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 MARCH 31, 2003
--------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10248
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FONAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
- ------------------------------- ------------------------------------
(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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at May 9, 2003
- -------------------------------- ---------------------------------------
Common Stock, par value $.0001 80,661,084
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 - March 31, 2003
(Unaudited) and June 30, 2002 3
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 2003 and
March 31, 2002 (Unaudited) 5
Condensed Consolidated Statements of Operations for
the Nine Months Ended March 31, 2003 and
March 31, 2002 (Unaudited) 6
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Three Months Ended
March 31, 2003 and March 31, 2002 (Unaudited) 7
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Nine Months Ended
March 31, 2003 and March 31, 2002 (Unaudited) 8
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 2003 and
March 31, 2002 (Unaudited) 9
Notes to Condensed Consolidated Financial Statements (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial 23
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS March 31, June 30,
2003 2002
(UNAUDITED)
Current Assets: ----------- -----------
Cash and cash equivalents $ 4,050 $ 7,461
Marketable securities 5,797 5,573
Restricted cash 5,500 5,500
Accounts receivable - net 1,360 781
Accounts receivable - related medical practices - net 12,395 12,939
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,302 1,153
Inventories 5,064 4,664
Investment in sales-type leases with related parties 29 1,797
Investment in sales-type lease 132 120
Prepaid expenses and other current assets 1,604 1,102
Assets from discontinued operations 3,632 4,007
----------- -----------
Total current assets 40,865 45,097
----------- -----------
Property and equipment - net 8,651 10,535
Advances and notes to related parties - net 1,299 1,497
Investment in sales-type leases - related parties - 815
Investment in sales-type lease 642 741
Notes receivable 60 175
Management agreements - net 10,479 11,001
Other intangible assets - net 3,210 2,649
Other assets 329 320
----------- -----------
$ 65,535 $ 72,830
=========== ===========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 3
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
(UNAUDITED)
Current Liabilities: ----------- -----------
Current portion of long-term debt and capital leases $ 7,287 $ 8,813
Accounts payable 5,269 3,999
Other current liabilities 7,845 7,485
Customer advances 4,798 4,308
Customer advances - related parties 798 3,400
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,529 1,115
Income taxes payable 734 745
Liabilities from discontinued operations 1,097 1,125
----------- -----------
Total Current Liabilities 29,357 30,990
Long-term debt and capital leases
less current portion 991 833
Unearned revenue - license fee 2,925 4,680
Other non-current liabilities 319 360
----------- -----------
Total Liabilities 33,592 36,863
----------- -----------
Minority interest 257 272
----------- -----------
STOCKHOLDERS' EQUITY
Class A non-voting Preferred Stock $.0001 par value;
8,000,000 authorized, 7,836,287 issued and outstanding
at March 31, 2003 and at June 30, 2002 1 1
Common Stock $.0001 par value; 85,000,000 shares
authorized; 78,690,551 outstanding at March 31, 2003
and 71,582,243 at June 30, 2002 8 7
Class B Common Stock $ .0001 par value; 4,000,000 shares
authorized, (10 votes per share), 4,153 issued and
outstanding at March 31, 2003 and 4,211 at 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 March 31, 2003 and at June 30, 2002 1 1
Paid-in capital in excess of par value 127,792 120,156
Accumulated other comprehensive income 65 85
Accumulated deficit (94,835) (82,883)
Notes receivable from stockholders ( 671) ( 997)
Treasury stock, at cost - 291,064 shares of common stock
at March 31, 2003 and at June 30, 2002 ( 675) ( 675)
----------- -----------
Total Stockholders' Equity 31,686 35,695
----------- -----------
Total Liabilities and Stockholders' Equity $ 65,535 $ 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
MARCH 31,
-----------------------
2003 2002
REVENUES ----------- -----------
Product sales - net $ 2,519 $ 1,897
Product sales - related parties - net 746 1,101
Service and repair fees - net 516 468
Service and repair fees - related parties - net 80 59
Management and other fees-related medical practices-net 5,329 6,341
License fees and royalties 585 585
----------- -----------
Total Revenues - Net 9,775 10,451
----------- -----------
COSTS AND EXPENSES
Costs related to product sales 1,717 1,411
Costs related to product sales - related parties 417 625
Costs related to service and repair fees 654 538
Costs related to service and repair
fees - related parties 191 67
Costs related to management and other
fees - related parties 3,324 3,477
Research and development 1,271 1,193
Selling, general and administrative 5,538 5,137
Compensatory element of stock issuances for
selling, general and administrative expenses 2,324 1,606
Provision for bad debts 54 13
Amortization of management agreements 174 174
----------- -----------
Total Costs and Expenses 15,664 14,241
----------- -----------
Loss From Operations ( 5,889) ( 3,790)
Financing Costs Paid in Stock and Warrants - ( 626)
Interest Expense ( 117) ( 62)
Interest Income 123 185
Other Income (Expense) ( 156) ( 11)
Minority Interest in Income of Partnerships ( 201) ( 46)
----------- -----------
Loss Before Provision for Income Taxes ( 6,240) ( 4,350)
Provision for Income Taxes 16 10
----------- -----------
Net Loss from Continuing Operations ( 6,256) ( 4,360)
Net Loss from Discontinued Operations ( 70) ( 690)
----------- -----------
NET LOSS $( 6,326) $( 5,050)
=========== ===========
Net Loss per share Continuing Operations $(.08) $(.07)
Net Loss per share Discontinued Operations - (.01)
----------- -----------
Basic and Diluted Net Loss per share $(.08) $(.08)
=========== ===========
Weighted average number of shares outstanding 76,653 63,200
=========== ===========
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 NINE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
REVENUES ----------- -----------
Product sales - net $ 11,252 $ 3,413
Product sales - related parties - net 6,727 3,534
Service and repair fees - net 1,567 1,440
Service and repair fees - related parties - net 243 168
Management and other fees-related medical practices-net 17,252 18,993
License fees and royalties 1,965 1,818
----------- -----------
Total Revenues - Net 39,006 29,366
----------- -----------
COSTS AND EXPENSES
Costs related to product sales 7,702 2,478
Costs related to product sales - related parties 4,000 2,545
Costs related to service and repair fees 2,035 1,632
Costs related to service
and repair fees - related parties 406 190
Costs related to management
and other fees - related parties 10,014 10,999
Research and development 3,875 3,653
Selling, general and administrative 17,198 14,987
Compensatory element of stock issuances for
selling, general and administrative expenses 4,130 3,311
Provision for bad debts 222 197
Amortization of management agreements 522 522
----------- -----------
Total Costs and Expenses 50,104 40,514
----------- -----------
Loss From Operations (11,098) (11,148)
Financing Costs Paid in Stock and Warrants - ( 1,641)
Interest Expense ( 481) ( 592)
Interest Income 570 718
Other Income (Expense) ( 158) 5
Minority Interest in Income of Partnerships ( 470) ( 147)
----------- -----------
Loss Before Provision for Income Taxes (11,637) (12,805)
Provision for Income Taxes 20 27
----------- -----------
Net Loss from Continuing Operations (11,657) (12,832)
Net Loss from Discontinued Operations ( 295) ( 775)
----------- -----------
NET LOSS $(11,952) $(13,607)
======= =======
Net Loss per share Continuing Operations $(.16) $(.21)
Net Loss per share Discontinued Operations - (.01)
----------- -----------
Basic and Diluted Net Loss per share $(.16) $(.22)
=========== ===========
Weighted average number of shares outstanding 74,276 61,731
=========== ===========
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
MARCH 31,
-----------------------
2003 2002
----------- -----------
Net loss $(6,326) $(5,050)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities,
net of tax 4 ( 68)
----------- -----------
Total comprehensive loss $(6,322) $(5,118)
=========== ===========
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
----------- -----------
Net loss $(11,952) $(13,607)
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of tax 65 82
----------- -----------
Total comprehensive loss $(11,887) $(13,525)
=========== ===========
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 NINE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
----------- -----------
Cash Flows from Operating Activities
Net loss $(11,952) $(13,607)
Loss from discontinued operations 295 775
----------- -----------
Loss from continuing operations (11,657) (12,832)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income of partnerships 470 147
Depreciation and amortization 3,200 3,436
Provision for bad debts 222 197
Compensatory element of stock issuances 4,130 3,311
Stock issued for professional services 2,450 586
Interest expense paid in stock 10 -
Financing costs paid in stock and warrants - 1,641
Amortization of unearned license fee ( 1,755) ( 1,755)
(Increase) decrease in operating assets, net:
Accounts and notes receivable ( 25) 634
Costs and estimated earnings in excess of
billings on uncompleted contracts ( 149) 873
Inventories ( 400) ( 563)
Principal payments on sales type lease-related
parties 2,583 31
Principal payments on sales type lease 87 92
Prepaid expenses and other current assets ( 502) ( 342)
Other assets ( 9) 7
Receivables and advances to related parties 178 ( 1,211)
Increase (decrease) in operating liabilities, net:
Accounts payable 1,270 ( 436)
Other current liabilities 527 160
Customer advances ( 2,112) 3,275
Billings in excess of costs and estimated
earnings on uncompleted contracts 414 488
Other liabilities ( 41) 28
Income taxes payable ( 11) 17
----------- -----------
Net cash used in continuing operations ( 1,120) ( 2,216)
Net cash provided by discontinued operations 62 ( 733)
----------- -----------
Net cash used in operating activities ( 1,058) ( 2,949)
----------- -----------
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 NINE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
----------- -----------
Cash Flows from Investing Activities:
Sales (purchases) of marketable securities ( 244) 212
Purchases of property and equipment ( 602) ( 2,119)
Costs of capitalized software development ( 627) ( 616)
Cost of patents and copyrights ( 223) -
----------- -----------
Net cash used in investing activities ( 1,696) ( 2,523)
----------- -----------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 405) ( 201)
Proceeds from long-term debt 950 -
Repayment of long-term debt and capital
leases ( 2,296) ( 3,470)
Proceeds from exercise of stock options
and warrants 1,104 -
----------- -----------
Net cash used in financing activities ( 647) ( 3,671)
----------- -----------
Decrease in Cash and Cash Equivalents ( 3,401) ( 9,143)
Cash of Continuing Operations Beginning of Period 7,461 13,935
Cash of Discontinued Operations Beginning of Period 33 105
----------- -----------
Cash and Cash Equivalents Beginning of Period 7,494 14,040
Cash of Continuing Operations End of Period 4,050 4,882
Cash of Discontinuing Operations End of Period 43 15
----------- -----------
Cash and Cash Equivalents End of Period $ 4,093 $ 4,897
========== ===========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 9
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(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 nine-month
period ended March 31, 2003 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.
In March 2003, the Company decided to sell its reporting unit which manages four
primary care medical practices. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, the results of these operations have been
accounted for as a discontinued operation. Accordingly, all prior periods
presented have been restated, where applicable, to reflect this reporting unit
as a discontinued operations. In April 2003, this reporting unit was sold. (See
Note 12.)
Page 10
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(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
intercompany accounts and transactions have been eliminated in consolidation.
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.
Page 11
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
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 6,535,000 and 4,036,000 shares of
common stock were outstanding at March 31, 2003, and 2002, 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.
At March 31, 2003, as permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure", which amended SFAS No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation", the Company has elected to
continue to follow the intrinsic value method in accounting for its stock-based
employee compensation arrangements as defined by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related
interpretations including Financial Accounting Standards Board Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No. 25. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net loss and loss
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation:
Page 12
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
( 000's Omitted)
------------------------------------------
For the Nine Months For the Three Months
Ended March 31, Ended March 31,
-------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net (Loss) as Reported $(11,952) $(13,607) $ (6,326) $ (5,050)
Deduct:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards 613 589 - -
--------- --------- --------- ---------
Pro Forma Net (Loss) $(12,565) $(14,196) $ (6,326) $ (5,050)
========= ========= ========= =========
Basic Net (Loss) Per Share as
Reported $(.16) $(.22) $(.08) $(.08)
========= ========= ========= =========
Basic Pro Forma Net (Loss) Per $(.17) $(.23) $(.08) $(.08)
Share ========= ========= ========= ========
Diluted Net (Loss) Per Share as $(.16) $(.22) $(.08) $(.08)
Reported ========= ========= ======== ========
Diluted Pro Forma Net (Loss) $(.17) $(.23) $(.08) $(.08)
Per Share ========= ========= ======== ========
The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:
For the Nine Months
Ended March 31,
--------------------
2003 2002
--------- ---------
Expected Life (Years) 3 3
Interest Rate 4.00% 4.00%
Annual Rate of Dividends 0% 0%
Volatility 92% 92%
Page 13
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
The fair value of options at date of grant using the fair value based method
during fiscal 2003 is estimated at $1.00.
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
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
Page 14
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
(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 continued to account for stock-based
compensation according to APB opinion No. 25, while its adoption of SFAS 148
requires the Company to provide prominent disclosures about the effect of SFAS
123 on reported income and requires the Company to disclose these effects in the
interim financial statements as well starting with the quarter ended March 31,
2003. The adoption of SFAS 148 did not 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
recognition requirements of FIN 45 were effective for guarantees issued or
modified after December 31, 2002 and adoption of the disclosure requirement were
effective for the Company during the Company's third quarter ending March 31,
2003. The adoption of FIN 45 will not 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
Page 15
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
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 March 31, 2003:
(000's omitted)
Unrealized Fair
Holdings Market
Cost Gains Value
------ ---------- -------
U.S. Government Obligations $3,783 $ 16 $3,799
Corporate bonds 1,949 49 1,998
------ ------ ------
$5,732 $ 65 $5,797
====== ====== ======
NOTE 5 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following at March 31, 2003:
(000's omitted)
Allowance for
Doubtful
Accounts and
Gross contractual
Receivable allowances Net
---------- ------------- -------
Receivable from equipment
Sales and service contracts $ 2,437 $ 1,077 $ 1,360
======= ======= =======
Receivables from related PC's $14,574 $ 2,179 $12,395
======= ======= =======
Page 16
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 5 - ACCOUNTS RECEIVABLE, NET (Continued)
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 59%
and 56% of the PC's net revenues for the nine months ended March 31, 2003 and
2002, 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 62% and 77% of the consolidated net revenues for the nine months
ended March 31, 2003 and 2002, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
Summarized income statement data for the nine months ended March 31, 2003
related to the 21 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted)
Patient Revenue - Net $25,156
=======
Income from Operations $ 683
=======
Net Income $ 10
=======
NOTE 6 - INVENTORIES
Inventories included in the accompanying consolidated balance sheet consist of:
(000's omitted)
March 31, 2003
--------------
Purchased parts, components and supplies $3,612
Work-in-process 1,452
-------
$5,064
=======
Page 17
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 7 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
(000's omitted)
1) Information relating to uncompleted contracts as of March 31, 2003 is as
follows:
Costs incurred on uncompleted Contracts $5,978
Estimated earnings 3,782
-------
9,760
Less: Billings to date 9,987
-------
$ (227)
=======
Included in the accompanying consolidated balance sheet under the following
captions:
Costs and estimated earnings in excess of
Billings on uncompleted contracts $1,302
Billings in excess of costs and estimated
Earnings on uncompleted contracts (1,529)
-------
$ (227)
=======
2) Customer advances consist of the following:
As of March 31, 2003
-------------------------------------
Related
Total Parties Other
------- -------- -------
Total advances from customers $15,583 $ 3,798 $11,785
Less: Advances from customers
on contracts under construction 9,987 3,000 6,987
------- -------- ------
$ 5,596 $ 798 $ 4,798
======= ======== ======
Page 18
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 8 - STOCKHOLDERS' EQUITY
Common Stock
During the nine months ended March 31, 2003:
a) The Company issued 1,756,119 shares of common stock to employees as
compensation of $2,024,204 under stock bonus plans.
b) The Company issued 717,796 shares of common stock valued at $ 741,937 to
consultants and others
c) The Company issued 1,125,000 shares as part of the consideration issued in
exchange for options held by a related party to acquire approximately 20% of the
stock of HMCA.
d) The Company issued 2,394,264 shares of common stock for services of
$2,450,254.
e) The Company issued 27,571 shares of common stock and received proceeds of
$31,203 upon the exercise of stock options.
f) The Company issued 1,000,000 shares of common stock and received proceeds of
$1,125,000 upon the exercise of warrants.
Subsequent to March 31, 2003, the Company issued approximately 1,971,000 shares
of common stock to employees, consultants and for professional services and to
vendors and other suppliers of goods and services.
Warrants
During the first quarter of fiscal 2003 in accordance with the 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.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2003 and 2002, the Company paid
approximately $481,000 and $700,000 for interest, respectively, of which $ -0-
and $101,000, respectively, were related to discontinued operations. In
addition, during the nine months ended March 31, 2003, the Company paid
approximately $25,000 and $8,000 for income taxes, respectively.
During the nine months ended March 31, 2003, 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.
Page 19
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
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 nine months ended March 31, 2003:
Net revenue from external customers $21,754 $17,252 $ 39,006
Inter-segment net revenues $ 1,941 --- $ 1,941
Operating loss $(8,674) $(2,424) $(11,098)
Depreciation and amortization $ 1,902 $ 1,298 $ 3,200
Compensatory element of stock issuances $ 1,067 $ 3,063 $ 4,130
Capital expenditures $ 247 $ 355 $ 602
Total identifiable assets $34,027 $31,508 $ 65,535
For the nine months ended March 31, 2002:
Net revenue from external customers $ 10,373 $18,993 $ 29,366
Inter-segment net revenues $ 765 --- $ 765
Operating (loss) income $(11,930) $ 782 $(11,148)
Depreciation and amortization $ 1,941 $ 1,495 $ 3,436
Compensatory element of stock issuances $ 1,645 $ 1,666 $ 3,311
Capital expenditures $ 1,204 $ 915 $ 2,119
Total identifiable assets at June 30, 2002 $ 40,179 $32,651 $ 72,830
NOTE 11 - FOREIGN SALES
During the nine months ended March 31, 2003 and 2002, the Company had foreign
revenues of approximately $1,043,000 and $1,763,000, respectively.
Page 20
NOTE 12 - SALE OF MANAGEMENT COMPANY
On April 8, 2003, the Company's wholly-owned subsidiary, HMCA sold all of its
issued and outstanding stock of A&A Services, Inc. ("A&A Services"), a physician
practice management services organization engaged in the business of managing
four primary care practices located in Queens County, New York (the
"Practices"). The sale was made to the former owners (the "Buyers"), for a
purchase price of $3,000,000, payable as follows: $500,000 at closing,
$2,350,000 due 75 days after closing and $150,000 six months following the
closing, together with a release of indebtedness in the approximate amount of
approximately $909,000, which remained owing to the Buyers by HMCA as a result
of the original acquisition.
The repurchase by the Buyers of the stock was the principal part of a settlement
of three lawsuits which had been instituted by the parties. The first was
instituted by HMCA and Fonar against the Buyers for fraud, failure of
consideration and breach of the contract with respect to the original
acquisition by HMCA of A&A Services, and the second was instituted by
professional corporations managed by HMCA against the Buyers for breach of their
employment agreements. The third case was commenced by a limited liability
company in which the Buyers have an interest, against A&A Services for
nonpayment of rent. The case was settled before the defending parties answered
the complaints. As part of the settlement, the parties released each other of
all claims, including all remaining balances due to the Buyers with respect to
the purchase of A&A Services and $21,167 owed to the limited liability company,
by A&A Services for past due rents.
There is no family, business or other material relationship between either of
the Buyers and any of Fonar, HMCA, or any of their respective affiliates,
directors, officers or any associate of any such director or officer.
A&A Services provided the Practices with management services, office space,
equipment, repair and maintenance service for the equipment and clerical and
other non-medical personnel. All services were terminated upon the sale.
This reporting unit of the Company's operations has been reflected as
discontinued operations for all periods presented. Accordingly, the assets and
liabilities of this reporting unit have been segregated from the assets and
liabilities from continuing operations in the consolidated balance sheets at
March 31, 2003 and June 30, 2002 and their operating results have been
segregated from continuing operations and are reported as discontinued
operations in the consolidated statements of operations, comprehensive income
(loss) and cash flows for the three and nine months ended March 31, 2003 and
2002.
As a result of this sale, the Company realized a pre-tax gain of approximately
$500,000 which will be recognized in discontinued operation during the quarter
ended June 30, 2003.
Page 21
Summarized financial information of the discontinued operations are as follows:
( 000's Omitted)
------------------------------------------
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
-------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Management and other fees - related
medical practices - net $ 373 $ 502 $1,148 $1,506
--------- --------- --------- ---------
Costs and Expenses:
Costs related to management
and other fees -related parties 372 432 1,226 1,228
Amortization of management
agreements 71 131 215 392
Interest expenses - 629 2 661
--------- --------- --------- ---------
Total Costs and Expenses 443 1,192 1,443 2,281
--------- --------- --------- ---------
Loss from Discontinued
Operations $ (70) $ (690) $ (295) $ (775)
========= ========= ========= =========
March 31, June 30,
2003 2002
Assets from Discontinued --------- ---------
Operations:
Cash $ 43 $ 33
Accounts receivable - related
medical practices - net 236 372
Property and equipment - net 27 62
Management agreements - net 3,304 3,519
Other assets 22 21
--------- ---------
Total Assets from
Discontinued Operations $3,632 $4,007
========= =========
Liabilities from
Discontinued Operations:
Long-term debt and capital leases $ 909 $ 963
Accounts payable 122 78
Other current liabilities 66 84
--------- ---------
Total Liabilities from
Discontinued Operations $1,097 $1,125
========= =========
Page 22
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the fiscal quarter ended March 31, 2003 (third quarter of fiscal 2003),
the Company reported a net loss of $6.3 million on revenues of $9.8 million as
compared to a net loss of $5.1 million on revenues of $10.5 million for the
third quarter of fiscal 2002.
For the nine month period ended March 31, 2003, the Company reported a net
loss of $12.0 million on revenues of $39 million, as compared to a net loss of
$13.6 million on revenues of $29.4 million for the nine month period ended March
31, 2002.
Overview and Trends
For the nine month period ended March 31, 2003, as compared to the nine
month period ended March 31, 2002, revenues increased significantly by 33%, most
dramatically in MRI equipment sales ($18 million compared to $6.9 million, an
increase of 161%) including both unrelated party scanner sales ($11.3 million
compared to $3.4 million, an increase of 232%) and related party scanner sales
($6.7 million compared to $3.5 million, an increase of 91%). Overall, for the
first nine months of fiscal 2003, revenues for the medical equipment segment
increased by 109% to $21.7 million from $10.4 million for the first nine months
of fiscal 2002. The revenues generated by Health Management Corporation of
America ("HMCA"), the Company's physician and diagnostic management services
segment, however, declined by 9% to $17.3 million for the first nine months of
fiscal 2003 as compared to $19 million for the first nine months of fiscal 2002.
The Company's revenues in the third quarter of fiscal 2003 ($9.8 million)
decreased by 40% from $16.3 million for the second quarter of fiscal 2003 (on
which the Company recognized a net loss of $2.9 million) and by 28% as compared
to $13.7 million for the first quarter of fiscal 2003 (on which the Company
recognized a net loss of $2.7 million).
Notwithstanding the overall decrease in revenues in the third quarter of
fiscal 2003 from the prior year ($9.8 million as compared to $10.5 million) as
well as from the preceding two quarters of fiscal 2003, the decrease in the
third quarter of fiscal 2003 as compared to fiscal 2002 reflect declines in
revenue in two areas: a decline of 16% in HMCA's revenues, from $6.3 million for
the third quarter for fiscal 2002 to $5.3 million for fiscal 2003 and a decline
of 32% in revenues from scanner sales to related parties, from $1.1 million for
the third quarter of fiscal 2002 to $746,000 for the third quarter of fiscal
2003. At the same time, however, revenues from scanners sales to unrelated
parties increased by 32% from $1.9 million for the third quarter of fiscal 2002
to $2.5 million for the third quarter of fiscal 2003.
We recognize MRI scanner sales revenues on the "percentage of completion"
basis, which means the revenues are shown as earned as the scanner is
manufactured. Revenues recognized in a particular quarter do not necessarily
reflect new orders or progress payments made by customers in that quarter. In
the third quarter of fiscal 2003, the decrease in revenues recognized was in
part the indirect result of delays in customer site preparations which are
necessary to enable us to deliver and install the scanner and recognize the
revenue. We build the scanners as the customer meets certain benchmarks in its
site preparation in order to minimize the time lag between incurring expenses of
manufacturing and our receipt of the cash progress payments from the customer
which are due only upon delivery. During the first nine months of fiscal 2003 we
received orders for 12 Stand-Up MRI scanners as compared to orders for 8
Stand-Up MRI scanners during the first nine months of fiscal 2002. For the third
quarter of fiscal 2003 we received orders for 4 Stand-Up MRI scanners as
compared to orders for 4 Stand-Up MRI scanners for the third quarter of fiscal
2002.
In addition revenues recognized by HMCA in the third quarter of fiscal 2003
were $5.3 million as compared to $6.3 million in the third quarter of fiscal
2002. This was principally the result of the closing of two MRI sites and one
physical therapy and physical rehabilitation facility during the nine month
period ended March 31, 2003 and the reduction of revenues at two MRI sites while
they were installing new Stand-Up(TM) MRI scanners.
In addition to the decline of revenues by 7% in the third quarter, from
$10.5 million in fiscal 2002 to $9.8 million in fiscal 2003, the total costs and
expenses for the quarter increased by 11% from $14.2 million in fiscal 2002 to
$15.7 million in fiscal 2003. Although changes in costs related to producing
revenues essentially tracked changes in revenues, selling general and
administrative expenses increased 8% from $5.1 million in the third quarter of
fiscal 2002 to $5.5 million in the third quarter of fiscal 2003 and the
compensatory element of stock issuances for selling general and administrative
expenses increased 44% from $1.6 million in the third quarter of fiscal 2002 to
$2.3 million in the third quarter of fiscal 2003, reflecting an increased use of
the Company's common stock in lieu of cash to pay employees, consultants and
professionals for services. As a result the Company's operating and net losses
were $5.9 million and $6.3 million, respectively, for the third quarter of
fiscal 2003 as compared to $3.8 million and $5 million, respectively for fiscal
2002.
For the nine months ended March 31, 2003, however, the Company's loss from
operations improved slightly, from an operating loss of $11,148,000 for the nine
months ended March 31, 2002 to a operating loss $11,098,000 for the nine months
ended March 31, 2003. The Company's net loss for the nine months ended March 31,
2003 improved, at $12 million, as compared to $13.6 for the nine months ended
March 31, 2002.
The overall trends reflected in the third quarter and nine month results
for fiscal 2003 are the absolute increase in revenues from the MRI equipment
segment of the Company's business, as compared to fiscal 2002 ($21.7 million for
the first nine months of fiscal 2003 as compared to $10.4 million for the first
nine months of fiscal 2002), the relative increase in MRI equipment segment
revenues relative to HMCA revenues ($21.7 million or 56% as compared to $17.3
million or 44%, for the first nine months of fiscal 2003 as compared to $10.4
million or 35% from the MRI equipment segment and $19 million or 65%, from HMCA,
for the first nine months of fiscal 2002). In addition a reduced dependence on
related party scanner sales revenues ($11.3 million or 63% to unrelated parties
and $6.7 million or 37% to related parties for the first nine months of fiscal
2003 as compared to $3.4 million, or 49% to unrelated parties and $3.5 million
or 51% to related parties for the first nine months of fiscal 2002) was
observed.
Following the end of the third quarter, on April 8, 2003, HMCA sold its
wholly-owned subsidiary, A&A Services, Inc. ("A&A Services") a physician
practice management services organization which managed four primary care
practices located in Queens County, New York. The sale was made to the former
owners for a purchase price of $3 million plus the elimination of a $909,000
balance due by HMCA to the former owners under the terms of the original
acquisition. Because of the declining performance by A&A Services through fiscal
2002, the Company recognized a loss of $4.7 million in fiscal 2002 on the
impairment of A&A Services' management agreements with the primary care
practices. Consequently, notwithstanding HMCA had originally acquired A&A
Services for a $10 million purchase price, the Company has realized a pre-tax
gain of approximately $500,000 from the sale as a result of the prior write down
and amortization of the management agreements, which will be recognized during
the fourth quarter of fiscal 2003.
Results of Operations
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 in 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 161%, from $6.9 million for
the first nine months of fiscal 2002 to $18.0 million for the first nine months
of fiscal 2003, reflecting increased sales of the Stand-Up MRI scanners. Service
and repair revenues increased by 13%, from $1.6 million for the first nine
months of fiscal 2002 to $1.8 million for the first nine months of fiscal 2003
and license fees and royalties increased by 11% from $1.8 million for the first
nine months of fiscal 2002 to $2.0 million for the first nine months of fiscal
2003. Consequently, overall revenues recognized by the Company's MRI equipment
manufacturing and service business increased by 109% from $10.4 million in the
first nine months of fiscal 2002 to $21.7 million in the first nine months of
fiscal 2003. There were significant increases in scanner sales to both unrelated
parties, from $3.4 million in the first nine months of fiscal 2002 to $11.3
million in the first nine months of fiscal 2003 (232%) and to related parties,
from $3.5 million in the first nine months of fiscal 2002 to $6.7 million in the
first nine months of fiscal 2003 (91%). As a result, the operating loss from the
Company's MRI equipment manufacturing and service business improved to a loss of
$8.7 million for the first nine months of fiscal 2003 from a loss of $11.9
million for the first nine months of fiscal 2002.
The increase in product sales reflected continuing market acceptance of the
Company's Stand-Up(TM) MRI scanners. During the first nine months of fiscal
2003, revenues of approximately $17.3 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 nine months of fiscal 2002, the Company recognized
revenues of approximately $6.9 million from the sale of Stand-Up(TM) MRI
scanners.
There were approximately $1 million in foreign sales revenues for the first
nine months of fiscal 2003 as compared to approximately $1.8 million in foreign
sales revenues for the first nine months in fiscal 2002.
HMCA, which provides physician and diagnostic management services,
experienced an operating loss of $2.4 million for the first nine months of
fiscal 2003 compared to operating income of $782,000 for the first nine months
of fiscal 2002. The decline in HMCA income was attributable to lower revenues
reflecting a decline in management fees ($17.3 million for the first nine months
of fiscal 2003 compared to $19.0 million for the first nine 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 nine facilities (six
in fiscal 2002 and three in fiscal 2003) and reduced revenues from two sites
while they were in the process of installing two new Stand-Up(TM) MRI scanners.
Shortly following the end of the third fiscal quarter of 2003, HMCA sold A&A
Services for $3.0 million (payable pursuant to a promissory note) to the
original owners of A&A Services plus forgiveness by the buyers of approximately
$909,000 remaining due to them by HMCA on account of the original purchase.
Accordingly, the Company's consolidated operating loss was $11.1 million
for the first nine months of fiscal 2003 as compared to a consolidated operating
loss of $11.1 million for the first nine months of fiscal 2002, which although
rounding to the same figure represented a slight improvement of $50,000.
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 among the principal reasons for the Company's
continuing operating losses. Product sales revenues attributable to the
Company's medical (MRI) equipment business were $18 million for the first nine
months of fiscal 2003 as compared to $6.9 million for the first nine months of
fiscal 2002. Costs of revenues attributable to the Company's product sales were
$11.7 million for the first nine months of fiscal 2003 as compared to $5.0
million for the first nine months of fiscal 2002.
As a result, the Company recognized a gross profit from product sales of
$6.3 million and a gross profit margin of 35% for the first nine months of
fiscal 2003 as compared to a gross profit of $1.9 million and a gross profit
margin of 28% for the first nine 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 $2.3 million in our new
advertising program, which includes television and radio advertising, during the
first nine months of fiscal 2003. This was the principal reason selling, general
and administrative expenses increased from $15.0 million in the first nine
months of fiscal 2002 to $17.2 million in the first nine months of fiscal 2003.
Research and development expenditures increased slightly by 5% to $3.9 million
for the first nine months of fiscal 2003 as compared to $3.7 million the first
nine months of fiscal 2002.
Compensatory element of stock issuance increased by 24% to approximately
$4.1 million for the first nine months of fiscal 2003 from approximately $3.3
million for the first nine months of fiscal 2002, reflecting a greater use of
Fonar's stock plans.
Interest expense of $481,000 in the first nine months of fiscal 2003
decreased by 23% as compared to $592,000 for the first nine months of fiscal
2002 due to the repayment of indebtedness. In addition, we had financing costs
of $1.6 million paid in stock and warrants in the first nine months of 2002 as
compared to no such costs in the first nine months of 2003.
Cash and cash equivalents decreased by 45% from $7.5 million at June 30,
2002 to $4.1 million at March 31, 2003, reflecting costs of building scanners
and increased expenses, while cash receipts from deliveries were in many cases
delayed because of customer delays in site preparation necessary for deliveries
to be made.
Inventories increased by 9% to $5.1 million at March 31, 2003 as compared
to $4.7 million at June 30, 2002 as the Company's new purchases of parts in the
manufacturing of scanners exceeded utilization in part as a result of customer
delays.
Accounts receivable increased to $13.8 million as at March 31, 2003 from
$13.7 million as at June 30, 2002, primarily due to decreased receivables from
HMCA's physician and diagnostic management business although accounts received
from service contracts on MRI scanners increased from $781,000 to $1.4 million.
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.
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.
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 25% from $13
million at June 30, 2002 to $9.8 million at March 31, 2003. Principal uses of
cash during the first nine months of fiscal 2003 included capital expenditures
of $602,000, repayment of indebtedness and capital lease obligations in the
amount of $2.3 million, capitalized software development costs of $627,000 and
capitalized patent and trademark costs of $223,000.
Marketable securities approximated $5.8 million as at March 31, 2003, as
compared to $5.6 million at June 30, 2002. At March 31, 2003, our investments in
U.S. Government obligations were approximately $3.8 million and our investments
in corporate and government agency bonds were approximately $2 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 nine months of fiscal 2003
approximated $1.1 million. 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.
Cash used in investing activities for the first nine months of fiscal 2003
approximated $1.7 million. The principal uses of cash from investing activities
during the first nine months of fiscal 2003 consisted of expenditures for
property and equipment of approximately $602,000, capitalized software and
patent costs of approximately $850,000 and additional investments in marketable
securities of $244,000.
Cash used by financing activities for the first nine months of fiscal 2003
approximated $647,000. 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 $2.3 million and the principal sources were net
proceeds from exercises of stock options and warrants of $1.1 million and
proceeds from long-term debt of $950,000.
Total liabilities decreased by 9% during the first nine months of fiscal
2003, from approximately $36.9 million at June 30, 2002 to approximately $33.6
million at March 31, 2003.
The decrease in liabilities was attributable principally to a decrease in
the current portion of long term debt ($8.8 million to $7.3 million) and a
decrease in customer advances of $2.1 million from $7.7 million at June 30, 2002
to $5.6 million at March 31, 2003 and a decrease in the unearned portion of
prepaid license fees from $4.7 million to $2.9 million. The decrease in total
liabilities was offset by an increase in accounts payable from $4.0 million at
June 30, 2002 to $5.3 million at March 31, 2003 and an increase in long-term
debt from $833,000 at June 30, 2002 to $991,000 at March 31, 2003.
As of March 31, 2003, our obligations included approximately $7.8 million
in other current liabilities including deferred revenue from license fees of
$2.3 million, unearned revenue on service contracts of $1.6 million, accrued
salaries and payroll taxes of $1.9 million and excise and sales taxes of $1.9
million.
As of March 31, 2003, 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 $11.5 million as of March 31, 2003, as
compared to working capital of $14.1 million as of June 30, 2002, declining by
18%. This reflects, with respect to current assets, principally a decrease in
cash of $3.4 million ($7.5 million at June 30, 2002 as compared to $4.1 million
at March 31, 2003) and a decrease in the current portion of investments in
sales-type leases ($1.9 million at June 30, 2002 as compared to $161,000 at
March 31, 2003 resulting from prepayments of the leases) offset by an increase
($1.2 million at June 30, 2002 as compared to $1.3 million at March 31, 2003) 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 prepaid expenses and
other current assets ($1.1 million at June 30, 2002 as compared to $1.6 million
at March 31, 2003), as a result of advances made to suppliers. Accounts
receivable remained relatively constant increasing slightly from $13.7 million
as at June 30, 2002 to $13.8 as at March 31 2003.
With respect to current liabilities, the current portion of long-term debt
decreased by $1.5 million from $8.8 million at June 30, 2002 to $7.3 million at
March 31, 2003 as a result of repayment of debt. Customer advances decreased
from $7.7 million at June 30, 2002 to $5.6 million at March 31, 2003 as a result
of existing orders being put into production. Accounts payable, however,
increased from $4.0 million at June 30, 2002 to $5.3 million at March 31, 2003
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 nine months of fiscal 2003, the
compensatory element of stock issuances was $4.1 million as compared to $3.3
million for the first nine 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 $350,000 to refurbish and improve one MRI facility.
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 four MRI facilities managed by HMCA and one Stand-Up(TM) MRI
scanner is in the process of being installed at one other MRI facility 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.
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 March 31, 2009. Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
March 31, 2003.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
in Fixed Rate Weighted Average
Date Instruments Interest Rate
3/31/04 $4,280,038 2.02%
3/31/05 453,984 5.39%
3/31/06 400,000 4.97%
3/31/07 200,000 5.25%
3/31/08 297,771 5.55%
3/31/09 100,000 3.38%
Total: $5,731,793
==========
Fair Value
at 3/31/03 $5,796,877
==========
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.
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: May 15, 2003
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: May 15, 2003
/s/ Raymond V. Damadian
Raymond V. Damadian
President, Principal Executive Officer and Acting Principal
Financial Officer