<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ Quarterly Report pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Quarter Ended
June 30, 1997
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------------- ---------------------
Commission File number
0-23416
Modern Medical Modalities Corporation
--------------------------------------
(exact name of registrant as specified in its charter)
New Jersey # 22-3059258
- -------------------------------------- ------------------------------------
(state or other jurisdiction of (I.R.S. Employer I.D.#)
incorporation or organization)
95 Madison Avenue, Suite 301 Morristown, N.J. 07960
- ------------------------------------------------------------------------------
(address of principal executive offices) (zip code)
(201) 538-9955
- ------------------------------------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the most recent practicable date.
Common Stock - Par Value $.0001 3,168,292
- ------------------------------- -----------------------
Class Outstanding Shares At
August 11, 1997
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page No.
--------
Item 1: FINANCIAL STATEMENT
Independent Accountants' Review Report 1
Consolidated Balance Sheets as at June 30, 1997
(Unaudited) and December 31, 1996 2-3
Consolidated Statements of Operations For the Three and
Six Months Ended June 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows For the Three and
Six Months Ended June 30, 1997 and 1996 (Unaudited) 5-6
Notes to Interim Consolidated Financial Statements
(Unaudited) 7-11
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 2: Changes in Securities 18
Item 3: Defaults upon Senior Securities 18
Item 4: Submission of Matters to a Vote of Security Holders 18
Item 5: Other Information 18
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
---------------------------------------
To the Board of Directors
Modern Medical Modalities Corporation
We have reviewed the consolidated balance sheet of Modern Medical Modalities
Corporation and Subsidiaries as at June 30, 1997, and the related consolidated
statements of operations for the three and six months ended June 30, 1997 and
the related consolidated statements of cash flows for the six months ended June
30, 1997, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants.
A review of interim financial information consists principally of obtaining an
understanding of the system for the preparation of interim financial
information, applying analytical review procedures to financial data, and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Modern Modalities Corporation and
Subsidiaries as at December 31, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended not
presently herein; and in our report dated March 28, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as at
December 31, 1996, is fairly presented, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
The June 30, 1996 financial statements of Modern Medical Modalities Corporation
and Subsidiaries were reviewed by other accountants whose report dated August 2,
1996, stated that they were not aware of any material modifications that should
be made to those statements in order for them to be in conformity with generally
accepted accounting principles.
New York, N. Y.
August 6, 1997
-1-
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
A S S E T S
Current assets:
Cash and cash equivalents $ 219,041 $ 42,421
Restricted cash for line of credit repayment 600,000 600,000
Accounts receivable (less contractual
allowances of $2,491,499 and $2,445,124,
respectively) 5,498,157 4,867,242
Current portion of note receivable
from affiliate 1,000,000 600,000
Current portion of note receivable 26,920 -
Loan receivable - affiliate 150,000 225,000
Other receivables 265,587 409,442
Due from affiliate 37,500 -
Prepaid expenses 53,143 113,836
------------ ------------
Total current assets 7,850,348 6,857,941
------------ ------------
Other assets:
Furniture, fixtures, equipment and
leasehold improvements (net of accumulated
depreciation and amortization of $5,575,692
and $4,759,821, respectively) 9,960,548 10,043,862
Note receivable - affiliate,
net of current portion - 400,000
Note receivable, net of current portion 129,077 -
Goodwill (net of accumulated amortization
of $94,614 and $47,307, respectively) 1,324,609 1,371,916
Organization costs (net of accumulated
amortization of $11,951 and $9,859,
respectively) 10,746 12,839
Investment in joint ventures 314,400 237,261
Investment in and advances to
unconsolidated affiliate 508,355 306,961
Deposits 144,415 129,451
------------ ------------
Total other assets 12,392,150 12,502,290
------------ ------------
$20,242,498 $19,360,231
------------ ------------
------------ ------------
See accompanying independent accountants' review report
and notes to consolidated financial statements.
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<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 41,685 $ -
Line of credit 599,750 599,750
Loan payable - joint venturer 110,467 100,467
Loans payable - affiliates 407,016 468,571
Current portion of long-term debt 2,768,300 2,721,906
Accounts payable 1,099,551 1,259,344
Accrued expenses 450,995 643,183
Due to affiliates 38,231 52,216
Deferred income taxes 478,710 126,310
------------ ------------
Total current liabilities 5,994,705 5,971,747
------------ ------------
Other liabilities:
Long-term debt, net of current portion 8,000,072 7,741,217
Deferred income taxes 956,218 858,618
Due to joint venturer 218,717 218,717
------------ ------------
Total other liabilities 9,175,007 8,818,552
------------ ------------
Total liabilities 15,169,712 14,790,299
------------ ------------
Minority interest 234,361 184,939
------------ ------------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $0.0001 par value,
Authorized - 5,000,000 shares
Issued and outstanding - 3,168,292 shares 317 317
Additional paid-in capital 3,866,389 3,866,389
Retained earnings 971,719 518,287
------------ ------------
Total stockholders' equity 4,838,425 4,384,993
------------ ------------
$20,242,498 $19,360,231
------------ ------------
------------ ------------
See accompanying independent accountants' review report
and notes to consolidated financial statements.
-3-
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------------ -------------------------
1997 1996 1997 1996
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Operating income:
Net revenue from services $ 2,409,291 $ 2,260,630 $4,999,978 $4,170,379
Management and marketing fees 308,690 247,649 514,510 466,925
---------- ---------- ---------- ----------
Total operating income 2,717,981 2,508,279 5,514,488 4,637,304
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative 1,656,963 1,506,669 3,192,261 2,683,330
Expenses associated with manage-
ment and marketing fee income 175,414 312,678 339,948 556,531
Bad debts 6,564 28,282 13,681 47,610
Depreciation an amortization 448,109 416,309 865,325 784,545
---------- ---------- ---------- ----------
Total operating expenses (2,287,050) (2,263,938) (4,411,215) (4,072,016)
---------- ---------- ---------- ----------
Income from operations 430,931 244,341 1,103,273 565,288
Other income (expenses):
Interest income 70,341 9,481 77,355 20,429
Interest expense (325,552) (371,835) (589,187) (705,113)
Miscellaneous income 15,657 165,872 45,950 231,954
Income from a joint venture 59,208 6,761 107,380 43,310
Income from minority owned
subsidiary (7,023) - 14,381 -
Gain on sale of subsidiary - - 252,076 -
---------- ---------- ---------- ----------
Total other income (expenses) (187,369) (189,721) (92,045) (409,420)
---------- ---------- ---------- ----------
Income before income taxes
and minority interest 243,562 54,620 1,011,228 155,868
Provision for income taxes (112,420) (2,750) (450,110) (8,805)
---------- ---------- ---------- ----------
Income before minority interest 131,142 51,870 561,118 147,063
Minority interest 35,874 42,663 107,686 123,768
---------- ---------- ---------- ----------
Net income $ 95,268 $ 9,207 $ 453,432 $ 23,295
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share - primary:
Net income $0.03 $0.00 $0.14 $0.01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares outstanding:
Primary 3,168,292 3,168,292 3,168,292 3,168,292
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying independent accountants' review report
and notes to consolidated financial statements.
-4-
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six
Months Ended
June 30,
------------------------
1997 1996
------ ------
Cash flows from operating activities:
Net income $ 453,432 $ 23,295
--------- ---------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 865,325 784,545
Contractual allowances 46,375 875,624
Bad debts 13,681 47,610
Income from an unconsolidated joint venture (107,380) (43,310)
Minority interest 49,422 113,209
Deferred income taxes 450,000 6,959
Income from unconsolidated affiliate (14,381) --
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
Accounts receivable (690,971) (2,506,961)
Due from affiliates (37,500) 40,609
Other receivable 143,855 --
Prepaid expenses 60,693 (17,363)
Deposits (14,964) --
Distributions from a joint venture 30,241 --
Due to affiliates (13,985) 118,573
Accounts payable (159,793) 266,026
Accrued expenses (192,188) (74,239)
Advances to unconsolidated affiliate (187,013) --
--------- ---------
Total adjustments 241,417 (388,718)
--------- ---------
Net cash provided by (used in) operating activities 694,849 (365,423)
--------- ---------
Cash flows from investing activities:
Acquisition of property assets (666,169) (177,712)
Proceeds from loan receivable --affiliate 75,000 --
Issuance of note receivable (155,997) --
Proceeds from note receivable --affiliate -- 100,000
Deposits - (4,065)
Distributions from a joint venture -- 125,750
--------- ---------
Net cash provided by (used in) investing activities (747,166) 43,973
--------- ---------
Cash flows from financing activities:
Line of credit -- 148,000
Proceeds from long-term debt 1,074,632 595,412
Joint venture advances 10,000 (8,742)
Payments on affiliates advances (61,555) --
Cash overdraft 41,685 --
Payments on capitalized lease obligations
and long-term debt (835,825) (778,736)
--------- ---------
Net cash provided by (used in) financing activities 228,937 (44,066)
--------- ---------
--------- ---------
Net increase (decrease) in cash and cash equivalents 176,620 (365,516)
Cash and cash equivalents at beginning of period 42,421 984,326
--------- ---------
Cash and cash equivalents at end of period $ 219,041 $ 618,810
--------- ---------
--------- ---------
See accompanying independent accountants' review report
and notes to consolidated financial statements.
-5-
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the Six
Months Ended
June 30,
-------------------
1997 1996
------ ------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period:
Interest $ 277,704 $ 532,771
---------- ----------
---------- ----------
Income taxes $ 1,522 $ 1,847
---------- ----------
---------- ----------
Non-cash transactions:
Capital lease obligation in connection with
acquisition of medical equipment $ -- $ 876,461
---------- ----------
---------- ----------
Assumption of lease obligations for
acquisition of property assets $ 66,442 $ --
---------- ----------
---------- ----------
Accounts receivable due from Prime
Contracting Corp. charged against
additional paid-in capital $ -- $ 358,002
---------- ----------
---------- ----------
See accompanying independent accountants' review report
and notes to consolidated financial statements.
-6-
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
NOTE 1 --ORGANIZATION AND BASIS OF PRESENTATION.
Modern Medical Modalities Corporation (the "Company") was
incorporated in the State of New Jersey on December 6, 1989. The
Company provides high technology medical equipment and management
services to hospitals and physicians.
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, Medical Marketing and
Management, Inc., Somerset Imaging Corporation, South Plainfield
Imaging, Inc., Medi-Corp., USA, South Jersey Medical Equipment Leasing
Corp., Detex Medical Services, Inc., Amherst Medical Equipment Leasing
Corp., OpenMRI of Morristown, Inc., West Paterson Medical Equipment
Leasing Corp., Ohio Medical Equipment Leasing Corporation, Metairie
Medical Equipment Leasing Corp., (incorporated on June, 1997 and
inactive) its majority owned subsidiary, Sylvania Diagnostics L.P., in
which the Company has a 50.2% interest, and its majority owned joint
ventures, Plainfield MRI Associates, Joint Venture, MRI Imaging Center
at PBI, OpenMRI of Morristown, Joint Venture and Doctors Imaging
Associates, Joint Venture. The Company has an 84%, 75%, 72%, and 50%
interest, respectively, in the joint ventures, by contract manages the
joint ventures, is the managing joint venturer and has unilateral
control. Investments in unconsolidated minority-owned subsidiaries,
Empire State Imaging Associates, Inc. and OpenMRI and Diagnostic
Services of Toms River, Inc., in which the Company has a 35% and 25%
interest and significant influence, is accounted for under the equity
method.
The accompanying unaudited consolidated financial statements and
footnotes have been condensed and, therefore, do not contain all
required disclosures. Reference should be made to the Company's
annual financial statement filed on Form 10-K for the year ended
December 31, 1996.
The financial statements for the three and six month periods ended
June 30, 1997 and 1996 have not been audited. In the opinion of
management, the unaudited interim consolidated financial statements
reflect all adjustments and accruals, consisting only of normal
recurring adjustments and accruals, necessary to present fairly the
financial position of the Company as at June 30, 1997 and the results
of its operations for the three and six month periods ended June 30,
1997 and 1996 and statements of cash flows for the three and six month
periods ended June 30, 1997 and 1996. The results for the three and
six month periods ended June 30, 1997 are not necessarily indicative
of the results to be expected for the full year.
-7-
<PAGE>
NOTE 1 --ORGANIZATION AND BASIS OF PRESENTATION. (Continued)
The accounting policies followed by the Company are set forth
in Note 1 to the Company's financial statements included in its
Annual Financial Statement filed on Form 10-K for the year ended
December 31, 1996, which is incorporated herein by reference.
Specific reference is made to this report for a description of the
Company's securities and the notes to financial statements included
therein.
Included in intangible assets is goodwill related to the
acquisition of Sylvania Diagnostics. Goodwill is amortized over 15
years. Goodwill is reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not
be recoverable.
The carrying amounts of cash, amounts receivable, short-term
notes receivable, accounts payable, and short-term debt approximate
fair value due to the short maturity of the instruments and the
provision for what management believes to be adequate reserves for
potential losses. It was not practicable to estimate the fair value
of long-term notes receivable at December 31, 1996 and long-term
debt at June 30, 1997 and December 31, 1996 because quoted market
prices do not exist and an estimate could not be made through other
means without incurring excessive costs.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Certain items in the 1996 financial statements have been
reclassified to conform with the 1997 presentation. These
reclassifications had no effect on the financial position, net
income or stockholders' equity for the periods presented.
NOTE 2 --EARNINGS PER SHARE.
Earnings per share are computed by dividing net income by the
weighted average number of common stock and common stock equivalent
shares outstanding during each period.
Common stock and common stock equivalent shares outstanding
include shares issued within one year of an initial public offering
(IPO), at a price below the IPO price, as outstanding for all
periods presented. Earnings per share --fully diluted for the three
and six months ended June 30, 1997 and 1996 is not presented in the
consolidated statements of operations since it is not dilutive.
-8-
<PAGE>
NOTE 3 --ACQUISITIONS AND DISPOSAL OF SUBSIDIARY.
(a) Acquisition:
On November 1, 1994 the Company acquired Prime Contracting
Corp. ("Prime") in a business combination accounted for as a pooling
of interests. Prime is a full service contractor who provides
turnkey design and construction services and became a wholly-owned
subsidiary of the Company, through the exchange of 112,457 shares of
the Company's common stock (market value of $650,000) for all of the
shares of the outstanding stock of Prime. The accompanying
consolidated financial statements are based on the assumption that
the companies were combined for the full year, and financial
statements of prior years have been retroactively restated to give
effect to the combination.
(b) Disposal:
On December 27, 1995, the Company entered into an agreement, as
modified in March 1996, with a related party to sell all of the
common stock of Prime for $1,200,000, payable as follows: $100,000
upon execution, $100,000 at closing and a promissory note bearing
interest at prime plus one percent. The note as amended, is
currently payable in installments of $600,000 on October 27, 1997
and $400,000 on April 27, 1998.
On December 27, 1996, the Company entered into a stock purchase
agreement with a related party to sell 65% of the capital stock of
Empire State Imaging Associates, Inc. ("Empire") for $250,000,
payable as follows: $25,000 at the closing and nine equal monthly
of $25,000 plus interest at prime plus 1%. The Company has recorded
an increase of $165,631 to stockholders' equity which represents the
excess of the sale price over the net assets of Empire. At June 30,
1997, the Company's investment in Empire is $86,458 and the Company
has advances receivable from Empire of $421,897.
NOTE 4 --PROPERTY AND EQUIPMENT, NET.
Property and equipment, consisted of the following:
June 30, December 31,
1997 1996
------------ -------------
(Unaudited)
Medical equipment $14,084,711 $13,355,067
Buildings 358,066 358,066
Furniture and fixtures 72,803 69,890
Automobiles 22,860 22,860
Leasehold improvements 997,800 997,800
------------ -------------
15,536,240 14,803,683
Less: Accumulated depreciation
and amortization 5,575,692 4,759,821
------------ -------------
$ 9,960,548 $10,043,862
------------ -------------
------------ -------------
-9-
<PAGE>
NOTE 5 --INVESTMENT IN AN UNCONSOLIDATED JOINT VENTURE.
Summarized (unaudited) financial information of the
unconsolidated joint venture, Union Imaging Associates, Joint
Venture, in which the Company has a 10% minority interest is as
follows:
Total Long-Term Total Total
Assets Debt Liabilities Capital
---------- ---------- ----------- ----------
June 30, 1997 $5,608,223 $2,961,046 $3,519,934 $2,088,289
December 31, 1996 $4,339,575 $1,938,137 $3,637,025 $ 702,550
(10%)
Gross Net Allocation
Revenues Income of Income
---------- ---------- -----------
For the three months ended
June 30, 1997 $1,443,896 $ 592,080 $ 59,208
For the six months ended
June 30, 1997 $2,910,717 $1,073,804 $107,380
For the year ended December
31, 1996 $4,417,540 $1,041,469 $104,147
NOTE 6 --LINE OF CREDIT.
In April 1995, the Company secured a one year line of credit
with Summit Bank of New Jersey for $600,000 at the bank's prime rate
for commercial borrowers. The line was renewed under the same terms
until December 1997. As of June 30, 1997, the amount of the
liability under the line of credit was $599,750. The line of credit
is secured by a certificate of deposit in the amount of $600,000.
NOTE 7 -LONG-TERM DEBT.
Long-term debt consists of the following:
June 30, December 31,
1997 1996
----------- -----------
(Unaudited)
Capitalized lease obligations (a) $ 9,377,429 $ 9,296,467
Accounts receivable financing (b) 937,021 686,173
Other (c) 453,922 480,483
----------- -----------
10,768,372 10,463,123
Less: Amounts due in one year 2,768,300 2,721,906
----------- -----------
$ 8,000,072 $ 7,741,217
----------- -----------
----------- -----------
(a) Capital Lease Obligations:
Capital lease obligations are collateralized by property and
equipment having an approximate original cost of $15,000,000 and an
approximate net book value of $10,000,000 at June 30, 1997.
-10-
<PAGE>
NOTE 7 -LONG-TERM DEBT. (Continued)
(b) Accounts Receivable Financing:
The Company entered into a agreement with DVI Business Credit to
finance up to $2,000,000 of the accounts receivable balances from two of
the Company's wholly-owned subsidiaries, a minority-owned subsidiary, and
two of its majority-owned joint ventures. Advances would bear interest
at the prime rate plus 4%. At June 30, 1997, the amount financed under
this agreement totalled $1,364,078, including $427,057 owed by the
minority-owned subsidiary.
(c) Other:
Sylvania Diagnostics limited partnership at June 30, 1997 is
obligated for notes payable incurred prior to the Company's acquiring its
50.2% interest. The Company has an agreement in which DVI indemnifies
the Company for these notes as well as all other pre-acquisition debts of
Sylvania Diagnostics. The notes payable at June 30, 1997 are as follows:
(i) Note payable to a bank which was due on March 14,
1996. The bank has not called the note and is
negotiating with the Company, Sylvania and DVI
to schedule repayment terms. The note bears
interest at 2.5% over prime. The note is col-
lateralized by substantially all of the assets
of Sylvania. $249,500
(ii) Note payable to a professional corporation in
equal monthly installments of $5,000 including
interest at 9.4% through July 2000. 160,939
(iii) Installment note payable to a bank in equal
monthly installments of $1,302 including interest
at 2% over prime through August 2000 and a final
payment in September 2000 of the remaining balance. 43,483
--------
$453,922
--------
--------
NOTE 8 --GAIN ON SALE OF SUBSIDIARY.
In February 1997, the Company acquired a 25% interest in
OpenMRI and Diagnostic Services of Toms River, Inc. In March 1997,
the Company entered into a contract for the sale of its stock in
this entity resulting in a gain of $252,076. The proceeds are
payable as follows: 25% at closing and a note for 75%, bearing
interest at 11% per annum, payable in monthly installments
commencing 90 days after the facility opens for business.
-11-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis provides information which
the Company's management believes is relevant to an assessment and
understanding of the Company's results of operations and financial
condition. This discussion should be read in conjunction with the
financial statements and notes thereto included elsewhere herein.
In 1995, the Company purchased Empire State Imaging Associates,
Inc. ("Empire State"). On December 27, 1996, the Company sold 65% of
the common stock of Empire State for $250,000 to a related party. The
Company commenced operations during the second, third and fourth
quarters of 1995 and the first quarter of 1996, respectively, at sites
located in Passaic and Somerset, New Jersey; Amherst, New York; and
Morristown, New Jersey. During the third quarter of 1996, the
Company, through its wholly-owned subsidiary, West Paterson Medical
Equipment Leasing Corp. ("WPMEL"), entered into a lease and management
services agreement at a site specializing in diagnostic imaging
located in West Paterson, New Jersey. In addition, the Company,
through its wholly-owned subsidiary, Ohio Medical Equipment Leasing
Corporation ("OME"), entered into a purchase and consulting agreement
to acquire a 50.2% interest as a general (managing) partner of a
diagnostic imaging center located in Sylvania, Ohio. Many of the
fluctuations on the line items on the balance sheets and the
statements of operations are directly attributable to the acquisition
and start-up of these entities.
Metairie Medical Equipment Leasing Corp. was incorporated in June
1997 (a 100% owned subsidiary of the Company). As of June 30, 1997,
this corporation was inactive.
Results of Operations:
For the three months ended June 30, 1997 as compared to the three
months ended June 30, 1996:
Revenues for Modern Medical Modalities Corporation and
subsidiaries aggregated $2,718,000 in 1997 as compared to $2,508,000
in 1996. The increase in revenues (8.4%) is directly attributable to
an increase in patient service revenues of $148,000 primarily from new
sites in operation in 1997.
Operating expenses for 1997 were $2,287,000 (84.1% of operating
revenues) as compared to $2,264,000 (90.3% of operating revenues) in
1996. This increase of $23,000 (1.0%) is primarily the result of an
increase in selling, general and administrative expenses of $150,000
due to the new sites in operation in 1997.
Expenses Associated with Management and Marketing Fee Income:
Expenses associated with management and marketing fee income
decreased by $137,000 (43.9%) to $175,000 in 1997. This decrease is
attributable to a reallocation of certain expenses directly to the
Company's various MRI sites.
-12-
<PAGE>
Interest Expense:
Interest expense has decreased by $46,000 when comparing 1997 and
1996. This decrease is attributable primarily to the financing of
equipment at Empire State which was included in the 1996 operations.
For the Six Months Ended June 30, 1997 as Compared
to the Six Months Ended June 30, 1996:
Revenues for Modern Medical Modalities Corporation and
subsidiaries aggregated $5,514,000 in 1997 as compared to $4,637,000
in 1996. The increase in revenues (18.9%) is directly attributable to
an increase in patient service revenues of $829,000 primarily from new
sites in operation in 1997.
Operating expenses for 1997 were $4,411,000 (80.0% of operating
revenues) as compared to $4,072,000 (87.8% of operating revenues) in
1996. This increase of $339,000 (8.3%) is primarily the result of an
increase in selling, general and administrative expenses of $509,000
due to the new sites in operation in 1997.
Expenses Associated with Management and Marketing Fee Income:
Expenses associated with management and marketing fee income
decreased by $217,000 (39.0%) to $340,000 in 1997. This decrease is
attributable to a reallocation of certain expenses directly to the
Company's various MRI sites.
Interest Expense:
Interest expense has decreased by $116,000 when comparing 1997
and 1996. This decrease is attributable primarily to the financing of
equipment at Empire State which was included in the 1996 operations.
Gain on Sale of Subsidiary:
In February 1997, the Company acquired a 25% interest in Open MRI
and Diagnostic Services of Toms River, Inc. In March 1997, the
Company entered into a contract with an unrelated third party for the
sale of its stock in this entity resulting in a gain of $252,000. The
proceeds are payable as follows: 25% at closing and a promissory note
for 75%, at 11% interest, payable in monthly installments commencing
90 days after the facility opens for business.
Liquidity and Capital Resources:
The Company has a commitment from the minority-owned joint
venturer in Doctors Imaging Associates, Joint Venture, to provide up
to $250,000 from time to time, for working capital purposes, as the
Company deems necessary. Advances from this joint venturer totaled
$219,000 as of June 30, 1997 and December 31, 1996.
The Company has a working capital surplus of $1,856,000 at June
30, 1997 as compared to a working capital surplus of $886,000 at
December 31, 1996.
-13-
<PAGE>
Liquidity and Capital Resources: (Continued)
During 1995, the Company secured a line of credit with Summit
Bank in the amount of $600,000. Under the terms of the agreement, the
rate on the line is at the prevailing prime rate. To secure the line,
the Company opened a certificate of deposit at Summit Bank in the
amount of $600,000.
In March 1997, the Company entered into an amended agreement with
DVI to finance up to $2,000,000 of the accounts receivable balances
from two of its wholly-owned subsidiaries, a minority-owned subsidiary
and two of its majority-owned joint ventures. Advances bear interest
at the prime rate plus four percent. At June 30, 1997, the total
outstanding advances is $1,364,000 including $427,000 owed by the
minority-owned subsidiary.
These are the only trends, commitments, events and/or material
uncertainties known to the Company.
In November 1994, the Company acquired Prime which it sold on
December 27, 1995 to a related party for $1,200,000 payable as
follows: $100,000 upon execution, $100,000 at closing and a
promissory note bearing interest at prime plus one percent. The note
is payable in two installments, $600,000 on October 27, 1997 and
$400,000 on April 27, 1998.
In April 1995, the Company formed a New York corporation, Empire
State Imaging Associates, Inc. ("Empire State"). On December 27,
1996, the Company sold 65% of the stock of Empire State to another
related party for $250,000 payable as follows: $25,000 down and
$25,000 per month with interest on the unpaid principal at prime plus
1%. At June 30, 1997, $150,000 was outstanding.
In February 1996, OpenMRI of Morristown ("OpenMRI"), a
majority-owned Joint Venture, commenced operations. The site, located
in Morristown, New Jersey, is a joint venture between a large medical
group and OpenMRI.
In July 1996, the Company, through its wholly-owned subsidiary
West Paterson Medical Equipment Leasing Corporation ("WPMEL"), entered
into a lease and management services agreement with Advanced Imaging &
Radiology Associates, P.A. ("M.D."). The agreement provides that
WPMEL will lease office space, fixtures and equipment and will provide
management services to M.D. over an initial term of five years with a
five year renewal option. The site, located in West Paterson, N.J. is
a medical practice specializing in diagnostic imaging.
In July 1996, the Company, through its wholly-owned subsidiary
Ohio Medical Equipment Leasing Corporation ("OME"), entered into a
purchase and consulting agreement with Medical Advances, Inc.
("Medical") to acquire an interest as a general (managing) partner of
Sylvania Diagnostics, an Ohio Limited Partnership ("Sylvania") for one
dollar. The interest acquired represents 50.2% of the total units
outstanding. Sylvania is a diagnostic imaging center located in
Sylvania, Ohio.
-14-
<PAGE>
Liquidity and Capital Resources: (Continued)
The Company also entered into an agreement with DVI which
provides for $135,000 of working capital advances which is only to be
used for operating Sylvania. If the Company determines that operating
Sylvania is not profitable, the Company has the option to require DVI
to purchase either Sylvania or OME for one dollar.
Valuation of Accounts Receivable:
The Company values its uncollected accounts receivable as part of
its determination of profit. The Company constantly reviews the
accounts receivable valuation. The continuing monthly review,
gathering of additional information, as well as changing reimbursement
rate, may cause adjustments to the accounts receivable valuation.
Healthcare System:
It is management's belief that the United States healthcare
system is in a state of change and will continue so for the next
several years. Management believes that small medical group practices
are referring and will continue to refer patients to free standing
centers as an alternative to costly hospital care as the cost of the
medical equipment and the patient volume needed to justify the
expenditure is not practical for individual and small group practices.
The Company's providing MRI and CT scans for these physicians in these
free standing centers offers, in management's opinion, an attractive
method for these practices to protect eroding income, offer
state-of-the-art technology and maintain patient loyalty.
Legislation:
Legislation has been passed in some states that will restrict the
physicians in joining joint ventures such as those of the Company. In
New Jersey, any site already in existence has been excluded from this
legislation. This legislation was enacted in July 1991.
Federal guidelines also known as "Safe Harbor" guidelines have
been established that will limit physicians to the number of Medicare
patients they can refer to an outpatient facility in which they have a
financial interest.
A commission has been appointed by the Federal government to
review the delivery of healthcare on a national level. Although many
alternatives have been discussed, it is impossible to determine at
this time what charges will be enacted or the affect on the Company's
business.
-15-
<PAGE>
Legislation: (Continued)
In order to curb the potential for fraud and abuse under the
Medicare and Medicaid programs, Congress has enacted certain laws
("the Anti-Kickback Laws") prohibiting the payment or receipt of any
remuneration in return for the referral of patients to a healthcare
provider for the furnishing of medical services or equipment, the
payment for which may be made in whole or in part by the Medicare or
Medicaid programs. It should be noted that the Anti-Kickback Laws
apply to both sides of the referral relationship: the provider making
the referral and the provider receiving the referral.
Violation of the Anti-Kickback Laws is a criminal felony
punishable by fines up to $25,000 and/or up to five years imprisonment
for each violation. Federal law also permits the Department of Health
and Human Services ("HHS") to assess civil fines against violators of
the Anti-Kickback Laws and to exclude them from participation in the
Medicare and Medicaid programs. These civil sanctions can be imposed
in proceedings that do not involve the same procedural requirements
and standards of proof as would be required in a criminal trial. Even
though the Joint Ventures have physician investors, the Anti-Kickback
laws will not have an effect on the Company's operations because the
Company does not bill Medicare and Medicaid for medical services as it
only leases equipment.
HHS has proposed regulations specifying "safe harbors" for
various payment practices between healthcare providers and their
referral sources. If a payment practice were to come within the safe
harbor, it would not be treated as an illegal Medicare/Medicaid
kickback which is a ground for exclusion from the Medicare/Medicaid
programs. While failure to fall within a safe harbor does not mean
that the practice is illegal, HHS had indicated that it may give such
arrangements closer scrutiny. In their present proposed form, no safe
harbor would cover an investment interest in the Company. It is
likely that this bill will be reintroduced in future sessions. The
Company cannot predict whether these regulatory or statutory
provisions will be enacted by federal or state authorities which would
prohibit or otherwise regulate referrals by physicians to the Company
thereby having a material adverse effect on the Company's operations.
-16-
<PAGE>
Legislation: (Continued)
The "Stark Bill" extends the prohibition against physician
self-referral, which had previously been applicable only to clinical
laboratory services, to several additional services, but also sets
forth several exceptions to the ban, which the following outlines: In
general, the Stark Bill provides that a physician with an ownership or
investment interest in or a compensation agreement with an entity is
prohibited from making referrals to that entity or the furnishing of
designated health services for which Medicare payment would otherwise
be made. Designated health services under the Stark Bill include (1)
clinical laboratory services; (2) physical therapy services; (3)
occupational therapy services; (4) radiology or other diagnostic
services; (5) radiology therapy services; (6) the furnishing of
durable medical equipment; (7) parental and enteral nutrients,
equipment and supplies; (8) prosthetics, orthotics and prosthetic
devices; (9) home health services; (10) outpatient prescription drugs;
and (11) inpatient and outpatient hospital services. This bill is
effective for referrals made on or after January 1, 1992, for clinical
laboratory services; and effective for referrals made after December
31, 1994, in the case of other designated health services. While this
bill has not affected the Company at this time, it may have an adverse
effect limiting Medicare and Medicaid referrals by physicians who are
investors in the Joint Venture.
In 1991, New Jersey enacted the Health Care Cost Reduction Act,
or so-called "Codey Bill", (N.J.S.A. 45: 9-22.4 et seq.) which
provided in part that a medical practitioner shall not refer a
patient, or direct one of its employees to refer a patient, to a
health care service in which the practitioner and/or the
practitioner's immediate family had any beneficial interest. The bill
specifically provided that for beneficial interests which were created
prior to the effective date of the Act, July 31, 1991, the
practitioner could continue to refer patients, or direct an employee
to do so, if the practitioner disclosed such interest to his patients.
The disclosure must take the form of a sign posted in a conspicuous
place in the practitioner's office informing the patients of such
interest and stating that a listing of alternative healthcare service
providers could be found in the telephone directory. All physicians
who refer to the Company's sites in New Jersey and also have a
financial interest in those sites have a sign posted as mandated by
the law.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
II. See notes to interim consolidated financial state-
ments, Note 2, regarding computation of per share
earnings.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during
the quarterly period ended June 30, 1997.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Modern Medical Modalities Corporation
--------------------------------------
(Registrant)
Date: August 11, 1997 Patrick O'Connor
---------------------------------------
Acting President
Date: August 11, 1997 Gregory Maccia
--------------------------------------
Vice President and Secretary
Date: August 11, 1997 Jan Goldberg
--------------------------------------
Vice President and Treasurer
-19-
<PAGE>
CONFORMED
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Modern Medical Modalities Corporation
-------------------------------------
(Registrant)
/s/Patrick O'Connor
Date: August 11, 1997 ------------------------------------
Patrick O'Connor
Acting President
/s/Gregory Maccia
Date: August 11, 1997 ---------------------------------------
Gregory Maccia
Vice President and Secretary
/s/Jan Goldberg
Date: August 11, 1997 --------------------------------------
Jan Goldberg
Vice President and Treasurer
-20-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS, AND CONSOLIDATED STATEMENTS OF INCOME OF THE COMPANY IN THE
COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
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<ALLOWANCES> 2,491,499
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<TOTAL-ASSETS> 20,242,498
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<BONDS> 8,000,072
0
0
<COMMON> 3,866,706
<OTHER-SE> 971,719
<TOTAL-LIABILITY-AND-EQUITY> 20,242,498
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<TOTAL-REVENUES> 2,717,981
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