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 SEPTEMBER 30, 2005
----------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10248
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FONAR CORPORATION
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(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: (631) 694-2929
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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 October 31, 2005
-------------------------------- ---------------------------------------
Common Stock, par value $.0001 110,070,767
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 - September 30, 2005
(Unaudited) and June 30, 2005
Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 2005 and
September 30, 2004 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Loss (Income) for the Three Months Ended
September 30, 2005 and September 30, 2004 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2005 and
September 30, 2004 (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 September 30, June 30,
2005 2005
(UNAUDITED)
Current Assets: -------- -------
Cash and cash equivalents $ 4,534 $ 5,517
Marketable securities 7,003 9,411
Accounts receivable - net 2,908 1,971
Accounts receivable - related parties -net 383 470
Medical receivables 8,490 9,990
Management fee receivable - 894
Management fee receivable - related
medical practices - net 8,297 7,826
Costs and estimated earnings in excess
of billings on uncompleted contracts 9,281 10,538
Inventories 8,708 9,838
Investment in sales-type lease 179 174
Current portion of advances and notes to related
medical practices 105 149
Current portion of note receivable less discount for
below market interest 81 -
Prepaid expenses and other current assets 1,299 1,785
------ ------
Total Current Assets 51,268 58,563
------ ------
Property and equipment - net 6,979 7,594
Advances and notes to related medical practices - net 184 201
Investment in sales-type lease 232 279
Notes receivable less discount for below market interest 6,152 553
Management agreements - net - 3,992
Other intangible assets - net 4,562 4,503
Other assets 425 409
-------- --------
Total Assets $ 69,802 $ 76,094
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
September 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2005
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of long-term debt and
capital leases $ 449 $ 425
Accounts payable 6,708 8,468
Other current liabilities 6,804 7,474
Unearned revenue on service contracts 3,738 3,305
Unearned revenue on service
contracts - related parties 505 526
Customer advances 1,456 1,633
Customer advance - related party 42 42
Income taxes payable - 11
Billings in excess of costs and estimated
earnings on uncompleted contracts 696 301
Billings in excess of costs and estimated
earnings on uncompleted contracts-related party - 153
------ ------
Total Current Liabilities 20,398 22,338
Long-Term Liabilities:
Due to related medical practices 136 128
Long-term debt and capital leases,
less current portion 983 966
Other liabilities 259 270
------ ------
Total Long-Term Liabilities 1,378 1,364
------ ------
Total Liabilities 21,776 23,702
------ ------
Minority interest 624 523
------ ------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, except share data)
September 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2005
(continued) (UNAUDITED)
---------- --------
STOCKHOLDERS' EQUITY:
Class A non-voting preferred stock $.0001 par value;
8,000,000 authorized, 7,836,287 issued and outstanding
at September 30, 2005 and June 30, 2005 1 1
Common Stock $.0001 par value; 150,000,000 and 130,000,000
Shares authorized at September 30, 2005 and June 30, 2005,
respectively; 108,922,898 issued at September 30, 2005
and 105,043,014 at June 30, 2005; 108,631,834 outstanding
at September 30, 2005 and 104,751,950 at June 30, 2005 11 10
Class B Common Stock $.0001 par value; 4,000,000
shares authorized, (10 votes per share), 3,953 issued
and outstanding at September 30, 2005 and June 30, 2005 - -
Class C Common Stock $.0001 par value; 10,000,000 shares
authorized, (25 votes per share), 9,562,824 issued
and outstanding at September 30, 2005 and June 30, 2005 1 1
Paid-in capital in excess of par value 164,123 159,929
Accumulated other comprehensive loss ( 202) ( 182)
Accumulated deficit (114,686) (106,369)
Notes receivable from employee stockholders ( 844) ( 846)
Unearned compensation ( 327) -
Treasury stock, at cost - 291,064 shares of common stock
at September 30, 2005 and June 30, 2005 ( 675) ( 675)
------- -------
Total Stockholders' Equity 47,402 51,869
------- -------
Total Liabilities and Stockholders' Equity $ 69,802 $ 76,094
======= =======
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
SEPTEMBER 30,
---------------------
2005 2004
REVENUES -------- --------
Product sales - net $ 4,011 $17,344
Product sales - related parties - net 179 307
Service and repair fees - net 1,684 896
Service and repair fees - related parties - net 241 145
Management and other fees - net 648 -
Management and other fees - related medical
practices - net 3,390 5,791
License fees and royalties - 585
-------- --------
Total Revenues - Net 10,153 25,068
-------- --------
COSTS AND EXPENSES
Costs related to product sales 3,753 10,920
Costs related to product sales - related parties 157 166
Costs related to service and repair fees 1,122 952
Costs related to service and repair
fees - related parties 285 163
Costs related to management and other fees 528 -
Costs related to management and other
fees - related medical practices 2,286 3,497
Research and development 1,840 1,374
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $ 524 and $ 781 for the three months
ended September 30, 2005 and 2004, respectively 6,555 6,881
Provision for bad debts 25 50
Amortization of management agreements 37 158
Termination costs paid with common stock 1,600 -
-------- --------
Total Costs and Expenses 18,188 24,161
-------- --------
(Loss) Income From Operations ( 8,035) 907
Interest Expense ( 74) ( 65)
Investment Income 173 106
Interest Income - Related Parties 4 7
Other (Expense) Income ( 104) 76
Minority Interest in Income of Partnerships ( 281) ( 226)
------ -------
(Loss) Income Before Provision for Income Taxes ( 8,317) 805
Provision for Income Taxes - 19
------- -------
NET (LOSS) INCOME $( 8,317) $ 786
======= =======
Net (Loss) Income Available to Common Stockholders $( 8,317) $ 728
------- -------
Basic (Loss) Earnings Per Common Share $(.08) $ .01
====== ======
Diluted (Loss) Earnings Per Common Share $(.08) $ .01
====== ======
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 (LOSS) INCOME
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
2005 2004
------ ------
Net (loss) income $(8,317) $ 786
Other comprehensive (loss) income net of tax:
Unrealized (losses) gains on securities,
net of tax ( 20) 41
------- -------
Total comprehensive (loss) income $(8,337) $ 827
======= =======
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 THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
2005 2004
------ ------
Cash Flows from Operating Activities
Net (loss) income $( 8,317) $ 786
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Minority interest in income of partnerships 281 226
Depreciation and amortization 844 982
Gain on sale of equipment ( 3) -
Provision for bad debts 25 50
Compensatory element of stock issuances 524 781
Stock issued for costs and expenses 1,391 635
Termination costs paid with common stock 1,600 -
Amortization of unearned compensation 73 -
Amortization of unearned license fee - ( 585)
Loss from sale of physical medicine
management business 144 -
(Increase) decrease in operating assets, net:
Accounts and management fee receivable ( 341) ( 1,237)
Notes receivable ( 33) -
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,258 ( 755)
Inventories 1,130 427
Principal payments received on sales type lease 41 37
Prepaid expenses and other current assets 486 ( 693)
Other assets ( 19) ( 17)
Advances and notes to related medical practices 61 71
Increase (decrease) in operating liabilities, net:
Accounts payable ( 1,760) 688
Other current liabilities ( 378) 192
Customer advances ( 177) ( 1,034)
Billings in excess of costs and estimated
earnings on uncompleted contracts 241 ( 127)
Other liabilities ( 11) ( 5)
Due to related medical practices 8 -
Income taxes payable ( 11) 19
------ ------
Net cash (used in) provided by operating activities ( 2,943) 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 THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
2005 2004
------ ------
Cash Flows from Investing Activities:
Purchases of marketable securities - ( 4,031)
Sales of marketable securities 2,388 4,798
Purchases of property and equipment ( 426) ( 513)
Costs of capitalized software development ( 169) ( 203)
Cost of patents and copyrights ( 61) ( 41)
Proceeds from sale of equipment 97 -
------ ------
Net cash provided by investing activities 1,829 10
------ ------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 180) ( 185)
Repayment of borrowings and capital
lease obligations ( 91) ( 120)
Net proceeds from exercise of stock options
and warrants 400 120
Repayment of notes receivable from employee
stockholders 2 22
------ ------
Net cash provided by (used in) financing activities 131 ( 163)
------ ------
Net (Decrease) Increase in Cash and Cash Equivalents ( 983) 288
Cash and Cash Equivalents - Beginning of Period 5,517 9,474
------ ------
Cash and Cash Equivalents - End of Period $ 4,534 $ 9,762
====== ======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(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 of America 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
three months ended September 30, 2005 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2006. 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 28, 2005 for the fiscal year ended June 30, 2005.
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"), 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 three months ended September 30, 2005 because
the participating securities do not have a contractual obligation to share in
the losses of the Company. For the three months ended September 30, 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.
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 and warrants or
conversion of the participating convertible securities that were excluded from
the diluted EPS calculation was approximately 7,028,000 because they are
antidilutive as a result of a net loss for the three months ended September 30,
2005. For the three months ended September 30, 2004, the number of common
shares potentially issuable upon the exercise of certain options of 864,247 have
not been included in the computation of diluted EPS since the effect would be
antidilutive.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
Three Months Three Months
ended September 30, ended September 30,
2005 2004
------------------- -----------------------------------
(000's omitted, except per share data)
Class C
Common Common
Total Total Stock Stock
-------- ----- ------ -------
Basic
Numerator:
Net (loss) income
available to common
stockholders $(8,317) $ 728 710 $ 18
======== ======= ======= =======
Denominator:
Weighted average 107,021 98,826 9,563
shares outstanding ======= ======= =======
Basic (loss) income
per common share $(.08) $ .01 $ -
======= ======= =======
Diluted
Weighted average
shares outstanding 107,021 98,826 98,826 9,563
Stock options - 70 70 -
Warrants - 428 428 -
Convertible Class
C common stock - 3,188 3,188 -
------- ------- ------ -------
Denominator for diluted
earnings per share:
Weighted average
shares outstanding
of common stock
and equivalents 107,021 102,512 102,512 9,563
======= ======= ======= =======
Diluted (loss) income
per common share $ (.08) $ .01 $ .01 $ -
======= ======= ======= =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" SFAS 123R. SFAS 123R requires the compensation cost relating to stock-
based payment transactions be recognized in financial statements. That cost
will be measured based on the fair value of the equity or liability instruments
issued on the grant date of such instruments, and will be recognized over the
period during which an individual is required to provide service in exchange for
the award (typically the vesting period). SFAS 123R covers a wide range of
stock-based compensation arrangements including stock options, restricted stock
plans, performance-based awards, stock appreciation rights, and employee stock
purchase plans. SFAS 123R replaces SFAS 123 and supersedes APB Opinion 25. In
April 2005, the Securities and Exchange Commission delayed the effective date of
SFAS 123R to the first interim or annual reporting period of the Company's first
fiscal year beginning on or after June 15, 2005. Early adoption will be
permitted in periods in which financial statements have not yet been issued.
The Company has adopted SFAS 123R as of July 1, 2005. As of June 30, 2005 all
options were fully vested and during the three months ended September 30, 2005
no employee options were granted. Accordingly, no additional compensation
charge was required and therefore there was no impact on the financial statement
upon the adoption of this pronouncement.
SFAS 123R permits public companies to adopt its requirement using one of two
methods: 1) A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the effective date and (b)
based on the fair value as measured under SFAS 123 for all awards granted to
employees prior to the effective date of SFAS 123R that remain unvested on the
effective date; or 2) A "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under
SFAS 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) to the start of the fiscal year in which SFAS 123R is adopted.
The Company adopted SFAS 123R using the modified prospective method.
Accordingly, the adoption of SFAS 123R's fair value method does not have a
significant impact on our result of operations, and it will have no impact on
our overall financial position. However, had we adopted SFAS 123R in prior
periods, the impact of that standard would have approximated the impact of SFAS
123 as described in the disclosure of pro forma net loss and loss per share in
Note 2 to our condensed consolidated financial statements. SFAS 123R also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. It is unlikely that we will have
near term benefits from tax deductions. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. We cannot estimate what those amounts will be in the future because
of various factors, including but not limited to the timing of employee
exercises and whether we will be in a taxable position. At this time, there
would be no tax impact related to the prior periods since the Company has a net
loss.
For the period ending prior to July 1, 2005, 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 had 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 income and earnings 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 September 30, 2004:
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(000's omitted, except per share data)
--------------------------------------
Net income available to
common shareholders $728
Less:
Undistributed earnings allocated to
Class C common stock 12
-------
716
Less:
Total stock-based employee compensation
expense determined under fair value
based method for all awards 28
-------
Pro forma Net Income $688
=======
Basic Net Income Per Share
as Reported $ 0.01
=======
Basic Pro forma Net Income
per Share $ 0.01
=======
Diluted Net Income per share
as reported $ 0.01
=======
Diluted Pro Forma Net Income $ 0.01
per share =======
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 Ended
September 30, 2004
-------------------
Expected life (years) 3
Interest Rate 2.69%
Annual Rate of dividends 0%
Volatility 55%
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 3 - ACCOUNTS RECEIVABLE AND MEDICAL RECEIVABLES
Accounts Receivable
Accounts receivable, net is comprised of the following at September 30, 2005:
Gross Allowance for
Receivable doubtful accounts Net
---------- ----------------- ---------
Receivables from equipment
sales and service contracts $ 3,406 $ 498 $ 2,908
========== ================= =========
Receivables from equipment
sales and service contracts-
related parties $ 1,029 $ 646 $ 383
========== ================= =========
Management fee receivables
from related medical
practices ("PC's") $ 10,339 $ 2,042 $ 8,297
========== ================= =========
The Company's customers are concentrated in the healthcare industry.
The Company's receivables from the related PC's consist substantially 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 47% and 62% of the PC's net revenues for both the three months
ended September 30, 2005 and 2004, 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.
Net revenues from management and other fees charged to the related PC's
accounted for approximately 33.4% and 23.1% of the consolidated net revenues for
the three months ended September 30, 2005 and 2004, respectively. Product sales
and service and repair fees from related parties amounted to approximately 4.1%
and 1.8% of consolidated net revenues for the three months ended September 30,
2005 and 2004, respectively.
Medical Receivables
The Company was assigned medical receivables valued at $11,775,000, in
connection with the satisfaction of the management fees and termination fees
related to a Termination and Replacement Agreement dated May 23, 2005. The
balance of the medical receivables as of September 30, 2005 was $8,490,000.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 3 - ACCOUNTS RECEIVABLE AND MEDICAL RECEIVABLES (Continued)
Unaudited Financial Information of Unconsolidated Managed Medical Practices
Summarized income statement data for the three months ended September 30, 2005
related to the 12 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted) (Income Tax-Cash Basis)
Patient Revenue - Net $ 4,326
=======
Income from Operations $ 2
=======
Net Loss $ (211)
=======
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet at
September 30, 2005 consist of:
(000's omitted)
Purchased parts, components
and supplies $ 5,667
Work-in-process 3,041
-------
$ 8,708
=======
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of September 30,
2005 is as follows:
(000's omitted)
Costs incurred on uncompleted
contracts $ 16,574
Estimated earnings 7,313
--------
23,887
Less: Billings to date 15,302
-------
$ 8,585
========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)
Included in the accompanying condensed consolidated balance sheet at September
30, 2005 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 9,281
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts 696
--------
$ 8,585
========
2) Customer advances consist of the following as of September 30, 2005:
Related
Total Party Other
-------- -------- -------
Total Advances $16,800 $ 42 $16,758
Less: Advances
on contracts under construction 15,302 - 15,302
------- ------- ------
$ 1,498 $ 42 $ 1,456
======= ======= ======
NOTE 6 -STOCKHOLDERS' EQUITY
Common Stock
During the three months ended September 30, 2005:
a) The Company issued 323,299 shares of common stock to employees as
compensation valued at $369,068 under stock bonus plans.
b) The Company issued 99,597 shares of common stock to consultants and others
at a valued at $111,150.
c) The Company issued 1,292,384 shares of common stock for costs and expenses
of $1,390,887.
d) The Company issued 400,000 shares of common stock upon the exercise of
stock options resulting in proceeds of $400,000.
e) The Company issued 1,764,604 shares of common stock for termination costs
and collection services valued at $1,880,238.
Options
During the quarter ended September 30, 2005, the Company granted to a financial
consultant 400,000 options to purchase common stock at an exercise price of
$1.00 per share. During the quarter ended September 30, 2005, the consultant
exercised 400,000 of their options.
Registration Statement
On August 9, 2005 the Company filed a shelf registration statement on Form S-3
and registered 10,000,000 shares of the Company's common stock.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 6 -STOCKHOLDERS' EQUITY (Continued)
2005 Stock Bonus Plan
On July 18, 2005, the Company filed a registration statement on Form S-8 and
registered 3,000,000 shares under the Company's 2005 Stock Bonus Plan.
Amendment of Certificate of Incorporation
On July 28, 2005, the Company amended its certificate of incorporation
increasing the number of authorized shares from 130,000,000 to 150,000,000.
NOTE 7 -SALE OF PHYSICAL MEDICINE MANAGEMENT BUSINESS
On July 28, 2005 Fonar, HMCA and Dynamic entered into an Asset Purchase
Agreement with Health Plus Management Services, L.L.C. ("Health Plus"), pursuant
to which HMCA and its subsidiary Dynamic sold to Health Plus the portion of
their business which was engaged in the business of managing physical therapy
and rehabilitation facilities, together with the assets used in the conduct of
such business.
The assets sold consisted principally of the management agreements with the
physical therapy and rehabilitation facility management business, the physical
therapy equipment, a portion of the accounts receivable and furniture and
fixtures the Company provided to the physical therapy and rehabilitation
facilities.
The purchase price under the Asset Purchase Agreement was $6.6 million, payable
pursuant to a promissory note (the "note") in 120 monthly installments
commencing on August 28, 2005. The first twelve installments are interest only
and the remaining 108 payments will consist of equal installments of principal
and interest in the amount of $76,014 each. The note is secured by a first lien
on all of the assets of Health Plus, including its accounts receivable. The
Note is subject to prepayment provisions to the extent Health Plus resells all
or part of the assets and business or utilizes the assets sold as collateral in
any debt financing. The note provides for interest at 5% per annum. The fair
value assigned to the note was $6,078,068 reflecting a discount of $521,932 for
the below market interest rate. The Company recorded a loss of $143,598 on this
transaction during the quarter ended September 30, 2005.
The two principals of Health Plus were employed by HMCA and Dynamic up to the
time of the closing of the business. In consideration for the termination of
their employment agreement, these two individuals each became entitled to
receive $800,000. In addition, each became entitled to receive $200,000 for
collection services to be provided on behalf of HMCA and Dynamic with respect to
a portion of the accounts receivable of certain physical therapy and
rehabilitation facilities which arose during the period when HMCA was engaged in
the management of those facilities. The $1,000,000 payable to each of these
individuals was satisfied in shares of Fonar common stock. During the three
months ended September 30, 2005 the Company issued 1,764,604 shares of common
stock valued at $1,880,238. The remaining balance under this obligation at
September 30, 2005 is $119,762 which was included in other current liabilities.
The Company capitalized $400,000 with respect to collection services which
is being amortized over 11 months. During the three months ended September 30,
2005, $72,727 was expensed and the remaining balance of $327,273 is classified
as unearned compensation.
For accounting purposes in accordance with accounting principles generally
accepted in the United States of America, the Company determined that the
classification of the disposed business described above as discontinued
operations would not be appropriate. Accordingly, the operating results of the
disposed business have been included in continuing operations in the
accompanying consolidated financial statements during the quarter ended
September 30, 2005.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 7 -SALE OF PHYSICAL MEDICINE MANAGEMENT BUSINESS (Continued)
The following schedule shows the calculation of the loss on sale of the physical
medicine business:
Selling Price $ 6,600,000
Less: Discount for below market interest (521,932)
-----------
Net selling price 6,078,068
Assets sold:
Management fee receivable 1,388,547
Property and equipment - net 444,230
Notes receivable 431,000
Management agreements - net 3,954,388
Security deposits 3,500
---------
Subtotal 6,221,666
-----------
Loss on sale of business $ (143,598)
============
NOTE 8 - 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, 2005. 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
Management
and
Medical Diagnostic
Equipment Services Totals
---------- ---------- ----------
For the three months ended September 30, 2005:
Net revenues from external customers $ 6,251 $ 4,038 $ 10,289
Inter-segment net revenues $ 136 $ - $ 136
Loss from operations $ (5,801) $ (2,234) $ (8,035)
Depreciation and amortization $ 494 $ 350 $ 844
Compensatory element of stock issuances $ 211 $ 313 $ 524
Termination costs paid with common stock$ - $ 1,600 $ 1,600
Capital expenditures $ 241 $ 415 $ 656
Identifiable assets $ 41,076 $ 28,726 $ 69,802
For the three months ended September 30, 2004:
Net revenues from external customers $ 19,277 $ 5,791 $ 25,068
Inter-segment net revenues $ 136 $ - $ 136
Income from operations $ 620 $ 287 $ 907
Depreciation and amortization $ 595 $ 387 $ 982
Compensatory element of stock issuances $ 285 $ 496 $ 781
Capital expenditures $ 500 $ 257 $ 757
Identifiable assets - June 30, 2005 $ 46,265 $ 29,829 $ 76,094
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENT
Common Stock
During the period from October 1 2005 through October 31, 2005:
a) The Company issued 118,517 shares of common stock to employees as
compensation of $127,882 under stock bonus plans.
b) The Company issued 1,220,416 shares of common stock for costs and
expenses of $1,283,348.
c) The Company issued 100,000 shares of common stock upon the exercise of
stock options resulting in proceeds of $100,000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
For the three month period ended September 30, 2005, we reported a net
loss of $8.3 million on revenues of $10.2 million as compared to a net income
of $786,000 on revenues of $25.1 million for the first three months of fiscal
2005.
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 diagnostic facilities management services,
which is conducted through Fonar's wholly-owned subsidiary, Health Management
Corporation of America ("HMCA"). During July 2005 HMCA sold the portion of
its business engaged in the management of physical therapy and rehabilitation
facilities.
Trends in the first quarter of fiscal 2006 include a decrease in product
sales with a continued emphasis on unrelated party sales revenues compared to
related parties (entities in which Dr. Damadian or members of his family have an
interest) revenues.
For the three month period ended September 30, 2005, as compared to the
three month period ended September 30, 2004, overall revenues from MRI product
sales decreased 76.3% ($4.2 million compared to $17.7 million). Unrelated party
scanner sales ($4.0 million compared to $17.3 million) decreased at a rate of
76.9% and related party scanner sales ($179,000 compared to $307,000) decreased
41.7%. Overall, for the first quarter of fiscal 2006, revenues for the medical
equipment segment decreased by 68.3% to $6.1 million from $19.3 million for the
first quarter of fiscal 2005. The revenues generated by HMCA also decreased, by
30.3% to $4.0 million for the first quarter of fiscal 2006 as compared to $5.8
million for the first quarter of fiscal 2005. The decrease in revenues
generated by HMCA resulted primarily from the sale of HMCA's business of
managing physical therapy and rehabilitation centers.
There were approximately $553,000 in foreign revenues for the first three
months of fiscal 2006 as compared to approximately $301,000 in foreign revenues
for the first three months of fiscal 2005, representing an increase in foreign
revenues of 83.7%. The increase is primarily the result of product revenues
recognized from a sale in Germany.
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, the
recognized revenue results from 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 from product sales for the first three
months of fiscal 2006 decreased 76.3% from the first three months of fiscal 2005
($4.2 million compared to $17.7 million), although there was a decrease in the
number of orders of 77.8%: we received orders for 2 Stand-Up(TM) (Upright(TM))
MRI scanners during the first three months of fiscal 2006 as compared to orders
for 8 Stand-Up(TM) (Upright(TM)) MRI scanners and one Fonar 360(TM) MRI scanner
during the first three months of fiscal 2005.
We believe the decrease in product sales revenues reflect the large
variation in sales revenue that is typical of the sale of high unit cost capital
equipment, which variation is characteristic of Fonar's 28 year experience
selling MRI scanning systems. We are optimistic that we will experience an
improvement in product sales performance based on receiving orders for four
Stand-Up(TM) (Upright(TM)) MRI scanners in October of 2005.
Service and repair revenues increased by 85%, from $1.0 million for the
first three months of fiscal 2005 to $1.9 million for the first three months of
fiscal 2006. License fees and royalties decreased from $585,000 for the first
three months of fiscal 2005 to $0 for the first three months of fiscal 2006 upon
the completion of the amortization of a license.
The increases in service and repair revenues are occurring because after
the warranty on the MRI scanner expires, the owner will ordinarily enter into a
service contract with us to assure continued coverage. We anticipate that for
this reason there will continue to be increases in service revenues as
warranties on installed scanners expire over time.
Costs related to product sales decreased by 64.7% from $11.1 million in
the first quarter of fiscal 2005 to $3.9 million in the first quarter of 2006,
reflecting the corresponding decrease in product sales. Costs related to
providing service increased 26.2% from $1.1 million in the first quarter of
fiscal 2005 to $1.4 million in the first quarter of 2006.
Service and repair revenues increased at a materially higher rate than the
costs related to providing service and repairs. Service contract prices are
fixed for the term of the contract, which are usually for a term of one year.
We believe that an important factor in keeping service costs down is our ability
to monitor the performance of customers' scanners from our facilities in
Melville on a daily basis and to detect and repair any irregularities before
more serious problems result. We also believe the low cost of providing service
reflects the high quality of our products.
Overall, our operating loss for our medical equipment segment was $5.8
million for the first quarter of fiscal 2006 as compared to operating income of
$620,000 for the first quarter of fiscal 2005.
HMCA revenues decreased in the first quarter of fiscal 2006, by 30.3% to
$4.0 million from $5.8 million for the first quarter of fiscal 2005. 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)
(Upright(TM)) MRI scanners. We now manage eight sites equipped with Stand-
Up(TM) MRI scanners, and we are planning to open two 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 ten. HMCA experienced
an operating loss of $2.2 million for the first quarter of fiscal 2006 compared
to operating income of $287,000 for the first quarter of fiscal 2005. This was
principally the result of a payment of $1.6 million for the termination of two
employment agreements in connection with the sale by HMCA of its physical
therapy and rehabilitation facility management business and the loss of revenues
resulting from the sale of that business.
HMCA cost of revenues for the first quarter of fiscal 2006 decreased to
$2.8 million as compared to $3.5 million for the first quarter of fiscal 2005,
which is also principally the result of HMCA's sale of its physical therapy and
rehabilitation facility management business.
Sale of Physical Therapy and Rehabilitation Facility Management Business
Notwithstanding our continuing efforts to increase revenues from the
management of MRI scanning facilities, HMCA's revenues declined because of the
sale of its business of managing physical therapy and rehabilitation practices.
The sale was completed on July 28, 2005. This sale was made in connection with
HMCA's decision to focus on the management of diagnostic imaging facilities.
The sale was made pursuant to an asset purchase agreement. The assets
sold consisted principally of the management agreements with the physical
therapy and rehabilitation facilities, the assignment of other agreements and
rights utilized in our physical therapy and rehabilitation facility management
business, physical therapy equipment, a portion of the accounts receivable and
office furnishings and equipment we provided to the physical therapy and
rehabilitation facilities.
The sale was made to Health Plus Management Services, L.L.C. There is no
material relationship between Health Plus and Fonar, HMCA, or any of their
respective subsidiaries, directors or officers, or associates of any such
person. The two principals of Health Plus were employed by HMCA up to the time
of the closing of the transaction. In consideration for the termination of
their employment agreements, these two individuals each became entitled to
receive $800,000. In addition, each became entitled to receive $200,000 for
billing and collection services to be provided on behalf of HMCA with respect to
a portion of the accounts receivable of certain physical therapy and
rehabilitation facilities which arose during the period when we were engaged in
the management of those facilities. The $1,000,000 payable to each of these
individuals may be paid at our option in shares of Fonar common stock.
The purchase price under the asset purchase agreement was $6.6 million,
payable pursuant to a promissory note in 120 monthly installments commencing on
August 28, 2005. The first twelve installments are interest only and the
remaining 108 payments will consist of equal installments of principal and
interest in the amount of $76,014 each. The note is subject to prepayment
provisions to the extent Health Plus resells all or part of the assets and
business or utilizes the assets sold as collateral in any debt financing. A
loss from the sale of $143,598 has been recorded during the quarter ended
September 30, 2005. The note provides for interest at 5% per annum. The $6.6
million note was valued at $6,078,068 as a result of a discount for the below
market interest rate.
As our consolidated revenues decreased by 59.5% to $10.2 million for the
first quarter of fiscal 2006 from $25.1 million for the first quarter of fiscal
2005, the total costs and expenses decreased by 24.7% to $18.2 million for the
first quarter of fiscal 2006 from $24.2 million for the first quarter of fiscal
2005. The decline in revenue was the primary reason we were unable to achieve
profitability in the first quarter of fiscal 2006.
Selling, general and administrative expenses decreased by 4.7% from $6.9
million in the first three months of fiscal 2005 to $6.6 million in the first
three months of fiscal 2006. The compensatory element of stock issuances
decreased by 32.9% from $781,000 in the first three months of fiscal 2005 to
$524,000 in the first three months of fiscal 2006 which is now included in
selling general and administrative expenses. This reflected a lesser use of
Fonar's stock in lieu of cash to pay employees, consultants and professionals
for services. Also, Fonar's stock was used in connection with the termination
of two employment contracts in the amount of $1.6 million.
Research and development expenses increased by 33.9% to $1.8 million for
the first three months of fiscal 2006 as compared to $1.4 million for the first
three months of fiscal 2005. Most of the increase was due to increased research
and development on our Fonar 360(TM) MRI scanner.
Interest expense in the first three months of fiscal 2006 increased by
13.8% to $74,000 from $65,000 for the first three months of fiscal 2005.
Inventories decreased by 11.5% to $8.7 million at September 30, 2005 as
compared to $9.8 million at June 30, 2005 as the Company's product sales
revenues decreased and we decreased our purchase of raw materials and
components.
Costs and estimated earnings in excess of billings on uncompleted
contracts decreased by 11.9% to $9.3 million at September 30, 2005 from $10.5
million at June 30, 2005. This decrease resulted from our receipt of
installment payments upon delivery to customers whose sites were prepared to
receive deliveries.
Management fee receivable and accounts receivable decreased by 5% to $20.1
million at September 30, 2005 from $21.2 million at June 30, 2005, primarily
due to decreased collection from the Company's management fee receivable.
Our operating and net loss were $8.0 million and $8.3 million,
respectively, for the first three months of fiscal 2006 as compared to operating
and net income of $907,000 and $786,000, respectively, for the first three
months of fiscal 2005.
The overall trends reflected in the results of operations for the first
three months of fiscal 2006 are a decrease in revenues from product sales, as
compared to the first three months of fiscal 2005 ($17.7 million for the first
three months of fiscal 2006 as compared to $4.2 million for the first three
months of fiscal 2006), and a decrease in MRI equipment segment revenues
relative to HMCA revenues ($6.1 million or 60% from the MRI equipment segment as
compared to $4.0 million or 40% from HMCA, for the first three months of fiscal
2006, as compared to $19.3 million or 77% from the MRI equipment segment and
$5.8 million or 23%, from HMCA, for the first three months of fiscal 2005). In
addition, we experienced a decrease in unrelated party sales relative to related
party sales in our medical equipment product sales ($4.0 million or 96% to
unrelated parties and $179,000 or 4% to related parties for the first three
months of fiscal 2006 as compared to $17.3 million, or 98% to unrelated parties
and $307,000 or 2% to related parties for the first three months of fiscal
2005).
We are committed to reversing the trends we have experienced in the first
three months in fiscal 2006. Nevertheless, factors beyond our control, such as
the timing and rate of market growth which depend on economic conditions, and
unexpected expenditures or the timing of such expenditures, make it impossible
to forecast future operating results. We believe we are pursuing the correct
policies which should prove successful in improving the Company's operating
results.
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 surgeons and other
interventional physicians to walk inside the magnet and achieve 360 degree
access to the patient to perform interventional procedures.
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 available commercially.
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. The geometry of the Stand-Up(TM) MRI and its transverse magnetic
field enables the use of two detector rf coils operating in quadrature which
increases the Stand-Up(TM) signal to noise ratio by 40% providing a signal to
noise ratio equal to a 1.2T recumbent only MRI scanner.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities decreased from $14.9
million at June 30, 2005 to $11.5 million at September 30, 2005. Principal uses
of cash during the first three months of fiscal 2006 included capital
expenditures for property and equipment of $426,000, repayment of borrowings and
capital lease obligations in the amount of $91,000, capitalized software
development costs of $169,000 and capitalized patent and copyright costs of
$61,000, and a decrease in accounts payable of 1.8 million.
Marketable securities approximated $7.0 million as at September 30, 2005,
as compared to $9.4 million at June 30, 2005. At September 30, 2005, our
investments in U.S. Government obligations were $2.7 million, our investments in
corporate and government agency bonds were $3.4 million and our investments in
certificates of deposit and deposit notes were $900,000. The investments made
have had the intended effect of maintaining a stable investment portfolio.
Cash used in operating activities for the first three months of fiscal
2006 approximated $2.9 million. Cash used in operating activities was
attributable primarily to the net loss of $8.3 million and a decrease in
accounts payable of $1.8 million offset by a decrease in costs and estimated
earnings in excess of billings on uncompleted contracts of $1.3 million, a
decrease in inventories of $1.1 million and principally, by the issuance of
stock in lieu of cash for termination of two employment contracts of $1.6
million and the issuance of stock for compensation, costs and expenses in lieu
of cash in the amount of $1.9 million.
Cash provided by investing activities for the first three months of
fiscal 2006 approximated $1.8 million. The principal source of cash from
investing activities during the first three months of fiscal 2006 consisted of
the sale of marketable securities of $2.4 million, offset by expenditures for
property and equipment of approximately $426,000 and capitalized software and
patent costs of approximately $230,000.
Cash provided by financing activities for the first three months of fiscal
2006 approximated $131,000. The sources of cash from financing activities were
net proceeds from exercises of stock options and warrants of $400,000. The
principal uses of cash in financing activities during the first three months of
fiscal 2006 consisted of repayment of principal on long-term debt and capital
lease obligations of approximately $91,000 and distributions to holders of
minority interests of $180,000.
The Company's obligations and the periods in which they are scheduled to
become due are set forth in the following table:
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 $ 447 $ 225 $ 222 $ -- $ --
Capital lease
Obligation 986 225 400 339 22
Operating
Leases 9,983 2,535 4,527 1,801 1,120
----------- ---------- ---------- ---------- ----------
Total cash
Obligations $ 11,416 $ 2,985 $ 5,149 $ 2,140 $ 1,142
=========== ========== ========== ========== ==========
Total liabilities decreased by 8.1% to $21.8 million at September 30, 2005
from $23.7 million at June 30, 2005.
We experienced an increase in long-term debt from $966,000 at June 30,
2005 to $983,000 at September 30, 2005, an increase in unearned revenue on
service contracts from $3.8 million to $4.2 million at June 30, 2005 to
September 30, 2005, an increase in billings in excess of costs and estimated
earnings on uncompleted contracts from $454,000 at June 30, 2005 to $696,000 at
September 30, 2005, a decrease in accounts payable from $8.5 million at June 30,
2005 to $6.7 million at September 30, 2005, a decrease in customer advances from
$1.7 million at cJune 30, 2005 cto $1.5 cmillion at September 30, 2005 and a
decrease in other current liabilities from $7.5 million at June 30, 2005 to $6.8
million at September 30, 2005.
As of September 30, 2005, the obligations of approximately $6.8 million in
other current liabilities included accrued salaries and payroll taxes of $1.2
million, accrued royalties of $952,000 and excise and sales taxes of $2.6
million.
Our working capital approximated $30.9 million as of September 30, 2005,
as compared to working capital of $36.2 million as of June 30, 2005, decreasing
by 14.8%. This resulted principally from a decrease in accounts receivable of
$1.1 million ($21.2 million at June 30, 2005 as compared to $20.1 million at
September 30, 2005), along with a decrease of customer advances of $200,000
($1.7 million at June 30, 2005 as compared to $1.5 million at September 30,
2005).
With respect to current liabilities, the current portion of long-term debt
increased from $425,000 at June 30, 2005 to $449,000 at September 30, 2005, and
billings in excess of costs and estimated earnings on uncompleted contracts
increased from $454,000 at June 30, 2005 to $696,000 at September 30, 2005.
Customer advances decreased from $1.7 million at June 30, 2005 to $1.5 million
at September 30, 2005 and accounts payable decreased from $8.5 million at June
30, 2005 to $6.7 million at September 30, 2005.
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 three months of fiscal 2006, the
compensatory element of stock issuances was $524,000 as compared to $781,000 for
the first three months of fiscal 2005. Utilization of equity in lieu of cash
compensation has improved our liquidity since it increases cash available for
other expenditures. In addition, we have been using stock to pay $ 1.6 million
for the termination of two employment agreements terminated in connection with
the sale of HMCA's physical therapy and rehabilitation facility management
business.
Fonar's capital resources are expected to improve as Fonar's MRI scanner
products gain wider market acceptance and produce increased product sales.
Inventories decreased by $1.1 million ($9.8 million at June 30, 2005 as
compared to $8.7 million at September 30, 2005) resulting from a decrease in the
purchasing of raw materials and components and in filling our backlog of orders.
Fonar has not committed to making additional capital expenditures in the
2006 fiscal year other than its intention to continue research and development
expenditures at current levels. HMCA also expects to incur capital expenditures
of approximately $600,000 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 ten.
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
September 30, 2005.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
Year of in Fixed Rate Weighted Average
Maturity Instruments Interest Rate
9/30/06 $ 1,198,982 3.25%
9/30/07 1,500,000 3.51%
9/30/08 1,350,000 3.55%
9/30/09 1,945,687 3.71%
9/30/10 998,812 1.85%
9/30/11 100,000 3.52%
------------
Total: $ 7,093,481
============
Fair Value
at 9/30/05 $ 6,893,229
============
All of our revenue, expense and capital purchasing activities are
transacted in United States dollars.
See Note 13 to the consolidated Financial Statements in our Form 10-K as
of and for the year ended June 30, 2005 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 as of the end of the period covered by this
report, the principal executive and acting principal financial officer of the
Company concluded that disclosure controls and procedures were effective.
(b) Change in internal controls.
The Company continues to enhance its controls and procedures related to the
financial reporting process, improvements that were established during the
latter part of fiscal 2005. This included hiring an outside consultant to
assist with technical accounting and reporting issues, developing more
standardized closing procedures and implementing a more formal process for
documenting the weekly management meetings to review operating performance and
results.
There have been no changes in our internal control over financial reporting
that occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: There were no material changes in litigation for
the first three months of fiscal 2006.
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:
Exhibit 31.1 Certification See Exhibits
Exhibit 32.1 Certification See Exhibits
8-K (earnings press release) filed on September 29, 2005
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:November 8, 2005