UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1998 Commission File Number 0-10248
FONAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 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 September 30, 1998
- - -------------------------------- ---------------------------------------
Common Stock, par value $.0001 53,010,965
Class B Common Stock, par value $.0001 5,411
Class C Common Stock, par value $.0001 9,562,824
Class A Preferred Stock, par value $.0001 7,836,286
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1998
and June 30, 1998
Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 1998 and
September 30, 1997
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 1998 and
September 30, 1997
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Three Months Ended September 30, 1998
and September 30, 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS
September 30, June 30,
1998 1998
(UNAUDITED)
Current Assets: --------- -------
Cash and cash equivalents $33,845 $41,751
Marketable securities 18,336 20,252
Accounts receivable - net 12,333 9,877
Costs and estimated earnings in excess
of billings on uncompleted contracts 261 834
Inventories 3,500 3,514
Prepaid expenses and other current assets 661 286
------ ------
Total current assets 68,936 76,514
------ ------
Restricted cash 5,000 5,000
Property and equipment - net 10,038 9,102
Advances and notes to affiliates and related parties- net 1,322 1,350
Notes receivable - net 492 66
Excess of cost over net assets of businesses acquired-net 23,473 14,746
Other intangible assets - net 1,132 1,162
Other assets 484 508
-------- --------
$110,877 $108,448
======== ========
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
September 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
(UNAUDITED)
Current Liabilities: ---------- --------
Current portion of debt and capital leases $ 4,182 $ 2,443
Accounts payable 1,547 2,030
Other current liabilities 11,178 11,256
Dividends payable 2,585 3,909
Customer advances 473 670
Billings in excess of costs and estimated
earnings on uncompleted contracts 31 31
Income taxes payable 955 955
Deferred income taxes 794 794
------ ------
Total current liabilities 21,745 22,088
Long-term debt and capital lease obligations
less current portion 20,610 13,560
Other non-current liabilities 118 113
------ ------
Total liabilities 42,473 35,761
------ ------
Minority interest 34 114
------ ------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Common Stock $.0001 par value; 60,000,000
shares authorized; 53,010,965 issued and outstanding
at September 30, 1998 and 52,954,465 at June 30, 1998 5 5
Class B Common Stock $ .0001 par value; 4,000,000
shares authorized, (10 votes per share), 5,411 issued
and outstanding at September 30 and at June 30, 1998 - -
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 and at June 30, 1998 1 1
Class A non-voting Preferred Stock $.0001 par value;
8,000,000 authorized, 7,836,286 issued and outstanding
at September 30 and at June 30, 1998 1 1
Paid-in capital in excess of par value 94,580 94,502
Accumulated other comprehensive income ( 1,282) ( 42)
Accumulated deficit (22,489) (19,645)
Notes receivable - stockholders ( 1,854) ( 1,854)
Treasury stock - 202,864 shares of common stock
at September 30 and 108,864 at June 30, 1998 ( 592) ( 395)
------- -------
Total stockholders' equity 68,370 72,573
------- -------
Total liabilities and stockholders' equity $110,877 $108,448
======= =======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
REVENUES -------- --------
Product sales - net $ 494 $ 1,511
Service and repair fees - net 569 616
Scanning and management fees - net 6,473 4,601
-------- --------
Total Revenues - Net 7,536 6,728
-------- --------
COSTS OF REVENUES:
Cost of product sales 855 2,174
Cost of service and repair fees 520 658
Cost of scanning and management fees - net 4,500 2,890
Research and development expenses 1,615 1,213
Selling, general and administrative expenses 3,116 2,389
Provision for bad debt - 273
Compensatory element of stock issuances - 286
Amortization of excess of cost over assets acquired 225 35
-------- --------
Total Costs and Expenses 10,831 9,918
-------- --------
Loss From Operations ( 3,295) ( 3,190)
Interest Expense ( 308) ( 92)
Interest Income 777 1,063
Other income-principally gain on litigation awards 9 -
------ -------
Loss before provision for taxes and
minority interest ( 2,817) ( 2,219)
Provision for income taxes 1 -
------- -------
Loss before minority interest ( 2,818) ( 2,219)
Minority interest in net (income) loss
of subsidiary and partnership ( 26) ( 46)
------- -------
NET LOSS $( 2,844) $( 2,265)
======= =======
Net Loss per share $(.04) $(.04)
====== ======
Weighted average number of shares outstanding 63,837 60,073
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1997
------ ------
Cash Flows from Operating Activities
Net Loss $( 2,844) $( 2,265)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income (loss) 26 46
Depreciation and amortization 999 861
Imputed interest on deferred payment obligation 27 -
Provision for losses on accounts and notes
receivable and accounts receivable from affiliates - 168
Compensatory and fee element of stock issuances - 44
Stock issued in settlement of current liabilities 74 248
(Increase) decrease in operating assets, net:
Receivable from litigation award - 77,223
Accounts and notes receivable ( 982) ( 1,493)
Costs and estimated earnings in excess of
billings on uncompleted contracts 573 286
Inventories 14 333
Prepaid expenses and other current assets ( 375) 86
Other assets 24 ( 202)
Receivables and advances to affiliates and
related parties 28 702
Increase (decrease) in operating liabilities, net:
Accounts payable ( 409) ( 116)
Other current liabilities ( 222) 219
Customer advances ( 197) ( 322)
Billings in excess of costs and estimated
earnings on uncompleted contracts - ( 192)
Other liabilities 5 ( 92)
------ ------
Net cash provided by (used in) operating activities ( 3,259) 75,534
------ ------
Cash Flows from Investing Activities:
Investment (reduction) in marketable securities 676 -
Acquisitions, net of cash acquired ( 2,000) -
Purchases of property and equipment - net ( 1,340) ( 1,257)
Cost of capitalized software development
and patents ( 47) ( 26)
------ ------
Net cash used in investing activities ( 2,711) ( 1,283)
------ ------
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1997
------ ------
Cash Flows from Financing Activities:
Distribution to minority interest ( 106) ( 41)
Repayment of borrowings and capital
lease obligations ( 309) ( 154)
Proceeds from sale of stock - 300
Repayment of notes receivable in connection
with shares issued under stock option
and bonus plans - net - 82
Dividends paid ( 1,324) -
Purchase of treasury stock ( 197) -
------ ------
Net cash provided by financing activities ( 1,936) 187
------ ------
Increase (Decrease) in Cash ( 7,906) 74,438
Cash at beginning of period 41,751 5,861
------ ------
Cash at end of period $33,845 $80,299
====== ======
See accompanying notes to consolidated financial statements (unaudited).
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1997
------ ------
Net loss $(2,844) $(2,265)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of tax (1,240) -
------- -------
Total comprehensive loss $(4,084) $(2,265)
======= =======
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1 - 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 medical providers, sometimes referred to as "Physician Practice
Management" or ("PPM"), including diagnostic imaging centers and ancillary
services. The services to be 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 PPM business through the consummation of two
acquisitions, effective June 30, 1997, and 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of FONAR
Corporation, its majority and wholly-owned subsidiaries/ partnerships and
its proportionate share in the accounts of all joint ventures. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities in the
consolidated financial statements and accompanying notes. The most
significant estimates relate to contractual and other allowances, income
taxes, contingencies and the useful lives of equipment. In addition,
healthcare industry reforms and reimbursement practices will continue to
impact the Company's operations and the determination of contractual and
other allowance estimates. Actual results could differ from those
estimates.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in debt
and Equity Securities" ("SFAS No. 115"). This standard requires that
certain debt and equity securities be adjusted to market value at the end
of each accounting period. Unrealized market value gains and losses are
charged to earnings if the securities are traded for short-term profit.
Otherwise, such unrealized gains and losses are charged or credited to
comprehensive income.
Management determines the proper classifications of investments in
obligations with fixed maturities and marketable equity securities at the
time of purchase and reevaluates such designations as of each balance sheet
date. At September 30, 1998, all securities covered by SFAS No. 115 were
designated as available for sale. Accordingly, these securities are stated
at fair value, with unrealized gains and losses reported in comprehensive
income. Realized gains and losses on sales of investments, as determined on
a specific identification basis, are included in the Consolidated Statement
of Operations.
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.
Investments in Joint Ventures and Limited Partnerships
------------------------------------------------------
The minority interests in the equity of consolidated joint ventures
and limited partnerships, which are not material, are reflected in the
accompanying consolidated financial statements. Investments by the Company
in joint ventures and limited partnerships over which the Company can
exercise significant influence but does not control are accounted for using
the equity method.
The Company suspends recognition of its share of joint ventures losses
in entities in which it holds a minority interest when its investment is
reduced to zero. The Company does not provide for additional losses unless,
as a partner or joint venturer, the Company has guaranteed obligations of
the joint venture or limited partnership.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
----------------------
Property and equipment procured in the normal course of business is
stated at cost. Property and equipment purchased in connection with an
acquisition is stated at its estimated fair value, generally based on an
appraisal. Property and equipment is being depreciated for financial
accounting purposes using the straight-line method over the shorter of
their estimated useful lives, generally five to seven years, or the term of
a capital lease, if applicable. Leasehold improvements are being amortized
over the shorter of the useful life or the remaining lease term. Upon
retirement or other disposition of these assets, the cost and related
accumulated depreciation of these assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains or
losses are reflected in the results of operations. Expenditures for
maintenance and repairs are charged to operations. Renewals and betterments
are capitalized.
Excess of Cost Over Net Assets of Businesses Acquired
-----------------------------------------------------
The excess of the purchase price over the fair market value of net
assets of businesses acquired is being amortized using the straight-line
method over 20 years.
Other Intangible Assets
-----------------------
1) Capitalized Software Development Costs
Certain software development costs incurred subsequent to the
establishment of the software's technological feasibility and completion of
the research and development on the product hardware, in which it is to be
used, are required to be capitalized. Capitalization ceases when the
product is available for general release to customers, at which time
amortization of capitalized costs begins. Amortization is calculated on the
straight-line basis over 5 years.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over 17 years.
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of long-lived
assets, including property and equipment, intangibles and excess of cost
over net assets of businesses acquired, when there are indications of
potential impairment, based on estimates of undiscounted future cash flows.
The amount of impairment is calculated by comparing anticipated discounted
future cash flows with the carrying value of the related asset. In
performing this analysis, management considers such factors as current
results, trends, and future prospects, in addition to other economic
factors.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
-------------------
Revenue on sales contracts for scanners is recognized under the
percentage-of-completion method. The Company manufactures its scanners
under specific contracts that provide for progress payments. Production and
installation take approximately six months. The percentage of completion is
determined by the ratio of costs incurred to date on completed
sub-assemblies to the total estimated cost for each scanner.
Contract costs include material, direct labor and overhead. Provisions
for estimated losses on uncompleted contracts, if any, are made in the
period in which such losses are determined. The asset, "Costs and Estimated
Earnings in Excess of Billings on Uncompleted Contracts", represents
revenues recognized in excess of amounts billed. The liability, "Billings
in Excess of Costs and Estimated Earnings on Uncompleted Contracts",
represents billings in excess of revenues recognized.
Revenue on scanner service contracts are recognized on the
straight-line method over the related contract period, usually one year.
Revenue from sales of other items are recognized upon shipment.
Revenue under management contracts is recognized based upon
contractual agreements for management services rendered by the Company
under various long-term agreements with related medical providers (the
"PC's"), commencing July 1, 1997. The PC's are primarily owned by Raymond
V. Damadian, M.D., President and Chairman of the Board of FONAR. The
Company's agreements with the PC's stipulate fees for services rendered,
are primarily calculated on activity based efforts at pre-determined rates
per unit of activity. All fees are re-negotiable at the anniversary of the
agreements and each year thereafter.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred. The
costs of materials and equipment that are acquired or constructed for
research and development activities, and have alternative future uses
(either in research and development, marketing or production), are
classified as property and equipment and depreciated over their estimated
useful lives. Certain software development costs are capitalized. See
property and equipment and intangible assets (capitalized software
development costs) sections of this note.
Advertising Costs
-----------------
Advertising costs are expensed as incurred.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
Deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
Product Warranty
----------------
The Company provides currently for the estimated cost to repair or
replace products under warranty provisions in effect at the time of
installation (generally for one year).
Customer Advances
-----------------
Cash advances and progress payments received on sales orders are
reflected as customer advances until such time as revenue recognition
begins.
Per Share Data
--------------
Net income (loss) per common and common equivalent share has been
computed based on the weighted average number of common shares and common
stock equivalents outstanding during the year. No effect has been given to
options outstanding under the Company's Stock Option Plans as no material
dilutive effect would result from the exercise of these items.
During fiscal 1998, the Company retroactively adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"), which requires companies to present basic earnings per share and
diluted earnings per share. No adjustments were required as a result of
this adoption.
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.
Restricted Cash
---------------
At September 30, 1998, $5,000,000 of cash was pledged as collateral on
an outstanding bank loan and was classified as restricted cash on the
balance sheet.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily cash, trade accounts
receivable, notes receivable, investment in sales-type leases and
investments, advances and notes to affiliates and related parties. Ongoing
credit evaluations of customers' financial condition are performed. The
Company generally retains title to the MRI scanners that it sells until the
scanners have been paid in full. The Company's customers are concentrated
in the industry of providing MRI scanning services.
Various related parties, accounted for approximately 77% and 68% of
revenues for the three months ended September 30, 1998 and 1997,
respectively.
At September 30, 1998, the Company had cash deposits approximately
$39,000,000 in excess of federally insured limits.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value
information at September 30, 1998 and June 30, 1998, as required by
Statement of Financial Accounting Standards 107, "Disclosures about Fair
Value of Financial Instruments". Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in
that Statement and does not purport to represent the aggregate net fair
value to the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short-term maturity of those instruments.
Accounts receivable and accounts payable: The carrying amounts
approximate fair value because of the short maturity of those instruments.
Investment in sales-type leases and investments, advances and notes to
affiliates and related parties. The carrying amount approximates fair value
because the discounted present value of the cash flow generated by the
related parties approximates the carrying value of the amounts due to the
Company.
Long-term debt and loans payable: The carrying amounts of debt and
loans payable approximate fair value due to the length of the maturities,
the interest rates being tied to market indices and/or due to the interest
rates not being significantly different from the current market rates
available to the Company.
All of the Company's financial instruments are held for purposes other
than trading.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
------------------------
Effective for fiscal year 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide proforma net income and proforma earnings per share disclosures
for employee stock option grants made during the year
and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the proforma disclosure
provisions of SFAS No. 123.
Accounting Changes
------------------
In November 1997, Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), was issued which
establishes standards for reporting and displaying comprehensive income in
a full set of financial statements. SFAS No. 130 defines comprehensive
income as changes in equity of a business enterprise during the periods
presented, except for transactions resulting from investments by an owner
and distribution to an owner. SFAS No. 130 does not require a company to
present a statement of comprehensive income if no items are present. The
Company adopted SFAS No. 130 during fiscal 1998.
New Pronouncements
------------------
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which revises
the accounting for software development costs and will require the
capitalization of certain costs. The Company recognizes the need to ensure
its operations will not be adversely impacted by Year 2000 software
failures. Software failures due to processing errors potentially arising
from calculations using the Year 2000 date are a known risk. The Company is
addressing this risk to the availability and integrity of financial systems
and the reliability of operational systems. The Company has established
processes for evaluating and managing the risks and costs associated with
this problem. The computing portfolio was identified and an initial
assessment has been completed. The cost of achieving Year 2000 compliance
will not have a material impact on the accompanying financial statements.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform with the
current year presentation.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 3 - ACQUISITIONS
Affordable Diagnostics, Inc.
----------------------------
On June 30, 1997, the Company's wholly-owned subsidiary consummated
the merger of the assets, liabilities and operations of Affordable
Diagnostics, Inc. ("Affordable"), a New York corporation, which managed and
operated three diagnostic imaging centers and managed one multi-specialty
practice in the Bronx and Westchester, New York. The merger was consummated
pursuant to a Merger Agreement ("Agreement") effective June 30, 1997, by
and among HMCA's wholly-owned subsidiary, HMCM, Inc. ("HMCM"). Pursuant to
the agreement, HMCM acquired all of the assets and liabilities of
Affordable through the issuance of 1,764,000 shares of the Company's Common
Stock, valued at $3,630,312.
The merger was accounted for as a purchase, under which the purchase
price was allocated to the acquired assets and assumed liabilities based
upon fair values at the date of the merger. The excess of the purchase
price over the fair value of the net assets acquired amounted to
approximately $2,796,000 and is being amortized on a straight-line basis
over 20 years. Subject to the centers achieving certain earning objectives
within the next one year, an additional 576,000 shares would be issued to
the sellers. During fiscal 1998, the earnings objectives were achieved and,
accordingly, 576,000 shares of common stock were issued to the sellers. The
value assigned to the additional shares issued was $923,442 and has been
recorded as additional goodwill subject to amortization over the stated
period. The accompanying consolidated financial statements include the
operations of Affordable from the date of the acquisition. The shares
issued to the Sellers as consideration pursuant to the Agreement are
subject to certain registration rights.
Concurrent with the above described transactions, HMCM entered into
consulting agreements with the shareholders of Affordable. Under such
agreements, 400,000 registered shares of FONAR's common stock, valued at
$1,096,000, were issued pursuant to one year consulting agreements with
HMCM.
Acquisition of RVDC
-------------------
Effective June 30, 1997, FONAR's wholly-owned subsidiary, HMCA,
acquired Raymond V. Damadian, M.D. MR Scanning Centers Management Company
("RVDC") and two affiliates, by purchasing all of the issued and
outstanding shares of RVDC from Dr. Damadian for 10,000 shares of the
common stock of FONAR. The business of RVDC, continued by HMCA was the
management of MRI diagnostics imaging centers in New York, Florida and
Georgia.
The Company has accounted for the acquisition in a manner similar to
the pooling-of-interests method due to Dr. Damadian's control over both the
Company and RVDC.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 3 - ACQUISITIONS (Continued)
Central Health Care Management Service, Inc.
-------------------------------------------
On January 23, 1998, a wholly-owned subsidiary of HMCA acquired the
business and assets of Central Health Care Management Services, Inc., a
management service organization "MSO" operating in Westchester County, New
York. The purchase price is to be determined in the future based on a
multiple of the net positive cash flow from the acquired business over the
succeeding twelve-month period. The purchase price, when determined, is
payable 1/3 in cash or marketable securities, 1/3 in notes and 1/3 in
shares of common stock of FONAR or HMCA. An advance of $50,000 was remitted
to the seller at the closing date. Based on current financial data, the
purchase price is expected to range from $660,000 to $1,100,000. Included
in accrued liabilities at September 30, 1998 is $1,000,000 representing an
estimate of the additional purchase price. Based on this estimate, the
excess of the cost over the acquired net assets would approximate $850,000.
A&A Services, Inc.
------------------
On March 20, 1998, the Company's physician management subsidiary,
HMCA, consummated the acquisition of the common stock of A&A Services, Inc.
("A&A"), a New York corporation, which manages four primary care practices
in Queens, New York.
Pursuant to the A&A agreements, HMCA acquired all of the common stock
of A&A for $4,000,000 in cash, a note payable for $4,000,000 bearing
interest at 6.0% per annum, payable in 16 equal quarterly installments of
interest and principal, commencing March of 1999, a note payable for
$1,293,000, bearing interest at 6.0% per annum, payable in 60 equal monthly
installments of principal and interest, commencing April 20, 1998, a
deferred payment obligation face amount of $2,000,000 and a contingent
payment based on the acquired operations achieving certain earnings
objectives over the five-year period following the acquisition date.
The promissory notes are collateralized by all of the assets of the
acquired operations and are guaranteed by FONAR.
The deferred payment obligation of $2,000,000 is convertible into
shares of HMCA's common stock upon the effectiveness of an Initial Public
Offering ("IPO") of HMCA's securities, provided the IPO is completed by
September 20, 2000. In the event an IPO of HMC's securities is not
completed by such date, the deferred payment obligation of $2,000,000 is
then payable over the following four years with interest at 6.0% per annum.
At such time when the deferred payment obligation is converted into shares
of HMC's common stock, the holders of such shares will then have certain
price protection guarantees from FONAR for a two-year period following such
conversions.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 3 - ACQUISITIONS (Continued)
The acquisition was accounted for as a purchase, under which the
purchase price was allocated to the acquired assets and assumed liabilities
based upon fair values at the date of the acquisition. The excess of the
purchase price over the fair value of the net assets acquired amounted to
approximately $10,448,000 and is being amortized on a straight-line basis
over 20 years. The accompanying consolidated financial statements include
the operations of A&A from the date of the acquisition.
Subject to the acquired business achieving certain earnings objectives
over the five-year period following the date of acquisition, additional
monies would be due to the sellers. The contingent additional purchase
price is not determinable as of June 30, 1998 and, accordingly, has not
been included in the allocated purchase price in light of the contingent
nature of the arrangement. If the earnings objectives are ultimately
achieved, the additional purchase price will be recorded as additional
goodwill subject to amortization over the stated period.
Dynamic Health Care Management, Inc.
------------------------------------
On August 20, 1998, the Company's physician management subsidiary,
HMCA, consummated the acquisition of the common stock of Dynamic Health
Care Management, Inc. ("Dynamic"), a New York corporation, which manages
three physician practices on Long Island, New York. The practices consist
of internal medicine, physiatry and physical rehabilitation.
Pursuant to the Dynamic agreements, HMCA acquired all of the common
stock of Dynamic for $2,000,000 in cash, a note payable for $1,265,000
bearing interest at 8% per annum, payable in sixty monthly installments, or
commencing one month following the closing date, a note payable for
$2,870,000 bearing interest at 8% per annum payable in three annual
installments of principal and interest commencing one year after the
closing date, and convertible notes face amount of $5,490,000, payable in
thirty-six monthly installments of principal and interest, commencing two
years after the closing date.
The promissory notes are collateralized by all of the assets of the
acquired operations and are guaranteed by the Company.
A substantial portion of the convertible notes of $5,490,000 are
convertible into shares of HMCA's common stock upon the effectiveness of an
Initial Public Offering ("IPO") of HMCA's securities providing the IPO is
consummated within two years of the closing date.
The acquisition was accounted for as a purchase, under which the
purchase price was allocated to the acquired assets and assumed liabilities
based upon fair values at the date of the acquisition. The excess of the
purchase price over the fair value of the net assets acquired amounted to
$8,951,907 and is being amortized on a straight-line basis over 20 years.
The accompanying consolidated financial statements include the operations
of Dynamic from the date of acquisition, August 20, 1998.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 4 - MARKETABLE SECURITIES
---------------------
The following is a summary of marketable securities at September 30, 1998:
(000's omitted)
---------------
Unrealized
Holdings Fair Market
Cost Gains (Loss) Value
--------- ----------- -----------
U.S. Government
Obligations $ 6,015 $ 23 $ 6,038
Corporate and government
agency bonds 2,598 13 2,611
Equity securities
including
mutual stock funds 11,005 (1,318) 9,687
--------- ----------- -----------
$19,618 $(1,282) $18,336
========= =========== ===========
NOTE 5 - ACCOUNTS RECEIVABLE, NET
------------------------
Accounts receivable, net is comprised of the following:
(000's omitted)
---------------
September 30, 1998 June 30, 1998
------------------ -------------
Receivable from equipment
sales $ 1,205 $ 1,930
Receivables assigned from
related PC's 14,125 10,344
Less: Allowance for
doubtful accounts
and contractual
allowances (2,997) (2,397)
------- -------
$12,333 $ 9,877
======= =======
The Company's receivable assigned from the related PC's substantially
consists of fees outstanding under management agreements and service
contracts 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.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 5 - ACCOUNTS RECEIVABLE, NET (Continued)
Approximately 14% and 13% of the PC's September 30, 1998 and September
30, 1997 imaging revenue was derived from the delivery of services, of
which the timing of payment is substantially contingent upon the timing of
settlement of pending litigation involving the recipient of services and
third parties (Letter of Protection or "LOP-type" accounts receivable). By
its nature, the realization of a substantial portion of these receivables
is expected to extend beyond one year from the date the service was
rendered. The Company anticipates that a material amount of its accounts
receivable will be outstanding for periods in excess of twelve months in
the future. The Company considers the aging of its accounts receivable in
determining the amount of allowance for doubtful accounts. Credit losses
associated with the receivables are provided for in the consolidated
financial statements and have historically been within management's
expectations.
For LOP-type receivables, the Company provides for uncollectible
accounts at substantially higher rates than any other revenue source.
NOTE 6 - INVENTORIES
Inventories included in the accompanying consolidated balance
sheets consist of:
(000's omitted)
September 30, 1998 June 30, 1998
------------------ -------------
Purchased parts,
components and
supplies $2,542 $ 2,549
Work-in-process 958 965
------ -------
$3,500 $ 3,514
====== =======
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended September 30, 1998 and 1997, the Company
paid $188,827 and $91,806 for interest, respectively. During the three
months ended September 30, 1998 and 1997, the Company paid $1,076 and $0
for income taxes, respectively.
During the three months ended September 30, 1998, the Company acquired
the assets and assumed the liabilities of Dynamic. The transaction had the
following non-cash impact on the balance sheet:
(000,s omitted)
-------------
Accounts receivable $ 1,900
Equipment 60
Intangibles 8,952
Accrued Liabilities (75)
Notes payable to sellers (8,837)
----------
Net Cash Used For Acquisition $ 2,000
==========
NOTE 8 - GOVERNMENT REGULATIONS
The healthcare industry is highly regulated by numerous laws,
regulations, approvals and licensing requirements at the federal, state and
local levels. Regulatory authorities have very broad discretion to
interpret and enforce these laws and promulgate corresponding regulation.
The Company believes that its operations under agreements pursuant to which
it is currently providing services are in material compliance with these
laws and regulations. However, there can be no assurance that a court or
regulatory authority will not determine that the Company's operations
(including arrangements with new or existing clients) violate applicable
laws or regulations.
If the Company's interpretation of the relevant laws and regulations
is inaccurate, the Company's business and its prospects could be materially
and adversely affected. The following are among the laws and regulations
that affect the Company's operations and development activities; corporate
practice of medicine; fee splitting; anti-referral laws; anti-kickback
laws; certificates of need, regulation of diagnostic imaging; no-fault
insurance; worker's compensation; and proposed healthcare reform
legislation.
NOTE 9 - Litigation
----------
On August 4, 1998, Beal Bank filed a notice of motion for summary
judgment against Melville Magnetic Resonance Imaging, P.C. ("Melville
Magnetic") and the Company. The motion for summary judgement seeks to
recover $733,855, plus accrued interest of $221,809 for payment of a bank
loan executed by Melville Magnetic and guaranteed by the Company. In the
event a judgement is levied against the Company as a guarantor on the loan,
the Company will exercise its rights to seek recovery from Melville
Magnetic.
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 10 - PROFORMA INFORMATION
The Company's consolidated financial statements for the three months
ended September 30, 1997 do not include the results of operations of A&A
and Dynamic and the consolidated financial statements for the three months
ended September 30, 1998 do not include the results of operations of
Dynamic for the period July 1, 1998 through August 20, 1998. The following
summarizes the unaudited proforma results of operations for the three
months ended September 30, 1998, and 1997, assuming the foregoing
acquisitions had occurred on June 30, 1997 (in thousands, except per share
data):
1998 1997
------------ -----------
(Unaudited) (Unaudited)
Revenues, net $ 8,215 $ 9,022
Loss from
operations $ (3,044) $ (2,594)
Income (loss)
before income
taxes $ (2,656) $ (1,883)
Fully diluted
net income
(loss) per
share $(.04) $(.03)
NOTE 11 - SEGMENT 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 following table shows in thousands of dollars net revenues,
operating income and other financial information by industry segment for
the three months ended September 30, 1998 and 1997:
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 11 - SEGMENT INFORMATION (continued)
1998 1997
Net revenues: ------- -------
Medical equipment $ 1,338 $ 2,454
Physician practice management 6,473 4,601
Intersegment eliminations ( 275) ( 327)
------- -------
Total $ 7,536 $ 6,728
======= =======
Income (loss) from operations:
Medical equipment $ (4,157) $ (3,887)
Physician practice management 862 697
------- -------
Total $ (3,295) $ (3,190)
======= =======
Depreciation and amortization:
Medical equipment $ 395 $ 311
Physician practice management 604 550
------- -------
Total $ 999 $ 861
======= =======
Capital expenditures:
Medical equipment $ 1,252 $ 435
Physician practice management 88 848
------- -------
Total $ 1,340 $ 1,283
======= =======
At September 30, At June 30,
1998 1998
---------------- -----------
Identifiable assets:
Medical equipment $ 70,726 $ 79,236
Physician practice management 40,151 29,212
------- -------
Total $ 110,877 $108,448
======= =======
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
For the fiscal quarter ended September 30, 1998 (first quarter of
fiscal 1999), the Company reported a net loss of $2.8 million on
revenues of $7.5 million as compared to a net loss of $2.3 million on
revenues of $6.7 million for the first quarter of fiscal 1998.
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 practice
management, a new line of business for the Company, which is conducted
through Fonar's wholly-owned subsidiary, Health Management Corporation
of America ("HMCA").
HMCA income from operations was approximately $862,000 for the
first quarter of fiscal 1999 compared to operating income of $697,000
for the first quarter of fiscal 1998. The results for fiscal 1998
reflected the profitability of HMCA's five acquisitions, Dynamic
Health Care Management, Inc. ("Dynamic"), A & A Services, Inc. ("A &
A"), Central Health Care Management Services LLC ("Central Health"),
Affordable Diagnostics, Inc. and its related companies ("Affordable")
and Raymond V. Damadian, M.D. MR Scanning Centers Management Company
and two related Florida companies ("RVDC"). Dynamic is a management
services organization (MSO) managing three multi-specialty physician
practices in Nassau and Suffolk Counties in New York, A & A is an MSO
managing four primary care practices in Queens County and Central
Health is a multi-specialty MSO in Yonkers, New York. Affordable was
engaged in the business of providing management services, office
space, equipment and non-medical personnel to three diagnostic imaging
centers and one physical rehabilitation center. RVDC was engaged in
the business of providing management and other services to 21
diagnostic imaging centers. Results of operations of Dynamic are
included from and after August 20, 1998, the closing of the
acquisition. Dynamic, A & A and Central Health were acquired following
September 30, 1997, and hence the results of operations for HMCA for
the first quarter of fiscal 1998 do not include the results of
operations of these companies.
The income from operations attributable to HMCA (physician
practice management) was not sufficient to offset the operating loss
from the Company's traditional MRI equipment manufacturing and service
business ($4.2 million for the first quarter of fiscal 1999 as
compared to $3.9 million for fiscal 1998). Accordingly the Company's
consolidated operating loss was $3.3 million for the first quarter of
fiscal 1999 as compared to an operating loss of $3.2 million for the
first quarter of fiscal 1998.
The Company's operating loss was offset in part, however, by
interest income of approximately $777,000 (as compared to interest
income of $1.1 million for the first quarter of fiscal 1998). Interest
income was derived from the interest earned on the Company's cash
deposits and cash equivalents and investments and marketable
securities, which were approximately $57 million as at September 30,
1998.
The principal reason for the Company's operating losses is low
product sales volumes. Sales revenues attributable to the Company's
medical (MRI) equipment business (sales and service) were $1.3 million
for the first quarter of fiscal 1999 as compared to $2.5 million for
the first quarter of fiscal 1998 (against costs of revenues
attributable to the Company's medical equipment business of $1.6
million for the first quarter of fiscal 1999 and $3.2 million for the
first quarter of fiscal 1998). The increased operating losses for the
Company's medical equipment business in the first quarter of fiscal
1999 ($4.2 million operating loss) over the first quarter of fiscal
1998 ($3.9 million operating loss) was attributable primarily to
increases of approximately $400,000 in research and development
expenditures and $200,000 in selling, general and administrative
expenses reduced by the improvement in the spread between the sales
revenue and related cost of revenues for the medical equipment
segment. The Company's efforts to improve equipment sales volume is
focused on research and development (expenditures of $1.6 million for
the first quarter of fiscal 1999 as compared to $1.2 million for the
first quarter of fiscal 1998) to improve the competitiveness of its
products and increasing marketing and sales efforts.
The Company's QUAD (TM) 7000 and QUAD (TM) 12000 MRI scanners,
together with other research and development projects, are intended to
significantly improve the Company's competitive position. The QUAD
scanners are highly competitive and totally new non-claustrophobic
scanners not previously available in the MRI market. At .6 Tesla field
strength, the QUAD 12000 magnet is the highest field "Open MRI" in the
industry, offering non-claustrophobic MRI together with high-field
image quality for the first time.
As part of its marketing program, the Company will also attend
the industry's annual trade show, RSNA (Radiological Society of North
America) in November 1998. The Company believes that it is uniquely
positioned to take advantage of the rapidly expanding "Open MRI"
market, as the manufacturer of the only high-field "Open MRI" in the
industry.
The Company expects marked demand for its high-field "Open MRI"
scanners since image quality increases are currently resulting from
the company's new R&D investments and from the higher magnetic field
of its Open scanner. In addition, 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.
With respect to the revenues attributable to the Company's
physician practice management business, the difference between the
$6.5 million in revenues for the first quarter of fiscal 1999 and $4.6
million in revenues for the first quarter of fiscal 1998 reflects
approximately $2.1 million in revenues attributable to Dynamic, A & A
and Central Health, its most recent acquisition.
The Company has continued its cost containment programs, which
include increasing the portion of manufacturing conducted on the
Company's premises. This has enabled the Company to achieve
significantly lower manufacturing costs than would have otherwise been
experienced in the production of its QUAD scanners. This has enabled
the Company to pass on to customers a much needed reduction in the
sales price of MRI scanners.
The Company has continued its efforts to increase scanner sales
in foreign countries as well as domestically. Revenues from foreign
product sales were $306,000 (approximately 62% of product sales
revenues and 4% of all revenues) for the first quarter of fiscal 1999,
against costs of revenues for such sales of $530,000 (approximately
62% of costs of revenues for product sales and 9% of all costs of
revenues). This compares to $696,371 in foreign product sales revenues
in the first quarter of fiscal 1998 (approximately 46% of product
sales revenues and 10% of all revenues) against $939,785 in costs of
foreign product sales revenues (approximately 43% of costs of revenues
for product sales and 10.0% of all costs of revenues) for the first
quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined from $42 million at June 30,
1998 to $34 million at September 30, 1998. Principal uses of cash
during the quarter included; cash used for acquisition of Dynamic $2
million (see Note 3- Dynamic Acquisition), capital expenditures $1.3
million, payment of special dividend to shareholders $1.3 million,
purchase of treasury stock $.2 million and $3 million to fund the loss
for the quarter.
Marketable securities approximated $18 million as of September
30, 1998 as compared to $20 million as of June 30, 1998. The
unrealized loss on marketable securities increased from $42,000 at
June 30, 1998 to $1,282,000 at September 30, 1998. Subsequent to
September 30, 1998, the unrealized loss on marketable securities has
decreased from $1,282,000 at September 30, 1998 to approximately
$200,000 at November 16, 1998 due to the improvement in market
conditions for equity securities.
As of September 30, 1998, the Company had no unused credit
facilities with banks or financial institutions.
The Company's business plan currently includes an aggressive
program for manufacturing and selling its new line of QUAD scanners
and expanding its new physician practice management business.
The Company believes that it has sufficient cash resources and
other liquid assets to support its operations.
The Company has assessed and continues to assess the impact of
the Year 2000 Issue (Y2K) on its financial reporting systems and
operations. The Year 2000 Issue is the result of computer programs
being written using two digits (rather than four) to define the
applicable year. The Company is developing a plan to meet this issue.
The Company is reviewing all in-house computer based systems. The MIS
department is updating or replacing older systems that are not Y2K
compatible. The Company is also reviewing and has started to plan
changes to its existing customer base of MRI scanners. The Company
expects that all computer based systems will be Y2K compliant and in
the final phase of testing in the second quarter of 1999. Based on
preliminary information, costs of addressing these items are currently
not expected to have a material adverse impact on the Company's
financial position.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There were no material changes in litigation for the first
quarter of fiscal 1999 from that described in Form 10-K for the fiscal
year ended June 30, 1998.
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:
(1) Form 8-K filed on April 7, 1998 for acquisition of A & A.
Financial Statements for A & A filed by Amendment on June 5, 1998.
(2) Form 8-K filed on September 4, 1998 for acquisition of
Dynamic. Financial statements for Dynamic filed by Amendment on
November 3, 1998.
<PAGE>
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 16, 1998
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