UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1999 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 September 30, 1999
- -------------------------------- ---------------------------------
Common Stock, par value $.0001 54,652,367
Class B Common Stock, par value $.0001 5,211
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 - September 30, 1999
and June 30, 1999 3-6
Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 1999 and
September 30, 1998 7
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 1999 and
September 30, 1998 8-9
Condensed Consolidated Statements of Comprehensive Income
(loss) for the Three Months Ended September 30, 1999 and
September 30, 1998 9
Notes to Condensed Consolidated Financial Statements 10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
PART II - OTHER INFORMATION
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS September 30, June 30,
1999 1999
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $ 9,767 $15,176
Marketable securities 21,075 20,198
Accounts receivable - net 15,226 13,937
Costs and estimated earnings in excess
of billings on uncompleted contracts 800 1,463
Inventories 3,745 4,238
Prepaid expenses and other current assets 423 701
------ ------
Total current assets 51,036 55,713
------ ------
Restricted cash 5,000 5,000
Property and equipment - net 11,541 11,442
Advances and notes to related parties - net 1,343 1,435
Notes receivable - net 13 25
Excess of cost over net assets of businesses acquired-net 22,571 22,876
Other intangible assets - net 828 889
Other assets 257 268
-------- --------
$ 92,589 $ 97,648
======== ========
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
September 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1999
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of debt and capital leases $ 4,542 $ 4,474
Accounts payable 1,744 2,402
Other current liabilities 9,925 9,921
Customer advances 92 96
Billings in excess of costs and estimated
earnings on uncompleted contracts - -
Income taxes payable 952 957
------ ------
Total current liabilities 17,255 17,850
Long-term debt and capital lease obligations
less current portion 18,920 20,348
Other non-current liabilities 133 131
------ ------
Total liabilities 36,308 38,329
------ ------
Minority interest - 15
------ ------
Commitments and contingencies (Notes 8 and 9)
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
STOCKHOLDERS' EQUITY
Common Stock $.0001 par value; 60,000,000
shares authorized; 54,652,367 issued and outstanding
at September 30 and 53,793,042 at June 30, 1999 5 5
Class B Common Stock $ .0001 par value; 4,000,000
shares authorized, (10 votes per share), 5,211 issued
and outstanding at September 30 and at June 30, 1999 - -
Class C Common Stock $.0001 par value; 10,000,000
shares authorized, (25 votesper share), 9,562,824 issued
and outstanding at September 30 and at June 30, 1999 1 1
Class A non-voting Preferred Stock $.0001 par value;
8,000,000 authorized, 7,836,286 issued and outstanding
at September 30 and at June 30, 1999 1 1
Paid-in capital in excess of par value 95,966 95,386
Accumulated other comprehensive income ( 204) ( 203)
Accumulated deficit (37,204) (33,861)
Notes receivable - stockholders ( 1,332) ( 1,226)
Unearned compensation ( 321) ( 207)
Treasury stock - 235,864 shares of common stock
at September 30 and 205,864 at June 30, 1999 ( 631) ( 592)
------- -------
Total stockholders' equity 56,281 59,304
------- -------
Total liabilities and stockholders' equity $ 92,589 $ 97,648
======= =======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
REVENUES -------- --------
Product sales - net $ 978 $ 494
Service and repair fees - net 344 569
Scanning and management fees - net 8,326 6,473
-------- --------
Total Revenues - Net 9,648 7,536
-------- --------
COSTS OF REVENUES:
Cost of product sales 1,242 855
Cost of service and repair fees 908 520
Cost of scanning and management fees - net 5,533 4,500
Research and development expenses 1,562 1,615
Selling, general and administrative expenses 3,424 3,116
Compensatory element of stock issuances 119 -
Amortization of excess of cost over assets acquired 305 225
-------- --------
Total Costs and Expenses 13,093 10,831
-------- --------
Loss From Operations ( 3,445) ( 3,295)
Interest Expense ( 601) ( 308)
Interest Income 556 777
Other income-principally gain on litigation awards 216 9
------ -------
Loss before provision for taxes and
minority interest ( 3,274) ( 2,817)
Provision for income taxes 5 1
------- -------
Loss before minority interest ( 3,279) ( 2,818)
Minority interest in net (income) loss
of subsidiary and partnership ( 64) ( 26)
------- -------
NET LOSS $( 3,343) $( 2,844)
======= =======
Basic and Diluted Net Loss per share $(.05) $(.04)
====== ======
Weighted average number of shares outstanding 65,446 63,837
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
------ ------
Cash Flows from Operating Activities
Net Loss $( 3,343) $( 2,844)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income (loss) 64 26
Depreciation and amortization 1,041 999
Imputed interest on deferred payment obligation 105 27
Compensatory element of stock issuances 119 -
Stock issued in settlement of current liabilities 172 74
(Increase) decrease in operating assets, net:
Accounts and notes receivable ( 1,277) ( 982)
Costs and estimated earnings in excess of
billings on uncompleted contracts 663 573
Inventories 493 14
Prepaid expenses and other current assets 278 ( 375)
Other assets 11 24
Receivables and advances to affiliates and
related parties 92 28
Increase (decrease) in operating liabilities, net:
Accounts payable ( 658) ( 409)
Other current liabilities 67 ( 222)
Customer advances ( 4) ( 197)
Billings in excess of costs and estimated
earnings on uncompleted contracts - -
Other liabilities 2 5
------ ------
Net cash used in operating activities ( 2,175) ( 3,259)
------ ------
Cash Flows from Investing Activities:
Investment (reduction) in marketable securities ( 877) 676
Acquisitions, net of cash acquired - ( 2,000)
Purchases of property and equipment - net ( 773) ( 1,340)
Cost of capitalized software development
and patents - ( 47)
------ ------
Net cash used in investing activities ( 1,650) ( 2,711)
------ ------
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
------ ------
Cash Flows from Financing Activities:
Distributions to minority interest ( 80) ( 106)
Repayment of borrowings and capital
lease obligations ( 1,465) ( 309)
Dividends paid - ( 1,324)
Purchase of treasury stock ( 39) ( 197)
------ ------
Net cash used in financing activities ( 1,584) ( 1,936)
------ ------
Increase (Decrease) in Cash ( 5,409) ( 7,906)
Cash at beginning of period 15,176 41,751
------ ------
Cash at end of period $ 9,767 $33,845
====== ======
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 THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
------ ------
Net loss $(3,343) $(2,844)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of tax 1 (1,240)
------- -------
Total comprehensive loss $(3,342) $(4,084)
======= =======
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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 physician 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, legal services, accounting, billing and
collection and the development and implementation of practice growth and
marketing strategies.
HMCA entered the physician and diagnostic management services business
through the consummation of two acquisitions, effective June 30, 1997, 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.
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 September 30, 1999, 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.
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.
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 and lease contracts is recognized based upon
contractual agreements for management services rendered by the Company and
leases of medical equipment 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 and equipment leased, 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.
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. At September 30, 1999, the Company had cash deposits of
approximately $9.5 million in excess of federally insured limits.
Restricted Cash
---------------
At September 30, 1999, $5,000,000 of cash was pledged as collateral on an
outstanding bank loan and was classified as restricted cash on the balance
sheet.
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.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information
at September 30, 1999 and June 30, 1999, 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.
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.
Comprehensive Income
--------------------
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
------------------
Effective July 1, 1998 the Company adopted the provisions of 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
requires the capitalization of certain costs. No adjustments were required as
a result of this adoption.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform with the
current year presentation.
NOTE 3 - ACQUISITIONS
Dynamic Health Care Management, Inc.
------------------------------------
On August 20, 1998, the Company's physician and diagnostic 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 7.5% per annum, payable in sixty monthly installments, commencing
one month following the closing date, a note payable for $2,870,000 bearing
interest at 7.5% 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
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 4 - MARKETABLE SECURITIES
---------------------
The following is a summary of marketable securities at September 30,
1999:
(000's omitted)
---------------
Unrealized
Amortized Holdings Fair Market
Cost Gains (Loss) Value
--------- ----------- -----------
U.S. Government
Obligations $12,002 $ (20) $11,982
Corporate and government
agency bonds 9,277 (184) 9,093
Equity securities
including
mutual stock funds - (-) -
--------- ----------- -----------
$21,279 $ (204) $21,075
========= =========== ===========
NOTE 5 - ACCOUNTS RECEIVABLE, NET
------------------------
Accounts receivable, net is comprised of the following:
(000's omitted)
---------------
September 30, 1999 June 30, 1999
------------------ -------------
Receivable from equipment
sales and service $ 2,093 $ 1,728
Receivables assigned from
related PC's 16,574 15,486
Less: Allowance for
doubtful accounts
and contractual
allowances (3,441) (3,277)
------- -------
$15,226 $13,937
======= =======
The Company's customers are concentrated in the healthcare industry.
The Company's receivable assigned from the related PC's substantially
consists of fees outstanding under management agreements, service contracts
and lease agreements 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 and health management
organizations.
Collection by the Company of its accounts receivable may be impaired by
the uncollectibility of medical fees from third party payors, particularly
insurance carriers covering automobile no-fault and workers compensation
claims due to longer payment cycles and rigorous informational requirements.
Further, payment of certain of the no-fault receivables are 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). Approximately 33% and 25% of the PC's net revenues for
the three months ended September 30, 1999 and September 30, 1998,
respectively, were derived from no-fault and personal injury protection
claims. By their 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. The Company takes
all legally available steps, including legally prescribed arbitrations, to
collect its receivables. 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.
Net revenues from the related PC's accounted for approximately 65% and
77% of the consolidated net revenues for the three months ended September 30,
1999 and 1998, respectively. As of June 30, 1999, the Company had a
significant receivable balance from one insurance company, which totaled
$1,623,000.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 6 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets
consist of:
(000's omitted)
September 30, 1999 June 30, 1999
Purchased parts, components
and supplies $3,250 $ 3,678
Work-in-process 495 560
------ -------
$3,745 $ 4,238
====== =======
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended September 30, 1999 and 1998, the Company
paid approximately $576,000 and $189,000 for interest, respectively. During
the three months ended September 30, 1999 and 1998, the Company paid
approximately $10,000 and $1,000 for income taxes, respectively.
During the three months ended September 30, 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
==========
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 April 1999,
summary judgment was granted against Melville Magnetic and the Company, as a
guarantor on the loan. The court's decision is currently under appeal.
Included in accrued liabilities at September 30, 1999 is $650,000 related to
this judgment.
NOTE 10 - PRO FORMA INFORMATION
The Company's consolidated financial statements for the three months
ended September 30, 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 pro forma results of operations for the three months ended
September 30, 1998, assuming the foregoing acquisition had occurred on June
30, 1998 (in thousands, except per share data):
Three Months Ended
September 30, 1998
-------------------
(Unaudited)
Revenues, net $ 8,215
Loss from operations $ (3,044)
Income (loss) before taxes $ (2,656)
Fully diluted net income
(loss) per share $(.04)
NOTE 11 - SUBSEQUENT EVENT
In October, 1999, the Company sold the stock of its subsidiary, Medical
SNI. Medical SNI, based in Haifa, Israel, designs and develops products for
the medical imaging and archiving industry. The effects of the sale include
the removal of liabilities of approximately $1.2 million and a pre-tax gain of
approximately $1.0 million. Fonar has a non-exclusive, perpetual, royalty free
worldwide license to use and sublicense the technology that was developed up
to the time of the sale.
NOTE 12 - SEGMENT AND RELATED INFORMATION
Effective July 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information".
SFAS No. 131 establishes standards for the way public enterprises report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to stockholders.
The Company operates in two industry segments - manufacturing and the
servicing of medical equipment and management of physician practices,
including diagnostic imaging services.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. All intersegment sales are
market-based. The Company evaluates performance based on income or loss from
operations.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 12 - SEGMENT AND RELATED INFORMATION (continued)
Summarized financial information concerning the Company's reportable
segments is shown for the three months ended September 30, 1999 and 1998 in
the following table (in thousands):
1999 1998
Net revenues: ------- -------
Medical equipment $ 1,635 $ 1,338
Physician management services 8,326 6,473
Intersegment eliminations ( 313) ( 275)
------- -------
Total $ 9,648 $ 7,536
======= =======
Income (loss) from operations:
Medical equipment $ (4,358) $ (4,157)
Physician management services 914 862
------- -------
Total $ (3,445) $ (3,295)
======= =======
Depreciation and amortization:
Medical equipment $ 477 $ 395
Physician management services 564 604
------- -------
Total $ 1,041 $ 999
======= =======
Compensatory element of stock issuances:
Medical equipment $ 27 $ -
Physician management services 92 -
------- -------
Total $ 119 $ -
======= =======
Capital expenditures:
Medical equipment $ 663 $ 1,252
Physician management services 110 88
------- -------
Total $ 773 $ 1,340
======= =======
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 12 - SEGMENT AND RELATED INFORMATION (Continued)
At At
Sept 30, June 30,
1999 1999
------ -------
Identifiable assets:
Medical equipment $ 51,526 $ 56,311
Physician management services 41,063 41,338
------- -------
Total $ 92,589 $ 97,648
======= =======
Export Sales:
The Company's areas of operations are principally in the United States.
The Company had export sales of medical equipment amounting to 0.0% and 4.0%
of consolidated net revenues for the three months ended September 30, 1999 and
1998, respectively.
The sales were made principally to the following locations:
1999 1998
------- -------
Spain - 4.0%
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the fiscal quarter ended September 30, 1999 (first quarter of fiscal
2000), the Company reported a net loss of $3.3 million on revenues of $9.6
million as compared to a net loss of $2.8 million on revenues of $7.5 million
for the first quarter of fiscal 1999.
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 and diagnostic management
services, which is conducted through Fonar's wholly-owned subsidiary, Health
Management Corporation of America ("HMCA").
HMCA income from operations increased to approximately $914,000 for the
first three months of fiscal 2000 compared to operating income of $862,000 for
the first three months of fiscal 1999. 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 multi-specialty physician
practices in Nassau and Suffolk Counties in New York, A & A is an MSO managing
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 diagnostic imaging centers and a physical
rehabilitation center. RVDC was engaged in the business of providing
management and other services to diagnostic imaging centers. Results of
operations of Dynamic are included from and after August 20, 1998, the closing
of the acquisition, and hence the results of operations for HMCA for the first
quarter of fiscal 1999 do not include the results of operations of Dynamic
from July 1, 1998 to August 20, 1998.
The income from operations attributable to HMCA (physician and diagnostic
management services) was not sufficient to offset the operating loss from the
Company's traditional MRI equipment manufacturing and service business ($4.3
million for the first three months of fiscal 2000 as compared to $4.2 million
for the first three months of fiscal 1999). Accordingly the Company's
consolidated operating loss was $3.4 million for the first three months of
fiscal 2000 as compared to an operating loss of $3.3 million for the first
quarter of fiscal 1999.
The principal reason for the Company's operating losses was low product
sales volumes while the Company was focused on the research and development of
its new products. Sales revenues attributable to the Company's medical (MRI)
equipment business (sales and service) were $1.6 million for the first three
months of fiscal 2000 as compared to $1.3 million for the first three months
of fiscal 1999. Costs of revenues attributable to the Company's medical
equipment business were $2.2 million for the first three months of fiscal 2000
and $1.6 million for the first three months of fiscal 1999.
The Company's efforts to improve equipment sales volume has been focused
on research and development (expenditures of $1.6 million for the first three
months of each of fiscal 2000 and fiscal 1999) 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 Company's works-in-progress (The OR-360(TM) MRI, Stand-Up(TM) MRI and
The Open Sky(TM) MRI), are intended to significantly improve the Company's
competitive position. The QUAD scanners are highly competitive
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, 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.
The Company's current "works in progress" are the OR 360(TM) scanner, the
Open Sky MRI(TM) scanner and the Stand-Up MRI(TM) scanner. The OR 360 has an
enlarged room sized magnet which allows full-fledged surgical teams to perform
conventional surgery on the patient inside the magnet. Surgical instruments,
needles, catheters, endoscopes and the like can be guided to the malignant
lesion by means of the MRI image, and treatment agents may be administered
directly and exclusively to the malignant tissue. The Open Sky MRI, similar in
design to the OR 360, includes the floor, ceiling and sidewalls of the
scanning room as part of the iron frame of the magnet. Unlike the OR 360, the
Open Sky MRI is strictly a diagnostic scanner, and does not include the
software and features that make the OR 360 suitable as an operating room. The
Company's Stand-Up MRI will allow patients to be scanned while standing,
sitting, bending or reclining. As a result MRI will be able to be used to show
abnormalities and injuries (particularly of the joints and spine) under full
weight-bearing conditions.
The Company has begun to shift its focus from research and development to
sales and marketing. To that end, the Company has entered into an agreement
with X-Ray Marketing Associates, a national network of independent dealers
employing in the aggregate over 700 professional sales representatives.
Pursuant to that agreement, X-Ray Marketing Associates has become a
distributor for Fonar's line of open MRI scanners.
As part of its marketing program, the Company will attend the industry's
annual trade show, RSNA (Radiological Society of North America) in November
1999. The Company believes that it is well positioned to take advantage of the
"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.
There were no revenues from foreign product sales or costs of revenues
for foreign product sales for the first three months of fiscal 2000. This
compares to $306,000 in foreign product sales revenues during the first three
months of fiscal 1999 (approximately 62% of product sales revenues and 4% of
all revenues) against $530,000 in costs of foreign product sales revenues
(approximately 62% of costs of revenues for product sales and 9% of all costs
of revenues) for the first three months of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined from $15.2 million at June 30, 1999 to
$9.8 million at September 30, 1999. Principal uses of cash during the first
three months of fiscal 2000 included: capital expenditures of $800,000,
purchase of short-term investments of $900,000, repayment of long-term debt of
$1.5 million and $2.1 million to fund the losses for the first three months of
fiscal 2000.
Marketable securities approximated $21.1 million as of September 30, 1999
as compared to $20 million as of June 30, 1999. From June 30, 1999 to
September 30, 1999 the Company reduced its investments in equity securities
from approximately $100,000 to $0 and increased its investments in U.S.
government obligations from approximately $11.0 million to $12.0 million. The
Company's investments in corporate and government agency bonds remained the
same at $9.1 million.
Total liabilities decreased since June 30, 1999 by approximately $2.0
million to approximately $36.3 million at September 30, 1999. The decrease in
liabilities from June 30, 1999 is attributable primarily to the retirement of
debt in the ordinary course.
As of September 30, 1999, 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 and diagnostic management services 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 has developed a
plan to meet this issue. The Company has reviewed all in-house computer based
systems. The MIS department is on schedule for updating or replacing older
systems that are not Y2K compatible. The Company has also reviewed, tested and
started to change to its existing customer base of MRI scanners. The Company
expects that all computer based systems will be Y2K compliant by the year
2000. Costs of addressing these items are not expected to have a material
adverse impact on the Company's financial position.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There were no material changes in litigation for the first quarter of
fiscal 2000 from that described in Form 10-K for the fiscal year ended June
30, 1999.
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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this ammended 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: December 7, 1999
