<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, 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
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MODERN MEDICAL MODALITIES CORPORATION
- --------------------------------------------------------------------------------
(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
--------------------------------------------------
(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
June 30, 1998
<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 1, Item 1.
RESULTS OF OPERATIONS:
For the three months ended June 30, 1998 as compared to the three months
ended June 30, 1997:
Revenues for Modern Medical Modalities Corporation and subsidiaries
aggregated $2,223,000 in 1998 as compared to $2,718,000 in 1997. The decrease
in revenues (18.2%) is attributable to a decrease in patient service revenues of
approximately $290,000 primarily resulting from the sale of Somerset Medical
Equipment Leasing Corp., and increased competition. The decrease in marketing
fees of approximately $205,000 resulted from contracts that have expired.
Operating expenses for 1998 were $2,266,000 as compared to $2,287,000 in
1997. This decrease of $21,000 results from approximately $307,000 as the
result of the sale of Somerset Medical Equipment Leasing Corp. and cost
reductions designed to offset other losses in patient service revenues and
marketing fees. This was off-set by increases in cost related to the
acquisition and start-up of Open MRI in Metaire.
INTEREST EXPENSE:
Interest expense increased approximately $74,000 when comparing 1998 and
1997. This increase is attributable to the financing of various equipment and
the acquisition and start-up of Open MRI of Metaire. This site opened for
business in February 1998.
LOSS ON SALE OF SUBSIDIARY:
Effective June 1, 1998, the Company sold its 35% interest in Central
Imaging of Yonkers, N.Y. incurring a loss on the sale of $743,000. The loss
consisted of unrecoverable investment in and advances to Central Imaging.
LOSS ON DISPOSAL OF SUBSIDIARY:
During June 1998, the Company exercised its option to return its 50.2%
interest in a diagnostic imaging center located in Sylvania, Ohio. The $168,000
represents unrecoverable working capital advances made to that center.
For the six months ended June 30, 1998 as compared to the six months ended
June 30, 1997:
Revenues for Modern Medical Modalities Corporation and subsidiaries
aggregated $4,020,000 in 1998 as compared to $5,514,000 in 1997. The decrease
in revenues of approximately $1,495,000 is attributable to a decrease in patient
service revenues of approximately $1,242,000 primarily resulting from the sale
of Somerset Medical Equipment Leasing Corp. in the third quarter of 1997, and
marketing fees of approximately $253,000 resulting from contracts that expired.
Operating expenses for 1998 were $4,676,000 as compared to $4,411,000 for
1997. This increase of approximately $265,000 resulted from an increase in
operating expenses as a result of the acquisition of start-up of Open MRI in
Metaire in the first quarter of 1998. These costs were partially off-set by
cost reduction during the second quarter in reaction to reduced marketing fees
and patient service revenues.
<PAGE>
INTEREST EXPENSE:
Interest expense increased approximately $34,000 when comparing 1998 and
1997. This increase is attributable to the financing of various equipment and
the acquisition and start-up of Open MRI of Metaire. This site opened for
business in February 1998.
LOSS ON SALE OF SUBSIDIARY:
Effective June 1, 1998, the Company sold its 35% interest in Central
Imaging of Yonkers, N.Y. incurring a loss on the sale of $743,000. The loss
consisted of unrecoverable investment in and advances to Central Imaging.
LOSS ON DISPOSAL OF SUBSIDIARY:
During June 1998, the Company exercised its option to return its 50.2%
interest in a diagnostic imaging center located in Sylvania, Ohio. The $168,000
represents unrecoverable working capital advances made to that center.
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
$748,000.
LIQUIDITY AND CAPITAL RESOURCES:
The Company has a working capital deficiency of $805,000 at June 30, 1998
as compared to a working capital surplus of $995,000 at December 31, 1997. The
loss on sale of subsidiary reduced working capital approximately $681,000 and
the restructuring of the note receivable for the sale of Prime Contracting Corp.
reduced working capital by $748,000 through June 30, 1998.
On May 7, 1998, the Company entered into an agreement to sell 70% of its
72% ownership of Open MRI of Morristown, Joint Venture (Open MRI) 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
retained the option to repurchase from the buyers, ADS Investment Corp. and Oak
Knoll Management Corporation (related party), 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.
On August 20, 1998, the Company, ADS Investment Corp. and Oak Knoll
Management Corporation (related party) modified the original agreement from a
sale to a loan. The terms of the new agreement are as follows: a loan in the
amount of $300,000, with interest due and payable at 12% per annum, secured by
70% of the Company's 72% ownership of Open MRI. The loan is due and payable on
September 30, 1998. The agreement also requires the personal guarantees made by
the lenders to DVI Business Credit Corporation on behalf of the Company be
replaced by September 30, 1998, as a condition of satisfactory settlement of the
loan.
For services rendered between May 7, 1998 and the date of maturity of this
loan, all distributions made to the lending parties by Open MRI will remain the
property of the lending parties.
These are the only trends, commitments, events and/or material
uncertainties known to the Company.
<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:
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.
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
<PAGE>
LEGISLATION: (cont.)
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.
<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
Not applicable.
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors
Modern Medical Modalities Corp.
We have reviewed the consolidated balance sheet of Modern Medical Modalities
Corp. and Subsidiaries as at June 30, 1998, and the related consolidated
statements of operations, and cash flows for the six months then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
A review of interim financial information consists principally of obtaining an
understanding of the system for the preparation of interim financial
information, applying analytical review procedures to financial data, and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Modern Medical Modalities Corp. 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
June 30, 1998 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
August 6, 1998, except for Note 10 as to which the date is August 20, 1998
1
<PAGE>
<TABLE>
<CAPTION>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited
ASSETS
Current assets:
Cash and cash equivalents........................ $ 165,800 $ 119,217
Restricted cash for line of credit repayment 600,000 600,000
Accounts receivable (less contractual allowances
of $2,168,061 and $2,475,004, respectively).. 3,557,897 4,919,714
Account receivable--joint venture................ 475,141 254,696
Current portion of note receivable
from affiliate............................... 188,889 972,650
Current portion of note receivable............... 46,590 46,590
Loan receivable--affiliates...................... 128,750 121,250
Due from officers................................ -- 94,343
Due from affiliates.............................. 75,600 --
Due from related party........................... 100,000 --
Other receivables................................ -- 47,554
Prepaid expenses................................. 10,894 44,999
----------- ------------
Total current assets........................ 5,349,561 7,221,013
----------- ------------
Other assets:
Furniture, fixtures, equipment and leasehold
improvements (net of accumulated
depreciation and amortization of $5,416,889
and $6,134,831, respectively)............... 7,566,090 9,445,204
Note receivable, net of current portion.......... 113,736 113,736
Goodwill (net of accumulated amortization of
$189,223)................................... -- 1,229,990
Organization costs (net of accumulated amortization
of $21,251 and $16,601, respectively)....... 76,447 81,097
Investment in joint venture...................... 342,030 259,483
Investment in and advances to
unconsolidated affiliate.................... -- 567,737
Deposits......................................... 100,818 151,901
----------- ------------
Total other assets.......................... 8,199,121 11,849,148
----------- ------------
$13,548,682 $19,070,161
----------- ------------
</TABLE>
See Notes to Interim Financial Statements
2
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilites:
Line of Credit................................................................... $ 599,750 $ 599,750
Accounts payable................................................................. 1,705,670 1,463,096
Accrued expenses................................................................. 819,127 556,862
Loan payable--joint venturer..................................................... 110,467 110,467
Loans payable--affiliates........................................................ 202,000 202,000
Current portion of long term debt................................................ 2,417,704 3,115,461
Due to affiliate................................................................. -- 23,594
Due to related party............................................................. 300,000 --
Deferred income taxes............................................................ -- 155,133
-------------- -------------
Total current liabilities.................................................... 6,154,718 6,226,363
-------------- -------------
Other liabilities:
Long-term debt, net of current portion........................................... 3,968,604 6,920,849
Deferred income taxes............................................................ 119,846 1,054,552
Due to joint venturer............................................................ 218,717 217,787
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Total other liabilities...................................................... 4,307,167 8,193,188
-------------- -------------
Total liabilities............................................................ 10,461,885 14,419,551
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Minority interest.................................................................. 111,991 140,825
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(decfict)....................................................... (891,900) 643,079
-------------- -------------
Total stockholders' equity................................................... 2,974,806 4,509,785
-------------- -------------
$ 13,548,682 $ 19,070,161
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</TABLE>
See Notes to Interim Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended For the Three Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating income:
Net revenue from services................ $ 4,019,879 $ 5,514,488 $ 2,223,199 $ 2,717,981
------------ ------------ ------------ ------------
Total operating income..................... 4,019,879 5,514,488 2,223,199 2,717,981
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative...... 3,773,763 3,532,209 1,800,672 1,832,377
Bad debts................................ 18,504 13,681 12,422 6,564
Depreciation and amortization............ 883,293 865,325 452,630 448,109
------------ ------------ ------------ ------------
Total operating expenses................... 4,675,560 4,411,215 2,265,724 2,287,050
------------ ------------ ------------ ------------
Income (loss) from operations.............. (655,681) 1,103,273 (42,525) 430,931
------------ ------------ ------------ ------------
Other income (expenses):
Interest income.......................... 40,117 77,355 15,599 70,341
Interest expense......................... (623,251) (589,187) (399,547) (325,552)
Miscellaneous income..................... 78,500 45,950 29,600 15,657
Income from joint ventures............... 164,837 107,380 113,964 59,208
Income from minority owned subsidiary.... -- 14,381 -- (7,023)
Gain (loss) on sale of subsidiary........ (742,619) 252,076 (742,619) --
Loss on disposal of subsidiary........... (168,064) -- (168,064) --
Restructuring of note receivable......... (747,650) -- -- --
------------ ------------ ------------ ------------
Total other income (expense)............... (1,998,130) (92,045) (1,151,067) (187,369)
------------ ------------ ------------ ------------
Income (loss) before income taxes
and minority interest.................... (2,653,811) 1,011,228 (1,193,592) 243,562
Provision for income taxes................. (1,179,761) 450,110 (515,361) 112,420
------------ ------------ ------------ ------------
Income before minority interest............ (1,474,050) 561,118 (678,231) 131,142
Minority interest.......................... (60,929) (107,686) (139,191) (35,874)
------------ ------------ ------------ ------------
Net income (loss).......................... $ (1,534,979) $ 453,432 $ (817,422) $ 95,268
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings per share
Net income (loss)........................ $ (0.48) $ 0.14 $ (0.26) $ 0.03
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Number of shares outstanding:
Basic.................................... 3,168,292 3,168,292 3,168,292 3,168,292
------------ ------------ ------------ ------------
See Notes to Interim Financial Statements
</TABLE>
4
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
JUNE 30,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)......................................... $(1,534,979) $ 453,432
----------- ----------
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................... 883,293 865,325
Contractual allowances.................................. (306,943) 46,375
Bad debts............................................... 18,504 13,681
Income from an unconsolidated joint venture............. (164,837) (107,380)
Minority interest....................................... 60,929 49,422
Deferred income taxes................................... (1,379,761) 450,000
Loss on sale of subsidiary............................ 742,619 --
Loss on disposal of subsidiary........................ 168,064 --
Restructuring of note receivable...................... 747,650 --
Income from unconsolidated affiliate.................... -- (14,381)
Increase (decrease) in cash attributable to changes in
operating assets and liabilities
Accounts receivable..................................... 1,668,760 (690,971)
Accounts receivable--joint venturer..................... (220,445) --
Other receivable........................................ 47,554 143,855
Due from affiliate...................................... (75,600) (37,500)
Due from officers....................................... 94,343 --
Due from related party.................................. 300,000
Prepaid expenses........................................ 34,105 60,693
Deposits................................................ 51,083 (14,964)
Distributions from a joint venture...................... -- 30,241
Due to affiliate........................................ (23,594) (13,985)
Due to related party.................................... (100,000)
Accounts payable........................................ 242,574 (159,793)
Accrued expenses........................................ 262,265 (192,188)
Advances to unconsolidated affiliate.................... -- (187,013)
----------- ----------
Total Adjustments......................................... 3,050,563 241,417
----------- ----------
Net cash provided (used) by operating activities............ 1,515,584 694,849
----------- ----------
Cash flow from investing activities
Fixed asset acquisitions................................ (723,941) (666,169)
Fixed assed dispositions................................ 1,539,665 --
Proceeds from loan receivable--affiliate................ (7,500) 75,000
Restructuring of note receivable........................ -- --
Proceeds from note receivable........................... 36,111
Issuance of note receivable............................. -- (155,997)
Investment in joint venture............................. (82,547) --
Decrease in minority interest........................... (28,834) --
----------- ----------
Net cash provided (used) by investing activities............ 761,788 (747,166)
Cash flow from financing activities:
Reduction of goodwill................................... 1,419,213 --
Proceeds from issuance of long-term debt................ -- 1,074,632
Payments on affiliates advances......................... -- (61,555)
Cash overdraft.......................................... -- 41,685
Joint venture advances.................................. -- 10,000
Disposal of long term debt.............................. (2,993,493) --
Principal payments on long-term debt.................... (656,509) (835,825)
----------- ----------
Net cash provided (used) by financing activities............ (2,230,789) 228,937
----------- ----------
Net increase in cash and equivalents........................ 46,583 176,620
Cash and equivalents, beginning of year..................... 719,217 42,421
----------- ----------
Cash and equivalents, end of year........................... $ 765,800 $ 219,041
----------- ----------
</TABLE>
See Notes to Interim Financial Statements
5
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
June 30, 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
Management, 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,
Sylvania Diagnostics L.P., (in which the Company had a 50.2% interest
which was disposed of on June 30, 1998) 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, Open 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., which was sold on June 30, 1998, in which the Company
had a 35% interest and significant influence, was 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 six month periods ended June
30, 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 June 30, 1998 and the results of its
operations for the six month periods ended June 30, 1998 and 1997 and
statements of cash flows for the six month periods ended June 30, 1998
and 1997. The results for the six month periods ended June 30, 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.
6
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
June 30, 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 (LOSS) PER SHARE.
Earnings (loss) per share are computed by dividing net income
(loss) 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 six months ended June
30, 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.
On June 30, 1998, the Company and its affiliate sold all the
outstanding stock of Empire to MID Rockland Imaging Partners, Inc., an
unrelated party, for the principal sum of $2,500,000. The Company
recorded a loss on this transaction in the amount of $742,619.
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.
On July 1, 1996, the Company through its wholly-owned
subsidiary, Ohio Medical Equipment Leasing Corporation ("OME")
purchased a 50.2% interest in Sylvania Diagnostics, LP ("Sylvania") for
one dollar. If the Company determines that operating Sylvania is not
profitable, DVI will purchase Sylvania for one dollar. On June 30,
1998, the Company exercised its option and sold Sylvania back to DVI
for one dollar. As a result of this disposition, the Company recorded a
loss in the amount of $168,064
7
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
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.
NOTE 5--PROPERTY AND EQUIPMENT, NET.
Property and equipment, net, consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Medical equipment $ 11,726,738 $ 14,083,189
Buildings 310,860 358,066
Furniture and fixtures 65,724 67,139
Automobiles 22,860 22,860
Leasehold improvements 856,797 1,048,780
------------ ------------
12,982,979 15,580,034
Less: Accumulated depreciation and amortization 5,416,889 6,134,831
------------ ------------
$ 7,566,090 $ 9,445,204
------------ ------------
------------ ------------
</TABLE>
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:
<TABLE>
<CAPTION>
Total Long-term Total Total
Assets Debt Liabilities Capital
<S> <C> <C> <C> <C>
June 30, 1998 5,873,197 1,956,377 2,574,667 3,298,530
December 31, 1997 5,538,114 1,354,524 3,116,550 2,421,564
</TABLE>
<TABLE>
<CAPTION>
(10%)
Gross Net Allocation
Revenues Income Of Income
--------- --------- -----------
<S> <C> <C> <C>
For the six months ended
June 30, 1998 2,133,364 1,310,485 131,049
For the year ended
December 31, 1997 5,603,802 2,078,843 207,884
</TABLE>
8
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
NOTE 7--LINE OF CREDIT.
In April 1995, the 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 June 30, 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:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
Capitalized lease obligations $ 5,628,207 $ 8,691,572
Accounts receivable financing (a) 656,781 926,363
Other 101,320 418,375
----------- -----------
6,386,308 10,036,310
Current portion 2,417,704 3,115,461
----------- -----------
Total long-term debt $ 3,968,604 $ 6,920,849
----------- -----------
</TABLE>
(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.
(a) 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 totaled $899,807; including
$143,050 owed by the minority-owned subsidiary.
NOTE 9--COMMITMENTS AND CONTINGENCIES
On June 18, 1998, the Company entered into a consulting agreement with
Benson Shore Capital, LLC ("Consultant"), for a period of one year. Consultant
shall render assistance to the Company as follows: developing strategic
initiatives and related industry partnerships, including providing assistance
with respect to acquisitions, joint ventures, and strategic business alliances.
The Company shall compensate consultant for these services as follows: 350,000
shares of its common stock, options to acquire up to an aggregate of 275,000
shares of its common stock exercisable at $1.00 per share, for
9
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
a period of 12 months.
NOTE 10--SUBSEQUENT EVENTS
On May 7, 1998 the Company entered into an agreement to sell
70% of its 72% ownership of Open MRI of Morristown, Joint Venture
("Open MRI") 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 retained the option to
repurchase from the buyers, ADS Investment Corp. and Oak Knoll
Management Corporation (related party), 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.
On August 20, 1998, the Company, ADS Investment Corp. and Oak
Knoll Management Corporation (related party) modified the original
agreement from a sale to a loan. The terms of the new agreement are as
follows: a loan in the amount of $300,000, with interest due and
payable at 12% per annum, secured by 70% of the Company's 72% ownership
of Open MRI. The loan is due and payable on September 30, 1998. The
agreement also requires the personal guarantees made by the lenders to
DVI Business Credit Corporation on behalf of the Company be replaced by
September 30, 1998, as a condition of satisfactory settlement of the
loan.
For services rendered between May 7, 1998 and the date of
maturity of this loan, all distributions made to the lending parties by
Open MRI will remain the property of the lending parties.
10
<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 CORP.
------------------------------------
(Registrant)
Date: Aug. 21, 1998 /s/ Roger Findlay
------------------------------------
Roger Findlay
Chairman of the Board of Directors
Date: Aug. 21, 1998 /s/ Jan Goldberg
------------------------------------
Jan Goldberg
Director and Chief Financial Officer
Date: Aug. 21, 1998 /s/ Gregory Maccia
------------------------------------
Gregory Maccia
Vice President, Secretary and Director
