FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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
---------
FONAR CORPORATION
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-2929
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at April 30, 2005
- -------------------------------- ---------------------------------------
Common Stock, par value $.0001 104,297,268
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 - March 31, 2005
(Unaudited) and June 30, 2004
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 2005 and
March 31, 2004 (Unaudited)
Condensed Consolidated Statements of Operations for
the Nine Months Ended March 31, 2005 and
March 31, 2004 (Unaudited)
Condensed Consolidated Statements of Comprehensive
Loss for the Three Months Ended March 31, 2005 and
March 31, 2004 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the Nine Months Ended March 31, 2005 and
March 31, 2004 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 2005 and
March 31, 2004 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit - 31.1
Exhibit - 32.1
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS March 31, June 30,
2005 2004
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $ 6,391 $ 9,474
Marketable securities 10,550 11,120
Restricted cash - 5,500
Accounts receivable - net 2,301 1,006
Accounts receivable - related parties - net 447 297
Management fee receivable - related medical
practices - net 14,927 14,315
Costs and estimated earnings in excess
of billings on uncompleted contracts 6,736 1,711
Costs and estimated earnings in excess
of billings on uncompleted contracts - related party - 112
Inventories 10,841 9,585
Investment in sales-type lease 168 154
Current portion of advances and notes to related
medical practices 156 240
Prepaid expenses and other current assets 1,997 1,572
------ ------
Total Current Assets 54,514 55,086
------ ------
Property and equipment - net 7,105 8,211
Advances and notes to related medical practices - net 359 481
Investment in sales-type lease 325 452
Management agreements - net 8,255 8,730
Other intangible assets - net 4,355 3,958
Other assets 289 283
-------- --------
Total Assets $ 75,202 $ 77,201
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of long-term debt and
capital leases $ 354 $ 5,983
Accounts payable 6,065 5,369
Other current liabilities 10,854 10,005
Unearned revenue on service contracts - related parties 455 373
Customer advances 2,910 7,800
Customer advances - related parties 642 -
Income taxes payable - 26
Billings in excess of costs and estimated
earnings on uncompleted contracts 580 2,937
Billings in excess of costs and estimated
earnings on uncompleted contracts - related parties 262 -
------ ------
Total Current Liabilities 22,122 32,493
Due to related medical practices 154 154
Long-term debt and capital leases,
less current portion 494 720
Other liabilities 281 299
------ ------
Total Long-Term Liabilities 929 1,173
------ ------
Total Liabilities 23,051 33,666
------ ------
Minority interest 449 381
------ ------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, except share data)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY (continued) 2005 2004
(UNAUDITED)
--------- --------
STOCKHOLDERS' EQUITY
Class A non-voting preferred stock
$.0001 par value; 8,000,000 authorized,
7,836,287 issued and outstanding
at March 31, 2005 and June 30, 2004 1 1
Common Stock $.0001 par value; 110,000,000
shares authorized; 104,487,248 issued
at March 31, 2005 and 98,704,937 at
June 30, 2004; 104,196,184 outstanding at
March 31, 2005 and 98,413,873 at June 30, 2004 10 10
Class B Common Stock $ .0001 par value;
4,000,000 shares authorized, (10 votes
per share), 3,953 issued and outstanding
at March 31, 2005 and 4,153 issued and
outstanding at June 30, 2004 - -
Class C Common Stock $.0001 par value;
10,000,000 shares authorized, (25 votes
per share), 9,562,824 issued
and outstanding at March 31, 2005
and at June 30, 2004 1 1
Paid-in capital in excess of par value 159,416 152,090
Accumulated other comprehensive income ( 183) ( 46)
Accumulated deficit (105,937) (107,384)
Notes receivable from employee stockholders ( 847) ( 843)
Unearned compensation ( 84) -
Treasury stock, at cost - 291,064 shares
of common stock at
March 31, 2005 and June 30, 2004 ( 675) ( 675)
------- -------
Total Stockholders' Equity 51,702 43,154
------- -------
Total Liabilities and Stockholders' Equity $ 75,202 $ 77,201
======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
REVENUES ---------- ---------
Product sales - net $15,550 $11,227
Product sales - related parties - net 1,743 959
Service and repair fees - net 1,361 733
Service and repair fees - related parties - net 201 113
Management and other fees - related medical
practices - net 5,890 5,736
License fees and royalties 585 585
---------- ---------
Total Revenues - Net 25,330 19,353
---------- ---------
COSTS AND EXPENSES
Costs related to product sales 9,966 7,036
Costs related to product sales - related parties 1,053 650
Costs related to service and repair fees 1,224 837
Costs related to service and repair
fees - related parties 166 212
Costs related to management and other
fees - related medical practices 3,657 3,580
Research and development 1,482 1,349
Selling, general and administrative 6,828 5,993
Compensatory element of stock issuances for
selling, general and administrative expenses 771 919
Provision for bad debts 50 25
Amortization of management agreements 158 158
---------- ---------
Total Costs and Expenses 25,355 20,759
---------- ---------
Loss From Operations ( 25) ( 1,406)
Interest Expense ( 47) ( 87)
Investment Income 133 118
Interest Income - Related Parties 6 9
Other Income (Expense) ( 305) 146
Minority Interest in Income of Partnerships ( 231) ( 258)
---------- ---------
Loss Before Provision for Income Taxes ( 469) ( 1,478)
Provision for Income Taxes 11 6
---------- ---------
NET LOSS $( 480) $( 1,484)
========== =========
Net Loss Available to Common Stockholders $( 480) $( 1,484)
========== =========
Basic Loss Per Common Share $ - $( .02)
========== =========
Diluted Loss Per Common Share $ - $( .02)
========== =========
Basic and Diluted Loss Per Share - Common C N/A 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 NINE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
REVENUES ---------- ---------
Product sales - net $ 51,832 $ 24,681
Product sales - related parties - net 4,621 4,128
Service and repair fees - net 3,473 1,980
Service and repair fees - related parties - net 574 321
Management and other fees - related medical
practices - net 17,642 17,574
License fees and royalties 1,755 1,860
---------- ---------
Total Revenues - Net 79,897 50,544
---------- ---------
COSTS AND EXPENSES
Costs related to product sales 33,005 15,127
Costs related to product sales - related parties 2,666 2,629
Costs related to service and repair fees 3,277 2,446
Costs related to service and repair
fees - related parties 521 479
Costs related to management and other
fees - related medical practices 10,911 10,750
Research and development 4,305 4,064
Selling, general and administrative 20,006 18,821
Compensatory element of stock issuances for
selling, general and administrative expenses 2,475 3,251
Provision for bad debts 150 110
Amortization of management agreements 475 475
---------- ---------
Total Costs and Expenses 77,791 58,152
---------- ---------
Income (Loss) From Operations 2,106 ( 7,608)
Interest Expense ( 179) ( 211)
Investment Income 394 306
Interest Income - Related Parties 19 36
Other Income (Expense) ( 162) 233
Minority Interest in Income of Partnerships ( 678) ( 690)
---------- ---------
Income (Loss) Before Provision for Income Taxes 1,500 ( 7,934)
Provision for Income Taxes 53 23
---------- ---------
NET INCOME (LOSS) $ 1,447 $( 7,957)
========== =========
Net Income (Loss) Available to Common Stockholders $ 1,346 $( 7,957)
========== =========
Basic Earnings (Loss) Per Common Share $ .01 $( .09)
========== =========
Diluted Earnings (Loss) Per Common Share $ .01 $( .09)
========== =========
Basic and Diluted Earnings (Loss) 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
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
---------- ---------
Net loss $( 480) $(1,484)
Other comprehensive income (loss), net of tax:
Unrealized gains (loss) on securities,
net of tax ( 146) 11
---------- ---------
Total comprehensive loss $( 626) $(1,473)
========== =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FOR THE NINE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
---------- ---------
Net income (loss) $ 1,447 $( 7,957)
Other comprehensive income (loss), net of tax:
Unrealized gains (loss) on securities,
net of tax ( 137) ( 20)
---------- ---------
Total comprehensive income (loss) $ 1,310 $( 7,977)
========== =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
---------- ---------
Cash Flows from Operating Activities
Net income (loss) $ 1,447 $( 7,957)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Minority interest in net income of partnerships 678 690
Depreciation and amortization 2,929 3,089
Provision for bad debts 150 110
Compensatory element of stock issuances 2,475 3,251
Stock issued for costs and expenses 4,290 11,896
Reduction in notes receivable from employee
stockholders adjusted to compensation 126 -
Gain on sale of equipment ( 28) -
Amortization of deferred revenue - license fee ( 1,755) ( 1,755)
(Increase) decrease in operating assets, net:
Accounts and management receivable ( 2,207) ( 3,832)
Costs and estimated earnings in excess of
billings on uncompleted contracts ( 4,913) ( 504)
Inventories ( 456) ( 3,872)
Principal payments received on sales type
lease-related party - 14
Principal payments received on sales type lease 113 100
Prepaid expenses and other current assets ( 425) ( 392)
Other assets ( 6) ( 29)
Advances and notes to related medical practices 206 149
Increase (decrease) in operating liabilities, net:
Accounts payable 697 1,188
Other current liabilities 2,747 1,388
Customer advances ( 4,248) 4,234
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 2,095) ( 2,294)
Other liabilities ( 18) 1
Income taxes payable ( 26) 14
---------- ---------
Net cash (used in) provided by operating activities ( 319) 5,489
---------- ---------
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
---------- ---------
Cash Flows from Investing Activities:
Purchases of marketable securities (11,745) (22,069)
Sales of marketable securities 12,178 16,551
Purchases of property and equipment ( 1,638) ( 793)
Costs of capitalized software development ( 605) ( 403)
Cost of patents and copyrights ( 306) ( 429)
Proceeds from sale of equipment 31 -
Repayment of note receivable from buyers
of A&A Services - Discontinued operations - 150
---------- ---------
Net cash used in investing activities ( 2,085) ( 6,993)
---------- ---------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 610) ( 679)
Proceeds from long-term debt - 5,500
Restricted cash 5,500 ( 5,500)
Repayment of borrowings and capital
lease obligations ( 5,854) ( 830)
Net proceeds from exercise of stock options
and warrants 254 719
Repayment of notes receivable from employee
stockholders 31 -
---------- ---------
Net cash used in financing activities ( 679) ( 790)
---------- ---------
Decrease in Cash and Cash Equivalents ( 3,083) ( 2,294)
Cash and Cash Equivalents - Beginning of Period 9,474 9,334
---------- ---------
Cash and Cash Equivalents - End of Period $ 6,391 $ 7,040
========== =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 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 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 nine months
ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2005. 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 16, 2004 for the
fiscal year ended June 30, 2004.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of FONAR Corporation
(the "Company"), its majority and wholly-owned subsidiaries and partnerships.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed based on weighted average
shares outstanding and excludes any potential dilution. In accordance with EITF
03-6, "Participating Securities and the Two-Class method under FASB Statement
No. 128" ("EITF 03-6"), which nullifies 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 Class
B common stock and Class C common stock, are not included in the computation of
basic EPS for three months ended March 31, 2005 and the nine months ended March
31, 2004 because the participating securities do not have a contractual
obligation to share in the losses of the Company. For the nine months ended
March 31, 2005, 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. The provisions of EITF 03-6 became effective for the Company
beginning April 1, 2004. The adoption of this new pronouncement did not have any
impact on the Company's consolidated financial statements.
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 of approximately
669,000, for the nine months ended March 31, 2005 have not been included in the
computation of diluted EPS since the effect would be antidilutive. For the three
months ended March 31, 2005, the number of common shares potentially issuable
upon the exercise of options and warrants or conversion of the participating
convertible securities that were excluded from the diluted EPS calculation was
approximately 9,033,000 because they are antidilutive as a result of the net
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
loss for that period. The number of common shares potentially issuable upon the
exercise of options and warrants or conversion of the participating convertible
securities that were excluded from the diluted EPS calculation was approximately
9,491,000, because they are antidilutive as a result of a net loss for the three
and nine months ended March 31, 2004.
(000's omitted, except per share data)
Three Months Three Months
ended March 31, ended March 31,
2005 2004
----------------------------------- ------------------
(000's omitted, except per share data)
Class C
Common Common
Total Stock Stock Total
Basic ------- ------- ------- -------
Numerator:
Net loss available to
common stockholders $ (480) $ (480) $ - $(1,484)
======= ====== ====== ========
Denominator:
Weighted average
shares 102,543 9,563 93,499
outstanding ======= ====== ========
Basic loss per
common share $ -- $ -- $ -- $ (.02)
======= ======= ====== =======
Diluted
Weighted average
shares outstanding 102,543 102,543 9,563 93,499
Stock options -- -- -- --
Warrants -- -- -- --
Convertible Class C
common stock -- -- -- --
------- ------- ------ -------
Denominator for diluted
earnings per share:
Weighted average shares
outstanding of common
stock and equivalents 102,543 102,543 9,563 93,499
======= ======= ====== =======
Diluted loss
per common share $ -- $ -- $ -- $ (.02)
======= ======= ====== =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
Nine Months Nine Months
ended March 31, ended March 31,
2005 2004
----------------------------------- ------------------
(000's omitted, except per share data)
Class C
Common Common
Total Stock Stock Total
Basic ------- ------- ------- -------
- -----
Numerator:
Net income (loss)
available to common
stockholders $ 1,346 $ 1,314 $ 32 $(7,957)
======= ======= ====== =======
Denominator:
Weighted average 100,731 9,563 88,986
shares outstanding ======= ====== =======
Basic earnings (loss)
per common share $ 0 .01 $ 0.01 $ -- $ (.09)
======= ======= ====== =======
Diluted
- -------
Weighted average shares
outstanding 100,731 100,731 9,563 88,986
Stock options 273 273 -- --
Warrants 536 536 -- --
Convertible Class C
common stock 3,188 3,188 -- --
------- ------- ------- -------
Denominator for diluted earnings per share:
Weighted average shares
outstanding of
common stock
and equivalents 104,728 104,728 9,563 88,986
======= ======= ====== =======
Diluted earnings (loss) per
common share $ 0.01 $ 0.01 $ -- $(.09)
======= ======= ====== =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments (Continued)
At March 31, 2005, the Company had various stock-based employee compensation
plans. As permitted under Statement of Financial Accounting Standard ("SFAS")
No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure",
which amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", the Company has elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation arrangements as
defined by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No. 25. No stock-based employee compensation cost is
reflected in operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
The following table illustrates the effect on net income (loss) and earnings
(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 or the Nine Months
Ended March 31, Ended March 31,
(000's omitted, (000's omitted,
except except
per share data) per share data)
------------------- -------------------
2005 2004 2005 2004
Net income (loss) available to -------- -------- -------- --------
common shareholders $(480) $(1,484) $1,346 $(7,957)
Less:
Undistributed earnings allocated to -- -- 32 --
Class C common stock -------- -------- -------- --------
$(480) $(1,484) $1,314 $(7,957)
Less:
Total stock-based employee compensation
expense determined under fair value 142 131 150 252
based method for all awards -------- -------- -------- --------
Pro forma Net Income (Loss) $ (622) $(1,615) $ 1,164 $(8,209)
======== ======== ======== ========
Basic Net Income (Loss) Per Share $ -- $ 0.02) $ 0.01 $ (0.09)
As Reported ======== ======== ======== ========
Basic Pro forma Net Income (Loss) $(0.01) $ (0.02) $ 0.01 $ (0.09)
Per Share ======== ======== ======== ========
Diluted Net Income (Loss) per share $ -- $ (0.02) $ 0.01 $ (0.09)
as reported ======== ======== ======== ========
Diluted Pro Forma Net Income (Loss) $(0.01) $ (0.02) $ 0.01 $ (0.09)
per share ======== ======== ======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments (Continued)
The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:
For the Three and Nine Months Ended
March 31,
-----------------------------------
2005 2004
------ ------
Expected life (years) 3 3
Interest Rate 2.69% 2.69%
Annual Rate of dividends 0% 0%
Volatility 55% 92%
Recent Accounting Pronouncements
In December, 2004, the Financial Accounting Standards Board ("FASB") issued its
final standard on accounting for share-based payments ("SBP"), FASB Statement
No. 123R (revised 2004), Share-Based Payment. The Statement requires companies
to expense the value of employee stock options and similar awards. Under FAS
123R, SBP awards result in a cost that will be measured at fair value on the
awards' grant date, based on the estimated number of awards that are expected to
vest. Compensation cost for awards that vest would not be reversed if the awards
expire without being exercised. The effective date for public companies is
annual periods beginning after June 15, 2005, and applied to all outstanding and
unvested SBP awards at a company's adoption. Management does not anticipate that
this Statement will have a significant impact on the Company's consolidated
financial statements.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable, net is comprised of the following at March 31, 2005:
Allowance
Gross for doubtful
Receivable accounts Net
------------- ------------- -------------
Receivables from equipment
sales and service contracts $ 2,769 $ 468 $ 2,301
============= ============= =============
Receivables from equipment
sales and service contracts-
related parties $ 1,103 $ 656 $ 447
============= ============= =============
Management fee receivables from
related medical practices ("PC's") $ 16,951 $ 2,024 $ 14,927
============= ============= =============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(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 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 65% of the PC's net revenues for both the nine months ended March
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 PC's
accounted for approximately 22.1% and 34.8% of the consolidated net revenues for
the nine months ended March 31, 2005 and 2004, respectively. Product sales and
service and repair fees from related parties amounted to approximately 6.5% and
5.5% of consolidated net revenues for the nine months ended March 31, 2005 and
2004, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
Summarized income statement data for the three months ended March 31, 2005
related to the 16 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted) (Income Tax-Cash Basis)
Patient Revenue - Net $ 8,210
========
Loss from Operations $ (237)
========
Net Loss $ (351)
========
Summarized income statement data for the nine months ended March 31, 2005
related to the 16 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted) (Income Tax-Cash Basis)
Patient Revenue - Net $24,595
========
Income from Operations $ 229
========
Net Loss $ (118)
========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 4 - INVENTORIES
Inventories included in the accompanying condensed consolidated balance sheet at
March 31, 2005 consist of:
(000's omitted)
Purchased parts, components
and supplies $ 7,935
Work-in-process 2,906
-------
$10,841
=======
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of March 31, 2005 is as
follows:
(000's omitted)
Costs incurred on uncompleted
contracts $17,480
Estimated earnings 12,037
--------
29,517
Less: Billings to date 23,623
--------
$ 5,894
========
Included in the accompanying condensed consolidated balance sheet at March 31,
2005 under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 6,736
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts (580)
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts-related parties (262)
--------
$ 5,894
========
2) Customer advances consist of the following as of March 31, 2005:
Related
Total Parties Other
-------- -------- -------
Total Advances $27,175 $3,642 $23,533
Less: Advances
on contracts under construction 23,623 3,000 20,623
------- ------- ------
$ 3,552 $ 642 $ 2,910
======= ======= =======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 6 -STOCKHOLDERS' EQUITY
Common Stock
During the three months ended March 31, 2005:
a) The Company issued 534,020 shares of common stock to employees as
compensation of $786,006 under stock bonus plans.
b) The Company issued 47,565 shares of common stock to consultants and others
at a value of $68,773.
c) The Company issued 1,418,814 shares of common stock for costs and expenses
of $2,116,801.
d) The Company issued 28,030 shares of common stock upon the exercise of stock
options resulting in proceeds of $30,695.
e) The Company issued 150,973 shares of common stock valued at $193,274 in
connection with the issuance of notes and loans receivable from employee
stockholders.
During the nine months ended March 31, 2005:
a) The Company issued 1,554,536 shares of common stock to employees as
compensation of $2,000,820 under stock bonus plans.
b) The Company issued 461,822 shares of common stock to consultants and others
at a value of $550,728.
c) The Company issued 3,277,636 shares of common stock for costs and expenses
of $4,290,112.
d) The Company issued 6,410 shares of common stock upon the exercise of stock
options resulting in compensation of $7,500.
e) The Company issued 49,484 shares of common stock upon the exercise of stock
options resulting in proceeds of $54,180.
f) The Company issued 178,973 shares of common stock valued at $223,234 in
connection with issuance of notes and loans receivable from employee
stockholders.
Class B Common Stock
During the nine months ended March 31, 2005, 200 shares of Class B common stock
were converted to common stock leaving 3,953 of such shares outstanding as of
March 31, 2005.
Warrants
On July 1, 2004, warrants to purchase 151,625 shares of the Company's common
stock were exercised at an exercise price of $.79 per share resulting in
proceeds of $119,784.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 6 -STOCKHOLDERS' EQUITY (Continued)
Warrants (Continued)
On November 4, 2004 warrants to purchase 101,625 shares of the Company's common
stock were exercised at an exercise price of $.79 per share resulting in
proceeds of $80,274.
2005 Stock Bonus Plan
On February 16, 2005, the Company filed a registration statement on Form S-8 to
register 3,000,000 shares under the Company's Stock Bonus Plan that was adopted
on February 15, 2005.
2005 Incentive Stock Option Plan
On February 16, 2005, the Company filed a registration statement on Form S-8 to
register 2,000,000 shares under the Company's 2005 Incentive Stock Option Plan
that was adopted on February 15, 2005.
NOTE 7 - LITIGATION SETTLEMENT
In March 2005, the Company settled a litigation for $550,000. At June 30, 2004
the Company reserved $200,000 in anticipation of a settlement. For the three
months ended March 31, 2005, the Company recorded an additional $350,000 shown
in other expenses, to reflect the balance of the settlement.
NOTE 8 - SEGMENT AND RELATED INFORMATION
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of physician practices, including diagnostic
imaging services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies as disclosed in the Company's 10-K as
of June 30, 2004. 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:
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 8 - SEGMENT AND RELATED INFORMATION (Continued)
(000's omitted)
Physician
Medical Management
Equipment Services Total
--------- ---------- ---------
For the three months ended March 31, 2005:
Net revenues from external customers $ 19,440 $ 5,890 $ 25,330
Inter-segment net revenues $ 114 $ -- $ 114
Income (loss) from operations $ (160) $ 135 $ (25)
Depreciation and amortization $ 562 $ 395 $ 957
Compensatory element of stock issuances $ 371 $ 400 $ 771
Capital expenditures $ 436 $ 357 $ 793
For the three months ended March 31, 2004:
Net revenues from external customers $ 13,617 $ 5,736 $ 19,353
Inter-segment net revenues $ 119 $ -- $ 119
Loss from operations $ (949) $ (457) $ (1,406)
Depreciation and amortization $ 598 $ 482 $ 1,080
Compensatory element of stock issuances $ 360 $ 559 $ 919
Capital expenditures $ 473 $ 476 $ 949
Physician
Medical Management
Equipment Services Total
--------- ---------- ---------
For the nine months ended March 31, 2005:
Net revenues from external customers $ 62,255 $ 17,642 $ 79,897
Inter-segment net revenues $ 357 $ -- $ 357
Income from operations $ 1,376 $ 730 $ 2,106
Depreciation and amortization $ 1,760 $ 1,169 $ 2,929
Compensatory element of stock issuances $ 1,152 $ 1,323 $ 2,475
Capital expenditures $ 1,425 $ 1,124 $ 2,549
Total identifiable assets $ 45,872 $ 29,330 $ 75,202
For the nine months ended March 31, 2004:
Net revenues from external customers $ 32,970 $ 17,574 $ 50,544
Inter-segment net revenues $ 353 $ -- $ 353
Loss from operations $ (7,179) $ (429) $ (7,608)
Depreciation and amortization $ 1,681 $ 1,408 $ 3,089
Compensatory element of stock issuances $ 1,552 $ 1,699 $ 3,251
Capital expenditures $ 1,027 $ 598 $ 1,625
Total identifiable assets $ 46,784 $ 27,568 $ 74,352
NOTE 9 - SUBSEQUENT EVENT
Common Stock
During the period from April 1, 2005 through April 30, 2005:
a) The Company issued 101,084 shares of common stock to employees as
compensation of $133,744 under stock bonus plans.
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the nine month period ended March 31, 2005, we reported net income of
$1.4 million on revenues of $79.9 million as compared to a net loss of $8.0
million on revenues of $50.5 million for the first nine months of fiscal 2004.
Our success in achieving profitability in the first nine months of fiscal 2005
is primarily due to the increase in our product sales and the maintenance of
healthy gross profit margins on product sales.
For the fiscal quarter ended March 31, 2005 (third quarter of fiscal 2005),
we reported a net loss of $480,000 on revenues of $25.3 million as compared to a
net loss of $1.5 million on revenues of $19.4 million for the third quarter of
fiscal 2004. Notwithstanding the increase in revenues and improvement in
operating results in the third quarter of fiscal 2005 compared to the
corresponding period for fiscal 2004, increases in selling, general,
administrative and other expenses resulted in a loss for the third quarter of
fiscal 2005.
Forward Looking Statements
Certain statements made in this Quarterly Report on Form 10-Q are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the expansion of
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statement included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
Results of Operations
The Company operates in two industry segments: the manufacture and
servicing of medical (MRI) equipment, the Company's traditional business which
is conducted directly by Fonar, and in physician and diagnostic management
services, which is conducted through Fonar's wholly-owned subsidiary, Health
Management Corporation of America ("HMCA").
Trends continuing in the third quarter of fiscal 2005 include an increase
in product sales with a continued emphasis on unrelated party sales revenues
compared to related parties (entities in which Dr. Damadian or members of his
family have an interest) revenues and the maintenance of high gross profit
margins on product sales: 36.8% for the first nine months of fiscal 2005
compared to 38.4% for the first nine months of fiscal 2004. We attribute these
trends to the continuing growth of our MRI product sales, particularly our
Stand-Up(TM) MRI scanners (also called Upright(TM) MRI scanners) and the
efficiencies resulting from our higher sales volumes.
For the three month period ended March 31, 2005, as compared to the three
month period ended March 31, 2004, overall revenues from MRI product sales
increased 41.9% ($17.3 million compared to $12.2 million). Unrelated party
scanner sales ($15.6 million compared to $11.2 million) increased at a rate of
38.5% while related party scanner sales ($1.7 million compared to 1.0 million)
increased 81.8%. Overall, for the third quarter of fiscal 2005, revenues for the
medical equipment segment increased by 42.7% to $19.4 million from $13.6 million
for the third quarter of fiscal 2004. The revenues generated by HMCA also
increased, by 2.7% to $5.9 million for the third quarter of fiscal 2005 as
compared to $5.7 million for the third quarter of fiscal 2004.
For the nine month period ended March 31, 2005, as compared to the nine
month period ended March 31, 2004, overall revenues from MRI product sales
increased 96.0% ($56.5 million compared to $28.8 million). Unrelated party
scanner sales ($51.8 million compared to $24.7 million) increased at a rate of
110.0% while related party scanner sales ($4.6 million compared to $4.1 million)
increased by 12%. Overall, for the third quarter of fiscal 2005, revenues for
the medical equipment segment increased by 88.8% to $62.3 million from $33.0
million for the third quarter of fiscal 2004.
The increase in product sales reflected continuing market acceptance of the
Company's Stand-Up(TM) MRI scanners. During the first nine months of fiscal
2005, revenues of approximately $55.4 million were recognized from sales of
Stand-Up(TM) MRI scanners. During the first nine months of fiscal 2004, the
Company recognized revenues of approximately $28.6 million from the sale of
Stand-Up(TM) MRI scanners.
There were approximately $5.1 million in foreign sales revenues for the
first nine months of fiscal 2005 as compared to approximately $615,000 in
foreign sales revenues for the first nine months of fiscal 2004, representing an
increase in foreign sales revenues of 729%. The increase is primarily the result
of revenues recognized from two sales in the United Kingdom and one in
Switzerland.
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, this results from
the 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 recognition for product sales for the first nine months of
fiscal 2005 increased 96.0% from the first nine months of fiscal 2004 ($56.5
million compared to $28.8 million), although there was a decrease in the number
of orders of 23.3%: we received orders for 23 Stand-Up MRI scanners during the
first nine months of fiscal 2005 as compared to orders for 30 Stand-Up MRI
scanners during the first nine months of fiscal 2004.
Service and repair revenues increased by 84.6%, from $846,000 for the third
quarter of fiscal 2004 to $1.6 million for the third quarter of fiscal 2005.
License fees and royalties remained constant at $585,000 for the third quarter
of fiscal 2004 and fiscal 2005.
Service and repair revenues increased by 75.9%, from $2.3 million for the
first nine months of fiscal 2004 to $4.0 million for the first nine months of
fiscal 2005. License fees and royalties decreased by 5.6% from $1.9 million for
the first nine months of fiscal 2004 to $1.8 million for the first nine months
of fiscal 2005.
These increases in service revenues are occurring because after the
warranty on the MRI scanner expires, the owner will ordinarily enter into a
service contract to assure continued coverage.
Costs related to product sales increased by 43.4% from $7.7 million in the
third quarter of fiscal 2004 to $11.0 million in the third quarter of 2005,
reflecting the corresponding increase in product sales revenues. Costs related
to providing service increased 32.5% from $1.0 million in the third quarter of
fiscal 2004 to $1.4 million in the third quarter of 2005.
Costs related to product sales increased by 100.9% from $17.8 million in
the first nine months of fiscal 2004 to $35.7 million in the first nine months
of fiscal 2005. Costs related to providing service increased 29.8% from $2.9
million in the first nine months of fiscal 2004 to $3.8 million in the first
nine months of fiscal 2005.
Although the costs related to product sales increased at a slightly higher
rate than revenues from product sales, a difference we do not regard as
significant, the increase in 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. 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 $160,000
for the third quarter of fiscal 2005 as compared to an operating loss of
$949,000 for the third quarter of fiscal 2004, and our operating income for our
medical equipment segment was $1.4 million for the first nine months of fiscal
2005 as compared to an operating loss of $7.2 million of fiscal 2004.
Our gross profit margin for the entire medical equipment segment (as
opposed to just product sales) was 36.2% for the third quarter of fiscal 2005,
as compared to 35.9% for the third quarter of fiscal 2004, and 36.6% for the
first nine months of fiscal 2005 as compared to 37.3% for the first nine months
of fiscal 2004.
HMCA revenues increased in the third quarter of fiscal 2005, by 2.7% to
$5.9 million from $5.7 million for the third quarter of fiscal 2004. For the
first nine months of fiscal 2005 and fiscal 2004 HMCA revenues were constant at
$17.6 million. 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) MRI scanners. We now manage four sites equipped with Stand-Up(TM)
MRI scanners, and we are planning to open four 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 eight. During fiscal
2004, HMCA closed one MRI site. The costs involved in closing this site were
approximately $37,400. HMCA experienced operating income of $135,000 for the
third quarter of fiscal 2005 compared to operating loss of $457,000 for the
third quarter of fiscal 2004. For the first nine months of fiscal 2005, HMCA
experienced operating income of $730,000 as compared to operating loss of
$429,000 for the first nine months of fiscal 2004.
HMCA cost of revenues for the third quarter of fiscal 2005 increased
slightly to $3.7 million as compared to $3.6 million for the third quarter of
fiscal 2004. HMCA costs of revenues increased slightly from $10.8 million in the
first nine months of fiscal 2004 to $10.9 million in the first nine months of
fiscal 2005.
As our consolidated revenues increased by 30.9% to $25.3 million for the
third quarter of fiscal 2005 from $19.4 million for the third quarter of fiscal
2004, the total costs and expenses increased by 22.1% to $25.4 million for the
third quarter of fiscal 2005 from $20.8 million for the third quarter of fiscal
2004.
Selling, general and administrative expenses increased by 13.9% from $6.0
million in the third quarter of fiscal 2004 to $6.8 million in the third quarter
of fiscal 2005. This increase was related to expenses incurred in our medical
segment related to marketing and customer relations programs, such as
participating in a trade show, increased commissions, and an in-house seminar
for all owners of Stand-Up MRI scanners and increased professional fees. A
portion of the increased professional fees related to the engagement of outside
consultants to assist us in preparation of internal documentation in connection
with our compliance with Section 404 of the Sarbanes-Oxley Act. In addition we
incurred expenses in connection with the defense of non-material litigation.
Other expenses included the amount we paid in settlement of the litigation.
These foregoing items were the principal reasons we were unable to achieve
profitability in the third quarter of fiscal 2005.
For the nine months of fiscal 2005 the consolidated revenues increased by
58.1% to $79.9 million from $50.5 million for the first nine months of fiscal
2004. Our total costs and expenses increased 33.8% from $58.2 million for the
first nine months of fiscal 2004 to $77.8 million for the first nine months of
fiscal 2005. Selling, general and administrative expenses increased by 6.3% from
$18.8 million in the first nine months of fiscal 2004 to $20.0 million in the
first nine months of fiscal 2005.
The compensatory element of stock issuances decreased by 23.9% from $3.3
million in the first nine months of fiscal 2004 to $2.5 million in the first
nine months of fiscal 2005. This 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 5.9% to $4.3 million for the
first nine months of fiscal 2005 as compared to $4.1 million for the first nine
months of fiscal 2004.
Interest expense in the first nine months of fiscal 2005 decreased by 15.2%
to $179,000 from $211,000 for the first nine months of fiscal 2004.
Inventories increased by 13.1% to $10.8 million at March 31, 2005 as
compared to $9.6 million at June 30, 2004 as the Company product sales revenues
increased.
Costs and estimated earnings in excess of billings on uncompleted contracts
increased by 270% to $6.7 million at March 31, 2005 from $1.8 million at June
30, 2004. This increase resulted from customers' sites being unprepared for
delivery notwithstanding our readiness to ship. Under our sales agreements,
certain installments are due on delivery.
Management fee receivable and accounts receivable increased by 13.2% to
$17.7 million at March 31, 2005 from $15.6 million at June 30, 2004, primarily
due to increased receivables from the Company's medical equipment segment which
includes service contracts on MRI scanners.
As a result the Company's operating and net income were $2.1 million and
$1.4 million, respectively, for the first nine months of fiscal 2005 as compared
to operating and net losses of $7.6 million and $8.0 million, respectively, for
the first nine months of fiscal 2004.
The overall trends reflected in the results of operations for the first
nine months of fiscal 2005 are an increase in revenues from product sales, as
compared to the first nine months of fiscal 2004 ($56.5 million for the first
nine months of fiscal 2005 as compared to $28.8 million for the first nine
months of fiscal 2004), and an increase in MRI equipment segment revenues
relative to HMCA revenues ($62.3 million or 78% from the MRI equipment segment
as compared to $17.6 million or 22% from HMCA, for the first nine months of
fiscal 2005, as compared to $32.9 million or 65% from the MRI equipment segment
and $17.6 million or 35%, from HMCA, for the first nine months of fiscal 2004).
In addition, we experienced an increase in unrelated party sales relative to
related party sales in our medical equipment product sales ($51.8 million or 92%
to unrelated parties and $4.6 million or 8% to related parties for the first
nine months of fiscal 2005 as compared to $24.7 million, or 86% to unrelated
parties and $4.1 million or 14% to related parties for the first nine months of
fiscal 2004). The increase in unrelated party sales reflects the increasing
penetration of the marketplace by our Stand-Up(TM) MRI scanners.
We believe that the continuing trends in our medical equipment division
have resulted in improved operating results and a profitable nine months in
fiscal 2005. 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, or to assure that each individual fiscal quarter will be profitable.
Nevertheless, we believe we have been pursuing the correct policies which have
resulted in a profit for the first nine months of fiscal year 2005 and should
prove successful in improving the Company's operating results and net income.
The Company's Stand-Up(TM), and Fonar-360(TM) MRI scanners, together with
the Company's works-in-progress, are intended to significantly improve the
Company's competitive position.
The Company's Stand-Up(TM) scanner, which operates at 6000 gauss (.6 Tesla)
field strength, allows patients to be scanned while standing or reclining. As a
result, for the first time, MRI is able to be used to show abnormalities and
injuries under full weight-bearing conditions, particularly the spine and
joints. A floor-recessed elevator brings the patient to the height appropriate
for the targeted image region. A custom-built adjustable bed will allow patients
to sit or lie on their backs, sides or stomachs at any angle.
Full-range-of-motion studies of the joints in virtually any direction will be
possible, an especially promising feature for sports injuries.
The Stand-Up(TM) will also be useful for MRI directed neuro-surgical
procedures as the surgeon would have unhindered access to the patient's head
when the patient is supine with no restrictions in the vertical direction. This
easy-entry, mid-field-strength scanner should be ideal for trauma centers where
a quick MRI-screening within the first critical hour of treatment will greatly
improve patients' chances for survival and optimize the extent of recovery.
The Fonar 360(TM) is an enlarged room sized magnet in which the floor,
ceiling and walls of the scan room are part of the magnet frame. This is made
possible by Fonar's patented Iron-Frame(TM) technology which allows the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Consequently, this scanner allows 360 degree access to the
patient and physicians and family members are able to enter the scanner and
approach the patient.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is
sometimes referred to as the Open Sky(TM) MRI. In its Open Sky(TM) version, the
Fonar 360(TM) serves as an open patient friendly scanner which allows 360 degree
access to the patient on the scanner bed. To optimize the patient-friendly
character of the Open Sky(TM) MRI, the walls, floor, ceiling and magnet poles
are decorated with landscape murals. The patient gap is twenty inches and the
magnetic field strength, like that of FONAR's Stand-Up(TM) and QUAD(TM) MRI
scanner, is 0.6 Tesla.
In the future, we may also develop the Fonar 360(TM) to function as an
operating room. We sometimes refer to this contemplated version of the Fonar
360(TM) as the OR-360(TM). In its OR-360(TM) version, which is in the planning
stages, the enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360(TM) would permit full-fledged surgical teams to walk into the
magnet and perform surgery on the patient inside the magnet. Most importantly
the exceptional quality of the MRI image and its capacity to exhibit tissue
detail on the image, can then be obtained real time during surgery to guide the
surgeon in the surgery. Thus surgical instruments, needles, catheters,
endoscopes and the like could be introduced directly into the human body and
guided to the malignant lesion by means of the MRI image. The number of
inoperable lesions should be greatly reduced by the availability of this new
capability. Most importantly treatment can be carried directly to the target
tissue. The interventional OR-360(TM) version of the Fonar 360(TM) is still in
the planning stages. There is not a prototype. A full range of MRI compatible
surgical instruments using ceramic cutting tools and beryllium-copper materials
are commercial available.
The Company's works in progress include an in-office weight bearing
extremities scanner which will be able to be used to examine the knee, foot,
elbow, hand, wrist and shoulder. This scanner will allow scans to be performed
under both weight- bearing and non-weight-bearing conditions.
The Company expects marked demand for its most commanding MRI products, the
Stand- Up(TM) and the Fonar 360(TM), first for their exceptional features in
patient diagnosis and treatment. These scanners additionally provide improved
image quality and higher imaging speed because of their higher field strength of
..6 Tesla.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities decreased from $20.6
million at June 30, 2004 to $16.9 million at March 31, 2005. Principal uses of
cash during the first nine months of fiscal 2005 included capital expenditures
for property and equipment of $1.6 million, repayment of borrowings and capital
lease obligations in the amount of $5.9 million, capitalized software
development costs of $605,000 and capitalized patent and copyright costs of
$306,000.
Marketable securities approximated $10.6 million as at March 31, 2005, as
compared to $11.1 million at June 30, 2004. At March 31, 2005, our investments
in U.S. Government obligations were $4.7 million, our investments in corporate
and government agency bonds were $3.6 million and our investments in
certificates of deposit and deposit notes were $2.1 million. The investments
made have had the intended effect of maintaining a stable investment portfolio.
Cash used in operating activities for the first nine months of fiscal 2005
approximated $319,000. Cash used in operating activities was attributable
primarily to an increase in accounts receivable of $2.2 million, an increase in
costs and estimated earnings in excess of billings on uncompleted contracts of
$4.9 million and an increase in other current liabilities of $2.7 million offset
primarily by net income of $1.4 million and the issuance of stock for
compensation, costs and expenses in the amount of $6.8 million.
Cash used in investing activities for the first nine months of fiscal 2005
approximated $2.1 million. The principal uses of cash from investing activities
during the first nine months of fiscal 2005 consisted of, expenditures for
property and equipment of approximately $1.6 million and capitalized software
and patent costs of approximately $911,000.
Cash used in financing activities for the first nine months of fiscal 2005
approximated $679,000. The principal uses of cash in financing activities during
the first nine months of fiscal 2005 consisted of repayment of principal on
long-term debt and capital lease obligations of approximately $5.9 million and
distributions to holders of minority interests of $610,000. The sources of cash
from financing activities were net proceeds from exercises of stock options and
warrants of $254,000 and restricted cash of $5.5 million.
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 $ 558 $ 221 $ 337 $ -- $ --
Capital lease
Obligation 290 133 152 5 --
Operating
Leases 10,289 2,411 4,469 2,269 1,113
----------- ---------- ---------- ---------- ----------
Total cash
Obligations $ 11,137 $ 2,765 $ 4,958 $ 2,301 $ 1,113
=========== ========== ========== ========== ==========
Total liabilities decreased by 31.5% to $23.1 million at March 31, 2005
from $33.7 million at June 30, 2004.
We experienced a decrease in long-term debt from $720,000 at June 30, 2004
to $494,000 at March 31, 2005, a decrease in billings in excess of cost and
estimated earnings on uncompleted contracts from $2.9 million at June 30, 2004
to $842,000 at March 31, 2005 an increase in accounts payable from $5.4 million
at June 30, 2004 to $6.1 million at March 31, 2005, a decrease in customer
advances from $7.8 million at June 30, 2004 to $3.6 million at March 31, 2005
and an increase in other current liabilities from $10.0 million at June 30, 2004
to $10.9 million at March 31, 2005.
As of March 31, 2005, the obligations of approximately $10.9 million in
other current liabilities included deferred revenue from license fees of
$585,000, unearned revenue on service contracts of $3.6 million, accrued
salaries and payroll taxes of $1.7 million and excise and sales taxes of $2.4
million.
Our working capital approximated $32.4 million as of March 31, 2005, as
compared to working capital of $22.6 million as of June 30, 2004, increasing by
43.4%. This results principally from an increase in accounts receivable of $2.1
million ($15.6 million at June 30, 2004 as compared to $17.7 million at March
31, 2005), along with a decrease of customer advances of $4.2 million ($7.8
million at June 30, 2004 as compared to $3.6 million at March 31, 2005).
Accounts receivable increased from $15.6 million as at June 30, 2004 to $17.7
million as at March 31, 2005 due to increased receivables from the Company's
medical equipment segment and in particular, an increase of approximately $1.4
million in accounts receivable from service contracts on MRI scanners along with
an increase in our physician and diagnostic management services segment of
$612,000.
With respect to current liabilities, the current portion of long-term debt
decreased from $6.0 million at June 30, 2004 to $354,000 at March 31, 2005, and
billings in excess of costs and estimated earnings on uncompleted contracts
decreased from $2.9 million at June 30, 2004 to $842,000 at March 31, 2005.
Customer advances decreased from $7.8 million at June 30, 2004 to $3.6 million
at March 31, 2005 and accounts payable increased from $5.4 million at June 30,
2004 to $6.1 million at March 31, 2005.
The decrease in current portion of long-term debt resulted from payment of
our $5.5 million line of credit loan which also was reflected in the reduction
of the restricted cash securing that loan from $5.5 million at June 30, 2004 to
$0 at March 21, 2005.
The aggregate decrease in customer advances and billings in excess of costs
and estimated earnings on uncompleted contracts reflects the Company's progress
in filling its backlog of orders, which also translates into an increase in
recognized revenues. A portion of this increase in revenues has resulted in an
increase in our costs and estimated earnings from $1.8 million at June 30, 2004
to $6.7 million at March 31, 2005. The increase in accounts payable resulted
from the purchase of parts to manufacture the scanners.
In order to conserve our capital resources, we have issued common stock
under our stock bonus and stock option plans to compensate employees and
non-employees for services rendered. In the first nine months of fiscal 2005,
the compensatory element of stock issuances was $2.5 million as compared to $3.3
million for the first nine months of fiscal 2004. 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
2005 fiscal year other than its intention to continue research and development
expenditures at current levels. HMCA also expects to incur capital expenditures
of approximately $1.2 million to acquire premises and to construct and furnish
four new Stand-Up(TM) MRI facilities, which would bring the total number of
Stand-Up(TM) MRI facilities managed by HMCA to eight.
Our business plan calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices.
We believe that the above mentioned financial resources, anticipated cash
flows from operations and potential financing sources, will provide the cash
flows needed to achieve the sales, service and production levels necessary to
support our operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investments are in fixed rate instruments. Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
March 31, 2005.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments Weighted
Year of in Fixed Rate Average
Maturity Instruments Interest Rate
-------- ------------- -------------
3/31/06 $ 4,328,488 1.50%
3/31/07 1,098,982 3.55%
3/31/08 1,350,000 3.20%
3/31/09 1,400,000 3.31%
3/31/10 2,144,499 2.88%
3/31/11 200,000 3.92%
3/31/14 100,000 4.14%
-------------
Total: $10,621,969
=============
Fair Value
at 3/31/05 $10,452,430
=============
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, 2004 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 made no significant changes during the three months ended March
31, 2005 in its internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation of those controls
by the principal executive and acting principal financial officer.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: There were no material changes in litigation for the
first nine months of fiscal 2005.
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: 8-K (earnings press release) filed on
September 16, 2004 8-K (earnings press
release) filed on November 9, 2004
Exhibit 31.1 Certification See Exhibits
Exhibit 32.1 Certification See Exhibits
8-K (earnings press release) filed on
February 9, 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: May 10, 2005