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, 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)
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, 1998
- -------------------------------- ---------------------------------------
Common Stock, par value $.0001 53,044,715
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 7,836,286
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1998
and June 30, 1998
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 1998 and
December 31, 1997
Condensed Consolidated Statements of Operations for
the Six Months Ended December 31, 1998 and
December 31, 1997
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1998 and
December 31, 1997
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Six Months Ended December 31, 1998
and December 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 December 31, June 30,
1998 1998
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $27,037 $41,751
Marketable securities 19,209 20,252
Accounts receivable - net 13,084 9,877
Costs and estimated earnings in excess
of billings on uncompleted contracts 572 834
Inventories 4,458 3,514
Prepaid expenses and other current assets 1,045 286
------ ------
Total current assets 65,405 76,514
------ ------
Restricted cash 5,000 5,000
Property and equipment - net 10,374 9,102
Advances and notes to affiliates and related parties- net 1,231 1,350
Notes receivable - net 467 66
Excess of cost over net assets of businesses acquired-net 23,159 14,746
Other intangible assets - net 1,009 1,162
Other assets 665 508
-------- --------
$107,310 $108,448
======== ========
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 1998 1998
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of debt and capital leases $ 3,945 $ 2,443
Accounts payable 1,666 2,030
Other current liabilities 10,266 11,256
Dividends payable 1,260 3,909
Customer advances 288 670
Billings in excess of costs and estimated
earnings on uncompleted contracts - 31
Income taxes payable 935 955
Deferred income taxes 794 794
------ ------
Total current liabilities 19,154 22,088
Long-term debt and capital lease obligations
less current portion 20,557 13,560
Other non-current liabilities 123 113
------ ------
Total liabilities 39,834 35,761
------ ------
Minority interest 47 114
------ ------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Common Stock $.0001 par value; 60,000,000
shares authorized; 53,044,715 issued and outstanding
at December 31 and 52,954,465 at June 30, 1998 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, 1998 - -
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, 1998 1 1
Class A non-voting Preferred Stock $.0001 par value;
8,000,000 authorized, 7,836,286 issued and outstanding
at December 31 and at June 30, 1998 1 1
Paid-in capital in excess of par value 94,659 94,502
Accumulated other comprehensive income ( 9) ( 42)
Accumulated deficit (24,966) (19,645)
Notes receivable - stockholders ( 1,670) ( 1,854)
Treasury stock - 202,864 shares of common stock
at December 31 and 108,864 at June 30, 1998 ( 592) ( 395)
------- -------
Total stockholders' equity 67,429 72,573
------- -------
Total liabilities and stockholders' equity $107,310 $108,448
======= =======
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,
---------------------
1998 1997
REVENUES -------- --------
Product sales - net $ 602 $ 1,028
Service and repair fees - net 572 777
Scanning and management fees - net 7,962 5,030
-------- --------
Total Revenues - Net 9,136 6,835
-------- --------
COSTS OF REVENUES:
Cost of product sales 1,316 1,495
Cost of service and repair fees 615 763
Cost of scanning and management fees - net 5,340 3,057
Research and development expenses 1,589 1,455
Selling, general and administrative expenses 3,670 2,926
Provision for bad debt - 173
Compensatory element of stock issuances - 274
Amortization of excess of cost over assets acquired 314 35
-------- --------
Total Costs and Expenses 12,844 10,178
-------- --------
Loss From Operations ( 3,708) ( 3,343)
Interest Expense ( 461) ( 83)
Investment Income - net 283 1,031
Other income 1,501 327
------ -------
Loss before provision for taxes and
minority interest ( 2,385) ( 2,068)
Provision for income taxes 1 -
------- -------
Loss before minority interest ( 2,386) ( 2,068)
Minority interest in net (income) loss
of subsidiary and partnership ( 92) 11
------- -------
NET LOSS $( 2,478) $( 2,057)
======= =======
Net Loss per share $(.04) $(.03)
====== ======
Weighted average number of shares outstanding 63,871 60,573
====== ======
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,
---------------------
1998 1997
REVENUES -------- --------
Product sales - net $ 1,096 $ 2,540
Service and repair fees - net 1,141 1,393
Scanning and management fees - net 14,435 9,631
-------- --------
Total Revenues - Net 16,672 13,564
-------- --------
COSTS OF REVENUES:
Cost of product sales 2,171 3,669
Cost of service and repair fees 1,136 1,421
Cost of scanning and management fees - net 9,840 5,948
Research and development expenses 3,204 2,667
Selling, general and administrative expenses 6,786 5,317
Provision for bad debt - 446
Compensatory element of stock issuances - 560
Amortization of excess of cost over assets acquired 539 70
-------- --------
Total Costs and Expenses 23,676 20,098
-------- --------
Loss From Operations ( 7,004) ( 6,534)
Interest Expense ( 768) ( 174)
Investment Income - net 1,061 2,094
Other income 1,509 327
------ -------
Loss before provision for taxes and
minority interest ( 5,202) ( 4,287)
Provision for income taxes 1 -
------- -------
Loss before minority interest ( 5,203) ( 4,287)
Minority interest in net (income) loss
of subsidiary and partnership ( 118) ( 34)
------- -------
NET LOSS $( 5,321) $( 4,321)
======= =======
Net Loss per share $(.08) $(.07)
====== ======
Weighted average number of shares outstanding 63,871 60,573
====== ======
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,
-----------------
1998 1997
------ ------
Cash Flows from Operating Activities
Net Loss $( 5,321) $( 4,321)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income (loss) 118 34
Depreciation and amortization 2,157 1,232
Imputed interest on deferred payment obligation 147 -
Provision for losses on accounts and notes
receivable and accounts receivable from affiliates - 446
Compensatory and fee element of stock issuances - 560
Stock issued in settlement of current liabilities 74 572
(Increase) decrease in operating assets, net:
Receivable from litigation award - 77,223
Accounts and notes receivable ( 1,708) ( 2,768)
Costs and estimated earnings in excess of
billings on uncompleted contracts 262 22
Inventories ( 944) ( 128)
Prepaid expenses and other current assets ( 759) 182
Other assets ( 157) ( 287)
Receivables and advances to affiliates and
related parties 119 755
Increase (decrease) in operating liabilities, net:
Accounts payable ( 364) ( 1,094)
Other current liabilities ( 818) ( 462)
Customer advances ( 382) ( 407)
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 31) ( 101)
Other liabilities 10 ( 101)
------ ------
Net cash provided by (used in) operating activities ( 7,597) 71,357
------ ------
Cash Flows from Investing Activities:
Investment (reduction) in marketable securities 1,076 -
Acquisitions, net of cash acquired ( 2,000) -
Purchases of property and equipment - net ( 2,242) ( 2,128)
Cost of capitalized software development
and patents - ( 53)
------ ------
Net cash used in investing activities ( 3,166) ( 2,181)
------ ------
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,
-----------------
1998 1997
------ ------
Cash Flows from Financing Activities:
Distribution to minority interest ( 185) ( 113)
Repayment of borrowings and capital
lease obligations ( 920) ( 352)
Repayment of notes receivable in connection
with shares issued under stock option
and bonus plans - net - 454
Dividends paid ( 2,649) -
Purchase of treasury stock ( 197) -
------ ------
Net cash used by financing activities ( 3,951) ( 11)
------ ------
Increase (Decrease) in Cash (14,714) 69,165
Cash at beginning of period 41,751 5,861
------ ------
Cash at end of period $27,037 $75,026
====== ======
See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
-----------------
1998 1997
------ ------
Net loss $(5,321) $(4,321)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of tax 33 -
------- -------
Total comprehensive loss $(5,288) $(4,321)
======= =======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation
which was incorporated on July 17, 1978. FONAR is 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.
Health Management Corporation of America ("HMCA") was organized by the
Company in March 1997 as a wholly-owned subsidiary in order to enable the
Company to expand into the business of providing comprehensive management
services to medical providers, sometimes referred to as "Physician Practice
Management" or ("PPM"), including diagnostic imaging centers and ancillary
services. The services to be 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,
legal services, accounting, billing and collection and the development and
implementation of practice growth and marketing strategies.
HMCA entered the PPM business through the consummation of two
acquisitions, effective June 30, 1997, and two acquisitions which were
consummated during fiscal 1998 and one acquisition consummated in August of
1998. The acquired companies in all cases were actively engaged in the
business of managing medical providers. The medical providers are diagnostic
imaging centers, principally MRI scanning centers, multi-specialty practices
and primary care practices.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of FONAR
Corporation, its majority and wholly-owned subsidiaries/ partnerships and
its proportionate share in the accounts of all joint ventures. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities in the
consolidated financial statements and accompanying notes. The most
significant estimates relate to contractual and other allowances, income
taxes, contingencies and the useful lives of equipment. In addition,
healthcare industry reforms and reimbursement practices will continue to
impact the Company's operations and the determination of contractual and
other allowance estimates. Actual results could differ from those estimates.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in debt
and Equity Securities" ("SFAS No. 115"). This standard requires that certain
debt and equity securities be adjusted to market value at the end of each
accounting period. Unrealized market value gains and losses are charged to
earnings if the securities are traded for short-term profit. Otherwise, such
unrealized gains and losses are charged or credited to comprehensive income.
Management determines the proper classifications of investments in
obligations with fixed maturities and marketable equity securities at the
time of purchase and reevaluates such designations as of each balance sheet
date. At December 31, 1998, all securities covered by SFAS No. 115 were
designated as available for sale. Accordingly, these securities are stated
at fair value, with unrealized gains and losses reported in comprehensive
income. Realized gains and losses on sales of investments, as determined on
a specific identification basis, are included in the Consolidated Statement
of Operations.
Inventories
-----------
Inventories consist of purchased parts, components and supplies, as
well as work-in-process, and are stated at the lower of cost (materials,
labor and overhead determined on the first-in, first-out method) or market.
Investments in Joint Ventures and Limited Partnerships
------------------------------------------------------
The minority interests in the equity of consolidated joint ventures and
limited partnerships, which are not material, are reflected in the
accompanying consolidated financial statements. Investments by the Company
in joint ventures and limited partnerships over which the Company can
exercise significant influence but does not control are accounted for using
the equity method.
The Company suspends recognition of its share of joint ventures losses
in entities in which it holds a minority interest when its investment is
reduced to zero. The Company does not provide for additional losses unless,
as a partner or joint venturer, the Company has guaranteed obligations of
the joint venture or limited partnership.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
----------------------
Property and equipment procured in the normal course of business is
stated at cost. Property and equipment purchased in connection with an
acquisition is stated at its estimated fair value, generally based on an
appraisal. Property and equipment is being depreciated for financial
accounting purposes using the straight-line method over the shorter of
their estimated useful lives, generally five to seven years, or the term of
a capital lease, if applicable. Leasehold improvements are being amortized
over the shorter of the useful life or the remaining lease term. Upon
retirement or other disposition of these assets, the cost and related
accumulated depreciation of these assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains or
losses are reflected in the results of operations. Expenditures for
maintenance and repairs are charged to operations. Renewals and betterments
are capitalized.
Excess of Cost Over Net Assets of Businesses Acquired
-----------------------------------------------------
The excess of the purchase price over the fair market value of net
assets of businesses acquired is being amortized using the straight-line
method over 20 years.
Other Intangible Assets
-----------------------
1) Capitalized Software Development Costs
Certain software development costs incurred subsequent to the
establishment of the software's technological feasibility and completion of
the research and development on the product hardware, in which it is to be
used, are required to be capitalized. Capitalization ceases when the
product is available for general release to customers, at which time
amortization of capitalized costs begins. Amortization is calculated on the
straight-line basis over 5 years.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over 17 years.
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of long-lived
assets, including property and equipment, intangibles and excess of cost
over net assets of businesses acquired, when there are indications of
potential impairment, based on estimates of undiscounted future cash flows.
The amount of impairment is calculated by comparing anticipated discounted
future cash flows with the carrying value of the related asset. In
performing this analysis, management considers such factors as current
results, trends, and future prospects, in addition to other economic
factors.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. Production and
installation take approximately six months. 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 related medical providers (the "PC's"), commencing
July 1, 1997. The PC's are primarily owned by Raymond V. Damadian, M.D.,
President and Chairman of the Board of FONAR. The Company's agreements with
the PC's stipulate fees for services rendered, 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.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred. The
costs of materials and equipment that are acquired or constructed for
research and development activities, and have alternative future uses
(either in research and development, marketing or production), are
classified as property and equipment and depreciated over their estimated
useful lives. Certain software development costs are capitalized. See
property and equipment and intangible assets (capitalized software
development costs) sections of this note.
Advertising Costs
-----------------
Advertising costs are expensed as incurred.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
Deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
Product Warranty
----------------
The Company provides currently for the estimated cost to repair or
replace products under warranty provisions in effect at the time of
installation (generally for one year).
Customer Advances
-----------------
Cash advances and progress payments received on sales orders are
reflected as customer advances until such time as revenue recognition
begins.
Per Share Data
--------------
Net income (loss) per common and common equivalent share has been
computed based on the weighted average number of common shares and common
stock equivalents outstanding during the year. No effect has been given to
options outstanding under the Company's Stock Option Plans as no material
dilutive effect would result from the exercise of these items.
During fiscal 1998, the Company retroactively adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"), which requires companies to present basic earnings per share and
diluted earnings per share. No adjustments were required as a result of this
adoption.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term highly liquid investments with a
maturity of three months or less when purchased to be cash or cash
equivalents.
Restricted Cash
---------------
At December 31, 1998, $5,000,000 of cash was pledged as collateral on
an outstanding bank loan and was classified as restricted cash on the
balance sheet.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily cash, trade accounts
receivable, notes receivable, investment in sales-type leases and
investments, advances and notes to affiliates and related parties. Ongoing
credit evaluations of customers' financial condition are performed. The
Company generally retains title to the MRI scanners that it sells until the
scanners have been paid in full. The Company's customers are concentrated in
the industry of providing MRI scanning services.
Various related parties, accounted for approximately 31% and 24% of
revenues for the six months ended December 31, 1998 and 1997, respectively.
At December 31, 1998, the Company had cash deposits approximately
$26,000,000 in excess of federally insured limits.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value
information at December 31, 1998 and June 30, 1998, as required by Statement
of Financial Accounting Standards 107, "Disclosures about Fair Value of
Financial Instruments". Such information, which pertains to the Company's
financial instruments, is based on the requirements set forth in that
Statement and does not purport to represent the aggregate net fair value to
the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short-term maturity of those instruments.
Accounts receivable and accounts payable: The carrying amounts
approximate fair value because of the short maturity of those instruments.
Investment in sales-type leases and investments, advances and notes to
affiliates and related parties. The carrying amount approximates fair value
because the discounted present value of the cash flow generated by the
related parties approximates the carrying value of the amounts due to the
Company.
Long-term debt and loans payable: The carrying amounts of debt and
loans payable approximate fair value due to the length of the maturities,
the interest rates being tied to market indices and/or due to the interest
rates not being significantly different from the current market rates
available to the Company.
All of the Company's financial instruments are held for purposes other
than trading.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
------------------------
Effective for fiscal year 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide proforma net income and proforma earnings per share disclosures
for employee stock option grants made during the year and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the proforma disclosure provisions of SFAS No. 123.
Accounting Changes
------------------
In November 1997, Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), was issued which
establishes standards for reporting and displaying comprehensive income in
a full set of financial statements. SFAS No. 130 defines comprehensive
income as changes in equity of a business enterprise during the periods
presented, except for transactions resulting from investments by an owner
and distribution to an owner. SFAS No. 130 does not require a company to
present a statement of comprehensive income if no items are present. The
Company adopted SFAS No. 130 during fiscal 1998.
New Pronouncements
------------------
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which revises the
accounting for software development costs and will require the
capitalization of certain costs. The Company recognizes the need to ensure
its operations will not be adversely impacted by Year 2000 software
failures. Software failures due to processing errors potentially arising
from calculations using the Year 2000 date are a known risk. The Company is
addressing this risk to the availability and integrity of financial systems
and the reliability of operational systems. The Company has established
processes for evaluating and managing the risks and costs associated with
this problem. The computing portfolio was identified and an initial
assessment has been completed. The cost of achieving Year 2000 compliance
will not have a material impact on the accompanying financial statements.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform with the
current year presentation.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 3 - ACQUISITIONS
Affordable Diagnostics, Inc.
----------------------------
On June 30, 1997, the Company's wholly-owned subsidiary consummated the
merger of 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 and Westchester, New York. The merger was consummated pursuant to
a Merger Agreement ("Agreement") effective June 30, 1997, by and among
HMCA's wholly-owned subsidiary, HMCM, Inc. ("HMCM"). Pursuant to the
agreement, HMCM acquired all of the assets and liabilities of Affordable
through the issuance of 1,764,000 shares of the Company's 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 would be issued to the sellers.
During fiscal 1998, the earnings objectives were achieved and, accordingly,
576,000 shares of common stock were issued to the sellers. The value
assigned to the additional shares issued was $923,442 and has been recorded
as additional goodwill subject to amortization over the stated period. The
accompanying consolidated financial statements include the operations of
Affordable from the date of the acquisition. The shares issued to the
Sellers as consideration pursuant to the Agreement are subject to certain
registration rights.
Concurrent with the above described transactions, HMCM entered into
consulting agreements with the shareholders of Affordable. Under such
agreements, 400,000 registered shares of FONAR's common stock, valued at
$1,096,000, were issued pursuant to one year consulting agreements with
HMCM.
Acquisition of RVDC
-------------------
Effective June 30, 1997, FONAR's wholly-owned subsidiary, HMCA,
acquired Raymond V. Damadian, M.D. MR Scanning Centers Management Company
("RVDC") and two affiliates, by purchasing all of the issued and outstanding
shares of RVDC from Dr. Damadian for 10,000 shares of the common stock of
FONAR. The business of RVDC, continued by HMCA was the management of MRI
diagnostics imaging centers in New York, Florida and Georgia.
The Company has accounted for the acquisition in a manner similar to
the pooling-of-interests method due to Dr. Damadian's control over both the
Company and RVDC.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 3 - ACQUISITIONS (Continued)
Central Health Care Management Service, Inc.
-------------------------------------------
On January 23, 1998, a wholly-owned subsidiary of HMCA acquired the
business and assets of Central Health Care Management Services, Inc., 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 HMCA. 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. Included in accrued
liabilities at September 30, 1998 is $1,000,000 representing an estimate of
the additional purchase price. Based on this estimate, the excess of the
cost over the acquired net assets would approximate $850,000.
A&A Services, Inc.
------------------
On March 20, 1998, the Company's physician management subsidiary, HMCA,
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, HMCA 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 equal quarterly installments of
interest and principal, commencing March 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 face amount of $2,000,000 and a contingent
payment based on the acquired operations achieving certain earnings
objectives 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 FONAR.
The deferred payment obligation of $2,000,000 is convertible into
shares of HMCA's common stock upon the effectiveness of an Initial Public
Offering ("IPO") of HMCA's securities, provided the IPO 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 certain price
protection guarantees from FONAR for a two-year period following such
conversions.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 3 - ACQUISITIONS (Continued)
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 $10,448,000 and is being amortized on a straight-line basis
over 20 years. The accompanying consolidated financial statements include
the operations of A&A from the date of the acquisition.
Subject to the acquired business achieving certain earnings objectives
over the five-year period following the date of acquisition, additional
monies would be due to the sellers. The contingent additional purchase price
is not determinable as of June 30, 1998 and, accordingly, has not been
included in the allocated purchase price in light of the contingent nature
of the arrangement. If the earnings objectives are ultimately achieved, the
additional purchase price will be recorded as additional goodwill subject to
amortization over the stated period.
Dynamic Health Care Management, Inc.
------------------------------------
On August 20, 1998, the Company's physician management subsidiary,
HMCA, consummated the acquisition of the common stock of Dynamic Health Care
Management, Inc. ("Dynamic"), a New York corporation, which manages three
physician practices on Long Island, New York. The practices consist of
internal medicine, physiatry and physical rehabilitation.
Pursuant to the Dynamic agreements, HMCA acquired all of the common
stock of Dynamic for $2,000,000 in cash, a note payable for $1,265,000
bearing interest at 8% per annum, payable in sixty monthly installments, or
commencing one month following the closing date, a note payable for
$2,870,000 bearing interest at 8% per annum payable in three annual
installments of principal and interest commencing one year after the closing
date, and convertible notes face amount of $5,490,000, payable in thirty-six
monthly installments of principal and interest, commencing two years after
the closing date.
The promissory notes are collateralized by all of the assets of the
acquired operations and are guaranteed by the Company.
A substantial portion of the convertible notes of $5,490,000 are
convertible into shares of HMCA's common stock upon the effectiveness of an
Initial Public Offering ("IPO") of HMCA's securities providing the IPO is
consummated within two years of the closing date.
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
$8,951,907 and is being amortized on a straight-line basis over 20 years.
The accompanying consolidated financial statements include the operations of
Dynamic from the date of acquisition, August 20, 1998.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 4 - MARKETABLE SECURITIES
---------------------
The following is a summary of marketable securities at December 31, 1998:
(000's omitted)
---------------
Unrealized
Holdings Fair Market
Cost Gains (Loss) Value
--------- ----------- -----------
U.S. Government
Obligations $12,611 $ 12 $12,623
Corporate and government
agency bonds 6,500 (18) 6,482
Equity securities
including
mutual stock funds 107 (3) 104
--------- ----------- -----------
$19,218 $ (9) $19,209
========= =========== ===========
NOTE 5 - ACCOUNTS RECEIVABLE, NET
------------------------
Accounts receivable, net is comprised of the following:
(000's omitted)
---------------
December 31, 1998 June 30, 1998
------------------ -------------
Receivable from equipment
sales and service $ 1,933 $ 1,930
Receivables assigned from
related PC's 14,301 10,344
Less: Allowance for
doubtful accounts
and contractual
allowances (3,150) (2,397)
------- -------
$13,084 $ 9,877
======= =======
The Company's receivable assigned from the related PC's substantially
consists of fees outstanding under management agreements and service
contracts with related PC's. Payment of the outstanding fees is based on
collection by the PC's of fees from third party medical reimbursement
organizations, principally insurance companies.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 5 - ACCOUNTS RECEIVABLE, NET (Continued)
Approximately 14% and 13% of the PC's December 31, 1998 and December
31, 1997 imaging revenue was derived from the delivery of services, of which
the timing of payment is substantially contingent upon the timing of
settlement of pending litigation involving the recipient of services and
third parties (Letter of Protection or "LOP-type" accounts receivable). By
its nature, the realization of a substantial portion of these receivables is
expected to extend beyond one year from the date the service was rendered.
The Company anticipates that a material amount of its accounts receivable
will be outstanding for periods in excess of twelve months in the future.
The Company considers the aging of its accounts receivable in determining
the amount of allowance for doubtful accounts. Credit losses associated with
the receivables are provided for in the consolidated financial statements
and have historically been within management's expectations.
For LOP-type receivables, the Company provides for uncollectible
accounts at substantially higher rates than any other revenue source.
NOTE 6 - INVENTORIES
Inventories included in the accompanying consolidated balance
sheets consist of:
(000's omitted)
December 31, 1998 June 30, 1998
----------------- -------------
Purchased parts, components
and supplies $3,234 $ 2,549
Work-in-process 1,224 965
------ -------
$4,458 $ 3,514
====== =======
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended December 31, 1998 and 1997, the Company
paid approximately $467,000 and $150,000 for interest, respectively. During
the six months ended December 31, 1998 and 1997, the Company paid $20,076
and $0 for income taxes, respectively.
During the six months ended December 31, 1998, the Company acquired the
assets and assumed the liabilities of Dynamic. The transaction had the
following non-cash impact on the balance sheet:
(000,s omitted)
---------------
Accounts receivable $ 1,900
Equipment 60
Intangibles 8,952
Accrued Liabilities (75)
Notes payable to sellers (8,837)
----------
Net Cash Used For Acquisition $ 2,000
==========
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
NOTE 8 - GOVERNMENT REGULATIONS
The healthcare industry is highly regulated by numerous laws,
regulations, approvals and licensing requirements at the federal, state and
local levels. Regulatory authorities have very broad discretion to interpret
and enforce these laws and promulgate corresponding regulation. The Company
believes that its operations under agreements pursuant to which it is
currently providing services are in material compliance with these laws and
regulations. However, there can be no assurance that a court or regulatory
authority will not determine that the Company's operations (including
arrangements with new or existing clients) violate applicable laws or
regulations.
If the Company's interpretation of the relevant laws and regulations is
inaccurate, the Company's business and its prospects could be materially and
adversely affected. The following are among the laws and regulations that
affect the Company's operations and development activities; corporate
practice of medicine; fee splitting; anti-referral laws; anti-kickback laws;
certificates of need, regulation of diagnostic imaging; no-fault insurance;
worker's compensation; and proposed healthcare reform legislation.
NOTE 9 - Litigation
----------
On August 4, 1998, Beal Bank filed a notice of motion for summary
judgment against Melville Magnetic Resonance Imaging, P.C. ("Melville
Magnetic") and the Company. The motion for summary judgment seeks to
recover $733,855, plus accrued interest of $221,809 for payment of a bank
loan executed by Melville Magnetic and guaranteed by the Company. In the
event a judgment is levied against the Company as a guarantor on the loan,
the Company will exercise its rights to seek recovery from Melville
Magnetic.
NOTE 10 - PROFORMA INFORMATION
The Company's consolidated financial statements for the six months
ended December 31, 1997 do not include the results of operations of A&A and
Dynamic and the consolidated financial statements for the six months ended
December 31, 1998 do not include the results of operations of Dynamic for
the period July 1, 1998 through August 20, 1998. The following summarizes
the unaudited proforma results of operations for the six months ended
December 31, 1998, and 1997, assuming the foregoing acquisitions had
occurred on June 30, 1997 (in thousands, except per share data):
1998 1997
------------ -----------
(Unaudited) (Unaudited)
Revenues, net $ 17,351 $ 18,164
Loss from operations $ (6,698) $ (5,644)
Income (loss) before taxes $ (5,041) $ (3,615)
Fully diluted net income
(loss) per share $(.08) $(.06)
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - 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, 1998 and 1997:
1998 1997
Net revenues: ------- -------
Medical equipment $ 2,799 $ 4,469
Physician practice management 14,435 9,631
Intersegment eliminations ( 562) ( 536)
------- -------
Total $ 16,672 $ 13,564
======= =======
Income (loss) from operations:
Medical equipment $ (9,153) $ (7,934)
Physician practice management 2,149 1,400
------- -------
Total $ (7,004) $ (6,534)
======= =======
Depreciation and amortization:
Medical equipment $ 857 $ 666
Physician practice management 1,298 566
------- -------
Total $ 2,155 $ 1,232
======= =======
Capital expenditures:
Medical equipment $ 1,915 $ 1,186
Physician practice management 327 995
------- -------
Total $ 2,242 $ 2,181
======= =======
At December 31, At June 30,
1998 1998
Identifiable assets: ----------- --------
Medical equipment $ 66,999 $ 79,236
Physician practice management 40,311 29,212
------- -------
Total $ 107,310 $108,448
======= =======
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the fiscal quarter ended December 31, 1998 (second quarter of
fiscal 1999), the Company reported a net loss of $2.5 million on revenues of
$9.1 million as compared to a net loss of $2.1 million on revenues of $6.8
million for the second quarter of fiscal 1998.
For the six months ended December 31, 1998, the Company reported a net
loss of $5.3 million on revenues of $16.7 million as compared to a net loss
of $4.3 on revenues of $13.6 for the first six months 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, Health Management Corporation of America ("HMCA").
HMCA income from operations was approximately $2.1 million for the
first half of fiscal 1999 ($1.3 million for the second quarter) compared to
income of $1.4 million for the first half of fiscal 1998. The results for
fiscal 1999 reflected the profitability of HMCA's five acquisitions, Dynamic
Health Care Management, Inc. ("Dynamic"), A & A Services, Inc. ("A & A"),
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"). Dynamic is a management services organization
(MSO) managing three multi-specialty physician practices in Nassau and
Suffolk Counties in New York, A & A is an MSO managing four primary care
practices in Queens County and Central Health is a multi-specialty MSO in
Yonkers, New York. 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. Results of operations of Dynamic are
included from and after August 20, 1998, the closing of the acquisition.
Dynamic, A & A and Central Health were acquired following December 31, 1997,
and hence the results of operations for HMCA for the first half of fiscal
1998 do not include the results of operations of these companies.
The income from operations attributable to HMCA (physician practice
management) was not sufficient to offset the operating loss from the
Company's traditional MRI equipment manufacturing and service business ($9.2
million for the first half of fiscal 1999 as compared to $7.9 million for
the first half of fiscal 1998). Accordingly the Company's consolidated
operating loss was $7.0 million for the first half ($3.7 million for the
second quarter) of fiscal 1999 as compared to an operating loss of $6.5
million for the first half ($3.3 million for the second quarter) of fiscal
1998.
The Company's operating loss was offset in part, however, by net
investment and interest income of approximately $1.1 million for the first
half ($283,000 for the second quarter) of fiscal 1999 as compared to $2.1
million for the first half ($1.0 for the second quarter) of fiscal 1998. Net
investment and interest income was derived from the interest earned on the
Company's cash deposits and cash equivalents and investments and marketable
securities, which were approximately $46.2 million as at December 31, 1998.
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 $2.2 million for the first half
($1.2 million for the second quarter) of fiscal 1999 as compared to $3.9
million for the first half ($1.8 million for the second quarter) of fiscal
1998. Costs of revenues attributable to the Company's medical equipment
business were $3.3 million for the first half (and $1.9 million for the
second quarter) of fiscal 1999 and $5.0 million for the first half (and $2.2
million for the second quarter) of fiscal 1998. The increased operating
losses for the Company's medical equipment business in the first half of
fiscal 1999 ($9.2 million operating loss) over the first half of fiscal 1998
($7.2 million operating loss) was attributable primarily to decreased sales
revenues and increased research and development and selling, general and
administrative expenses. The Company's efforts to improve equipment sales
volume is focused on research and development (expenditures of $3.2 million
for the first half of fiscal 1999 as compared to $2.7 million for the first
half of fiscal 1998) 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 the research and development of its Stand-Up MRI and Open Sky MRI
products, are intended to significantly improve the Company's competitive
position. The QUAD (tm) scanners are highly competitive and totally new
non-claustrophobic scanners not previously available in the MRI market. At
.6 Tesla field strength, the QUAD (tm) 12000 magnet is the highest field
"Open MRI" in the industry, with the largest patient opening as well. The
high field permits the Company's Open MRI to provide the superior image
quality traditionally missing in other Open MRI products because of their
lower field strengths.
As part of its marketing program, the Company attended the industry's
annual trade show, RSNA (Radiological Society of North America) in November
1998. 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.
With respect to the revenues attributable to the Company's physician
practice management business, the difference between the $14.4 million in
revenues for the first half ($7.9 million for the second quarter) of fiscal
1999 and $9.6 million in revenues for the first half ($5.0 million for the
second quarter) of fiscal 1998 includes approximately $2.7 million in
revenues attributable to Dynamic, A & A and Central Health, the most recent
acquisitions.
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 (tm) 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 $380,000 (approximately 35% of product sales revenues and 2.2% of
all revenues) for the first half of fiscal 1999, against costs of revenues
for such sales of $752,000 (approximately 34.6% of costs of revenues for
product sales and 3.2% of all costs of revenues). This compares to $1.2
million in foreign product sales revenues in the first half of fiscal 1998
(approximately 47% of product sales revenues and 8.8% of all revenues)
against $1.7 million in costs of foreign product sales revenues
(approximately 46% of costs of revenues for product sales and 8.4% of all
costs of revenues) for the first half of fiscal 1998. Revenues from foreign
product sales were $74,000 (approximately 12% of product sales revenues and
.8% of all revenues) for the second quarter of fiscal 1999, against costs of
revenues for such sales of $161,000 (approximately 12% of costs of revenues
for product sales and 1.2% of all costs of revenues). This compares to
$504,000 in foreign product sales revenues in the second quarter of fiscal
1998 (approximately 49% of product sales revenues and 7.3% of all revenues)
against $760,000 in costs of foreign product sales revenues (approximately
51% of costs of revenues for product sales and 7.4% of all costs of
revenues) for the second quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined from $42 million at June 30, 1998 to
$27 million at December 31, 1998. Principal uses of cash during the first
half of fiscal 1999 included: cash used for the acquisition of Dynamic of $2
million (see Note 3 - Dynamic Acquisition), capital expenditures of $2.2
million, payment of special dividends to shareholders of $2.6 million,
purchase of treasury stock of $197,000 and $8 million to fund the losses for
the first two quarters.
Marketable securities approximated $19.2 million as of December 31,
1998 as compared to $20 million as of June 30, 1998. During the six-month
period ending December 31, 1998, the Company realized a loss of
approximately $171,000 on sales of equity securities. From June 30, 1998 to
December 31, 1998 the Company reduced its investments in equity securities
from approximately $11 million to $104,000 and increased its investments in
U.S. government obligations from approximately $6.7 million to $12.6 million
and in corporate and government agency bonds from approximately $2.6 million
to $6.5 million. This has had the intended effect of reducing the volatility
of the Company's investment portfolio.
Total liabilities were increased since June 30, 1998 by approximately
$4.1 million to approximately $39.8 million at December 31, 1998. The
increase in liabilities from June 30, 1998 is attributable primarily to
additional debt incurred in connection with HMCA's acquisition of Dynamic,
which closed in the first quarter of fiscal 1999.
As of December 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 and other
liquid assets to support of its operations.
The Company has assessed and continues to assess the impact of the Year
2000 Issue (Y2K) on its financial reporting systems and operations. The Year
2000 Issue is the result of computer programs being written using two digits
(rather than four) to define the applicable year. The Company is developing
a plan to meet this issue. The Company is reviewing all in-house computer
based systems. The MIS department is updating or replacing older systems
that are not Y2K compatible. The Company is also reviewing and has started
to plan changes to its existing customer base of MRI scanners. The Company
expects that all computer based systems will be Y2K compliant and in the
final phase of testing in the second quarter of calendar year 1999. Based on
preliminary information, costs of addressing these items are currently not
expected to have a material adverse impact on the Company's financial
position.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
In February 1998 Fonar commenced an action in the United States
District Court for the Eastern District of New York against Shimadzu
Corporation for infringement of Fonar's multi-angle oblique (MAO) imaging
patent (U.S. Patent No. 4,871,966). Civil Action No. CV 98-0680 (LDW). This
action was settled in the second quarter of fiscal 1999. As part of the
settlement, Shimadzu agreed to pay royalties to Fonar in exchange for
Shimadzu being granted a license under the MAO patent.
There were no other material changes in litigation for the first
quarter of fiscal 1999 from that described in Form 10-K for the fiscal year
ended June 30, 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: None
Item 6 - Exhibits and Reports on Form 8-K: None
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 12, 1999
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