FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 2004
----------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission file number 0-10248
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FONAR CORPORATION
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-2929
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 latest practicable date.
Class Outstanding at January 31, 2005
- -------------------------------- -------------------------------
Common Stock, par value $.0001 102,588,071
Class B Common Stock, par value $.0001 3,953
Class C Common Stock, par value $.0001 9,562,824
Class A Preferred Stock, par value $.0001 7,836,287
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2004
(Unaudited) and June 30, 2004
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 2004 and
December 31, 2003 (Unaudited)
Condensed Consolidated Statements of Operations for
the Six Months Ended December 31, 2004 and
December 31, 2003 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Three Months Ended
December 31, 2004 and December 31, 2003 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Six Months Ended
December 31, 2004 and December 31, 2003 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 2004 and
December 31, 2003 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit - 31.1
Exhibit - 32.1
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS December 31, June 30,
2004 2004
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $ 8,082 $ 9,474
Marketable securities 12,125 11,120
Restricted cash 5,500 5,500
Accounts receivable - net 2,631 1,006
Accounts receivable - related parties - net 414 297
Management fee receivable - related medical
practices - net 14,464 14,315
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,546 1,711
Costs and estimated earnings in excess
of billings on uncompleted contracts - related party 1,500 112
Inventories 9,316 9,585
Investment in sales-type lease 163 154
Current portion of advances and notes to related
medical practices 200 240
Prepaid expenses and other current assets 2,148 1,572
------ ------
Total Current Assets 59,089 55,086
------ ------
Property and equipment - net 7,259 8,211
Advances and notes to related medical practices - net 391 481
Investment in sales-type lease 369 452
Management agreements - net 8,413 8,730
Other intangible assets - net 4,206 3,958
Other assets 289 283
-------- --------
Total Assets $ 80,016 $ 77,201
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2004
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of long-term debt and
capital leases $ 5,897 $ 5,983
Accounts payable 5,603 5,369
Other current liabilities 10,984 10,005
Unearned revenue on service contracts - related parties 471 373
Customer advances 3,003 7,800
Customer advances - related party 42 -
Income taxes payable 24 26
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,691 2,937
Billings in excess of costs and estimated
earnings on uncompleted contracts - related party 441 -
------ ------
Total Current Liabilities 29,156 32,493
Due to related medical practices 154 154
Long-term debt and capital leases,
less current maturities 563 720
Other liabilities 289 299
------ ------
Total Long-Term Liabilities 1,006 1,173
------ ------
Total Liabilities 30,162 33,666
------ ------
Minority interest 446 381
------ ------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, except share data)
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2004
(continued) (UNAUDITED)
------------ --------
STOCKHOLDERS' EQUITY
Class A non-voting preferred stock $.0001 par value;
8,000,000 authorized, 7,836,287 issued and outstanding
at December 31, 2004 and June 30, 2004 1 1
Common Stock $.0001 par value; 110,000,000 shares
authorized; 102,307,846 issued at December 31, 2004 and
98,704,937 at June 30, 2004; 102,016,782 outstanding at
December 31, 2004 and 98,413,873 at June 30, 2004 10 10
Class B Common Stock $ .0001 par value; 4,000,000 shares
authorized, (10 votes per share), 3,953 issued and
outstanding at December 31, 2004 and 4,153 issued
and outstanding at June 30, 2004 - -
Class C Common Stock $.0001 par value; 10,000,000 shares
authorized, (25 votes per share), 9,562,824 issued and
outstanding at December 31, 2004 and June 30, 2004 1 1
Paid-in capital in excess of par value 156,221 152,090
Accumulated other comprehensive loss ( 37) ( 46)
Accumulated deficit (105,457) (107,384)
Notes receivable from employee stockholders ( 656) ( 843)
Treasury stock, at cost - 291,064 shares of common
stock at December 31, 2004 and June 30, 2004 ( 675) ( 675)
------- -------
Total Stockholders' Equity 49,408 43,154
------- -------
Total Liabilities and Stockholders' Equity $ 80,016 $ 77,201
======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------
2004 2003
REVENUES -------- --------
Product sales - net $ 18,938 $ 8,603
Product sales - related parties - net 2,571 1,941
Service and repair fees - net 1,216 671
Service and repair fees - related parties - net 228 100
Management and other fees - related medical
practices - net 5,961 5,884
License fees and royalties 585 690
-------- --------
Total Revenues - Net 29,499 17,889
-------- --------
COSTS AND EXPENSES
Costs related to product sales 12,119 5,342
Costs related to product sales - related parties 1,448 1,217
Costs related to service and repair fees 1,102 891
Costs related to service and repair
fees - related parties 193 105
Costs related to management and other
fees - related medical practices 3,757 3,779
Research and development 1,448 1,383
Selling, general and administrative 7,077 6,301
Compensatory element of stock issuances for
selling, general and administrative expenses 923 1,116
Provision for bad debts 50 60
Amortization of management agreements 159 158
-------- --------
Total Costs and Expenses 28,276 20,352
-------- --------
Income (Loss) From Operations 1,223 ( 2,463)
Interest Expense ( 67) ( 63)
Investment Income 154 113
Interest Income - Related Parties 6 10
Other Income (Expense) 67 ( 10)
Minority Interest in Income of Partnerships ( 220) ( 212)
------ -------
Income (Loss) Before Provision for Income Taxes 1,163 ( 2,625)
Provision for Income Taxes 22 5
------- -------
NET INCOME (LOSS) $ 1,141 $( 2,630)
======= =======
Net Income (Loss) Available to Common Stockholders $ 1,060 $( 2,630)
------- -------
Basic Earnings (Loss) Per Common Share $ .01 $( .03)
======== ========
Diluted Earnings (Loss) Per Common Share $ .01 $( .03)
======== ========
Basic and Diluted Earnings Per Share-Common C - N/A
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2004 2003
REVENUES -------- --------
Product sales - net $36,282 $13,454
Product sales - related parties - net 2,878 3,169
Service and repair fees - net 2,112 1,247
Service and repair fees - related parties - net 373 208
Management and other fees - related medical
practices - net 11,752 11,838
License fees and royalties 1,170 1,275
-------- --------
Total Revenues - Net 54,567 31,191
-------- --------
COSTS AND EXPENSES
Costs related to product sales 23,039 8,091
Costs related to product sales - related parties 1,614 1,978
Costs related to service and repair fees 2,054 1,609
Costs related to service and repair
fees - related parties 355 268
Costs related to management and other
fees - related medical practices 7,254 7,169
Research and development 2,822 2,716
Selling, general and administrative 13,177 12,827
Compensatory element of stock issuances for
selling, general and administrative expenses 1,704 2,333
Provision for bad debts 100 85
Amortization of management agreements 317 317
-------- --------
Total Costs and Expenses 52,436 37,393
-------- --------
Income (Loss) From Operations 2,131 ( 6,202)
Interest Expense ( 132) ( 123)
Investment Income 260 188
Interest Income - Related Parties 13 27
Other Income (Expense) 143 88
Minority Interest in Income of Partnerships ( 446) ( 433)
------ -------
Income (Loss) Before Provision for Income Taxes 1,969 ( 6,455)
Provision for Income Taxes 42 17
------ -------
NET INCOME (LOSS) $ 1,927 $( 6,472)
======= ========
Net Income (Loss) Available to Common Stockholders 1,789 $( 6,472)
------- --------
Basic Earnings (Loss) Per Common Share $ .02 $( .07)
======== ========
Diluted Earnings (Loss) Per Common Share $ .02 $( .07)
======== ========
Basic and Diluted Earnings Per Share-Common C - N/A
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
-----------------
2004 2003
------ ------
Net income (loss) $ 1,141 $(2,630)
Other comprehensive loss, net of tax:
Unrealized losses on securities,
net of tax ( 32) ( 10)
------- -------
Total comprehensive income (loss) $ 1,109 $(2,640)
======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
-----------------
2004 2003
------ ------
Net income (loss) $ 1,927 $(6,472)
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of tax 9 31
------ ------
Total comprehensive income (loss) $ 1,936 $(6,441)
====== ======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
-----------------
2004 2003
------ ------
Cash Flows from Operating Activities:
Net income (loss) $ 1,927 $( 6,472)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Minority interest in net income of partnerships 446 433
Depreciation and amortization 1,972 2,009
Provision for bad debts 100 85
Compensatory element of stock issuances 1,704 2,333
Stock issued for costs and expenses 2,173 9,671
Reduction in notes receivable from employee
stockholders adjusted to compensation 126 -
Gain on sale of equipment ( 28) -
Amortization of deferred revenue-license fee ( 1,170) ( 1,170)
(Increase) decrease in operating assets, net:
Accounts and management receivable ( 2,041) ( 1,544)
Costs and estimated earnings in excess of
billings on uncompleted contracts ( 723) ( 1,057)
Inventories ( 380) ( 2,196)
Principal payments received on sales type
lease-related party - 14
Principal payments received on sales type lease 74 66
Prepaid expenses and other current assets ( 576) ( 1,517)
Other assets ( 5) ( 8)
Advances and notes to related medical practices 130 74
Increase (decrease) in operating liabilities, net:
Accounts payable 235 ( 74)
Other current liabilities 2,309 1,259
Customer advances ( 4,755) 4,645
Billings in excess of costs and estimated
earnings on uncompleted contracts 195 ( 3,769)
Other liabilities ( 10) 3
Income taxes payable ( 2) 11
------ ------
Net cash provided by operating activities 1,701 2,796
------ ------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
-----------------
2004 2003
------ ------
Cash Flows from Investing Activities:
Sales (purchases) of marketable securities ( 996) 1,847
Purchases of property and equipment ( 1,165) ( 258)
Costs of capitalized software development ( 396) ( 265)
Cost of patents and copyrights ( 195) ( 153)
Proceeds from sale of equipment 31 -
Repayment of note receivable from buyers
of A&A Services - Discontinued operations - 150
------ ------
Net cash (used in) provided by investing activities ( 2,721) 1,321
------ ------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 382) ( 439)
Repayment of borrowings and capital
lease obligations ( 242) ( 616)
Net proceeds from exercise of stock options
and warrants 224 450
Repayment of notes receivable from employee
stockholders 29 -
------ ------
Net cash used in financing activities ( 371) ( 605)
------ ------
Increase (Decrease) in Cash and Cash Equivalents ( 1,391) 3,512
Cash and Cash Equivalents - Beginning of Period 9,474 9,334
------ ------
Cash and Cash Equivalents - End of Period $ 8,083 $12,846
====== ======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six months ended
December 31, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2005. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K filed on September 16, 2004 for the
fiscal year ended June 30, 2004.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of FONAR Corporation
(the "Company"), its majority and wholly-owned subsidiaries and partnerships.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed based on weighted average
shares outstanding and excludes any potential dilution. In accordance with EITF
03-6, "Participating Securities and the Two-Class method under FASB Statement
No. 128" ("EITF 03-6"), which nullifies EITF Topic D-95, "Effect of
Participating Convertible Securities on the Computation of Basic Earnings Per
Share," the Company's participating convertible securities, which include Class
B common stock and Class C common stock, are not included in the computation of
basic EPS for the six months ended December 31, 2003 because the participating
securities do not have a contractual obligation to share in the losses of the
Company. For the six months ended December 31, 2004, the Company used the
Two-Class method for calculating basic earnings per share and applied the if
converted method in calculating diluted earnings per share. The provisions of
EITF 03-6 became effective for the Company beginning April 1, 2004. The adoption
of this new pronouncement did not have any impact on the Company's consolidated
financial statements.
Diluted EPS reflects the potential dilution from the exercise or conversion of
all dilutive securities into common stock based on the average market price of
common shares outstanding during the period. The number of common shares
potentially issuable upon the exercise of certain options of approximately
689,000 for the six months ended December 31, 2004 have not been included in the
computation of diluted EPS since the effect would be antidilutive. The number of
common shares potentially issuable upon the exercise of options and warrants or
conversion of the participating convertible securities that were excluded from
the diluted EPS calculation was approximately 9,066,000, because they are
antidilutive as a result of a net loss for the three and six months ended
December 31, 2003.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
(000's omitted, except per share data)
Three Months Three Months
ended December 31, ended December 31,
2004 2003
----------------------------------- ------------------
Class C
Common Common
Total Stock Stock Total
Basic
Numerator:
Net income (loss)
available to
common stockholders $1,060 $1,034 $26 $(2,630)
======= ====== ====== ========
Denominator:
Weighted average
shares 100,822 9,563 88,988
outstanding ======= ====== ========
Basic earnings
(loss) per
common share $ .01 $ .01 $ -- $ (.03)
======= ======= ====== =======
Diluted
Weighted average
shares outstanding 100,822 100,822 9,563 88,988
Stock options 311 311 --
Warrants 523 523 --
Convertible Class C
common stock 3,188 3,188
------- ------- ------ -------
Denominator for diluted
earnings per share:
Weighted average
shares outstanding
of common stock and
equivalents 104,844 104,844 9,563 88,988
======= ======= ====== =======
Diluted earnings (loss)
per common share $ .01 $ .01 $ -- $ (.03)
======= ======= ====== =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
(000's omitted, except per share data)
Six Months Six Months
ended December 31, ended December 31,
2004 2003
----------------------------------- ------------------
Class C
Common Common
Total Stock Stock Total
Basic
Numerator:
Net income (loss)
available to
common stockholders $ 1,789 $1,746 $ 43 $ (6,472)
======= ====== ====== ========
Denominator:
Weighted average
shares 99,824 9,563 86,730
outstanding ======= ====== ========
Basic earnings
(loss) per
common share $ 0 .02 $ 0.02 $ -- $ (.07)
======= ======= ====== =======
Diluted
Weighted average
shares outstanding 99,824 99,824 9,563 86,730
Stock options 195 195 --
Warrants 487 487 --
Convertible Class C
common stock 3,188 3,188
------- ------- ------ -------
Denominator for diluted
earnings per share:
Weighted average
shares outstanding
of common stock and
equivalents 103,694 103,694 9,563 86,730
======= ======= ====== =======
Diluted earnings (loss)
per common share $ .02 $ .02 $ -- $ (.07)
======= ======= ====== =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments
At December 31, 2004, the Company had various stock-based employee compensation
plans. As permitted under Statement of Financial Accounting Standard ("SFAS")
No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure",
which amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", the Company has elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation arrangements as
defined by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No. 25. No stock-based employee compensation cost is
reflected in operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation:
For the Three Months Ended For the Six Months Ended
December 31, December 31,
(000's omitted, (000's omitted,
except per share data) except per share data)
-------------------------- ------------------------
2004 2003 2004 2003
--------- -------- --------- --------
Net Income (loss)
available to
common shareholders $1,060 $(2,630) $1,789 $(6,472)
Less:
Undistributed earnings
allocated to Class C
common stock 26 -- 43 --
--------- -------- --------- --------
1,034 (2,630) 1,746 (6,472)
Less:
Total stock-based
employee compensation
expense determined
under fair value
based method for all
awards 24 50 52 248
--------- -------- --------- --------
Pro forma Net Income
(Loss) $1,010 $(2,680) $ 1,694 $(6,720)
========= ======== ========= ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments (Continued)
For the Three Months Ended For the Six Months Ended
December 31, December 31,
(000's omitted, (000's omitted,
except per share data) except per share data)
-------------------------- ------------------------
2004 2003 2004 2003
--------- -------- --------- --------
Basic Net Income (Loss)
Per Share As Reported $ 0.01 $ (0.03) $ 0.02 $ (0.07)
========= ======== ========= ========
Basic Pro forma Net
Income (Loss) Per Share $ 0.01 $ (0.03) $ 0.02 $ (0.08)
========= ======== ========= ========
Diluted Net Income (Loss)
per share as reported $ 0.01 $ (0.03) $ 0.02 $ (0.07)
========= ======== ========= ========
Diluted Pro Forma Net
Income (Loss) per share $ 0.01 $ (0.03) $ 0.02 $ (0.08)
========= ======== ========= ========
The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:
For the Three and Six Months Ended
December 31,
----------------------------------
2004 2003
-------- --------
Expected life (years) 3 3
Interest Rate 2.69% 4.00%
Annual Rate of dividends 0% 0%
Volatility 55% 92%
Recent Accounting Pronouncements
In December, 2004, the Financial Accounting Standards Board ("FASB") issued its
final standard on accounting for share-based payments ("SBP"), FASB Statement
No. 123R (revised 2004), Share-Based Payment. The Statement requires companies
to expense the value of employee stock options and similar awards. Under FAS
123R, SBP awards result in a cost that will be measured at fair value on the
awards' grant date, based on the estimated number of awards that are expected to
vest. Compensation cost for awards that vest would not be reversed if the awards
expire without being exercised. The effective date for public companies is
interim and annual periods beginning after June 15, 2005, and applied to all
outstanding and unvested SBP awards at a company's adoption. Management does not
anticipate that this Statement will have a significant impact on the Company's
consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restricted Cash
At December 31, 2004, $5,500,000 of cash has been pledged as collateral on an
outstanding bank loan and has been classified as restricted cash on the
accompanying condensed consolidated balance sheet.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable, net is comprised of the following at December 31, 2004:
(000's omitted)
Allowance
for
Gross doubtful
Receivable accounts Net
---------- ---------- --------
Receivables from equipment
sales and service contracts $ 3,099 $ 468 $ 2,631
======== ========== ========
Receivables from equipment
sales and service contracts-
related parties $ 1,109 $ 695 $ 414
======== ========== ========
Receivables from related medical
practices ("PC's") $ 16,438 $ 1,974 $ 14,464
======== ========== ========
The Company's customers are concentrated in the healthcare industry.
The Company's receivables from the related PC's substantially consist of fees
outstanding under management agreements, service contracts and lease agreements.
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 the PC's 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 65% of the PC's net revenues for both the six months ended
December 31, 2004 and 2003, 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
and contractual allowances. The Company generally takes all legally available
steps to collect its receivables. Credit losses associated with the receivables
are provided for in the condensed consolidated financial statements and have
historically been within management's expectations.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 3 - ACCOUNTS RECEIVABLE (Continued)
Net revenues from management and other fees charged to the related PC's
accounted for approximately 21.5% and 38.0% of the consolidated net revenues for
the six months ended December 31, 2004 and 2003, respectively. Product sales and
service and repair fees from related parties amounted to approximately 6.0% and
14.2% of consolidated net revenues for the six months ended December 31, 2004
and 2003, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
- ---------------------------------------------------------------------------
Summarized income statement data for the three months ended December 31, 2004
related to the 16 unconsolidated medical practices managed by the Company is as
follows: (000's omitted) (Income Tax-Cash Basis)
Patient Revenue - Net $ 8,251
=======
Income from Operations $ 158
=======
Net Income $ 46
=======
Summarized income statement data for the six months ended December 31, 2004
related to the 16 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted) (Income Tax-Cash Basis)
Patient Revenue - Net $16,385
=======
Income from Operations $ 466
=======
Net Income $ 233
=======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet at
December 31, 2004 consist of:
(000's omitted)
Purchased parts, components
and supplies $ 6,819
Work-in-process 2,497
-------
$ 9,316
=======
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of December 31, 2004 is as
follows:
(000's omitted)
Costs incurred on uncompleted
Contracts $18,741
Estimated earnings 13,623
-------
32,364
Less: Billings to date 31,450
-------
$ 914
=======
Included in the accompanying condensed consolidated balance sheet at December
31, 2004 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 2,546
Cost and estimated earnings in excess of
billings on uncompleted contracts-related party 1,500
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts (2,691)
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts-related party ( 441)
--------
$ 914
========
2) Customer advances consist of the following as of December 31, 2004:
Related
Total Parties Other
-------- -------- --------
Total Advances $34,495 $ 1,542 $ 32,953
Less: Advances
on contracts under construction 31,450 1,500 29,950
-------- ------- --------
$ 3,045 $ 42 $ 3,003
======== ======= =========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 6 -STOCKHOLDERS' EQUITY
Common Stock
During the three months ended December 31, 2004:
a) The Company issued 512,939 shares of common stock to employees as
compensation of $623,401 under stock bonus plans.
b) The Company issued 279,523 shares of common stock to consultants and others
at a value of $329,961.
c) The Company issued 1,289,562 shares of common stock for costs and expenses
of $1,532,557.
d) The Company issued 21,454 shares of common stock upon the exercise of stock
options resulting in proceeds of $23,485.
During the six months ended December 31, 2004:
a) The Company issued 1,020,516 shares of common stock to employees as
compensation of $1,214,814 under stock bonus plans.
b) The Company issued 414,257 shares of common stock to consultants and others
at a value of $481,955.
c) The Company issued 1,858,822 shares of common stock for costs and expenses
of $2,173,311.
d) The Company issued 6,410 shares of common stock upon the exercise of stock
options resulting in compensation of $7,500.
e) The Company issued 21,454 shares of common stock upon the exercise of stock
options resulting in proceeds of $23,485.
f) The Company issued 28,000 shares of common stock valued at $29,960 in
connection with issuance of notes and loans receivable from employee
stockholders.
Class B Common Stock
During the six months ended December 31, 2004, 200 shares of Class B common
stock were converted to common stock leaving 3,953 of such shares outstanding as
of December 31, 2004.
Warrants
On July 1, 2004, warrants to purchase 151,625 shares of the Company's common
stock were exercised at an exercise price of $.79 per share.
On November 4, 2004 warrants to purchase 101,625 shares of the Company's common
stock were exercised at an exercise price of $.79 per share.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 7 - SEGMENT AND RELATED INFORMATION
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 as disclosed in the Company's 10-K as
of June 30, 2004. All inter-segment 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 in the following table:
(000's omitted)
Physician
Medical Management
Equipment Services Total
--------- ---------- --------
For the three months ended December 31, 2004:
Net revenues from external customers $ 23,538 $ 5,961 $ 29,499
Inter-segment net revenues $ 107 $ -- $ 107
Income from operations $ 915 $ 308 $ 1,223
Depreciation and amortization $ 603 $ 387 $ 990
Compensatory element of stock issuances $ 496 $ 427 $ 923
Capital expenditures $ 489 $ 510 $ 999
For the three months ended December 31, 2003:
Net revenues from external customers $ 12,005 $ 5,884 $ 17,889
Inter-segment net revenues $ 113 $ -- $ 113
Income (Loss) from operations $ (2,533) $ 70 $ (2,463)
Depreciation and amortization $ 546 $ 463 $ 1,009
Compensatory element of stock issuances $ 596 $ 520 $ 1,116
Capital expenditures $ 202 $ 98 $ 300
For the six months ended December 31, 2004:
Net revenues from external customers $ 42,815 $ 11,752 $ 54,567
Inter-segment net revenues $ 243 $ -- $ 243
Income from operations $ 1,536 $ 595 $ 2,131
Depreciation and amortization $ 1,198 $ 774 $ 1,972
Compensatory element of stock issuances $ 781 $ 923 $ 1,704
Capital expenditures $ 989 $ 767 $ 1,756
Total Identifiable Assets $ 50,756 $ 29,260 $ 80,016
For the six months ended December 31, 2003:
Net revenues from external customers $ 19,353 $ 11,838 $ 31,191
Inter-segment net revenues $ 234 $ -- $ 234
Income (Loss) from operations $ (6,230) $ 28 $ (6,202)
Depreciation and amortization $ 1,083 $ 926 $ 2,009
Compensatory element of stock issuances $ 1,192 $ 1,141 $ 2,333
Capital expenditures $ 554 $ 122 $ 676
Total Identifiable Assets $ 37,625 $ 27,468 $ 65,093
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 8 - SUBSEQUENT EVENTS
Common Stock
During the period from January 1, 2005 through January 31, 2005:
a) The Company issued 265,135 shares of common stock to employees as
compensation of $381,047 under stock bonus plans.
b) The Company issued 224,882 shares of common stock for costs and expenses of
$327,107.
c) The Company issued 19,118 shares of common stock to consultants and others
at a value of $28,369.
d) The Company issued 20,348 shares of common stock upon the exercise of stock
options resulting in proceeds of $22,658.
e) The Company issued 41,806 shares of common stock valued at $41,806 in
connection with issuance of a note receivable from an employee stockholder.
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the six month period ended December 31, 2004 (first half of fiscal
2005), we reported net income of $1.9 million on revenues of $54.6 million as
compared to a net loss of $6.5 million on revenues of $31.2 million for the
first half of fiscal 2004. Our success in achieving profitability in the first
half of fiscal 2005 is primarily due to the increase in our product sales and
the maintenance of healthy gross profit margins on product sales.
For the fiscal quarter ended December 31, 2004 (second quarter of fiscal
2005), we reported a net income of $1.14 million on revenues of $29.5 million as
compared to a net loss of $2.6 million on revenues of $17.9 million for the
second quarter of fiscal 2004.
The second quarter of fiscal 2005 represented an even greater improvement
over our performance in the first quarter of fiscal 2005 reflecting an increase
in our net income of 45% from $786,000 to $1.14 million and an increase of 17.7%
in our revenues from $25.1 million in the first quarter to $29.5 million in the
second quarter.
Forward Looking Statements
Certain statements made in this Quarterly Report on Form 10-Q are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the expansion of
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statement included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
Results of Operations
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 in physician and diagnostic management
services, which is conducted through Fonar's wholly-owned subsidiary, Health
Management Corporation of America ("HMCA").
Trends continuing in the second quarter of fiscal 2005 and contributing to
our profitability include an increase in product sales with an increasing
emphasis on unrelated party sales revenues compared to related parties (entities
in which Dr. Damadian or members of his family have an interest) revenues and
the maintenance of high gross profit margins on product sales: 37% for the first
six months of fiscal 2005 compared to 39% for the first six months of fiscal
2004. We attribute these trends to the continuing growth of our MRI product
sales, particularly our Stand-Up(TM) MRI scanners (also called Upright(TM) MRI
scanners) and the increased efficiencies resulting from our higher sales
volumes.
For the three month period ended December 31, 2004, as compared to the
three month period ended December 31, 2003, overall revenues from MRI product
sales increased 104% ($21.5 million compared to $10.5 million). Unrelated party
scanner sales ($18.9 million compared to $8.6 million) increased at an even
greater rate of 120% while related party scanner sales ($2.6 million compared to
$1.9 million) increased 32.5%. Overall, for the second quarter of fiscal 2005,
revenues for the medical equipment segment increased by 96% to $23.5 million
from $12.0 million for the second quarter of fiscal 2004. The revenues generated
by HMCA, also increased, by 1.3% to $6.0 million for the second quarter of
fiscal 2005 as compared to $5.9 million for the second quarter of fiscal 2004.
For the six month period ended December 31, 2004, as compared to the six
month period ended December 31, 2003, overall revenues from MRI product sales
increased 135.6% ($39.2 million compared to $16.6 million). Unrelated party
scanner sales ($36.3 million compared to $13.5 million) increased at a rate of
170% while related party scanner sales ($2.9 million compared to $3.2 million)
decreased by 9.4%. Overall, for the second quarter of fiscal 2005, revenues for
the medical equipment segment increased by 121.3% to $42.8 million from $19.3
million for the second quarter of fiscal 2004.
The increase in product sales reflected continuing market acceptance of the
Company's Stand-Up(TM) MRI scanners. During the first six months of fiscal 2005,
revenues of approximately $38.4 million were recognized from sales of
Stand-Up(TM) MRI scanners. During the first six months of fiscal 2004, the
Company recognized revenues of approximately $16.5 million from the sale of
Stand-Up(TM) MRI scanners.
There were approximately $3.6 million in foreign sales revenues for the
first six months of fiscal 2005 as compared to approximately $502,000 million in
foreign sales revenues for the first six months of fiscal 2004.
We recognize MRI scanner sales revenues on the "percentage of completion"
basis, which means the revenues are recognized as the scanner is manufactured.
Revenues recognized in a particular quarter do not necessarily reflect new
orders or progress payments made by customers in that quarter. We build the
scanner as the customer meets certain benchmarks in its site preparation in
order to minimize the time lag between incurring costs of manufacturing and our
receipt of the cash progress payments from the customer which are due upon
delivery. Consequently, there can be a disparity between the revenues recognized
in a fiscal period and the number of product sales. Generally, this results from
the revenues from a scanner sale being recognized in a fiscal quarter or
quarters following the quarter in which the sale was made. Illustrating this
point, the revenue recognition for product sales for the first six months of
fiscal 2005 increased 135.6% from the first six months of fiscal 2004 ($39.1
million compared to $16.6 million), although there was a decrease in the number
of orders of 14%: we received orders for 12 Stand-Up MRI scanners and for one
Fonar 360(TM) scanner during the first six months of fiscal 2005 as compared to
orders for 14 Stand-Up MRI scanners during the first six months of fiscal 2004.
Service and repair revenues increased by 87.3%, from $771,000 for the
second quarter of fiscal 2004 to $1.4 million for the first quarter of fiscal
2005. License fees and royalties decreased by 15% from $690,000 for the second
quarter of fiscal 2004 to$585,000 for the first quarter of fiscal 2005.
Service and repair revenues increased by 70.8%, from $1.5 million for the
first six months of fiscal 2004 to $2.5 million for the first six months of
fiscal 2005. License fees and royalties decreased by 8.2% from $1.3 million for
the first six months of fiscal 2004 to$1.2 million for the first six months of
fiscal 2005.
Costs related to product sales increased by 106.8% from $6.6 million in the
second quarter of fiscal 2004 to $13.6 million in the first quarter of 2005,
reflecting the corresponding increase in product sales revenues. Costs related
to providing service increased 30.1% from $996,000 in the second quarter of
fiscal 2004 to $1.3 million in the first quarter of 2005. In both cases, the
percentage increase in revenues was greater than the percentage increase in
costs.
Costs related to product sales increased by 144.9% from $10.1 million in
the first six months of fiscal 2004 to $24.7 million in the first six months of
fiscal 2005. Costs related to providing service increased 28.4% from $1.9
million in the first six months of fiscal 2004 to $2.4 million in the first six
months of fiscal 2005.
As a result, combined with the containment of other expenses, our operating
income for our medical equipment segment was $916,000 for the second quarter of
fiscal 2005 as compared to an operating loss of $2.5 million for the second
quarter of fiscal 2004.
Our operating income for our medical equipment segment was $1.5 million for
the first six months of fiscal 2005 as compared to an operating loss of $6.2
million of fiscal 2004.
Our gross profit margin for the entire medical equipment segment (as
opposed to just product sales) was 36.9% for the second quarter of fiscal 2005,
as compared to 37.8% for the first quarter of fiscal 2004, and 37.1% for the
first six months of fiscal 2005 as compared to 39.4% for the first six months of
fiscal 2004.
HMCA revenues increased in the second quarter of fiscal 2005, by 1.3% to
$6.0 million from $5.9 million for the second quarter of fiscal 2004. For the
first six months of fiscal 2005 and 2004 HMCA revenues were $11.8. HMCA is
seeking to increase revenues from the MRI facilities by continuing its program
of replacing older scanners at the sites we manage with Stand-Up(TM) MRI
scanners. We now manage four sites equipped with Stand-Up(TM) MRI scanners, and
we are planning to open four new sites with Stand-Up(TM) MRI scanners within the
next twelve months, which would bring the total number of facilities with
Stand-Up(TM) MRI scanners we manage to eight. During fiscal 2004, HMCA closed
one MRI site. HMCA experienced operating income of $308,000 for the second
quarter of fiscal 2005 compared to operating income of $70,000 for the second
quarter of fiscal 2004. For the first six months of fiscal 2005, HMCA
experienced operating income of $595,000 as compared to operating income of
$28,000 for the first six months of fiscal 2004.
HMCA cost of revenues for the second quarter of fiscal 2005 and 2004 was
$3.8 million. HMCA costs of revenues remained essentially constant at $7.2
million in the first six months of fiscal 2004 and fiscal 2005.
As our consolidated revenues increased by 64.8% to $29.5 million for the
second quarter of fiscal 2005 from $17.9 million for the second quarter of
fiscal 2004, the total costs and expenses increased by 38.9% to $28.3 million
for the second quarter of fiscal 2005 from $20.3 million for the second quarter
of fiscal 2004. Selling, general and administrative expenses increased by 12.7%
from $6.3 million in the second quarter of fiscal 2004 to $7.1 million in the
second quarter of fiscal 2005. This increase was related to our medical segment
participating in 3 trade shows. For the six months of fiscal 2005 the
consolidated revenues increased by 74.9% to $54.6 million from $31.2 for the
first six months of fiscal 2004. Our total costs and expenses increased 40.2%
from $37.4 million for the first six months of fiscal 2004 to $52.4 million for
the first six months of fiscal 2005. Selling, general and administrative
expenses increased by 2.7% from $12.8 million in the first six months of fiscal
2004 to $13.2 million in the first six months of fiscal 2005.
The compensatory element of stock issuances decreased by 27.0% from $2.3
million in the first six months of fiscal 2004 to $1.7 million in the first six
months of fiscal 2005. This reflected a lesser use of Fonar's stock in lieu of
cash to pay employees, consultants and professionals for services.
Research and development expenses increased by 3.9% to $2.8 million for the
first six months of fiscal 2005 as compared to $2.7 million for the first six
months of fiscal 2004.
Interest expense in the first six months of fiscal 2005 increased by 7.3%
to $132,000 from $123,000 for the first six months of fiscal 2004 due to new
borrowings.
Inventories decreased by 2.8% to $9.3 million at December 31, 2004 as
compared to $9.6 million at June 30, 2004 as the Company filled orders and
product sales revenues increased.
Management fee receivable and accounts receivable increased by 12.1% to
$17.5 million at December 31, 2004 from $15.6 million at June 30, 2004,
primarily due to increased receivables from the Company's medical equipment
segment which includes service contracts on MRI scanners.
As a result the Company's operating and net income were $2.1 million and
$1.9 million, respectively, for the first six months of fiscal 2005 as compared
to operating and net losses of $6.2 million and $6.5 million, respectively, for
the first six months of fiscal 2004.
The overall trends reflected in the results of operations for the first six
months of fiscal 2005 are an increase in revenues from product sales, as
compared to the first six months of fiscal 2004 ($54.6 million for the first six
months of fiscal 2005 as compared to $31.2 million for the first six months of
fiscal 2004), and an increase in MRI equipment segment revenues relative to HMCA
revenues ($42.8 million or 78% from the MRI equipment segment as compared to
$11.8 million or 22% from HMCA, for the first six months of fiscal 2005, as
compared to $19.4 million or 62% from the MRI equipment segment and $11.8
million or 38%, from HMCA, for the first six months of fiscal 2004). In
addition, we experienced an increase in unrelated party sales relative to
related party sales in our medical equipment product sales ($36.3 million or 93%
to unrelated parties and $2.9 million or 7% to related parties for the first six
months of fiscal 2005 as compared to $13.5 million, or 81% to unrelated parties
and $3.2 million or 19% to related parties for the first six months of fiscal
2004). The relative decline in related party sales reflects the increasing
penetration of the marketplace by our Stand-Up(TM) MRI scanners which has more
than compensated for the decline in the related party sales revenues. During the
first six months of fiscal 2005, related party sales decreased, by 9.2% to $2.9
million as compared to $3.2 million for fiscal 2004.
We believe that the continuing trends in our medical equipment division
have resulted in improved operating results and a profitable six months in
fiscal 2005. Factors beyond our control, such as the timing and rate of market
growth which depend on economic conditions, make it impossible to forecast
future operating results. Nevertheless, we believe we have been pursuing the
correct policies which now have brought us to the point of profitability and
should prove successful in keeping the Company profitable and improving its
operating results and net income.
The Company's Stand-Up(TM), and Fonar-360(TM) MRI scanners, together with
the Company's works-in-progress, are intended to significantly improve the
Company's competitive position.
The Company's Stand-Up(TM) scanner, which operates at 6000 gauss (.6 Tesla)
field strength, allows patients to be scanned while standing or reclining. As a
result, for the first time, MRI is 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.
The Stand-Up(TM) will also be useful for MRI directed neuro-surgical
procedures as the surgeon would have unhindered access to the patient's head
when the patient is supine 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(TM) is an enlarged room sized magnet in which the floor,
ceiling and walls of the scan room are part of the magnet frame. 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. Consequently, this scanner allows 360 degree access to the
patient and physicians and family members are able to enter the scanner and
approach the patient.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is
sometimes referred to as the Open Sky(TM) MRI. In its Open Sky(TM) version, the
Fonar 360(TM) serves as an open patient friendly scanner which allows 360 degree
access to the patient on the scanner bed. To optimize the patient-friendly
character of the Open Sky(TM) MRI, the walls, floor, ceiling and magnet poles
are decorated with landscape murals. The patient gap is twenty inches and the
magnetic field strength, like that of FONAR's Stand-Up(TM) and QUAD(TM) MRI
scanner, is 0.6 Tesla.
In the future, we may also develop the Fonar 360(TM) to function as an
operating room. We sometimes refer to this contemplated version of the Fonar
360(TM) as the OR-360(TM). In its OR-360(TM) version, which is in the planning
stages, the enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360(TM) would 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 capacity to exhibit tissue
detail on the image, can then be obtained real time during surgery to guide the
surgeon in the surgery. Thus surgical instruments, needles, catheters,
endoscopes and the like could 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 interventional OR-360(TM) version of the Fonar 360(TM) is still in
the planning stages. There is not a prototype. A full range of MRI compatible
surgical instruments using ceramic cutting tools and beryllium-copper materials
are commercial available.
The Company's works in progress include an in-office weight bearing
extremities scanner which will be able to be used to examine the knee, foot,
elbow, hand, wrist and shoulder. This scanner will allow scans to be performed
under both weight- bearing and non-weight-bearing conditions.
The Company expects marked demand for its most commanding MRI products, the
Stand- Up(TM) and the Fonar 360(TM), first for their exceptional features in
patient diagnosis and treatment. These scanners additionally provide improved
image quality and higher imaging speed because of their higher field strength of
..6 Tesla.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities decreased slightly from
$20.6 million at June 30, 2004 to $20.2 million at December 31, 2004. Principal
uses of cash during the first six months of fiscal 2005 included capital
expenditures for property and equipment of $1.2 million, repayment of borrowings
and capital lease obligations in the amount of $242,000, capitalized software
development costs of $396,000 and capitalized patent and copyright costs of
$195,000.
Marketable securities approximated $12.1 million as at December 31, 2004,
as compared to $11.1 million at June 30, 2004. At December 31, 2004, our
investments in U.S. Government obligations were $5.4 million, our investments in
corporate and government agency bonds were $3.6 million and our investments in
certificates of deposit and deposit notes were $3.1 million. The investments
made have had the intended effect of maintaining a stable investment portfolio.
Cash provided by operating activities for the first six months of fiscal
2005 approximated $1.7 million. Cash provided by operating activities was
attributable primarily to net income of $1.9 million, stock issued for
compensation, costs and expenses of $3.9 million, offset primarily by an
increase in accounts receivable of $2.0 million.
Cash used in investing activities for the first six months of fiscal 2005
approximated $2.7 million. The principal uses of cash from investing activities
during the first six months of fiscal 2005 consisted of, expenditures for
property and equipment of approximately $1.2 million and capitalized software
and patent costs of approximately $591,000, and marketable securities of
$996,000.
Cash used by financing activities for the first six months of fiscal 2005
approximated $371,000. The principal uses of cash in financing activities during
the first six months of fiscal 2005 consisted of repayment of principal on
long-term debt and capital lease obligations of approximately $242,000 and
distributions to holders of minority interests of $382,000. The source of cash
from financing activities was net proceeds from exercises of stock options and
warrants of $224,000.
The Company's obligations and the periods in which they are scheduled to
become due are set forth in the following table:
(000's OMITTED)
Due in
Less Due Due Due
than 1 in 1-3 in 4-5 after 5
Obligation Total year years years years
- -------------- ----------- ---------- ---------- ---------- ----------
Long-term debt $ 6,116 $5,723 $ 393 $ -- $ --
Capital lease
Obligation 345 175 112 58 --
Operating
Leases 10,929 2,426 4,543 2,792 1,168
----------- ---------- ---------- ---------- ----------
Total cash
Obligations $ 17,390 $8,324 $ 5,048 $ 2,850 $ 1,168
=========== ========== ========== ========== ==========
Total liabilities decreased by 10.4% to $30.2 million at December 31, 2004
from $33.7 million at June 30, 2004.
We experienced a decrease in long-term debt from $720,000 at June 30, 2004
to $563,000 at December 31, 2004, an increase in billings in excess of costs and
estimated earnings on uncompleted contracts from $2.9 million at June 30, 2004
to $3.1 million at December 31, 2004, an increase in accounts payable from $5.4
million at June 30, 2004 to $5.6 million at December 31, 2004, a decrease in
customer advances from $7.8 million at June 30, 2004 to $3.0 million at December
31, 2004 and an increase in other current liabilities from $10.0 million at June
30, 2004 to $11.0 million at December 31, 2004.
As of December 31, 2004, the obligations of approximately $11.0 million in
other current liabilities included deferred revenue from license fees of $1.2
million, unearned revenue on service contracts of $4.3 million, accrued salaries
and payroll taxes of $1.0 million and excise and sales taxes of $2.5 million.
Our working capital approximated $29.9 million as of December 31, 2004, as
compared to working capital of $22.6 million as of June 30, 2004, increasing by
32.3%. This results principally from an increase in accounts receivable of $1.9
million ($15.6 million at June 30, 2004 as compared to $17.5 million at December
31, 2004), along with a decrease of customer advances of $3.8 million ($7.8
million at June 30, 2004 as compared to $3.0 million at December 31, 2004).
Accounts receivable increased from $15.6 million as at June 30, 2004 to $17.5
million as at December 31, 2004 due to increased receivables from the Company's
medical equipment segment and in particular, an increase of approximately $1.6
million in accounts receivable from service contracts on MRI scanners.
With respect to current liabilities, the current portion of long-term debt
decreased from $6.0 million at June 30, 2004 to $5.9 million at December 31,
2004, and billings in excess of costs and estimated earnings on uncompleted
contracts increased from $2.9 million at June 30, 2004 to $3.1 million at
December 31, 2004. Customer advances decreased from $7.8 million at June 30,
2004 to $3.0 million at December 31, 2004 and accounts payable increased from
$5.4 million at June 30, 2004 to $5.6 million at December 31, 2004.
The aggregate decrease in customer advances and billings in excess of costs
and estimated earnings on uncompleted contracts reflects the Company's progress
in filling its backlog of orders, which also translates into an increase in
recognized revenues. The increase in accounts payable resulted from the purchase
of parts to manufacture the scanners.
In order to conserve our capital resources, we have issued common stock
under our stock bonus and stock option plans to compensate employees and
non-employees for services rendered. In the first six months of fiscal 2005, the
compensatory element of stock issuances was $1.7 million as compared to $2.3
million for the first six months of fiscal 2004. Utilization of equity in lieu
of cash compensation has improved our liquidity since it increases cash
available for other expenditures.
The foregoing trends in Fonar's capital resources are expected to improve
as Fonar's MRI scanner products gain wider market acceptance and produce
increased product sales.
Fonar has not committed to making additional capital expenditures in the
2005 fiscal year other than its intention to continue research and development
expenditures at current levels. HMCA also expects to incur capital expenditures
of approximately $1.0 million to acquire premises and to construct and furnish
four new Stand-Up(TM) MRI facilities, which would bring the total number of
Stand-Up(TM) MRI facilities managed by HMCA to eight.
Our business plan calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices.
We believe that the above mentioned financial resources, anticipated cash
flows from operations and potential financing sources, will provide the cash
flows needed to achieve the sales, service and production levels necessary to
support our operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investments are in fixed rate instruments. Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
December 31, 2004.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
Year of in Fixed Rate Weighted Average
Maturity Instruments Interest Rate
-------- ------------- ----------------
12/31/05 $ 6,569,333 1.36%
12/31/06 1,498,982 3.33%
12/31/07 1,100,000 3.21%
12/31/08 1,050,000 3.08%
12/31/09 1,648,500 3.13%
12/31/10 100,000 3.50%
12/31/13 100,000 4.12%
-------------
Total: $ 12,066,815
============
Fair Value
at 12/31/04 $ 12,022,407
============
All of our revenue, expense and capital purchasing activities are
transacted in United States dollars.
See Note 12 to the consolidated Financial Statements in our Form 10-K as of
and for the year ended June 30, 2004 for information on long-term debt.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the principal executive and acting principal financial officer of the
Company concluded that disclosure controls and procedures were adequate.
(b) Change in internal controls.
The Company made no significant changes in its internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation of those controls by the principal executive and acting
principal financial officer.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: There were no material changes in litigation for the
first six months of fiscal 2005.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds: 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: 8-K
(earnings press release) filed on September 16, 2004
8-K (earnings press release) filed on November 9, 2004
Exhibit 31.1 Certification See Exhibits
Exhibit 32.1 Certification See Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FONAR CORPORATION
(Registrant)
By: /s/ Raymond V. Damadian
Raymond V. Damadian
President & Chairman
Dated: February 9, 2005