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, 1997 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, 1997
- -------------------------------- ---------------------------------------
Common Stock, par value $.0001 47,643,871
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
<PAGE> Page 2
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1997
and June 30, 1996 3
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 1997 and
March 31, 1996 4
Condensed Consolidated Statements of Operations for
the Nine Months Ended March 31, 1997 and
March 31, 1996 5
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 1997 and
March 31, 1996 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
<PAGE> Page 3
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS March 31, June 30,
1997 1996
(UNAUDITED)
Current Assets: ---------- -------
Cash $ 7,031 $ 3,712
Accounts and notes receivable, net of allowance
for doubtful accounts of $ 713 2,285 1,797
Accounts receivable from affiliates 400 400
Costs and estimated earnings in excess
of billings on uncompleted contracts (Note C) 1,273 336
Inventories (Note B) 5,712 3,624
Other current assets 1,011 1,595
----- ------
Total current assets 17,712 11,464
----- ------
Assets held for resale 450 450
Property and equipment, at cost 14,163 13,820
Less accumulated depreciation and amortization (11,834) (11,319)
-------- --------
2,329 2,501
Investment in and receivables from affiliates,
net of allowance of $ 1,250 30,564 28,353
Cost of acquired technology and license, patents
and software development costs, net 4,171 4,460
Net investment in sales-type leases 4,123 5,519
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note C) 9,460 9,460
Other assets 1,103 889
------ ------
$ 69,912 $ 63,096
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 100 $ 100
Current maturities of long-term debt and
capital lease obligations 2,342 2,909
Accounts payable 2,030 1,748
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note C) 194 170
Accrued expenses, customer advances and
other current liabilities 8,437 8,892
------ ------
Total current liabilities 13,103 13,819
------ ------
Long-term debt and capital lease obligations
less current maturities 807 963
Other liabilities 29 59
------ ------
836 1,022
------ ------
Minority interest ( 35) 117
------ ------
Stockholders' Equity (Note D) 56,008 48,138
------ ------
$ 69,912 $ 63,096
See notes to condensed consolidated financial statements. ====== ======
<PAGE> 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,
---------------------
1997 1996
-------- --------
REVENUES $ 2,570 $ 3,047
-------- --------
COSTS AND EXPENSES:
Cost of revenues 2,082 2,355
Research and development 1,977 888
Selling, general and administrative 2,598 2,214
-------- --------
Loss from operations ( 4,087) ( 2,410)
Other income, net - 4,257
------- -------
Income (loss) before provision for income taxes
and minority interest ( 4,087) 1,847
Provision for income taxes - -
------- -------
Income (loss) before minority interest ( 4,087) 1,847
------- -------
Minority interest in net loss of
subsidiary and partnership 55 44
-------- ------
NET INCOME (LOSS) $( 4,032) $ 1,891
======== ======
Net Income per common share:
Income (loss) before minority interest $( .07) $ .04
Minority interest .00 .00
------ ------
Net Income per common share $( .07) $ .04
====== ======
Weighted average number of common shares outstanding 58,693 51,368
====== ======
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,
---------------------
1997 1996
-------- --------
REVENUES $ 8,130 $ 11,061
-------- --------
COSTS AND EXPENSES:
Cost of revenues 6,239 6,697
Research and development 3,846 2,511
Selling, general and administrative 7,514 6,142
-------- --------
Loss from operations ( 9,469) ( 4,289)
Other income, net 9,685 4,795
-------- --------
Income before provision for income taxes
and minority interest 216 506
Provision for income taxes - -
-------- -------
Income before minority interest 216 506
Minority interest in net loss of
subsidiary and partnership 153 138
-------- -------
NET INCOME $ 369 $ 644
======== =======
Net Income per common share:
Income (loss) before minority interest $ .00 $ .01
Minority interest .00 .00
------- ------
Net Income per common share $ .00 $ .01
======= ======
Weighted average number of common shares outstanding 58,693 51,368
====== ======
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,
-----------------
1997 1996
------ ------
Operating activities:
Net Income $ 369 $ 644
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interest in net income (loss) ( 153) ( 138)
Depreciation and amortization 1,141 1,876
(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 ( 2,902) ( 210)
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 ( 179) ( 773)
-------- --------
Net cash provided by (used in) operating activities ( 1,724) 1,399
-------- --------
Investing activities:
Purchases of property and equipment,
net of capital lease obligations ( 343) ( 91)
Investment in and receivables from affiliates ( 2,211) ( 6,799)
Cost of acquired technology and license,
patents and software development costs ( 337) ( 434)
-------- --------
Net cash used by investing activities ( 2,891) ( 7,324)
-------- --------
Financing activities:
Proceeds from borrowings, net
of capital lease obligations - -
Repayment of borrowings and capital
lease obligations ( 723) ( 635)
Decrease in investment in sales-type leases - -
Collection of principal on sales-type leases 1,370 -
Issuance of common stock and warrants and
collection of stockholder notes, net 7,501 8,615
(Increase) Decrease in other assets ( 214) ( 528)
-------- --------
Net cash provided by financing activities 7,934 7,452
-------- --------
Increase in Cash 3,319 1,527
Cash at beginning of period 3,712 3,268
------- -------
Cash at end of period $ 7,031 $ 4,795
======= =======
See notes to condensed consolidated financial statements.
<PAGE> Page 7
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
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 nine months ended March 31, 1997 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)
-------------------
March 31, June 30,
1997 1996
------- -------
Purchased parts components and supplies $ 5,227 $ 3,316
Work in process 485 308
------- -------
$ 5,712 $ 3,624
======= =======
NOTE C - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts are comprised of: (000's OMITTED)
--------------------
March 31, June 30,
1997 1996
------- -------
Costs incurred on uncompleted contracts $ 7,041 $ 5,147
Estimated earnings 7,587 7,202
------- -------
14,628 12,349
Less: billings to date ( 4,089) ( 2,723)
--------- --------
$ 10,539 $ 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 $ 1,273 $ 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 ( 194) ( 170)
. ------- -------
$ 10,539 $ 9,626
======= =======
<PAGE> Page 8
NOTE D - STOCKHOLDERS' EQUITY
(000'S OMITTED)
Stockholders' Equity is comprised of: ---------------------------
March 31, June 30,
1997 1996
------------- -----------
Common Stock $.0001 par value; 50,000,000
shares authorized; 47,643,871 outstanding
at March 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 March 31 and at June 30. - -
Class C Common Stock $.0001 par value;
10,000,000 shares authorized, 9,562,824
outstanding at March 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 March 31 and at June 30. 1 1
Additional paid-in capital 83,955 75,985
Accumulated deficit (25,329) (25,698)
Notes receivable - stockholders ( 2,230) ( 1,760)
Treasury stock - 108,864 shares ( 395) ( 395)
------- -------
$ 56,008 $ 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
($13.9 million:$56.0 million) as at March 31, 1997. This change in the
Company's capitalization resulted from a combination of an increase in
stockholders' equity (approximately 7.9 million) and a decrease of
approximately $.9 million in total liabilities.
<PAGE> Page 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the first nine months of fiscal 1997, the Company reported
a net income of $369,000 on revenues of $8.1 million as compared to a net
income of $644,000 on revenues of $11.0 million for the first nine months of
fiscal 1996.
For the third quarter of fiscal 1997, the Company reported a
net loss of $4.0 million on revenues of $2.6 million as compared to a net
income of $1.9 million on revenues of $3.0 million for the third 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
$6.2 million for the first nine months of fiscal 1997 ($2.1 million for the
third quarter of fiscal 1997) as compared to $6.7 million for the first nine
months of fiscal 1996 ($2.4 million for the third quarter of fiscal 1996),
research and development, selling, general and administrative expenses
increased to approximately $11.4 million for the first nine months of fiscal
1997 ($4.6 million for the third quarter of fiscal 1997) as compared to $8.7
million for the first nine months of fiscal 1996 ($3.1 million for the third
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.
<PAGE> Page 10
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 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 March 31, 1997, the Company's liquidity and capital
resources positions changed from the June 30, 1996 position as follows:
March 31, June 30,
1997 1996 Change
____________ ____________ __________
Working capital
(deficiency) $4,609,000 ($2,355,000) $6,964,000
Total liabilities were reduced since June 30, 1996 by
approximately $1.0 million to approximately $13.9 million at March 31, 1997.
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
$723,000 to $3.2 million at March 31, 1997.
As of March 31, 1997, 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.
<PAGE> Page 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
In February, 1997, the United States Court of Appeals for the Federal
Circuit affirmed the judgment of the United States District Court for the
Eastern District of New York in Fonar's favor against General Electric
Company (FONAR CORPORTION AND DR. RAYMOND V. DAMADIAN V. GENERAL ELECTRIC
COMPANY ET ANO., 96-1075, -1106, -1091) for $62 million (plus interest) for
infringement of its Multi-Angle Oblique imaging patent (MAO), U.S. Patent
No. 4,871,966. In addition, the Court of Appeals reinstated the jury
verdict finding infringement of Fonar's original MRI patent, U.S. patent No.
3,789,832 and awarding Fonar $35 million in damages for infringement of that
patent.
General Electric Company subsequently petitioned the Court of Appeals
for a rehearing, with the suggestion that the rehearing be held EN BANC (by
all the judges). On May 8, 1997, the Court of Appeals denied those
requests. Fonar expects that General Electric Company will petition the
Supreme Court to hear the case. It is within the Supreme Court's discretion
whether or not to hear the appeal.
In October 1996, Fonar and Siemens amicably resolved their pending
patent infringement litigation in the United States District Court in
Delaware in which each company had asserted certain of its patents related
to magnetic resonance imaging technology were infringed by the other. The
settlement agreement, which does not admit liability by either party,
includes a cross-license by Siemens and Fonar of certain patents relating to
MRI technology. Fonar received a monetary payment from Siemens and an
agreement by Siemens to pay Fonar royalties. Other terms of the settlement
are confidential.
In January 1997, the Court of Appeals for the Second Circuit reinstated
Fonar's copyright and unfair competition claims against Magnetic Resonance
Plus in the case of FONAR CORPORATION V. MAGNETIC RESONANCE PLUS INC., 93
CIV 2220 (CBM). Subsequently, in March 1997, the District Court for the
Southern District of New York set aside the $2.3 million judgment rendered
against Fonar on Magnetic Resonance Plus' counterclaims. A date for retrial
has not yet been set.
There were no other material changes in litigation for the third 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
<PAGE> Page 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FONAR CORPORATION
(Registrant)
By: /s/ Raymond V. Damadian
-----------------------
Raymond V. Damadian
President & Chairman
Dated: May 14, 1997
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