UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
-----------
(Mark One)
|X| Annual Report to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Fiscal Year ended December 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 No. 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 Identification No.)
incorporation or organization)
1719 Route 10, Suite 117, Parsippany, NJ 07054
- ---------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (973) 538-9955
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each Exchange on which Registered
- ------------------- -----------------------------------------
Not Applicable None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0002 Par Value
------------------------------
(Title of Class)
Class A Common Stock Purchase Warrants
--------------------------------------
(Title of Class)
Class B Common Stock Purchase Warrants
--------------------------------------
(Title of Class)
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
<PAGE>
for such shorter prior 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. Yes |_| No |X|
The issuer's net sales for the most recent fiscal year were $6,415,000.
The aggregate market value of the voting stock held by non-affiliates
based upon the last sale price on March 25, 1999 was approximately $1,448,982.
As of March 25, 1999 there were 1,759,146 shares of Common Stock, par
value $.0002 per share, outstanding.
2
<PAGE>
PART I
Item 1. Business
Modern Medical Modalities was incorporated in the State of New Jersey on
December 6, 1989. Modern Modalities Corporation was incorporated in the State of
New Jersey on June 4, 1990. The two companies had common ownership, directors
and officers. In July 1992, the two companies were merged under the laws of the
State of New Jersey, by way of an agreement which accounted for the combination
as a tax-free merger. The surviving corporation is known as Modern Medical
Modalities Corporation.
On March 12, 1999, the Company's effected a 1 for 2 reverse split of its
common stock. As a result of the reverse stock split the Company has 1,759,146
shares of common stock issued and outstanding.
Modern Medical Modalities Corporation leases magnetic resonance imaging
("MRI") and computerized axial tomography ("CT Scan") equipment to hospitals and
physicians. Additionally, the Company on a clerical and administrative level
manages hospital based and physician managed ambulatory centers for third
parties who provide medical imaging services. The Company, however, does not
perform medical services. The Company offers a full range of services to
hospitals and physician clients, including the selection and acquisition of
appropriate equipment, the design and supervision of facility construction, the
provision and training of technical and support staff, patient billing and
collection and the provision of overall marketing and management services. The
Company can provide either its full range of services at medical technology
centers or a more limited range of services at mobile or fixed sites depending
on the needs of its customers.
The Company presently leases equipment and manages one hospital based MRI
site located in Passaic, New Jersey, and seven free standing MRI and CT Scan and
Diagnostic Imaging ambulatory centers in Louisiana (1), New Jersey (5) and
Maryland (1). The Company also receives a management fee of 11.25% of gross cash
collections from the site in Union, New Jersey for performing management
functions. The Company's relationship with the joint-ventures range from 10%
through 84% equity interest.
On April 20, 1998, the Company entered into a merger agreement with R.F.
Management Corp. ("R.F.") which provided for the merger of R.F. into the
Company, however due to subsequent events, the Company and R.F. are
re-evaluating the terms of the transaction and there can be no assurance that
the transaction will be consummated. In the event that a modified merger
agreement is entered into, the Company intends to submit the plan of merger to a
vote of its shareholders for approval.
UNION JOINT VENTURE
In July 1990, the Company entered into a Joint Venture Agreement with
Union Imaging Associates, Inc. (the "Union Joint Venture") for the purpose of
providing magnetic resonance and CT Scan imaging services to radiologists and
other medical professionals, including leasing and
3
<PAGE>
financing equipment for use in such business. The Union Joint Venture shall
terminate upon the earliest of (i) June 30, 2010, (ii) the sale of the subject
business or (iii) mutual agreement of the joint venturers. The Company serves as
the managing joint venturer pursuant to the Union Joint Venture Agreement and as
such has managerial responsibility for the subject business including, placing
of personnel, leasing equipment, budgeting, contracting, billing, paying debts,
making lease payments and making distributions to the joint venturers.
The Company shall continue to serve as managing joint venturer until the
Company's liability under the Union Joint Venture's equipment lease with DVI
Financial is satisfied. Thereafter, the Company shall continue to serve as the
managing joint venturer until the earlier to occur of: (i) the Company's
resignation upon 60 days notice to Union Imaging or (ii) 60 days after receipt
of notice from Union Imaging that the holders of at least 80% of Union Imaging's
stock had voted to terminate the Company as managing joint venturer. For serving
as managing joint venturer the Company receives 11.25% of gross collections for
a management fee as well as a 10% equity position.
BOWIE JOINT VENTURE
In April 1991, the Company entered into a Joint Venture Agreement with
Doctors Imaging Associates, Inc. (the "Bowie Joint Venture") for the purpose of
providing magnetic resonance and CT Scan imaging services to radiologists and
other medical professionals, including leasing and financing equipment necessary
for such a business. The Bowie Joint Venture Agreement shall terminate upon the
earliest of: (i) April 30, 2011, (ii) the sale of the subject business, or (iii)
by mutual consent of the joint venturers. The Company serves as managing joint
venturer pursuant to the Bowie Joint Venture Agreement and as such has
managerial responsibility for the subject business, including the hiring of
personnel, leasing equipment, budgeting, contracting, billing, paying all debts,
making lease payments and making distributions to the joint venturers. The
Company and Doctors Imaging each has a 50% interest in the profits, obligations
and liabilities under the Bowie Joint Venture Agreement.
During the first quarter of 1999, the Company agreed in principle to sell
its fifty percent (50%) interest in the Bowie Joint Venture for $100,000,
provided that the following stipulations are met: (i) the removal of the Company
as a guarantor from the DVI leasing documents, (ii) a release from Picker
International of all past due amounts. Additionally, the Company will not be
responsible for any of the outstanding accounts payable of The Doctors Imaging
Joint Venture.
PLAINFIELD JOINT VENTURE
In July 1991, the Company entered into a Joint Venture Agreement with
Plainfield MRI Associates, Inc. (the "Plainfield Joint Venture") for the purpose
of providing magnetic resonance imaging services and equipment to radiologists
and other medical professionals, including leasing and financing equipment for
use in such business. The Plainfield Joint Venture shall terminate upon the
earlier of (i) July 30, 2011; (ii) the sale of the subject business; (iii)
termination of the Agreement dated April 25, 1991 with Muhlenberg Regional
Medical Center, Inc., and the Plainfield Joint Venture being unable to relocate
the subject business to another profitable site; (iv) the subject
4
<PAGE>
business being determined unprofitable for 3 consecutive calendar months at the
sole discretion of the Company; (v) the repossession of equipment pursuant to
the Equipment Lease with DVI Financial dated December 1, 1993; or (vi) mutual
consent of the joint venturers.
The Company serves as the managing joint venturer pursuant to the
Plainfield Joint Venture Agreement and as such has managerial responsibility for
the subject business including, hiring of personnel, leasing equipment,
budgeting, contracting, billing, paying debts, making lease payments and making
distributions to the joint venturers.
The Company shall continue to serve as managing joint venturer until the
Company's liability associated with the subject business to DVI Financial is
satisfied. Thereafter, the Company shall continue to serve as managing joint
venturer until the Company's resignation upon 60 days notice to Plainfield MRI,
Inc.
The interests of the Company and Plainfield MRI, Inc. in the profits and
obligations and liabilities under the Plainfield Joint Venture Agreement are 84%
and 16% respectively.
BETH ISRAEL JOINT VENTURE
In June 1995, the Company entered into a Joint Venture Agreement with Beth
Israel MRI Corporation and Advanced Imaging Radiology Associates P.A. to provide
certain non-professional services to an MRI facility which was developed by the
Company, and is located on the campus of Beth Israel Hospital. The term of the
Agreement is for a seven (7) year period with an automatic renewal provision for
successive seven year periods. The Company has a 75% interest in the profits,
obligations and liabilities under the Joint Venture Agreement.
METAIRE MEDICAL EQUIPMENT LEASING
In June of 1997, Metaire Medical Equipment Leasing was incorporated in the
state of New Jersey, as a 100% owned subsidiary of the Company. In October 1997,
Metaire Medical Equipment Leasing Corporation was registered as a Corporation
doing business in the State of Louisiana. Under the terms of the venture
agreement the Company will receive 100% of the profits and equity of Open MRI
and Imaging Center of Metaire. The site opened for business in February of 1998.
There is an agreement with an unaffiliated group that providing they raise
$250,000 and provide other management consideration, they will receive 34% of
the site. To date the $250,000 has been raised, but the management obligations
have not yet been met.
In March 1998, the Company sold to KFC Venture LLC, 15% of Open MRI and
Imaging Center of Metaire, LLC for $250,000 payable $100,000 upon execution of
the agreement and $25,000 per month for six months. Under the terms of the
agreement, $125,000 of the $250,000 must be paid back to KFC Venture LLC,
without interest. Until such time, all distributions shall be divided equally,
with fifty percent of said distribution being paid to KFC Ventures, LLC as a
return of its initial capital investment up to the amount of $125,000 and the
other fifty percent of said distribution being distributed to the members of
Open MRI of
5
<PAGE>
Metaire, in accordance with their percentage interests in Open MRI of Metaire.
In September 1998, the management contract with Southern Medical
Consultants LLP was terminated for the management of Open MRI and Imaging Center
of Metaire. According to the letter agreement of March 30, 1998, if Southern
Medical is not active in the site nor managing the site through the end of the
lease payments, then no stock transfers will be made. To date no stock transfer
has been made.
MEDICAL IMAGING INDUSTRY
The Company has positioned itself to participate in the expanding managed
health care market. The Company will continue to aggressively seek to joint
venture with hospital and physician managed ambulatory centers. The Company
intends to expand its marketing efforts by establishing new sources of patient
referrals to its existing centers in the next year. These patient referrals
consist of Health Maintenance Organizations (HMO), Preferred Provider
Organizations (PPO), Union Contracts and Hospital Contracts.
The Company has focused on the advanced imaging technologies of MRI and CT
Scan. The use of these technologies has grown significantly in the United States
during the last several years due to increasing physician acceptance of the
value of advanced imaging technologies in the early diagnosis of disease.
Hospitals are facing competitive pressures to provide technology and related
services despite strict budgetary limitations and are increasingly utilizing
third parties, such as the Company, to provide the necessary facility and
related services because of the substantial equipment and personnel costs
involved.
Generally, the centers participate in specific HMO or PPO programs because
the Company finds that many of the physicians who refer to the centers belong to
the HMO or PPO. There are instances when the centers initiate contact with
various third parties to provide services to their membership. This is usually
the case with the larger insurance plans. In the case of unions or managed care
programs contacts are usually made by the benefit managers representing the
various programs. Usually, the centers are recommended by the physicians in the
area.
In most cases the Company is approached by a group of physicians or a
hospital who are looking to install a MRI or CT scanner. The Company first
reviews the location that the equipment is to be placed in and reviews a general
outline or business plan. Information that is presented includes other centers
in the area, patient financial class, patient demographics in the area served,
and potential referring physicians. In the case of a hospital, the Company
requests the number of MRI and CT scanning that the hospital sends to other
facilities. The Company also contacts neighboring sites to determine the waiting
time for scheduling an exam to see if patients are waiting an excessive amount
of time for an exam. The Company contacts potential referring physicians to
determine if they are experiencing problems with existing facilities and if they
would support a new facility. Managed care groups and HMO's are contacted to
determine if contracts for providing service are available and to ascertain the
membership in the catchment area of the potential new
6
<PAGE>
sites. If the site is considered to be positive a request is made to the various
equipment manufacturers for a bid on the equipment the Company deems necessary.
After all information needed by the Company is received, the Company determines
the financial viability of the project. Based on the criteria above, the Company
reviews each site to determine if utilization and proliferation of the equipment
and services is a concern.
Medical diagnostic imaging systems facilitate the diagnosis of disease and
disorders at an early stage, often minimizing the amount and cost of care needed
to stabilize or cure the patient and frequently obviating the need for invasive
diagnostic procedures, such as exploratory surgery. Diagnostic imaging systems
are based on the ability of energy waves to penetrate human tissue and generate
images of the body which can be displayed either on film or on a video monitor.
Imaging systems have evolved from conventional x-ray to the advanced
technologies of MRI and CT Scan.
MRI is an advanced imaging system that uses a strong magnetic field and
radiowaves to allow physicians to explore the inner workings of the human body.
The pictures produced by this technology assist the doctor in detecting and
defining the differences between healthy and diseased tissue.
CT is a specialized method of examining various body parts using x-rays
and computer reconstructions to form a cross sectional image. During the exam
the x-ray tube travels completely around the body and the computer reconstructs
the information to form a cross sectional image. A series of these images, or
slices, is taken through the area of interest, providing the physician with a
detailed look at structures not otherwise seen with regular x-rays.
The Company has focused its efforts on leasing and managing fully equipped
MRI and CT centers at hospitals and physicians' offices. The use of these
technologies has grown significantly in the United States during the last
several years due to increasing physician acceptance of the value of advanced
imaging technologies in the early diagnosis of disease, the expanding
applications of CT and MRI and the growing patient base attributable to an aging
population.
In addition, changes in third party reimbursement systems have resulted in
declining profit margins for many hospitals, thus reducing capital available to
hospitals, thereby reducing their traditional incentives to purchase or lease
equipment and pass such costs through to third parties. By leasing equipment and
purchasing services from companies such as the Company, hospitals are able to
conserve their limited capital resources for other purposes and reduce the risks
associated with technical obsolescence and under utilization of equipment and
services.
SERVICES PROVIDED
The Company offers the full range of services discussed below. The needs
of a particular hospital or physician group determine the extent of the services
offered in each instance, which the Company can deliver either on a more limited
basis or through a full service medical technology center. Each site is staffed
by administrative, technical and support personnel. In addition, a
7
<PAGE>
physician and a physician group provide professional services and interpret MRI
or CT scans at each site. The Company does not engage in the practice of
medicine. Such physicians are not employees of the Company. However, the most
significant cost of operating an imaging center is the capital and finance costs
of equipment.
The Company provides equipment and related services, technical and support
staffing, marketing, patient scheduling, billing and collection and management
in all of the Company's sites located throughout New Jersey and at the Company's
new site in New Orleans, LA.
In the Bowie, Maryland site, the Company provides equipment and related
services and management. The technical and support staff and patient scheduling,
billing and collection are supplied by Doctors Imaging Associates of which the
Company is a 50% joint-venturer.
Equipment and related services. The Company consults with its potential
clients and existing clients to identify the equipment best suited to meet the
client's needs on a cost-effective basis. The Company then acquires the
equipment through lease/purchase agreements. In addition, the Company assists
the hospital or physicians and their personnel in complying with licensing and
other regulatory requirements, which consist of all applicable county building
permits and architectural filings as well as filing all necessary equipment
registration forms with the applicable state agencies. The Company supervises
the installation and testing of the equipment and provides periodic inspection
of the equipment at the facility. The Company undertakes to maintain its
clients' equipment and typically enters into agreements with equipment
manufacturers or other third parties for the delivery of maintenance services.
Technical and support staffing. The Company provides technologists who
operate the equipment at the facility. The Company trains and provides on-going
safety instruction and educational programs for its technologists as well as the
hospital's technologists. The Company also provides clerical personnel to
provide administrative duties such as scheduling and answering phone inquiries.
Marketing. The Company provides its customers with marketing services,
including the design and formulation of a marketing program for each facility to
inform physicians in the community as to the technology and services available
at the facility. The Company also provides marketing personnel who market
patient referral sources, including HMOs and other health plans.
Patient scheduling, billing and collection. At the medical technology
centers, the Company schedules patient appointments, prepares all patient
billing and is responsible for collection. In providing billing and collection
services, the Company bills the patients directly and, therefore, assumes the
credit risk on such billings and any delays attendant to reimbursement through
governmental programs or third party payors. The Company also is responsible at
the centers for related administrative and recordkeeping functions and all
management information services.
Management. The Company assumes full managerial responsibility and control
over facility
8
<PAGE>
operations, including all of the foregoing services, at medical technology
centers.
DELIVERY OF SERVICES
The Company delivers its services to its customers through either
contractual arrangements with hospitals and clinics or medical technology center
arrangements with hospitals or physician groups, as discussed below. The Company
may form imaging centers utilizing a variety of ownership vehicles. Presently,
the Company operates its sites under joint venture agreements. Other structures,
which may be used in a center can be one of the following:
Partnership. The Company forms a partnership with another entity such as a
hospital, physician group or the like. The costs associated with the project can
be assumed by the Company or apportioned to each partner. The Company provides
the management and receives a management fee in addition to having an ownership
position.
Medical technology centers. The Company will establish a medical
technology center within a Hospital Center or with a physician group ("Radiology
Group Center") through which the Company will offer its full range of services.
A Hospital Center involves only the Company and a hospital, whereas a Radiology
Group Center generally involves the Company (as managing general partner), and a
radiology physician group. A Hospital Center is located on a hospital campus, is
affiliated with that hospital and provides both inpatient and outpatient
services; whereas a Radiology Group Center is a free standing center that is not
affiliated with a hospital and engages primarily in outpatient services.
When the Company enters into a joint venture with a Hospital the
provisions of the HHS "Anti-Kickback" rules and the AMA policy on self referral
do not generally apply. (See "Licenses, Governmental Reimbursement and
Regulations"). The Hospital does not receive a percentage of profits for
allowing the Company to operate its equipment at the facility.
Fee-for-service. When a hospital requires the Company's services, but
wishes to maintain overall control of the delivery of such services and of the
service facility, the Company may contract to provide its services on a
fee-for-service basis. Under this arrangement, the Company typically furnishes
the hospital with the appropriate equipment, facility and marketing services and
staffing on an as-needed basis. In a typical fee-for-service arrangement, the
Company bills the hospital only for the number of patient procedures performed
each month. The Company charges the hospital for the Company's services and is
not involved in managing the facility. The Company currently has no
fee-for-service arrangement.
If the Company enters into fee-for-service contracts, these contracts will
typically have a term ranging from two to five years. During the term of the
contract, the hospital will grant to the Company the exclusive right to provide
the particular service at the hospital. The Company
9
<PAGE>
does not expect to have any minimum payment requirements in its fee-for-service
contracts. The Company therefore assumes the risk that revenues generated in
respect of its equipment may not be sufficient to discharge the Company's
financial obligations to lenders and lessors and other costs of operations. The
Company typically finances its acquisition of equipment and matches the
amortization period of such financial obligations to the term of the hospital
contract. However, the amortization period for a specific piece of equipment may
extend beyond the term of the related contract, requiring the Company to finance
any resulting negative cash flow. The Company attempts to manage these risks by
reviewing a prospective hospital's utilization history and prospects and,
through its sales force, remarketing equipment upon termination of contracts.
A hospital requiring part-time service will engage the Company to schedule
its mobile unit to be on location at the hospital at prescribed times. The
Company maintains a mobile unit which is a custom-designed vehicle that is a
totally self-contained facility.
Radiology group centers. The Company began its medical technology center
operations by establishing free standing, outpatient imaging centers with groups
of radiologists. The Company does not at present utilize services with the
hospitals. Set forth below is a table of the Company's centers, listing their
respective services.
SERVICES BY TECHNOLOGY
RADIOLOGY GROUP CENTERS MRI CT SCAN DIAGNOSTIC IMAGING
Union, New Jersey(1) Yes Yes No
Bowie, Maryland(2) Yes Yes No
South Plainfield, NJ(7) Yes No No
Marlton, New Jersey Yes Yes Yes
Yonkers, New York(9) Yes Yes Yes
Amherst, New York(3) Yes No No
Open MRI of Morristown(4) Yes No Yes
West Paterson Medical Equipment No No Yes
Leading Corp.(5)
Ohio Medical Equipment Leasing Yes Yes Yes
Corp./Sylvania Diag.(6)
- --------------------------------------------------------------------------------
10
<PAGE>
Metaire Med. Equipment Leasing Yes No No
MEDICAL TECHNOLOGY CENTERS
Passaic, New Jersey(8) Yes No No
- ----------
(1) This joint venture was organized on June 22, 1990 for the purpose of
providing MRI and CT services to medical professionals. The joint venture
has two joint-venturers, the Company, the managing joint venturer, and
Union Imaging Associates Inc. ("UIA"). The Company has a 10% interest and
UIA has a 90% interest in the Joint Venture.
(2) This joint venture was organized on April 23, 1991 for the purpose of
providing MRI and CT services to medical professionals. The joint venture
has two joint venturers the Company, the managing joint-venturer, and
Doctors Imaging Associates, Inc. Each has a 50% interest in the joint
venture.
(3) This is an extremity MRI (which images only legs and arms) that
discontinued operations in 1997.
(4) This Joint Venture was organized in October 1995 for the purpose of
providing MRI services to Medical professionals. The Joint Venture has
three joint ventures: the Company, RMC Consulting, Inc. and Barbara
Krasnica. In September 1998, the Company sold 70% of its 72% ownership
interest for $300,000 and certain other conditions.
(5) In July 1996, the Company through its wholly-owned subsidiary entered into
a lease and management service agreement with Advanced Imaging and
Radiology Services P.A. to provide office space, fixtures and diagnostic
imaging equipment to the P.A. for five years with a renewal for five
years.
(6) In July 1996, the Company, through its wholly-owned subsidiary Ohio
Medical Equipment Leasing Corporation ("OME"), entered into a purchase and
consulting agreement with Medical Advances, Inc. ("Medical") to acquire an
interest as a general (managing) partner of Sylvania Diagnostics
("Sylvania"), an Ohio Limited Partnership, for one dollar. The interest
acquired represents 50.2% of the total units outstanding. Sylvania is a
diagnostic imaging center located in Sylvania, Ohio. In June 1998, the
Company returned its interest in the site to DVI Financial Services.
(7) This Joint Venture was organized on July 30, 1991 for the purpose of
providing MRI services to medical professionals. The Joint Venture has two
venturers, the Company, the managing joint-venturer, and Plainfield MRI
Associates, Inc. ("PMA"). The Company has an 84% interest and PMA has a
16% interest in the joint venture.
(8) This Joint Venture was organized in June, 1995 for the purpose of
providing MRI services to medical professionals. The Joint Venture has two
venturers, the Company, the managing
11
<PAGE>
joint-venturer and Beth Israel MRI Corporation and Advanced Imaging
Radiology Associates P.A. ("PBI"). The Company has a 75% interest and PBI
has a 25% interest in the joint venture.
(9) The Yonkers, New York site was sold in May 1998.
Each of the above agreements involved an initial financial commitment on
the part of the Company ranging between $1 million and $3 million per center,
which includes equipment, installation, facility construction and start-up
working capital. Equipment, which is generally leased, represents the greatest
commitment by the Company. The Company's commitment is offset only by such
revenues as are generated from the utilization of the center.
Hospital centers. The Company had embarked on a program to establish
additional medical technology centers ("Hospital Centers") in conjunction with
hospitals by entering into arrangements to operate full service Hospital Centers
located in or near hospital campuses. The Company's first Hospital Center opened
on June 28, 1991 and the Passaic General site on October 14, 1992, both of which
were subsequently closed.
In addition to the equipment and facility services provided in its
arrangements, the Company provides at a medical technology center all technical
and support staffing; expanded marketing services; patient scheduling, billing
and collection services; management information systems; and overall management.
GROWTH STRATEGY AND MARKETING
The Company markets its services to physicians and hospitals through
various methods. These include telemarketing, direct solicitation, direct mail,
sponsorship of in service education programs for physicians and technical staff,
and personal visits to physician offices. The Company also attends many of the
large radiology shows throughout the country.
The Company is pursuing a strategy of aggressively seeking new Hospital
Centers and physician managed ambulatory centers. Its target markets also
include hospitals without a diagnostic imaging facility, to which the Company
can offer its part-time mobile units. The Company will engage in intensive
marketing in areas of specialized physician groups, chiropractors, health
maintenance organizations (HMO), preferred provider organizations (PPO), union
locals, municipalities and insurance companies. The Company currently negotiates
discounts with large suppliers of patients as allowed by law. The Company's
objective is to respond to the concerns of spiraling health care costs while
maintaining quality of care to the patient. This is attainable based on the
premise that increased volume results in a reduction of cost per can which is
passed along to the Company's contracted clients.
The Company applies a variety of criteria in evaluating each prospective
hospital customer. These criteria include the extent of the hospitals' present
diagnostic imaging services; its competitive environment; the size and type of
hospital; the number of referring physicians and their specialties; the patient
volume and the nature of the payors (private insurance programs, government
12
<PAGE>
reimbursement programs or other health or medical organizations).
The Company's plan of operation will be to continue to expand the
equipment use of its current customers during the remainder of this year. The
Company will, with its direct marketing efforts, continue to seek for new
clients, whether through acquisition of sites or startups.
TECHNOLOGY SOURCES
The Company obtains its medical equipment and ancillary supplies from
various manufacturers, including General Electric, Toshiba, Siemens, Philips,
Picker, Hitachi, DuPont and Kodak. The Company is not dependent on any one
supplier and believes that it has good relationships with its suppliers.
Equipment acquisition costs can range dramatically depending upon the
model and peripheral equipment acquired. Currently, MRI equipment ranges from
$1,000,000 to $2,000,000, extremity RI and CT equipment currently ranges from
$300,000 to $800,000.
Installation and maintenance costs on the equipment can be substantial,
particularly with respect to MRI units. Installation costs can range from
$250,000 to $500,000 for an MRI unit depending on the particular installation
circumstances. Maintenance costs on such a unit can be as high as $200,000 per
year. The Company typically enters into agreements with equipment manufacturers
or other third parties for equipment maintenance.
Equipment is financed by the Company (typically with a five year term)
with lenders and lessors, with equipment serving as security for the loans. The
Company's acquisition methods (purchase or lease) will depend upon the specific
circumstances of each transaction.
SUPPLIES
The Company's equipment and supplies are available from a variety of
sources. The loss of no single supplier would be expected to have a material
adverse effect on the Company.
LICENSES, GOVERNMENTAL REIMBURSEMENT AND REGULATIONS
Licenses. Since the Company leases MRI and CT equipment as well as
providing clerical and administrative services to hospital based and physician
managed ambulatory centers, its activities are not subject to material
governmental regulation. The Company does not perform medical services. However,
the government regulations do apply to the Company with respect to payment on
third party Medicare and Medicaid reimbursement. The Company is subject to the
"Anti-Kickback" Laws, the "Stark Bill" as well as in New Jersey, the Health Care
Cost Reduction Act which are discussed herein. In the future, however, the
Company may be required to maintain licenses or certificates of need issued by
individual states. A number of states require hospitals to
13
<PAGE>
obtain a Certificate-of-Need ("CON") prior to the acquisition of major medical
equipment. The CON programs vary considerably from state to state, but all
attempt to regulate the acquisition of expensive medical equipment purchases
involving technologies whose capital costs exceed some specified threshold or
whose introduction at the hospital represents a significant change in services.
Some states also regulate the acquisition of diagnostic imaging equipment
indirectly through rate commissions which prescribe hospital rates. To date, the
CON laws and regulations and state rate commissions have not had a material
effect on the Company's business, although there is no assurance that such laws
and regulations will not change or that rate commissions will not take actions
that may adversely affect the Company's business.
To the best of the Company's knowledge, there are no current regulations
in the State of Maryland that adversely affect or are material to the Company's
operations. The State of Maryland has recently passed legislation that restricts
physicians from being investors in imaging centers. There are no physician
investors who will refer patients in the Bowie, Maryland Joint Venture.
Government reimbursement. In major areas of its business, the Company
relies for payment on third party (in large part governmental) reimbursement.
Its charges are predominantly paid either directly by third party payors or by
its clients which in turn receive reimbursement from such sources.
Medicare and Medicaid reimbursement regulations require that purchased
diagnostic services be billed directly by the physician. This regulation allows
a physician to bill and collect directly for services. Medicare regulations call
for predefined fee schedules to be used for all medicare approved patients. The
difference between the amount the Company charges and the limiting charge must
be written off or disallowed. Medicare, for assigned patients, will pay 80% of
the allowed amount, the remaining 20% is the patient's or a co-insurer's
responsibility.
The centers that the Company is affiliated with all participate in many
reimbursement programs such as Medicare and Medicaid as well as other private
insurers. Under these arrangements the Center agrees to accept the approved
amount of reimbursement from each individual payor. Monthly statements are only
sent out when allowed by contractual arrangements with the insurers.
Regulations. In order to curb the potential for fraud and abuse under the
Medicare and Medicaid programs, Congress has enacted certain laws (the
"Anti-Kickback Laws") prohibiting the payment or receipt of any remuneration in
return for the referral of patients to a healthcare provider for the furnishing
of medical services or equipment, the payment for which may be made in whole or
in part by the Medicare or Medicaid programs. New Jersey, as well as other
states, have enacted similar state laws. The Anti-Kickback Laws apply to both
sides of the referral relationship: the provider making the referral and the
provider receiving the referral. Violation of the Anti- Kickback Laws is a
criminal felony punishable by fines of up to $25,000 and/or up to five years
imprisonment for each violation. Federal law also permits the Department of
Health and Human Services ("HHS") to assess civil fines against violators of the
Anti-Kickback Laws and to exclude them from participation in the Medicare and
Medicaid programs. These civil sanctions can be imposed in
14
<PAGE>
proceedings that do not involve the same procedural requirements and standards
of proof as would be required in a criminal trial.
The Anti-Kickback Laws are broadly drafted and judicial decisions rendered
thus far, while made in the context of overt payments explicitly in exchange for
referrals, have broadly interpreted the scope of these laws.
Several federal courts considering the issue, including the U.S. Court of
Appeals having jurisdiction over New Jersey, have concluded that the
Anti-Kickback Laws would be violated if "any purpose" of a challenged economic
arrangement is to induce or pay for referrals, no matter how incidental that
purpose may be or how many other legitimate purposes may exist for the
arrangement in question. Accordingly, many types of business relationships
between healthcare providers, including investments in healthcare providers by
physicians, hospitals or others who are in a position to refer patients could be
held to fall within the prohibitions of the Anti-Kickback Laws or similar state
laws.
The American Medical Association (the "AMA") has reaffirmed its original
Guidelines which were issued on May 6, 1992, which stated that physicians should
not refer patients to a health care facility outside their office in which they
do not have an active participation and only a passive investment interest.
These are ethical rules and recommendations of the AMA and they do not have a
binding legal effect.
HHS has adopted regulations specifying "safe harbors" for various payment
practices between providers and their referral sources. If a payment practice
were to come within the safe harbor and were not a "sham" to circumvent the
law's requirements, it would not be treated as an illegal Medicare/Medicaid
kickback or grounds for exclusion from the Medicare/Medicaid programs. While
failure to fall within a safe harbor does not mean that the practice is illegal,
HHS had indicated that it may give such arrangements closer scrutiny. In their
present form, no safe harbor would cover an investment interest in the Company.
The Company cannot predict whether other regulatory or statutory provisions will
be enacted by federal or state authorities which would prohibit or otherwise
regulate referrals by physicians to the Company thereby having a material
adverse effect on the Company's operations.
The federal "Ethics in Patient Referrals Law of 1989", often referred to
as the "Stark Law", prohibited a physician with a "financial relationship" with
an entity that furnishes clinical laboratory services (or a physician with an
"immediate family member" with such a relationship) from making a referral to
that entity for clinical laboratory services for which payment may be made under
that entity for clinical laboratory services for which payment may be made under
Medicare. It also prohibited that entity from billing Medicare, an individual, a
third party payor, or other entity, for an item or service furnished pursuant to
a prohibited referral. It required any entity that collects any amounts as a
result of such a billing to refund those amounts. The law provided certain
exceptions, namely, certain situations that would not constitute referrals, and
certain situations that would not constitute a "financial relationship."
15
<PAGE>
Later amendments to the Stark law extended the original prohibition on
referrals and billing to cover ten additional "designated health services," in
addition to clinical laboratory services, and extended the ban to services
payable under Medicaid, both beginning with referrals made after December 31,
1994.
The "designated health services" are clinical laboratory services;
physical therapy services (including speech language pathology services);
occupational therapy services; radiology services (including any diagnostic test
or treatment using x-rays, ultrasound or other imaging services, CT scan, MRI,
radiation or nuclear medicine, however, excluding invasive radiology where the
imaging modality is used to guide a needle, probe or catheter (such as cardiac
catheterization), and thus is clearly incidental to a separate major procedure;
also excluding screening mamography); radiation therapy services and supplies;
durable medical equipment and supplies; parenteral and enteral nutrients,
equipment and supplies; prosthetics, orthotics, and prosthetic devices and
supplies; home health services provided by a home health agency; outpatient
prescription drugs; inpatient and outpatient hospital services, whether provided
by the hospital or by others under arrangements with the hospital for which by
the hospital or by others under arrangements with the hospital for which the
hospital bills, but not including services provided by the hospital under a
separate license, such as home health care or physical therapy provided by a
hospital-owned home health agency or skilled nursing facility.
In 1991, New Jersey enacted the Health Care Cost Reduction Act, or
so-called "Codey Bill", (N.J.S.A. 45: 9-22.4 et seq.) which provided in part
that a medical practitioner shall not refer a patient, or direct one of its
employees to refer a patient, to a health care service in which the practitioner
and/or the practitioner's immediate family had any beneficial interest. The bill
specifically provided that for beneficial interests which were created prior to
the effective date of the Act, July 31, 1991, the practitioner could continue to
refer patients, or direct an employee to do so, if the practitioner disclosed
such interest to his patients. The disclosure must take the form of a sign
posted in a conspicuous place in the practitioner's office informing the
patients of such interest and stating that a listing of alternative health care
service providers could be found in the telephone directory. All physicians who
refer in the sites in New Jersey and also have a financial interest in those
sites have a sign posted as mandated by the law.
Under the present "Stark Bill", a physician who has a financial
relationship with an entity may not make a referral to the entity for the
furnishing of clinical laboratory services for which payment is made under the
Medicare or Medicaid programs. The Stark Bill, passed with an effective date of
January 1, 1995, will expand the application of the Medicare ban on self-
referrals after December 31, 1994. The Stark Bill also extends the self-referral
ban to physical therapy services, radiology services including MRI and CT Scans,
ultrasound services, radiation therapy services and the furnishing of durable
medical equipment, the furnishing of parenteral and enteral nutrition equipment
and supplies, the furnishing of out-patient prescription drugs, ambulance
services, home infusion therapy services, occupational therapy services and
in-patient and out-patient hospital services (including services furnished in a
psychiatric or rehabilitation hospital). As of the date of this filing, the
Company has not experienced any material adverse effects of limited Medicare and
16
<PAGE>
Medicaid referrals.
Presently there is physician investor ownership in two of the sites in
which the Company participates. The Stark Bill provides that a physician who has
a financial relationship with an entity cannot make a referral to the entity for
the furnishing of various radiology services including MRI and CT services.
Under the provision of the Bill, those physicians which invest in the Company's
sites will not be allowed to make referrals of which Medicare and/or Medicaid
payments are made.
For the two sites that the Company participates in, the Medicare/Medicaid
percentage for physician investors for Union Imaging Associates is approximately
4.8% and Plainfield M.R.I. Associates is approximately 2%. The third site,
Doctors Imaging Associates does not have physician investors who refer patients.
Based upon the low utilization of Medicare/Medicaid volume of physician
investors the Company has no plans to restructure any of its physician investor
sites. Any new sites that the Company may develop in the future will not have
any referring physician investors.
COMPETITION
The Company faces competition from various other companies ranging from
small local companies to those operating on a regional or national scale.
Although these companies may be more experienced or have more financial
resources at their disposal, the Company competes in the marketplace on the
basis of its performance in the industry, its reputation for the quality of its
services and its expertise in tailoring the structure of its contractual
arrangements and services to meet the specific needs of its customers. The
Company believes that few of its competitors provide the Company's range of
services from full service medical technology centers to more limited mobile and
fixed site arrangements. The Company maintains close working relationships with
three major equipment manufacturers. Representatives of these manufacturers have
been introducing the Company to various clients in an effort to arrange joint
ventures and then sell equipment. This relationship between the Company and its
manufacturers resulted in the sites located in Bowie, Maryland and Amherst, New
York.
The Company's imaging centers compete for patients with other hospitals
and radiology groups in their area. These centers and hospital customers compete
on the basis of efficiency and service.
INSURANCE
The Company carries general liability insurance with coverage of up to
$1,000,000 per claim and a commercial umbrella policy of $10,000,000. The
Company believes that such coverage is adequate. Additionally, the Company
maintains general liability, commercial umbrella and insurance for the
replacement of all leased equipment at each of its facilities.
EMPLOYEES
17
<PAGE>
As of March 31, 1999, the Company employed 41 persons on a full-time basis
and 24 persons on a part time basis. The following table reflects the employees
per facility:
TOTAL FULL-TIME PART-TIME
Modern Medical (Corporate) 13 12 1
Marlton 10 6 4
Morristown 3 2 1
West Paterson 6 2 4
JOINT VENTURES
South Plainfield 3 2 1
Union 19 11 8
Passaic 4 2 2
Bowie 7 4 3
- - -
Total: 65 41 24
== == ==
LEASE AGREEMENTS AT JOINT VENTURE SITES
The Company as managing Joint-Venturer has entered into an equipment
lease/purchase agreement with a non-affiliated party, DVI Financial, dated
December 1, 1993 ("Equipment Lease") which provides for the lease/purchase of
one Picker 1.OT mobile MRI unit in a Calumet Coach payable over a 60 month term
with payments each of $36,350 (the "basic rent") which is being charged as an
expense of the Company. On June 15, 1998, the Company refinanced the lease
purchase of the Picker 1.OT mobile MRI unit, reducing its monthly rental payment
to $13,407 per month for a period of thirty-six (36) months. The Company is
current in all its payments. This leased equipment is presently located at the
Muhlenberg Regional Medical Center in Plainfield, New Jersey.
The Company, as managing Joint-Venturer, has entered into an equipment
lease/purchase agreement with a non-affiliated party, DVI Financial, dated
December 1, 1993 ("Equipment Lease") which provides for the lease/purchase of
MRI and CT equipment payable over a 60-month term with payments each at $44,331
(the "Basic rent") which was charged as an expense of the business and was paid
in full in 1998. This leased equipment is presently located in Union, New
Jersey. The Company financed an open MRI in Union, New Jersey in 1996 which is
payable over a 60 month term at $23,403 per month. The Company is current in all
of its payments.
The Company, as managing Joint-Venturer, has entered into an equipment
lease/purchase agreement with a non-affiliated party, DVI Financial, dated
November 15, 1994 ("Equipment
18
<PAGE>
Lease") which provides for the lease/purchase of MRI and CT equipment payable
over a 60 month term with payments each of $36,714. The Company is current in
all of its payments. This leased equipment is presently located in Bowie,
Maryland.
The Company, as managing Joint-Venturer, has entered into an agreement
with a non-affiliated party Beth Israel MRI Corporation and Advanced Imaging
Radiology Associates P.A. to provide certain non-professional services to a MRI
facility which was developed by the Company and is located on the campus of Beth
Israel Hospital. This agreement is for a 60-month term with payments each of
$38,245. The Company is current is all of its payments.
During the last quarter of 1998, the Company refinanced its lease with DVI
Financial Services for the Beth Israel MRI Center. Under the terms of the
refinancing the Company extended the lease/purchase with DVI for sixty months
for the unpaid balance. The resulting refinance will lower the monthly payments
from $38,245 to $21,159.
During the last quarter of 1998, the Company refinanced its lease with DVI
Financial Services for the South Jersey Equipment Leasing Corporation site in
Marlton, New Jersey. Under the terms of the refinancing of the Company extended
the lease/purchase with DVI for sixty months for the unpaid balance. The
resulting refinance will lower the monthly payments from $35,092 to $23,271.
PRIME CONTRACTING CORPORATION
On November 25, 1994, Modern Medical Modalities Corporation (the
"Company"), pursuant to a written agreement, purchased Prime Contracting Corp.
("Prime") of Union, New Jersey. Pursuant to the terms of this agreement, the
Company purchased all of the issued and outstanding shares of Prime's common
stock in exchange for 112,457 shares of the Company's common stock. Prime became
a subsidiary of the Company, effective as of November 1, 1994.
Prime is a full service contractor that for the past fifteen years has
provided turnkey design and construction services. Prime builds free standing
structures and renovates existing facilities with an emphasis on room
renovations for hospitals and private medical facilities. Prime's installations
have included the following: Magnetic Resonance Imaging ("MRI"), Computerized
Axial Tomography ("CAT") Scan Suites, Radiography/Fluoroscopy, Cardiac
Catherization Labs, Laser Network Systems, Special Procedures, Angiography,
Mammography, Ultrasound, Linear Accelerator, Lithotripsy, Cystography Units,
Nuclear Medicine, Laboratory Areas and Operating Rooms.
Prime's range of turnkey design/build services include:
Feasibility Studies: Prime provides site analysis and preparation of
budget cost estimates and comparisons.
19
<PAGE>
Architectural Engineering: Prime designs the project to meet and stay
within the customer's budget. Prime's team of architects and engineers offers
processing of all necessary permits, the Certificate of Need (CON), and
preparation of all construction plans and specifications.
Construction Management: Prime's onsite management team has the technical
expertise to manage all of the complexities of a project from start to finish.
Prime relives the customer of the daily worry of overseeing the project and
ensure's that the project is completed according to schedule.
On December 27, 1995, the Company entered into an agreement with a related
party to sell all of the common stock of Prime Contracting Corp. for $1,200,000,
payable as follows: $100,000 upon execution, $100,000 at closing and a
promissory note bearing interest at prime plus one percent. The note was payable
in two installments, $600,000 on October 27, 1997 and $400,000 on April 27,
1998. In the event that gross annual revenue for Prime for the calendar year
1996 falls below $3,000,000, then the final payment of $400,000 shall be
forfeited.
On March 3, 1998, the Company agreed to restructure the promissory note
for the sale of Prime as follows: $200,000 in cash, payable over thirty-six
months, plus interest calculated at prime plus 1% and a thirty-six month option
to purchase 250,000 of the related party's stock at $.05 per share.
SOUTH JERSEY MEDICAL EQUIPMENT LEASING CORPORATION
On October 12, 1994, Modern Medical Modalities Corporation, formed a New
Jersey corporation, South Jersey Medical Equipment Leasing Corp. ("South Jersey
Medical").
On December 29, 1994, South Jersey Medical, which is 100% owned by Modern
Medical Modalities Corporation, purchased for $1,550,000 certain assets and
liabilities of NRM Imaging Associates, Partnership, an entity that leases MRI
and CT equipment. South Jersey Medical will provide space, equipment (MRI and CT
Scanner) and non-professional services, including management and billing and
collection functions to South Jersey Imaging Associates, P.A. located at 55 East
Route 70, Marlton, New Jersey.
MEDICAL MARKETING AND MANAGEMENT, INC.
On April 13, 1994, Modern Medical Modalities Corporation, formed a New
Jersey corporation, Medical Marketing & Management Inc. ("Medical Marketing").
Medical Marketing, which is 100% owned by Modern Medical Modalities
Corporation, is responsible for negotiating contracts with various health care
providers as well as marketing for Modern Medical Modalities Corporation.
Medical Marketing has contracts to provide services with other facilities.
20
<PAGE>
SOUTH PLAINFIELD IMAGING, INC.
In July of 1994, the Company assumed the assets and liabilities of Park
Plaza Radiology, Diagnostic Imaging Center, located in South Plainfield, New
Jersey. In September of 1994, the Company changed the name of Park Plaza
Radiology to South Plainfield Imaging, Inc.
EMPIRE STATE IMAGING ASSOCIATES, INC.
In April 1995, the Company founded a New York Corporation, Empire State
Imaging Associates, Inc. ("Empire State"). On April 28, 1995, Empire State,
which is 100% owned by the Company, purchased for $750,000 in cash and $200,000
of the Company's stock, assets and certain liabilities of Central Imaging
Associates, Limited Partnership ("Central Imaging"), an entity that leases MRI,
CT and various diagnostic imaging equipment. Empire State will provide space,
equipment (MRI, CT, Mammography, Ultrasound and Diagnostic Imaging) and
nonprofessional services, including management and billing and collection
functions to Central Imaging located in Yonkers, New York.
Empire State a wholly-owned subsidiary of the Company, has entered into a
Loan and Security Agreement ("Loan Lease") with a non-affiliated party, DVI
Financial Services, Inc., dated May 5, 1995, which provides for the purchase of
MRI, CT and diagnostic imaging equipment payable over a 60 month term with
payments each of $61,350 (the "Basic Rent"), which is being charged as an
expense of the business. This equipment is located in Yonkers, New York.
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. 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%. On
June 1, 1998, the Company sold its remaining 35% interest in Empire State
Imaging Associates, Inc.
AMHERST MEDICAL EQUIPMENT LEASING CORPORATION
In April 1995, Amherst Medical Equipment Leasing Corporation ("Amherst"),
a wholly-owned subsidiary of the Company, was formed. Amherst entered into an
agreement with Amherst Imaging Associates, P.A., to provide certain
non-professional services. In accordance with this agreement, Amherst has leased
space in Amherst, New York, effective July 1, 1995, for a period of five years
at a monthly rent of $1,275. On July 17, 1995, the Company entered into an
agreement with Magna-Lab, Inc. to purchase a permanent MRI at a cost of
approximately $500,000. Financing has been secured through DVI Financing
Services. The lease in the amount of $327,000 is payable over 60 months at a
monthly payment of $7,068 commencing on January 1, 1996. Magna Labs has agreed
to accept 18% of the operating income on a cash basis for a five year period to
cover the cost of the balance of the machine. This income sharing is for five
years and is not to exceed $200,000. As part of the agreement, Magna-Lab agreed
to pay the monthly space rent until the MRI is delivered.
21
<PAGE>
In 1997, this operation was discontinued.
OPEN MRI OF MORRISTOWN
During February of 1996, the Company under the terms of a joint venture
with RMC Consulting Inc. and one individual developed a MRI facility located in
Morristown, New Jersey. Under the terms of the agreement, dated October 31,
1995, the Company has the responsibility to make all day to day decisions on
behalf of the Joint Venture "Open MRI of Morristown." The term of the Joint
Venture shall terminate October 15, 2015 unless the business is sold, or the
joint venture is terminated by mutual consent of the participants. The term of
the Joint Venture may be extended by mutual written consent of the participants.
Under the terms of the Joint Venture the profit distribution is as follows:
Modern Medical Modalities Corporation 72%, RMC Consulting Inc. 18% and Barbara
Krasnica 10%.
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 was 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.
On September 30, 1998, the Company effectively sold 70% of its interest in
Open MRI fro $300,000 and the purchaser's agreement to provide the Company's
creditor, DVI Business Credit personal guaranties of the principals of purchaser
in an amount not to exceed $150,000. The Company recorded a gain on this
transaction in the amount of $30,171.
OPEN MRI & DIAGNOSTIC SERVICES OF TOMS RIVER, INC.
In February 1997, the Company acquired a 25% interest from an affiliated
party in Open MRI & Diagnostic Services of Toms River, Inc.
22
<PAGE>
In March 1997, the Company entered into a contract for the sale of its
stock in this entity. Under the terms of the sale, the purchasing party,
Advanced Open MRI and Diagnostic Imaging P.A., paid $75,000 in advance, $175,000
at closing and the balance of $750,000 is payable in monthly installments of
$25,000 commencing in April 1998.
OHIO MEDICAL EQUIPMENT LEASING CORPORATION/SYLVANIA DIAGNOSTICS
In July 1996, the Company, through its wholly-owned subsidiary Ohio
Medical Equipment Leasing Corporation ("OME"), entered into a purchase and
consulting agreement with Medical Advances, Inc. ("Medical") to acquire an
interest as a general (managing) partner of Sylvania Diagnostics ("Sylvania"),
an Ohio Limited Partnership, for one dollar. The interest acquired represents
50.2% of the total units outstanding. Sylvania is a diagnostic imaging center
located in Sylvania, Ohio.
The Company also entered into an agreement with DVI which provides for
$135,000 of working capital advances which are only to be used for operating
Sylvania. If the Company determines that operating Sylvania is not profitable,
DVI will purchase either Sylvania or OME for one dollar.
As a result of this acquisition, the Company has recorded the difference
between the acquisition price of one dollar and the allocated percentage of the
cumulative deficit as goodwill and the cumulative allocated losses in excess of
basis of the limited partners of Sylvania as an intangible asset as of July 1,
1996, the date of acquisition. All subsequent losses are allocated to the
Company with future income first applied to the losses and the remainder against
the intangible asset until it is fully recovered.
On June 29, 1998, pursuant to an agreement between the Company and DVI,
the Company exercised its option to sell OME to DVI for one dollar.
WEST PATERSON MEDICAL LEASING CORPORATION
In July 1996, the Company, through its wholly-owned subsidiary West
Paterson Medical Equipment Leasing Corporation ("WPMEL"), entered into a lease
and management services agreement (the "Agreement") with Advanced Imaging &
Radiology Associates, P.A. ("M.D."). WPMEL is a medical practice specializing in
diagnostic imaging located in West Paterson, New Jersey. The Agreement provides
that WPMEL will lease office space, fixtures and equipment and will provide
management services to M.D. over an initial term of five years with a five year
renewal option. Under the terms of the Agreement, WPMEL has assumed all debt,
expenses and accounts receivable for the site. Subsequently, in February 1997
the Company ordered a Toshiba CT Scan for the site, for $335,000, financed by
DVI Financial Services. The CT Scan became operational in the middle of March
1997.
23
<PAGE>
Item 2. Properties
Real estate leases
One of the Company's majority-owned joint ventures, Doctors Imaging
Associates, Joint Venture, leases a facility under a non-cancelable operating
lease which expires in 2002. The facility is located in Bowie, Maryland and the
lease includes a five-year option to renew, with monthly rental payments of
$4,331, plus utilities.
One of the Company's wholly-owned subsidiaries, Union Imaging Associates,
Inc., leases a facility under a non-cancelable operating lease which expires in
March 2000. The facility is located in Union, New Jersey with monthly rental
payments of $4,425, plus utilities.
The Company leases its main administrative offices, located in Parsippany,
New Jersey, under a five-year agreement treated as an operating lease at a
monthly rental payment of $2,722 per month. In addition, the Company is
obligated under various leases at the sites of its wholly-owned subsidiaries.
Future minimum lease payments under these leases as of December 31, 1998 and
1997 are as follows:
December 31,
1998 1997
----------- ---------
1999 $ 505,272 $ 349,522
2000 324,799 169,300
2001 210,334 63,500
2002 146,153 -0-
2003 and thereafter 38,584 -0-
----------- ---------
TOTAL $ 1,224,942 $ 581,322
Item 3. Legal Proceedings
On June 25, 1998, the Company was named in an arbitration proceeding
brought by Stephen Findlay, former President of Prime Contracting, one of the
Company's former subsidiaries. Mr. Findlay alleges that he is due certain monies
pursuant to his employment agreement with Prime Contracting, under which he was
terminated. The Company believes it has meritorious defenses and intends to
rigorously defend the arbitration.
Other than the above, the Company is not a party to any material legal
proceedings.
24
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its securityholders
during the fourth quarter of 1998.
PART II
Item 5. Market for the Company's Common Stock
On March 12, 1999, the Company effected a 1 for 2 reverse split of its
authorized and outstanding shares of common stock. As of the date hereof, the
Company has outstanding 1,759,146 shares of its Common Stock $.0001 par value
("Common Stock"). The Company's Common Stock is traded on the Nasdaq SmallCap
Market ("Nasdaq SmallCap") under the symbol "MODM." The following table sets
forth the high and low bid prices for the Common Stock as reported by on the
Nasdaq SmallCap. The high and low bid prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions. All bid prices for the periods prior to the Company's 1 for 2
reverse stock split effected on March 12, 1999, have been adjusted to reflect
such reverse stock split.
Common Stock
------------
Fiscal 1997 High Low
---- ---
First $ 7.12 $ 2.80
Second $ 6.00 $ 3.20
Third $ 6.32 $ 4.28
Fourth $ 6.56 $ 4.40
Fiscal 1998
First $ 5.25 $ 3.50
Second $ 4.00 $ .8125
Third $ 1.875 $ 1.00
Fourth $ .75 $ .0625
Fiscal 1999
First (through March 25, 1999) $ 2.75 $ .125
On March 25, 1999, there were 28 holders of record of the Company's
1,759,146 outstanding shares of Common Stock.
On March 25, 1999, the last sale price of the Common Stock as reported on
the Nasdaq SmallCap Market was $1.0313.
25
<PAGE>
Dividend Policy
The Company has never paid or declared dividends on its Common Stock. The
payment of cash dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking Statements
When used in this Form 10-KSB and in future filings by the Company with
the Securities and Exchange commission, the words or phrases "will likely
result" and "the company expects," "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions are intended to
identify "forward-looking statements." The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, each of which
speak only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
has no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
In 1994, Modern Medical Modalities Corporation (the "Company") started
Medical Marketing & Management, Inc. which markets not only the sites of the
Company, but for other physician groups and hospitals. In November 1994, the
Company acquired Prime Contracting Corp. ("Prime") in a business combination
accounted for as a pooling of interests. Prime is a full service contractor who
provides turnkey design and construction services for medical facilities
primarily on the east coast of the United States. On December 27, 1995, the
Company entered into an agreement with a related party to sell all of the common
stock of Prime for $1,200,000.
In 1995, the Company purchased Empire State Imaging Associates, Inc.
("Empire State"). On December 27, 1996, the Company sold 65% of the common stock
of Empire State for $250,000 to a related party. The Company commenced
operations during the second, third and fourth quarters of 1995 and the first
quarter of 1996, respectively, at sites located in Passaic and Somerset, New
Jersey; Amherst, New York; and Morristown, New Jersey. During the third quarter
of 1996, the Company, through its wholly-owned subsidiary, West Paterson Medical
Equipment Leasing Corp. ("WPMEL"), entered into a lease and management services
agreement at a site specializing in diagnostic imaging located in West Paterson,
New Jersey. In addition, the Company through its wholly-owned subsidiary Ohio
Medical Equipment Leasing Corporation ("OME") entered into a purchase and
consulting agreement to acquire a 50.2% interest as a general (managing) partner
of a diagnostic imaging center located in Sylvania, Ohio. Many of the
fluctuations on the line items
26
<PAGE>
on the balance sheets and the statements of operations are directly attributable
to the acquisition and start-up of these entities.
In February 1997, the Company acquired a 25% interest from an affiliated
party in Open MRI & Diagnostic Services of Toms River, Inc.
In March 1997, the Company entered into a contract for the sale of its
stock in this entity. Under the terms of 100% of the sale, the purchasing party
paid $75,000 in advance, $175,000 at closing and the balance of $750,000 is
payable in monthly installments of $25,000 commencing in April 1998.
In March of 1998, the Company sold to the KFC Venture LLC, 15% of Open MRI
and Imaging Center of Metaire, LLC for $250,000 payable $100,000 upon execution
of the agreement and $25,000 a month for six months. Under the terms of the
agreement, $125,000 of the $250,000 must be paid back to KFC Venture LLC without
interest before any profits can be distributed. Until such time, all
distributions shall be divided equally with fifty percent of said distribution
being paid to KFC Ventures, LLC as a return of its initial capital investment up
to the amount of $125,000 and the other fifty percent of said distribution being
distributed to the members in accordance with their percentage interests in the
Company.
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.
In 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.
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.
On September 30, 1998 the Company effectively sold 70% of its interest in
Open MRI for
27
<PAGE>
$300,000 and the purchaser's agreement to provide the Company's creditor, DVI
Business Credit, personal guaranties of the principals of purchaser in an amount
not to exceed $150,000. The Company recorded a gain on this transaction in the
amount of $30,171. The Company has retained a 2% ownership interest in Open MRI.
In September 1998, the management contract with Southern Medical
Consultants LLP was terminated for the management of Open MRI of Metaire.
According to the letter agreement of March 30, 1998, if Southern Medical is not
active in the site nor managing the site through the end of the lease payments,
then no stock transfers will be made. No stock transfers have been made to date.
Results of Operations:
For the year ended December 31, 1998 as
compared to the year ended December 31, 1997
The Company experienced a loss during the fourth quarter of 1998 of $263,000.
This loss is attributable to the Company's new center in New Orleans and
additional provisions taken at certain sites for collection of accounts
receivable.
Revenues for the Company and its subsidiaries aggregated $6,415,000 in 1998 as
compared to $10,104,000 in 1997. The decrease in revenues of approximately
$3,689,000 is attributable to a decrease in patient service revenues for the
Company's various imaging centers of approximately $1,534,000, the sale of three
imaging centers of approximately $1,817,000 and a decrease in Medical Marketing
& Management's revenues of approximately $344,000.
Operating expenses for 1998 were $8,197,000 as compared to $8,807,000 in 1997.
This decrease came primarily from the sale of two sites in 1998 and one site in
1997 of approximately $1,760,000. This savings was substantially offset by the
operating expenses of a new center opened by the Company in New Orleans, LA of
approximately $772,000 and a net increase in operating expenses of approximately
$378,000 at the Company's remaining sites.
Selling, general and administrative expenses for 1998 were $6,628,000 as
compared to $6,989,000 in 1997 or a reduction of approximately $361,000. This
reduction resulted from the sale of three sites during 1997 and 1998,
approximately $1,500,000, offset by the opening and start-up of a new site in
New Orleans, LA of approximately $704,000 plus a net increase of approximately
$325,000 in the remaining sites. The balance of the change relates to reduced
costs of approximately $95,000 in expenses related to operating the Company's
Medical Marketing and Management subsidiary.
Selling, general and administrative expenses, include payroll, facility rent,
equipment maintenance coss, site marketing costs, medical and office supplies,
utilities and insurance. The increase in selling, general and administrative
expenses of approximately $325,000 resulted from increased equipment maintenance
costs and additional marketing costs at those sites.
28
<PAGE>
Interest expense, net of a decrease in interest income of approximately $78,000,
has decreased by approximately $290,000. This reduction in interest expense
resulted primarily from the reduction of debt related to the sale of three sites
in 1998 and 1997 of approximately $260,000 and the retirement of debt in the
normal course of business of approximately $99,000 offset by increased interest
expense at the new site opened in New Orleans, LA in 1998 of approximately
$69,000.
Depreciation and amortization for 1998 was approximately $1,544,000 as compared
to approximately $1,789,000 in 1997. This reduction of approximately $245,000
was primarily related to the sale of three sites during 1997 and 1998.
Loss on Sale of Subsidiary:
Effective June 1, 1998, the Company sold its 35% interest in Central Imaging of
Yonkers, NY incurring a loss on the sale of $743,000. The loss consisted of
unrecoverable investment in and advances to Central Imaging.
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 the
36 month option to purchase 250,000 shares of the related party stock $.05. The
Company recorded a loss from note receivable restructuring in the approximate
amount of $748,000.
RESULTS OF OPERATIONS:
FOR THE YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31,
1996:
The Company experienced a loss for the fourth quarter of ($365,000). This loss
is attributable to the following:
<TABLE>
<S> <C>
Closing of Detex Mammography Center 1
in Edison, New Jersey ($117,000)
Loss from operations and disposition of
Somerset Imaging Corporation (239,000)
1997 startup expenses applicable to
Metaire Medical Equipment Leasing Corp. (58,000)
TOTAL ($414,000)
</TABLE>
Revenues for Modern Medical Modalities Corporation and subsidiaries
aggregated $9,941,000 in 1997 as compared to $12,075,000 in 1996. The increase
in revenues is
29
<PAGE>
directly attributable to an increase in patient service revenues for the
Company's various MRI sites of $5,502,000 and an increase in Medical Marketing &
Management's revenues of $399,000.
Operating expenses for 1997 were $8,807,000 (88.6% of operating revenues)
as compared to $$9,873,000 (81.8% of operating revenues) in 1996. This reduction
of $1,134,000 was due to the sale of Somerset Imaging Corporation, the disposal
of Detex Mammography Center, and the sale of 65% of Empire State Imaging
Associates, Inc.
Operating expenses for 1996 were $9,873,000 (81.8% of operating revenues)
as compared to $6,125,000 (97.7% of operating revenues) in 1995. This increase
of $3,748,000 (61.2%) is primarily the result of an increase in depreciation
expense of $706,000 due to the large increase in property assets and the
increase in the following:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
This category of expenses has increased by $2,766,000 when comparing 1996
to 1995. Increases in costs attributable to sites that commenced operations in
1996 or had operations for only a portion of the fiscal 1995 are as follows:
<TABLE>
<S> <C> <C>
Empire State $ 345,000 Payroll, rent, supplies, office expenses
WPMEL 154,000 Payroll, rent, supplies, office expenses
Amherst 194,000 Payroll, rent, office expenses
OME 408,000 Payroll, rent, supplies, office expenses
OpenMRI of Morristown 419,000 Payroll, rent, office expenses
MRI Imaging Center at PBI 399,000 Payroll, rent, supplies, office expenses
Somerset Imaging
Corporation 298,000 Payroll, rent, supplies, office expenses
----------
Total $2,217,000
----------
----------
</TABLE>
EXPENSES ASSOCIATED WITH MARKETING REVENUE:
Expenses associated with management and marketing revenues decreased by $243,000
(21.5%) to $888,000 in 1997.
Expenses associated with management and marketing revenues increased by $254,000
(51.8%) to $744,000 in 1996 and 1995. This increase is due to the additional
employees and expenses related to the operation (travel, trade shows, etc.)
needed by Medical Marketing & Management, Inc. to market the increased number of
Company sites and increased number of marketing contracts with outside physician
groups as evidenced by the $399,000 (115.8%) increase in marketing revenues in
1996 to $743,000.
INTEREST EXPENSE:
Interest expense, net of an increase in interest income of $98,000, has
decreased by $224,000 when comparing 1997 and 1996.
Interest expense, net of a decrease in interest income of $30,000, has increased
by $441,000 when comparing 1996 and 1995. This increase is attributable
primarily to the financing of equipment at Empire State, MRI Imaging Center at
PBI, Somerset Imaging Corporation, Amherst Medical Equipment Leasing
Corporation, OpenMRI of Morristown, as well as interest on the lines of credit
with Summit Bank of New Jersey, Republic National Bank, and financing with DVI
Financial Services, Inc.("DVI").
30
<PAGE>
Liquidity and Capital Resources:
The Company has a working capital deficiency of $1,963,000 at December 31,
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.
In March of 1998, the Company sold to the KFC Venture LLC, 15% of Open MRI
and Imaging Center of Metaire, LLC for $250,000 payable $100,000 upon execution
of the agreement and $25,000 a month for six months. Under the terms of the
agreement, $125,000 of the $250,000 must be paid back to KFC Venture LLC without
interest before any profits can be distributed. Until such time, all
distributions shall be divided equally with fifty percent of said distribution
being paid to KFC Ventures, LLC as a return of its initial capital investment up
to the amount of $125,000 and the other fifty percent of said distribution being
distributed to the members in accordance with their percentage interests in the
Company.
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.
On September 30, 1998 the Company effectively sold 70% of its interest in
Open MRI for $300,000 and the purchaser's agreement to provide the Company's
creditor, DVI Business Credit, personal guaranties of the principals of
purchaser in an amount not to exceed $150,000. The Company recorded a gain on
this transaction in the amount of $30,171. The Company has retained a 2%
ownership interest in Open MRI.
In September 1998, the management contract with Southern Medical
Consultants LLP was terminated for the management of Open MRI of Metaire.
According to the letter agreement of March 30, 1998, if Southern Medical is not
active in the site nor managing the site through the end of the lease payments,
then no stock transfers will be made. No stock transfer has been made.
During 1998, the Company refinanced the following sites:
OLD NEW DECREASE
Passaic Beth Israel MRI $45,255 $24,557 $20,698
South Jersey Imaging 37,267 23,217 14,356
South Plainfield Imaging 36,350 13,207 22,943
-------
Monthly reduction in debt funding $57,997
On an annual basis the above refinancing results in a cash savings of
$695,694. All of the above refinanced loans are for sixty (60) months.
In addition, for the year ended December 1998, the Company reduced the
outstanding accounts receivable working capital line of credit by approximately
$635,000 ($1,302,000 to $667,000). The Company intends to continue to reduce the
outstanding principal balance on this line of credit at a rate of 10% of the
cash receipts of the applicable imaging centers.
During 1998, the Company reduced personnel salaries by a total of
$443,000, including fringe benefits. The duties of those employees whose jobs
were eliminated were reassigned to other Company employees.
These are the only trends, commitments, events and/or material
uncertainties known to the Company.
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.
VALUATION OF ACCOUNTS RECEIVABLE:
The Company values its uncollected accounts receivable as part of its
determination of profit. The Company constantly reviews the accounts receivable
valuation. The continuing monthly review, gathering of additional information,
as well as changing reimbursement rate, may cause adjustments to the accounts
receivable valuation.
HEALTHCARE SYSTEM:
The healthcare system is in a state of change and will continue so for the next
several years. Small medical group practices are referring patients to free
standing centers as an alternative to costly hospital care. The cost of this
medical equipment and the patient volume needed to justify the expenditure is
not practical for individual and small group practices. Providing MRI and CT
scans for these physicians in these free standing centers offers an attractive
method to protect eroding income, offer state-of-the-art technology and maintain
patient loyalty.
31
<PAGE>
Legislation:
In order to curb the potential for fraud and abuse under the Medicare and
Medicaid programs, Congress has enacted certain laws (the "Anti-Kickback Laws")
prohibiting the payment or receipt of any remuneration in return for the
referral of patients to a healthcare provider for the furnishing of medical
services or equipment, the payment for which may be made in whole or in part by
the Medicare or Medicaid programs. New Jersey, as well as other states, have
enacted similar state laws. The Anti-Kickback Laws apply to both sides of the
referral relationship: the provider making the referral and the provider
receiving the referral. Violation of the Anti- Kickback Laws is a criminal
felony punishable by fines of up to $25,000 and/or up to five years imprisonment
for each violation. Federal law also permits the Department of Health and Human
Services ("HHS") to assess civil fines against violators of the Anti-Kickback
Laws and to exclude them from participation in the Medicare and Medicaid
programs. These civil sanctions can be imposed in proceedings that do not
involve the same procedural requirements and standards of proof as would be
required in a criminal trial.
The Anti-Kickback Laws are broadly drafted and judicial decisions rendered thus
far, while made in the context of overt payments explicitly in exchange for
referrals, have broadly interpreted the scope of these laws.
Several federal courts considering the issue, including the U.S. Court of
Appeals having jurisdiction over New Jersey, have concluded that the
Anti-Kickback Laws would be violated if "any purpose" of a challenged economic
arrangement is to induce or pay for referrals, no matter how incidental that
purpose may be or how many other legitimate purposes may exist for the
arrangement in question. Accordingly, many types of business relationships
between healthcare providers, including
32
<PAGE>
investments in healthcare providers by physicians, hospitals or others who are
in a position to refer patients could be held to fall within the prohibitions of
the Anti-Kickback Laws or similar state laws.
The American Medical Association (the "AMA") has reaffirmed its original
Guidelines which were issued on May 6, 1992, which stated that physicians should
not refer patients to a health care facility outside their office in which they
do not have an active participation and only a passive investment interest.
These are ethical rules and recommendations of the AMA and they do not have a
binding legal effect.
HHS has adopted regulations specifying "safe harbors" for various payment
practices between providers and their referral sources. If a payment practice
were to come within the safe harbor and were not a "sham" to circumvent the
law's requirements, it would not be treated as an illegal Medicare/Medicaid
kickback or grounds for exclusion from the Medicare/Medicaid programs. While
failure to fall within a safe harbor does not mean that the practice is illegal,
HHS had indicated that it may give such arrangements closer scrutiny. In their
present form, no safe harbor would cover an investment interest in the Company.
The Company cannot predict whether other regulatory or statutory provisions will
be enacted by federal or state authorities which would prohibit or otherwise
regulate referrals by physicians to the Company thereby having a material
adverse effect on the Company's operations.
The federal "Ethics in Patient Referrals Law of 1989", often referred to as the
"Stark Law", prohibited a physician with a "financial relationship" with an
entity that furnishes clinical laboratory services (or a physician with an
"immediate family member" with such a relationship) from making a referral to
that entity for clinical laboratory services for which payment may be made under
that entity for clinical laboratory services for which payment may be made under
Medicare. It also prohibited that entity from billing Medicare, an individual, a
third party payor, or other entity, for an item or service furnished pursuant to
a prohibited referral. It required any entity that collects any amounts as a
result of such a billing to refund those amounts. The law provided certain
exceptions, namely, certain situations that would not constitute referrals, and
certain situations that would not constitute a "financial relationship."
Later amendments to the Stark law extended the original prohibition on referrals
and billing to cover ten additional "designated health services," in addition to
clinical laboratory services, and extended the ban to services payable under
Medicaid, both beginning with referrals made after December 31, 1994.
The "designated health services" are clinical laboratory services; physical
therapy services (including speech language pathology services); occupational
therapy services; radiology services (including any diagnostic test or treatment
using x-rays, ultrasound or other imaging services, CT scan, MRI, radiation or
nuclear medicine, however, excluding invasive radiology where the imaging
modality is used to guide a needle, probe or catheter (such as cardiac
catheterization), and thus is clearly incidental to a separate major procedure;
also excluding screening mamography); radiation therapy services and supplies;
durable medical equipment and supplies; parenteral and enteral nutrients,
33
<PAGE>
equipment and supplies; prosthetics, orthotics, and prosthetic devices and
supplies; home health services provided by a home health agency; outpatient
prescription drugs; inpatient and outpatient hospital services, whether provided
by the hospital or by others under arrangements with the hospital for which by
the hospital or by others under arrangements with the hospital for which the
hospital bills, but not including services provided by the hospital under a
separate license, such as home health care or physical therapy provided by a
hospital-owned home health agency or skilled nursing facility.
In 1991, New Jersey enacted the Health Care Cost Reduction Act, or so-called
"Codey Bill", (N.J.S.A. 45: 9-22.4 et seq.) which provided in part that a
medical practitioner shall not refer a patient, or direct one of its employees
to refer a patient, to a health care service in which the practitioner and/or
the practitioner's immediate family had any beneficial interest. The bill
specifically provided that for beneficial interests which were created prior to
the effective date of the Act, July 31, 1991, the practitioner could continue to
refer patients, or direct an employee to do so, if the practitioner disclosed
such interest to his patients. The disclosure must take the form of a sign
posted in a conspicuous place in the practitioner's office informing the
patients of such interest and stating that a listing of alternative health care
service providers could be found in the telephone directory. All physicians who
refer in the sites in New Jersey and also have a financial interest in those
sites have a sign posted as mandated by the law.
Under the present "Stark Bill", a physician who has a financial relationship
with an entity may not make a referral to the entity for the furnishing of
clinical laboratory services for which payment is made under the Medicare or
Medicaid programs. The Stark Bill, passed with an effective date of January 1,
1995, will expand the application of the Medicare ban on self- referrals after
December 31, 1994. The Stark Bill also extends the self-referral ban to physical
therapy services, radiology services including MRI and CT Scans, ultrasound
services, radiation therapy services and the furnishing of durable medical
equipment, the furnishing of parenteral and enteral nutrition equipment and
supplies, the furnishing of out-patient prescription drugs, ambulance services,
home infusion therapy services, occupational therapy services and in-patient and
out-patient hospital services (including services furnished in a psychiatric or
rehabilitation hospital). As of the date of this filing, the Company has not
experienced any material adverse effects of limited Medicare and Medicaid
referrals.
34
<PAGE>
Item 7. Financial Statements
See Pages F-1 to F-19.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On March 7, 1998, the Company dismissed Weinick, Sanders & Co. LLP,
located at 1515 Broadway, New York, New York 10036, as its independent
accountants. The Company has engaged Vincent J. Batyr & Co., located at 27 North
Broadway, Tarrytown, New York 10591, as its new independent certified public
accountants. In connection with the two most recent fiscal years and subsequent
interim period preceding Weinick, Sanders & Co. LLP's dismissal, there were no
disagreements with Weinick, Sanders & Co. LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. Weinick, Sanders & Co. LLP's report on the financial statements for
either of the past two years did not contain an adverse opinion or disclaimer of
opinion and was not qualified or modified.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Person
Compliance with Section 16(a) of the Exchange Act
The officers and directors of the Company, and further information concerning
them, are as follows:
Name Age Position
- ---- --- --------
Roger Findlay 51 Chairman of the Board of Directors and
President
Jan Goldberg 48 Vice President, Principal Accounting Officer,
Treasurer and Director
Gregory Maccia 45 Vice President, Secretary and Director
Fred Mancinelli 56 Director
Carl Gedeon 48 Director
Each of the above officers and directors shall hold office until the next annual
meeting of the Company's shareholders and until a successor is elected and
qualified.
ROGER FINDLAY is a co-founder and has been Chairman of the Board of Directors of
the Company since its inception in June 1990. In March 1999, Mr. Findlay was
appointed President of the Company. Since 1989, Mr. Findlay has also been
co-founder of Technology Services, Inc., a
35
<PAGE>
software support company for medical offices and commercial accounts. Since
1986, he has also been founder and President of Northern New Jersey Medical
Management, a general partner of a diagnostic imaging center. From 1986 to 1989,
Mr. Findlay was President of Advacare, Inc., a practice management and physician
billing company. He was co-founder and President of Effective Management
Services, Inc., from 1984 to 1986, which provided facilities management and
custom programming for hospitals, universities and physician groups. Mr.
Findlay, from 1984 to 1986, was also co-founder and President of Medical
Accounts Management Services, a software development company. From 1984 to 1986,
Mr. Findlay was chief operating officer of NMR of America, Inc., a publicly
traded company engaged in operating MRI sites. Mr. Findlay, from 1972 to 1986,
was President and co-owner of Medical Billing Services, Inc.
JAN GOLDBERG is a co-founder and was Secretary, Treasurer and Director of the
Company until November, 1992. Since November 1992, Mr. Goldberg has been the
Vice President, Treasurer and Director of the Company. From 1989 to 1990, Mr.
Goldberg was founder and President of GPM, Inc., a physician billing
organization with offices in Florida and New York. From 1987 to 1988, Mr.
Goldberg was operations manager for Advacare, Inc., a practice management and
physician billing company. From 1984 to 1987, Mr. Goldberg was manager of a
multi-specialty radiology practice, BBS Billing, Inc. an east coast diagnostic
physician group which had contracts with hospitals in New York as well as their
own private offices and outpatient facilities. From 1974 to 1984, Mr. Goldberg
held various positions with Blue Cross as well as with hospitals in the New York
area. Mr. Goldberg was involved in setting up fee-for-service reimbursement
systems and was involved in various aspects of hospital administration.
GREGORY MACCIA is a co-founder of the Company and was Vice President and
Director until November, 1992. Since November 1992, Mr. Maccia has been the Vice
President, Secretary and a Director of the Company. Mr. Maccia has also been
President of Technology Services, Inc., a software design and facilities
management company for medical and commercial accounts since 1989. From 1986-
1989, Mr. Maccia was Vice President of Advacare, Inc., a national practice
management and physician billing company. Since 1986, Mr. Maccia has been
co-founder of Northern New Jersey Medical Management, Inc. He was co-founder and
Vice President of Medical Accounts Management Services, Inc. (MAMS) from 1984 to
1986 which developed and sold physician, outpatient and clinical billing
software systems. Mr. Maccia, from 1984 to 1986, was co-founder and Vice
President of Effective Management Services, Inc. (EMS), which provided custom
programming and facilities management with contracts to hospitals and
universities in the tri-state area as well as collection agencies and
non-medical entities. From 1977 to 1984, Mr. Maccia owned and managed his own
consulting company.
36
<PAGE>
FRED J. MANCINELLI was appointed to the Board of Directors of Modern Medical
Modalities on March 3, 1998. Since 1988 Mr. Mancinelli has been President of CBS
Business Forms and Printing, Inc., a privately owned marketing, printing and
forms corporation located in Cedar Knolls, New Jersey. From 1971 to 1988, Mr.
Mancinelli was Vice President of Sales for New Jersey for Computer Business
Supplies, Inc. He purchased the New Jersey Branch office in 1988 and has
concentrated on meeting the total business forms and printing requirements of
over 350 customers. He is responsible for the administrative management,
marketing, cash flow analysis and sales for the Company. From 1962 to 1971, he
was employed by Autographic Business Forms, serving as Communications Manager
from 1962-1964, salesman from 1964-1968 and the New Jersey regional sales
manager from 1968-1971.
CARL GEDEON was appointed to the Board of Directors of Modern Medical Modalities
on March 3, 1998. Mr. Gedeon has over twenty years of experience in the medical
support business, concentrating on sales with an emphasis on unique design,
financing and problem solving for diagnostic imaging centers. Currently Mr.
Gedeon is founder and president of MedSpace, Inc., a company that specializes in
the design and manufacture of state of the art building systems utilized to
house diagnostic imaging equipment. Previously, Mr. Gedeon was vice president of
a major modular office company specializing in medical systems throughout the
United States.
Under the securities laws of the United States, the Company's directors,
its executive (and certain other) officers, and any persons holding ten percent
or more of the Company's Common Stock must report on their ownership of the
Company's Common Stock and any changes in that ownership to the Securities and
Exchange Commission and to the National Association of Securities Dealers,
Inc.'s Automated Quotation System. Specific due dates for these reports have
been established. During the year ended December 31, 1998, the Company believes
all reports required to be filed by Section 16(a) were filed on a timely basis.
Item 10. Executive Compensation
The following table sets forth all cash compensation for services rendered
in all capacities to the Company, for the year ended December 31, 1998 (referred
to as "1998" in this table), the year ended December 31, 1997 (referred to as
"1997" in this table) and the year ended December 31, 1996 (referred to as
"1996" in this table) paid to the Company's Chief Executive Officer. There were
no other executive officer's or other persons whose compensation at the end of
the above 1998, 1997 and 1996 years whose total compensation exceeded $100,000
per annum. Roger Findlay was appointed President of the Company in March, 1999.
Dominic Gugliemi served as the Company's President from August 1998 to March
1999.
37
<PAGE>
<TABLE>
<CAPTION>
Restricted All Other
Name and Principal Stock Compen-
Position Year Salary Bonus Awards Options/SARs sation(1)
- -------- ---- ------ ----- ------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Roger Findlay 1998 $118,215 $5,550
Chairman of the 1997 $ 38,462 $6,480
Board of Directors 1996 $111,538 $5,916
Dominic Gugliemi 1998 $ 20,959 $1,500
President 1997 $ 48,769 $2,700
1996
</TABLE>
- ----------
(1) Includes the cost of the use of automobiles leased by the Company, the cost
of benefits, including premiums for life insurance and any other personal
benefits provided by the Company to such persons in connection with the
Company's business and directors fees.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 25, 1999
with respect to each beneficial owner of five percent (5%) or more of the
outstanding shares of Common Stock of the Company, each officer and director of
the Company and all officers and directors as a group. The table does not
include securities exercisable into common stock that have not yet vested or are
not exercisable within 60 days of the date hereof. Unless otherwise indicated,
the address of each such person or entity is 1719 Route 10, Suite 117,
Parsippany, New Jersey 07054.
Name and Address Number of Shares Percentage of
Of Beneficial Owner Beneficially Owned(1) Common Stock
- ------------------- --------------------- ------------
Roger Findlay 118,048 6.7%
Jan Goldberg 118,046 6.7%
Gregory Maccia 118,046 6.7%
Fred Mancinelli -0- 0.0%
Carl Gideon -0- 0.0%
All officers and directors 354,140 20.1%
as a group (5 persons)
- ----------
(1) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock that an individual or group has a right
to acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purposes of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for the purposes of
38
<PAGE>
computing the percentage ownership of any other person shown in the table.
Item 12. Certain Relationships and Related Transactions
On October 15, 1992, the Company initially issued an additional 2,245,000
shares of common stock. Officers of the Company have received shares, for an
aggregate value of $57,500 as follows: Roger Findlay (589,635 shares), Jan
Goldberg (589,630 shares) and Gregory Maccia (589,630 shares). These shares were
issued pursuant to a recapitalization of the Company.
Doctors Imaging Associates, a Joint Venture whose financial statements are
consolidated with those of the Company has received net non-interest bearing
advances from Doctors Imaging Associates, Inc., a joint venture, totaling
$225,717 and 240,751 at December 31, 1995 and December 31, 1994, respectively.
Doctors Imaging Associates, Inc. is obligated to advance up to $250,000 from
time to time for working capital as the Company deems necessary. These advances
are to be repaid prior to any distribution of profits to the joint venturers.
Messrs. Findlay and Maccia who are officers and directors of the Company
are also general partners in a limited partnership which engages in diagnostic
imaging. This limited partnership concerns only one site, which is located at
Union, New Jersey and provides ultrasound, mammography, fluoroscopy and nuclear
medicine only. However, the limited partnership does not lease MRI and CT
equipment. Therefore, it is managements belief that there is no competition
between the Company and the limited partnership. Moreover, no conflict of
interest exists for Messrs. Findlay and Maccia as officers of the Company and
general partners of the limited partnership. There are no leasing transactions
between the Company and the limited partnership. To date there has been no
transactions between the limited partnership and the Company.
Item 13. Exhibits, Lists and Reports on Form 8- K
(a) Exhibits
27 Financial Data Schedule
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report on Form 10-KSB to be
signed on its behalf by the undersigned, thereunto duly authorized.
MODERN MEDICAL MODALITIES CORPORATION
By: /s/ ROGER FINDLAY
---------------------------------
Roger Findlay, President and
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Roger Findlay President and Chairman of the Board March 31, 1999
- -------------------
Roger Findlay
/s/ Jan Goldberg Vice President, Principal March 31, 1999
- ------------------- Accounting Officer, Treasurer
Jan Goldberg and Director
/s/ Gregory Maccia Vice President, Secretary March 31, 1999
- ------------------- and Director
Gregory Maccia
/s/ Fred Mancinelli Director March 31, 1999
- -------------------
Fred Mancinelli
/s/ Carl Gedeon Director March 31, 1999
- -------------------
Carl Gedeon
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Modern Medical Modalities Corporation
We have audited the accompanying consolidated Balance Sheets of Modern Medical
Modalities Corporation and Subsidiaries as at December 31, 1998, and 1997, and
the related Consolidated Statements of Operations, Stockholders' Equity, and
Cash Flows for the three years ended December 31, 1998, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Modern
Medical Modalities Corporation and Subsidiaries as at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
the years ended December 31, 1998, 1997 and 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Vincent J. Batyr & Co.
Certified Public Accountants
Tarrytown, NY
March 10, 1999
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 56,313 $ 119,217
Restricted cash for line of credit repayment 600,000 600,000
Accounts receivable (less contractual allowances of
$ 2,447,579 and $ 2,475,004, respectively) 2,816,356 4,919,714
Account receivable - joint venture 585,607 254,696
Current portion of note receivable
from affiliate 141,667 972,650
Current portion of note receivable 46,590 46,590
Loan receivable - affiliates 128,750 121,250
Due from officers 126,368 94,343
Due from affiliates 77,600 --
Other receivables 82,014 47,554
Prepaid expenses 11,023 44,999
----------- -----------
Total current assets 4,672,288 7,221,013
----------- -----------
Other assets:
Furniture, fixtures, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $5,742,206 and $ 6,134,831, respectively) 6,703,426 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 $ 25,901 and $ 16,601, respectively) 71,797 81,097
Investment in joint venture 290,998 259,483
Investment in and advances to
unconsolidated affiliate -- 567,737
Deposits 40,446 151,901
Deferred tax asset 484,718 --
Other long term assets 6,381 --
----------- -----------
Total other assets 7,711,502 11,849,148
----------- -----------
$12,383,790 $19,070,161
=========== ===========
</TABLE>
F-2
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 595,552 $ 599,750
Accounts payable 1,892,755 1,463,096
Accrued expenses 1,029,677 556,862
Loan payable - joint venturer 71,942 110,467
Loans payable - affiliates 202,000 202,000
Current portion of long term debt 2,789,678 3,115,461
Due to affiliate 49,466 23,594
Due to related party 4,389 --
Deferred income taxes -- 155,133
------------ ------------
Total current liabilities 6,635,459 6,226,363
------------ ------------
Other liabilites:
Long-term debt, net of current portion 3,034,863 6,920,849
Deferred income taxes -- 1,054,552
Due to joint venturer 218,717 217,787
------------ ------------
Total other liabilities 3,253,580 8,193,188
------------ ------------
Total liabilities 9,889,039 14,419,551
------------ ------------
Minority interest 187,489 140,825
Stockholders' equity:
Common stock, $0.0001 par value,
Authorized - 5,000,000 shares
Issued and outstanding - 3,518,292 and 3,168,292 shares, respectively 317 317
Additional paid-in capital 3,866,389 3,866,389
Retained earnings (deficit) (1,559,444) 643,079
------------ ------------
Total stockholders' equity 2,307,262 4,509,785
============ ============
$ 12,383,790 $ 19,070,161
============ ============
</TABLE>
F-3
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating income:
Net revenue from services $ 6,414,945 $ 10,103,869 $ 12,074,914
------------ ------------ ------------
Total operating income 6,414,945 10,103,869 12,074,914
------------ ------------ ------------
Operating expenses:
Selling, general and administrative 6,628,492 6,989,141 8,043,674
Bad debts 23,750 29,793 67,582
Depreciation and amortization 1,544,401 1,788,503 1,761,294
------------ ------------ ------------
Total operating expenses 8,196,643 8,807,437 9,872,550
------------ ------------ ------------
Income (loss) from operations (1,781,698) 1,296,432 2,202,364
------------ ------------ ------------
Other income (expenses):
Interest income 57,218 135,497 37,909
Interest expense (849,998) (1,218,356) (1,344,649)
Miscellaneous income 110,567 -- --
Income from joint ventures 151,601 217,909 104,147
Income (loss) from minority owned --
subsidiary -- (8,981) --
Loss on sale of property assets -- (26,702) --
Gain (loss) on sale of subsidiary
net of income tax benefit of $319,326 (423,293) 252,076 319,326
Gain (loss) on sale of subsidiary
net of income taxes of $12,974 17,197 (36,907) --
Loss on disposal of subsidiary
net of income tax benefit of $72,268 (95,796) -- 72,268
Restructuring of note receivable
net of income tax benefit of $321,490 (426,160) -- 321,490
------------ ------------ ------------
Total other income (expense) (1,458,664) (685,464) (489,509)
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes and
minority interest (3,240,362) 610,968 1,712,855
Provision for income taxes (994,293) 277,990 455,320
------------ ------------ ------------
Income (loss) from continuing operations
before minority interest (2,246,069) 332,978 1,257,535
Minority interest 43,546 (144,424) (294,625)
------------ ------------ ------------
Net income (loss) from continuing operations (2,202,523) 188,554 962,910
Income (loss) from discontinued
operations, net of income tax effect
of $ - , $53,233, and $ - , respectively -- (63,762) --
------------ ------------ ------------
Net income (loss) $ (2,202,523) $ 124,792 $ 962,910
============ ============ ============
Basic earnings per share
Net income (loss) $ (0.67) $ 0.06 $ 0.30
============ ============ ============
Number of shares outstanding:
Basic 3,285,278 3,168,292 3,168,292
============ ============ ============
</TABLE>
F-4
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-----------------------------------------
1998 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $(2,202,523) $ 509,987 $ 509,987
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,544,401 1,301,331 1,301,331
Contractual allowances 27,425 376,664 376,664
Bad debts 23,750 21,930 21,930
Income from an unconsolidated joint venture (151,601) (163,699) (163,699)
Minority interest (43,546) 51,763 51,763
Deferred income taxes (1,694,403) 419,000 419,000
Loss on sale of subsidiary 742,619 -- --
Gain on sale of subsidiary (30,171)
Loss on disposal of subsidiary 168,064 -- --
Restructuring of note receivable 747,650 -- --
Income from unconsolidated affiliate -- 8,981 8,981
Loss on sale of property assets -- 26,702 26,702
Increase (decrease) in cash attributable to changes in operating assets and
liabilities:
Accounts receivable 2,103,358 (995,554) (995,554)
Accounts receivable - joint venturer (330,911) (303,775) (303,775)
Other receivable (34,460) 71,599 71,599
Due from affiliate (77,600) -- --
Due from officers (32,025) (84,221) (84,221)
Prepaid expenses 33,976 43,547 43,547
Deposits 111,455 (25,896) (25,896)
Distributions from a joint venture -- 330,966 330,966
Due to affiliate 25,872 (45,890) (45,890)
Accounts payable 429,660 (194,555) (194,555)
Accrued expenses 472,815 57,443 57,443
Advances to unconsolidated affiliate -- (239,055) (239,055)
----------- ----------- -----------
Total adjustments 4,036,328 657,281 657,281
----------- ----------- -----------
Net cash provided (used) by operating activities 1,833,805 1,167,268 1,167,268
----------- ----------- -----------
Cash flow from investing activities:
Organization costs -- (60,840) (60,840)
Fixed asset acquisitions (1,367,360) (1,605,311) (1,605,311)
Fixed assed dispositions 2,492,764 -- --
Proceeds from loan receivable - affiliate (7,500) 125,000 125,000
Proceeds from note receivable 72,222
Issuance of note receivable -- (160,326) (160,326)
Investment in joint venture (31,515) -- --
Note receivable - affiliate -- 18,350 18,350
Increase in minority interest (46,664) -- --
----------- ----------- -----------
Net cash provided (used) by investing activities 1,111,947 (1,683,127) (1,683,127)
Cash flow from financing activities:
Reduction of goodwill 1,419,213 -- --
Proceeds from issuance of long-term debt -- 2,039,632 2,039,632
Payments on affiliates advances -- (156,505) (156,505)
Cash overdraft -- 3,088 3,088
Joint venture advances -- 10,000 10,000
Loan payable - joint venturer (37,595)
Disposal of long term debt (3,717,089) -- --
Principal payments on long-term debt (673,185) (1,220,119) (1,220,119)
----------- ----------- -----------
Net cash provided (used) by financing activities (3,008,656) 676,096 676,096
----------- ----------- -----------
Net increase in cash and equivalents (62,904) 160,237 160,237
Cash and equivalents, begining of year 719,217 42,421 42,421
=========== =========== ===========
Cash and equivalents, end of year $ 656,313 $ 202,658 $ 202,658
=========== =========== ===========
</TABLE>
F-5
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Shares Stock Capital Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,168,292 317 $ 4,086,413 $ 240,806 $ 4,327,536
Write-down of assets relating
to the disposal of
Prime Contracting Corp. -- -- (358,000) -- (358,000)
Adjustment in connection with
the sale of 65% of Empire
State Imaging Associates, Inc. -- -- 137,976 27,655 165,631
Net income for the year ended
December 31, 1996 -- -- -- 249,826 249,826
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 3,168,292 317 3,866,389 518,287 4,384,993
Net income for the year ended
December 31, 1997 -- -- -- 124,792 124,792
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 3,168,292 317 3,866,389 643,079 4,509,785
Issuance of common stock in
connection with Benson Shore
Capital, LLC consulting agreement 350,000 -- -- -- --
Net income for the year ended
December 31, 1998 -- -- -- (2,202,523) (2,202,523)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 3,518,292 317 $ 3,866,389 $(1,559,444) $ 2,307,262
=========== =========== =========== =========== ===========
</TABLE>
F-6
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLCIES.
(a) Organization and Business:
Modern Medical Modalities Corporation (the "Company") was
incorporated in the State of New Jersey on December 6, 1989. The Company
provides high technology medical equipment and management services to
hospitals and physicians. Modern Modalities Corporation was incorporated
in the State of New Jersey on June 4, 1990, for the same purpose. The two
companies had common ownership, directors and officers. In July 1992, the
two companies were merged under the laws of the State of New Jersey, by
way of an agreement accounted for as a tax-free merger. The surviving
corporation is known as Modern Medical Modalities Corporation.
(b) Basis of Presentation:
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, Medical Marketing and Management,
Inc., Somerset Imaging Corporation, South Plainfield Imaging, Inc.,
Medi-Corp., USA, South Jersey Medical Equipment Leasing Corp., Amherst
Medical Equipment Leasing Corp., Open MRI of Morristown, Inc., West
Paterson Medical Equipment Leasing Corp., Ohio Medical Equipment Leasing
Corporation, its majority owned subsidiary, Sylvania Diagnostics L.P., (in
which the Company had a 50.2% interest until June 30, 1998, see Note 3),
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, by contract manages the joint
ventures, is the managing joint venture and 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. The Company sold 70% of its 72% owned subsidiary,
Open MRI of Morristown, on September 30, 1998. Investment in an
unconsolidated joint venture, Union Imaging Associates, Joint Venture in
which the Company has a 10% interest and significant influence, is
accounted for under the equity method. All significant intercompany
transactions and accounts have been eliminated in the consolidation.
F-7
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(c) Operating Revenue:
Revenue from services to physicians are recorded at a percentage of
the physicians' established rates under a contractual agreement between
the Company and the Physicians. Under these agreements, the Company
participates, on the same percentage basis, with adjustments known as
contractual allowances, under third-party reimbursement agreements with
the physicians, deducted to arrive at net revenue from services.
Management fees are generated, through a contractual agreement
between the Company and a joint venture, Union Imaging Associates, Joint
Venture ("Union") , in which the Company owns a minority interest, based
on a percentage of cash collections. Under the terms of the joint venture
agreement, the Company receives 11.25% of the joint venture's percentage
of the cash collections in exchange for managing the joint venture. The
Company's responsibilities include the management of all personnel,
leasing of operating facilities and equipment, negotiation of contracts,
payments of debts and obligations and preparation and review of invoices
and claims.
(d) The physicians with which the Company contracts, operate under various
payment systems with third-party payers. A substantial portion of the
Company's revenues are attributable to payments made by
government-sponsored health care programs and other third party payers.
The Company receives these payments either directly, in the case of
imaging center revenues relating to reimbursable direct patient billings,
or indirectly, in the case of technical fee-for-service payments made by
hospitals. Any change in reimbursement regulations, or the enactment of
legislation, which would have the effect of placing material limitations
on the amount of reimbursement for imaging services could adversely affect
the operations of the Company. In addition, health care reimbursement
programs are not uniformly prompt in making required payments. Extensive
payment delays are not uncommon, and the Company's financial resources
could be strained while awaiting payment.
(e) Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
(f) Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. The
Company places its cash with high credit quality financial institutions
which at times, may be in excess of the FDIC insurance limit.
F-8
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(g) Accounts Receivable:
Accounts receivable is stated net of contractual allowances. Based
upon its past history, the Company estimates the amount of the accounts
receivable it does not expect to receive. The Company values its
uncollected accounts receivable as part of its determination of profit and
constantly reviews the valuation. The continuing review and gathering of
additional information, as well as changing reimbursement rates, may cause
adjustments.
(h) Furniture, Fixtures, Equipment and Leasehold Improvements:
Furniture, fixtures, equipment and leasehold improvements are stated
at cost. Depreciation and amortization are provided for, generally using
the straight-line method over the lease term or the estimated useful lives
of the related asset, five to seven years for office equipment and
furniture and fixtures, and ten years for medical equipment by charges to
income.
(i) Goodwill:
The Company recorded goodwill relating to the acquisition of a
subsidiary which is being amortized over a period of fifteen years.
(j) Revenue and Cost Recognition:
The Company recognizes revenue from services upon performance for
medical, management and marketing services for financial statement
reporting purposes.
(k) Income Taxes:
The Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes", which provides for income tax accounting under the
asset and liability method and requires adjustment of deferred tax
balances for changes in tax laws and rates. The Company reports income on
the cash basis for income tax reporting purposes. Provision for income
taxes includes federal and state income taxes currently payable and those
deferred because of temporary differences arising primarily from the
recognition of income on the cash basis for tax purposes versus the
accrual basis for financial reporting purposes.
(1) Earnings Per Share:
Earnings per share have been computed by dividing the net income by
the weighted average number of common stock and common stock equivalent
shares outstanding. Common stock and common stock equivalent shares
outstanding include shares issued within one year of an initial public
offering (IPO), at a price below the IPO price, as outstanding for all
periods presented.
(m) Reclassification:
Certain reclassifications have been made to the 1997 and 1996
financial statements to conform to the 1998 presentation.
F-9
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(n) New Accounting Standards:
The Company has adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-lived Assets to be Disposed of". This
statement established accounting standards for the impairment of
long-lived assets (including goodwill) to be held and used as well as
those to be disposed of. The statement requires management to periodically
review these assets in light of certain events or circumstances which may
effect the recoverability or carrying value of said assets and to adjust
the value downward or to dispose of the asset accordingly. The adoption of
this standard did not have a material effect on the Company's financial
position or its results of operations.
(o) Retirement Plan:
The Company maintains a qualified 401(k) wage deferral plan.
Employees may defer a portion of their salary. The Company does not
contribute to the plan.
NOTE 2 - GOING CONCERN.
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern. The Company
has a working capital deficiency of $1,963,171 as of December 31, 1998,
and has sustained continued losses from operations, which raise
substantial doubt about the Company's ability to continue as a going
concern.
The Company has begun implementation of a restructuring plan for its
subsidiaries and believes this plan will make the Company profitable in
future periods. This plan includes increasing marketing personnel to
increase patient service revenue, as well as a reduction of administrative
personnel. Duties of those employees whose jobs were eliminated were
reassigned to existing employees.
NOTE 3 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS
In October 1995, the Company entered into a joint venture ("Open MRI
of Morristown, Joint Venture") agreement with RMC Consulting, Inc. and two
individuals to develop a MRI facility located in Morristown, New Jersey.
In December 1995, OpenMRI of Morristown, Inc. ("OpenMRI"), a wholly-owned
subsidiary of the Company, was assigned the Company's interest in the
joint venture. OpenMRI accepted delivery of a new magnetic resonance
imaging machine and opened in February 1996. The Company had a 72%
interest in the profit, obligations and liabilities under the joint
venture agreement until September 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 expired on August 31,
1998.
F-10
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS (Continued)
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
are to remain the property of the lending parties.
On September 30, 1998 the Company effectively sold 70% of its
interest in Open MRI for $300,000 and the purchaser's agreement to provide
the Company's creditor, DVI Business Credit, personal guaranties of the
principals of purchaser in an amount not to exceed $150,000. The Company
recorded a gain on this transaction in the amount of $17,197, net of
income taxes in the amount of $12,974. The Company has retained a 2%
ownership interest in Open MRI.
On November 1, 1994, the Company acquired Prime Contracting Corp.
("Prime") in a business combination accounted for as a pooling of
interests. Prime is a full service contractor providing turnkey design and
construction services, becoming a wholly-owned subsidiary of the Company,
through the exchange of 112,457 shares of the Company's common stock
(market value of $650,000) for all of the shares of the outstanding stock
of Prime.
On December 27, 1995, the Company entered into an agreement with a
related party to sell all of the common stock of Prime for $1,200,000,
payable as follows: $100,000 upon execution, $100,000 at closing and a
promissory note bearing interest at prime plus one percent. The note was
payable in two installments, $600,000 after six months and $400,000 after
one year of the closing date. The Company in 1995 recorded an increase of
$987,554 to stockholders' equity which represents the excess of the sale
price over the net assets of Prime.
The Agreement was modified in 1996 to extend the note payments of
$600,000 to October 1997 and $400,000 to April 1998. Additionally, the
modified agreement required the Company to charge $358,000 of receivables
from Prime to additional paid-in capital in 1996 as an adjustment to the
sale price. On March 3, 1998, the agreement was restructured, resulting in
a loss in the amount of $426,160, net of income tax benefit in the amount
of $321,490 (see Note 4).
F-11
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS. (Continued)
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 one percent. The Company has recorded
an increase of $165,631 to stockholders' equity which represents the
excess of the sale price over the net assets of Empire. At December 31,
1997 and 1996, the Company's investment in Empire is $61,354 and $60,321,
respectively, and the Company had advances receivable from Empire of
$506,383 and $246,640. 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 $423,293 net of
income tax benefit in the amount of $319,326.
During 1996, the Company incorporated two wholly-owned subsidiaries.
Ohio Medical Equipment Leasing Corporation ("OME") was incorporated in the
State of Ohio for the purpose of acquiring a majority interest in Sylvania
Diagnostics. West Paterson Medical Equipment Leasing Corp. ("WPMEL") was
incorporated in the State of New Jersey for the purpose of opening a
diagnostic imaging center in West Paterson.
In July 1996, the Company, through OME, entered into a purchase and
consulting agreement with Medical Advances, Inc. ("Medical") to acquire an
interest as a general (managing) partner of Sylvania Diagnostics
("Sylvania"), an Ohio Limited Partnership, for one dollar. The interest
acquired represents 50.2% of the total units outstanding. Sylvania is a
diagnostic imaging center located in Sylvania, Ohio.
As a result of this acquisition, the Company recorded the difference
between the acquisition price of one dollar and the allocated percentage
of the cumulative deficit as goodwill and the cumulative allocated losses
in excess of basis of the limited partners of Sylvania as an intangible
asset as of July 1, 1996, the date of acquisition. All subsequent losses
are allocated to the Company with future income first applied to the
losses and the remainder against the intangible asset until it is fully
recovered. The Company also entered into an agreement with DVI which
provides for $135,000 of working capital advances which are only to be
used for operating Sylvania. If the Company determines that operating
Sylvania is not profitable, DVI will purchase either Sylvania or OME for
one dollar. In August 1996, Sylvania entered into an agreement with DVI to
refinance equipment and related leasehold improvements in the aggregate
amount of $2,127,366. The amount was payable in 64 monthly installments
commencing in March 1997 of $20,000 for the first four months and $44,968
over the remaining 60 months. The Company is indemnified for all prior
liabilities and obligations of the limited partnership by DVI, an
equipment finance company who is the lessor of Sylvania's medical
equipment. 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 $95,796 net of income tax benefit
in the amount of $72,268.
In July 1996, the Company, through its wholly-owned subsidiary
WPMEL, entered into a lease and management services agreement with
Advanced Imaging & Radiology Associates, P.A. ("M.D."). The agreement
provides that WPMEL will lease office space, fixtures and equipment and
will provide management services to M.D. over an initial term of five
years with a five year renewal option. The site, located in West Paterson,
New Jersey, is a medical practice specializing in diagnostic imaging.
F-12
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS. (Continued)
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.
In June of 1997, Metaire Medical Equipment Leasing was incorporated
in the state of New Jersey, as a 100% owned subsidiary of the Company. In
October of 1997, Metaire Medical Equipment Leasing Corporation was
registered as a Corporation doing business in the State of Louisiana. On
April 15, 1998 Open MRI & Imaging Center of Metairie, LLC ("LLC") was
organized in the state of Louisiana. Under terms of the venture agreement,
the Company, through its 100% owned corporation, owns 85% of the LLC.
In October 1997, the Company entered into a contract for the sale of all
leasehold rights, medical equipment, and the assumption of certain
liabilities of Somerset Medical Equipment Leasing Corporation, resulting
in a loss of $36,907.
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 $426,160, net of income tax benefit in the
amount of $321,490.
NOTE 5 - FURNITURE, FIXTURES, EQUIPMENT AND LEASHOLD IMPROVEMENTS.
Furniture, fixtures, equipment and leasehold improvements consist of
the following:
December 31,
-----------------------------
1998 1997
----------- -----------
Medical Equipment $11,459,664 $14,083,189
Building 310,860 358,066
Furniture and Fixtures 65,830 67,139
Automobiles 22,860 22,860
Leasehold improvements 586,418 1,048,780
----------- -----------
12,445,632 15,580,034
Less: Accumulated Depreciation
and Amortization 5,742,206 6,134,831
----------- -----------
6,703,426 9,445,203
=========== ===========
F-13
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 6 - INVESTMENT IN JOINT VENTURE.
In 1990, the Company acquired a ten percent (10%) interest in Union
Imaging Associates, Joint Venture, which it accounts for using the equity
method of accounting, due to the significant influence it has on the joint
venture as its managing venturer.
The following is a summary of selected financial information from
the financial statements of the joint venture in which the Company has an
investment.
Total Long-Term Total Total
Assets Debt Liabilities Capital
----------- ---------- ----------- ----------
December 31, 1998 $4,485,673 $1,271,846 $1,741,863 $2,743,810
December 31, 1997 5,538,114 1,354,524 3,116,550 342,721
December 31, 1996 4,339,575 1,938,137 3,637,025 702,550
10%
Gross Allocations
Revenues Net Income of Income
---------- ---------- ----------
December 31, 1998 $4,141,948 $1,492,754 $149,275
December 31, 1997 5,603,802 2,078,843 207,884
December 31, 1996 4,417,540 1,041,469 104,147
NOTE 7 - LINE OF CREDIT.
In April 1995, the Company secured a line of credit with Summit Bank
for $600,000 at the bank's prime rate for commercial borrowers. As of
December 31, 1998 and 1997, the amount of the liability under the line of
credit was $595,552 and $599,750, respectively. 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:
December 31,
-----------------------------
1998 1997
----------- -----------
Capitalized lease obligations (a) $ 4,758,725 $ 8,691,572
Accounts receivable financing (b) 1,065,815 926,363
Other (c) -- 418,375
----------- -----------
5,824,540 10,036,310
Current portion 2,788,475 3,115,461
----------- -----------
Total long-term debt $ 3,036,053 $ 6,920,849
=========== ===========
(a) Capitalized Lease Obligations:
The Company entered into certain leases for the rental of equipment,
which have been recorded as capital leases for financial statement
reporting purposes and are included in equipment.
F-14
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - LONG-TERM DEBT (Continued).
(b) Accounts Receivable Financing:
The Company entered into two separate agreements with DVI to finance
up to $1,500,000 of the accounts receivable balances from two of the
Company's subsidiaries and one of its joint ventures and $1,500,000 of the
accounts receivable balance from the Company's unconsolidated joint
venture. The agreements extend to March and June 1998, respectively, with
consecutive one year renewal terms. The agreements are non-cancelable,
except in the event of default by the Company. At December 31, 1997, the
amounts financed under these agreements totaled $1,065,815 and $926,363,
respectively. The Company has guaranteed the $1,500,000 financing line of
credit of the unconsolidated joint venture. The unconsolidated joint
venture has loaned the Company $110,467 from the proceeds of this line of
credit. At December 31, 1997, the Company is not in compliance with the
terms of the loan agreement. Management is presently negotiating with DVI
to bring the Company into compliance.
(c) Other:
Sylvania Diagnostics limited partnership at December 31, 1997 was
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 Company sold it interest in Sylvania to DVI on
June 30, 1998. The notes payable at December 31, 1997 were as follows:
December 31,
---------------------
1998 1997
---------- ---------
(i) Note payable to a bank which was due on
March 14, 1995. 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
-------------------------------------------------------------------------
(ii) Note payable to a professional corporation
in equal monthly installments of $5,000 including
interest at 9.4% through July 2000. -- 130,939
-------------------------------------------------------------------------
(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. -- 37,936
-------------------------------------------------------------------------
$ -- $ 418,375
========== =========
F-15
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - LONG TERM DEBT. (Continued)
(c) Other (Continued):
The future principal payments for long-term debt are as follows :
December 31,
-------------------------------
1998 1997
----------- -----------
1998 $ -- $ 3,115,461
1999 2,789,678 2,732,447
2000 977,263 2,385,084
2001 1,023,019 1,578,420
2002 598,949 551,898
2003 339,702 --
2004 95,930 --
----------- -----------
5,824,541 10,363,310
Less current portion 2,789,678 3,115,461
----------- -----------
Non-current portion $ 3,034,863 $ 7,247,849
=========== ===========
NOTE 9 - STOCKHOLDERS' EQUITY
In February 1994, the Company completed an initial public offering
of its securities pursuant to the Securities Act of 1993 (as amended) from
which it received proceeds of $1,986,181, net of commissions and expenses
of the offering of $601,319. The offering included the sale of $17,500
units including the underwriters' overallotment of 67,500 units at a
selling price of $5.00 per unit. Each unit consisted of one (1) share of
the Company's $0.0001 par value common stock ("Common Stock"), one (1)
Class A Redeemable Common Stock Purchase Warrant ("A Warrant") and one (1)
Class B Redeemable Common Stock Purchase Warrant ("B Warrant). Each A
Warrant entitles the holder to purchase one (1) share of Common Stock for
a period, as extended, ending in August 1997 at a price of $6.50. Each B
Warrant entitles the holder to purchase one (1) share of Common Stock for
a period, as extended, ending in February 2000 at a price of $8.00.
On September 18, 1998, the Company entered into a consulting
agreement with Benson Shore Capital, LLC ("Consultant"), for a period of
one year. The agreement required consultant to 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 compensated
consultant by issuing consultant 350,000 shares of its common stock.
F-16
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 - INCOME TAXES.
The Company does not report income, for income tax reporting
purposes, on the consolidated or acrual basis. Deferred income tax asset
(liability) at December 31, 1998 and 1997 of $484,718 and $(1,209,685),
respectively, represent temporary differences arising primarily from the
recognition of income on the cash receipts and cash disbursements basis of
accounting for income tax reporting purposes and 9% for state income tax
purposes, which are expected to be realized in future years, thus, no
valuation allowance has been provided.
The Company has recorded income tax provision (credit) at December
31, 1998, 1997 and 1996 of $(1,694,403), $277,990, and $455,320,
respectively. The Company has a net operating loss carry-forward for
federal income tax purposes which are available to offset future taxable
income through 2011.
The following is a reconciliation for the U.S. federal statutory tax
rate and the apparent tax rate:
1998 1997 1996
---- ---- ----
U.S. Federal statutory rate 34.0% 34.0% 34.0%
State taxes 6.0 6.0 6.0
Goodwill amortization 1.6 1.6
Other 3.9 3.9 3.9
---- ---- ----
Apparent tax rate 43.9% 45.5% 45.5%
==== ==== ====
NOTE 11 - RELATED PARTY TRANSACTIONS.
Advances to Joint Venturer:
A majority-owned joint venture, Doctors Imaging Associates, Joint
Venture, has received non-interest bearing advances from one of the joint
venturers totaling $218,717 at December 31, 1997 and 1996. The joint
venturer is obligated to advance up to $250,000 from time to time for
working capital as the Company deems necessary. These advances are to be
repaid prior to any distributions of profits to the joint venturers.
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
(a) Doctors Imaging Associates, Joint Venture:
The joint venture which owns the minority 50% interest in the joint
venture, has a contract to provide professional radiology services on a
percentage basis to the joint venture. In addition, through a separate
company with common ownership, the joint venturer also leases space to the
joint venture.
F-17
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
(b) Muhlenberg Regional Medical Center:
The Company entered into an agreement with Muhlenberg Regional
Medical Center (the "Hospital") which provides for the placement of a
mobile magnetic resonance imaging ("MRI") unit at the Hospital for five
(5) years without rent. In addition, the Company entered into an agreement
with an affiliate of the Hospital for certain management services to be
provided to the Company for a five (5) year term requiring minimum annual
management fees of $50,000. In June 1996, the agreements terminated by
their terms.
(c) Services Support Agreements:
One of the Company's majority-owned joint ventures, Doctors Imaging
Associates, Joint Venture, signed two service support agreements with the
equipment manufacturer. The agreements, which commenced January 1, 1993
and August 1, 1993, respectively, are for a period of forty-eight (48)
months and provide for monthly maintenance charges of $11,640 and $4,667,
respectively.
(d) Amherst Project:
In April 1995, Amherst Medical Equipment Leasing Corporation
("AMHERST"), a wholly-owned subsidiary of the Company, was formed. AMHERST
entered into an agreement with Amherst Imaging Associates, P.A., to
provide certain non-professional services. In accordance with this
agreement, AMHERST has leased space in Amherst, New York, effective July
1, 1995, for a period of five years at a monthly rent of $1,275. On July
17, 1995, the Company entered into an agreement with Magna-Lab, Inc. to
purchase a permanent MRI at a cost of approximately $500,000. Financing
has been secured through DVI. The lease in the amount of $327,000 is
payable over 60 months at a monthly payment of $7,068 commencing on
January 1, 1996. Magna-Lab has agreed to accept 18% of the operating
income on a cash basis for a five year period to cover the cost of the
balance of the machine. This income sharing is for five years and is not
to exceed $200,000. As part of the agreement, Magna-Lab agreed to pay the
monthly space rent until the MRI is delivered.
(d) Year 2000 Readiness
The Year 2000 readiness of the Company's customers and hardware and
software offerings from the Company's suppliers, subcontractors and
business partners may vary. The Year 2000 also presents a number of other
risks and uncertainties that could affect the Company, including utilities
failures, the lack of personnel skilled in the resolution of Year 2000
issues, and the nature of government responses to the issues, among
others. While the Company continues to believe that the Year 2000 matters
discussed above will not have a material impact on its business, financial
condition or results of operations, it remains uncertain whether or to
what extent the Company maybe affected.
F-18
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 13 - SUBSEQUENT EVENTS.
In February, 1999, the Company entered into an agreement to sell
lits 50% interest in Doctor's Imaging Associates, Joint Venture for
$100,000. Since all terms of the agreement have not been satisfied, the
sale has not been completed at this time.
On March 11, 1999, the Company effectuated a one for two reverse
stock split of the Company's issued and outstanding shares of common
stock. The reverse stock split became effective on March 12, 1999. After
the reverse stock split, the Company has 1,759,146 shares of common stock
issued and outstanding and a total of 2,500,000 shares authorized for
issuance.
F-19
See Independent Auditors' Report and Notes to Consolidated Financial Statments
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 56,313
<SECURITIES> 0
<RECEIVABLES> 5,263,935
<ALLOWANCES> (2,447,579)
<INVENTORY> 0
<CURRENT-ASSETS> 4,672,288
<PP&E> 12,472,362
<DEPRECIATION> (5,742,206)
<TOTAL-ASSETS> 12,383,790
<CURRENT-LIABILITIES> 5,538,139
<BONDS> 0
317
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,383,790
<SALES> 6,414,945
<TOTAL-REVENUES> 6,414,945
<CGS> 0
<TOTAL-COSTS> 8,196,643
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,528,162
<INTEREST-EXPENSE> 849,998
<INCOME-PRETAX> (3,940,472)
<INCOME-TAX> 1,694,403
<INCOME-CONTINUING> (2,202,523)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,202,523)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> 0
</TABLE>
