FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 2002
----------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10248
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FONAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-2929
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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 period covered by this report.
Class Outstanding at February 10, 2003
- -------------------------------- ---------------------------------------
Common Stock, par value $.0001 76,680,706
Class B Common Stock, par value $.0001 4,153
Class C Common Stock, par value $.0001 9,562,824
Class A Preferred Stock, par value $.0001 7,836,287
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2002
(Unaudited) and June 30, 2002 3
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 2002 and
December 31, 2001 (Unaudited) 5
Condensed Consolidated Statements of Operations for
the Six Months Ended December 31, 2002 and
December 31, 2001 (Unaudited) 6
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Three Months Ended
December 31, 2002 and December 31, 2001 (Unaudited) 7
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Six Months Ended
December 31, 2002 and December 31, 2001 (Unaudited) 7
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 2002 and
December 31, 2001 (Unaudited) 8
Notes to Condensed Consolidated Financial Statements (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial 19
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 25
Market Risk
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION 26
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Page 2
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS December 31, June 30,
2002 2002
(UNAUDITED)
Current Assets: --------- ---------
Cash and cash equivalents $ 4,890 $ 7,494
Marketable securities 5,743 5,573
Restricted cash 5,500 5,500
Accounts receivable - net 1,501 781
Accounts receivable - related medical practices - net 12,936 13,311
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,308 1,153
Inventories 3,955 4,664
Investment in sales-type leases with related parties 119 1,797
Investment in sales-type lease 127 120
Prepaid expenses and other current assets 1,986 1,102
--------- ---------
Total current assets 38,065 41,495
--------- ---------
Property and equipment - net 9,325 10,596
Advances and notes to related parties - net 1,274 1,497
Investment in sales-type leases - related parties 777 815
Investment in sales-type lease 676 741
Notes receivable 89 175
Management agreements - net 14,028 14,520
Other intangible assets - net 3,059 2,649
Other assets 348 342
--------- ---------
$ 67,641 $ 72,830
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 3
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2002
(UNAUDITED)
Current Liabilities: --------- ---------
Current portion of long-term debt and capital leases $ 8,642 $ 9,776
Accounts payable 6,396 4,077
Other current liabilities 7,980 7,556
Customer advances 3,149 4,308
Customer advances - related parties 991 3,400
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,414 1,115
Income taxes payable 758 758
--------- ---------
Total Current Liabilities 29,330 30,990
Long-term debt and capital leases
less current portion 333 833
Unearned revenue - license fee 3,510 4,680
Other non-current liabilities 335 360
--------- ---------
Total Liabilities 33,508 36,863
--------- ---------
Minority interest 199 272
--------- --------
STOCKHOLDERS' EQUITY
Class A non-voting Preferred Stock $.0001 par
value; 8,000,000 authorized, 7,836,287 issued and
outstanding at December 31 and at June 30, 2002 1 1
Common Stock $.0001 par value; 85,000,000 shares
authorized; 74,657,193 issued and outstanding at
December 31, 2002 and 71,582,243 at June 30, 2002 7 7
Class B Common Stock $ .0001 par value; 4,000,000
shares authorized, (10 votes per share), 4,211
issued and outstanding at December 31 and June 30,
2002 - -
Class C Common Stock $.0001 par value; 10,000,000
shares authorized, (25 votes per share), 9,562,824
issued and outstanding at December 31 and at June
30, 2002 1 1
Paid-in capital in excess of par value 123,720 120,156
Accumulated other comprehensive income 61 85
Accumulated deficit (88,510) (82,883)
Notes receivable from stockholders ( 671) ( 997)
Treasury stock, at cost - 291,064 shares of common
stock at December 31 and at June 30, 2002 ( 675) ( 675)
--------- ---------
Total Stockholders' Equity 33,934 35,695
--------- ---------
Total Liabilities and Stockholders' Equity $ 67,641 $ 72,830
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 4
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
REVENUES --------- ---------
Product sales - net $ 5,933 $ 480
Product sales - related parties - net 2,822 1,585
Service and repair fees - net 594 472
Service and repair fees - related parties - net 101 67
Management and other fees - related medical
practices - net 6,166 6,514
License fees and royalties 732 648
--------- ---------
Total Revenues - Net 16,348 9,766
--------- ---------
COSTS AND EXPENSES
Costs related to product sales 4,105 348
Costs related to product sales - related parties 1,697 1,175
Costs related to service and repair fees 700 542
Costs related to service and repair
fees - related parties 122 77
Costs related to management and other
fees - related parties 3,696 4,349
Research and development 1,358 1,254
Selling, general and administrative 6,120 5,078
Compensatory element of stock issuances for
selling, general and administrative expenses 1,059 627
Provision for bad debts 114 42
Amortization of management agreements 246 305
--------- ---------
Total Costs and Expenses 19,217 13,797
--------- ---------
Loss From Operations ( 2,869) ( 4,031)
Financing Costs Paid in Stock and Warrants - ( 721)
Interest Expense ( 121) ( 207)
Interest Income 191 244
Other Income (Expense) ( 2) ( 4)
Minority Interest in Income of Partnerships ( 117) 19
--------- ---------
Loss Before Provision for Income Taxes ( 2,918) ( 4,700)
Provision for Income Taxes 3 10
--------- ---------
NET LOSS $( 2,921) $( 4,710)
========= =========
Basic and Diluted Net Loss per share $(.04) $(.08)
========= =========
Weighted average number of shares outstanding 73,926 60,667
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 5
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
REVENUES --------- ---------
Product sales - net $ 8,733 $ 1,516
Product sales - related parties - net 5,981 2,433
Service and repair fees - net 1,050 972
Service and repair fees - related parties - net 164 109
Management and other fees - related medical
practices - net 12,698 13,657
License fees and royalties 1,380 1,233
--------- ---------
Total Revenues - Net 30,006 19,920
--------- ---------
COSTS AND EXPENSES
Costs related to product sales 5,985 1,067
Costs related to product sales - related parties 3,583 1,920
Costs related to service and repair fees 1,380 1,095
Costs related to service and repair
fees - related parties 216 123
Costs related to management and other
fees - related parties 7,543 8,318
Research and development 2,604 2,460
Selling, general and administrative 11,660 9,820
Compensatory element of stock issuances for
selling, general and administrative expenses 1,806 1,735
Provision for bad debts 168 185
Amortization of management agreements 492 609
--------- ---------
Total Costs and Expenses 35,437 27,332
--------- ---------
Loss From Operations ( 5,431) ( 7,412)
Financing Costs Paid in Stock and Warrants - ( 1,015)
Interest Expense ( 367) ( 562)
Interest Income 447 533
Other Income (Expense) ( 3) 16
Minority Interest in Income of Partnerships ( 269) ( 100)
--------- ---------
Loss Before Provision for Income Taxes ( 5,623) ( 8,540)
Provision for Income Taxes 4 17
--------- ---------
NET LOSS $( 5,627) $( 8,557)
========= =========
Basic and Diluted Net Loss per share $(.08) $(.14)
========= =========
Weighted average number of shares outstanding 73,088 60,053
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
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FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
--------- ---------
Net loss $ (2,921) $ (4,710)
Other comprehensive loss, net of tax:
Unrealized losses on securities,
net of tax ( 17) ( 35)
--------- ---------
Total comprehensive loss $ (2,938) $ (4,745)
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
--------- ---------
Net loss $(5,627) $ (8,557)
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of tax 61 66
--------- ---------
Total comprehensive loss $ (5,566) $ (8,491)
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 7
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
--------- ---------
Cash Flows from Operating Activities
Net loss $( 5,627) $( 8,557)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income of partnerships 269 100
Depreciation and amortization 2,299 2,567
Provision for bad debts 168 185
Compensatory element of stock issuances 1,806 1,735
Stock issued for professional services 701 339
Interest expense paid in stock 10 -
Financing costs paid in stock and warrants - 1,015
Amortization of unearned license fee ( 1,170) ( 1,170)
(Increase) decrease in operating assets, net:
Accounts and notes receivable ( 340) 883
Costs and estimated earnings in excess of
billings on uncompleted contracts ( 155) 466
Inventories 709 ( 978)
Principal payments on sales type lease-related
parties 1,716 30
Principal payments on sales type lease 58 66
Prepaid expenses and other current assets ( 884) ( 468)
Other assets ( 6) 1
Receivables and advances to related parties 203 ( 1,265)
Increase (decrease) in operating liabilities, net:
Accounts payable 2,319 ( 453)
Other current liabilities 591 ( 135)
Customer advances ( 3,538) 1,327
Billings in excess of costs and estimated
earnings on uncompleted contracts 299 223
Other liabilities ( 25) 21
Income taxes payable - 12
--------- ---------
Net cash used in operating activities ( 597) ( 4,056)
--------- ---------
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 8
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
--------- ---------
Cash Flows from Investing Activities:
Sales (purchases) of marketable securities ( 194) 14
Purchases of property and equipment ( 439) ( 801)
Costs of capitalized software development ( 436) ( 354)
Cost of patents and copyrights ( 168) -
--------- ---------
Net cash used in investing activities ( 1,237) ( 1,141)
--------- ---------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 262) ( 167)
Repayment of long-term debt and capital
leases ( 1,612) ( 2,917)
Proceeds from exercise of stock options
and warrants 1,104 -
--------- ---------
Net cash used in financing activities ( 770) ( 3,084)
--------- ---------
Decrease in Cash and Cash Equivalents ( 2,604) ( 8,281)
Cash and Cash Equivalents Beginning of Period 7,494 14,040
--------- ---------
Cash and Cash Equivalents End of Period $ 4,890 $ 5,759
========= =========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 9
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six-month period
ended December 31, 2002 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 2003. 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 October 7, 2002 for the fiscal
year ended June 30, 2002.
NOTE 2 - DESCRIPTION OF BUSINESS
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation, which
was incorporated on July 17, 1978. FONAR is engaged in the research,
development, production and marketing of medical scanning equipment, which uses
principles of Magnetic Resonance Imaging ("MRI") for the detection and diagnosis
of human diseases. In addition to deriving revenues from the direct sale of MRI
equipment, revenue is also generated from its installed-base of customers
through its service and upgrade programs.
Health Management Corporation of America ("HMCA") was organized by the Company
in March 1997, as a wholly-owned subsidiary, in order to enable the Company to
expand into the business of providing comprehensive management services to
physicians' practices and other medical providers, including diagnostic imaging
centers and ancillary services. The services provided by the Company include
development, administration, leasing of office space, facilities and medical
equipment, provision of supplies, staffing and supervision of non-medical
personnel, legal services, accounting, billing and collection and the
development and implementation of practice growth and marketing strategies.
HMCA entered the physician and diagnostic management services business through
the consummation of two acquisitions in fiscal 1997, two acquisitions in fiscal
1998, and one acquisition consummated in fiscal 1999. The acquired companies in
all cases were actively engaged in the business of managing medical providers.
The medical providers are diagnostic imaging centers, principally MRI scanning
centers, multi-specialty practices and primary care practices.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of FONAR Corporation,
its majority and wholly-owned subsidiaries and partnerships. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation (Continued)
The Company does not consolidate the medical practices which it manages, as it
has previously determined that consolidation of such medical practices is not
appropriate because the underlying management agreements do not meet all of the
six criteria of Emerging Issues Task Force ("EITF") Consensus No. 97-2.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in The United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities in the consolidated financial statements and accompanying notes. The
most significant estimates relate to contractual and other allowances, income
taxes, contingencies and the useful lives of equipment. In addition, healthcare
industry reforms and reimbursement practices will continue to impact the
Company's operations and the determination of contractual and other allowance
estimates. Actual results could differ from those estimates.
Inventories
Inventories consist of purchased parts, components and supplies, as well as
work-in-process, and are stated at the lower of cost (materials, labor and
overhead determined on the first-in, first out method) or market.
Management Agreements
Management agreements are being amortized using the straight-line method over
20-year term of the agreements.
Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment, intangibles and management contracts, when
there are indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is calculated by
comparing anticipated discounted future cash flows with the carrying value of
the related asset. In performing this analysis, management considers such
factors as current results, trends, and future prospects, in addition to other
economic factors.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on weighted average shares
outstanding and excludes any potential dilution. In accordance with EITF Topic
D-95, "Effect of Participating Convertible Securities on the Computation of
Basic Earnings Per Share," the Company's participating convertible securities,
which include the Class A Non-voting Preferred stock, Class B common stock and
Class C common stock, are not included in the computation of basic or diluted
Page 11
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
earnings per share since they are antidilutive. In accordance with EITF Topic
D-95, prior period's earnings per share were restated. Diluted earnings (loss)
per share reflects the potential dilution from the exercise or conversion of all
dilutive securities into common stock based on the average market price of
common shares outstanding during the period.
Options and warrants to purchase approximately 5,921,000 and 4,036,000 shares of
common stock were outstanding at December 31, 2002, and 2001, respectively, but
were not included in the computation of diluted earnings per share due to losses
for all periods, as a result of the options and warrants being antidilutive.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Accounting for Business Combinations" and SFAS No. 142, "Accounting for
Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting and
prohibits the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. According to SFAS No. 142, goodwill,
which arises from business combinations after June 30, 2001, cannot be
amortized. In addition, SFAS No. 142 requires the discontinuation of goodwill
amortization and the amortization of intangible assets with indeterminate lives
effective the date the Company adopts the statement. The Company adopted SFAS
No. 141 and SFAS No. 142 on July 1, 2001.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion No.
30, "Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of the carrying amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The provisions of SFAS 144 have been adopted by the Company as of July 1,2001.
The adoption of SFAS 144 did not have a significant impact to the consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145 ("SFAS 145"), "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishments", and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements", which amended SFAS No. 4, affects income statement
classification of gains and losses from extinguishment of debt. The Company
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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
adopted SFAS 145 on January 1, 2002 on a prospective basis and the adoption did
not have a significant impact to the consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity to be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of SFAS 146 did not have a
significant impact to the consolidated financial statements.
On December 31, 2002, the FASB issued SFAS No.148 ("SFAS 148"), Accounting for
stock-Based Compensation-Transition and Disclosure. SFAS 148 amends SFAS No. 123
("SFAS 123"), Accounting for Stock -Based Compensation, to provide an
alternative method of transition to SFAS 123's fair value method of accounting
for stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 and APB opinion No. 28, Interim Financial Reporting, to
require disclosure in the summary of significant accounting polices of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. While the statement does not amend SFAS 123 to require
companies to account for employee stock options using the fair value method, the
disclosure provisions of SFAS 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS 123, or the intrinsic value
method of APB opinion No. 25. The Company will continue to account for
stock-based compensation according to APB opinion No. 25, while its adoption of
SFAS 148 will require the Company to provide prominent disclosures about the
effect of SFAS 123 on reported income and will require the Company to disclose
these effects in the interim financial statements as well starting with the
quarter ending March 31, 2003. The Company does not expect the adoption of SFAS
148 will have a significant impact to the consolidated financial position or
results of operations.
In November 2002, The FASB issued FASB Interpretation No.45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a company, at
the time it issues a guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002 and adoption of the disclosure requirement are
effective for the Company during the Company's third quarter ending March 31,
2003. The Company does not expect the adoption of FIN 45 will have a significant
impact on its consolidated financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 " Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. The
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company is currently evaluating the effect
that the adoption of FIN 46 will have on its results of operations and financial
condition.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at December 31, 2002:
(000's omitted)
Unrealized Fair
Holdings Market
Cost Gains Value
------ ---------- -------
U.S. Government $3,883 $ 14 $3,897
Obligations
Corporate bonds 1,799 47 1,846
------ ------- ------
$5,682 $ 61 $5,743
====== ======= ======
Page 14
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
NOTE 5 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following at December 31, 2002:
(000's omitted)
Allowance for
Doubtful
accounts and
Gross contractual
Receivable allowances Net
---------- ------------- -------
Receivable from equipment
sales and service contracts $ 2,578 $ 1,077 $ 1,501
======= ======= =======
Receivables from related PC's $15,065 $ 2,129 $12,936
======= ======= =======
The Company's customers are concentrated in the healthcare industry.
The Company's receivables from the related PC's substantially consist of fees
outstanding under management agreements, service contracts and lease agreements
with related PC's. 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 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 58%
and 56% of the PC's net revenues for the six months ended December 31, 2002 and
2001, 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 takes all legally available steps, including legally
prescribed arbitrations, to collect its receivables. Credit losses associated
with the receivables are provided for in the consolidated financial statements
and have historically been within management's expectations.
Net revenues from the related PC's, including product sales, accounted for
approximately 63% and 81% of the consolidated net revenues for the six months
ended December 31, 2002 and 2001, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
Summarized income statement data for the six months ended December 31, 2002
related to the 21 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted)
Patient Revenue - Net $17,279
=======
Income from Operations $ 495
=======
Net Income $ 17
=======
Page 15
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
NOTE 6 - INVENTORIES
Inventories included in the accompanying consolidated balance sheet consist of:
(000's omitted)
Dec 31, 2002
--------------
Purchased parts, components
and supplies $2,821
Work-in-process 1,134
-------
$3,955
=======
NOTE 7 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
(000's omitted)
1) Information relating to uncompleted contracts as of December 31, 2002 is as
follows:
Costs incurred on uncompleted Contracts $7,567
Estimated earnings 4,475
-------
12,042
Less: Billings to date 12,148
-------
$ (106)
=======
Included in the accompanying consolidated balance sheet under the following
captions:
Costs and estimated earnings in excess of
Billings on uncompleted contracts $1,308
Billings in excess of costs and estimated
Earnings on uncompleted contracts (1,414)
-------
$ (106)
=======
2) Customer advances consist of the
following: As of December 31, 2002
----------------------------------
Related
Total Parties Other
-------- -------- -------
Total advances from customers $16,288 $ 6,690 $ 9,598
Less: Advances from customers
on contracts under construction 12,148 5,699 6,449
------- ------- ------
$ 4,140 $ 991 $ 3,149
======= ======= ======
Page 16
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
NOTE 8 - STOCKHOLDERS' EQUITY
Common Stock
During the six months ended December 31, 2002:
a) The Company issued 1,043,240 shares of common stock to employees as
compensation of $1,293,657 under stock bonus plans.
b) The Company issued 336,380 shares of common stock valued at $375,051 to
consultants and others
c) The Company issued 580,259 shares of common stock for professional services
of $700,909.
d) The Company issued 27,571 shares of common stock and received proceeds of
$31,203 upon the exercise of stock options.
e) The Company issued 1,000,000 shares of common stock and received proceeds of
$1,125,000 upon the exercise of warrants.
Subsequent to December 31, 2002, the Company issued approximately 1,000,000
shares of common stock to employees, consultants and for professional services,
and 1,000,000 shares of 1,300,000 shares issued in exchange for options held by
a related party to acquire approximately 20% of the stock of HMCA at a nominal
exercise price.
During the six months ended December 31, 2001:
a) The Company issued 234,083 shares of common stock for professional services
of $338,563.
b) The Company issued 579,015 shares of common stock to employees as
compensation of $910,094 under stock bonus plans.
c) The Company issued 231,295 shares of common stock for consulting services of
$343,038.
Warrants
During the first quarter of fiscal 2003 in accordance with our agreements with
The Tail Wind Fund, Ltd., the Company issued replacement callable warrants to
purchase 2,000,000 shares, on the same terms as the original warrants. The
exercise price of these replacement callable warrants will vary depending on the
market price of the stock, subject to a minimum exercise price of $2 per share
and maximum of $6 per share.
Page 17
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended December 31, 2002 and 2001, the Company paid
approximately $353,000 and $428,000 for interest, respectively. In addition,
during the six months ended December 31, 2002 and 2001, the Company paid
approximately $3,000 and $0 for income taxes, respectively.
During the six months ended December 31, 2002, the Company issued 87,500 shares
of the common stock, valued at $90,125, as compensation to the holder of a
minority interest in certain limited partnerships involving MRI facilities.
NOTE 10 - SEGMENT AND RELATED INFORMATION
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of physician practices, including diagnostic
imaging services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies as disclosed in the Company 10-K as
of June 30, 2002. All inter-segment sales are market-based. The Company
evaluates performance based on income or loss from operations.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
(000's omitted)
Physician
Medical Management
Equipment Services Total
--------- ---------- --------
For the six months ended December 31, 2002:
Net revenue from external customers $17,308 $12,698 $30,006
Inter-segment net revenues $ 719 --- $ 719
Operating loss $(4,712) $ (719) $(5,431)
Depreciation and amortization $ 1,267 $ 1,032 $ 2,299
Compensatory element of stock issuances $ 486 $ 1,320 $ 1,806
Total identifiable assets $36,002 $31,639 $67,641
Capital expenditures $ 190 $ 249 $ 439
For the six months ended December 31, 2001:
Net revenue from external customers $ 6,263 $13,657 $19,920
Inter-segment net revenues $ 578 --- $ 578
Operating (loss) income $(7,971) $ 559 $(7,412)
Depreciation and amortization $ 1,279 $ 1,288 $ 2,567
Compensatory element of stock issuances $ 854 $ 881 $ 1,735
Total identifiable assets $40,434 $36,090 $76,524
Capital expenditures $ 516 $ 285 $ 801
NOTE 11 - FOREIGN SALES
During the six months ended December 31, 2002 and 2001, the Company had foreign
revenues of approximately $388,000 and $449,000, respectively.
Page 18
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the fiscal quarter ended December 31, 2002 (second quarter of fiscal
2003), the Company reported a net loss of $2.9 million on revenues of $16.3
million as compared to a net loss of $4.7 million on revenues of $9.8 million
for the second quarter of fiscal 2002.
For the six month period ended December 31, 2002, the Company reported a
net loss of $5.6 million on revenues of $30 million, as compared to a net loss
of $8.6 million on revenues of $19.9 million for the six month period ended
December 31, 2001.
The Company's revenues increased by 19% from $13.7 million for the first
quarter of fiscal 2003 (on which the Company recognized a net loss of $2.7
million) to $16.3 million for the second quarter of fiscal 2003 (on which the
Company recognized a net loss of $2.9 million).
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 physician and diagnostic management services,
which is conducted through Fonar's wholly-owned subsidiary, Health Management
Corporation of America ("HMCA").
MRI equipment sales increased dramatically by 277%, from $3.9 million for
the first six months of fiscal 2002 to $14.7 million for the first six months of
fiscal 2003, reflecting increased sales of the Stand-Up MRI scanners. Service
and repair revenues increased by 9%, from $1.1 million for the first six months
of fiscal 2002 to $1.2 million for the first six months of fiscal 2003.
Consequently, overall revenues recognized by the Company's MRI equipment
manufacturing and service business increased by 174% from $6.3 million in the
first six months of fiscal 2002 to $17.3 million in the first six months of
fiscal 2003. There were significant increases in scanner sales to both unrelated
parties, from $1.5 million in the first six months of fiscal 2002 to $8.7
million in the first six months of fiscal 2003 (480%) and to related parties,
from $2.4 million in the first six months of fiscal 2002 to $6.0 million in the
first six months of fiscal 2003 (150%). As a result, the operating loss from the
Company's MRI equipment manufacturing and service business improved to a loss of
$4.7 million for the six months of fiscal 2003 from a loss of $8.0 million for
the first six months of fiscal 2002.
The dramatic increase in product sales reflected market acceptance of the
Company's Stand-Up(TM) MRI scanners. During the first six months of fiscal 2003,
revenues of approximately $14.2 million were recognized from sales of
Stand-Up(TM) MRI scanners and $100,000 from the sale of a refurbished Beta MRI
scanner. During the first six months of fiscal 2002, the Company recognized
revenues of approximately $3.9 million from the sale of Stand-Up(TM) MRI
scanners and $48,000 from the sales of QUAD(TM) scanners.
There were approximately $388,000 in foreign sales revenues for the first
six months of fiscal 2003 as compared to approximately $449,000 in foreign sales
revenues for the first six months in fiscal 2002.
Page 19
FONAR CORPORATION AND SUBSIDIARIES
HMCA, which provides physician and diagnostic management services,
experienced an operating loss of $719,000 for the first six months of fiscal
2003 compared to operating income of $559,000 for the first six months of fiscal
2002. The decline in HMCA income was attributable to lower revenues reflecting a
decline in management fees ($12.7 million for the first six months of fiscal
2003 compared to $13.7 million for the first six months of fiscal 2002) from the
facilities and medical practices managed by HMCA. The principal cause for the
decline in HMCA revenues was the closing of eight facilities (six in fiscal 2002
and two in fiscal 2003) and the continuing decline in management fees from the
primary care medical practices managed by HMCA.
Accordingly, the Company's consolidated operating loss was $5.4 million for
the first six months of fiscal 2003 as compared to a consolidated operating loss
of $7.4 million for the first six months of fiscal 2002, representing an
improvement of 27%.
Although the Company's scanner sales increased significantly from fiscal
2002, increased costs and expenses, together with a decline in management fee
revenues recognized by HMCA, are the principal reasons for the Company's
improved but continuing operating losses. Product sales revenues attributable to
the Company's medical (MRI) equipment business were $14.7 million for the first
six months of fiscal 2003 as compared to $3.9 million for the first six months
of fiscal 2002. Costs of revenues attributable to the Company's product sales
were $9.6 million for the first six months of fiscal 2003 as compared to $3.0
million for the first six months of fiscal 2002.
As a result, the Company recognized a gross profit from product sales of
$5.1 million and a gross profit margin of 35% for the first six months of fiscal
2003 as compared to a gross profit of $962,000 and a gross profit margin of 24%
for the first six months of fiscal 2002. Our gross profit margin on product
sales increased as a result of greater efficiencies realized as a result of our
increased sales volume and production levels.
The Company's efforts to improve equipment sales volume have emphasized
increased marketing and sales efforts and research and development to improve
the competitiveness of its products.
As a result, we incurred expenses of approximately $1.7 million in our new
advertising program, which includes television and radio advertising, during the
first six months of fiscal 2003. This was the principal reason selling, general
and administrative expenses increased from $9.8 million in the first six months
of fiscal 2002 to $11.7 million in the first six months of fiscal 2003. Research
and development expenditures increased slightly by 4% to $2.6 million for the
first six months of fiscal 2003 as compared to $2.5 million the first six months
of fiscal 2002.
Compensatory element of stock issuance increased by 6% to approximately
$1.8 million for the first six months of fiscal 2002 from approximately $1.7
million for the first six months of fiscal 2003, reflecting a greater use of
Fonar's stock bonus plan.
Interest expense of $367,000 in the first six months of fiscal 2003
decreased by 35% as compared to $562,000 for the first six months of fiscal 2002
due to the repayment of indebtedness. In addition, we had financing costs of
$1.0 million paid in stock and warrants in the first six months of 2002 as
compared to no such costs in the first six months of 2003.
Page 20
FONAR CORPORATION AND SUBSIDIARIES
Inventories declined by 15% to $4.0 million at December 31, 2002 as
compared to $4.7 million at June 30, 2002 as the Company's utilization of
existing inventory exceeded new purchases of parts in the manufacturing of
scanners to fill orders.
Accounts receivable increased to $14.4 million as at December 31, 2002 from
$14.1 million as at June 30, 2002, primarily due to increased receivables from
service contracts on MRI scanners.
In July, 2000 General Electric and the Company entered into an agreement
under which General Electric agreed to act as a sales representative for the
Company's Stand-Up(TM) MRI scanners. Fonar has been working closely with GE
Medical Systems to assist them in marketing the Stand-Up(TM) MRI. General
Electric has purchased a total of four Stand-Up MRI scanners to resell to its
customers, two of them in September 2002.
The Company's Stand-Up(TM), QUAD(TM) and Fonar-360(TM) MRI scanners,
together with the Company's works-in-progress (QUAD-S(TM) MRI) and other works
in progress, are intended to significantly improve the Company's competitive
position. In addition, the Company offers a low cost open scanner, the Echo(TM)
MRI, operating at .3 Tesla field strength for its cost conscious customers.
The Company's Stand-Up(TM) scanner, which operates at 6000 gauss (.6 Tesla)
field strength, allows patients to be scanned while standing or reclining. As a
result, for the first time, MRI is able to be used to show abnormalities and
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 with no
restrictions in the vertical direction. This easy-entry, mid-field-strength
scanner should be ideal for trauma centers where a quick MRI-screening within
the first critical hour of treatment will greatly improve patients' changes for
survival and optimize the extent of recovery.
The Fonar 360(TM) is an enlarged room sized magnet in which the floor,
ceiling and walls of the scan room are part of the magnet frame. This is made
possible by Fonar's patented Iron-Frame(TM) technology which allows the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Consequently, this scanner allows 360 degree access to the
patient and physicians and family members are able to enter the scanner and
approach the patient.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is
sometimes referred to as the Open Sky(TM) MRI. In its Open Sky(TM) version, the
Fonar 360(TM) serves as an open patient friendly scanner which allows 360 access
to the patient on the scanner bed. To optimize the patient-friendly character of
the Open Sky(TM) MRI, the walls, floor, ceiling and magnet poles are decorated
with landscape murals. The patient gap is twenty inches and the magnetic field
strength, like that of FONAR's Stand-Up(TM) and QUAD(TM) MRI scanner, is 0.6
Tesla.
Page 21
FONAR CORPORATION AND SUBSIDIARIES
In the future, we may also develop the Fonar 360(TM) to function as an
operating room. We sometimes refer to this contemplated version of the Fonar
360(TM) as the OR-360(TM). In its OR-360(TM) version, which is in the planning
stages, the enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360(TM) would permit full-fledged surgical teams to walk into the
magnet and perform surgery on the patient inside the magnet. Most importantly
the exceptional quality of the MRI image and its capacity to exhibit tissue
detail on the image, can then be obtained real time during surgery to guide the
surgeon in the surgery. Thus surgical instruments, needles, catheters,
endoscopes and the like could be introduced directly into the human body and
guided to the malignant lesion by means of the MRI image. The number of
inoperable lesions should be greatly reduced by the availability of this new
capability. Most importantly treatment can be carried directly to the target
tissue. The interventional OR-360(TM) version of the Fonar 360(TM) is still in
the planning stages. There is not a prototype. A full range of MRI compatible
surgical instruments using ceramic cutting tools and beryllium-copper materials
are commercial available.
The QUAD(TM)MRI scanner also utilizes a 0.6 Tesla iron core electromagnet
and is accessible from four sides. The QUAD(TM)was the first "open" MRI scanner
at high field.
The Company's works in progress include an in-office weight bearing
extremities scanner which will be able to be used to examine the knee, foot,
elbow, hand and wrist. This scanner will allow scans to be performed in under
both weight- bearing and non-weight-bearing conditions.
The Company expects marked demand for its most commanding MRI products, the
Stand-Up(TM) and the Fonar 360(TM), first for their exceptional features in
patient diagnosis and treatment. These scanners additionally provide improved
image quality and higher imaging speed because of their higher field strength of
..6 Tesla.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities decreased by 19% from
$13.1 million at June 30, 2002 to $10.6 million at December 31, 2002. Principal
uses of cash during the first six months of fiscal 2003 included capital
expenditures of $439,000, repayment of indebtedness and capital lease
obligations in the amount of $1.6 million, capitalized software development
costs of $436,000 and capitalized patent and trademark costs of $168,000.
Marketable securities approximated $5.7 million as at December 31, 2002, as
compared to $5.6 million at June 30, 2002. At December 31, 2002, our investments
in U.S. Government obligations were approximately $3.9 million and our
investments in corporate and government agency bonds were approximately $1.8
million. This has had the intended effect of reducing the volatility of the
Company's investment portfolio.
Cash used by operating activities for the first six months of fiscal 2003
approximated $597,000. Cash used by operating activities was attributable
substantially to our net loss for the period reduced by prepayments from related
parties on certain sales-type leases.
Page 22
FONAR CORPORATION AND SUBSIDIARIES
Cash used in investing activities for the first six months of fiscal 2003
approximated $1.2 million. The principal uses of cash from investing activities
during the first six months of fiscal 2003 consisted of expenditures for
property and equipment and capitalized software and patent costs of
approximately $1.0 million and additional investments in marketable securities
of $194,000.
Cash used by financing activities for the six months of fiscal 2003
approximated $770,000. The principal uses of cash in financing activities during
the first six months of fiscal 2003 consisted of repayment of principal on
long-term debt of approximately $1.6 million and the principal sources were net
proceeds from exercises of stock options and warrants of $1.1 million.
Total liabilities decreased by 9.2% during the first six months of fiscal
2003, from approximately $36.9 million at June 30, 2002 to approximately $33.5
million at December 31, 2002. The decrease in liabilities was attributable
principally to a decrease in the non-current long term debt and capital leases
($833,000 to $333,000), a decrease in the current portion of long term debt
($9.8 million to $8.6 million) and a decrease in customer advances of $3.6
million from $7.7 million at June 30, 2002 to $4.1 million at December 31, 2002.
The decrease in total liabilities was offset by an increase in accounts payable
from $4.1 million at June 30, 2002 to $6.4 million at December 31, 2002.
As at December 31, 2002, our obligations included approximately $8.0
million in other current liabilities including deferred revenue from license
fees of $2.3 million, unearned revenue on service contracts of $1.4 million,
accrued salaries and payroll taxes of $2.2 million and excise and sales taxes of
$1.8 million.
As of December 31, 2002, we had a bank credit facility of $5,500,000 which
was utilized in full. The interest on loans made under the facility is either
the bank's prime rate, as in effect from time to time or 0.5% plus the bank's
cost of funds rate, as selected by Fonar when the loan is made.
Our working capital approximated $8.7 million as of December 31, 2002, as
compared to working capital of $10.5 million as of June 30, 2002, declining by
17%. This reflects, with respect to current assets, principally a decrease in
cash of $2.6 million ($7.5 million at June 30, 2002 as compared to $4.9 million
at December 31, 2002) and a decrease in the current portion of investments in
sales-type leases ($1.9 million at June 30, 2002 as compared to $246,000 at
December 31, 2002 resulting from prepayments of the leases) offset by an
increase of $100,000 ($1.2 million at June 30, 002 as compared to $1.3 million
at December 31, 2002) in costs and estimated earnings in excess of billings on
uncompleted contracts (this item represents the extent to which the revenues
earned on a contract exceed the advances we received from the customer) and
increases in accounts receivable ($14.1 million at June 30, 2002 as compared to
$14.4 million at December 31, 2002) and prepaid expenses and other current
assets ($1.1 million at June 30, 2002 as compared to $2.0 million at December
31, 2002), as a result of advances made to suppliers.
Page 23
FONAR CORPORATION AND SUBSIDIARIES
With respect to current liabilities, the current portion of long-term debt
decreased by $1.2 million from $9.8 million at June 30, 2002 to $8.6 million at
December 31, 2002 as a result of repayment of debt, and customer advances
decreased by $3.6 million from $7.7 million at June 30, 2002 to $4.1 million at
December 31, 2002 as a result of existing orders being put into production.
Accounts payable, however, increased by $2.3 million from $4.1 million at June
30, 2002 to $6.4 million at December 31, 2002 as the Company incurred
obligations in connection with increased manufacturing and advertising
activities.
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 first half of fiscal 2003, the
compensatory element of stock issuances was $1.8 million as compared to $1.7
million for the first six months of fiscal 2002. 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 greater
sales revenues.
Fonar has not committed to making additional capital expenditures in the
2003 fiscal year other than its intention to continue research and development
expenditures at current levels HMCA also expects to incur expenditures of
approximately $676,000 to refurbish and improve two MRI facilities.
Our business plan currently includes an aggressive program for
manufacturing and selling our new line of Open MRI scanners. In addition, we are
enhancing our revenue by participating into the physician and diagnostic
management services business through our subsidiary, HMCA.
HMCA is in the process of upgrading the MRI facilities which it manages,
most significantly by the replacement of existing MRI scanners with new
Stand-Up(TM) MRI scanners. To date, Stand-Up(TM) MRI scanners have been
installed at two MRI facilities managed by HMCA and are in the process of being
installed at two other MRI facilities managed by HMCA.
Our business plan calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices.
We believe that the above mentioned financial resources, anticipated cash
flows from operations and potential financing sources, will provide the cash
flows needed to achieve the sales, service and production levels necessary to
support our operations.
Page 24
FONAR CORPORATION AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investments are in fixed rate instruments. None of the fixed rate
instruments in which we invest extend beyond December 31, 2007. Below is a
tabular presentation of the maturity profile of the fixed rate instruments held
by us at December 31, 2002.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
in Fixed Rate Weighted Average
Date Instruments Interest Rate
12/31/03 $3,821,603 1.70%
12/31/04 962,416 5.38%
12/31/05 300,000 4.97%
12/31/06 200,000 5.25%
12/31/07 397,771 5.29%
-------------
Total: $5,681,790
========
Fair Value
at 12/31/02 $5,742,705
========
All of our revenue, expense and capital purchasing activities are
transacted in United States dollars.
See Note 11 to the consolidated Financial Statements in our Form 10-K as of
and for the year ended June 30, 2002 for information on long term debt.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this report, the
principal executive and acting principal financial officer of the Company
concluded that disclosure controls and procedures were adequate.
(b) Change in internal controls. The Company made no significant changes in its
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the
principal executive and acting principal officer.
Page 25
FONAR CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There were no material changes in litigation for the first six months of
fiscal 2003.
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, 2003
Page 26
FONAR CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Raymond V. Damadian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fonar Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
person performing the equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Raymond V. Damadian
Raymond V. Damadian
President, Principal Executive Officer and Acting Principal Financial Officer