ (9,240) (0.70) ======= ======= ======== ======== ========
64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Dated: June 21, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ Michael L. Goldberg Director, Chairman and ------------------------------ Chief Executive Officer Dated: June 21, 2002 Michael L. Goldberg /s/ Phillip E. Pearce Director Dated: June 21, 2002 ------------------------------ Phillip E. Pearce /s/ Michael J. Pickering, M.D. Director Dated: June 21, 2002 ------------------------------ Michael J. Pickering, M. D. /s/ Dennis A. Dolnick Chief Financial Officer Dated: June 21, 2002 ------------------------------ Dennis A. Dolnick
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