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 SEPTEMBER 30, 2003 ------------------ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ------ Commission file number 0-10248 ------- FONAR CORPORATION ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 11-2464137 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 110 Marcus Drive Melville, New York 11747 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 694-2929 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date. Class Outstanding at November 10, 2003 - ----------------------------------------- -------------------------------- Common Stock, par value $.0001 88,606,413 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 - September 30, 2003 (Unaudited) and June 30, 2003 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2003 and September 30, 2002 (Unaudited) Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended September 30, 2003 and September 30, 2002 (Unaudited) Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2003 and September 30, 2002 (Unaudited) Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial 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 Signatures Exhibit - 31.1 Exhibit - 32.1 FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) ASSETS September 30, June 30, 2003 2003 (UNAUDITED) Current Assets: ----------- ------- Cash and cash equivalents $ 9,673 $ 9,334 Marketable securities 5,416 5,837 Accounts receivable - net 1,077 717 Accounts receivable - related parties -net 80 114 Accounts receivable - related medical practices - net 12,630 12,261 Costs and estimated earnings in excess of billings on uncompleted contracts 54 360 Costs and estimated earnings in excess of billings on uncompleted contracts - related parties 230 - Inventories 6,825 5,057 Investment in sales-type leases with related party - 14 Investment in sales-type lease 140 136 Prepaid expenses and other current assets 1,701 1,286 Note receivable from buyers of A&A Services 150 150 ------ ------ Total Current Assets 37,976 35,266 ------ ------ Property and equipment - net 8,006 8,626 Advances and notes to related parties - net 1,113 1,267 Investment in sales-type lease 570 606 Management agreements - net 9,205 9,364 Other intangible assets - net 3,457 3,375 Other assets 247 245 -------- -------- $ 60,574 $ 58,749 ======== ======== See accompanying notes to condensed consolidated financial statements (unaudited). FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED) September 30, June 30, 2003 2003 (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY ------------- -------- Current Liabilities: Current portion of long-term debt and capital leases $ 707 $ 1,022 Accounts payable 3,921 3,704 Other current liabilities 7,748 7,552 Unearned revenue on service contracts - related parties 148 240 Customer advances 8,030 4,306 Customer advances - related parties 50 627 Income taxes payable 16 10 Billings in excess of costs and estimated earnings on uncompleted contracts 2,135 4,390 Billings in excess of costs and estimated earnings on uncompleted contracts-related parties - 361 ------ ------ Total Current Liabilities 22,755 22,212 Due to affiliates 262 262 Long-term debt and capital leases, less current portion 802 908 Deferred revenue - license fee 1,755 2,340 Other non-current liabilities 303 302 ------ ------ Total Liabilities 25,877 26,024 ------ ------ Minority interest 365 345 ------ ------ See accompanying notes to condensed consolidated financial statements (unaudited). FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's OMITTED, except share data) September 30, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2003 (continued) (UNAUDITED) ------------- -------- STOCKHOLDERS' EQUITY: Class A non-voting preferred stock $.001 par value; 8,000,000 authorized, 7,836,287 issued and outstanding at September 30, 2003 and June 30, 2003 1 1 Common Stock $.0001 par value; 110,000,000 shares authorized; 86,452,881 issued at September 30, 2003 and 82,452,958 at June 30, 2003; 86,161,817 outstanding at September 30, 2003 and 82,161,894 at June 30, 2003 9 8 Class B Common Stock $ .0001 par value; 4,000,000 shares authorized, (10 votes per share), 4,153 issued and outstanding at September 30, 2003 and June 30, 2003 - - Class C Common Stock $.0001 par value; 10,000,000 shares authorized, (25 votes per share), 9,562,824 issued and outstanding at September 30, 2003 and June 30, 2003 1 1 Paid-in capital in excess of par value 137,562 131,519 Accumulated other comprehensive income 48 69 Accumulated deficit (101,732) (97,889) Notes receivable from stockholders ( 882) ( 654) Treasury stock, at cost - 291,064 shares of common stock at September 30, 2003 and June 30, 2003 ( 675) ( 675) ------- ------- Total Stockholders' Equity 34,332 32,380 ------- ------- Total Liabilities and Stockholders' Equity $ 60,574 $ 58,749 ======== ======== See accompanying notes to condensed consolidated financial statements (unaudited). FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's OMITTED, except share data) FOR THE THREE MONTHS ENDED SEPTEMBER 30, --------------------- 2003 2002 REVENUES ---------- -------- Product sales - net $ 4,850 $ 2,800 Product sales - related parties - net 1,229 3,159 Service and repair fees - net 577 456 Service and repair fees - related parties - net 107 63 Management and other fees - related medical practices - net 5,954 6,150 License fees and royalties 585 648 -------- -------- Total Revenues - Net 13,302 13,276 -------- -------- COSTS AND EXPENSES Costs related to product sales 2,749 1,880 Costs related to product sales - related parties 762 1,886 Costs related to service and repair fees 718 680 Costs related to service and repair fees - related parties 163 94 Costs related to management and other fees - related medical practices 3,391 3,441 Research and development 1,333 1,246 Selling, general and administrative 6,526 5,531 Compensatory element of stock issuances for selling, general and administrative expenses 1,216 747 Provision for bad debts 25 54 Amortization of management agreements 158 174 -------- -------- Total Costs and Expenses 17,041 15,733 -------- -------- Loss From Operations ( 3,739) ( 2,457) Interest Expense ( 60) ( 234) Interest Expense - Related Parties - ( 9) Investment Income 75 146 Interest Income - Related Parties 17 110 Other Income (Expense) 97 ( 1) Minority Interest in Income of Partnerships ( 221) ( 152) -------- ------- Loss Before Provision for Income Taxes ( 3,831) ( 2,597) Provision for Income Taxes 12 1 -------- ------- Net Loss from Continuing Operations ( 3,843) ( 2,598) -------- ------- Net Loss from Discontinued Operations - ( 108) -------- --------- NET LOSS $( 3,843) $( 2,706) Basic and Diluted Net Loss per ======== ========= share - continuing operations $(.05) $(.04) Basic and Diluted Net Loss per share - discontinued operations - - -------- --------- Basic and Diluted Net Loss per share $(.05) $(.04) ======== ========= Weighted Average Number of Shares Outstanding 84,484 72,249 ======== ========= See accompanying notes to condensed consolidated financial statements (unaudited). FONAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (000'S OMITTED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 2003 2002 --------- --------- Net loss $(3,843) $(2,706) Other comprehensive income, net of tax: Unrealized gains on securities, net of tax 48 78 ------- --------- Total comprehensive loss $(3,795) $(2,628) ========= ========= 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 THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 2003 2002 --------- --------- Cash Flows from Operating Activities Net loss $( 3,843) $( 2,706) Loss from discontinued operations - 108 ------- ------- Loss from continuing operations ( 3,843) ( 2,598) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest in income of partnerships 221 152 Depreciation and amortization 1,000 1,072 Provision for bad debts 25 54 Compensatory element of stock issuances 1,216 747 Stock issued for costs and expenses 4,170 419 Interest expense paid in stock - 10 Amortization of deferred revenue-license fee ( 585) ( 585) (Increase) decrease in operating assets, net: Accounts and notes receivable ( 719) ( 324) Costs and estimated earnings in excess of billings on uncompleted contracts 76 528 Inventories ( 1,768) ( 11) Principal payments received on sales type lease - related parties 14 1,682 Principal payments received on sales type lease 32 29 Prepaid expenses and other current assets ( 415) ( 553) Other assets ( 2) - Advances and notes to related parties 154 ( 3) Increase (decrease) in operating liabilities, net: Accounts payable 217 202 Other current liabilities 104 214 Customer advances 3,147 ( 1,901) Billings in excess of costs and estimated earnings on uncompleted contracts ( 2,616) 1,887 Other non-current liabilities 1 ( 13) Income taxes payable 6 - ------ ------ Net cash provided by continuing operations 435 1,008 Net cash used in discontinued operations - ( 15) ------ ------- Net cash provided by operating activities 435 993 ------ ------- 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 THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 2003 2002 -------- -------- Cash Flows from Investing Activities: Sales of marketable securities 400 49 Purchases of property and equipment ( 96) ( 313) Costs of capitalized software development ( 132) ( 224) Cost of patents and copyrights ( 76) ( 104) -------- -------- Net cash provided by (used in) investing activities 96 ( 592) -------- -------- Cash Flows from Financing Activities: Distributions to holders of minority interests ( 201) ( 122) Repayment of long-term debt and capital lease obligations ( 421) ( 820) Net proceeds from exercise of stock options and warrants 430 1,156 -------- -------- Net cash provided by (used in) financing activities ( 192) 214 -------- -------- Increase in Cash and Cash Equivalents 339 615 Cash and Cash Equivalents - Beginning of Period 9,334 7,461 -------- -------- Cash and Cash Equivalents - End of Period $ 9,673 $ 8,076 ======== ======== See accompanying notes to condensed consolidated financial statements (unaudited). FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 three-month period ended September 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004. 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 September 30, 2003 for the fiscal year ended June 30, 2003. 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. On April 8, 2003, 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 (see Note 22 in the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on September 30, 2003 for the fiscal year ended June 30, 2003). 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. 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, contingencies, revenue recognition and litigation. 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 Amounts allocated to management agreements, in connection with four acquisitions completed during the period from June 1997 through August 1998, are being amortized using the straight-line method over the 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. Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss) Per Share At September 30, 2003, the Company had various stock-based employee compensation plans. 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. 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 (loss) per share since they are antidilutive. 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 6,146,926 and 6,034,000 shares of common stock were outstanding at September 30, 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. 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: For the Three Ended September 30, (000's omitted except per share data) ------------------------------------- 2003 2002 ---------- ---------- Net Loss As Reported $(3,843) $(2,706) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards 518 458 Pro forma Net Loss ---------- ---------- $(4,361) $(3,164) ========== ========== Basic and Diluted Net Loss Per Share as Reported $ (0.05) $ (0.04) ========== ========== Basic and Diluted Pro forma Net Loss Per Share $ (0.05) $ (0.04) ========== ========== 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 Three Ended September 30, ----------------------------- 2003 2002 ------- ------- Expected life (years) 3 3 Interest Rate 4.00% 4.00% Annual Rate of dividends 0% 0% Volatility 55% 92% Recent Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. It requires classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, otherwise, is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 in the quarter ended September 30, 2003. The adoption did not have an impact on the condensed consolidated financial statements. Reclassifications Certain prior period balances have been reclassified to conform to the current period presentation. NOTE 4 - MANAGEMENT AGREEMENTS In connection with four acquisitions completed during the period June of 1997 through August of 1998, a portion of the purchase price was allocated to various long-term management agreements. The cost, accumulated amortization and net carrying value at September 30, 2003 is as follows: (000's omitted) Acquisition Accumulated Net Carrying Date Cost Amortization Value ----------- ------- ------------ ------------ Affordable Diagnostics, Inc. June 1997 $ 3,720 $ 1,117 $ 2,603 Dynamic Health Care Management, Inc. August 1998 8,952 2,350 6,602 ----------- ------- ------------ ------------ $12,672 $ 3,467 $ 9,205 ======= ============ ============ Amortization of management agreements for the three months ended September 30, 2003 and 2002 was $158,394 and $174,071, respectively. NOTE 5 - MARKETABLE SECURITIES The following is a summary of marketable securities at September 30, 2003: (000's omitted) --------------- Unrealized Fair Holdings Market Cost Gains Value ---------- ------------ -------- U.S. Government $2,382 $ 6 $2,388 Obligations Corporate bonds 2,951 38 2,989 Stocks 35 4 39 ------ ------- ------ $5,368 $48 $5,416 ====== ======= ====== All debt securities are due within five years. At September 30, 2003, the amount of cost due within one year was approximately $4,183,000. NOTE 6 - ACCOUNTS RECEIVABLE Accounts receivable, net is comprised of the following at September 30, 2003: Allowance Gross for doubtful Receivable accounts allowance Net ---------- ------------------ -------- Receivable for equipment sales and services contracts $ 1,558 $ 481 $ 1,077 ========== ================== ======== Receivable from equipment sales and service contracts- related parties $ 736 $ 656 $ 80 Receivables from related PC's $ 13,951 $ 1,321 $ 12,630 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. 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 the PC's 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 67% and 54% of the PC's net revenues for the three months ended September 30, 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 generally takes all legally available steps, including legally prescribed arbitrations, to collect its receivables. Credit losses associated with the receivables are provided for in the condensed consolidated financial statements and have historically been within management's expectations. Net revenues from management and other fees charged to the related PC's accounted for approximately 45% and 46% of the consolidated net revenues for the three months ended September 30, 2003 and 2002, respectively. Unaudited Financial Information of Unconsolidated Managed Medical Practices Summarized income statement data for the three months ended September 30, 2003 related to the 17 unconsolidated medical practices managed by the Company is as follows: (000's omitted) Patient Revenue - Net $7,853 ====== Income from Operations $ 4 ====== Net Loss (Income Tax - Cash Basis) $ (125) ====== NOTE 7 - INVENTORIES Inventories included in the accompanying condensed consolidated balance sheet at September 30, 2003 consist of: (000's omitted) Purchased parts, components and supplies $ 5,039 Work-in-process 1,786 ------- $ 6,825 ======= NOTE 8 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER ADVANCES 1) Information relating to uncompleted contracts as of September 30, 2003 is as follows: (000's omitted) Costs incurred on uncompleted contracts $ 5,870 Estimated earnings 4,037 ------- 9,907 Less: Billings to date 11,758 ------- $(1,851) ======== Included in the accompanying condensed consolidated balance sheet at September 30, 2003 under the following captions: Costs and estimated earnings in excess of $ 54 Billings on uncompleted contracts Costs and estimated earnings in excess of Billings on uncompleted contracts - related parties 230 Less:Billings in excess of costs and estimated Earnings on uncompleted contracts (2,135) -------- $(1,851) ======== 2) Customer advances consist of the following as of September 30, 2003: Related Total Parties Other -------- -------- ------- Total Advances $19,838 $ 1,203 $18,635 Less: Advances on contracts under construction 11,758 1,153 10,605 ------- ------- ------ $ 8,080 $ 50 $8,030 ======= ======= ====== NOTE 9 -STOCKHOLDERS' EQUITY Common Stock During the three months ended September 30, 2003: a) The Company issued 644,832 shares of common stock to employees as compensation of $1,017,938 under stock bonus plans. b) The Company issued 192,090 shares of common stock to consultants and others at a value of $284,781. c) The Company issued 2,659,732 shares of common stock for costs and expenses of $4,169,470. d) The Company issued 138,937 shares of common stock upon the exercise of stock options resulting in proceeds of $146,256. e) the Company issued 164,332 shares of its common stock valued at $140,808 in connection with the issuance of notes receivable from stockholders. During the three months ended September 30, 2002: a) The Company issued 506,459 shares of common stock to employees as compensation of $688,365 under stock bonus plans. b) The Company issued 171,380 shares of common stock to consultants and others of $208,601. c) The Company issued 323,283 shares of common stock for costs and expenses of $426,442. d) The Company issued 26,671 shares of common stock of $31,203 upon the exercise of stock options. e) The Company issued 97,850 shares of its common stock valued at $99,180 in connection with distributions made to its minority stockholders. Warrants On August 27, 2003, warrants to purchase 200,000 shares of the Company's common stock were exercised by The Tail Wind Fund, Ltd. (the "Investor") at an exercise price of approximately $1.42 per share. On September 30, 2002, the Company issued 1,000,000 shares of common stock and received proceeds, net of fees, of $1,073,072 upon the exercise of certain of the callable warrants. On September 30, 2002, in accordance with the agreements with the Investor, 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 $2.00 per share and maximum of $6.00 per share. NOTE 10 - COMMITMENTS AND CONTINGENCIES Litigation The Company is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract and employment claims. In the opinion of management, the aggregate liability, if any, with respect to such actions will not have a material adverse effect on the consolidated financial position or results of operations of the Company. NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION During the three months ended September 30, 2003 and 2002, the Company paid approximately $62,000 and $283,000 for interest, respectively. In addition, during the three months ended September 30, 2003 and 2002, the Company paid approximately $6,000 and $1,000 for income taxes, respectively. NOTE 12 - 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's 10-K as of June 30, 2003. 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 three months ended September 30, 2003: Net revenues from external customers $ 7,348 $5,954 $13,302 Inter-segment net revenues 121 -- 121 Loss from operations (3,697) (42) (3,739) Depreciation and amortization 537 463 1,000 Compensatory element of stock issuances 595 621 1,216 Total identifiable assets 32,884 27,690 60,574 Capital expenditures 72 24 96 For the three months ended September 30, 2002: Net revenues from external customers 7,126 6,150 13,276 Inter-segment net revenues 361 -- 361 Income (Loss) from operations (2,507) 50 (2,457) Depreciation and amortization 634 437 1,072 Compensatory element of stock issuances 240 507 747 Total identifiable assets 39,244 32,280 71,524 Capital expenditures 100 213 313 NOTE 13- DISCONTINUED OPERATIONS Summarized financial information of the net loss from discontinued operations for the three months ended September 30, 2002 is as follows: (000's omitted) For the Three Months Ended September 30, 2002 ------ Management and other fees - related medical practices - net $ 381 ------ Costs and Expenses: Costs related to management and other fees - related medical practices 415 Amortization of management agreement 71 Interest expense 3 ------ Total Costs and Expenses 489 ------ Loss from Discontinued Operations $ (108) ====== FONAR CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. For the fiscal quarter ended September 30, 2003 (first quarter of fiscal 2004), the Company reported a net loss of $3.8 million on revenues of $13.3 million as compared to a net loss of $2.7 million ($2.6 million from continuing operations) on revenues of $13.3 million for the first quarter of fiscal 2003. Reclassification to Prior Periods: Discounted Operations The financial information presented for the quarter ended September 30, 2002 (first quarter of fiscal 2003) has been reclassified to reflect that certain operations were discontinued. On April 8, 2003, HMCA sold its wholly-owned subsidiary A&A Services, Inc. ("A&A Services"), a physician practices management services organization which managed four primary care practices located in Queens County, New York. Consequently, the result of operations for these discontinued operations are no longer reflected in the operating results for the first quarter of fiscal 2003 although they are reflected in the net loss of $2.7 million for the quarter. Overview and Trends For the three month period ended September 30, 2003, as compared to the three month period ended September 30, 2002, overall revenues from MRI equipment sales increased 2% ($6.1 million compared to $6.0 million) although unrelated party scanner sales ($4.9 million compared to $2.8 million) increased 75% while related party scanner sales ($1.2 million compared to $3.2 million) decreased 63%. Overall, for the first three months of fiscal 2004, revenues for the medical equipment segment increased by 3% to $7.3 million from $7.1 million for the first three months of fiscal 2003. The revenues generated by Health Management Corporation of America ("HMCA"), the Company's physician and diagnostic management services segment, however, declined by 3% to $6.0 million for the first three months of fiscal 2004 as compared to $6.2 million for the first three months 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. 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 upon delivery. Consequently, although the revenue recognition for the first quarter of fiscal 2004 increased only 2% from the first quarter of fiscal 2003 ($6.1 million compared to $6.0 million), we received orders for 8 Stand-Up MRI scanners during the first three months of fiscal 2004 as compared to orders for 6 Stand-Up MRI scanners during the first three months of fiscal 2003. In addition revenues recognized by HMCA declined by 3% in the first quarter of fiscal 2004 to $6.0 million as compared to $6.2 million in the first quarter of fiscal 2003. This was principally the overall result of the closing of two MRI sites and one physical therapy and physical rehabilitation facility during fiscal 2003 counterbalanced by the increase in revenues at two MRI sites which had new Stand-Up(TM) MRI scanners installed. Although our consolidated revenues remained constant, at $13.3 million in the first quarter of fiscal 2003 and $13.3 million in the first quarter of fiscal 2004, the total costs and expenses for the first quarter increased by 8% from $15.7 million in fiscal 2003 to $17.0 million in fiscal 2004. Although changes in costs related to producing revenues essentially tracked changes in revenues, selling general and administrative expenses increased 18% from $5.5 million in the first quarter of fiscal 2003 to $6.5 million in the first quarter of fiscal 2004 and the compensatory element of stock issuances increased 61% from $747,000 in the first quarter of fiscal 2003 to $1.2 million in the first quarter of fiscal 2004. As a result the Company's operating and net losses were $3.7 million and $3.8 million, respectively, for the first quarter of fiscal 2004 as compared to $2.5 million and $2.7 million ($2.6 million from continuing operations), respectively for fiscal 2003. The overall trends reflected in the first quarter results for fiscal 2004 are the increase in revenues from the MRI equipment segment of the Company's business, as compared to fiscal 2003 ($7.3 million for the first three months of fiscal 2004 as compared to $7.1 million for the first three months of fiscal 2003), the relative increase in MRI equipment segment revenues relative to HMCA revenues ($7.3 million or 55% from the MRI equipment segment as compared to $6.0 million or 45% from HMCA, for the first three months of fiscal 2004, as compared to $7.1 million or 53% from the MRI equipment segment and $6.2 million or 47%, from HMCA, for the first three months of fiscal 2003). In addition, we experienced a marked increase in unrelated party sales relative to related party scanner sales ($4.9 million or 80% to unrelated parties and $1.2 million or 20% to related parties for the first three months of fiscal 2004 as compared to $2.8 million, or 47% to unrelated parties and $3.2 million or 53% to related parties for the first three months of fiscal 2003). The absolute decline (63%) as well as significant relative decline in related party scanner sales revenues was attributable in large measure to the bankruptcy of the related parties' primary financing source. 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 by 2%, from $6.0 million for the first three months of fiscal 2003 to $6.1 million for the first three months of fiscal 2004, reflecting increased sales of the Stand-Up MRI scanners. Service and repair revenues increased by 32%, from $519,000 for the first three months of fiscal 2003 to $684,000 for the first three months of fiscal 2004 and license fees and royalties decreased by 10% from $648,000 for the first three months of fiscal 2003 to $585,000 for the first three months of fiscal 2004. Consequently, overall revenues recognized by the Company's MRI equipment manufacturing and service business increased by 3% from $7.1 million in the first three months of fiscal 2003 to $7.3 million in the first three months of fiscal 2004. There were significant increases, however, in scanner sales to unrelated parties, from $2.8 million in the first three months of fiscal 2003 to $4.9 million in the first three months of fiscal 2004 (75%). Scanner sales to related parties, however, decreased from $3.2 million in the first three months of fiscal 2003 to $1.2 million in the first three month of fiscal 2004 (63%), in large measure because of the bankruptcy of the traditional principal funding source for the related parties' MRI scanner purchases. Due primarily to increased selling, general and administrative expenses and an increase in the compensatory element of stock issuances, the operating loss from the Company's MRI equipment manufacturing and service business increased to a loss of $3.7 million for the first three months of fiscal 2004 from a loss of $2.5 million for the first three months of fiscal 2003. Notwithstanding the increased operating loss resulting from such increased expenses, we increased our gross profit margin on product sales to 43% ($2.6 million) for the first three months of fiscal 2004 from 37% ($2.2 million) for the first three months of fiscal 2003. Our gross profit margin on product sales has increased as a result of greater efficiencies realized as a result of our increased sales volumes and production levels. Product sales revenues attributable to the medical (MRI ) equipment business were $6.1 million for the first three months of fiscal 2004 as compared to $6.0 million for the first three months of fiscal 2003. Costs of revenues attributable to our product sales declined by 8% to $3.5 million for the first three months of fiscal 2004 from $3.8 million for the first three months of fiscal 2003. The increase in product sales to unrelated parties reflected continuing market acceptance of the Company's Stand-Up(TM) MRI scanners. During the first three months of fiscal 2004, revenues of approximately $6.1 million were recognized from sales of Stand-Up(TM) MRI scanners. During the first three months of fiscal 2003, the Company recognized revenues of approximately $5.5 million from the sale of Stand-Up(TM) MRI scanners and $100,000 from the sale of a refurbished Beta MRI Scanner. There were approximately $354,000 in foreign sales revenues for the first three months of fiscal 2004 as compared to approximately $252,000 in foreign sales revenues for the first three months in fiscal 2003. HMCA, which provides physician and diagnostic management services, experienced an operating loss of $42,000 for the first three months of fiscal 2004 compared to operating income of $50,000 for the first three months of fiscal 2003. The decline in HMCA income was attributable to lower revenues reflecting a decline in management fees ($6.0 million for the first three months of fiscal 2004 compared to $6.2 million for the first three months of fiscal 2003) from the facilities and medical practices managed by HMCA. The principal cause for the decline in HMCA revenues was the closing of three facilities in fiscal 2003, although this was counterbalanced by increased revenues from two sites which installed two new Stand-Up(TM) MRI scanners. Accordingly, the Company's consolidated operating loss increased to $3.7 million for the first three months of fiscal 2004 from a consolidated operating loss of $2.5 million for the first three months of fiscal 2003. Our efforts to improve equipment sales volume resulted in a 18% increase in selling, general and administrative expenses from $5.5 million in the first three months of fiscal 2003 to $6.5 million in the first three months of fiscal 2004. The most significant increase was in the commissions payable to independent sales representatives, which increased to $400,000 in the first quarter of fiscal 2004 from $16,000 in the first quarter of fiscal 2003. Commissions payable to our internal sales force also increased by 47%, to $138,000 in the first quarter of fiscal 2004 from $94,000 in the first quarter of fiscal 2003. Advertising expenses increased by 8% to $794,000 in the first quarter of fiscal 2004 from $733,000 in the first quarter of fiscal 2003. In addition, research and development expenses increased by 8% to $1.3 million for the first three months of fiscal 2004 as compared to $1.2 million for the first three months of fiscal 2003. Also contributing to the operating and net loss increases was the increase in the compensatory element of stock issuances, which increased by 61% to approximately $1.2 million for the first three months of fiscal 2004 from approximately $747,000 for the first three months of fiscal 2003. This reflected greater use of Fonar's stock in lieu of cash to pay employees, consultants and professionals for services. Interest expense of $60,000 in the first three months of fiscal 2004, however, decreased by 75% as compared to $243,000 for the first three months of fiscal 2003 due to the repayment of indebtedness. Cash and cash equivalents increased by 4% from $9.3 million at June 30, 2003 to $9.7 million at September 30, 2003, reflecting an increase in cash receipts from customer deposits. Inventories increased by 33% to $6.8 million at September 30, 2003 as compared to $5.1 million at June 30, 2003 as the Company's new purchases of parts in the manufacturing of scanners exceeded utilization in contemplation of filling our backlog of orders. Accounts receivable increased to $13.8 million as at September 30, 2003 from $13.1 million as at June 30, 2003, primarily due to increased receivables from HMCA's physician and diagnostic management business and accounts received from service contracts on MRI scanners increased from $831,000 to $1.2 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's head when the patient is supine 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 from $15.2 million at June 30, 2003 to $15.1 million at September 30, 2003. Principal uses of cash during the first three months of fiscal 2004 included capital expenditures of $96,000, repayment of indebtedness and capital lease obligations in the amount of $421,000, capitalized software development costs of $132,000 and capitalized patent and trademark costs of $76,000. Marketable securities approximated $5.4 million as at September 30, 2003, as compared to $5.8 million at June 30, 2003. At September 30, 2003, our investments in U.S. Government obligations were $2.4 million and our investments in corporate and government agency bonds were $3.0 million. This has had the intended effect of reducing the volatility of the Company's investment portfolio. Cash provided by operating activities for the first three months of fiscal 2004 approximated $435,000. Cash provided by operating activities was attributable primarily to customer advances of $3.1 million, stock issued for compensation, costs and expenses of $5.4 million, offset primarily by the net loss of $3.8 million, billings in excess of costs and estimated earnings on uncompleted contracts of $2.6 million and inventory purchases of $1.8 million. Cash provided by investing activities for the first three months of fiscal 2004 approximated $96,000. The principal uses of cash from investing activities during the first three months of fiscal 2004 consisted of expenditures for property and equipment of approximately $96,000 and capitalized software and patent costs of approximately $208,000, which were offset, however, by sales of investments in marketable securities of $400,000. Cash used by financing activities for the first three months of fiscal 2004 approximated $192,000. The principal uses of cash in financing activities during the first three months of fiscal 2004 consisted of repayment of principal on long-term debt of approximately $421,000 and distributions to holders of minority interests of $201,000. The principal sources were net proceeds from exercises of stock options and warrants of $430,000. Total liabilities decreased during the first three months of fiscal 2004, from approximately $26.0 million at June 30, 2003 to approximately $25.9 million at September 30, 2003. The Company's obligations and the periods in which they are scheduled to become due are set forth in the following table: (000's OMITTED) Due in Less Due Due Due than 1 in 1-3 in 4-5 after 5 Obligation Total year years years years - -------------- ----------- ---------- ---------- ---------- ---------- Long-term debt $ 889 $ 226 $ 663 $ - $ - Capital lease Obligation 620 481 139 - - Operating leases 11,817 2,900 4,100 2,817 2,000 ----------- ---------- ---------- ---------- ---------- Total cash Obligations $ 13,326 $ 3,607 $ 4,902 $ 2,817 $ 2,000 =========== ========== ========== ========== ========== The decrease in liabilities was attributable principally to a decrease in the current portion of long term debt ($1.0 million at June 30, 2003 to $707,000 at September 30, 2003, and a decrease in the deferred revenue from license fees from $2.3 million to $1.8 million, a decrease in excess of costs and estimated earnings on uncompleted contracts from $4.7 million at June 30, 2003 to $2.1 million at September 30, 2003 and a decrease in long-term debt from $908,000 at June 30, 2003 to $802,000 at September 30, 2003. The decrease in total liabilities was offset, however, by an increase in customer advances from $4.9 million at June 30, 2003 to $8.1 million at September 30, 2003 and by an increase in accounts payable from $3.7 million at June 30, 2003 to $3.9 million at September 30, 2003. As of September 30, 2003, our obligations included approximately $7.7 million in other current liabilities including deferred revenue from license fees of $2.3 million, unearned revenue on service contracts of $1.4 million, accrued salaries and payroll taxes of $1.0 million and excise and sales taxes of $1.9 million. Our working capital approximated $15.2 million as of September 30, 2003, as compared to working capital of $13.1 million as of June 30, 2003, increasing by 16%. This reflects, with respect to current assets, principally an increase in cash of $400,000 ($9.3 million at June 30, 2003 as compared to $9.7 million at September 30, 2003) and an increase ($5.1 million at June 30, 2003 as compared to $6.8 million at September 30, 2003) in inventories for purchases of parts in the manufacturing of scanners and increases in prepaid expenses and other current assets ($1.7 million at June 30, 2003 as compared to $1.3 million at September 30, 2003), as a result of advances made to suppliers. Accounts receivable increased from $13.1 million as at June 30, 2003 to $13.8 as at September 30, 2003. With respect to current liabilities, the current portion of long-term debt decreased by $315,000 from $1.0 million at June 30, 2003 to $707,000 at September 30, 2003 as a result of repayment of debt, and billings in excess of costs and estimated earnings on uncompleted contracts decreased from $4.7 million at June 30, 2003 to $2.1 million at September 30, 2003. Customer advances, however, increased from $4.9 million at June 30, 2003 to $8.1 million at September 30, 2003 and accounts payable increased from $3.7 million at June 30, 2003 to $3.9 million at September 30, 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 three months of fiscal 2004, the compensatory element of stock issuances was $1.2 million as compared to $747,000 million for the first three 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 2004 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. Below is a tabular presentation of the maturity profile of the fixed rate instruments held by us at September 30, 2003. INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT BY EXPECTED MATURITY WEIGHTED AVERAGE INTEREST RATE Investments in Fixed Rate Weighted Average Date Instruments Interest Rate ---- ------------- ---------------- 9/30/04 $ 4,182,669 1.90% 9/30/05 450,000 3.98% 9/30/06 300,000 4.96% 9/30/07 100,000 4.50% 9/30/08 200,000 4.04% 9/30/13 100,000 4.07% Total: $ 5,332,669 ============= Fair Value at 9/30/03 $ 5,376,903 ============= All of our revenue, expense and capital purchasing activities are transacted in United States dollars. See Note 12 to the consolidated Financial Statements in our Form 10-K as of and for the year ended June 30, 2003 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 three months of fiscal 2004. 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: Exhibit 31.1 Certification, See Exhibits Exhibit 32.1 Certification, See Exhibits 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: November 14, 2003