<PAGE>
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
March 31, 1997
( ) 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)
95 MADISON AVENUE, SUITE 301 MORRISTOWN, N.J. 07960
- ------------------------------------------------------------------------------
(address of principal executive offices) (zip code)
(201) 538-9955
- ------------------------------------------------------------------------------
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
May 14, 1997
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1: FINANCIAL STATEMENT
Independent Accountants' Review Report . . . . . . . . . 1
Consolidated Balance Sheets as at March 31, 1997
(Unaudited) and December 31, 1996 . . . . . . . . . . 2-3
Consolidated Statements of Operations For the Three
Months Ended March 31, 1997 and 1996 (Unaudited) . . . 4
Consolidated Statements of Cash Flows For the Three
Months Ended March 31, 1997 and 1996 (Unaudited) . . . 5-6
Notes to Interim Consolidated Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . 7-11
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 12-16
PART II - OTHER INFORMATION
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . 17
Item 2: Changes in Securities . . . . . . . . . . . . . . . . . 17
Item 3: Defaults upon Senior Securities . . . . . . . . . . . . 17
Item 4: Submission of Matters to a Vote of Security Holders . . 17
Item 5: Other Information . . . . . . . . . . . . . . . . . . . 17
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors
Modern Medical Modalities Corporation
We have reviewed the consolidated balance sheet of Modern Medical Modalities
Corporation and Subsidiaries as at March 31, 1997, and the related consolidated
statements of operations, and cash flows for the three months then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
A review of interim financial information consists principally of obtaining an
understanding of the system for the preparation of interim financial
information, applying analytical review procedures to financial data, and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Modern Modalities Corporation and
Subsidiaries as at December 31, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended not
presently herein; and in our report dated March 28, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as at
December 31, 1996, is fairly presented, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
The March 31, 1996 financial statements of Modern Medical Modalities Corporation
and Subsidiaries were reviewed by other accountants whose report dated May 2,
1996, stated that they were not aware of any material modifications that should
be made to those statements in order for them to be in conformity with generally
accepted accounting principles.
/s/ Weinich, Sanderflo LLP
New York, N. Y.
May 9, 1997
<PAGE>
-2-
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
-------------- ------------
(Unaudited)
A S S E T S
-----------
Current assets:
Cash and cash equivalents $ 147,910 $ 42,421
Restricted cash for line of credit repayment 600,000 600,000
Accounts receivable (less contractual
allowances of $2,592,254 and $2,445,124,
respectively) 5,485,045 4,867,242
Current portion of note receivable
from affiliate 600,000 600,000
Current portion of note receivable 9,127 -
Loan receivable - affiliate 175,000 225,000
Other receivables 317,774 409,442
Prepaid expenses 58,226 113,836
----------- -----------
Total current assets 7,393,082 6,857,941
----------- -----------
Other assets:
Furniture, fixtures, equipment and
leasehold improvements (net of accumulated
depreciation and amortization of $5,152,250
and $4,759,821, respectively) 9,671,535 10,043,862
Note receivable - affiliate,
net of current portion 400,000 400,000
Note receivable, net of current portion 144,003 -
Goodwill (net of accumulated amortization
of $70,961 and $47,307, respectively) 1,348,262 1,371,916
Organization costs (net of accumulated
amortization of $10,993 and $9,859,
respectively) 11,705 12,839
Investment in joint ventures 267,292 237,261
Investment in and advances to
unconsolidated affiliate 481,713 306,961
Deposits 125,914 129,451
----------- -----------
Total other assets 12,450,424 12,502,290
----------- -----------
$19,843,506 $19,360,231
----------- -----------
----------- -----------
See accompanying independent accountants' review report
and notes to consolidated financial statements.
<PAGE>
-3-
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Cash overdraft $ 45,214 $ -
Line of credit 599,750 599,750
Loan payable - joint venturer 110,467 100,467
Loans payable - affiliates 401,162 468,571
Current portion of long-term debt 2,627,354 2,721,906
Accounts payable 1,578,897 1,259,344
Accrued expenses 726,351 643,183
Due to affiliates - 52,216
Deferred income taxes 126,310 126,310
----------- -----------
Total current liabilities 6,215,505 5,971,747
----------- -----------
Other liabilities:
Long-term debt, net of current portion 7,519,559 7,741,217
Deferred income taxes 614,318 858,618
Due to joint venturer 218,717 218,717
----------- -----------
Total other liabilities 8,352,594 8,818,552
----------- -----------
Total liabilities 14,568,099 14,790,299
----------- -----------
Minority interest 532,250 184,939
----------- -----------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $0.0001 par value,
Authorized - 5,000,000 shares
Issued and outstanding - 3,168,292 shares 317 317
Additional paid-in capital 3,866,389 3,866,389
Retained earnings 876,451 518,287
----------- -----------
Total stockholders' equity 4,743,157 4,384,993
----------- -----------
$19,843,506 $19,360,231
----------- -----------
----------- -----------
See accompanying independent accountants' review report
and notes to consolidated financial statements.
<PAGE>
-4-
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
---------- -----------
Operating income:
Net revenue from services $2,590,687 $1,909,749
Management and marketing fees 205,820 219,276
----------- -----------
Total operating income 2,796,507 2,129,025
----------- -----------
Operating expenses:
Selling, general and administrative 1,535,298 1,176,661
Expenses associated with management
and marketing fee income 164,534 243,852
Bad debts 7,117 19,328
Depreciation and amortization 417,216 368,236
----------- -----------
Total operating expenses 2,124,165 1,808,077
----------- -----------
Income from operations 672,342 320,948
----------- -----------
Other income (expenses):
Interest income 7,014 10,948
Interest expense ( 263,635) ( 333,278)
Miscellaneous income 30,293 66,082
Income from a joint venture 48,172 36,548
Income from minority owned subsidiary 21,404 -
Gain on sale of subsidiary 252,076 -
----------- -----------
Total other income (expenses) 95,324 ( 219,700)
----------- -----------
Income before income taxes and minority interest 767,666 101,248
Provision for income taxes 337,690 6,055
----------- -----------
Income before minority interest 429,976 95,193
Minority interest 71,812 81,105
----------- -----------
Net income $ 358,164 $ 14,088
----------- -----------
----------- -----------
Earnings per share - primary:
Net income $.11 $-Nil-
---- ------
---- ------
Number of shares outstanding:
Primary 3,168,292 3,168,292
---------- ----------
---------- ----------
See accompanying independent accountants' review report
and notes to consolidated financial statements.
<PAGE>
-5-
<TABLE>
<CAPTION>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE
MONTHS ENDED
MARCH 31,
------------------------
1997 1996
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 358,164 $ 14,088
---------- ----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 417,216 368,236
Contractual allowances 147,130 492,028
Bad debts 7,117 19,328
Income from an unconsolidated joint venture ( 48,172) ( 36,548)
Minority interest 347,311 77,103
Deferred income taxes ( 244,300) 4,211
Income from unconsolidated affiliate ( 21,404) -
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
Accounts receivable ( 772,050) ( 1,104,647)
Due from affiliate - ( 100,698)
Other receivable 91,668 -
Prepaid expenses 55,610 33,903
Deposits 3,537 ( 47,444)
Distributions from a joint venture 18,141 18,000
Due to affiliate ( 52,216) ( 109,170)
Accounts payable 319,553 265,869
Accrued expenses 83,168 ( 107,435)
Advances to unconsolidated affiliate ( 153,348) -
---------- ----------
Total adjustments 198,961 ( 227,264)
---------- ----------
Net cash provided by (used in) operating activities 557,125 ( 213,176)
---------- ----------
Cash flows from investing activities:
Acquisition of property assets ( 20,101) ( 75,297)
Proceeds from loan receivable - affiliate 50,000 -
Issuance of note receivable ( 153,130) -
Proceeds from note receivable - affiliate - 100,000
---------- ----------
Net cash provided by (used in) operating activities ( 123,231) 24,703
---------- ----------
Cash flows from financing activities:
Line of credit - 93,000
Proceeds from long-term debt 158,414 58,140
Joint venture advances 10,000 -
Payments on affiliates advances ( 67,409) -
Cash overdraft 45,214 -
Payments on capitalized lease obligations
and long-term debt ( 474,624) ( 341,176)
---------- ----------
Net cash provided by (used in) financing activities ( 328,405) ( 190,036)
---------- ----------
Net increase (decrease) in cash and cash equivalents 105,489 ( 378,509)
Cash and cash equivalents at beginning of period 42,421 984,326
---------- ----------
Cash and cash equivalents at end of period $ 147,910 $ 605,817
---------- ----------
---------- ----------
</TABLE>
See accompanying independent accountants' review report
and notes to consolidated financial statements.
<PAGE>
-6-
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
FOR THE THREE
MONTHS ENDED
MARCH 31,
------------------------
1997 1996
----------- ----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period:
Interest $ 261,214 $ 337,182
---------- ----------
---------- ----------
Income taxes $ 1,872 $ 1,847
---------- ----------
---------- ----------
Non-cash transactions:
Capital lease obligation in connection with
acquisition of medical equipment for Open
MRI of Morristown $ - $ 876,461
---------- ----------
---------- ----------
See accompanying independent accountants' review report
and notes to consolidated financial statements.
<PAGE>
-7-
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
NOTE 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 and Management,
Inc., Somerset Imaging Corporation, South Plainfield Imaging, Inc., Medi-
Corp., USA, South Jersey Medical Equipment Leasing Corp., Detex Medical
Services, Inc., Amherst Medical Equipment Leasing Corp., OpenMRI of Morristown,
Inc., West Paterson Medical Equipment Leasing Corp., Ohio Medical Equipment
Leasing Corporation, its majority owned subsidiary, Sylvania Diagnostics L.P.,
in which the Company has a 50.2% interest, and its majority owned joint
ventures, Plainfield MRI Associates, Joint Venture, MRI Imaging Center at PBI,
OpenMRI of Morristown, Joint Venture and Doctors Imaging Associates, Joint
Venture. The Company has an 84%, 75%, 72%, and 50% interest, respectively, in
the joint ventures, by contract manages the joint ventures, is the managing
joint venturer and has unilateral control. Investments in unconsolidated
minority-owned subsidiaries, Empire State Imaging Associates, Inc. and OpenMRI
and Diagnostic Services of Toms River, Inc., in which the Company has a 35% and
25% interest and significant influence, is accounted for under the equity
method.
The accompanying unaudited consolidated financial statements and
footnotes have been condensed and, therefore, do not contain all required
disclosures. Reference should be made to the Company's annual financial
statement filed on Form 10-K for the year ended December 31, 1996.
The financial statements for the three months period ended March
31, 1997 and 1996 have not been audited. In the opinion of management, the
unaudited interim consolidated financial statements reflect all adjustments
and accruals, consisting only of normal recurring adjustments and accruals,
necessary to present fairly the financial position of the Company as at
March 31, 1997 and the results of its operations for the three month
periods ended March 31, 1997 and 1996 and statements of cash flows for the
three months periods ended March 31, 1997 and 1996. The results for the
three months period ended March 31, 1997 are not necessarily indicative of
the results to be expected for the full year.
<PAGE>
-8-
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION. (Continued)
The accounting policies followed by the Company are set forth in
Note 1 to the Company's financial statements included in its Annual
Financial Statement filed on Form 10-K for the year ended December 31,
1996, 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 15 years.
Goodwill is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
The carrying amounts of cash, amounts 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.
Certain items in the 1996 financial statements have been
reclassified to conform with the 1997 presentation. These
reclassifications had no effect on the financial position, net income or
stockholders' equity for the periods presented.
NOTE 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.
Common stock and common stock equivalent shares outstanding
include shares issued within one year of an initial public offering (IPO),
at a price below the IPO price, as outstanding for all periods presented.
Earnings per share - fully diluted for the three months ended March 31,
1997 and 1996 is not presented in the consolidated statements of operations
since it is anti-dilutive.
<PAGE>
-9-
NOTE 3 - ACQUISITIONS AND DISPOSAL OF SUBSIDIARY.
On November 30, 1994 the Company acquired Prime Contracting Corp.
(Prime) which was sold on December 27, 1995 to a related party 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.
On December 27, 1996, the Company entered into a stock purchase
agreement with a related party to sell 65% of the capital stock of Empire
State Imaging Associates, Inc. ("Empire") for $250,000, payable as follows:
$25,000 as the closing and nine equal monthly of $25,000 plus interest at
prime plus 1%. The Company has recorded an increase of $165,631 to
stockholders' equity which represents the excess of the sale price over the
net assets of Empire. At March 31, 1997, the Company's investment in
Empire is $99,228 and the Company has advances receivable from Empire of
$382,485.
NOTE 4 - PROPERTY AND EQUIPMENT, NET.
Property and equipment, consisted of the following:
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
Medical equipment $13,372,256 $13,355,067
Buildings 358,066 358,066
Furniture and fixtures 72,803 69,890
Automobiles 22,860 22,860
Leasehold improvements 997,800 997,800
----------- -----------
14,823,785 14,803,683
Less: Accumulated depreciation
and amortization 5,152,250 4,759,821
----------- -----------
$ 9,671,535 $10,043,862
----------- -----------
----------- -----------
NOTE 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:
<TABLE>
<CAPTION>
TOTAL LONG-TERM TOTAL TOTAL
ASSETS DEBT LIABILITIES CAPITAL
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
March 31, 1997 (unaudited) $5,592,226 $3,132,721 $3,762,240 $1,829,985
December 31, 1996 $4,339,575 $1,938,137 $3,637,025 $ 702,550
</TABLE>
<TABLE>
<CAPTION>
(10%)
GROSS NET ALLOCATION
REVENUES INCOME OF INCOME
---------- ---------- ----------
<S> <C> <C> <C>
For the three months ended
March 31, 1997 (unaudited) $1,466,821 $ 481,724 $ 48,172
For the year ended December
31, 1996 $4,417,540 $1,041,469 $104,147
</TABLE>
<PAGE>
-10-
NOTE 6 - LINE 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 March 31, 1997, 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.
NOTE 7 - LONG-TERM DEBT.
Long-term debt consists of the following:
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
Capitalized lease obligations (a) $ 8,975,056 $ 9,296,467
Accounts receivable financing (b) 704,951 686,173
Other (c) 466,904 480,483
----------- -----------
10,146,911 10,463,123
Less: Amounts due in one year 2,627,354 2,721,906
----------- -----------
$ 7,519,557 $ 7,741,217
----------- -----------
----------- -----------
(a) Capital Lease Obligations:
Capital lease obligations are collateralized by property and
equipment having an approximate original cost of $15,000,000 and an
approximate net book value of $10,000,000 at March 31, 1997.
(b) Accounts Receivable Financing:
The Company entered into a agreement with DVI Business Credit to
finance up to $2,000,000 of the accounts receivable balances from two of
the Company's wholly-owned subsidiaries, a minority-owned subsidiary, and
two of its majority-owned joint ventures. Advances would bear interest at
the prime rate plus 4%. At March 31, 1997, the amount financed under this
agreement totalled $1,125,069, including $420,108 owed by the
minority-owned subsidiary.
(c) Other:
Sylvania Diagnostics limited partnership at March 31, 1997 is
obligated for notes payable incurred prior to the Company's acquiring its
50.2% interest. The Company has an agreement in which DVI indemnifies the
Company for these notes as well as all other pre-acquisition debts of
Sylvania Diagnostics. The notes payable at March 31, 1997 are as follows:
(i) Note payable to a bank which was due on March 14,
1996. The bank has not called the note and is
negotiating with the Company, Sylvania and DVI
to schedule repayment terms. The note bears
interest at 2.5% over prime. The note is col-
lateralized by substantially all of the assets
of Sylvania. $249,500
(ii) Note payable to a professional corporation in
equal monthly installments of $5,000 including
interest at 9.4% through July 2000. 172,134
(iii) Installment note payable to a bank in equal
monthly installments of $1,302 including interest
at 2% over prime through August 2000 and a final
payment in September 2000 of the remaining balance. 45,270
--------
$466,904
--------
--------
<PAGE>
-11-
NOTE 8 - GAIN ON SALE OF SUBSIDIARY.
In February 1997, the Company acquired a 25% interest in OpenMRI
and Diagnostic Services of Toms River, Inc. In March 1997, the Company
entered into a contract for the sale of its stock in this entity resulting
in a gain of $252,076. The proceeds are payable as follows: 25% at
closing and a note for 75%, bearing interest at 11% per annum, payable in
monthly installments commencing 90 days after the facility opens for
business.
<PAGE>
-12-
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 not only the
sites of the Company, but for other physician groups and hospitals. In
November 1994, the Company acquired Prime Contracting Corp. ("Prime"). 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"). On December 27, 1996, the Company sold 65% of the
common stock of Empire State for $250,000 to a related party. 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 three months ended March 31, 1997 as compared to the
three months ended March 31, 1996:
Revenues for Modern Medical Modalities Corporation and
subsidiaries aggregated $2,797,000 in 1997 as compared to $2,129,000 in
1996. The increase in revenues (31.4%) is directly attributable to an
increase in patient service revenues of $681,000 primarily from new sites
in operation in 1997.
Operating expenses for 1997 were $2,124,000 (76.0% of operating
revenues) as compared to $1,808,000 (84.9% of operating revenues) in 1996.
This increase of $316,000 (17.5%) is primarily the result of an increase in
selling, general and administrative expenses of $358,000 due to the new
sites in operation in 1997.
<PAGE>
-13-
Expenses Associated with Management and Marketing Fee Income:
Expenses associated with management and marketing fee income
decreased by $79,000 (32.4%) to $165,000 in 1997. This decrease is
attributable to a reallocation of certain expenses directly to the
Company's various MRI sites.
Interest Expense:
Interest expense, net of a decrease in interest income of $4,000
has decreased by $65,000 when comparing 1997 and 1996. This decrease is
attributable primarily to the financing of equipment at Empire State which
was included in the 1996 operations.
Gain on Sale of Subsidiary:
In February 1997, the Company acquired a 25% interest in Open MRI
and Diagnostic Services of Toms River, Inc. In March 1997, the Company
entered into a contract with an unrelated third party for the sale of its
stock in this entity resulting in a gain of $252,000. The proceeds are
payable as follows: 25% at closing and a promissory note for 75%, at 11%
interest, payable in monthly installments commencing 90 days after the
facility opens for business.
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 $219,000 as of
March 31, 1997 and 1996.
The Company has a working capital surplus of $1,177,000 at March
31, 1997 as compared to a working capital surplus of $886,000 at March 31,
1996.
During 1995, the Company secured a line of credit with 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 the amount of
$600,000.
In March 1997, the Company entered into an amended agreement with
DVI to finance up to $2,000,000 of the accounts receivable balances from
two of its wholly-owned subsidiaries, a minority-owned subsidiary and two
of its majority-owned joint ventures. Advances bear interest at the prime
rate plus four percent. At March 31, 1997, the total outstanding advances
is $1,125,000 including $420,000 owed by the minority-owned subsidiary.
These are the only trends, commitments, events and/or material
uncertainties known to the Company.
<PAGE>
-14-
Liquidity and Capital Resources: (Continued)
In November 1994, the Company acquired Prime which it sold on
December 27, 1995 to a related party 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.
In April 1995, the Company formed a New York corporation, Empire
State Imaging Associates, Inc. ("Empire State"). On December 27, 1996, the
Company sold 65% of the stock of Empire State to another related party for
$250,000 payable as follows: $25,000 down and $25,000 per month with
interest on the unpaid principal at prime plus 1%. At March 31, 1997,
$175,000 was outstanding.
In February 1996, OpenMRI of Morristown ("OpenMRI"), a
majority-owned Joint Venture, commenced operations. The site, located in
Morristown, New Jersey, is a joint venture between a large medical group
and OpenMRI.
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, the Company has the option to require DVI to 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 rate, may cause
adjustments to the accounts receivable valuation.
<PAGE>
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Healthcare System:
It is management's belief that the United States the healthcare
system is in a state of change and will continue so for the next several
years. Management believes that small medical group practices are
referring and will continue to refer patients to free standing centers as
an alternative to costly hospital care as the cost of the medical
equipment and the patient volume needed to justify the expenditure is not
practical for individual and small group practices. The Company's
providing MRI and CT scans for these physicians in these free standing
centers offers, in management's opinion, an attractive method for these
practices 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 charges 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 or 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.
Violation of the Anti-Kickback Laws is a criminal felony
punishable by fines 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.
<PAGE>
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Legislation: (Continued)
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 Stark 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 or the furnishing of designated health
services for which Medicare payment would otherwise be made. Designated
health services under the Stark 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 healthcare 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.
<PAGE>
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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 state-
ments, Note 2, regarding 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 March 31, 1997.
<PAGE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MODERN MEDICAL MODALITIES CORPORATION
-------------------------------------
(Registrant)
---------------------------------------
Date: May 19, 1997 Patrick O'Connor
Acting President
---------------------------------------
Date: May 19, 1997 Gregory Maccia
Vice President and Secretary
----------------------------------------
Date: May 19, 1997 Jan Goldberg
Vice President and Treasury
<PAGE>
-19-
CONFORMED
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MODERN MEDICAL MODALITIES CORPORATION
-------------------------------------
(Registrant)
/s/ Patrick O'Connor
----------------------------------------
Date: May 19, 1997 Patrick O'Connor
Acting President
/s/ Gregory Maccia
----------------------------------------
Date: May 19, 1997 Gregory Maccia
Vice President and Secretary
/s/ Jan Goldberg
-----------------------------------------
Date: May 19, 1997 Jan Goldberg
Vice President and Treasury
