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 MARCH 31, 2004
----------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission file number 0-10248
------------
FONAR CORPORATION
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-2929
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at April 30, 2004
----------------------------------------- -----------------------------
Common Stock, par value $.0001 97,451,775
Class B Common Stock, par value $.0001 4,153
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 - March 31, 2004
(Unaudited) and June 30, 2003
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 2004 and
March 31, 2003 (Unaudited)
Condensed Consolidated Statements of Operations for
the Nine Months Ended March 31, 2004 and
March 31, 2003 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Loss for the Three Months Ended March 31, 2004 and
March 31, 2003 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Loss for the Nine Months Ended March 31, 2004 and
March 31, 2003 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 2004 and
March 31, 2003 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit - 31.1
Exhibit - 32.1
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS March 31, June 30,
2004 2003
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $ 7,040 $ 9,334
Marketable securities 11,335 5,837
Restricted cash 5,500 -
Accounts receivable - net 1,327 717
Accounts receivable - related parties - net 1,820 114
Accounts receivable - related medical practices - net 13,667 12,261
Costs and estimated earnings in excess
of billings on uncompleted contracts 864 360
Inventories 8,929 5,057
Investment in sales-type lease with related party - 14
Investment in sales-type lease 149 136
Prepaid expenses and other current assets 1,678 1,286
Note receivable from buyers of A&A Services - 150
------ ------
Total Current Assets 52,309 35,266
------ ------
Property and equipment - net 7,480 8,626
Advances and notes to related parties - net 1,118 1,267
Investment in sales-type lease 493 606
Management agreements - net 8,889 9,364
Other intangible assets - net 3,789 3,375
Other assets 274 245
-------- --------
$ 74,352 $ 58,749
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of long-term debt and
capital leases $ 6,068 $ 1,022
Accounts payable 4,892 3,704
Other current liabilities 8,723 7,552
Unearned revenue on service contracts - related parties 433 240
Customer advances 9,167 4,306
Customer advances - related parties - 627
Income taxes payable 24 10
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,457 4,390
Billings in excess of costs and estimated
earnings on uncompleted contracts - related parties - 361
------- ------
Total Current Liabilities 31,764 22,212
Due to affiliates 262 262
Long-term debt and capital leases,
less current portion 787 908
Deferred revenue - license fee 585 2,340
Other non-current liabilities 303 302
------ ------
Total Liabilities 33,701 26,024
------ ------
Minority interest 356 345
------ ------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, except share data)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY (continued) 2004 2003
(UNAUDITED)
--------- --------
STOCKHOLDERS' EQUITY
Class A non-voting preferred stock
$.0001 par value; 8,000,000 authorized,
7,836,287 issued and outstanding
at March 31, 2004 and June 30, 2003 1 1
Common Stock $.0001 par value; 110,000,000
shares authorized; 94,491,387 issued
at March 31, 2004 and 82,452,958 at
June 30, 2003; 94,200,323 outstanding at
March 31, 2004 and 82,161,894 at June 30, 2003 9 8
Class B Common Stock $ .0001 par value;
4,000,000 shares authorized, (10 votes
per share), 4,153 issued and
outstanding at March 31, 2004 and June 30, 2003 - -
Class C Common Stock $.0001 par value;
10,000,000 shares authorized, (25 votes
per share), 9,562,824 issued and outstanding
at March 31, 2004 and at June 30, 2003 1 1
Paid-in capital in excess of par value 147,599 131,519
Accumulated other comprehensive income 49 69
Accumulated deficit (105,846) (97,889)
Notes receivable from employee stockholders ( 843) ( 654)
Treasury stock, at cost - 291,064 shares of common stock
at March 31, 2004 and June 30, 2003 ( 675) ( 675)
------- -------
Total Stockholders' Equity 40,295 32,380
------- -------
Total Liabilities and Stockholders' Equity $ 74,352 $ 58,749
======= =======
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
MARCH 31,
---------------------------
2004 2003
REVENUES --------- --------
Product sales - net $11,227 $ 2,519
Product sales - related parties - net 959 746
Service and repair fees - net 733 516
Service and repair fees - related parties - net 113 80
Management and other fees - related medical
practices - net 5,736 5,329
License fees and royalties 585 585
-------- --------
Total Revenues - Net 19,353 9,775
-------- --------
COSTS AND EXPENSES
Costs related to product sales 7,036 1,717
Costs related to product sales - related parties 650 417
Costs related to service and repair fees 837 654
Costs related to service and repair
fees - related parties 212 191
Costs related to management and other
fees - related medical practices 3,580 3,324
Research and development 1,349 1,271
Selling, general and administrative 5,993 5,538
Compensatory element of stock issuances for
selling, general and administrative expenses 919 2,324
Provision for bad debts 25 54
Amortization of management agreements 158 174
-------- --------
Total Costs and Expenses 20,759 15,664
-------- --------
Loss From Operations ( 1,406) ( 5,889)
Interest Expense ( 87) ( 108)
Interest Expense - Related Parties - ( 9)
Investment Income 118 97
Interest Income - Related Parties 9 26
Other Income (Expense) 146 ( 156)
Minority Interest in Income of Partnerships ( 258) ( 201)
------- --------
Loss Before Provision for Income Taxes ( 1,478) ( 6,240)
Provision for Income Taxes 6 16
------- --------
Loss from Continuing Operations ( 1,484) ( 6,256)
Loss from Discontinued Operations - ( 70)
------- --------
NET LOSS $( 1,484) $( 6,326)
======= ========
Basic and Diluted Loss per
share - continuing operations $(.02) $(.08)
Basic and Diluted Loss per
share - discontinued operations - -
------ ------
Basic and Diluted Net Loss per share $(.02) $(.08)
====== =======
Weighted Average Number of Shares Outstanding 93,499 76,653
====== =======
See accompanying notes to condensed consolidat ed financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE NINE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
REVENUES -------- ---------
Product sales - net $ 24,681 $ 11,252
Product sales - related parties - net 4,128 6,727
Service and repair fees - net 1,980 1,567
Service and repair fees - related parties - net 321 243
Management and other fees - related medical
practices - net 17,574 17,252
License fees and royalties 1,860 1,965
-------- ---------
Total Revenues - Net 50,544 39,006
-------- ---------
COSTS AND EXPENSES
Costs related to product sales 15,127 7,702
Costs related to product sales - related parties 2,629 4,000
Costs related to service and repair fees 2,446 2,035
Costs related to service and repair
fees - related parties 479 406
Costs related to management and other
fees - related medical practices 10,750 10,014
Research and development 4,064 3,875
Selling, general and administrative 18,821 17,198
Compensatory element of stock issuances for
selling, general and administrative expenses 3,251 4,130
Provision for bad debts 110 222
Amortization of management agreements 475 522
-------- --------
Total Costs and Expenses 58,152 50,104
-------- --------
Loss From Operations ( 7,608) (11,098)
Interest Expense ( 211) ( 463)
Interest Expense - Related Parties - ( 18)
Investment Income 306 389
Interest Income - Related Parties 36 181
Other Income (Expense) 233 ( 158)
Minority Interest in Income of Partnerships ( 690) ( 470)
------ -------
Loss Before Provision for Income Taxes ( 7,934) (11,637)
Provision for Income Taxes 23 20
------- -------
Loss from Continuing Operations ( 7,957) (11,657)
Loss from Discontinued Operations - ( 295)
------- -------
NET LOSS $( 7,957) $(11,952)
======= =======
Basic and Diluted Loss per
share - continuing operations $(.09) $(.16)
Basic and Diluted Loss per
share - discontinued operations - -
------ ------
Basic and Diluted Net Loss per share $(.09) $(.16)
====== ======
Weighted Average Number of Shares Outstanding 88,986 74,276
====== ======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
-------- --------
Net loss $(1,484) $(6,326)
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of tax 11 4
-------- --------
Total comprehensive loss $(1,473) $(6,322)
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
--------- ---------
Net loss $( 7,957) $(11,952)
Other comprehensive income (loss), net of tax:
Unrealized gains (loss) on securities,
net of tax ( 20) 65
--------- --------
Total comprehensive loss $( 7,977) $(11,887)
========= =========
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 NINE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
--------- ---------
Cash Flows from Operating Activities
Net loss $( 7,957) $(11,952)
Loss from discontinued operations - 295
--------- ---------
Loss from continuing operations ( 7,957) (11,657)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income of partnerships 690 470
Depreciation and amortization 3,089 3,200
Provision for bad debts 110 222
Compensatory element of stock issuances 3,251 4,130
Stock issued for costs and expenses 11,896 2,450
Interest expense paid in stock - 10
Amortization of deferred revenue - license fee ( 1,755) ( 1,755)
(Increase) decrease in operating assets, net:
Accounts and notes receivable ( 3,832) ( 25)
Costs and estimated earnings in excess of
billings on uncompleted contracts ( 504) ( 149)
Inventories ( 3,872) ( 400)
Principal payments on sales type lease-related
parties 14 2,583
Principal payments on sales type lease 100 87
Prepaid expenses and other current assets ( 392) ( 502)
Other assets ( 29) ( 9)
Advances and notes to related parties 149 178
Increase (decrease) in operating liabilities, net:
Accounts payable 1,188 1,270
Other current liabilities 1,388 527
Customer advances 4,234 ( 2,112)
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 2,294) 414
Other non-current liabilities 1 ( 41)
Income taxes payable 14 ( 11)
------ ------
Net cash provided by (used in) continuing operations 5,489 ( 1,120)
Net cash provided by discontinued operations - 62
------- ------
Net cash provided by (used in) operating activities 5,489 ( 1,058)
------- ------
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 NINE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
------- ------
Cash Flows from Investing Activities:
Purchases of marketable securities ( 5,518) ( 244)
Purchases of property and equipment ( 793) ( 602)
Costs of capitalized software development ( 403) ( 627)
Cost of patents and copyrights ( 429) ( 223)
Repayment of note receivable from buyers
of A&A Services - Discontinued operations 150 -
------ ------
Net cash used in investing activities ( 6,993) ( 1,696)
------ ------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 679) ( 405)
Proceeds from long-term debt 5,500 950
Restricted cash ( 5,500) -
Repayment of long-term debt and capital
lease obligations ( 830) ( 2,296)
Net proceeds from exercise of stock options
and warrants 719 1,104
------ ------
Net cash used in financing activities ( 790) ( 647)
------ ------
Decrease in Cash and Cash Equivalents ( 2,294) ( 3,401)
Cash and Cash Equivalents - Beginning of Period 9,334 7,494
------ ------
Cash and Cash Equivalents - End of Period $ 7,040 $ 4,093
====== ======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three or
nine-month period ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2004. 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 30, 2003 for the fiscal year ended June 30, 2003.
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.
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share
--------------------------------------------------------------------------------
At March 31, 2004, the Company had various stock-based employee compensation
plans. As permitted under Statement of Financial Accounting Standard ("SFAS")
No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure",
which amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", the Company has elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation arrangements as
defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees", and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of APB No.
25. No stock-based employee compensation cost is reflected in operations, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.
Basic net loss per share is computed based on weighted average shares
outstanding and excludes any potential dilution. In accordance with EITF Topic
D-95, "Effect of Participating Convertible Securities on the Computation of
Basic Earnings Per Share," the Company's participating convertible securities,
which include the Class A Non-voting Preferred stock, Class B common stock and
Class C common stock, are not included in the computation of basic or diluted
net loss per share since they are antidilutive. Diluted net loss per share
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share (Continued)
--------------------------------------------------------------------------------
Options and warrants to purchase approximately 5,899,000 and 6,034,000 shares of
common stock were outstanding at March 31, 2004 and 2003, respectively, but were
not included in the computation of diluted net loss per share since the options
and warrants were antidilutive as a result of the net losses for all periods.
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share (Continued)
--------------------------------------------------------------------------------
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation:
For the Three Months Ended
March 31,
(000's omitted except per share data)
-------------------------------------
2004 2003
------------ ------------
Net Loss As Reported
$ (1,484) $ (6,326)
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method for
all awards 26 135
Pro forma Net Loss ------------ ------------
(1,510) $ (6,461)
============ ============
Basic and Diluted Net Loss Per Share
as Reported $(0.02) $(0.08)
============ ============
Basic and Diluted Pro forma Net Loss
Per Share $(0.02) $(0.08)
============ ============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
StockOptions and Warrants and Similar Equity Instruments and Earnings (Loss) Per
Share (Continued)
For the Nine Months Ended
March 31,
(000's omitted except per share data)
-------------------------------------
2004 2003
------------ ------------
Net Loss As Reported $(7,957) $ (11,952)
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method for
all awards 148 335
Pro forma Net Loss ------------ ------------
$(8,105) $(12,287)
============ ============
Basic and Diluted Net Loss Per Share
as Reported $(0.09) $(0.16)
============ ============
Basic and Diluted Pro forma Net Loss
Per Share $(0.09) $(0.17)
============ ============
The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:
For the Three and Nine Months Ended
March 31,
------------------------------------
2004 2003
------------ ------------
Expected life (years) 3 3
Interest Rate 2.69% 4.00%
Annual Rate of dividends 0% 0%
Volatility 55% 92%
Restricted Cash
---------------
At March 31, 2004, $5,500,000 of cash has been pledged as collateral on an
outstanding bank loan and has been classified as restricted cash on the
accompanying condensed consolidated balance sheet.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
--------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and, otherwise, is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company adopted SFAS No. 150
in the first quarter of fiscal year 2004. The adoption did not have an impact on
the condensed consolidated financial statements.
In January 2003, as revised in December 2003, the FASB issued Interpretation No.
46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after March 15, 2004. The effect of the adoption of
this new accounting pronouncement does not have a significant impact on the
Company's condensed consolidated financial statements for the period ended March
31, 2004.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable, net is comprised of the following at March 31 , 2004:
Allowance
Gross for doubtful
Receivable accounts Net
---------- ------------ --------
Receivables from equipment
sales and service contracts $ 1,808 $ 481 $ 1,327
======== ============ ========
Receivables from equipment
sales and service contracts-
related parties $ 2,476 $ 656 $ 1,820
======== ============ ========
Receivables from related
medical practices ("PC's") $15,098 $1,431 $ 13,667
======== ============ ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 3 - ACCOUNTS RECEIVABLE (Continued)
The Company's customers are concentrated in the healthcare industry.
The Company's receivables from the related PC's substantially consist of fees
outstanding under management agreements, service contracts and lease agreements.
Payment of the outstanding fees is based on collection by the PC's of fees from
third party medical reimbursement organizations, principally insurance companies
and health management organizations.
Collection by the Company of its accounts receivable may be impaired by the
uncollectibility of the PC's medical fees from third party payors, particularly
insurance carriers covering automobile no-fault and workers compensation claims
due to longer payment cycles and rigorous informational requirements.
Approximately 65% and 59% of the PC's net revenues for the nine months ended
March 31, 2004 and 2003, respectively, were derived from no-fault and personal
injury protection claims. The Company considers the aging of its accounts
receivable in determining the amount of allowance for doubtful accounts and
contractual allowances. The Company generally takes all legally available steps,
including legally prescribed arbitrations, 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 34.8% and 44.2% of the consolidated net revenues for
the nine months ended March 31, 2004 and 2003, respectively. Product sales and
service and repair fees to related parties amounted to approximately 8.8% and
17.9% of consolidated net revenues for the nine months ended March 31, 2004 and
2003, respectively.
Net revenues from management and other fees charged to the related PC's
accounted for approximately 29.6% and 54.5% of the consolidated net revenues for
the three months ended March 31, 2004 and 2003, respectively. Product sales and
service and repair fees to related parties amounted to approximately 5.5% and
8.5% of consolidated net revenues for the three months ended March 31, 2004 and
2003, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------
Summarized income statement data for the nine months ended March 31, 2004
related to the 17 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted)
Patient Revenue - Net $24,960
=======
Income from Operations $ 376
=======
Net Income (Income Tax - Cash Basis) $ 16
=======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 3 - ACCOUNTS RECEIVABLE (Continued)
Summarized income statement data for the three months ended March 31, 2004
related to the 17 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted)
Patient Revenue - Net $ 8,594
=======
Income from Operations $ 184
=======
Net Income (Income Tax - Cash Basis) $ 71
=======
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet at
March 31, 2004 consist of:
(000's omitted)
Purchased parts, components
and supplies $ 6,592
Work-in-process 2,337
-------
$ 8,929
=======
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of March 31, 2004 is as
follows:
(000's omitted)
Costs incurred on uncompleted
contracts $ 6,243
Estimated earnings 5,854
--------
12,097
Less: Billings to date 13,690
--------
$(1,593)
========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)
Included in the accompanying condensed consolidated balance sheet at March 31,
2004 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $864
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts (2,457)
--------
$(1,593)
========
2) Customer advances consist of the following as of March 31, 2004:
Related
Total Parties Other
------- ------- -------
Total Advances $22,857 $ -- $22,857
Less: Advances
on contracts under construction 13,690 -- 13,690
------- ------- ------
$ 9,167 $ -- $ 9,167
======= ======= =======
NOTE 6 -STOCKHOLDERS' EQUITY
Common Stock
During the three months ended March 31, 2004:
a) The Company issued 476,429 shares of commons stock to employees as
compensation of $644,556 under stock bonus plans.
b) The Company issued 229,698 shares of common stock to consultants and others
at a value of $314,383.
c) The Company issued 1,899,803 shares of common stock for costs and expenses
of $2,225,611.
d) The Company issued 26,570 shares of common stock upon the exercise of stock
options resulting in proceeds of $29,194.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 6 -STOCKHOLDERS' EQUITY (Continued)
Common Stock
During the nine months ended March 31, 2004:
a) The Company issued 1,351,918 shares of common stock to employees as
compensation of $1,942,088 under stock bonus plans.
b) The Company issued 1,003,676 shares of common stock to consultants and
others at a value of $1,395,388.
c) The Company issued 8,831,144 shares of common stock for costs and expenses
of $11,896,214.
d) The Company issued 183,893 shares of common stock upon the exercise of
stock options resulting in proceeds of $195,777.
e) The Company issued 267,798 shares of its common stock valued at $283,806 in
connection with the issuance of notes and loans receivable from employee
stockholders.
Warrants
On August 27, 2003, warrants to purchase 200,000 shares of the Company's common
stock were exercised by The Tail Wind Fund, Ltd. (the "Investor") at an exercise
price of approximately $1.42 per share.
On January 27, 2004, warrants to purchase 200,000 shares of the Company's common
stock were exercised by The Tail Wind Fund, Ltd. (the "Investor") at an exercise
price of approximately $1.17 per share.
On April 28, 2004, warrants to purchase 3,000,000 shares of the Company's common
stock were exercised by The Tail Wind Fund, Ltd. (the "Investor") at an exercise
price of $1.00 per share. (Note 9)
2004 Stock Bonus Plan
On February 6, 2004, the Company filed a Registration Statement on Form S-8 to
register 2,000,000 shares under the Company's 2004 Stock Bonus Plan that was
adopted on February 4, 2004.
Stock Options
During January 2004, the Company granted 25,640 options to an employee at an
exercise price of $1.17 per share that vest quarterly from February 2004 to
November 2004.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 7 - SEGMENT AND RELATED INFORMATION
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of physician practices, including diagnostic
imaging services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies as disclosed in the Company's 10-K as
of June 30, 2003. All inter- segment sales are market-based. The Company
evaluates performance based on income or loss from operations.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
(000's omitted)
Physician
Medical Management
Equipment Services Total
--------- ---------- --------
For the three months ended March 31, 2004:
Net revenues from external customers $ 13,736 $ 5,736 $19,472
Inter-segment net revenues $ 119 -- 119
Loss from operations $ (949) (457) (1,406)
Depreciation and amortization $ 598 482 1,080
Compensatory element of stock issuances $ 360 559 919
Capital expenditures $ 59 476 535
For the three months ended March 31, 2003:
Net revenues from external customers $ 5,668 $ 5,329 $10,997
Inter-segment net revenues $ 1,222 --- $ 1,222
Loss from operations $ (3,962) $(1,927) $(5,889)
Depreciation and amortization $ 635 $ 433 $ 1,068
Compensatory element of stock issuances $ 581 $ 1,743 $ 2,324
Capital expenditures $ 57 $ 106 $ 163
For the nine months ended March 31, 2004:
Net revenues from external customers $ 33,323 $17,574 $50,897
Inter-segment net revenues $ 353 -- 353
Loss from operations $ (7,179) (429) (7,608)
Depreciation and amortization $ 1,681 1,408 3,089
Compensatory element of stock issuances $ 1,552 1,699 3,251
Total identifiable assets $ 46,784 27,568 74,352
Capital expenditures $ 195 598 793
For the nine months ended March 31, 2003:
Net revenue from external customers $ 23,695 $17,252 $ 40,947
Inter-segment net revenues $ 1,941 --- $ 1,941
Loss from operations $ (8,674) $(2,424) $(11,098)
Depreciation and amortization $ 1,902 $ 1,298 $ 3,200
Compensatory element of stock issuances $ 1,067 $ 3,063 $ 4,130
Total identifiable assets $ 34,027 $31,508 $ 65,535
Capital expenditures $ 247 $ 355 $ 602
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 8- DISCONTINUED OPERATIONS
Summarized financial information of the loss from discontinued operations for
the three and nine months ended March 31, 2003 is as follows:
(000's omitted)
For the Three Months Ended
March 31,
2003
---------
Management and other fees - related
medical practices - net $ 373
---------
Costs and Expenses:
Costs related to management and
other fees - related medical practices 372
Amortization of management agreement 71
---------
Total Costs and Expenses 443
---------
Loss from Discontinued Operations $ (70)
=========
For the Nine Months Ended
March 31,
2003
---------
Management and other fees - related
medical practices - net $1,148
---------
Costs and Expenses:
Costs related to management and
other fees - related medical practices 1,226
Amortization of management agreement 215
Interest expense 2
---------
Total Costs and Expenses 1,443
---------
Loss from Discontinued Operations $ (295)
=========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENTS
Amendment to Outstanding Warrants
Subsequent to the end of the third quarter, on April 28, 2004, the Company
entered into agreements with The Tail Wind Fund Ltd., amending the outstanding
Callable Warrant and Purchase Warrant previously issued by the Company to The
Tail Wind Fund Ltd.
The Callable Warrant was issued on August 30, 2002 by the Company covering
2,000,000 shares of common stock. Under the terms of the Callable Warrant, the
exercise price was variable, and was to be equal to the average closing bid
price of the Company's common stock for the full calendar month preceding the
date of exercise subject to a maximum exercise price of $6.00 per share and a
minimum exercise price of $2.00 per share, subject to adjustment.
The Purchase Warrant was issued on May 24, 2001 by the Company covering 659,501
shares of the Company's common stock at an exercise price of $1.801 per share,
subject to adjustment.
Both the Callable Warrant and the Purchase Warrant contained anti-dilution
provisions, which provided for proportionate adjustments of the exercise price
and number of underlying shares in the event of stock splits, stock dividends or
reverse stock splits and sales of the Company's common stock below the warrant
exercise price.
On April 28, 2004, The Tail Wind Fund Ltd. and the Company amended the terms of
the Callable Warrant and Purchase Warrant to resolve adjustments resulting from
the anti-dilution provisions. The number of shares of stock remaining under the
Callable Warrant were agreed to be 3,000,000, exercisable at a price of $1.00
per share provided The Tail Wind Fund Ltd. immediately exercised the Callable
Warrant in full. The Tail Wind Fund Ltd. has exercised the Callable Warrant in
full, purchasing 3,000,000 shares for $3,000,000.
The number of shares underlying the Purchase Warrant was agreed to be increased
to 1,000,000 shares of common stock at an exercise price of $0.79 per share.
Although the exercise price was reduced in accordance the terms of the Purchase
Warrant, The Tail Wind Fund Ltd. agreed to accept an adjustment representing a
lesser number of shares to which it would have been entitled if the formula
contained in the original terms of the Purchase Warrant were strictly followed,
in consideration, among other things, for the term of the Purchase Warrant being
extended three years, to May 24, 2009.
Common Stock
During the period from April 1, 2004 through April 30, 2004:
a) The Company issued 222,652 shares of common stock to employees as
compensation of $303,087.
b) The Company issued 28,800 shares of common stock to consultants and others
at a value of $38,592.
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the fiscal quarter ended March 31, 2004 (third quarter of fiscal 2004),
we reported a net loss of $1.5 million on revenues of $19.4 million as compared
to a net loss of $6.3 million on revenues of $9.8 million for the third quarter
of fiscal 2003. This represented a decline in our net loss of 76% and an
improvement of 98% in our revenues.
For the nine month period ended March 31, 2004, we reported a net loss of
$8.0 million on revenues of $50.5 million as compared to a net loss of $12.0
million ($11.7 million from continuing operations) on revenues of $39.0 million
for the nine month period ended March 31, 2003. This represented a decline in
our net loss of 33.3% and an improvement of 29.6% in our revenues.
Discontinued Operations
The financial information presented for the nine months ended March 31,
2003 reflects certain operations that were discontinued. On April 8, 2003, HMCA
sold its wholly-owned subsidiary A&A Services, Inc. ("A&A Services"), a
physician practice management services organization which managed four primary
care practices located in Queens County, New York. Consequently, the result of
operations for these discontinued operations are no longer reflected in the
operating results for the nine month period ended March 31, 2003 although they
are reflected in the net loss of $12.0 million for the period. The net loss from
continuing operations for the first nine months of fiscal 2004 was $8.0 million.
There were no results of operations from discontinued operations in fiscal 2004.
Forward Looking Statements
Certain statements made in this Quarterly Report on Form 10-Q are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the expansion of
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statement included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
Results of Operations
The Company operates in two industry segments: the manufacture and
servicing of medical (MRI) equipment, the Company's traditional business which
is conducted directly by Fonar, and in physician and diagnostic management
services, which is conducted through Fonar's wholly-owned subsidiary, Health
Management Corporation of America ("HMCA").
Trends continuing in the third quarter and first nine months of fiscal 2004
include an increase in product sales with an increasing emphasis on unrelated
party sales revenues compared to related parties (entities in which Dr. Damadian
or members of his family have an interest) revenues and the maintenance of high
gross profit margins on product sales: 38.4% for the first nine months of fiscal
2004 compared to 34.9% for the first nine months of fiscal 2003 and 36.9% for
the third quarter of fiscal 2004 compared to 34.6% for the third quarter of
fiscal 2003. We attribute these trends to the continuing growth of our MRI
product sales, particularly our Stand-Up(TM) MRI scanners and the increased
efficiencies resulting from our higher sales volumes.
For the three month period ended March 31, 2004, as compared to the three
month period ended March 31, 2003, overall revenues from MRI product sales
increased 273.2% ($12.2 million compared to $3.3 million). Unrelated party
scanner sales ($11.2 million compared to $2.5 million) increased at an even
greater rate of 345.7% while related party scanner sales ($746,000 compared to
$959,000) increased by 28.6%. Overall, for the third quarter of fiscal 2004,
revenues for the medical equipment segment increased by 206.3% to $13.6 million
from $4.4 million for the third quarter of fiscal 2003.
For the nine month period ended March 31, 2004, as compared to the nine
month period ended March 31, 2003, overall revenues from MRI product sales
increased 60.2% ($28.8 million as compared to $18.0 million). Unrelated party
product sales ($24.7 million compared to $11.3 million) increased 119.3% while
related party product sales ($4.1 million compared to $6.7 million) decreased
38.6%. Overall, revenues for the medical equipment segment increased by 51.6% to
$33.0 million for the first nine months of fiscal 2004 as compared to $21.8
million for the first nine months of fiscal 2003.
The increase in product sales reflected continuing market acceptance of the
Company's Stand-Up(TM) MRI scanners. During the first nine months of fiscal
2004, revenues of approximately $28.6 million were recognized from sales of
Stand-Up(TM) MRI scanners. During the first nine months of fiscal 2003, the
Company recognized revenues of approximately $17.3 million from the sale of
Stand-Up(TM) MRI scanners and $100,000 from the sale of a refurbished Beta MRI
Scanner. During the third quarter of fiscal 2004, we recognized $12.1 million
from sales of Stand-Up(TM) MRI scanners as compared to $3.1 million from sales
of Stand-Up(TM) MRI scanners during the third quarter of fiscal 2003.
There were approximately $615,000 in foreign sales revenues for the first
nine months of fiscal 2004 as compared to approximately $1.0 million in foreign
sales revenues for the first nine months in fiscal 2003.
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
scanners 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, although the revenue recognition for product sales for
the first nine months of fiscal 2004 increased 60.2% from the first nine months
of fiscal 2003 ($28.8 million compared to $18.0 million), we received orders for
30 Stand-Up MRI scanners during the first nine months of fiscal 2004 as compared
to orders for 12 Stand-Up MRI scanners during the first nine months of fiscal
2003, representing an increase in orders of 150%.
Service and repair revenues increased by 41.9%, from $596,000 for the third
quarter of fiscal 2003 to $846,000 for the third quarter of fiscal 2004 and by
27.1% from $1.8 million for the first nine months of fiscal 2003 to $2.3 million
the first nine months of fiscal 2004. License fees and royalties remained
constant at $585,000 for the third quarter of fiscal 2003 and third quarter of
fiscal 2004 and decreased by 5.3% from $2.0 million for the first nine months of
fiscal 2003 to $1.9 million for the first nine months of fiscal 2004.
Costs related to product sales increased by 260.2% from $2.1 million in the
third quarter of fiscal 2003 to $7.7 million in the third quarter of 2004 and by
51.7% from $11.7 million in the first nine months of fiscal 2003 to $17.8
million in the first nine months of fiscal 2004, reflecting the increase in
sales revenues, particularly in the comparison of the third quarter of fiscal
2004 and the third quarter of fiscal 2003. Costs related to providing service
increased 24.1% from $845,000 in the third quarter of fiscal 2003 to $1 million
in the third quarter of 2004 and by 19.8% from $2.4 million for the first nine
months of fiscal 2003 to $2.9 million for the first nine months of fiscal 2004.
As a result, we increased our gross profit margin for our medical equipment
segment to 35.9% for the third quarter of fiscal 2004, as compared to 33% for
the third quarter of fiscal 2003 and to 37.3% for the first nine months of
fiscal 2004, as compared to 35% for the first nine months of fiscal 2003.
Our operating loss for our medical equipment segment was $949,000 for the
third quarter of fiscal 2004 as compared to $4.0 million for the third quarter
of fiscal 2003. Our operating loss for our medical equipment business was $7.2
million for the first nine months of fiscal 2004 as compared to $8.7 million for
the first nine months of fiscal 2003.
HMCA revenues increased in the third quarter of fiscal 2004, by 7.6% to
$5.7 million from $5.3 million for the third quarter of fiscal 2003 and in the
first nine months of fiscal 2004 by 1.9% to $17.6 million from $17.3 million for
the first nine months of 2003. This resulted in large measure from our program
of replacing older scanners at the sites we manage with Stand-Up(TM) MRI
scanners. We now manage four sites equipped with Stand-Up(TM) MRI scanners, and
we are planning to open 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 six. During fiscal 2003, HMCA closed two
MRI sites and one physical therapy and rehabilitation facility, although the
resulting decrease in revenues has as of March 31, 2004 been overcome by an
increase in revenues at sites where Stand-Up(TM) MRI scanners have been
installed.
HMCA experienced an operating loss of $457,000 for the third quarter of
fiscal 2004 compared to an operating loss of $1.9 million for the third quarter
of fiscal 2003. For the first nine months of fiscal 2004, HMCA experienced an
operating loss of $429,000 as compared to an operating loss of $2.4 million for
the first nine months of fiscal 2003. In addition losses from HMCA's now
discontinued primary care practice management operations, which are now not
included in the operating losses for fiscal 2003, were $70,000 in the third
quarter of fiscal 2003 and $295,000 for the first nine months of fiscal 2003.
HMCA costs of revenues increased 7.3% from $10.0 million in the first nine
months of fiscal 2003 to $10.8 million in the first nine months of fiscal 2004,
by 7.7% to $3.6 million in the third quarter of fiscal 2004 as compared to $3.3
million in the third quarter of fiscal 2003. HMCA revenues were reduced by the
closing of three facilities in fiscal 2003, although this is being
counterbalanced by increased revenues from four sites which installed new
Stand-Up(TM) MRI scanners. HMCA is planning to install two new Stand-Up(TM) MRI
scanners as well.
As our consolidated revenues increased by 29.6% to $50.5 million for the
first nine months of fiscal 2004 from $39.0 million for the first nine months of
fiscal 2003, the total costs and expenses increased by only 16.1% to $58.2
million for the first nine months of fiscal 2004 from $50.1 million for the
first nine months of fiscal 2004. Changes in costs related to producing revenues
for said nine month periods essentially tracked changes in revenues. Selling
general and administrative expenses increased by 9.4% from $17.2 million in the
first nine months of fiscal 2003 to $18.8 million in the first nine months of
fiscal 2004. The increase was attributable primarily to increases in salaries,
commissions and benefits to our internal sales force ($632,000 increase),
commissions to independent sales representatives ($364,000 increase), payments
to consultants ($249,000 increase), participation in trade shows ($163,000
increase) and royalties under a patent license with a foreign patent holding
company ($166,000 increase). These increases were in part offset by a decrease
in advertising expenses ($427,000 decrease). The rate of increase further
declined in the third quarter as selling, general and administrative expenses
increased by only 8.2% from $5.5 million in the third quarter of fiscal 2003 to
$6.0 million in the third quarter of fiscal 2004.
The compensatory element of stock issuances decreased by 21.3% from $4.1
million in the first nine months of fiscal 2003 to $3.3 million in the first
nine months of fiscal 2004. This expense decreased even more significantly by
60.5% from $2.3 million in the third quarter of fiscal 2003 to $919,000 in the
third quarter of fiscal 2004.
This reflected a lesser use of Fonar's stock in lieu of cash to pay
employees, consultants and professionals for services.
In addition, research and development expenses increased by 4.9% to $4.1
million for the first nine months of fiscal 2004 as compared to $3.9 million for
the first nine months of fiscal 2003 and by 6.1% to $1.35 million for the third
quarter of fiscal 2004 from $1.27 for the third quarter of fiscal 2003.
Interest expense of $211,000 in the first nine months of fiscal 2004,
however, decreased by 56.1% from $481,000 for the first nine months of fiscal
2003 due to the repayment of indebtedness and by 25.6% to $87,000 in third
quarter of fiscal 2004 as compared to $117,000 in the third quarter of fiscal
2003.
Inventories increased by 76.6% to $8.9 million at March 31, 2004 as
compared to $5.1 million at June 30, 2003 as the Company's new purchases of
parts in the manufacturing of scanners exceeded utilization in contemplation of
filling our backlog of orders.
Accounts receivable increased by 28.4% to $16.8 million at March 31, 2004
from $13.1 million at June 30, 2003, primarily due to increased receivables from
HMCA's physician and diagnostic management business and accounts receivable from
service contracts on MRI scanners.
As a result the Company's operating and net losses were $7.6 million and
$8.0 million, respectively, for the first nine months of fiscal 2004 as compared
to $11.1 million and $12.0 million, respectively, for the first nine months of
fiscal 2003. Operating and net losses for the third quarter of fiscal 2004
improved even more significantly, at $1.4 million and $1.5 million respectively
as compared to $5.9 million and $6.3 million, respectively, for the third
quarter of fiscal 2003.
The overall trends reflected in the results of operations for the first
nine months of fiscal 2004 are the increase in revenues from product sales, as
compared to the first nine months of fiscal 2003 ($28.8 million for the first
nine months of fiscal 2004 as compared to $18.0 million for the first nine
months of fiscal 2003), and the increase in MRI equipment segment revenues
relative to HMCA revenues ($33.0 million or 65% from the MRI equipment segment
as compared to $17.6 million or 35% from HMCA, for the first nine months of
fiscal 2004, as compared to $21.8 million or 56% from the MRI equipment segment
and $17.3 million or 44%, from HMCA, for the first nine months of fiscal 2003).
In addition, we experienced an increase in unrelated party sales relative to
related party sales in our medical equipment product sales ($24.7 million or 86%
to unrelated parties and $4.1 million or 14% to related parties for the first
nine months of fiscal 2004 as compared to $11.3 million, or 63% to unrelated
parties and $6.7 million or 37% to related parties for the first nine months of
fiscal 2003). The absolute decline (39%) as well as the significant relative
decline in related party scanner sales revenues over the respective nine month
periods was attributable in part to the bankruptcy of the related parties'
primary financing source, (although the related parties have obtained and are in
the process of obtaining new financing sources), but the relative decline in
related party sales is also a result of the increasing penetration of the
marketplace by our Stand-Up(TM) MRI scanners. During the third quarter of fiscal
2004, related party sales increased, however, by 29% to $959,000 as compared to
$746,000 for fiscal 2003.
We believe that the existing trends in both our medical equipment division
and in the upgrading and streamlining of HMCA's operations, absent unforeseen
circumstances, should result in improved operating results. Factors beyond our
control, such as the timing and rate of market growth which depend on economic
conditions, make it impossible, however, to forecast when or if Fonar will
become profitable, but we believe we are pursuing the correct policies to bring
us to the point where we should be profitable and that those policies should
prove successful in moving the Company in that direction.
The Company's Stand-Up(TM), and Fonar-360(TM) MRI scanners, together with
the Company's works-in-progress, are intended to significantly improve the
Company's competitive position.
The Company's Stand-Up(TM) scanner, which operates at 6000 gauss (.6 Tesla)
field strength, allows patients to be scanned while standing or reclining. As a
result, for the first time, MRI is able to be used to show abnormalities and
injuries under full weight-bearing conditions, particularly the spine and
joints. A floor-recessed elevator brings the patient to the height appropriate
for the targeted image region. A custom-built adjustable bed will allow patients
to sit or lie on their backs, sides or stomachs at any angle.
Full-range-of-motion studies of the joints in virtually any direction will be
possible, an especially promising feature for sports injuries.
The Stand-Up(TM) will also be useful for MRI directed neuro-surgical
procedures as the surgeon would have unhindered access to the patient's head
when the patient is supine with no restrictions in the vertical direction. This
easy-entry, mid-field-strength scanner should be ideal for trauma centers where
a quick MRI-screening within the first critical hour of treatment will greatly
improve patients' chances for survival and optimize the extent of recovery.
The Fonar 360(TM) is an enlarged room sized magnet in which the floor,
ceiling and walls of the scan room are part of the magnet frame. This is made
possible by Fonar's patented Iron-Frame(TM) technology which allows the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Consequently, this scanner allows 360 degree access to the
patient and physicians and family members are able to enter the scanner and
approach the patient.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is
sometimes referred to as the Open Sky(TM) MRI. In its Open Sky(TM) version, the
Fonar 360(TM) serves as an open patient friendly scanner which allows 360 degree
access to the patient on the scanner bed. To optimize the patient-friendly
character of the Open Sky(TM) MRI, the walls, floor, ceiling and magnet poles
are decorated with landscape murals. The patient gap is twenty inches and the
magnetic field strength, like that of FONAR's Stand-Up(TM) and QUAD(TM) MRI
scanner, is 0.6 Tesla.
In the future, we may also develop the Fonar 360(TM) to function as an
operating room. We sometimes refer to this contemplated version of the Fonar
360(TM) as the OR-360(TM). In its OR-360(TM) version, which is in the planning
stages, the enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360(TM) would permit full-fledged surgical teams to walk into the
magnet and perform surgery on the patient inside the magnet. Most importantly
the exceptional quality of the MRI image and its capacity to exhibit tissue
detail on the image, can then be obtained real time during surgery to guide the
surgeon in the surgery. Thus surgical instruments, needles, catheters,
endoscopes and the like could be introduced directly into the human body and
guided to the malignant lesion by means of the MRI image. The number of
inoperable lesions should be greatly reduced by the availability of this new
capability. Most importantly treatment can be carried directly to the target
tissue. The interventional OR-360(TM) version of the Fonar 360(TM) is still in
the planning stages. There is not a prototype. A full range of MRI compatible
surgical instruments using ceramic cutting tools and beryllium-copper materials
are commercial available.
The Company's works in progress include an in-office weight bearing
extremities scanner which will be able to be used to examine the knee, foot,
elbow, hand, wrist and shoulder. This scanner will allow scans to be performed
under both weight- bearing and non-weight-bearing conditions.
The Company expects marked demand for its most commanding MRI products, the
Stand- Up(TM) and the Fonar 360(TM), first for their exceptional features in
patient diagnosis and treatment. These scanners additionally provide improved
image quality and higher imaging speed because of their higher field strength of
..6 Tesla.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities increased from $15.2
million at June 30, 2003 to $18.4 million at March 31, 2004. Principal uses of
cash during the first nine months of fiscal 2004 included purchases of
marketable securities of $5.5 million, capital expenditures of $793,000,
repayment of indebtedness and capital lease obligations in the amount of
$830,000, capitalized software development costs of $403,000, capitalized patent
and copyright costs of $429,000 and purchases of inventory of $3.9 million.
Marketable securities approximated $11.3 million as at March 31, 2004, as
compared to $5.8 million at June 30, 2003. At March 31, 2004, our investments in
U.S. Government obligations were $4.1 million, our investments in corporate and
government agency bonds were $5.4 million and our investments in certificates of
deposit and deposit notes were $1.8 million. The increase in marketable
securities resulted from the decision of the Company to reinvest a portion of
cash and cash equivalents. The investments made have had the intended effect of
maintaining a stable investment portfolio.
Cash provided by operating activities for the first nine months of fiscal
2004 approximated $5.5 million. Cash provided by operating activities was
attributable primarily to customer advances of $4.2 million and stock issued for
compensation, costs and expenses of $11.9 million, offset primarily by the net
loss of $8.0 million, billings in excess of costs and estimated earnings on
uncompleted contracts of $2.3 million and inventory purchases of $3.9 million.
Cash used in investing activities for the first nine months of fiscal 2004
approximated $7.0 million. The principal uses of cash from investing activities
during the first nine months of fiscal 2004 consisted of purchases of marketable
securities of $5.5 million, expenditures for property and equipment of
approximately $793,000 and capitalized software and patent costs of
approximately $832,000.
Cash used by financing activities for the first nine months of fiscal 2004
approximated $790,000. The principal uses of cash in financing activities during
the first nine months of fiscal 2004 consisted of repayment of principal on
long-term debt and capital lease obligations of approximately $830,000 and
distributions to holders of minority interests of $679,000. The source of cash
from financing activities was net proceeds from exercises of stock options and
warrants of $719,000. In addition, we borrowed $5.5 million but this was offset
by establishing a restricted cash collateral account for the debt of $5.5
million.
Total liabilities increased by 29.5% to $33.7 million at March 31, 2004
from $26.0 million at June 30, 2003.
The Company's obligations and the periods in which they are scheduled to
become due are set forth in the following table:
(000's OMITTED)
Due in
Less Due Due Due
than 1 in 1-3 in 4-5 after 5
Obligation Total year years years years
-------------- ----------- ---------- ---------- ---------- ----------
Long-term debt $ 6,252 $ 5,699 $ 450 $ 103 $ --
Capital lease
Obligation 603 369 139 90 5
Operating
Leases 10,367 3,000 4,300 2,950 117
----------- ---------- ---------- ---------- ----------
Total cash
Obligations $ 17,222 $ 9,068 $ 4,889 $ 3,143 $ 122
=========== ========== ========== ========== ==========
We experienced an increase in the current portion of long term debt ($1.0
million at June 30, 2003 to $6.1 million at March 31, 2004, a decrease in the
long-term portion of deferred revenue from license fees from $2.3 million to
$585,000, a decrease in excess of costs and estimated earnings on uncompleted
contracts from $4.8 million at June 30, 2003 to $2.5 million at March 31, 2004 a
decrease in long-term debt from $908,000 at June 30, 2003 to $787,000 at March
31, 2004 and an increase in accounts payable from $3.7 million at June 30, 2003
to $4.9 million at March 31, 2004. Those decreases were offset, however, by an
increase in customer advances from $4.9 million at June 30, 2003 to $9.2 million
at March 31, 2004 and by an increase in other current liabilities from $7.6
million at June 30, 2003 to $8.7 million at March 31, 2004.
As of March 31, 2004, these obligations of approximately $8.7 million in
other current liabilities included deferred revenue from license fees of $2.3
million, unearned revenue on service contracts of $1.8 million, accrued salaries
and payroll taxes of $1.4 million and excise sales taxes of $2.0 million.
Our working capital approximated $20.5 million as of March 31, 2004, as
compared to working capital of $13.1 million as of June 30, 2003, increasing by
57.4%. This results principally from an increase in cash and marketable
securities of $3.2 million ($15.2 million at June 30, 2003 as compared to $18.4
million at March 31, 2004) and an increase ($5.1 million at June 30, 2003 as
compared to $8.9 million at March 31, 2004) in inventories for purchases of
parts in the manufacturing of scanners and increases in prepaid expenses and
other current assets ($1.3 million at June 30, 2003 as compared to $1.7 million
at March 31, 2004), as a result of advances made to suppliers. Accounts
receivable increased from $13.1 million as at June 30, 2003 to $16.8 million as
at March 31, 2004 due to increased receivables from HMCA's physician and
diagnostic management business and accounts receivable from service contracts on
MRI scanners.
With respect to current liabilities, the current portion of long-term debt
increased from $1.0 million at June 30, 2003 to $6.1 million at March 31, 2004
as a result of the borrowing of $5.5 million, and billings in excess of costs
and estimated earnings on uncompleted contracts decreased from $4.7 million at
June 30, 2003 to $2.5 million at March 31, 2004. Customer advances increased
from $4.9 million at June 30, 2003 to $9.2 million at March 31, 2004 and
accounts payable increased from $3.7 million at June 30, 2003 to $4.9 million at
March 31, 2004.
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 nine months of fiscal 2004,
the compensatory element of stock issuances was $3.3 million as compared to $4.1
million for the first nine months of fiscal 2003. Utilization of equity in lieu
of cash compensation has improved our liquidity since it increases cash
available for other expenditures.
The foregoing trends in Fonar's capital resources are expected to improve
as Fonar's MRI scanner products gain wider market acceptance and produce
increased product sales.
Fonar has not committed to making additional capital expenditures in the
2004 fiscal year other than its intention to continue research and development
expenditures at current levels. HMCA also expects to incur expenditures of
approximately $750,000 to acquire premises and to construct and furnish two new
Stand-Up(TM) MRI facilities, which would bring the total number of Stand-Up(TM)
MRI facilities managed by HMCA to six. In January, 2004, Fonar assumed a capital
lease obligation for approximately $130,000 for the purchase of a new telephone
system.
Our business plan currently includes an aggressive program for
manufacturing and selling our new line of Open MRI scanners. In addition, we are
enhancing our revenue by participating into the physician and diagnostic
management services business through our subsidiary, HMCA.
HMCA is in the process of upgrading the MRI facilities which it manages,
most significantly by the replacement of existing MRI scanners with new
Stand-Up(TM) MRI scanners. To date, Stand-Up(TM) MRI scanners have been
installed at four MRI facilities managed by HMCA and two Stand-Up(TM) MRI
scanners are planned to be installed at new MRI facilities which will be managed
by HMCA.
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
March 31, 2004.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
Year of in Fixed Rate Weighted Average
Maturity Instruments Interest Rate
-------- ------------- -------------
3/31/05 $8,600,446 2.15%
3/31/06 950,000 3.57%
3/31/07 300,000 4.58%
3/31/08 450,000 3.48%
3/31/09 750,000 2.96%
3/31/11 100,000 3.52%
3/31/14 100,000 4.07%
Total: $11,250,446
===========
Fair Value
at 3/31/04 $11,298,244
===========
All of our revenue, expense and capital purchasing activities are
transacted in United States dollars.
See Note 12 to the consolidated Financial Statements in our Form 10-K as of
and for the year ended June 30, 2003 for information on long-term debt.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this report, the
principal executive and acting principal financial officer of the Company
concluded that disclosure controls and procedures were adequate.
(b) Change in internal controls. The Company made no significant changes in its
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the
principal executive and acting principal financial officer.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: There were no material changes in litigation for the
first nine months of fiscal 2004.
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:
8-K (earnings press release) filed on February 12, 2004
Exhibit 31.1 Certification See Exhibits
Exhibit 32.1 Certification See Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FONAR CORPORATION
(Registrant)
By: /s/ Raymond V. Damadian
Raymond V. Damadian
President & Chairman
Dated: May 17, 2004