UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 0-23416
MODERN MEDICAL MODALITIES CORPORATION
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(Exact name of registrant as specified in its charter)
New Jersey 22-3059258
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
95 Madison Avenue, Suite 301, Morristown, NJ 07960
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(Address principal executive offices) (zip code)
Registrant's telephone number, including area code (201) 538-9955
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock
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Class A Common Stock Purchase Warrant
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Class B Common Stock Purchase Warrant
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities and 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 .
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The number of shares outstanding of Registrant's Common Stock as of
12/31/96: 3,168,292, $.0001 par value.
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PART I
Item 1. BUSINESS
Modern Medical Modalities was incorporated in the State of New Jersey on
December 6, 1989. Modern Modalities Corporation was incorporated in the State of
New Jersey on June 4, 1990. The two companies had common ownership, directors
and officers. In July 1992, the two companies were merged under the laws of the
State of New Jersey, by way of an agreement which accounted for the combination
as a tax-free merger. The surviving corporation is known as Modern Medical
Modalities Corporation.
On November 24, 1992, the Company's common stock was split 5 for 1. The
effect of the stock split is reflected retroactively throughout the Prospectus.
Modern Medical Modalities Corporation leases magnetic resonance imaging
("MRI") and computerized axial tomography ("CT Scan") equipment to hospitals and
physicians. Additionally, the Company on a clerical and administrative level
manages hospital based and physician managed ambulatory centers for third
parties who provide medical imaging services. The Company, however, does not
perform medical services. The Company offers a full range of services to
hospitals or physician clients, including the selection and acquisition of
appropriate equipment, the design and supervision of facility construction, the
provision and training of technical and support staff, patient billing and
collection and the provision of overall marketing and management services. The
Company can provide either its full range of services at medical technology
centers or a more limited range of services at mobile or fixed sites depending
on the needs of its customers.
The Company presently leases equipment and manages two hospital based MRI
sites located in Plainfield, New Jersey and Passaic, New Jersey, and eight free
standing MRI and CT Scan and Diagnostic Imaging ambulatory centers in New York
(2), New Jersey (5) and Maryland (1). The Company also receives a management fee
of 11.25% of gross cash collections from the site in Union, New Jersey for
performing management functions. The Company's relationship with the
joint-ventures range from 10% through 84% equity interest.
Union Joint Venture
In July 1990, the Company entered into a Joint Venture Agreement with Union
Imaging Associates, Inc. (the "Union Joint Venture") for the purpose of
providing magnetic resonance and CT Scan imaging services to radiologists and
other medical professionals, including leasing and financing equipment for use
in such business. The Union Joint Venture shall terminate upon the earliest of
(i) June 30, 2010, (ii) the sale of the subject business or (iii) mutual
agreement of the joint venturers. The Company serves as the managing joint
venturer pursuant to the Union Joint Venture Agreement and as such has
managerial responsibility for the subject business including, hiring of
personnel, leasing equipment, budgeting, contracting, billing, paying debts,
making lease payments and making distributions to the joint venturers.
The Company shall continue to serve as managing joint venturer until the
Company's liability under the Union Joint Venture's equipment lease with DVI
Financial is satisfied. Thereafter, the Company shall continue to serve as the
managing joint venturer until the earlier to occur of: (i) the Company's
resignation upon 60 days notice to Union Imaging or (ii) 60 days after receipt
of notice from Union Imaging that the holders of at least 80% of Union Imaging's
stock had voted to terminate the Company as managing joint venturer. For serving
as managing joint venturer the Company receives 11.25% of gross collections for
a management fee as well as 10% equity position.
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Bowie Joint Venture
In April 1991, the Company entered into a Joint Venture Agreement with
Doctors Imaging Associates, Inc. (the "Bowie Joint Venture") for the purpose of
providing magnetic resonance and CT Scan imaging services to radiologists and
other medical professionals, including leasing and financing equipment necessary
for such a business. The Bowie Joint Venture Agreement shall terminate upon the
earliest of: (i) April 30, 2011, (ii) the sale of the subject business, or (iii)
by mutual consent of the joint venturers. The Company serves as managing joint
venturer pursuant to the Bowie Joint Venture Agreement and as such has
managerial responsibility for the subject business, including the hiring of
personnel, leasing equipment, budgeting, contracting, billing, paying all debts,
making lease payments and making distributions to the joint venturers. The
Company and Doctors Imaging each has a 50% interest in the profits, obligations
and liabilities under the Bowie Joint Venture Agreement.
Plainfield Joint Venture
In July, 1991, the Company entered into a Joint Venture Agreement with
Plainfield MRI Associates, Inc. (the "Plainfield Joint Venture") for the purpose
of providing magnetic resonance imaging services and equipment to radiologists
and other medical professionals, including leasing and financing equipment for
use in such business. The Plainfield Joint Venture shall terminate upon the
earlier of (i) July 30, 2011; (ii) the sale of the subject business; (iii)
termination of the Agreement dated April 25, 1991 with Muhlenberg Regional
Medical Center, Inc., and the Plainfield Joint Venture being unable to relocate
the subject business to another profitable site; (iv) the subject business being
determined unprofitable for 3 consecutive calendar months at the sole discretion
of the Company; (v) the repossession of equipment pursuant to the Equipment
Lease with DVI Financial dated December 1, 1993; or (vi) mutual consent of the
joint venturers.
The Company serves as the managing joint venturer pursuant to the
Plainfield Joint Venture Agreement and as such has managerial responsibility for
the subject business including, hiring of personnel, leasing equipment,
budgeting, contracting, billing, paying debts, making lease payments and making
distributions to the joint venturers.
The Company shall continue to serve as managing joint venturer until the
Company's liability associated with the subject business to DVI Financial is
satisfied. Thereafter, the Company shall continue to serve as managing joint
venturer until the Company's resignation upon 60 days notice to Plainfield MRI,
Inc.
The interests of the Company and Plainfield MRI, Inc. in the profits,
obligations and liabilities under the Plainfield Joint Venture Agreement are 84%
and 16% respectively.
Beth Israel Joint Venture
In June 1995, the Company entered into a Joint Venture Agreement with Beth
Israel MRI Corporation and Advanced Imaging Radiology Associates P.A. to provide
certain non-professional services to a MRI facility which was developed by the
Company, and is located on the campus of Beth Israel Hospital. The term of the
Agreement is for a seven (7) year period with an automatic renewal provision for
successive seven year periods. The Company has a 75% interest in the profits,
obligations and liabilities under the Joint Venture Agreement.
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Medical Imaging Industry
The Company is attempting to position itself to participate in the
expanding managed health care market. The Company will continue to aggressively
seek to joint venture with hospital and physician managed ambulatory centers.
The Company intends to expand its marketing efforts by establishing new sources
of patient referrals to its existing centers in the next year. These patient
referrals consist of Health Maintenance Organizations (HMO), Preferred Provider
Organizations (PPO), Union Contracts and Hospital Contracts, to its existing
centers during the next year. See "Use of Proceeds".
The Company has focused on the advanced imaging technologies of MRI and CT
Scan. The use of these technologies has grown significantly in the United States
during the last several years due to increasing physician acceptance of the
value of advanced imaging technologies in the early diagnosis of disease.
Hospitals are facing competitive pressures to provide technology and related
services despite strict budgetary limitations and are increasingly utilizing
third parties, such as the Company, to provide the necessary facility and
related services because of the substantial equipment and personnel costs
involved.
Generally, the centers participate in specific HMO or PPO programs because
the Company finds that many of the physicians who refer to the centers belong to
the HMO or PPO. There are instances when the centers initiates contact with
various third parties to provide services to their membership. This is usually
the case with the larger insurance plans. In the case of unions or managed care
programs contacts are usually made by the benefit managers representing the
various programs. Usually, the centers are recommended by the physicians in the
area. The costs incurred for obtaining these referrals are negligible.
In most cases the Company is approached by a group of physicians or a
hospital who are looking to install a MRI or CT scanner. The Company first
reviews the location that the equipment is to be placed in and reviews a general
outline or business plan. Information that is presented includes other centers
in the area, patient financial class, patient demographics in the area served,
and potential referring physicians. In the case of a hospital, the Company
requests the number of MRI and CT scanning that the hospital sends to other
facilities. The Company also contacts neighboring sites to determine the waiting
time for scheduling an exam to see if patients are waiting an excessive amount
of time for an exam. The Company contacts potential referring physicians to
determine if they are experiencing problems with existing facilities and if they
would support a new facility. Managed care groups and HMO's are contacted to
determine if contracts for providing service are available and to ascertain the
membership in the catchment area of the potential new sites. If the site is
considered to be positive a request is made to the various equipment
manufacturers for a bid on the equipment the Company deems necessary. After all
information needed by the Company is received, the Company determines the
financial viability of the project. Based on the criteria above, the Company
reviews each site to determine if utilization and proliferation of the equipment
and services is a concern.
Medical diagnostic imaging systems facilitate the diagnosis of disease and
disorders at an early stage, often minimizing the amount and cost of care needed
to stabilize or cure the patient and frequently obviating the need for invasive
diagnostic procedures, such as exploratory surgery. Diagnostic imaging systems
are based on the ability of energy waves to penetrate human tissue and generate
images of the body which can be displayed either on film or on a video monitor.
Imaging systems have evolved from conventional x-ray to the advanced
technologies of magnetic resonance imaging ("MRI")and computed
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axial tomography ("CT").
MRI is an advanced imaging system that uses a strong magnetic field and
radiowaves to allow physicians to explore the inner workings of the human body.
The pictures produced by this technology assist the doctor in detecting and
defining the differences between healthy and diseased tissue.
CT is a specialized method of examining various body parts using x-rays and
computer reconstructions to form a cross sectional image. During the exam the
x-ray tube travels completely around the body and the computer reconstructs the
information to form a cross sectional image. A series of these images, or
slices, is taken through the area of interest, providing the physician with a
detailed look at structures not otherwise seen with regular x-rays.
The Company has focused its efforts on leasing and managing fully equipped
MRI and CT centers at hospitals and physicians' offices. The use of these
technologies has grown significantly in the United States during the last
several years due to increasing physician acceptance of the value of advanced
imaging technologies in the early diagnosis of disease, the expanding
applications of CT and MRI and the growing patient base attributable to an aging
population.
In addition, changes in third party reimbursement systems have resulted in
declining profit margins for many hospitals, thus reducing capital available to
hospitals, thereby reducing their traditional incentives to purchase or lease
equipment and pass such costs through to third parties. By leasing equipment and
purchasing services from companies such as the Company, hospitals are able to
conserve their limited capital resources for other purposes and reduce the risks
associated with technical obsolescence and under utilization of equipment and
services.
Services Provided
The Company offers the full range of services discussed below. The needs of
a particular hospital or physician group determine the extent of the services
offered in each instance, which the Company can deliver either on a more limited
basis or through a full service medical technology center. Each site is staffed
by administrative, technical and support personnel. In addition, a physician and
a physician group provide professional services and interpret MRI or CT scans at
each site. The Company does not engage in the practice of medicine. Such
physicians are not employees of the Company. However, the most significant cost
of operating an imaging center is the capital and finance costs of equipment.
The Company provides equipment and related services, technical and support
staffing, marketing, patient scheduling, billing and collection and management
in all of the Company's sites located throughout New York and New Jersey.
In the Bowie, Maryland site, the Company provides equipment and related
services and management. The technical and support staff and patient scheduling,
billing and collection are supplied by Doctors Imaging Associates of which the
Company is a 50% joint-venturer.
Equipment and Related Services. The Company consults with its potential
clients and existing clients to identify the equipment best suited to meet the
client's needs on a cost-effective basis. The Company then acquires the
equipment through lease/purchase agreements. In addition, the Company assists
the hospital or physicians and their personnel in complying with licensing and
other regulatory requirements, which consist of all applicable county building
permits and architectural filings as well as filing all necessary equipment
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registration forms with the applicable state agencies. The Company supervises
the installation and testing of the equipment and provides periodic inspection
of the equipment at the facility. The Company undertakes to maintain its
clients' equipment and typically enters into agreements with equipment
manufacturers or other third parties for the delivery of maintenance services.
Technical and Support Staffing. The Company provides technologists who
operate the equipment at the facility. The Company trains and provides on-going
safety instruction and educational programs for its technologists as well as the
hospital's technologists. The Company also provides clerical personnel to
provide administrative duties such as scheduling and answering phone inquiries.
Marketing. The Company provides its customers with marketing services,
including the design and formulation of a marketing program for each facility to
inform physicians in the community as to the technology and services available
at the facility. The Company also provides marketing personnel who market
patient referral sources, including HMOs and other health plans.
Patient Scheduling, Billing and Collection. At the medical technology
centers, the Company schedules patient appointments, prepares all patient
billing and is responsible for collection. In providing billing and collection
services, the Company bills the patients directly and, therefore, assumes the
credit risk on such billings and any delays attendant to reimbursement through
governmental programs or third party payors. The Company also is responsible at
the centers for related administrative and recordkeeping functions and all
management information services.
Management. The Company assumes full managerial responsibility and control
over facility operations, including all of the foregoing services, at medical
technology centers.
Delivery of Services
The Company delivers its services to its customers through either
contractual arrangements with hospitals and clinics or medical technology center
arrangements with hospitals or physician groups, as discussed below. The Company
may form imaging centers utilizing a variety of ownership vehicles. Presently,
the Company operates its sites under joint venture agreements. Other structures,
which may be used in a center can be one of the following:
Partnership - The Company forms a partnership with another entity such as a
hospital, physician group or the like. The costs associated with the project can
be assumed by the Company or apportioned to each partner. The Company provides
the management and receives a management fee in addition to having an ownership
position.
Medical Technology Centers. The Company will establish a medical technology
center within a Hospital Center or with a physician group ("Radiology Group
Center") through which the Company will offer its full range of services. A
Hospital Center involves only the Company and a hospital, whereas a Radiology
Group Center generally involves the Company (as managing general partner), and a
radiology physician group. A Hospital Center is located on a hospital campus, is
affiliated with that hospital and provides both inpatient and outpatient
services; whereas a Radiology Group Center is a free standing center that is not
affiliated with a hospital and engages primarily in outpatient services.
When the Company enters into a joint venture with a Hospital the provisions
of the HHS "anti kick" rules and the AMA policy on self referral do
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not generally apply. (See "Licenses, Governmental Reimbursement and
Regulations"). The Hospital does not receive a percentage of profits for
allowing the Company to operate its equipment at the facility.
Fee-for-Service. When a hospital requires the Company's services, but
wishes to maintain overall control of the delivery of such services and of the
service facility, the Company may contract to provide its services on a
fee-for-service basis. Under this arrangement, the Company typically furnishes
the hospital with the appropriate equipment, facility and marketing services and
staffing on an as-needed basis. In a typical fee-for-service arrangement, the
Company bills the hospital only for the number of patient procedures performed
each month. The Company charges the hospital for the Company's services and is
not involved in managing the facility. The Company currently has no
fee-for-service arrangement.
If the Company enters into fee-for-service contracts, these contracts will
typically have a term ranging from two to five years (with the majority being
five years). During the term of the contract, the hospital will grant to the
Company the exclusive right to provide the particular service at the hospital.
The Company does not expect to have any minimum payment requirements in its
fee-for-service contracts. The Company therefore assumes the risk that revenues
generated in respect of its equipment may not be sufficient to discharge the
Company's financial obligations to lenders and lessors and other costs of
operations. The Company typically finances its acquisition of equipment and
matches the amortization period of such financial obligations to the term of the
hospital contract. However, the amortization period for a specific piece of
equipment may extend beyond the term of the related contract, requiring the
Company to finance any resulting negative cash flow. The Company attempts to
manage these risks by reviewing a prospective hospital's utilization history and
prospects and, through its sales force, remarketing equipment upon termination
of contracts.
A hospital requiring part-time service will engage the Company to schedule
its mobile unit to be on location at the hospital at prescribed times. The
Company maintains a mobile unit which is a custom-designed vehicle that is a
totally self-contained facility.
Radiology Group Centers. The Company began its medical technology center
operations by establishing free standing, outpatient imaging centers with groups
of radiologists. The Company does not at present utilize services with the
hospitals. Set forth below is a table of the Company's centers, listing their
respective services.
Services by Technology
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Radiology Group Centers MRI CT Diagnostic Imaging
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Union, New Jersey (1) Yes Yes No
Bowie, Maryland (2) Yes Yes No
Somerset, New Jersey No Yes Yes
South Plainfield, New Jersey Yes No No
Marlton, New Jersey Yes Yes Yes
Morristown, New Jersey Yes No No
Edison, New Jersey No No Yes
Yonkers, New York Yes Yes Yes
Amherst, New York (3) Yes No No
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Open MRI of Morristown (4) Yes No Yes
West Paterson Medical
Equipment Leading Corp.(5) No No Yes
Ohio Medical Equipment Leasing
Corp./Sylvania Diagnostics(6) Yes Yes Yes
Medical Technology Centers
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Plainfield, New Jersey (7) Yes No
Passaic, New Jersey (8) Yes No
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(1) This joint venture was organized on June 22, 1990 for the purpose of
providing MRI and CT services to medical professionals. The joint venture
has two joint-venturers, the Company, the managing joint venturer, and
Union Imaging Associates Inc. ("UIA"). The Company has a 10% interest and
UIA has a 90% interest in the Joint Venture.
(2) This joint venture was organized on April 23, 1991 for the purpose of
providing MRI and CT services to medical professionals. The joint venture
has two joint venturers the Company, the managing joint-venturer, and
Doctors Imaging Associates, Inc. Each has a 50% interest in the joint
venture.
(3) This is an extremity MRI.
(4) This Joint Venture was organized in October 1995 for the purpose of
providing MRI services to Medical professionals. The Joint Venture has
three joint ventures: the Company, RMC Consulting, Inc. and Barbara
Krasnica.
(5) In July 1996 the Company through its wholly-owned subsidiary entered into a
lease and management service agreement with Advanced Imaging and Radiology
Services P.A. to provide office space, fixtures and diagnostic imaging
equipment to the P.A. for five years with a renewal for five years.
(6) 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.
(7) This Joint Venture was organized on July 30, 1991 for the purpose of
providing MRI services to medical professionals. The Joint Venture has two
venturers, the Company, the managing joint-venturer, and Plainfield MRI
Associates, Inc. ("PMA"). The Company has an 84% interest and PMA has a 16%
interest in the joint venture.
(8) This Joint Venture was organized in June, 1995 for the purpose of providing
MRI services to medical professionals. The Joint Venture has two venturers,
the Company, the managing joint-venturer and Beth Israel MRI Corporation
and Advanced Imaging Radiology Associates P.A. ("PBI"). The Company has an
75% interest and PBI has a 25% interest in the joint venture.
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Each of the above agreements involved an initial financial commitment on
the part of the Company ranging between $1 million and $3 million per center,
which includes equipment, installation, facility construction and start-up
working capital. Equipment, which is generally leased, represents the greatest
commitment by the Company. The Company's commitment is offset only by such
revenues as are generated from the utilization of the center.
Hospital Centers. The Company has embarked on a program during the last two
years to establish additional medical technology centers ("Hospital Centers") in
conjunction with hospitals by entering into arrangements to operate full service
Hospital Centers located in or near hospital campuses. The Company's first
Hospital Center opened on June 28, 1991 and the Passaic site on October 14,
1992.
In addition to the equipment and facility services provided in its
arrangements, the Company provides at a medical technology center all technical
and support staffing; expanded marketing services; patient scheduling, billing
and collection services; management information systems; and overall management.
Growth Strategy and Marketing
The Company markets its services to physicians and hospitals through
various methods. These include direct solicitation, direct mail, sponsorship of
inservice education programs for physicians and technical staff, and personal
visits to physician offices. The Company also attends many of the large
radiology shows throughout the country.
The Company is pursuing a strategy of aggressively seeking new Hospital
Centers and physician managed ambulatory centers. Its target markets also
include hospitals without a diagnostic imaging facility, to which the Company
can offer its part-time mobile units. The Company will engage in intensive
marketing in areas of specialized physician groups, chiropractors, health
maintenance organizations (HMO), preferred provider organizations (PPO), union
locals, municipalities and insurance companies. The Company currently negotiates
discounts with large suppliers of patients as allowed by law. The Company's
objective is to respond to the concerns of spiraling health care costs while
maintaining quality of care to the patient. This is attainable based on the
premise that increased volume results in a reduction of cost per scan which is
passed along to the Company's contracted clients.
The Company applies a variety of criteria in evaluating each prospective
hospital customer. These criteria include the extent of the hospitals' present
diagnostic imaging services; its competitive environment; the size and type of
hospital; the number of referring physicians and their specialties; the patient
volume and the nature of the payors (private insurance programs, government
reimbursement programs or other health or medical organizations).
The Company's plan of operation will be to continue to expand the equipment
use of its current customers during the remainder of this year. The Company
will, with its direct marketing efforts, continue to seek for new clients,
whether through acquisition of sites or startups. As of the date of this
document, the Company has agreements to provide services at the Somerset and
Beth Israel Hospital (Passaic, New Jersey) location.
Technology Sources
The Company obtains its medical equipment and ancillary supplies from
various manufacturers, including General Electric, Toshiba, Siemens, Philips,
Picker, Hitachi, DuPont and Kodak. The Company is not dependent on any one
supplier and believes that it has good relationships with its suppliers.
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Equipment acquisition costs can range dramatically depending upon the model
and peripheral equipment acquired. Currently, MRI equipment ranges from
$1,000,000 to $2,000,000, extremity MRI and CT equipment currently ranges from
$300,000 to $800,000. See "Use of Proceeds".
Installation and maintenance costs on the equipment can be substantial,
particularly with respect to MRI units. Installation costs can range from
$250,000 to $500,000 for an MRI unit depending on the particular installation
circumstances. Maintenance costs on such a unit can be as high as $200,000 per
year. The Company typically enters into agreements with equipment manufacturers
or other third parties for equipment maintenance.
Equipment is financed by the Company (typically with a five year term) with
lenders and lessors, with equipment serving as security for the loans. The
Company's acquisition methods (purchase or lease) will depend upon the specific
circumstances of each transaction.
Supplies
The Company's equipment and supplies are available from a variety of
sources. The loss of no one supplier would be expected to have a material
adverse effect on the Company.
LICENSES, GOVERNMENTAL REIMBURSEMENT AND REGULATIONS
Licenses. Since the Company leases MRI and CT equipment as well as
providing clerical and administrative services to hospital based and physician
managed ambulatory centers, its activities are not subject to material
governmental regulation. The Company does not perform medical services. However,
the government regulations do apply to the Company with respect to payment on
third party Medicare and Medicaid reimbursement. The Company is subject to the
"Anti-Kickback" Laws, the "Stark Bill" as well as in New Jersey, the Health Care
Cost Reduction Act which are discussed herein. In the future, however, the
Company may be required to maintain licenses or certificates of need issued by
individual states. A number of states require hospitals to obtain a
Certificate-of-Need ("CON") prior to the acquisition of major medical equipment.
The CON programs vary considerably from state to state, but all attempt to
regulate the acquisition of expensive medical equipment purchases involving
technologies whose capital costs exceed some specified threshold or whose
introduction at the hospital represents a significant change in services. Some
states also regulate the acquisition of diagnostic imaging equipment indirectly
through rate commissions which prescribe hospital rates. To date, the CON laws
and regulations and state rate commissions have not had a material effect on the
Company's business, although there is no assurance that such laws and
regulations will not change or that rate commissions will not take actions that
may adversely affect the Company's business.
To the best of the Company's knowledge, there are no current regulations in
the State of Maryland that adversely affect or are material to the Company's
operations. The State of Maryland has recently passed legislation that restricts
physician investors in imaging centers. There are no physician investors who
will refer patients in the Bowie, Maryland Joint Venture.
Government Reimbursement. In major areas of its business, the Company
relies for payment on third party (in large part governmental) reimbursement.
Its charges are predominantly paid either directly by third party payors or by
its clients which in turn receive reimbursement from such sources.
Medicare and Medicaid reimbursement regulations require that purchased
diagnostic services be billed directly by the physician. This regulation
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allows a physician to bill and collect directly for services. Medicare
regulations call for predefined fee schedules to be used for all medicare
approved patients. The difference between the amount the Company charges and the
limiting charge must be written off or disallowed. Medicare, for assigned
patients, will pay 80% of the allowed amount, the remaining 20% is the patient's
or a co-insurer's responsibility.
The centers that the Company is affiliated with all participate in many
reimbursement programs such as Medicare and Medicaid as well as other private
insurers. Under these arrangements the Center agrees to accept the approved
amount of reimbursement from each individual payor. Monthly statements are only
sent out when allowed by contractual arrangements with the insurers.
Regulations. 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. New Jersey, as well as other
states, have enacted similar state laws. 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 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.
The Anti-Kickback Laws are broadly drafted and judicial decisions rendered
thus far, while made in the context of overt payments explicitly in exchange for
referrals, have broadly interpreted the scope of these laws. Several federal
courts considering the issue, including the U.S. Court of Appeals having
jurisdiction over New Jersey, have concluded that the Anti-Kickback Laws would
be violated if "any purpose" of a challenged economic arrangement is to induce
or pay for referrals, no matter how incidental that purpose may be or how many
other legitimate purposes may exist for the arrangement in question.
Accordingly, many types of business relationships between healthcare providers,
including investments in healthcare providers by physicians, hospitals or others
who are in a position to refer patients could be held to fall within the
prohibitions of the Anti-Kickback Laws or similar state laws.
The American Medical Association (the "AMA") has reaffirmed its original
Guidelines which were issued on May 6, 1992, which stated that physicians should
not refer patients to a health care facility outside their office in which they
do not have an active participation and only a passive investment interest.
These are ethical rules and recommendations of the AMA and they do not have a
binding legal effect.
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 or grounds 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. A bill was introduced, but
not enacted in the 1991-92 session of Congress which would generally prohibit an
entity from furnishing a service to an individual for which payment would be
made by Medicare or Medicaid if the individual's
11
<PAGE>
referring physician, or an immediate family member of such referring physician,
had an ownership or other financial interest in the entity. It is likely that
this bill will be reintroduced in future sessions of Congress. The Company
cannot predict whether this or other 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.
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 in the sites in New Jersey and also have a financial interest in those
sites have a sign posted as mandated by the law.
Under the present "Stark Bill", a physician who has a financial
relationship with an entity may not make a referral to the entity for the
furnishing of clinical laboratory services for which payment is made under the
Medicare or Medicaid programs. The Stark Bill, passed with an effective date of
January 1, 1995, will expand the application of the Medicare ban on
self-referrals after December 31, 1994. The Stark Bill also extends the
self-referral ban to physical therapy services, radiology services including MRI
and CT Scans, ultrasound services, radiation therapy services and the furnishing
of durable medical equipment, the furnishing of parenteral and enteral nutrition
equipment and supplies, the furnishing of out-patient prescription drugs,
ambulance services, home infusion therapy services, occupational therapy
services and in-patient and out-patient hospital services (including services
furnished in a psychiatric or rehabilitation hospital). As of the date of this
filing, the Company has not experienced any material adverse effects of limited
Medicare and Medicaid referrals.
Presently there is physician investor ownership in two of the sites in
which the Company participates. The Stark Bill provides that a physician who has
a financial relationship with an entity cannot make a referral to the entity for
the furnishing of various radiology services including MRI and CT services.
Under the provision of the Bill, those physicians which invest in the Company's
sites will not be allowed to make referrals of which Medicare and/or Medicaid
payments are made.
For the two sites that the Company participates in, the Medicare/Medicaid
percentage for physician investors for Union Imaging Associates is approximately
4.8% and Plainfield M.R.I. Associates is approximately 2%. The third site,
Doctors Imaging Associates does not have physician investors who refer patients.
Based upon the low utilization of Medicare/Medicaid volume of physician
investors the Company has no plans to restructure any of its physician investor
sites. Any new sites that the Company may develop in the future will not have
any referring physician investors.
12
<PAGE>
Competition
The Company faces competition from various other companies ranging from
small local companies to those operating on a regional or national scale.
Although these companies may be more experienced or have more financial
resources at their disposal, the Company competes in the marketplace on the
basis of its performance in the industry, its reputation for the quality of its
services and its expertise in tailoring the structure of its contractual
arrangements and services to meet the specific needs of its customers. The
Company believes that few of its competitors provide the Company's range of
services from full service medical technology centers to more limited mobile and
fixed site arrangements. The Company maintains close working relationships with
three major equipment manufacturers. Representatives of these manufacturers have
been introducing the Company to various clients in an effort to arrange joint
ventures and then sell equipment. This relationship between the Company and its
manufacturers resulted in the sites located in Bowie, Maryland and Amherst, New
York.
The Company's imaging centers compete for patients with other hospitals
and radiology groups in their area. These centers and hospital customers compete
on the basis of efficiency and service.
Insurance
The Company carries general liability insurance with coverage of up to
$1,000,000 per claim and a commercial umbrella policy of $2,000,000. The Company
believes that such coverage is adequate. Additionally, the Company maintains
general liability, commercial umbrella and insurance for the replacement of all
leased equipment at each of its facilities.
Employees
As of December 31, 1996, the Company employs 59 persons on a full time
basis and 30 persons on a part time basis. The following table reflects the
employees per facility:
Full Part
Total Time Time
----- ---- ----
Modern Medical (Corporate) 12 12 1
Medical Marketing 9 9 --
Somerset 4 2 2
South Plainfield 1 -- 1
Marlton 10 6 4
Yonkers 6 5 1
Amherst 1 1 --
Edison 3 -- 3
Morristown 3 2 1
West Paterson 7 2 5
Joint Ventures:
Plainfield 8 3 5
Union 19 6 13
Passaic 6 2 4
Ohio 14 11 3
Bowie 7 4 3
--- -- --
Total: 110 64 46
=== == ==
13
<PAGE>
Lease Agreements at Joint Venture Sites
The Company as managing Joint-Venturer has entered into an equipment
lease/purchase agreement with a non-affiliated party, DVI Financial, dated
December 1, 1993 ("Equipment Lease") which provides for the lease/purchase of
one Picker 1.OT mobile MRI unit in a Calumet Coach payable over a 60 month term
with payments each of $36,350 (the "basic rent") which is being charged as an
expense of the Company. The Company is current in all its payments. This leased
equipment is presently located at the Muhlenberg Regional Medical Center in
Plainfield, New Jersey.
The Company, as managing Joint-Venturer, has entered into an agreement with
a non-affiliated party Muhlenberg Regional Medical Center (Hospital) which
provides for the placement of the mobile magnetic resonance unit at the Hospital
for five years without rent and an agreement with an affiliate of the Hospital
for a five-year term requiring minimum annual charges of $50,000 for certain
management services which are provided by the hospital. The Company is also
responsible for the transportation of the unit and the mobile magnetic resonance
unit.
The Company, as managing Joint-Venturer, has entered into an equipment
lease/purchase agreement with a non-affiliated party, DVI Financial, dated
December 1, 1993 ("Equipment Lease") which provides for the lease/purchase of
MRI and CT equipment payable over a 60-month term with payments each at $44,331
(the "Basic rent") which is being charged as an expense of the business. The
Company is current in all its payments. This leased equipment is presently
located in Union, New Jersey.
The Company, as managing Joint-Venturer, has entered into an equipment
lease/purchase agreement with a non-affiliated party, DVI Financial, dated
November 15, 1994 ("Equipment Lease") which provides for the lease/purchase of
MRI and CT equipment payable over a 60 month term with payments each of $36,714.
The Company is current in all its payments. This leased equipment is presently
located in Bowie, Maryland.
The Company, as managing Joint-Venturer, has entered into an agreement with
a non-affiliated party Beth Israel MRI Corporation and Advanced Imaging
Radiology Associates P.A. to provide certain non-professional services to a MRI
facility which was developed by the Company and is located on the campus of Beth
Israel Hospital. This agreement is for a 60-month term with payments each of
$38,245. The Company is current is all its payments.
Legal Matters
Legal Proceedings. The Company is not a party to any legal proceedings.
Submission of Matters to Vote of Security Holders. No matters were
submitted to the vote of security holders during the Fiscal Year 1995.
Prime Contracting Corp.
On November 25, 1994, Modern Medical Modalities Corporation (the
"Company"), pursuant to a written Agreement, purchased Prime Contracting Corp.
("Prime") of Union, New Jersey. Pursuant to the terms of this Agreement, 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 for the past fifteen years 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. Prime's
14
<PAGE>
installations have included the following: Magnetic Resonance Imaging ("MRI"),
Computerized Axial Tomography ("CAT") Scan Suites, Radiography/Fluoroscopy,
Cardiac Catherization Labs, Laser Network Systems, Special Procedures,
Angiography, Mammography, Ultrasound, Linear Accelerator, Lithotripsy,
Cystography Units, Nuclear Medicine, Laboratory Areas and Operating Rooms.
Prime's range of turnkey design/build services include:
Feasibility Studies: Prime provides site analysis and preparation of budget
cost estimates and comparisons.
Architectural Engineering: Prime designs the project to meet and stay
within the customer's budget. Prime's team of architects and engineers offers
processing of all necessary permits, the Certificate of Need (CON), and
preparation of all construction plans and specifications.
Construction Management: Prime's onsite management team has the technical
expertise to manage all of the complexities of a project from start to finish.
Prime relives the customer of the daily worry of overseeing the project and
ensure's that the project is completed according to schedule.
On December 27, 1995, the Company entered into an agreement with a related
party to sell all of the common stock of Prime Contracting Corp. 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 after six months and $400,000 after one year of
the closing date. In the event that gross annual revenue for Prime for the
calendar year 1996 falls below $3,000,000, then the final payment of $400,000
shall be forfeited.
South Jersey Medical Equipment Leasing Corp.
On October 12, 1994, Modern Medical Modalities Corporation, formed a New
Jersey corporation, South Jersey Medical Equipment Leasing Corp. ("South Jersey
Medical").
On December 29, 1994, South Jersey Medical, which is 100% owned by Modern
Medical Modalities Corporation, purchased for $1,550,000 certain assets and
liabilities of NRM Imaging Associates, Partnership, an entity that leases MRI
and CT equipment. South Jersey Medical will provide space, equipment (MRI and CT
Scanner) and non-professional services, including management and billing and
collection functions to South Jersey Imaging Associates, P.A. located at 55 East
Route 70, Marlton, New Jersey.
Medical Marketing and Management, Inc.
On April 13, 1994, Modern Medical Modalities Corporation, formed a New
Jersey corporation, Medical Marketing & Management Inc. ("Medical Marketing").
Medical Marketing, which is 100% owned by Modern Medical Modalities
Corporation, is responsible for negotiating contracts with various health care
providers as well as marketing for Modern Medical Modalities Corporation.
Medical Marketing has contracts to provide services with other facilities.
South Plainfield Imaging, Inc.
In July of 1994, the Company assumed the assets and liabilities of Park
Plaza Radiology, Diagnostic Imaging Center, located in South Plainfield, New
Jersey. In September of 1994, the Company changed the name of Park Plaza
Radiology to South Plainfield Imaging, Inc.
15
<PAGE>
Atrium Imaging
In October of 1994, Medical Marketing and Management, Inc. signed a
contract with Atrium Imaging of Manalapan, New Jersey. Under the terms of this
agreement, Medical Marketing and Management will provide administrative, billing
and marketing services to the operation. Under the terms of the agreement,
Medical Marketing and Management will receive the greater of $4,000 or 8% of
cash collected per month.
Empire State Imaging Associates, Inc.
In April 1995, the Company founded 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 a wholly-owned subsidiary of the Company, 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.
Amherst Medical Equipment Leasing Corporation
In April 1995, Amherst Medical Equipment Leasing Corporation ("Amherst"), a
wholly-owned subsidiary of the Company, was formed. Amherst entered into an
agreement with Amherst Imaging Associates, P.A., to provide certain
non-professional services. In accordance with this agreement, Amherst has leased
space in Amherst, New York, effective July 1, 1995, for a period of five years
at a monthly rent of $1,275. On July 17, 1995, the Company entered into an
agreement with Magna-Lab, Inc. to purchase a permanent MRI at a cost of
approximately $500,000. Financing has been secured through DVI Financing
Services. The lease in the amount of $327,000 is payable over 60 months at a
monthly payment of $7,068 commencing on January 1, 1996. Magna Labs has agreed
to accept 18% of the operating income on a cash basis for a five year period to
cover the cost of the balance of the machine. This income sharing is for five
years and is not to exceed $200,000. As part of the agreement, Magna-Lab agreed
to pay the monthly space rent until the MRI is delivered.
Somerset Imaging Corp.
In July 1995, Somerset Imaging Corp., a wholly-owned subsidiary commenced
operations at a facility located in Somerset, New Jersey providing CT Scan
imaging and Radiology/Fluoroscopy diagnostic services to radiologists and other
medical professionals, including leasing and financing equipment for use in this
business.
Open MRI of Morristown
During February of 1996, the Company under the terms of a joint venture
with RMC Consulting Inc. and one individual developed a MRI facility located in
Morristown, New Jersey. Under the terms of the agreement, dated October 31,
1995, the Company has the responsibility to make all day to day decisions on
behalf of the Joint Venture "Open MRI of Morristown." The term of the Joint
Venture shall terminate October 15, 2015 unless the business is sold, or
16
<PAGE>
the joint venture is terminated by mutual consent of the participants. The term
of the Joint Venture may be extended by mutual written consent of the
participants. Under the terms of the Joint Venture the profit distribution is as
follows: Modern Medical Modalities Corporation 72%, RMC Consulting Inc.
18% and Barbara Krasnica 10%.
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 the 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.
West Paterson Medical 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 (the "Agreement") with Advanced Imaging &
Radiology Associates, P.A. ("M.D."). WPMEL is a medical practice specializing in
diagnostic imaging located in West Paterson, New Jersey. 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. Under the terms of the Agreement, WPMEL has assumed all debt,
expenses and accounts receivable for the site. Subsequently, in February 1997
the Company ordered a Toshiba CT Scan for the site, for $335,000, financed by
DVI Financial Services. The CT Scan became operational in the middle of March
1997.
Item 2. PROPERTIES
Real Estate Leases
One of the Company's majority-owned joint ventures, Doctors Imaging
Associates, Joint Venture, leases a facility under a non-cancelable operating
lease which expires in 2002. The facility is located in Bowie, Maryland and the
lease includes a five-year option to renew, with monthly rental payments of
$4,331, plus utilities.
One of the Company's majority-owned joint ventures, Plainfield MRI
Associates, Inc., Joint Venture, has entered into an agreement with an affiliate
of Muhlenberg Regional Medical Center for five (5) years without rent. However,
for certain management services to be provided to the Company a minimum
management fee of $50,000 must be paid per annum by the Company. This agreement
expires in 1996 and is currently under negotiation to renew.
One of the Company's wholly-owned subsidiaries, Union Imaging
17
<PAGE>
Associates, Inc., leases a facility under a non-cancelable operating lease which
expires in March 2000. The facility is located in Union, New Jersey with monthly
rental payments of $4,425, plus utilities.
The Company leases its main administrative offices, located in Morristown,
New Jersey, under a month-to-month agreement treated as an operating lease at a
monthly rental payment of $6,000 per year. In addition, the Company is obligated
under various leases at the sites of its wholly-owned subsidiaries. Future
minimum lease payments under these leases as of December 31, 1996 and 1995 are
as follows:
December 31,
1 9 9 6 1 9 9 5
------- -------
1996 $ -- $ 497,600
1997 643,562 499,100
1998 523,285 412,400
1999 349,522 306,900
2000 168,300 155,600
2001 and thereafter 63,500 --
---------- ----------
Total $1,748,169 $1,871,600
========== ==========
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Modern Medical Modalities Corporations' initial public offering closed on
February 17, 1994. Neither a cash or stock dividend has been paid or issued.
517,500 Units were sold in the public offering. Each unit consisted of (1)
share of Common Stock and one (1) Class A Redeemable Common Stock Purchase
Warrant ("A Warrant") and one (1) Class B Redeemable Common Stock Purchase
Warrant ("B Warrant").
The Company's Common Stock is traded in the NASDAQ over-the-counter market
under the symbol MODM. It's "A Warrant" and "B Warrant" are traded under the
symbols MODMW and MODMZ. As quoted in the Monthly Statistical Reports of the
National Association of Securities Dealers, Inc., the approximate high and low
bid prices for the year ended December 31, 1996 are as follows:
COMMON STOCK
------------
Date High Low
---- ---- ---
01/96 3.00 2.24
02/96 3.56 1.40
03/96 2.08 1.48
04/96 2.20 1.60
05/96 3.00 2.20
06/96 3.00 2.08
07/96 2.44 2.24
08/96 3.16 2.24
09/96 3.00 2.44
10/96 3.28 3.00
11/96 3.28 2.28
12/96 2.56 2.20
A WARRANT
---------
Date High Low
---- ---- ---
01/96 .24 .24
02/96 .28 .28
03/96 .28 .28
04/96 .28 .28
05/96 .50 .28
06/96 .48 .32
07/96 .48 .40
08/96 1.00 .48
09/96 1.00 .48
10/96 1.00 .60
11/96 1.00 .40
12/96 .44 .32
19
<PAGE>
B WARRANT
---------
Date High Low
---- ---- ----
01/96 .06 .06
02/96 .06 .06
03/96 .06 .06
04/96 .06 .06
05/96 .08 .06
06/96 .06 .04
07/96 .06 .04
08/96 .06 .04
09/96 .06 .04
10/96 .04 .04
11/96 .04 .02
12/96 .02 .02
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the years ended December 31, 1996, 1995, 1994, 1993 and 1992. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes thereto include elsewhere herein.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Selected statement of operating data:
Total operating income $12,074,914 $ 6,268,403 $ 3,656,909 $3,185,008 $2,274,121
Total operating expenses 9,872,550 6,124,604 3,114,115 2,114,828 917,971
Income (loss) from continuing operations 249,826 ( 424,530) 222,143 308,109 935,884
Income (loss) from discontinued operations -- ( 316,524) 71,180 ( 63,433) --
Net income (loss) 249,826 ( 741,054) 405,631 244,676 --
Proforma net income N/A N/A N/A N/A 298,454
Per share data:
Income (loss) from continuing operations .08 (.13) .08 .13 .12
Income (loss) from discontinued operations -- (.10) .02 (.03) --
Net income (loss) .08 (.23) .14 .10 --
Proforma net income N/A N/A N/A N/A .12
Selected balance sheet data:
Total assets $19,360,231 $16,538,791 $10,311,614 $6,257,963 $5,688,500
Long-term obligations 8,818,552 8,601,297 5,126,863 3,506,903 3,600,306
Total liabilities 14,975,238 12,211,255 6,430,578 4,768,739 4,692,056
Retained earnings 518,287 240,806 1,059,729 654,098 22,776
Stockholders' equity 4,384,993 4,327,536 3,881,036 1,489,224 830,102
Working capital (deficit) 886,194 1,646,004 2,862,871 404,253 147,801
</TABLE>
21
<PAGE>
ITEM 7 - 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") 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"). 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 year ended December 31, 1996 as compared to the year ended December 31,
1995:
Revenues for Modern Medical Modalities Corporation and subsidiaries aggregated
$12,075,000 in 1996 as compared to $6,268,000 in 1995. The increase in revenues
is directly attributable to an increase in patient service revenues for the
Company's various MRI sites of $5,502,000 and an increase in Medical Marketing &
Management's revenues of $399,000.
Operating expenses for 1996 were $9,873,000 (81.8% of operating revenues) as
compared to $6,125,000 (97.7% of operating revenues) in 1995. This increase of
$3,748,000 (61.2%) is primarily the result of an increase in depreciation
expense of $706,000 due to the large increase in property assets and the
increase in the following:
22
<PAGE>
Selling, General and Administrative Expenses:
This category of expenses has increased by $2,766,000 when comparing 1996 to
1995. Increases in costs attributable to sites that commenced operations in 1996
or had operations for only a portion of the fiscal 1995 are as follows:
Empire State $ 345,000 Payroll, rent, supplies, office expenses
WPMEL 154,000 Payroll, rent, supplies, office expenses
Amherst 194,000 Payroll, rent, office expenses
OME 408,000 Payroll, rent, supplies, office expenses
OpenMRI of Morristown 419,000 Payroll, rent, office expenses
MRI Imaging Center at PBI 399,000 Payroll, rent, supplies, office expenses
Somerset Imaging
Corporation 298,000 Payroll, rent, supplies, office expenses
----------
Total $2,217,000
==========
Expenses Associated with Marketing Revenue:
Expenses associated with marketing revenues increased by $254,000 (51.8%) to
$744,000 in 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 as
evidenced by the $399,000 (115.8%) increase in marketing revenues in 1996 to
$743,000.
Interest Expense:
Interest expense, net of a decrease in interest income of $30,000, has increased
by $441,000 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, OpenMRI of Morristown, as well as interest on the lines of credit
with Summit Bank of New Jersey, Republic National Bank, and financing with DVI
Financial Services, Inc. ("DVI").
For the year ended December 31, 1995 as compared to the year ended December 31,
1994:
Revenues for Modern Medical Modalities Corporation aggregated $6,268,000 in 1995
as compared to $3,657,000 in 1994. The $2,611,000 (71.4%) increase in revenues
is directly attributable to an increase of the patient service revenues for the
Company's various MRI sites in the amount of $2,421,000 and an increase in
Medical Marketing & Management's revenues in the amount of $224,000.
Operating expenses for 1995 were $6,125,000 (97.7% of revenues) compared to
$3,114,000 (85.2% of revenues) in 1994. This increase of $3,011,000 (96.7%) is
primarily the result of an increase in depreciation expense of $505,000
resulting from the large increase in property assets and the increase in the
following:
23
<PAGE>
Selling, General and Administrative Expenses:
This category of expenses has increased by $2,099,000 (102.5%) to $4,147,000 in
1995 as compared to the $2,048,000 of such costs incurred in the same period of
1994. Increases are attributable to sites commencing operations in 1995 which
were not operational for all or part of 1994.
Empire State $709,000 Payroll, rent, supplies, office expenses
Amherst 26,000 Payroll, rent, office expenses
--------
Total $735,000
========
In addition, increases in expenses for facilities that were operational in both
years of $1,304,000 which is attributable to the increased revenues in 1995 are
as follows:
MRI Imaging Center
at PBI $ 199,000 Payroll, marketing, supplies
Plainfield MRI Associates 71,000 Office expenses, marketing
South Jersey Medical
Equipment Leasing
Corporation 738,000 Payroll, rent equipment, maintenance,
supplies, marketing, office equipment
Modern Medical Modalities 31,000 Insurance, travel, general operations
South Plainfield
Imaging, Inc. 74,000 Payroll, rent
Somerset Imaging
Corporation 191,000 Payroll, rent supplies, marketing,
---------- office expenses
Total $1,304,000
==========
Expenses Associated with Management Fee Income:
Expenses associated with management fee income increased by $70,000 when
comparing 1995 and 1994. This increase is due primarily to the increased salary
expenses of administrative support personnel, and the additional employees need
to manage the sites.
Interest Expense:
Interest expense has increased by $617,000 when comparing 1995 and 1994. This
increase is attributable primarily to the financing of equipment at South
Jersey, Empire State, MRI Imaging Center at PBI, Somerset Imaging, as well as
interest on the line of credit with Summit Bank of New Jersey ("Summit Bank").
24
<PAGE>
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 and $226,000 as of December 31, 1996 and 1995,
respectively.
The Company has a working capital surplus of $888,000 at December 31, 1996 as
compared to a working capital surplus of $1,646,000 at December 31, 1995.
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 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 to finance up to
$1,500,000 of the accounts receivable balances from one of the Company's
wholly-owned subsidiaries, Empire State and one of its joint ventures. Advances
bear interest at the prime rate plus four percent. At December 31, 1996, the
total outstanding advances is $686,000.
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
OpenMRI 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
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.
25
<PAGE>
Liquidity and Capital Resources: (Continued)
The Company recorded an increase of $988,000, 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 was
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 diagnostics imaging equipment. Empire State provides space, equipment
(MRI, CT, Mammography, Ultrasound and Diagnostic Imaging) and nonprofessional
services, including management and billing and collection to Central Imaging
located in Yonkers, New York.
Empire State, entered into a Loan and Security Agreement ("Loan Lease") with a
non-affiliated party, DVI, 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.
On December 27, 1996, the Company sold 65% of the stock of Empire State for
$250,000 payable as follows: $25,000 down and $25,000 per month with interest on
the unpaid principal at prime plus 1%.
In April 1995, Amherst Medical Equipment Leasing Corporation, a wholly-owned
subsidiary, of the Company, was formed. The subsidiary's site, located in
Amherst, New York, commenced operations in January 1996.
In June 1995, the MRI at the Passaic site began operations. The site is a joint
venture between Passaic Beth Israel and the Company.
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, DVI will
purchase either Sylvania or OME for one dollar.
26
<PAGE>
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:
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 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 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.
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.
27
<PAGE>
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 for 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.
28
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MODERN MEDICAL MODALITIES CORPORATION
INDEX..............................................................37
INDEPENDENT AUDITORS' REPORT OF WEINICK, SANDERS & CO. LLP.........F-1
INDEPENDENT AUDITORS' REPORT OF DDK & COMPANY LLP..................F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at December 31, 1996 and 1995.......F-3 - F-4
Consolidated Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994.............F-5 - F-6
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994.............F-7
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994.............F-8 - F-10
Notes to Financial Statements......................................F-11 - F-25
INDEPENDENT AUDITORS' REPORT ON ACCOMPANYING INFORMATION
OF WEINICK, SANDERS & CO. LLP....................................F-26
INDEPENDENT AUDITORS' REPORT ON ACCOMPANYING INFORMATION
OF DDK & COMPANY LLP..............................................F-27
Schedule VIII - Valuation and Qualifying Accounting..............F-28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On January 17, 1997, Company dismissed DDK & Company LLP, located at 1500
Broadway - 12th Floor, New York, New York 10036, as its independent accountant.
The Company has engaged Weinick, Sanders & Co. LLP, located at 1515 Broadway,
New York, New York 10036, as its new certified public accountants. In connection
with the two most recent fiscal years and subsequent interim period preceding
DDK & Company LLP's dismissal, there were no disagreements with DDK & Company
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. DDK & Company LLP's report on the
financial statements for either of the past two years did not contain an adverse
opinion or disclaimer of opinion and was not qualified or modified.
29
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers and directors of the Company, and further information concerning
them, are as follows:
Name Age Position
---- --- --------
Roger Findlay 49 Chairman of the Board
of Directors
Patrick O'Connor 43 President
Jan Goldberg 46 Vice President, Treasurer
and Director
Gregory Maccia 43 Vice President, Secretary,
and Director
Elli Pittas 43 Vice President of
Operations and Director
Each of the above officers and directors shall hold office until the next annual
meeting of the Company's shareholders and until a successor is elected and
qualified.
Roger Findlay is a co-founder and has been Chairman of the Board of Directors of
the Company since its inception in June 1990. Since 1989, Mr. Findlay has also
been co-founder of Technology Services, Inc., a software support company for
medical offices and commercial accounts. Since 1986, he has also been founder
and President of Northern New Jersey Medical Management, a general partner of a
diagnostic imaging center. From 1986 to 1989, Mr. Findlay was President of
Advacare, Inc., a practice management and physician billing company. He was
co-founder and President of Effective Management Services, Inc., from 1984 to
1986, which provided facilities management and custom programming for hospitals,
universities and physician groups. Mr. Findlay, from 1984 to 1986, was also
co-founder and President of Medical Accounts Management Services, a software
development company. From 1984 to 1986, Mr. Findlay was chief operating officer
of NMR of America, Inc., a publicly traded company engaged in operating MRI
sites. Mr. Findlay, from 1972 to 1986, was President and co-owner of Medical
Billing Services, Inc.
Patrick O'Connor has been President of the Company since January 1, 1996. Mr.
O'Connor has been President and co-founder of Medical Marketing and Management
Inc., a wholly-owned subsidiary of the Company since its inception in October
1994. From October 1994 to December 1995, Mr. O'Connor was Vice President of
sales, marketing and project development for the company. Mr. O'Connor from
August 1982 to October 1994 was an MRI Specialist, Account Executive and Account
Specialist for Picker International.
30
<PAGE>
Jan Goldberg is a co-founder and was Secretary, Treasurer and Director of the
Company until November, 1992. Since November 1992, Mr. Goldberg has been the
Vice President, Treasurer and Director of the Company. From 1989 to 1990, Mr.
Goldberg was founder and President of GPM, Inc., a physician billing
organization with offices in Florida and New York. From 1987 to 1988, Mr.
Goldberg was operations manager for Advacare, Inc., a practice management and
physician billing company. From 1984 to 1987, Mr. Goldberg was manager of a
multi-specialty radiology practice, BBS Billing, Inc. an east coast diagnostic
physician group which had contracts with hospitals in New York as well as their
own private offices and outpatient facilities. From 1974 to 1984, Mr. Goldberg
held various positions with Blue Cross as well as with hospitals in the New York
area. Mr. Goldberg was involved in setting up fee-for-service reimbursement
systems and was involved in various aspects of hospital administration.
Gregory Maccia is a co-founder of the Company and was Vice President and
Director until November, 1992. Since November 1992, Mr. Maccia has been the Vice
President, Secretary and a Director of the Company. Mr. Maccia has also been
President of Technology Services, Inc., a software design and facilities
management company for medical and commercial accounts since 1989. From 1986-
1989, Mr. Maccia was Vice President of Advacare, Inc., a national practice
management and physician billing company. Since 1986, Mr. Maccia has been
co-founder of Northern New Jersey Medical Management, Inc. He was co-founder and
Vice President of Medical Accounts Management Services, Inc. (MAMS) from 1984 to
1986 which developed and sold physician, outpatient and clinical billing
software systems. Mr. Maccia, from 1984 to 1986, was co-founder and Vice
President of Effective Management Services, Inc. (EMS), which provided custom
programming and facilities management with contracts to hospitals and
universities in the tri-state area as well as collection agencies and
non-medical entities. From 1977 to 1984, Mr. Maccia owned and managed his own
consulting company.
Elli Pittas has been Vice President of Operations and a Director for the Company
since May 1994. From April 1991 to April 1994, Ms. Pittas was employed with the
Company as Site Manager. Ms. Pittas from 1980 to 1991 was employed as a data
coordinator by Advacare Inc., a national practice management and physician
billing company.
31
<PAGE>
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the executive compensation and distribution paid
to each executive officer of the Company during the year ended December 31,
1996.
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- ------------------------------------------------------------------------------------------------
Name and Restricted
Principal Fiscal Other Stock Options/ LTIP All other
Other Position Year Salary Bonus Compensation Awards SARSs Payouts Compensation
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger Findlay
Chairman of the
Board of Directors 1996 $111,538 -- $5,916 -- -- -- --
Patrick O'Connor
President 1996 $129,712 -- $5,916 -- -- -- --
Gregory Maccia
Vice President,
Secretary
and Director 1996 $ 85,000 -- $5,846 -- -- -- --
Jan Goldberg
Vice President,
Treasurer
and Director 1996 $ 85,000 -- $4,421 -- -- -- --
Elli Pittas
Vice President of
Operations and
Director 1996 $ 47,497 -- $0 -- -- -- --
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) The above compensation figures include the cost to the Company of the use of
automobiles leased by the Company, the cost of benefits, including premiums for
life insurance and any other personal benefits provided by the Company to such
persons in connection with the Company's business and directors fees.
32
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock with respect to the beneficial ownership
of shares of Common Stock, by (i) each person who is known by the Company to own
beneficially more than 5% of the Company's outstanding Common Stock; (ii) each
of the Company's directors; and (iii) all directors and officers of the Company
as a group.
Name Amount
and Address and Nature
of Beneficial of Beneficial
Owner Ownership(1)
------------- ------------
Roger Findlay 236,096
29 Oak Knoll Road
Mendham, New Jersey
Jan Goldberg 236,091
555 North Avenue
Fort Lee, New Jersey
Gregory Maccia 236,091
41 Mount Pleasant Rd.
Morristown, New Jersey
Elli Pittas 0
149 Combs Hollow Road
Randolf, New Jersey
Patrick O'Connor 0
255 Serpentine Drive
Bayville, New Jersey
Officers and Directors 702,278
as a group (5 Persons)
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of Common
Stock beneficially owned by them.
Messrs. Findlay, Goldberg, and Maccia may be deemed "Parents" and
"Founders" of the Company as those terms are defined under the Securities Act of
1933, as amended.
33
<PAGE>
Item 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
On October 15, 1992, the Company initially issued an additional 2,245,000 shares
of common stock. Officers of the Company have received shares, for an aggregate
value of $57,500 as follows: Roger Findlay (589,635 shares), Jan Goldberg
(589,630 shares) and Gregory Maccia (589,630 shares). These shares were issued
pursuant to a recapitalization of the Company.
Doctors Imaging Associates, a Joint Venture whose financial statements are
consolidated with those of the Company has received net non-interest bearing
advances from Doctors Imaging Associates, Inc., a joint venture, totaling
$225,717 and 240,751 at December 31, 1995 and December 31, 1994, respectively.
Doctors Imaging Associates, Inc. is obligated to advance up to $250,000 from
time to time for working capital as the Company deems necessary. These advances
are to be repaid prior to any distribution of profits to the joint venturers.
Messrs. Findlay and Maccia who are officers and directors of the Company are
also general partners in a limited partnership which engages in diagnostic
imaging. This limited partnership concerns only one site, which is located at
Union, New Jersey and provides ultrasound, mammography, fluoroscopy and nuclear
medicine only. However, the limited partnership does not lease MRI and CT
equipment. Therefore, it is managements belief that there is no competition
between the Company and the limited partnership. Moreover, no conflict of
interest exists for Messrs. Findlay and Maccia as officers of the Company and
general partners of the limited partnership. There are no leasing transactions
between the Company and the limited partnership. To date there has been no
transactions between the limited partnership and the Company.
34
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements. A list of financial statements is contained
in "Modern Medical Modalities Corporation Index to Financial Statements" on page
37 hereof.
2. Exhibits. Not Applicable.
(b) Reports on Form 8-K
On January 17, 1997, Company dismissed DDK & Company LLP, located at 1500
Broadway - 12th Floor, New York, New York 10036, as its independent accountant.
The Company has engaged Weinick, Sanders & Co. LLP, located at 1515 Broadway,
New York, New York 10036, as its new certified public accountants. In connection
with the two most recent fiscal years and subsequent interim period preceding
DDK & Company LLP's dismissal, there were no disagreements with DDK & Company
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. DDK & Company LLP's report on the
financial statements for either of the past two years did not contain an adverse
opinion or disclaimer of opinion and was not qualified or modified.
(c) Exhibits. Not Applicable.
35
<PAGE>
Item 14(a)
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1996
I N D E X
Page No.
--------
INDEPENDENT AUDITORS' REPORT OF WEINICK, SANDERS & CO. LLP.......... F-1
INDEPENDENT AUDITOR'S REPORT OF DDK & COMPANY LLP .................. F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as at December 31, 1996 and 1995 .. F-3 - F-4
Consolidated Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994 ........ F-5 - F-6
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994 ........ F-7
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994 ........ F-8 - F-10
Notes to Financial Statements ................................. F-11 - F-25
INDEPENDENT AUDITORS' REPORT ON ACCOMPANYING INFORMATION
OF WEINICK, SANDERS & CO. LLP .................................... F-26
INDEPENDENT AUDITORS' REPORT ON ACCOMPANYING INFORMATION
OF DDK & COMPANY LLP ............................................. F-27
Schedule VIII - Valuation and Qualifying Accounting ........... F-28
37
<PAGE>
Weinick, Sanders & Co. LLP
CERTIFIED PUBLIC ACCOUNTANTS
1515 BROADWAY
NEW YORK, N.Y. 10036-5768
212-868-3333
FAX 212-764-3060
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Modern Medical Modalities Corporation
We have audited the accompanying 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 years ended December 31, 1996 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Modern
Medical Modalities Corporation and Subsidiaries as at December 31, 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1994, in conformity with generally accepted
accounting principles.
/s/ Weinick, Sanders & Co. LLP
New York, N. Y.
March 28, 1997
F-1
<PAGE>
{DDK & COMPANY LETTERHEAD}
Independent Auditors' Report
To the Stockholders
Modern Medical Modalities Corporation
We have audited the accompanying consolidated balance sheet of Modern
Medical Modalities Corporation and subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals used and significant estimated made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Modern Medical Modalities Corporation and subsidiaries as of December 31, 1995,
and the consolidated results of their operations, changes in their stockholders'
equity and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ DDK & Company LLP
DDK & Company LLP
Certified Public Accountants
New York, New York
March 8, 1996
F-2
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
1996 1995
----------- ----------
A S S E T S
Current assets:
Cash and cash equivalents $ 642,421 $ 984,326
Accounts receivable (less contractual
allowances of $2,445,124 and $1,556,114,
respectively) 4,867,242 2,695,096
Current portion of note receivable from affiliate 600,000 1,100,000
Loan receivable - affiliate 225,000 --
Due from affiliate -- 243,556
Other receivables 409,442 --
Prepaid expenses 113,836 77,294
----------- -----------
Total current assets 6,857,941 5,100,272
----------- -----------
Other assets:
Furniture, fixtures, equipment and
leasehold improvements (net of accumulated
depreciation and amortization of $4,759,821
and $2,569,209, respectively) 10,043,862 11,051,593
Note receivable - affiliate,
net of current portion 400,000 --
Goodwill (net of accumulated amortization
of $47,307) 1,371,916 --
Organization costs (net of accumulated
amortization of $9,859 and $7,939,
respectively) 12,839 40,928
Investment in joint ventures 237,261 164,320
Investment in and advances to
unconsolidated affiliate 306,961 --
Deposits 129,451 181,678
----------- -----------
Total other assets 12,502,290 11,438,519
----------- -----------
$19,360,231 $16,538,791
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
1996 1995
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 599,750 $ 496,750
Loan payable - joint venturer 100,467 --
Loans payable - affiliates 468,571 --
Current portion of long-term debt 2,721,906 1,917,813
Accounts payable 1,259,344 583,355
Accrued expenses 643,183 347,180
Due to affiliates 52,216 109,170
Deferred income taxes 126,310 --
----------- -----------
Total current liabilities 5,971,747 3,454,268
----------- -----------
Other liabilities:
Long-term debt, net of current portion 7,741,217 7,843,911
Deferred income taxes 858,618 531,669
Due to joint venturer 218,717 225,717
---------- ----------
Total other liabilities 8,818,552 8,601,297
----------- -----------
Total liabilities 14,790,299 12,055,565
----------- -----------
Minority interest 184,939 155,690
----------- -----------
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 4,086,413
Retained earnings 518,287 240,806
----------- -----------
Total stockholders' equity 4,384,993 4,327,536
----------- -----------
$19,360,231 $16,538,791
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Operating income:
Net revenue from services $11,048,296 $5,546,400 $3,124,920
Management fees 283,263 377,591 411,958
Marketing revenues 743,355 344,412 120,031
----------- ---------- ----------
Total operating income 12,074,914 6,268,403 3,656,909
----------- ---------- ----------
Operating expenses:
Selling, general and administrative 6,912,230 4,146,624 2,047,630
Expenses associated with
management fee income 387,429 347,275 277,320
Expenses associated with
marketing revenue 744,015 489,683 135,149
Bad debts 67,582 85,978 103,515
Depreciation and amortization 1,761,294 1,055,044 550,501
----------- ---------- ----------
Total operating expenses 9,872,550 6,124,604 3,114,115
----------- ---------- ----------
Income from operations 2,202,364 143,799 542,794
----------- ---------- ----------
Other income (expenses):
Interest income 37,909 68,217 74,724
Interest expense ( 1,344,649) ( 933,137) ( 316,361)
Income from joint ventures 104,147 54,332 99,937
----------- ---------- ----------
Total other income (expenses) ( 1,202,593) ( 810,588) ( 141,700)
----------- ---------- ----------
Income (loss) from continuing operations
before income tax provision (credit),
minority interest and net cumulative
change in accounting principle 999,771 ( 666,789) 401,094
Income tax provision (credit) 455,320 ( 243,478) 177,585
----------- ---------- ----------
Income (loss) from continuing operations
before minority interest and net cumu-
lative change in accounting principle 544,451 ( 423,311) 223,509
Minority interest ( 294,625) ( 1,219) ( 1,366)
----------- ---------- ---------
Income (loss) from continuing operations 249,826 ( 424,530) 222,143
Income (loss) from discontinued
operations, net of income tax effect
of ($77,866), and $53,450 - ( 316,524) 71,180
----------- ---------- ----------
Income (loss) before accounting change 249,826 ( 741,054) 293,323
Cumulative change in accounting
principle, net of income tax
effect of $72,651 - - 112,308
----------- ---------- ----------
Net income (loss) $ 249,826 ($ 741,054) $ 405,631
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------
1996 1995 1994
----- ----- -----
Earnings per share - primary:
Income (loss) from continuing operations $0.08 ($0.13) $0.08
Income (loss) from discontinued operations - ( 0.10) 0.02
Income from cumulative change
in accounting principle - - 0.04
----- ----- -----
Net income (loss) $0.08 ($0.23) $0.14
===== ===== =====
Earnings per share - fully diluted:
Income (loss) from continuing operations ($0.10) $0.06
Income (loss) from discontinued operations ( 0.08) 0.02
Income from cumulative change
in accounting principle - 0.03
----- -----
Net income (loss) ($0.18) $0.11
===== =====
Weighted average common and common
equivalent shares outstanding:
Primary 3,168,292 3,142,797 2,937,916
Fully diluted 4,177,797 3,859,490
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional
Number of Common Paid-In Retained
Shares Stock Capital Earnings Total
--------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 2,458,335 $246 $ 834,880 $ 654,098 $1,489,224
Net proceeds from issuance of
common stock - Initial public
offering (net of expenses of
$601,319) 517,500 52 1,986,129 -- 1,986,181
Issuance of common stock -
Acquisition of
Prime Contracting Corp. 112,457 11 ( 11) -- --
Net income for the year ended
December 31, 1994 -- -- -- 405,631 405,631
--------- ---- ---------- ---------- ----------
Balance at December 31, 1994 3,088,292 309 2,820,998 1,059,729 3,881,036
Adjustment in connection
with the disposal of
Prime Contracting Corp. -- -- 1,065,423 ( 77,869) 987,554
Issuance of common stock
Acquisition of certain
assets and the assumption
of certain liabilities of
Central Imaging Partners,
Limited Partnership 80,000 8 199,992 -- 200,000
Net loss for the year ended
December 31, 1995 -- -- -- ( 741,054)( 741,054)
--------- ---- ---------- ---------- ----------
Balance at December 31, 1995 3,168,292 317 4,086,413 240,806 4,327,536
Write-down of assets relating
to the disposal of
Prime Contracting Corp. -- -- ( 358,000) -- ( 358,000)
Adjustment in connection with
the sale of 65% of Empire
State Imaging Associates, Inc. -- -- 137,976 27,655 165,631
Net income for the year
ended December 31, 1996 -- -- -- 249,826 249,826
--------- ---- ---------- ---------- ----------
Balance at December 31, 1996 3,168,292 $317 $3,866,389 $ 518,287 $4,384,993
========= ==== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 249,826 ($ 741,054) $ 405,631
---------- ---------- ----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,761,294 1,055,044 550,501
Contractual allowances 889,010 463,774 487,805
Bad debts 67,582 85,978 103,515
Income from an unconsolidated joint venture ( 104,147) ( 54,332) ( 99,937)
Minority interest 294,625 ( 24,838) ( 29,418)
Deferred income taxes 453,259 ( 190,029) 249,986
Increase (decrease) in cash attributable
to changes in operating assets and
liabilities:
Accounts receivable ( 2,703,156) ( 1,646,558) ( 1,037,221)
Due from affiliate -- ( 243,556) --
Other receivables ( 409,442) 25,397 ( 25,397)
Prepaid expenses ( 36,542) ( 37,790) ( 39,504)
Security deposits and organization costs 78,396 269,712 ( 312,306)
Distributions from a joint venture 31,206 104,945 70,995
Due to affiliates ( 56,954) 109,170 --
Accounts payable 675,989 370,086 13,919
Accrued expenses 296,023 166,537 49,048
Income taxes payable -- ( 250) 225
---------- ---------- ----------
Total adjustments 1,237,143 453,290 ( 17,789)
---------- ---------- ----------
Net cash provided by (used in)
operating activities 1,486,969 ( 287,764) 387,842
---------- ---------- ----------
Cash flows from investing activities:
Payments for acquisition of furniture,
fixtures, equipment and leasehold
improvements ( 461,453) ( 554,112) ( 250,296)
Net assets of discontinued subsidiary -- 105,670 ( 71,180)
Proceeds from note receivable - affiliate 100,000 100,000 --
Proceeds from loan receivable - affiliate 25,000 -- --
Purchase of partnership interest -
net of cash acquired 3,710 -- --
---------- ---------- ----------
Net cash used in investing activities ( 332,743) ( 348,442) ( 321,476)
---------- ---------- ----------
Cash flows from financing activities:
Line of credit 103,000 496,750 --
Deferred offering costs -- -- 138,487
Affiliate advances 468,571 ( 15,034) 85,476
Joint venture advances 93,467 -- --
Due from managing agent -- 316,031 ( 227,591)
Due to managing agent -- ( 64,000) 64,000
Payments on capitalized lease obligations
and long-term debt ( 2,161,169) ( 1,120,051) ( 321,397)
Issuance of common stock -- -- 1,986,181
---------- ---------- ----------
Net cash (used in) provided by
financing activities ( 1,496,131) ( 386,304) 1,725,156
---------- ---------- ----------
Net (decrease) increase in cash
and cash equivalents ( 341,905) ( 1,022,510) 1,791,522
Cash and cash equivalents at beginning of year 984,326 2,006,836 215,314
---------- ---------- ----------
Cash and cash equivalents at end of year $ 642,421 $ 984,326 $2,006,836
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year:
Interest $1,285,075 $ 993,137 $ 316,361
========== ========== ==========
Income taxes $ 2,091 $ 225 $ 25
========== ========== ==========
Non-cash transactions:
Capital lease obligation in connection
with the acquisition of certain assets
and the assumption of certain liabili-
ties of Central Imaging Partners,
Limited Partnership $ -- $2,738,834 $ --
========== ========== ==========
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
Imaging Project $ -- $ 828,078 $ --
========== ========== ==========
Capital lease obligation in connection
with acquisition of medical equipment
for Amherst Medical Equipment Leasing Corp. $ -- $ 327,000 $ --
========== ========== ==========
Loan payable obligation in connection
with acquisition of medical equipment
for Amherst Medical Equipment Leasing Corp. $ -- $ 151,564 $ --
========== ========== ==========
Capital lease obligation in connection
with the acquisition of certain assets
and assumption of certain liabilities of
South Jersey Medical Equipment Leasing Corp. $ -- $ -- $1,550,000
========== ========== ==========
Common stock to be issued in connection
with the acquisition of Prime
Contracting Corp. $ -- $ -- $ 308,831
========== ========== ==========
Note receivable in connection with the
sale of Prime Contracting Corp. $ -- $1,100,000 $ --
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
(Continued)
Loan receivable in connection with the sale
of Empire State Imaging Associates, Inc. $ 250,000 $ -- $ --
========== ========== ==========
Write-down of assets relating to the
disposal of Prime Contracting Corp. $ 358,000 $ -- $ --
========== ========== ==========
Capital lease obligations in connection
with the acquisition of Sylvania
Diagnostics, L.P. $2,127,366 $ -- $ --
========== ========== ==========
Capital lease obligation in connection
with the acquisition of medical equipment
for OpenMRI of Morristown, joint venture $1,149,711 $ -- $ --
========== ========== ==========
The Company purchased 50.2% of the outstanding
units of Sylvania Diagnostics, L.P.
In conjunction with the acquisition,
liabilities were assumed as follows:
Assets acquired $1,966,399 $ -- $ --
Intangibles 1,419,223 -- --
Cash paid ( 1) -- --
---------- ---------- ----------
Liabilities assumed $3,385,621 $ -- $ --
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Organization and Business:
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. Modern Modalities Corporation
was incorporated in the State of New Jersey on June 4, 1990, for the
same purpose. The two companies had common ownership, directors and
officers. In July 1992, the two companies were merged under the laws
of the State of New Jersey, by way of an agreement accounted for as a
tax-free merger. The surviving corporation is known as Modern Medical
Modalities Corporation.
(b) Basis of Presentation:
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., Empire State Imaging Associates, Inc., Detex Medical Services,
Inc., Amherst Medical Equipment Leasing Corp., Open MRI 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. 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 under the equity method. All significant intercompany
transactions and accounts have been eliminated in the consolidation.
F-11
<PAGE>
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(c) Operating Revenues:
Revenues from services to physicians are recorded at a percentage
of the physicians' established rates under a contractual agreement
between the Company and the physicians. Under these agreements, the
Company participates, on the same percentage basis, with adjustments
known as contractual allowances, under third-party reimbursement
agreements with the physicians, deducted to arrive at net revenue from
services. A schedule of revenue and contractual allowances is as
follows:
For the Years Ended December 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
Revenue from services $13,492,462 $5,932,326 $4,557,800
Less: Contractual
allowances 2,444,166 385,926 1,432,880
----------- ---------- ----------
Net revenue from services $11,048,296 $5,546,400 $3,124,920
=========== ========== ==========
Management fees are generated, through a contractual agreement
between the Company and a joint venture, Union Imaging Associates,
Joint Venture ("Union"), in which the Company owns a minority
interest, based on a percentage of cash collections. Under the terms
of the joint venture agreement, the Company receives 11.25% of the
joint venture's percentage of the cash collections in exchange for
managing the joint venture. The Company's responsibilities include the
management of all personnel, leasing of operating facilities and
equipment, negotiation of contracts, payments of debts and obligations
and preparation and review of invoices and claims.
(d) Reimbursement Contingencies:
The physicians with which the Company contracts, operate under
various payment systems with third-party payors. A substantial portion
of the Company's revenues are attributable to payments made by
government-sponsored health care programs and other third party
payors. The Company receives these payments either directly, in the
case of imaging center revenues relating to reimbursable direct
patient billings, or indirectly, in the case of technical
fee-for-service payments made by hospitals. Any change in
reimbursement regulations, or the enactment of legislation, which
would have the effect of placing material limitations on the amount of
reimbursement for imaging services could adversely affect the
operations of the Company. In addition, health care reimbursement
programs are not uniformly prompt in making required payments.
Extensive payment delays are not uncommon, and the Company's financial
resources could be strained while awaiting payment.
F-12
<PAGE>
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(e) Use of Estimates:
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.
(f) Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents. The Company places its cash with high credit quality
financial institutions which at times, may be in excess of the FDIC
insurance limit.
(g) Accounts receivable:
Accounts receivable is stated net of contractual allowances.
Based upon its past history, the Company estimates the amount of the
accounts receivable it does not expect to receive. The Company values
its uncollected accounts receivable as part of its determination of
profit and constantly reviews the valuation. The continuing review and
gathering of additional information, as well as changing reimbursement
rates, may cause adjustments.
(h) Furniture, Fixtures, Equipment and Leasehold Improvements:
Furniture, fixtures, equipment and leasehold improvements are
stated at cost. Depreciation and amortization are provided for,
generally using the straight-line method over the lease term or the
estimated useful lives of the related asset, five to seven years for
office equipment and furniture and fixtures, and ten years for medical
equipment by charges to income.
(i) Goodwill:
The Company recorded goodwill relating to the acquisition of a
subsidiary which is being amortized over a period of fifteen years.
(j) Revenue and Cost Recognition:
The Company recognizes revenue from services upon performance for
medical, management and marketing services for financial statement
reporting purposes.
F-13
<PAGE>
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(k) Income Taxes:
The Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", which provides for income tax
accounting under the asset and liability method and requires
adjustment of deferred tax balances for changes in tax laws and rates.
The Company reports income on the cash basis for income tax reporting
purposes. Provision for income taxes includes federal and state income
taxes currently payable and those deferred because of temporary
differences arising primarily from the recognition of income on the
cash basis for tax purposes versus the accrual basis for financial
reporting purposes.
(l) Earnings Per Share:
Earnings per share have been computed by dividing the net income
by the weighted average number of common stock and common stock
equivalent shares outstanding. 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.
(m) Reclassification:
Certain reclassifications have been made to the 1995 and 1994
financial statements to conform to the 1996 presentation.
(n) New Accounting Standards:
The Company has adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". This statement establishes accounting standards for the
impairment of long-lived assets (including goodwill) to be held and
used as well as those to be disposed of. The statement requires
management to periodically review these assets in light of certain
events or circumstances which may effect the recoverability or
carrying value of said assets and to adjust the value downward or to
dispose of the asset accordingly. The adoption of this standard did
not have a material effect on the Company's financial position or its
results of operations.
(o) Retirement Plan:
The Company maintains a qualified 401(k) wage deferral plan.
Employees may defer a portion of their salary. The Company does not
contribute to the plan.
F-14
<PAGE>
NOTE 2 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS.
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 providing turnkey design
and construction services, becoming 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.
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,
OpenMRI of Morristown, Inc. ("OpenMRI"), a wholly-owned subsidiary of
the Company, was assigned the Company's interest in the joint venture.
OpenMRI accepted delivery of a new magnetic resonance imaging machine
and opened in February 1996. The joint venture shall terminate upon
earlier of (i) October 31, 2015; (ii) the sale of the business; or
(iii) the mutual consent of the joint venturers. The Company has a 72%
interest in the profit, obligations and liabilities under the joint
venture agreement. The Company and its wholly-owned subsidiary,
OpenMRI of Morristown, Inc., 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.
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, payable as follows: $100,000 upon execution, $100,000 at
closing and a promissory note bearing interest at prime plus one
percent. The note was payable in two installments, $600,000 after six
months and $400,000 after one year of the closing date. The Company in
1995 recorded an increase of $987,554 to stockholders' equity which
represents the excess of the sale price over the net assets of Prime.
The agreement was modified in 1996 to extend the note payments of
$600,000 to October 1997 and $400,000 to April 1998. Additionally, the
modified agreement required the Company to charge $358,000 of
receivables from Prime to additional paid-in capital in 1996 as an
adjustment to the sale price.
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 one percent. 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 December
31, 1996, the Company's investment in Empire is $60,321 and the
Company has advances receivable from Empire of $246,640.
F-15
<PAGE>
NOTE 2 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS. (Continued)
During 1996, the Company incorporated two wholly-owned
subsidiaries. Ohio Medical Equipment Leasing Corporation ("OME") was
incorporated in the State of Ohio for the purpose of acquiring a
majority interest in Sylvania Diagnostics. West Paterson Medical
Equipment Leasing Corp. ("WPMEL") was incorporated in the State of New
Jersey for the purpose of opening a diagnostic imaging center in West
Paterson.
In July 1996, the Company, through 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.
As a result of this acquisition, the Company 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. 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.
In August 1996, Sylvania entered into a 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. The Company, Sylvania
and DVI are presently discussing amending the repayment terms of this
obligation. The Company is indemnified for all prior liabilities and
obligations of the limited partnership by DVI, an equipment finance
company who is the lessor of Sylvania's medical equipment.
In July 1996, the Company, through its wholly-owned subsidiary
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.
F-16
<PAGE>
NOTE 3 - FURNITURE, FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS.
Furniture, fixtures, equipment and leasehold improvements consist
of the following:
December 31,
--------------------------
1996 1995
----------- -----------
Medical equipment $13,355,067 $12,047,374
Building 358,066 310,860
Furniture and fixtures 69,890 100,956
Automobiles 22,860 22,860
Leasehold improvements 997,800 1,138,752
----------- -----------
14,803,683 13,620,802
Less: Accumulated depreciation
and amortization 4,759,821 2,569,209
----------- -----------
$10,043,862 $11,051,593
=========== ===========
NOTE 4 - INVESTMENT IN JOINT VENTURE.
In 1990, the Company acquired a ten percent (10%) interest in
Union Imaging Associates, Joint Venture, which it accounts for using
the equity method of accounting, due to the significant influence it
has on the joint venture as its managing venturer.
The following is a summary of selected financial information from
the financial statements of the joint venture in which the Company has
an investment:
Total Long-Term Total Total
Assets Debt Liabilities Capital
---------- ---------- ---------- ----------
December 31, 1996 $4,339,575 $1,938,137 $3,637,025 $ 702,550
December 31, 1995 3,251,821 1,550,917 1,679,846 1,571,975
December 31, 1994 4,171,097 1,700,807 2,021,767 2,149,330
(10%)
Gross Allocations
Revenues Net Income of Income
---------- ---------- ----------
December 31, 1996 $4,417,540 $1,041,469 $ 104,147
December 31, 1995 3,127,608 543,317 54,332
December 31, 1994 4,170,019 999,374 99,937
NOTE 5 - LINE OF CREDIT.
In April 1995, the Company secured a line of credit with Summit
Bank for $600,000 at the bank's prime rate for commercial borrowers.
In April 1996, the Company renewed this line of credit for an
additional year. As of December 31, 1996 and 1995, the amount of the
liability under the line of credit was $599,750 and $496,750,
respectively. The line of credit is secured by a certificate of
deposit in the amount of $600,000.
F-17
<PAGE>
NOTE 6 - LONG-TERM DEBT.
Long-term debt consists of the following:
December 31,
------------------------
1996 1995
---------- ----------
Capitalized lease obligations (a) $9,296,467 $9,471,392
Accounts receivable financing (b) 686,173 --
Construction (financing) -- 290,332
Other (c) 480,483 --
---------- ----------
10,463,123 9,761,724
Less: Amounts due in one year 2,721,906 1,917,813
---------- ----------
$7,741,217 $7,843,911
========== ==========
(a) Capitalized Lease Obligations:
The Company entered into certain leases for the rental of
equipment, which have been recorded as capital leases for financial
statement reporting purposes and are included in equipment. The
depreciation expense for these assets for the years ended December 31,
1996, 1995 and 1994 are $1,490,620, $879,858 and $478,888,
respectively. The related cost and accumulated depreciation for this
equipment at December 31, 1996 and 1995 are as follows:
December 31,
--------------------------
1996 1995
----------- -----------
Cost $14,893,560 $12,152,085
Less: Accumulated depreciation 3,734,538 2,243,918
----------- -----------
$11,159,022 $ 9,908,167
=========== ===========
(b) Accounts Receivable Financing:
The Company entered into two separate agreements with DVI 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 and
$1,500,000 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 December 31, 1996, the amounts financed under these
agreements totalled $686,173 and $1,093,841, respectively. The Company
has guaranteed the $1,500,000 financing line of credit of the
unconsolidated joint venture. The unconsolidated joint venture has
loaned the Company $100,467 from the proceeds of this line of credit.
F-18
<PAGE>
NOTE 6 - LONG-TERM DEBT. (Continued)
(c) Other:
Sylvania Diagnostics limited partnership at December 31, 1996 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
December 31, 1996 are as follow:
(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. 183,080
(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. 47,903
--------
$480,483
========
The following is a schedule by year of future minimum lease
payments under the terms of these leases, together with the present
value of the net future minimum lease payments as of:
December 31,
--------------------------
1996 1995
----------- -----------
1996 $ -- $ 2,973,585
1997 3,212,855 2,906,157
1998 3,122,505 2,869,807
1999 2,722,655 2,433,242
2000 1,740,552 992,311
2001 and thereafter 667,358 --
----------- -----------
Total future minimum lease payments 11,465,925 12,175,102
Less: Amounts representing interest 2,169,458 2,703,710
Present value of future
minimum lease payments 9,296,467 9,471,392
Less: Current portion 2,026,482 1,866,230
----------- -----------
Non-current portion of future
minimum lease payments $ 7,269,985 $ 7,605,162
=========== ===========
F-19
<PAGE>
NOTE 6 - LONG-TERM DEBT. (Continued)
(c) Other: (Continued)
The future principal payments for long-term debt are as follows:
December 31,
-------------------------
1996 1995
----------- ----------
1996 $ -- $1,917,813
1997 2,721,905 2,163,008
1998 3,225,816 2,400,921
1999 2,385,084 2,249,020
2000 1,578,420 1,030,962
2001 and thereafter 551,898 --
----------- ----------
$10,463,123 $9,761,724
=========== ==========
NOTE 7 - STOCKHOLDERS' EQUITY.
In February 1994, the Company completed an initial public
offering of its securities pursuant to the Securities Act of 1993 (as
amended) from which it received proceeds of $1,986,181, net of
commissions and expenses of the offering of $601,319. The offering
included the sale of 517,500 units including the underwriters'
over-allotment of 67,500 units at a selling price of $5.00 per unit.
Each unit consisted of one (1) share of the Company's $0.0001 par
value common stock ("Common Stock"), one (1) Class A Redeemable Common
Stock Purchase Warrant ("A Warrant") and one (1) Class B Redeemable
Common Stock Purchase Warrant ("B Warrant"). Each A Warrant entitles
the holder to purchase one (1) share of Common Stock for a period, as
extended, ending in August 1997 at a price of $6.50. Each B Warrant
entitles the holder to purchase one (1) share of Common Stock for a
period, as extended, ending in February 1998 at a price of $8.00.
NOTE 8 - INCOME TAXES.
The Company does not report income, for income tax reporting
purposes, on the consolidated or accrual basis. Deferred income taxes
payable at December 31, 1996 and 1995 of $984,928 and $531,669,
respectively, represent temporary differences arising primarily from
the recognition of income on the cash receipts and cash disbursements
basis of accounting for income tax reporting purposes at the statutory
rates of 34% for federal income tax purposes and 9% for state income
tax purposes, which are expected to be realized in future years, thus,
no valuation allowance has been provided.
The Company has recorded income tax provision (credit) at
December 31, 1996, 1995 and 1994 of $455,350, ($243,478) and $177,585,
respectively. The Company has a net operating loss carry-forward for
federal income tax purposes which are available to offset future
taxable income of $3,171,000 through 2010.
F-20
<PAGE>
NOTE 8 - INCOME TAXES. (Continued)
The following is a reconciliation for the U.S. federal statutory
tax rate and the apparent tax rate:
1996 1995 1994
------ ------ ------
U.S. Federal statutory rate 34.0% (34.0%) 34.0%
State taxes 6.0 ( 6.0) 9.0
Goodwill amortization 1.6 -- --
Other 3.9 3.5 1.3
---- ---- ----
Apparent tax rate 45.5% (36.5%) 44.3%
===== ===== =====
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities at December
31, 1996 and 1995 are as follows:
1 9 9 6
-------
Deferred Tax
Gross ------------------------
Items Amount Asset Liabilities
----- ---------- ---------- -----------
Net revenues $4,867,242 $ -- $1,943,976
Other receivables 409,442 -- 163,531
Operating expenses 1,788,721 714,415 --
Depreciation 2,149,769 -- 858,618
Net operating loss
carryforwards 3,171,713 1,266,782 --
---------- ----------
Subtotal 1,981,197 2,966,125
Valuation allowances -- --
---------- ----------
Total deferred taxes $1,981,197 $2,966,125
========== ==========
1 9 9 5
-------
Deferred Tax
Gross ------------------------
Items Amount Asset Liabilities
----- ---------- ---------- -----------
Net revenues $2,695,096 $ -- $1,158,891
Operating expenses 853,241 366,894 --
Depreciation 234,823 100,974 --
Net operating loss
carryforwards 370,590 159,354 --
---------- ----------
Subtotal 627,222 1,158,891
Valuation allowances -- --
---------- ----------
Total deferred taxes $ 627,222 $1,158,891
========== ==========
F-21
<PAGE>
NOTE 8 - INCOME TAXES. (Continued)
The Company has recorded current and deferred income taxes as
follows:
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Current:
Federal $ -- $ -- $ --
State 2,091 -- 250
-------- -------- --------
Total $ 2,091 $ -- $ 250
======== ======== ========
Deferred:
Federal $385,829 ($188,618) $192,827
State 67,400 ( 54,860) 57,159
-------- -------- --------
Total $453,229 ($243,478) $249,986
======== ======== ========
NOTE 9 - RELATED PARTY TRANSACTIONS.
Advances to Joint Venturer:
A majority-owned joint venture, Doctors Imaging Associates, Joint
Venture, has received non-interest bearing advances from one of the
joint venturers totaling $218,717 and $225,717 at December 31, 1996
and 1995, respectively. The joint venturer is obligated to advance up
to $250,000 from time to time for working capital as the Company deems
necessary. These advances are to be repaid prior to any distributions
of profits to the joint venturers.
NOTE 10 - CHANGE IN ACCOUNTING PRINCIPLE.
Effective January 1, 1994, the Company changed its method of
recognizing management fee income to more accurately reflect current
earned income. Management fee income from the Company's minority-owned
joint venture, Union Imaging Associates, Joint Venture was recorded on
a method approximating the cash basis. Since the Company has provided
substantially all of the stipulations of the management contract,
management fees will now be recorded as income purely on the accrual
basis.
The cumulative effect of the change in accounting principle is
$184,959 (or $112,308, net of income taxes). This change, if reflected
retroactively, would effect income as follows:
Year Ended Income Net
December 31, Amount Taxes Effect
------------ -------- ------- --------
1990 $ 1,881 $ 739 $ 1,142
1991 90,138 35,406 54,732
1992 75,848 29,793 46,055
1993 17,092 6,713 10,379
--------- ------- --------
Total $184,959 $72,651 $112,308
======== ======= ========
F-22
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES.
(a) Real Estate Leases:
One of the Company's majority-owned joint ventures, Doctors
Imaging Associates, Joint Venture, leases a facility under a
non-cancelable lease which expires in 1999. The facility is located in
Bowie, Maryland and the lease includes a three-year option to renew,
with monthly rental payments of $6,187, plus utilities and escalations
based upon increase in the consumer price index (CPI).
The Company also leases its main administrative offices, located
in Morristown, New Jersey, from a related party under a month-to-month
agreement treated as an operating lease for a monthly rental payment
of approximately $6,000. In addition, the Company is obligated under
various other leases for its facilities. The future minimum lease
payments for all locations under their respective leases as of
December 31, 1996 and 1995 are as follows:
December 31,
------------------------
1996 1995
---------- ----------
1996 $ -- $ 497,600
1997 643,562 499,100
1998 523,285 412,400
1999 349,522 306,900
2000 168,300 155,600
2001 and thereafter 63,500 --
---------- ----------
Total $1,748,169 $1,871,600
========== ==========
(b) Doctors Imaging Associates, Joint Venture:
The joint venturer which owns the minority 50% interest in the
joint venture, has a contract to provide professional radiology
services on a percentage basis to the joint venture. In addition,
through a separate company with common ownership, the joint venturer
also leases space to the joint venture.
(c) Muhlenberg Regional Medical Center:
The Company entered into an agreement with Muhlenberg Regional
Medical Center (the "Hospital") which provides for the placement of a
mobile magnetic resonance imaging ("MRI") unit at the Hospital for
five (5) years without rent. In addition, the Company entered into an
agreement with an affiliate of the Hospital for certain management
services to be provided to the Company for a five (5) year term
requiring minimum annual management fees of $50,000. In June 1996, the
agreements terminated by their terms.
(d) Services Support Agreements:
One of the Company's majority-owned joint ventures, Doctors
Imaging Associates, Joint Venture, signed two service support
agreements with the equipment manufacturer. The agreements, which
commenced January 1, 1993 and August 1, 1993, respectively, are for a
period of forty-eight (48) months and provide for monthly maintenance
charges of $11,640 and $4,667, respectively. In 1997, the joint
venture entered into a new service support agreement.
F-23
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES. (Continued)
(e) Somerset Imaging Project:
Construction on the Somerset project and the delivery of the
equipment was completed on July 14, 1995. Financing has been secured
through DVI. Two leases have been secured: the first for the CT Scan
and the Radiology/Fluoroscopy room in the amount of $518,106 and
payable for the first three months at $5,792 and the next 60 payments
at $11,787. The second lease is for construction in the amount of
$277,865 payable at $3,106 for the first three months and $6,321 for
the next 60 months. A third lease for $32,107 has been arranged for
additional construction upgrades not included in the original
construction lease and is payable at $359 for the first three months
and $730 for the next 60 months.
(f) Empire State Project:
In April 1995, the Company founded a New York corporation, Empire
State Imaging Associates, Inc. On April 28, 1995, Empire, which is
100% owned by the Company, purchased for $750,000 in cash and $200,000
of the Company's stock, the assets and certain liabilities of Central
Imaging Associates, Limited Partnership ("Central Imaging"), an entity
that leases MRI, CT and various diagnostic imaging equipment. Empire
will provide space, equipment (MRI, CT, Mammography, Ultrasound and
Diagnostic Imaging) and nonprofessional services, including
management, billing and collection functions to Central Imaging
located in Yonkers, New York.
Empire entered into a Loan and Security Agreement ("Loan Lease")
with DVI, 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.
On December 27, 1996, the Company entered into a stock purchase
agreement with a related party, which is a minority stockholder of
Prime, 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 one percent. 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 December 31, 1996, the
Company's investment in Empire is $60,321 and the Company has advances
receivable from Empire of $246,640.
(g) Amherst Project:
In April 1995, Amherst Medical Equipment Leasing Corporation
("AMHERST"), a wholly-owned subsidiary of the Company, was formed.
AMHERST entered into an agreement with Amherst Imaging Associates,
P.A., to provide certain non-professional services. In accordance with
this agreement, AMHERST has leased space in Amherst, New York,
effective July 1, 1995, for a period of five years at a monthly rent
of $1,275. On July 17, 1995, the Company entered into an agreement
with Magna-Lab, Inc. to purchase a permanent MRI at a cost of
approximately $500,000. Financing has been secured through DVI. The
lease in the amount of $327,000 is payable over 60 months at a monthly
payment of $7,068 commencing on January 1, 1996. Magna-Lab has agreed
to accept 18% of the operating income on a cash basis for a five year
period to cover the cost of the balance of the machine. This income
sharing is for five years and is not to exceed $200,000. As part of
the agreement, Magna-Lab agreed to pay the monthly space rent until
the MRI is delivered.
F-24
<PAGE>
NOTE 12 - REPORTABLE EVENTS.
The consolidated financial statements of the Company as of
December 31, 1994, and for the year then ended, were audited by
another auditor whose report, dated March 8, 1995, expressed an
unqualified opinion of those statements. In August 1995, the auditor
was dismissed. The Company engaged a different accounting firm to
audit the financial statements of the Company as of December 31, 1995,
and for the year then ended. In 1996, the Company engaged its present
accountants to audit the financial statements as of December 31, 1996
and for the years ended December 31, 1996 and 1994. There were no
disagreements or differences of opinion on any matter of accounting
principle or practice, financial statement disclosure or significant
accounting estimates between the former auditors and the management of
the Company.
Effective January 1, 1996, Mr Patrick O'Connor became Acting
President of the Company replacing Roger Findlay who will continue as
Chairman of the Board of Directors and will serve as a consultant to
the Company.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT ON ACCOMPANYING INFORMATION
Our audits of the basic consolidated financial statements as at December 31,
1996, and for the years ended December 31, 1996 and 1994, were made for the
purpose of forming an opinion on these financial statements taken as a whole.
The information included in Schedule VIII (as required by regulation S-X) on
page F-28 is presented for the purpose of additional analysis, and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements, and in our opinion, is fairly presented in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
/s/ WEINICK, SANDERS & CO. LLP
WEINICK, SANDERS & CO. LLP
Certified Public Accountants
New York, N. Y.
March 28, 1997
F-26
<PAGE>
[DDK & COMPANY LLP LETTERHEAD]
Independent Auditors' Report on Accompanying Information
Our audit of the basic consolidated financial statements as of December 31,
1995, and for the year then ended, was made for the purpose of forming an
opinion on these financial statements taken as a whole. The information included
in Schedule VII (as required by regulations S-X) is presented for the purpose of
additional analysis, and is not a required part of the basis financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements, and in our
opinion, is fairly presented in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/S/ DDK & Company LLP
DDK & Company LLP
Certified Public Accountants
New York, New York
March 8, 1996
F-27
<PAGE>
SCHEDULE VIII
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTING
<TABLE>
<CAPTION>
Additions
------------------
Charged
Balance to Costs Charged
Beginning and to Other Balance at
Description of Period Expenses Accounts Deductions End of Period
- ----------- --------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Contractual allowances:
Year ended
December 31, 1996 $1,556,114 $889,010 $ -- $ -- $2,445,124
Year ended
December 31, 1995 $1,092,340 $463,774 $ -- $ -- $1,556,114
Year ended
December 31, 1994 $ 604,535 $487,805 $ -- $ -- $1,092,340
</TABLE>
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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
By /s/Patrick O'Connor
-----------------------------------
Patrick O'Connor
President
Date April 14, 1997
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By /s/Patrick O'Connor
----------------------------------------------------
President
Date April 14, 1997
----------------------------------------------------
* * *
By /s/Roger Findlay
----------------------------------------------------
Roger Findlay
Chairman of the Board of Directors
Date April 14, 1997
----------------------------------------------------
* * *
By /s/Gregory Maccia
----------------------------------------------------
Gregory Maccia
Vice President, Secretary and Director
Date April 14, 1997
----------------------------------------------------
* * *
By /s/Jan Goldberg
----------------------------------------------------
Jan Goldberg
Vice President, Treasurer and Director
Date April 14, 1997
----------------------------------------------------
* * *
By /s/Elli Pittas
----------------------------------------------------
Elli Pittas
Vice President of Operations and Director
Date April 14, 1997
----------------------------------------------------
