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, 1996 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, 1996 - -------------------------------- --------------------------------------- Common Stock, par value $.0001 45,066,671 Class B Common Stock, par value $.0001 5,411 Class C Common Stock, par value $.0001 9,562,824 Class A Preferred Stock, par value $.0001 7,855,627 FONAR CORPORATION AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1996 and June 30, 1996 3 Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 1996 and December 31, 1995 4 Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 1996 and December 31, 1995 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1996 and December 31, 1995 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 FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) ASSETS December 31, June 30, 1996 1996 (UNAUDITED) Current Assets: --------- ------- Cash $ 9,700 $ 3,712 Accounts and notes receivable, net of allowance for doubtful accounts of $ 713 1,660 1,797 Accounts receivable from affiliates 400 400 Costs and estimated earnings in excess of billings on uncompleted contracts (Note C) 547 336 Inventories (Note B) 5,719 3,624 Other current assets 987 1,595 ------ ------ Total current assets 19,013 11,464 ====== ====== Assets held for resale 450 450 ------ ------ Property and equipment, at cost 13,968 13,820 Less accumulated depreciation and amortization (11,645) (11,319) -------- -------- 2,323 2,501 Investment, advances and notes to affiliates and related parties, net of allowance of $ 1,250 30,195 28,353 Cost of acquired technology and license, patents and software development costs, net 4,309 4,460 Net investment in sales-type leases 4,240 5,519 Costs and estimated earning in excess of billings on uncompleted contracts (Note C) 9,460 9,460 Other assets 1,054 889 ------ ------- $ 71,044 $ 63,096 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable $ 100 $ 100 Current maturities of long-term debt and capital lease obligations 2,641 2,909 Accounts payable 1,759 1,748 Billings in excess of costs and estimated earnings on uncompleted contracts (Note C) 187 170 Accrued expenses, customer advances and other current liabilities 8,121 8,892 ------ ------ Total current liabilities 12,808 13,819 ====== ====== Long-term debt and capital lease obligations less current maturities 737 963 Other liabilities 39 59 ------ ------ 776 1,022 ------ ------ Minority interest 19 117 ------ ------ Stockholders' Equity (Note D) 57,441 48,138 ------ ------ $ 71,044 $ 63,096 See notes to condensed consolidated financial statements. ====== ====== FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except per share data) FOR THE THREE MONTHS ENDED DECEMBER 31, --------------------- 1996 1995 -------- -------- REVENUES $ 2,973 $ 3,672 -------- -------- COSTS AND EXPENSES: Cost of revenues 2,194 2,152 Research and development 951 777 Selling, general and administrative 2,872 1,929 ------- ------- Loss from operations ( 3,044) ( 1,186) Other income, net 9,420 256 ------- ------- Net income (loss) before provision for taxes and minority interest 6,376 ( 930) Provision for income taxes - - ------- ------- Net income (loss) before minority interest 6,376 ( 930) Minority interest in net loss of subsidiary and partnership 48 53 ------ ------ NET INCOME (LOSS) $ 6,424 $( 877) ======= ======= Net income per common share: Net income (loss) before taxes & minority interest $ .11 $( .02) Minority interest .00 .00 ------ ------ Net income per common share $ .11 $( .02) ====== ====== Weighted average number of common shares outstanding 56,116 49,879 ====== ====== See notes to condensed consolidated financial statements. FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except per share data) FOR THE SIX MONTHS ENDED DECEMBER 31, --------------------- 1996 1995 ------- -------- REVENUES $ 5,560 $ 8,015 ------- -------- COSTS AND EXPENSES: Cost of revenues 4,157 4,342 Research and development 1,869 1,623 Selling, general and administrative 4,916 3,929 ------- ------- Loss from operations ( 5,382) ( 1,879) Other income, net 9,685 537 ------- ------- Net income (loss) before provision for taxes and minority interest 4,303 ( 1,342) Provision for income taxes - - ------- ------- Net income (loss) before minority interest 4,303 ( 1,342) Minority interest in net loss of subsidiary and partnership 98 95 ------ ------ NET INCOME (LOSS) $ 4,401 $( 1,247) ======= ====== Net income per common share: Net income (loss) before taxes & minority interest $ .08 $( .03) Minority interest .00 .00 ------ ------ Net income per common share $ .08 $( .03) ====== ====== Weighted average number of common shares outstanding 56,116 49,879 ====== ====== See notes to condensed consolidated financial statements. FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE SIX MONTHS ENDED DECEMBER 31, ----------------- 1996 1995 ------ ------ Operating activities: Net income (loss) $ 4,401 $( 1,247) Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in net income (loss) ( 98) ( 95) Depreciation and amortization 794 1,084 (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 ( 1,543) 528 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 ( 763) ( 1,558) ------ ------ Net cash provided (used) in operating activities 2,791 ( 1,288) ------ ------ Investing activities: Purchases of property and equipment, net of capital lease obligations ( 128) ( 71) Investment in and receivables from affiliates ( 1,842) ( 5,215) Cost of acquired technology and license, patents and software development costs, net ( 317) ( 542) ------ ------ Net cash used in investing activities ( 2,287) ( 5,828) ------ ------ Financing activities: Proceeds from borrowings, net of capital lease obligations - - Repayment of borrowings and capital lease obligations ( 514) ( 436) (Increase) decrease in investment in sales-type leases - - Collection of principal on sales-type leases 1,261 103 Issuance of common stock and warrants and collection of stockholder notes, net 4,902 5,817 Decrease (increase) in other assets ( 165) ( 510) ------ ------ Net cash provided by financing activities 5,484 4,974 ------ ------ Increase (decrease) in cash 5,988 ( 2,142) Cash at beginning of period 3,712 3,267 ------ ------ Cash at end of period $ 9,700 $ 1,125 ====== ====== See notes to condensed consolidated financial statements. FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 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. 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, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 1997. For further information, refer to the Company's consolidated report on Form 10-K for the fiscal year ended June 30, 1996. NOTE B - INVENTORIES The components of inventory consist of: (000's OMITTED) ------------------ December 31, June 30, 1996 1996 ------- ------- Purchased parts components and supplies $ 5,233 $ 3,316 Work in process 486 308 ------- ------- $ 5,719 $ 3,624 ======= ======= NOTE C - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Uncompleted contracts are comprised of: (000's OMITTED) -------------------- December 31, June 30, 1996 1996 ------- ------- Costs incurred on uncompleted contracts $ 6,035 $ 5,147 Estimated earnings 7,484 7,202 ------- ------- 13,519 12,349 Less: billings to date ( 3,699) ( 2,723) ------- ------- $ 9,820 $ 9,626 ======= ======= Uncompleted contracts have been individually netted and are reported as follows: Costs and estimated earnings in excess of billings on uncompleted contracts-short term $ 547 $ 336 Costs and estimated earnings in excess of billings on uncompleted contracts-long term 9,460 9,460 Billings in excess of costs and estimated earnings on uncompleted contracts ( 187) ( 170) ------- ------- $ 9,820 $ 9,626 ======= ======= NOTE D - STOCKHOLDERS' EQUITY (000'S OMITTED) Stockholders' Equity is comprised of: --------------------------- December 31, June 30, 1996 1996 ------------- ----------- Common Stock $.0001 par value; 50,000,000 shares authorized; 45,066,671 outstanding at December 31 and 42,871,751 at June 30 $ 5 $ 4 Class B Common Stock $ .0001 par value; 4,000,000 shares authorized, 5,411 outstanding at December 31 and at June 30. - - Class C Common Stock $ .0001 par value; 10,000,000 shares authorized, 9,562,824 outstanding at December 31 and at June 30. 1 1 Class A non-voting Preferred Stock $.0001 par value; 8,000,000 shares authorized, 7,855,627 outstanding at December 31 and at June 30. 1 1 Additional paid-in capital 81,291 75,985 Accumulated deficit (21,297) (25,698) Notes receivable - stockholders ( 2,165) ( 1,760) Treasury stock - 108,864 shares ( 395) ( 395) ------- ------- $ 57,441 $ 48,138 ======= ======= NOTE E - CHANGES IN CAPITALIZATION The Company's debt to equity ratio changed from approximately 1:3 ($14.8 million:$48.1 million) as at June 30, 1996 to approximately 1:4 ($13.6 million:$57.4 million) as at December 31, 1996. This change in the Company's capitalization resulted from a combination of an increase in stockholders' equity (approximately $9.3 million) and a decrease of approximately $1.0 million in current liabilities. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. For the first six months of fiscal 1997, the Company reported net income of $4.4 million on revenues of $5.6 million as compared to a net loss of $1.2 million on revenues of $8.0 million for the first six months of fiscal 1996. For the second quarter of fiscal 1997, the Company reported net income of $6.4 million on revenues of $3.0 million as compared to a net loss of $877,000 on revenues of $3.7 million for the second quarter of fiscal 1996. The Company's QUAD (TM) 7000 and QUAD (TM) 12000 MRI scanners, together with other research and development projects, are intended to significantly improve the Company's competitive position. Having received FDA approval for its QUAD 7000 and QUAD 12000 scanners, the Company is aggressively marketing its products. The QUAD scanners are highly competitive and totally new non-claustrophobic scanners not previously available in the MRI market. At .6 Tesla field strength, 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. In November, 1996, the Company concluded an agreement with a chain of medical distributors having a large national sales force. As part of its marketing program, the Company also attended the industry's annual trade show, RSNA (Radiological Society of North America) in November 1996. The Company believes that it is uniquely positioned to take advantage of the rapidly expanding "Open MRI" market, as the manufacturer of the only high-field "Open MRI" in the industry. The Company expects marked demand for its high-field "Open MRI" scanners since image quality increases as a direct proportion to magnetic field strength. 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. Cost containment programs continue in force, but the Company is expanding its operations and productive capacity to meet new orders worldwide. Consequently, although costs of revenues decreased slightly to $4.2 million for the first six months of fiscal 1997 ($2.2 million for the second quarter of fiscal 1997) as compared to $4.3 million for the first six months of fiscal 1996 ($2.2 million for the second quarter of fiscal 1996), research and development, selling, general and administrative expenses increased to approximately $6.8 million for the first six months of fiscal 1997 ($3.8 million for the second quarter of fiscal 1997) as compared to $5.6 million for the first six months of fiscal 1996 ($2.7 million for the second quarter of fiscal 1996). These cost containment programs, which include increasing the portion of manufacturing conducted on the Company's premises, have enabled the Company to achieve significantly lower manufacturing costs than would have otherwise been experienced in the production of its QUAD scanners. This has enabled the Company to pass on to customers a much needed reduction in the sales price of MRI scanners. The Company has continued its program for upgrading previously installed scanners. The versatility and productivity of MRI technology creates the impetus for new uses. As a result, 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. The Company has continued its efforts to increase scanner sales in foreign countries as well as domestically. Based on sales to date, further indications of interest, meetings, sales trips abroad and negotiations, the Company is cautiously optimistic that foreign sales will prove a significant source of revenue. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company's liquidity and capital resources positions changed from the June 30, 1996 position as follows: December 31, June 30, 1996 1996 Change ____________ ____________ __________ Working capital (deficiency) $6,205,000 ($2,355,000) $8,560,000 Total liabilities were reduced since June 30, 1996 by approximately $1.3 million to approximately $13.6 million at December 31, 1996. 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, from June 30, 1993 to June 30, 1994 by $3.8 million to $6.0 million, and from June 30, 1994 through June 30, 1995, by $2.1 million to approximately $3.9 million. At June 30, 1996 interest bearing debt was approximately $4.0 million, and was reduced by approximately $514,000 to $3.5 million at December 31, 1996. As of December 31, 1996, the Company had no unused credit facilities with banks or financial institutions. While continuing to focus on new sources of income and cost containment, the Company's business plan currently includes an aggressive program for manufacturing and selling its new line of QUAD scanners which are achieving success in the marketplace and which the Company has had under development for four years. 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. PART II - OTHER INFORMATION Item 1 - Legal Proceedings: In March 1993, the Company commenced an action in the United States District Court for the Southern District of New York against an independent service organization, Magnetic Resonance Plus, Inc. for infringing Fonar's copyrighted software and misappropriating Fonar's trade secrets. Magnetic Resonance Plus counterclaimed, alleging that Fonar had violated the antitrust laws and tortiously interfered with Magnetic Resonance Plus' contracts and prospective economic advantage. FONAR CORPORATION V. MAGNETIC RESONANCE PLUS, INC., 93 CIV. 2220 (CBM). In July 1996, the Court dismissed Fonar's claims. Nevertheless, over Fonar's objections and notwithstanding that Fonar was appealing the decision, the Court allowed Magnetic Resonance Plus' counterclaims to proceed to trial. In December 1996, after trial, the jury rejected Magnetic Resonance Plus' antitrust claims (as well as a third state law claim), but delivered a verdict of $2.3 million (including $800,000 in punitive damages) against the Company on the two tortious interference claims. Subsequently, in January 1997, the Court of Appeals for the Second Circuit reversed the District Court and reinstated Fonar's copyright and unfair competition claims against Magnetic Resonance Plus. The Company expects that the Court of Appeals' decision reinstating its claims will also result in a reversal of the $2.3 million judgment against it, since the centerpiece of Magnetic Resonance Plus' tortious interference argument was that Fonar's copyright lawsuit was baseless. There were no other material changes in litigation for the second quarter of fiscal 1997 from that described in Form 10-K for the fiscal year ended June 30, 1996. 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 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 13, 1997