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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
Commission File Number 0-26488
R.F. MANAGEMENT CORP.
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(Exact name of registrant as specified in its charter)
New York 22-3318886
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
95 Madison Avenue, Suite 301, Morristown, NJ 07960
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(Address principal executive offices) (zip code)
Registrant's telephone number, including area code (201) 292-2833
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock
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Class A Common Stock Purchase Warrant
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Class B Common Stock Purchase Warrant
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities and Exchange act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
The number of shares outstanding of Registrant's Common Stock as of
09/30/98: 3,460,833, $.0001 par value.
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PART I
Item 1. BUSINESS
R.F. Management Corp. (the "Company"), is engaged in the business of
administering and managing free standing outpatient centers owned by
radiologists who perform diagnostic services at such Centers. In addition, the
Company is engaged in the business of medical construction and mobile MRI
services.
The Company was incorporated in the State of New York in August, 1994 and
its executive offices are located at 95 Madison Avenue, Suite 301, Morristown,
New Jersey 07960. It's telephone number is (973) 292-2833.
Medical diagnostic imaging systems facilitate the diagnosis of disease and
disorders at an early stage, often minimizing the amount of cost and care needed
to stabilize or cure the patient and frequently obviate 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 advance
technologies.
The Company offers a full range of administrative services, including
contract negotiations, site selection, equipment procurement, construction,
office personnel, office management, patient scheduling, patient billing, cash
collections, personnel management and marketing. The Company can provide either
a full or limited range of administrative services at the Centers depending upon
the needs of the Centers' owners.
During the fiscal year ending September 30, 1998, the Company wholly owned
or owned a majority of the following companies:
1. Northern NJ Medical Management, Inc.
2. Brady Cancer Centers, Inc.
3. Empire State Imaging Associates, Inc. (The Company no longer has any
affiliation with Empire).
4. Atrium Radiology Corp.
5. MobileTec, Inc.
6. Hamilton McGregor International, Inc.
NORTHERN NJ MEDICAL MANAGEMENT, INC.
In May 1995, the Company entered into a Stock Acquisition Agreement with
Northern New Jersey Medical Management, Inc. ("Northern"), incorporated in the
State of New Jersey in January 1985, with offices located at 95 Madison Avenue,
Morristown, New Jersey 07960 wherein the Company purchased all of the issued and
outstanding shares of Common Stock of Northern. The sole officers,
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directors and principal shareholders of Northern were Roger Findlay and Gregory
Maccia, who are or have been officers, directors and principal shareholders and
affiliates of the Company. Northern is now a wholly owned subsidiary of the
Company. The Company and Northern are hereinafter collectively referred to as
the Company. The Company has no plans to expand the business conducted by
Northern.
Pursuant to the terms of the Agreement, the Company purchased all of the
issued and outstanding shares of common stock of Northern. In consideration, the
Company will pay Messrs. Findlay and Maccia an aggregate of $750,000 in
accordance with the following terms:
$150,000 paid upon execution of the agreement; the balance of
$600,000 will be paid in the form of a promissory note, with
interest at prime plus 1% on the unpaid principal balance, payable
as follows:
$150,000 on January 30, 1996;
$150,000 on January 30, 1997;
$150,000 on January 30, 1998;
$150,000 on January 30, 1999.
The Company is currently in default on the promissory note to Messrs.
Findlay and Maccia. The Company has maintained ongoing discussions with Messrs.
Findlay and Maccia to correct the default.
Northern's diagnostic center offers several services including X-ray
(Radiography), Ultrasonography (Ultra-sound), Mammography and Nuclear Medicine.
Pursuant to a written agreement, dated January 25, 1986, the Company is
providing administrative services for an outpatient diagnostic medical imaging
center located in Union, New Jersey. The term of the agreement is twenty (20)
years. The Company is responsible for the day to day managing of the center,
including hiring and selection of non-medical employees, marketing and the
responsibility of all computer operations at the site. Medical professionals
employed by the Center provide all medical and diagnostic services at the site.
The Company is not engaged in the practice of medicine at the Center.
BRADY CANCER CENTERS, INC.
On December 1, 1996, the Company acquired assets from Luther W. Brady &
Associates, P.C. and Bucks Radiation Oncology, Inc. The assets are used to
provide radiation therapy and are located in Voorhers, NJ and Havertown and
Langhorne PA. The wholly owned subsidiary, Brady Cancer Centers Inc. was formed
in March 1997.
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Fiscal year ended September 30, 1998, has shown that the Company has the
ability to grow and to prosper.
During the past year, the Company has restructured liabilities and long
term debt while at the same time increasing operating revenues for those
subsidiaries still owned by the Company.
The operating revenue generated by the Company's subsidiaries: Atrium
Radiology Corp., Mobile Tec, Inc. and Northern NJ Medical Management, Inc. show
an upward growth trend. This growth is attributable to an increase in patient
volume at Atrium and, management fees paid to Northern and new rental agreements
that Mobil Tec has in place to rent its Mobile MRI's.
Due to the sale of the Company's subsidiaries Empire State Imaging
Associates Inc. and Brady Cancer Centers, Inc. the overall results shows a
reduction in revenue. But the company believes that Atrium, MobileTec and
Northern will continue to grow. This growth when added to the revenue generated
by the medical construction business of Hamilton McGregor has the Company moving
in the right direction.
Subsequent to Sept. 30, 1998, the Company has been engaged by Point
Pleasant Radiology to develop a free standing MRI center in Wall NJ. This
contract is to run for a period of 5 years. This contract will pay an average of
$5,000 per month to the Company.
Year 1999 looks brighter as the Company continues to pursue new
opportunities such as the Point Pleasant contract and the development of imaging
centers where the Company not only earns a management fee but also owns the
assets. This potential for growth also with the restructuring of long term debt
should make the Company into a viable business now and into the future
ATRIUM RADIOLOGY CORP.
On January 31, 1997 the Company acquired 52% of the outstanding stock of
Atrium Radiology Corp.
Atrium Radiology Corp. has a lease and management services agreement with
Dr. Howard Kessler, to provide his radiology practice, located in Manalapan NJ,
with diagnostic imaging equipment, and staff along with the provision for
management and marketing services. Atrium Radiology Corp. provides the following
equipment: CAT Scan, Ultrasound, Mammography, X-Ray and MRI. The term of this
agreement is for five (5) years and is due to expire in Sept. 1999. For its
services and for the lease of the equipment, Atrium is paid 75% of the
collections of the site.
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MOBILETEC, INC.
MobileTec provides MRI services to hospitals or physicians that do not
have the equipment of their own. MobileTec owns and operates two (2) MRI units
housed in trailers. These units are rented to the hospital or physician for
their use in providing these services to their patients. MobilTec's arrangements
are a rental by the day, week or month or MobilTec rents space and provides the
necessary staff to provide these services and through the radiologist who uses
the equipment, third party payers are billed.
HAMILTON McGREGOR INTERNATIONAL, INC.
On January 1, 1997, the Company acquired 52% of the outstanding capital
stock of Hamilton McGregor International, Inc. ("Hamilton") from a related party
for $750,000. Hamilton, through a wholly-owned subsidiary, is a general
construction contractor engaged primarily in the construction of medical suites
for the provision of various outpatient services.
On December 1, 1997, the $600,000 note payable issued to a related party
in connection with the purchase of 822,000 shares of Hamilton McGregor
International, Inc. was cancelled. The Company recorded a gain from debt
cancellation in the amount of $503,760. In addition, the Company records a
charge to operations of approximately $328,000 representing the carrying value
of goodwill recorded at the date of issuance of the note.
On March 3, 1998, the Company restructured the promissory note payable for
the acquisition of Prime Contracting Corp. to a related party as follows:
$200,000 in cash, payable over 36 months, plus interest calculated at prime plus
one percent (1%) and a 36 month option to purchase 250,000 shares of related
party stock at $0.05. The Company recorded a gain from note payable
restructuring in the amount of $772,650.
Additionally, the Company manages and markets for diagnostic imaging
sites which include the Imaging Center of Scranton and Open MRI of Morris and
Essex.
THE IMAGING CENTER OF SCRANTON
In May of 1998, the Company entered into an agreement with the Imaging
Center of Scranton located in Scranton, P.A. to provide the center with
marketing and management services. The terms call for the Company to be paid 10%
of the collections of the center for a period of two (2) years. This contract is
renewable.
OPEN MRI of MORRIS and ESSEX
The Company entered into a six (6) month marketing agreement
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effective October, 1998 to enroll Open MRI of Morris and Essex with various
managed cared companies. The Company receives $4,500.00 per month for this
service. This agreement can be renewed.
Range of Services
The Company provides the full range of services discussed below. The needs
of a physician group determine the extent of the services provided by the
Company at a particular Center. The Company can deliver services on a limited
basis or through a full service medical center.
Equipment and Related Services. The Company consults with physicians to
identify the equipment best suited to meet the customer's needs on a
cost-effective basis and then acquire the equipment through lease/purchase
agreement. In addition, the Company assists the physicians and their personnel
in complying with licensing and other regulatory requirements. 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
the equipment which it provides and enters into agreements with equipment
manufacturers or other third parties for the delivery of maintenance services.
Technical and Support Staffing. The Company provides non-physician
staffing who operate the equipment at the facility. The Company trains and
provide on-going safety instruction and educational programs for its staff. The
Company does not provide any medical services at the Center.
Marketing. The Company provides its customers with marketing services,
including the design and formulation of a marketing program for each facility to
inform the physician community as to the technology and services available at
the facility.
Patient Scheduling, Billing and Collection. At the Centers, the Company
schedules patients and prepare all patient billing and is responsible for
collection. The Company will also be responsible for related administrative and
record-keeping functions and all management information services.
Equipment Sources
The Company obtains its medical equipment and supplies from various
manufacturers. The Company is not dependent on any one supplier of equipment.
REGULATION AND GOVERNMENTAL REIMBURSEMENT
Government Reimbursement. In major areas of its business, the Company may
rely for payment on third party (in large part governmental) reimbursement. Its
charges are predominantly paid by
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its clients which in turn receive reimbursement from such sources.
The Centers that the Company is affiliated with 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. The diagnostic centers currently managed by the Company are
owned by radiologists who actively engage in the performance of diagnostic
testing at the Centers. No investment interest or financial relationship exists
between the Center and any physician who is not a radiologist administering
procedures at the Center. No ownership interest or financial relationship will
exist between such Centers and any physician who is not a surgeon performing
operations on his/her patient at such Centers. The Company does not and will not
have any ownership or financial interest in the diagnostic imaging centers other
than the administration and management of such centers pursuant to written
agreements.
Competition
The Company competes with many firms that offer similar services. This
segment of the industry is highly competitive and many of the Company's
competitors have financial, marketing and other resources substantially greater
than those of the Company. Some of the Company's competitors enjoy an additional
competitive advantage by reason of their ability to offer discounts and other
services. Accordingly, the Company seeks to address smaller markets which have a
need for free-standing or out-patient centers performing diagnostic or
outpatient ambulatory surgery. The Company has identified the State of New
Jersey as its area of operation because of its favorable legislation regarding
one room surgical and diagnostic suites.
The medical diagnostic business is characterized by a high degree of
competition. In the Company's case, this competition comes from a number of
independent local operators specializing in one or two medical applications, and
from a few large diversified healthcare companies (primarily larger hospitals
having the resources and capability to provide mobile diagnostic services to
other healthcare facilities) which provide ultrasound and other diagnostic
services as part of their overall medical business. Although the Company
believes that is has a competitive advantage over most of the small operators
(the Company competes in its marketplace based upon its performance, marketing
and its ability to customize its contractual arrangement), the Company may be
vulnerable to competition from the larger healthcare companies, at least one of
which can be found in each of the Company's geographic markets, and all of which
are substantially larger and possess
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greater financial resources than the Company.
Marketing
The Company markets its services through direct solicitation by various
employees, as well as direct mail, independent marketing companies, medical
staff in-service programs, and personal sales visits to physicians, the primary
emphasis of which is to educate the physician about program services. In
addition, the Company will focus its marketing efforts by obtaining patient
referrals to its centers from sources such as health maintenance organizations
(HMO), preferred provider organizations (PPO), union contracts and hospital
contracts. The Company will position itself to participate in the expanding
managed healthcare market through direct solicitation of HMO's, PPO's and
physicians. The Company intends to establish joint ventures with hospitals and
physician managed ambulatory surgery centers to provide services to subscribers
at reduced rates. See "Use of Proceeds".
Insurance
The Company carries general liability insurance with coverage of up to
$1,000,000.00 per claim and a commercial umbrella policy of $2,000,000. The
Company believes that such coverage will be adequate.
Employees
As of September, 1998, the Company employed 6 persons on a full-time
basis. Of the 6 employees, 4 are in management, 1 is in sales/marketing and 1 is
clerical/administrative.
Item 2. PROPERTIES
The Company's offices, at present, are located at 95 Madison Avenue, Suite
301, Morristown, New Jersey 07960. These premises are leased by Northern. The
premises are utilized by Northern, the Company and other entities related to the
Company and/or the management. Expense in connection with the use of such
premises are allocated among the businesses that share the facility. At this
time, the Company does not have any proposals for new facilities for its
proposed operations.
Item 3. LEGAL PROCEEDINGS
In October 1995, Northern New Jersey Medical Management, Inc. the
Company's wholly owned subsidiary, was named as a party in a lawsuit initiated
by several of the limited partners in Union Diagnostic Facilities Group, L.P.
The suit alleges, among other things, breach of fiduciary duty, mismanagement
and negligence. The suit is presently in the discover stage and, therefore, no
determination as to the possible outcome can be made. The Company
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believes the suit is without merit and intends to vigorously defend itself.
In April 1997, the Company was named as co-defendant in a lawsuit against
Dr. Luther Brady, his affiliates and associates, his attorneys and an alleged
employee of the Company. The suit, filed by a former associate of Dr. Brady's,
alleges that this individual had certain prior contractual rights to acquire the
assets employed in the operation of the Company's radiation therapy center,
located in Voorhees, New Jersey. The plaintiff seeks unspecified damages against
the Company for alleged fraud, equitable fraud and tortuous interference with
the contract. The Company has denied these allegations in its response.
In June 1997, the Company filed a third-party complaint against various
Brady affiliates and their attorneys, alleging that it has no knowledge of any
pre-existing rights to acquire the assets and that failure to disclose such
rights is a breach of numerous representations and warranties contained in the
asset purchase agreement. The Company seeks contribution and indemnity, damages,
partial recession of the various agreements entered into between the Company and
the Brady affiliates, injunctive relief and the return of certain monies held in
escrow.
On October 28, 1997, $1.5 million of the "escrow" monies were returned by
the attorney defendants to the Company's lender, DVI Financial Services, Inc. In
September and November, 1998 an additional $2 million dollars were returned to
DVI. The attorney defendants' motion to dismiss certain of RF's malpractice
related claims against them was granted in December 1998. Very limited discovery
has taken place to date. It is too early at this time to evaluate any eventual
outcome of this case.
In April 1998, the Company commenced a lawsuit in New York State Supreme
Court (County of New York) against its former accountants, Weinick Sanders &
Co., LLP, Certified Public Accountants; Weinick Sanders Leventhal & Co., LLP,
Certified Public Accountants; Gregory J. Lavin and Ronald J. Tramazzo ("Weinick
Sanders"). The Company has alleged in its complaint that the defendant, Weinick
Sanders, committed professional negligence, breached its agreement of
engagement, engaged in fraudulent inducement and unjust enrichment. The Company
is suing the defendant, Weinick Sanders in the amount of $750,000 plus punitive
damages. Weinick Sanders has answered and counterclaimed for unjust enrichment
and breach of contract in the amount of $119,000.
In June, 1998, "Hamilton", the Company's 52% owned subsidiary, was named
as defendant in an arbitration filed by Stephen Findlay under the Employment
Arbitration Rules of the American Arbitration Association. The claim alleges
termination of Mr. Findlay without cause and breach of an employment contract.
The plaintiff seeks compensatory and punitive damages, costs and legal fees.
This
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matter is in the pleading stage. It is too early at this time to estimate the
eventual outcome of this case.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
R.F. Management Corp.'s initial public offering closed on July 21, 1995.
Neither a cash or stock dividend has been paid or issued.
From September 1997 until April 1998, the Company's Common Stock was
traded in the NASDAQ over-the-counter market under the symbol RFMC. Thereafter,
the Company was delisted and traded over-the-counter (bulletin board). As quoted
in the Monthly Statistical Reports of the National Association of Securities
Dealers, Inc., the approximate high and low bid prices for the year ended
September 30, 1998 are as follows:
COMMON STOCK
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<TABLE>
<CAPTION>
Date High Low
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<S> <C> <C>
10/97 1.375 1.219
11/97 1.375 1.250
12/97 .938 .938
01/98 1.156 1.063
02/98 .969 .969
03/98 .370 .370
04/98 .370 .370
05/98 .125 .125
06/98 .125 .125
07/98 .031 .031
08/98 .000 .000
09/98 .062 .062
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
R.F. Management Corp. (the "Company") was formed in August of 1994, for
the purpose of establishing, administrating and managing free-standing
outpatient ambulatory surgery centers. In 1995, the Company acquired 100% of the
outstanding shares of Northern New Jersey Medical Management, Inc. ("Northern")
in a business combination accounted for as a pooling of interests. Northern, a
New Jersey corporation formed in 1986, is engaged in the management of a
diagnostic imaging center located in Union, New Jersey. All references to the
Company's prior operating history relates to the operations of Northern.
The Company presently administers and manages two outpatient diagnostic
centers. The Company is responsible for the day to day management of the site,
including hiring and selection of non-medical employees, marketing and the
responsibility of all computer operations at the site. Medical professionals
employed at the Center provide all medical and diagnostic services at the site.
The Company is not engaged in the practice of medicine.
On December 27, 1995, R.F. acquired forty percent (40%) of the outstanding
shares of Mobile Medical Services Limited ("Mobile"), a privately held Company
incorporated in Ireland, and a fifty-one percent (51%) interest in the property
owned or leased by its subsidiaries for $350,000. Mobile Medical Services
Limited provides mobile MRI, CT, Lithotripsy and Cardiac Catheterization
services in the Netherlands, United Kingdom, Italy and Germany. The payment
terms call for the Company to make payments directly to designated creditors on
behalf of Mobile. As of September 30, 1998, $330,000 is reflected as an
investment in joint venture.
On November 15, 1996, the Company acquired a 75% interest in Mobiltec,
Inc. (MobileTec") a newly formed entity incorporated in the State of New Jersey.
Mobiletec provides mobile MRI facilities to doctors, hospitals and medical
groups for which it receives a per-test or daily rental fee. The results of
operations from its inception are included in these consolidated financial
statements.
On December 1, 1996, the Company acquired certain assets and assumed
certain liabilities from Luther W. Brady & Associates, P.C. and Bucks Radiation
Oncology, Inc. The assets are used to provide radiation therapy services and are
located in Voorhees, New Jersey and Havertown and Langhorne, Pennsylvania. The
purchase price for these assets was $3,700,000. The Company also assumed certain
note payable totaling approximately $837,000. The fair value of the assets
acquired aggregated approximately $3,280,000. The difference between the
purchase price and the fair value of the assets, net of liabilities assumed,
resulted in the creation of
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goodwill of approximately $1,257,000. In connection with the acquisition, the
Company has arranged for financing of the purchase price aggregating $3,500,000,
in the form of installment notes, payable in 60 monthly installments including
interest of 11.6%, totaling approximately $77,150 per month. Repayment of these
notes commenced March 1, 1997.
In March 1997, the Company formed a new wholly owned subsidiary, Brady
Cancer Centers, Inc., and transferred the assets acquired from Luther W. Brady &
Associates, P.C. and Bucks Radiation Oncology, Inc. to the subsidiary. In
October, 1997, $1.5 million dollars of the financed purchase price was returned
to the lender. In September and November, 1998, an additional $2 million dollars
were returned to the lender. In November, 1998, the Company paid the lender the
$300,000 certificate of deposit pledged as collateral for lender. Additionally,
the Company entered into a promissory note to pay the balance of debt to lender
in the amount of $157,409. The Company recorded a loss on disposal of subsidiary
in the amount of $252,176. See notes to consolidated financial statements
included in Item 8.
On December 27, 1996, the Company acquired 65% of the outstanding capital
stock of Empire State Imaging Associates, Inc. ("Empire"), a New York
Corporation, from an affiliated company for a total of $250,000. Empire operates
an imaging center, which provides non-claustrophobic MRI, CT scanning,
mammography, ultrasound and x-ray services. As part of the purchase price, the
Company issued an installment note, in the principal sum of $225,000, payable in
nine monthly installments plus interest at prime plus 1% on the unpaid balance.
On June 30, 1998, the Company and its affiliate (which owned the remaining
35%) sold all of the outstanding stock 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 $297,170.
On January 31, 1997, the Company acquired 52% of the outstanding capital
stock of Atrium Radiology Corp. ("Atrium") for 133,333 shares of the Company's
common stock, having a fair value of $100,000 on the date of acquisition. The
agreement also calls for the seller to receive the first $300,000 of net profits
to be earned from future operations. The acquisition resulted in the creation of
goodwill amounting to approximately $221,000. Atrium's financial position and
results of operations as and for the eight months ended September 30, 1997 have
been included in these consolidated financial statements.
In February 1997, the Company acquired a 75% interest in Open MRI and
Diagnostic Services of Toms River, Inc. ("Open MRI"), a newly formed
corporation. On March 19, 1997, the Company and its affiliate (which owned the
remaining 25%) sold all the outstanding
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capital stock to Advanced Open MRI and Diagnostic Imaging, P.A., an unrelated
party, for the principal sum of $1,000,000. The Company's share of the proceeds
of $750,000 resulted in a gain of $592,340. Of the purchase price, $75,000 was
received at the signing of the contract, $175,000 was received at the closing in
April 1997 and the balance of $750,000 is payable in 30 equal installments of
$25,000 commencing 90 days after the opening of the facility. The first
installment is expected to be received on May 1, 1998. Using the present value
of the note, discounted at 11%, the Company has recorded a gain on the sale of
its stock amounting to approximately $489,000. The note is collateralized by 52%
of the common stock of Open MRI, which is held in escrow.
In July 1998, the Company agreed to accept the immediate payment of
$225,000 to satisfy the note receivable from the sale of Open MRI. The
settlement resulted in a loss of $255,979.
Results of Operations
Year ended September 30, 1998 compared to the year ended September 30,
1997:
Gross Revenues approximated $10,723,000 for the year ended September 30,
1998, as compared to $11,370,000 for the year ended September 30, 1997. These
revenues include operations from the medical construction business of $5,634,000
for the year ended June 30, 1998 compared to $3,506,000 for the six months ended
June 30, 1997. The Company's reduced annualized revenues from the medical
construction business result from management's policy of bidding on construction
contracts with higher profit margins.
Net Service Revenue approximated $5,090,000 for the year ended September
30, 1998 compared to $7,864,000 for the year ended September 30, 1997. This 35%
reduction in Net Service Revenue resulted from dispositions of "Empire" and
"Brady" during the year ended September 30, 1998. See notes to consolidated
financial statements included in Item 8.
Operating expenses for the year ended September 30, 1998 were
approximately $5,896,000, as compared to approximately $8,938,000 for the year
ended September 30, 1997, a decrease of approximately $3,042,000. Management
attributes this decrease to reduced expenditures due to disposal of two
subsidiaries during the year ended September 30, 1998.
Interest expense for the year ended September 30, 1998 was approximately
$845,000 as compared to approximately $868,000 for the year ended September 30,
1997.
Interest income aggregated approximately $48,000 for the year ended
September 30, 1998 as compared to approximately $122,000 for the year ended
September 30, 1997. This decrease of approximately
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$74,000 is due to the Company's decrease in the investment balance from the
proceeds of the initial public offering.
Net loss decreased to approximately $1,137,000 or $.33 per share for the
year ended September 30, 1998 as compared to $1,625,000 or $.48 for the year
ended September 30, 1997, on a primary basis. The explanation of this decrease
in the amount of $488,000 resulted from net extraordinary gains approximating
$1,020,000, of which $504,000 was charged as a write-off of goodwill.
Year ended September 30, 1997 compared to the year ended September 30,
1996:
Results of operations, which presents operating data for the Company and
Northern New Jersey Medical Management, Inc. reflects total operating revenues
of $988,600 as compared to approximately $675,600 or 46%. The increase in
management fees resulted from expansion associated with efforts to establish mew
and existing surgical and diagnostic centers.
Results of operations form this medical construction business, which began
this year, reflect total revenue of $3,506,000.
Results of operations from medical services such as diagnostic imagery
business resulted in revenues of approximately $6,875,000.
Operating expenses for the year ended September 30, 1997 were
approximately $8,938,000, as compared to approximately $1,579,000 for the year
ended September 30, 1996, as increase of approximately $7,359,000. Management
attributes this increase to expenditures made for salaries, professional fees,
consulting expenses and travel and entertainment cost associated with efforts to
establish and manage new and existing surgical centers, cash flow for new
acquisitions and new entities.
Interest expense for the year ended September 30, 1997 was approximately
$868,000 as compared to approximately $56,000 for the year ended September 30,
1996. This is primarily attributed to the financing of the new acquisitions and
new entities.
Interest income aggregated approximately $122,000 for the year ended
September 30, 1997 as compared to approximately $131,000 for the year ended
September 30, 1996. This decrease of approximately $9,000 is due to the
Company's decrease in the investment balance from the proceeds of the initial
public offering.
Net loss increased to approximately $1,625,000 or $.48 per share for the
year ended September 30, 1997 as compared to $952,000 or $.29 for the year ended
September 30, 1996, on a primary basis. The explanation of this increase is a
direct result of the increase in expansion associated with the efforts to
establish new and
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existing surgical centers, as well as emergence into new markets. The healthcare
dollar for the past few years has been earmarked for reductions. Although third
party payors are shrinking the amount of healthcare payments, quality care and
highly technological equipment is still a priority. With increases in the cost
of highly technological equipment and the cost to borrow money, profit margins
will be reduced. It is the Company's aim to address the effects of lower
healthcare reimbursement and increased equipment costs by handling a larger
volume of patients at its newly acquired centers and at its future centers
through a managed care network.
Liquidity and Capital Resources
Cash and cash equivalents were $175,163 at September 30, 1998, compared to
$442,657 at September 30, 1997, a decrease of $267,494.
The Company had a working capital deficiency of $1,039,000 as of September
30, 1998 as compared to a working capital deficiency of $1,670,000 as of
September 30, 1997. The Company has sustained continued losses form operations,
which raise substantial doubt about the Company's ability to continue as a going
concern. This matter is discussed in further detail in Note 2 in the Company's
Notes to Consolidated Financial Statements.
The Company had a working capital of $1,670,000 as of September 30, 1997
as compared to a working capital surplus of $2,905,000 as of September 30, 1996.
The Company had sustained continued losses from operations, which raised
substantial doubt about the Company's ability to continue as a going concern.
This matter is discussed in further detail in Note 2 in the Company's Notes to
Consolidated Financial Statements.
The Company has a working capital surplus of $2,905,272 at September 30,
1996 when compared to a working capital surplus of $4,513,996 at September 30,
1995. This decrease is primarily the result of expenditures incurred in the
expansion and development of new business. The Company experienced a net
decrease in cash and equivalents aggregating approximately $2,362,000 for the
year ended September 30, 1996. This decrease results primarily from the net loss
and other operating activities aggregating approximately $1,442,000, the
investments in a joint venture, certificate of deposit and fixed assets
aggregating approximately $882,000 and the repayment of $150,000 of notes
payable to stockholders less advances from a line of credit of approximately
$168,000. On April 30, 1996, the Company entered into a one year $400,000 line
of credit agreement with a bank which bears interest on the unpaid principal at
prime plus one percent (9.25%). The line is collateralized by a one year
certificate of deposit. As of September 30, 1996, the amount outstanding under
the line of credit aggregated approximately $168,000. The Company believes that
it has sufficient resources to support the operations of Northern and begin its
proposed surgical center operations and it has working
16
<PAGE>
capital to administer and manage the centers for the next twelve months. The
Company believes that the net proceeds from the Initial Public Offering will be
sufficient to meet its plans with respect to the management and the
administration of sites in the next twelve months and its working capital needs
for the foreseeable future. It is the belief of the Company that the normal cash
flow generated from the administration and management from the Centers will
provide excess cash (capital) which will be used for expenses and future capital
needs.
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 may be affected.
There are no other known trends, demands, commitments or events that will
impact the Company's results of operations, liquidity and/or capital resources.
Item 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements of R.F. Management Corp. and
Subsidiaries as of September 30, 1996 and 1995 and for the three year period
ended September 30, 1996.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-1
Consolidated Financial Statements
Consolidated Balance Sheets F-2, F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5, F-6
Consolidated Statements of Stockholder's Equity F-7
Notes to Consolidated Financial Statements F-8-F-22
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
17
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are listed in the
table below and brief summaries of their business experience and certain other
information with respect of them are set forth thereafter:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Roger Findlay 51 Chairman of the Board of Directors
Wayne P. Miller 48 President, Secretary and Director
Louis A. D'Esposito 67 Director
Jan Goldberg 47 Director
Gregory C. Maccia 44 Director
Aron Scharf 48 Director
Edward Alling 55 Director
</TABLE>
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 selected
and qualified.
ROGER B. FINDLAY is co-founder and has been Chairman of the Board of
Directors since its inception. He resigned as President of the Company,
effective May 1997. Since June 1990, Mr. Findlay is also co-founder, President
and Chairman of the Board of Modern Medical Modalities Corporation, a public
company listed on Nasdaq Small Capital Market, that leases magnetic resonance
imaging and computerized axial tomography equipment to hospitals and physicians
("Modern Medical"). Mr. Findlay since 1989 has also been co-founder of
Technology Services, Inc. a software support company for medical offices and
commercial accounts ("Technology Services"). Mr. Findlay from 1986-1989 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. Additionally, from 1986 he has been founder and
President of Northern New Jersey Medical Management, Inc., a general partner of
a diagnostic imaging center. From 1984 to 1986, Mr. Findlay was
18
<PAGE>
chief operating officer of NMR of America, Inc., a publicly traded Company
engaged in MRI sites. Mr. Findlay from 1972 to 1986 was President and co-owner
of Medical Billing Services. Mr. Findlay will devote his full time to the
affairs of the Company.
WAYNE P. MILLER was elected President of the Company, effective May 1997.
He has been Secretary and Director of the Company since December 1995. Mr.
Miller from December 1989 to November 1995 was employed by Modern Medical
Modalities Corp., a company that leases magnetic resonance imaging and
computerized axial tomography equipment to hospitals and physicians, and then by
its wholly owned subsidiary Medical Marketing & Management Inc. as National
Marketing/Sales Director. Since 1991 Mr. Miller has been employed by The
Physicians Network, a company that provides turnkey medical billing systems to
billing companies, hospitals and physicians. From 1991 to 1995, Mr. Miller was
an independent consultant providing billing and computerized consulting services
to physicians and hospitals. Mr. Miller from 1990 to 1991 was Vice President of
Billing for Healthnet a company engaged in the business of physician billing and
receivable management. From 1986 to 1990, Mr. Miller was Vice President of
Marketing with HealthCare Technologies, a company specializing in total turnkey
physician billing solutions. Mr. Miller from 1983 to 1986 was contracted by
Health Corp. of the Archdiocese of Newark as Vice President of PrimeMark, to
establish a hospital based collection agency for three hospitals and create a
physician fee-for-service billing company for the hospitals' billing procedures.
LOUIS A. D'ESPOSITO has been Vice President, Chief Financial Officer of
the Company from 1995 to 1997 and Director of the Company since 1996. From 1993
to 1995, Mr. D'Esposito was the Eastern Regional Manager of DVI Financial
Services, Inc., an equipment leasing and finance company specializing in the
leasing and financing of high-tech medial equipment. Mr. D'Esposito from 1983 to
1993 was the Regional Manager of U.S. Concord, Inc. a division of the Hong Kong
and Shanghai Banking Corporation, also specializing in the leasing and financing
of medical equipment.
JAN GOLDBERG is a co-founder and was Secretary, Treasurer and Director of
the Company until 1996. Since November 1992, Mr. Goldberg has been the Vice
President, Treasurer and a 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-
19
<PAGE>
service reimbursement systems and was involved in various aspects of hospital
administration. Mr. Jan Goldberg is an officer and director of Modern Medical
Modalities Corporation, a public company traded on Nasdaq.
GREGORY C. 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. Mr. Maccia is an officer and director of Modern Medical
Modalities Corporation, a public company traded on Nasdaq.
ARON SCHARF was appointed Chairman of the Board of Directors of Hamilton
McGregor International, Inc. on June 30, 1997. Mr. Scharf is responsible for
financial projections and planning, cash- flow analysis and consultation. He was
appointed to the Board of Directors of R.F. Management Corp. in 1998. Mr. Scharf
received both a B.A. in Business and a B.S. in Industrial Engineering from
Rutgers University, New Brunswick, New Jersey. He went on to earn his Masters in
Operations Research from Rutgers and an MBA from Fairleigh Dickenson University.
From 1974-82 he was employed by Johnson and forecaster and marketing analyst.
When he left J&J he opened MicroAge Computers, a retail computer store and
founded Sunrise Multi-Marketing, a sale and leasing company specializing in
computer equipment. He served as president of Fidelity Telecom Group until his
return to Modern Medical Modalities Corporation in 1996. Since 1996, Mr. Scharf
has also been employed as a business manager for Modern Medical Modalities
Corporation, a public company traded on Nasdaq.
EDWARD ALLING graduated with a B.S. Degree in Accounting from the
University of Connecticut in 1962. After graduation, Mr. Alling was commissioned
in the United States Army as an officer serving in Germany and Vietnam from 1962
to 1971. After leaving the service, he joined Firestone Plastics Company as the
Manager of Accounting in their West Caldwell, New Jersey facility. In 1983, he
joined Occidental Petroleum Corporation as a Senior Auditor
20
<PAGE>
before becoming a Controller in their adhesives facilities in New York and New
Jersey. Mr Alling has been employed by Fidelity Telecom Group of Highland Park,
New Jersey since 1991 and has served as the company Controller.
21
<PAGE>
Executive Compensation
The following table sets forth the executive compensation and distribution
paid to each executive officer of the Company during the Year ended September
30, 1998.
<TABLE>
<CAPTION>
EXECUTIVE COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- ------------------------------------------------------------------------------------------------------------
Name and Restricted
Principal Fiscal Other Stock Options/ LTIP All Other
Other Position Year Salary Bonus Compensation Awards SARSs Payouts Compensation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Roger Findlay
President 1998 -- -- -- -- -- --
and Director
Wayne P. Miller
President, 1998 85,000 -- -- -- -- -- --
Secretary
and Director
Louis A. D'Esposito
Vice President, 1998 -- -- -- -- -- --
Chief Financial
Officer and Director
Jan Goldberg
Director, 1998 -- -- -- -- -- --
Gregory C. Maccia
Director, 1998 -- -- -- -- -- --
Aron Scharf
Director, 1998 -- -- -- -- -- --
Edward Alling
Director, 1998 -- -- -- -- -- --
</TABLE>
22
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of the date of this
Prospectus, and as adjusted to reflect the sale of the Securities offered
hereby, based on information obtained from the persons named below, with respect
to the beneficial ownership of shares of Common Stock, by (i) each person who is
known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock; (ii) each of the Company's directors; and (iii) all
directors and officers of the Company as a group.
<TABLE>
<CAPTION>
Name Amount
and Address and Nature
of Beneficial of Beneficial Percentage of Outstanding
Owner Ownership(2) Shares Presently Owned
- ------------- ------------- -------------------------
<S> <C> <C>
Roger Findlay(1)
95 Madison Avenue
Morristown, NJ 07960 998,000 --%
Oak Knoll Management Corp.
Oak Knoll Road
Mendham, NJ 07945 644,000 --%
Wayne P. Miller
c/o RF Management -- --
95 Madison Ave.
Morristown, NJ 07960
Louis A. D'Esposito -- --
29 Glen Drive
Bardonia, NY 10954
Jan Goldberg -- --
555 North Avenue
Fort Lee, NJ 07024
Gregory C. Maccia -- --
41 Mount Pleasant Rd.
Morristown, NJ 07960
Aron Scharf -- --
86 Harrison Avenue
Highland Park, NJ 08904
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Edward Alling -- --
c/o R.F. Management Corp.
95 Madison Avenue
Suite 301
Morristown, NJ 07960
Officers and 1,642,000 100%
Directors
as a group
(7 Persons)(7)
</TABLE>
(1) 644,000 shares of Mr. Findlay's 998,000 shares are owned by Oak
Knoll Management Corp.Alice Findlay is the sole Stockholder, Officer
and Director of Oak Knoll Management Corp Alice Findlay is the wife
of Roger Findlay, who is a Principal Stockholder, the President and
Chairman of the Board of Directors of the Company. Roger Findlay has
no affiliation with Oak Knoll Management Corp. and disclaims
beneficial ownership of such shares.
(2) Unless otherwise noted, the Company believes that all persons named
in the table have sole voting and investment power with respect to
all shares of Common Stock beneficially owned by them. A person is
deemed to be the beneficial owner of securities that can be acquired
by such person within 60 days from the date of this Prospectus upon
the exercise of warrants or options.
(3) Includes the shares owned by Oak Knoll Management Corp. Roger
Findlay has no affiliation with Oak Knoll Management Corp. and
disclaims beneficial ownership of the 644,000 shares.
Mr. Findlay may be deemed a "Parent" and "Founder" of the Company as these terms
are defined under the Securities Act of 1933, as amended.
Item 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The Company was incorporated as R.F. Management Corp. in the State of New
York on August 4, 1994, for the purpose of providing free standing or outpatient
centers performing ambulatory surgery.
In August, 1994, the Company issued 560,000 shares of Common Stock (giving
effect to the 4-for-1 stock split on December 22, 1994) to Roger Findlay in
consideration of Mr. Findlay's payment of $.01 per share. Mr. Findlay
subsequently transferred 206,000 shares of Common Stock (giving effect to the
4-for-1 stock split on December 22, 1994) to unaffiliated parties. In August,
1994, the Company also issued an aggregate of 120,000 shares of Common Stock
24
<PAGE>
(giving effect to the 4-for-1 stock split on December 22, 1994) to Jan Goldberg
and 120,000 shares to Gregory Maccia, in consideration of payment of $.02 per
share. Mr. Findlay, Mr. Goldberg and Mr. Maccia may be deemed "Promoters" as
that term is defined under the Securities Act of 1933, as amended. There are no
additional transactions between Messrs. Findlay, Goldberg and Maccia, except as
delivered below.
In December of 1994, the Company completed an offering of its securities
under an exemption pursuant to Regulation D of the Securities Act of 1933. The
offering closed on December 15, 1994, with the sale of 350,000 shares of the
Company's voting common stock (giving effect to the 4-for-1 stock split on
December 22, 1994) at the offering price of $2.00 per share (giving effect to
the 4-for-1 stock split on December 22, 1994), that raised an aggregate of
$615,995 for the Company.
In May 1995, the Company entered into a Stock Acquisition Agreement (the
"Agreement") with Northern New Jersey Medical Management, Inc. ("Northern") a
corporation formed in the State of New Jersey in January 1986 with offices
located at 95 Madison Avenue, Morristown, New Jersey 07960. Northern administers
and manages a free standing outpatient center performing diagnostic services.
The sole officers, directors and principal shareholders of Northern were Roger
Findlay and Gregory Maccia, who are officers, directors and principal
shareholders of the Company.
Pursuant to the terms of the Agreement, the Company purchased all of the
issued and outstanding shares of common stock of Northern. In consideration, the
Company will pay Messrs. Findlay and Maccia an aggregate of $750,000 in
accordance with the following terms:
$150,000 paid upon execution of the agreement; the balance of
$600,000 will be paid in the form of a promissory note, with
interest at prime plus 1% on the unpaid principal balance, payable
as follows:
$150,000 on January 30, 1996;
$150,000 on January 30, 1997;
$150,000 on January 30, 1998;
$150,000 on January 30, 1999.
The Company is currently in default on the promissory note to Messrs.
Findlay and Maccia. The Company has maintained ongoing discussions with Messrs.
Findlay and Maccia to correct the default.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
R.F. MANAGEMENT CORP.
By
----------------------------------------------------
Roger Findlay
Chairman of the Board of Directors,
Date February 10, 1999
----------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By
----------------------------------------------------
Roger Findlay
Chairman of the Board of Directors,
Date February 10, 1999
----------------------------------------------------
* * *
By
----------------------------------------------------
Wayne P. Miller
Director, President
Date February 10, 1999
----------------------------------------------------
* * *
By
----------------------------------------------------
Aron Scharf
Director, Vice President and Treasurer
Date February 10, 1999
----------------------------------------------------
* * *
26
<PAGE>
By
----------------------------------------------------
Jan Goldberg
Director
Date February 10, 1999
----------------------------------------------------
* * *
By
----------------------------------------------------
Gregory C. Maccia
Director
Date February 10, 1999
----------------------------------------------------
* * *
By
----------------------------------------------------
Lou D'Esposito
Director
Date February 10, 1999
----------------------------------------------------
* * *
By
----------------------------------------------------
Edward Alling
Director
Date February 10, 1999
----------------------------------------------------
27
<PAGE>
To the Board of Directors and Stockholders
of R.F. Management Corp.
We have audited the accompanying consolidated balance sheets of R.F.
Management Corp. and Subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998. 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 did not audit the financial statements of Northern New Jersey
Medical Management, Inc., a wholly-owned subsidiary, which statements reflected
total assets of $505,926 and $520,373 as of September 30, 1998 and 1997, and
total revenues of $346,657, $341,292, and $309,067 for the three year period
ended September 30, 1998. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to
amounts included for Northern New Jersey Medical Management, Inc., is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of R.F. Management Corp. and
Subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 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 net 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
December 21, 1998
F-1
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
<S> <C> <C>
1998 1997
------------ -------------
Current assets:
Cash and cash equivalents.......................................................... $ 183,263 $ 523,772
Certificates of deposit............................................................ 700,000 707,073
Accounts receivable................................................................ 2,000,243 3,923,513
Note receivable--current portion................................................... -- 39,827
Loans receivable--stockholders and officers........................................ -- 32,024
Loans receivable................................................................... -- 33,367
Deferred income taxes.............................................................. 238,845 5,650
Other current assets............................................................... 139,137 107,285
------------ -------------
Total current assets............................................................. 3,261,488 5,372,511
------------ -------------
------------ -------------
Other assets:
Note receivable--net of current portion............................................ -- 441,152
Equipment (net of accumulated depreciation of $595,415 and $817,071,
respectively).................................................................... 1,548,183 5,835,756
Investment in a limited partnership................................................ 10,969 10,250
Investment in joint venture........................................................ 330,000 350,000
Deferred consulting fee............................................................ -- 810,599
Deposits and other assets.......................................................... 107,982 245,605
Goodwill, net of accumulated amortization of $74,479 and $149,554, respectively)... 1,002,730 2,865,901
Organization costs (net of accumulated amortization of $52,549 and $49,696,
respectively).................................................................... 54,248 81,307
------------ -------------
Total other assets............................................................... 3,054,112 10,640,570
------------ -------------
$ 6,315,600 $ 16,013,081
------------ -------------
------------ -------------
</TABLE>
F-2
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
<S> <C> <C>
1998 1997
----------- -------------
Current liabilities:
Lines of credit.................................................................... $ 400,000 $ 397,000
Accounts payable................................................................... 2,245,297 2,127,854
Consulting fees payable--current portion........................................... -- 45,591
Accrued expenses and other current liabilities..................................... 112,973 905,894
Due to affiliates.................................................................. 128,338 947,816
Deferred income taxes.............................................................. 94,834 61,605
Notes payable--equipment--current portion.......................................... 752,252 2,099,342
Notes payable--related parties--current portion.................................... 566,810 456,917
----------- -------------
Total current liabilities........................................................ 4,300,504 7,042,019
----------- -------------
----------- -------------
Other liabilities:
Notes payable--equipment--net of current portion................................... 1,261,050 4,756,021
Notes payable--related parties--
net of current portion............................................................. 91,667 1,546,798
Consulting fees payable--net of current portion.................................... -- 990,808
----------- -------------
Total other liabilities.......................................................... 1,352,717 7,293,627
----------- -------------
Minority interest in equity of subsidiaries.......................................... 146,418 23,975
----------- -------------
Commitments and contingencies........................................................ -- --
Stockholders' equity:
Common stock, $0.0001 par value,
Authorized--15,000,000 shares
Issued and outstanding--3,460,833 shares........................................... 346 346
Additional paid-in capital......................................................... 4,223,628 4,223,628
Deficit............................................................................ (3,708,013) (2,570,514)
----------- -------------
Total stockholders' equity....................................................... 515,961 1,653,460
----------- -------------
$ 6,315,600 $ 16,013,081
----------- -------------
----------- -------------
</TABLE>
F-3
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------------------
<S> <C> <C> <C>
1998 1996 1997
------------- ------------- -------------
Revenues:
Net service revenue................................................ $ 5,089,771 $ 7,863,899 $ 312,971
Construction revenue............................................... 5,633,716 3,506,025 --
------------- ------------- -------------
Total revenues....................................................... 10,723,487 11,369,924 312,971
------------- ------------- -------------
Costs and expenses
Operating expenses................................................. 5,896,081 8,937,626 1,579,288
Construction costs................................................. 4,388,829 2,722,924 --
Interest........................................................... 845,428 868,305 55,615
Depreciation and amortization...................................... 822,351 792,102 22,817
Goodwill writedown................................................. 503,760 -- --
Interest income.................................................... (48,316) (122,186) (174,731)
------------- ------------- -------------
Total costs and expenses............................................. 12,408,133 13,198,771 1,482,989
------------- ------------- -------------
Loss from operations
before Sale of Subsidiary, Income Taxes, Partnership Income,
Minority Interest and Extraordinary Item......................... (1,684,646) (1,828,847) (1,170,018)
Gain (loss) on sale of subsidiary.................................... (297,170) 489,228 --
Gain (loss) on disposal of subsidiary.............................. (252,176) -- --
------------- ------------- -------------
Loss from operations
before Income Taxes, Partnership Income, Minority Interest and
Extraordinary Item............................................... (2,233,992) (1,339,619) (1,170,018)
Income tax (provision) recovery...................................... 366,603 (320,932) 217,724
------------- ------------- -------------
Loss from operations before partnership income (loss)................ (1,867,389) (1,660,551) (952,294)
Income (loss) from a limited partnership -........................... (1,461) (515) 80
------------- ------------- -------------
Loss before Minority Interest and Extraordinary Item................. (1,868,850) (1,661,066) (952,214)
Minority interest in loss from subsidiaries.......................... (122,443) 36,346 --
------------- ------------- -------------
Loss before Extraordinary Item....................................... (1,991,293) (1,624,720) (952,214)
Extraordinary Items
Gain (loss) from Extinguishment of Debt (net of $82,264 income tax
provision)....................................................... 421,496 -- --
Gain (loss) from Extinguishment of Debt (net of $126,174 income tax
provision)....................................................... 646,476 -- --
Gain (loss) from Extinguishment of Debt (net of $41,801 income tax
recovery)........................................................ (214,178) -- --
------------- ------------- -------------
Net loss............................................................. $ (1,137,499) $ (1,624,720) $ (952,214)
------------- ------------- -------------
------------- ------------- -------------
Primary weighted average shares outstanding........................ 3,460,833 3,415,902 3,327,500
------------- ------------- -------------
------------- ------------- -------------
Loss per share..................................................... $ (0.33) $ (0.48) $ (0.29)
------------- ------------- -------------
</TABLE>
F-4
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
Operating activities:
Net income (loss).................................................. $ (1,137,499) $ (1,624,720) $ (952,214)
------------- ------------- -------------
Adjustments to reconcile net income (loss) to net cash provided by
(used) in operating activities
Depreciation and amortization.................................... 822,351 792,102 22,817
Deferred income taxes............................................ (199,966) (151,543) (218,347)
Minority interest in (income) loss from subsidiaries............. 122,443 -- --
Consulting fees.................................................. 810,599 -- --
Goodwill writedown............................................... 503,760
Changes in operating assets and liabilities
Accounts receivable............................................ 1,923,270 (3,566,971) (206,275)
Loans receivable............................................... 33,367 -- --
Other receivables.............................................. -- (12,281) --
Other current assets........................................... (31,852) (6,075) (84,785)
Accounts payable and accrued expenses.......................... (675,478) 2,999,068 336
Income taxes payable........................................... -- -- (3,825)
Other payables................................................. -- 2,099,342 --
Gain from extinguishment of debt............................... (1,020,431) -- --
Loss from sale of subsidiary....................................... 297,170 -- --
Loss on disposal of subsidiary................................. 252,176 -- --
------------- ------------- -------------
Net cash provided by (used in) operating activities.......... 1,699,910 528,922 (1,442,293)
------------- ------------- -------------
Investing activities
Fixed asset additions.............................................. (1,077,296) (6,347,574) (123,357)
Fixed assed dispositions........................................... 4,470,296 -- --
Investment in limited partnership.................................. (719) (870) (135)
Investment in joint venture........................................ 20,000 -- (350,000)
Disposition of goodwill............................................ 1,905,621 -- --
Investment in a certificate of deposit............................. 7,073 (298,807) (408,266)
Acquisition of subsidiary.......................................... -- (3,015,455) --
Note receivable.................................................... 480,979 (480,979) 20,000
Deposits and other assets.......................................... 137,623 (164,739) (75,836)
Loans receivable................................................... 32,024 -- --
Advances from affiliates........................................... (819,478) 947,816 --
------------- ------------- -------------
Net cash used in investing activities........................ 5,156,123 (9,360,608) (937,594)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-5
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
Financing activities:
Organization costs............................................. 24,206 81,115 --
Advances from line of credit................................... 3,000 229,300 167,700
Additions to long term debt.................................... -- 6,993,627 --
Notes payable--equipment....................................... (4,842,061) -- --
Notes payable--related party................................... (1,345,238) (306,917) (150,000)
Consulting fees payable........................................ (1,036,399) -- --
Sale of common stock........................................... -- 100,000 --
------------- ------------- -------------
Net cash provided by (used in) financing activities.......... (7,196,492) 7,097,125 17,700
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................. (340,459) (1,734,561) (2,362,187)
Cash and cash equivalents--beginning................................. 523,722 2,258,333 4,620,520
------------- ------------- -------------
Cash and cash equivalents--end....................................... $ 183,263 $ 523,772 $ 2,258,333
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-6
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
NUMBER OF COMMON PAID-IN SUBSCRIPTIONS EARNINGS
SHARES STOCK CAPITAL RECEIVABLE (DEFICIT) TOTAL
---------- ------------- ---------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995............... 3,327,500 333 4,123,641 -- 6,420 4,130,394
Net loss for the year ended September 30,
1996...................................... -- -- -- -- (952,214) (952,214)
--
---------- --- ---------- ----------- -----------
Balance at September 30, 1996............... 3,327,500 333 4,123,641 -- (945,794) 3,178,180
Issuance of common stock for the acquisition
of Atrium Radiology Corp.................. 133,333 13 99,987 -- -- 100,000
Net loss for the year ended September 30,
1997...................................... -- -- -- -- (1,624,720) (1,624,720)
--
---------- --- ---------- ----------- -----------
Balance at September 30, 1997............... 3,460,833 346 4,223,628 -- (2,570,514) 1,653,460
Net loss for the year ended September 30,
1998...................................... -- -- -- -- (1,137,499) (1,137,499)
--
---------- --- ---------- ----------- -----------
Balance at September 30, 1998............... 3,460,833 346 4,223,628 -- (3,708,013) 515,961
--
---------- --- ---------- ----------- -----------
</TABLE>
F-7
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 1--GENERAL AND ACCOUNTING POLICIES
(a) Organization:
R.F. Management Corp. ("R.F.") was incorporated in the State of New York on
August 4, 1994. On December 22, 1994, pursuant to an action of the Board of
Directors, R.F. affected a 4-for-1 stock split of its $0.0001 par value common
stock. The financial statements contained herein have been restated to reflect
the stock split and all references to shares issued or outstanding in the
accompanying financial statements are on a post-split basis.
(b) Principal Business Activity:
R.F.'s business is to provide management advisory and other services in
connection with the establishment and operation of free standing, outpatient
centers performing ambulatory surgery, diagnostic imaging and radiation therapy.
R.F. offers a full range of services, including contract negotiations, site
selection, equipment procurement, construction, office personnel and physician
staffing, office management, patient scheduling, patient billing, cash
collections, personnel management and marketing.
(c) Summary of Significant Accounting Policies:
(1) Consolidation Policy:
The consolidated financial statements include the accounts of R.F.
Management Corp. ("R.F."), its wholly-owned subsidiaries, Northern New
Jersey Medical Management, Inc. ("Northern"), R.F. Management Corp. of Toms
River ("RFTR"), Brady Cancer Centers, Inc. ("BCC"), and Open MRI and
Diagnostic Services of Toms River, Inc. ("Open MRI"), and its majority owned
subsidiaries, Empire State Imaging Associates, Inc. ("Empire"), Mobiletec,
Inc. "(Mobiletec"), Hamilton McGregor International, Inc. ("Hamilton"), and
Atrium Radiology corp. ("Atrium"), in which R.F. has a 65%, 75%, 52% and 52%
interest, respectively. R.F., Northern, RFTR, BCC, Open MRI, Empire,
Mobiletec, Hamilton and Atrium are hereafter collectively referred to as
("the Company"). All significant intercompany transactions and accounts have
been eliminated in consolidation.
(2) 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.
(3) 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 adjustment.
(c) Summary of Significant Accounting Policies: (Continued)
(4) Equipment:
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
F-8
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 1--GENERAL AND ACCOUNTING POLICIES (CONTINUED)
estimated useful lives of the related asset, 10 years for medical equipment
and 5 to 7 years for office equipment. Expenditures which are not expected
to extend the economic life of an asset are expensed as incurred.
(5) Goodwill:
The Company has recorded goodwill relating to the acquisition of
subsidiaries which is being amortized over a period of fifteen years.
(6) Organizational Expenses:
Organizational expenses incurred in the set-up of the Company and its
subsidiaries have been capitalized and will be amortized over a period of 5
years from the commencement of operations.
(7) Deferred Offering Costs:
All deferred offering costs incurred by the Company in conjunction with
the private placement offering and initial public offering (IPO) have been
charged to additional paid-in capital upon the completion of the offering
(see Note 3).
(8) Revenue Recognition:
Revenue, consisting primarily of management fees generated through
contracting agreements between the Company and doctors or physician groups
practicing at the Company's facilities, are recognized when the services are
rendered. The Company is responsible for the operational management of the
facility including non-medical personnel, acquiring or leasing medical
equipment, leasing a facility procuring all necessary supplies and billing
and collection services.
Additional revenue is derived from construction services rendered
through its subsidiary, Hamilton, and is recognized on an accrual basis
under the percentage of completion method of accounting.
(9) 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.
(10) Income Taxes:
The Company adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) NO. 109, "Accounting for
Income Taxes", for financial statements reporting purposes, which required a
change from the deferred method (APB 11) to the assets and liability method
of accounting for income taxes. The assets and liability approach requires
the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities and the effect of future
tax planing strategies to reduce any deferred tax liability. Under this
method, deferred tax liabilities and assets are determined based on the
differences between the financial statement carrying amounts and tax basis
of assets and liabilities using enacted rates in effect in the years in
which the differences are expected to reverse. The adoption of SFAS 109 did
not have a material impact on the consolidated financial statements.
F-9
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 1--GENERAL AND ACCOUNTING POLICIES (CONTINUED)
(11) Loss Per Share:
Loss per share has been computed by dividing the net loss by the
weighted average number of common shares and common equivalent shares
outstanding during each period.
(12) Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents, contracts receivable,
accounts payable and short-term debt approximate fair value due to the short
maturity of the instruments and the provision for what management believes
to be adequate reserves for potential losses. It was not practicable to
estimate the fair value of long-term debt because quoted market prices do
not exist and an estimate could not be made through other means without
incurring excessive costs.
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
$1,039,016 as of September 30, 1998, and has sustained continued losses from
operations, which raise substantial doubt about the Company's ability to
continue as a going concern.
On September 18, 1997 the Company's Board of Directors resolved to pursue a
potential merger with Modern Medical Modalities Corp., and affiliated company.
That plan is presently in the exploratory stage.
The Company has also begun implementation of a restructuring plan for its
subsidiaries and believes this plan will make the Company profitable in future
periods.
In December, 1997, the Company's $600,000 note payable to a related party
was cancelled. The Company recorded the gain from debt cancellation as a
goodwill writedown. (See Note 4.)
In March, 1998, the Company's $1,000,000 note payable to a related party was
restructured. The Company recorded a gain from note payable restructuring in the
amount of $772,650. (See Note 4.)
The Company partially settled the "Brady" matter (see notes 14(e) & 15) in
September and November, 1998. The Company's lender, DVI Financial Services,
Inc., was repaid $3,500,000 of capital lease obligations.
NOTE 3--MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS.
On December 27, 1995, R.F. acquired forty percent (40%) of the outstanding
shares of Mobile Medical Services Limited ("Mobile"), a privately held Company
incorporated in Ireland, and a fifty one percent (51%) interest in the property
owned or leased by its subsidiaries for $350,000. The terms of the agreement
called for the Company to make payments directly to designated creditors on
behalf of Mobile. As of September 30, 1998, $330,000 is reflected as an
investment in joint venture.
On November 15, 1996, the Company acquired seventy-five percent (75%)
interest in Mobiletec, Inc. ("Mobiletec"), a newly formed entity incorporated in
the State of New Jersey. Mobiletec provides mobile M.R.I. facilities to doctors,
hospitals and medical groups for which it receives a per-test or daily rental
fee. The results of operations from its inception are included in these
consolidated financial statements.
F-10
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 3--MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS. (CONTINUED)
On December 1, 1996, the Company acquired certain assets and assumed certain
liabilities form Luther W. Brady & Associates, P.C. and Bucks Radiation
Oncology, Inc. The assets are used to provide radiation therapy services and are
located in Voorhees, New Jersey and Havertown and Langhorne, Pennsylvania. The
purchase price for these assets was $3,700,000. The Company also assumed certain
notes payable totaling approximately $837,000. The fair value of the assets
acquired aggregated approximately $3,280,000. The difference between the
purchase price and the fair value of the assets, net of liabilities assumed,
resulted in the creation of goodwill of approximately $1,257,000. In connection
with the acquisition, the Company has arranged for financing of the purchase
price aggregating $3,500,000, in the form of installment notes, payable in 60
monthly installments including interest at 11.6%, totaling approximately $77,150
per month. Repayment of these notes commenced March 1, 1997.
In March, 1997, the Company formed a new wholly-owned subsidiary, Brady
Cancer Centers, Inc. and transferred to assets acquired from Luther W. Brady &
Associates, P.C. and Bucks Radiation Oncology, Inc. to the subsidiary.
In October, 1997, $1.5 million of the financed purchase price was returned
to the lender. In September and November, 1998, an additional $2 million was
returned to the lender. The Company recorded a loss on disposal of this
subsidiary in the amount of $252,176 (See notes 14(e) and 15).
On December 27, 1996, the Company acquired 65% of the outstanding capital
stock of Empire State Imaging Associates, Inc. ("Empire"), a New York
corporation, from an affiliated company for a total of $250,000. Empire operates
an imaging center which provides non-claustrophobic MRI, CT scanning,
mammography, ultrasound and x-ray services. As part of the purchase price, the
Company issued an installment note, in the principal sum of $225,000, payable in
nine monthly installments plus interest at prime plus 1% on the unpaid balance.
On June 30, 1998, the Company and its affiliate (which owned the remaining
35%) sold all the outstanding stock 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 $297,170.
On January 1, 1997, the Company acquired 52% of the outstanding capital
stock of Hamilton McGregor International, Inc. ("Hamilton") in a private
transaction with a related party for a total purchase price of $750,000.
Hamilton, through a wholly-owned subsidiary, is a general construction
contractor. As part of the purchase price, the Company issued an installment
note in the sum of $600,000, without interest payable in four annual
installments on the anniversary date of the agreement. When discounted, assuming
the Company's normal cost of funds, the purchase price has been recorded as
approximately $615,000 and resulted in the creation of goodwill of approximately
$1,350,000. Hamilton's fiscal year ends on June 30. Hamilton's financial
position and results of operations as of and for the year ended June 30, 1998,
and for the six months ended June 30, 1997 have been included in these
consolidated financial statements.
On January 31, 1997, the Company acquired 52% of the outstanding capital
stock of Atrium Radiology Corp. ("Atrium") for 133,333 shares of the Company's
common stock, having a fair value of $100,000 on the date of acquisition. The
agreement also calls for the seller to receive the first $300,000 of net profits
to be earned from future operations. The acquisition resulted in the creation of
goodwill amounting to approximately $221,000. Atrium's financial position and
results of operations as of and for the eight months ended September 30, 1997
have been included in these consolidated financial statements.
F-11
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 3--MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS. (CONTINUED)
In February 1997, the Company acquired a 75% interest in Open MRI and
Diagnostic Services of Toms River, Inc. ("Open MRI"), a newly formed
corporation. On March 19, 1997, the Company and its affiliate (which owned the
remaining 25%) sold all the outstanding capital stock to Advanced Open MRI and
Diagnostic Imaging, P.A., and unrelated party, for the principal sum of
$1,000,000. The Company's share of the proceeds of $750,000 resulted in a gain
of $592, 340. Of the purchase price, $75,000 was received at the signing of the
contract, $175,000 was received at the closing in April 1997 and the balance of
$750,000 is payable in 30 equal installments of $25,000 commencing 90 days after
the opening of the facility. Using the present value of the note, discounted at
11%, the Company recorded a gain on the sale of its stock amounting to
approximately $489,000. The note is collateralized by 52% of the common stock of
Open MRI, which is held in escrow.
NOTE 4--EXTRAORDINARY ITEMS
On December 1, 1997 the $600,000 note payable issued to a related party in
connection with the purchase of 822,000 shares of Hamilton McGregor
International, Inc. ("Hamilton") was canceled. The Company recorded the gain
from debt cancellation in the amount of $503,760 as a goodwill writedown. The
asset of goodwill was determined to be impaired because of the current financial
condition of Hamilton and its inability to generate future operating income
without substantial sales volume increases which are uncertain. Furthermore,
anticipated future cash flows of Hamilton indicate that the recoverability of
the asset is not reasonably assured.
On March 3, 1998, the Company restructured the promissory note payable for
the acquisition of Prime Contracting Corp. to a related party as follows:
$200,000 in cash, payable ver 36 months, plus interest calculated at prime plus
one percent (1%) and a 36 month option to purchase 250,000 shares of related
party stock at $0.05. The Company recorded a gain from note payable
restructuring in the amount of $772,650.
In July 1998, the Company agreed to accept the immediate payment of $225,000
to satisfy the note receivable from the sale of Open MRI (see Note 3). The
settlement resulted in a loss of $255,979.
NOTE 5--RESTRICTED CASH.
Restricted cash consists of two certificates of deposit in the aggregate
principal sum of $700,000, and $707,073 at September 30, 1998 and 1997. The
first certificate, in the principal sum of $400,000, has been pledged as
collateral to secure the Company's revolving line of credit with a bank (See
Note 9). The second certificate in the principal sum of $300,000, has been
pledged as collateral to secure a standby letter of credit for the benefit of
DVI Financial Services, Inc. (See Note 14(e)).
F-12
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 6--EQUIPMENT
Furniture, fixtures, equipment and leasehold improvements consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Buildings......................................................... $ -- $ 680,000
Equipment......................................................... 1,742,630 5,158,510
Furniture and fixtures............................................ 86,002 337,190
Leasehold improvements............................................ 53,588 184,588
Computer equipment................................................ 119,021 106,330
Vehicles.......................................................... 142,357 186,209
------------ ------------
2,143,598 6,652,827
Less: Accumulated depreciation and amortization................... 595,415 817,071
------------ ------------
$ 1,548,863 $ 5,835,756
------------ ------------
------------ ------------
</TABLE>
NOTE 7--INVESTMENT IN A LIMITED PARTNERSHIP.
The Company has a one percent (1%) ownership in Union Diagnostic Facilities
Group, L.P. the investment is recorded on the equity method since the Company is
the only general partner. The Company's duties include contract negotiations,
site selection, equipment procurement, construction, office personnel and
physician staffing, office management and marketing. The Company records its
income from the limited partnership monthly.
Effective January 1, 1995, the limited partnership changes its reporting
period from December 31 to September 30, for financial statement purposes. The
following is a summary of condensed financial data
F-13
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 7--INVESTMENT IN A LIMITED PARTNERSHIP. (CONTINUED)
from the audited financial statements of the limited partnership in which the
Company has an investment at September 30, 1998, 1997,1996 and 1995 and December
31, 1994.
<TABLE>
<CAPTION>
TOTAL LONG-TERM TOTAL TOTAL
ASSETS DEBT LIABILITIES CAPITAL
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
09/30/98..................................................... $ 1,047,097 $ 104,786 $ 1,000,586 $ 46,511
09/30/97..................................................... 1,173,998 122,857 881,091 272,907
09/30/96..................................................... 821,822 102,702 402,117 419,704
09/30/95..................................................... 703,809 56,175 251,117 452,692
12/31/94..................................................... 629,545 69,004 240,138 389,407
</TABLE>
<TABLE>
<CAPTION>
ASSETS LIABILITIES
---------------------- ----------------------
<S> <C> <C> <C> <C>
NON- NON-
CURRENT CURRENT CURRENT CURRENT
---------- ---------- ---------- ----------
09/30/98......................................................... $ 547,937 $ 499,160 $ 895,800 $ 104,786
09/30/97......................................................... 648,785 525,213 758,234 122,857
09/30/96......................................................... 454,465 367,356 299,415 102,702
09/30/95......................................................... 445,849 257,960 194,942 56,175
12/31/94......................................................... 405,566 223,979 171,134 69,004
</TABLE>
<TABLE>
<CAPTION>
NET ALLOCATION
NET INCOME OF INCOME
REVENUES (LOSS) (LOSS)
------------ ----------- -----------
<S> <C> <C> <C>
09/30/98................................................................... $ 1,629,129 ($ 246,396) ($ 2,469)
09/30/97................................................................... 1,637,445 (87,047) ($ 870)
09/30/96................................................................... 1,642,128 13,637 135
09/30/95................................................................... 1,243,165 169,285 1,693
12/31/94................................................................... 1,648,846 249,495 2,495
</TABLE>
Gross profit and income from continuing operations does not differ from net
income. The partnership has no redeemable securities or minority interest.
NOTE 8--LINE OF CREDIT.
The Company established a revolving line of credit with a bank to borrow up
to $400,000, with interest charged on a monthly basis at the bank's prime rate
plus 1%. The line is collateralized by a certificate of deposit (see Note 5). As
of September 30, 1998 and 1997, amounts outstanding under this facility totaled
$400,000 and $397,000, respectively.
F-14
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 9--NOTES PAYABLE.
Notes payable consist of the following:
<TABLE>
<S> <C>
Capital lease obligations for the
acquisition of equipment........... 2,013,302
Less: Current maturities............. 752,252
-----------
$ 1,261,050
-----------
-----------
</TABLE>
The annual principal maturities under these notes are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
-------------------------
<S> <C>
1999............................................................................ $ 752,252
2000............................................................................ 469,074
2001............................................................................ 352,787
2002............................................................................ 273,893
2003............................................................................ 142,903
2004............................................................................ 22,393
------------
$ 2,013,302
------------
------------
</TABLE>
F-15
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 10-- NOTES PAYABLE--RELATED PARTIES.
Notes payable--related parties consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
<S> <C> <C>
1998 1997
---------- ------------
A $225,000 note issued in connection with the purchase of Empire State Imaging
Associates, Inc., payable in 9 monthly installments of $25,000 plus 1% interest on the
unpaid balance........................................................................ $ -- $ 100,000
A $600,000 note issued in connection with the purchase of Northern New Jersey Medical
Management, Inc. payable in 4 annual installments of $150,000, which bears interest at
prime plus 1% per month. This note is presently in default. Management is currently
engaged in negotiations to restructure payment terms.................................. 290,000 300,000
A $600,000 note issued in connection with the purchase of Hamilton McGregor
International, Inc., payable without interest payable in 4 annual installments of
$150,000, discounted to its present value using an assumed interest rate of 11%. See
Note 4................................................................................ -- 503,760
A $1,000,000 note issued in connection with the purchase of Prime Contracting Corp.,
restructured to $200,000, payable over 36 months, bearing interest at prime plus 1%.
See Note 4............................................................................ 163,889 1,000,000
A $113,181 loan advanced from a stockholder, payable on demand bearing interest at 9.5%
per annum............................................................................. 93,588 99,955
A $200,000 note issued for working capital, payable over 20 months, bearing interest at
14.5% per annum....................................................................... 101,000 --
A $10,000 note issued for working capital, payable on demand, bearing interest at 14.5%
per annum............................................................................. 10,000 --
---------- ------------
$ 658,477 $ 2,003,715
---------- ------------
---------- ------------
</TABLE>
The annual principal maturities under these notes are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
-------------
<S> <C>
1999 $ 566,810
2000 91,667
----------
$ 658,477
----------
----------
</TABLE>
F-16
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 11-- INCOME TAXES.
The Company does not report income, for income tax reporting purposes, on
the accrual basis. As a result of the adoption of SFAS 109, the Company has
recorded deferred income taxes payable at September 30, 1998 and 1997 of $94,834
and $61,605, respectively, and has recorded deferred income tax assets at
September 30, 1998 and 1997 of $238,845 and $5,650, respectively, which
represent temporary differences arising primarily from recognition of income on
the cash receipts and cash disbursements basis of accounting for income tax
reporting purposes at the statutory rates of 34% for federal income tax purposes
and 6% for state income tax purposes, which are expected to be realized in
future years.
The Company has recorded total income tax benefit (provision) for the years
ended September 30, 1998, 1997 and 1996 of $199,996, ($320,932) and $217,724,
respectively. The Company has a net operating loss (NOL) carryforward for
federal income tax purposes of approximately $1,202,228 and $1,340,000 at
September 30, 1998 and 1997, respectively, available to offset income taxes in
future years through the year ended September 30, 2013.
The following is a reconciliation of the U.S. federal statutory tax rate and
the apparent tax rate:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
U.S. federal tax.............................................................. (34.00%) (34.00%) (34.00%)
State taxes, net of federal tax benefit....................................... (6.00%) (6.00%) (6.00%)
Benefit from net operating loss (NOL) carryforward............................ -- --
Valuation allowance........................................................... 23.67% 63.96% 20.88%
Other......................................................................... -- -- 0.51%
--------- --------- ---------
Apparent tax rate............................................................. (16.33%) 23.96% (18.61%)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 11-- INCOME TAXES. (CONTINUED)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at September 30, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX
GROSS -----------------------
AMOUNT ASSETS LIABILITIES
------------ ---------- -----------
<S> <C> <C> <C>
1998:
Accounts receivable......................................................... $ 109,310 $ -- $ 44,653
Accumulated depreciation.................................................... 103,575 -- 49,152
Investment in a limited partnership......................................... 2,519 -- 1,029
Accounts payable and accrued expenses....................................... 8,728 3,565 --
Net operating loss carryforwards............................................ 1,202,228 480,891 --
------------ ---------- -----------
Sub-total................................................................... 484,456 94,834
Valuation allowance......................................................... 245,611 --
------------ ---------- -----------
Deferred tax assets and liabilities......................................... $ 238,845 $ 94,834
------------ ---------- -----------
------------ ---------- -----------
1997:
Accounts receivable......................................................... $ 129,822 $ -- $ 53,032
Accumulated depreciation.................................................... 17,635 -- 7,204
Investment in a limited partnership......................................... 3,351 -- 1,369
Accounts payable and accrued expenses....................................... 13,831 5,650 --
Net operating loss carryforwards............................................ 1,340,000 536,000 --
------------ ---------- -----------
Sub-total................................................................... 541,650 61,605
Valuation allowances........................................................ 536,000 --
------------ ---------- -----------
Deferred tax assets and liabilities......................................... $ 5,650 $ 61,605
------------ ---------- -----------
------------ ---------- -----------
</TABLE>
NOTE 12-- STOCKHOLDERS' EQUITY
(a) Private Placement Offering:
In August 1994, the Board of Directors of the Company passed a resolution
authorizing the management of the Company to initiate steps to make a private
placement of the Company's securities in order to raise capital. On December 22,
1994, the Company's common stock was split 4-for-1. The effect of the split is
being reflected retroactively. In December of 1994, the Company completed an
offering of its
F-18
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 12-- STOCKHOLDERS' EQUITY (CONTINUED)
securities under an exemption pursuant to Regulation D--Rules Governing the
Limited Offer and Sale of Securities Without Registration Under the Securities
Act of 1933. The $800,000 offering was to include the sale of 400000 shares
(after giving effect to the 4-for-1 stock split). The offering closed on
December 15, 1994, with the sale of 350,000 (shares after giving effect to the
4-for-1 stock split on December 22, 1994) of the Company's $0.0001 par value
voting common stock at the offering price of $2.00 per share (after giving
effect to toe 4-for-1 stock split) that raised an aggregate of $615,995, net of
expenses of $84,005, for the Company.
(b) Initial Public Offering:
In December 1994, the Board of Directors of the Company passed a resolution
authorizing the management of the Company to initiate steps to make an initial
public offering (IPO) of the Company's securities in order to raise capital.
Management was granted authority to file a registration statement (on Form S-1)
with the United States Securities and exchange Commission (SEC) pursuant to the
Securities Act of 1933 (as amended) and to register the securities in any state
jurisdiction that management felt was required and appropriate. The initial
public offering called for the Company to offer up to 850,000 shares (977,500
shares if the underwriter's over-allotment is exercised) of common stock (the
"Common Stock") at $5.50 per share, 850,000 (977,500, if the underwriter's
over-allotment is exercised) Class A Redeemable Common Stock Purchase Warrants
(the "A Warrants") at $0.10 per warrant and 850,000 (977,500 shares if the
underwriter's over-allotment is exercised) Class B Redeemable Common Stock
Purchase Warrants (the "B Warrants") at $0.10 per warrant. Each A Warrant
entitles the holder to purchase one (1) share of common Stock for a period of
eighteen (18) months from the effective date of the offering at a price of
$5.50. Each B Warrant entitles the holder to purchase one (1) share of common
Stock for a period of thirty-six (36) months from the effective date of the
offering at a price of $7.00. The offering was declared effective by the United
States Securities and Exchange Commission on July 21, 1995, and closed on July
27, 1995 with the sale of 977,500 B Warrants, and raised an aggregate of
$4,205,899, net of expenses of $1,365,851, for the Company.
NOTE 13-RELATED PARTY TRANSACTIONS.
Operating Expenses:
The Company maintains an office at 95 Madison Avenue, Suite 301, Morristown,
New Jersey. Expenses incurred in the operation of the Company's office facility
including rent, telephone and office expenses are allocated to numerous
businesses which share the facility. The allocations are based on usage and
revenues. Management believes that the allocations are reasonable and proper.
The expenses for the years ended September 30, 1998, 1997, and 1996 aggregated
$65,132, $75,550, and $63,560, respectively. During the year ended September 30,
1996, the Company paid $60,000 for consulting services to an affiliated company.
Furthermore, during the years ended September 30, 1998 and 1997, the Company
acquired software from another related party at an approximate cost of $30,000
and $35,000, respectively.
The Company entered into an agreement with an affiliated company to provide
marketing services to the Company. For the year ended September 30, 1996,
compensation for services totaled approximately $50,000.
F-19
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 14-COMMITMENTS AND CONTINGENCIES.
(a) Letter of Intent and Underwriters Agreement:
Pursuant to a signed letter of intent with Landmark Commodities, Inc. d/b/a
Landmark International Equities ("Landmark"), the Company has successfully
completed the sale of its securities in an initial public offering (IPO) (See
Note 15). In addition, the Company has agreed to sell Landmark an option to
purchase 977,500 shares of Common Stock including the underwriter's
over-allotment, 977,500 A Warrants including the underwriter's over-allotment,
and 977,500 B Warrants including the underwriter's over-allotment for a period
of four (4) years at one-hundred and twenty percent (120%) of the offering price
of $6.60, $0.12 and $0.12, respectively. In January 1995, the Company paid
Landmark $50,000, in advance, for financial consulting services. The services
are for the period from February 1, 1995 to January 31, 1996.
(b) Employment Agreement:
In June 1997, the Company entered into an employment agreement with Wayne P.
Miller which provides for a five year term of employment, commencing in June
1997 at a salary of $85,000 for each year. The agreement provides that Mr.
Miller is to receive an amount equal to three times his annual salary if this
contract is cancelled by the Company.
(c) Lease and Management Service Agreements:
In April 1996, RFTR entered into an agreement to lease a 9,000 square foot
facility for five years with a base annual rental cost of $117,000. Included in
the other assets at September 30, 1996 is approximately $19,500 of rental
security deposits.
In July 1996, RFTR entered into a lease and management service agreement
with Surgical associates, P.A. to provide space, equipment and non-professional
services, including management and billing and collection functions to a newly
formed Surgical Center.
On May 30, 1996, the Company entered into a five-year lease and management
Service Agreement with Associates in Otolaryngology of New Jersey, P.A. to
provide management, administrative marketing, operational and related services
to the physicians office in addition to providing the necessary fixtures and
equipment to be utilized in the practice. The Company has also guaranteed the
rental payments on the facility for the term of the management service
agreement. The five year term of this agreement commences with the completion of
the new facility construction.
(d) Year 2000 Compliance:
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-20
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 14-COMMITMENTS AND CONTINGENCIES. (CONTINUED)
(e) Subsequent Events:
In November, 1998, the Company agreed with its lender, DVI Financial
Services, Inc. ("DVI) to settle its remaining liabilities in conjunction with
the disposal of the "Brady" assets and liabilities, as described more fully in
notes 3 and 17. The Company paid DVI the $300,000 certificate of deposit pledged
as collateral for the benefit of DVI (see Note 5). Additionally, the Company
entered into a promissory note to pay the balance of debt in the amount of
$157,409, with interest at the rate of 10% per annum, payable in 48 equal
payments in the amount of $4,027 each, commencing February 1, 1999.
NOTE 15-LITIGATION
In October 1995, Northern New Jersey Medical Management, Inc. the Company's
wholly owned subsidiary, was named as a party in a lawsuit initiated by several
of the limited partners in Union Diagnostic Facilities Group, L.P. The suit
alleges, among other things, breach of fiduciary duty, mismanagement and
negligence. The suit is presently in the discover stage and, therefore, no
determination as to the possible outcome can be made. The Company believes the
suit is without merit and intends to vigorously defend itself.
In April 1997, the Company was named as co-defendant in a lawsuit against
Dr. Luther Brady, his affiliates and associates, his attorneys and an alleged
employee of the Company. The suit, filed by a former associate of Dr. Brady's,
alleges that this individual had certain prior contractual rights to acquire the
assets employed in the operation of the Company's radiation therapy center,
located in Voorhees, New Jersey. The plaintiff seeks unspecified damages against
the Company for alleged fraud, equitable fraud and tortuous interference with
the contract. The Company has denied these allegations in its response.
In June 1997, the Company filed a third-party complaint against various
Brady affiliates and their attorneys, alleging that it has no knowledge of any
pre-existing rights to acquire the assets and that failure to disclose such
rights is a breach of numerous representations and warranties contained in the
asset purchase agreement. The Company seeks contribution and indemnity, damages,
partial recession of the various agreements entered into between the Company and
the Brady affiliates, injunctive relief and the return of certain monies held in
escrow.
On October 28, 1997, $1.5 million of the "escrow" monies were returned by
the attorney defendants to the Company's lender, DVI Financial Services, Inc. In
September and November, 1998 an additional $2 million dollars were returned to
DVI. The attorney defendants' motion to dismiss certain of RF's malpractice
related claims against them was granted in December 1998. Very limited discovery
has taken place to date. It is too early at this time to evaluate any eventual
outcome of this case.
In April, 1998, the Company commenced a lawsuit in New York State Supreme
Court (County of New York) against its former accountants, Weinick Sanders &
Co., LLP, Certified Public Accountants; Weinick Sanders Leventhal & Co., LLP,
Certified Public Accountants; Gregory J. Lavin and Ronald J. Tramazzo ("Weinick
Sanders"). The Company has alleged in its complaint that the defendant, Weinick
Sanders, committed professional negligence, breached its agreement of
engagement, engaged in fraudulent inducement and unjust enrichment. The Company
is suing the defendant, Weinick Sanders in the amount of $750,000 plus punitive
damages. Weinick Sanders has answered and counterclaimed for unjust enrichment
and breach of contract in the amount of $119,000. It is too early at this time
to evaluate any eventual outcome of this case.
F-21
<PAGE>
R.F. MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998, 1997, AND 1996
NOTE 15-LITIGATION (CONTINUED)
In June, 1998, "Hamilton", the Company's 52% owned subsidiary, was named as
defendant in an arbitration filed by Stephen Findlay under the Employment
Arbitration Rules of the American Arbitration Association. The claim alleges
termination of Mr. Findlay without cause and breach of an employment contract.
The plaintiff seeks compensatory and punitive damages, costs and legal fees.
This matter is in the pleading stage. It is too early at this time to estimate
the eventual outcome of this case.
F-22
