UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 30, 1999 Commission File Number 0-10248 FONAR CORPORATION ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 11-2464137 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 110 Marcus Drive Melville, New York 11747 ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 694-2929 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding at September 30, 1999 - -------------------------------- --------------------------------- Common Stock, par value $.0001 54,652,367 Class B Common Stock, par value $.0001 5,211 Class C Common Stock, par value $.0001 9,562,824 Class A Preferred Stock, par value $.0001 7,836,286
FONAR CORPORATION AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 1999 and June 30, 1999 3-6 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 1999 and September 30, 1998 7 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1999 and September 30, 1998 8-9 Condensed Consolidated Statements of Comprehensive Income (loss) for the Three Months Ended September 30, 1999 and September 30, 1998 9 Notes to Condensed Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 PART II - OTHER INFORMATION
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) ASSETS September 30, June 30, 1999 1999 (UNAUDITED) Current Assets: --------- ------- Cash and cash equivalents $ 9,767 $15,176 Marketable securities 21,075 20,198 Accounts receivable - net 15,226 13,937 Costs and estimated earnings in excess of billings on uncompleted contracts 800 1,463 Inventories 3,745 4,238 Prepaid expenses and other current assets 423 701 ------ ------ Total current assets 51,036 55,713 ------ ------ Restricted cash 5,000 5,000 Property and equipment - net 11,541 11,442 Advances and notes to related parties - net 1,343 1,435 Notes receivable - net 13 25 Excess of cost over net assets of businesses acquired-net 22,571 22,876 Other intangible assets - net 828 889 Other assets 257 268 -------- -------- $ 92,589 $ 97,648 ======== ======== See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) September 30, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1999 (UNAUDITED) Current Liabilities: ---------- -------- Current portion of debt and capital leases $ 4,542 $ 4,474 Accounts payable 1,744 2,402 Other current liabilities 9,925 9,921 Customer advances 92 96 Billings in excess of costs and estimated earnings on uncompleted contracts - - Income taxes payable 952 957 ------ ------ Total current liabilities 17,255 17,850 Long-term debt and capital lease obligations less current portion 18,920 20,348 Other non-current liabilities 133 131 ------ ------ Total liabilities 36,308 38,329 ------ ------ Minority interest - 15 ------ ------ Commitments and contingencies (Notes 8 and 9)
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) STOCKHOLDERS' EQUITY Common Stock $.0001 par value; 60,000,000 shares authorized; 54,652,367 issued and outstanding at September 30 and 53,793,042 at June 30, 1999 5 5 Class B Common Stock $ .0001 par value; 4,000,000 shares authorized, (10 votes per share), 5,211 issued and outstanding at September 30 and at June 30, 1999 - - Class C Common Stock $.0001 par value; 10,000,000 shares authorized, (25 votesper share), 9,562,824 issued and outstanding at September 30 and at June 30, 1999 1 1 Class A non-voting Preferred Stock $.0001 par value; 8,000,000 authorized, 7,836,286 issued and outstanding at September 30 and at June 30, 1999 1 1 Paid-in capital in excess of par value 95,966 95,386 Accumulated other comprehensive income ( 204) ( 203) Accumulated deficit (37,204) (33,861) Notes receivable - stockholders ( 1,332) ( 1,226) Unearned compensation ( 321) ( 207) Treasury stock - 235,864 shares of common stock at September 30 and 205,864 at June 30, 1999 ( 631) ( 592) ------- ------- Total stockholders' equity 56,281 59,304 ------- ------- Total liabilities and stockholders' equity $ 92,589 $ 97,648 ======= ======= See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except per share data) FOR THE THREE MONTHS ENDED SEPTEMBER 30, --------------------- 1999 1998 REVENUES -------- -------- Product sales - net $ 978 $ 494 Service and repair fees - net 344 569 Scanning and management fees - net 8,326 6,473 -------- -------- Total Revenues - Net 9,648 7,536 -------- -------- COSTS OF REVENUES: Cost of product sales 1,242 855 Cost of service and repair fees 908 520 Cost of scanning and management fees - net 5,533 4,500 Research and development expenses 1,562 1,615 Selling, general and administrative expenses 3,424 3,116 Compensatory element of stock issuances 119 - Amortization of excess of cost over assets acquired 305 225 -------- -------- Total Costs and Expenses 13,093 10,831 -------- -------- Loss From Operations ( 3,445) ( 3,295) Interest Expense ( 601) ( 308) Interest Income 556 777 Other income-principally gain on litigation awards 216 9 ------ ------- Loss before provision for taxes and minority interest ( 3,274) ( 2,817) Provision for income taxes 5 1 ------- ------- Loss before minority interest ( 3,279) ( 2,818) Minority interest in net (income) loss of subsidiary and partnership ( 64) ( 26) ------- ------- NET LOSS $( 3,343) $( 2,844) ======= ======= Basic and Diluted Net Loss per share $(.05) $(.04) ====== ====== Weighted average number of shares outstanding 65,446 63,837 ====== ====== See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, ----------------- 1999 1998 ------ ------ Cash Flows from Operating Activities Net Loss $( 3,343) $( 2,844) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Minority interest in net income (loss) 64 26 Depreciation and amortization 1,041 999 Imputed interest on deferred payment obligation 105 27 Compensatory element of stock issuances 119 - Stock issued in settlement of current liabilities 172 74 (Increase) decrease in operating assets, net: Accounts and notes receivable ( 1,277) ( 982) Costs and estimated earnings in excess of billings on uncompleted contracts 663 573 Inventories 493 14 Prepaid expenses and other current assets 278 ( 375) Other assets 11 24 Receivables and advances to affiliates and related parties 92 28 Increase (decrease) in operating liabilities, net: Accounts payable ( 658) ( 409) Other current liabilities 173 ( 222) Customer advances ( 4) ( 197) Billings in excess of costs and estimated earnings on uncompleted contracts - - Other liabilities 2 5 ------ ------ Net cash used in operating activities ( 2,069) ( 3,259) ------ ------ Cash Flows from Investing Activities: Investment (reduction) in marketable securities ( 877) 676 Acquisitions, net of cash acquired - ( 2,000) Purchases of property and equipment - net ( 773) ( 1,340) Cost of capitalized software development and patents - ( 47) ------ ------ Net cash used in investing activities ( 1,650) ( 2,711) ------ ------ See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, ----------------- 1999 1998 ------ ------ Cash Flows from Financing Activities: Distributions to minority interest ( 80) ( 106) Repayment of borrowings and capital lease obligations ( 1,465) ( 309) Dividends paid - ( 1,324) Purchase of treasury stock ( 39) ( 197) ------ ------ Net cash provided by financing activities ( 1,690) ( 1,936) ------ ------ Increase (Decrease) in Cash ( 5,409) ( 7,906) Cash at beginning of period 15,176 41,751 ------ ------ Cash at end of period $ 9,767 $33,845 ====== ====== See accompanying notes to consolidated financial statements (unaudited). FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (000'S OMITTED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, ----------------- 1999 1998 ------ ------ Net loss $(3,343) $(2,844) Other comprehensive income, net of tax: Unrealized gains (losses) on securities, net of tax 1 (1,240) ------- ------- Total comprehensive loss $(3,342) $(4,084) ======= =======
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) NOTE 1 - DESCRIPTION OF BUSINESS FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation which was incorporated on July 17, 1978. FONAR is engaged in the research, development, production and marketing of medical scanning equipment which uses principles of Magnetic Resonance Imaging ("MRI") for the detection and diagnosis of human diseases. In addition to deriving revenues from the direct sale of MRI equipment, revenue is also generated from its installed base of customers through its service and upgrade programs. Health Management Corporation of America ("HMCA") was organized by the Company in March 1997 as a wholly-owned subsidiary in order to enable the Company to expand into the business of providing comprehensive management services to physician practices and other medical providers, including diagnostic imaging centers and ancillary services. The services provided by the Company include development, administration, leasing of office space, facilities and medical equipment, provision of supplies, staffing and supervision of non-medical personnel, legal services, accounting, billing and collection and the development and implementation of practice growth and marketing strategies. HMCA entered the physician and diagnostic management services business through the consummation of two acquisitions, effective June 30, 1997, two acquisitions which were consummated during fiscal 1998 and one acquisition consummated in August of 1998. The acquired companies in all cases were actively engaged in the business of managing medical providers. The medical providers are diagnostic imaging centers, principally MRI scanning centers, multi-specialty practices and primary care practices. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries/ partnerships and its proportionate share in the accounts of all joint ventures. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates ---------------- The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The most significant estimates relate to contractual and other allowances, income taxes, contingencies and the useful lives of equipment. In addition, healthcare industry reforms and reimbursement practices will continue to impact the Company's operations and the determination of contractual and other allowance estimates. Actual results could differ from those estimates. Investment in Marketable Securities ----------------------------------- The Company accounts for its investments using Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in debt and Equity Securities" ("SFAS No. 115"). This standard requires that certain debt and equity securities be adjusted to market value at the end of each accounting period. Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, such unrealized gains and losses are charged or credited to comprehensive income. Management determines the proper classifications of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. At September 30, 1999, all securities covered by SFAS No. 115 were designated as available for sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in comprehensive income. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations. Inventories ----------- Inventories consist of purchased parts, components and supplies, as well as work-in-process, and are stated at the lower of cost (materials, labor and overhead determined on the first-in, first-out method) or market. Investments in Joint Ventures and Limited Partnerships ------------------------------------------------------ The minority interests in the equity of consolidated joint ventures and limited partnerships, which are not material, are reflected in the accompanying consolidated financial statements. Investments by the Company in joint ventures and limited partnerships over which the Company can exercise significant influence but does not control are accounted for using the equity method. The Company suspends recognition of its share of joint ventures losses in entities in which it holds a minority interest when its investment is reduced to zero. The Company does not provide for additional losses unless, as a partner or joint venturer, the Company has guaranteed obligations of the joint venture or limited partnership. Property and Equipment ---------------------- Property and equipment procured in the normal course of business is stated at cost. Property and equipment purchased in connection with an acquisition is stated at its estimated fair value, generally based on an appraisal. Property and equipment is being depreciated for financial accounting purposes using the straight-line method over the shorter of their estimated useful lives, generally five to seven years, or the term of a capital lease, if applicable. Leasehold improvements are being amortized over the shorter of the useful life or the remaining lease term. Upon retirement or other disposition of these assets, the cost and related accumulated depreciation of these assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in the results of operations. Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Excess of Cost Over Net Assets of Businesses Acquired ----------------------------------------------------- The excess of the purchase price over the fair market value of net assets of businesses acquired is being amortized using the straight-line method over 20 years. Other Intangible Assets ----------------------- 1) Capitalized Software Development Costs Certain software development costs incurred subsequent to the establishment of the software's technological feasibility and completion of the research and development on the product hardware, in which it is to be used, are required to be capitalized. Capitalization ceases when the product is available for general release to customers, at which time amortization of capitalized costs begins. Amortization is calculated on the straight-line basis over 5 years. 2) Patents and Copyrights Amortization is calculated on the straight-line basis over 17 years. Long-Lived Assets ----------------- The Company periodically assesses the recoverability of long-lived assets, including property and equipment, intangibles and excess of cost over net assets of businesses acquired, when there are indications of potential impairment, based on estimates of undiscounted future cash flows. The amount of impairment is calculated by comparing anticipated discounted future cash flows with the carrying value of the related asset. In performing this analysis, management considers such factors as current results, trends, and future prospects, in addition to other economic factors. Revenue Recognition ------------------- Revenue on sales contracts for scanners is recognized under the percentage-of-completion method. The Company manufactures its scanners under specific contracts that provide for progress payments. Production and installation take approximately six months. The percentage of completion is determined by the ratio of costs incurred to date on completed sub-assemblies to the total estimated cost for each scanner. Contract costs include material, direct labor and overhead. Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. The asset, "Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts", represents billings in excess of revenues recognized. Revenue on scanner service contracts are recognized on the straight-line method over the related contract period, usually one year. Revenue from sales of other items are recognized upon shipment. Revenue under management and lease contracts is recognized based upon contractual agreements for management services rendered by the Company and leases of medical equipment under various long-term agreements with related medical providers (the "PC's"), commencing July 1, 1997. The PC's are primarily owned by Raymond V. Damadian, M.D., President and Chairman of the Board of FONAR. The Company's agreements with the PC's stipulate fees for services rendered and equipment leased, are primarily calculated on activity based efforts at pre-determined rates per unit of activity. All fees are re-negotiable at the anniversary of the agreements and each year thereafter. Research and Development Costs ------------------------------ Research and development costs are charged to expense as incurred. The costs of materials and equipment that are acquired or constructed for research and development activities, and have alternative future uses (either in research and development, marketing or production), are classified as property and equipment and depreciated over their estimated useful lives. Certain software development costs are capitalized. See property and equipment and intangible assets (capitalized software development costs) sections of this note. Advertising Costs ----------------- Advertising costs are expensed as incurred. Income Taxes ------------ Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Product Warranty ---------------- The Company provides currently for the estimated cost to repair or replace products under warranty provisions in effect at the time of installation (generally for one year). Customer Advances ----------------- Cash advances and progress payments received on sales orders are reflected as customer advances until such time as revenue recognition begins. Per Share Data -------------- Net income (loss) per common and common equivalent share has been computed based on the weighted average number of common shares and common stock equivalents outstanding during the year. No effect has been given to options outstanding under the Company's Stock Option Plans as no material dilutive effect would result from the exercise of these items. During fiscal 1998, the Company retroactively adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), which requires companies to present basic earnings per share and diluted earnings per share. No adjustments were required as a result of this adoption. Cash and Cash Equivalents ------------------------- The Company considers all short-term highly liquid investments with a maturity of three months or less when purchased to be cash or cash equivalents. At September 30, 1999, the Company had cash deposits of approximately $9.5 million in excess of federally insured limits. Restricted Cash --------------- At September 30, 1999, $5,000,000 of cash was pledged as collateral on an outstanding bank loan and was classified as restricted cash on the balance sheet. Concentration of Credit Risk ---------------------------- Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash, trade accounts receivable, notes receivable, investment in sales-type leases and investments, advances and notes to affiliates and related parties. Ongoing credit evaluations of customers' financial condition are performed. The Company generally retains title to the MRI scanners that it sells until the scanners have been paid in full. The Company's customers are concentrated in the industry of providing MRI scanning services. Fair Value of Financial Instruments ----------------------------------- The financial statements include various estimated fair value information at September 30, 1999 and June 30, 1999, as required by Statement of Financial Accounting Standards 107, "Disclosures about Fair Value of Financial Instruments". Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value to the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value because of the short-term maturity of those instruments. Accounts receivable and accounts payable: The carrying amounts approximate fair value because of the short maturity of those instruments. Investment in sales-type leases and investments, advances and notes to affiliates and related parties. The carrying amount approximates fair value because the discounted present value of the cash flow generated by the related parties approximates the carrying value of the amounts due to the Company. Long-term debt and loans payable: The carrying amounts of debt and loans payable approximate fair value due to the length of the maturities, the interest rates being tied to market indices and/or due to the interest rates not being significantly different from the current market rates available to the Company. All of the Company's financial instruments are held for purposes other than trading. Stock-Based Compensation ------------------------ Effective for fiscal year 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide proforma net income and proforma earnings per share disclosures for employee stock option grants made during the year and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the proforma disclosure provisions of SFAS No. 123. Comprehensive Income -------------------- In November 1997, Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), was issued which establishes standards for reporting and displaying comprehensive income in a full set of financial statements. SFAS No. 130 defines comprehensive income as changes in equity of a business enterprise during the periods presented, except for transactions resulting from investments by an owner and distribution to an owner. SFAS No. 130 does not require a company to present a statement of comprehensive income if no items are present. The Company adopted SFAS No. 130 during fiscal 1998. New Pronouncements ------------------ Effective July 1, 1998 the Company adopted the provisions of SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", which revises the accounting for software development costs and requires the capitalization of certain costs. No adjustments were required as a result of this adoption. Reclassifications ----------------- Certain prior year balances have been reclassified to conform with the current year presentation. NOTE 3 - ACQUISITIONS Dynamic Health Care Management, Inc. ------------------------------------ On August 20, 1998, the Company's physician and diagnostic management subsidiary, HMCA, consummated the acquisition of the common stock of Dynamic Health Care Management, Inc. ("Dynamic"), a New York corporation, which manages three physician practices on Long Island, New York. The practices consist of internal medicine, physiatry and physical rehabilitation. Pursuant to the Dynamic agreements, HMCA acquired all of the common stock of Dynamic for $2,000,000 in cash, a note payable for $1,265,000 bearing interest at 7.5% per annum, payable in sixty monthly installments, commencing one month following the closing date, a note payable for $2,870,000 bearing interest at 7.5% per annum payable in three annual installments of principal and interest commencing one year after the closing date, and convertible notes face amount of $5,490,000, payable in thirty-six monthly installments of principal and interest, commencing two years after the closing date. The promissory notes are collateralized by all of the assets of the acquired operations and are guaranteed by the Company. A substantial portion of the convertible notes of $5,490,000 are convertible into shares of HMCA's common stock upon the effectiveness of an Initial Public Offering ("IPO") of HMCA's securities providing the IPO is consummated within two years of the closing date. The acquisition was accounted for as a purchase, under which the purchase price was allocated to the acquired assets and assumed liabilities based upon fair values at the date of the acquisition. The excess of the purchase price over the fair value of the net assets acquired amounted to $8,951,907 and is being amortized on a straight-line basis over 20 years. The accompanying consolidated financial statements include the operations of Dynamic from the date of acquisition, August 20, 1998.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) NOTE 4 - MARKETABLE SECURITIES --------------------- The following is a summary of marketable securities at September 30, 1999: (000's omitted) --------------- Unrealized Amortized Holdings Fair Market Cost Gains (Loss) Value --------- ----------- ----------- U.S. Government Obligations $12,002 $ (20) $11,982 Corporate and government agency bonds 9,277 (184) 9,093 Equity securities including mutual stock funds - (-) - --------- ----------- ----------- $21,279 $ (204) $21,075 ========= =========== =========== NOTE 5 - ACCOUNTS RECEIVABLE, NET ------------------------ Accounts receivable, net is comprised of the following: (000's omitted) --------------- September 30, 1999 June 30, 1999 ------------------ ------------- Receivable from equipment sales and service $ 2,093 $ 1,728 Receivables assigned from related PC's 16,574 15,486 Less: Allowance for doubtful accounts and contractual allowances (3,441) (3,277) ------- ------- $15,226 $13,937 ======= ======= The Company's customers are concentrated in the healthcare industry. The Company's receivable assigned from the related PC's substantially consists of fees outstanding under management agreements, service contracts and lease agreements with related PC's. Payment of the outstanding fees is based on collection by the PC's of fees from third party medical reimbursement organizations, principally insurance companies and health management organizations. Collection by the Company of its accounts receivable may be impaired by the uncollectibility of medical fees from third party payors, particularly insurance carriers covering automobile no-fault and workers compensation claims due to longer payment cycles and rigorous informational requirements. Further, payment of certain of the no-fault receivables are substantially contingent upon the timing of settlement of pending litigation involving the recipient of services and third parties (Letter of Protection or "LOP-type" accounts receivable). Approximately 33% and 25% of the PC's net revenues for the three months ended September 30, 1999 and September 30, 1998, respectively, were derived from no-fault and personal injury protection claims. By their nature, the realization of a substantial portion of these receivables is expected to extend beyond one year from the date the service was rendered. The Company anticipates that a material amount of its accounts receivable will be outstanding for periods in excess of twelve months in the future. The Company considers the aging of its accounts receivable in determining the amount of allowance for doubtful accounts. The Company takes all legally available steps, including legally prescribed arbitrations, to collect its receivables. Credit losses associated with the receivables are provided for in the consolidated financial statements and have historically been within management's expectations. For LOP-type receivables, the Company provides for uncollectible accounts at substantially higher rates than any other revenue source. Net revenues from the related PC's accounted for approximately 65% and 77% of the consolidated net revenues for the three months ended September 30, 1999 and 1998, respectively. As of June 30, 1999, the Company had a significant receivable balance from one insurance company, which totaled $1,623,000.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) NOTE 6 - INVENTORIES Inventories included in the accompanying consolidated balance sheets consist of: (000's omitted) September 30, 1999 June 30, 1999 Purchased parts, components and supplies $3,250 $ 3,678 Work-in-process 495 560 ------ ------- $3,745 $ 4,238 ====== ======= NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION During the three months ended September 30, 1999 and 1998, the Company paid approximately $576,000 and $189,000 for interest, respectively. During the three months ended September 30, 1999 and 1998, the Company paid approximately $10,000 and $1,000 for income taxes, respectively. During the three months ended September 30, 1998, the Company acquired the assets and assumed the liabilities of Dynamic. The transaction had the following non-cash impact on the balance sheet: (000,s omitted) Accounts receivable $ 1,900 Equipment 60 Intangibles 8,952 Accrued Liabilities (75) Notes payable to sellers (8,837) ---------- Net Cash Used For Acquisition $ 2,000 ========== NOTE 8 - GOVERNMENT REGULATIONS The healthcare industry is highly regulated by numerous laws, regulations, approvals and licensing requirements at the federal, state and local levels. Regulatory authorities have very broad discretion to interpret and enforce these laws and promulgate corresponding regulation. The Company believes that its operations under agreements pursuant to which it is currently providing services are in material compliance with these laws and regulations. However, there can be no assurance that a court or regulatory authority will not determine that the Company's operations (including arrangements with new or existing clients) violate applicable laws or regulations. If the Company's interpretation of the relevant laws and regulations is inaccurate, the Company's business and its prospects could be materially and adversely affected. The following are among the laws and regulations that affect the Company's operations and development activities; corporate practice of medicine; fee splitting; anti-referral laws; anti-kickback laws; certificates of need, regulation of diagnostic imaging; no-fault insurance; worker's compensation; and proposed healthcare reform legislation. NOTE 9 - LITIGATION On August 4, 1998, Beal Bank filed a notice of motion for summary judgment against Melville Magnetic Resonance Imaging, P.C. ("Melville Magnetic") and the Company. The motion for summary judgment seeks to recover $733,855, plus accrued interest of $221,809 for payment of a bank loan executed by Melville Magnetic and guaranteed by the Company. In April 1999, summary judgment was granted against Melville Magnetic and the Company, as a guarantor on the loan. The court's decision is currently under appeal. Included in accrued liabilities at September 30, 1999 is $650,000 related to this judgment. NOTE 10 - PRO FORMA INFORMATION The Company's consolidated financial statements for the three months ended September 30, 1998 do not include the results of operations of Dynamic for the period July 1, 1998 through August 20, 1998. The following summarizes the unaudited pro forma results of operations for the three months ended September 30, 1998, assuming the foregoing acquisition had occurred on June 30, 1998 (in thousands, except per share data): Three Months Ended September 30, 1998 ------------------- (Unaudited) Revenues, net $ 8,215 Loss from operations $ (3,044) Income (loss) before taxes $ (2,656) Fully diluted net income (loss) per share $(.04) NOTE 11 - SUBSEQUENT EVENT In October, 1999, the Company sold the stock of its subsidiary, Medical SNI. Medical SNI, based in Haifa, Israel, designs and develops products for the medical imaging and archiving industry. The effects of the sale include the removal of liabilities of approximately $1.2 million and a pre-tax gain of approximately $1.0 million. Fonar has a non-exclusive, perpetual, royalty free worldwide license to use and sublicense the technology that was developed up to the time of the sale. NOTE 12 - SEGMENT AND RELATED INFORMATION Effective July 1, 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the way public enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. The Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of physician practices, including diagnostic imaging services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All intersegment sales are market-based. The Company evaluates performance based on income or loss from operations.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) NOTE 12 - SEGMENT AND RELATED INFORMATION (continued) Summarized financial information concerning the Company's reportable segments is shown for the three months ended September 30, 1999 and 1998 in the following table (in thousands): 1999 1998 Net revenues: ------- ------- Medical equipment $ 1,635 $ 1,338 Physician management services 8,326 6,473 Intersegment eliminations ( 313) ( 275) ------- ------- Total $ 9,648 $ 7,536 ======= ======= Income (loss) from operations: Medical equipment $ (4,358) $ (4,157) Physician management services 914 862 ------- ------- Total $ (3,445) $ (3,295) ======= ======= Depreciation and amortization: Medical equipment $ 477 $ 395 Physician management services 564 604 ------- ------- Total $ 1,041 $ 999 ======= ======= Compensatory element of stock issuances: Medical equipment $ 27 $ - Physician management services 92 - ------- ------- Total $ 119 $ - ======= ======= Capital expenditures: Medical equipment $ 663 $ 1,252 Physician management services 110 88 ------- ------- Total $ 773 $ 1,340 ======= =======
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) NOTE 12 - SEGMENT AND RELATED INFORMATION (Continued) At At Sept 30, June 30, 1999 1999 ------ ------- Identifiable assets: Medical equipment $ 51,526 $ 56,311 Physician management services 41,063 41,338 ------- ------- Total $ 92,589 $ 97,648 ======= ======= Export Sales: The Company's areas of operations are principally in the United States. The Company had export sales of medical equipment amounting to 0.0% and 4.0% of consolidated net revenues for the three months ended September 30, 1999 and 1998, respectively. The sales were made principally to the following locations: 1999 1998 ------- ------- Spain - 4.0% Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. For the fiscal quarter ended September 30, 1999 (first quarter of fiscal 2000), the Company reported a net loss of $3.3 million on revenues of $9.6 million as compared to a net loss of $2.8 million on revenues of $7.5 million for the first quarter of fiscal 1999. The Company operates in two industry segments: the manufacture and servicing of medical (MRI) equipment, the Company's traditional business which is conducted directly by Fonar and physician and diagnostic management services, which is conducted through Fonar's wholly-owned subsidiary, Health Management Corporation of America ("HMCA"). HMCA income from operations increased to approximately $914,000 for the first three months of fiscal 2000 compared to operating income of $862,000 for the first three months of fiscal 1999. The results for fiscal 1999 reflected the profitability of HMCA's five acquisitions, Dynamic Health Care Management, Inc. ("Dynamic"), A & A Services, Inc. ("A & A"), Central Health Care Management Services LLC ("Central Health"), Affordable Diagnostics, Inc. and its related companies ("Affordable") and Raymond V. Damadian, M.D. MR Scanning Centers Management Company and two related Florida companies ("RVDC"). Dynamic is a management services organization (MSO) managing multi-specialty physician practices in Nassau and Suffolk Counties in New York, A & A is an MSO managing primary care practices in Queens County and Central Health is a multi-specialty MSO in Yonkers, New York. Affordable was engaged in the business of providing management services, office space, equipment and non-medical personnel to diagnostic imaging centers and a physical rehabilitation center. RVDC was engaged in the business of providing management and other services to diagnostic imaging centers. Results of operations of Dynamic are included from and after August 20, 1998, the closing of the acquisition, and hence the results of operations for HMCA for the first quarter of fiscal 1999 do not include the results of operations of Dynamic from July 1, 1998 to August 20, 1998. The income from operations attributable to HMCA (physician and diagnostic management services) was not sufficient to offset the operating loss from the Company's traditional MRI equipment manufacturing and service business ($4.3 million for the first three months of fiscal 2000 as compared to $4.2 million for the first three months of fiscal 1999). Accordingly the Company's consolidated operating loss was $3.4 million for the first three months of fiscal 2000 as compared to an operating loss of $3.3 million for the first quarter of fiscal 1999. The principal reason for the Company's operating losses was low product sales volumes while the Company was focused on the research and development of its new products. Sales revenues attributable to the Company's medical (MRI) equipment business (sales and service) were $1.6 million for the first three months of fiscal 2000 as compared to $1.3 million for the first three months of fiscal 1999. Costs of revenues attributable to the Company's medical equipment business were $2.2 million for the first three months of fiscal 2000 and $1.6 million for the first three months of fiscal 1999. The Company's efforts to improve equipment sales volume has been focused on research and development (expenditures of $1.6 million for the first three months of each of fiscal 2000 and fiscal 1999) to improve the competitiveness of its products and increasing marketing and sales efforts. The Company's QUAD(TM) 7000 and QUAD(TM) 12000 MRI scanners, together with the Company's works-in-progress (The OR-360(TM) MRI, Stand-Up(TM) MRI and The Open Sky(TM) MRI), are intended to significantly improve the Company's competitive position. The QUAD scanners are highly competitive non-claustrophobic scanners not previously available in the MRI market. At .6 Tesla field strength, the QUAD 12000 magnet is the highest field "Open MRI" in the industry, with the largest patient opening as well. The high field permits the Company's Open MRI to provide the superior image quality traditionally missing in other Open MRI products because of their lower field strengths. The Company's current "works in progress" are the OR 360(TM) scanner, the Open Sky MRI(TM) scanner and the Stand-Up MRI(TM) scanner. The OR 360 has an enlarged room sized magnet which allows full-fledged surgical teams to perform conventional surgery on the patient inside the magnet. Surgical instruments, needles, catheters, endoscopes and the like can be guided to the malignant lesion by means of the MRI image, and treatment agents may be administered directly and exclusively to the malignant tissue. The Open Sky MRI, similar in design to the OR 360, includes the floor, ceiling and sidewalls of the scanning room as part of the iron frame of the magnet. Unlike the OR 360, the Open Sky MRI is strictly a diagnostic scanner, and does not include the software and features that make the OR 360 suitable as an operating room. The Company's Stand-Up MRI will allow patients to be scanned while standing, sitting, bending or reclining. As a result MRI will be able to be used to show abnormalities and injuries (particularly of the joints and spine) under full weight-bearing conditions. The Company has begun to shift its focus from research and development to sales and marketing. To that end, the Company has entered into an agreement with X-Ray Marketing Associates, a national network of independent dealers employing in the aggregate over 700 professional sales representatives. Pursuant to that agreement, X-Ray Marketing Associates has become a distributor for Fonar's line of open MRI scanners. As part of its marketing program, the Company will attend the industry's annual trade show, RSNA (Radiological Society of North America) in November 1999. The Company believes that it is well positioned to take advantage of the "Open MRI" market, as the manufacturer of the only high-field "Open MRI" in the industry. The Company expects marked demand for its high-field "Open MRI" scanners since image quality increases as a direct proportion to magnetic field strength. In addition, the Company's new scanners provide improved image quality and high speed imaging at costs that are significantly less than the competition and more in keeping with the medical cost reduction demands being made by our national leaders on behalf of the public. There were no revenues from foreign product sales or costs of revenues for foreign product sales for the first three months of fiscal 2000. This compares to $306,000 in foreign product sales revenues during the first three months of fiscal 1999 (approximately 62% of product sales revenues and 4% of all revenues) against $530,000 in costs of foreign product sales revenues (approximately 62% of costs of revenues for product sales and 9% of all costs of revenues) for the first three months of fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents declined from $15.2 million at June 30, 1999 to $9.8 million at September 30, 1999. Principal uses of cash during the first three months of fiscal 2000 included: capital expenditures of $800,000, purchase of short-term investments of $900,000, repayment of long-term debt of $1.5 million and $2.1 million to fund the losses for the first three months of fiscal 2000. Marketable securities approximated $21.1 million as of September 30, 1999 as compared to $20 million as of June 30, 1999. From June 30, 1999 to September 30, 1999 the Company reduced its investments in equity securities from approximately $100,000 to $0 and increased its investments in U.S. government obligations from approximately $11.0 million to $12.0 million. The Company's investments in corporate and government agency bonds remained the same at $9.1 million. Total liabilities decreased since June 30, 1999 by approximately $2.0 million to approximately $36.3 million at September 30, 1999. The decrease in liabilities from June 30, 1999 is attributable primarily to the retirement of debt in the ordinary course. As of September 30, 1999, the Company had no unused credit facilities with banks or financial institutions. The Company's business plan currently includes an aggressive program for manufacturing and selling its new line of QUAD scanners and expanding its new physician and diagnostic management services business. The Company believes that it has sufficient cash resources and other liquid assets to support of its operations. The Company has assessed and continues to assess the impact of the Year 2000 Issue (Y2K) on its financial reporting systems and operations. The Year 2000 Issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. The Company has developed a plan to meet this issue. The Company has reviewed all in-house computer based systems. The MIS department is on schedule for updating or replacing older systems that are not Y2K compatible. The Company has also reviewed, tested and started to change to its existing customer base of MRI scanners. The Company expects that all computer based systems will be Y2K compliant by the year 2000. Costs of addressing these items are not expected to have a material adverse impact on the Company's financial position. PART II - OTHER INFORMATION Item 1 - Legal Proceedings: There were no material changes in litigation for the first quarter of fiscal 2000 from that described in Form 10-K for the fiscal year ended June 30, 1999. Item 2 - Changes in Securities: None Item 3 - Defaults Upon Senior Securities: None Item 4 - Submission of Matters to a Vote of Security Holders: None Item 5 - Other Information: None Item 6 - Exhibits and Reports on Form 8-K: None
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FONAR CORPORATION (Registrant) By: /s/ Raymond V. Damadian Raymond V. Damadian President & Chairman Dated: November 15, 1999