FONAR CORP — Interim / Quarterly Report 1996

Feb 14, 1996

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED DECEMBER 31, 1995 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: (516) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding at December 31, 1995 - -------------------------------- --------------------------------------- Common Stock, par value $.0001 40,310,247 Class B Common Stock, par value $.0001 5,848 Class C Common Stock, par value $.0001 9,562,824 Class A Preferred Stock, par value $.0001 7,855,627 Page 1 FONAR CORPORATION AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1995 and June 30, 1995 3 Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 1995 and December 31, 1994 4 Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 1995 and December 31, 1994 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1995 and December 31, 1994 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations PART II - OTHER INFORMATION 11 Page 2 FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) ASSETS December 31, June 30, 1995 1995 (UNAUDITED) Current Assets: --------- ------- Cash $ 1,125 $ 3,267 Accounts and notes receivable, net of allowance for doubtful accounts of $ 604 1,415 1,797 Accounts receivable from affiliates 400 400 Costs and estimated earnings in excess of billings on uncompleted contracts (Note C) 568 324 Inventories (Note B) 2,508 2,295 Other current assets 1,106 1,483 ------ ------ Total current assets 7,122 9,566 ====== ====== Assets held for resale 598 598 ------ ------ Property and equipment, at cost 13,245 13,416 Less accumulated depreciation and amortization (10,787) (10,630) -------- -------- 2,458 2,786 Investment, advances and notes to affiliates and related parties, net of allowance of $ 1,250 29,566 23,940 Cost of acquired technology and license, patents and software development costs, net 5,036 5,084 Net investment in sales-type leases 5,318 4,962 Costs and estimated earning in excess of billings on uncompleted contracts (Note C) 5,996 6,681 Other assets 1,837 1,327 ------ ------- $ 57,931 $ 54,944 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable $ 100 $ 100 Current maturities of long-term debt and capital lease obligations 3,055 3,252 Accounts payable 1,376 1,595 Billings in excess of costs and estimated earnings on uncompleted contracts (Note C) 14 11 Accrued expenses, customer advances and other current liabilities 8,363 9,685 ------ ------ Total current liabilities 12,908 14,643 ====== ====== Long-term debt and capital lease obligations less current maturities 796 529 Other liabilities 79 99 ------ ------ 875 628 ------ ------ Minority interest 190 285 Stockholders' Equity (Note D) 43,958 39,388 ------ ------ $ 57,931 $ 54,944 ====== ====== See notes to condensed consolidated financial statements. Page 3 FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except per share data) FOR THE THREE MONTHS ENDED DECEMBER 31, --------------------- 1995 1994 -------- -------- REVENUES $ 3,672 $ 3,671 -------- -------- COSTS AND EXPENSES: Cost of revenues 2,152 1,528 Research and development 777 846 Selling, general and administrative 1,929 1,727 ------- ------- Loss from operations ( 1,186) ( 430) Other income, net 256 355 ------- ------- Loss before provision for taxes and minority interest ( 930) ( 75) Provision for income taxes - - ------- ------- Loss before minority interest ( 930) ( 75) Minority interest in net loss of subsidiary and partnership 53 24 ------ ------ NET LOSS $( 877) $( 51) ======= ======= Net income per common share: Loss before taxes & minority interest $ ( .02) $ .00 Minority interest .00 .00 ------ ------ Net income per common share $( .02) $ .00 ====== ====== Weighted average number of common shares outstanding 49,879 38,006 ====== ====== See notes to condensed consolidated financial statements. Page 4 FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except per share data) FOR THE SIX MONTHS ENDED DECEMBER 31, --------------------- 1995 1994 ------- -------- REVENUES $ 8,015 $ 8,577 ------- -------- COSTS AND EXPENSES: Cost of revenues 4,342 3,802 Research and development 1,623 1,643 Selling, general and administrative 3,929 3,842 ------- ------- Loss from operations ( 1,879) ( 710) Other income, net 537 479 ------- ------- Loss before provision for taxes and minority interest ( 1,342) ( 231) Provision for income taxes - - ------- ------- Loss before minority interest ( 1,342) ( 231) Minority interest in net loss of subsidiary and partnership 95 108 ------ ------ NET LOSS $( 1,247) $( 123) ======= ====== Net income per common share: Loss before taxes and minority interest $( .03) $ .00 Minority interest .00 .00 ------ ------ Net income per common share $( .03) $ .00 ====== ====== Weighted average number of common shares outstanding 49,879 38,006 ====== ====== See notes to condensed consolidated financial statements. Page 5 FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE SIX MONTHS ENDED DECEMBER 31, ----------------- 1995 1994 ------ ------ Operating activities: Net income (loss) $( 1,247) $( 123) Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in net income (loss) ( 95) ( 108) Depreciation and amortization 1,084 1,154 (Increase) decrease in operating assets, net: accounts and notes receivable, inventories, other current assets, costs and estimated earnings in excess of billings on uncompleted contracts and assets held for resale 528 ( 1,788) Increase (decrease) in operating liabilities, net: accounts payable, accrued expenses and other current liabilities, billings in excess of costs and estimated earnings on uncompleted contracts and other liabilities ( 1,558) ( 2,112) ------ ------ Net cash used in operating activities ( 1,288) ( 2,977) ------ ------ Investing activities: Purchases of property and equipment, net of capital lease obligations ( 71) ( 9) Investment in and receivables from affiliates ( 5,215) ( 1,856) Cost of acquired technology and license, patents and software development costs, net ( 542) ( 648) ------ ------ Net cash used in investing activities ( 5,828) ( 2,513) ------ ------ Financing activities: Proceeds from borrowings, net of capital lease obligations - - Repayment of borrowings and capital lease obligations ( 436) ( 1,189) (Increase) decrease in investment in sales-type leases - 962 Collection of principal on sales-type leases 103 203 Issuance of common stock and warrants and collection of stockholder notes, net 5,817 5,401 Decrease (increase) in other assets ( 510) 15 ------ ------ Net cash provided by financing activities 4,974 5,392 ------ ------ Increase (decrease) in cash ( 2,142) ( 98) Cash at beginning of period 3,267 577 ------ ------ Cash at end of period $ 1,125 $ 479 ====== ====== See notes to condensed consolidated financial statements. Page 6 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE A - 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 10Q and Article 10 of Regulation S-K. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The comparative figures for fiscal 1995 have been adjusted to reflect year end adjustments. In the opinion of management, all adjustments (consisting of normal adjusting accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended December 31, 1995 are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 1996. For further information, refer to the Company's consolidated report on Form 10-K for the fiscal year ended June 30, 1995. NOTE B - INVENTORIES The components of inventory consist of: (000's OMITTED) ------------------ December 31, June 30, 1995 1995 ------- ------- Purchased parts components and supplies $ 2,410 $ 2,205 Work in process 98 90 ------- ------- $ 2,508 $ 2,295 ======= ======= NOTE C - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Uncompleted contracts are comprised of: (000's OMITTED) -------------------- December 31, June 30, 1995 1995 ------- ------- Costs incurred on uncompleted contracts $ 4,460 $ 4,373 Estimated earnings 4,826 5,053 ------- ------- 9,286 9,426 Less: billings to date ( 2,736) ( 2,432) ------- ------- $ 6,550 $ 6,994 ======= ======= Uncompleted contracts have been individually netted and are reported as follows: Costs and estimated earnings in excess of billings on uncompleted contracts-short term $ 568 $ 324 Costs and estimated earnings in excess of billings on uncompleted contracts-long term 5,996 6,681 Billings in excess of costs and estimated earnings on uncompleted contracts ( 14) ( 11) ------- ------- $ 6,550 $ 6,994 ======= ======= Page 7 NOTE D - STOCKHOLDERS' EQUITY (000'S OMITTED) Stockholders' Equity is comprised of: --------------------------- December 31, June 30, 1995 1995 ------------- ----------- Common Stock $.0001 par value; 50,000,000 shares authorized; 40,310,247 outstanding at December 31 and 38,229,448 at June 30 $ 4 $ 4 Class B Common Stock $ .0001 par value; 4,000,000 shares authorized, 5,848 outstanding at December 31 and 3,193,456 at June 30. - - Class C Common Stock $ .0001 par value; 10,000,000 shares authorized, 9,562,824 outstanding at December 31. 1 - Class A non-voting Preferred Stock $.0001 par value; 8,000,000 shares authorized, 7,855,627 outstanding at December 31. 1 1 Additional paid-in capital 69,855 63,779 Accumulated deficit (23,351) (22,104) Notes receivable - stockholders ( 2,157) ( 1,897) Treasury stock - 108,864 shares ( 395) ( 395) ------- ------- $ 43,958 $ 39,388 ======= ======= NOTE E - CHANGES IN CAPITALIZATION The Company's debt to equity ratio changed from approximately 3:8 ($15.3 million:$39.4 million) as at June 30, 1995 to approximately 1:3 ($13.8 million:$44.0 million) as at December 31, 1995. This change in the Company's capitalization resulted from a combination of an increase in capital stock (approximately $5.8 million) and a decrease of approximately $1.7 million in current liabilities. Page 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the first six months of fiscal 1996, the Company reported net loss of $ 1.2 million on revenues of $ 8.0 million as compared to net loss of $ 123,000 on revenues of $ 8.6 million for the corresponding period of the prior fiscal year. For the second quarter of fiscal 1996, the Company reported net loss of $877,000 on revenues of approximately $3.7 million, as compared to net loss of $ 51,000 on revenues of approximately $3.7 million for the corresponding period for the prior fiscal year. The Company continues to benefit from the programs the Company set in motion in fiscal 1989; namely strict cost containment initiative, the redirecting of corporate business into more profitable enterprises within the MRI industry and the paying down of interest bearing debt. The Company has received FDA approval for its "Quad 7000" and "Quad 12000" MRI scanners and has commenced selling. These products, together with other research and development projects are intended to significantly improve the Company's competitive position. The Quad scanners are highly competitive and totally new non-claustrophobic scanners not previously available in the MRI market. The Quad 12000 magnet is the highest field "Open MRI" in the industry, offering non-claustrophobic MRI together with high-field image quality for the first time. The Company expects vigorous sales from its new products. The exceptional versatility and productivity of MRI technology creates the impetus for new uses. As a result, dramatic new features are developed and sold to the Company's customer base thereby extending the useful life of their equipment, avoiding obsolescence and minimizing capital expenditures. Upgrades consist of hardware, software and pulse sequences designed to maximize throughput while maintaining image quality and patient comfort. Accordingly, during the current fiscal year, the Company has continued the program for upgrading previously installed scanners. In conjunction with this program, significant research and development programs were undertaken, emphasizing the development of new features for the Company's scanner upgrade program. More specifically, products derived from the Company's new scanners are expected to generate upgrade revenue as customers upgrade their existing scanners to take advantage of the improved image quality and high speed image processing capabilities. As part of its marketing program, the Company attended the industry's annual trade show, RSNA (Radiological Society of North America) in November 1995, where its new Quad 12000 and Quad 7000 scanners were enthusiastically received. The Company believes that it is uniquely positioned to take advantage of the rapidly expanding "Open MRI" market. The Company now is uniquely positioned as the manufacturer of the only high-field "Open MRI" in the industry. The Company expects marked demand for this product since image quality increases as a direct proportion to magnetic field strength. The demand for "Open MRI" is a very strong but the industry reputation of these magnets has been hampered by their weak magnetic field strengths and impaired image quality. Fonar's .6 Tesla Quad 12000 cures this limitation. In addition, the Company's new scanners provide improved image quality and high speed imaging at costs that are significantly less than the competition and more in keeping with the medical cost reduction demands being made by our national leaders on behalf of the public. Page 9 In fiscal 1992, the Company began laying the ground work for increased scanner sales in foreign countries as well as domestically. The Company has continued these efforts, and based on sales to date, further indications of interest, meetings, sales trips abroad and negotiations, the Company is cautiously optimistic that foreign sales will produce significant revenue. Liquidities and Capital Resources At December 31, 1995, the Company's liquidity and capital resources positions changed from the June 30, 1995 position as follows: December 31, June 30, 1995 1995 Change ------------- ---------- --------- Working capital (deficiency) ($ 5,786,000) ($ 5,077,000) $( 709,000) Total liabilities were reduced since June 30, 1995 by approximately $1.5 million to approximately $13.8 million. As of December 31, 1995, the Company had no unused credit facilities with banks or financial institutions. Since June 1989, a principal objective of the Company has been to reduce and ultimately eliminate its debt. Since the inception of the plan, interest bearing debt was reduced from $23.1 million in fiscal 1989 to $18.5 million in fiscal 1990. From June 30, 1990 through June 30, 1991, interest bearing debt was reduced by an additional $3.3 million to $15.2 million and from June 30, 1991 through June 30, 1992 interest bearing debt was reduced by an additional $3.1 million to $12.1 million. From June 30, 1992 through June 30, 1993, interest bearing debt was reduced by $2.3 million to $9.8 million, and from June 30, 1993 to June 30, 1994 by $ 3.8 million to $ 6.0 million. Through June 30, 1995, interest bearing debt was reduced by an additional $2.1 million to approximately $3.9 million and through December 31, 1995 interest bearing debt was further reduced by $400,000 to approximately $3.5 million. While continuing to focus on new sources of income and cost containment, the Company's business plan is also re-emphasizing MRI scanner sales with the new Quad scanners. The Company expects to reduce its working capital deficiency during the current fiscal year by internally generated cash from operating profits and the refinancing and/or restructuring of maturity terms of certain loans. The Company will also pursue equity financing alternatives. The Company believes that the above mentioned programs will provide the cash flows needed to achieve the sales, service and production levels necessary to support its operations. Page 10 PART II - OTHER INFORMATION Item 1 - Legal Proceedings: There were no material changes in litigation for the second quarter of fiscal 1996 from that described in Form 10-K for the fiscal year ended June 30, 1995. 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: None Page 11 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) Dated: February 13, 1996 By: /s/ Raymond V. Damadian ------------------------- Raymond V. Damadian President & Chairman Page 12