UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED DECEMBER 31, 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
------------------
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 December 31, 1997
- -------------------------------- ---------------------------------------
Common Stock, par value $.0001 49,915,377
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 - December 31, 1997
and June 30, 1997
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 1997 and
December 31, 1996
Condensed Consolidated Statements of Operations for
the Six Months Ended December 31, 1997 and
December 31, 1996
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1997 and
December 31, 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 December 31, June 30,
1997 1997
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $75,026 $ 5,861
Receivable from litigation award - 77,223
Accounts receivable - net 8,386 6,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 797 819
Inventories 3,569 3,441
Prepaid expenses and other current assets 228 410
------ ------
Total current assets 88,006 93,754
------ ------
Property and equipment - net 7,273 6,068
Advances and notes to affiliates and related parties- net 1,174 1,929
Long-term accounts receivable - net 254 254
Notes receivable - net 43 107
Capitalized software development costs - net 567 772
Other intangible assets - net 3,520 3,569
Other assets 525 238
-------- --------
$101,362 $106,691
======== ========
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
December 31, 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 1,662 2,388
Accounts payable 1,744 2,837
Other current liabilities 11,912 13,471
Dividends payable 7,855 7,855
Customer advances 357 764
Billings in excess of costs and estimated
earnings on uncompleted contracts 92 193
Income taxes payable 2,950 100
Deferred income taxes 222 3,072
------ ------
Total current liabilities 27,218 31,095
Deferred income taxes, net of current portion 222 222
Long-term debt and capital lease obligations
less current portion 2,189 1,824
Other non-current liabilities - 101
------ ------
Total liabilities 29,629 33,242
------ ------
Minority interest 127 204
------ ------
Commitments and contingencies - -
<PAGE>
STOCKHOLDERS' EQUITY
Common Stock $.0001 par value; 60,000,000
shares authorized; 49,915,377 issued and outstanding
at December 31 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 December 31 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 December 31 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 December 31 and at June 30, 1997 1 1
Paid-in capital in excess of par value 92,990 90,640
Accumulated deficit (18,313) (13,992)
Notes receivable - stockholders ( 2,135) ( 1,919)
Unearned compensation ( 548) ( 1,096)
Treasury stock - 108,864 shares of common
stock at December 31 and June 30, 1997 ( 395) ( 395)
------- -------
Total stockholders' equity 71,606 73,245
------- -------
Total liabilities and stockholders' equity $101,362 $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
DECEMBER 31,
---------------------
1997 1996
REVENUES -------- --------
Product sales - net $ 1,028 $ 1,436
Service and repair fees - net 777 671
Scanning and management fees - net 5,030 2,445
-------- --------
Total Revenues - Net 6,835 4,552
-------- --------
COSTS AND EXPENSES:
Cost of product sales 1,495 2,153
Cost of service and repair fees 763 551
Cost of scanning and management fees - net 3,057 1,587
Research and development expenses 1,455 950
Selling, general and administrative expenses 2,926 3,699
Provision for bad debt 173 466
Compensatory element of stock issuances 274 109
Amortization of excess of cost over assets acquired 35 -
------- -------
Total Costs and Expenses 10,178 9,515
-------- --------
Loss From Operations ( 3,343) ( 4,963)
Interest Expense ( 83) ( 81)
Interest Income 1,031 100
Other income-principally gain on litigation awards 327 9,401
------ -------
Income (loss) before provision for taxes and
minority interest ( 2,068) 4,457
Provision for income taxes - -
------- -------
Income (loss) before minority interest ( 2,068) 4,457
Minority interest in net (income) loss
of subsidiary and partnership 11 46
------- -------
NET INCOME (LOSS) $( 2,057) $ 4,503
======= =======
Net Income (Loss) per share $(.03) $ .08
====== ======
Weighted average number of shares outstanding 60,573 56,116
====== ======
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 SIX MONTHS ENDED
DECEMBER 31,
---------------------
1997 1996
REVENUES -------- --------
Product sales - net $ 2,540 $ 2,627
Service and repair fees - net 1,393 1,289
Scanning and management fees - net 9,631 4,690
-------- --------
Total Revenues - Net 13,564 8,606
-------- --------
COSTS AND EXPENSES:
Cost of product sales 3,669 4,056
Cost of service and repair fees 1,421 1,057
Cost of scanning and management fees - net 5,948 2,957
Research and development expenses 2,667 1,869
Selling, general and administrative expenses 5,317 5,876
Provision for bad debt 446 960
Compensatory element of stock issuances 560 187
Amortization of excess of cost over assets acquired 70 -
-------- --------
Total Costs and Expenses 20,098 16,962
-------- --------
Loss From Operations ( 6,534) ( 8,356)
Interest Expense ( 174) ( 150)
Interest Income 2,094 185
Other income-principally gain on litigation awards 327 9,650
------ -------
Income (loss) before provision for taxes and
minority interest ( 4,287) 1,329
Provision for income taxes - -
------- -------
Income (loss) before minority interest ( 4,287) 1,329
Minority interest in net (income) loss
of subsidiary and partnership ( 34) 98
------- -------
NET INCOME (LOSS) $( 4,321) $ 1,427
======= =======
Net Income (Loss) per share $(.07) $ .03
====== ======
Weighted average number of shares outstanding 60,573 56,116
====== ======
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 SIX MONTHS ENDED
DECEMBER 31,
-----------------
1997 1996
------ ------
Cash Flows from Operating Activities
Net Income (Loss) $( 4,321) $ 1,427
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income (loss) 34 ( 98)
Depreciation and amortization 1,232 930
Provision for losses on accounts and notes
receivable and accounts receivable from affiliates 446 960
Compensatory and fee element of stock issuances 560 187
Stock issued in settlement of current liabilities 572 693
(Increase) decrease in operating assets, net:
Receivable from litigation award 77,223 -
Accounts and notes receivable ( 2,768) ( 945)
Costs and estimated earnings in excess of
billings on uncompleted contracts 22 ( 211)
Inventories ( 128) ( 963)
Prepaid expenses and other current assets 182 608
Other assets ( 287) ( 165)
Receivables and advances to affiliates and
related parties 755 312
Increase (decrease) in operating liabilities, net:
Accounts payable and income taxes ( 1,094) 11
Other current liabilities ( 462) ( 771)
Customer advances ( 407) -
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 101) 17
Other liabilities ( 101) ( 20)
------ ------
Net cash provided by (used in) operating activities 71,357 1,972
------ ------
Cash Flows from Investing Activities:
Purchases of property and equipment - net ( 2,128) ( 180)
Cost of capitalized software development
and patents ( 53) ( 317)
------ ------
Net cash used in investing activities ( 2,181) ( 497)
------ ------
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 SIX MONTHS ENDED
DECEMBER 31,
-----------------
1997 1996
------ ------
Cash Flows from Financing Activities:
Distribution to minority interest ( 113) -
Repayment of borrowings and capital
lease obligations ( 352) ( 514)
Repayment of notes receivable in connection
with shares issued under stock option
and bonus plans - net 454 4,902
------ ------
Net cash provided by (used in) financing activities ( 11) 4,388
------ ------
Increase (Decrease) in Cash 69,165 5,863
Cash at beginning of period 5,861 3,861
------ ------
Cash at end of period $75,026 $ 9,724
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
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 medial
equipment, provision of supplies, staffing and supervision of non-medical
personnel, accounting, billing 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 Magnetic 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 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 six months ended December 31, 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 method. 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 December 31, 1997 cash and cash equivalents approximated
$75 million of which $73.6 million was invested in two mutual funds.
Approximately half of the $73.6 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 $74.6 million in the aggregate as
of December 31, 1997.
<PAGE>
NOTE 4 - INVENTORIES
The components of inventory consist of:
(000's OMITTED)
----------------
December 31, 1997 June 30, 1997
------- -------
Purchased parts
components and supplies $ 2,628 $ 2,534
Work in progress 941 907
------- -------
$ 3,569 $ 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 net
assets 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.
Raymond V. Damadian M.D. MR Scanning Centers
Management Company
-------------------
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.
Central Health Care Management Service, LLC
-------------------------------------------
On January 23, 1998, a wholly-owned subsidiary of HMC acquired the business
and assets of Central Health Care Management Services, LLC, a management
service organization "MSO" operating in the Bronx and Queens, New York. The
purchase price is to be determined in the future based on a multiple of the
net positive cash flow from the acquired business over the succeeding twelve
month period. The purchase price, when determined, is payable 1/3 in cash
or marketable securities, 1/3 in notes and 1/3 in shares of common stock of
Fonar or HMC. An advance of $50,000 was remitted to the seller at the
closing date. Based on current financial data, the purchase price is
expected to range from $660,000 to $1,100,000.
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 six
months ended December 31, 1997 and 1996:
1997 1996
Net revenues: ------- -------
Medical equipment $ 3,933 $ 3,916
Physician practice management 9,631 4,690
------- -------
Total $ 13,564 $ 8,606
======= =======
Income (loss) from operations:
Medical equipment $ (7,934) $ (8,079)
Physician practice management 1,400 ( 277)
------- -------
Total $ (6,534) $ (8,356)
======= =======
Depreciation and amortization:
Medical equipment $ 666 $ 794
Physician practice management 566 136
------- -------
Total $ 1,232 $ 930
======= =======
Capital expenditures:
Medical equipment $ 1,186 $ 445
Physician practice management 995 52
------- -------
Total $ 2,181 $ 497
======= =======
December 31, June 30,
1997 1997
----------- --------
Identifiable assets:
Medical equipment $ 87,564 $ 96,624
Physician practice management 13,798 10,067
------- -------
Total $ 101,362 $106,691
======= =======
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the six month period ended December 31, 1998, the Company
reported a net loss of $4.3 million on revenues of $13.6 million as compared
to a gain of $1.4 million on revenues of $8.6 million for the six month
period ended December 31, 1997. The gain in fiscal 1997 was attributable
principally to proceeds received from the settlement of one of the Company's
patent lawsuits. Results of operations improved in fiscal 1998, from an
operating loss of $8.4 million for the six month period ended December 31,
1997 to an operating loss of $6.5 million for the six month period ended
December 31, 1998.
For the fiscal quarter ended December 31, 1997 (second quarter
of fiscal 1998), the Company reported a net loss of $2.1 million on revenues
of $6.8 million as compared to a net gain of $4.5 million (attributable
principally to the settlement of a patent lawsuit) on revenues of $4.6
million for the second quarter of fiscal 1997. Operating results, however,
improved from an operating loss of $4.9 million for the second quarter of
fiscal 1997 to an operating loss of $3.3 million for the second quarter of
fiscal 1998.
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 showed operating income of approximately $1,400,000 for
the first six months of fiscal 1998 compared to operating loss of $277,000
for the first six months of fiscal 1997. This 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
($7.9 million for the first half of fiscal 1998 as compared to $8.0 million
for fiscal 1997). Accordingly the Company's consolidated operating loss was
$6.5 million for the first half of fiscal 1998 as compared to a consolidated
operating loss of $8.4 million for the first quarter of fiscal 1997.
The Company's operating loss was offset in part, however, by
interest income of approximately $2.1 million (as compared to interest
income of $185,000 for the first six months of fiscal 1997). Interest
income was derived from the interest earned on the Company's cash deposits
and cash equivalents, which were approximately $75.0 million as at December
31, 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 $73.6 million as of December 31, 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 approximately $3.9 million
for the first half of both fiscal 1998 and fiscal 1997 (against costs of
revenues attributable to the Company's medical equipment business of
approximately $5.1 million for the first half of both fiscal 1998 and fiscal
1997). The Company's efforts to improve equipment sales volume is focused
on research and development (expenditures of $2.7 million for the first half
of fiscal 1998 as compared to $1.9 million for the first half 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. The QUAD scanners
are 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.
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.
In addition to the QUAD scanners, the Company is completing
the development of two new MRI scanners which are intended to enhance the
Company's competitive position and revenues. At the MRI industry's annual
trade show, RSNA (Radiological Society of North America), in November 1997,
the Company introduced a new model scanner, the OR 360, one of its latest
works-in-progress. Most of the design work for the OR 360 has been
completed and construction of a prototype is approximately 50% complete.
The Company expects to complete development of the OR 360 and apply for FDA
approval by June, 1998. The Company estimates the approval process would
take approximately three months.
The OR 360 has an enlarged room sized magnet. Consequently,
surgical teams may perform conventional surgery on the patient inside the
magnet. Most importantly the surgeon can obtain the MRI image in real time
during surgery to guide him in the surgery. Thus surgical instruments could
be introduced directly into the body and guided to the malignant lesion by
the MRI image. The number of inoperable lesions should be greatly reduced
by the availability of this new capability.
With current cancer treatment methods, therapy must always be
restricted in the doses that can be applied to the malignant tissue because
of the adverse effects on the healthy tissues. The Company expects that
once its new OR 360 product is available, treatment agents may be
administered directly to the malignant tissue through small catheters or
needles. This would allow much larger doses of chemotherapy, x-rays, laser
ablation, microwave, or rf to be applied directly and exclusively to the
malignant tissue with more effective results. The presence of the MRI image
during treatment will help the operator to judge during treatment if the
treatment is being effective.
The Company's other principal work in progress is a breast MRI
scanner. MRI is dramatically superior to the present x-ray technology used
in mammograms. MRI takes advantage of the nuclear resonance signal elicited
from the body's tissues and the exceptional sensitivity of this signal for
detecting disease. Consequently, the MRI image contrasts between healthy
and cancerous soft tissue are high. In x-ray mammography, however, the
x-ray image contrast between cancerous and healthy tissue is poor, making
the detection of breast cancers by the x-ray mammogram less than optimal.
An added benefit of MRI mammography relative to x-ray
mammography is the elimination of the need for the patient to disrobe and
the painful compression of the breast typical of the x-ray mammogram. The
patient is scanned in her street clothes in MRI mammography. Moreover MRI
mammogram scans the entire chest wall including the axilla for the presence
of nodes which the x-ray mammogram cannot reach.
A prototype of the Company's breast scanner has been
constructed and the breast scanner is awaiting clinical trials. Clinical
evaluation is expected to be completed within 18 months, and sales are
expected to commence thereafter.
It should be noted that the comparative figures in the
Company's Consolidated Statements of Operations for the first six months and
second 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 six months and second
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 $9.6
million in revenues for the first half of fiscal 1998 and $4.7 million in
revenues for the first half of fiscal 1997 reflects approximately $2.6
million in revenues attributable to Affordable and approximately $2.1
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 $6.0
million for the first half of fiscal 1998 and $3.0 million for the first
half of fiscal 1997 is attributable to Affordable's costs of revenues of
approximately $1.4 million and additional costs of approximately $1.5
million incurred to provide increased levels of service to facilities
formerly managed by RVDC.
The Company has continued its efforts to increase scanner
sales in foreign countries as well as domestically. Revenues from foreign
product sales were $968,768 (approximately 38% of product sales revenues and
7% of all revenues) for the first half of fiscal 1998, against costs of
revenues for such sales of $1.2 million (approximately 32% of costs of
revenues for product sales and 11% of all costs of revenues). This compares
to $457,658 in foreign product sales revenues in the first half of fiscal
1997 (approximately 17% of product sales revenues and 5% of all revenues)
against $733,539 in costs of foreign product sales revenues (approximately
18% of costs of revenues for product sales and 9% of all costs of revenues)
for the first half of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's liquidity and capital
resources positions changed from its June 30, 1997 position as follows:
December 31, June 30,
1997 1997 Change
____________ ____________ __________
Working capital
surplus $60,788,000 $62,659,000 ($1,871,000)
The decrease in working capital since June 30, 1997 was
attributable to the Company's losses in the first half of fiscal 1997.
Total liabilities were decreased since June 30, 1997 by
approximately $3.6 million to approximately $29.6 million at December 31,
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
$4.3 million as of December 31, 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 its operations, including new product development. The Company
estimates completion of the development of its new OR 360 and breast
scanners will require approximately $4,000,000 and $2,000,000 respectively.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
In June 1995 a Fonar stockholder commenced an action in the
Delaware Court of Chancery against Fonar and its directors, alleging
breaches of fiduciary duties by the defendants in connection with a
recapitalization plan adopted by the stockholders of the Company on April 3,
1995 (Horace Rubenstein, Individually and on Behalf of All Others Similarly
Situated v. Raymond V. Damadian et al., C.A. No. 14378). The case was
settled in April 1997. Under the original terms of the settlement
agreement, as approved by the Court of Chancery on April 29, 1997, the
Company, among other things, agreed to issue Warrants to purchase Common
Stock to the holders of Fonar Common Stock as of October 20, 1995.
On December 17, 1997, counsel for the Plaintiff (Class) and
the Company reached an agreement to amend the settlement agreement. As
proposed, the modification provides that the Company will issue 2,231,689.6
shares of Fonar Common Stock in substitution for the 4,909,767 Warrants that
were to have been issued. In addition, the modification provides for a
schedule to pay the special dividends on the Company's Common Stock and
Class A Non-voting Preferred Stock with respect to awards and settlements
already received by the Company in connection with its patent litigations.
A hearing has been set for March 2, 1998 on this proposed modification of
the settlement.
In June, 1997, the Company agreed to pay $415,000 in
settlement of the lawsuit commenced by Summit Rovins and Feldesman in the
Supreme Court of the State of New York. This amount was paid in accordance
with the terms of the agreement in November, 1997. The case involved a
claim for legal fees.
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:
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: February 13, 1998
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