UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED DECEMBER 31, 2001 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) (631) 694-2929 ------------------------------ Registrant's telephone number, including area code: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding at December 31, 2001 - -------------------------------- -------------------------------- Common Stock, par value $.0001 61,570,097 Class B Common Stock, par value $.0001 4,211 Class C Common Stock, par value $.0001 9,562,824 Class A Preferred Stock, par value $.0001 7,836,286
FONAR CORPORATION AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 2001 and June 30, 2001 3 Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2001 and December 31, 2000 5 Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 2001 and December 31, 2000 6 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2001 and December 31, 2000 7 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended December 31, 2001 and December 31, 2000 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II - OTHER INFORMATION
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) ASSETS December 31, June 30, 2001 2001 (UNAUDITED) Current Assets: ------------ --------- Cash and cash equivalents $ 5,759 $14,040 Marketable securities 6,137 6,085 Accounts receivable - net 1,063 850 Accounts receivable - related medical practices - net 12,085 13,181 Costs and estimated earnings in excess of billings on uncompleted contracts 1,303 1,769 Inventories 4,703 3,725 Investment in sales-type leases - related parties 195 191 Investment in sales-type lease 112 120 Prepaid expenses and other current assets 1,372 904 -------- -------- Total current assets 32,729 40,865 -------- -------- Restricted cash 5,500 5,500 Property and equipment - net 9,733 10,637 Advances and notes to related parties - net 2,824 1,559 Investment in sales-type leases - related parties 2,480 2,514 Investment in sales-type lease 803 861 Notes receivable - net 375 375 Management agreements - net 19,829 20,438 Other intangible assets - net 1,955 1,854 Other assets 296 297 -------- -------- $76,524 $84,900 ======== ======== See accompanying notes to condensed consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) December 31, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2001 (UNAUDITED) Current Liabilities: ------------ -------- Current portion of long-term debt and capital lease obligations $ 6,184 $ 6,635 Accounts payable 2,568 3,021 Other current liabilities 5,954 6,176 Customer advances 2,999 1,672 Billings in excess of costs and estimated earnings on uncompleted contracts 574 351 Income taxes payable 777 765 Convertible debentures 3,150 4,500 -------- -------- Total current liabilities 22,206 23,120 Long-term debt and capital lease obligations, less current portion 7,643 10,109 Unearned revenue - license fee 8,190 9,360 Other non-current liabilities 348 327 -------- -------- Total liabilities 38,387 42,916 -------- -------- Minority interest 86 153 -------- -------- Commitments and contingencies - - STOCKHOLDERS' EQUITY Common Stock $.0001 par value; 85,000,000 shares authorized; 61,570,097 and 59,524,455 shares issued; 61,279,033 and 59,233,391 shares outstanding at December 31, 2001 and June 30, 2001, respectively 6 6 Class B Common Stock $ .0001 par value; 4,000,000 shares authorized, (10 votes per share), 4,211 issued and outstanding at December 31, 2001 and at June 30, 2001 - - Class C Common Stock $.0001 par value; 10,000,000 shares authorizede, (25 votes per share), 9,562,824 issued and outstanding at December 31, 2001 and at June 30, 2001 1 1 Class A non-voting Preferred Stock $.0001 par value; 8,000,000 authorized, 7,836,287 issued and outstanding at December 31, 2001 and at June 30, 2001 1 1 Paid-in capital in excess of par value 108,454 104,984 Accumulated other comprehensive income 150 84 Accumulated deficit (68,558) (60,001) Notes receivable - stockholders ( 838) ( 1,040) Unearned compensation ( 490) ( 1,529) Treasury stock - 291,064 shares of common stock at December 31, 2001 and June 30, 2001 ( 675) ( 675) -------- -------- Total stockholders' equity 38,051 41,831 -------- -------- Total liabilities and stockholders' equity $76,524 $84,900 ======== ======== See accompanying notes to condensed consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except per share data) FOR THE THREE MONTHS ENDED DECEMBER 31, -------------------------- 2001 2000 REVENUES -------- -------- Product sales - net $ 480 $ 995 Product sales - related parties - net 1,585 - Service and repair fees - net 539 464 Patient revenue - net - 342 Management and other fees - related medical practices - net 6,514 7,161 License fees and royalties 648 627 -------- -------- Total Revenues - Net 9,766 9,589 -------- -------- COSTS OF REVENUES: Cost related to product sales 348 1,180 Cost related to product sales - related parties 1,175 - Cost related to service and repair fees 619 545 Cost related to patient revenue - 281 Cost related to management and other fees - related parties 4,349 4,303 Research and development 1,254 1,516 Selling, general and administrative 5,078 4,780 Provision for bad debts 42 - Compensatory element of stock issuances for selling, general & administrative expenses 627 637 Amortization of management agreements 305 305 -------- -------- Total Costs and Expenses 13,797 13,547 -------- -------- Loss From Operations ( 4,031) ( 3,958) Interest Expense ( 207) ( 315) Financing costs paid in stock and warrants ( 721) - Investment Income 244 543 Other income (expense) ( 4) 788 Minority interest in (income) loss of subsidiary and partnerships 19 ( 65) -------- -------- Loss before provision for income taxes ( 4,700) ( 3,007) Provision for income taxes 10 7 -------- -------- NET LOSS $( 4,710) $( 3,014) ======== ======== Basic and diluted Net Loss per share $(.07) $(.04) ======== ======== Weighted average number of shares outstanding 72,307 68,273 ======== ======== See accompanying notes to condensed consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except per share data) FOR THE SIX MONTHS ENDED DECEMBER 31, ------------------------ 2001 2000 REVENUES -------- -------- Product sales - net $1,516 $ 1,134 Product sales - related parties - net 2,433 118 Service and repair fees - net 1,081 923 Patient revenue - net - 717 Management and other fees - related medical practices - net 13,657 14,425 License fees and royalties 1,233 1,254 -------- -------- Total Revenues - Net 19,920 18,571 -------- -------- COSTS OF REVENUES: Cost related to product sales 1,067 1,472 Cost related to product sales - related parties 1,920 343 Cost related to service and repair fees 1,218 1,217 Cost related to patient revenue 597 Cost related to management and other fees - related parties 8,318 8,512 Research and development 2,460 3,028 Selling, general and administrative 9,820 9,218 Provision for bad debts 185 - Compensatory element of stock issuances for selling, general & administrative expenses 1,735 1,533 Amortization of management agreements 609 609 -------- -------- Total Costs and Expenses 27,332 26,529 -------- -------- Loss From Operations ( 7,412) ( 7,958) Interest Expense ( 562) ( 594) Financing costs paid in stock and warrants ( 1,015) - Investment Income 533 1,003 Other income (expense) 16 810 Minority interest in (income) loss of partnership ( 100) ( 168) -------- -------- Loss before provision for taxes and minority interest ( 8,540) ( 6,907) Provision for income taxes 17 14 -------- -------- NET LOSS $( 8,557) $( 6,921) ======== ======= Basic and Diluted Net Loss per share $(.12) $(.10) ======== ======== Weighted average number of shares outstanding 72,307 68,273 ======== ======== See accompanying notes to condensed consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE SIX MONTHS ENDED DECEMBER 31, ------------------------ 2001 2000 -------- -------- Cash Flows from Operating Activities Net Loss $( 8,557) $( 6,921) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Minority interest in net income loss of partnerships 100 168 Depreciation and amortization 2,567 2,323 Provision for bad debts 185 - Stock issued for financing costs paid in stock and warrants 1,015 - Compensatory element of stock issuances 1,735 1,533 Stock issued for professional services 339 237 Amortization of unearned license revenue ( 1,170) ( 1,170) License fee - 9,000 (Increase) decrease in operating assets, net: Accounts and notes receivable 883 163 Costs and estimated earnings in excess of billings on uncompleted contracts 466 695 Inventories ( 978) ( 1,470) Investment in sales-type lease - related parties - ( 935) Principal payments received on investment in sales type leases - related parties 30 52 Principal payments received on investment in sales type leases 66 - Prepaid expenses and other current assets ( 468) 123 Other assets 1 2 Advances and notes to related parties ( 1,265) 40 Increase (decrease) in operating liabilities, net: Accounts payable ( 453) 537 Other current liabilities ( 135) ( 763) Customer advances 1,327 ( 425) Billings in excess of costs and estimated earnings on uncompleted contracts 223 119 Other liabilities 21 - Income taxes payable 12 - -------- -------- Net cash provided by (used in) operating activities ( 4,056) 3,308 -------- -------- Cash Flows from Investing Activities: Investment in marketable securities 14 1,936 Purchases of property and equipment ( 801) ( 1,243) Costs of capitalized software development ( 354) - -------- -------- Net cash provided by (used in) investing activities ( 1,141) 693 -------- -------- See accompanying notes to condensed consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED) FOR THE SIX MONTHS ENDED DECEMBER 31, ------------------------ 2001 2000 -------- -------- Cash Flows from Financing Activities: Distributions to holders of minority interests ( 167) ( 184) Repayment of borrowings and capital lease obligations ( 2,917) ( 1,693) Purchase of common stock - ( 4) -------- -------- Net cash used by financing activities ( 3,084) ( 1,881) -------- -------- Increase (Decrease) in Cash ( 8,281) 2,120 Cash and Cash Equivalents - beginning of period 14,040 11,430 -------- -------- Cash and Cash Equivalents - end of period $ 5,759 $13,550 ======== ======== FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (000'S OMITTED) FOR THE SIX MONTHS ENDED DECEMBER 31, ------------------------ 2001 2000 -------- -------- Net loss $(8,557) $(6,921) Other comprehensive income, net of tax: Unrealized gains (losses) on securities, net of tax 66 227 -------- -------- Total comprehensive loss $(8,491) $(6,694) ======== ======== See accompanying notes to condensed consolidated financial statements (unaudited).
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP") 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 US GAAP 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, 2001 are not necessarily indicative of the results that may be expected for the year ending June 30, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K/A filed on October 30, 2001 for the fiscal year ended June 30, 2001. 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, effective June 30, 1997, two acquisitions which were consummated during fiscal 1998 and one acquisition consummated in August of 1998. 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.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) 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 inter-company accounts and transactions have been eliminated in consolidation. The Company no longer consolidates any medical practices which it manages. The Company had previously consolidated certain medical practices managed as a result of the 1998 acquisitions of A & A Services, Inc. and Dynamic Health Care Management, Inc. The Company also previously consolidated the practices conducted by Superior Medical Services, P.C. The Company has 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 Issue Task Force ("EITF") Consensus No. 97-2. Accordingly the consolidating statement of operations and cash flows for the six-months ended December 31, 2000 have been restated. The significant effect of such restated financial statements for the six months ended December 31, 2000 has been to decrease revenue and related costs by $2.5 million. In addition, the consolidated balance sheet caption "Excess of Costs Over Net Assets of Businesses Acquired - Net" has been reclassified to "Management Agreements - Net". Net revenue from the Company's wholly owned Florida multi-specialty practice is reflected in the accompanying Consolidated Statement of Operations under the caption "Patient - Net". Net revenue from the management of related medical practices is reflected in the accompanying consolidated statements of operations under the caption "Management and Other Fees - Related Medical Practices - Net". Use of Estimates - ---------------- The preparation of the consolidated financial statements in conformity with US GAAP 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 (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.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Diluted 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 4,036,000 and 403,000 shares of common stock were outstanding at December 31, 2001 and 2000, respectively, but were not included in the computation of diluted earnings per share due to losses in both periods, as a result of the options and warrants being antidilutive. In addition, convertible debentures, which are convertible into 2,200,000 shares at December 31, 2001 were antidilutive. Stock-Based Compensation - ------------------------ The Company accounts for its compensation and stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company provided proforma net income and proforma earnings per share disclosures at June 30, 2001 for employee stock option grants, as if the fair-value-based method defined in SFAS No. 123 had been applied. Stock-based compensation issued to employees and consultants is valued based on the quoted market price of the common stock at the time of issuance.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements - -------------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations". SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In addition, SFAS 141 establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. The provisions of SFAS 141 have been adopted by the Company as of July 1, 2001. The adoption of SFAS 141 has not changed the method of accounting used in previous business combinations, initiated prior to July 1, 2001. In July 2001, the FASB also issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. Certain provisions may also apply to acquisitions initiated subsequent to June 30, 2001. SFAS 142 supersedes APB Opinion No. 17 "Intangible Assets" and requires, among other things, the discontinuance of amortization related to goodwill and indefinite lived intangible assets. These assets will then be subject to an impairment test at least annually. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangible as goodwill, reassessment of the useful lives of existing recognized intangibles and reclassification of certain intangibles out of previously reported goodwill. The Company does not anticipate any significant impact to the consolidated financial statements as the result of the adoption of SFAS No. 142 and expects to continue to amortize all identifiable intangible assets. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes Statement of Financial Accounting standards 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 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 are effective for fiscal years beginning after December 15, 2001. The Company is evaluating the effect of this statement on the Company's results of operations and financial position. Reclassifications - ----------------- Certain prior year balances have been reclassified to conform to the current year presentation.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 4 - CASH AND CASH EQUIVALENTS The Company considers all short-term highly liquid investments with a maturity of three months or less when purchased to be cash or cash equivalents. At December 31, 2001, the Company had cash deposits of approximately $5.3 million in excess of federally insured limits. NOTE 5 - RESTRICTED CASH At December 31, 2001, $5,500,000 of cash has been pledged as collateral on an outstanding bank loan and has been classified as restricted cash on the consolidated balance sheet. NOTE 6 - MARKETABLE SECURITIES - ------------------------------- The following is a summary of marketable securities at December 31, 2001: (000's omitted) --------------- Unrealized Amortized Holdings Fair Market Cost Gains Value --------- ----------- ----------- U.S. Government $3,864 $ 107 $3,971 obligations Corporate bonds 2,123 43 2,166 --------- ----------- ----------- $5,987 $ 150 $6,137 ========= =========== =========== NOTE 7 - ACCOUNTS RECEIVABLE, NET Accounts receivable, net is comprised of the following at December 31, 2001: (000's omitted) --------------- Allowance for doubtful accounts Gross and contractual Receivable allowances Net ---------- ----------------- -------- Receivable from equipment sales and service contracts $ 2,096 $ 1,033 $1,063 ========= ========= ======== Receivables from related PCs $13,120 $1,035 $12,085 ========= ========= ======== The Company's customers are concentrated in the healthcare industry.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 7 - ACCOUNTS RECEIVABLE, NET (Continued) 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 56% and 40% of the PC's net revenues for the six months ended December 31, 2001 and December 31, 2000, 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 81% and 78% of the consolidated net revenues for the six months ended December 31, 2001 and 2000, respectively. Unaudited Financial Information of Unconsolidated Managed Medical Practices - --------------------------------------------------------------------------- Summarized income statement data for the six months ended December 31, 2001 related to the 24 unconsolidated medical practices managed by the Company is as follows: (000's omitted) Patient Revenue - Net $17,076 ======== Income from Operations $ 131 ======== Net Income $ 41 ========
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 8 - INVENTORIES Inventories included in the accompanying consolidated balance sheets consist of: l (000's omitted) December 31, 2001 June 30, 2001 ----------------- ------------- Purchased parts, components and supplies $3,856 $3,050 Work-in-process 847 675 -------- --------- $4,703 $3,725 ======== ========= NOTE 9 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER ADVANCES (000's omitted) 1) Information relating to uncompleted contracts as of December 31, 2001 is as follows: Costs incurred on uncompleted $4,505 contracts Estimated earnings 1,103 -------- 5,608 Less: Billings to date 4,879 -------- $ 729 ======== Included in the accompanying consolidated balance sheet under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts $1,303 Billings in excess of costs and estimated earnings on uncompleted contracts 574 -------- $ 729 ======== 2) Customer advances consist of the following: Total advances from customers $7,878 Less: Advances from customers on contracts under construction 4,879 -------- $2,999 ========
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 10 - CONVERTIBLE DEBENTURES Pursuant to a securities purchase agreement, dated May 24, 2001, between the Company and an investor group, the Company issued and sold to the investor group on that date for an aggregate purchase price of $4.5 million: 4% convertible debentures due June 30, 2002 in the aggregate principal amount of $4.5 million, convertible into shares of the Company's common stock at a conversion price of $2.047 per share, subject to adjustment. Purchase warrants to purchase an aggregate of 659,501 shares of the Company's common stock at an initial exercise price of $1.801 per share, subject to adjustment; and Callable warrants to purchase an aggregate of 2,000,000 shares of the Company's common stock at a fluctuating exercise price which will vary depending on the market price for the Company's common stock. In connection with the issuance of the debentures, the Company paid a placement fee in the amount of $157,500. In addition, the Company issued 300,000 purchase warrants to the placement agent. The debentures are convertible at the option of the holder at a price of $2.047 per share. If the holders decide not to convert, the debenture is payable in ten monthly installments of $450,000 commencing September 1, 2001. At the option of the Company, the principal installments can be either in cash or shares of the Company's' common stock, valued at the lesser of: a) 90% of the average of the four lowest closing bid prices during the preceding month, or b) the average of the four lowest closing bid prices during the preceding calendar month, less $0.125. By amendment dated October 25, 2001, however, the payments originally due October 1, 2001 and November 1, 2001, were extended to November 5, 2001, and for those payments, the stock was valued at the average of the two lowest closing bid prices for October, 2001 less $0.25. On November 5, 2001, the Company made these payments for principal due of $900,000 and related accrued interest on this principal of $16,500 through the issuance of 959,626 shares of the Company's common stock. The Company made the December, 2001, January, 2002 and February, 2002 payments ($450,000 plus interest each) through the issuance of 398,181 shares, 430,935 shares and 486,895 shares. The purchase warrants cover 959,501 shares of common stock and have an exercise price of $1.801 per share, subject to adjustment. The exercise period extends to May 24, 2006. The callable warrants cover 2,000,000 shares of common stock and have a variable exercise price. Subject to a maximum price of $6.00 per share and a minimum price of $2.00 per share, which is subject to adjustment, pursuant to the terms of the warrants, the exercise price will be equal to the average closing bid price of the Company's common stock for the full calendar month preceding the date of exercise. The exercise period extends to May 24, 2004.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 10 - CONVERTIBLE DEBENTURES (Continued) The Company has the option of redeeming up to 200,000 callable warrants per month at a price of $0.01 per underlying warrant share, if the average closing bid price of its common stock is greater than 115% of the warrant price in effect for five consecutive trading days in any calendar month. The debentures and warrants provide for proportionate adjustments in the event of stock splits, stock dividends and reverse splits. In addition, the conversion and exercise prices will be reduced, with certain specified exemptions, if the Company issues shares at lower prices, then the debenture conversion or warrant exercise prices, or less than market price for the common stock. The terms of the registration rights agreement with the investor requires the Company to register approximately two times the number of shares necessary to repay the debentures in common stock at the lower of the market price, as computed under the agreement, or the conversion price, plus the number of shares underlying the warrants. NOTE 11 - NOTES PAYABLE Pursuant to a stock payment agreement consummated in January, 2002 between the Company and Dr. Glenn Muraca and Dr. Giovanni Marciano, Dr. Muraca and Dr. Marciano agreed to accept payment of certain debt obligations in shares of common stock and the Company issued 1,000,000 shares of common stock to each of them, or 2,000,000 shares in the aggregate. The shares are being issued to pay four promissory notes which were issued by our subsidiary, HMCA, in partial payment of the purchase price for the acquisition of A&A Services, Inc. The total balance of principal and interest due under the notes as of December 20, 2001 was $3,076,791.20. Payments under the notes were due quarterly. In order to induce Dr. Muraca and Marciano to accept payment in stock and in the manner provided in the stock payment agreement, the Company agreed to pay a premium on the note obligations. The total amount now due as a result is $3,613,325.50 in the aggregate. Under the terms of the stock payment agreement, Company will issue shares, and the net proceeds from the sale of the shares will be applied to the indebtedness. The quarterly payment due dates were waived, but the net proceeds received by the selling stockholders must be sufficient to pay the full indebtedness for each note, including the premium on the note, by the final maturity date of the note: September 20, 2002 in the case of two of the notes and December 20, 2002 in the case of two of the notes. If a note, including the premium, is not satisfied in full by the time of its final maturity date, then interest will accrue on the unpaid balance at the rate of 6% per annum and the selling stockholders could require the difference to be paid in cash. In the event the net proceeds from the sale of the 2,000,000 shares issued are not sufficient to pay the obligations by July 1, 2002, the Company will issue additional shares in an amount estimated to be sufficient to pay the balance due. The Company has reserved the option not to issue more than 5,000,000 shares in the aggregate. This transaction will increase the liquidity of the Company by making cash available for other purposes.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION During the six months ended December 31, 2001 and 2000, the Company paid approximately $428,000 and $480,000 for interest, respectively. During the six months ended December 31, 2001 and 2000, the Company paid approximately $0 and $28,000 for income taxes, respectively. During the six months ended December 31, 2001: The Company issued 234,083 shares of common stock for professional services of $338,563. 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. d) The Company issued 1,367,867 shares of common stock in satisfaction of principal of $1,350,000 and accrued interest of $26,100. During the six months ended December 31, 2000: a) The Company issued 418,708 shares of common stock to employees as compensation of $885,538 under stock bonus plans. b) The Company issued 636,767 shares of common stock for consulting services of $1,244,201. c) The Company acquired equipment of $56,831 under an equipment note payable obligation. d) The Company issued 124,000 shares of common stock for professional services of $234,000. NOTE 13 - SALE OF SUBSIDIARY In June of 2001, HMCA sold the stock of its wholly-owned Florida multi-specialty practice subsidiaries, Medical Specialties, Inc. and Diagnostic Services, Inc. for a promissory note for $50,000, resulting in a loss of $37,000. NOTE 14 - SEGMENT AND RELATED INFORMATION Effective July 1, 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures About Segments of an Enterprises and Related Information". SFAS No. 131 establishes standards for the way public enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. The Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of physician practices, including diagnostic imaging services.
FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (UNAUDITED) NOTE 14 - SEGMENT AND RELATED INFORMATION (Continued) 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/A as of June 30, 2001. 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, 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 For the six months ended December 31, 2000: Net revenue from external customers 3,429 15,142 18,571 Inter-segment net revenues 551 - 551 Operating (loss) income (9,258) 1,300 (7,958 Depreciation and amortization 1,097 1,226 2,323 Compensatory element of stock 792 741 1,533 issuances Total identifiable assets 46,756 41,365 88,121 Capital expenditures 827 416 1,243
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. For the fiscal quarter ended December 31, 2001 (second quarter of fiscal 2002), the Company reported a net loss of $4.7 million on revenues of $9.8 million as compared to a net loss of $3.0 million on revenues of $9.6 million for the second quarter of fiscal 2001. For the six month period ended December 31, 2001, the Company reported a net loss of $8.6 million on revenues $19.9 million, as compared to a net loss of $6.9 million on revenues of $18.6 million for the six month period ended December 31, 2000. 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"). Increased MRI equipment sales resulted in an increase in revenues recognized by the Company's MRI equipment manufacturing and service business, from $3.4 million in the first six months of fiscal 2001 to $6.3 million in the first six months of fiscal 2002. A significant increase in scanner sales to related parties, from $118,000 in the first six months of fiscal 2001 to $2.4 million in the first six months of fiscal 2002, was the principal reason for the increase. As a result the operating loss from the Company's MRI equipment manufacturing and service business was $8.0 million for the six months of fiscal 2002 as compared to $9.3 million for the first six months of fiscal 2001. HMCA (physician and diagnostic management services) income from operations was $559,000 for the first six months of fiscal 2002 compared to income of $1.3 million for the first six months of fiscal 2001. The decline in HMCA income was attributable to lower revenues reflecting a decline in management fees ($13.7 million for the first six months of fiscal 2002 compared to $15.1 million for the first six months of fiscal 2001) from the medical practices managed by HMCA. During the second quarter of fiscal 2002, two of the MRI scanning facilities managed by HMCA were closed, contributing to the decline in revenues. Accordingly the Company's consolidated operating loss was $7.4 million for the first six months of fiscal 2002 as compared to a consolidated operating loss of $8.0 million for the first six months of fiscal 2001. Although the Company's scanner sales increased significantly from fiscal 2001, low product sales volume continues to be the principal reason for the Company's operating losses. Sales revenues attributable to the Company's medical (MRI) equipment business were $3.9 million for the first six months of fiscal 2002 as compared to $1.3 million for the first six months of fiscal 2001. Costs of revenues attributable to the Company's product sales were $3.0 million for the six months of fiscal 2002 as compared to $1.8 million for the first six months of fiscal 2001. The Company's efforts to improve equipment sales volume have emphasized research and development to improve the competitiveness of its products and increased marketing and sales efforts. Research and development expenditures were $2.5 million for the first six months of fiscal 2002 and $3.0 million for the first six months of fiscal 2001. Selling, general and administrative expenses increased, from $9.2 million in the first six months of fiscal 2001 to $9.8 million in the first six months of fiscal 2002, primarily due to the expansion of Fonar's sales force and efforts (an increase of approximately $460,000) and the amortization of deferred financing costs of $148,000 during fiscal 2002 incurred in connection with the issuance of convertible debentures in the principal amount of $4.5 million in May 2001. The increase in compensatory element of stock issuance from approximately $1.5 million for the first six months of fiscal 2001 to approximately $1.7 million for the first six months of fiscal 2002 reflected greater use of Fonar's stock bonus plan to pay certain employees in stock rather than cash. Interest expense ($562,000) in the first six months of fiscal 2002 as compared to $594,000 for the first six months of fiscal 2001) remained constant. Financing costs paid in shares of stock and warrants, however, in the amount of $1.0 million, were incurred in the first six months of fiscal 2002, reflecting the amortization of the value of the warrants issued in connection with issuance of the Company's convertible debentures ($588,000) and financing costs in connection with the Company's convertible debentures ($427,000). Inventories increased to $4.7 million at December 31, 2001 from $3.7 million at June 30, 2001 as the Company purchased parts and commenced manufacturing scanners to fill orders and anticipated orders. Accounts receivable increased to $1.1 million as at December 31, 2001 from $850,000 as at June 30, 2001, principally reflecting increased revenues from service contracts on MRI scanners. The Company's Indomitable (TM) (also referred to as Stand-Up), QUAD (TM), Fonar-360 (TM) and QUAD 12000S (TM) MRI, 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. The Company's Indomitable (TM) scanner 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 allows 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 Company believes that Indomitable(TM) will also prove useful for MRI-directed 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' chances for survival and optimize the extent of recovery. The Fonar 360 has an enlarged room sized magnet in which the magnet frame is incorporated into the floor, ceiling and walls of the scan room. 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. Physicians and family members are able to actually enter the scanner and approach the patient. In its Open Sky version, the Fonar 360 serves as an open patient friendly scanner which allows 360 degree access to the patient on the scanner bed. The walls can be decorated with panoramic murals and the entire scan room can be decorated to be incorporated into the pictured landscape. In its future interventional OR-360 version, the enlarged room sized magnet and 360 degree access to the patient afforded by the Fonar 360 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 exceptional capacity to exhibit tissue detail on the image, by virtue of the nuclear resonance signal's extraordinary capacity to create image contrast, can then be obtained real time during surgery to guide the surgeon in the surgery. Thus surgical instruments, needles, catheters, endoscopes and the like can 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 "QUAD" scanners are unique MRI scanners in that four sides are open thus allowing access to the scanning area from four vantage points. The starshaped open design of the QUAD will also make possible a host of new applications, particularly MRI mammography and MRI directed surgery (Interventional MRI). The QUAD (TM) 12000 MRI scanner utilizes a 6000 gauss iron core electromagnet and is accessible from four sides. The QUAD 12000 is the first "open" MRI scanner at high field. The Company also offers a low cost open scanner, the Echo, which operates at a .3 Tesla field strength. The Echo is an open upgraded version of the Company's former principal product, the Beta MRI scanner, but is open on four sides to provide four directions for patient access instead of two. The Company has also developed a superconductive version of its open iron frame magnets, the "QUAD 12000S" (TM), and has completed construction of a prototype with a 0.6 Tesla superconductive magnet. The Company's design of its superconductive magnet anticipated the possibility of making its other products available as superconducting magnets. Therefore, it is the Company's objective to make Indomitable (TM) and the Fonar 360 available to FONAR's customers as either iron-frame resistive models or iron-frame superconductive magnets depending on customer preference and pricing. During the first six months of fiscal 2002, revenues of approximately $3.9 million were recognized from the sale of Stand-Up MRI scanners and $48,000 from the sale of QUAD MRI scanners. In addition, revenues of approximately $180,000 were recognized from the sales of upgrades, principally from the Sympulse (TM) upgrade. During the first six months of fiscal 2001, revenues of approximately $118,000 were recognized from the sale of QUAD scanners, $892,000 from the sale of the Stand-Up MRI scanners and, $51,000 from the sale of Echo scanners There were no foreign product sales for the first six months of fiscal 2002 or fiscal 2001. Liquidity and Capital Resources. Cash and cash equivalents decreased from $14.0 million at June 30, 2001 to $5.8 million at December 31, 2001. Principal uses of cash during the first three months of fiscal 2002 included: capital expenditures of $1.2 million, repayment of long-term debt of $2.9 million and $4.1 million to fund operating activities for the first six months of fiscal 2002. Marketable securities approximated $6.1 million as of both December 31, 2001 and June 30, 2001. Such investments were in U.S. government obligations and corporate bonds. Total liabilities decreased since June 30, 2001 by $4.5 million to $38.4 million at December 31, 2001. The decrease in liabilities from June 30, 2001 is attributable primarily to the repayment of long-term debt and capital lease obligations of $2.9 million and the amortization of the license fee of $1.2 million. As of December 31, 2001, the Company had a bank credit facility of $5,500,000. The unused portion of the facility was approximately $214,000. 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. The Company's business plan currently includes an aggressive program for manufacturing and selling its new line of scanners and expanding its new physician and diagnostic management services business. In May of 2001, the Company issued convertible debentures in the principal amount of $4.5 million. These debentures are convertible at the option of the holder at a price of $2.047 per share. Otherwise, the debentures are payable in ten monthly installments of principal of $450,000 each, with interest at 4% per annum. The installments can be paid in cash or common stock at the Company's option. In such case the common stock would be valued at the lesser of: a) 90% of the average of the four lowest closing bid prices during the preceding month, or b) the average of the four lowest closing bid prices during the preceding calendar month, less $0.125. By amendment dated October 25, 2001, however, the payments originally due October 1, 2001 and November 1, 2001, were extended to November 5, 2001, and for those payments, the stock was valued at the average of the two lowest closing bid prices for October, 2001 less $0.25. On November 5, 2001, the Company made these payments for principal due of $900,000 and related accrued interest on this principal of $16,500 through the issuance of 959,626 shares of the Company's common stock. The Company made the December, 2001, January, 2002 and February, 2002 payments ($450,000 plus interest each) through the issuance of 398,181 shares, 430,935 shares and 486,895 shares. No part of the debentures have been converted to date. The ability of the Company to pay this debt in common stock increases the liquidity of the Company by enabling cash to be used for operations and to pay other obligations. Pursuant to a stock payment agreement consummated in January, 2002 between the Company and Dr. Glenn Muraca and Dr. Giovanni Marciano, Dr. Muraca and Dr. Marciano agreed to accept payment of certain debt obligations in shares of common stock and the Company issued 1,000,000 shares of common stock to each of them, or 2,000,000 shares in the aggregate. The shares are being issued to pay four promissory notes which were issued by our subsidiary, Health Management Corporation of America or HMCA, in partial payment of the purchase price for the acquisition of A&A Services, Inc. The total balance of principal and interest due under the notes as of December 20, 2001 was $3,076,791.20. Payments under the notes were due quarterly. In order to induce Dr. Muraca and Marciano to accept payment in stock and in the manner provided in the stock payment agreement, the Company agreed to pay a premium on the note obligations. The total amount now due as a result is $3,613,325.50 in the aggregate. Under the terms of the stock payment agreement, Company will issue shares, and the net proceeds from the sale of the shares will be applied to the indebtedness. The quarterly payment due dates were waived, but the net proceeds received by the selling stockholders must be sufficient to pay the full indebtedness for each note, including the premium on the note, by the final maturity date of the note: September 20, 2002 in the case of two of the notes and December 20, 2002 in the case of two of the notes. If a note, including the premium, is not satisfied in full by the time of its final maturity date, then interest will accrue on the unpaid balance at the rate of 6% per annum and the selling stockholders could require the difference to be paid in cash. In the event the net proceeds from the sale of the 2,000,000 shares issued are not sufficient to pay the obligations by July 1, 2002, the Company will issue additional shares in an amount estimated to be sufficient to pay the balance due. The Company has reserved the option not to issue more than 5,000,000 shares in the aggregate. This transaction will increase the liquidity of the Company by making cash available for other purposes. The Company believes that it has sufficient cash resources and other liquid assets to support its operations. The Company and its subsidiary, HMCA, are continuing to explore both bank financing and the placement of debt and equity securities. PART II - OTHER INFORMATION Item 1 - Legal Proceedings: There were no material changes in litigation for the first six months of fiscal 2002 from that described in the Company's Form 10-K for the fiscal year ended June 30, 2001. 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 Chief Executive Officer and Acting Principal Financial Officer Dated: February 15, 2002