<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
September 30, 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
November 13, 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 September 30, 1997
(Unaudited) and December 31, 1996 . . . . . . . . . . . 2-3
Consolidated Statements of Operations For the Three and
Nine Months Ended September 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows For the Three and
Nine Months Ended September 30, 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. . . . . . . . . . . . 12-17
PART II - OTHER INFORMATION
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . 18
Item 2: Changes in Securities . . . . . . . . . . . . . . . . . 18
Item 3: Defaults upon Senior Securities . . . . . . . . . . . . 18
Item 4: Submission of Matters to a Vote of Security Holders . . 18
Item 5: Other Information . . . . . . . . . . . . . . . . . . . 18
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . 19
<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 September 30, 1997, and the related
consolidated statements of operations for the three and nine months ended
September 30, 1997 and the related consolidated statements of cash flows for the
nine months then ended. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted 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 Medical 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.
New York, N. Y.
November 12, 1997
<PAGE>
-2-
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
A S S E T S
Current assets:
Cash and cash equivalents $ 202,658 $ 42,421
Restricted cash for line of credit repayment 600,000 600,000
Accounts receivable (less contractual
allowances of $2,821,788 and $2,445,124,
respectively) 5,464,202 4,867,242
Account receivable - joint venture 303,775 -
Current portion of note receivable
from affiliate 981,650 600,000
Current portion of note receivable 46,590 -
Loan receivable - affiliate 100,000 225,000
Other receivables 337,843 409,442
Due from officer 84,221 -
Prepaid expenses 70,289 113,836
----------- -----------
Total current assets 8,191,228 6,857,941
----------- -----------
Other assets:
Furniture, fixtures, equipment and
leasehold improvements (net of accumulated
depreciation and amortization of $5,711,708
and $4,759,821, respectively) 9,752,253 10,043,862
Note receivable - affiliate,
net of current portion - 400,000
Note receivable, net of current portion 113,736 -
Goodwill (net of accumulated amortization
of $118,269 and $47,307, respectively) 1,300,954 1,371,916
Organization costs (net of accumulated
amortization of $14,044 and $9,859,
respectively) 69,494 12,839
Investment in joint ventures 69,994 237,261
Investment in and advances to
unconsolidated affiliate 537,035 306,961
Deposits 153,910 129,451
----------- -----------
Total other assets 11,997,376 12,502,290
----------- -----------
$20,188,604 $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)
September 30, December 31,
1997 1996
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 3,088 $ -
Line of credit 599,750 599,750
Loan payable - joint venturer 110,467 100,467
Loans payable - affiliates 312,066 468,571
Current portion of long-term debt 3,801,010 2,721,906
Accounts payable 1,064,789 1,259,344
Accrued expenses 700,626 643,183
Due to affiliate 6,326 52,216
Deferred income taxes 412,928 126,310
----------- -----------
Total current liabilities 7,011,050 5,971,747
----------- -----------
Other liabilities:
Long-term debt, net of current portion 6,836,155 7,741,217
Deferred income taxes 991,000 858,618
Due to joint venturer 218,717 218,717
----------- -----------
Total other liabilities 8,045,872 8,818,552
----------- -----------
Total liabilities 15,056,922 14,790,299
----------- -----------
Minority interest 236,702 184,939
----------- -----------
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 1,028,274 518,287
----------- -----------
Total stockholders' equity 4,894,980 4,384,993
----------- -----------
$20,188,604 $19,360,231
----------- -----------
----------- -----------
See accompanying independent accountants' review report
and notes to consolidated financial statements.
<PAGE>
-4-
<TABLE>
<CAPTION>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating income:
Net revenue from services $1,844,844 $3,034,508 $6,844,822 $7,204,887
Management and marketing fees 580,454 299,309 1,094,964 766,234
---------- ---------- ---------- ----------
Total operating income 2,425,298 3,333,817 7,939,786 7,971,121
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative 1,312,590 2,120,810 4,504,851 4,804,140
Expenses associated with manage-
ment and marketing fee income 326,372 254,439 666,320 811,070
Bad debts 8,249 8,418 21,930 56,028
Depreciation an amortization 444,054 465,635 1,309,379 1,250,180
---------- ---------- ---------- ----------
Total operating expenses 2,091,265 2,849,302 6,502,480 6,921,418
---------- ---------- ---------- ----------
Income from operations 334,033 484,515 1,437,306 1,049,703
---------- ---------- ---------- ----------
Other income (expenses):
Interest income 26,636 15,903 103,991 36,332
Interest expense ( 345,822) ( 403,250) ( 935,009) ( 1,108,363)
Miscellaneous income 60,255 32,922 106,205 264,876
Income from a joint venture 56,319 18,548 163,699 61,858
Loss from minority owned
subsidiary ( 23,362) - ( 8,981) -
Loss on sale of property assets ( 26,702) - ( 26,702) -
Gain on sale of subsidiary - - 252,076 -
---------- ---------- ---------- ----------
Total other income (expenses) ( 252,676) ( 335,877) ( 344,721) ( 745,297)
---------- ---------- ---------- ----------
Income before income taxes
and minority interest 81,357 148,638 1,092,585 304,506
Provision for income taxes 43,644 70,303 493,754 150,108
---------- ---------- ---------- ----------
Income before minority interest 37,713 78,335 598,831 154,398
Minority interest ( 18,842) 64,749 88,844 117,517
---------- ---------- ---------- ----------
Net income $ 56,555 $ 13,586 $ 509,987 $ 36,881
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share - primary:
Net income $0.02 $ - $0.16 $0.01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares outstanding:
Primary 3,168,292 3,168,292 3,168,292 3,168,292
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying independent accountants' review report
and notes to consolidated financial statements.
<PAGE>
-5-
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------- ----------
Cash flows from operating activities:
Net income $ 509,987 $ 36,881
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,301,331 1,250,180
Contractual allowances 376,664 1,585,289
Bad debts 21,930 56,028
Income from an unconsolidated joint venture ( 163,699) ( 61,858)
Minority interest 51,763 254,517
Deferred income taxes 419,000 11,018
Loss from unconsolidated affiliate 8,981 -
Loss on sale of property assets 26,702 -
Increase (decrease) in cash attributable to
changes in operating assets and
liabilities:
Accounts receivable ( 995,554) ( 3,962,017)
Accounts receivable - joint venture ( 303,775) -
Due from affiliate - ( 34,059)
Other receivables 71,599 -
Prepaid expenses 43,547 ( 7,818)
Due to affiliate ( 45,890) ( 41,214)
Accounts payable ( 194,555) 539,903
Accrued expenses 57,443 175,740
Distributions from a joint venture 330,966 -
Advances to unconsolidated affiliate ( 239,055) -
Deposits ( 25,896) -
---------- ----------
Net cash provided by (used in) operating
activities 1,251,489 ( 197,410)
---------- ----------
Cash flows from investing activities:
Organization costs ( 60,840) -
Acquisition of property assets ( 1,605,311) ( 1,171,467)
Issuance of note receivable ( 160,326) -
Note receivable - affiliate 18,350 100,000
Deposits - ( 17,008)
Distributions from a joint venture - 72,194
Proceeds from loan receivable - affiliate 125,000 -
Purchase of Sylvania Diagnostics - net cash
acquired - 3,710
Due from officer ( 84,221) -
---------- ----------
Net cash used in investing activities ( 1,767,348) ( 1,012,571)
---------- ----------
Cash flows from financing activities:
Minority interest - ( 25,358)
Line of credit - 148,000
Payments on affiliates advances ( 156,505) -
Cash overdraft 3,088 -
Joint venture advances 10,000 -
Proceeds from long-term debt 2,039,632 2,111,238
Due to joint ventures - 83,725
Due to/from managing agent - 208,000
Payments on capitalized lease obligations and
long-term debt ( 1,220,119) ( 1,726,274)
Defferred interest - 35,970
---------- ----------
Net cash provided by financing activities 676,096 835,301
---------- ----------
Net increase (decrease) in cash and cash equivalents 160,237 (374,680)
Cash and cash equivalents at beginning of period 42,421 984,326
---------- ----------
Cash and cash equivalents at end of period $ 202,658 $ 609,646
---------- ----------
---------- ----------
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 NINE
MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
--------- ----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period:
Interest $ 863,368 $ 900,251
---------- ----------
---------- ----------
Income taxes $ 1,754 $ 1,847
---------- ----------
---------- ----------
Supplemental schedule of non cash investing
and financing activities:
Assumption of lease obligations for
acquisition of property assets $ 66,442 $ -
---------- ----------
---------- ----------
Disposal of property assets for assumption
of liabilities and deposit $ 644,034 $ -
---------- ----------
---------- ----------
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 conjuction with the
acquisition, liabilities were assumed as follows:
Assets acquired $ - $2,208,191
Intangibles - 1,177,431
Cash paid - ( 1)
---------- ----------
Liabilities assumed - $7,922,798
---------- ----------
---------- ----------
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
SEPTEMBER 30, 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 subsidiaries,
Sylvania Diagnostics L.P., (in which the Company has a 50.2% interest) and
Metairie Medical Equipment Leasing Corp., a 100% owned subsidiary which
was incorporated in June 1997, 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 and by contract manages the joint ventures, in which
it is the managing joint venturer and it 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 35% and 25% interest and significant
influence, are 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 and nine month periods
ended September 30, 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 September 30, 1997 and the results of its
operations for the three and nine month periods ended September 30, 1997
and 1996 and statements of cash flows for nine month periods ended
September 30, 1997 and 1996. The results for the three and nine month
periods ended September 30, 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, 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 at December 31, 1996 and long-term debt at September 30, 1997
and December 31, 1996 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 and nine months ended
September 30, 1997 and 1996 is not presented in the consolidated statements
of operations since it is not dilutive.
<PAGE>
-9-
NOTE 3 - ACQUISITIONS AND DISPOSAL OF SUBSIDIARY.
On November 1, 1994 the Company acquired Prime Contracting Corp.
("Prime") in a business combination accounted for as a pooling of
interests, 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.
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 as amended, is currently payable in
installments of $581,650 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 at 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 September 30, 1997, the Company's investment in
Empire is $51,329 and the Company has advances receivable from Empire of
$485,706.
NOTE 4 - PROPERTY AND EQUIPMENT, NET.
Property and equipment, consisted of the following:
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Medical equipment $14,075,348 $13,355,067
Buildings 358,066 358,066
Furniture and fixtures 67,141 69,890
Automobiles 22,860 22,860
Leasehold improvements 940,546 997,800
----------- -----------
15,463,961 14,803,683
Less: Accumulated depreciation
and amortization 5,711,708 4,759,821
----------- -----------
$ 9,752,253 $10,043,862
----------- -----------
----------- -----------
<PAGE>
-10-
NOTE 5 - INVESTMENT IN AN UNCONSOLIDATED JOINT VENTURE.
Summarized (unaudited) 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, 1997 $5,506,247 $2,606,166 $3,219,316 $2,286,930
December 31, 1996 $4,339,575 $1,938,137 $3,637,025 $ 702,550
(10%)
GROSS NET ALLOCATION
REVENUES INCOME OF INCOME
---------- ---------- ----------
For the three months ended
September 30, 1997 $1,317,623 $ 563,183 $ 56,319
For the nine months ended
September 30, 1997 $4,228,340 $1,636,987 $163,699
For the year ended December
31, 1996 $4,417,540 $1,041,469 $104,147
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 under the same terms until
December 1997. As of September 30, 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:
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Capitalized lease obligations (a) $ 9,267,914 $ 9,296,467
Accounts receivable financing (b) 933,065 686,173
Other (c) 436,186 480,483
----------- -----------
10,637,165 10,463,123
Less: Amounts due in one year 3,801,010 2,721,906
----------- -----------
$ 6,836,155 $ 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 $9,000,000 at September 30, 1997.
<PAGE>
-11-
NOTE 7 - LONG-TERM DEBT. (Continued)
(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 September 30, 1997, the amount financed under
this agreement totalled $1,361,154, including $428,089 owed by the
minority-owned subsidiary.
(c) Other:
Sylvania Diagnostics limited partnership at September 30, 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 September 30, 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. 145,939
(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. 40,747
--------
$436,186
--------
--------
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.
NOTE 9 - CONTINGENCY.
The Board of Directors announced that they had approved to undertake
a study of the feasibility of merger of the Company with a related entity,
RF Management Corporation (RFM). Upon completion of the studies by both
the Company and RFM, each Board will vote on the merger and if both Boards
approve submit the merger plan to each entity's respective shareholders for
their approval.
<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 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.
Metairie Medical Equipment Leasing Corp. was incorporated in June 1997
(a 100% owned subsidiary of the Company).
Results of Operations:
For the three months ended September 30, 1997 as compared to the three
months ended September 30, 1996:
Revenues for Modern Medical Modalities Corporation and subsidiaries
aggregated $2,425,000 in 1997 as compared to $3,334,000 in 1996. The
decrease in revenues (27.3%) is directly attributable to a decrease in
patient service revenues primarily due to the sale of Empire State in
December, 1996.
Operating expenses for 1997 were $2,091,000 (86.2% of operating
revenues) as compared to $2,849,000 (85.5% of operating revenues) in 1996.
This decrease of $758,000 (26.6%) is primarily the result of a decrease in
selling, general and administrative expenses due to the sale of Empire
State.
Expenses Associated with Management and Marketing Fee Income:
Expenses associated with management and marketing fee income increased
by $172,000 (28.3%) to $326,000 in 1997. This increase is attributable to
additional expenses related to the increased number of marketing contracts
with outside physician groups as evidenced by the $282,000 increase in
marketing revenues in 1997 to $580,000.
<PAGE>
-13-
Interest Expense:
Interest expense has decreased by $57,000 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.
For the Nine Months Ended September 30, 1997 as Compared
to the Nine Months Ended September 30, 1996:
Revenues for Modern Medical Modalities Corporation and subsidiaries
aggregated $7,940,000 in 1997 as compared to $7,971,000 in 1996. The
decrease in revenues (0.4%) is primarily attributable to the sale of Empire
State.
Operating expenses for 1997 were $6,502,000 (81.9% of operating
revenues) as compared to $6,921,000 (86.8% of operating revenues) in 1996.
This decrease of $419,000 (6.1%) is primarily the result of the sale of
Empire State.
Expenses Associated with Management and Marketing Fee Income:
Expenses associated with management and marketing fee income decreased
by $45,000 (6.3%) to $666,000 in 1997. This decrease is attributable to a
reallocation of certain expenses directly to the Company's various MRI
sites offset by the additional expenses associated with the increase number
of marketing contracts with outside physician groups.
Interest Expense:
Interest expense has decreased by $173,000 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 September 30, 1997
and December 31, 1996.
The Company has a working capital surplus of $1,180,000 at September
30, 1997 as compared to a working capital surplus of $886,000 at December
31, 1996.
<PAGE>
-14-
Liquidity and Capital Resources: (Continued)
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 September 30, 1997, the total outstanding advances
is $1,361,000 including $428,000 owed by the minority-owned subsidiary.
These are the only trends, commitments, events and/or material
uncertainties known to the Company.
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,
$581,650 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 September 30, 1997,
$100,000 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.
<PAGE>
-15-
Liquidity and Capital Resources: (Continued)
The Company also entered into an agreement with DVI which provides for
$135,000 of working capital advances which is 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.
Healthcare System:
It is management's belief that the United States 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.
<PAGE>
-16-
Legislation: (Continued)
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.
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.
<PAGE>
-17-
Legislation: (Continued)
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>
-18-
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 September 30, 1997.
<PAGE>
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MODERN MEDICAL MODALITIES CORPORATION
-------------------------------------
(Registrant)
---------------------------------------
Date: November 14, 1997 Dominic A. Guglielmi
President
---------------------------------------
Date: November 14, 1997 Gregory Maccia
Vice President and Secretary
----------------------------------------
Date: November 14, 1997 Jan Goldberg
Vice President and Treasurer
<TABLE> <S> <C>
<PAGE>
<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-30-1997
<CASH> 802,658
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<ALLOWANCES> 2,821,788
<INVENTORY> 0
<CURRENT-ASSETS> 8,191,228
<PP&E> 15,463,961
<DEPRECIATION> 5,711,708
<TOTAL-ASSETS> 20,188,604
<CURRENT-LIABILITIES> 7,011,050
<BONDS> 6,836,155
0
0
<COMMON> 3,866,706
<OTHER-SE> 1,028,274
<TOTAL-LIABILITY-AND-EQUITY> 20,188,604
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<CGS> 0
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