FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10248
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FONAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Marcus Drive, Melville, New York 11747
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(631) 694-2929
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Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at November 6, 2002
- ----------------------------------------- -------------------------------
Common Stock, par value $.0001 74,456,638
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 7,836,287
FONAR CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2002
and June 30, 2002 3
Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 2002 and
September 30, 2001 5
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the Three Months Ended
September 30, 2002 and September 30, 2001 6
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2002 and
September 30, 2001 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 22
Certification 23
Page 2
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED)
ASSETS
Sept. 30, June 30,
2002 2002
(UNAUDITED)
Current Assets: ----------- ---------
Cash and cash equivalents $ 8,094 $ 7,494
Marketable securities 5,517 5,573
Restricted cash 5,500 5,500
Accounts receivable - net 1,183 781
Accounts receivable - related medical practices - net 13,303 13,311
Costs and estimated earnings in excess
of billings on uncompleted contracts 625 1,153
Inventories 4,675 4,664
Investment in sales-type leases with related parties 134 1,797
Investment in sales-type lease 123 120
Prepaid expenses and other current assets 1,655 1,102
---------- --------
Total current assets 40,809 41,495
---------- --------
Property and equipment - net 10,003 10,596
Advances and notes to related parties - net 1,541 1,497
Investment in sales-type leases - related parties 796 815
Investment in sales-type lease 709 741
Notes receivable 132 175
Management agreements - net 14,274 14,520
Other intangible assets - net 2,878 2,649
Other assets 342 342
---------- --------
$ 71,484 $ 72,830
========== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 3
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's OMITTED, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY Sept. 30, June 30,
2002 2002
Current Liabilities: (UNAUDITED)
Current portion of long-term debt and ---------- --------
capital leases $ 9,245 $ 9,776
Accounts payable 4,272 4,077
Other current liabilities 7,764 7,556
Customer advances 4,805 4,308
Customer advances - related parties 972 3,400
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,002 1,115
Income taxes payable 758 758
---------- --------
Total Current Liabilities 30,818 30,990
Long-term debt and capital leases
less current portion 450 833
Unearned revenue - license fee 4,095 4,680
Other non-current liabilities 347 360
---------- --------
Total Liabilities 35,710 36,863
---------- --------
Minority interest 222 272
---------- --------
STOCKHOLDERS' EQUITY
Class A non-voting Preferred Stock $.001 par value;
8,000,000 authorized, 7,836,287 issued and outstanding
at September 30 and at June 30, 2002 1 1
Common Stock $.0001 par value; 85,000,000
shares authorized; 73,697,536 issued and outstanding
at September 30, 2002 and 71,582,243 at June 30, 2002 7 7
Class B Common Stock $ .0001 par value; 4,000,000
shares authorized, (10 votes per share), 4,211 issued
and outstanding at September 30 and June 30, 2002 - -
Class C Common Stock $.0001 par value; 10,000,000 shares
authorized, (25 votes per share), 9,562,824 issued
and outstanding at September 30 and at June 30, 2002 1 1
Paid-in capital in excess of par value 122,726 120,156
Accumulated other comprehensive income 78 85
Accumulated deficit (85,589) (82,883)
Notes receivable from stockholders ( 997) ( 997)
Treasury stock, at cost - 291,064 shares of common stock
at September 30, 2002 and June 30, 2002 ( 675) ( 675)
---------- --------
Total Stockholders' Equity 35,552 35,695
---------- --------
Total Liabilities and Stockholders' Equity $ 71,484 $ 72,830
========== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 4
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(000's OMITTED, except per share data) FOR THE THREE MONTHS ENDED
Sept. 30, Sept. 30,
2002 2001
REVENUES ---------- --------
Product sales - net $ 2,800 $ 1,036
Product sales - related parties - net 3,159 847
Service and repair fees - net 456 500
Service and repair fees - related parties - net 63 42
Management and other fees - related medical
practices - net 6,532 7,143
License fees and royalties 648 585
---------- --------
Total Revenues - Net 13,658 10,153
---------- --------
COSTS AND EXPENSES
Costs related to product sales 1,880 719
Costs related to product sales - related parties 1,886 744
Costs related to service and repair fees 680 553
Costs related to service and repair
fees - related parties 94 46
Costs related to management and other
fees - related parties 3,847 3,970
Research and development 1,246 1,205
Selling, general and administrative 5,540 4,742
Compensatory element of stock issuances for
selling, general and administrative expenses 747 1,108
Provision for bad debts 54 143
Amortization of management agreements 246 305
---------- --------
Total Costs and Expenses 16,220 13,535
---------- --------
Loss From Operations ( 2,562) ( 3,382)
Financing Costs Paid in Stock and Warrants - ( 294)
Interest Expense ( 246) ( 355)
Interest Income 256 289
Other Income (Expense) ( 1) 20
Minority Interest in Income of Partnerships ( 152) ( 119)
---------- --------
Loss Before Provision for Income Taxes ( 2,705) ( 3,841)
Provision for Income Taxes 1 6
---------- --------
NET LOSS $ ( 2,706) $( 3,847)
========== ========
Basic and Diluted Net Loss per share $ (.04) $ (.06)
========== ========
Weighted average number of shares outstanding 72,249 59,440
========== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 5
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(000'S OMITTED) FOR THE THREE MONTHS ENDED
Sept. 30, Sept. 30,
2002 2001
---------- --------
Net loss $ (2,706) $ (3,847)
Other comprehensive income, net of tax:
Unrealized gains on securities,
net of tax 78 101
---------- --------
Total comprehensive loss $ (2,628) $ (3,746)
========== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED) FOR THE THREE MONTHS ENDED
Sept. 30, Sept. 30,
2002 2001
---------- --------
Cash Flows from Operating Activities
Net loss $ ( 2,706) $( 3,847)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in net income of partnerships 152 119
Depreciation and amortization 1,154 1,266
Provision for bad debts 54 143
Compensatory element of stock issuances 747 1,108
Stock issued for professional services 419 87
Interest expense paid in stock 10 -
Financing costs paid in stock and warrants - 294
Amortization of unearned license fee ( 585) ( 585)
(Increase) decrease in operating assets, net:
Accounts and notes receivable ( 338) 465
Costs and estimated earnings in excess of
billings on uncompleted contracts 528 ( 733)
Inventories ( 11) ( 467)
Principal payments on sales type lease-related
parties 1,682 31
Principal payments on sales type lease 29 39
Prepaid expenses and other current assets ( 553) 35
Other assets - 9
Receivables and advances to related parties 92 ( 1,267)
Increase (decrease) in operating liabilities, net:
Accounts payable 195 ( 246)
Other current liabilities 208 ( 406)
Customer advances ( 1,901) 170
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,887 ( 251)
Other liabilities ( 13) 10
Income taxes payable - 6
---------- --------
Net cash provided by (used in) operating activities 1,050 ( 4,020)
---------- --------
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 6
FONAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED) FOR THE THREE MONTHS ENDED
Sept. 30, Sept. 30,
2002 2001
---------- --------
Cash Flows from Investing Activities:
Sales of marketable securities 49 48
Purchases of property and equipment ( 313) ( 200)
Costs of capitalized software development ( 224) ( 181)
Cost of patents and copyrights ( 104) -
---------- --------
Net cash used in investing activities ( 592) ( 333)
---------- --------
Cash Flows from Financing Activities:
Distributions to holders of minority interests ( 122) ( 83)
Repayment of borrowings and capital
lease obligations ( 892) ( 2,009)
Proceeds from exercise of stock options
and warrants 1,156 -
---------- --------
Net cash provided by (used in) financing activities 142 ( 2,092)
---------- --------
Increase (Decrease) in Cash and Cash Equivalents 600 ( 6,445)
Cash and Cash Equivalents Beginning of Period 7,494 14,040
---------- --------
Cash and Cash Equivalents End of Period $ 8,094 $ 7,595
========== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
Page 7
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2003. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K filed on October 7,
2002 for the fiscal year ended June 30, 2002.
NOTE 2 - DESCRIPTION OF BUSINESS
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation, which
was incorporated on July 17, 1978. FONAR is engaged in the research,
development, production and marketing of medical scanning equipment, which uses
principles of Magnetic Resonance Imaging ("MRI") for the detection and diagnosis
of human diseases. In addition to deriving revenues from the direct sale of MRI
equipment, revenue is also generated from its installed-base of customers
through its service and upgrade programs.
Health Management Corporation of America ("HMCA") was organized by the Company
in March 1997, as a wholly-owned subsidiary, in order to enable the Company to
expand into the business of providing comprehensive management services to
physicians' practices and other medical providers, including diagnostic imaging
centers and ancillary services. The services provided by the Company include
development, administration, leasing of office space, facilities and medical
equipment, provision of supplies, staffing and supervision of non-medical
personnel, legal services, accounting, billing and collection and the
development and implementation of practice growth and marketing strategies.
HMCA entered the physician and diagnostic management services business through
the consummation of two acquisitions in fiscal 1997, two acquisitions in fiscal
1998, and one acquisition consummated in fiscal 1999. The acquired companies in
all cases were actively engaged in the business of managing medical providers.
The medical providers are diagnostic imaging centers, principally MRI scanning
centers, multi-specialty practices and primary care practices.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of FONAR Corporation,
its majority and wholly-owned subsidiaries and partnerships. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company does not consolidate the medical practices which it manages, as it
has previously determined that consolidation of such medical practices is not
appropriate because the underlying management agreements do not meet all of the
six criteria of Emerging Issues Task Force ("EITF") Consensus No. 97-2.
Page 8
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Inventories
Inventories consist of purchased parts, components and supplies, as well as
work-in-process, and are stated at the lower of cost (materials, labor and
overhead determined on the first-in, first out method) or market.
Management Agreements
Management agreements are being amortized using the straight-line method over
20-year term of the agreements.
Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment, intangibles and management contracts, when
there are indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is calculated by
comparing anticipated discounted future cash flows with the carrying value of
the related asset. In performing this analysis, management considers such
factors as current results, trends, and future prospects, in addition to other
economic factors.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on weighted average shares
outstanding and excludes any potential dilution. In accordance with EITF Topic
D-95, "Effect of Participating Convertible Securities on the Computation of
Basic Earnings Per Share," the Company's participating convertible securities,
which include the Class A Non-voting Preferred stock, Class B common stock and
Class C common stock, are not included in the computation of basic or diluted
earnings per share since they are antidilutive. In accordance with EITF Topic
D-95, prior period's earnings per share were restated. Diluted earnings (loss)
per share reflects the potential dilution from the exercise or conversion of all
dilutive securities into common stock based on the average market price of
common shares outstanding during the period.
Options and warrants to purchase approximately 5,921,000 and 4,036,000 shares of
common stock were outstanding at September 30, 2002, and 2001, respectively, but
were not included in the computation of diluted earnings per share due to losses
for all years, as a result of the options and warrants being antidilutive.
Page 9
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Accounting for Business Combinations" and SFAS No. 142, "Accounting for
Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting and
prohibits the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. According to SFAS No. 142, goodwill,
which arises from business combinations after June 30, 2001, cannot be
amortized. In addition, SFAS No. 142 requires the discontinuation of goodwill
amortization and the amortization of intangible assets with indeterminate lives
effective the date the Company adopts the statement, was adopted on June 30,
2002. The adoption of SFAS No. 142 did not have a significant impact on the
consolidated financial statements and the Company expects to continue to
amortize all identifiable intangible assets.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion No.
30, "Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of the carrying amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The provisions of SFAS 144 have been adopted by the Company as of July 1,2001.
The adoption of SFAS 144 did not have a significant impact to the consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145 ("SFAS 145"), "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishments", and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements", which amended SFAS No. 4, will affect income
statement classification of gains and losses from extinguishment of debt. The
Company adopted SFAS 145 on January 1, 2002 on the prospective basis and the
adoption did not have a significant impact to the consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity to be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS 146 also establishes that fair value is the objective for
Page 10
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of SFAS 146 did not have a
significant impact to the consolidated financial statements.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at September 30, 2002:
(000's omitted)
Unrealized Fair
Holdings Market
Cost Gains Value
------ ---------- -------
U.S. Government $3,665 $ 38 $3,703
Obligations
Corporate bonds 1,773 41 1,814
------ ------- ------
$5,438 $ 79 $5,517
====== ======= ======
NOTE 5 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following at September 30, 2002:
(000's omitted)
Allowance for
Doubtful
accounts and
Gross contractual
Receivable allowances Net
---------- ------------- -------
Receivable from equipment
sales and service contracts $ 2,260 $ 1,077 $ 1,183
======= ======= =======
Receivables from related PC's $15,372 $ 2,069 $13,303
======= ======= =======
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.
Page 11
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 5 - ACCOUNTS RECEIVABLE, NET (Continued)
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 54%
and 56% of the PC's net revenues for the three months ended September 30, 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 71% and 79% of the consolidated net revenues for the three months
ended September 30, 2002 and 2001, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
Summarized income statement data for the three months ended September 30, 2002
related to the 21 unconsolidated medical practices managed by the Company is as
follows:
(000's omitted)
Patient Revenue - Net $8,592
======
Income from Operations $ 139
======
Net Income $ 7
======
NOTE 6 - INVENTORIES
Inventories included in the accompanying consolidated balance sheet consist of:
(000's omitted)
Sept. 30, 2002
--------------
Purchased parts, components
and supplies $3,484
Work-in-process 1,191
-------
$4,675
=======
Page 12
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 7 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
(000's omitted)
1) Information relating to uncompleted contracts as of September 30, 2002 is as
follows:
Costs incurred on uncompleted Contracts $3,840
Estimated earnings 2,454
-------
6,294
Less: Billings to date 8,671
-------
$(2,377)
=======
Included in the accompanying consolidated balance sheet under the following
captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 625
Billings in excess of costs and estimated
earnings on uncompleted contracts (3,002)
-------
$(2,377)
=======
2) Customer advances consist of the following:
As of September 30, 2002
------------------------
Related
Total Parties Other
-------- -------- -------
Total advances from customers $14,448 $ 6,402 $8,046
Less: Advances from customers
on contracts under construction 8,671 5,430 3,241
------- ------- ------
$ 5,777 $ 972 $4,805
======= ======= ======
NOTE 8 - STOCKHOLDER'S EQUITY
Common Stock
During the quarter ended September 30, 2002:
a) The Company issued 506,459 shares of common stock to employees as
compensation of $688,365 under stock bonus plans.
b) The Company issued 171,380 shares of common stock to consultants and others
of $208,601.
c) The Company issued 323,283 shares of common stock for professional services
of $426,442.
d) The Company issued 26,671 shares of common stock of $31,203 upon the
exercise of stock options.
Page 13
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 8 - STOCKHOLDER'S EQUITY (Continued)
Common Stock (Continued)
During the quarter ended September 30, 2001:
a) The Company issued 55,133 shares of common stock for professional services
of $87,019.
b) The Company issued 317,339 shares of common stock to employees as
compensation of $572,118 under stock bonus plans.
c) The Company issued 125,000 shares of common stock for consulting services
of $197,506.
Warrants
During the first quarter of fiscal 2003 in accordance with our agreements with
The Tail Wind Fund, Ltd., the Company issued replacement callable warrants to
purchase 2,000,000 shares, on the same terms as the original warrants. The
original warrants were exercised at reduced prices: 1,000,000 at $1.50 per share
during the year ended June 30, 2002, and 1,000,000 at $1.125 per share during
the first quarter of fiscal 2003. The exercise price of these replacement
callable warrants will vary depending on the market price of the stock, subject
to a minimum exercise price of $2 per share and maximum of $6 per share.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended September 30, 2002 and 2001, the Company paid
approximately $283,000 and $289,000 for interest, respectively. In addition,
during the three months ended September 30, 2002 and 2001, the Company paid
approximately $1,000 and $0 for income taxes, respectively.
During the three months ended September 30, 2002, the Company issued 87,500
shares of the common stock, valued at $90,125, as compensation to the holder of
a minority interest in certain limited partnerships involving MRI facilities.
NOTE 10 - SEGMENT AND RELATED INFORMATION
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of physician practices, including diagnostic
imaging services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies as disclosed in the Company 10-K as
of June 30, 2002. All inter-segment sales are market-based. The Company
evaluates performance based on income or loss from operations.
Page 14
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 10 - SEGMENT AND RELATED INFORMATION (Continued)
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 Quarter ended September 30, 2002:
Net revenue from external customers $ 7,126 $ 6,532 $13,658
Inter-segment net revenues $ 361 --- $ 361
Operating loss $(2,507) $ (55) $(2,562)
Depreciation and amortization $ 634 $ 520 $ 1,154
Compensatory element of stock issuances $ 240 $ 507 $ 747
Total identifiable assets $38,671 $34,437 $73,108
Capital expenditures $ 100 $ 213 $ 313
For the Quarter ended September 30, 2001:
Net revenue from external customers $ 3,010 $ 7,143 $10,153
Inter-segment net revenues $ 353 --- $ 353
Operating (loss) income $(3,937) $ 555 $(3,382)
Depreciation and amortization $ 636 $ 630 $ 1,266
Compensatory element of stock issuances $ 565 $ 543 $ 1,108
Total identifiable assets $42,548 $36,906 $79,454
Capital expenditures $ 40 $ 160 $ 200
NOTE 11 - FOREIGN SALES
During the three months ended September 30, 2002 and 2001, the Company had
foreign revenues of approximately $252,000 and $299,000, respectively.
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FONAR CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the fiscal quarter ended September 30, 2002 (first quarter of fiscal
2003), the Company reported a net loss of $2.7 million on revenues of $13.7
million as compared to a net loss of $3.8 million on revenues of $10.2 million
for the first quarter of fiscal 2002.
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 216%, from $1.9 million for
the first three months of fiscal 2002 to $6.0 million for the first three months
of fiscal 2003, reflecting increased sales of the Stand-Up MRI scanners. Service
and repair revenues declined slightly by 4%, from $542,000 for the first three
months of fiscal 2002 to $519,000 for the first three months of fiscal 2003.
Consequently, overall revenues recognized by the Company's MRI equipment
manufacturing and service business increased by 137% from $3.0 million in the
first three months of fiscal 2002 to $7.1 million in the first three months of
fiscal 2003. There were significant increases in scanner sales to both unrelated
parties, from $1.0 million in the first three months of fiscal 2002 to $2.8
million in the first three months of fiscal 2003 (170%) and to related parties,
from $847,000 in the first three months of fiscal 2002 to $3.2 million in the
first three months of fiscal 2003 (273%). As a result, the operating loss from
the Company's MRI equipment manufacturing and service business improved to $2.5
million for the three months of fiscal 2003 from $3.9 million for the first
three months of fiscal 2002.
The dramatic increase in product sales reflected market acceptance of the
Company's Stand-Up(TM) MRI scanners. During the first three months of fiscal
2003, revenues of approximately $5.5 million were recognized from sales of
Stand-Up(TM) MRI scanners and $100,000 from sales of a refurbished Beta MRI
scanner. During the first three months of fiscal 2002, the Company recognized
revenues of approximately $1.6 million from the sale of Stand-Up(TM) MRI
scanners and $164,000 from the sales of QUAD(TM) scanners.
There were approximately $252,000 in foreign sales revenues for the first
three months of fiscal 2003 as compared to approximately $299,000 in foreign
sales revenues for the first three months in fiscal 2002.
HMCA, which provides physician and diagnostic management services,
experienced an operating loss of $55,000 for the first three months of fiscal
2003 compared to operating income of $555,000 for the first three months of
fiscal 2002. The decline in HMCA income was attributable to lower revenues
reflecting a decline in management fees ($6.5 million for the first three months
of fiscal 2003 compared to $7.1 million for the first three months of fiscal
2002) from the facilities and medical practices managed by HMCA. The principal
cause for the decline in HMCA revenues was the closing of five facilities in
fiscal 2002.
Accordingly, the Company's consolidated operating loss was $2.6 million for
the first three months of fiscal 2003 as compared to a consolidated operating
loss of $3.4 million for the first three months of fiscal 2002.
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FONAR CORPORATION AND SUBSIDIARIES
Although the Company's scanner sales increased significantly from fiscal
2002, increased costs and expenses, together with a decline in management fee
revenues recognized by HMCA, are the principal reasons for the Company's
improved but continuing operating losses. Product sales revenues attributable to
the Company's medical (MRI) equipment business were $6.0 million for the first
three months of fiscal 2003 as compared to $1.9 million for the first three
months of fiscal 2002. Costs of revenues attributable to the Company's product
sales were $3.8 million for the first three months of fiscal 2003 as compared to
$1.5 million for the first three months of fiscal 2002.
As a result, the Company recognized a gross profit from product sales of
$2.2 million and a gross profit margin of 37% for the first quarter of fiscal
2003 as compared to a gross profit of $420,000 and a gross profit margin of 22%
for the first quarter of fiscal 2002. Our gross profit margin on product sales
increased as a result of greater efficiencies realized as a result of our
increased sales volume.
The Company's efforts to improve equipment sales volume have emphasized
increased marketing and sales efforts and research and development to improve
the competitiveness of its products.
As a result, we incurred expenses of approximately $733,000 in our new
advertising program, which includes television and radio advertising, during the
first quarter of fiscal 2003. This was the principal reason selling, general and
administrative expenses increased from $4.7 million in the first three months of
fiscal 2002 to $5.5 million in the first three months of fiscal 2003. Research
and development expenditures remained constant at $1.2 million for the first
three months of fiscal 2003 as compared to the first three months of fiscal
2002.
There was a decrease of 33% in compensatory element of stock issuance from
approximately $1.1 million for the first three months of fiscal 2002 to
approximately $747,000 for the first three months of fiscal 2003, reflecting a
lesser use of Fonar's stock bonus plan.
Interest expense of $246,000 in the first three months of fiscal 2003
decreased by 31% as compared to $355,000 for the first three months of fiscal
2002 due to the repayment of indebtedness. In addition, we had financing costs
of $294,000 paid in stock and warrants in the first fiscal quarter 2002 as
compared to no such costs in the first fiscal quarter of 2003.
Inventories remained constant at $4.7 million at September 30, 2002 as
compared to June 30, 2002 as the Company purchased parts and commenced
manufacturing scanners to fill orders and anticipated orders.
Accounts receivable increased to $14.5 million as at September 30, 2002
from $14.1 million as at June 30, 2002, primarily due to increased receivables
from service contracts on MRI scanners.
In July, 2002 General Electric and the Company entered into an agreement
under which General Electric agreed to act as a sales representative for the
Company's Stand-Up(TM) MRI scanners. Fonar has been working closely with GE
Medical Systems to assist them in marketing the Stand-Up(TM) MRI. General
Electric purchased two Stand-Up MRI scanners to resell to its customers in
September 2002.
The Company's Stand-Up(TM), QUAD(TM) and Fonar-360(TM) MRI scanners,
together with the Company's works-in-progress (QUAD-S(TM) MRI) and other works
in progress, are intended to significantly improve the Company's competitive
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FONAR CORPORATION AND SUBSIDIARIES
position. In addition, the Company offers a low cost open scanner, the Echo(TM)
MRI, operating at .3 Tesla field strength for its cost conscious customers.
The Company's Stand-Up(TM) scanner, which operates at 6000 gauss (.6 Tesla)
field strength, allows patients to be scanned while standing or reclining. As a
result, for the first time, MRI is able to be used to show abnormalities and
injuries under full weight-bearing conditions, particularly the spine and
joints. A floor-recessed elevator brings the patient to the height appropriate
for the targeted image region. A custom-built adjustable bed will allow patients
to sit or lie on their backs, sides or stomachs at any angle.
Full-range-of-motion studies of the joints in virtually any direction will be
possible, an especially promising feature for sports injuries.
The Stand-Up(TM) will also be useful for MRI directed neuro-surgical
procedures as the surgeon would have unhindered access to the patient with no
restrictions in the vertical direction. This easy-entry, mid-field-strength
scanner should be ideal for trauma centers where a quick MRI-screening within
the first critical hour of treatment will greatly improve patients' changes for
survival and optimize the extent of recovery.
The Fonar 360(TM) is an enlarged room sized magnet in which the floor,
ceiling and walls of the scan room are part of the magnet frame. This is made
possible by Fonar's patented Iron-Frame(TM) technology which allows the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Consequently, this scanner allows 360 degree access to the
patient and physicians and family members are able to enter the scanner and
approach the patient.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is
sometimes referred to as the Open Sky(TM) MRI. In its Open Sky(TM) version, the
Fonar 360(TM) serves as an open patient friendly scanner which allows 360 access
to the patient on the scanner bed. To optimize the patient-friendly character of
the Open Sky(TM) MRI, the walls, floor, ceiling and magnet poles are decorated
with landscape murals. The patient gap is twenty inches and the magnetic field
strength, like that of FONAR's Stand-Up(TM) and QUAD(TM) MRI scanner, is 0.6
Tesla.
In the future, we may also develop the Fonar 360(TM) to function as an
operating room. We sometimes refer to this contemplated version of the Fonar
360(TM) as the OR-360(TM). In its OR-360(TM) version, which is in the planning
stages, the enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360(TM) would permit full-fledged surgical teams to walk into the
magnet and perform surgery on the patient inside the magnet. Most importantly
the exceptional quality of the MRI image and its capacity to exhibit tissue
detail on the image, can then be obtained real time during surgery to guide the
surgeon in the surgery. Thus surgical instruments, needles, catheters,
endoscopes and the like could be introduced directly into the human body and
guided to the malignant lesion by means of the MRI image. The number of
inoperable lesions should be greatly reduced by the availability of this new
capability. Most importantly treatment can be carried directly to the target
tissue. The interventional OR-360(TM) version of the Fonar 360(TM) is still in
the planning stages. There is not a prototype. A full range of MRI compatible
surgical instruments using ceramic cutting tools and beryllium-copper materials
are commercial available.
The QUAD(TM)MRI scanner also utilizes a 0.6 Tesla iron core electromagnet
and is accessible from four sides. The QUAD(TM)was the first "open" MRI scanner
at high field.
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FONAR CORPORATION AND SUBSIDIARIES
The Company's works in progress include an in-office weight bearing
extremities scanner which will be able to be used to examine the knee, foot,
elbow, hand and wrist. This scanner will allow scans to be performed in under
both weight-bearing and non-weight-bearing conditions.
The Company expects marked demand for its most commanding MRI products, the
Stand-Up(TM) and the Fonar 360(TM), first for their exceptional features in
patient diagnosis and treatment. These scanners additionally provide improved
image quality and higher imaging speed because of their higher field strength of
..6 Tesla.
Liquidity and Capital Resources
As a result of increased sales, the Company's cash reserves improved in the
first quarter of fiscal 2003. Cash, cash equivalents and marketable securities
increased by 4.2% from $13.1 million at June 30, 2002 to $13.6 million at
September 30, 2002. Principal uses of cash during the first quarter of fiscal
2003 included capital expenditures of $313,000, repayment of indebtedness and
capital lease obligations in the amount of $892,000, capitalized software
development costs of $224,000 and capitalized patent and trademark costs of
$104,000.
Marketable securities approximated $5.5 million as of September 30, 2002,
as compared to $5.6 million at June 30, 2002. At September 30, 2002, our
investments in U.S. Government obligations were approximately $3.7 million and
our investments in corporate and government agency bonds were approximately $1.8
million. This has had the intended effect of reducing the volatility of the
Company's investment portfolio.
Cash provided by operating activities for the first quarter of fiscal 2003
approximated $1.1 million. Cash provided by operating activities was
attributable substantially to prepayments from related parties on certain
sales-type leases.
Cash used in investing activities for the first quarter of fiscal 2003
approximated $592,000. The principal uses of cash from investing activities
during the first quarter of fiscal 2003 consisted of expenditures for property
and equipment and capitalized software and patent costs of approximately
$641,000, offset by the proceeds from the sale of marketable securities of
$49,000.
Cash provided by financing activities for the first quarter of fiscal 2003
approximated $142,000. The principal uses of cash in financing activities during
the first quarter of fiscal 2003 consisted of repayment of principal on
long-term debt of approximately $892,000 and the principal sources were proceeds
from exercises of stock options and warrants of $1.2 million.
Total liabilities decreased slightly by 3.1% during the first quarter of
fiscal 2003, from approximately $36.9 million at June 30, 2002 to approximately
$35.7 million at September 30, 2002. The decrease in liabilities was
attributable principally to a decrease in long term debt ($833,000 to $450,000)
and a decrease in current the portion of long term debt ($9.8 million to $9.2
million).
During the first quarter of fiscal 2003 in accordance with our agreements
with The Tail Wind Fund, Ltd., we issued replacement callable warrants to
purchase 2,000,000 shares, on the same terms as the original warrants (which
were exercised at reduced prices: 1,000,000 at $1.50 per share during fiscal
2002 and 1,000,000 at $1.125 per share during the first quarter of fiscal 2003).
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FONAR CORPORATION AND SUBSIDIARIES
The exercise price of these replacement callable warrants will vary depending on
the market price of the stock, subject to a minimum exercise price of $2 per
share and maximum of $6 per share.
As at September 30, 2002, our obligations included approximately $7.8
million in other current liabilities including deferred revenue from license
fees of $2.3 million, unearned revenue on service contracts of $1.2 million,
accrued salaries and payroll taxes of $2.1 million and excise and sales taxes of
$1.9 million.
As of September 30, 2002, we had a bank credit facility of $5,500,000. The
unused portion of the facility was approximately $102,000. 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.
Our working capital surplus as of September 30, 2002 approximates $10.0
million, as compared to a working capital surplus of $10.5 million as of June
30, 2002, declining slightly by 4.9%. This reflects principally a decrease of
$528,000 ($1.2 million at June 30, 2002 as compared to $625,000 at September 30,
2002) in costs and estimated earnings in excess of billings on uncompleted
contracts (this item represents the extent to which the revenues earned on a
contract exceed the advances we received from the customer) and a decrease in
the current portion of investments in sales-type leases with related parties
($1.8 million at June 30, 2002 as compared to $134,000 at September 30, 2002
resulting from prepayments of the leases) offset by an increase in cash of
$600,000 ($7.5 million at June 30, 2002 as compared to $8.1 million at September
30, 2002) and increases in accounts receivable ($14.1 million at June 30, 2002
as compared to $14.5 million at September 30, 2002) and prepaid expenses and
other current assets ($1.1 million at June 30, 2002 as compared to $1.7 million
at September 30, 2002). We have been able to maintain our working capital
surplus notwithstanding our operating losses because of customer advances from
increased sales of our scanner products.
In order to conserve our capital resources, we have issued common stock
under our stock bonus and stock option plans to compensate employees and
non-employees for services rendered. In first quarter of fiscal 2003, the
compensatory element of stock issuances was $747,000 as compared to $1.1 million
for the first quarter of fiscal 2002. Utilization of equity in lieu of cash
compensation has improved our liquidity since it increases cash available for
other expenditures.
The foregoing trends in Fonar's capital resources are expected to improve
as Fonar's MRI scanner products gain wider market acceptance and produce greater
sales revenues.
Fonar has not committed to making capital expenditures in the 2003 fiscal
year other than its intention to continue research and development expenditures
at current levels and to purchase equipment for $35,000. In addition, HMCA plans
to incur expenditures of approximately $140,000 for a new billing system. HMCA
also expects to incur expenditures of approximately $606,000 to refurbish and
improve two MRI facilities.
Our business plan currently includes an aggressive program for
manufacturing and selling our new line of Open MRI scanners. In addition, we are
enhancing our revenue by participating into the physician and diagnostic
management services business through our subsidiary, HMCA. HMCA is in the
process of upgrading the facilities which it manages, most significantly by the
replacement of existing MRI scanners with new Stand-Up(TM) MRI scanners.
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FONAR CORPORATION AND SUBSIDIARIES
Our business plan calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices.
We believe that the above mentioned financial resources, anticipated cash
flows from operations and potential financing sources, will provide the cash
flows needed to achieve the sales, service and production levels necessary to
support our operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investments are in fixed rate instruments. None of the fixed rate
instruments in which we invest extend beyond September 30, 2007. Below is a
tabular presentation of the maturity profile of the fixed rate instruments held
by us at September 30, 2002.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
in Fixed Rate Weighted Average
Date Instruments Interest Rate
------- ------------- ----------------
9/30/03 $3,578,534 5.68%
9/30/04 962,454 5.35%
9/30/05 300,000 5.17%
9/30/06 300,000 5.25%
9/30/07 297,771 5.49%
----------
Total: $5,438,759
==========
Fair Value
at 9/30/02 $5,516,528
==========
All of our revenue, expense and capital purchasing activities are
transacted in United States dollars.
See Note 11 to the consolidated Financial Statements in our Form 10-K for
information on long term debt.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this report, the
principal executive and acting principal financial officer of the Company
concluded that disclosure controls and procedures were adequate.
(b) Change in internal controls. The Company made no significant changes in its
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the
principal executive and acting principal financial officer.
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FONAR CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There were no material changes in litigation for the first three months of
fiscal 2003.
Item 2 - Changes in Securities: None
Item 3 - Defaults Upon Senior Securities: None
Item 4 - Submission of Matters to a Vote of Security Holders: None
Item 5 - Other Information: None
Item 6 - Exhibits and Reports on Form 8-K: We filed a report on Form 8-K on
September 10, 2002, reflecting a change of our accountants from Grassi & Co.,
CPAs, P.C. to Marcum & Kliegman LLP. The reason for this change was that the
individual accountants handling our account left Grassi & Co. and joined Marcum
& Kliegman.
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 18, 2002
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FONAR CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Raymond V. Damadian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fonar Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
person performing the equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 18, 2002
/s/ Raymond V. Damadian
Raymond V. Damadian
President, Principal Executive Officer and Acting Principal
Financial Officer
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