UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1997 Commission File Number 0-10248
FONAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 694-2929
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this
report.
Class Outstanding at September 30, 1997
- ----------------------------------------- ---------------------------------
Common Stock, par value $.0001 49,332,447
Class B Common Stock, par value $.0001 5,411
Class C Common Stock, par value $.0001 9,562,824
Class A Preferred Stock, par value $.0001 7,855,627
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1997
(unaudited) and June 30, 1997
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended September 30, 1997 and
September 30, 1996
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended September 30, 1997 and
September 30, 1996
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS September 30, June 30,
1997 1997
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $80,299 $ 5,861
Receivable from litigation award - 77,223
Accounts receivable - net 7,379 6,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 532 819
Inventories 3,108 3,441
Prepaid expenses and other current assets 324 410
------ ------
Total current assets 91,642 93,754
------ ------
Property and equipment - net 7,027 6,068
Advances and notes to affiliates and related parties- net 1,227 1,929
Long-term accounts receivable - net 254 254
Notes receivable - net 51 107
Capitalized software development costs - net 669 772
Other intangible assets - net 3,544 3,569
Other assets 440 238
-------- --------
$104,854 $106,691
======== ========
See accompanying notes to consolidated financial statements (unaudited).
<PAGE> FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED) September 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
(UNAUDITED)
Current Liabilities: ---------- --------
Notes payable $ 424 $ 415
Current maturities of long-term debt and
capital lease obligations 2,243 2,388
Accounts payable 2,701 2,837
Other current liabilities 13,689 13,471
Dividends payable 7,855 7,855
Customer advances 442 764
Billings in excess of costs and estimated
earnings on uncompleted contracts 1 193
Income taxes payable 2,968 100
Deferred income taxes 222 3,072
------ ------
Total current liabilities 30,545 31,095
Deferred income taxes, net of current portion 222 222
Long-term debt and capital lease obligations
less current portion 1,940 1,824
Other non-current liabilities 9 101
------ ------
Total liabilities 32,716 33,242
------ ------
Minority interest 210 204
------ ------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Common Stock $.0001 par value; 60,000,000
shares authorized; 49,332,447 issued and outstanding
at September 30 and 49,133,422 at June 30, 1997 5 5
Class B Common Stock $ .0001 par value; 4,000,000
shares authorized, (10 votes per share), 5,411 issued
and outstanding at September 30 and at June 30, 1997 - -
Class C Common Stock $.0001 par value; 10,000,000 shares
authorized, (25 votes per share), 9,562,824 issued
and outstanding at September 30 and at June 30, 1997 1 1
Class A non-voting Preferred Stock $.0001 par value;
8,000,000 authorized, 7,855,627 issued and outstanding
at September 30 and at June 30, 1997 1 1
Paid-in capital in excess of par value 91,232 90,640
Accumulated deficit (16,257) (13,992)
Notes receivable - stockholders ( 1,837) ( 1,919)
Unearned compensation ( 822) ( 1,096)
Treasury stock - 108,864 shares of common
stock at September 30 and June 30, 1997 ( 395) ( 395)
------- -------
Total stockholders' equity 71,928 73,245
------- -------
Total liabilities and stockholders' equity $104,854 $106,691
======= =======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
REVENUES -------- --------
Product sales - net $ 1,511 $ 1,191
Service and repair fees - net 616 618
Scanning and management fees - net 4,601 2,245
-------- --------
Total Revenues - Net 6,728 4,054
-------- --------
COSTS OF REVENUES:
Product sales 2,174 1,903
Service and repair fees 658 506
Scanning and management fees - net 2,890 1,370
-------- --------
Total Cost of Revenues 5,722 3,779
-------- --------
GROSS PROFIT 1,006 275
EXPENSES
Research and development expenses 1,213 919
Selling, general and administrative expenses 2,389 2,177
Provision for bad debt 273 494
Compensatory element of stock issuances 286 78
Amortization of excess of cost over assets acquired 35 -
-------- --------
Loss From Operations ( 3,190) ( 3,393)
Interest Expense ( 92) ( 69)
Interest Income 1,063 85
Other income-principally gain on litigation awards - 249
------ -------
Loss before provision for taxes and
minority interest ( 2,219) ( 3,128)
Provision for income taxes - -
------- -------
Loss before minority interest ( 2,219) ( 3,128)
Minority interest in net (income) loss
of subsidiary and partnership ( 46) 52
------- -------
NET LOSS $( 2,265) $( 3,076)
======= =======
Net Loss per share $(.04) $(.06)
====== ======
Weighted average number of shares outstanding 60,073 55,138
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
------ ------
Cash Flows from Operating Activities
Net Loss $( 2,265) $( 3,076)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income (loss) 46 ( 52)
Depreciation and amortization 587 465
Provision for losses on accounts and notes
receivable and accounts receivable from affiliates 168 394
Compensatory and fee element of stock issuances 286 78
Stock issued in settlement of current liabilities 280 361
(Increase) decrease in operating assets, net:
Receivable from litigation award 77,223 -
Accounts and notes receivable ( 1,493) ( 274)
Costs and estimated earnings in excess of
billings on uncompleted contracts 286 31
Inventories 333 ( 645)
Prepaid expenses and other current assets 86 182
Other assets ( 202) -
Receivables and advances to affiliates and
related parties 702 156
Increase (decrease) in operating liabilities, net:
Accounts payable and income taxes ( 116) ( 386)
Other current liabilities 219 ( 118)
Customer advances ( 322) ( 75)
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 192) ( 116)
Other liabilities ( 92) 10
------ ------
Net cash provided by (used in) operating activities 75,534 ( 3,065)
------ ------
Cash Flows from Investing Activities:
Purchases of property and equipment - net ( 1,257) ( 83)
Cost of capitalized software development
and patents ( 26) ( 76)
------ ------
Net cash used in investing activities ( 1,283) ( 159)
------ ------
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
------ ------
Cash Flows from Financing Activities:
Distribution to minority interest ( 41) -
Repayment of borrowings and capital
lease obligations ( 154) ( 220)
Proceeds from sale of stock 300 -
Repayment of notes receivable in connection
with shares issued under stock option
and bonus plans - net 82 2,172
------ ------
Net cash provided by financing activities 187 1,952
------ ------
Increase (Decrease) in Cash 74,438 ( 1,272)
Cash at beginning of period 5,861 3,861
------ ------
Cash at end of period $80,299 $ 2,589
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
NOTE 1 - GENERAL
Since its incorporation in 1978, FONAR Corporation and Subsidiaries ("the
Company") has engaged in the research, development, production and marketing
of medical scanning equipment which uses principles of Magnetic Resonance
Imaging ("MRI") for the detection and diagnosis of human diseases. In
addition to deriving revenues from the direct sale of MRI equipment, revenue
is also generated from its installed base of customers through its service
and upgrade programs.
U.S. Health Management Corporation (Physician
---------------------------------------------
Practice Management Business)
-----------------------------
U.S. Health Management Corporation ("HMC") was organized by the Company
in March 1997 as a wholly- owned subsidiary for the purpose of engaging in
the business of providing comprehensive management services to physicians'
practices and other medical providers, including diagnostic imaging centers
and ancillary services. The services provided by the Company include
development, administration, leasing of office space, facilities and medical
provision of supplies, staffing and supervision of non-medical personnel,
accounting, and collection and the development and implementation of
practice growth and marketing strategies. This business is sometimes
referred to as "physician practice management" (PPM").
HMC became actively engaged in the PPM business through two
acquisitions which were consummated effective June 30, 1997. The acquired
companies in both cases were actively engaged in the business of managing
medical providers. With the exception of one multi-specialty practice, all
of the medical providers are diagnostic imaging centers, principally MRI
scanning centers.
The first acquisition was of a group of several interrelated entities
engaged in the business of managing three diagnostic imaging centers and one
multi-speciality practice in New York State. The transaction was effected
through a merger between a wholly-owned subsidiary of HMC and Affordable
Diagnostics, Inc., one of the acquired companies which immediately prior to
the merger had acquired the assets and assumed the liabilities of the other
acquired companies (together, the "Affordable Companies").
The second completed acquisition was of Raymond V. Damadian, M.D. MR
Scanning Centers Management Company ("RVDC"). Pursuant to the terms of the
transaction, HMC purchased all of the issued and outstanding shares of stock
of RVDC from Raymond V. Damadian in exchange for 10,000 shares of the common
stock of FONAR. Raymond V. Damadian, the principal stockholder, President
and Chairman of the Board of FONAR, was the sole stockholder, Director and
President of RVDC immediately prior to the acquisitions. In connection with
the acquisition of RVDC, HMC also acquired Tallahassee Magnetic Resonance
Imaging, P.A. ("TMRI") and First Coast Resonance Imaging, P.A. ("First
Coast"), which also are wholly-owned by Raymond V. Damadian. The business of
RVDC, acquired by HMC, was the management of MRI diagnostic imaging centers
in New York, Florida, Georgia and other locations.
As a result of the above described transactions, HMC has acquired the
business of managing 24 MRI scanning centers. Twenty of the scanning
centers are managed pursuant to management agreements, and four of the
centers are partnerships, with RVDC as the general partner. Effective July
1, 1997, HMC entered into new management agreements with each of the
centers. Pursuant to the management agreements, HMC is providing
comprehensive management services, including administrative services, office
facilities, office equipment, supplies and personnel (except for physicians)
to the centers. Service for the centers' MRI scanning equipment is provided
under the management agreements in these cases. MRI scanning systems are
provided to NOTE 1 -GENERAL (continued) thirteen of the centers pursuant to
scanner leases entered into effective July 1, 1997.
The accompanying unaudited condensed consolidated financial statements
of Fonar Corporation and Subsidiaries ("the Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10Q and Article 10
of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements.
In the opinion of management, all adjustments (consisting of normal
adjusting accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the
fiscal year ended June 30, 1998. The unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto contained in the Company's Annual
Report for the fiscal year ended June 30, 1997.
NOTE 2 - REVENUE RECOGNITION
Revenue on sales contracts for scanners is recognized under the
percentage-of-completion The Company manufactures its scanners under
specific contracts that provide for progress payments. The percentage of
completion is determined by the ratio of costs incurred to date on completed
sub-assemblies to the total estimated cost for each scanner.
Contract costs include material, direct labor and overhead. Provisions
for estimated losses on uncompleted contracts, if any, are made in the
period in which such losses are determined. The asset, "Costs and Estimated
Earnings in Excess of Billings on Uncompleted Contracts", represents
revenues recognized in excess of amounts billed. The liability, "Billings in
Excess of Costs and Estimated Earnings on Uncompleted Contracts", represents
billings in excess of revenues recognized.
Revenue on scanner service contracts are recognized on the
straight-line method over the related contract period, usually one year.
Revenue from sales of other items are recognized upon shipment.
Revenue under management contracts is recognized based upon contractual
agreements for management services rendered by the Company under various
long-term agreements with medical providers (the "PC's"), commencing July 1,
1997. The Company's agreements with the PC's stipulate fees for services
rendered and are primarily calculated on activity based efforts at
pre-determined rates per unit of activity. All fees are re-negotiable at
the anniversary of the agreements and each year thereafter.
NOTE 3 - CASH AND CASH EQUIVALENTS
On September 2, 1992, the Company filed an action against General
Electric Company, ("GE"), Hitachi Ltd. and other defendants for patent
infringements. On July 2, 1997, following the denial of GE's petition for a
rehearing and application for a stay, GE paid the Company $128.7 million.
After deductions of legal costs and expenses the net cash paid to the
Company was $77.2 million. At September 30, 1997 cash and cash equivalents
approximated $80.3 million of which $78.2 million was invested in two mutual
funds. Approximately half of the $78.2 million was invested in a short-term
U.S. treasury fund and the remaining balance was invested in a money market
fund. The funds are managed by an affiliate company of major New York bank.
Accordingly, the Company's cash and cash equivalents exceeded Federal
Depository Insurance Corporation ("FDIC") and Securities Investors
Protection Corporation ("SIPIC") limits by $78.7 million in the aggregate as
of September 30, 1997.
NOTE 4 - INVENTORIES
The components of inventory consist of:
(000's OMITTED)
----------------
September 30, 1997 June 30, 1997
------- -------
Purchased parts
components and supplies $ 2,300 $ 2,534
Work in progress 808 907
------- -------
$ 3,108 $ 3,441
======= =======
NOTE 5 - ACQUISITIONS
Affordable Diagnostics, Inc.
----------------------------
On June 30, 1997, HMC acquired the assets, liabilities and operations
of Affordable Diagnostics, Inc. ("Affordable"), a New York corporation,
which managed and operated three diagnostic imaging centers and managed one
multi-specialty practice in the Bronx, Westchester and New York. The
acquisition was consummated pursuant to a Merger Agreement ("Agreement")
effective June 30, 1997, by and between HMC's wholly-owned subsidiary, HMCM,
Inc. ("HMCM") and Affordable. Pursuant to the agreement, HMCM acquired all
of the assets and liabilities of Affordable in exchange for 1,764,000 shares
of Fonar Common Stock, valued at $3,630,312. The merger was accounted for as
a purchase, under which the purchase price was allocated to the acquired
assets and assumed liabilities based upon fair values at the date of the
merger. The excess of the purchase price over the fair value of the
netassets acquired amounted to approximately $2,796,000 and is being
amortized on a straight-line basis over 20 years. Subject to the centers
achieving certain earning objectives within the next one year, an additional
576,000 shares may be issued to the sellers. These shares have not been
included in the allocated purchase price because of the contingent nature of
the arrangement.
Acquisition of RVDC
-------------------
Effective June 30,1997, FONAR's wholly-owned subsidiary, U.S. Health
Management Corporation ("HMC"),acquired RVDC by purchasing all of the issued
and outstanding shares of RVDC from Dr. Damadian for 10,000 shares of the
common stock of FONAR. In connection with the acquisition of RVDC, HMC also
acquired a center in Tallahassee and Jacksonville, Florida. These
transactions have been accounted for under the pooling of interests method
of accounting. The business acquired include the management of twenty-one
(21) MRI diagnostic centers located in New York, Florida and Georgia.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SEGMENT INFORMATION
The Company operates in two industry segments - manufacturing and the
servicing of medical equipment and management of physician practices,
including diagnostic imaging services.
The following table shows in thousands of dollars net revenues,
operating income and other financial information by industry segment for the
three months ended September 30, 1997 and 1996:
1997 1996
Net revenues: ------- -------
Medical equipment $ 2,127 $ 1,809
Physician practice management 4,601 2,245
------- -------
Total $ 6,728 $ 4,054
======= =======
Income (loss) from operations:
Medical equipment $ (3,887) $ (3,291)
Physician practice management 697 (102)
------- -------
Total $ (3,190) $ (3,393)
======= =======
Identifiable assets:
Medical equipment $ 92,347 47,911
Physician practice management 12,507 6,115
------- -------
Total $ 104,854 $ 54,026
======= =======
Depreciation and amortization:
Medical equipment $ 311 $ 399
Physician practice management 276 66
------- -------
Total $ 587 $ 465
======= =======
Capital expenditures:
Medical equipment $ 435 $ 134
Physician practice management 848 25
------- -------
Total $ 1,283 $ 159
======= =======
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the fiscal quarter ended September 30, 1997 (first quarter
of fiscal 1998), the Company reported a net loss of $2.3 million on revenues
of $6.7 million as compared to a net loss of $3.1 million on revenues of
$4.1 million for the first quarter of fiscal 1997.
The Company operates in two industry segments: the
manufacture and servicing of medical (MRI) equipment, the Company's
traditional business which is conducted directly by Fonar and physician
practice management, a new line of business for the Company, which is
conducted through Fonar's wholly-owned subsidiary, U.S. Health Management
Corporation ("HMC").
HMC income from operations was approximately $697,000 for the
first quarter of fiscal 1998 compared to an operating loss of $102,000 for
the first quarter of fiscal 1997. The results for fiscal 1998 reflected the
profitability of HMC's two acquisitions, Affordable Diagnostics, Inc. and
its related companies ("Affordable") and Raymond V. Damadian, M.D. MR
Scanning Centers Management Company and two related Florida companies
("RVDC"). Affordable was engaged in the business of providing management
services, office space, equipment and non-medical personnel to three
diagnostic imaging centers and one physical rehabilitation center. RVDC was
engaged in the business of providing management and other services to 21
diagnostic imaging centers. Following the acquisition of RVDC, HMC
increased the level of services rendered and the management fees charged to
the imaging centers formerly managed by RVDC and integrated the operations
of the acquired entities; HMC now provides centralized management,
administrative, billing and other services to the various facilities from
HMC's headquarters in Melville, New York.
The income from operations attributable to HMC (physician
practice management) was not sufficient to offset the operating loss from
the Company's traditional MRI equipment manufacturing and service business
($3.9 million for the first quarter of fiscal 1998 as compared to $3.3
million for fiscal 1997). Accordingly the Company's consolidated operating
loss was $3.2 million for the first quarter of fiscal 1998 as compared to an
operating loss of $3.4 million for the first quarter of fiscal 1997.
The Company's operating loss was offset in part, however, by
interest income of approximately $1.1 million (as compared to interest
income of $85,000 for the first quarter of fiscal 1997). Interest income
was derived from the interest earned on the Company's cash deposits and cash
equivalents, which were approximately $80.3 million as at September 30,
1997. These amounts include the net proceeds of $77.2 million received by
the Company in July 1997 from its patent lawsuit against General Electric
Company. Approximately $78.2 million as of September 30, 1997 was held in
mutual funds divided evenly between a cash management money market account
(bank obligations and commercial paper) and a U.S. Treasury securities money
market fund (United States Treasury securities).
The principal reason for the Company's operating losses is low
product sales volumes. Sales revenues attributable to the Company's medical
(MRI) equipment business (sales and service) were an improved but still low
$2.1 million for the first quarter of fiscal 1998 as compared to $1.8
million for the first quarter of fiscal 1997 (against costs of revenues
attributable to the Company's medical equipment business of $2.8 million for
the first quarter of fiscal 1998 and $2.4 million for the first quarter of
fiscal 1997). The increased operating losses for the Company's medical
equipment business in the first quarter of fiscal 1998 ($3.9 million
operating loss) over the first quarter of fiscal 1997 ($3.3 million
operating loss) was attributable primarily to increases of approximately
$300,000 in research and development expenditures and $200,000 in selling,
general and administrative expenses. The Company's efforts to improve
equipment sales volume is focused on research and development (expenditures
of $1.2 million for the first quarter of fiscal 1998 as compared to $919,000
for the first quarter of fiscal 1997) to improve the competitiveness of its
products and increasing marketing and sales efforts.
The Company's QUAD(TM) 7000 and QUAD(TM) 12000 MRI scanners,
together with other research and development projects, are intended to
significantly improve the Company's competitive position. Having received
FDA approval for its QUAD 7000 and QUAD 12000 scanners, the Company is
aggressively marketing its products. The QUAD scanners are highly
competitive and totally new non-claustrophobic scanners not previously
available in the MRI market. At .6 Tesla field strength, the QUAD 12000
magnet is the highest field "Open MRI" in the industry, offering non-
claustrophobic MRI together with high-field image quality for the first
time.
In November, 1996, the Company concluded an agreement with a
chain of medical distributors having a large national sales force. The
Company is negotiating an extension of this contract.
As part of its marketing program, the Company will also attend
the industry's annual trade show, RSNA (Radiological Society of North
America) in November 1997. The Company believes that it is uniquely
positioned to take advantage of the rapidly expanding "Open MRI" market, as
the manufacturer of the only high-field "Open MRI" in the industry.
The Company expects marked demand for its high-field "Open
MRI" scanners since image quality increases as a direct proportion to
magnetic field strength. In addition, the Company's new scanners provide
improved image quality and high speed imaging at costs that are
significantly less than the competition and more in keeping with the medical
cost reduction demands being made by our national leaders on behalf of the
public.
It should be noted that the comparative figures in the
Company's Consolidated Statements of Operations for the first quarter of
fiscal 1997 include the results of operations of RVDC but do not include the
results of operations for Affordable. The Company's Consolidated Statements
of Operations for the first quarter of fiscal 1998 include the results of
operations of both, as a result of the consummation of the acquisitions by
HMC of Affordable and RVDC.
With respect to the revenues attributable to the Company's
physician practice management business, the difference between the $4.6
million in revenues for the first quarter of fiscal 1998 and $2.2 million in
revenues for the first quarter of fiscal 1997 reflects approximately $1.3
million in revenues attributable to Affordable and approximately $1.1
million in revenues attributable to increased management fees charged by HMC
to facilities formerly managed by RVDC. The difference between cost of
revenues for the Company's physician practice management business of $2.9
million for the first quarter of fiscal 1998 and $1.4 million for the first
quarter of fiscal 1997 is attributable to Affordable's costs of revenues of
approximately $700,000 and additional costs of approximately $800,000
incurred to provide increased levels of service to facilities formerly
managed by RVDC. Overall, the improvement in the results of operations of
the Company's physician practice management business, from an operating loss
of $102,000 in the first quarter of fiscal 1997 to operating income of
$697,000 in the first quarter of fiscal 1998 is attributable to Affordable's
operating income of approximately $110,000 and an increase of approximately
$690,000 in the operating profitability of the business acquired from RVDC.
The Company has continued its cost containment programs, which
include increasing the portion of manufacturing conducted on the Company's
premises. This has enabled the Company to achieve significantly lower
manufacturing costs than would have otherwise been experienced in the
production of its QUAD scanners. This has enabled the Company to pass on to
customers a much needed reduction in the sales price of MRI scanners.
The Company has continued its efforts to increase scanner
sales in foreign countries as well as domestically. Revenues from foreign
product sales were $696,371 (approximately 46% of product sales revenues and
10% of all revenues) for the first quarter of fiscal 1998, against costs of
revenues for such sales of $939,785 (approximately 43% of costs of revenues
for product sales and 16% of all costs of revenues). This compares to
$239,779 in foreign product sales revenues in the first quarter of fiscal
1997 (approximately 20% of product sales revenues and 5.9% of all revenues)
against $401,658 in costs of foreign product sales revenues (approximately
21% of costs of revenues for product sales and 10.6% of all costs of
revenues) for the first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's liquidity and capital
resources positions changed from its June 30, 1997 position as follows:
September 30, June 30,
1997 1997 Change
____________ ____________ __________
Working capital
surplus $61,097,000 $62,659,000 ($1,562,000)
The decrease in working capital since June 30, 1997 was
attributable to the Company's losses in the first quarter of fiscal 1997.
Total liabilities were decreased slightly since June 30, 1997
by approximately $526,000 to approximately $32.7 million at September 30,
1997.
Since June 1989, a principal objective of the Company has been
to reduce and ultimately eliminate its debt. Since the inception of the
plan, interest bearing debt was reduced from $23.1 million in fiscal 1989 to
$4.6 million as of September 30, 1997.
As of September 30, 1997, the Company had no unused credit
facilities with banks or financial institutions.
The Company's business plan currently includes an aggressive
program for manufacturing and selling its new line of QUAD scanners and
expanding its new physician practice management business.
The Company believes that it has sufficient cash resources to
support of its operations. The mutual funds at September 30, 1997 are
liquid and readily available. In addition, $2.1 million was on deposit in
bank accounts at September 30, 1997.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
In February, 1997, the United States Court of Appeals for the Federal
Circuit affirmed the judgment of the United States District Court for the
Eastern District of New York in Fonar's favor against General Electric
Company (Fonar Corporation and Dr. Raymond V. Damadian v. General Electric
Company et ano., 96-1075, -1106, -1091) for $62 million (plus interest) for
infringement of its Multi-Angle Oblique imaging patent (MAO), U.S. Patent
No. 4,871,966. In addition, the Court of Appeals reinstated the jury
verdict finding infringement of Fonar's original MRI patent, U.S. patent No.
3,789,832 and awarding Fonar $35 million in damages for infringement of that
patent.
On May 8, 1997, the Court of Appeals denied General Electric Company's
petition for a rehearing with the suggestion that the rehearing be held en
banc (by all the judges).
On October 6, 1997, the United States Supreme Court denied General
Electric Company's petition for a writ of certiorari.
Previously, in July 1997, General Electric Company had paid Fonar the
sum of $128.7 million on account of the judgments and interest. Of that
sum, the net amount to Fonar after deduction of attorneys' fees and expenses
was $77.2 million.
In January 1997, the Court of Appeals for the Second Circuit reinstated
Fonar's copyright infringement and unfair competition claims against
Magnetic Resonance Plus in the case of Fonar Corporation v. Magnetic
Resonance Plus Inc., 93 CIV 2220 (CBM). Subsequently, in March 1997, the
District Court for the Southern District of New York set aside the $2.3
million judgment rendered against Fonar on Magnetic Resonance Plus'
counterclaims. A trial on the Company's copyright infringement and unfair
competition claims and retrial on Magnetic Resonance Plus' counterclaims for
"economic interference" (the anti-trust counterclaims and interference with
contract counterclaims have been dismissed) is presently scheduled for
January, 1998.
There were no other material changes in litigation for the first quarter
of fiscal 1998 from that described in Form 10-K for the fiscal year ended
June 30, 1997.
Item 2 - Changes in Securities: None
Item 3 - Defaults Upon Senior Securities: None
Item 4 - Submission of Matters to a Vote of Security Holders: None
Item 5 - Other Information: None
Item 6 - Exhibits and Reports on Form 8-K:
(1) Form 8-K filed on July 14, 1997 for acquisition of
Affordable. Financial Statements for Affordable filed by
Amendment on September 15, 1997.
(2) Form 8-K filed on August 15, 1997 for acquisition of
RVDC. Separate Financial Statements for RVDC not
required because the consolidated financial statements of
the Company contained in its Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 included the
operating results of RVDC.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FONAR CORPORATION
(Registrant)
By: /s/ Raymond V. Damadian
Raymond V. Damadian
President & Chairman
Dated: November 26, 1997
