UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ____________ to ________________
Commission file number 0-23416
MODERN MEDICAL MODALITIES CORPORATION
(Exact name of Small Business Issuer as Specified in Its Charter)
New Jersey 22-3059258
- ---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1719 Route 10, Suite 117
Parsippany, New Jersey 07054
- ---------------------- -----
(Address of principal executive offices) (Zip Code)
(973) 538-9955 (Issuer's telephone number, including area code)
--------------
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of the registrant's Common Stock, $.0002
Par Value, on November 15, 1999 was 2,506,471 shares.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
<PAGE>
MODERN MEDICAL MODALITIES CORPORATION
SEPTEMBER 30, 1999 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements .................................................2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................21
ii
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements, which are other than statements of historical facts. These
statements are subject to uncertainties and risks including, but not limited to,
product and service demand and acceptance, changes in technology, economic
conditions, the impact of competition and pricing, government regulation, and
other risks defined in this document and in statements filed from time to time
with the Securities and Exchange Commission. All such forward-looking statements
are expressly qualified by these cautionary statements and any other cautionary
statements that may accompany the forward-looking statements. In addition,
Modern Medical Modalities Corporation disclaims any obligations to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998..................................................2
Consolidated Income Statements for the nine and
three months ended September 30, 1999 and 1998.........................4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998..............5
Notes to Consolidated Financial Statements..........................6-11
1
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 140,472 $ 56,313
Restricted cash for line of credit repayment 600,000 600,000
Accounts receivable (less contractual allowances of
$ 2,346,619 and $ 2,447,579, respectively) 2,579,989 2,816,356
Account receivable - joint venture 3,869 585,607
Current portion of note receivable
from affiliate 113,889 141,667
Current portion of note receivable 46,590 46,590
Loan receivable - affiliates 128,750 128,750
Due from officers 153,868 126,368
Due from affiliates 55,877 77,600
Other receivables 85,112 82,014
Prepaid expenses -- 11,023
-------------- --------------
Total current assets 3,908,416 4,672,288
-------------- --------------
Other assets:
Furniture, fixtures, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $4,832,350 and $ 5,742,206, respectively) 5,181,526 6,703,426
Note receivable, net of current portion 113,736 113,736
Organization costs (net of accumulated amortization
of $ 31,665 and $ 25,901, respectively) 64,822 71,797
Investment in joint venture 337,020 290,998
Deposits 25,530 40,446
Deferred tax asset 460,352 484,718
Other long term assets -- 6,381
-------------- --------------
Total other assets 6,182,986 7,711,502
-------------- --------------
$ 10,091,402 $ 12,383,790
-------------- --------------
</TABLE>
2
See Notes to Interim Financial Statements
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 595,552 $ 595,552
Accounts payable 1,394,443 1,892,755
Accrued expenses 357,245 1,029,677
Loan payable - joint venturer 71,942 71,942
Loans payable - affiliates -- 202,000
Current portion of long term debt 2,233,261 2,789,678
Due to affiliate 271,271 49,466
Due to related party 4,389 4,389
-------------- --------------
Total current liabilities 4,928,103 6,635,459
-------------- --------------
Other liabilites:
Long-term debt, net of current portion 2,531,338 3,034,863
Due to joint venturer -- 218,717
-------------- --------------
Total other liabilities 2,531,338 3,253,580
-------------- --------------
Total liabilities 7,459,441 9,889,039
-------------- --------------
Minority interest 185,019 187,489
Stockholders' equity:
Common stock, $0.0002 par value,
Authorized - 2,500,000 shares
Issued and outstanding - 2,426,473 shares 485 317
Additional paid-in capital 4,071,131 3,866,389
Retained earnings (deficit) (1,624,674) (1,559,444)
-------------- --------------
Total stockholders' equity 2,446,942 2,307,262
-------------- --------------
$ 10,091,402 $ 12,383,790
-------------- --------------
</TABLE>
3
See Notes to Interim Financial Statements
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating income:
Net revenue from services $ 3,122,427 $ 5,220,960 $ 1,190,394 $ 1,201,081
------------- ------------- ------------- -------------
Total operating income 3,122,427 5,220,960 1,190,394 1,201,081
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 2,092,089 5,566,843 914,529 1,793,080
Bad debts -- 23,750 -- 5,246
Depreciation and amortization 824,951 1,206,544 266,270 323,251
------------- ------------- ------------- -------------
Total operating expenses 2,917,040 6,797,137 1,180,799 2,121,577
------------- ------------- ------------- -------------
Income (loss) from operations 205,387 (1,576,177) 9,595 (920,496)
------------- ------------- ------------- -------------
Other income (expenses):
Interest income 28,392 47,020 9,257 6,903
Interest expense (472,518) (818,256) (151,374) (195,005)
Miscellaneous income -- 64,953 -- (13,547)
Income from joint ventures 95,405 190,872 19,749 26,035
Income from minority owned --
subsidiary -- -- -- --
Gain (loss) on sale of subsidiary, net of income -- --
taxes of $43,000 and $319,326, respectively 57,000 (423,293) -- --
Gain on sale of subsidiary, net of income
taxes of $12,974 -- 17,197 -- 17,197
Loss on disposal of subsidiary
net of income taxes of $72,268 -- (95,796) -- --
Restructuring of note receivable
net of income taxes of $321,490 -- (426,160) -- --
------------- ------------- ------------- -------------
Total other income (expense) (291,721) (1,443,463) (122,368) (145,443)
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interest (86,334) (3,719,750) (112,773) (1,065,939)
Provision for income taxes (18,634) (1,607,422) (32,976) (427,661)
------------- ------------- ------------- -------------
Income before minority interest (67,700) (2,112,328) (79,797) (638,278)
Minority interest 2,470 172,843 (9,718) 233,772
------------- ------------- ------------- -------------
Net income (loss) $ (65,230) (1,939,485) $ (89,515) $ (404,506)
============= ============= ============= =============
Basic earnings per share
============= ============= =============
Net income (loss) $ (0.03) $ (0.61) $ (0.05) $ (0.13)
============= ============= ============= =============
Number of weighted shares outstanding:
============= ============= =============
Basic 1,980,888 3,168,292 1,818,560 3,168,292
============= ============= ============= =============
</TABLE>
4
See Notes to Interim Financial Statements
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (65,230) $(1,939,485)
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 824,951 1,206,544
Contractual allowances 100,960 221,927
Bad debts -- 23,750
Income from an unconsolidated joint venture (95,405) (190,872)
Minority interest (2,470) (172,843)
Deferred income taxes 24,366 (1,607,422)
Loss on sale of subsidiary (100,000) 742,619
Loss on disposal of subsidiary -- 168,064
(Gain) on disposal of subsidiary -- (30,171)
Restructuring of note receivable -- 747,650
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
Accounts receivable 337,327 2,008,472
Accounts receivable - joint venturer 581,738 (241,238)
Other receivable (3,098) 47,554
Due from affiliate 21,723 (77,600)
Due from officers (27,500) 94,343
Prepaid expenses 11,023 29,850
Deposits 14,916 104,084
Other assets 6,381 --
Due to affiliate 221,805 9,209
Accounts payable (498,312) 472,853
Accrued expenses (672,432) 176,015
Advances from joint ventures (218,717) --
----------- -----------
Total adjustments 527,256 3,732,788
----------- -----------
Net cash provided (used) by operating activities 462,026 1,793,303
----------- -----------
Cash flow from investing activities:
Fixed asset acquisitions (142,325) (300,955)
Fixed assed dispositions 848,562 1,207,496
Proceeds from loan receivable - affiliate -- (7,500)
Proceeds from note receivable 27,778 72,222
Organization costs 1,211 --
Investment in joint venture (46,022) (93,394)
Decrease in minority interest -- (98,969)
----------- -----------
Net cash provided (used) by investing activities 689,204 778,900
Cash flow from financing activities:
Reduction of goodwill -- 1,419,213
Proceeds from issuance of long-term debt 86,460 --
Issuance of capital stock 204,910 --
Disposal of long term debt (443,417) (3,746,095)
Loans payable - affiliates (202,000) --
Principal payments on long-term debt (713,024) (856,602)
----------- -----------
Net cash provided (used) by financing activities (1,067,071) (3,183,484)
----------- -----------
Net increase in cash and equivalents 84,159 (611,281)
Cash and equivalents, begining of year 656,313 719,217
----------- -----------
Cash and equivalents, end of year $ 740,472 $ 107,936
----------- -----------
</TABLE>
5
See Notes to Interim Financial Statements
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION.
Modern Medical Modalities Corporation (the "Company") was
incorporated in the State of New Jersey on December 6, 1989. The Company
provides high technology medical equipment and management services to
hospitals and physicians.
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries, Medical Marketing and Management, Inc.,
Somerset Imaging Corporation, South Plainfield Imaging, Inc., Medi-Corp.,
USA, South Jersey Medical Equipment Leasing Corp., Amherst Medical
Equipment Leasing Corp., Open MRI of Morristown, Inc., West Paterson
Medical Equipment Leasing Corp., Ohio Medical Equipment Leasing
Corporation, its majority owned subsidiaries, 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, and Open MRI &
Imaging Center of Metairie, LLC. The Company has an 84%, 75%, and 85%
interest, respectively, in the joint ventures and by contract manages the
joint ventures, in which it is the managing joint venturer and it has
unilateral control. Investments in unconsolidated joint ventures, Union
Imaging Associates, Joint Venture, and Open MRI of Morristown, Joint
Venture, in which the Company has a 10% and 2%, interest, respectively,
and significant influence, are accounted for under the equity method. All
significant intercompany transactions and accounts have been eliminated in
the consolidation.
The accompanying unaudited consolidated financial statements and
footnotes have been condensed and, therefore, do not contain all required
disclosures. Reference should be made to the Company's annual financial
statement filed on Form 10-K for the year ended December 31, 1998.
The financial statements for the nine month period ended September
30, 1999 and 1998 have not been audited. In the opinion of management, the
unaudited interim consolidated financial statements reflect all
adjustments and accruals, consisting only of normal recurring adjustments
and accruals, necessary to present fairly the financial position of the
Company as at September 30, 1999 and the results of its operations for the
nine month periods ended September 30, 1999 and 1998 and statements of
cash flows for the nine month periods ended September 30, 1999 and 1998.
The results for the nine month periods ended September 30, 1999 and 1998
are not necessarily indicative of the results to be expected for the full
year.
The accounting policies followed by the Company are set forth in
Note 1 to the Company's financial statements included in its Annual
Financial Statement filed on form 10-K for the year ended December 31,
1998, which is incorporated herein by reference. Specific reference is
made to this report for a description of the Company's securities and the
notes to financial statements included therein.
6
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued)
The carrying amounts of cash, accounts receivable, short-term notes
receivable, accounts payable, and short-term debt approximate fair value
due to the short maturity of the instruments and the provision for what
management believes to be adequate reserves for potential losses. It was
not practical to estimate the fair value of long-term notes receivable and
long-term debt because quoted market prices do not exist and an estimate
could not be made through other means without incurring excessive costs.
Certain items in the 1998 financial statements have been
reclassified to conform with the 1999 presentation. These
reclassifications had no effect on the financial position, net income or
stockholders' equity for the periods presented.
NOTE 2 - EARNINGS (LOSS) PER SHARE.
Earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of common stock and common stock equivalent
shares outstanding during each period. Earnings per share - diluted for
the nine months ended September 30, 1999 is not presented in the
consolidated statements of operations since it is not dilutive.
NOTE 3 - DISPOSAL OF SUBSIDIARY.
In January 1999, the Company sold its 50% interest in Doctors
Imaging Associates, Joint Venture for $100,000. As a result of this
disposition, the Company recorded a gain on sale of subsidiary in the
amount of $57,000, net of income taxes in the amount of $43,000.
7
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 4 - PROPERTY AND EQUIPMENT, NET.
Property and equipment, net, consisted of the following:
September 30, December 31,
1999 1998
------------- -------------
(unaudited)
Medical equipment $ 9,152,125 $ 11,459,664
Buildings 310,860 310,860
Furniture and fixtures 65,830 65,830
Automobiles 51,017 22,860
Leasehold improvements 434,044 586,418
------------- -------------
10,013,877 12,445,632
Less: Accumulated depreciation
and amortization 4,832,350 5,742,206
------------- -------------
$ 5,181,526 $ 6,703,426
============= =============
NOTE 5 - INVESTMENT IN AN UNCONSOLIDATED JOINT VENTURE.
Summarized (unaudited) financial information of the unconsolidated
joint venture, Union Imaging Associates, Joint Venture, in which the
Company has a 10% minority interest, is as follows:
Total Long-term Total Total
Assets Debt Liabilities Capital
September 30, 1999 4,905,176 1,517,090 2,036,808 2,868,368
December 31, 1998 4,485,673 1,271,846 1,741,863 2,743,810
(10%)
Gross Net Allocation
Revenues Income Of Income
---------- ----------- --------------
For the nine months ended
September 30, 1999 3,611,483 859,913 85,991
For the year ended
December 31, 1998 4,141,948 1,492,754 149,275
8
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 6 - LINE OF CREDIT.
In April 1995, the Company secured a line of credit with Summit Bank
of New Jersey for $600,000 at the bank's prime rate for commercial
borrowers. As of September 30, 1999 the amount of the liability under the
line of credit was $595,552. The Line of credit is secured by a
certificate of deposit in the amount of $600,000.
NOTE 7 - LONG-TERM DEBT.
Long-term debt consists of the following:
September 30, December 31,
1999 1998
---------- ----------
(unaudited)
Capitalized lease obligations $3,830,157 $4,758,726
Accounts receivable financing (a) 934,442 1,065,815
---------- ----------
4,764,599 5,824,541
Current portion 2,233,261 2,789,678
---------- ----------
Long-term debt, net of current portion $2,531,338 $3,034,863
---------- ----------
(a) Capital Lease Obligations:
The Company entered into certain leases for the rental of equipment,
which have been recorded as capital leases for financial statement
reporting purposes and are included in equipment.
(a) Accounts Receivable Financing:
The Company entered into an agreement with DVI Business Credit to
finance up to $2,000,000 of the accounts receivable balances from two of
the Company's wholly-owned subsidiaries, a minority-owned subsidiary, and
two of its majority-owned joint ventures. Advances would bear interest at
the prime rate plus 4%. At September 30, 1999, the amount financed under
this agreement totaled $934,442.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
(a) Advisory Agreement
In January 1999, the Company entered into an advisory
agreement with Allen Wolfson ("Advisor"), for a period of six
months. The agreement will be automatically extended on an annual
basis. The agreement can be terminated with at least thirty (30)
days written notice prior to the end of the agreement. Advisor shall
assist the Company in its effecting the purchase of businesses and
assets relative to its business and growth strategy.
On July 19, 1999 the Company issued 330,00 shares of its
common stock to Allen Wolfson, as compensation, as required by the
advisor agreement.
9
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
In January 1999, the Company entered into a consulting
agreement with Richard Suber for a period of six months. The
agreement may be extended on a month to month basis. Consultant
shall render services regarding: potential strategies for generating
new business for the Company, structuring of potential business
opportunities for the Company, general corporate filings as needed,
and document preparation as needed to accomplish the above.
The Company shall pay consultant a retainer fee of 20,000
shares of its common stock.
(b) 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.
NOTE 9 - STOCKHOLDERS' EQUITY
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.
On April 12, 1999 Benson Shore Capital, LLC, exercised its option to
acquire 136,125 shares (adjusted for the one for two reverse stock split
of the Company's common stock) at $.001 per share
In July, 1999, the Board of Directors of the Company passed a
resolution authorizing the management of the Company to initiate steps for
a private placement of the Company's securities in order to raise capital.
Management was granted authority to prepare a Private Placement Memorandum
pursuant to Regulation D Rules governing the Limited Offer and Sale of
Securities Without Registration Under the Securities Act of 1933 (as
amended) and to register the securities in any state jurisdiction that
management felt was required and appropriate.
On July 20, 1999, the Company closed $283,000 of its private
placement for an aggregate of 148,702 shares of its common stock. The
number of shares of common stock was determined by taking the average
closing bid price for the five trading days prior to July 20, 1999 and
deducting 30% from such average.
The Company incurred expenses of $49,590 in connection with the
private placement. Additionally, 25,000 shares were issued to underwriters
in connection with the private placement.
10
<PAGE>
MODERN MEDICAL MODALITIES CORP. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
On July 19, 1999 the Company issued 330,000 shares of its common
stock to Allen Wolfson, as compensation, as required by the advisor
agreement.
NOTE 10 - SUBSEQUENT EVENTS
On October 14, 1999 the Company closed $500,000 of its private
placement for convertible notes. The notes mature on October 14, 2000,
paying a 10% annualized rate of interest payable at conversion or upon
maturity. The Company incurred expenses of $67,500 in connection with the
private placement. Additionally, 60,000 shares, and 2,500,000 warrants
were issued to underwriters in connection with this private placement.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere herein. Except for
historical information contained herein, certain statements herein are forward-
looking statements that are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks and uncertainties that may cause the Company's
actual results in future periods to differ materially from forecasted results.
Those risks include, among others, the receipt and timing of future customer
orders, price pressures and other competitive factors leading to a decrease in
anticipated revenues and gross profit margins.
In 1994, Modern Medical Modalities Corporation (the "Company") started
Medical Marketing & Management, Inc. which markets not only the sites of the
Company, but for other physician groups and hospitals. In November 1994, the
Company acquired Prime Contracting Corp. ("Prime") in a business combination
accounted for as a pooling of interests. Prime is a full service contractor who
provides turnkey design and construction services for medical facilities
primarily on the east coast of the United States. On December 27, 1995, the
Company entered into an agreement with a related party to sell all of the common
stock of Prime for $1,200,000.
In 1995, the Company purchased Empire State Imaging Associates, Inc.
("Empire State"). On December 27, 1996, the Company sold 65% of the common stock
of Empire State for $250,000 to a related party. The Company commenced
operations during the second, third and fourth quarters of 1995 and the first
quarter of 1996, respectively, at sites located in Passaic and Somerset, New
Jersey; Amherst, New York; and Morristown, New Jersey. During the third quarter
of 1996, the Company, through its wholly-owned subsidiary, West Paterson Medical
Equipment Leasing Corp. ("WPMEL"), entered into a lease and management services
agreement at a site specializing in diagnostic imaging located in West Paterson,
New Jersey. In addition, the Company through its wholly-owned subsidiary Ohio
Medical Equipment Leasing Corporation ("OME") entered into a purchase and
consulting agreement to acquire a 50.2% interest as a general (managing) partner
of a diagnostic imaging center located in Sylvania, Ohio. Many of the
fluctuations on the line items on the balance sheets and the statements of
operations are directly attributable to the acquisition and start-up of these
entities.
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 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, all of which were
made. 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.
12
<PAGE>
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 required 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, which was completed. 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 transfers have been made to date.
Results of Operations:
For the three months ended September 30, 1999 as compared to the three months
ended September 30, 1998
Revenue
For the three months ended September 30, 1999 operating revenue was $1,190,394
as compared to $1,201,081 for the three months ended September 30, 1998. The
decrease in revenues of $10,687 was a direct result of the sale of: (i) Open MRI
at Corvas; and (ii) Doctors Imaging Associates, and (iii) the return of Ohio
Medical Equipment Leasing Corporation to DVI Financial Services.
Depreciation Expense
Depreciation expense for the three months ended September 30, 1999 was $266,270
as compared to $323,251 for the comparable prior period, a reduction of
approximately $56,981. This decrease is directly attributable to the sale of
Open MRI at Corvas and Doctors Imaging Associates, and to the return of Ohio
Medical Equipment Leasing Corporation.
Interest Expense
Interest expense for the three months ended September 30, 1999 was $151,374 as
compared to the comparable prior year period of $195,005, a decrease of $43,631.
This decrease is attributable to the Company's sale of Open MRI at Corvas and
Doctors Imaging Associates and the return of Ohio Medical Equipment Leasing
Corporation and the refinancing of three of the Company's centers.
13
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended
September 30, 1999 were $914,529 as compared to $1,793,080 for the comparable
period in 1998, a decrease of approximately $878,551. Such decrease is primarily
attributable to the sale of various sits of approximately $886,000.
For the nine months ended September 30, 1999 as compared to the nine months
ended September 30, 1998
Operating Revenue
For the nine months ended September 30, 1999 operating revenue was $3,122,427 as
compared to $5,220,960 for the nine months ended September 30, 1998. The
decrease in revenues of $2,098,533 was a result of the sale of Open MRI at
Corvas of $887,861, the sale of Doctors Imaging Associates of $1,874,582 and the
return of Ohio Medical Equipment Leasing Corporation to DVI Financial Services
of $818,286. These reduction in revenues from these sites have been partially
offset by an increase in revenues from the Company's other sites.
Depreciation Expense
Depreciation expense for the nine months ended September 30, 1999 was $381,593
as compared to $1,206,544 for the comparable prior year period, a reduction of
approximately $824,951. This decrease is directly attributable to the sale of
Open MRI at Corvas and Doctors Imaging Associates and the return of Ohio Medical
Equipment Leasing Corporation.
Interest Expense
Interest expense for the nine month period ended September 30, 1999 was $472,518
as compared to the comparable prior year period of $818,256, a decrease of
$345,738. This decrease is attributable to the Company's sale of Open MRI at
Corvas and Doctors Imaging Associates and the return of Ohio Medical Equipment
Leasing Corporation, and the refinancing of three of the Company's centers.
Additionally, the Company has reduced its working capital lines of credit with
the DVI Business Group by approximately $151,000 since December 31, 1998,
resulting in a decrease in interest expense on the Company's outstanding debt.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September
30, 1999 were $2,092,089 as compared to $5,566,843 for the comparable period in
1998, a decrease of approximately $3,474,754. Such decrease is largely
attributable to the sale of sale of various centers of approximately $2,700,000,
as well as various corporate reductions of approximately $500,000.
- ----------
14
<PAGE>
Liquidity and Capital Resources:
The Company has a working capital deficiency of $1,028,716 at September 30, 1999
as compared to a working capital deficiency of $1,963,000 at December 31, 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 expired 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 $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.
15
<PAGE>
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 31, 1998, the Company reduced the
outstanding accounts receivable working capital line of credit by approximately
$635,000 ($1,302,000 to $667,000) and for the nine months ended September 30,
1999 the outstanding balance has been further reduced to $516,000. 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.
In July 1999, the Company sold 148,702 shares of its common stock to accredited
investors in a private placement transaction pursuant to Regulation D Rule 506
of the Securities Act of 1933, as amended. The Company received gross proceeds
of $283,000, before offering expenses of approximately $49,590, which the
Company intends to use for working capital and general corporate purposes.
In October 1999, the Company sold $500,000 principal amount of its 10%
Convertible Notes to two institutional investors. The Company received net
proceeds of $432,500, which the Company intends to use for working capital and
general corporate purposes.
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.
16
<PAGE>
Healthcare System:
The Healthcare system is in a state of change and will continue so for the next
several years. Small medical group practices are referring patients to free
standing centers as an alternative to costly hospital care. The cost of this
medical equipment and the patient volume needed to justify the expenditure is
not practical for individual and small group practices. Providing MRI and CT
Scans for these physicians in these free standing centers offers an attractive
method to protect eroding income, offer state-of-the-art technology and maintain
patient loyalty.
Legislation:
In order to curb the potential for fraud and abuse under the Medicare and
Medicaid programs, Congress has enacted certain laws (the "Anti-Kickback Laws")
prohibiting the payment or receipt of any remuneration in return for the
referral of patients to a healthcare provider for the furnishing of medical
services or equipment, the payment for which may be made in whole or in part by
the Medicare or Medicaid programs. New Jersey, as well as other states, have
enacted similar state laws. The Anti-Kickback Laws apply to both sides of the
referral relationship: the provider making the referral and the provider
receiving the referral. Violation of the Anti- Kickback Laws is a criminal
felony punishable by fines of up to $25,000 and/or up to five years imprisonment
for each violation. Federal law also permits the Department of Health and Human
Services ("HHS") to assess civil fines against violators of the Anti-Kickback
Laws and to exclude them from participation in the Medicare and Medicaid
programs. These civil sanctions can be imposed in proceedings that do not
involve the same procedural requirements and standards of proof as would be
required in a criminal trial.
The Anti-Kickback Laws are broadly drafted and judicial decisions rendered thus
far, while made in the context of overt payments explicitly in exchange for
referrals, have broadly interpreted the scope of these laws.
Several federal courts considering the issue, including the U.S. Court of
Appeals having jurisdiction over New Jersey, have concluded that the
Anti-Kickback Laws would be violated if "any purpose" of a challenged economic
arrangement is to induce or pay for referrals, no matter how incidental that
purpose may be or how many other legitimate purposes may exist for the
arrangement in question. Accordingly, many types of business relationships
between healthcare providers, including investments in healthcare providers by
physicians, hospitals or others who are in a position to refer patients could be
held to fall within the prohibitions of the Anti-Kickback Laws or similar state
laws.
The American Medical Association (the "AMA") has reaffirmed its original
Guidelines which were issued on May 6, 1992, which stated that physicians should
not refer patients to a health care facility outside their office in which they
do not have an active participation and only a passive investment interest.
These are ethical rules and recommendations of the AMA and they do not have a
binding legal effect.
HHS has 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
17
<PAGE>
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,
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
18
<PAGE>
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.
Year 2000 Compliance:
Many computer systems and software products worldwide and throughout all
industries will not function properly as the year 2000 approaches unless
changed, due to a once-common programming standard that represents years using
two-digits. This is the "Year 2000 problem" that has received considerable media
coverage. 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, 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 may be affected.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MODERN MEDICAL MODALITIES CORPORATION
Dated: November 15, 1999 By: /s/ Roger Findlay
---------------------------
Roger Findlay
President and Chairman of the Board
By: /s/ Jan Goldberg
---------------------------
Jan Goldberg
Vice President, Principal Accounting Officer,
Treasurer and Director
By: /s/ Gregory Marcia
---------------------------
Gregory Marcia
Vice President and Director
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 140,472
<SECURITIES> 0
<RECEIVABLES> 4,926,608
<ALLOWANCES> 2,346,619
<INVENTORY> 0
<CURRENT-ASSETS> 3,908,416
<PP&E> 10,013,876
<DEPRECIATION> 4,832,350
<TOTAL-ASSETS> 10,091,402
<CURRENT-LIABILITIES> 4,937,132
<BONDS> 2,531,338
0
0
<COMMON> 485
<OTHER-SE> 2,437,428
<TOTAL-LIABILITY-AND-EQUITY> 10,091,402
<SALES> 3,122,427
<TOTAL-REVENUES> 3,122,427
<CGS> 2,917,040
<TOTAL-COSTS> 2,917,040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 472,518
<INCOME-PRETAX> (86,334)
<INCOME-TAX> (18,634)
<INCOME-CONTINUING> (65,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (65,230)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
