<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended
March 31, 1998
( ) 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
95 Madison Avenue, Suite 301, Morristown, NJ 07960
---------------------------------------------------
(Address principal executive offices) (zip code)
Registrant's telephone number, including area code (973) 538-9955
--------------
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 / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the most recent practicable date.
Common Stock - Par Value $.0001 3,168,292
------------------------------- -------------------------------
Class Outstanding Shares At
November 13, 1997
<PAGE>
PART I -- FINANCIAL INFORMATION
Page No.
Item 1: FINANCIAL STATEMENT
Independent Accountants' Review Report............................... 1
Consolidated Balance Sheets as at March 31, 1998
(Unaudited) and December 31, 1997................................. 2
Consolidated Statements of Operations
For the Three Months Ended March 31, 1998 and 1997 (Unaudited).... 4
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997 (Unaudited).... 5
Notes to Interim Consolidated Financial Statements (Unaudited)....... 6-10
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11-14
PART II -- OTHER INFORMATION
Item 1: Legal Proceedings............................................... 15
Item 2: Changes in Securities........................................... 15
Item 3: Defaults upon Senior Securities................................. 15
Item 4: Submission of Matters to a Vote of Security Holders............. 15
Item 5: Other Information............................................... 15
Item 6: Exhibits and Reports on Form 8-K................................ 15
Signatures...................................................... 16
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors
Modern Medical Modalities Corporation
We have reviewed the consolidated balance sheet of Modern Medical Modalities
Corporation and Subsidiaries as at March 31, 1998, and the related
consolidated statements of operations, and chash flows for the three months
then ended, in accordance with Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public
Accountants.
A review of interim financial information consists principally of obtaining
an understanding of the system for the preparation of interim financial
information, applying analytical review procedures to financial data, and
making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consollidated balance sheet of Modern Medical Modalities
Corporation and Subsidiaries as at December 31, 1997, 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
April 17, 1998, 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, 1997 is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Vincent J. Batyr & Co.
Tarrytown, NY
May 28, 1998
1
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Operating income:
Net revenue from services $ 1,796,680 $ 2,796,507
----------------- -----------------
Total operating income 1,796,680 2,796,507
----------------- -----------------
Operating expenses:
Selling, general and administrative 1,973,091 1,699,832
Bad debts 6,082 7,117
Depreciation and amortization 430,663 417,216
----------------- -----------------
Total operating expenses 2,409,836 2,124,165
----------------- -----------------
Income (loss) from operations (613,156) 672,342
----------------- -----------------
Other income (expenses):
Interest income 24,518 7,014
Interest expense (223,704) (263,635)
Miscellaneous income 48,900 30,293
Income from joint ventures 50,873 48,172
Income from minority owned
subsidiary - 21,404
Gain on sale of subsidiary - 252,076
Restructuring of note receivable (747,650) -
----------------- -----------------
Total other income (expense) (847,063) 95,324
----------------- -----------------
Income (loss) before income taxes
and minority interest (1,460,219) 767,666
Provision for income taxes (664,400) 337,690
----------------- -----------------
Income before minority interest (795,819) 429,976
Minority interest (78,262) 71,812
----------------- -----------------
Net income (loss) $ (717,557) $ 358,164
================= =================
Basic earnings per share
Net income (loss)
================= =================
Number of shares outstanding:
Basic 3,168,292 3,168,292
================= =================
</TABLE>
See accompanying independent accountant's review report and notes to
financial statements
2
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
-----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (717,557) $ 358,164
------------ -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 430,663 417,216
Contractual allowances (49,979) 147,130
Bad debts 6,082 7,117
Income from an unconsolidated joint venture (50,873) (48,172)
Minority interest 85,684 347,311
Deferred income taxes (664,400) (244,300)
Income from unconsolidated affiliate - (21,404
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
Accounts receivable 515,375 (772,050)
Accounts receivable - joint venturer (138,475) -
Other receivable (14,433) 91,668
Due from affiliate (32,500) -
Due from officers 94,343 -
Prepaid expenses 17,359 55,610
Deposits (3,194) 3,537
Distributions from a joint venture (1,381) 18,141
Due to affiliate 496 (52,216)
Accounts payable 36,992 319,553
Accrued expenses 232,541 83,168
Advances to unconsolidated affiliate (35,209) (153,348)
------------ -----------
Total adjustments 429,091 198,961
------------ -----------
Net cash provided (used) by operating activities (288,466) 557,125
------------ -----------
Cash flow from investing activities:
Fixed asset acquisitions (590,874) (20,101)
Proceeds from loan receivable - affiliate - 50,000
Restructuring of note receivable 772,650 -
Issuance of note receivable - (153,130)
------------ -----------
Net cash provided (used) by investing activities 181,776 (123,231)
Cash flow from financing activities:
Proceeds from issuance of long-term debt 354,184 158,414
Payments on affiliates advances - (67,409)
Cash overdraft - 45,214
Joint venture advances 32,583 10,000
Principal payments on long-term debt (211,693) (474,624)
------------ -----------
Net cash provided (used) by financing activities 175,074 (328,405)
------------ -----------
Net increase in cash and equivalents 68,384 105,489
Cash and equivalents, begining of year 719,217 42,421
Cash and equivalents, end of year $ 787,601 $ 147,910
============ ===========
</TABLE>
See accompanying independent accountants' review report and notes to
consolidated financial statements
3
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 187,601 $ 119,217
Restricted cash for line of credit repayment 600,000 600,000
Accounts receivable (less contractual
allowances of $ 2,425,025 and $ 2,475,004,
respectively) 4,454,318 4,919,714
Account receivable - joint venture 394,101 254,696
Current portion of note receivable
from affiliate 200,000 972,650
Current portion of note receivable 46,590 46,590
Loan receivable - affiliate 153,750 121,250
Due from officers - 94,343
Other receivables 61,987 47,554
Prepaid expenses 27,640 44,999
----------------- -----------------
Total current assets 6,125,987 7,221,013
================= =================
Other assets:
Furniture, fixtures, equipment and
leasehold improvements (net of accumulated
depreciation and amortization of $ 6,549,256
and $ 6,134,831, respectively 9,621,653 9,445,204
Note receivable, net of current portion 113,736 113,736
Goodwill (net of accumulated amortization
of $ 212,887 and $ 189,233, respectively. 1,206,336 1,229,990
Organization costs (net of accumulated
amortization of $ 18,926 and $ 16,601,
respectively) 78,772 81,097
Investment in joint ventures 310,002 259,483
Investment in and advances to
unconsolidated affiliate 602,946 567,737
Deposits 155,095 151,901
----------------- -----------------
Total other assets 12,088,540 11,849,148
----------------- -----------------
$ 18,214,527 $ 19,070,161
================= =================
</TABLE>
See accompanying independent accountant's review report and notes to
financial statements
4
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------------- -----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Line of credit $ 599,750 $ 599,750
Loan payable - joint venturer 143,050 110,467
Loans payable - affiliates 202,000 202,000
Current portion of long term debt 3,725,429 3,115,461
Accounts payable 1,500,088 1,463,096
Accrued expenses 789,403 556,862
Due to affiliate 24,090 23,594
Deferred income taxes 104,152 155,133
----------------- -----------------
Total current liabilities 7,087,962 6,226,363
----------------- -----------------
Other liabilites:
Long-term debt, net of current portion 6,453,372 6,920,849
Deferred income taxes 441,133 1,054,552
Due to joint venturer 218,717 217,787
----------------- -----------------
Total other liabilities 7,113,222 8,193,188
----------------- -----------------
Total liabilities 14,201,184 14,419,551
----------------- -----------------
Minority interest 221,115 140,825
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 (deficit) (74,478) 643,079
----------------- -----------------
Total stockholders' equity 3,792,228 4,509,785
----------------- -----------------
----------------- -----------------
$ 18,214,527 $ 19,070,161
================= =================
</TABLE>
See accompanying independent accountant's review report and notes to
financial statements
5
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
March 31, 1998
(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 Managment,
Inc., Somerset Imaging Corporation, South Plainfield Imaging, Inc.,
Medi-Corp., USA, South Jersey Medical Equipment Leasing Corp., Amherst
Medical Equipment Leasing Corp., Open MRI of Morristown, Inc., West
Paterson Medical Equipment Leasing Corp., Ohio Medical Equipment Leasing
Corporation, its majority owned subsidiaries, Sylania Diagnostics L.P.,
(in which the Company has a 50.2% interest) and Metairie Medical
Equipment Leasing Corp., a 100% owned subsidiary which was incorporated
in June 1997, and its majority owned joint ventures, Plainfield MRI
Associates, Joint Venture, MRI Imaging Center at PBI, Opend MRI of
Morristown, Joint Venture and Doctors Imaging Associates, Joint Venture.
The Company has an 84%, 75%, 72%, and 50% interest, respectively, in
the joint ventures and by contract manages the joint ventures, in which
it is the managing joint venturer and it has unilateral control.
Investment in an unconsolidated minority-owned subsidiary, Empire State
Imaging Associates, Inc., in which the Company has a 35% interest and
significant influence, is accounted for under the equity method.
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.
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,
1997.
The financial statements for the three month periods ended March
31, 1998 and 1997 have not been audited. In the opinion of management,
the unaudited interim consolidated financial statements reflect all
adjustments and accruals, consisting only of normal recurring
adjustments and accruals, necessary to present fairly the financial
position of the Company as at March 31, 1998 and the results of its
operations for the three month periods ended March 31, 1998 and 1997 and
statements of cash flows for the three month periods ended March 31,
1998 and 1997. The results for the three month periods ended March 31,
1998 and 1997 are not necessarily indicative of the results to be
expected for the full year.
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,
1997, 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.
6
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued)
The carrying amounts of cash, accounts receivable, short-term
notes receivable, accounts payable, and short-term debt approximate fair
value due to the short maturity of the instruments and the provision for
what management believes to be adequate reserves for potential losses.
It was not practical to estimate the fair value of long-term notes
receivable and long-term debt because quoted market prices do not exist
and an estimate could not be made through other means without incurring
excessive costs.
Certain items in the 1997 financial statements have been
reclassified to conform with the 1998 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 - diluted for the three months ended
March 31, 1998 is not presented in the consolidated statements of
operations since it is not dilutive.
NOTE 3 - ACQUISITIONS AND DISPOSAL OF SUBSIDIARY.
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 installments
of $25,000 plus interest at prime plus 1%. The company has recorded an
increase of $165,631 to stockholders' equity which represents the excess
of the sale price over the net assets of Empire. At March 31, 1998, the
Company's investment in Empire is $61,708, and the Company has advances
receivable from Empire of $541,238.
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 for the sale of its stock in this entity
resulting in a gain of $252,076. The proceeds are payable as follows:
25% at closing and a note for 75%, bearing interest at 11% per annum,
payable in monthly installments commencing 90 days after the facility
opens for business.
NOTE 4 - RESTRUCTURING OF NOTE RECEIVABLE
On March 3, 1998 the Company restructured the promissory note
receivable for the sale of Prime Contracting Corp. to a related party as
follows: $ 200,000 in cash payable over 36 months, plus interest
calculated at prime plus 1% and a 36 month option to purchase 250,000
shares of the related party stock at $ 0.05. The Company recorded a
loss from note receivable restructuring in the amount of $747,650.
7
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
NOTE 5 - PROPERTY AND EQUIPMENT, NET.
Property and equipment, net, consisted of the following:
March 31, December 31,
1998 1997
----------- -----------
(unaudited)
Medical equipment $14,625,376 $14,083,189
Buildings 358,066 358,066
Furniture and fixtures 67,139 67,139
Automobiles 22,860 22,860
Leasehold improvements 1,097,468 1,048,780
----------- -----------
16,170,909 15,580,034
Less: Accumulated depreciation
and amortization 6,549,256 6,134,831
----------- -----------
$ 9,621,653 $ 9,445,204
=========== ===========
NOTE 6 - 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
March 31, 1998 5,460,767 2,266,512 2,836,240 2,624,527
December 31, 1997 5,538,114 1,354,524 3,116,550 2,421,564
(10%)
Gross Net Allocation
Revenues Income Of Income
----------- ----------- -----------
For the three months ended
March 31, 1998 1,436,565 505,186 50,519
For the year ended
December 31, 1997 5,603,802 2,078,843 207,884
8
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
NOTE 7 - LINE OF CREDIT.
In April 1995, the Company secured a line of credit with Summit
Bank of New Jersey for $600,000 at the bank's prime rate for commercial
borrowers. As of March 31, 1998 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 8 - LONG-TERM DEBT.
Long-term debt consists of the following:
March 31, December 31,
1998 1997
------------ ------------
(unaudited)
Capitalized lease obligations (a) $ 8,876,277 $ 8,691,572
Accounts receivable financing (b) 899,807 926,363
Other (c) 402,717 418,375
------------ ------------
10,178,801 10,036,310
Current portion 3,725,429 3,115,461
------------ ------------
Total long-term debt $ 6,453,372 $ 6,920,849
------------ ------------
(a) Capital 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.
(b) Accounts Receivable Financing:
The Company entered into an agreement with DVI Business Credit to
finance up to $2,000,000 of the accounts receivable balances from two of
the Company's wholly-owned subsidiaries, a minority-owned subsidiary, and
two of its majority-owned joint ventures. Advances would bear interest
at the prime rate plus 4%. At March 31, 1998, the amount financed under
this agreement totalled $ 899,807, including $ 143,050 owed by the
minority-owned subsidiary.
9
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
NOTE 8 - LONG-TERM DEBT (Continued)
(c) Other:
Sylvania Diagnostics limited partnership at March 31, 1998 is
obligated for notes payable incurred prior to the Company's acquiring its
50.2% interest. The Company has an agreement in which DVI indemnifies the
Company for these notes as well as all other pre-acquisition debts of
Sylvania Diagnostics. The notes payable at March 31, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
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
collateralized by substantially all of the assets of Sylvania. $ 249,500 $ 249,500
Note payable to a professional corporation in equal
monthly installments of $5,000 including interest
at 9.4% through July 2000. 118,171 130,939
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. 35,046 37,936
402,717 418,375
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS
In April 1998, the Company agreed to sell its 35% interest in
Empire State Imaging Associates, Inc. ("Empire") to an unaffiliated
company. The proposed sale is subject to a due diligence review of
Empire by the buyer. At this time, the due diligence review has not
been completed.
On May 7, 1998 the Company entered into an agreement to sell 70%
of its 72% ownership of Open MRI of Morristown, Joint Venture for $
300,000. The terms required $ 100,000 payable at signing, and monthly
payments in the amount of $ 50,000 on May 1, June 1, July 1 and August
1, 1998. The Company retains the option to repurchase from the buyers
the 70% interest upon payment of $ 50,000 plus all prior payments and
any additional costs incurred by the buyers. The option expires on
August 31, 1998.
10
<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 included in Part I,
Item 1.
RESULTS OF OPERATIONS:
For the three months ended March 31, 1998 as compared to the three months
ended March 31, 1997:
Revenues for Modern Medical Modalities Corporation and subsidiaries
aggregated $1,796,680 in 1998 as compared to $2,796,507 in 1997. The decrease
in revenues (35.8%) is directly attributable to a decrease in patient service
revenues primarily due to the sale of Somerset Medical Equipment Leasing Corp.
in October, 1997.
Operating expenses for 1998 were $2,409,836 as compared to $2,124,165. The
increase of $285,671 is primarily the result of an increase in selling, general
and administrative expenses due to the acquisition of OpenMRI of Metaire. The
site opened for business in February 1998.
INTEREST EXPENSE:
Interest expense has decreased by $40,000 when comparing 1998 and 1997.
This decrease is attributable primarily to the financing of equipment at
Somerset Medical Equipment Leasing Corp. which was included in the 1997
operations
RESTRUCTURING OF NOTE RECEIVABLE:
On March 3, 1998, the Company restructured the promissory note receivable
for the sale of Prime Contracting Corp. to a related party as follows: $200,000
in cash payable over 36 months, plus interest calculated at prime plus 1% and a
36 month option to purchase 250,000 shares of the related party stock at $.05.
The Company recorded a loss from note receivable restructuring in the amount of
$747,650.
LIQUIDITY AND CAPITAL RESOURCES:
The Company has a commitment from the minority-owned joint venturer in
Doctors Imaging Associates, Joint Venture, to provide up to $250,000 from time
to time, for working capital purposes, as the Company deems necessary. Advances
from this joint venturer totaled $219,000 as of March 31, 1998 and December 31,
1997.
The Company has a working capital deficiency of $962,000 at March 31, 1998
as compared to a working capital surplus of $995,000 at December 31, 1997. The
restructuring of the note receivable for the sale of Prime Contracting Corp.
reduced working capital by $748,000 at March 31, 1998.
These are the only trends, commitments, events and/or material
uncertainties known to the Company.
In April 1998, the Company agreed to sell its 35% interest in Empire State
Imaging Associates, Inc. ("Empire") to an unaffiliated Company. The proposed
sale is subject to a due diligence review of Empire by the buyer. At this time,
the due diligence review has not been completed.
On May 7, 1998, the Company entered into an agreement to sell 70% of its
72% ownership of OpenMRI of Morristown, Joint Venture for $300,000. The terms
required $100,000 payable at signing and monthly payments in the amount of
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:(CONT.)
$50,000 on May 1, June 1, July 1 and August 1, 1998. The Company retains the
option to repurchase from the buyers the 70% interest upon payment of $50,000
plus all prior payments and any additional costs incurred by the buyers. The
option expires on August 31, 1998.
In July 1996, the Company, through its wholly-owned subsidiary West
Paterson Medical Equipment Leasing Corporation ("WPMEL"), entered into a lease
and management services agreement with Advanced Imaging & Radiology Associates,
P.A. ("M.D."). The agreement provides that WPMEL will lease office space,
fixtures and equipment and will provide management services to M.D. over an
initial term of five years with a five year renewal option. The site, located
in West Paterson, N. J. is a medical practice specializing in diagnostic
imaging.
In July 1996, the Company, through its wholly-owned subsidiary Ohio Medical
Equipment Leasing Corporation ("OME"), entered into a purchase and consulting
agreement with Medical Advances, Inc. ("Medical") to acquire an interest as a
general (managing) partner of Sylvania Diagnostics, an Ohio Limited Partnership
("Sylvania") for one dollar. The interest acquired represents 50.2% of the
total units outstanding. Sylvania is a diagnostic imaging center located in
Sylvania, Ohio.
The Company also entered into an agreement with DVI which provides for
$135,000 of working capital advances which are only to be used for operating
Sylvania. If the Company determines that operating Sylvania is not profitable,
DVI will purchase either Sylvania or OME for one dollar.
VALUATION OF ACCOUNTS RECEIVABLE:
The Company values its uncollected accounts receivable as part of its
determination of profit. The Company constantly reviews the accounts receivable
valuation. The continuing monthly review, gathering of additional information,
as well as changing reimbursement rate, may cause adjustments to the accounts
receivable valuation.
HEALTHCARE SYSTEM:
It is management's belief that the United States healthcare 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.
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LEGISLATION: (cont.)
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.
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
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LEGISLATION: (cont.)
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.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
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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 CORP.
------------------------------------
(Registrant)
Date: May 28, 1998 /s/ Roger Findlay
------------------------------------
Roger Findlay
Chairman of the Board of Directors
Date: May 28, 1998 /s/ Gregory Maccia
------------------------------------
Gregory Maccia
Vice President, Secretary and Director
Date: May 28, 1998 /s/ Jan Goldberg
------------------------------------
Jan Goldberg
Vice President, Treasurer and Director
Date: May 28, 1998 /s/ Elli Pittas
------------------------------------
Elli Pittas
Vice President of Operations and Director
16
