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