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, 1995 Commission File Number 0-10248
FONAR CORPORATION
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 694-2929
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at March 31, 1995
-------------------------------- ---------------------------------------
Common Stock, par value $.0001 36,410,972
Class B Common Stock,
par value $.0001 3,194,556
<PAGE> Page 2
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1995
and June 30, 1994 3
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 1995 and
March 31, 1994 4
Condensed Consolidated Statements of Operations for
the Nine Months Ended March 31, 1995 and
March 31, 1994 5
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 1995 and
March 31, 1994 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II - OTHER INFORMATION 10
<PAGE> Page 3
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS March 31, June 30,
1995 1994
(UNAUDITED)
Current Assets: ---------- -------
Cash $ 542 $ 577
Accounts and notes receivable, net of allowance
for doubtful accounts of $ 1,692 3,309 3,045
Accounts receivable from affiliates 400 400
Costs and estimated earnings in excess
of billings on uncompleted contracts (Note C) 422 401
Inventories (Note B) 2,885 2,776
Other current assets 1,605 2,846
----- ------
Total current assets 9,163 10,045
----- ------
Assets held for resale 598 608
Property and equipment, at cost 15,130 15,199
Less accumulated depreciation and amortization (12,118) (11,398)
-------- --------
3,012 3,801
Investment in and receivables from affiliates,
net of allowance of $ 1,250 21,655 19,054
Cost of acquired technology and license, patents
and software development costs, net 4,598 4,869
Net investment in sales-type leases 4,802 5,816
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note C) 7,058 2,855
Other assets 1,327 1,370
------ ------
$ 52,213 $ 48,418
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 220 $ 100
Current maturities of long-term debt and
capital lease obligations 3,281 4,427
Accounts payable 2,466 3,018
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note C) 68 -
Accrued expenses, customer advances and
other current liabilities 9,402 10,250
------ ------
Total current liabilities 15,437 17,795
------ ------
Long-term debt and capital lease obligations
less current maturities 1,013 1,457
Other liabilities 139 201
------ ------
1,152 1,658
------ ------
Minority interest 458 632
------ ------
Stockholders' Equity (Note D) 35,166 28,333
------ ------
$ 52,213 $ 48,418
====== ======
See notes to condensed consolidated financial statements.
<PAGE4> Page 4
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1994
-------- --------
REVENUES $ 3,181 $ 5,017
-------- --------
COSTS AND EXPENSES:
Cost of revenues 1,449 1,883
Research and development 735 427
Selling, general and administrative 2,083 1,895
-------- --------
Income (loss) from operations ( 1,086) 812
Other income, net 118 151
------- -------
Income (loss) before provision for income taxes
and minority interest ( 968) 963
Provision for income taxes - -
------- -------
Income (loss) before minority interest ( 968) 963
------- -------
Minority interest in net loss (income) of
subsidiary and partnership 65 -
-------- ------
NET INCOME (LOSS) $( 903) $ 963
======== ======
Net Income per common share:
Income (loss) before minority interest $( .02) $ .03
Minority interest .00 .00
------ ------
Net Income per common share $( .02) $ .03
====== ======
Weighted average number of common shares outstanding 39,606 32,630
====== ======
See notes to condensed consolidated financial statements.
<PAGE> Page 5
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE NINE MONTHS ENDED
MARCH 31,
---------------------
1995 1994
-------- --------
REVENUES $ 11,759 $ 11,821
-------- --------
COSTS AND EXPENSES:
Cost of revenues 5,251 5,538
Research and development 2,378 2,169
Selling, general and administrative 5,926 5,106
-------- --------
Loss from operations ( 1,796) ( 992)
Other income, net 597 2,094
-------- --------
Income (loss) before provision for income taxes
and minority interest ( 1,199) 1,102
Provision for income taxes - -
-------- -------
Income (loss) before minority interest ( 1,199) 1,102
Minority interest in net loss (income) of
subsidiary and partnership 174 -
-------- -------
NET INCOME (LOSS) $( 1,025) $ 1,102
======== =======
Net Income per common share:
Income (loss) before minority interest $( .03) $ .03
Minority interest .00 .00
------- ------
Net Income per common share $( .03) $ .03
======= ======
Weighted average number of common shares outstanding 39,606 32,630
====== ======
See notes to condensed consolidated financial statements.
<PAGE> Page 6
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
-----------------
1995 1994
------ ------
Operating activities:
Net Income (Loss) $( 1,025) $ 1,102
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interest in net income (loss) ( 174) -
Depreciation and amortization 1,742 1,337
(Increase) decrease in operating assets, net:
accounts and notes receivable, inventories,
other current assets, costs and estimated
earnings in excess of billings on uncompleted
contracts and assets held for resale ( 3,478) ( 98)
Increase (decrease) in operating liabilities,
net: accounts payable, accrued expenses and
other current liabilities, billings in excess
of costs and estimated earnings on uncompleted
contracts and other liabilities ( 1,394) ( 1,057)
-------- --------
Net cash provided by used in operating activities ( 4,329) 1,284
-------- --------
Investing activities:
Purchases of property and equipment,
net of capital lease obligations ( 31) ( 673)
Investment in and receivables from affiliates ( 2,601) ( 7,139)
Cost of acquired technology and license,
patents and software development costs ( 751) ( 957)
-------- --------
Net cash (used by) investing activities ( 3,383) ( 8,769)
-------- --------
Financing activities:
Proceeds from borrowings, net
of capital lease obligations - -
Repayment of borrowings and capital
lease obligations ( 1,470) ( 2,446)
Decrease in investment in sales-type leases 962 1,546
Collection of principal on sales-type leases 284 538
Issuance of common stock and warrants and
collection of stockholder notes, net 7,858 8,537
(Increase) Decrease in other assets 43 ( 14)
-------- --------
Net cash provided by financing activities 7,677 8,161
-------- --------
Increase (Decrease) in Cash ( 35) 676
Cash at beginning of period 577 226
------- -------
Cash at end of period $ 542 $ 902
======= =======
See notes to condensed consolidated financial statements.
<PAGE> Page 7
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE A - 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 10Q and
Article 10 of Regulation S-K. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The comparative figures for
fiscal 1994 have been adjusted to reflect year end adjustments.
In the opinion of management, all adjustments (consisting of normal
adjusting accruals) considered necessary for a fair presentation have been
included. Operating results for the nine months ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the fiscal
year ended June 30, 1995. For further information, refer to the Company's
consolidated report on Form 10-K for the fiscal year ended June 30, 1994.
NOTE B - INVENTORIES
The components of inventory consist of: (000's OMITTED)
-------------------
March 31, June 30,
1995 1994
------- -------
Purchased parts components and supplies $ 2,812 $ 2,706
Work in process 73 70
------- -------
$ 2,885 $ 2,776
======= =======
NOTE C - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts are comprised of: (000's OMITTED)
--------------------
March 31, June 30,
1995 1994
------- -------
Costs incurred on uncompleted contracts $ 4,000 $ 2,035
Estimated earnings 5,027 1,886
------- -------
9,027 3,921
Less: billings to date ( 1,615) ( 665)
--------- --------
$ 7,412 $ 3,256
======== ========
Uncompleted contracts have been individually
netted and are reported as follows:
Costs and estimated earnings in excess of
billings on uncompleted contracts-short term $ 422 $ 401
Costs and estimated earnings in excess of
billings on uncompleted contracts-long term 7,058 2,855
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 68) ( -)
------- -------
$ 7,412 $ 3,256
======= =======
<PAGE> Page 8
NOTE D - STOCKHOLDERS' EQUITY
(000'S OMITTED)
Stockholders' Equity is comprised of: ---------------------------
March 31, June 30,
1995 1994
------------- -----------
Common Stock $.0001 par value; 50,000,000
shares authorized; 36,410,972 outstanding
at March 31 and 31,235,773 at June 30. $ 4 $ 3
Class B Common Stock $ .0001 par value;
4,000,000 shares authorized, 3,194,556
outstanding at March 31 and at June 30. - -
Class C non-voting Common Stock $.001
par value; 20,000,000 shares authorized. - -
Preferred Stock $ .001 par value 10,000,000
shares authorized. - -
Additional paid-in capital 58,222 49,818
Accumulated deficit (21,366) (20,341)
Unearned compensation - -
Notes receivable - stockholders ( 1,299) ( 752)
Treasury stock - 108,864 shares ( 395) ( 395)
------- -------
$ 35,166 $ 28,333
======= =======
NOTE E - CHANGES IN CAPITALIZATION
The Company's debt to equity ratio changed from approximately 5:7
($19.5 million:$28.3 million) as at June 30, 1994 to approximately 1:2
($16.6 million:$35.2 million) as at March 31, 1995. This change in the
Company's capitalization resulted from a combination of an increase in
capital stock (approximately 8.4 million) and a decrease of approximately
$2.3 million in current liabilities.
<PAGE> Page 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the first nine months of fiscal 1995, the Company reported a net
loss of $1.0 million on revenues of $11.8 million as compared to net income
of $1.1 million on revenues of $11.8 million for the corresponding period of
the prior fiscal year.
For the third quarter of fiscal 1995, the Company reported a net loss
of $903,000 on revenues of approximately $3.2 million, as compared to a net
income of $963,000 on revenues of approximately $5.0 million for the
corresponding period for the prior fiscal year. The principal reason for
the third quarter loss in 1995 is the lower revenue. The Company does not
see a long-term trend in these results. Additionally, the Company
anticipates increased revenue as a result of it's patent infringement
lawsuit (see Part II, Item 1, Legal Proceedings). The comparative figures
for fiscal 1994 have been adjusted to reflect year end adjustments.
The Company continues to benefit from the programs the Company set in
motion in fiscal 1989; namely strict cost containment initiatives, the
redirecting of corporate business into more profitable enterprises within
the MRI industry and the paying down of interest bearing debt.
The Company has received FDA approval for its "Quad 7000" MRI scanner
and has commenced selling. The Company is awaiting FDA approval for its
"Quad 12000" MRI scanner. These products, together with other research and
development projects are intended to significantly improve the Company's
competitive position. The Quad scanners will be highly competitive and
totally new non-claustrophobic scanners (high field in the case of the Quad
12000) not available in today's MRI market. The Company expects vigorous
sales from these new products.
The exception versatility and productivity of MRI technology creates the
impetus for new uses. As a result, dramatic new features are developed and
sold to the Company's customer base thereby extending the useful life of
their equipment, avoiding obsolescence and minimizing capital expenditures.
Upgrades consist of hardware, software and pulse sequences designed to
maximize throughput while maintaining image quality and patient comfort.
This income resource is considered to be a major asset of the Company.
Accordingly, during the current fiscal year, the Company has continued
the program for upgrading previously installed scanners. In conjunction
with this program, significant research and development programs have been
continued, which emphasize the development of new features for the Company's
scanner upgrade program. More specifically, products derived from the
Company's new "Quad" and "Ultimate" scanners are expected to generate
substantial upgrade revenue as customers upgrade their existing scanners to
take advantage of the improved image quality and high speed image processing
capabilities.
Products derived from the Company's scanner product line are expected to
generate significant revenue in fiscal 1995. The Quad and Ultimate MRI
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 fiscal 1992, the Company began laying the ground work for increased
scanner sales in foreign countries as well as domestically. Based on
numerous indications of interest, meetings, sales trips abroad and
negotiations, the Company is cautiously optimistic that foreign sales will
produce significant revenue.
<PAGE> Page 10
Liquidities and Capital Resources
At March 31, 1995, the Company's liquidity and capital resources
positions changed from the June 30, 1994 position as follows:
March 31, June 30,
1995 1994 Change
Working capital ------------- ---------- ----------
(deficiency) ($ 6,274,000) ($ 7,750,000) $1,476,000
Total liabilities were reduced since June 30, 1994 by approximately
$2.9 million to approximately $16.6 million.
Although vendor and creditor payment obligations continue to run beyond
normal payment terms. The Company has been able to direct its resources to
maintain scanner system deliveries and to reduce its past due payment
obligations.
Since June 1989, a principal objective of the Company has been to reduce
and ultimately eliminate its debt. Since the inception of the plan,
interest bearing debt was reduced from $23.1 million in fiscal 1989 to $18.5
million in fiscal 1990. From June 30, 1990 through June 30, 1991, interest
bearing debt was reduced by an additional $3.3 million to $15.2 million and
from June 30, 1991 through June 30, 1992 interest bearing debt was reduced
by an additional $3.1 million to $12.1 million. From June 30, 1992 through
June 30, 1993, interest bearing debt was reduced by $2.3 million to $9.8
million, and from June 30, 1993 to June 30, 1994 by $3.8 million to $6.0
million. Continuing this program in the nine months since June 30, 1994,
the Company has reduced its interest bearing debt an additional $1.5 million
to $4.5 million.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
General Electric Company and Hitachi
On September 2, 1992, the Company filed an action against General
Electric Company ("General Electric"), Hitachi Ltd. ("Hitachi") and other
defendants for patent infringement in the United States District Court for
the Eastern District of New York. (FONAR Corporation and Dr. Raymond V.
Damadian v. Hitachi Ltd. et. al. Civil Action No. 92-4126). In its suit,
the Company alleged that five of its patents were being infringed. The
defendants contested FONAR's claims, and Hitachi counterclaimed, alleging
infringement by FONAR of two of its patents.
In April 1995 FONAR reached a settlement with Hitachi Ltd. and related
defendants.
On May 19, 1995, the jury rendered a verdict in FONAR's favor against
General Electric on the two patents being asserted by FONAR against General
Electric. The two patents are the first MRI patent, issued in 1974
(Apparatus and Method for Detecting Cancer in Tissue, 2/5/74, U.S. Patent #
3,789,832) and the Multi-Angle Oblique patent (Apparatus and Method for
Multiple Angle Oblique MRI, 10/3/89, U.S. Patent # 4,871,966).
Further proceedings to determine the amount of damages recoverable by
FONAR as a result of the infringement of the two patents are expected to
commence during the week of May 22, 1995.
FONAR is also seeking an injunction against further infringement of its
Multi-Angle Oblique patent (No. 4,871,966) by General Electric Company.
<PAGE> Page 11
Kivitz and Rad-Sonic
On March 4, 1987, Philip B. Kivitz, M.D. and Rad-Sonic Diagnostic
Medical Clinics, Inc., filed a complaint against Advanced Medical
Diagnostics Corporation ("AMD"), FONAR, Raymond V. Damadian and others in
the San Francisco County Superior Court (Case Action No. 870407). AMD is a
subsidiary of FONAR. In January 1993, the case went to trial and the jury
returned a verdict of $880,000 against AMD and $120,000 against FONAR. (In
his complaint, Dr. Kivitz had claimed $10,000,000 in compensatory damages
and $10,000,000 in punitive damages). On June 17, 1993, the Court granted
FONAR's and AMD's motion for judgment notwithstanding the verdict, thereby
vacating the entire award against both FONAR and AMD. The plaintiffs
appealed the Court's granting of judgment notwithstanding the verdict. On
February 27, 1995, the appellate court affirmed the lower court's judgment
notwithstanding the verdict as to FONAR, but reversed the judgment as to
AMD. As a result, the trial court's determination that the plaintiffs could
not recover against FONAR was upheld, but the jury verdict of $880,000
against AMD was reinstated. AMD filed a petition for review with the
California Supreme Court. AMD's petition was denied on May 17, 1995.
Summit, Rovins and Feldesman
On April 3, 1990, Summit, Rovins and Feldesman commenced an action in
the Supreme Court of the State of New York, County of New York against the
Company and its President, Raymond V. Damadian. The complaint alleges
unpaid fees for legal services and disbursements in the amount of
$664,371.65. The Company is contesting the plaintiff's claims as excessive
and improper charges for legal services, and has asserted various defenses
and a counterclaim of $100,000 for a refund of fees. The plaintiff made a
motion for summary judgment which was granted as to the existence of
liability but denied as to the amount. Dr. Damadian's cross-motion to
dismiss the action against him personally was granted. Both parties
appealed the court's decisions. On March 9, 1995, the appellate court
reversed the granting of summary judgment against FONAR. The appellate
court also upheld the dismissal of the action against Dr. Damadian
personally. The case is in discovery.
Myheal Technologies
In January, 1991, Myheal Technologies and a former employee commenced an
action against FONAR in the United States District Court for the Eastern
District of New York (Index No. 91 CIV 0204). The amount claimed was
$5,000,000 in damages and $5,000,000 in punitive damages. The claim arose
out of an alleged breach of an agreement between the Company and a former
research and development employee of the Company. A jury verdict rendered
in December 1993 against the Company for $1,150,000 was set aside, and a
second trial was ordered and held. On March 24, 1995, the jury rendered a
verdict in favor of the plaintiffs in the amount of $250,000. On April 21,
1995, the Company made a motion for judgment as a matter of law dismissing
the plaintiffs' claims. In the alternative the Company has requested a new
trial or reduction of damages. The Company's motion is scheduled to be
argued on June 2, 1995.
Item 2 - Changes in Securities: None
Item 3 - Defaults Upon Senior Securities: None
<PAGE> Page 12
Item 4 - Submission of Matters to a Vote of Security Holders:
The Company's annual meeting of shareholders was held on April 3, 1995.
At the meeting, the stockholders reelected the sitting Board of Directors,
Raymond V. Damadian, Claudette Chan, Robert Janoff and Herbert Maisel. The
stockholders also approved a recapitalization proposal, the creation of a
new class of preferred stock to be issued to holders of the Company's Common
Stock as a stock dividend, a stock bonus plan and two stock option plans,
and the selection of Tabb, Conigliaro & McGann, P.C. as the Company's
auditors for fiscal 1995.
Item 5 - Other Information: None
Item 6 - Exhibits and Reports on Form 8-K: None
M-2460
<PAGE> PAGE 13
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)
Dated: May 22, 1995 By: /s/ Raymond V. Damadian
Raymond V. Damadian
President & Chairman
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