UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED DECEMBER 31, 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 December 31, 2000 - -------------------------------- --------------------------------------- Common Stock, par value $.0001 57,543,946 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
FONAR CORPORATION AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 2000 and June 30, 2000 Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2000 and December 31, 1999 Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 2000 and December 31, 1999 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2000 and December 31, 1999 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended December 31, 2000 and December 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
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) ASSETS December 31, June 30, 2000 2000 (UNAUDITED) Current Assets: ----------- ------- Cash and cash equivalents $13,780 $11,811 Marketable securities 9,775 11,484 Accounts receivable - net 14,533 14,389 Receivable from license agreement 2,700 - Costs and estimated earnings in excess of billings on uncompleted contracts 273 968 Inventories 5,006 3,536 Investment in sales-type lease w/related party 121 58 Prepaid expenses and other current assets 481 604 ------ ------ Total current assets 46,669 42,850 ------ ------ Restricted cash 5,000 5,000 Property and equipment - net 10,849 11,227 Advances and notes to affiliates and related parties- net 1,119 1,159 Investment in sales-type lease w/related party 1,693 873 Notes receivable - net 506 501 Excess of cost over net assets of businesses acquired-net 21,048 21,657 Other intangible assets - net 943 1,036 Other assets 294 296 -------- -------- $ 88,121 $ 84,599 ======== ======== See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) December 31, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 2000 (UNAUDITED) Current Liabilities: ---------- -------- Current portion of debt and capital leases $ 6,981 $ 6,225 Accounts payable 2,276 1,739 Other current liabilities 8,102 8,967 Customer advances 157 582 Billings in excess of costs and estimated earnings on uncompleted contracts 119 - Income taxes payable 877 897 ------ ------ Total current liabilities 18,512 18,410 Long-term debt and capital lease obligations less current portion 12,295 14,744 Unearned revenue - license fee 10,530 - Other non-current liabilities 138 138 ------ ------ Total liabilities 41,475 33,292 ------ ------ Minority interest 6 22 ------ ------ Commitments and contingencies - - STOCKHOLDERS' EQUITY Common Stock $.0001 par value; 60,000,000 shares authorized; 57,543,946 issued and outstanding at December 31 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 December 31 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 December 31 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 December 31 and at June 30, 2000 1 1 Paid-in capital in excess of par value 100,970 98,581 Accumulated other comprehensive income ( 38) ( 265) Accumulated deficit (51,738) (44,817) Notes receivable - stockholders ( 1,040) ( 1,338) Unearned compensation ( 847) ( 213) Treasury stock - 299,264 shares of common stock at December 31 and 289,264 at June 30, 2000 ( 675) ( 671) ------- ------- Total stockholders' equity 46,640 51,285 ------- ------- Total liabilities and stockholders' equity $ 88,121 $ 84,599 ======= ======= See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except per share data) FOR THE THREE MONTHS ENDED DECEMBER 31, --------------------- 2000 1999 REVENUES -------- -------- Product sales - net $ 995 $ 832 Service and repair fees - net 464 493 Scanning and management fees - net 8,896 8,176 License fees and royalties 627 489 ------- ------- Total Revenues - Net 10,982 9,990 ------- ------- COSTS OF REVENUES: Cost of product sales 1,180 1,191 Cost of service and repair fees 545 881 Cost of scanning and management fees - net 5,977 5,796 Research and development expenses 1,516 1,453 Selling, general and administrative expenses 4,780 4,089 Provision for bad debt - - Compensatory element of stock issuances 637 111 Amortization of excess of cost over assets acquired 305 305 ------- ------- Total Costs and Expenses 14,940 13,826 ------- ------- Loss From Operations ( 3,958) ( 3,836) Interest Expense ( 315) ( 392) Interest Income 543 533 Gain on sale of subsidiary/partnership interest 750 1,022 Other income (expense) 38 70 ------ ------- Loss before provision for taxes and minority interest ( 2,942) ( 2,603) Provision for income taxes 7 6 ------- ------- Loss before minority interest ( 2,949) ( 2,609) Minority interest in net (income) loss of subsidiary and partnership ( 65) ( 55) ------- ------- NET LOSS $( 3,014) $( 2,664) ======= ======= Basic and diluted Net Loss per share $(.04) $(.04) ====== ====== Weighted average number of shares outstanding 68,273 66,471 ====== ====== See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except per share data) FOR THE SIX MONTHS ENDED DECEMBER 31, --------------------- 2000 1999 REVENUES -------- -------- Product sales - net $ 1,252 $ 1,810 Service and repair fees - net 923 837 Scanning and management fees - net 17,664 16,502 License fees and royalties 1,254 720 -------- -------- Total Revenues - Net 21,093 19,869 -------- -------- COSTS OF REVENUES: Cost of product sales 1,815 2,433 Cost of service and repair fees 1,217 1,788 Cost of scanning and management fees - net 11,631 11,329 Research and development expenses 3,028 3,015 Selling, general and administrative expenses 9,218 7,515 Provision for bad debt - - Compensatory element of stock issuances 1,533 230 Amortization of excess of cost over assets acquired 609 609 -------- -------- Total Costs and Expenses 29,051 26,919 -------- -------- Loss From Operations ( 7,958) ( 7,050) Interest Expense ( 594) ( 993) Interest Income 1,003 1,089 Gain on sale of subsidiary/partnership interest 750 1,022 Other income (expense) 60 55 ------ ------- Loss before provision for taxes and minority interest ( 6,739) ( 5,877) Provision for income taxes 14 11 ------- ------- Loss before minority interest ( 6,753) ( 5,888) Minority interest in net (income) loss of subsidiary and partnership ( 168) ( 119) ------- ------- NET LOSS $( 6,921) $( 6,007) ======= ======= Basic and diluted Net Loss per share $(.10) $(.09) ====== ====== Weighted average number of shares outstanding 68,273 66,471 ====== ====== See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE SIX MONTHS ENDED DECEMBER 31, ----------------- 2000 1999 ------ ------ Cash Flows from Operating Activities Net Loss $( 6,921) $( 6,007) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Minority interest in net income (loss) 168 119 Depreciation and amortization 2,323 2,100 Imputed interest on deferred payment obligation - 210 Gain on sale of subsidiary/partnership interest - ( 1,022) Compensatory and fee element of stock issuances 1,533 230 Stock issued in settlement of current liabilities 237 293 Amortization of unearned license revenue ( 1,170) - License fee 9,000 - (Increase) decrease in operating assets, net: Accounts and notes receivable ( 149) ( 1,908) Costs and estimated earnings in excess of billings on uncompleted contracts 695 397 Inventories ( 1,470) 807 Prepaid expenses and other current assets 123 212 Other assets 2 ( 3) Receivables and advances to affiliates and related parties 40 174 Investment in sales-type lease w/related party ( 883) - Increase (decrease) in operating liabilities, net: Accounts payable 537 ( 623) Other current liabilities ( 602) ( 354) Customer advances ( 425) 7 Billings in excess of costs and estimated earnings on uncompleted contracts 119 - Other liabilities - 4 ------ ------ Net cash provided by (used in) operating activities 3,157 ( 5,364) ------ ------ Cash Flows from Investing Activities: Reduction in marketable securities 1,936 808 Purchases of property and equipment - net ( 1,243) ( 1,199) ------ ------ Net cash provided by (used in) investing activities 693 ( 391) ------ ------ See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE SIX MONTHS ENDED DECEMBER 31, ----------------- 2000 1999 ------- ------- Cash Flows from Financing Activities: Distribution to minority interest ( 184) ( 166) Repayment of borrowings and capital lease obligations ( 1,693) ( 2,102) Purchase of treasury stock ( 4) ( 79) ------ ------ Net cash used by financing activities ( 1,881) ( 2,347) ------ ------ Increase (Decrease) in Cash 1,969 ( 8,102) Cash at beginning of period 11,811 15,176 ------ ------ Cash at end of period $13,780 $ 7,074 ======= ======= See accompanying notes to consolidated financial statements (unaudited). FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (000'S OMITTED) FOR THE SIX MONTHS ENDED DECEMBER 31, ----------------- 2000 1999 ------ ------ Net loss $(6,921) $(6,007) Other comprehensive income, net of tax: Unrealized gains (losses) on securities, net of tax 227 ( 121) ------- ------- Total comprehensive loss $(6,694) $(6,128) ======= ======= See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 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 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. FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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 December 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"). 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 December 31, 2000, the Company had cash deposits of approximately $12.8 million in excess of federally insured limits. Restricted Cash --------------- At December 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 December 31, 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. FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (UNAUDITED) NOTE 3 - MARKETABLE SECURITIES --------------------- The following is a summary of marketable securities at December 31, 2000: (000's omitted) --------------- Unrealized Amortized Holdings Fair Market Cost Gains (Loss) Value --------- ------------ ----------- U.S. Government $ - $ - $ - Obligations Corporate and government 9,813 (38) 9,775 agency bonds Equity securities including mutual stock funds - - - --------- -------- -------- $ 9,813 $ ( 38) $ 9,775 ========= ======== ======== FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (UNAUDITED) NOTE 4 - ACCOUNTS RECEIVABLE, NET ------------------------ Accounts receivable, net is comprised of the following: (000's omitted) --------------- December 31, 2000 June 30, 2000 ----------------- ------------- Receivable from equipment sales and service $3,231 $2,380 Receivables assigned from related PC's 14,230 14,937 Less: Allowance for doubtful accounts and contractual allowances (2,928) (2,928) ------- ------- $ 14,533 $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 six months ended December 31, 2000 and December 31, 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 six months ended December 31, 2000 and 1999, respectively. FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (UNAUDITED) NOTE 5 - INVENTORIES Inventories included in the accompanying consolidated balance sheets consist of: (000's omitted) December 31, 2000 June 30, 2000 ----------------- ------------- Purchased parts, components and supplies $ 3,622 $ 2,917 Work-in-process 1,384 619 ------- ------- $ 5,006 $ 3,536 ======= ======= NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION During the six months ended December 31, 2000 and 1999, the Company paid approximately $480,000 and $822,000 for interest, respectively. During the six months ended December 31, 2000 and 1999, the Company paid approximately $28,000 and $21,000 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. FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (UNAUDITED) 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 December 31, 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. In October, 2000, the Company sold its interest in the partnership of AMD Southfield Michigan Limited Partnership. AMD Southfield operates an MRI Scanning Center in Michigan. The Company recognized a pre-tax gain of 750,000. 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.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (UNAUDITED) 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% and 0% of consolidated net revenues for the six months ended December 31, 2000 and 1999, respectively. 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 six months ended December 31, 2000 and 1999 in the following table (in thousands): 2000 1999 Net revenues: ------- ------- Medical equipment $ 3,980 $ 3,960 Physician management services 17,664 16,503 Intersegment eliminations ( 551) ( 594) ------- ------- Total $ 21,093 $ 19,869 ======= ======= Income (loss) from operations: Medical equipment $ (9,258) $ (8,501) Physician management services 1,300 1,451 ------- ------- Total $ (7,958) $ (7,050) ======= ======= Depreciation and amortization: Medical equipment $ 1,097 $ 966 Physician management services 1,226 1,134 ------- ------- Total $ 2,323 $ 2,100 ======= ======= Compensatory element of stock issuances: Medical equipment $ 792 $ 35 Physician management services 741 195 ------- ------- Total $ 1,533 $ 230 ======= ======= Capital expenditures: Medical equipment $ 827 $ 1,043 Physician management services 416 156 ------- ------- Total $ 1,243 $ 1,199 ======= ======= At December 31, At June 30, 2000 2000 Identifiable assets: ----------- -------- Medical equipment $ 46,756 $ 43,046 Physician management services 41,365 41,553 ------- ------- Total $ 88,121 $ 84,599 ======= =======
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. For the fiscal quarter ended December 31, 2000 (second quarter of fiscal 2001), the Company reported a net loss of $3.0 million on revenues of $11.0 million as compared to a net loss of $2.7 million on revenues of $10.0 million for the second quarter of fiscal 2000. For the six month period ended December 31, 2000, the Company reported a net loss of $6.9 million on revenues of $21.1 million as compared to a net loss of $6.0 million on revenues of $19.9 million for the six month period ended December 31, 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 $1.3 million for the first six months of fiscal 2001 compared to income of $1.5 million for the first six 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 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 ($9.3 million for the first six months of fiscal 2001 and $8.5 million for the first six months of fiscal 2000). Accordingly the Company's consolidated operating loss was $8.0 million for the first six months of fiscal 2001 as compared to an operating loss of $7.0 million for the first six months of fiscal 2000. Nevertheless, licensing fees and royalties recognized by the Company's traditional MRI manufacturing and service business increased from $720,000 in the first six months of fiscal 2000 to $1.3 million in the first six months of fiscal 2001. Most of the licensing revenue recognized in 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. Sales revenues attributable to the Company's medical (MRI) equipment business (sales and service) were $2.2 million for the first six months of fiscal 2001 as compared to $2.6 million for the first six months of fiscal 2000. Costs of revenues attributable to the Company's medical equipment business were $3.0 million for the first six months of fiscal 2001 and $4.2 million for the first six months 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 $3.0 million for the first six months of fiscal 2001 and $3.0 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 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. In November, 2000, the Company completed the first part of its program to establish its own direct nationwide sales force. Nine salespeople were recruited and placed throughout the country in their respective territories. Nine more are being sought to complete Fonar's full strength national force. There were no foreign product sales for the first six months of fiscal 2001 and foreign sales of less than 1% of total revenues in fiscal 2000. Cash and cash equivalents increased from $11.8 million at June 30, 2000 to $13.8 million at December 31,2000. Principal uses of cash during the first six months of fiscal 2001 included: capital expenditures of $1.2 million, repayment of long-term debt of $1.7 million and $6.9 million to fund the losses for the first six months of fiscal 2001. Cash of approximately $9.0 million was provided from licensing fees. Marketable securities approximated $9.8 million as of December 31, 2000 as compared to $11.5 million as of June 30, 2000. From June 30, 2000 to December 31, 2000 the Company reduced its investments in corporate and government agency bonds from $11.5 million to $9.8 million. The Company had no investments in equity securities or U.S. government obligations at either June 30, 2000 or December 31, 2000. Total liabilities increased since June 30, 2000 by approximately $8.2 million to approximately $41.5 million at December 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 $10.5 million). As of December 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. 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
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FONAR CORPORATION (Registrant) By: /s/ Raymond V. Damadian Raymond V. Damadian President & Chairman Dated: February 14, 2001