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 ------------ ------------- Commission file number 0-10248 ------------ FONAR CORPORATION - ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 11-2464137 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 110 Marcus Drive Melville, New York 11747 - ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 694-2929 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the 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). Page 6
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. Page 10
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 Page 12
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 Page 13
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