SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 2002 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
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(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at March 31, 2002
---------------------------------------- -----------------------------
Common Stock, par value $.0001 67,245,054
Class B Common Stock, par value $.0001 4,211
Class C Common Stock, par value $.0001 9,562,824
Class A Preferred Stock, par value $.0001 7,836,286
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2002
(Unaudited) and June 30, 2001
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2002 and March 31, 2001 (Unaudited)
Condensed Consolidated Statements of Operations for the Nine
Months Ended March 31, 2002 and March 31, 2001 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2002 and March 31, 2001 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the Nine Months Ended March 31, 2002 and March 31, 2001
(Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Reasons for Amendment
The 10-Q is being amended to correct an error in the results of operations
reported for the separate segments. Certain interest expenses, which should have
been allocated to the Company's medical equipment segment, were instead
allocated to the physician management services segment. Although the
consolidated operating loss for the Company is unchanged, the operating loss
shown for the medical equipment segment has increased from $10.8 million to
$11.9 million and the operating loss for the physician management services
segment of $479,000 is now operating income of $668,000. See Note 12 (Segment
and Related Information) and the 8th paragraph of Item 2 (Management's
Discussion and Analysis of Financial Conditions and Results of Operations).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS March 31, June 30,
2002 2001
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $ 4,897 $14,040
Marketable securities 5,871 6,085
Accounts receivable - net 1,240 850
Accounts receivable - related medical practices - net 12,303 13,181
Costs and estimated earnings in excess
of billings on uncompleted contracts 896 1,769
Inventories 4,288 3,725
Investment in sales-type lease - related parties 194 191
Investment in sales-type lease 116 120
Prepaid expenses and other current assets 1,320 904
------ ------
Total current assets 31,125 40,865
------ ------
Restricted cash 5,500 5,500
Property and equipment - net 10,204 10,637
Advances and notes to related parties - net 2,770 1,559
Investment in sales-type lease - related parties 2,480 2,514
Investment in sales-type lease 773 861
Notes receivable - net 375 375
Management agreements - net 19,524 20,438
Other intangible assets - net 2,095 1,854
Other assets 290 297
-------- --------
$ 75,136 $ 84,900
======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of long term debt and capital
lease obligations $ 3,646 $ 6,635
Accounts payable 2,581 3,021
Other current liabilities 6,201 6,176
Customer advances 4,947 1,672
Billings in excess of costs and estimated
earnings on uncompleted contracts 839 351
Income taxes payable 782 765
Convertible debentures 1,800 4,500
------ ------
Total current liabilities 20,796 23,120
Long-term debt and capital lease obligations,
less current portion 6,862 10,109
Unearned revenue - license fee 7,605 9,360
Other non-current liabilities 355 327
------ ------
Total liabilities 35,618 42,916
------ ------
Minority interest 99 153
------ ------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Common Stock $.0001 par value; 85,000,000 shares
authorized; 67,245,054 and 59,524,455 issued
66,953,990 and 59,233,391 outstanding at March 31, 2002
and June 30, 2001 respectively 7 6
Class B Common Stock $ .0001 par value; 4,000,000
shares authorized, (10 votes per share), 4,211 issued
and outstanding at March 31, 2002 and at June 30, 2001 - -
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, 2002 and at June 30, 2001 1 1
Class A non-voting Preferred Stock $.0001 par value;
8,000,000 authorized, 7,836,286 issued and outstanding
at March 31, 2002 and at June 30, 2001 1 1
Paid-in capital in excess of par value 114,796 104,984
Accumulated other comprehensive income 82 84
Accumulated deficit (73,607) (60,001)
Notes receivable - stockholders ( 990) ( 1,040)
Unearned compensation ( 196) ( 1,529)
Treasury stock - 291,064 shares of common stock
at March 31, 2002 and June 30, 2001 ( 675) ( 675)
------- -------
Total stockholders' equity 39,419 41,831
------- -------
Total liabilities and stockholders' equity $ 75,136 $ 84,900
======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------
2002 2001
REVENUES -------- --------
Product sales - net $ 1,897 $ 1,513
Product sales - related parties - net 1,101 798
Service and repair fees - net 527 510
Patient revenue - net - 431
Management and other fees - related medical
practices -net 6,843 7,537
License fees and royalties 585 585
-------- --------
Total Revenues - Net 10,953 11,374
-------- --------
COSTS AND EXPENSES:
Cost related to product sales 1,411 1,213
Cost related to product sales - related parties 625 729
Cost related to service and repair fees 605 592
Cost related to patient revenue - 382
Cost related to management and other fees -
related parties 3,909 3,797
Research and development expenses 1,193 1,528
Selling, general and administrative 5,137 4,319
Provision for bad debts 13 15
Compensatory element of stock issuances for
selling, general and administrative expenses 1,606 1,320
Amortization of management agreements 305 305
------- -------
Total Costs and Expenses 14,804 14,200
-------- --------
Loss From Operations ( 3,851) ( 2,826)
Interest Expense ( 147) ( 362)
Interest expense to induce certain noteholders to
accept the company's stock to extinguish debt ( 544) -
Financing costs paid in stock and warrants ( 626) -
Investment Income 185 523
Other income (expense) ( 11) ( 32)
Minority interest in (income) loss of partnerships ( 46) ( 92)
------ -------
Loss before provision for income taxes ( 5,040) ( 2,789)
Provision for income taxes 10 12
------- -------
NET LOSS $( 5,050) $( 2,801)
======= =======
Basic and diluted Net Loss per share $(.07) $(.04)
====== ======
Weighted average number of shares outstanding 76,296 69,517
====== ======
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE NINE MONTHS ENDED
MARCH 31,
---------------------
2002 2001
REVENUES -------- --------
Product sales - net $ 3,413 $ 2,646
Product sales - related parties - net 3,534 916
Service and repair fees - net 1,608 1,433
Patient revenue - net - 1,148
Management and other fees - related medical
practices - net 20,499 22,780
License fees and royalties 1,818 1,839
-------- --------
Total Revenues - Net 30,872 30,762
-------- --------
COSTS AND EXPENSES:
Cost related to product sales 2,478 2,685
Cost related to product sales - related parties 2,545 1,072
Cost related to service and repair fees 1,822 1,809
Cost related to patient revenue - 979
Cost related to management and other fees -
related parties 12,227 13,126
Research and development expenses 3,653 4,556
Selling, general and administrative 14,987 13,537
Provision for bad debts 197 15
Compensatory element of stock issuances for
selling, general and administrative expenses 3,311 2,853
Amortization of management agreements 914 914
-------- --------
Total Costs and Expenses 42,134 41,546
-------- --------
Loss From Operations (11,262) (10,784)
Interest Expense ( 709) ( 955)
Interest expense to induce certain noteholders to
accept the Company's stock to extinguish debt ( 544) -
Financing costs paid in stock and warrants ( 1,641) -
Investment Income 718 1,526
Gain on sale of subsidiary/partnership interest - 750
Other income (expense) 5 28
Minority interest in (income) loss of partnerships ( 147) ( 260)
------ -------
Loss before provision for income taxes (13,580) ( 9,695)
Provision for income taxes 27 26
------- -------
NET LOSS $(13,607) $( 9,721)
======= =======
Basic and diluted Net Loss per share $(.19) $(.14)
====== ======
Weighted average number of shares outstanding 72,935 69,517
====== ======
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 NINE MONTHS ENDED
MARCH 31,
-----------------
2002 2001
------ ------
Cash Flows from Operating Activities
Net Loss $(13,607) $( 9,721)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in net income (loss) 147 260
Depreciation and amortization 3,884 3,489
Financing costs paid in stock and warrants 1,641 -
Provision for bad debts 197 15
Gain on sale of subsidiary/partnership interest - ( 750)
Compensatory element of stock issuances 3,311 2,853
Stock issued for professional fees 586 547
Amortization of unearned license fee ( 1,755) ( 1,755)
License fee - 11,700
(Increase) decrease in operating assets, net:
Accounts and notes receivable 488 ( 1,551)
Costs and estimated earnings in excess of
billings on uncompleted contracts 873 ( 142)
Inventories ( 563) ( 1,154)
Investment in sales-type lease - related parties - ( 935)
Investment in sales-type lease - ( 1,050)
Principal payments received on investment in
sales-type leases - related parties 31 81
Principal payments received on investment in
sales-type leases 92 25
Prepaid expenses and other current assets ( 342) 111
Other assets 7 8
Advances and notes to related parties ( 1,211) ( 664)
Increase (decrease) in operating liabilities, net:
Accounts payable ( 440) 436
Other current liabilities 111 ( 3,041)
Customer advances 3,275 ( 330)
Billings in excess of costs and estimated
earnings on uncompleted contracts 488 -
Other liabilities 28 -
Income taxes payable 17 -
------ ------
Net cash used in operating activities ( 2,742) ( 1,568)
------ ------
Cash Flows from Investing Activities:
Purchases of property and equipment ( 2,119) ( 1,506)
Investment in marketable securities 212 4,227
Costs of capitalized software development ( 616) -
------ ------
Net cash provided by (used in) investing activities ( 2,523) 2,721
------ ------
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 NINE MONTHS ENDED
MARCH 31,
-----------------
2002 2001
------ ------
Cash Flows from Financing Activities:
Distributions to holders of minority interest ( 201) ( 267)
Repayment of borrowings and capital
lease obligations ( 3,677) ( 3,606)
Purchase of treasury stock - ( 4)
Proceeds on sale of partnership interest - 750
------ ------
Net cash used in financing activities ( 3,878) ( 3,127)
------ ------
Increase (Decrease) in Cash and cash equivalents ( 9,143) ( 1,974)
Cash and cash equivalents at beginning of period 14,040 11,430
------ ------
Cash and cash equivalents at end of period $ 4,897 $ 9,456
====== ======
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE NINE MONTHS ENDED
MARCH 31,
-----------------
2002 2001
------ ------
Net loss $(13,607) $(9,721)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of tax ( 2) 345
--------- --------
Total comprehensive loss $(13,609) $( 9,376)
========= ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("US GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by US GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2002. The consolidated balance that at
June 30, 2001 has been derived from the audited consolidated financial
statements at that date. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A filed on October 30, 2001 for the fiscal year ended June
30, 2001.
NOTE 2 - DESCRIPTION OF BUSINESS
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation, which
was incorporated on July 17, 1978. FONAR is engaged in the research,
development, production and marketing of medical scanning equipment which uses
principles of Magnetic Resonance Imaging ("MRI") for the detection and diagnosis
of human diseases. In addition to deriving revenues from the direct sale of MRI
equipment, revenue is also generated from its installed base of customers
through its service and upgrade programs.
Health Management Corporation of America ("HMCA") was organized by the Company
in March 1997 as a wholly-owned subsidiary in order to enable the Company to
expand into the business of providing comprehensive management services to
physicians' practices and other medical providers, including diagnostic imaging
centers and ancillary services. The services provided by the Company include
development, administration, leasing of office space, facilities and medical
equipment, provision of supplies, staffing and supervision of non-medical
personnel, legal services, accounting, billing and collection and the
development and implementation of practice growth and marketing strategies.
HMCA entered the physician and diagnostic management services business through
the consummation of two acquisitions, effective June 30, 1997, two acquisitions
which were consummated during fiscal 1998 and one acquisition consummated in
August of 1998. The acquired companies in all cases were actively engaged in the
business of managing medical providers. The medical providers are diagnostic
imaging centers, principally MRI scanning centers, multi-specialty practices and
primary care practices.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of FONAR Corporation,
its majority and wholly owned subsidiaries and partnerships. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The Company no longer consolidates any medical practices which it manages. The
Company had previously consolidated certain medical practices managed as a
result of the 1998 acquisitions of A & A Services, Inc. and Dynamic Health Care
Management, Inc. The Company also previously consolidated the practices
conducted by Superior Medical Services, P.C. The Company has determined that
consolidation of such medical practices is not appropriate because the
underlying management agreements do not meet all of the six criteria of Emerging
Issue Task Force ("EITF") Consensus No. 97-2. Accordingly the consolidating
statement of operations and cash flows for the nine months ended March 31, 2001
have been restated. The significant effect of such restated financial statements
for the nine months ended March 31, 2001 has been to decrease revenue and
related costs by $3.4 million. In addition, the consolidated balance sheet
caption "Excess of Costs Over Net Assets of Businesses Acquired - Net" has been
reclassified to "Management Agreements - Net".
Net revenue from the Company's wholly owned Florida multi-specialty practice is
reflected in the accompanying Consolidated Statement of Operations under the
caption "Patient - Net". Net revenue from the management of related medical
practices is reflected in the accompanying consolidated statements of operations
under the caption "Management and Other Fees - Related Medical Practices - Net".
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted loss per share reflects
the potential dilution from the exercise or conversion of all dilutive
securities into common stock based on the average market price of common shares
outstanding during the period.
Options and warrants to purchase approximately 4,036,000 and 403,000 shares of
common stock were outstanding at March 31, 2002 and 2001, respectively, but were
not included in the computation of diluted earnings per share due to losses in
both periods, as a result of the options and warrants being antidilutive. In
addition, convertible debentures, which are convertible into 879,336 shares at
March 31, 2002 were antidilutive.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations"
which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations". SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. In addition, SFAS 141 establishes specific criteria
for the recognition of intangible assets separately from goodwill and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain. The provisions of SFAS 141 have been adopted by the Company as of July 1,
2001. The adoption of SFAS 141 has not changed the method of accounting used in
previous business combinations, initiated prior to July 1, 2001.
In July 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective
for fiscal years beginning after December 15, 2001. Certain provisions may also
apply to acquisitions initiated subsequent to June 30, 2001. SFAS 142 supersedes
APB Opinion No. 17 "Intangible Assets" and requires, among other things, the
discontinuance of amortization related to goodwill and indefinite lived
intangible assets. These assets will then be subject to an impairment test at
least annually. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangible as goodwill,
reassessment of the useful lives of existing recognized intangibles and
reclassification of certain intangibles out of previously reported goodwill. The
Company does not anticipate any significant impact to the consolidated financial
statements as the result of the adoption of SFAS No. 142 and expects to continue
to amortize all identifiable intangible assets.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supersedes Statement of Financial Accounting standards No. 121
("SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion No.
30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The Company is evaluating the effect of this statement on the
Company's results of operations and financial position.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 2002, the FASB issued Statement of Financial Accounting Standards No. 145
("SFAS 145"), "Rescission of FASB Statements Nos. 4, 44, and 64, Amendment to
FASB Statement No. 13, and Technical Corrections". Provisions of SFAS 145
concerning the rescission of SFAS No. 4 (classification of gain or loss on the
extinguisment of debt) are effective for fiscal years beginning after May 15,
2002. Gains or losses on debt extinguishments that have been shown on the income
statement as extraordinary items in prior periods should be reclassified (if
they do not otherwise meet the criteria for extraordinary status in Opinion 30).
SFAS 4, issued in 1975, requires that all gains or losses from the
extinguishment of debt be classified as an extraordinary item. Since SFAS 4 was
issued, debt extinguishment has become an integral part of the risk management
strategies of some entities. Because transactions in support of such a strategy
are not unusual and infrequent, they do not qualify for extraordinary treatment
pursuant to, Reporting the Results of Operations.
The Company has adopted the provisions of SFAS 145 for the quarter ended March
31, 2002, the effect of which is to reflect the additional interest costs of
approximately $544,000 as a result of the extinguishment of debt to be
classified as an other expense item and not as an extraordinary item (see Note
11).
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 4 - CASH AND CASH EQUIVALENTS
The Company considers all short-term highly liquid investments with a maturity
of three months or less when purchased to be cash or cash equivalents. At March
31, 2002, the Company had cash deposits of approximately $4.6 million in excess
of federally insured limits.
NOTE 5 - MARKETABLE SECURITIES
The following is a summary of marketable securities at March 31, 2002:
(000's omitted)
--------------
Unrealized
Amortized Holdings Fair Market
Cost Gains Value
--------- ----------- -----------
U.S. Government $4,066 $ 66 $4,132
obligations
Corporate bonds 1,723 16 1,739
--------- ----------- -----------
$5,789 $ 82 $5,871
========= =========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 6 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following at March 31, 2002:
(000's omitted)
---------------
Allowance for
doubtful accounts
Gross and contractual
Receivable allowances Net
---------- ----------------- --------
Receivable from equipment
sales and service contracts $ 2,273 $ 1,033 $1,240
========== ================= ========
Receivables from related PC's $13,338 $1,035 $12,303
========== ================= ========
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 56%
and 40% of the PC's net revenues for the nine months ended March 31, 2002 and
2001, respectively, were derived from no-fault and personal injury protection
claims. The Company considers the aging of its accounts receivable in
determining the amount of allowance for doubtful accounts and contractual
allowances. The Company takes all legally available steps, including legally
prescribed arbitrations, to collect its receivables. Credit losses associated
with the receivables are provided for in the consolidated financial statements
and have historically been within management's expectations.
Net revenues from the related PC's, including product sales, accounted for
approximately 82% and 80% of the consolidated net revenues for the nine months
ended March 31, 2002 and 2001, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------
Summarized income statement data for the nine months ended March 31, 2002
related to the 24 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted)
Patient Revenue - Net $ 25,757
========
Income from Operations $ 112
========
Net Income $ 8
========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
(000's omitted)
March 31, 2002 June 30, 2001
--------------- -------------
Purchased parts, components
and supplies $3,511 $3,050
Work-in-process 777 675
-------- --------
$4,288 $3,725
======== ========
NOTE 8 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
(000's omitted)
---------------
1) Information relating to uncompleted contracts as of March 31, 2002 is as
follows:
Costs incurred on uncompleted $3,452
contracts
Estimated earnings 1,025
-------
4,477
Less: Billings to date 4,420
-------
$ 57
=======
Included in the accompanying consolidated balance sheet under the following
captions:
Costs and estimated earnings in
excess of billings on
uncompleted contracts $ 896
Billings in excess of costs and
estimated earnings on
uncompleted contracts 839
-------
$ 57
=======
2) Customer advances consist of the following:
Total advances from customers $9,367
Less: Advances from customers
on contracts under
construction 4,420
-------
$4,947
=======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 9 - CONVERTIBLE DEBENTURES
Pursuant to a securities purchase agreement, dated May 24, 2001, between the
Company and an investor group, the Company issued and sold to the investor group
on that date for an aggregate purchase price of $4.5 million:
4% convertible debentures due June 30, 2002 in the aggregate principal amount of
$4.5 million, convertible into shares of the Company's common stock at a
conversion price of $2.047 per share, subject to adjustment.
Purchase warrants to purchase an aggregate of 659,501 shares of the Company's
common stock at an initial exercise price of $1.801 per share, subject to
adjustment; and
Callable warrants to purchase an aggregate of 2,000,000 shares of the Company's
common stock at a fluctuating exercise price which will vary depending on the
market price for the Company's common stock.
In connection with the issuance of the debentures, the Company paid a placement
fee in the amount of $157,500. In addition, the Company issued 300,000 purchase
warrants to the placement agent.
The debentures are convertible at the option of the holder at a price of $2.047
per share. If the holders decide not to convert, the debenture is payable in ten
monthly installments of $450,000 commencing September 1, 2001. At the option of
the Company, the principal installments can be either in cash or shares of the
Company's' common stock, valued at the lesser of: a) 90% of the average of the
four lowest closing bid prices during the preceding month, or b) the average of
the four lowest closing bid prices during the preceding calendar month, less
$0.125. By amendment dated October 25, 2001, however, the payments originally
due October 1, 2001 and November 1, 2001, were extended to November 5, 2001, and
for those payments, the stock was valued at the average of the two lowest
closing bid prices for October, 2001 less $0.25. For the nine months ended March
31, 2002, the Company made these payments for principal due of $2,700,000 and
related accrued interest on this principal of $63,800 through the issuance of
2,793,97 shares of the Company's common stock.
The purchase warrants cover 959,501 shares of common stock and have an exercise
price of $1.801 per share, subject to adjustment. The exercise period extends to
May 24, 2006.
The callable warrants cover 2,000,000 shares of common stock and have a variable
exercise price. Subject to a maximum price of $6.00 per share and a minimum
price of $2.00 per share, which is subject to adjustment, pursuant to the terms
of the warrants, the exercise price will be equal to the average closing bid
price of the Company's common stock for the full calendar month preceding the
date of exercise. The exercise period extends to May 24, 2004.
The Company has the option of redeeming up to 200,000 callable warrants per
month at a price of $0.01 per underlying warrant share, if the average closing
bid price of its common stock is greater than 115% of the warrant price in
effect for five consecutive trading days in any calendar month.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 9 - CONVERTIBLE DEBENTURES (Continued)
The debentures and warrants provide for proportionate adjustments in the event
of stock splits, stock dividends and reverse splits. In addition, the conversion
and exercise prices will be reduced, with certain specified exemptions, if the
Company issues shares at lower prices, then the debenture conversion or warrant
exercise prices, or less than market price for the common stock.
The terms of the registration rights agreement with the investor requires the
Company to register approximately two times the number of shares necessary to
repay the debentures in common stock at the lower of the market price, as
computed under the agreement, or the conversion price, plus the number of shares
underlying the warrants.
NOTE 10 - NOTES PAYABLE
Pursuant to a stock payment agreement consummated January 11, 2002 between the
Company and Dr. Glenn Muraca and Dr. Giovanni Marciano, Dr. Muraca and Dr.
Marciano agreed to accept payment of certain debt obligations in shares of
common stock the Company issued 1,000,000 shares of common stock to each of
them, or 2,000,000 shares in the aggregate at $1.27 per share totaling
$2,539,333. The shares are being issued to pay four promissory notes which were
issued, HMCA, in partial payment of the purchase price for the acquisition of
A&A Services, Inc. The total balance of principal and interest due under the
notes as of January 11, 2002 was $3,076,791. Payments under the notes were due
quarterly. In order to induce Dr. Muraca and Marciano to accept payment in stock
and in the manner provided in the stock payment agreement, the Company agreed to
pay a 15% premium on the note obligations and related accrued interest. The
total amount due as a result is $3,613,325 in the aggregate. The additional
interest of $ 544,370 as a result of the agreement in order to induce the notes
to accept payment of the note obligations has been recorded as an other expense
item (and not an extraordinary item) in the statement of operations for the
three and nine months ended March 31, 2002 in accordance with provisions of SFAS
145 (see Note 3).
Under the terms of the stock payment agreement, The Company will issue shares,
and the net proceeds from the sale of the shares will be applied to the
indebtedness. The quarterly payment due dates were waived, but the net proceeds
received by the selling stockholders must be sufficient to pay the full
indebtedness for each note, including the premium on the note, by the final
maturity date of the note: September 20, 2002 in the case of two of the notes
and December 20, 2002 in the case of two of the notes. If a note, including the
premium, is not satisfied in full by the time of its final maturity date, then
interest will accrue on the unpaid balance at the rate of 6% per annum and the
selling stockholders could require the difference to be paid in cash.
In the event the net proceeds from the sale of the 2,000,000 shares issued are
not sufficient to pay the obligations by July 1, 2002, the Company will issue
additional shares in an amount estimated to be sufficient to pay the balance
due. The Company has reserved the option not to issue more than 5,000,000 shares
in the aggregate.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended March 31, 2002 and 2001, the Company paid
approximately $700,000 and $951,000 for interest, respectively. In addition,
during the nine months ended March 31, 2002 and 2001, the Company paid
approximately $8,000 and $48,000 for income taxes, respectively.
During the nine months ended March 31, 2002:
a) The Company issued 451,512 shares of common stock for professional services
of $585,623.
b) The Company issued 1,627,657 shares of common stock to employees as
compensation of $2,125,571 under stock bonus plans.
c) The Company issued 584,795 shares of common stock for consulting services
of $733,743.
d) The Company issued 2,793,972 shares of common stock in satisfaction of
principal of $2,700,000 and accrued interest of $63,800.
e) The Company issued 2,000,000 shares of common stock in satisfaction of
principal of $2,539,333.
During the nine months ended March 31, 2001:
a) The Company issued 1,003,679 shares of common stock to employees as
compensation of $1,639,941 under stock bonus plans.
b) The Company issued 870,067 shares of common stock for consulting services
of $1,544,779.
c) The Company acquired equipment of $176,480 under equipment notes payable
obligations.
d) The Company issued 365,000 shares of common stock for professional services
of $544,000.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED
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 10-K/A as
of June 30, 2001. All inter- segment sales are market-based. The Company
evaluates performance based on income or loss from operations.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
(000's omitted)
Physician
Medical Management
Equipment Services Total
--------- ---------- ---------
For the nine months ended March 31, 2002:
Net revenue from external customers 11,138 20,499 31,637
Inter-segment net revenues 765 - 765
Operating (loss) income (11,930) 668 (11,262)
Depreciation and amortization 1,941 1,943 3,884
Compensatory element of stock
issuances 1,645 1,666 3,311
Total identifiable assets 38,832 36,304 75,136
Capital expenditures 1,204 915 2,119
For the nine months ended March 31, 2001:
Net revenue from external customers 7,669 23,928 31,597
Inter-segment net revenues 835 - 835
Operating (loss) income (12,948) 2,164 (10,784)
Depreciation and amortization 1,642 1,847 3,489
Compensatory element of stock 1,393 1,460 2,853
issuances
Total identifiable assets 42,164 40,014 84,900
Capital expenditures 898 608 1,506
NOTE 13 - SUBSEQUENT EVENTS
In April, 2002, the Company granted options to three employees to purchase
135,000 shares of the Company's common stock at exercise prices ranging from
$.97 to $1.00. The options must be exercised within ten years from the date of
grant.
FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the fiscal quarter ended March 31, 2002 (third quarter of fiscal 2002),
the Company reported a net loss of $5.1 million on revenues of $11.0 million as
compared to a net loss of $2.8 million on revenues of $11.4 million for the
third quarter of fiscal 2001.
For the nine month period ended March 31, 2002, the Company reported a net
loss of $13.6 million on revenues of $30.9 million as compared to a net loss of
$9.7 million on revenues of $30.8 million for the nine month period ended March
31, 2001.
The Company operates in two industry segments: the manufacture and
servicing of medical (MRI) equipment, the Company's traditional business which
is conducted directly by Fonar and physician and diagnostic management services,
which is conducted through Fonar's wholly-owned subsidiary, Health Management
Corporation of America ("HMCA").
MRI equipment sales increased dramatically, by 92%, from $3.6 million for
the first nine months of fiscal 2001 to $6.9 million for the first nine months
of fiscal 2002, reflecting increased sales of the Stand-Up MRI scanners. Service
and repair revenues increased by 15%, from $1.4 million for the first nine
months of fiscal 2001 to $1.6 million for the first nine months of fiscal 2002.
Consequently, overall revenues recognized by the Company's MRI equipment
manufacturing and service business increased by 53%, from $6.8 million in the
first nine months of fiscal 2001 to $10.4 million in the first nine months of
fiscal 2002. There were significant increases in scanner sales to both unrelated
parties, from $2.6 million in the first nine months of fiscal 2001 to $3.4
million in the first nine months of fiscal 2002 (31%) and to related parties,
from $916,000 in the first nine months of fiscal 2001 to $3.5 million in the
first nine months of fiscal 2002 (289%). As a result the operating loss from the
Company's MRI equipment manufacturing and service business was $10.8 million for
the nine months of fiscal 2002 as compared to $12.9 million for the first nine
months of fiscal 2001.
The dramatic increase in product sales reflected market acceptance of the
Company's Stand-Up MRI scanners. During the first nine months of fiscal 2002,
revenues of approximately $6.9 million were recognized from sales of Stand-Up
MRI scanners. During the first nine months of fiscal 2001, revenues of
approximately $1.9 million were recognized from the sales of QUAD scanners, $1.0
million from the sale of Stand-Up MRI scanners, and $329,000 from the sale of
Echo scanners.
There were $1.2 million in foreign sales revenues for the first nine months
of fiscal 2002 as compared to no foreign sales revenues for the first nine
months in fiscal 2001.
Impacting on the losses in fiscal 2002 were increased interest and
financing costs ($2.9 million for the first nine months of fiscal 2002 compared
to $955,000 for the first nine months of fiscal 2001), a reduction in investment
income ($718,000 for the first nine months of fiscal 2002 compared to $1.5
million for the first nine months of fiscal 2001) and lower revenues from HMCA
($20.5 million for the first nine months of fiscal 2002 as compared to $23.9
million for the first nine months of fiscal 2001).
HMCA (physician and diagnostic management services) experienced operating
income of $668,000 for the first nine months of fiscal 2002 compared to income
of $2.2 million for the first nine months of fiscal 2001. The decline in HMCA
income was attributable to lower revenues reflecting a decline in management
fees ($20.5 million for the first nine months of fiscal 2002 compared to $22.8
million for the first nine months of fiscal 2001) from the facilities and
medical practices managed by HMCA. During fiscal 2002, five of the MRI scanning
facilities managed by HMCA were closed, contributing to the decline in revenues.
Accordingly the Company's consolidated operating loss was $11.3 million for
the first nine months of fiscal 2002 as compared to a consolidated operating
loss of $10.8 million for the first nine months of fiscal 2001.
Although the Company's scanner sales increased significantly from fiscal
2001, low product sales volume, together with a decline in management fees, are
the principal reasons for the Company's operating losses. Product sales revenues
attributable to the Company's medical (MRI) equipment business were $6.9 million
for the first nine months of fiscal 2002 as compared to $3.6 million for the
first nine months of fiscal 2001. Costs of revenues attributable to the
Company's product sales were $5.0 million for the nine months of fiscal 2002 as
compared to $3.8 million for the first nine months of fiscal 2001.
The Company's efforts to improve equipment sales volume have emphasized
research and development to improve the competitiveness of its products and
increased marketing and sales efforts. Research and development expenditures
were $3.7 million for the first nine months of fiscal 2002 and $4.6 million for
the first nine months of fiscal 2001.
Selling, general and administrative expenses increased, from $13.5 million
in the first nine months of fiscal 2001 to $15.0 million in the first nine
months of fiscal 2002, primarily due to the expansion of Fonar's sales force (an
increase of approximately $665,000), the implementation of a television
advertising campaign in the third quarter of fiscal 2002 ($269,000), and the
amortization of deferred financing costs of $222,000 during fiscal 2002 incurred
in connection with the issuance of convertible debentures in the principal
amount of $4.5 million in May 2001.
The increase in compensatory element of stock issuance from approximately
$2.9 million for the first nine months of fiscal 2001 to approximately $3.3
million for the first nine months of fiscal 2002 reflected greater use of
Fonar's stock bonus plan to pay certain employees in stock rather than cash.
Interest expense ($1.3 million) in the first nine months of fiscal 2002 as
compared to $955,000 for the first nine months of fiscal 2001) increased by 37%.
Financing costs paid in shares of stock and warrants, however, in the amount of
$1.6 million, were incurred in the first nine months of fiscal 2002, reflecting
the amortization of the value of the warrants issued in connection with issuance
of the Company's convertible debentures ($882,000) and financing costs in
connection with the Company's convertible debentures ($759,000).
Inventories increased to $4.3 million at March 31, 2002 from $3.7 million
at June 30, 2001 as the Company purchased parts and commenced manufacturing
scanners to fill orders and anticipated orders.
Accounts receivable increased to $1.2 million as at March 31, 2002 from
$850,000 as at June 30, 2001, principally reflecting increased revenues from
service contracts on MRI scanners, although receivables from related medical
practices declined, reflecting the decline in HMCA revenues.
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 Indomitable (TM) Stand-Up MRI Scanner. Following receipt of FDA
clearance, Fonar has been working closely with GE Medical Systems to assist them
in preparing their sales force to market and sell the Stand-Up MRI. General
Electric purchased two Stand-Up MRI scanners to resell to its customers in April
2002.
The Company's Indomitable (TM) (Stand-Up), QUAD (TM) and Fonar-360 (TM) MRI
scanners, together with the Company's works-in-progress (QUAD 12000S (TM) MRI),
are intended to significantly improve the Company's competitive position. In
addition, the Company offers a low cost open scanner, the Echo (TM) MRI,
operating at .3 Tesla field strength.
The Company's Indomitable (TM) scanner, which received clearance to market
from the FDA on October 3, 2000, will allow patients to be scanned while
standing or reclining. As a result, for the first time, MRI will be 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.
Indomitable(TM) will also be useful for MR-directed surgical procedures as
the surgeon would have unhindered access to the patient with no restrictions in
the vertical direction. This easy-entry, mid-field-strength scanner should be
ideal for trauma centers where a quick MRI-screening within the first critical
hour of treatment will greatly improve patients' chances for survival and
optimize the extent of recovery.
The Fonar 360 has an enlarged room sized magnet in which the magnet frame
is incorporated into the floor, ceiling and walls of the scan room. This is made
possible by Fonar's patented Iron-Frame(TM) technology which allows the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Physicians and family members are able to actually enter the
scanner and approach the patient. In its Open Sky version, the Fonar 360 serves
as an open patient friendly scanner which allows 360 degree access to the
patient on the scanner bed. The walls can be decorated with panoramic murals and
the entire scan room can be decorated to be incorporated into the pictured
landscape.
In its future interventional OR-360 version, the enlarged room sized magnet
and 360 degree access to the patient afforded by the Fonar 360 permit
full-fledged surgical teams to walk into the magnet and perform surgery on the
patient inside the magnet. Most importantly the exceptional quality of the MRI
image and its exceptional capacity to exhibit tissue detail on the image, by
virtue of the nuclear resonance signal's extraordinary capacity to create image
contrast, can then be obtained real time during surgery to guide the surgeon in
the surgery. Thus surgical instruments, needles, catheters, endoscopes and the
like can be introduced directly into the human body and guided to the malignant
lesion by means of the MRI image. The number of inoperable lesions should be
greatly reduced by the availability of this new capability. Most importantly
treatment can be carried directly to the target tissue.
The "QUAD" scanners are unique MRI scanners in that four sides are open
thus allowing access to the scanning area from four vantage points. The
starshaped open design of the QUAD will also make possible a host of new
applications, particularly MRI mammography and MRI directed surgery
(Interventional MRI). The QUAD (TM) 12000 MRI scanner utilizes a 6000 gauss iron
core electromagnet and is accessible from four sides. The QUAD 12000 is the
first "open" MRI scanner at high field. The QUAD (TM) 7000 is similar in design
to the QUAD 12000 but utilizes a smaller 3,500 gauss electromagnet.
The Company is also developing a superconductive version of its open iron
frame magnets, the "QUAD 12000S" (TM), and has completed construction of a
prototype with a 0.6 Tesla superconductive magnet. The Company's design of its
superconductive magnet anticipated the possibility of making its other products
available as superconducting magnets. Therefore, it is the Company's objective
to make Indomitable (TM) and the Fonar 360 available to FONAR's customers as
either iron-frame resistive models or iron-frame superconductive magnets
depending on customer preference and pricing.
The Company expects marked demand for its high-field "Open MRI" scanners
since image quality increases as a direct proportion to magnetic field strength.
The Company anticipates that the variety of its "Open MRI" products will also
serve to maximize the appeal of its product line to a wide variety of users. The
Company's new scanners provide improved image quality and high speed imaging at
costs that are significantly less than the competition and more in keeping with
the medical cost reduction demands being made by our national leaders on behalf
of the public. In addition, the Company offers a low cost scanner, the Echo, for
the particularly cost conscious customers.
Liquidity and Capital Resources
As a result of increased sales, the Company's utilization of its cash
reserves slowed significantly in the third quarter of fiscal 2002.
Although cash and cash equivalents decreased from $14.0 million at June 30,
2001 to $4.9 million at March 31, 2002, cash and cash equivalents declined only
18% in the third quarter, from $5.8 million to $4.9 million, as compared to a
decline of 24%, from $7.6 million to $5.8 million, in the second quarter and a
decline of 46%, from $14.0 million to $7.6 million, in the first quarter.
Principal uses of cash during the first nine months of fiscal 2002 included:
capital expenditures of $2.1 million, repayment of long-term debt of $3.7
million and $3.3 million to fund operating activities for the first nine months
of fiscal 2002.
Marketable securities approximated $5.9 million as of March 31, 2002 and
$6.1 million as of June 30, 2001. Such investments were in U.S. government
obligations and corporate bonds.
Total liabilities decreased since June 30, 2001 by $7.2 million to $35.8
million at March 31, 2002. The decrease in liabilities from June 30, 2001 is
attributable primarily to the repayment of long-term debt and capital lease
obligations of $3.7 million and the amortization of the license fee of $1.8
million.
As of March 31, 2002, the Company had a bank credit facility of $5,500,000.
The unused portion of the facility was approximately $175,000. The interest on
loans made under the facility is either the bank's prime rate, as in effect from
time to time, or 0.5% plus the bank's cost of funds rate, as selected by Fonar
when the loan is made.
The Company's business plan currently includes an aggressive program for
manufacturing and selling its new line of scanners and expanding its new
physician and diagnostic management services business.
In May of 2001, the Company issued convertible debentures in the principal
amount of $4.5 million. These debentures are convertible at the option of the
holder at a price of $2.047 per share. Otherwise, the debentures are payable in
ten monthly installments of principal of $450,000 each, with interest at 4% per
annum. The installments can be paid in cash or common stock at the Company's
option. In such case the common stock would be valued at the lesser of: a) 90%
of the average of the four lowest closing bid prices during the preceding month,
or b) the average of the four lowest closing bid prices during the preceding
calendar month, less $0.125. By amendment dated October 25, 2001, however, the
payments originally due October 1, 2001 and November 1, 2001, were extended to
November 5, 2001, and for those payments, the stock was valued at the average of
the two lowest closing bid prices for October, 2001 less $0.25. Through May 15,
2002, the Company has issued 4,419,026 shares in payment of the debentures. As
of May 15, 2002, one principal payment ($450,000) plus interest remains to be
made.
No part of the debentures have been converted to date. The ability of the
Company to pay this debt in common stock increases the liquidity of the Company
by enabling cash to be used for operations and to pay other obligations.
Pursuant to a stock payment agreement consummated in January, 2002 between
the Company and Dr. Glenn Muraca and Dr. Giovanni Marciano, Dr. Muraca and Dr.
Marciano agreed to accept payment of certain debt obligations in shares of
common stock and the Company issued 1,000,000 shares of common stock to each of
them, or 2,000,000 shares in the aggregate. The shares are being issued to pay
four promissory notes which were issued by our subsidiary, Health Management
Corporation of America or HMCA, in partial payment of the purchase price for the
acquisition of A&A Services, Inc. The total balance of principal and interest
due under the notes as of December 20, 2001 was $3,076,791. Payments under the
notes were due quarterly. In order to induce Dr. Muraca and Marciano to accept
payment in stock and in the manner provided in the stock payment agreement, the
Company agreed to pay a premium on the note obligations. The total amount due as
a result of the stock purchase agreement was $3,613,326 in the aggregate.
Under the terms of the stock payment agreement, Company will issue shares,
and the net proceeds from the sale of the shares will be applied to the
indebtedness. The quarterly payment due dates were waived, but the net proceeds
received by the selling stockholders must be sufficient to pay the full
indebtedness for each note, including the premium on the note, by the final
maturity date of the note: September 20, 2002 in the case of two of the notes
and December 20, 2002 in the case of two of the notes. If a note, including the
premium, is not satisfied in full by the time of its final maturity date, then
interest will accrue on the unpaid balance at the rate of 6% per annum and the
selling stockholders could require the difference to be paid in cash.
In the event the net proceeds from the sale of the 2,000,000 shares issued
are not sufficient to pay the obligations by July 1, 2002, the Company will
issue additional shares in an amount estimated to be sufficient to pay the
balance due. The Company has reserved the option not to issue more than
5,000,000 shares in the aggregate. This transaction will increase the liquidity
of the Company by making cash available for other purposes.
The Company believes that it has sufficient cash resources and other liquid
assets to support its operations. The Company and its subsidiary, HMCA, are
continuing to explore both bank financing and the placement of debt and equity
securities.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There were no material changes in litigation for the first nine months of
fiscal 2002 from that described in the Company's Form 10-K for the fiscal year
ended June 30, 2001.
Item 2 - Changes in Securities: None
Item 3 - Defaults Upon Senior Securities: None
Item 4 - Submission of Matters to a Vote of Security Holders: None
Item 5 - Other Information: None
Item 6 - Exhibits and Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended 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 24, 2002