FORM 8
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13, or 15 (d) of THE SECURITIES
EXCHANGE ACT OF 1934
FONAR CORPORATION
(Exact name of registrant as specified in charter)
Commission File No. 0-10248
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items,
financial statements, exhibits or other portions of its Current Report on
Form 8-K (Date of Earliest Event Reported: March 20, 1998) as set forth
in the pages attached hereto:
Item 7 (Financial Statements and Exhibits).
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Amendment to be signed on its behalf
by the undersigned, thereunto duly authorized.
FONAR CORPORATION
(Registrant)
By: /s/ Raymond V. Damadian
Raymond V. Damadian
President and Chairman
Date: June 5, 1998
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
Financial Statements. Separate financial statements of the acquired
business, A&A Services, Inc. and affiliates, are filed under this
amendment to the aforementioned Current Report on Form 8-K of the Company.
Exhibits. Previously filed.
A&A SERVICES, INC.
AND AFFILIATES
FINANCIAL REPORT
DECEMBER 31, 1997 AND 1996
A&A SERVICES, INC. AND AFFILIATES
INDEX TO UNAUDITED FINANCIAL REPORT
DECEMBER 31, 1997 AND 1996
REPORT OF INDEPENDENT ACCOUNTANTS
COMBINED BALANCE SHEETS
At December 31, 1997 and 1996
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the Years Ended December 31, 1997 and 1996
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1996
NOTES TO COMBINED FINANCIAL STATEMENTS
Tabb, Conigliaro & McGann, P.C.
Certified Public Accountants
200 Madison Avenue
Suite 2200
New York, NY 10016
To the Board of Directors and Owners
of A&A Services, Inc. and Affiliates
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
We have audited the accompanying combined balance sheets of A&A Services,
Inc. and Affiliates (the "Company") as of December 31, 1997 and 1996 and
the related combined statements of income and retained earnings, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position
of A&A Services, Inc. and Affiliates as of December 31, 1997 and 1996 and
the combined results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting
principles.
As more fully discussed in Note 8 to the financial statements, A&A
Services, Inc. was acquired by a subsidiary of FONAR Corporation pursuant
to a stock purchase agreement on March 20, 1998.
/s/ TABB, CONIGLIARO & McGANN, P.C.
TABB, CONIGLIARO & McGANN, P.C.
New York, New York
March 31, 1998
A&A SERVICES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
AT DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
---- ----
CURRENT ASSETS: $ 18,673 $ 213,697
Cash and cash equivalents
Accounts receivable - net of billing
adjustments and allowance for
uncollectible accounts of $714,286
at 1997 and $439,658 at
1996 (Notes 2 and 3) 601,258 472,590
Prepaid expenses and other 5,462 2,357
------- -------
TOTAL CURRENT ASSETS 625,393 688,644
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net
of accumulated depreciation and
amortization (Notes 2 and 4) 126,551 144,599
OTHER ASSETS 9.300 6,207
-------- -------
TOTAL ASSETS $761,244 $839,450
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $458,059 $457,752
Deferred taxes payable (Note 2) 28,000 28,000
-------- --------
TOTAL LIABILITIES 486,059 485,752
-------- --------
COMMITMENTS AND OTHER MATTERS (Notes 2, 3, 5, 7 and 8)
STOCKHOLDERS' EQUITY: (Note 6)
Common stock 3,800 3,800
Paid-in capital 66,492 66,492
Retained earnings 204,893 283,406
-------- --------
TOTAL STOCKHOLDERS' EQUITY 275,185 353,698
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 761,244 $839,450
========= ========
The accompanying notes are an integral part of the combined financial
statements.
A&A SERVICES, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
REVENUE - NET $4,314,287 $3,291,251
---------- ----------
COSTS AND EXPENSES:
Operating expenses of medical
practices 2,259,944 1,723,908
Physicians compensation 1,276,515 1,104,099
Billings and collections 183,178 129,209
Depreciation and amortization 65,994 50,586
---------- ----------
TOTAL COSTS AND EXPENSES 3,785,631 3,007,802
---------- ----------
INCOME BEFORE INCOME TAXES 528,656 283,449
INCOME TAXES (Note 2) (94,286) (50,512)
---------- ----------
NET INCOME 434,370 232,937
RETAINED EARNINGS - BEGINNING 283,406 434,469
LESS: DIVIDENDS PAID (512,883) (384,000)
---------- ----------
RETAINED EARNINGS - ENDING $ 204,893 $ 283,406
========== ==========
The accompanying notes are an integral part of the combined financial
statements.
A&A SERVICES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 434,370 $ 232,937
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Depreciation and amortization 65,994 50,586
--------- ---------
500,364 283,523
Changes in operating assets
and liabilities:
Accounts receivable, net (128,668) 14,414
Other assets (6,198) 1,836
Accounts payable and
accrued liabilities 307 158,056
--------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 365,805 457,829
--------- ---------
CASH USED IN INVESTING ACTIVITIES
Purchase of equipment and
leasehold improvements (47,946) (21,487)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of
common stock - 2,600
Dividends paid (512,883) (384,000)
--------- ---------
NET CASH USED IN FINANCING
ACTIVITIES (512,883) (381,400)
--------- ---------
NET(DECREASE) INCREASE IN CASH (195,024) 54,942
CASH - BEGINNING OF THE PERIOD 213,697 158,755
--------- ---------
CASH - END OF THE PERIOD $ 18,673 $ 213,697
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ - $ -
========= =========
Income taxes $ 94,826 $ 50,512
========= =========
The accompanying notes are an integral part of the combined financial
statements.
A&A SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1997 AND 1996
NOTE 1 - DESCRIPTION OF BUSINESS
A&A Services, Inc., a New York corporation, was incorporated on May 24,
1995, herein referred to as "A&A" and, collectively, with its affiliated
companies as the "Company". The Company operates and manages four
outpatient general medical practices and provides management services,
which include administration, accounting, billing and collections and
payroll.
As discussed further in Note 8, A&A Services, Inc. was acquired by a
subsidiary of FONAR Corporation pursuant to a stock purchase agreement on
March 20, 1998.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The combined financial statements include the accounts of A&A and the
following companies (the "PC's") affiliated through common ownership:
Company Location
------- --------
Dr. Giovanni Marciano & Dr. Glenn Muraca
Physicians, P.C. Queens, New York
Corona Medical Offices, P.C. Queens, New York
Liberty Medical Offices, P.C. Queens, New York
Howard Beach Medical Offices, P.C. Queens, New York
Use of Estimates
- ----------------
The preparation of the combined 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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Furthermore, healthcare industry
reforms and reimbursement practices will continue to impact on the
Company's revenues and operations. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
- -----------------------------------
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the accompanying balance sheets at amounts considered by
management to reasonably approximate fair value.
A&A SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1997 AND 1996
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
- ----------------------------
Financial instruments, which potentially subject the Company to
concentration of credit risk is principally cash investments and accounts
receivable.
The Company maintains its cash account at a major international bank
located in Hempstead, New York. The total cash balance for each company
account is insured by the Federal Deposit Insurance Corporation ("FDIC")
up to $100,000. The Company in its normal course of business maintains
cash balances that exceed, on a regular basis, the FDIC limit. At
December 31, 1996, the Company had a cash balance that exceeded the FDIC
limit by $226,598.
The Company's services are rendered principally in the New York
metropolitan area. A significant portion of the accounts receivable is
billable to third party medical reimbursement organizations, mainly
insurance carriers and health management organizations ("HMO"). Although
the Company does not foresee a credit risk associated with these
receivables, repayment is dependent upon future financial stability of the
disbursing companies, which are subject to numerous regulations by the
federal, state and local governments.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents.
Equipment and Leasehold Improvements
- ------------------------------------
Equipment is depreciated on the straight-line basis over the estimated
useful lives of the assets (5 to 7 years). Leasehold improvements are
amortized over the shorter of the term of the lease or the life of the
asset. Expenditures for maintenance and repairs are charged to
operations. Renewals and betterments are capitalized.
Impairment of Assets
- --------------------
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company
adopted Statement 121 on January 1, 1996 and there was no effect to the
Company.
A&A SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1997 AND 1996
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
- ------------
The Company has elected to be taxed under the provisions of subchapter "S"
of the Internal Revenue Code and comparable state regulations. Under
these provisions, the Company does not pay federal or state corporate
income taxes on its taxable income (nor is it allowed a net operating loss
carryback or carryover as a deduction). Instead, the stockholders report
their proportionate share of the Company's taxable income (or loss) and
tax credits on their personal income tax returns. However, New York City
and New York State taxes continue to be provided. The New York State
taxes are equal to the corporate tax computed as if the Company was not an
"S" corporation, reduced by the tax that would be payable on the Company's
net income if taxed at the highest personal income tax rate.
Deferred income taxes have been provided under the liability method.
Deferred tax assets and liabilities are determined based upon the
estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities, as measured by the
current enacted tax rates. Deferred tax expense is the result of changes
in the deferred tax asset and liability.
Deferred income taxes reflected on the balance sheet resulted primarily
from the timing difference of reporting on the cash basis for tax purposes
and the accrual basis for financial statement purposes.
Revenue Recognition
- -------------------
Revenue is recognized at the time the service is performed.
NOTE 3 - ACCOUNTS RECEIVABLE
On January 1, 1997, the Company entered into a letter agreement with a
medical billing service. The billing service's primary function is the
submission and collection of the patient invoices from third party payors,
mainly insurance carriers and HMO's. The fee for this service is based on
a percent of the monthly cash collections. The minimum applicable percent
starts at 6% and decreases to 5%.
Approximately 75% of the Company's accounts receivable and related
revenues are derived from third party payors, mainly insurance carriers
and HMO. The third party payors are constantly revising their
reimbursements to healthcare providers, which has a direct effect on the
realization of the accounts receivable. The Company has given effect to
these reimbursement practices through provisions in the allowance for
doubtful accounts.
A&A SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1997 AND 1996
NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31, 1997 and 1996 consist
of the following:
1997 1996
---- ----
Equipment $ 157,611 $ 152,831
Leasehold improvements 253,276 210,110
---------- ----------
410,887 362,941
Less: Accumulated depreciation
and amortization 284,336 218,342
---------- ----------
$ 126,551 $ 144,599
========== ==========
For the years ended December 31, 1997 and 1996, depreciation and
amortization amounted to $65,994 and $50,586, respectively.
NOTE 5 - PENSION PLANS
Money Purchase Plan
- -------------------
The PC's have a noncontributory defined money purchase pension plan
covering substantially all full time employees. Contributions to the plan
must be five percent (5%) of eligible wages.
For the years ended December 31, 1997 and 1996, contributions incurred for
the money purchase plan amounted to $23,716 and $23,566, respectively.
Profit Sharing Plan
- -------------------
The PC's have a profit sharing plan covering substantially all full-time
employees. Contributions are decided by the Board of Directors each year.
However, contributions cannot exceed 15% of each covered employee's
salary.
For the year ended December 31, 1997 and 1996, contributions incurred for
the profit sharing plan amounted to $52,507 and $36,434, respectively.
A&A SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1997 AND 1996
NOTE 6 - STOCKHOLDERS' EQUITY
Common stock - no par value - at December 31, 1997 and 1996 consisted of
the following:
1997 1996
---- ----
A&A Services, Inc.
100 shares authorized, issued and
outstanding $ 100 $ 100
Dr. Giovanni Marciano & Dr. Glenn
Muraca Physicians, P.C.:
100 shares authorized, issued and
outstanding 1,000 1,000
Corona Medical Offices, P.C.:
100 shares authorized, issued and
outstanding 100 100
Liberty Medical Offices, P.C.:
100 shares authorized, issued and
outstanding 100 100
Howard Beach Medical Offices, P.C.:
100 shares authorized, issued and
outstanding 2,500 2,500
----- -----
Total $3,800 $3,800
====== ======
Combined additional paid-in capital at December 31, 1997 and 1996 amounted
to $66,492 and was entirely attributable to the Dr. Giovanni Marciano and
Dr. Glenn Muraca Physicians, P.C.
NOTE 7 - COMMITMENTS AND OTHER MATTERS
Operating Leases
- ----------------
The Company leases its medical office properties and various equipment
under noncancellable operating lease agreements, which expire between May
1998 and July 2006, and require various minimum annual rentals. Several
of the leases provide for renewal options to extend the leases for
additional five or ten-year periods. Certain property leases require
additional payment for property taxes, normal maintenance and insurance.
Rent expense under the operating leases approximated $245,000 and $140,000
for the years ended December 31, 1997 and 1996, respectively.
A&A SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1997 AND 1996
NOTE 7 - COMMITMENTS AND OTHER MATTERS (Continued)
Operating Leases (Continued)
- ----------------------------
At December 31, 1997, the aggregate future minimum lease payments due
under these noncancellable operating leases are as follows:
Year Ending December 31, Operating Leases
------------------------ ----------------
1998 $ 186,166
1999 128,219
2000 59,248
2001 59,648
2002 64,101
2003 and thereafter 256,706
---------
$ 754,088
=========
Employment Agreements
- ---------------------
On September 1, 1997, one of the PC's entered into a 10-year employment
agreement with a physician. The agreement provides for a base annual
salary of $120,000, plus a cost of living increase of 5% per annum.
Furthermore, the employment agreement provides for bonuses based on levels
of patient billings.
For the years ended December 31, 1997 and 1996, compensation expense
related to this employee approximated $162,000 and $126,000, respectively.
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; and proposed healthcare reform legislation.
A&A SERVICES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1997 AND 1996
NOTE 8 - SUBSEQUENT EVENTS
Sale of A&A Services, Inc.
- --------------------------
On March 20, 1998, U.S. Health Management Corp. ("HMC") and affiliates
consummated the acquisition of the common stock of the Company. HMC is a
wholly-owned subsidiary of FONAR Corporation, a publicly traded company
listed on the NASDAQ Stock Exchange.
Pursuant to the purchase agreements, HMC and affiliates acquired all of
the common stock of the Company for $4,000,000 in cash, a note payable for
$4,000,000, bearing interest at 6.0% per annum, payable in 16 quarterly
installments, commencing June 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 of $2,000,000 and contingent payments based on
future earnings.