FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) Quarterly Report pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Quarter Ended
September 30, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to __________________
Commission File number
0-23416
-------
Modern Medical Modalities Corporation
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
New Jersey # 22-3059258
- ------------------------------- -----------------------
(state or other jurisdiction of (I.R.S. Employer I.D.#)
incorporation or organization)
2509 Park Avenue, Suite 1A, South Plainfield, N.J. 07080
- --------------------------------------------------------------------------------
(address of principal executive offices) (zip code)
(908) 755-2525
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the most recent practicable date.
Common Stock - Par Value $.0001 3,168,292
- ------------------------------- ---------------------
Class Outstanding Shares At
November 9, 1996
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Table of Contents
PAGE
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 3 - 4
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1996 and 1995 (unaudited) 5 - 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 (unaudited) 7 - 8
Notes to Interim Consolidated Financial Statements
(unaudited) 9 - 14
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 20
Part II. Other Information 21
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
Signatures 22
Exhibit 11.1
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 609,646 $ 984,326
Accounts receivable (less contractual
allowances of $2,523,705 and $1,556,114,
respectively) 4,962,202 2,695,096
Note receivable - affiliate -- 100,000
Due from affiliates 277,615 243,556
Prepaid expenses 90,979 77,294
----------- -----------
Total current assets 5,940,442 4,100,272
----------- -----------
Other assets
Furniture, fixtures, equipment and leasehold
improvements (net of accumulated
depreciation and amortization of
$4,859,877 and $2,569,209, respectively) 12,854,418 11,051,593
Note receivable - affiliate 1,000,000 1,000,000
Deposits 200,557 181,678
Organization costs (net of accumulated
amortization of $65,418 and $7,939,
respectively) 66,503 40,928
Intangibles (net of accumulated
amortization of $14,777) 1,162,654 --
Investment in an unconsolidated joint venture 153,984 164,320
----------- -----------
Total other assets 15,438,116 12,438,519
----------- -----------
TOTAL ASSETS $21,378,558 $16,538,791
=========== ===========
See Notes to Interim Consolidated Financial Statements.
3
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
September 30, December 31,
1996 1995
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit $ 644,750 $ 496,750
Current portion of long-term debt 3,677,365 1,917,813
Accounts payable 1,296,429 583,355
Accrued expenses 604,524 347,180
Due to affiliates 67,958 109,170
Due to managing agent 208,000 --
----------- -----------
Total current liabilities 6,499,026 3,454,268
----------- -----------
Other liabilities
Long-term debt, net of current portion 9,600,169 7,843,911
Deferred income taxes 542,687 531,669
Due to joint venturers 309,442 225,717
Deferred interest 35,970 --
----------- -----------
Total other liabilities 10,488,268 8,601,297
----------- -----------
TOTAL LIABILITIES 16,987,294 12,055,565
----------- -----------
Minority interest 384,849 155,690
----------- -----------
Commitments and contingencies -- --
Stockholders' equity
Common stock, $0.0001 par value,
5,000,000 shares authorized,
3,168,292 shares issued and outstanding 317 317
Additional paid-in capital 3,728,411 4,086,413
Retained earnings 277,687 240,806
----------- -----------
TOTAL STOCKHOLDERS'
EQUITY 4,006,415 4,327,536
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $21,378,558 $16,538,791
=========== ===========
See Notes to Interim Consolidated Financial Statements.
4
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Operating income
Net revenue from services $ 3,034,508 $ 1,163,804 $ 7,204,887 $ 3,719,851
Management fees 137,414 47,670 356,512 262,079
Marketing revenues 161,895 185,878 409,722 395,310
----------- ----------- ----------- -----------
Total operating income 3,333,817 1,397,352 7,971,121 4,377,240
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative
expenses 2,120,810 986,792 4,804,140 2,784,503
Expenses associated with
management fee income 93,237 103,550 270,248 347,275
Expenses associated with marketing
revenues 161,202 126,483 540,722 375,597
Bad debts 8,418 21,161 56,028 64,049
Depreciation and amortization 465,635 216,617 1,250,180 705,354
----------- ----------- ----------- -----------
Total operating expenses 2,849,302 1,454,603 6,921,318 4,276,778
----------- ----------- ----------- -----------
Income (loss) from operations 484,515 (57,251) 1,049,803 100,462
----------- ----------- ----------- -----------
Other income and (expenses)
Interest income 15,903 16,352 36,332 56,139
Interest expense (403,250) (257,377) (1,108,363) (594,746)
Miscellaneous income (expense) 32,922 (5,853) 264,876 17,646
Income (loss) from a joint venture 18,548 (4,806) 61,858 44,235
Minority interest (130,749) (10,873) (254,517) (25,017)
----------- ----------- ----------- -----------
Total other income (expenses) (466,626) (262,557) (999,814) (501,743)
----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes
(benefit), and minority interest 17,889 (319,808) 49,989 (401,281)
Income taxes (benefit) 4,303 (119,155) 13,108 (146,797)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 13,586 (200,653) 36,881 (254,484)
Income (loss) from discontinued
operations, net of income tax
(benefit) of ($59,845) and $72,203),
respectively -- (95,968) -- (115,338)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 13,586 $ (296,621) $ 36,881 $ (369,822)
=========== =========== =========== ===========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Restated) (Restated)
<S> <C> <C> <C> <C>
Number of shares outstanding
Primary 3,168,292 3,134,174 3,168,292 3,134,174
Fully diluted 4,203,292 4,123,292 4,203,292 4,123,292
Stock to be issued -- 80,000 -- 80,000
Weighted average shares outstanding
Primary 3,168,292 3,134,174 3,168,292 3,134,174
Fully diluted 4,203,292 4,169,174 4,203,292 4,169,174
Earnings per share - primary
Income (loss) from
continuing operations $ -- $ (0.06) $ 0.01 $ (0.08)
Income (loss) from
discontinued operations -- (0.03) -- (0.04)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ - Nil - $ (0.09) $ 0.01 $ (0.12)
========== ========== ========== ==========
Earnings per share - fully diluted
Income (loss) from
continuing operations $ -- $ 0.01
Income (loss) from
discontinued operations -- --
---------- ----------
NET INCOME (LOSS) $ - Nil - $ 0.01
========== ==========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
6
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
ended September 30,
1996 1995
---- ----
(Restated)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 36,881 $ (369,822)
Adjustments to reconcile net income (loss) to net cash
provided by(used in) operating activities
Depreciation and amortization 1,250,180 705,354
Contractual allowances 1,585,289 316,864
Bad debts 56,028 64,049
Income from an unconsolidated joint venture (61,858) (44,235)
Minority interest 254,517 25,017
Deferred income taxes 11,018 (146,797)
Increase (decrease) in cash attributable to changes in
operating assets and liabilities
Accounts receivable (3,962,017) (1,253,692)
Management fee receivable -- (171,013)
Due from affiliate (34,059) (349,916)
Other receivable -- 25,397
Prepaid expenses (7,818) (120,292)
Due to affiliate (41,214) --
Accounts payable 539,903 242,203
Accrued expenses 175,740 18,008
Income taxes payable -- (250)
----------- -----------
Net cash used in operating activities (197,410) (1,059,125)
----------- -----------
Cash flows from investing activities
Payments for acquisition of furniture, fixtures,
equipment and leasehold improvements (1,171,467) (524,153)
Purchase of short-term investments -- (610,410)
Note receivable - affiliate 100,000 --
Deposits (17,008) 343,306
Distributions from a joint venture 72,194 85,797
Net assets of discontinued subsidiary -- 115,338
Purchase of Sylvania Diagnostics - net of cash acquired 3,710 --
----------- -----------
Net cash used in investing activities (1,012,571) (590,122)
----------- -----------
Cash flows from financing activities
Minority interest (25,358) (18,057)
Lines of credit 148,000 306,750
Affiliate advances -- (15,034)
Proceeds from long-term debt 2,111,238 --
Due to joint ventures 83,725 --
Due to/from managing agent 208,000 460,031
Payments on capitalized lease obligations and long-term debt (1,726,274) (724,647)
Deferred interest 35,970 --
----------- -----------
Net cash provided by financing activities 835,301 9,043
----------- -----------
Net decrease in cash and cash equivalents (374,680) (1,640,204)
Cash and cash equivalents at beginning of period 984,326 2,006,836
----------- -----------
Cash and cash equivalents at end of period
$ 609,646 $ 366,632
=========== ===========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
7
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
ended September 30,
--------------------------
1996 1995
---- ----
(Restated)
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the period
Interest $ 900,251 $ 594,746
Income taxes $ 1,847 $ 25
Non-cash transactions
Capital lease obligation in connection with the acquisition
of certain assets and the assumption of certain liabilities
of Central Imaging Partners, Limited Partnership $ -- $ 2,637,088
Common stock to be issued in connection with acquisition of
assets of Central Imaging Partners, Limited Partnership $ -- $ 200,000
Capital lease obligation in connection with the
construction of MRI Imaging Center at Passaic
Beth Israel and the acquisition of medical equipment $ -- $ 2,006,860
Capital lease obligation in connection with the construction $ --
and delivery of medical equipment at the Somerset $ 828,078
Imaging Project
Capital lease obligation in connection with acquisition
of medical equipment for Open MRI of Morristown $ 1,149,711 $ --
Capital lease obligation in connection with refinancing
of medical equipment and leasehold improvements at
the Sylvania Diagnostics Project $ 2,127,366 $ --
Accounts receivable due from Prime Contracting Corp. $ --
charged against additional paid-in capital $ 358,002
The Company purchased 50.2% of the outstanding units in
Sylvania Diagnostics, L.P. In conjunction with the
acquisition, liabilities were assumed as follows:
Assets acquired $ 2,208,191 $ --
Intangibles 1,177,431 --
Cash paid (1) --
----------- -----------
Liabilities assumed $ 3,385,621 $ --
=========== ===========
</TABLE>
See Notes to Interim Consolidated Financial Statements.
8
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 1996 (Unaudited)
1 Organization and Basis of Presentation
Modern Medical Modalities Corporation (the "Company") was
incorporated in the State of New Jersey on December 6, 1989. The
Company provides high technology medical equipment and
management services to hospitals and physicians.
The consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries, Medical Marketing &
Management, Inc., Somerset Imaging Corporation, South Plainfield
Imaging, Inc., Medi Corp, USA, South Jersey Medical Equipment
Leasing Corporation, Empire State Imaging Associates, Inc.,
Detex Medical Services, Inc., Amherst Medical Equipment Leasing
Corporation, West Paterson Equipment Leasing Corporation and
Ohio Medical Equipment Leasing Corporation and its majority
owned joint ventures, Plainfield MRI Associates, Joint Venture,
MRI Imaging Center at PBI, Open MRI of Morristown, Inc.,
Sylvania Diagnostics L.P. and Doctors Imaging Associates, Joint
Venture. The Company has an 84%, 75%, 72%, 50.2% and 50%
interest, respectively, in the joint ventures, by contract
manages the joint ventures and has unilateral control.
Investment in an unconsolidated joint venture, Union Imaging
Associates, Joint Venture, in which the Company has a 10%
interest and significant influence, is accounted for on the
equity method. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The consolidated balance sheet as of September 30, 1996 and the
consolidated statements of operations for the three and nine
month periods ended September 30, 1996 and 1995 and the
consolidated statements of cash flows for the nine month periods
ended September 30, 1996 and 1995 have been prepared by the
Company without audit.
In the opinion of management, the accompanying financial
statements referred to above contain all necessary adjustments,
consisting of normal accruals and recurring entries only, which
are necessary to present fairly the Company's consolidated
results for the interim periods being presented.
The accounting policies followed by the Company are set forth in
Note 2 to the Company's financial statements included in its
Annual Financial Statement filed on Form 10-K for the year ended
December 31, 1995, which is incorporated herein by reference.
Specific reference is made to this report for a description of
the Company's securities and the notes to financial statements
included therein.
Included in intangible assets is goodwill related to the
acquisition of Sylvania Diagnostics. Goodwill is amortized over
10 years. Goodwill is reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable (see Note 8).
The carrying amounts of cash, accounts receivable, short-term
notes receivable, accounts payable, and short-term debt
approximate fair value due to the short maturity of the
instruments and the provision for what management believes to be
adequate reserves for potential losses. It was not practicable
to estimate the fair value of long-term notes receivable and
long-term debt because quoted market prices do not exist and an
estimate could not be made through other means without incurring
excessive costs.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could
differ from those estimates.
The results of operations for the three and nine month periods
ended September 30, 1996 and 1995 are not necessarily indicative
of the results to be expected for the full year.
continued...
9
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 1996 (Unaudited)
1 Organization and Basis of Presentation (Continued)
Certain items in the 1995 financial statements have been reclassified to
conform with the 1996 presentation. These reclassifications had no effect
on the financial position, net income (loss) or changes in stockholders'
equity for the periods presented.
2 Earnings Per Share
Earnings per share are computed by dividing net income by the weighted
average number of common stock and common stock equivalent shares
outstanding during each period. Earnings per share - fully diluted for the
three and nine months ended September 30, 1996 is not presented in the
consolidated statements of operations since it is anti-dilutive.
3 Acquisitions and Disposal of Subsidiary
Acquisition
On November 1, 1994, the Company acquired Prime Contracting Corp.
("Prime") in a business combination accounted for as a pooling of
interests. Prime is a full service contractor who provides turnkey design
and construction services and became a wholly-owned subsidiary of the
Company, through the exchange of 112,457 shares of the Company's common
stock (market value of $650,000) for all of the shares of the outstanding
stock of Prime. The accompanying consolidated financial statements are
based on the assumption that the companies were combined for the full
year, and financial statements of prior years have been retroactively
restated to give effect to the combination.
Restatement
The financial statements as of and for the nine and three months ended
September 30, 1995 had previously treated the acquisition under the
purchase method. The financial statements have been restated to correct
this error. The effect of the restatement was to decrease the net loss by
approximately $5,500 and $1,800, respectively, for the nine and three
months ended September 30, 1995.
Disposal
On December 27, 1995, the Company entered into an agreement, as modified
in March 1996, with a related party to sell all of the common stock of
Prime for $1,200,000, payable as follows: $100,000 upon execution,
$100,000 at closing and a promissory note bearing interest at prime plus
one percent. The note is payable in two installments, $600,000 on October
27, 1997, and $400,000 on April 27, 1998. If Prime's gross annual revenue
for the calendar year 1996 falls below $3,000,000, then the final payment
of $400,000 shall be forfeited.
The Company has recorded an increase of $987,554, in December 1995, to
additional paid-in capital which represents the excess of the sale price
over the net assets of Prime. In conjunction with the modified agreement,
the Company's accounts receivable due from Prime of approximately $358,000
has been charged against additional paid-in capital.
10
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 1996 (Unaudited)
4 Property and Equipment, Net
Property and equipment consisted of the following at September 30, 1996
(unaudited) and December 31, 1995:
September 30, December 31,
1996 1995
----------- -----------
(unaudited)
Medical equipment $15,612,902 $12,047,375
Buildings 358,066 310,860
Furniture and fixtures 113,168 100,956
Automobiles 22,860 22,860
Leasehold improvements 1,607,299 1,138,751
----------- -----------
Total 17,714,295 13,620,802
Less: Accumulated depreciation and amortization 4,859,877 2,569,209
----------- -----------
Property and equipment, net $12,854,418 $11,051,593
=========== ===========
5 Investment in an Unconsolidated Joint Venture
Summarized financial information of the unconsolidated joint venture,
Union Imaging Associates, Joint Venture, in which the Company has a 10%
minority interest is as follows:
Total Long-Term Total Total
Assets Debt Liabilities Capital
---------- ---------- ---------- ----------
September 30, 1996
(unaudited) $5,311,536 $2,453,012 $3,757,646 $1,553,890
December 31, 1995 3,251,821 1,550,917 1,679,846 1,571,975
(10%)
Gross Net Allocation
Revenues Income of Income
---------- ---------- ----------
Nine months ended
September 30, 1996 (unaudited) $3,541,465 $ 618,582 $ 61,858
Year ended December 31, 1995 3,127,608 543,317 54,332
The Joint Venture entered into an agreement with DVI Financial Services,
Inc. ("DVI") to provide financing of a new Outlook Whole Body MRI System
("Outlook MRI) from Picker International Picker") which was accepted for
delivery during June 1996. The aggregate amount financed for the Outlook
MRI and related leasehold improvements was $1,049,289 and is payable over
60 months with monthly payments of $10,000 for the first three months and
$23,403 for the next 57 months.
11
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 1996 (Unaudited)
6 Lines of Credit
In April 1995, the Company secured a one year line of credit with Summit
Bank of New Jersey for $600,000 at the bank's prime rate for commercial
borrowers. The line was renewed for an additional year in April 1996. As
of September 30, 1996, the amount of the liability under the line of
credit was $599,750. The line of credit is secured by a certificate of
deposit in the amount of $600,000.
In April 1996, the Company obtained an unsecured line of credit with
Republic National Bank for $100,000 at the bank's prime rate for
commercial borrowers plus one percent. As of September 30, 1996, the
amount of liability under the line of credit was $45,000.
7 Long Term Debt
Long-term debt at September 30, 1996 (unaudited) and December 31, 1995
consists of the following:
September 30, December 31,
1996 1995
----------- -----------
(unaudited)
Construction financing $ -- $ 290,332
Accounts receivable financing 923,452 --
Capital lease obligations 12,354,082 9,471,392
----------- -----------
Total 13,277,534 9,761,724
Less: Amounts due in one year 3,677,365 1,917,813
----------- -----------
Total long-term debt $ 9,600,169 $ 7,843,911
=========== ===========
Site Financing - Open MRI of Morristown
In October 1995, the Company entered into a joint venture agreement with
RMC Consulting, Inc. and two individuals to develop a MRI facility located
in Morristown, New Jersey. In December 1995, Open MRI of Morristown, Inc.
(Open MRI), a majority owned joint venture was formed. Open MRI accepted
delivery of a new Outlook MRI from Picker and opened in February 1996. The
Company entered into an agreement with DVI Financial Services, Inc. (DVI)
to provide permanent financing aggregating $1,187,786 on this new site.
This amount is payable over 63 months at monthly payments of $11,158 for
the first three months and $25,598 per month for the next 60 months.
continued...
12
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 1996 (Unaudited)
7. Long Term Debt (Continued)
Site Financing - Sylvania Diagnostics
In August 1996, Sylvania Diagnostics (a majority owned joint venture)
entered into an agreement with DVI to refinance equipment and related
leasehold improvements in the aggregate amount of $2,127,366. The amount
is payable in 64 monthly installments commencing in March 1997 of $20,000
for the first four months and $44,968 over the remaining 60 months. At
September 30, 1996, the Company has recorded $35,970 of deferred interest
relating to these loans.
Capital Lease Obligations
Capital lease obligations are collateralized by property and equipment
having an approximate original cost of $15,758,000 and an approximate net
book value of $11,819,000 at September 30, 1996.
Accounts Receivable Financing
The Company has entered into an agreement with an affiliated company to
finance its receivable from one of the Company's joint ventures. Advances
bear interest at the prime rate plus five percent. Management is of the
opinion that the terms of this agreement are comparable to those which
would be available from other sources. At September 30, 1996, the amount
outstanding under this agreement totalled $48,215.
The Company has entered into two separate agreements with DVI Business
Credit to finance up to $1,500,000 of the accounts receivable balances
from two of the Company's subsidiaries and one of the its joint ventures
and $1,000,000 of the accounts receivable balance from the Company's
unconsolidated joint venture. The agreements extend to March and June
1998, respectively, with consecutive one year renewal terms. The
agreements are non-cancelable, except in the event of a default by the
Company. At September 30, 1996, the amounts financed under these
agreements totalled $923,452 and $994,101, respectively, with interest
payable monthly at the prime rate plus four percent.
8 New Sites
West Paterson Medical Equipment Leasing Corporation
In July 1996, the Company, through its wholly-owned subsidiary West
Paterson Medical Equipment Leasing Corporation ("WPMEL"), entered into a
lease and management services agreement with Advanced Imaging & Radiology
Associates, P.A. ("M.D."). The agreement provides that WPMEL will lease
office space, fixtures and equipment and will provide management services
to M.D. over an initial term of five years with a five year renewal
option. The site, located in West Paterson, N.J., is a medical practice
specializing in diagnostic imaging.
continued...
13
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 1996 (Unaudited)
8 New Sites (Continued)
Ohio Medical Equipment Leasing Corporation/Sylvania Diagnostics
In July 1996, the Company, through its wholly-owned subsidiary Ohio
Medical Equipment Leasing Corporation ("OME"), entered into a purchase and
consulting agreement with Medical Advances, Inc. ("Medical") to acquire an
interest as a general (managing) partner of Sylvania Diagnostics
("Sylvania"), an Ohio Limited Partnership, for one dollar. The interest
acquired represents 50.2% of the total units outstanding. Sylvania is a
diagnostic imaging center located in Sylvania, Ohio.
The Company also entered into an agreement with DVI which provides for
$135,000 of working capital advances which are only to be used for
operating Sylvania. If the Company determines that operating Sylvania is
not profitable, DVI will purchase either Sylvania or OME for one dollar.
As a result of this acquisition, the Company has recorded the difference
between the acquisition price of one dollar and the allocated percentage
of the cumulative deficit as goodwill and the cumulative allocated losses
in excess of basis of the limited partners of Sylvania as an intangible
asset as of July 1, 1996, the date of acquisition. All subsequent losses
are allocated to the Company with future income first applied to the
losses and the remainder against the intangible asset until it is fully
recovered.
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the financial statements and notes thereto included
elsewhere herein.
In 1994, Modern Medical Modalities Corporation (the "Company") started Medical
Marketing ^ Management, Inc. which markets the sites of the Company, and sites
for other physician groups and hospitals. In November 1994, the Company acquired
Prime Contracting Corp. ("Prime") in a business combination accounted for as a
pooling of interests. Prime is a full service contractor who provides turnkey
design and construction services for medical facilities primarily on the east
coast of the United States. On December 27, 1995, the Company entered into an
agreement with a related party to sell all of the common stock of Prime for
$1,200,000.
In 1995, the Company purchased Empire State Imaging Associates, Inc. ("Empire
State"). The Company commenced operations during the second, third and fourth
quarters of 1995 and the first quarter of 1996, respectively, at sites located
in Passaic and Somerset, New Jersey, Amherst, New York and Morristown, New
Jersey. During the third quarter of 1996 the Company, through its wholly owned
subsidiary West Paterson Medical Equipment Leasing Corp. ("WPMEL") entered into
a lease and management services agreement at a site specializing in diagnostic
imaging located in West Paterson, New Jersey. In addition, the Company through
its wholly-owned subsidiary Ohio Medical Equipment Leasing Corporation ("OME")
entered into a purchase and consulting agreement to acquire a 50.2% interest as
a general (managing) partner of a diagnostic imaging center located in Sylvania,
Ohio. Many of the fluctuations on the line items on the balance sheets and the
statements of operations are directly attributable to the acquisition and
start-up of these entities.
RESULTS OF OPERATIONS
For the nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995:
Operating revenues for Modern Medical Modalities Corporation and subsidiaries
aggregated approximately $7,971,000 in 1996 as compared to approximately
$4,377,000 in 1995. The increase in revenue is directly attributable to an
increase in the patient service revenue for the Company's various MRI sites in
the amount of $3,485,000.
Operating expenses for 1996 aggregated approximately $6,921,000 as compared to
$4,277,000 in 1995. This increase of approximately $2,644,000 is primarily the
result of an increase in depreciation and amortization expense of approximately
$545,000 resulting from the increase in fixed assets and the increase in the
following:
15
<PAGE>
Selling General and Administrative Expenses
This category of expenses has increased by approximately $2,019,000 when
comparing 1996 to 1995. Approximate increases attributable to sites that were
not in 1995 expenses or in 1995 for only a portion of the nine months are as
follows:
Empire State $ 154,000 Payroll, Rent, Supplies, Office Expenses
WPMEL 72,000 Payroll, Rent, Supplies, Office Expenses
Amherst 157,000 Payroll, Rent, Office Expenses
OME 199,000 Payroll, Rent, Supplies, Office Expenses
Open MRI of Morristown 281,000 Payroll, Rent, Office Expenses
MRI Imaging Center @ PBI 528,000 Payroll, Rent, Supplies, Office Expenses
Somerset Imaging Corp. 191,000 Payroll, Rent, Supplies, Office Expenses
----------
Total $1,582,000
==========
Expenses Associated with Marketing Revenue
Expenses associated with marketing revenues increased by approximately $165,000
when comparing 1996 and 1995. This increase is due to the additional employees
and expenses related to the operation (travel, trade shows, etc.) needed by
Medical Marketing & Management, Inc. to market the increased numb r of Company
sites and increased number of marketing contracts with outside physician groups.
Interest Expense
Interest expense has increased by approximately $513,000 when comparing 1996 and
1995. This increase is attributable primarily to the financing of equipment at
Empire State, MRI Imaging Center at PBI, Somerset Imaging Corporation, Amherst
Medical Equipment Leasing Corporation, Open MRI of Morristown, as well as
interest on the lines of credit with Summit Bank of New Jersey, Republic
National Bank, and financing with DVI Business Credit.
For the three months ended September 30, 1996 as compared to the three months
ended September 30, 1995:
Operating revenues for Modern Medical Modalities Corporation and subsidiaries
aggregated approximately $3,334,000 in 1996 as compared to approximately
$1,397,000 in 1995. The increase in revenue is directly attributable to an
increase in the patient service revenue for the Company's various MRI sites in
the amount of $1,871,000.
Operating expenses for 1996 aggregated approximately $2,849,000 as compared to
$1,455,000 in 1995. This increase of approximately $1,394,000 is primarily the
result of an increase in depreciation and amortization expense of approximately
$249,000 resulting from the increase in fixed assets and the increase in the
following:
16
<PAGE>
Selling General and Administrative Expenses
This category of expenses has increased by approximately $1,134,000 when
comparing 1996 to 1995. Approximate increases attributable to sites that were
not in 1995 expenses are as follows:
WPMEL 72,000 Payroll, Rent, Supplies, Office Expenses
Amherst 64,000 Payroll, Rent, Office Expenses
OME 199,000 Payroll, Rent, Supplies, Office Expenses
Open MRI of Morristown 146,000 Payroll, Supplies, Office Expenses
MRI Imaging Center @ PBI 172,000 Payroll, Rent, Supplies, Office Expenses
Somerset Imaging Corp. 86,000 Payroll, Rent, Supplies, Office Expenses
--------
Total $739,000
========
Expenses Associated with Marketing Revenue
Expenses associated with marketing revenues increased by approximately $35,000
when compari g 1996 and 1995. This increase is due to the additional employees
and expenses related to the operation (travel, trade shows, etc.) needed by
Medical Marketing & Management, Inc. to market the increased number of Company
sites and increased number of marketing contracts with outside physician groups.
Interest Expense
Interest expense has increased by approximately $146,000 when comparing 1996 and
1995. This increase is attributable primarily to the financing of equipment at
Empire State, MRI Imaging Center at PBI, Somerset Imaging Corporation, Amherst
Medical Equipment Leasing Corporation, Open MRI of Morristown, as well as
interest on the lines of credit with Summit Bank of New Jersey, Republic
National Bank and financing with DVI Business Credit.
Liquidity and Capital Resources
The Company has a commitment from the minority-owned joint venturer in Doctors
Imaging Associates, Joint Venture, to provide up to $250,000 from time to time,
for working capital purposes, as the Company deems necessary. Advances from this
joint venturer totaled $216,974 as of September 30, 1996 and $225,717 as of
December 31, 1995.
The Company has a working capital deficit of $558,584 at September 30, 1996 as
compared to a working capital surplus of $646,004 at December 31, 1995. This
decrease is primarily attributable to the $358,000 of accounts receivable from
Prime which has been charged against additional paid-in capital and start-up
costs for the new sites which commenced operations in 1996.
During 1995, the Company secured a line of credit with Summit Bank of New Jersey
("Summit Bank") in the amount of $600,000. Under the terms of the agreement, the
rate on the line is at the prevailing prime rate. To secure the line, the
Company opened a certificate of deposit at Summit Bank.
In April 1996, the Company obtained a $100,000 line of credit with Republic
National Bank for the Empire State location. The rate on the line is prime plus
one percent.
In March 1996, the Company entered into an agreement with DVI Business Credit to
finance up to $1,500,000 of the accounts receivable balances from two of the
Company's subsidiaries and one of its joint ventures. Advances bear interest at
the prime rate plus four percent. At September 30, 1996, the total outstanding
advances is $923,452.
continued...
17
<PAGE>
Liquidity and Capital Resources (Continued)
These are the only trends, commitments, events and/or material uncertainties
known to the Company.
The Company reassigned $10,000 of a deposit with Picker International, for the
Open MRI of Morristown site, which commenced operations in February 1996.
Additionally, the Company has purchased from Advance Healthcare Resources Inc.
the rights to a Varian linear accelerator for $20,000. The accelerator, which is
manufactured by Varian, Inc. is not subject to newly enacted New Jersey laws
requiring a Certificate of Need (CON) for the installation of such equipment.
In November 1994, the Company, pursuant to a written Agreement, acquired Prime
Contracting Corp. ("Prime") of Union, New Jersey in a business combination
accounted for as a pooling of interests. The Company purchased all of the issued
and outstanding shares of Prime's common stock in exchange for 112,457 shares of
the Company's common stock. Prime became a subsidiary of the Company, effective
as of November 1, 1994. Prime is a full service contractor that has provided
turnkey design and construction services. Prime builds free standing structures
and renovates existing facilities with an emphasis in room renovations for
hospitals and private medical facilities.
On December 27, 1995, the Company entered into an agreement, as modified in
March 1996, with a related party to sell all of the common stock of Prime for
$1,200,000 payable as follows: $100,000 upon execution, $100,000 at closing and
a promissory note bearing interest at prime plus one percent. The note is
payable in two installments, $600,000 on October 27, 1997 and $400,000 on April
27, 1998. If Prime's gross annual revenue for the calendar year 1996 falls below
$3,000,000, then the final payment of $400,000 shall be forfeited.
The Company recorded an increase of $987,554, in December 1995, to shareholders'
equity which represents the excess of the sale price over the net assets of
Prime. In conjunction with the modified agreement in March 1996, the Company's
accounts receivable due from Prime of approximately $358,000 has been charged
against additional paid-in capital.
In April 1995, the Company formed a New York corporation, Empire State Imaging
Associates, Inc. ("Empire State"). On April 28, 1995, Empire State, which is
100% owned by the Company, purchased for $750,000 in cash and $200,000 of the
Company's stock, assets and certain liabilities of Central Imaging Associates,
Limited Partnership ("Central Imaging"), an entity that leases MRI, CT and
various diagnostic imaging equipment. Empire State will provide space, equipment
(MRI, CT, Mammography, Ultrasound and Diagnostic Imaging) and nonprofessional
services, including management and billing and collection functions to Central
Imaging located in Yonkers, New York.
Empire State, has entered into a Loan and Security Agreement ("Loan Lease") with
a non-affiliated party, DVI Financial Services, Inc., dated May 5, 1995, which
provides for the purchase of MRI, CT and diagnostic imaging equipment payable
over a 60 month term with payments each of $61,350 (the "Basic Rent"), which is
being charged as an expense of the business. This equipment is located in
Yonkers, New York.
In April 1995, Amherst Medical Equipment Leasing Corporation, a wholly-owned
subsidiary, of the Company, was formed. The site, located in Amherst New York,
commenced operations in January 1996.
In June 1995, the MRI at the Passaic site began operation. The site is a joint
venture between Passaic Beth Israel Hospital and the Company.
In February 1996, Open MRI of Morristown (Open MRI), a majority owned Joint
venture, commenced operations. The site, located in Morristown, New Jersey, is a
joint venture between a large medical group and Open MRI.
continued...
18
<PAGE>
Liquidity and Capital Resources (Continued)
In July 1996, the Company, through its wholly-owned subsidiary West Paterson
Medical Equipment Leasing Corporation ("WPMEL"), entered into a lease and
management services agreement with Advanced Imaging & Radiology Associates, P.A.
("M.D."). The agreement provides that WPMEL will lease office space, fixtures
and equipment and will provide management services to M.D. over an initial term
of five years with a five year renewal option. The site, located in West
Paterson, N.J., is a medical practice specializing in diagnostic imaging.
In July 1996, the Company, through its wholly-owned subsidiary Ohio Medical
Equipment Leasing Corporation ("OME"), entered into a purchase and consulting
agreement with Medical Advances, Inc. ("Medical") to acquire an interest as a
general (managing) partner of Sylvania Diagnostics, an Ohio Limited Partnership
("Sylvania") for one dollar. The interest acquired represents 50.2% of the total
units outstanding. Sylvania is a diagnostic imaging center located in Sylvania,
Ohio.
The Company also entered into an agreement with DVI which provides for $135,000
of working capital advances which are only to be used for operating Sylvania. If
the Company determines that operating Sylvania is not profitable, DVI will
purchase either Sylvania or OME for one dollar.
Valuation of Accounts Receivable
The Company values its uncollected accounts receivable as part of its
determination of profit. The Company constantly reviews the accounts receivable
valuation. The continuing monthly review, gathering of additional information,
as well as changing reimbursement rates, may cause adjustments to the accounts
receivable valuation.
Healthcare System
The healthcare system is in a state of change and will continue so for the next
several years. Small medical group practices are referring patients to free
standing centers as an alternative to costly hospital care. The cost of this
medical equipment and the patient volume needed to justify the expenditure is
not practical for individual and small group practices. Providing MRI and CT
scans for these physicians in these free standing centers offers an attractive
method to protect eroding income, offer state-of-the-art technology and maintain
patient loyalty.
Legislation
Legislation has been passed in some states that will restrict the physicians in
joining joint ventures such as those of the Company. In New Jersey, any site
already in existence has been excluded from this legislation. This legislation
was enacted in July 1991.
Federal guidelines also known as "Safe Harbor" guidelines have been established
that will limit physicians to the number of Medicare patients they can refer to
an outpatient facility in which they have a financial interest.
A commission has been appointed by the Federal government to review the delivery
of healthcare on a national level. Although many alternatives have been
discussed, it is impossible to determine at this time what changes will be
enacted or the affect on the Company's business.
In order to curb the potential for fraud and abuse under the Medicare and
Medicaid programs, Congress has enacted certain laws (the Anti-Kickback Laws")
prohibiting the payment or receipt of any remuneration in return for the
referral of patients to a healthcare provider for the furnishing of medical
services of equipment, the payment for which may be made in whole or in part by
the Medicare or Medicaid programs. It should be noted that the Anti-Kickback
Laws apply to both sides of the referral relationship: the provider making the
referral and the provider receiving the referral.
continued...
19
<PAGE>
Legislation (Continued)
Violation of the Anti-Kickback Laws is a criminal felony punishable by fines of
up to $25,000 and/or up to five years imprisonment for each violation. Federal
law also permits the Department of Health and Human Services ("HHS") to assess
civil fines against violators of the Anti-Kickback Laws and to exclude them from
participation in the Medicare and Medicaid programs. These civil sanctions can
be imposed in proceedings that do not involve the same procedural requirements
and standards of proof as would be required in a criminal trial. Even though the
Joint Ventures have physician investors, the Anti-Kickback laws will not have an
effect on the Company's operations because the Company does not bill Medicare
and Medicaid for medical services as it only leases equipment.
HHS has proposed regulations specifying "safe harbors" for various payment
practices between healthcare providers and their referral sources. If a payment
practice were to come within the safe harbor, it would not be treated as an
illegal Medicare/Medicaid kickback which is a ground for exclusion from the
Medicare/Medicaid programs. While failure to fall within a safe harbor does not
mean that the practice is illegal, HHS had indicated that it may give such
arrangements closer scrutiny. In their present proposed form, no safe harbor
would cover an investment interest in the Company. It is likely that this bill
will be reintroduced in future sessions. The Company cannot predict whether
these regulatory or statutory provisions will be enacted by federal or state
authorities which would prohibit or otherwise regulate referrals by physicians
to the Company thereby having a material adverse effect on the Company's
operations.
The "Stark Bill" extends the prohibition against physician self-referral, which
had previously been applicable only to clinical\laboratory services, to several
additional services, but also sets forth several exceptions to the ban, which
the following outlines: In general, the Bill provides that a physician with an
ownership or investment interest in or a compensation agreement with an entity
is prohibited from making referrals to that entity for the furnishing of
designated health services for which Medicare payment would otherwise be made.
Designated health services under the Bill include (1) clinical laboratory
services; (2) physical therapy services; (3) occupational therapy services; (4)
radiology or other diagnostic services; (5) radiology therapy services; (6) the
furnishing of durable medical equipment; (7) parental and enteral nutrients,
equipment and supplies; (8) prosthetics, orthotics and prosthetic devices (9)
home health services; (10) outpatient prescription drugs; and (11) inpatient and
outpatient hospital services. This bill is effective for referrals made on or
after January 1,1992, for clinical laboratory services; and effective for
referrals made after December 31, 1994, in the case of other designated health
services. While this bill has not affected the Company at this time, it may have
an adverse effect limiting Medicare and Medicaid referrals by physicians who are
investors in the Joint Venture.
In 1991, New Jersey enacted the Health Care Cost Reduction Act, or so-called
"Codey Bill", (N.J.S.A. 45: 9-22.4 et seq.) which provided in part that a
medical practitioner shall not refer a patient, or direct one of its employees
to refer a patient, to a health care service in which the practitioner and/or
the practitioner's immediate family had any beneficial interest. The bill
specifically provided that for beneficial interests which were created prior to
the effective date of the Act, July 31, 1991, the practitioner could continue to
refer patients, or direct an employee to do so, if the practitioner disclosed
such interest to his patients. The disclosure must take the form of a sign
posted in a conspicuous place in the practitioner's office informing the
patients of such interest and stating that a listing of alternative health care
service providers could be found in the telephone directory. All physicians who
refer to the Company's sites in New Jersey and also have a financial interest in
those sites have a sign posted as mandated by the law.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
II. See notes to interim consolidated financial statements, Note
2, regarding computation of per share earnings.
II.I Computation of per share earnings
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
quarterly period ended September 30, 1996.
21
<PAGE>
CONFORMED
Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Modern Medical Modalities Corporation
(Registrant)
Date: December 18, 1996 /s/Patrick O'Connor
---------------------------------
Patrick O'Connor
Acting President
Date: December 18, 1996 /s/Gregory Maccia
---------------------------------
Gregory Maccia
Vice President and Secretary
Date: December 18, 1996 /s/Jan Goldberg
---------------------------------
Jan Goldberg
Vice President and Treasurer
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
Exhibit 11.1
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
-------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 13,586 $ (296,621) $ 36,881 $ (369,822)
=========== =========== =========== ===========
PRIMARY
Total weighted average
shares outstanding 3,168,292 3,116,137 3,168,292 3,116,137
=========== =========== =========== ===========
Income (loss) from
continuing operations $ -- $ (0.06) $ 0.01 $ (0.08)
Income (loss) from
discontinued operations -- (0.03) -- (0.04)
----------- ----------- ----------- -----------
Net income (loss) per share $ - Nil - $ (0.09) $ 0.01 $ (0.12)
=========== =========== =========== ===========
FULLY DILUTED
Weighted average shares 3,168,292 3,134,174 3,168,292 3,134,174
Assumed conversions
A warrants and B warrants 1,035,000 1,035,000 1,035,000 1,035,000
Total weighted average
shares outstanding 4,203,292 4,169,174 4,203,292 4,169,174
=========== =========== =========== ===========
Income (loss) from
continuing operations $ -- $ (0.05) $ 0.01 $ (0.06)
Income (loss) from
discontinued operations -- (0.01) -- (0.03)
----------- ----------- ----------- -----------
Net income (loss) per share $ - Nil - $ (0.07) $ 0.01 $ (0.09)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
consolidated balance sheets, and consolidated statements of income of the
Company in the Company's form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 609,646
<SECURITIES> 0
<RECEIVABLES> 7,485,907
<ALLOWANCES> (2,523,705)
<INVENTORY> 0
<CURRENT-ASSETS> 5,940,442
<PP&E> 17,714,295
<DEPRECIATION> 4,859,877
<TOTAL-ASSETS> 21,378,558
<CURRENT-LIABILITIES> 6,499,026
<BONDS> 9,600,169
0
0
<COMMON> 317
<OTHER-SE> 4,006,098
<TOTAL-LIABILITY-AND-EQUITY> 21,378,558
<SALES> 0
<TOTAL-REVENUES> 7,971,121
<CGS> 0
<TOTAL-COSTS> 6,921,318
<OTHER-EXPENSES> 999,814
<LOSS-PROVISION> 56,028
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 49,989
<INCOME-TAX> 13,108
<INCOME-CONTINUING> 36,881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,881
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
