UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 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)
Registrant's telephone number, including area code: (631) 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 March 31, 2000
- -------------------------------- ---------------------------------------
Common Stock, par value $.0001 55,949,729
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
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2000
and June 30, 1999
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 2000 and March 31, 1999
Condensed Consolidated Statements of Operations for
the Nine Months Ended March 31, 2000 and March 31, 1999
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 2000 and March 31, 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 March 31, June 30,
2000 1999
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $ 6,164 $15,176
Marketable securities 15,503 20,198
Accounts receivable - net 16,291 13,937
Costs and estimated earnings in excess
of billings on uncompleted contracts 151 1,463
Inventories 3,690 4,238
Prepaid expenses and other current assets 820 701
------ ------
Total current assets 42,619 55,713
------ ------
Restricted cash 5,000 5,000
Property and equipment - net 11,253 11,442
Advances and notes to affiliates and related parties- net 1,201 1,435
Costs and estimated earnings in excess of billings on
uncompleted contracts - long term 1,263 -
Notes receivable - net 6 25
Excess of cost over net assets of business acquired-net 21,962 22,876
Other intangible assets - net 721 889
Other assets 299 268
-------- --------
$ 84,324 $ 97,648
======== ========
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of debt and capital leases $ 3,965 $ 4,474
Accounts payable 1,562 2,402
Other current liabilities 8,854 9,921
Customer advances 107 96
Billings in excess of costs and estimated
earnings on uncompleted contracts - -
Income taxes payable 939 957
------ ------
Total current liabilities 15,427 17,850
Long-term debt and capital lease obligations
less current portion 17,427 20,348
Other non-current liabilities 252 131
------ ------
Total liabilities 33,106 38,329
------ ------
Minority interest 29 15
------ ------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Common Stock $.0001 par value; 60,000,000
shares authorized; 55,949,729 issued and outstanding
at March 31, 2000 and 53,793,042 at June 30, 1999 6 5
Class B Common Stock $ .0001 par value; 4,000,000
shares authorized, (10 votes per share), 5,211 issued
and outstanding at March 31, 2000 and at June 30, 1999 - -
Class C Common Stock $.0001 par value; 10,000,000 shares
authorized, (25 votes per share), 9,562,824 issued and
outstanding at March 31, 2000 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 March 31, 2000 and at June 30, 1999 1 1
Paid-in capital in excess of par value 97,533 95,386
Accumulated deficit (43,832) (33,861)
Notes receivable - stockholders ( 1,059) ( 1,226)
Accumulated other comprehensive income ( 333) ( 203)
Unearned compensation ( 457) ( 207)
Treasury stock - 270,864 shares of common stock
at March 31, 2000 and 205,864 at June 30, 1999 ( 671) ( 592)
------- -------
Total stockholders' equity 51,189 59,304
------- -------
Total liabilities and stockholders' equity $ 84,324 $ 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
MARCH 31,
---------------------
2000 1999
REVENUES -------- --------
Product sales - net $ 877 $ 261
Service and repair fees - net 379 494
Scanning and management fees - net 8,594 8,860
-------- --------
Total Revenues - Net 9,850 9,615
-------- --------
COSTS AND EXPENSES:
Cost of product sales 701 973
Cost of service and repair fees 875 595
Cost of scanning and management fees - net 5,516 6,244
Research and development expenses 1,358 1,922
Selling, general and administrative expenses 4,053 3,651
Provision for bad debt 63 -
Compensatory element of stock issuances 918 84
Amortization of excess of cost over assets acquired 305 314
------- -------
Total Costs and Expenses 13,789 13,783
-------- --------
Loss From Operations ( 3,939) ( 4,168)
Interest Expense ( 366) ( 579)
Investment Income - net 477 523
Other expense (income) ( 37) 9
------ -------
Loss before provision for taxes and
minority interest ( 3,865) ( 4,215)
Provision for income taxes 22 4
------- -------
Loss before minority interest ( 3,887) ( 4,219)
Minority interest in net (income) loss
of subsidiary and partnership ( 76) ( 96)
------- -------
NET LOSS $( 3,963) $( 4,315)
======= =======
Basic and diluted Net Loss per share $(.06) $(.07)
====== ======
Weighted average number of shares outstanding 66,708 64,567
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE NINE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
REVENUES -------- --------
Product sales - net $ 2,686 $ 1,356
Service and repair fees - net 1,216 1,635
Scanning and management fees - net 25,096 23,296
-------- --------
Total Revenues - Net 28,998 26,287
-------- --------
COSTS AND EXPENSES:
Cost of product sales 3,134 3,144
Cost of service and repair fees 2,664 1,730
Cost of scanning and management fees - net 16,845 16,084
Research and development expenses 4,373 5,126
Selling, general and administrative expenses 11,568 10,437
Provision for bad debt 63 -
Compensatory element of stock issuances 1,148 84
Amortization of excess of cost over assets acquired 914 853
-------- --------
Total Costs and Expenses 40,709 37,458
-------- --------
Loss From Operations (11,711) (11,171)
Interest Expense ( 1,358) ( 1,347)
Investment Income - net 1,566 1,583
Gain on sale of subsidiary 1,022 -
Other income-principally gain on litigation awards 738 1,519
------ -------
Loss before provision for taxes and
minority interest ( 9,743) ( 9,416)
Provision for income taxes 33 6
------- -------
Loss before minority interest ( 9,776) ( 9,422)
Minority interest in net (income) loss
of subsidiary and partnership ( 195) ( 214)
------- -------
NET LOSS $( 9,971) $( 9,636)
======= =======
Basic and diluted Net Loss per share $(.15) $(.15)
====== ======
Weighted average number of shares outstanding 66,708 64,567
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
-----------------
1999 1999
------ ------
Cash Flows from Operating Activities
Net Loss $( 9,971) $( 9,636)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income (loss) 195 214
Depreciation and amortization 3,172 3,279
Imputed interest on deferred payment obligation 315 266
Provision for losses on accounts and notes
receivable and accounts receivable from affiliates 63 -
Gain on sale of subsidiary ( 1,022)
Compensatory and fee element of stock issuances 1,148 84
Stock issued in settlement of current liabilities 516 124
(Increase) decrease in operating assets, net:
Accounts and notes receivable ( 2,335) ( 2,699)
Costs and estimated earnings in excess of
billings on uncompleted contracts 49 733
Inventories 548 ( 1,748)
Prepaid expenses and other current assets ( 119) ( 698)
Other assets ( 31) ( 163)
Receivables and advances to affiliates and
related parties 234 189
Increase (decrease) in operating liabilities, net:
Accounts payable and income taxes ( 858) ( 177)
Other current liabilities ( 242) ( 2,031)
Customer advances 11 ( 408)
Billings in excess of costs and estimated
earnings on uncompleted contracts - ( 31)
Other liabilities 121 ( 113)
------ ------
Net cash used in operating activities ( 8,206) (12,815)
------ ------
Cash Flows from Investing Activities:
Purchases of property and equipment - net ( 1,776) ( 2,819)
Purchase of Central Health Care Mgmt Service
net of cash acquired - ( 465)
Purchase of Dynamic Inc and affiliates,
net of cash acquired - ( 2,000)
Investment (reduction) in marketable securities 4,562 959
------ ------
Net cash provided by (used in) investing activities 2,786 ( 4,325)
------ ------
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
-----------------
2000 1999
------ ------
Cash Flows from Financing Activities:
Distribution to minority interest ( 209) ( 288)
Repayment of borrowings and capital
lease obligations ( 3,304) ( 1,416)
Dividends paid - ( 3,909)
Purchase of treasury stock ( 79) ( 197)
------ ------
Net cash used in financing activities ( 3,592) ( 5,810)
------ ------
Increase (Decrease) in Cash ( 9,012) (22,950)
Cash at beginning of period 15,176 41,751
------ ------
Cash at end of period $ 6,164 $18,801
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
-----------------
2000 1999
------ ------
Net loss $( 9,971) $(9,636)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of tax ( 130) ( 1)
--------- --------
$(10,101) $(9,637)
========= ========
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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.
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 March 31, 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"), 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 March 31, 2000, the Company had cash deposits of approximately
$5.8 million in excess of federally insured limits.
Restricted Cash
---------------
At March 31, 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 March 31, 2000 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.
NOTE 4 - MARKETABLE SECURITIES
---------------------
The following is a summary of marketable securities at March 31, 2000:
(000's omitted)
---------------
Unrealized
Amortized Holdings Fair Market
Cost Gains (Loss) Value
--------- ----------- -----------
U.S. Government
Obligations $ 5,174 $ (66) $ 5,108
Corporate and government
agency bonds 10,663 (268) 10,395
Equity securities
including
mutual stock funds --- --- ---
--------- ----------- -----------
$15,837 $ (334) $15,503
========= =========== ===========
NOTE 5 - ACCOUNTS RECEIVABLE, NET
------------------------
Accounts receivable, net is comprised of the following:
(000's omitted)
---------------
March 31, 2000 June 30, 1999
------------------ -------------
Receivable from equipment
sales and service $ 2,215 $ 1,728
Receivables assigned from
related PC's 17,683 15,486
Less: Allowance for
doubtful accounts
and contractual
allowances (3,607) (3,277)
------- -------
$16,291 $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 nine months ended March 31, 2000 and March 31, 1999, 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 45% and
28% of the consolidated net revenues for the nine months ended March 31, 2000
and 1999, respectively. As of June 30, 1999, the Company had a significant
receivable balance from one insurance company, which totaled $1,623,000.
NOTE 6 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets
consist of:
(000's omitted)
March 31, 2000 June 30, 1999
-------------- -------------
Purchased parts, components
and supplies $3,202 $ 3,678
Work-in-process 488 560
------ -------
$3,690 $ 4,238
====== =======
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2000 and 1999, the Company paid
approximately $1,008,000. and $642,000 for interest, respectively. During the
nine months ended March 31, 2000 and 1999, the Company paid approximately
$37,000 and $70,000 for income taxes, respectively.
On August 20, 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 March 31, 2000 is $650,000 related to this
judgment.
NOTE 10 - PRO FORMA INFORMATION
The Company's consolidated financial statements for the nine months ended
March 31, 1999 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 nine months ended March 31,
1999, assuming the foregoing acquisition had occurred on June 30, 1998 (in
thousands, except per share data):
Nine Months Ended
March 31, 1999
-------------------
(Unaudited)
Revenues, net $ 26,866
Loss from operations $ (10,920)
Income (loss) before taxes $ (9,255)
Fully diluted net income
(loss) per share $(.14)
NOTE 11 - 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. Fonar has a non-exclusive, perpetual, royalty free
worldwide license to use and sublicense the then existing technology.
NOTE 12 - 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 0.2% and 2.0%
of consolidated net revenues for the nine months ended March 31, 2000 and
1999, respectively.
The sales were made principally to the following locations:
2000 1999
----- -----
Spain 0.2% 2.0%
Effective July 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures About Segments of an Enterprises 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.
Summarized financial information concerning the Company's reportable
segments is shown for the nine months ended March 31, 2000 and 1999 in the
following table (in thousands):
2000 1999
Net revenues: ------- -------
Medical equipment $ 4,841 $ 3,837
Physician practice management 25,096 23,296
Intersegment eliminations ( 939) ( 846)
------- -------
Total $ 28,998 $ 26,287
======= =======
Income (loss) from operations:
Medical equipment $ (13,666) $(14,479)
Physician practice management 1,955 3,308
------- -------
Total $ (11,711) $(11,171)
======= =======
Depreciation and amortization:
Medical equipment $ 1,458 $ 1,299
Physician practice management 1,714 1,980
------- -------
Total $ 3,172 $ 3,279
======= =======
Compensatory element of stock issuances:
Medical equipment $ 589 $ 84
Physician management services 559 -
------- -------
$ 1,148 $ 84
======= =======
Capital expenditures:
Medical equipment $ 1,417 $ 2,305
Physician practice management 359 514
------- -------
Total $ 1,776 $ 2,819
======= =======
At At
March 31, June 30,
2000 1999
----------- --------
Identifiable assets:
Medical equipment $ 42,710 $ 56,310
Physician practice management 41,614 41,338
------- -------
Total $ 84,324 $ 97,648
======= =======
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the fiscal quarter ended March 31, 2000 (third quarter of fiscal
2000), the Company reported a net loss of $4.0 million on revenues of $9.9
million as compared to a net loss of $4.3 million on revenues of $9.6 million
for the third quarter of fiscal 1999.
For the nine months ended March 31, 2000, the Company reported a net loss
of $10.0 million on revenues of $29.0 million as compared to a net loss of
$9.6 million on revenues of $26.3 million for the first nine months 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 was approximately $2.0 million for the first
nine months of fiscal 2000 ($504,000 for the third quarter) compared to income
of $3.3 million for the first nine months of fiscal 1999 ($1.2 million for the
third quarter of fiscal 1999). The decline in HMCA income was attributable to
its operating, selling, general and administrative costs, including start-up
costs, relating to the expansion of its business. The results for fiscal 2000
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. 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
nine months 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 ($13.7
million for the first nine months of fiscal 2000 and $14.5 million for the
first nine months of fiscal 1999). Accordingly the Company's consolidated
operating loss was $11.7 million for the first nine months ($3.9 million for
the third quarter) of fiscal 2000 as compared to an operating loss of $11.2
million for the first nine months ($4.2 million for the third quarter) of
fiscal 1999.
The Company's operating loss for the nine month period was offset in
part, however, by the gain of approximately $1 million recognized in
connection with the sale of its subsidiary, Medical SNI in the second quarter
of fiscal 2000. Medical SNI, based in Haifa, Israel designed and developed
medical imaging and archiving products. The Company retains a license to use
and sublicense the technology of Medical SNI developed up to the time of the
sale.
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 $3.9 million for the first nine
months of fiscal 2000 ($1.2 million for the third quarter of fiscal 2000) as
compared to $3.0 million for the first nine months of fiscal 1999 ($0.7
million for the third quarter of fiscal 1999). Costs of revenues attributable
to the Company's medical equipment business were $5.8 million for the first
nine months of fiscal 2000 ($1.6 million for the third quarter of fiscal 2000)
and $4.9 million for the first nine months of fiscal 1999 ($1.6 million for
the third quarter of fiscal 1999).
The Company's efforts to improve equipment sales volume has been focused
on research and development to improve the competitiveness of its products and
increasing marketing and sales efforts. Research and development expenditures
were $4.4 million for the first nine months of fiscal 2000 ($1.4 million for
the third quarter of fiscal 2000) and $5.1 million for the first nine months
of fiscal 1999 ($1.9 million for the third quarter of fiscal 1999).
The Company's QUAD (TM) 7000, QUAD (TM) 12000, OR-360 (TM) and the Open
Sky (TM) MRI scanners, together with the Company's works-in-progress (the
Stand-Up (TM) MRI and Pinnacle (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. In addition, the Company offers a low cost open scanner, the
Echo (TM) MRI, operating at .3 Tesla field strength.
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 current "works in progress" are the Stand-Up MRI (TM)
scanner and Pinnacle MRI (TM).
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 Pinnacle MRI is a superconducting
version of the Company's QUAD 12000 scanner, operating a field strength of 0.6
Tesla. The Pinnacle combines the benefits of the Company's patented iron-frame
verticle field magnet with a superconducting driver.
The Company's seven scanners and works-in-progress scanners (dubbed the
"Fonar Seven") represent the largest number of products and widest range of
MRI capabilities offered by any manufacturer in the MRI industry. As part of
its marketing program, the Company attended the industry's annual trade show,
RSNA (Radiological Society of North America) in December 1999, where the
"Fonar Seven" were exhibited and enthusiastically received. 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 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.
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 particularly cost conscious customers.
Revenues from foreign product sales were $79,000 (approximately 3% of
product sales revenues and less than 1% of all revenues) for the first nine
months of fiscal 2000, against costs of revenues for such sales of $55,000
(approximately 2% of costs of revenues for product sales and less than 1% of
all costs of revenues). This compares to $455,000 in foreign product sales
revenues in the first nine months of fiscal 1999 (approximately 34% of product
sales revenues and 2.0% of all revenues) against $1.1 million in costs of
foreign product sales revenues (approximately 34% of costs of revenues for
product sales and 5% of all costs of revenues) for the first nine months of
fiscal 1999. Revenues from foreign product sales were $0 (0% of product sales
revenues and 0% of all revenues) for the third quarter of fiscal 2000, against
costs of revenues for such sales of $0 (0% of costs of revenues for product
sales and 0% of all costs of revenues). This compares to $74,000 in foreign
product sales revenues in the third quarter of fiscal 1999 (approximately 28%
of product sales revenues and 1% of all revenues) against $276,000 in costs of
foreign product sales revenues (approximately 28% of costs of revenues for
product sales and 4% of all costs of revenues) for the third quarter of fiscal
1999.
Liquidity and Capital Resources
Cash and cash equivalents declined from $15.2 million at June 30, 1999 to
$6.2 million at March 31, 2000. Principal uses of cash during the first nine
months of fiscal 2000 included: capital expenditures of $1.8 million,
repayment of long-term debt of $3.3 million and $4.9 million to fund the
losses for the first nine months of fiscal 2000. Cash of approximately $4.3
million was provided from the sale of marketable securities.
Marketable securities approximated $15.5 million as of March 31, 2000 as
compared to $20.2 million as of June 30, 1999. From June 30, 1999 to March 31,
2000 the Company reduced its investments in equity securities from
approximately $100,000 to $0, reduced its investments in U.S. government
obligations from approximately $11.0 million to $5.2 million, and increased
its investments in corporate and government agency bonds from $9.1 million to
$10.7 million.
Total liabilities decreased since June 30, 1999 by approximately $5.2
million to approximately $33.1 million at March 31, 2000. The decrease in
liabilities from June 30, 1999 is attributable primarily to the retirement of
debt in the ordinary course.
As of March 31, 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.
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 has successfully implemented the Y2K plan and all
systems were upgraded or replaced with little or no impact on operations. The
Company has also reviewed its existing customer base of MRI scanners. The
customer service department installed Y2K complaint software on the Company's
customers' MRI scanners. The scanners transitioned to the Year 2000
successfully. Costs of addressing these items did not 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 nine months of
fiscal 2000 from that described in the Company's 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:
The Company held its annual meeting on April 10, 2000 at which the
following items were submitted to the stockholders: (1) the election of
Management's nominees (Raymond V. Damadian, Claudette J.V. Chan, Robert J.
Janoff and Charles N. O'Data) as directors, (2) the adoption of the Company's
1999 Employee Stock Purchase Plan, (3) the ratification of the Company's 1997
Non-Statutory Stock Option Plan and 1997 Stock Bonus Plan and (4) the
ratification of the reelection of Tabb, Conigliaro & McGann, P.C. as the
Company's auditors for the fiscal year ending June 30, 2000. All of the
nominees, Raymond V. Damadian, Claudette J.V. Chan, Robert J. Janoff and
Charles N. O'Data were elected as directors and all the other proposals were
approved by the stockholders.
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: May 15, 2000
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