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 MARCH 31, 1998 Commission File Number 0-10248
FONAR CORPORATION
- ------------------------------------------------------------------------
(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
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(516) 694-2929
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Registrant's telephone number, including area code:
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 March 31, 1998
- -------------------------------- ---------------------------------------
Common Stock, par value $.0001 50,221,305
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 - March 31, 1998
and June 30, 1997
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 1998 and March 31, 1997
Condensed Consolidated Statements of Operations for
the Nine Months Ended March 31, 1998 and March 31, 1997
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 1998 and March 31, 1997
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 March 31, June 30,
1998 1997
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $ 64,762 $ 5,861
Receivable from litigation award - 77,223
Accounts receivable - net 10,269 6,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,117 819
Inventories 4,088 3,441
Prepaid expenses and other current assets 288 410
------ ------
Total current assets 80,524 93,754
------ ------
Property and equipment - net 7,820 6,068
Advances and notes to affiliates and related parties- net 891 1,929
Long-term accounts receivable - net 254 254
Notes receivable - net 32 107
Capitalized software development costs - net 506 772
Other intangible assets - net 14,115 3,569
Other assets 715 238
-------- --------
$104,857 $106,691
======== ========
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
(UNAUDITED)
Current Liabilities: ---------- --------
Notes payable $ 424 $ 415
Current maturities of long-term debt and
capital lease obligations 1,999 2,388
Accounts payable 1,176 2,837
Other current liabilities 11,498 13,471
Dividends payable 7,855 7,855
Customer advances 303 764
Billings in excess of costs and estimated
earnings on uncompleted contracts - 193
Income taxes payable 2,950 100
Deferred income taxes 222 3,072
------ ------
Total current liabilities 26,427 31,095
Deferred income taxes, net of current portion 222 222
Long-term debt and capital lease obligations
less current portion 9,175 1,824
Other non-current liabilities - 101
------ ------
Total liabilities 35,824 33,242
------ ------
Minority interest 92 204
------ ------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Common Stock $.0001 par value; 60,000,000
shares authorized; 50,221,305 issued and outstanding
at March 31 and 49,133,422 at June 30 5 5
Class B Common Stock $ .0001 par value; 4,000,000
shares authorized, (10 votes per share), 5,411 issued
and outstanding at March 31 and at June 30 - -
Class C Common Stock $.0001 par value; 10,000,000 shares
authorized, (25 votes per share), 9,562,824 issued
and outstanding at March 31 and at June 30 1 1
Class A non-voting Preferred Stock $.0001 par value;
8,000,000 authorized, 7,855,627 issued and outstanding
at March 31 and at June 30, 1997 1 1
Paid-in capital in excess of par value 93,720 90,640
Accumulated deficit (21,982) (13,992)
Notes receivable - stockholders ( 2,135) ( 1,919)
Unearned compensation ( 274) ( 1,096)
Treasury stock - 108,864 shares of common
stock at March 31 and at June 30 ( 395) ( 395)
------- -------
Total stockholders' equity 68,941 73,245
------- -------
Total liabilities and stockholders' equity $104,857 $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
MARCH 31,
---------------------
1998 1997
REVENUES -------- --------
Product sales - net $ 1,232 $ 1,204
Service and repair fees - net 657 699
Scanning and management fees - net 5,247 2,539
-------- --------
Total Revenues - Net 7,136 4,442
-------- --------
COSTS AND EXPENSES:
Cost of product sales 1,880 2,070
Cost of service and repair fees 614 572
Cost of scanning and management fees - net 3,415 1,621
Research and development expenses 1,936 1,977
Selling, general and administrative expenses 3,215 3,184
Provision for bad debt 150 520
Compensatory element of stock issuances 274 138
Amortization of excess of cost over assets acquired 35 -
------- -------
Total Costs and Expenses 11,519 10,082
-------- --------
Loss From Operations ( 4,383) ( 5,640)
Interest Expense ( 99) ( 81)
Interest Income 839 101
Other income-principally gain on litigation awards 3 -
------ -------
Income (loss) before provision for taxes and
minority interest ( 3,640) ( 5,620)
Provision for income taxes - -
------- -------
Income (loss) before minority interest ( 3,640) ( 5,620)
Minority interest in net (income) loss
of subsidiary and partnership ( 29) 55
------- -------
NET INCOME (LOSS) $( 3,669) $( 5,565)
======= =======
Net Income (Loss) per share $(.06) $(.09)
====== ======
Weighted average number of shares outstanding 61,120 58,693
====== ======
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 NINE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
REVENUES -------- --------
Product sales - net $ 3,772 $ 3,831
Service and repair fees - net 2,050 1,988
Scanning and management fees - net 14,878 7,229
-------- --------
Total Revenues - Net 20,700 13,048
-------- --------
COSTS AND EXPENSES:
Cost of product sales 5,549 6,126
Cost of service and repair fees 2,035 1,629
Cost of scanning and management fees - net 9,363 4,578
Research and development expenses 4,603 3,846
Selling, general and administrative expenses 8,534 9,060
Provision for bad debt 596 1,480
Compensatory element of stock issuances 834 325
Amortization of excess of cost over assets acquired 105 -
-------- --------
Total Costs and Expenses 31,619 27,044
-------- --------
Loss From Operations (10,919) (13,996)
Interest Expense ( 274) ( 231)
Interest Income 2,934 286
Other income-principally gain on litigation awards 331 9,650
------ -------
Income (loss) before provision for taxes and
minority interest ( 7,928) ( 4,291)
Provision for income taxes - -
------- -------
Income (loss) before minority interest ( 7,928) ( 4,291)
Minority interest in net (income) loss
of subsidiary and partnership ( 62) 153
------- -------
NET INCOME (LOSS) $( 7,990) $( 4,138)
======= =======
Net Income (Loss) per share $(.13) $(.07)
====== ======
Weighted average number of shares outstanding 61,120 58,693
====== ======
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 NINE MONTHS ENDED
MARCH 31,
-----------------
1998 1997
------ ------
Cash Flows from Operating Activities
Net Income (Loss) $( 7,990) $( 4,138)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income (loss) 62 ( 153)
Depreciation and amortization 1,991 1,305
Provision for losses on accounts and notes
receivable and accounts receivable from affiliates 596 1,445
Compensatory and fee element of stock issuances 834 325
Stock issued in settlement of current liabilities 760 1,080
(Increase) decrease in operating assets, net:
Receivable from litigation award 77,223 -
Accounts and notes receivable ( 4,190) ( 1,410)
Costs and estimated earnings in excess of
billings on uncompleted contracts ( 298) ( 361)
Inventories ( 647) ( 103)
Prepaid expenses and other current assets 122 602
Other assets ( 477) ( 214)
Receivables and advances to affiliates and
related parties 1,038 389
Increase (decrease) in operating liabilities, net:
Accounts payable and income taxes ( 1,661) ( 240)
Other current liabilities ( 475) ( 1,153)
Customer advances ( 461) ( 125)
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 193) 17
Other liabilities ( 101) ( 30)
------ ------
Net cash provided by (used in) operating activities 66,133 ( 2,764)
------ ------
Cash Flows from Investing Activities:
Purchases of property and equipment - net ( 3,023) ( 507)
Cost of capitalized software development
and patents ( 106) ( 337)
Purchase of Central Health Care Mgmt Service,
net of cash acquired ( 50) -
Purchase of A&A Services Inc and affiliates,
net of cash acquired ( 3,900) -
------ ------
Net cash used in investing activities ( 7,079) ( 844)
------ ------
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 NINE MONTHS ENDED
MARCH 31,
-----------------
1998 1997
------ ------
Cash Flows from Financing Activities:
Distribution to minority interest ( 135) -
Repayment of borrowings and capital
lease obligations ( 472) ( 723)
Repayment of notes receivable in connection
with shares issued under stock option
and bonus plans - net 454 7,501
------ ------
Net cash provided by (used in) financing activities ( 153) 6,778
------ ------
Increase (Decrease) in Cash 58,901 3,170
Cash at beginning of period 5,861 3,861
------ ------
Cash at end of period $64,762 $ 7,031
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(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
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 nine months ended March 31, 1998 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.
<PAGE>
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.
<PAGE>
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 March 31, 1998 cash and cash equivalents
approximated $64.8 million of which $52.4 million was invested in two mutual
funds. Approximately $12.3 million was invested in a short-term U.S.
treasury fund and the $40.1 million as 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 $63.5 million in the aggregate as
of March 31, 1998.
NOTE 4 - INVENTORIES
The components of inventory consist of:
(000's OMITTED)
----------------
March 31, 1998 June 30, 1997
------- -------
Purchased parts
components and supplies $ 3,011 $ 2,534
Work in progress 1,077 907
------- -------
$ 4,088 $ 3,441
======= =======
<PAGE>
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.
NOTE 5 - ACQUISITIONS (continued)
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 Westchester County, 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.
Acquisition of A&A Services, Inc
--------------------------------
On March 20, 1998, the Company's physician management subsidiary, HMC,
consummated the acquisition of the common stock of A&A Services, Inc.
("A&A"), a New York corporation, which manages four primary care practices
in Queens, New York.
Pursuant to the A&A agreements, HMC acquired all of the common stock of
A&A for $4,000,000 in cash, a note payable for $4,000,000 bearing interest
at 6.0% per annum, payable in 16 quarterly installments commencing June of
1999, a note payable for $1,293,000 bearing interest at 6.0% per annum
payable in 60 equal monthly installments of principal and interest
commencing April 20, 1998, a deferred payment obligation of $2,000,000 and a
contingent payment based on the acquired operations achieving certain
earnings objective over the five-year period following the acquisition date.
The promissory notes are collateralized by all of the assets of the
acquired operations and are guaranteed by the Company.
The deferred payment obligation of $2,000,000 is automatically
convertible into shares of HMC's common stock upon the effectiveness of an
initial public offering ("IPO") of HMC's securities, which is completed by
September 20, 2000. In the event an IPO of HMC's securities is not
completed by such date, the deferred payment obligation of $2,000,000 is
then payable over the following four years with interest at 6.0% per annum.
At such time when the deferred payment obligation is converted into shares
of HMC's common stock, the holders of such shares will then have price
guarantees from FONAR for a certain period following such conversions.
The acquisition 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 acquisition. The excess of the
purchase price over the fair value of the net assets acquired amounted to
approximately $10,953,000 and is being amortized on a straight-line basis
over 30 years. The accompanying consolidated financial statements include
the operations of A&A from the date of the acquisition.
<PAGE>
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 nine
months ended March 31, 1998 and 1997:
1998 1997
Net revenues: ------- -------
Medical equipment $ 5,822 $ 5,819
Physician practice management 14,878 7,229
------- -------
Total $ 20,700 $ 13,048
======= =======
Income (loss) from operations:
Medical equipment $ (12,996) $(15,101)
Physician practice management 2,077 1,105
------- -------
Total $ (10,919) $(13,996)
======= =======
Depreciation and amortization:
Medical equipment $ 978 $ 1,141
Physician practice management 1,013 164
------- -------
Total $ 1,991 $ 1,305
======= =======
Capital expenditures:
Medical equipment $ 1,643 $ 680
Physician practice management 1,486 164
------- -------
Total $ 3,129 $ 844
======= =======
At At
March 31, June 30,
1998 1997
----------- --------
Identifiable assets:
Medical equipment $ 78,547 $ 96,624
Physician practice management 26,310 10,067
------- -------
Total $ 104,857 $106,691
======= =======
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the nine month period ended March 31, 1998, the Company reported a
net loss of $7.99 million on revenues of $20.70 million as compared to a
loss of $4.14 million on revenues of $13.05 million for the nine month
period ended March 31, 1997. This represents a 58.62% increase in revenues
from the comparable period for the prior fiscal year, reflecting the
acquisitions consummated by the Company's subsidiary, U.S. Health Management
Corporation. The smaller net loss in fiscal 1997 was attributable
principally to proceeds received from the settlement of one of the Company's
patent lawsuits. Results of operations, however, improved in fiscal 1998,
from an operating loss of $14.00 million for the nine month period ended
March 31, 1997 to an operating loss of $10.92 million for the nine month
period ended March 31, 1998.
For the fiscal quarter ended March 31, 1998 (third quarter of fiscal
1998), the Company reported a net loss of $3.67 million on revenues of $7.14
million as compared to a net loss of $5.57 million on revenues of $4.44
million for the third quarter of fiscal 1997. Operating results also
improved from an operating loss of $5.64 million for the third quarter of
fiscal 1997 to an operating loss of $4.38 million for the third 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 $2.1 million ($3.0 million
prior to merger related expenses and amortization of goodwill) for the first
nine months of fiscal 1998 compared to operating income of $1.1 million for
the first nine months of fiscal 1997. This reflected the profitability of
HMC's three acquisitions, Central Health Care Management Services, LLC
("Central Health"), 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"). Central Health and
Affordable were engaged in the business of providing management services,
office space, equipment and non-medical personnel to health care providers
and imaging facilities in the Bronx and Westchester Counties, New York.
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.
Notwithstanding an improvement in the operations of the Company's
traditional MRI equipment manufacturing and services business ($13.0 million
for the first nine months of fiscal 1998 as compared to $15.1 million for
fiscal 1997), the income from operations attributable to HMC (physician
practice management) was not sufficient to offset the operating loss from
the Company's equipment manufacturing and service operations. Accordingly
the Company's consolidated operating loss was $10.9 million for the first
nine months of fiscal 1998 as compared to a consolidated operating loss of
$14.0 million for the first nine months of fiscal 1997.
The Company's operating loss was offset in part, however, by interest
income of approximately $2.9 million (as compared to interest income of
$286,000 for the first nine months of fiscal 1997). Interest income was
derived from the interest earned on the Company's cash deposits and cash
equivalents, which were approximately $64.8 million as at March 31, 1998.
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 $52.4 million as of March 31, 1998 was held in
mutual funds divided between a money market fund (76.53%) and a short-term
U.S. Treasury fund (23.47%).
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 $5.8 million for
the first nine months of both fiscal 1998 and fiscal 1997 (against costs of
revenues attributable to the Company's medical equipment business of
approximately $7.6 million for the first nine months of fiscal 1998 and $7.8
million for the first nine months of fiscal 1997). The Company's efforts to
improve equipment sales volume is focused on research and development ($4.6
million for the first nine months of fiscal 1998 as compared to $3.8 million
for the first nine months 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 60% complete.
The Company expects to complete development of the OR 360 and apply for FDA
approval by October, 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 16 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 nine months and third
quarter of fiscal 1997 include the results of operations of RVDC but do not
include the results of operations for Affordable or Central Health. The
Company's Consolidated Statements of Operations for the first nine months
and third quarter of fiscal 1998 include the results of operations of all
three, as a result of the consummation of the acquisitions by HMC of Central
Health, Affordable and RVDC.
With respect to the revenues attributable to the Company's physician
practice management business, the difference between the $14.9 million in
revenues for the first nine months of fiscal 1998 and $7.2 million in
revenues for the first nine months of fiscal 1997 reflects approximately
$4.2 million in revenues attributable to Affordable, approximately $293,000
in revenues attributable to Central Health and approximately $3.2 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 $9.3
million for the first nine months of fiscal 1998 and $4.6 million for the
first nine months of fiscal 1997 is attributable to Affordable's costs of
revenues of approximately $2.2 million, Central Health's costs of revenue of
$123,000 and additional costs of approximately $2.4 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 $1,177,825 (approximately 31% of product sales revenues and 6% of
all revenues) for the first nine months of fiscal 1998, against costs of
revenues for such sales of $1.5 million (approximately 27% of costs of
revenues for product sales and 9% of all costs of revenues). This compares
to $457,658 in foreign product sales revenues in the first nine months of
fiscal 1997 (approximately 12% of product sales revenues and 4% of all
revenues) against $733,539 in costs of foreign product sales revenues
(approximately 12% of costs of revenues for product sales and 6% of all
costs of revenues) for the first nine months of fiscal 1997.
Liquidity and Capital Resources
At March 31, 1998, the Company's liquidity and capital resources
positions changed from its June 30, 1997 position as follows:
March 31, June 30,
1998 1997 Change
____________ ____________ __________
Working capital
surplus $54,097,000 $62,659,000 ($8,562,000)
The decrease in working capital since June 30, 1997 was attributable to
the Company's losses in the first nine months of fiscal 1998.
Total liabilities were increased since June 30, 1997 by approximately
$2.6 million to approximately $35.8 million at March 31, 1998.
As of March 31, 1998, 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.
<PAGE>
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. On March 2, 1998,
the Court of Chancery approved the modification. The modification provides
that the Company issue 2,231,689.6 shares of Fonar Common Stock in
substitution for the 4,909,767 Warrants that were to have been issued.
These shares were issued in April 1998.
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. The first
installment of these dividends will be paid to holders of the Company's
Class A Non-voting Preferred Stock and Common Stock as of May 15, 1998. The
payment date will be May 26, 1998.
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:
Acquisition of New Business
Effective March 20, 1998, the Company's wholly-owned subsidiary, U.S.
Health Management Corporation ("HMC") acquired 100% of the issued and
outstanding stock of A & A Services, Inc. ("A & A Services"), a management
services organization (MSO) engaged in the business of managing four primary
care practices located in Queens County, New York (the "Practices").
A & A Services provides the Practices with management services, office
space, equipment, repair and maintenance service for the equipment and
clerical and other non-medical personnel. The office locations for the
Practices are located in Woodhaven, Richmond Hill, Corona and Ridgewood in
Queens County, New York.
Item 6 - Exhibits and Reports on Form 8-K:
Form 8-K filed on April 7, 1998 for acquisition of A & A Services, Inc.
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: May 15, 1998
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