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 DECEMBER 31, 2005
----------------------------
[ ] 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
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FONAR CORPORATION
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (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 January 31, 2006
-------------------------------- ---------------------------------------
Common Stock, par value $.0001 111,313,780
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 - December 31, 2005
(Unaudited) and June 30, 2005 3
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 2005 and
December 31, 2004 (Unaudited) 6
Condensed Consolidated Statements of Operations for
the Six Months Ended December 31, 2005 and
December 31, 2004 (Unaudited) 7
Condensed Consolidated Statements of Comprehensive
(Loss) Income for the Three Months Ended
December 31, 2005 and December 31, 2004 (Unaudited) 8
Condensed Consolidated Statements of Comprehensive
(Loss) Income for the Six Months Ended
December 31, 2005 and December 31, 2004 (Unaudited) 9
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 2005 and
December 31, 2004 (Unaudited) 10
Notes to Condensed Consolidated Financial Statements (Unaudited) 12
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 December 31, June 30,
2005 2005
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $ 8,349 $ 5,517
Marketable securities 6,580 9,411
Accounts receivable - net 4,238 1,971
Accounts receivable - related parties - net 495 470
Medical receivables 7,587 9,990
Management fee receivable - 894
Management fee receivable - related medical
practices - net 7,915 7,826
Costs and estimated earnings in excess
of billings on uncompleted contracts 5,091 10,538
Inventories 8,173 9,838
Investment in sales-type lease 369 174
Current portion of advances and notes to related
medical practices 124 149
Current portion of note receivable less discount
for below market interest 205 -
Prepaid expenses and other current assets 1,907 1,785
------ ------
Total Current Assets 51,033 58,563
------ ------
Property and equipment - net 6,920 7,594
Advances and notes to related medical practices - net 172 201
Investment in sales-type lease - 279
Notes receivable less discount for below market interest 6,023 553
Management agreements - net - 3,992
Other intangible assets - net 4,728 4,503
Other assets 380 409
-------- --------
Total Assets $ 69,256 $ 76,094
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2005
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of long-term debt and
capital leases $ 445 $ 425
Accounts payable 5,925 8,468
Other current liabilities 6,524 7,474
Unearned revenue on service contracts 5,045 3,305
Unearned revenue on service contracts - related parties 510 526
Customer advances 2,258 1,633
Customer advances - related party 42 42
Income taxes payable - 11
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,108 301
Billings in excess of costs and estimated
earnings on uncompleted contracts - related parties 663 153
------ ------
Total Current Liabilities 22,520 22,338
Long-Term Liabilities:
Due to related medical practices 93 128
Long-term debt and capital leases,
less current portion 1,268 966
Other liabilities 248 270
------ ------
Total Long-Term Liabilities 1,609 1,364
------ ------
Total Liabilities 24,129 23,702
------ ------
Minority interest 668 523
------ ------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, except share data)
December 31, 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 December 31, 2005 and June 30, 2005 1 1
Common Stock $.0001 par value; 150,000,000 and 130,000,000
shares authorized at December 31, 2005 and June 30, 2005,
respectively; 111,439,129 issued at December 31, 2005
and 105,043,014 at June 30, 2005; 111,148,065 outstanding at
December 31, 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 December 31, 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 December 31, 2005 and June 30, 2005 1 1
Paid-in capital in excess of par value 166,472 159,929
Accumulated other comprehensive loss ( 329) ( 182)
Accumulated deficit (120,044) (106,369)
Notes receivable from employee stockholders ( 760) ( 846)
Unearned compensation ( 218) -
Treasury stock, at cost - 291,064 shares of common stock
at December 31, 2005 and June 30, 2005 ( 675) ( 675)
------- -------
Total Stockholders' Equity 44,459 51,869
------- -------
Total Liabilities and Stockholders' Equity $ 69,256 $ 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
DECEMBER 31,
---------------------
2005 2004
REVENUES -------- --------
Product sales - net $ 1,829 $18,938
Product sales - related parties - net 2,337 2,571
Service and repair fees - net 1,854 1,216
Service and repair fees - related parties - net 250 228
Management and other fees - related medical
practices - net 3,044 5,961
License fees and royalties 1,227 585
-------- --------
Total Revenues - Net 10,541 29,499
-------- --------
COSTS AND EXPENSES
Costs related to product sales 1,754 12,119
Costs related to product sales - related parties 1,837 1,448
Costs related to service and repair fees 1,201 1,102
Costs related to service and repair
fees - related parties 161 193
Costs related to management and other
fees - related medical practices 2,387 3,757
Research and development 1,725 1,448
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $ 545 and $ 923 for the three months
ended December 31, 2005 and 2004, respectively 6,995 8,000
Provision for bad debts 25 50
Amortization of management agreements - 159
-------- --------
Total Costs and Expenses 16,085 28,276
-------- --------
(Loss) Income From Operations ( 5,544) 1,223
Interest Expense ( 90) ( 67)
Investment Income 238 154
Interest Income - Related Parties 2 6
Other Income 321 67
Minority Interest in Income of Partnerships ( 285) ( 220)
------ -------
(Loss) Income Before Provision for Income Taxes ( 5,358) 1,163
Provision for Income Taxes - 22
------- -------
NET (LOSS) INCOME $( 5,358) $ 1,141
======= =======
Net (Loss) Income Available to Common Stockholders $( 5,358) $ 1,060
------- -------
Basic (Loss) Earnings Per Common Share $ ( .05) $ .01
======== ========
Diluted (Loss) Earnings Per Common Share $ ( .05) $ .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 OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2005 2004
REVENUES -------- --------
Product sales - net $ 5,840 $36,282
Product sales - related parties - net 2,517 2,878
Service and repair fees - net 3,538 2,112
Service and repair fees - related parties - net 491 373
Management and other fees - net 648 -
Management and other fees - related medical
practices - net 6,433 11,752
License fees and royalties 1,227 1,170
-------- --------
Total Revenues - Net 20,694 54,567
-------- --------
COSTS AND EXPENSES
Costs related to product sales 5,507 23,039
Costs related to product sales - related parties 1,994 1,614
Costs related to service and repair fees 2,431 2,054
Costs related to service and repair
fees - related parties 337 355
Costs related to management and other fees 528 -
Costs related to management and other
fees - related medical practices 4,673 7,254
Research and development 3,565 2,822
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $ 1,069 and $ 1,704 for the six months
ended December 31, 2005 and 2004, respectively 13,550 14,881
Provision for bad debts 50 100
Amortization of management agreements 37 317
Termination costs paid with common stock 1,600 -
-------- --------
Total Costs and Expenses 34,272 52,436
-------- --------
(Loss) Income From Operations (13,578) 2,131
Interest Expense ( 164) ( 132)
Investment Income 410 260
Interest Income - Related Parties 6 13
Other Income 218 143
Minority Interest in Income of Partnerships ( 567) ( 446)
------ -------
(Loss) Income Before Provision for Income Taxes (13,675) 1,969
Provision for Income Taxes - 42
------ -------
NET (LOSS) INCOME $(13,675) $ 1,927
======= ========
Net (Loss) Income Available to Common Stockholders $(13,675) $ 1,789
------- --------
Basic (Loss) Earnings Per Common Share $ ( .13) $ .02
======== ========
Diluted (Loss) Earnings Per Common Share $ ( .13) $ .02
======== ========
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
DECEMBER 31,
-----------------
2005 2004
------ ------
Net (loss) income $(5,358) $ 1,141
Other comprehensive loss, net of tax:
Unrealized losses on securities,
net of tax ( 127) ( 32)
------- -------
Total comprehensive (loss) income $(5,485) $ 1,109
======= =======
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 SIX MONTHS
ENDED
DECEMBER 31,
-----------------
2005 2004
------ ------
Net (loss) income $(13,675) $ 1,927
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on securities,
net of tax ( 147) 9
------ ------
Total comprehensive (loss) income $(13,822) $ 1,936
====== ======
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 SIX MONTHS
ENDED
DECEMBER 31,
-----------------
2005 2004
------ ------
Cash Flows from Operating Activities:
Net (loss) income $(13,675) $ 1,927
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Minority interest in income of partnerships 567 446
Depreciation and amortization 1,659 1,972
Provision for bad debts 50 100
Compensatory element of stock issuances 1,069 1,704
Stock issued for costs and expenses 2,891 2,173
Termination costs paid with common stock 1,600 -
Amortization of unearned compensation 182 -
Reduction in notes receivable from employee
stockholders adjusted to compensation 88 126
Gain on sale of equipment ( 3) ( 28)
Amortization of unearned license fee - ( 1,170)
Loss from sale of physical medicine
management business 144 -
(Increase) decrease in operating assets, net:
Accounts and management fee receivable ( 522) ( 2,041)
Notes receivable ( 28) -
Costs and estimated earnings in excess of
billings on uncompleted contracts 5,447 ( 723)
Inventories 1,664 ( 380)
Principal payments received on sales type lease 84 74
Prepaid expenses and other current assets ( 122) ( 576)
Other assets 26 ( 5)
Advances and notes to related medical practices 54 130
Increase (decrease) in operating liabilities, net:
Accounts payable ( 2,544) 235
Other current liabilities 853 2,309
Customer advances 626 ( 4,755)
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,316 195
Other liabilities ( 23) ( 10)
Due to related medical practices ( 35) -
Income taxes payable ( 11) ( 2)
------ ------
Net cash provided by operating activities 1,357 1,701
------ ------
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 SIX MONTHS
ENDED
DECEMBER 31,
-----------------
2005 2004
------ ------
Cash Flows from Investing Activities:
Purchases of marketable securities - ( 9,269)
Sales of marketable securities 2,684 8,273
Purchases of property and equipment ( 1,010) ( 1,165)
Costs of capitalized software development ( 373) ( 396)
Cost of patents and copyrights ( 195) ( 195)
Proceeds from sale of equipment 97 31
------ ------
Net cash provided by (used in) investing activities 1,203 ( 2,721)
------ ------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 421) ( 382)
Proceeds from long-term debt 391 -
Repayment of long-term and capital
leases ( 202) ( 242)
Proceeds from exercise of stock options
and warrants 500 224
Collection of notes receivable from employee
stockholders 4 29
------ ------
Net cash provided by (used in) financing activities 272 ( 371)
------ ------
Net Increase(Decrease)in Cash and Cash Equivalents 2,832 ( 1,391)
Cash and Cash Equivalents - Beginning of Period 5,517 9,474
------ ------
Cash and Cash Equivalents - End of Period $ 8,349 $ 8,083
====== ======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 six months ended December 31, 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, its majority and wholly-owned subsidiaries and partnerships
(collectively the "Company"). 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 six months ended December 31,
2005 because the participating securities do not have a contractual obligation
to share in the losses of the Company. For the six months ended December 31,
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 7,025,000 because they are
antidilutive as a result of a net loss for the six months ended December 31,
2005. For the six months ended December 31, 2004, the number of common shares
potentially issuable upon the exercise of certain options of 689,000 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
DECEMBER 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
-------------------------
Three Months Three Months
ended December 31, ended December 31,
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 $(5,358) $1,060 $1,034 $ 26
=================== ======== ======== ========
Denominator:
Weighted average shares
outstanding 110,275 100,822 9,563
=================== ======== ======== ========
Basic (loss) income
per common share$ (.05) $ .01 $ .01 $ __
=================== ======== ======== ========
Diluted
Weighted average
shares outstanding 110,275 100,822 100,822
Stock options -- 311 311
Warrants -- 523 523
Convertible Class C
common stock -- 3,188 3,188
------------------- -------- --------
Denominator for diluted earnings
per share:
Weighted average
shares outstanding
of common stock
and equivalents 110,275 104,844 104,844
=================== ======== ========
Diluted (loss) income
per common share $ (.05) $ .01 $ .01
=================== ======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
-------------------------
Six Months Six Months
ended December 31, ended December 31,
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 $(13,675) $ 1,789 $ 1,746 $ 43
=================== ======== ======== ========
Denominator:
Weighted average
shares outstanding 108,648 99,824 9,563
=================== ======== ========
Basic (loss) income
per common share $ (.13) $ .02 $ .02 $ __
=================== ======== ======== ========
Diluted
Weighted average
shares outstanding 108,648 99,824 99,824
Stock options -- 195 195
Warrants -- 487 487
Convertible Class C
common stock -- 3,188 3,188
------------------- -------- --------
Denominator for diluted earnings
per share:
Weighted average
shares outstanding
of common stock
and equivalents 108,648 103,694 103,694
=================== ======== ========
Diluted (loss) income
per common share $ (.13) $ .02 $ .02
=================== ======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 six months ended December 31, 2005 the Company granted to an
employee 50,000 options to purchase common stock at an exercise price of $1.00.
Accordingly, no additional compensation charge was required because the value
of these options were determined to be diminimus and therefore there was no
impact on the condensed consolidated financial statements 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 did not have a
significant impact on our result of operations, and it will have no impact on
our overall financial position. However, had the Company 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
the Company 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. The Company 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 the Company 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 and six months ended December
31, 2004:
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
For the Three Months For the Six Months
Ended December 31, 2004 Ended December 31, 2004
(000's omitted, except (000's omitted except
per share data) per share data)
------------------------- -----------------------
Net income available to
common shareholders $1,060 $1,789
Less:
Undistributed earnings
allocated to
Class C common stock 26 43
-------- -------
1,034 1,746
Less:
Total stock-based
employee compensation
expense determined
under fair value
based method for all awards 24 52
-------
---------
Pro forma Net Income $1,010 $1,694
======= ======
Basic Net Income Per Share
as Reported $ 0.01 $ 0.02
======= ======
Basic Pro forma Net Income
per Share $ 0.01 $ 0.02
======= ======
Diluted Net Income per share
as reported $ 0.01 $ 0.02
======= ======
Diluted Pro Forma Net Income
per share $ 0.01 $ 0.02
======= ======
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 Six Months
Ended
December 31, 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
DECEMBER 31, 2005
(UNAUDITED)
NOTE 3 - ACCOUNTS RECEIVABLE AND MEDICAL RECEIVABLES
Accounts Receivable
Accounts receivable, net is comprised of the following at December 31, 2005:
(000's Omitted)
Gross Allowance for doubtful
Receivable accounts Net
---------- ---------------------- -----------
Receivables from equipment
sales and service contracts $ 4,736 $ 498 $ 4,238
========== ====================== ===========
Receivables from equipment
sales and service contracts-
related parties $ 1,141 $ 646 $ 495
========== ====================== ===========
Management fee receivables
from related medical
practices ("PC's") $ 9,982 $ 2,067 $ 7,915
========== ====================== ===========
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 48% and 65% of the PC's net revenues for both the six months
ended December 31, 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 P.C's
accounted for approximately 28.9% and 20.2% of the consolidated net revenues
for the three months ended December 31, 2005 and 2004, respectively. Product
sales and service repair fees from related parties amounted to approximately
24.5% and 9.5% of consolidated net revenues for the three months ended December
31, 2005 and 2004, respectively.
Net revenues from management and other fees charged to the related PC's
accounted for approximately 31.1% and 21.5% of the consolidated net revenues
for the six months ended December 31, 2005 and 2004, respectively. Product
sales and service and repair fees from related parties amounted to
approximately 14.5% and 6.0% of consolidated net revenues for the six months
ended December 31, 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 December 31, 2005 was $7,587,000.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 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 $ 4,072
=======
Income from Operations $ 109
=======
Net Loss $ (103)
=======
Summarized income statement data for the six months ended December 31, 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 $ 8,398
=======
Income from Operations $ 111
=======
Net Loss $ (314)
=======
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet
at December 31, 2005 consist of:
(000's omitted)
Purchased parts, components
and supplies $ 5,661
Work-in-process 2,512
-------
$ 8,173
=======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of December
31, 2005 is as
follows:
(000's omitted)
Costs incurred on uncompleted
contracts $ 17,217
Estimated earnings 7,891
--------
25,108
Less: Billings to date 21,788
-------
$ 3,320
========
Included in the accompanying condensed consolidated balance sheet at December
31, 2005 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 5,091
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts 1,108
Billings in excess of costs and estimated
earnings on uncompleted contracts - related
parties 663
--------
$ 3,320
========
2) Customer advances consist of the following as of December 31, 2005:
Related
Total Party Other
-------- -------- -------
Total Advances $ 24,088 $ 3,042 $21,046
Less: Advances
on contracts under construction 21,788 3,000 18,788
--------- -------- -------
$ 2,300 $ 42 $ 2,258
======== ======== =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 6 - LOAN PAYABLE
On November 29, 2005, HMCA purchased a building in Tallahassee, Florida. The
total purchase price, including closing costs was $437,644. The purchase price
was funded by a loan of $500,000 of which $391,974 was used towards the
purchase price. As of December 31, 2005 there was an unused portion of the
loan of $108,026 which is to be used for future construction costs relating to
the building.
The loan requires monthly payments of interest at a rate of 7% until May 29,
2009 followed by payments of $3,908 per month until May 29, 2026. A final
payment of the entire unpaid portion of principal and interest will be due on
May 29, 2026.
NOTE 7 -STOCKHOLDERS' EQUITY
Common Stock
During the three months ended December 31, 2005:
a) The Company issued 272,690 shares of common stock to employees as
compensation valued at $233,082 under stock bonus plans.
b) The Company issued 332,858 shares of common stock to consultants and
others valued at $298,344.
c) The Company issued 583,797 shares of common stock for costs and expenses
of $1,499,628.
d) The Company issued 110,000 shares of common stock upon the exercise of
stock options resulting in proceeds of $100,000.
e) The Company issued 106,886 shares of common stock for termination costs
and collection service's valued at $115,437.
f) The Company issued 110,000 shares of common stock valued at $89,000 in
connection with issuance of notes receivable from
employee stockholders.
Common Stock
During the six months ended December 31, 2005:
a) The Company issued 595,989 shares of common stock to employees as
compensation valued at $602,150 under stock bonus plans.
b) The Company issued 432,455 shares of common stock to consultants and
others valued at $409,494.
c) The Company issued 2,876,181 shares of common stock for costs and
expenses of $2,890,515.
d) The Company issued 510,000 shares of common stock upon the exercise of
stock options resulting in proceeds of $500,000.
e) The Company issued 1,871,490 shares of common stock for termination costs
and collection service valued at $1,995,675.
f) The Company issued 110,000 shares of common stock valued at $89,000 in
connection with issuance of notes receivable from
employee stockholders.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)
NOTE 7 -STOCKHOLDERS' EQUITY (Continued)
Options
During the six months ended December 31, 2005, the Company granted to a
financial consultant 570,000 options to purchase common stock at exercise
prices ranging from $.65 to $1.00 per share. During the six months ended
December 31, 2005 the consultant exercised all of the 570,000 options granted
to him during the six months ended December 31, 2005.
NOTE 8 -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 six months ended December 31,
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 six
months ended December 31, 2005 the Company issued 1,871,490 shares totaling
$1,995,675. The remaining balance under this obligation at December 31, 2005
is $4,325 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 six months ended December 31, 2005,
$181,818 was amortized and the remaining balance of $218,182 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.
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 3,954,389
Security deposits 3,500
----------
Subtotal 6,221,666
------------
Loss on sale of business $ (143,598)
============
NOTE 9 - LICENSE FEES AND ROYALTIES
During the three months ended December 31, 2005, the Company received a fee in
the amount of $1,227,000 from an independent licensee who had not met its
annual sales quota.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(UNAUDITED)
NOTE 10 - 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
Diagnostic
Medical Imaging
Equipment Services Totals
--------- ---------- ---------
For the three months ended December 31, 2005:
Net revenues from external customers $ 7,497 $ 3,044 $ 10,541
Inter-segment net revenues $ 141 $ --- $ 141
Loss from operations $ (4,756) $ (788) $ (5,544)
Depreciation and amortization $ 505 $ 310 $ 815
Compensatory element of stock issuances $ 545 $ --- $ 545
Capital expenditures $ 436 $ 486 $ 922
For the three months ended December 31, 2004:
Net revenues from external customers $ 23,538 $ 5,961 $ 29,499
Inter-segment net revenues $ 107 $ -- $ 107
Income from operations $ 915 $ 308 $ 1,223
Depreciation and amortization $ 603 $ 387 $ 990
Compensatory element of stock issuances $ 496 $ 427 $ 923
Capital expenditures $ 489 $ 510 $ 999
Physician
Management
and
Diagnostic
Medical Imaging
Equipment Services Totals
--------- ---------- ---------
For the six months ended December 31, 2005:
Net revenues from external customers $ 13,613 $ 7,081 $ 20,694
Inter-segment net revenues $ 277 $ -- $ 277
Loss from operations $ (10,556) $ (3,022) $(13,578)
Depreciation and amortization $ 999 $ 660 $ 1,659
Compensatory element of stock issuances $ 756 $ 313 $ 1,069
Termination costs paid with common stock $ -- $ 1,600 $ 1,600
Capital expenditures $ 677 $ 901 $ 1,578
Identifiable assets $ 41,088 $ 28,168 $ 69,256
For the six months ended December 31, 2004:
Net revenues from external customers $ 42,815 $ 11,752 $ 54,567
Inter-segment net revenues $ 243 $ -- $ 243
Income from operations $ 1,536 $ 595 $ 2,131
Depreciation and amortization $ 1,198 $ 774 $ 1,972
Compensatory element of stock issuances $ 781 $ 923 $ 1,704
Capital expenditures $ 989 $ 767 $ 1,756
Identifiable assets - June 30, 2005 $ 46,265 $ 29,829 $ 76,094
NOTE 11 - SUBSEQUENT EVENT
Common Stock
During the period from January 1, 2006 through January 31, 2006:
a) The Company issued 15,000 shares of common stock to employees as
compensation of $12,000 under stock bonus plans.
b) The Company issued 37,000 shares of common stock for costs and
expenses of $28,490.
c) The Company issued 95,715 shares of common stock upon the exercise
of stock options resulting in proceeds of $70,000.
d) The Company issued 18,000 shares of common stock to consultants and
others at a value of $13,860.
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
For the six month period ended December 31, 2005 (first half of fiscal
2006), we reported a net loss of $13.7 million on revenues of $20.7 million as
compared to net income of $1.9 million on revenues of $54.6 million for the
first half of fiscal 2005.
For the fiscal quarter ended December 31, 2005 (second quarter of fiscal
2006), we reported a net loss of $5.4 on revenues of $10.5 as compared to net
income of $1.1 million on revenues of $29.5 million.
Notwithstanding the continued losses, the second quarter of fiscal 2006
represented an improvement in our performance from the first quarter of fiscal
2006, reflecting a decrease in our net loss of 35.6% from $8.3 million to $5.4
million and an increase of 3.8% in our revenues from $10.2 million in the first
quarter to $10.5 million in the second quarter. The losses were primarily due
to increased marketing and advertising pressure from our competitors attempting
to minimize the unique medical benefits of Upright MRI(TM), which companies may
not make Upright MRI(TM) because of Fonar's patents. A national advertising
campaign will commence within the next few weeks to bring the benefits of
weight-bearing MRI, and its necessity in the proper evaluation of back pain, to
the attention of the consumer.
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 second quarter of fiscal 2006 include a decrease in
unrelated party product sales revenues and an increase to related party
revenues. Sales orders for Stand-Up(TM) MRI scanners increased from one in the
first fiscal quarter to five in the second fiscal quarter (two of which were to
related parties). The Company will focus on increased advertising and
marketing efforts to improve sales performance in the second half of fiscal
2006.
For the three month period ended December 31, 2005, as compared to the
three month period ended December 31, 2004, overall revenues from MRI product
sales decreased 80.6% ($4.2 million compared to $21.5 million). Unrelated
party scanner sales ($1.8 million compared to $18.9 million) decreased at a
rate of 90.3% and related party scanner sales ($2.6 million compared to $2.3)
decreased 9.1%. Overall, for the second quarter of fiscal 2006, revenues for
the medical equipment segment decreased by 68% to $7.5 million from $23.5
million for the second quarter of fiscal 2005. The revenues generated by HMCA
also decreased, by 48.9% to $3.0 million for the second quarter of fiscal 2006
as compared to $6.0 million for the second quarter of fiscal 2005. The
decrease in revenues recognized by HMCA resulted primarily from the sale of
HMCA's business of managing physical therapy and rehabilitation centers during
July, 2005.
For the six month period ended December 31, 2005, as compared to the six
month period ended December 31, 2004, overall revenues from MRI product sales
decreased 78.7% ($8.4 million compared to $39.2 million). Unrelated party
scanner sales ($5.8 million compared to $36.3 million) decreased at a rate of
83.9% and related party scanner sales ($2.5 compared to $2.9 million) decreased
12.5%. Overall, for the first half of fiscal 2006, revenues for the medical
equipment segment decreased by 68.2% to $13.6 million from $42.8 million for
the first half of fiscal 2005. The revenues recognized by HMCA also decreased,
by 39.7% to $7.1 million for the first half of fiscal 2006 as compared to $11.8
million for the first half of fiscal 2005. The decrease in revenues recognized
by HMCA resulted primarily from the sale of HMCA's business of managing
physical therapy and rehabilitation centers during July, 2005.
There were approximately $1.5 million in foreign revenues for the first
six months of fiscal 2006 as compared to approximately $3.6 million in foreign
revenues for the first six months of fiscal 2005, representing a decrease in
foreign revenues of 58.3%.
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
six months of fiscal 2006 decreased 78.7% from the first six months of fiscal
2005 ($8.4 million compared to $39.2 million). We received, however, orders
for six Stand-Up(TM) (Upright(TM)) MRI scanners during the first six months of
fiscal 2006 as compared to orders for five Stand-Up(TM) (Upright(TM)) MRI
scanners and one Fonar 360(TM) MRI scanner during the first six 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.
Service and repair revenues increased by 45.7%, from $1.4 million for
the second quarter of fiscal 2005 to $2.1 million for the second quarter of
fiscal 2006. License fees and royalties increased from $585,000 for the second
quarter of fiscal 2005 to $1.2 million for the second quarter of fiscal 2006.
The $1.2 million for the second quarter of fiscal 2006 represents a payment by
an independent licensee which had not met its sales quota. The $585,000 in
2005 represented an amortization of license fees which were fully amortized at
June 30, 2005.
Service and repair revenues increased by 62.1%, from $2.5 million for the
first six months of fiscal 2005 to $4.0 million for the first six months of
fiscal 2006. License fees and royalties remained constant at $1.2 million for
the first six months of fiscal 2005 and the first six months of fiscal 2006.
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 73.5% from $13.6 million in
the second quarter of fiscal 2005 to $3.6 million in the second quarter of
2006, reflecting the corresponding decrease in product sales. Costs related to
providing service increased 5.2% from $1.3 million in the second quarter of
fiscal 2005 to $1.4 million in the first quarter of 2006.
Costs related to product sales decreased by 69.6% from $24.7 million in
the first six months of fiscal 2005 to $7.5 million in the first quarter of
2006, reflecting the corresponding decrease in product sales. Costs related to
providing service increased 14.9% from $2.4 million in the first six months of
fiscal 2005 to $2.8 million in the first six months 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 $10.6
million for the first six months of fiscal 2006 as compared to operating income
of $1.5 million for the first six months of fiscal 2005.
HMCA revenues decreased in the second quarter of fiscal 2006, by 48.9% to
$3.0 million from $6.0 million for the second quarter of fiscal 2005. For the
first six months of fiscal 2006, HMCA revenues decreased by 39.7% to $7.1
million from $11.8 million for the first six months 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 $3.0 million for the first six months of
fiscal 2006 compared to operating income of $595,000 for the first six months
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 second quarter of fiscal 2006 decreased to
$2.4 million as compared to $3.8 million for the second quarter of fiscal 2005,
which is also principally the result of HMCA's sale of its physical therapy and
rehabilitation facility management business. HMCA cost of revenues for the
first six months of fiscal 2006 decreased to $5.2 million as compared to $7.2
million for the first six months of fiscal 2005.
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 was payable 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 64.3% to $10.5 million for the
second quarter of fiscal 2006 from $29.5 million for the second quarter of
fiscal 2005, the total costs and expenses decreased by 43.1% to $16.1 million
for the second quarter of fiscal 2006 from $28.3 million for the second quarter
of fiscal 2005. The decline in revenue was the primary reason we were unable
to achieve profitability in the second quarter of fiscal 2006. For the six
months of fiscal 2006 the consolidated revenues decreased by 62.1% to $20.7
million from $54.6 millions for the six months of fiscal 2005.
Selling, general and administrative expenses decreased by 5.3% from $13.2
million in the first six months of fiscal 2005 to $12.5 million in the first
six months of fiscal 2006. The compensatory element of stock issuances
decreased by 37.3% from $1.7 million in the first six months of fiscal 2005 to
$1.1 million in the first six months of fiscal 2006 which is now included in
selling general and administrative expenses. This primarily reflected a lesser
use of Fonar's stock in lieu of cash to pay employees, consultants and
professionals for services.
Research and development expenses increased by 26.3% to $3.6 million for
the first six months of fiscal 2006 as compared to $2.8 million for the first
six 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 six months of fiscal 2006 increased by
24.3% to $164,000 from $132,000 for the first six months of fiscal 2005.
Inventories decreased by 16.9% to $8.2 million at December 31, 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 51.7% to $5.1 million at December 31, 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 and medical receivables and accounts receivable decreased
by 4.3% to $20.2 million at December 31, 2005 from $21.2 million at June 30,
2005, primarily due to decreased collection from the Company's management fee
and medical receivables and an increase in accounts receivable from the medical
segment.
Our operating and net loss were $13.6 million and $13.7 million,
respectively, for the first six months of fiscal 2006 as compared to operating
and net income of $2.1 million and $1.9 million, respectively, for the first
six months of fiscal 2005.
The overall trends reflected in the results of operations for the first
six months of fiscal 2006 are a decrease in revenues from product sales, as
compared to the first six months of fiscal 2005 ($8.4 million for the first six
months of fiscal 2006 as compared to $39.2 million for the first six months of
fiscal 2005), and a decrease in MRI equipment segment revenues relative to HMCA
revenues ($13.6 million or 66% from the MRI equipment segment as compared to
$7.1 million or 34% from HMCA, for the first six months of fiscal 2006, as
compared to $42.8 million or 78% from the MRI equipment segment and $11.8
million or 22%, from HMCA, for the first six 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 ($5.8 million or 70%
to unrelated parties and $2.5 million or 30% to related parties for the first
six months of fiscal 2006 as compared to $36.3 million, or 93% to unrelated
parties and $2.9 million or 7% to related parties for the first six months of
fiscal 2005).
We are committed to reversing the trends we have experienced in the first
six 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 remained constant at
$14.9 million at June 30, 2005 and at December 31, 2005. Principal uses of
cash during the first six months of fiscal 2006 included capital expenditures
for property and equipment of $1.0 million, repayment of long-term debt and
capital lease obligations in the amount of $202,000, capitalized software
development costs of $373,000 and capitalized patent and copyright costs of
$195,000, and a decrease in accounts payable of $2.5 million.
Marketable securities approximated $6.6 million as at December 31, 2005,
as compared to $9.4 million at June 30, 2005. This reduction represents the
maturation of marketable securities which have not been reinvested and the
proceeds of which are available to fund operations if needed. At December 31,
2005, our investments in U.S. Government obligations were $2.6 million, our
investments in corporate and government agency bonds were $3.0 million and our
investments in certificates of deposit and deposit notes were $776,000. The
investments made have had the intended effect of maintaining a stable
investment portfolio.
Cash provided by operating activities for the first six months of fiscal
2006 approximated $1.4 million. Cash provided by operating activities was
attributable primarily to a decrease in costs and estimated earnings in excess
of billings on uncompleted contracts of $5.4 million, a decrease in inventories
of $1.7 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
$4.0 million which offsets the net loss of $13.7 million.
Cash provided by investing activities for the first six months of fiscal
2006 approximated $1.2 million. The principal source of cash from investing
activities during the first six months of fiscal 2006 consisted of the sale of
marketable securities of $2.7 million, offset by expenditures for property and
equipment of approximately $1.0 million and capitalized software and patent
costs of approximately $568,000.
Cash provided by financing activities for the first six months of fiscal
2006 approximated $272,000. The sources of cash from financing activities were
net proceeds from exercises of stock options and warrants of $500,000. The
principal uses of cash in financing activities during the first six months of
fiscal 2006 consisted of repayment of principal on long-term debt and capital
lease obligations of approximately $202,000 and distributions to holders of
minority interests of $421,000.
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 $ 785 $ 229 $ 164 $ -- $ 392
Capital lease
Obligation 928 216 401 295 16
Operating
Leases 8,728 2,262 4,299 1,194 973
----------- ---------- ---------- ---------- ----------
Total cash
Obligations $ 10,441 $ 2,707 $ 4,864 $ 1,489 $ 1,381
=========== ========== ========== ========== ==========
Total liabilities increased by 1.8% to $24.1 million at December 31, 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 $1.3 million at December 31, 2005, an increase in unearned revenue on
service contracts from $3.8 million to $5.6 million at June 30, 2005 to
December 31, 2005, an increase in billings in excess of costs and estimated
earnings on uncompleted contracts from $454,000 at June 30, 2005 to $1.8
million at December 31, 2005, a decrease in accounts payable from $8.5 million
at June 30, 2005 to $5.9 million at December 31, 2005, an increase in customer
advances from $1.7 million at June 30, 2005 to $2.3 at December 31, 2005 and a
decrease in other current liabilities from $7.5 million at June 30, 2005 to
$6.5 million at December 31, 2005. Long-term debt increased primarily as a
result of a loan to purchase real estate for an MRI facility managed by HMCA.
As of December 31, 2005, the total of $6.5 million in other current
liabilities included primarily accrued salaries and payroll taxes of $1.2
million, accrued royalties of $917,000 and excise and sales taxes of $2.5
million.
Our working capital approximated $28.5 million as of December 31, 2005,
as compared to working capital of $36.2 million as of June 30, 2005, decreasing
by 21.3%. This resulted principally from a decrease in accounts receivable of
$1.0 million ($21.2 million at June 30, 2005 as compared to $20.2 million at
December 31, 2005), an increase of customer advances of $600,000 ($1.7 million
at June 30, 2005 as compared to $2.3 million at December 31, 2005) along with a
decrease of inventories of $1.6 million ($9.8 million at June 30, 2005 as
compared to $8.2 million at December 31, 2005).
With respect to current liabilities, the current portion of long-term
debt increased from $425,000 at June 30, 2005 to $445,000 at December 31, 2005,
and billings in excess of costs and estimated earnings on uncompleted contracts
increased from $454,000 at June 30, 2005 to $1.8 million at December 31, 2005.
Customer advances increased from $1.7 million at June 30, 2005 to $2.3 million
at December 31, 2005 and accounts payable decreased from $8.5 million at June
30, 2005 to $5.9 million at December 31, 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 six months of fiscal 2006, the
compensatory element of stock issuances was $1.1 million as compared to $1.7
million for the first six 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 used 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 recognition and acceptance and produce increased
product sales. The Company is focusing on increased advertising and marketing
to increase demand for its products.
Inventories decreased by $1.6 million ($9.8 million at June 30, 2005 as
compared to $8.2 million at December 31, 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 $450,000 to lease 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 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.
The Company received written notification from The Nasdaq Stock Market
on December 22, 2005 that the bid price of its common stock for the last 30
consecutive trading days had closed below the minimum $1.00 per share required
for continued listing under Nasdaq Marketplace Rule 4310(c)(4) (the "Rule").
Pursuant to Nasdaq Marketplace Rule 4310(c)(8)(D), the Company has been
provided an initial period of 180 calendar days, or until June 20, 2006, to
regain compliance. The notice states the Nasdaq staff (the "Staff") will
provide written notification that the Company has achieved compliance with the
Rule if at any time before June 20, 2006 the bid price of the Company's common
stock closes at $1.00 per share or more for a minimum of 10 consecutive
business days.
If the Company cannot demonstrate compliance with the Rule by June 20,
2006, the Staff will determine whether the Company meets the Nasdaq Capital
Market initial listing criteria as set forth in Marketplace Rule 4310(c),
except for the bid price requirement. If the Company meets the initial listing
criteria, the Staff will notify the Company that it has been granted an
additional 180 calendar days compliance period. FONAR currently complies with
the requirements for initial listing on the The Nasdaq Capital Market, except
for the $1.00 minimum closing bid price. If the Company is not eligible for an
additional compliance period, the Staff will provide written notice that the
Company's securities will be delisted. At that time, the company may appeal the
Staff's determination to delist its securities to a Listing Qualifications
Panel.
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 December 31, 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
-------- ------------- ----------------
12/31/06 $ 1,398,982 3.50%
12/31/07 1,300,000 3.65%
12/31/08 1,150,000 3.49%
12/31/09 2,344,499 3.52%
12/31/10 600,000 3.23%
------------
Total: $ 6,793,481
============
Fair Value
at 12/31/05 $ 6,472,099
============
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 six 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
8-K (earning press release) filed on
November 8, 2005
8-K (notice of failure to maintain bid price
of common stock at $1.00 for 30 days) on
December 23, 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:February 9, 2006