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 SEPTEMBER 30, 2000 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)
(631) 694-2929
---------------------------------------------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at September 30, 2000
-------------------------------- ---------------------------------
Common Stock, par value $.0001 56,627,572
Class B Common Stock, par value $.0001 4,211
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, 2000
and June 30, 2000
Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 2000 and
September 30, 1999
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2000 and
September 30, 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS September 30, June 30,
2000 2000
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $17,654 $11,811
Marketable securities 9,584 11,484
Accounts receivable - net 14,566 14,389
Receivable from license agreement 2,700 -
Costs and estimated earnings in excess
of billings on uncompleted contracts 151 968
Inventories 4,408 3,536
Investment in sales-type lease w/related party 118 58
Prepaid expenses and other current assets 548 604
------ ------
Total current assets 49,729 42,850
------ ------
Restricted cash 5,000 5,000
Property and equipment - net 11,088 11,227
Advances and notes to related parties - net 1,109 1,159
Investment in sales-type lease w/related party 1,725 873
Notes receivable - net 506 501
Excess of cost over net assets of businesses acquired-net 21,352 21,657
Other intangible assets - net 989 1,036
Other assets 296 296
-------- --------
$ 91,794 $ 84,599
======== ========
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 2000 2000
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of debt and capital leases $ 7,054 $ 6,225
Accounts payable 2,381 1,739
Other current liabilities 8,240 8,967
Customer advances 597 582
Billings in excess of costs and estimated
earnings on uncompleted contracts - -
Income taxes payable 897 897
------ ------
Total current liabilities 19,169 18,410
Long-term debt and capital lease obligations
less current portion 12,917 14,744
Unearned revenue - license fee 11,115 -
Other non-current liabilities 138 138
------ ------
Total liabilities 43,339 33,292
------ ------
Minority interest 53 22
------ ------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Common Stock $.0001 par value; 60,000,000
shares authorized; 56,627,572 issued and outstanding
at September 30 and 56,315,471 at June 30, 2000 6 6
Class B Common Stock $ .0001 par value; 4,000,000
shares authorized, (10 votes per share), 4,211 issued
and outstanding at September 30 and at June 30, 2000 - -
Class C Common Stock $.0001 par value; 10,000,000 shares
authorized, (25 votes per share), 9,562,824 issued
and outstanding at September 30 and at June 30, 2000 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, 2000 1 1
Paid-in capital in excess of par value 99,316 98,581
Accumulated other comprehensive income ( 147) ( 265)
Accumulated deficit (48,724) (44,817)
Notes receivable - stockholders ( 1,348) ( 1,338)
Unearned compensation ( 32) ( 213)
Treasury stock - 289,264 shares of common stock
at September 30 and 289,264 at June 30, 2000 ( 671) ( 671)
------- -------
Total stockholders' equity 48,202 51,285
------- -------
Total liabilities and stockholders' equity $ 91,794 $ 84,599
======= =======
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,
-------------------
2000 1999
REVENUES -------- --------
Product sales - net $ 257 $ 978
Service and repair fees - net 459 344
Scanning and management fees - net 8,768 8,326
License fees and royalties 627 231
-------- --------
Total Revenues - Net 10,111 9,879
-------- --------
COSTS OF REVENUES:
Cost of product sales 635 1,242
Cost of service and repair fees 672 908
Cost of scanning and management fees - net 5,654 5,533
Research and development expenses 1,512 1,562
Selling, general and administrative expenses 4,436 3,424
Compensatory element of stock issuances 896 119
Amortization of excess of cost over assets acquired 305 305
-------- --------
Total Costs and Expenses 14,110 13,093
-------- --------
Loss From Operations ( 3,999) ( 3,214)
Interest Expense ( 279) ( 601)
Interest Income 460 556
Other income (expense) 22 ( 15)
------ -------
Loss before provision for taxes and
minority interest ( 3,796) ( 3,274)
Provision for income taxes 8 5
------- -------
Loss before minority interest ( 3,804) ( 3,279)
Minority interest in net (income) loss
of subsidiary and partnership ( 103) ( 64)
------- -------
NET LOSS $( 3,907) $( 3,343)
======= =======
Basic and Diluted Net Loss per share $(.06) $(.05)
====== ======
Weighted average number of shares outstanding 67,366 65,446
====== ======
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,
-----------------
2000 1999
------ ------
Cash Flows from Operating Activities
Net Loss $( 3,907) $( 3,343)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income (loss) 103 64
Depreciation and amortization 1,153 1,041
Imputed interest on deferred payment obligation - 105
Compensatory element of stock issuances 896 119
Stock issued in settlement of current liabilities - 172
Amortization of unearned license revenue ( 585) -
License fee 9,000 -
(Increase) decrease in operating assets, net:
Accounts and notes receivable ( 182) ( 1,277)
Costs and estimated earnings in excess of
billings on uncompleted contracts 817 663
Inventories ( 872) 493
Prepaid expenses and other current assets 67 278
Other assets - 11
Receivables and advances to affiliates and
related parties 50 92
Investment in sales-type lease w/related party ( 912) -
Increase (decrease) in operating liabilities, net :
Accounts payable 642 ( 658)
Other current liabilities ( 727) 173
Customer advances 15 ( 4)
Other liabilities - 2
------ ------
Net cash provided by (used in) operating activities 5,558 ( 2,069)
------ ------
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,
-----------------
2000 1999
------ ------
Cash Flows from Investing Activities:
Investment (reduction) in marketable securities 2,018 ( 877)
Purchases of property and equipment - net ( 663) ( 773)
------ ------
Net cash provided by (used in) investing activities 1,355 ( 1,650)
------ ------
Cash Flows from Financing Activities:
Distributions to minority interest ( 72) ( 80)
Repayment of borrowings and capital
lease obligations ( 998) ( 1,465)
Purchase of treasury stock - ( 39)
------ ------
Net cash used in financing activities ( 1,070) ( 1,690)
------ ------
Increase (Decrease) in Cash 5,843 ( 5,409)
Cash at beginning of period 11,811 15,176
------ ------
Cash at end of period $17,654 $ 9,767
====== ======
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,
------------------
2000 1999
------- -------
Net loss $(3,907) $(3,343)
Other comprehensive income, net
of tax:
Unrealized gains (losses) on
securities, net of tax 118 1
------- -------
Total comprehensive loss $(3,789) $(3,342)
======= =======
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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 and through technology
licensing agreements.
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.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
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.
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, 2000, 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"). 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. Revenue under licensing agreements is
recognized over the lesser of the economic life of the assets or the term of
the licensing agreement.
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, 2000, the Company had cash deposits of
approximately $17.5 million in excess of federally insured limits.
Restricted Cash
---------------
At September 30, 2000, $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, 2000 and June 30, 2000, 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.
Computer Software
------------------
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.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 3 - MARKETABLE SECURITIES
---------------------
The following is a summary of marketable securities at September 30,
2000:
(000's omitted)
---------------
Unrealized
Amortized Holdings Fair Market
Cost Gains (Loss) Value
--------- ---------- -----------
U.S. Government $----- $ ------ $ ------
Obligations
Corporate and government 9,731 (147) 9,584
agency bonds
Equity securities
including
mutual stock funds ----- ------ ------
--------- ---------- -----------
$ 9,731 $ (147) $ 9,584
========= ========== ===========
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 4 - ACCOUNTS RECEIVABLE, NET
------------------------
Accounts receivable, net is comprised of the following:
(000's omitted)
---------------
September 30, 2000 June 30, 2000
------------------ -------------
Receivable from equipment
sales and service $2,022 $2,380
Receivables assigned from
related PC's 15,472 14,937
Less: Allowance for
doubtful accounts
and contractual
allowances (2,928) (2,928)
------- -------
$ 14,566 $14,389
======= =======
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.
Approximately 40% and 33% of the PC's net revenues for the three months ended
September 30, 2000 and September 30, 1999, respectively, were derived from
no-fault and personal injury protection claims.
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.
Net revenues from the related PC's accounted for approximately 87% and
65% of the consolidated net revenues for the three months ended September 30,
2000 and 1999, respectively.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 5 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets
consist of:
(000's omitted)
---------------
September 30, 2000 June 30, 2000
------------------ -------------
Purchased parts, components
and supplies $ 3,125 $ 2,917
Work-in-process 1,283 619
------ -------
$ 4,408 $ 3,536
====== =======
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended September 30, 2000 and 1999, the Company
paid approximately $342,000 and $576,000 for interest, respectively. During
the three months ended September 30, 2000 and 1999, the Company paid
approximately $1,000 and $10,000 for income taxes, respectively.
NOTE 7 - 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 8 - 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, 2000 and June 30, 2000 is
$650,000 related to this judgment.
NOTE 9 - GAIN ON SALE OF SUBSIDIARY
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. The Company has a non-exclusive, perpetual,
royalty free worldwide license to use and sublicense the then existing
technology.
NOTE 10 - LICENSE AGREEMENT
In July of 2000, the Company entered into a license agreement pursuant
to which it licensed certain of its intellectual assets on a non-exclusive
basis. Renumeration payable to the Company under this agreement is $11,700,000
of which $9,000,000 was received in September of 2000 and the balance is due
in January of 2001. The license fee will be recognized as income ratably over
the five-year period ending June 30, 2005.
NOTE 11 - SEGMENT AND RELATED INFORMATION
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 0.0%
of consolidated revenues for the three months ended September 30, 2000 and
1999, respectively.
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, 2000
(UNAUDITED)
NOTE 11 - SEGMENT AND RELATED INFORMATION (Continued)
Summarized financial information concerning the Company's reportable
segments is shown for the three months ended September 30, 2000 and 1999 in
the following table (in thousands):
2000 1999
Net revenues: ------- -------
Medical equipment $ 1,618 $ 1,635
Physician practice management 8,768 8,326
Intersegment eliminations ( 275 ) ( 313)
------- -------
Total $ 10,111 $ 9,648
======= =======
Income (loss) from operations:
Medical equipment $ (4,800 ) $ (4,358)
Physician practice management 801 914
------- -------
Total $ (3,999 ) $ (3,445)
======= =======
Depreciation and amortization:
Medical equipment $ 542 $ 477
Physician practice management 611 564
------- -------
Total $ 1,153 $ 1,041
======= =======
Compensatory element of stock issuances:
Medical equipment $ 524 $ 27
Physician practice management 372 92
------- -------
Total $ 896 $ 119
======= =======
Capital expenditures:
Medical equipment $ 478 $ 663
Physician practice management 185 110
------- -------
Total $ 663 $ 773
======= =======
At At
Sept 30, June 30,
2000 2000
------ -------
Identifiable assets:
Medical equipment $ 52,917 $ 43,046
Physician practice management 38,877 41,553
------- -------
Total $ 91,794 $ 84,599
======= =======
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the fiscal quarter ended September 30, 2000 (first quarter of fiscal
2001), the Company reported a net loss of $3.9 million on revenues of $10.1
million as compared to a net loss of $3.3 million on revenues of $9.9 million
for the first quarter of fiscal 2000.
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 was approximately $800,000 for the first
three months of fiscal 2001 compared to income of $914,000 for the first three
months of fiscal 2000. The decline in HMCA income was attributable to its
operating, selling, general and administrative costs, including start-up costs
and expenses related to moving to its new headquarters, relating to the
expansion of its business. The results for fiscal 2001 reflected the
performance 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
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 ($4.8 million for the first three months of fiscal 2001 and $4.4
million for the first three months of fiscal 2000). Accordingly the Company's
consolidated operating loss was $4.0 million for the first three months of
fiscal 2001 as compared to an operating loss of $3.4 million for the first
three months of fiscal 2000.
Nevertheless, licensing fees and royalties recognized by the Company's
traditional MRI manufacturing and service business increased from $231,000 in
the first three months of fiscal 2000 to $627,000 in the first three months of
fiscal 2001. Most of the licensing revenue recognized in the first quarter of
fiscal 2001 resulted from a technology license agreement executed in the first
quarter.
The principal reason for the Company's operating losses was low product
sales volumes while the Company was focused on research and development. Sales
revenues attributable to the Company's medical (MRI) equipment business (sales
and service) were $257,000 for the first three months of fiscal 2001 as
compared to $978,000 for the first three months of fiscal 2000. Costs of
revenues attributable to the Company's medical equipment business were $1.3
million for the first quarter of fiscal 2001 and $2.1 million for the first
quarter of fiscal 2000.
The Company's efforts to improve equipment sales volume have emphasized
research and development to improve the competitiveness of its products and
increased marketing and sales efforts. Research and development expenditures
were $1.5 million for the first quarter of fiscal 2001 and $1.6 million for
the first quarter of fiscal 2000.
The Company's Indomitable (TM) (Stand-Up), QUAD (TM) and Fonar-360 (TM)
MRI scanners, together with the Company's works-in-progress (Pinnacle (TM)
MRI), are intended to significantly improve the Company's competitive
position. In addition, the Company offers a low cost open scanner, the Echo
(TM) MRI, operating at .3 Tesla field strength.
The Company's Indomitable (TM) scanner, which received clearance to
market from the FDA on October 3, 2000, will allow patients to be scanned
while standing or reclining. As a result, for the first time, MRI will be able
to be used to show abnormalities and injuries under full weight-bearing
conditions, particularly the spine and joints. A floor-recessed elevator
brings the patient to the height appropriate for the targeted image region. A
custom-built adjustable bed will allow patients to sit or lie on their backs,
sides or stomachs at any angle. Full-range-of-motion studies of the joints in
virtually any direction will be possible, an especially promising feature for
sports injuries.
Indomitable(TM) will also be useful for MR-directed surgical procedures
as the surgeon would have unhindered access to the patient with no
restrictions in the vertical direction. This easy-entry, mid-field-strength
scanner should be ideal for trauma centers where a quick MRI-screening within
the first critical hour of treatment will greatly improve patients' chances
for survival and optimize the extent of recovery.
The Fonar 360 has an enlarged room sized magnet in which the magnet
frame is incorporated into the floor, ceiling and walls of the scan room. This
is made possible by Fonar's patented Iron-Frame(TM) technology which allows
the Company's engineers to control, contour and direct the magnet's lines of
flux in the patient gap where wanted and almost none outside of the steel of
the magnet where not wanted. Physicians and family members are able to
actually enter the scanner and approach the patient. In its Open Sky version,
the Fonar 360 serves as an open patient friendly scanner which allows 360
degree access to the patient on the scanner bed. The walls can be decorated
with panoramic murals and the entire scan room can be decorated to be
incorporated into the pictured landscape.
In its future interventional OR-360 version, the enlarged room sized
magnet and 360 degree access to the patient afforded by the Fonar 360 permit
full-fledged surgical teams to walk into the magnet and perform surgery on the
patient inside the magnet. Most importantly the exceptional quality of the MRI
image and its exceptional capacity to exhibit tissue detail on the image, by
virtue of the nuclear resonance signal's extraordinary capacity to create
image contrast, can then be obtained real time during surgery to guide the
surgeon in the surgery. Thus surgical instruments, needles, catheters,
endoscopes and the like can be introduced directly into the human body and
guided to the malignant lesion by means of the MRI image. The number of
inoperable lesions should be greatly reduced by the availability of this new
capability. Most importantly treatment can be carried directly to the target
tissue.
The "QUAD" scanners are unique MRI scanners in that four sides are open
thus allowing access to the scanning area from four vantage points. The
starshaped open design of the QUAD will also make possible a host of new
applications, particularly MRI mammography and MRI directed surgery
(Interventional MRI). The QUAD (TM) 12000 MRI scanner utilizes a 6000 gauss
iron core electromagnet and is accessible from four sides. The QUAD 12000 is
the first "open" MRI scanner at high field. The QUAD (TM) 7000 is similar in
design to the QUAD 12000 but utilizes a smaller 3,500 gauss electromagnet.
The Company is also developing a superconductive version of its open
iron frame magnets, the "Pinnacle" (TM), and has completed construction of a
prototype with a 0.6 Tesla superconductive magnet. The Company's design of its
superconductive magnet anticipated the possibility of making its other
products available as superconducting magnets. Therefore, it is the Company's
objective to make Indomitable (TM) and the Fonar 360 available to FONAR's
customers as either iron-frame resistive models or iron-frame superconductive
magnets depending on customer preference and pricing.
The Company has terminated its distributorship agreement with X-Ray
Marketing Associates, a national network of independent dealers. The Company
intends and is proceeding to build a nationwide internal sales force.
The Company expects marked demand for its high-field "Open MRI" scanners
since image quality increases as a direct proportion to magnetic field
strength. The Company anticipates that the variety of its "Open MRI" products
will also serve to maximize the appeal of its product line to a wide variety
of users. The Company's new scanners provide improved image quality and high
speed imaging at costs that are significantly less than the competition and
more in keeping with the medical cost reduction demands being made by our
national leaders on behalf of the public. In addition, the Company offers a
low cost scanner, the Echo, for the particularly cost conscious customers.
There were no foreign product sales for the first three months of fiscal
2001 or 2000.
Cash and cash equivalents increased from $11.8 million at June 30, 2000
to $17.7 million at September 30, 2000. Principal uses of cash during the
first three months of fiscal 2001 included: capital expenditures of $663,000,
repayment of long-term debt of $1.0 million and $3.5 million to fund the
losses for the first three months of fiscal 2001. Cash of approximately $9.0
million was provided from licensing fees and $2.0 million was provided from
the sale of marketable securities.
Marketable securities approximated $9.6 million as of September 30, 2000
as compared to $11.5 million as of June 30, 2000. From June 30, 2000 to
September 30, 2000 the Company reduced its investments in corporate and
government agency bonds from $11.5 million to $9.6 million. The Company had no
investments in equity securities or U.S. government obligations at either June
30, 2000 or September 30, 2000.
Total liabilities increased since June 30, 2000 by approximately $10.1
million to approximately $43.3 million at September 30, 2000. The increase in
liabilities from June 30, 2000 is attributable primarily to the advance
payment of license fees received by the Company in the first quarter of fiscal
2001 (unearned portion of revenues in the amount of $11.1 million).
As of September 30, 2000, 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 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's subsidiary, HMCA is
also exploring both bank financing and the private placement of subordinated
debt and/or equity securities.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There were no material changes in litigation for the first three months of
fiscal 2001 from that described in the Company's Form 10-K for the fiscal year
ended June 30, 2000.
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 report to be signed on its behalf by the
undersigned thereunto duly authorized.
FONAR CORPORATION
(Registrant)
By: /s/ Raymond V. Damadian
Raymond V. Damadian
President & Chairman
Dated: November 14, 2000
