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 DECEMBER 31, 1996 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
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(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 December 31, 1996
- -------------------------------- ---------------------------------------
Common Stock, par value $.0001 45,066,671
Class B Common Stock, par value $.0001 5,411
Class C Common Stock, par value $.0001 9,562,824
Class A Preferred Stock, par value $.0001 7,855,627
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31,
1996 and June 30, 1996 3
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 1996 and
December 31, 1995 4
Condensed Consolidated Statements of Operations for
the Six Months Ended December 31, 1996 and
December 31, 1995 5
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1996 and
December 31, 1995 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 11
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED)
ASSETS December 31, June 30,
1996 1996
(UNAUDITED)
Current Assets: --------- -------
Cash $ 9,700 $ 3,712
Accounts and notes receivable, net of allowance
for doubtful accounts of $ 713 1,660 1,797
Accounts receivable from affiliates 400 400
Costs and estimated earnings in excess
of billings on uncompleted contracts (Note C) 547 336
Inventories (Note B) 5,719 3,624
Other current assets 987 1,595
------ ------
Total current assets 19,013 11,464
====== ======
Assets held for resale 450 450
------ ------
Property and equipment, at cost 13,968 13,820
Less accumulated depreciation and amortization (11,645) (11,319)
-------- --------
2,323 2,501
Investment, advances and notes to affiliates and
related parties, net of allowance of $ 1,250 30,195 28,353
Cost of acquired technology and license, patents
and software development costs, net 4,309 4,460
Net investment in sales-type leases 4,240 5,519
Costs and estimated earning in excess of billings
on uncompleted contracts (Note C) 9,460 9,460
Other assets 1,054 889
------ -------
$ 71,044 $ 63,096
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 100 $ 100
Current maturities of long-term debt and
capital lease obligations 2,641 2,909
Accounts payable 1,759 1,748
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note C) 187 170
Accrued expenses, customer advances and
other current liabilities 8,121 8,892
------ ------
Total current liabilities 12,808 13,819
====== ======
Long-term debt and capital lease obligations
less current maturities 737 963
Other liabilities 39 59
------ ------
776 1,022
------ ------
Minority interest 19 117
------ ------
Stockholders' Equity (Note D) 57,441 48,138
------ ------
$ 71,044 $ 63,096
See notes to condensed consolidated financial statements. ====== ======
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------
1996 1995
-------- --------
REVENUES $ 2,973 $ 3,672
-------- --------
COSTS AND EXPENSES:
Cost of revenues 2,194 2,152
Research and development 951 777
Selling, general and administrative 2,872 1,929
------- -------
Loss from operations ( 3,044) ( 1,186)
Other income, net 9,420 256
------- -------
Net income (loss) before provision for
taxes and minority interest 6,376 ( 930)
Provision for income taxes - -
------- -------
Net income (loss) before minority interest 6,376 ( 930)
Minority interest in net loss of
subsidiary and partnership 48 53
------ ------
NET INCOME (LOSS) $ 6,424 $( 877)
======= =======
Net income per common share:
Net income (loss) before taxes & minority interest $ .11 $( .02)
Minority interest .00 .00
------ ------
Net income per common share $ .11 $( .02)
====== ======
Weighted average number of common shares outstanding 56,116 49,879
====== ======
See notes to condensed consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
1996 1995
------- --------
REVENUES $ 5,560 $ 8,015
------- --------
COSTS AND EXPENSES:
Cost of revenues 4,157 4,342
Research and development 1,869 1,623
Selling, general and administrative 4,916 3,929
------- -------
Loss from operations ( 5,382) ( 1,879)
Other income, net 9,685 537
------- -------
Net income (loss) before provision for
taxes and minority interest 4,303 ( 1,342)
Provision for income taxes - -
------- -------
Net income (loss) before minority interest 4,303 ( 1,342)
Minority interest in net loss of
subsidiary and partnership 98 95
------ ------
NET INCOME (LOSS) $ 4,401 $( 1,247)
======= ======
Net income per common share:
Net income (loss) before taxes & minority interest $ .08 $( .03)
Minority interest .00 .00
------ ------
Net income per common share $ .08 $( .03)
====== ======
Weighted average number of common shares outstanding 56,116 49,879
====== ======
See notes to condensed consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
-----------------
1996 1995
------ ------
Operating activities:
Net income (loss) $ 4,401 $( 1,247)
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interest in net income (loss) ( 98) ( 95)
Depreciation and amortization 794 1,084
(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 ( 1,543) 528
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 ( 763) ( 1,558)
------ ------
Net cash provided (used) in operating activities 2,791 ( 1,288)
------ ------
Investing activities:
Purchases of property and equipment,
net of capital lease obligations ( 128) ( 71)
Investment in and receivables from affiliates ( 1,842) ( 5,215)
Cost of acquired technology and license,
patents and software development costs, net ( 317) ( 542)
------ ------
Net cash used in investing activities ( 2,287) ( 5,828)
------ ------
Financing activities:
Proceeds from borrowings, net
of capital lease obligations - -
Repayment of borrowings and capital
lease obligations ( 514) ( 436)
(Increase) decrease in investment in
sales-type leases - -
Collection of principal on sales-type leases 1,261 103
Issuance of common stock and warrants and
collection of stockholder notes, net 4,902 5,817
Decrease (increase) in other assets ( 165) ( 510)
------ ------
Net cash provided by financing activities 5,484 4,974
------ ------
Increase (decrease) in cash 5,988 ( 2,142)
Cash at beginning of period 3,712 3,267
------ ------
Cash at end of period $ 9,700 $ 1,125
====== ======
See notes to condensed consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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.
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 six months ended December 31, 1996 are
not necessarily indicative of the results that may be expected for the
fiscal year ended June 30, 1997. For further information, refer to the
Company's consolidated report on Form 10-K for the fiscal year ended June
30, 1996.
NOTE B - INVENTORIES
The components of inventory consist of: (000's OMITTED)
------------------
December 31, June 30,
1996 1996
------- -------
Purchased parts components and supplies $ 5,233 $ 3,316
Work in process 486 308
------- -------
$ 5,719 $ 3,624
======= =======
NOTE C - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts are comprised of: (000's OMITTED)
--------------------
December 31, June 30,
1996 1996
------- -------
Costs incurred on uncompleted contracts $ 6,035 $ 5,147
Estimated earnings 7,484 7,202
------- -------
13,519 12,349
Less: billings to date ( 3,699) ( 2,723)
------- -------
$ 9,820 $ 9,626
======= =======
Uncompleted contracts have been individually
netted and are reported as follows:
Costs and estimated earnings in excess of
billings on uncompleted contracts-short term $ 547 $ 336
Costs and estimated earnings in excess of
billings on uncompleted contracts-long term 9,460 9,460
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 187) ( 170)
------- -------
$ 9,820 $ 9,626
======= =======
NOTE D - STOCKHOLDERS' EQUITY
(000'S OMITTED)
Stockholders' Equity is comprised of: ---------------------------
December 31, June 30,
1996 1996
------------- -----------
Common Stock $.0001 par value; 50,000,000
shares authorized; 45,066,671 outstanding
at December 31 and 42,871,751 at June 30 $ 5 $ 4
Class B Common Stock $ .0001 par value;
4,000,000 shares authorized, 5,411 outstanding
at December 31 and at June 30. - -
Class C Common Stock $ .0001 par value;
10,000,000 shares authorized, 9,562,824
outstanding at December 31 and at June 30. 1 1
Class A non-voting Preferred Stock $.0001 par
value; 8,000,000 shares authorized, 7,855,627
outstanding at December 31 and at June 30. 1 1
Additional paid-in capital 81,291 75,985
Accumulated deficit (21,297) (25,698)
Notes receivable - stockholders ( 2,165) ( 1,760)
Treasury stock - 108,864 shares ( 395) ( 395)
------- -------
$ 57,441 $ 48,138
======= =======
NOTE E - CHANGES IN CAPITALIZATION
The Company's debt to equity ratio changed from approximately 1:3
($14.8 million:$48.1 million) as at June 30, 1996 to approximately 1:4
($13.6 million:$57.4 million) as at December 31, 1996. This change in
the Company's capitalization resulted from a combination of an increase
in stockholders' equity (approximately $9.3 million) and a decrease of
approximately $1.0 million in current liabilities.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the first six months of fiscal 1997, the Company reported
net income of $4.4 million on revenues of $5.6 million as compared to a net
loss of $1.2 million on revenues of $8.0 million for the first six months of
fiscal 1996.
For the second quarter of fiscal 1997, the Company reported
net income of $6.4 million on revenues of $3.0 million as compared to a net
loss of $877,000 on revenues of $3.7 million for the second quarter of
fiscal 1996.
The Company's QUAD (TM) 7000 and QUAD (TM) 12000 MRI scanners,
together with other research and development projects, are intended to
significantly improve the Company's competitive position. Having received
FDA approval for its QUAD 7000 and QUAD 12000 scanners, the Company is
aggressively marketing its products. The QUAD scanners are highly
competitive and totally new non-claustrophobic scanners not previously
available in the MRI market. At .6 Tesla field strength, the QUAD 12000
magnet is the highest field "Open MRI" in the industry, offering
non-claustrophobic MRI together with high-field image quality for the first
time.
In November, 1996, the Company concluded an agreement with a
chain of medical distributors having a large national sales force.
As part of its marketing program, the Company also attended
the industry's annual trade show, RSNA (Radiological Society of North
America) in November 1996. The Company believes that it is uniquely
positioned to take advantage of the rapidly expanding "Open MRI" market, as
the manufacturer of the only high-field "Open MRI" in the industry.
The Company expects marked demand for its high-field "Open
MRI" scanners since image quality increases as a direct proportion to
magnetic field strength. In addition, the Company's new scanners provide
improved image quality and high speed imaging at costs that are
significantly less than the competition and more in keeping with the medical
cost reduction demands being made by our national leaders on behalf of the
public.
Cost containment programs continue in force, but the Company
is expanding its operations and productive capacity to meet new orders
worldwide. Consequently, although costs of revenues decreased slightly to
$4.2 million for the first six months of fiscal 1997 ($2.2 million for the
second quarter of fiscal 1997) as compared to $4.3 million for the first six
months of fiscal 1996 ($2.2 million for the second quarter of fiscal 1996),
research and development, selling, general and administrative expenses
increased to approximately $6.8 million for the first six months of fiscal
1997 ($3.8 million for the second quarter of fiscal 1997) as compared to
$5.6 million for the first six months of fiscal 1996 ($2.7 million for the
second quarter of fiscal 1996).
These cost containment programs, which include increasing the
portion of manufacturing conducted on the Company's premises, have enabled
the Company to achieve significantly lower manufacturing costs than would
have otherwise been experienced in the production of its QUAD scanners.
This has enabled the Company to pass on to customers a much needed reduction
in the sales price of MRI scanners.
The Company has continued its program for upgrading previously
installed scanners. The versatility and productivity of MRI technology
creates the impetus for new uses. As a result, 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.
The Company has continued its efforts to increase scanner sales in
foreign countries as well as domestically. Based on sales to date, further
indications of interest, meetings, sales trips abroad and negotiations, the
Company is cautiously optimistic that foreign sales will prove a significant
source of revenue.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's liquidity and capital
resources positions changed from the June 30, 1996 position as follows:
December 31, June 30,
1996 1996 Change
____________ ____________ __________
Working capital
(deficiency) $6,205,000 ($2,355,000) $8,560,000
Total liabilities were reduced since June 30, 1996 by
approximately $1.3 million to approximately $13.6 million at December 31,
1996.
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, from June 30, 1993 to June 30, 1994 by $3.8 million
to $6.0 million, and from June 30, 1994 through June 30, 1995, by $2.1
million to approximately $3.9 million. At June 30, 1996 interest bearing
debt was approximately $4.0 million, and was reduced by approximately
$514,000 to $3.5 million at December 31, 1996.
As of December 31, 1996, the Company had no unused credit
facilities with banks or financial institutions.
While continuing to focus on new sources of income and cost
containment, the Company's business plan currently includes an aggressive
program for manufacturing and selling its new line of QUAD scanners which
are achieving success in the marketplace and which the Company has had under
development for four years.
The Company believes that the above mentioned programs will
provide the cash flows needed to achieve the sales, service and production
levels necessary to support its operations.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
In March 1993, the Company commenced an action in the United States
District Court for the Southern District of New York against an independent
service organization, Magnetic Resonance Plus, Inc. for infringing Fonar's
copyrighted software and misappropriating Fonar's trade secrets. Magnetic
Resonance Plus counterclaimed, alleging that Fonar had violated the
antitrust laws and tortiously interfered with Magnetic Resonance Plus'
contracts and prospective economic advantage. FONAR CORPORATION V. MAGNETIC
RESONANCE PLUS, INC., 93 CIV. 2220 (CBM).
In July 1996, the Court dismissed Fonar's claims. Nevertheless, over
Fonar's objections and notwithstanding that Fonar was appealing the
decision, the Court allowed Magnetic Resonance Plus' counterclaims to
proceed to trial.
In December 1996, after trial, the jury rejected Magnetic Resonance
Plus' antitrust claims (as well as a third state law claim), but delivered a
verdict of $2.3 million (including $800,000 in punitive damages) against the
Company on the two tortious interference claims.
Subsequently, in January 1997, the Court of Appeals for the Second
Circuit reversed the District Court and reinstated Fonar's copyright and
unfair competition claims against Magnetic Resonance Plus.
The Company expects that the Court of Appeals' decision reinstating its
claims will also result in a reversal of the $2.3 million judgment against
it, since the centerpiece of Magnetic Resonance Plus' tortious interference
argument was that Fonar's copyright lawsuit was baseless.
There were no other material changes in litigation for the second
quarter of fiscal 1997 from that described in Form 10-K for the fiscal year
ended June 30, 1996.
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: February 13, 1997
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