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, 2003
-----------------
[ ] 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 January 31, 2004
- ----------------------------------------- --------------------------------
Common Stock, par value $.0001 93,654,706
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 - December 31, 2003
(Unaudited) and June 30, 2003 3
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 2003 and
December 31, 2002 (Unaudited) 6
Condensed Consolidated Statements of Operations for
the Six Months Ended December 31, 2003 and
December 31, 2002 (Unaudited) 7
Condensed Consolidated Statements of Comprehensive
Loss for the Three Months Ended
December 31, 2003 and December 31, 2002 (Unaudited) 8
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Six Months Ended
December 31, 2003 and December 31, 2002 (Unaudited) 8
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 2003 and
December 31, 2002 (Unaudited) 9
Notes to Condensed Consolidated Financial Statements (Unaudited) 11
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
Page 2
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS December 31, June 30,
2003 2003
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $12,846 $ 9,334
Marketable securities 3,959 5,837
Accounts receivable - net 1,340 717
Accounts receivable - related parties - net 214 114
Accounts receivable - related medical practices - net 12,997 12,261
Costs and estimated earnings in excess
of billings on uncompleted contracts 686 360
Costs and estimated earnings in excess
of billings on uncompleted contracts - related party 731 -
Inventories 7,253 5,057
Investment in sales-type leases with related party - 14
Investment in sales-type lease 144 136
Prepaid expenses and other current assets 2,803 1,286
Note receivable from buyers of A&A Services - 150
------ ------
Total Current Assets 42,973 35,266
------ ------
Property and equipment - net 7,554 8,626
Advances and notes to related parties - net 1,193 1,267
Investment in sales-type lease 532 606
Management agreements - net 9,047 9,364
Other intangible assets - net 3,541 3,375
Other assets 253 245
-------- --------
$ 65,093 $ 58,749
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 3
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2003
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of long-term debt and
capital leases $ 642 $ 1,022
Accounts payable 3,629 3,704
Other current liabilities 8,636 7,552
Unearned revenue on service contracts - related parties 283 240
Customer advances 9,495 4,306
Customer advances - related parties 83 627
Income taxes payable 21 10
Billings in excess of costs and estimated
earnings on uncompleted contracts 953 4,390
Billings in excess of costs and estimated
earnings on uncompleted contracts - related parties 29 361
------ ------
Total Current Liabilities 23,771 22,212
Due to affiliates 262 262
Long-term debt and capital leases,
less current portion 782 908
Deferred revenue - license fee 1,170 2,340
Other non-current liabilities 305 302
------ ------
Total Liabilities 26,290 26,024
------ ------
Minority interest 339 345
------ ------
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 4
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, except share data)
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2003
(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, 2003 and June 30, 2003 1 1
Common Stock $.0001 par value; 110,000,000
shares authorized; 91,658,887 issued at December 31, 2003
and 82,452,958 at June 30, 2003; 91,367,823 outstanding at
December 31, 2003 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 December 31, 2003 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 December 31, 2003 and June 30, 2003 1 1
Paid-in capital in excess of par value 144,301 131,519
Accumulated other comprehensive income 38 69
Accumulated deficit (104,361) (97,889)
Notes receivable from employee stockholders ( 850) ( 654)
Treasury stock, at cost - 291,064 shares of common stock
at December 31, 2003 and June 30, 2003 ( 675) ( 675)
------- -------
Total Stockholders' Equity 38,464 32,380
------- -------
Total Liabilities and Stockholders' Equity $ 65,093 $ 58,749
======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 5
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------
2003 2002
REVENUES -------- --------
Product sales - net $ 8,603 $ 5,933
Product sales - related parties - net 1,941 2,822
Service and repair fees - net 671 594
Service and repair fees - related parties - net 100 101
Management and other fees - related medical
practices - net 5,884 5,773
License fees and royalties 690 732
-------- --------
Total Revenues - Net 17,889 15,955
-------- --------
COSTS AND EXPENSES
Costs related to product sales 5,342 4,105
Costs related to product sales - related parties 1,217 1,697
Costs related to service and repair fees 891 700
Costs related to service and repair
fees - related parties 105 122
Costs related to management and other
fees - related medical practices 3,779 3,258
Research and development 1,383 1,358
Selling, general and administrative 6,301 6,120
Compensatory element of stock issuances for
selling, general and administrative expenses 1,116 1,059
Provision for bad debts 60 114
Amortization of management agreements 158 174
-------- --------
Total Costs and Expenses 20,352 18,707
-------- --------
Loss From Operations ( 2,463) ( 2,752)
Interest Expense ( 63) ( 121)
Investment Income 113 146
Interest Income - Related Parties 10 44
Other Expense ( 10) ( 2)
Minority Interest in Income of Partnerships ( 212) ( 117)
------ -------
Loss Before Provision for Income Taxes ( 2,625) ( 2,802)
Provision for Income Taxes 5 3
------- -------
Net Loss from Continuing Operations ( 2,630) ( 2,805)
Net Loss from Discontinued Operations - ( 116)
------- -------
NET LOSS $( 2,630) $( 2,921)
Basic and Diluted Net Loss per ======== ========
share - continuing operations $(.03) $(.04)
Basic and Diluted Net Loss per
share - discontinued operations - -
------- --------
Basic and Diluted net Loss per share $(.03) $(.04)
======== ========
Weighted Average Number of Shares Outstanding 88,988 73,926
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 6
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2003 2002
REVENUES -------- --------
Product sales - net $13,454 $ 8,733
Product sales - related parties - net 3,169 5,981
Service and repair fees - net 1,247 1,050
Service and repair fees - related parties - net 208 164
Management and other fees - related medical
practices - net 11,838 11,923
License fees and royalties 1,275 1,380
-------- --------
Total Revenues - Net 31,191 29,231
-------- --------
COSTS AND EXPENSES
Costs related to product sales 8,091 5,985
Costs related to product sales - related parties 1,978 3,583
Costs related to service and repair fees 1,609 1,380
Costs related to service and repair
fees - related parties 268 216
Costs related to management and other
fees - related medical practices 7,169 6,690
Research and development 2,716 2,604
Selling, general and administrative 12,827 11,660
Compensatory element of stock issuances for
selling, general and administrative expenses 2,333 1,806
Provision for bad debts 85 168
Amortization of management agreements 317 348
-------- --------
Total Costs and Expenses 37,393 34,440
-------- --------
Loss From Operations ( 6,202) ( 5,209)
Interest Expense ( 123) ( 355)
Interest Expense - Related Parties - ( 9)
Investment Income 188 292
Interest Income - Related Parties 27 155
Other Income (Expense) 88 ( 3)
Minority Interest in Income of Partnerships ( 433) ( 269)
------ -------
Loss Before Provision for Income Taxes ( 6,455) ( 5,398)
Provision for Income Taxes 17 4
------ -------
Net Loss from Continuing Operations ( 6,472) ( 5,402)
Net Loss from Discontinued Operations - ( 225)
------- ------
NET LOSS $( 6,472) $( 5,627)
Basic and Diluted Net Loss per ======= ========
share - continuing operations $(.07) $(.08)
Basic and Diluted Net Loss per
share - discontinued operations - -
------- --------
Basic and Diluted Net Loss per share $(.07) $(.08)
======= ========
Weighted Average Number of Shares Outstanding 86,730 73,088
====== ======
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 7
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
-----------------
2003 2002
------ ------
Net loss $(2,630) $(2,921)
Other comprehensive loss, net of tax:
Unrealized losses on securities,
net of tax ( 10) ( 17)
------- -------
Total comprehensive loss $(2,640) $(2,938)
======= =======
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 SIX MONTHS ENDED
DECEMBER 31,
-----------------
2003 2002
------ ------
Net loss $(6,472) $(5,627)
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of tax 31 61
------- -------
Total comprehensive loss $(6,441) $(5,566)
======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 8
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
-----------------
2003 2002
------ ------
Cash Flows from Operating Activities
Net loss $( 6,472) $( 5,627)
Loss from discontinued operations - 225
----- -----
Loss from continuing operations ( 6,472) ( 5,402)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income of partnerships 433 269
Depreciation and amortization 2,009 2,132
Provision for bad debts 85 168
Compensatory element of stock issuances 2,333 1,806
Stock issued for costs and expenses 9,671 701
Interest expense paid in stock - 10
Amortization of deferred revenue-license fee ( 1,170) ( 1,170)
(Increase) decrease in operating assets, net:
Accounts and notes receivable ( 1,544) ( 453)
Costs and estimated earnings in excess of
billings on uncompleted contracts ( 1,057) ( 155)
Inventories ( 2,196) 709
Principal payments on sales type lease-related
parties 14 1,716
Principal payments on sales type lease 66 58
Prepaid expenses and other current assets ( 1,517) ( 884)
Other assets ( 8) ( 6)
Advances and notes to related parties 74 82
Increase (decrease) in operating liabilities, net:
Accounts payable ( 74) 2,304
Other current liabilities 1,259 592
Customer advances 4,645 ( 3,538)
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 3,769) 299
Other non-current liabilities 3 ( 25)
Income taxes payable 11 -
------ ------
Net cash provided by (used in) continuing operations 2,796 ( 787)
Net cash provided by discontinued operations - 118
------ ------
Net cash provided by (used in) operating activities 2,796 ( 669)
------ ------
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 9
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
-----------------
2003 2002
------ ------
Cash Flows from Investing Activities:
Sales (purchases) of marketable securities 1,847 ( 194)
Purchases of property and equipment ( 258) ( 439)
Costs of capitalized software development ( 265) ( 436)
Cost of patents and copyrights ( 153) ( 168)
Repayment of note receivable from buyers
of A&A Services - Discontinued operations 150 -
------ ------
Net cash provided by (used in) investing activities 1,321 ( 1,237)
------ ------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 439) ( 262)
Repayment of long-term debt and capital
lease obligations ( 616) ( 1,540)
Net proceeds from exercise of stock options
and warrants 450 1,104
------ ------
Net cash used in financing activities ( 605) ( 698)
------ ------
Increase (Decrease) in Cash and Cash Equivalents 3,512 ( 2,604)
Cash and Cash Equivalents - Beginning of Period 9,334 7,494
------ ------
Cash and Cash Equivalents - End of Period $12,846 $ 4,890
====== ======
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 10
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(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 six-month period
ended December 31, 2003 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 December 31, 2003, the Company had various stock-based employee compensation
plans. As permitted under Standard 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.
Page 11
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(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 5,874,000 and 6,034,000 shares of
common stock were outstanding at December 31, 2003 and 2002, 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.
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
December 31,
(000's omitted except per share data)
-------------------------------------
2003 2002
------------- -------------
Net Loss As Reported $(2,630) $(2,921)
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method for
all awards 242 -
------------- -------------
Pro forma Net Loss $(2,872) $(2,921)
============= =============
Basic and Diluted Net Loss Per Share
as Reported $(0.03) $(0.04)
============= =============
Basic and Diluted Pro forma Net Loss
Per Share $(0.03) $(0.04)
============= =============
Page 12
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share (Continued)
- --------------------------------------------------------------------------------
For the Six Months Ended
December 31,
(000's omitted except per share data)
-------------------------------------
2003 2002
------------- -------------
Net Loss As Reported $(6,472) $(5,627)
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method for
all awards 697 404
------------- -------------
Pro forma Net Loss $(7,169) $(6,031)
============= =============
Basic and Diluted Net Loss Per Share
as Reported $(0.07) $(0.08)
============= =============
Basic and Diluted Pro forma Net Loss
Per Share $(0.07) $(0.08)
============= =============
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,
(000's omitted except per share data)
-------------------------------------
2003 2002
------------- -------------
Expected life (years) 3 3
Interest Rate 2.69% 4.00%
Annual Rate of dividends 0% 0%
Volatility 55% 92%
Page 13
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(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 a 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 Company is
currently evaluating the effect that the adoption of FIN 46 will have on its
consolidated financial position or results of operations.
Reclassifications
- -----------------
Certain prior period balances have been reclassified to conform to the current
period presentation. The reclassifications had no effect on the Company's
results of operations.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable, net is comprised of the following at December 31, 2003:
Allowance
Gross for doubtful
Receivable accounts Net
---------- ------------ ----------
Receivables from equipment
sales and service contracts $ 1,821 $ 481 $ 1,340
========== ============ ==========
Receivables from equipment
sales and service contracts-
related parties $ 870 $ 656 $ 214
========== ============ ==========
Receivables from related medical
practices ("PC's") $14,403 $ 1,406 $ 12,997
========== ============ ==========
Page 14
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(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 58% of the PC's net revenues for the six months ended
December 31, 2003 and 2002, 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 38% and 41% of the consolidated net revenues for the
six months ended December 31, 2003 and 2002, respectively. Product sales and
service and repair fees - net to related parties amounted to approximately 14.2%
and 24.1% of consolidated net revenues for the six months ended December 31,
2003 and 2002, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
- ---------------------------------------------------------------------------
Summarized income statement data for the six months ended December 31, 2003
related to the 17 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted)
Patient Revenue - Net $16,366
========
Income from Operations $ 192
========
Net Loss (Income Tax - Cash Basis) $ (55)
========
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet at
December 31, 2003 consist of:
(000's omitted)
Purchased parts, components
and supplies $ 5,355
Work-in-process 1,898
-------
$ 7,253
=======
Page 15
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of December 31, 2003 is as
follows:
(000's omitted)
Costs incurred on uncompleted
contracts $ 5,063
Estimated earnings 4,570
-------
9,633
Less: Billings to date 9,198
-------
$ 435
========
Included in the accompanying condensed consolidated balance sheet at December
31, 2003 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $686
Costs and estimated earnings in excess of
billings on uncompleted contracts - related party 731
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts (953)
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts - related parties (29)
--------
$ 435
========
2) Customer advances consist of the following as of December 31, 2003:
Related
Total Parties Other
-------- -------- -------
Total Advances $18,776 $ 1,291 $17,485
Less: Advances
on contracts under construction 9,198 1,208 7,990
------- ------- ------
$ 9,578 $ 83 $9,495
======= ======= ======
Page 16
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
NOTE 6 -STOCKHOLDERS' EQUITY
Common Stock
During the six months ended December 31, 2003:
a) The Company issued 875,489 shares of common stock to employees as
compensation of $1,297,532 under stock bonus plans.
b) The Company issued 773,978 shares of common stock to consultants and others
at a value of $1,081,005.
c) The Company issued 6,931,341 shares of common stock for costs and expenses
of $9,670,603.
d) The Company issued 157,323 shares of common stock upon the exercise of
stock options resulting in proceeds of $166,583.
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.
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.
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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
NOTE 7 - SEGMENT AND RELATED INFORMATION (Continued)
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 December 31, 2003:
Net revenues from external customers $ 12,239 $ 5,884 $18,123
Inter-segment net revenues $ 113 -- 113
Operating (loss) income $ (2,533) 70 (2,463)
Depreciation and amortization $ 546 463 1,009
Compensatory element of stock issuances $ 597 520 1,117
Total identifiable assets $ 37,625 27,468 65,093
Capital expenditures $ 64 98 162
For the three months ended December 31, 2002:
Net revenues from external customers $ 10,901 $ 5,773 $16,674
Inter-segment net revenues $ 358 --- $ 358
Loss from operations $ (2,205) $ (547) $(2,752)
Depreciation and amortization $ 633 $ 427 $ 1,060
Compensatory element of stock issuances $ 246 $ 813 $ 1,059
Capital expenditures $ 90 $ 36 $ 126
Physician
Medical Management
Equipment Services Total
--------- ---------- --------
For the six months ended December 31, 2003:
Net revenues from external customers $ 19,587 $11,838 $31,425
Inter-segment net revenues $ 234 -- 234
Operating (loss) income $ (6,230) 28 (6,202)
Depreciation and amortization $ 1,083 926 2,009
Compensatory element of stock issuances $ 1,192 1,141 2,333
Total identifiable assets $ 37,625 27,468 65,093
Capital expenditures $ 136 122 258
For the six months ended December 31, 2002:
Net revenue from external customers $ 18,027 $11,923 $29,950
Inter-segment net revenues $ 719 --- $ 719
Loss from operations $ (4,712) $ (497) $(5,209)
Depreciation and amortization $ 1,267 $ 865 $ 2,132
Compensatory element of stock issuances $ 486 $ 1,320 $ 1,806
Capital expenditures $ 190 $ 249 $ 439
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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
NOTE 8- DISCONTINUED OPERATIONS
Summarized financial information of the net loss from discontinued operations
for the six months ended December 31, 2002 is as follows:
(000's omitted)
For the Three Months
Ended
December 31,
2002
------------
Management and other fees - related
medical practices - net $ 394
------------
Costs and Expenses:
Costs related to management and
other fees - related medical practices 437
Amortization of management agreement 73
Interest expense -
------------
Total Costs and Expenses 510
------------
Net Loss from Discontinued Operations $ (116)
============
(000's omitted)
For the Six Months
Ended
December 31,
2002
------------
Management and other fees - related
medical practices - net $ 775
------------
Costs and Expenses:
Costs related to management and
other fees - related medical practices 853
Amortization of management agreement 144
Interest expense 3
------------
Total Costs and Expenses 1,000
------------
Net Loss from Discontinued Operations $ (225)
============
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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENTS
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.
Common Stock
During the period from January 1, 2004 through January 31, 2004:
a) The Company issued 306,345 shares of common stock to employees as
compensation of $405,465.
b) The Company issued 183,398 shares of common stock to consultants and
others at a value of $247,533.
c) The Company issued 1,573,789 shares of common stock for costs and
expenses of $2,118,122.
d) The Company issued 6,755 shares of common stock upon the exercise of
stock options resulting in proceeds of $7,599.
e) The Company issued 16,296 shares of common stock valued at $17,636 in
connection with the issuance of notes receivable from stockholders.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the fiscal quarter ended December 31, 2003 (second quarter of fiscal
2004), we reported a net loss of $2.6 million on revenues of $17.9 million as
compared to a net loss of $2.9 million ($2.8 million from continuing operations)
on revenues of $16.0 million for the second quarter of fiscal 2003. This
represented a decline in our net loss of 10% (6.2% from continuing operations)
and an improvement of 12.1% in our revenues.
The second quarter of fiscal 2004 represented an even greater improvement
over our performance in the first quarter of fiscal 2004 reflecting a decline in
our net loss of 31.6% from $3.8 million to $2.6 million and an increase of 34.6%
in our revenues from $13.3 million in the first quarter to $17.9 million in the
second quarter.
Nevertheless, as a result of our net loss of $3.8 million in the first
quarter of fiscal 2003, on revenues of $13.3 million, our net loss for the first
half of fiscal 2004 increased to $6.5 million from $5.6 million ($5.4 million
from continuing operations) for the first six months of fiscal 2004.
For the six month period ended December 31, 2003, we reported a net loss of
$6.5 million on revenues of $31.2 million as compared to a net loss of $5.6
million ($5.4 million from continuing operations) on revenues of $29.2 million
for the six month period ended December 31, 2002.
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FONAR CORPORATION AND SUBSIDIARIES
The increases in selling, general and administrative expenses showed signs
of slowing in the second quarter of fiscal 2004 as well as the compensatory
element of stock issuances. Costs of product sales increased at a lower rate
than revenues, resulting in higher gross profit margins. Health Management
Corporation of America, our physician and diagnostic management services segment
(HMCA) in the first six months of fiscal 2004 and most prominently in the second
quarter of fiscal 2004 incurred costs relating to producing revenues which
increased at a greater rate than revenues. Nevertheless, HMCA's decrease in
selling general and administrative expenses and compensatory element of stock
issuances have enabled HMCA to recognize operating income of $28,000 for the
first six months of fiscal 2004 as compared to an operating loss of $497,000 for
the first six months of fiscal 2003, notwithstanding a slight decrease in
revenues comparing the same periods. HMCA revenues reversed their decline in the
second quarter of fiscal 2004 showing a slight increase over the same period for
the prior year, which enabled HMCA to recognize operating income of $70,000 for
the second quarter of fiscal 2004 as compared to an operating loss of $547,000
for the second quarter of fiscal 2003.
Notwithstanding increases in revenues in our medical equipment business,
most significantly in product sales to unrelated parties, increases in selling,
general and administrative expenses and the compensatory element of stock
issuances resulted in a greater operating loss for the first six months of
fiscal 2004 than for the first six months of fiscal 2003 ($6.2 million as
compared to $4.7 million, respectively). Selling, general and administrative
expenses and the compensatory element of stock issuances have remained fairly
constant between the first and second quarters of fiscal 2004 ($4.8 million and
$595,000 respectively in the first quarter and $4.8 million and $597,000
respectively in the second quarter). We are optimistic about Fonar's future
operating results if we can maintain the rate of increases in product sales to
unrelated parties ($8.6 million in the second quarter of fiscal 2004 as compared
to $4.9 million in the first quarter of fiscal 2004, $5.9 million in the second
quarter of 2003 and $2.8 million in the first quarter of fiscal 2003) coupled
with a continuing increase in gross profit margins and the containment of
expenses. We are optimistic that expenditures being utilized to upgrade HMCA's
managed facilities will continue to improve HMCA's operating results as the
number of Stand-Up(TM) MRI scanners in service at HMCA and the utilization of
those facilities increases.
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, will 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.
Reclassification to Prior Periods: Discontinued Operations
The financial information presented for the six months ended December 31,
2002 has been reclassified to reflect that certain operations 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,
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FONAR CORPORATION AND SUBSIDIARIES
the result of operations for these discontinued operations are no longer
reflected in the operating results for the six month period ended December 31,
2002 although they are reflected in the net loss of $5.6 million for the period.
The net loss from continuing operations for the first six months of fiscal 2003
was $5.4 million. There were no results of operations from discontinued
operations in fiscal 2004.
Overview and Trends
Trends continuing in the second quarter and first half of fiscal 2004
include an increase in product sales with an increasing emphasis on unrelated
party sales revenues compared to related party (entities in which Dr. Damadian
or members of his family have an interest) sales and the maintenance of high
gross profit margins on product sales: 39.4% for the first six months of fiscal
2004 compared to 35% for the first six months of fiscal 2003 and 37.8% for the
second quarter of fiscal 2004 compared to 33.7% for the second quarter of fiscal
2003. We attribute these trends to the continuing growth of our MRI products,
particularly our Stand-Up(TM) MRI scanners and the increased efficiencies
resulting from our higher sales volumes.
HMCA revenues have begun to increase in the second quarter of fiscal 2004,
as we proceed with our program of replacing older scanners at the sites we
manage with Stand-Up(TM) MRI scanners. We now manage three sites equipped with
Stand-Up(TM) MRI scanners and are completing the installation of a Stand-Up(TM)
MRI scanner at a fourth site.
For the three month period ended December 31, 2003, as compared to the
three month period ended December 31, 2002, overall revenues from MRI product
sales increased 20% ($10.5 million compared to $8.8 million). Unrelated party
scanner sales ($8.6 million compared to $5.9 million) increased at an even
greater rate of 45% while related party scanner sales ($1.9 million compared to
$2.8 million) decreased 31%. Overall, for the second quarter of fiscal 2004,
revenues for the medical equipment segment increased by 17.9% to $12.0 million
from $10.2 million for the second quarter of fiscal 2003. The revenues generated
by HMCA, also increased, by 2% to $5.9 million for the second quarter of fiscal
2004 as compared to $5.8 million for the second quarter of fiscal 2003.
For the six month period ended December 31, 2003, as compared to the six
month period ended December 31, 2002, overall revenues from MRI product sales
increased 13% ($16.6 million as compared to $14.7 million). Unrelated party
product sales ($13.5 million compared to $8.7 million) increased 54% while
related party product sales ($3.2 million compared to $6.0 million) decreased
48%. Overall, revenues for the medical equipment segment increased by 11.8% to
$19.4 million for the first six months of fiscal 2004 as compared to $17.3
million for the first six months of fiscal 2003. HMCA's revenues decreased,
however by 1% to $11.8 million for the first six months of fiscal 2004 from
$11.9 million for the first six months of fiscal 2003. During fiscal 2003, HMCA
closed two MRI sites and one physical therapy and rehabilitation facility,
although the resulting decrease in revenues has as of December 31, 2003 been
largely compensated by an increase in revenues at sites where Stand-Up(TM) MRI
scanners have been installed.
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
Page 22
FONAR CORPORATION AND SUBSIDIARIES
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 half of fiscal 2004 increased only 13% from the first half of fiscal
2003 ($16.6 million compared to $14.7 million), we received orders for 14
Stand-Up MRI scanners during the first six months of fiscal 2004 as compared to
orders for 8 Stand-Up MRI scanners during the first six months of fiscal 2003.
As our consolidated revenues increased by 6.7% ($29.2 million for the first
half of fiscal 2003 to $31.2 million for the first half of fiscal 2004), the
total costs and expenses increased by 8.1% from $34.4 million for the first half
fiscal 2003 to $37.4 million for the first half of fiscal 2004. Although changes
in costs related to producing revenues for said six month periods essentially
tracked changes in revenues, with the exception of a 7.1% increase in costs
relating to a decrease of 1% in revenues for HMCA, selling general and
administrative expenses increased by 10% from $11.7 million in the first half of
fiscal 2003 to $12.8 million in the first half of fiscal 2004. The increase was
attributable primarily to increases in salaries and commissions, including
commissions to independent sales representatives ($642,000 increase), payments
to consultants ($167,000 increase), participation in trade shows ($122,000
increase) and royalties under a patent license with a foreign patent holding
company ($292,000 increase). Nevertheless, this trend has stabilized as selling,
general and administrative expenses increased by only 3% from $6.1 million in
the second quarter of fiscal 2003 to $6.3 million in the second quarter of
fiscal 2004.
The compensatory element of stock issuances increased by 29.2% from $1.8
million in the first half of fiscal 2003 to $2.3 million in the first half of
fiscal 2004. This expense has also slowed, increasing by 5.4% from $1.06 million
in the second quarter of fiscal 2003 to $1.1 in the second quarter of fiscal
2004. As a result the Company's operating and net losses were $6.2 million and
$6.5 million, respectively, for the first half of fiscal 2004 as compared to
$5.2 million and $5.6 million respectively for the first half of fiscal 2003.
Operating and net losses for the second quarter of fiscal 2004, however, were
$2.5 million and $2.6 million respectively and $2.8 million and $2.9 million for
the second quarter of fiscal 2003 respectively. Results of operations in the
second quarter of fiscal 2004 improved significantly over the results for the
first quarter, but were less favorable than for the second quarter of fiscal
2003. Operating and net losses for the first quarter of fiscal 2004 were $3.7
million and $3.8 million, respectively, and $2.5 million and $2.7 million ($2.6
million from continuing operations), respectively for the first quarter of
fiscal 2003.
The overall trends reflected in the results for the first half of fiscal
2004 are the increase in revenues from product sales, as compared to the first
half of fiscal 2003 ($16.6 million for the first six months of fiscal 2004 as
compared to $14.7 million for the first six months of fiscal 2003), and the
increase in MRI equipment segment revenues relative to HMCA revenues ($19.4
million or 62% from the MRI equipment segment as compared to $11.8 million or
38% from HMCA, for the first six months of fiscal 2004, as compared to $17.3
million or 59% from the MRI equipment segment and $11.9 million or 41%, from
HMCA, for the first six months of fiscal 2003). In addition, we experienced an
increase in unrelated party sales relative to related party sales in our medical
Page 23
FONAR CORPORATION AND SUBSIDIARIES
equipment segment ($16.0 million or 83% to unrelated parties and $3.4 million or
17% to related parties for the first six months of fiscal 2004 as compared to
$11.2 million, or 64% to unrelated parties and $6.1 million or 36% to related
parties for the first six months of fiscal 2003). The absolute decline (45%) as
well as the significant relative decline in related party scanner sales revenues
was attributable in large measure 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. In addition, product sales
increased by 42%, from $6.1 million to $10.5 million in the first quarter of
fiscal 2004 as compared to the second quarter of fiscal 2004.
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").
MRI product sales increased by 20.4%, from $8.8 million for the second
quarter of fiscal 2003 to $10.5 million for the second quarter of fiscal 2004
and by 13% from $14.7 million for the first six months of fiscal 2003 to $16.6
million for the first six months of fiscal 2004. These increases reflected
increased sales of the Stand-Up MRI scanners. Service and repair revenues
increased by 10.9%, from $695,000 for the second quarter of fiscal 2003 to
$771,000 for the second quarter of fiscal 2004 and by 19.9% to $1.5 million for
the first six months of fiscal 2003 as compared to $1.2 million the first six
months of fiscal 2004. License fees and royalties decreased by 5.7% from
$732,000 for the second quarter of fiscal 2003 to $690,000 for the second
quarter of fiscal 2004 and by 7.6% from $1.4 million for the first six months of
fiscal 2003 as compared to $1.3 million for the first six months of fiscal 2004.
Consequently, overall revenues recognized by the Company's medical equipment
manufacturing and service business increased by 17.9% from $10.2 million in the
second quarter of fiscal 2003 to $12.0 million in the second quarter of fiscal
2004 and by 11.8% for the first six months of fiscal 2004 as compared to the
first six months of fiscal 2003, from $17.3 million to $19.4 million.
Significant increases continued in scanner sales to unrelated parties,
which increased by 45% from $5.9 million in the second quarter of fiscal 2003 to
$8.6 million in the second quarter of fiscal 2004. For the first six months of
fiscal 2004 as compared to the first six months of fiscal 2003 products sales to
unrelated parties increased by 54%, from $8.7 million to $13.5 million. Scanner
sales to related parties, however, continued to decrease from $2.8 million in
the second quarter of fiscal 2003 to $1.9 million in the second quarter of
fiscal 2004, or 31% and from $6.0 million to $3.2 million, or 47%, for the first
six months of fiscal 2003 and the first six months of 2004, respectively. This
decline resulted in large measure because of the bankruptcy of the traditional
principal funding source for the related parties' MRI scanner purchases,
although new financing sources have been and are in the process of being
acquired. Costs related to product sales increased by 13% from $5.8 million in
the second quarter of fiscal 2003 to $6.6 million in the second quarter of 2004
and by 5.2% from $9.6 million in the first six months of fiscal 2003 to $10.1
million in the first six months of fiscal 2004. Costs related to providing
service increased 21.2% from $822,000 in the second quarter of fiscal 2003 to
$996,000 in the second quarter of 2003 and by 17.6% from $1.6 million for the
Page 24
FONAR CORPORATION AND SUBSIDIARIES
first six months of fiscal 2003 to $1.9 million for the first six months of
fiscal 2004.
As a result, we increased our gross profit margin for our medical equipment
business to 37.1% for the second quarter of fiscal 2004, as compared to 34.9%
for the second quarter of fiscal 2003 and to 38.3% for the first six months of
fiscal 2004, as compared to 35.5% for the first six months of fiscal 2003.
Our gross profit margins on product sales increased to 37.8% for the second
quarter of fiscal 2004, as compared to 33.7% for the second quarter of fiscal
2003 and to 39.4% for the first six months of fiscal 2004, as compared to 35%
for the first six months of fiscal 2003.
As a result, our operating loss for our medical equipment business was $2.5
million for the second quarter of fiscal 2004 as compared to $2.0 million for
the second quarter of fiscal 2003. Our operating loss for our medical equipment
business was $6.2 million for the first six months of fiscal 2004 as compared to
$4.7 million and for the first six 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 six months of fiscal 2004,
revenues of approximately $16.5 million were recognized from sales of
Stand-Up(TM) MRI scanners. During the first six months of fiscal 2003, the
Company recognized revenues of approximately $14.2 million from the sale of
Stand-Up(TM) MRI scanners and $100,000 from the sale of a refurbished Beta MRI
Scanner. During the second quarter of fiscal 2004, we recognized $10.5 million
from sales of Stand-Up(TM) MRI scanners as compared to $8.6 million from sales
of Stand-Up(TM) MRI scanners during the second quarter of fiscal 2003.
There were approximately $502,000 in foreign sales revenues for the first
six months of fiscal 2004 as compared to approximately $388,000 in foreign sales
revenues for the first six months in fiscal 2003.
HMCA experienced operating income of $70,000 for the second quarter of
fiscal 2004 compared to operating loss of $547,000 for the second quarter of
fiscal 2003. For the first six months of fiscal 2004, HMCA experienced an
operating income of $28,000 as compared to an operating loss of $497,000 for the
first six 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 $116,000 in the second quarter of fiscal
2003 and $225,000 for the first half of fiscal 2003. Although HMCA showed a
slight decline of 0.7% in revenues for the first six months of fiscal 2004 as
compared to the first six months of fiscal 2003, of $11.8 million and $11.9
million respectively, this declining trend was reversed in the second quarter of
fiscal 2004. In the second quarter of fiscal 2004, HMCA revenues increased 1.9%
to $5.9 million as compared to $5.8 million for the second quarter of fiscal
2003. Nevertheless, the reversal of the decline in the second quarter in
revenues was offset by an increase in costs of revenues of 7.2% from $6.7
million in the first six months of fiscal 2003 to $7.2 million in the first six
months of fiscal 2004, a significant portion of that increase being realized in
the second quarter of fiscal 2004, which showed an increase of 16% to $3.8
million as compared to $3.2 million in the second 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 three sites
which installed new Stand-Up(TM) MRI scanners and a fourth site which is in the
process of installing a Stand-Up(TM) MRI scanner.
Page 25
FONAR CORPORATION AND SUBSIDIARIES
Accordingly, the Company's consolidated operating loss improved to $2.5
million for the second quarter of fiscal 2004 from $2.8 million for the second
quarter of fiscal 2003, although for the six month period ended December 31,
2003, our consolidated operating loss had increased to $6.2 million from $5.2
million for the six month period ended December 31, 2002.
Our efforts to improve equipment sales volume resulted in a 3% increase in
selling, general and administrative expenses from $6.1 million in the second
quarter of fiscal 2003 to $6.3 million in the second quarter of fiscal 2004 and
an increase of 10% from $11.7 million in the first six months of fiscal 2003 to
$12.8 million in the first six months of fiscal 2004. The most significant
increases were in the commissions payable to independent sales representatives,
which increased to $408,000 in the first half of fiscal 2004 from $32,397 in the
first half of fiscal 2003. Salaries and commissions payable to our internal
sales force also increased by 19.5%, to $1.6 million in the first half of fiscal
2004 from $1.4 million in the first half of fiscal 2003. Advertising expenses
decreased by 5.9% to $1.6 million in the first half of fiscal 2004 from $1.7
million in the first half of fiscal 2003. In addition, research and development
expenses increased by 4.3% to $2.7 million for the first six months of fiscal
2004 as compared to $2.6 million for the first six months of fiscal 2003.
Also contributing to the operating and net loss increases was the increase
in the compensatory element of stock issuances, which increased by 29% to $2.3
million for the first six months of fiscal 2004 from $1.8 million for the first
six months of fiscal 2003. This reflected greater use of Fonar's stock in lieu
of cash to pay employees, consultants and professionals for services.
Interest expense of $123,000 in the first six months of fiscal 2004,
however, decreased by 66.2% from $364,000 for the first six months of fiscal
2003 due to the repayment of indebtedness.
Cash and cash equivalents increased by 37.6% from $9.3 million at June 30,
2003 to $12.8 million at December 31, 2003, reflecting an increase in cash
receipts from customer deposits from $4.9 million at June 30, 2003 to $9.6
million at December 31, 2003.
Inventories increased by 43.4% to $7.3 million at December 31, 2003 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 to $14.6 million at December 31, 2003 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.
The Company's Stand-Up(TM), QUAD(TM) and Fonar-360(TM) MRI scanners,
together with the Company's works-in-progress (QUAD-S(TM) MRI) and other works
in progress, are intended to significantly improve the Company's competitive
position. In addition, the Company offers a low cost open scanner, the Echo(TM)
MRI, operating at .3 Tesla field strength for its cost conscious customers.
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
Page 26
FONAR CORPORATION AND SUBSIDIARIES
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' changes 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 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 QUAD(TM) MRI scanner also utilizes a 0.6 Tesla iron core electromagnet
and is accessible from four sides. The QUAD(TM) was the first "open" MRI scanner
at high field.
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FONAR CORPORATION AND SUBSIDIARIES
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 and wrist. This scanner will allow scans to be performed in 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 $16.8 million at December 31, 2003. Principal uses
of cash during the first six months of fiscal 2004 included capital expenditures
of $258,000, repayment of indebtedness and capital lease obligations in the
amount of $616,000, capitalized software development costs of $265,000,
capitalized patent and trademark costs of $153,000 and purchases of inventory of
$2.2 million.
Marketable securities approximated $4.0 million as at December 31, 2003, as
compared to $5.8 million at June 30, 2003. At December 31, 2003, our investments
in U.S. Government obligations were $487,000 and our investments in corporate
and government agency bonds were $3.4 million. The decline in marketable
securities resulted from the maturity of certain fixed rate instruments which
were converted into cash and cash equivalents. These investments have had the
intended effect of reducing the volatility of the Company's investment
portfolio.
Cash provided by operating activities for the first six months of fiscal
2004 approximated $2.8 million. Cash provided by operating activities was
attributable primarily to customer advances of $4.6 million and stock issued for
compensation, costs and expenses of $12.0 million, offset primarily by the net
loss of $6.5 million, billings in excess of costs and estimated earnings on
uncompleted contracts of $3.8 million and inventory purchases of $2.2 million.
Cash provided by investing activities for the first six months of fiscal
2004 approximated $1.3 million. The principal sources of cash were sales of
investments in marketable securities of $1.8 million, and the principal uses of
cash from investing activities during the first six months of fiscal 2004
consisted of expenditures for property and equipment of approximately $258,000,
capitalized software and patent costs of approximately $418,000 and repayment of
a note receivable by the purchasers of HMCA's primary medical care management
operations (A&A Services, Inc.) of $150,000.
Cash used by financing activities for the first six months of fiscal 2004
approximated $605,000. The principal uses of cash in financing activities during
the first six months of fiscal 2004 consisted of repayment of principal on
long-term debt and capital lease obligations of approximately $616,000 and
distributions to holders of minority interests of $439,000. The source of cash
from financing activities was net proceeds from exercises of stock options and
warrants of $450,000.
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FONAR CORPORATION AND SUBSIDIARIES
Total liabilities increased by 1% to $26.3 million at December 31, 2003
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 $ 867 $ 246 $ 456 $ 165 $ -
Capital lease
Obligation 557 396 114 40 7
Operating
Leases 11,092 2,950 4,200 2,900 1,042
----------- ---------- ---------- ---------- ----------
Total cash
Obligations $ 12,516 $ 3,592 $ 4,770 $ 3,105 $ 1,049
=========== ========== ========== ========== ==========
Although total liabilities increased by only 1%, we experienced a decrease
in the current portion of long term debt ($1.0 million at June 30, 2003 to
$642,000 at December 31, 2003, a decrease in the long-term portion of deferred
revenue from license fees from $2.3 million to $1.2 million, a decrease in
excess of costs and estimated earnings on uncompleted contracts from $4.8
million at June 30, 2003 to $982,000 at December 31, 2003 a decrease in
long-term debt from $908,000 at June 30, 2003 to $782,000 at December 31, 2003
and a decrease in accounts payable from $3.7 million at June 30, 2003 to $3.6
million at December 31, 2003. Those decreases were offset, however, by an
increase in customer advances from $4.9 million at June 30, 2003 to $9.6 million
at December 31, 2003 and by an increase in other liabilities from $7.6 million
at June 30, 2003 to $8.6 million at December 31, 2003.
As of December 31, 2003, these obligations of approximately $8.6 million in
other current liabilities including deferred revenue from license fees of $2.3
million, unearned revenue on service contracts of $1.7 million, accrued salaries
and payroll taxes of $2.6 million and excise and sales taxes of $2.0 million.
Our working capital approximated $19.2 million as of December 31, 2003, as
compared to working capital of $13.1 million as of June 30, 2003, increasing by
47.1%. This results principally from an increase in cash of $3.5 million ($9.3
million at June 30, 2003 as compared to $12.8 million at December 31, 2003) and
an increase ($5.1 million at June 30, 2003 as compared to $7.3 million at
December 31, 2003) 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 $2.8 million at December 31, 2003), as a
result of advances made to suppliers. Accounts receivable increased from $13.1
million as at June 30, 2003 to $14.6 million as at December 31, 2003 due to
increased receivables from HMCA's physician and diagnostic management business
and accounts receivable from service contracts on MRI scanners.
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FONAR CORPORATION AND SUBSIDIARIES
With respect to current liabilities, the current portion of long-term debt
decreased from $1.0 million at June 30, 2003 to $642,000 at December 31, 2003 as
a result of repayment of debt, and billings in excess of costs and estimated
earnings on uncompleted contracts decreased from $4.7 million at June 30, 2003
to $982,000 at December 31, 2003. Customer advances, however, increased from
$4.9 million at June 30, 2003 to $9.6 million at December 31, 2003 and accounts
payable decreased from $3.7 million at June 30, 2003 to $3.6 million at December
31, 2003.
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 2004, the
compensatory element of stock issuances was $2.3 million as compared to $1.8
million for the first six 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 $250,000 to refurbish and improve one MRI facility. 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 three MRI facilities managed by HMCA and one Stand-Up(TM) MRI
scanner is in the process of being installed at one other MRI facility 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.
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FONAR CORPORATION AND SUBSIDIARIES
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, 2003.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
Year of in Fixed Rate Weighted Average
Maturity Instruments Interest Rate
-------- ----------- -------------
12/31/04 $2,267,719 2.97%
12/31/05 750,000 3.79%
12/31/06 400,000 4.62%
12/31/07 200,000 4.51%
12/31/08 100,000 3.38%
12/31/13 200,000 3.82%
Total: $3,917,719
==========
Fair Value
at 12/31/03 $3,965,329
==========
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.
Page 31
FONAR CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: There were no material changes in litigation for the
first six 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
October 6, 2003
Exhibit 31.1 Certification See Exhibits
Exhibit 32.1 Certification See Exhibits
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FONAR CORPORATION AND SUBSIDIARIES
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 12, 2004