SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 2001 Commission File Number 0-10248 FONAR CORPORATION ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 11-2464137 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 110 Marcus Drive Melville, New York 11747 - ---------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) (631) 694-2929 --------------------------------------------------- Registrant's telephone number, including area code: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding at March 31, 2001 - ----------------------------------------- ----------------------------- Common Stock, par value $.0001 58,787,817 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 - March 31, 2001 and June 30, 2000 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and March 31, 2000 Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 2001 and March 31, 2000 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2001 and March 31, 2000 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 March 31, June 30, 2001 2000 (UNAUDITED) Current Assets: --------- ------- Cash and cash equivalents $ 10,349 $11,811 Marketable securities 7,602 11,484 Accounts receivable - net 15,586 14,389 Costs and estimated earnings in excess of billings on uncompleted contracts 1,110 968 Inventories 4,690 3,536 Investment in sales-type lease 260 58 Prepaid expenses and other current assets 493 604 ------ ------ Total current assets 40,090 42,850 ------ ------ Restricted cash 5,000 5,000 Property and equipment - net 10,289 11,227 Advances and notes to affiliates and related parties-net 1,808 1,159 Investment in sales-type lease 2,550 873 Notes receivable - net 506 501 Excess of cost over net assets of business acquired-net 20,743 21,657 Other intangible assets - net 904 1,036 Other assets 288 296 -------- -------- $ 82,178 $ 84,599 ======== ======== See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) March 31, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 (UNAUDITED) Current Liabilities: ---------- -------- Current portion of debt and capital leases $ 6,619 $ 6,225 Accounts payable 2,196 1,739 Other current liabilities 5,792 8,967 Customer advances 252 582 Income taxes payable 876 897 ------ ------ Total current liabilities 15,735 18,410 Long-term debt and capital lease obligations less current portion 10,744 14,744 Unearned revenue - license fee 9,945 - Other non-current liabilities 138 138 ------ ------ Total liabilities 36,562 33,292 ------ ------ Minority interest 15 22 ------ ------ Commitments and contingencies - - STOCKHOLDERS' EQUITY Common Stock $.0001 par value; 60,000,000 shares authorized; 58,787,817 issued and outstanding at March 31, 2001 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 March 31, 2001 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 March 31, 2001 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 March 31, 2001 and at June 30, 2000 1 1 Paid-in capital in excess of par value 102,567 98,581 Accumulated other comprehensive income 80 ( 265) Accumulated deficit (54,538) (44,817) Notes receivable - stockholders ( 1,040) ( 1,338) Unearned compensation ( 801) ( 213) Treasury stock - 299,264 shares of common stock at March 31, 2001 and 289,264 at June 30, 2000 ( 675) ( 671) ------- ------- Total stockholders' equity 45,601 51,285 ------- ------- Total liabilities and stockholders' equity $ 82,178 $ 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 MARCH 31, --------------------- 2001 2000 REVENUES -------- -------- Product sales - net $ 2,311 $ 877 Service and repair fees - net 510 379 Scanning and management fees - net 9,701 8,594 License fees and royalties 585 - -------- -------- Total Revenues - Net 13,107 9,850 -------- -------- COSTS AND EXPENSES: Cost of product sales 1,942 701 Cost of service and repair fees 592 875 Cost of scanning and management fees - net 5,912 5,516 Research and development expenses 1,528 1,358 Selling, general and administrative expenses 4,319 4,053 Provision for bad debt 15 63 Compensatory element of stock issuances 1,320 918 Amortization of excess of cost over assets acquired 305 305 ------- ------- Total Costs and Expenses 15,933 13,789 -------- -------- Loss From Operations ( 2,826) ( 3,939) Interest Expense ( 362) ( 366) Interest Income - net 523 477 Other income (expense) (32) ( 37) ------ ------- Loss before provision for taxes and minority interest ( 2,697) ( 3,865) Provision for income taxes 12 22 ------- ------- Loss before minority interest ( 2,709) ( 3,887) Minority interest in net (income) loss of subsidiary and partnership ( 92) ( 76) ------- ------- NET LOSS $( 2,801) $( 3,963) ======= ======= Basic and diluted Net Loss per share $(.04) $(.06) ====== ====== Weighted average number of shares outstanding 69,517 66,708 ====== ====== 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 NINE MONTHS ENDED MARCH 31, --------------------- 2001 2000 REVENUES -------- -------- Product sales - net $ 3,562 $ 2,686 Service and repair fees - net 1,433 1,216 Scanning and management fees - net 27,365 25,096 License fees and royalties 1,839 720 -------- -------- Total Revenues - Net 34,199 29,718 -------- -------- COSTS AND EXPENSES: Cost of product sales 3,757 3,134 Cost of service and repair fees 1,809 2,664 Cost of scanning and management fees - net 17,542 16,845 Research and development expenses 4,556 4,373 Selling, general and administrative expenses 13,537 11,568 Provision for bad debt 15 63 Compensatory element of stock issuances 2,853 1,148 Amortization of excess of cost over assets acquired 914 914 -------- -------- Total Costs and Expenses 44,983 40,709 -------- -------- Loss From Operations (10,784) (10,991) Interest Expense ( 955) ( 1,358) Interest Income - net 1,526 1,566 Gain on sale of subsidiary/partnership interest 750 1,022 Other income (expense) 28 18 ------ ------- Loss before provision for taxes and minority interest ( 9,435) ( 9,743) Provision for income taxes 26 33 ------- ------- Loss before minority interest ( 9,461) ( 9,776) Minority interest in net (income) loss of subsidiary and partnership ( 260) ( 195) ------- ------- NET LOSS $ ( 9,721) $( 9,971) ======= ======= Basic and diluted Net Loss per share $(.14) $(.15) ====== ====== Weighted average number of shares outstanding 69,517 66,708 ====== ====== See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE NINE MONTHS ENDED MARCH 31, ----------------- 2001 2000 ------ ------ Cash Flows from Operating Activities Net Loss $( 9,721) $( 9,971) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Minority interest in net income (loss) 260 195 Depreciation and amortization 3,489 3,172 Imputed interest on deferred payment obligation - 315 Provision for losses on accounts and notes receivable and accounts receivable from affiliates 15 63 Gain on sale of subsidiary/partnership interest (750) ( 1,022) Compensatory and fee element of stock issuances 2,853 1,148 Stock issued in settlement of current liabilities 547 516 Amortization of unearned license fee ( 1,755) - License fee 11,700 - (Increase) decrease in operating assets, net: Accounts and notes receivable ( 1,202) ( 2,335) Costs and estimated earnings in excess of billings on uncompleted contracts ( 142) 49 Inventories ( 1,154) 548 Prepaid expenses and other current assets 111 ( 119) Other assets 8 ( 31) Receivables and advances to affiliates and related parties ( 664) 234 Investment in sales-type lease ( 1,879) - Increase (decrease) in operating liabilities, net: Accounts payable and income taxes 436 ( 858) Other current liabilities ( 2,878) ( 242) Customer advances ( 330) 11 Other liabilities - 121 ------ ------ Net cash provided by (used in) operating activities ( 1,056) ( 8,206) ------ ------ Cash Flows from Investing Activities: Purchases of property and equipment - net ( 1,506) ( 1,776) Reduction in marketable securities 4,227 4,562 ------ ------ Net cash provided by (used in) investing activities 2,721 2,786 ------ ------ See accompanying notes to consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE NINE MONTHS ENDED MARCH 31, ----------------- 2001 2000 ------ ------ Cash Flows from Financing Activities: Distribution to minority interest ( 267) ( 209) Repayment of borrowings and capital lease obligations ( 3,606) ( 3,304) Purchase of treasury stock ( 4) ( 79) Proceeds on sale of partnership interest 750 - ------ ------ Net cash used in financing activities ( 3,127) ( 3,592) ------ ------ Increase (Decrease) in Cash ( 1,462) ( 9,012) Cash at beginning of period 11,811 15,176 ------ ------ Cash at end of period $10,349 $ 6,164 ====== ====== 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 NINE MONTHS ENDED MARCH 31, ----------------- 2001 2000 ------ ------ Net loss $( 9,721) $(9,971) Other comprehensive income, net of tax: Unrealized gains (losses) on securities, net of tax 345 ( 130) --------- -------- Total comprehensive loss $( 9,376) $(10,101) ========= ========
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) (000's OMITTED) 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 MARCH 31, 2001 (UNAUDITED) (000's OMITTED) 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 March 31, 2001, 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. Advertising expenses for the nine months ended March 31, 2001 and 2000 were $2,322 and $2,122 respectively. 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 -------------- Basic and diluted net income (loss) per 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. Cash and Cash Equivalents ------------------------- The Company considers all short-term highly liquid investments with a maturity of three months or less when purchased to be cash or cash equivalents. At March 31, 2001, the Company had cash deposits of approximately $10.2 million in excess of federally insured limits. Restricted Cash --------------- At March 31, 2001, $5 million of cash was pledged as collateral on an outstanding bank loan and was classified as restricted cash on the balance sheet. Concentration of Credit Risk ---------------------------- Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash, trade accounts receivable, notes receivable, investment in sales-type leases and investments, advances and notes to affiliates and related parties. Ongoing credit evaluations of customers' financial condition are performed. The Company generally retains title to the MRI scanners that it sells until the scanners have been paid in full. The Company's customers are concentrated in the industry of providing MRI scanning services. Fair Value of Financial Instruments ----------------------------------- The financial statements include various estimated fair value information at March 31, 2001 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 MARCH 31, 2001 (UNAUDITED) (000's OMITTED) NOTE 3 - MARKETABLE SECURITIES --------------------- The following is a summary of marketable securities at March 31, 2001: (000's omitted) --------------- Unrealized Amortized Holdings Fair Market Cost Gains (Loss) Value --------- ------------ ----------- U.S. Government $----- $----- $----- Obligations Corporate and government 7,522 80 7,602 agency bonds Equity securities including mutual stock funds ----- ----- ----- ------- ------- ------- ------- ------- ------- 7,522 80 7,602 ======= ======= =======
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) (000's OMITTED) NOTE 4 - ACCOUNTS RECEIVABLE, NET ------------------------ Accounts receivable, net is comprised of the following: (000's omitted) --------------- March 31, 2001 June 30, 2000 -------------- ------------- Receivable from equipment sales and service $3,059 $2,380 Receivables from related PC's 15,455 14,937 Less: Allowance for doubtful accounts and contractual allowances (2,928) (2,928) ------- ------- $15,586 $14,389 ======== ======== The Company's customers are concentrated in the healthcare industry. The Company's receivable 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 44% and 45% of the PC's net revenues for the nine months ended March 31, 2001 and March 31, 2000, 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 nine months ended March 31, 2001 and 2000, respectively.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) (000's OMITTED) NOTE 5 - INVENTORIES Inventories included in the accompanying consolidated balance sheets consist of: (000's omitted) --------------- March 31, 2001 June 30, 2000 -------------- ------------- Purchased parts, components and supplies $ 3,846 $ 2,917 Work-in-process 844 619 ------- ------- $ 4,690 $ 3,536 ======= ======= NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION During the nine months ended March 31, 2001 and 2000, the Company paid approximately $951 and $1,008 for interest, respectively. During the nine months ended March 31, 2001 and 2000, the Company paid approximately $48 and $37 for income taxes, respectively. NOTE 7 - GOVERNMENT REGULATIONS The healthcare industry is highly regulated by numerous laws, regulations, approvals and licensing requirements at the federal, state and local levels. Regulatory authorities have very broad discretion to interpret and enforce these laws and promulgate corresponding regulation. The Company believes that its operations under agreements pursuant to which it is currently providing services are in material compliance with these laws and regulations. However, there can be no assurance that a court or regulatory authority will not determine that the Company's operations (including arrangements with new or existing clients) violate applicable laws or regulations. If the Company's interpretation of the relevant laws and regulations is inaccurate, the Company's business and its prospects could be materially and adversely affected. The following are among the laws and regulations that affect the Company's operations and development activities; corporate practice of medicine; fee splitting; anti-referral laws; anti-kickback laws; certificates of need, regulation of diagnostic imaging; no-fault insurance; worker's compensation; and proposed healthcare reform legislation. NOTE 8 - LITIGATION On April 27, 2000, Beal Bank, S.S.B. filed a motion for summary judgment against Melville Magnetic Resonance Imaging, P.C. ("Melville Magnetic") and the Company in a litigation in the New York Supreme Court, Suffolk County. The summary judgment motion sought recovery of the principal plus accrued interest on a Promissory Note executed by Melville Magnetic and guaranteed by the Company. The court subsequently granted Beal Bank's motion and entered judgment against Melville Magnetic and the Company in the amount of $1.4 million. On February 5, 2001, the Company paid the judgment in full in order to stop the accrual of interest. On February 6, 2001, Melville Magnetic and the Company filed an appeal from the judgment. Fonar has charged back Melville Magnetic $754 related to this payment. Such amount is included in notes receivable as of March 31, 2001. During the quarter ended March 31, 2001, the Company settled its Kivitz judgment litigation for a payment of $1.225 million. The full amount of the judgment was accrued for as of June 30, 2000. No additional charge to earnings was necessary as of March 31, 2001. NOTE 9 - GAIN ON SALE OF SUBSIDIARY AND PARTNERSHIP INTEREST 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. 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 $11.7 million of which $9 million was received in September of 2000 and $2.7 million in January of 2001. The license fee is being recognized as income ratably over the five-year period ending June 30, 2005.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (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 nine months ended March 31, 2001 and 2000, 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 nine months ended March 31, 2001 and 2000 in the following table (in thousands):
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) NOTE 11 - SEGMENT AND RELATED INFORMATION (Continued) 2001 2000 Net revenues: ------- ------- Medical equipment $ 7,669 $ 5,561 Physician practice management 27,365 25,096 Intersegment eliminations ( 835) ( 939) ------- ------- Total $ 34,199 $ 29,718 ======= ======= Income (loss) from operations: Medical equipment $ (12,948) $(12,946) Physician practice management 2,164 1,955 ------- ------- Total $ (10,784) $(10,991) ======= ======= Depreciation and amortization: Medical equipment $ 1,642 $ 1,458 Physician practice management 1,847 1,714 ------- ------- Total $ 3,489 $ 3,172 ======= ======= 2001 2000 ------- ------- Compensatory element of stock issuances: Medical equipment $ 1,393 $ 589 Physician management services 1,460 559 ------- ------- $ 2,853 $ 1,148 ======= ======= Capital expenditures: Medical equipment $ 898 $ 1,417 Physician practice management 608 359 ------- ------- Total $ 1,506 $ 1,776 ======= ======= At At March 31, June 30, 2001 2000 --------- -------- Identifiable assets: Medical equipment $ 42,164 $ 43,046 Physician practice management 40,014 41,553 ------- ------- Total $ 82,178 $ 84,599 ======= =======
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. For the fiscal quarter ended March 31, 2001 (third quarter of fiscal 2001), the Company reported a net loss of $2.8 million on revenues of $13.1 million as compared to a net loss of $3.9 million on revenues of $9.9 million for the third quarter of fiscal 2000. For the nine month period ended March 31, 2001, the Company reported a net loss of $9.7 million on revenues of $34.2 million as compared to a net loss of $10.0 million on revenues of $29.7 million for the nine month period ended March 31, 2000. The Company operates in two industry segments: the manufacture and servicing of medical (MRI) equipment, the Company's traditional business which is conducted directly by Fonar and physician and diagnostic management services, which is conducted through Fonar's wholly-owned subsidiary, Health Management Corporation of America ("HMCA"). HMCA income from operations was approximately $2.2 million on revenues of $27.4 million for the first nine months of fiscal 2001 compared to income of $2.0 million on revenues of $25.1 million for the first nine months of fiscal 2000. The increase in HMCA revenue and income was attributable primarily to an increase in management fees from HMCA's multispecialty practice clients. 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 ($12.9 million for the first nine months of both fiscal 2001 and fiscal 2000). Accordingly the Company's consolidated operating loss was $10.8 million for the first nine months of fiscal 2001 as compared to an operating loss of $11.0 million for the first nine 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 nine months of fiscal 2000 to $1.8 million in the first nine 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. Nevertheless, sales revenues attributable to the Company's medical (MRI) equipment segment increased to $7.7 million for the first nine months of fiscal 2001 as compared to $5.6 million for the first nine months of fiscal 2000. Of these amounts, revenues attributable to product sales were $2.3 million for the third quarter of fiscal 2001, compared to $877,000 for the third quarter of fiscal 2000. Costs of revenues attributable to the Company's medical equipment business were $5.6 million for the first nine months of fiscal 2001 and $5.8 million for the first nine months of fiscal 2000. Inventories increased to $4.7 million as at March 31, 2001 from $3.5 million as at June 30, 2001 as the Company purchased parts and commenced manufacturing scanners to fill anticipated orders. 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. The Company has also equipped a trailer van to serve as a mobile showroom, featuring a model of one of The Company's MRI scanner models. The showroom is used by the Company's sales force across the United States to generate interest in the Company's products. In July, 2000 General Electric and the Company entered into an agreement under which General Electric agreed to act as a sales representative for the Company's Indomitable (TM) Stand-Up MRI Scanner. Following receipt of FDA clearance, Fonar has been working closely with GE Medical Systems to assist them in preparing their sales force to market and sell the Stand-Up MRI. Fonar anticipates the first results from General Electric's efforts on Fonar's behalf in the last quarter of fiscal 2001 or first quarter of fiscal 2002. Ongoing research and development expenditures to sustain and further advance the competitiveness of Fonar's MRI scanners were $4.6 million for the first nine months of fiscal 2001 and $4.4 million for the first nine months of fiscal 2000. There were no foreign product sales for the first nine months of fiscal 2001 and foreign sales of less than 1% of total revenues for the first nine months in 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. Liquidity and Capital Resources Cash and cash equivalents decreased from $11.8 million at June 30, 2000 to $10.3 million at March 31,2001. Principal uses of cash during the first nine months of fiscal 2001 included: capital expenditures of $1.5 million, repayment of long-term debt and current liabilities (principally payment of judgments ) of $3.6 million and $2.9 million respectively and $9.7 million to fund the losses for the first nine months of fiscal 2001. Cash of approximately $11.7 million was provided from licensing fees. Marketable securities approximated $7.6 million as of March 31, 2001 as compared to $11.5 million as of June 30, 2000. From June 30, 2000 to March 31, 2001 the Company reduced its investments in corporate and government agency bonds from $11.5 million to $7.6 million. The Company had no investments in equity securities or U.S. government obligations at either June 30, 2000 or March 31, 2001. Accounts receivable increased $1.2 million from $14.4 million as at June 30, 2000 to $15.6 million at March 31, 2001. This increase was largely attributable to an increase in revenues and to a delay in reimbursements paid to HMCA's clients by one of the payor insurance companies, which in turn resulted in a delay in the payment of management fees to HMCA by those clients. Total liabilities increased since June 30, 2000 by approximately $3.3 million to approximately $36.6 million at March 31, 2001. 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 $9.9 million). The Company's repayment of long term debt and current liabilities in the third fiscal quarter was the principal factor in the reduction of total liabilities from $41.5 million at December 31, 2000 to $36.6 million at March 31, 2001. As of March 31, 2001, 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 and its subsidiary, HMCA, are exploring both bank financing and the placement of debt and equity securities.
PART II - OTHER INFORMATION Item 1 - Legal Proceedings: There were no material changes in litigation for the first nine 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: May 11, 2001